Good morning, ladies and gentlemen. Welcome to Vesuvius' half year 2023 result presentation. My name is Patrick André, Chief Executive of Vesuvius, and to my right with me this morning is Mark Collis, our Chief Financial Officer. I will start with some updates on our performance during the first 6 months of the year before Mark gives you more details on our financials. I will conclude with some perspectives on the year 2023 before opening the floor for questions. We delivered a solid and resilient set of results during the first half of the year, ahead of our expectations, despite still difficult market condition and a persistently strong inflationary environment. Our revenue decreased only by 3% on the underlying basis, despite significantly lower volumes than during last year's first half, thanks to a solid pricing performance.
Our trading profit decreased by 18% on the underlying basis due to these lower volumes. Increased 14% as compared with the second half last year on comparable volumes. Our first half trading profit also includes an exceptional GBP 3.5 million charge related to the February cyber incident, from which we have now fully recovered. At 10.5%, our return on sales decreased by 190 basis point, as compared with the first half last year on the underlying basis, but increased by 130 basis point as compared with the second half 2022, which was the lowest point of our markets.
Despite a strong level of growth-related capital investment and the negative consequences of the cyber incident, which slowed down in the first half of efforts to reduce inventories, we could achieve a cash conversion ratio of 67% and maintain a very solid balance sheet structure with a Debt-to-EBITDA leverage ratio of 1. This good level of cash generation and our confidence in our ability to maintain such performance, made the board confident to raise our interim dividend by 5% to 6.8 pence per share. In the Steel Division, the main reason behind these very resilient results was our ability to maintain a strong pricing discipline, fully compensating all of our cost increases, including labor cost increases. This pricing discipline was made possible by the strength of our technology-based business model and the differentiated value our products and solutions bring to our customers.
The Flow Control business unit, in particular, showed strong resilience in those adverse market conditions. The Foundry division also increased its result as compared with last year, confirming its strong recovery potential in the coming years. All of our strategic capacity expansion projects are fully on track. The VISO expansion in Poland and India are now operational. The Slide Gate expansion in Poland will be operational by the end of this year. Our Flow Control fluxes and Basic Monolithics expansions in India will be operational by mid-next year. We also decided end of June to approve a new Aluminosilicate Monolithics expansion in India, in our new Vizag flagship plant. This will be operational before the end of 2024.
All those expansions in state-of-the-art operations, put us in a very favorable position to capture the strong expected growth of the very dynamic markets of India, Southeast Asia, Middle East, and North Africa. We also continue to base our growth strategy on technological differentiation with the launch of 14 new products during the first half of the year. Our new product sales ratio, defined as a percentage of our turnover, realized which products which didn't exist 5 years ago, reached 16%. Our objective is to rapidly reach and stabilize at a 20% level. You can see on the top left part of this slide, pictures of our VISO expansion in India, already completed and operational since the beginning of the year.
We are already using this new capacity to gain market share in Flow Control, in what is now the fastest growing region in the world for steel production. You can also see on the bottom left part of these pictures, of this slide, pictures of our new Flow Control fluxes plant, currently under construction, also in India, within our new Vizag flagship industrial complex. We are planning for this new line to become operational in spring next year. This will enable us to significantly increase our market share in the country. Besides those investments in the Steel Division, we are also increasing our investment in the Foundry Division, in particular in China, to accelerate our penetration of the aluminum foundry market and benefit from the strong dynamism of the electric vehicle market in the country.
We expect that altogether, this growth investment will generate an incremental GBP 40 million EBITDA by 2026. We have also maintained our pace of innovation during the first half of the year, with 14 new products introduced to the market to support our margin increase and market share gains objectives. You can see on this slide some of the most important technological innovations we have introduced to the market over the past few months. On the left is a new fully robotized Ladle Tube Changer, recently introduced by the Flow Control business unit, enabling not only a significant improvement of the quality of the steel, but also the operation of the ladle platform in the steel plants without any operator being present. This is a unique and patented product, which only Vesuvius can offer to its steel customers.
