Good afternoon or good morning to all analysts, shareholders, investors, and other participants on this call. Please be informed that the meeting will be recorded. Oswald Schmid, CEO, and Taoufiq Boussaid, CFO, will guide us through the news that we are sharing today, including our business context and priorities, the results for the first half of 2022, and our outlook and ambitions. I now give the floor to Oswald Schmid, CEO.
Thank you, Katelijn. Good afternoon or good morning. Hello, everyone. A warm welcome on behalf of Taoufiq and myself. We're happy to share with you the results of the first half of 2022. We will also give some insights on how we perceive the ongoing macroeconomic development, how we are moving Bekaert to the next level in its strategic transformation. First of all, let's have a look on the financial robustness of Bekaert with some figures of the first half of the year. Delivered robust sales growth, you see it at +24% in an environment which, of course, was also guided by lower volumes, by inflation, but with very strong pricing. The underlying EBIT was inferior to last year, and here we have to make a remark. We know the first half year of 2021 was an exceptional one.
We are here on the same basis as we had last year. The ROCE continued to exceed 0.88. These results, and the financials are always an outcome of the results, what we do reflect the focus of our actions that we have made us more resilient to the economic cyclicality. Those actions we have to continue the strong capitalization to further work on the excellent operational performance, leveraging the benefits from our global footprint and local services as for our customer. Further to this, of course, this might be a smaller part, capturing already short- to medium-term growth opportunities, both sustainability and innovation trends. I will come back to this in a moment. Looking at the financial parameters, and here you see we have compared the last six months, we achieved strong and constant sales growth up to 24%.
The underlying EBITDA comparable to the year-on-year, what we have shown in an exceptional year in absolute amounts, of course, from 2021 to 2022. The net debt leverage below a factor of one. There's a robust growth in the net results with an EPS earnings per share increasing by 14% to EUR 4.16. Of course, Taoufiq will go a little bit more into details of these financials, but I would like to put and summarize the context of the market environment in which we have achieved these results. The environment was very turbulent and is very turbulent with widespread macro imbalances, not only for us, for our customer. Yes, indeed, for all of us. We see it every day in the news, and we experience it every day.
Very high inflation and cost in all input costs, changes in the monetary policy as a reaction to the inflation. As the energy shortage crisis coming up more and more, and on top of the shortage of materials, it's labor and logistic issues. We have seen the impact of supply chain and COVID-19 lockdowns in China for many months. We have seen that, you know, for many weeks, the factories maybe have been closed or people have been in a kind of closed loop production in the factories, living and working. There is the war more than five months continuing, Ukraine and Russia, and we see in some areas weakening economies. However, we see also tailwinds, positive developments that create real and new opportunities. The reverse globalization trend, they continue.
This is a benefit for Bekaert because being present on a global scale, we can further utilize this setup to serve our customer better. The energy transition accelerates towards renewable energy sources such as wind and hydrogen. But moreover, there's a strong trend to energy independence. It becomes crucial, particularly when it concerns, for example, Russian gas for Europe, and this will trigger even more investments in some special countries. In addition to that, sustainability trends and decarbonization will benefit other markets and investments as well, such as low carbon constructions. We all see the electric vehicle trend is growing. It's a growing market with good opportunities for offering our products in this area. Stimulus programs in U.S., mainly utilities, and as recently announced also in China, EUR 220 billion mainly in infrastructure and automotive.
They will support and should boost the economic activities in and demand in these areas. Now how do we deal with all these headwinds and tailwinds, but we remain focused on our value creation agenda. How do we continue to perform, transform and grow? You might remember we started this in 2020, and we have made significant progress in a turbulent environment in performing and transforming our business. It has proved to be truly a value creating for customers, make them successful, for people to attract them to work for us, the society, and of course, for the return of the shareholders. We see this value creation already benefiting all the stakeholders. When we talk about the customers, we see more and more long-term supply agreements. We see more and more customers joining in development contracts.
We of course see the supply continuity through the crisis was a very big lever. Global leadership in the areas where we're in with local presence. The return value to shareholders by increasing their dividend, and I'm sure you're aware of this, by 50% and the continued share buyback which we are doing. This was the Perform, Transform, Growth, as we called it 1.0, meaning perform strong execution and focus in key performance metrics. This can be on P&L basis. This can be balance. This can be how we deal with. It was about setting up innovation, digital, sustainability as a key lever for growth. Goals was about putting the seeds of growth, building positions in hydrogen, low-carbon. Now we're taking it to the next level of Perform, Transform and Growth, and we call it 2.0, with a kind of dual track.
The first one is strengthen the core where we're in for a long time, which of course, is the absolute main one. There's a second part slowly developing, and this is really where we say in Perform, strengthen the core, further improve the business mix. Let's look continuously at the position of the customer. In the Transform area, it's about creating smart, sustainable, safe solutions by expanding our digital beyond steel alternative materials and services offering to the key markets. Grow means leadership in target markets, which we see as a future growth areas. That's the Bekaert's core we wanna strengthen, and then we seed the first seeds. I would say we plant the first seeds in the Bekaert beyond. Strategy focus, and this is our core and beyond approach, is really aimed at future-proofing our balanced portfolio.
Our objective is, as said before, value creation for all stakeholders. Strengthen, optimize the core business where we can. We have in many areas, we are absolutely the trusted and preferred supplier of Steel Wire Solutions . As mentioned many times, with the global footprint, we are close to the customer in every sense. We want to go from being a leading solution supplier in selected markets. Allow me just to give you three examples. The first one is enabling the energy transition for renewable electricity, power infrastructure and hydrogen production. Another example is supporting and facilitating urbanization with a clean and high performance solution in the areas of concrete and CO2 reductions. Of course, the electric mobility, as also mentioned before, the offer we can give to the customer.
This of course translates in the half-year focus areas we have in 2022, leveraging discipline, passing on cost inflation, and making sure that all our actions in plan are executed. We are continuously working on the portfolio management to look which are the businesses which give us the return we are aiming for, continuing the operational excellence in customer intimacy. The second part is to look where we can add in the area of low carbon concrete reinforcement solutions that we can contribute to decarbonization, where we can help on the energy transition. We have project wins in offshore wind farm tenders that will give some examples later on in further building a leading position in the hydrogen electrolysis technologies. We are expanding our position in energy utility markets in the U.S.
