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Edited Transcript of VSVS.L earnings conference call or presentation 26-Jul-18 8:15am GMT

Half Year 2018 Vesuvius PLC Earnings Call

London Jul 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Vesuvius PLC earnings conference call or presentation Thursday, July 26, 2018 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Guy F. Young

Vesuvius plc - CFO & Executive Director

* Patrick Georges Felix André

Vesuvius plc - CEO & Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Andrew Francis Caldwell

Barclays Bank PLC, Research Division - Research Analyst

* David Alexander Larkam

Numis Securities Limited, Research Division - Analyst

* Jonathan Hurn

Deutsche Bank AG, Research Division - Research Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [1]

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Ladies and gentlemen, good morning. Welcome to the presentation of the Vesuvius Half Year 2018 Results.

My name is Patrick André. I'm Chief Executive of Vesuvius. And to my left is Guy Young, our Chief Financial Officer.

Firstly, I will present an overview of performance during the first half of the year then Guy will go into more details about our financial results. And I will then conclude with some considerations on our outlook for the full year 2018.

We achieved good results in the first half. This is our strongest results since we became an independent company in 2012. Our trading profit improved on an underlying basis, a little bit over 20%, reaching GBP 99.6 million over the first half. But even more importantly, our profitability improved by 80 basis points on an underlying basis, reaching 11.1%. And we think that with implementation of our strategy, we have some further room for improvement in the years ahead. Thanks to these strong results and an efficient working capital management, we were able to further strengthen our balance sheet with our net debt-to-EBITDA ratio reaching 1.3 end of June versus 1.6 one year ago. Based on these good results and our confidence going forward, our board decided to increase our interim dividend by a little bit above 9% to 6p per share.

What are the main factors behind these good results? First of all, we benefited from a positive market environment in our 2 key end markets of steel and foundry. And more importantly, as we speak today, these 2 markets remain positively oriented.

But we were also successful with our self-help initiatives, first to successfully mitigate the 2 headwinds which negatively impacted our 2017 results. First, raw material increase. We were successful with the price increase initiative. And now, globally at group level, our price increase initiative has been able to fully compensate the raw material cost increase.

In Flow Control, the intercompany supply headwind have been fully eliminated as we speak. Our European plants are running like a clock, eliminating the need to import excess material from India and China as we had to do last year.

At the same time, all our restructuring programs are being implemented on time and on target. And we are announcing today a further increase to the targets of our new restructuring program announced last March by a further GBP 7 million, bringing the total targeted savings to GBP 22 million per year.

Let's now review these points into more detail. So steel markets. All steel markets, as you can see on this slide, have been positively oriented. Steel consumption and production remains everywhere on their long-term positive growth trend. We observe no sign of negative disruption in that respect.

In this positive context, the Steel Division continues as (inaudible) to outperform the underlying market growth. Even if you eliminate the price impact, our volume growth has been significantly ahead of general market growth. The only exception to this is EU28, where we have been giving priority to a price increase -- to a disciplined price increase initiative over volume where we have lost temporarily some minor market share, but we intend to recover this very rapidly.

As a quick illustration of value-creating solution, you have on this picture, analyst question of the combined robotics and consumable solution that we are now proposing to our customers worldwide. Our robots enable our customers to eliminate the risk of human presence in dangerous walking areas in the plant and also eliminate the associated risk of human errors with negative impact on the final steel quality. And our robots can only operate with our consumables thanks to their patented robot-ready design. With this approach, we can displace some of our competitors with those customers which have a specific focus on safety and quality all over the world.

In Foundry also, most markets were positively oriented during the first half and remain so today. This was particularly the case in the most important market for us, general engineering and mining, which today represents close to 50% of the final outlet of our sales in the foundry market.

In this positive environment, the Foundry Division also increased its penetration rate during the first half supported by its offering of value-creating solution. You can see on the -- this picture, a picture of a new feeder sleeves product which enables our Foundry customer to minimize the metal losses during the casting process and, at the same time, enables them to increase -- improve the quality of their finished testing product.

We are accelerating our strategy to penetrate key developing market. You can see these figures are quite impressive, the increase of our sales in the key developing market. EEMEA is EMEA without the EU, so it's a developing part, Middle East, Africa, Eastern Europe of EMEA. And those 4 key developing markets for us now represent 39% of our total sales. They represented only 30% of our sales 4 years ago. And we are accelerating our actions there by increasing our investments in local resources in marketing and sales. We put more boots on the ground in decisions to grow even further to accelerate our growth in these key areas for us.

