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Edited Transcript of VSVS.L earnings conference call or presentation 25-Jul-19 9:00am GMT

Half Year 2019 Vesuvius PLC Earnings Call

London Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Vesuvius PLC earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00am 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

* David Barker

BofA Merrill Lynch, Research Division - Equity Research Analyst

* David Alexander Larkam

Numis Securities Limited, Research Division - Analyst

* Michael John Blogg

Investec Bank plc, Research Division - Capital Goods Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

* William Turner

Goldman Sachs Group Inc., Research Division - Research 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, welcome to our Vesuvius' H1 2019 Results Presentation. I'm Patrick André, Chief Executive of Vesuvius, and to my left is Guy Young, our Chief Financial Officer. I will start by presenting you some update on our first half performance, then Guy will give you some more details about our financials, and then I will conclude with some considerations about our outlook going forward. We are pleased to present this morning a very resilient results despite a challenging market environment. In this challenging market, our revenue decreased only 1.1% on an underlying basis. Operating profit was nearly unchanged as compared with last year, declining only 0.5%. And even more important, our profitability as measured by our return on sales, slightly increased to 11.1%.

Our net debt-to-EBITDA slightly increased to 1.3 but this is due to the acquisition of CCPI beginning of the year and to the fact that for the first time, we are using the IFRS 16 in our accounting, which mechanically increase the reporting of our net debt. This very resilient result and the projected free cash flow generation capacity of the group gave the board confidence to increase our interim dividend by 3.3% to 6.2p per share.

As mentioned, we experienced clearly challenging market conditions during the first half, both in the steel market outside of China and in the foundry market for this part of the market related to the automotive industry. However, our job is not to complain about the market. Our job is to act and adapt. And in this market, we were about to continue delivering on our self-help restructuring programs. We could deliver, during the first half, GBP 5.8 million of recurring cash savings. And we are announcing today an expansion of our restructuring program, targeting an incremental GBP 16 million of cash savings by 2021.

And at the same time that we continue to optimize our cost base, we are accelerating our actions to grow our top line. We launched a very promising new products during the first half, and we are planning to launch a successful wave of new products every quarter over the next 18 months to enable us to expand our market share going forward.

Let's now go into a bit more in details on this different point. As you can see on this slide, steel markets were obviously much less favorable during the first half of this year as compared with what they were 1 year ago. Steel production is a work outside of China, actually decreased year-on-year. These are the numbers end of May, the one end of June are not available as we speak. That will become available in the coming few days, but we don't expect a significant change.

The only part of the world outside of China where we have some significant growth was the U.S. In China, statistics, at least, official statistics show an impressive 10% growth year-on-year. As you know, the reliability of statistics in China is questionable. But whatever the number, it is clear that during the first half, steel market were positive; steel demand and steel production were positive in China.

In this challenging market of Steel Division commercial performance was quite resilient with -- in nearly everywhere. Very good results in China, where we are continuing to grow significantly and profitably. The only area where we lost some volumes were in India, where we have been confronting with a clearly challenging and more competitive environment in the context, whereas Indian steel production growth beginning of the year at only 1.1% was clearly below the long-term trend.

In Foundry, the most important weakness, as you can see on this slide, was in the light vehicle-related market where across the board, we had some weakness in the market. The medium and heavy vehicle market was also relatively soft in Asia.

Despite this weakness, our Foundry Division sales could progress in the Americas and in EEMEA. EMEA, excluding the European Union, but also clearly declined in other regions, mostly in Asia and in the European Union.

In this challenging market environment, we were able to react. Our new decentralized entrepreneurial organization is now fully operational. And despite the market, we've been able to make significant progress from a strategic point of view in the implementation of our strategy in H1. We are continuing to reinforce our technology leadership with now the expansion of our R&D center in Suzhou in China. R&D center is now fully operational. And we launched several innovative and very promising new products during the first half, and we are planning to continue doing that. We are now in the pipe every quarter for the next 18 months, successive waves of launches of new products, which we will implement.

At the same time, we could continue our penetration of the most promising emerging markets with, in particular, and I would like to stress it, continuing very good results in China. And this is not only the result, but also it's a profitable growth that we are able to implement now in China.