Here we see a chance to go further, and the area of electric vehicles for sure will give us some more areas for innovation. Smart, sustainable, and safe solutions and wins. I will just focus on a couple, two, three points. Here you can see on top of the map, we are implementing the first slabless elevated construction programs with our partners, CCL in Norway and Germany. This is a low carbon concrete for elevated slabs with Bekaert Dramix fibers. It has two ways. The first one, it's much easier to install. It reduces the TCO, it reduces also the CO2 footprint. On the right side, last week, I think we're very proud of that, we concluded the first synthetic ropes contract with MingYang Smart Energy, and this is China's leading wind turbine manufacturer.
We deliver synthetic mooring lines for the newest type of offshore floating turbines. In the middle, it's not a project win, but it's a very prestigious award win. In May, Bekaert won the Tire Technology International Award for Innovation of the Year at the Tire Technology Expo in Hannover. For the people who know tire, well, this is a, I would say, very recognized award here, and it's about cobalt-free steel. Because cobalt, you know, is maybe not one of the materials you wanna use in the future. This would allow tire makers to make their products entirely cobalt free. Altogether, exciting product projects that illustrate where the world is moving to smart, sustainable, and safe solution, but also an illustration of Bekaert's contribution and presence in exciting projects all over the world. Here, last but not least, a small update of our global presence.
You see there the world is quite covered with products. You see our manufacturing bases, offices, technology centers, engineering centers. When we look in the first half year, how was the geographical allocation? 39% was EMEA. When you take North America and South America together, it's about 36% and followed by Asia-Pacific area with 25%. From the consolidated sales by industry, of course, in automotive with our Rubber Reinforcement, but many other applications like wipers or window regulators, that's all together. It's the very strong one. Construction is coming up more and more. I think energy and utilities will be for sure the one which we see much more growing in respect to the allocations. Now what I think is time to Taoufiq to look into the figures, and I'm handing the floor to you.
Thank you very much, Oswald. Good afternoon, everyone. Again, my pleasure to have this opportunity to take you through some of our key financial highlights for the first half 2022. I would like to make just very quickly a couple of disclaimers to elaborate on the context before jumping into the figures. As you know, during the first half of 2022, we cannot say that we were evolving in a normalized context. The situation, the slowdown of the economy in China has been further exacerbated. More importantly, I mean, the effect of the inflation continues to increase, the post-pandemic situation combined with the war in Ukraine have made the overall environment more complex.
It was overall a very challenging, volatile and complex environment to navigate, and our performance needs to be interpreted in this context. The second small disclaimer is that for most of the comparisons that we will be using in the discussion, we're referring to H1 2021. As you may remember, H1 2021, we posted a fantastic set of results. The bar was very high, and as you can see, for many KPIs, we have managed to match or even beat many of these results. With that, I will jump into the sales. I will comment on the overall sales for Bekaert, and then I will elaborate on the specific business units' performance.
Our consolidated sales have grew almost 25%, a significant expansion of the top line, our consolidated sales standing at EUR 3.5 billion almost. There is, well, significant boost for the last six months. With these volumes we are hitting new milestones and another record. This performance is allowing us to deliver almost EUR 500 million incremental sales compared to the same period of last year. A very strong set of results, which have been crystallized by our continuous focus on better segmentation, product portfolio, innovation and as well reduced presence in lower margin applications.
While our active pricing management has allowed us to mitigate the impact from the inflationary effects that we have seen so far. We have approached our markets with a lot of discipline. This is how we have been quite successful, and we will see it later when we discuss the gross margin. We have been able to translate many of the cost increases in input costs in a quite successful way. As I said, I will elaborate later on the specific views. I will jump directly into some of the P&L metrics, and I will comment first on the cost of sales. As you can see, our cost of sales grew almost by 30%.
This is a direct impact of the inflation we have been suffering from, actually since 2021. It's touching really all categories of input costs, so ranging from labor down to raw material, utilities, transportation and obviously energy. However, as I have explained it, we have been working hard on the price and the mix, and this has allowed us to absorb significant, if not all of the impact that we have been suffering from these increases. Not only the increases from the inflation, but we have also compensated from the operational leverage that we had to hold as a result of some volume shrinkages that we have seen in some specific geographies, namely China and Latin America.
As a result of this performance, we are posting a gross profit of EUR 472 million. It's actually in line, EUR 1 million short, with the level of performance delivered in H1 of 2021. In relative terms, there is a dilution effect of 4 percentage points, which is triggered by a couple of elements. You know that the sales growth, there is a component of it associated with the push of the inflation effect. Obviously, this push does happen, or this pass-through of inflation effect does happen without markup, so it doesn't generate the margin.
The second effect is related to a timing delay, so we are incurring the cost increases ahead of the timing where we're pushing these impacts in our end prices to our customers. Moving further down the line, overhead expenses. We have a decrease in percentage by roughly 120 basis points at 7.3%. In absolute terms, we have a slight increase in the range of EUR 13 million. This is mainly related to some expenses associated with some IT project and also an accounting reclassification from balance sheet to P&L, as some expenses associated with some licenses needed to be considered as CapEx and not OpEx.
In the line other operating revenue and expenses, EUR 19 million, there is the impact of the proceeds resulting from the sale of an idle asset. That's land that we have in Doncaster in the U.K., which is amounting to EUR 11.5 million. Moving to the EBIT. There as well, when you look at the evolution, remarkable stability given the context and the challenges that we have to deal with, EUR 283 million with almost no impact. EUR 1 million coming from inventory valuation as the impact coming from the inventory valuation in 2022 was equivalent to the impact that we reported in 2021.