The only exception you can see on this slide is Foundry in India where we had a temporary slowdown of our growth, even if it was growing, due to the priority that we have been giving to credit risk management. And despite the sometimes complicated environment in India, we had absolutely 0 credit losses at any customers in India, be it in the Steel or in the Foundry Division over the past few months.

We are also accelerating our R&D efforts. After having already increased our R&D spend by around 30% last year, we are accelerating further in 2018 and in the coming years. We took the decision to expand our steel mechatronics research facility in Belgium. This will be operational as of 2020. At the same time, we are expanding our research centers in Asia, both in India and in China. We believe that these increased efforts in R&D will not only enable us to increase and widen the positive technological gap between us and our competitors, but also it enable us to tap into the best talent pool all over the world and, in particular, in Asia. The time where all bright Indian and Chinese engineers were dreaming about going to study in the States and stay and live in the States, these days are over. These people, they want to stay in their country. If we want to attract the brightest minds in our organization, which is clearly our goal, we need to be there, including in terms of research facility.

Our restructuring plan is completely on track timing-wise and target-wise. We have announced in July -- beginning of July, a few days ago, the closure of 3 of our European plants. The production capacity of these plants will be redistributed among the remaining plants in Europe, increasing both the efficiency and the profitability of those plants. We are also announcing an increase by GBP 7 million of the target of our new restructuring program, which is now brought to GBP 22 million. This relates mostly to Advanced Refractory and Flow Control operations in NAFTA. We are, in parallel, reinforcing with new talent and existing talents in the organization our focus on operational excellence and continuous improvement in all our plants in our worldwide network.

You can see on this slide, the details of the savings and cost of our restructuring programs. A total of GBP 32.6 million of savings remain to materialize and will be delivered progressively up to 2021, mostly to -- up to 2020. The last GBP 2.3 million in 2021. As far as costs are concerned, the majority of those costs have already been accounted for. The GBP 14.5 million remaining to be incurred will be accounted for in 2018 second half and 2019.

Our global technical services offering is continuing to make good progress with 11% growth of our revenues in technical services from first half last year. And this concerns all of our divisions. You can see on this picture the new generation, a new product, a new generation of oxygen probes that we are now putting on the market which allows our steel customers to measure in less than 10 seconds the precise oxygen content of the metal, which will then allow the steel customer to refine the chemical composition of their steel and improve the quality of their steel.

Raw material cost increases have been successfully passed through in the first half. We are quite satisfied with our price increase initiative and its success, which, again, demonstrates the pricing power associated with the high-quality product and solutions that we are proposing to our customers. We were very successful in the Steel Division, a little bit less than very successful in the Foundry Division. And I consider that we still have some raw material cost to be recovered in the Foundry Division in some areas in the world, notably in North Asia, in the second half.

Since the beginning of the year, raw material prices have mostly either stabilized or even started to decline. Some magnesite product have clearly started to decline since the beginning of the year. The only raw material which is still increasing a bit is Zirconia, but clearly, the trend is completely different from what we are confronted with last year.

Now, if we have a closer look at our divisional performance and, before handing over to Guy, you can see the trading profit of the Steel Division increased by 26.5% on an underlying basis and the profitability increased by 110 basis points to 10.3%. This good performance was made possible by the success of our price increase initiative clearly, the successful implementation of our restructuring program and the unwind of the Flow Control intercompany supply headwind.

In the Foundry Division, the trading profit increased by 11% on an underlying basis. It's profitability increased only marginally to 12.8% still on an underlying basis. These results can be explained by good sales volume, also by the successful implementation of the restructuring program. However, the profitability of Foundry would have improved further if this raw material cost increase had been completely fully recovered. Again, we expect this to be the case in the months going forward.

I will now hand over to Guy, who will give you more details on our financial performance.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [2]

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Thank you, Patrick. Good morning, everyone, and thank you for joining us on what we know is an extremely busy earnings day for most of you.

It is very pleasing to be able to report with a strong set of results for the first 6 months ending June 2018 characterized by the underlying growth that we've seen in revenue and trading profit of 12.1% and 20.3%, respectively.