You have on this side some illustrations of our new products in the Steel Division. On the left, you have our new generation of frigate, which we call DuraPlate, supported by our new LG3000 gate systems. This will enable our steel customers to improve at the same time the safety in their steel plants. We have good mix for their workers and also obviously their economics, because these new consumables and system make it less costly to operate for the steel producers.

On the right, this is more in advanced refractory. You can see that we are also developing robotics solutions in advanced refractory, where I used to talk about frigate hold but we are also now doing it in advanced refractory. And the recent acquisition of Comat is helping us accelerate this push into robotics also for advanced refractory because Comat among many advantages was also quite strongly engaged in the development of robotics. So there are clearly R&D synergies on top of the cost synergies that we are now already starting to export.

On the right, this is a new generation of lasers that is now being proposed by our Californian subsidiary, Process Metrix. In the Foundry Division also, we are accelerating the launch of new products. And here, you have an example with a new generation of steel center, which will better clean the steel during the testing process and then enable our customers, our foundry customers to improve the quality of their own finished product and to sell them at a better price to their own end customers. So there is clearly a financial benefit deriving from these new products for our customers.

The integration of our newly acquired subsidiary, CCPI, is proceeding very well, ahead of plan and better than expected. We closed this acquisition on March 1 this year. And at the end of this month of July, we will close the Blanchester plant, one of the 2 plants of CCPI, completely integrating the production of Blanchester into our existing manufacturing network without losing a single customer in the process. And thanks to this very quick implementation of cost synergies between CCPI and us, we are now significantly ramping up both the amount and speed of delivery of the synergies following this acquisition. We expect the total synergies to reach now GBP 4 million per year as from next year. And if you take into account those synergies, the EBITDA multiple of this acquisition is now on or around 4, which is quite attractive.

As mentioned, we are now launching an expansion of our restructuring program with a further GBP 16 million of recurring savings targeted by 2021. To make it simple because we had some programs already in the back, to make it simple for you to assess the expected impact on our results, we put on this slide the total savings expected as from now from the combination of all these programs. At the same time, the share of the existing program, which remains to be delivered plus the GBP 16 million. This altogether amounts to GBP 35 million internal to recurring cash savings that we expect to flow into our results according to the schedule that you have on this slide, GBP 11.8 million in the second half this year because we have already started to implement several weeks ago this expansion of our program. So we will see the first result already in the second half, GBP 18.2 million next year and the last GBP 5 million in 2021.

As a veteran, during the first half of this year, I would like to remind that we delivered GBP 5.8 million of recurring sales. So we expect more in the second half than what we delivered already in the first half.

Now if we take a closer look at the divisional results, we can see here that the Steel Division performed quite well in the challenging market environment that we are confronted with, with a quite resilient top line because the top line increased 0.4%. It's not much, but in the type of market that we are in, it's not that bad. And we were able, at the same time, to increase our operating profit and to increase our profitability by 30 basis points. And clearly the explanation behind this number is quite a successful implementation of the self-help restructuring measures inside the Steel Division.

We were a bit less satisfied with the result of our Foundry Division obviously where our sales affected by the difficult market conditions, declined by 4.1% on an underlying basis, mostly in Asia and EU. On the positive side, if you remember last year, I told you that the price increase, we are lagging behind the raw material increase. This is now fully compensated and prices have been adjusted to fully compensate for the historical raw material cost increase.

Another negative factor in the Foundry Division, we suffered contrary to the steel of some delay in implementation of our restructuring actions in the Foundry Division in the European Union and especially in Germany. Due to these factors, the Foundry Division trading profit on an underlying basis declined by 7.3% and the return on sales declined by 40 basis points.

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

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

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Thank you, Patrick, and good morning, everyone. Before looking at a little bit more detail in terms of our revenue, trading profit and return on sales, there are a number of items on the income statement that we always run through and I think are worth mentioning.

The first one that I'd like to point out is the share of JV income, which is clearly reduced. This is as a result of the largest of our 3 Chinese joint ventures being held for sale since March, when we stopped reporting income associated with that joint venture. The joint venture was actually sold in June at a small profit of GBP 1.1 million, which has been included in our separately reported items.