Looking at the three main blocks that we have in the graph, you will see that we have a volume impact of EUR 32 million. That's the impact of the operational unit damage resulting from the volume shrinkage. There's roughly 50,000 tons, 56,000 tons missing from RR entirely in China. There's another 46,000 tons missing from Steel Wire Solutions across many regions. This has triggered this volume related drag, which is also translated partly in the cash conversion cost as it triggers a fixed cost under absorption, to which we will need to add all the impacts coming from the inflation. This is leading to the EUR 110 million degradation of the cash conversion cost.
The combination of these two gray boxes and drags, that's amounting to EUR 142 million, that we're compensating for 90% of its value through the pricing and mix effort and the great performance delivered by the company in terms of mitigating some of the headwinds that we've been facing. The other lines I have already touched on, the overhead, small degradation related to IS/IT. On the line other, that's mainly related to the sale of assets that I have referred to. Now, moving into the business units performance, and I will start with RR.
RR is reporting a very solid sales growth of 12% versus H1 of last year, despite the volume drop that I was referring to, which is exclusively coming from China. We have been able to compensate all of this volume drop in terms of top line through the very good performance in terms of pricing and mix and passed on input cost price increases to our customers. This has allowed us to offset more than the gap, and we're still reporting a 6% organic growth on the top line, which is complemented by an additional upside coming from the FX movement. Negative impact coming from the demand situation in China. Several different reasons actually explaining this situation.
The first one is that country had to go through several rounds of COVID lockdowns since March 2022. We kind of started seeing a slowdown of the demand overall in China back in end of Q2 2021. At that time, we thought that it was temporary and that the situation will improve. As of end of Q2, we still don't see this improvement. However, we do see first sign of changes. We do see them in July. Whether this will be further crystallized, it's hard to say, but we do consider that inventories in the supply chain are progressively depleted.
Hopefully, the continuation of this inventories depletion will start generating a growth starting the end of Q3. That's at least one of the outlooks that we have. Again, it's very hard to predict given the volatility of the environment. Looking at some of the indicators that we're following, that's our interpretation of the situation. On a more positive note, I think that it's important to state that all the other regions where RR is present has performed quite strongly. To name a few regions, EMEA and India are definitely very performing very well. All our plants with the exclusion of China are operating at full capacity, so this is a very good indicator for us.
The EBIT performance, you see a dilution versus H1 2021. This is primarily coming from China, and it is distorting the overall value performance. Again, while the other geographies are performing at a very good level. For the second half, we are expecting a modest recovery in China. It's an assumption that still needs to be tested. The other regions will continue to perform quite well. We do think that the stimulus program, which will be implemented in China will also be beneficial to the automotive and the consumer spending, and this will have a knock-on impact on the entire demand of China. Moving to Steel Wire Solutions.
A sales expansion of 26% as well on the back of a very strong price mix and fast raw material changes, which is accounting for 32%, on top of a Forex movement of roughly 3.5%. This is compensating as well a drop of volume which is roughly in the range of 9.4%, which is corresponding to the 46,000-48,000 tons that I have referred to earlier. The volume decreases were in specific case of SWS across the board. We saw a drop of volumes of 6% in the important market of Latin America and an equivalent of 8% drop in volumes in the EMEA, 3% roughly in North America.
China, Southeast Asia, it's a very small market for Steel Wire Solutions, but the percentage was much higher. It was in the range of 13%. From a segment perspective and application perspective, we continue to see a good momentum in the utilities and the energy markets. We are still banking on this improvement to continue for the balance of the year. However, some other type of applications like construction and agriculture will be somehow struggling a little bit for the balance of the year. We do hope that a stimulus program in the infrastructure in China will benefit our business in SWS. Overall, the situation is characterized by a drop of volume as we speak.
Moving to Specialty Businesses . Specialty Businesses is reporting a very strong increase of the top line of 74%. Part of this increase is related to the reclassification of a business segment, the Hose and Conveyor Belt from RR to Specialty Businesses . If we exclude this reclassification and you look at the three other segments, that increase is 38%. Very strong level of performance. You see this performance as well translated in the EBIT percentage. All the segments have reported a very robust double-digit growth and a very strong level of profitability on the back of very solid mix and very strong pricing.
Going into a bit more detail and looking at the specific segment within Specialty Businesses, and starting with Building Products, very strong top-line growth in the range of 51%, further compounded by, and that's important to mention, a volume growth by 10%. A very successful implementation of the actions associated with the mix and the pricing, which is also helped by a shift towards high-end fibers for specific construction applications. Fiber Technologies, there as well, very strong performance. Top line growing by 26.5%. Very strong momentum in high-end filtration, in semiconductor, in hydrogen applications. Very successful execution of the price up campaigns.
The automotive related applications are somehow a bit behind or generating a small drag, mainly related to the issues with the overall supply chain in the sector. Combustion Technology, there as well, very strong performance. An increase of 21% of the top line. Successful execution of a price up campaign as well. Very good execution of some operation adjustment with the shift of production from the Netherlands to Romania, which is allowing us to be more cost efficient. Last but not least, Hose and Conveyor Belts . There as well, record sales actually for the first six months, which is mainly delivered on the back of a very strong demand from OEM manufacturers.
The projections for the view for the foreseeable future is that for the moment we do not see any specific reason why this trend should change. We're still aiming at a very strong performance for the balance of the year. We do see immense growth prospects for Dramix steel fibers. Fiber Technologies will continue capturing the momentum that we see in advanced hydrogen electrolyzers. For the combustion business, the shift towards more environmentally friendly burners will continue, and this will allow us to further capture some of the opportunities in the market. Last but not least, BBRG. A top-line growth of 13.4%. There as well is on the back of a very strong pricing realization.
Some positive coming as well from the FX movements, which are compensating the volume drop of roughly 11%. The order book for the business is again at record high level, primarily driven by the business momentum that we see in the U.S. We'll be able to further crystallize this momentum with the capacity expansion that we are currently conducting for the U.S., while the situation in Europe is somehow on the low end, mainly resulting from the scale back of our trading activities with Russia.
Other region where the business is present is LATAM, and there, we continue to see a very strong Advanced Cords, the year-on-year growth was relatively modest, mainly impacted by the slowdown of the construction activity in China. That's for our specific segments. Just to continue moving through some of the P&L KPIs. We are reporting a result after tax of EUR 223 million. That's EUR 26 million increase versus last year. Main contributor is obviously the EBIT performance, but as well, some intermediary lines like the other financial income, which is quite unusual. This is the proceeds generated through some of our financial instruments.