Before going into a little bit more detail on some of the revenue and trading profit, as is customary, I'll quickly comment on a couple of income statement items below trading profit. The first of which is our post share of JV results, which has grown from just over GBP 0.4 million to GBP 2.6 million. This is largely as a result of better and improved performance in our China joint ventures, which has been driven by price increases. Our net finance costs have reduced from GBP 7.3 million last year to GBP 4.8 million, principally because of the lower cost of debt associated with the EUR 100 million USPP refinancing that we undertook last year.

Our effective tax rate of 26% is roughly 2% lower than last year and lower than we expected. There are 2 main factors that play into this. The first is that we've had lower tax payable in Mexico. Mexico, for us, is a functional currency of U.S. dollar. Tax payable in pesos, with the FX movement, meant that we had a credit to our ETR. We've also eliminated the impact of the U.S. tax reform BEAT charge post some clarification on interpretation and our ability to utilize the sales losses. We now expect our full year ETR to be between 26% and 27% for 2018.

Our headline EPS grew by 28.9% in the period compared to H1 2017.

If we turn now to some detail on underlying revenue, which, after adjusting for FX of GBP 31.6 million, increased by just over GBP 97 million on an underlying basis or 12.1%. The underlying increase was driven by a combination of higher volume and selling prices that, on average for the group, accounted for 5.9% and 6.2%, respectively, over the 12.1%. The Steel Division grew revenue by GBP 70.6 million or 13.1% and Foundry by GBP 26.5 million or 10.2%.

In terms of our trading profit, again, after adjusting for foreign exchange, we reported a 20.3% increase from GBP 82.8 million to GBP 99.6 million for the 6 months. The largest component of the increase was the drop-through from revenue generated by higher volumes of a combined GBP 11.9 million, which equates to just over 25%. Other key contributors that we pulled out in the bridge includes GBP 5 million of restructuring savings, in line with our expectations, GBP 4.1 million reversal of the Flow Control EMEA friction costs and GBP 2.8 million of net price increase of raw materials and other COGS inflation. Partially offsetting this was GBP 3.3 million of OpEx investment in sales and R&D personnel as we referred to at our full year results, along with 2 nonrecurring provision charges totaling GBP 3.7 million.

We maintained our focus on working capital, which reduced further the percentage of revenue from 26.2% in June last year to 24.1% as of June '18. This improving trend meant that despite the 12.1% increase in revenue and the requisite investments in working capital, our trade working capital increase over the same period was limited to 6.1% on a current -- on a constant currency basis. Progress continued to be made in reducing our debtors days and increasing our creditors days. Inventory days remained flat as we increased inventory levels prior to the summer shutdown period and built some inventory as part of our restructuring planning. We expect our total -- our trade working capital as a percentage of revenue to further improve by year-end.

The higher profits and ongoing working capital management translated into an operating cash flow of GBP 76.7 million and a conversion rate of 77%. CapEx is lower than depreciation at the half year, but we expect this to be at depreciation levels by the year-end. The net working capital investment has been necessary as we already mentioned to support our increased activity levels.

Finally, in terms of net debt, the healthy GBP 76.7 million of operating cash flow was offset by a number of cash outflows in the period, which -- the main ones included interest and tax totaling GBP 24.4 million; cash restructuring costs of GBP 10.4 million; payment of our 2017 final dividend of GBP 33.8 million; and a further GBP 15.9 million, which is made up of GBP 8.3 million purchase of shares for long-term incentive plans and GBP 7.4 million of FX and revaluation of our net debt. This resulted in a marginal increase in net debt to GBP 7.5 million between the year-end and June. Our net debt-to-EBITDA remains at 1.3, in line with December's levels and an improvement from the 1.6x at June last year. In addition, a reduction in our net pension deficit from GBP 16.5 million at year-end to GBP 8.3 million at June 2018 further underlines what we believe to be a strengthening of our balance sheet.

I'd now like to hand back to Patrick to review our outlook.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [3]

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Thank you, Guy.

Looking forward, it's only July, so we remain cautious in our outlook as every year in July. But even if we remain cautious, I think we are cautiously optimistic regarding the outlook in our market. Clearly, the case in the steel market where all indicators, as we speak, remain positively oriented. We only have this afternoon as a number of the WSA for the month of June. So with that, we do not expect any negative news from that.