Our net finance costs have increased by GBP 1.4 million. This is due mainly to the inclusion of an interest charge associated with the IFRS 16 and some FX impacts on our USPP dollar and euro-denominated interests.

Our effective tax rate in 2019 is forecast at 28%, which is in line with the guidance given at the full year results. The increase is over and above the 26% that we had in the prior year, and it's all down to the change in treatment of the way in which we're reporting our U.S. deferred tax asset treatment, which is no longer through to our SRI.

The impact of all of these increases, along with the 0.5% lower trading profit, has driven the headline earnings to GBP 63.8 million and the headline EPS of 23.7p.

As Patrick mentioned, we've extended our restructuring program, the costs of which are taken through separately reported items. By definition, these are obviously not shown in the headline numbers here, but totaled GBP 10.7 million in the first half. Of this GBP 10.7 million, GBP 2.4 million were noncash costs associated with inventory and asset write-downs, the remaining GBP 8.3 million was split between the GBP 2 million that we flagged associated with the older program and GBP 6.3 million of the extension that we announced today.

If we turn now to a breakdown of our revenue. Our reported revenue for the first half of 2019 of GBP 889 million was down GBP 7.6 million or 0.9% on the GBP 897 million we reported last year. If we adjust the reported revenue for the FX impact of GBP 3.2 million and removing the revenue of both BMI, which was a disposal last year and CCPI, this year's acquisition, our underlying revenue of GBP 879.7 million was down GBP 9.4 million or 1.1% on the prior year.

The impact of this on our trading profit is illustrated here. Reported trading profit is down 0.7% and underlying trading profit down 0.5%, both of which being better than the revenue performance and resulting in a marginal increase in our return on sales, despite the revenue decline.

As with the revenue bridge, we've adjusted here for FX and acquisitions and disposals to arrive at our underlying trading profit of GBP 98.1 million for the first half. What is evident is that the improved return on sales is as a result of the restructuring savings of GBP 5.8 million, offsetting the GBP 4.4 million decline in trading profit from lower sales.

As noted in our RNS, the GBP 5.8 million of savings was some GBP 1.2 million lower than we had originally anticipated as we encountered some delays in the delivery of programs in foundry EMEA, but the total regionally estimated benefits for foundry EMEA savings remain unchanged. We also recorded some one-off costs in the first half that will not repeat in the second half of some GBP 1.9 million.

The resilience of our return on sales in the current circumstances is a really important indicator for us as we work towards one of our key goals, which is higher sustainable trading profit margins. When we plot against steel production data, it is encouraging to note that our return on sales has been maintained above 11% despite lower steel production, and over this period was at its highest level in H1 2019.

If we could turn to the balance sheet. Our trading working capital sales percentage as of June is at 23.9%, which is flat in comparison to our year-end 2018 position. We have made some further progress in reducing our debt to the days, although this doesn't fully reflect the improvement in the overall aging of our book. Creditors' days too have improved as we continue to negotiate extension to terms with our key suppliers. These have, however, been offset by an increase in the inventory days, due in part to a normal seasonal variation where we have higher balances generally in June than we do in December, but also reflecting pocket of inventory build in preparation for our restructuring plans.

It remains our target to record an improvement on this 23.9% by year-end. In terms of our cash flow, our cash conversion at June was 82.7% as a result of CapEx remaining broadly in line with our depreciation charge and managed growth in our working capital. CapEx spend in H1 2019 was a gross GBP 28.7 million, offset by some minor asset sales totaling GBP 3.3 million, giving you the net GBP 25.4 million on the slide.

I have previously noted that with the restructuring programs, we do expect our full year CapEx to run on average at between 120% and 125% of depreciation for the next couple of years. The operating cash flow of GBP 81.8 million has contributed to reducing our net debt, although the total net debt-to-EBITDA has increased from GBP 248 million as of December to GBP 307 million by June. The 2 particular key drivers of the increase alongside the routine outflows associated with tax, interest and dividends with the acquisition of CCPI and the adjustment for IFRS 16.