We do see as well an improvement from the income tax. We are reaching a record low level in terms of ETR, mainly resulting from the usage of some deferred tax assets. One-off, so to speak, this is not a performance that can be repeated. 20% is not a normalized ETR. We have already discussed our expectations in terms of the normalized ETR, which is more in the range of 26%-28%. Nevertheless, very good performance expected for 2022.
Last but not least, the share in the result of the joint ventures and associate slightly below 2021, but still a very strong EUR 29 million on the back of very strong performance of our joint ventures in Brazil, which are reporting a significant increase of the top line also increases of volume. Very good performance that we are expecting to see continuing for the balance of the year. That's for the P&L. Moving quickly to the balance sheet. As you have noticed, our average working capital on sales has increased to 15%, so clearly not at the level where we would like to see it, but it's something which is clearly driven by the environment where we're navigating.
The key driver on the increase of the working capital is associated with the inventories. The accounts receivable really 10%. As far as the inventories is concerned, there is 60% of the increase which is associated with the raw prices, which create higher value of our inventories. 40% is related to increases in tonnages, and there are two drivers. The first one is that we needed to rebuild our inventory levels after a very low opening balance sheet at the beginning of the year. We are not expecting this figure to stay as they are. We will be actively working on them to further optimize them for the balance sheet.
Some key figures per share, and there, the relevant figure, and Oswald has touched on that, is the very nice step up that we are reporting for the EPS at EUR 4.16. The result of all the good work and the improved results that we have been able to deliver during the first half of 2022. A quick recap on where we stand with the share buyback. You all know that we have initiated the program back in 2022. The first two tranches of respectively EUR 30 million have been completed. The last one has been completed on the twenty-second of July.
We have relaunched or launched the third tranche of the program today for another EUR 30 million, and we will be canceling incremental shares that will be acquired during the balance of 2022. Outlook. We are conscious that this outlook might create some frustration because there are no figures in it. Again, bear with us, I mean, given the current situation, which we'll be reading in a crystal ball, if we want to provide a more precise guidance. I think that the key message for us is that we are conscious that we'll be continuing navigating in a complex environment. There are some clouds which are accumulating in the horizon.
The situation might potentially become even more difficult in the next six months. However, we do think that we have proved the demonstration that we know how we can manage this type of challenges. We are implementing contingency plans. We will further accelerate some of the structural cost savings that we have. We didn't tackle all the hanging fruits that we have in the organization, so we will make sure that we tackle them in a structured way. The pricing discipline is there to stay. It's not something which is punctual, so we will continue to further leverage on that, and we will continue looking at it actively at our portfolio management. That's how we see the situation.
The organic top-line growth, I'm aware that we have provided the guidance during the first half. I think that again, because the environment is becoming even more volatile, it will be difficult at this stage to make a firm statement on that. All we want to say at this stage is that we will be actively working on it to make sure that we deliver on the guidance that we have initially provided at the end of Q2. Now Katelijn Bohez.
Thank you. Thank you, Taoufiq Boussaid. We now start the Q&A session with our covering analysts. When you have questions, please raise your virtual hand, and when invited, unmute your microphone, turn on your camera, please identify yourself, and raise a maximum of three questions per round. We will organize as many rounds as needed. I see that Emmanuel has already raised his hand, so please shoot, Emmanuel.
Yes. Hi, good afternoon. Emmanuel Carlier from Kempen. Two questions to start with, both on the guidance. Starting with the sales guidance. After the Q1 trading update, you kind of indicated that organic sales growth would be around 18%. I think during the presentation you have been pretty clear on how you expect the volumes to evolve. But could you be a little bit more specific about how you think about pricing? I think it would be helpful to hear how the wire rod pricing is evolving. That's the first question, a bit more clarity on how you think about pricing in the second half.
Yeah. I mean, again, all the statements we will make are working assumptions, which can evolve significantly along the way. What we have seen in terms of wire rod pricing, because it's generating significant impact on the top line, that last year it has increased by more than 50% versus the position at the beginning of the year. We saw a further increase of the wire rod prices by 20% during the first half of the year. That's the situation here today.
We do think that the situation will evolve because supply of wire rod is easing across many geographies, probably with the exception of China, where the expected rebound generated by the stimulus program will probably create some tensions on the overall wire rod situation. The assumption that we have taken so far is that prices on a compound average rate will decrease. The gain of the 20% or the increase of 20% will be translated into a decrease of 20% for the balance of the year. Therefore, the cost inflation impact coming from material that we have reported for the first half will not be translated one to one.
We will obviously now adjust our strategy, we have already done it in the past, to hold on the current pricing level as much as possible. Just by the nature of the business, we know that there is a natural time lag of roughly three months between the moment we see the decreases of the prices and the moment it is translated to end customers. That's for the moment the expectation that we are banking on.
Okay. That's clear. Maybe just one updated question on that. What is the spot wire rod price indicating today? Is that already showing some decreases? I guess it's.
It has.
depending on some region, but
It is very much. Well, it's depending on the region and on the wire rod grade that we're seeing. With the exception of China, the indication is that it's slightly decreasing. Not massively, but there is a decrease which is already noticeable in July. Not to say.
Absolutely. I think it's not only wire rod which we are watching. It's also the other ones on energy, you know, utilities. We are looking at this one. As Taoufiq was saying, it depends a little bit on the regions. In China, we see more the flattish one than, say, in other areas. It's really about also, you know, what is the stocks, what is the inventory? Is there some demand coming back? Maybe we see this also in China. It's still a little bit of a crystal ball, what we need there. I think the overall trend comes into the softer.
Is it fair to say that you kind of, in your mind, think that pricing could go down 20%, but as of today, you only saw a limited decline so far?
You mean the wire rod prices?
Yes.
Yeah. Yeah.
Yeah.
The wire rods. Yeah. If it happens, it will be gradual. It will not come one shot. It will happen gradually over the next 6 months or 5 months until year end.