Regarding the impact of the U.S. sanctions 232 -- Section 232 sanctions, you know that this should have a positive direct impact on Vesuvius because United States is one of the regions in the world where we have the highest penetration rate. Based on already announced project to create new capacity or expand existing capacity, we estimate that the resulting increase in U.S. steel production should be on or around 8 million to 9 million tonnes. It doesn't mean that there will not be more, but this is based on what has been already announced by U.S. steel producer. So this will play favorably for us. This being said, this will only materialize progressively over time. I don't expect a significant positive impact in 2018. We don't factor this in our outlook. This will come later on in '19, '20 and '21.

In Foundry, the majority of our end market remain positively oriented as we speak. We see the only exception which is from a sign of softening in the light vehicle market, specifically in the U.S. and in North Asia, which is a very minority part of our outlet. And we estimate that the part of our outlet in markets where the trends remain largely positive will largely compensate this.

Regarding potential trade restrictions, we don't have any more crystal balls than anybody else. This being said, I think that considering the fact that Vesuvius has production facilities in all large trading blocks worldwide and we don't rely -- our supply chain doesn't rely on big flows of movement of pieces of material between these large trading blocks, so we feel we are resistant to whatever scenario could materialize in terms of direct impact to us. Indirect impact, we have no, again, no more crystal ball than anybody else. But in terms of direct impact, we don't see Vesuvius as being potentially impacted by any tightening of trade restrictions in case this would happen.

For all these reasons, we are cautiously optimistic regarding our second half results as the environment in our key end markets remain positive. These strengths in underlying markets and our continuing implementation of self-help measures underpins our confidence that our full year trading profit will be marginally above the current consensus market expectation of GBP 189 million.

Looking further beyond 2018, we believe, with everything we have in the pipe, in our ability to deliver further organic improvement in our profit margins as we will continue to implement our strategy, our work strategy and to deliver on our restructuring program.

Thank you for your attention. So now, Guy and I would be pleased to answer any questions you may have.

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Questions and Answers

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [1]

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It's Andrew Douglas from Jefferies. A number of short questions, please. Can you just explain to me how you're going to win back market share that you've lost in quick fashion without using price as a tool? First question.

Raw materials, you've done a good job in kind of getting that back. Do you have any issues over raw material availability going to second half and into next year?

And then one big, I guess, strategic question for you guys. The strategy of decentralization, which we talked about at least last year, how do you feel that's going? Are people getting on board or are they getting on the bus and disappearing? How do you feel (inaudible) kind of progressing across the group, please?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [2]

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On your first question, first, we clearly didn't move much. I think when you launch a strong price increase initiative, it's very important to check that you lose a little bit market share because if you don't lose a little bit market share, it means that you are not being ambitious enough. And I think that in the Steel Division, I'm very happy with what our management has been doing. I think that the price increase initiative in a very short period of time -- and we are talking relatively a large number because to give you an order of magnitude of the more than 12% underlying growth of our top line, give or take, as of this [instruction]. So it's -- we are not talking small numbers.

This has been, I think, brilliantly executed by our team. And there are (inaudible) marginal market share in some European countries where I must say some customers have been sending a message. And yes, we are going a bit quick, but I think it's perfectly normal. And at the end of the day, the quality of our products have not changed over the past 6 months. It remains positive and -- even with those customers which sends us a signal. At the end of day, it's the same customers. They understand very well because we are -- an important point. We have been honest. And it's a very important tool for us with our customers. We are always honest with our customers. We are not trying to take advantage of the situation. As you know, we are not integrated between -- in raw material. We are very transparent with our customers with the reasons why we have to increase our prices and we are very careful not to take advantage of this. So those customers, even if they think that we have been a bit quick, at the end of the day, they know that we have not been taking advantage of them. So we don't believe at all that there would be any remaining bad feelings.

By the way, we already see signs that it's not the case and there is no reason why our customers would deprive themselves of the possibility to use good products, which would then make more money. So our customers themselves are profit-oriented. So I don't expect any difficulties in getting back on track in our -- including in EU28, very rapidly and probably already in the second half in our normal strategy to outperform market semester after semester.