Our net debt-to-EBITDA ratio that we are disclosing here of 1.3x compares to the 1x as of December and is done on a consistent calculation. Our actual banking covenants are calculated excluding the IFRS 16 adjustments and will therefore be at a lower rate, somewhere in and around 1.15x.

As a whole, our balance sheet and liquidity positions remained strong, and we continue to have the required capital base of which to support the delivery of our strategy.

With that, I'd like to hand back to Patrick for the outlook.

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

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Thank you, Guy. We experienced clearly challenging end market conditions during the first half, and we do not expect recovery in the second half. It doesn't mean that we do not expect a recovery at some point in time, because it should be a reminder that we don't see any change in the fundamentals of our end market, both in steel and foundry. Going forward, these markets remain growing market. We have experienced sometimes above average in the coming -- in the past couple of years. We have the year 2019, which will be below average, but the fundamentals of the market have not changed.

We believe that we have the right strategy to grow profitably in these end markets. And more importantly, with our new entrepreneurial decentralized organization, we now have the right people, the right teams to implement and deliver on this strategy.

As a consequence, assuming a stabilization of our end markets at current levels, we expect our trading profit for 2019 to be broadly in line with market expectations, and we remain confident in our ability to grow both our trading profit and our return on sale in the coming year.

Thank you very much for your attention. Now will be happy with Guy to answer any questions you may have.

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Questions and Answers

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David Barker, BofA Merrill Lynch, Research Division - Equity Research Analyst [1]

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David from Bank of America. Just one quick one for me. In your outlook statement, you talked about stabilization in end market in order to get to the current consensus expectations. Can you just confirm, does that mean you're basically saying H2, we should assume, world steel ex China is flat? And if so, how much visibility do you kind of have on that?

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

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By this, we assume that H2 conditions will be similar to what they are today as we speak.

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David Barker, BofA Merrill Lynch, Research Division - Equity Research Analyst [3]

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Okay. So you don't mean steel needs to be flat for you to reach guidance is what I'm saying to reach consensus there?

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

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Not meaning that average H2 will be the same as average H1. I'm meaning that we are assuming that H2 conditions will be similar to what they are today as we speak.

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David Barker, BofA Merrill Lynch, Research Division - Equity Research Analyst [5]

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Okay. And then just a quick follow-up. So I know you kind of left out the commentary on June, and we haven't had world steel data on June. Can you talk a little bit about what the trading conditions were in that month, in particular, given you're saying that you're assuming that H2 will be in line with June?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [6]

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I will not talk specifically about the most of it. But to give you some qualitative idea about the market, generally external market conditions were a bit tougher in Q2 than in Q1. In these global market conditions, the Steel Division performance was slightly better in Q2 than in Q1. And the Foundry Division performance was slightly less in Q2 than in Q1. On average, the group was a bit better in Q2 than in Q1.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [7]

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Michael Blogg from Investec. Can I go back to your bubble charts earlier on when you were describing the performance of the Steel Division and the markets you're serving. Two of the bubbles, actually the one Southeast Asia stands out as being one where you seem to have gained market share quite significantly. I just wondered what's behind that, whether it's a customer-specific or even territory-specific.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [8]

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In Southeast Asia, it's both customer and foundry. We are growing very significantly in Vietnam, which is the country where steel production is growing the most in Southeast Asia. So we -- when you compound the 2 effects, you have a significantly positive one. If you look this in comparison with Southeast Asia as a whole.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [9]

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Fine. And on your new product development, it sounds from the examples you gave us as though most of them are replacements for your existing products as opposed to new functionality. Is that a fair comment?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [10]

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I first, if I may. Yes. Many of our new products are new generation of existing products. This has [always the 2], and this will continue to be the case. But with this plate, for example, we have been introducing new generations of plate every few years for quite a long time, but each time by increasing the level of performance. And this example is interesting because we combine the consumables, which is a plate and the systems -- the mechanical system needed to enable to extract the value out of this consumable for the customer, the systems, which is also a proprietary patented system working only with the plates. And yes, this is a system and this is a plate. So you can say and you are right to say, this is replacing a lot of system and also plates. But we are going another level in terms of value and use for our customer and it's exactly the basis of the business model, which enable us to grow our market share year-after-year.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [11]