Yeah.
This, Emmanuel, as you know that we have, for example, in Rubber Reinforcement , we have contracts which are also based on some indexes, and these indexes always shift up, but also the downs in this way. This is exactly what Taoufiq is referring to. There's always a time delay of shifts in this matter.
Yeah. That's clear. Thank you. My second question is on the guidance on costs. In the guidance statements, you literally mention that you're looking at additional structural cost savings.
Right.
Could you elaborate a little bit on that? What do you mean with it, and what kind of savings would it result in?
There are different type of structural cost savings that we are aiming to tackle. The first one is that, I mean, if the volume continue decreasing, we will need to make sure that we absorb a more efficient way our fixed cost. This will mainly rely on some self-help measure that we have already executed on in 2020 during the COVID crisis. We will duplicate some of these measures. We will also look at cost savings associated with our suppliers. We will make sure that our wire rod is acquired at the best possible price, probably optimizing the mix of grades of steel that we will be acquiring.
The back offices in the company are also going through a phase where we are optimizing them, further leveraging on global shared services in low-cost places. The third leg will be to look actively at our footprint to make sure that it's completely optimized. Obviously, for this last one, it's not something where we can tell you where and when. All I can say that it's something that where we will have a higher sense of urgency depending on how the volumes will be evolving. We are not ruling out the possibility to take actions when it comes to this specific aspect.
Okay. Thank you. Is there any quantification you could give us? I know it's a bulk of many different elements, but I guess you have in your mind the kind of number you would like to lower the cost base with.
Yeah, we have in our mind something, but I think it's still premature to tell you what the figure is.
Yeah. Okay. Thank you.
Thank you, Emmanuel Carlier.
I would now give the floor to Wim Hoste to raise his questions. Wim?
Yes. Good afternoon. Thanks for the opportunity to ask questions. I have a couple ones. Maybe first on Building Products. Can you maybe elaborate a bit more in detail about your take on the outlook for that globally and certainly also with regards to China? There's a lot of I think volatility in the Chinese construction market, some large developers getting into trouble. I was wondering on your view on the outlook for Building Products globally and certainly also in China. That's the first question.
Second question would be, looking back one year ago, you had a strong first half in Steel Wire Solutions, partly because you gained contracts because some of your competitors were not able to supply as fluently as before. Are you now holding on to these contracts? Have you gained and locked in the share of wallet you won last year or is there kind of reversal of that trend? That is the second question. I would like to ask one third question on your balance sheet. It is still very strong, even if working capital was a bit up and what's your take on the use of that balance sheet strength going forward? Is M&A still on the agenda?
Is it more bold- on how are you looking at the progress with regards to the share buybacks? Any thoughts on all of that? That would also be helpful. Thank you.
The first one.
I think the first one, yeah, and Taoufiq was explaining, Building Products is one, even it's not the majority of our business, but a real highlight. When you look at this, when you see we have a +17%, I think I call it, operating increase there. It was where we also fixed in a much better way the pricing. We have been looking on the demand and supply. But when you come to this, a lot of this is in Europe. I think this is a business where we really think also to come out of Europe to look further what we can do in U.S. Because in U.S., I think even some there's different opinions if there's a recession. The finance minister, she said this morning, it's not the recession, it's maybe you know, it's very difficult.
I think U.S. is where we're looking at this one. Of course, Europe was one we had to fix and also to pass on the costs. India, it's a minor exposure, but this also goes very well. China is not the impact because the, I would say, the exposure we have there is very limited. Overall, I think we can say in the first half of the year and also starting even in the last months of last year, BP has done a great job in progressing in their products.
For me, you know, I mentioned several, the Dramix is really the way where we can say sustainability is a business opportunity because it gets really more and more in the mind of our markets, of our customers to reduce the CO2 negative impact you have out of cement, and the less you use, the better it is. Here one example I just mentioned with the slab, but we have to elevate the slab is just shows there's an increase in the awareness. Does this take off at all or is it a light switch? No, but it's constantly growing. We have done the basis, we have done the prices, we have looked, and I think there were some, I would say, special buying in the first half of the year. We have been also the inventories we have to lower at our customer.
A little bit of this, I would say strong increase is coming. There was people replenishing their inventory. When you take an overall trend, I would say Europe's strong. America, we want to increase our footprint. India, I think we get, I would say, quite some good feedback. India is anyway a country where we would like to focus much more on because there's a slower growth but a constant growth. When you look there, like also in Rubber Reinforcement, with the radialization what's going on, I think it's a promising market. It takes maybe a little bit of time, and coming back to China, it's a little bit exposure there.
Just to complement this one, if you allow me also.
Yes.
I think that when it comes to BPR, I think that what we're seeing, especially when it comes to the steel fiber, it's really a structural trap. Because one of the key hurdles that we had to deal with, and to some extent still need to manage in short-term future, is the adoption. You know that construction is a very conservative environment, so they want proven solutions. When you come with something very innovative as using steel fibers in constructions, it's really driving some challenges in terms of adoption. However, we do think that the increasing pressure in terms of CO2 emissions, the inflation that you have in the labor, in the construction sector will accelerate the adoption and the thinking about alternative solutions.
Those Dramix help in terms of CO2 emissions decarbonization, but it has also the benefit of reducing the labor which is needed, when it comes to the specific applications and the quantity of cement which is needed. I think that there are some very strong value proposition associated with the product and the application, which in the current context can only be used as a further leverage to sustain the growth that we are seeing so far.
Just to finally complement this, I think it's also about the scarcity of the labor, but we have to be also very honest and transparent. The construction industry is a very conservative one, yeah, with all the regulatory norms. The go-to-market, where we're really focusing on, is the most crucial part.
Got you.
Because the prerequisites, the environment is there, the structural adoption is there. How to go to market, how to make it into the norms, I think this is what we are working on. The second one on SWS.
SWS.