Your second question, raw material availability. No, we at Vesuvius -- I will not say everybody has been in the same situation -- that we at Vesuvius have not been affected by raw material availability issues because we have an extensive network of relationship with our suppliers, including -- and especially in China where we have a very strong purchasing or a very strong arm of our purchasing organization locally with many boots on the ground in our purchasing organization in China. And again, this has enabled us to develop long-term relationship with our Chinese suppliers. It worked in China. Chinese management is Chinese mostly. We have only one expat left in China. Our Chinese management is Chinese, having developed strong relationship with suppliers and our suppliers do not let us down in difficult times. So if we have to cut somebody, it's from Vesuvius.

The decentralization, yes, it's going very well. It's going very well. We have introduced new values a few weeks ago in the group to support this change toward a more entrepreneurial spirit decentralization. We are very active with the response and we see a strong drive from the organization to go towards this more entrepreneurial decentralized state.

Again, I think the proof is there with the speed with which this price increase initiative has been implemented. It's not somebody in the headquarters in London. I would love to tell you that I did it all myself, but unfortunately and fortunately it's not. Our people did it on the ground, taking themselves initiatives to increase prices, going to customers. And I could say the same for our restructuring program. The reason why our restructuring program are on track and on schedule is because our people on the ground are doing it. Again, it's not me at account. So we have good people on the ground taking matters into their own hands. And I'm quite happy with the way the organization is responding to this new values and new future.

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Jonathan Hurn, Deutsche Bank AG, Research Division - Research Analyst [3]

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It's Jonathan Hurn from Deutsche Bank. Just a few questions for me, please. Firstly, you obviously have talked about organic margin expansion coming through in sort of 2019 and beyond. Can you just talk a little bit more about what your aspirations are for the group margin? That was first question.

Second one was just going back to that pricing. I think, obviously, pricing (inaudible) volume growth in the first half. How do we think about pricing growth coming through in second half, especially against a backdrop of certain raw materials like silicon carbide coming down?

And the third one was just on market share gain. I think you've talked about market share gain across both divisions. I mean, who are you taking market share from in terms of products? And what are they actually doing about it to try and regain it?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [4]

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We are sticking to our objective in terms of margin. We have clear rendezvous points in 2020, where we are targeting the 12.5% -- above 12.5% trading margin for the group, which is above 15% for both Foundry and Flow Control before total cost, above 10% also before total cost for Advanced Refractory. The weighted average of all these after deducting is, give or take, 1.5% of total cost, giving you our targeted group margin for 2020. And I think it's important to have a deadline. This being said, I see no obvious reason why 2020 should be the end of the road. And we are working on -- and I believe that it's reasonable to have even more ambitious objectives beyond 2020. Regarding prices. Our guidelines are very clear. We are not there to make profit or to lose money on raw materials. So we make our money on technology by adding value to these raw materials. So when raw material go up, we pass, as we did, this price increase to our customers. If and when raw materials will go down, we will pass through the decline of this raw material cost to our customers. It's a question of managing the long-term relationship and the trust relationship between us and our customers, which, I strongly believe, is key to the sustainability of our margins long term. As far as your last question is concerned about market share. How do we gain market share? It's a combination of, I would say, classical market share gain against some of our competitor. And this, we regularly gain market share typically with the type of combination robotics plus consumable offerings that I illustrated during the presentation. Such combination enabled us to gain market share from some of our competitor in thyssen in Brazil where we completely displaced one of our large competitors out of the former thyssen now Ternium plant in Brazil. And we took 100% of the consumable market thanks to this offering. So classical market share, but it's also, especially in developing countries like China, gaining market share against nothing. Because when steel customers, for example, our foundry customer are ramping up, are willing to ramp up the quality of their finished product, they go from using nothing, none of our products or any of our competitors' products to using our products. So there is more and more steel being produced using Flow Control product. There is more and more testing pieces being produced in foundry using products similar to the one our Foundry Division is proposing to the market.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [5]

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(inaudible)

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Unidentified Analyst, [6]

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First question is, you've seen -- you're seeing good organic sales growth. Restructuring plans are advancing well. You've got some further ambitious targets. Do you think you can ever get above the 25% operational drop-through? And where do you think we could see that in the midterm?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [7]

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Thank you. It's -- I'd just like to talk to the bridge. So what we try to demonstrate in the bridge is, by isolating that impact on trading profit in relation to the revenue, which, if you strip out the pricing, that GBP 11.9 million over the 473 gives you 25.1-ish. So that is the 25% that we were seeking to achieve. We take a look at that drop-through after having disclosed, obviously, those positives. If you take a look at the right-hand side of that bridge, you've got GBP 3.3 million, which we have always maintained is part of our OpEx investment. In the event that we are growing above kind of GDP-type rates, we are going to need to invest in sales personnel in the right regions and R&D for the long-term anyway. That's effectively what we purport to be the difference between the 25% and the 35%.