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Is it fair to say those new products generally generate better margins for you than the ones they're replacing as well?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [12]

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They are generating better margin, especially when they enable us to gain market share. Because the margin on incremental volumes is extremely good as you can imagine.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [13]

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It's Andrew Douglas from Jeffries. A few quick questions, please, if I can. On CCPI. Maybe I'm a bit stupid here, but on your charts, it looks like you did GBP 9.7 million of sales and GBP 0.8 million of operating profit in the first half. Maybe my model is wrong, but that's a touch lower than I would have expected from a margin profile. Can you just walk me through anything that I need to understand there on CCPI?

With respect to the foundry cost savings delay, has that just been pushed to the right a little bit? Or has that been pushed to the right a lot? Or has that been kind of lost? I think you had GBP 1.2 million of cost saving delays in the first half. Is that -- if you can talk through that and explain kind of what's going on, that'd be great.

And kind of slight different -- we're looking at double charts. It looks like EEMEA was down quite a lot more than market. And then your statement, you said there's a few customer-specific issues. If you could just help us out on that, that would also be great.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [14]

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I will let Guy answer on the CCPI question, but it's -- in a nutshell, it's a one-off accounting adjustment at the time of acquisition, which Guy will be much more competent than I am to give you more details. On the foundry, yes, we are -- on the plan, we -- our plan was to be 1.2 -- on or around GBP 1.2 million restructuring savings more than what we delivered on the foundry part in the first half, but this remains in the plan. It's simply a delay in time. This will be delivered over the coming months.

Regarding EEMEA, this is really a collection of specific customer situation. We had one of our customer in Kazakhstan, for example, who had a significant technical issue to stock his blast furnace. Now the blast furnace is back online. So we have some of our important customer where we have high penetration rates having specific issues during this first half, and we expect these to progressively go back to normal in the future.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [15]

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And on the CCPI, if you take the bridges, you're right, GBP 0.8 million position on the TP over the GBP 9.7 million on the revenue is not the margins that we might have expected. As part of the acquisition accounting, we have had to fair value finished good inventory, which means that our gross margin has effectively been negatively impacted in the first 4 months of operation by -- to the tune of about GBP 500,000. If you add the GBP 500,000 back to the GBP 0.8 million, you get to a normal operating margin of 13%, which is in line with our acquisition accretive to group margin.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [16]

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And just one quick follow-up. We'd all like you to make more CCPI acquisitions for 4x EBITDA. That'd be good. What's the -- and what's the outlook for future M&A? If you can give us an update.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [17]

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We would love to, as you can imagine. No. We are following our strategy. So we have identified in the strategic review that we called on sort of [EEMEA] and the team about 1 year ago a list of potentially attractive acquisitions. So we know what we would like. We know what we would not like, which is sometimes even more important. And in a systematic way, we are approaching potential targets. At the time where we established at least 1 year ago, none of them were fulfilled, including CCPI. And so there is absolutely no guarantee that anything will happen in the coming few years. But if some other opportunities will present itself -- themselves, we would look at them. But an important point is that we have also very clear ideas about the financial conditions which we feel should be necessary for a deal to be attractive. So will these financial conditions be met or not? We'll see. If they are not met, we will make no deal.

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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William Turner from Goldman Sachs. Can you elaborate a bit more on what you're going to be doing in this new restructuring program and how you come about with the costs and the benefits and what your process is for those numbers?

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

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Basically, what we are doing is the same model. We are closing plants and consolidating the capacity of those plants to other existing flagship plants. We are concentrating our production capacity in a reduced number of flagship plants which we are modernizing and automatizing. We are not reducing in doing so our overall production capacity because we believe that we are in growing markets, and we are in growing markets where our plan is to expand market share. So there is no way we want to decrease our operational capacity. We are simply concentrating this production capacity on a reduced number of plants. This year, we will close 6 plants. This year, by the end of the year, we will have closed 6 plants worldwide. And so this is a difficult exercise, as you can imagine. And because we are doing that mostly in Europe and North America, so it's complex, but we are doing it. And this is basis of our program. Your second question was?