Yeah. SWS last year was an amazing year, huh? It's in human life, not every year we have an amazing year. Yes, the volumes were down. You mentioned about the contract. I think the volumes were down. My thing is we don't have a change of the share which we have. The overall volumes went down, so it also went down for us. We have a lot, I would say, of political topics there. You had a lot of elections there, and people were waiting what happens. More left or more right, what does this means for interest, for taxes, et cetera, in this way. I think we still have a very solid position. We have a very successful merger there. I would say an acquisition we did with Almasa. It's of course on a smaller scale.
You are right indeed, as in for comparison to 21, I think, yes, it is absolutely softening less volume. It's not the loss of the market share. The market went small. When you look on the years of 2020 and 2019 backwards, I think it's still on a reasonable level.
Very good.
Yeah. Very good. Yeah. Because, you know, we also talked about the logistics and all, you know, what's coming from outside. This hasn't changed yet, yeah? When you look back a couple of weeks with all the lockdowns just off Shanghai, and I'm sure you have seen the pictures of the ships queuing up. This has also. I mean, the demand is lower. There's also this uncertainty out of different elections. You have just heard about the unrest a couple of weeks ago in Ecuador, et cetera. This is, of course, influencing as well, this industry as well. I think there was something on the balance sheet also.
The third question is on the balance sheet. In the current context, for us, the name of the game is about balance sheet conservatism. We will not do inconsiderate things in the current context. We need to gain more visibility before being more open to some of our balance sheet positions. Having said that, we don't want to compromise our future growth. I think that there are obvious proven areas where we need to grow, where we need to continue investing. We touched on some of them. We might have tactical bolt-on transactions associated with that. Can be M&A, can be partnerships. We are not ruling this out.
We will probably approach it from a very opportunistic standpoint, because we do think as well that when it came to our M&A plans that we have discussed several times, the current context actually can represent also an opportunity. It can drive some of the multiples that we were looking at initially to a much reasonable and acceptable level, and it would be probably the right time to look at that. We want to be very opportunistic. We want to be conservative with the way we're managing our balance sheet. The context is somehow forcing us to be conservative. As far as the SBB program, when we launched it, we stated that we are not ruling out the possibility of doing additional SBBs.
The environment doesn't allow us to make obvious and clear statements on that. If the situation evolves, we will obviously come and tell you how much and by when. For the moment, I mean, we want to remain prudent for the time being.
Okay, very clear. Thank you, and congratulations to good results.
Thank you, Wim Hoste.
Frank Claassen, you're next.
Yes. Good afternoon, everyone. Frank Claassen of Degroof Petercam. Three questions, please. First of all, on the working capital, you've indicated that you're, let's say, not happy or not fully satisfied with the current inventory levels. 15% of revenues, working capital. What would be a level going forward? Can we go back to the 13%, or what is your vision on the working capital? Secondly, on the energy crisis in Europe, high gas prices, high electricity prices, how much exposure do you have there? Have you seen most of the impact, or is there still more to come for you? Maybe some hedging is there in place. Some words on that, please. Finally, on China, let's say, how did the competition behave so far in a tough environment?
Do you think you can move back to double-digit margins if the market indeed recovers? Thank you.
Take China and take the two other ones.
Sure. Okay, starting with the working capital, I mean, as I tried to explain, there are a couple of reasons which are leading to the current situation. Obviously, in a context where the wire rods are increasing at the level where they are, it triggers an increase of your inventories from that. Currently, if we look at the days of inventory, we normally operate around 60 days of inventories. The 60 days have increased to 90 days by the end of 2020 or June 2020. A quite sizable increase.
This is something that we have somehow allowed because we were dealing with a new environment where the price of the wire rods were increasing on a constant basis. We wanted to make sure that we captured the wire rods at the best price possible, and that's why we have created some safety stocks. We have also rebuilt the inventories which were significantly depleted at the end of Q4 2020, 2021. Managing inventory is something that we have done on a regular basis since 2018, 2019, so we know how to manage it. I think our objective is to bring them back at 60 days by the end of the year, so we're very bullish about it.
This is how we will be managing it. Oswald and myself, we're looking at the inventory levels by plant on a bi-weekly basis, almost. It's something which is clearly on top of our agenda. Again, it has increased. As a percentage, working capital is at 15%. It's not outrageous. I mean, that's the normalized level where we were a couple of years ago. Again, coming back to 14%-13%, I mean, it's a task, it's not a challenge. On the energy crisis and the hedging. The approach is very much differentiated by region. In China, we cannot do hedging. It's a fixed price. In the U.S., also there's no hedging possible except for gas.
In Europe, we do some hedging, but we prefer having a hedging through the sales contract and indexes embedded into the sales contracts. Having said that, we have done some hedges. For 2022, as far as Europe is concerned, we have an average of 90% hedges. We are in the money versus the recharges. We have started at the right timing doing these hedges. We have started in September 2021, which puts us in a situation where we consider that Europe is properly hedged. Now we're working on 2023, so we are reaching a level where 50% of our expected acquisitions are hedged.
We continue to further increase this percentage, but this is where we are. On top of the hedges that we're doing, I think for us, what is really important is to make sure that we have a natural hedging, so to speak, through our sales contracts.
Can I ask a follow-up on that? Because does that mean that part of the, let's say, higher electricity prices could still come next year because the hedges roll off, or are hedged at a higher level, or is that not the line of thinking?
Well, I mean, some of the electricity. I mean, the hedges are not covering 100% of the increase that we have. We have already started having some of these impacts versus our hedges. As I said, we are not going to be dramatically impacted next year because that's the reason why we prefer to have hedging through our contracts and to index them through our contracts, because it allows us to translate the real increases that we see in our markets to our end customers. The hedging is a complement, a tactical tool, instrument, but we focus more on translating the prices in our, the increases in our end prices.
Maybe to complement.
Yeah, that's clear.
On this one, Frank, you know, we take huge efforts from the sustainability point of view to reduce the energy intensity. We run currently, I know, over the last months, projects how we can take out double-digit % the consumption of energy. This we did start before anybody was thinking about the energy crisis. It's both way. One is the commercial effect, how we can pass it on. The other effects will be how can we reduce less? We have a solar. We are about to early 2023 in Ubisa. We have in India something. You know, there's a lot of activities going on. We build a lot of intelligence in our machines to steer much better the energy consumption.