On the far right-hand side of that bridge, the GBP 3.7 million of provisioning, the reason we've called those out is we believe that those are once-off in nature. If you want to play with the GBP 3.3 million and the GBP 3.7 million, you'll get back to what we believe are absolutely crisp and clear drop-through would be, which is closer to the 35%. So we believe we're in the 25% to 35% range as we expect it to be.

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Unidentified Analyst, [8]

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Okay. And so given future investment, it'd probably be towards the lower end of that range would be a sort of target over the next 3 years, is that fair?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [9]

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I suppose it would slightly depend on where the investment is. So when we look at our strategy going forward, we do have some CapEx and we do have some OpEx. Yes, the OpEx investment will naturally drop that drop-through closer to the 25%, but CapEx will not. So that combination should mean somewhere between the 2 depending on the degree of growth.

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Unidentified Analyst, [10]

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Okay. Just one final question. You're seeing China steel production up 5.5% year-to-date. Your China exposure 8% to group revenue is fairly limited. Obviously, China is outgrowing the rest of the market. Can you just describe the competitive dynamic there, how realistic is it for you to take that 8% higher? Obviously, I know that your, sort of, sterling amount per unit is also lower there. So how can we realistically think about that market?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [11]

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China, first of all, I have question mark about the 5.4%. I'm not 100% sure what the reality behind the strategy here. And the very important thing is that for us, Vesuvius, China is not a final market growth game. It's a penetration game. Our strategy in China -- our best-case strategic scenario is 0% growth in China. So our strategy is to grow double-digit in China with a 0% market growth. Why? Because our game is a penetration game. It's about Chinese producers both in Steel and Foundry ramping up in quality and using more and more of our product. To give you an illustration, in the U.S. today, we sell in Flow Control, for example, $1.5 of our product per tonne of steel being produced in the U.S. In China, it's $0.08. So the potential for Chinese steel producers to use much more of our products when they would be willing to increase the average quality of the steel they produce is huge. So for us, even at 0% growth rate in China, we believe we have a very strong case to grow up sales quite importantly, both in the steel -- and when we say steel, China is Flow Control. We have no specific ambition for Advanced Refractory in China. We think that is a cutthroat competition market for Advanced Refractory. China steel for us Flow Control. And in Flow Control, we believe we have a very strong case in China, which will enable us to grow quite significantly. And we are adding capacity as we speak in China not to export outside of China but to serve Chinese customer in Flow Control. And in Foundry, we already have enough capacity to satisfy the growth of the market. Because the phenomena is very similar. Chinese foundry producers are going up the scale in terms of quality. They want to produce more sophisticated foundry pieces and naturally, they start using more of our product.

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Unidentified Analyst, [12]

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And can you help us, just finally, to quantify if a local producer was to use your equipment versus another, what's the sort of an uptick they can see in quality? How should I think about that?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [13]

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I think that -- what we see in China, when I say, $0.08, it's not that everybody is consuming $0.08 of our product. The most advanced steel producers in China, they consume more or less the same amount of our product that any well-advanced Western steel producers. The Baosteel -- it's only that there are not enough of them yet. And the percentage of these people is increasing in the global steel landscape in China. So it is -- you may have seen, but China, for example, has started very recently to -- they were traditionally exporting long products. They started to -- they're now starting to export little bit long products -- flat products, I mean. And to export flat products, they need the same quality, they need to be competitive quality wise with what is available on the market coming from Western producers. When they need that, they need to use our product.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [14]

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Dave Larkam from Numis. Firstly, on foundry raw material. Can you say what the impact of that has been? And I'm surprised that you can't push those prices up. There's a lot more fragmented customer base there. I don't believe you have the same sort of long-term pricing issues that you have on the steel side. Talk about that. And then just talk about the Phase II of the further cost savings there? I mean, GBP 10 million of CapEx, it's sounds like this is much more of a sort of automation-type investment rather than sort of plant closures. Is that fair? And if so, are there far more opportunities in that sort of area?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [15]