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [20]

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Just the process of how you're coming up with the numbers.

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

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Yes. Cash. The short answer is cash. We are looking at what are the one-off cash costs of each project, what are the recurring cash savings of each project. We started this process close to 3 years ago now. And obviously, we started with the easiest and most attractive one. The new program that we are announcing today, GBP 16 million of recurring cash savings, GBP 25.7 million of one-off cash cost, ratio is 1.6%. The first action that we launched some years ago, we are more on 1%. Now we are 1.6%. So obviously, the further we dig, the higher the ratio. But a ratio of 1.6% of one-off cash costs-to-recurring cash savings remains extremely attractive. It's even better than the CCPI acquisition even if the ratio of CCPI at 4 is quite attractive. 1.6%, there is no acquisition at 1.6% last time we checked, unfortunately. So we -- in terms of capital allocation, we believe that for our shareholder, it is one of the most attractive capital allocation choices that Guy and I should make, and we -- our intention is to continue doing that.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [22]

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Could I add very quickly on -- I know that there's sort of some questions associated with how far is this going to go. I would just draw your attention to the fact that in the GBP 16 million, we're talking about GBP 4 million of those are coming from CCPI, which you've mentioned, but there's a reasonable slug associated with the acquisition. So that wasn't part of the original footprint. And then in this particular round, a bit like some of our very early programs, there is a proportion of OpEx. So whereas in more recent past it's been very manufacturing footprint oriented, given what we saw in the first quarter, we've taken a relook at the OpEx line. So there's a bit more OpEx in this one, plus CCPI in the total of the GBP 16 million.

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [23]

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It's Sam Bland from JP Morgan. Two, please. I know you said earlier that from the CCPI plant closure, you hadn't seen any impact on demand from customers. Can you extend that more generally to the other plant closures you've been doing across the group? Generally, you haven't seen an impact from demand or customer response from those. And the second question is I think you said earlier that India had been maybe a little bit more of a price-sensitive market of late. Is there anything specific about that Indian market that's making it more price competitive than, let's say, some other geographies around the world?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [24]

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On your first question, the answer is yes. So far, all of the restructuring actions that we've been conducting over the past few years, we've been able to implement them without any negative impact on our customer base. But clearly, this requires preparation, which means that before pushing the button, this is between 6 months and 1-year preparation because the customers will not see a return. The day we push the button, we assume that the plant can go on strike immediately. It doesn't always happen, but you know how to -- how these kind of negotiation can unravel. So we always get organized in a way that the day we push the button, we -- our supply chain network is organized in a way that we are able to deliver to customers from the older plants in the network in a flawless way so that our customers will not even notice. And this had been the case up until now. Now we have some orders to deliver, so we still have some project to implement, but we have a clear methodology to make sure that the interests of our customers are fully protected when we implement those operations. And we've been successful so far.

India, very -- I would say a conjunction of circumstances. On one end of it, you have the market growing clearly slower than expected. The growth of steel production in India during the first half was 1.1%. At this time in the year, European or North American rates are -- so it's the time of growth rates. India is expected to deliver. So you have, at the same time, a slowdown in demand. And at the same time, it's clear that more or less, all the refractory producers in the world seems to believe that India is the [Dorado] of tomorrow. So you -- the conjunction of these 2 phenomena has -- result in an extremely and increasingly competitive environment in India. In this environment, it is not our policy to undervalue the quality of our products, and we believe that this is the right thing to do in a long-term strategy. So short term, this may result in some volume losses. But this has happened in the past, by the way. This is not the first time in history that you have some ups and down in the Indian market.

We are not overpricing our products. We have no intention to underprice our product. And each time in the past, this type of phenomena happen gradually. Then the customer realize that in terms of global value in use, it's better to use our product even if it's a little bit more expensive than some lower-quality products from competition. So we are -- we don't see what happened in India over the past few months as neither anything unusual nor structural. And we feel that over the coming months and years, it will gradually come back to where it is on the long-term trend. And our intention is to continue growing both of sales and market share in India.