We are really digitizing in, of course, you start always with the biggest plants first, to meter it within the meter and to really say, you know, how can we, in the process, flow optimize all our energy consumption. So it's a little bit twofold. Yeah? This works very well together in this environment you might imagine. I think that the last one was on China. China is special. When you look forward, we had many video conferences with our colleagues through the three months, they say, roughly of the shutdown. I think it demanded a lot from our people there, yeah? Currently, we can say there is a release. I learned that maybe China has seen this tough lockdown in Shanghai, maybe it has not been the best solution. This is what we also see.
Our plants are currently running, and you know we had this close to production where people have been sleeping and working and eating there. This is gone all over the place. The demand, this is also very clear, has reduced. In this environment, you will not see a prospering development of the situation. What now we think is I think we have somehow bottomed out because what was produced was out of existing inventories. I would say there's a need now to replenish it. When does it start up? Will it go up to the original height? No. I think what in our plan is that there's a kind of modest recovery from this very low. The second thing is what we need to understand in China.
When you look back in the trend last 25 years, China was all about growth, growth. This was somehow the mathematics of China, how it was developed, and this comes to an end. We see that, you know, our competitors, they have announced they wanna grow like they did last the 25 years. This is one topic, but when you look on their financial results they have publicly offered, they're suffering a lot. Some of them have given a profit warning, some of them are mentioning losses. I think there will be a rethinking if really new capacity will be necessary because you will not get the value you aim for with all this intensive CapEx. The first one is we have a main chart of truck tire business in our tire business.
You know, you can say 80%-85% of our exposure in China is Rubber Reinforcement . With the stimulus package we see now coming up, I would say this is one of the levers, infrastructure is always the first one to come. Yeah? It will not be at the height, I would say, what we have once experienced, but I think we are bottoming out. The good thing is for us is we have areas like, I think I mentioned it, in India, where we're really exploring and see that things are coming in the right way, of course, not on the very short term, and that we in Europe have still a very solid and strong demand. In the balances too, and of course, our aim is to come to those heights which we have always been aiming for.
You know, we cannot escape the environment. Taoufiq Boussaid has nicely described it, what we can do with self-help measures. You know? This is where we are tackling. Other things which are not under control is always difficult to see or to forecast.
Okay, thank you very much.
Thank you.
Now I invite Stijn Demeester to raise his questions. Stijn?
Yes. Yes, good afternoon. Thanks for taking my questions. A couple of follow-ups, three if I may. The first one is, again, sorry, on the outlook. We are now one month in Q3. How many months of visibility do you have, on second half trading? And what for you are the main areas of uncertainty if you look at the second half? Yeah, let's start with this one.
Yeah. We have an average of three months outlook on the performance of our business. I mean, there's a significant portion of our business which is LTSA based. This gives us a good indication, especially in our heart of where I think, Dramix. Overall, what we do see currently is our order book are quite strong. We are growing in many areas, specifically the low- carbon concrete businesses, for instance. We mentioned hydrogen. We mentioned offshore fleet markets. We are expanding our positions as well in that region as a. I mean, there are several indicators where we do think that provides a reasonable visibility on how the things might be trending.
I mean, the big question mark is a little bit associated with the pricing elasticity discussion with the prospect of the demand in places like China and Europe with the prospect of a recession. The combination of these things are all the risks which can kill some of the visibility that we have. That's why, I mean, again, in a normalized environment, I would have told you, "Okay, it's three months, it's this amount, this is the percentage that we're expecting." It's just too difficult currently with the volatility we're seeing to be able to commit more firmly on any specific figure.
Can you commit on Q3, or is it mostly the fourth quarter that is sort of worrying you?
Well, I mean, so the second-
Not that I want you to commit something on Q3, but is that?
Yeah.
Is that sort of the visibility you have today?
Well, I mean, the plan that we have is I mean, we do forecast for a full year, and then it's a six-month forecast. It's something that we review on a monthly basis. The second half of the year is a kind of peculiar period because, I mean, you have less working days, you have summer breaks, you have shorter months in December. You have seasonality impact on some specific applications like construction during the winter. I mean, to answer simply your question, yes, we know what Q3 will look like. Am I going to tell you how much sales and EBIT we're going to deliver in Q3? The answer is no.
Understood. Second question is on what I assume still stands in your outlook is the profitability bracket of 9%-11%. Would you also expect it to reach on a half-year basis? Or is it? Yeah, you know, more concretely, do you think that the margin in the second half will be in that bracket?
Well, I mean, to answer this question, you can just look at the patterns that we have from the past. You always see that the first half has a tendency to be stronger than the second half. With the exception probably of 2020 and 2021, if I remember correctly.
Second half 2020.
Which were a bit peculiar because we were in the COVID pandemic. The expectation is that second half will be lower in profitability compared to the first half. I mean, we committed or we guided in the 9%-11%. For the moment, we don't want to change this guidance. We're sticking to the wording we have already communicated in Q2. There is clearly a pattern for the second half of the year with the seasonality effect, and also, the volatility which is becoming higher than what we do think we have gone through during the first half of the year.
Okay. Understood. The last one is on FIFO, your most loved subject. When you say that your assessment today is for a wire rod price to decline by 20%, what would be the associated FIFO impact in the second half? Can you give some building block here? Is it the full reversal of the last year's? I guess it was in absolute terms EUR 40-ish million. How should we look at FIFO for the second half?
Yeah.
Cause that's quite a big impact in when we talk about margin, that's obviously a big force here.
Yes. First part, we're expecting a reversal of the first half impacts that we have seen. A decrease, therefore a negative FIFO for H2, which will be probably a bit below the upside that we got in H1. Again, I don't know if I have to admit it, but we kind of got it wrong when we started projecting FIFO actually, because the prices went completely off track compared to our initial assumptions. Now, our working assumption is a conservative one. We do think that prices will decrease and it will erase most of the gains that we have seen during the first half. We have already started seeing a decrease and a negative FIFO for the first time in the year in the month of June.
Although it was very small, we still had a decrease in the negative FIFO.