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Okay. On the first point, give or take figures, but I would have been happy to see a couple of million more of price increase in foundry over the first half. And we -- and I think that there is no reason why we should not be able to do it. The reason is not that customers are -- yes, customers are dispersed. This has not changed. In fact, in some region of the world, the competition with all the foundry producers is quite intense. And especially in regions like North Asia, where the end market is not doing very good -- north Asia is one of the region -- by the way, if you take Korea, Korea is a declining market. Korea is not doing very good globally from a global economic point of view -- domestic Korea, I mean, where you still have a fairly large number of suppliers vying for market share in a relatively limited market. So this type of phenomena has been at place to explain the fact that it has been less easy or more difficult in foundry for some pockets, especially North Asia, to increase prices in the first half. But we think that this should be corrected going forward. And you're perfectly right for your -- on your remark for our CapEx. We are clearly not -- we are not investing in, I would say, classical capacity increase. We are adding shifts in our plants to face our capacity needs. So our CapEx in our plants are mostly automation CapEx, CapEx which are, as an objective, to make our plants more efficient, more productive over the long term. This is also the reason why we are contemplating our production in a reduced number of flagship plants. And those plants that we decide to keep, we invest to modernize them, to automate them, to robotize them and to make them much more efficient on a long-term basis.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [16]

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It's Andrew Caldwell at Barclays. Can I just ask, on the auto exposure, you called out a temporary impact of WLTP in the second half. What sort of feasibility do you have on your orders in that business?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [17]

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Andrew, (inaudible).

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [18]

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What is your visibility? And have you actually seen an impact of the auto producers changing production in relation to that? And secondly, we talked a little bit about market share already, but how has your market share developed overall over the last, say, 12 months? Where do you see your market share as a percentage of total field refractory is at this point?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [19]

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I will try to answer by the (inaudible). We have been, as anybody else, reading everything which has been said about WLTP. It's unclear what will happen, but we see that even if the -- these bottlenecks people are talking about in terms of testing capacity bottleneck would have some impact in the second half, which is only a temporary impact because -- it's a temporary impact, which should be -- we can catch up, which should happen end of the year or beginning of next year. And we don't see any slowing down in the final demand for cars in Europe so far. And as far as our customers are concerned, I don't know if they are blind, but for the time being, we have no feedback from our customers on the ground about any specific worry they would have about it. Again, I'm very careful because sometimes, even our customers are a bit short-term, but we don't hear frightening noises coming from the ground as we speak today because of WLTP. As far as market share is concerned, we are continuing to gain market share over the past 12 months. And even globally, if you look on a worldwide basis, overall, the first half, not only the last 12 months, but overall, the first half. So our overall strategy to gain market share is, I would say, continuing as planned normally over the past 12 months.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [20]

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A separate follow-up. Could you just remind us what the pricing impact was on your top line on the second half of '17, what the comp effect's going to be for the second half of this year?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [21]

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We -- on the second half of this -- on the first half of this year, as I mentioned earlier, we -- give or take, half of the top line increase is price, the other one is volume. For the second half of this year, considering the trend in raw materials, we expect relatively limited price impact on our top line in the second half as compared with the first half. As compared with second half last year, obviously, there will be, but as compared with the first half, we don't expect a significant price impact between H2 and H1.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [22]

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Question from me. It's Robert from Morgan Stanley. Can you just give us an update on the typical lag you're seeing between the raw material price inflation issues and when you can put those prices through with your customers? Has there been any change? Are you kind of renegotiating those contracts on a more frequent basis than you have in the past? And does it differ by division? And secondly, it's just whether are you seeing any sort of restocking issues with your customers? How much of that growth benefit that have you seen in the first half of this year you think is down to restocking versus underlying volume demand? And then, finally, just if you can give us an update on the robotics sales. How many of those units have you actually got in place with the customers right now? And of that, how much is sort of you placing that with the customer under trial versus the customer actually buying those units?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [23]

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On the first part, we used to have up until last year an order of magnitude of 1 year -- not 1 year time lag, but we were practically negotiating prices with a 1-year validity with our customers and then renegotiating our prices every year. Since this experience of very sharp, not only important in terms of size, but very quick increase of raw material prices in the second half last year, which have never been experienced before, the size has been experienced before, the speed, not. We decided to amend slightly our contract. Again, it's on a case-by-case basis. There is no such thing as a (inaudible). But generally speaking, we have introduced in most of our contract clauses enabling us in case external conditions would justify it, quicker renegotiation of prices depending on raw material prices situations. So our ability today to react to raw material challenges, we are more agile today than what we were even 6 months ago. So we have much shorter duration. I think in most of the case, we should be able in less than 3 months to change and renegotiate our prices. After that, it's over, the negotiation. You have the legal aspect of it, but you have also a negotiating aspect, which remains as always.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [24]

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(inaudible).