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Unidentified Analyst, [25]

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Yes. Kevin (inaudible). Couple of questions. Following up back on the general pricing comment you're making there about your wider strategy. Obviously, you referred in the presentation to foundry and the fact that you've recovered past raw material rises. If anything, some of your own material costs are starting to drift down. How do you think about the pricing environment against that backdrop in foundry? And then also, how do you see the balance in pricing and raw materials in the steel side of the business? And then on my second question, whether or not -- so you set a 12.5% margin target for next year. You said that a little while ago, the world was a little different. Is it still something you think is achievable? And what backdrop would you need to make it achievable?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [26]

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On your first question, our business is not to make or lose money on raw materials. We have a clear strategy of not being integrated upstream. Our business was really to add value to these raw materials. We are not a mining company. We don't intend to be. That's the reason why we are -- look at the too intensive industry, and that's the reason why we can generate permanently a good level of free cash flow, so -- or activity. What it means is that when raw material prices increase, we increase accordingly the price of our finished products not above the raw material increase but not below. And conversely, when raw material prices decrease, we also adapt -- because it is a fair thing to do in the management of a long-term relationship with our customers, we also adapt downward our finish product prices without any negative impact on the whole profitability because we are not integrated downstream. And it's clear today that if you look at the general situation in the raw material market, over the past couple of years, we are more in an increasing type of market. Today, some raw material prices have already clearly started to decline in line with the general economic situation. But for us, we don't see that as having a negative impact on our profitability and results going forward.

On your second question, assuming market conditions will stabilize at current level, we believe that our margin objective remains achievable.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [27]

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Dave Larkam from Numis. A few ones on the numbers first. There was GBP 1.9 million of nonrecurring costs, I think you said, Guy. Can you just give us a bit more detail on that? And then secondly, in the provisions, there's a GBP 5 million release. Can you talk about that, where it's come through in the statements?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [28]

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Sure. Well, I'll start with the first one because I can answer that. The one-off costs of GBP 1.9 million that we had on the bridge is -- the vast majority of that is associated with marketing and expenses for GIFA-METEC, which is a 1-in-every-4-year trade fair that is done by both Foundry and our Steel divisions. That simply won't recur for a number of years going forward. And the H1 to H2 split that we are naturally going to want to look at, I felt it was important just to strip that out to make sure that, that was understood.

In terms of the provision release, Dave, I'd probably want to just unpack that a little bit more before coming back to you with any specific answer.

We have seen in terms of our major provision movements, a marginal increase in our central doubtful debts provision. We've done that on the basis of our current market conditions. British Steel was obviously a big customer of ours. We've managed to get through that without having incurred any bad debt expense. But given the current market environment, we felt that it was appropriate to increase our doubtful debt by GBP 1 million. I would need to just chat with you separately, frankly, to understand the GBP 5 million..

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [29]

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Still on the operations. I mean you mentioned that the raw materials -- you said there was a bit of pain on the way up with raw materials. Do you get a bit of sort of extra flex on the way down generally? And then just on the cost savings of GBP 35 million, can you give us an indication, Steel/Foundry, how that breaks down?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [30]

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The -- it's a fair question about -- we took some pain on the way up. Will we take some pleasure on the way down? We are not factoring this into our accounts. We'll see what happens. And it will depend on the speed. And so it's a little bit beyond our control. But on this point, again I can only stress that it's not our business to make or lose money on raw materials. We highly value the fairness of our relationship with our customers. We have long-term relationship with our customers, especially in the steel industry, and the strength of this relationship is based on the way we manage our image and our brand vis-a-vis our customers. And I think we will behave in a fair way vis-a-vis our customer. And in exactly the same way, we expect them to behave in a fair way vis-a-vis us on the way up. We will behave in a fair way on the way down. The -- regarding where most of the savings will come from, there is a majority of those savings in the Steel Division. It's not only in the Steel Division, but in the savings going forward, out of the GBP 35 million, a significant majority of this is in the Steel Division.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [31]