Okay. A follow-up here, if I may. If wire rod prices would revert to the historical mean, what would be the cumulative impact?
Historically, what's your baseline? Because, I mean, as I said, I mean, in 2021, we had a 50% increase of the wire rod. First half of 2022, 20% versus the position of end year. On a, an 18 months period, there's a 70% increase of the wire rod prices. Assuming that, all the 70% increase will be erased in the next coming year, we do think it's clearly not possible.
No, no. Sure. I mean.
There will be some balancing. The demand will probably ease. Again, it's still very difficult to assess whether the stimuli programs and the tension that it will generate on the steel demand will trigger a massive evolution in one direction or the other. I mean, again, very difficult to answer your question. I don't know. If you have a more accurate answer.
No, I think FIFO is only anyway special because I think we have to look on sales, we have to look on profitability, how much is pricing, how much is in the inventory, by when is the impact. It's really, I think, a very
It's all on prices.
It's more on the prices. Of course, you know, then what we are when we say this would be easing, it would be going in, we'll have to hold on the prices. You know, this is the biggest challenge we have in front of us. We have a lower demand to keep on the prices. This is where a little bit of a cautiousness has to come in for reality reasons. This is what we are working to make sure that we don't give something away that we don't have. This is also the inventory at the price levels we can then have also to the sales to the customers properly reflected. This is the challenge we see, and this is where it's very different from region to region as well.
I know how this is in Europe, a little bit easier. I think India is also okay. China hopefully goes up a little bit upwards. Of course let them, we will not come back to this very high level.
I'm saying just from the mechanics of the FIFO and the way it impacts our profitability. Normally one would expect that a decreasing wire rod price should also improve our cost of sales and our margin, provided we hold on the prices as Oswald has said. There are really a couple of factors that needs to be modeled if you want to have some kind of assessment. The first one is how fast the prices will go down, up to which level. The second and very important assumption is how long we can hold on the existing prices to sustain the top line.
As I mentioned, there is a timing delay between the moment where a price upward or downward is happening and the moment it is reflected in the price, and that's an average of three months at least.
Okay. All right. Okay, good. Thanks.
No, thanks.
Emmanuel, you want to raise an additional question?
Yes. Thank you. I have one question on hydrogen. You have been quite upbeat on that, on that segment. Could you maybe update us on the progress you have booked in the first half of 2022? Also give us a little bit of your financial aspirations for this segment.
I think, yeah, you wanna start with the.
Well, I mean, hydrogen, as you know, it's first of all associated with a technology that we started developing some years ago. Now it's really picking up. We were in the single-digit type of top line. What we see is that the sales have quadrupled in 2022 from the mid-single-digit last year. We do see a kind of exponential growth when it comes to this specific segment and application. We have very clear ambition to grow in this sector in line with the demand. The key challenge is to manage the scale-up phase.
As you know, the big challenge when it comes to hydrogen is to increase the capacity as fast as possible in order to bring the price to a reasonable level. That's why, I mean, there are very bullish prospects when it comes to hydrogen. This is obviously triggering a discussion around the investment associated with this market. What we see currently is that the forecast and the projections and the demands coming from the clients with whom we have LTAs are changing upward on a regular basis. It's really booming very fast. It's going upwards on almost a constant basis. Yeah, this is where we are.
If you look maybe a few years out, let's say that you generate around EUR 20 million in sales in 2022.
Well, I'm
Could you move towards EUR 200 million, for example, by 2025? Because this is quite important to the profitability as well.
It is. I mean, looking at the level of margins, it is very important. Now our scenario is that we should move in the range of EUR 100 million by 2025. From there's an exponential growth which is expected.
Emmanuel, just to comment on this one. I think the demand situation is really accelerating. We get, say, periodically a higher demand forecast. It's really put on the right technology as well. There are mainly two technologies there. We're investing in which we can have a significant play, and I think we're on the right track. This is a little bit of a brief phase, but what you see in all, everybody's partnering with somebody as we do, because everybody is convinced that this has in three, four years a significant takeoff in this area. There's a good and a bad. You know, hydrogen is all about there's one technology which can also use renewable energy, and the technology we are looking at is they can take green energy. I think this is also a very big differentiator.
The key topic is how fast the costs can go down. This is always compared to fossils. When you look, you know. With the current, I would say, gas prices or whatever it is, hydrogen gets more and more attractive, and it gets attractive sooner. I think this is also where some people maybe say, "Can we go faster than before?" Yeah.
Okay.
We are not only on hydrogen, we have also in the BCT, and how Taoufiq was mentioning before, we call it environmentally friendly burners, which we have 20% of our products can already use today hydrogen. We think that also in the industrial burners, hydrogen might come earlier than originally forecasted.
Just to further complement some of the figures I have given to you, Emmanuel, I mean, this is really organic growth, and we are not ruling out partnerships, M&As, when it comes to hydrogen to help us further capitalize on the prospects of the market.
Okay. If you would be thinking about partnerships or M&A, would that be a broadening of the solution you have? Because I think if I understood it right in the past, you mentioned that you were one of the sole suppliers in the electrolyzers.
That depends a little bit on the technology. You know, today we deliver out of our, I would say it's our fine fiber business. We deliver this membrane. The membrane is coated, and then you have the catalyst. I think what we are currently, we can do maybe coating by ourselves, we can do more and more. How can we really more integrate it? You know, what is the field of play we could offer here in this market, not only the membrane. I think this is just a logical way, what we always say in the adjacent areas go in. Because it really confirms, and this is what we hear from our customers, the technology we have here, the capability. This is maybe once we did not touch yet.
We have a lot of different capabilities going on in the way we move forward with the future. Hydrogen is one of the area where we have an absolute small capability building up, especially because the market will come.
Okay, thanks a lot.
Thank you, Emmanuel.
With this, gentlemen, thank you, ladies and gentlemen. Thank you for participating. To the analysts, thank you for the interesting questions. Thank you for your continued interest, everybody. We look forward to meeting you again in the near future.
Thank you for joining. Have a good weekend. For the ones who can be in vacation, have a good vacation. Thank you all.
Thank you very much.