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [25]

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That goes both ways. That goes -- yes, we cannot let it go on. We'd love to, but we cannot. Generally, it goes both ways. Again, it's a very important point for me. We should not rip off the customer, and we should make good money, but we need to be very careful preserving the long-term relationship of trust between us and our key customers. It's a key component of our commercial strategy. Stocking, not for the time being. Again, I would not pretend we see everything everywhere, but we have no signal on the ground of, including in China, of any existing restocking in our end market. Again, I would be very humble on that. I will not pretend that we know everything. Very humbly, what we know, it doesn't indicate any existing restocking. Robotics, I -- we are not divulging precise numbers. But clearly, we see a clear trend of increasing interest of customers in the steel industry for this robotics solution for -- it's really long-term trend for good reasons. Because first, many of these countries see a decline in their working age population. And it's the case in many North Asian countries. It's the case in some European countries. So the decline in working age population plays a key role. The fact that for this reducing working age population, less and less people are attracted to working dangerous areas, which we can all understand. And also, because these are not only dangerous areas, but areas where -- which are prone to human errors. Especially because they are dangerous, people are asked to operate in very warm environment with the steel environment. So it's easier, if I may say, to make mistakes for -- in this environment. Our robots, they always repeat the same thing, the same gesture, and this gives increased confidence to our customers because if little short for example in Flow Control, is not -- even if little bit is very nice, coming from Vesuvius, but if it is not properly installed, and if air can still go through, the quality of steel will not be good. So our robots, they have -- they make repetitive gestures. They do always the same thing, and they're accurate. And so there is a clear trend to be attracted from our customers. So we have more and more inquiries, more and more trials. And now, clear sales are developing. And it's a new trend because 3 years ago, we were selling nothing. Even 2 years ago, not much. So now, we are clearly seeing a ramp-up of these operations. And if I may, our main bottleneck today is our own internal resources to deal with these projects because these are quite large projects. To install robots at a customer site is a big project requiring large resources in terms of automation. This is one of the reasons, by the way, where we are increasing our mechatronics, both research and capability, center in close to Brussels in Belgium. Because human resources is our main bottleneck. We have difficulty to follow today the increase in customer demand for this robotics solution. But we believe we are well engaged to solve these bottleneck issues.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [26]

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Andy from Jefferies again. Your bottom end of your sweet spot for net-debt-to-EBITDA. I was just wondering if you can give us an update on your view on M&A in this space. Clearly, steel Flow Control and Foundry might be quite difficult. Just wondering your thoughts going forward on that business?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [27]

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The question from Andy was in and around us being towards the bottom end of our comfort zone with regards to leverage and our thoughts on M&A.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [28]

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Yes, it's true, because our comfort zone has not changed. It's not a strategy anymore if you change your strategy every 2 months. So our comfort zone remains the same as what we have already communicated on. So we are, obviously, close to this -- to the bottom of this component. And we have no reason not to continue to deleverage over the months to come. And so, yes, we are proactively looking at external growth opportunities. Now we are not putting ourselves under any kind of time pressure to deliver on this because I think it would be the surest way to do stupid things, which we have no intention of doing. So yes, we are actively looking. Yes, there are some potentially attractive opportunities. Will these potentially attractive opportunities be first available -- be available at what we consider as being a reasonable price? Future will tell. And we are giving us some time, and I will not tell you what "some time" means because -- but we are giving us some time to look at these. And it's -- these are 6 months, not 5 years. And if in due time, what was achieved we would not have found attractive external growth opportunities, then there will still be other ways to get us back to what our comfort zone is, knowing again the fact that our comfort zone itself doesn't change. Thank you very much for your attention. And you can benefit from the warm weather and nice weather in London. Bye-bye.