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It's Robert from Morgan Stanley. A couple of questions just maybe around these restructuring plans that you've had. Obviously, over the last few years -- so you said you've aggregated them all in one slide given there've been a few announcements made. I guess I'm just trying to get a feel for how much further scope there could be if you see more of a slowdown. Maybe if you could just frame it in terms of, I guess, the number of plants you currently have globally. You mentioned you were taking out 6. Are there more obvious ones kind of lower-hanging fruits still sitting around where you can bring further capacity out, further consolidation? And sort of what sort of typical expense do you take on a sort of per plant basis? That would be helpful. And then maybe just around the digital business, I know the numbers are still quite small, but maybe if you can give us some color there. You obviously had that in the group for a couple of years now and just the progress you're making there. So it was down year-on-year. Maybe just what customers' uptake has been on that?.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [32]

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Regarding the restructuring, low-hanging fruits, honestly no because we've been in this exercise for the past few years. And after a few years of screening, I am doubtful that there will -- there are remaining low-hanging fruits. The reasoning, to get back to the previous questions, one of the previous question, is a cash reasoning. So we started with a ratio of one-off costs-to-recurring cash savings, which were 1 or sometimes below 1. Then we are progressively increasing. The current ratio for the new actions that we are presenting today is 1.6%. And if you strip out the CCPI benefit and cost, we are closing to 2%. We are -- excluding CCPI, the ratio is closing to 2%. Quite attractive, so I think we should do it.

So obviously, the other remaining opportunities at less than 2% ratio of one-off cash costs-to-recurring cash savings, I don't think so. I don't think -- so I think that we are now -- have a quite significant exploration of what was possible. Now we'll see if there is or not reasons to go further in the years to come, I think, one step at a time. Today, the focus on the team is on delivering what has already been identified and, if I may, [pummel]. So this is keeping the team busy. Once they've done that, normally it's a normal cycle, we will ask the team to look for other opportunities.

On the digital business question, the first thing is that I would like to remind that out of what was previously the digital business, we have shifted a significant fraction -- portion of this inside the Flow Control and Advanced Refractories division essentially last year. And the part that is now completely integrated in the business, and there is a Digital Services division inside Flow Control, are -- the lasers are now -- the lasers or robotics part of Advanced Refractories are now integrated into Advanced Refractories. The part of the Digital Services activity which is integrated inside the division is doing quite well. The part which we have been keeping as a separate entity, under separate management has been decreasing slightly over the first half, as you've noticed, and this is mostly a part which we call sensors and probes, which is not completely -- which is there -- for historical reasons is completely related to our overall global long-term Digital Services strategy. So this part has been experiencing some top line -- a clear slowdown of top line evolution during the first half, but we don't see that as having any impact on the global development of our overall Digital Services strategy, which is more based on the continuous measurement of parameters and linked with the overall process. So this is that part which has declined on the first half.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [33]

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That's great. So maybe if I can just sort of follow up on your first point around the restructuring and consolidation. I guess what I'm trying to get a flavor for is you mentioned that maybe there's nothing below 2x ratio in terms of savings anymore. But when do we sort of get to the break point where you do something, I guess, more dramatic, more structural to the business and this sort of savings plan can be coming on a fairly sort of drip feed basis over the last sort of 2, 3 years? Is there any likelihood that we see something more structural or larger in the next couple of years? Or if you need to take further steps, is it going to be sort of more of the same?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [34]

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Our perception is that we have been doing quite structural and dramatic things. But I think it's all a question of perception. But -- and we were -- we are closing 6 plants this year. If you ask most of our people, we'll probably find that it is structural and dramatic. But it's all a question of where we place the level of perception. And so this is not continuous improvement. And to be very clear what we are doing, continuous improvement, this is the bread and butter. We are doing that on top of it. What we are -- what we've been doing and what we are launching to do today has nothing to do with the classical continuous improvements that you have in a normal business. These are really structural measures where we are closing full operations considerably restructuring our manufacturing, supply chain organization and with structural impact. So this -- if there is more of it, it would be of the same nature.

If there are no more questions, I would like to thank you for your attendance today and wish you a nice and warm day. Enjoy.