In the middle of the slide, you can also see a new and unique robotics offering of the Advanced Refractories business unit. This new robot allows the automatic installation of dry vibratable monolithics in the tundish preparation area with high levels of consistency. It also greatly increases the safety and working ergonomics of the personnel in the steel plant. On the right side of the slide, you can see a picture of the new water-soluble core binder for high-pressure die casting aluminum foundries introduced by the Foundry Division. It enables those high-productivity foundries to manufacture sophisticated casting pieces with complex internal structure, not only facilitating weight and cost savings, but also opening new possibilities for these very efficient foundries to expand their activity.
Beyond these innovations, our sustained and leading research and development efforts enable us to benefit from a strong pipeline of new products, which we will continue to introduce at pace to the market in the coming months and years. We have also continued, during the first half, to make very significant progress in our safety and sustainability improvement journey. On the safety side, our lost time injury frequency rate, measuring the number of incidents per million of hours worked, dropped to 0.7, our best result ever. We are planning to continue our efforts to improve even further towards our goal of becoming, as rapidly as possible, a zero-accident company. We also continue to introduce new products to help our customers improve their own sustainability performance.
You can see on the right side of this slide, the new SEMCO coating solution of the Foundry Division, reducing the energy consumption of our foundry customers by more than 90% for the associated industrial operations. Let's now look in more details into the performance of the Steel Division during the first half. As you can see on this slide, where the size of the bubbles is proportional to Vesuvius Steel Division sales, steel production declined in all major regions of the world during the first half, with the only notable exceptions being India, mostly, and to a lower extent, China. Due to the difficult situation of the construction sector worldwide, long steel products were proportionately much more affected than flat products by this difficult situation. Looking forward, we expect the steel market to continue to be strong in India, but we are cautious for the other regions.
We also expect flat steel to continue to perform significantly better than long products. On the positive side, steel inventories have now been purged of excesses and appear to be at a normal or sometimes even low level. Our Flow Control business unit continued, as in previous half years, to gain market share through technological differentiation and quality products. Our volumes progressed more than the underlying market in most regions. This was particularly the case in India, the most dynamic market worldwide, where our new capacity expansion is already supporting our development. Our sales in the EEMEA region, which is a bit the outlier there, were affected by destocking and payment difficulties of some of our customers and by the earthquake in Turkey. We expect, however, our sales in this region to recover rapidly going forward.
Let's now have a look at the financial results of the Steel Division. Due to the steel market decline and Ukraine conflict-related sanctions, our volumes declined by 6% and 13% respectively in the Flow Control and Advanced Refractories divisions as compared with the first half last year. As previously mentioned, we continue to gain market share in most regions in Flow Control, but we temporarily lost some market share in Advanced Refractories due to our disciplined pricing policy. We expect to regain this market share again, rapidly in the coming months. The trading profit of the division decreased by 27% on the underlying basis, as compared with H1 last year, to GBP 75 million, but increased by 17% as compared with H2, 2022.
The division's return on sales decreased 310 basis points as compared with H1 last year to 10.5%, but increased 160 basis points at compared with H2 2022. Let's now turn to the Foundry Division. As you can see on the slide, most foundry end markets started to recover in the first half of 2023, with the only notable exception being South America, due to the negative situation of the trucks sector in this region. This the improvement was especially visible in the automotive sector across most region. The Foundry Division, however, is not yet benefiting fully from this end market improvement due to a destocking movement of casting pieces in several regions, and in particular, North Asia. We expect this destocking to be mostly over by year-end.
Despite this negative impact of the destocking movement in some regions, the Foundry Division registered solid results during the first half, thanks, in particular, to a very good pricing performance. The division's trading profit, at GBP 30 million, increased by 18% as compared with last year. Return on sales increased by 130 basis points as compared with the first half last year, and 50 basis points as compared with H2 2022. We are also very pleased with the progress of the division's research and development performance, with a strong improvement of the pipeline of new products. We expect the performance of the Foundry Division to continue to improve in the coming years, when the destocking movement in the foundry sector will have come to an end and when new products are progressively introduced to the market.
I will now hand over to Mark, who will give you more details about our financials.
Thank you, Patrick. Morning! I mean, first of all, great to be here. For my first set of Vesuvius results, I'm four months in, and it's definitely been a good stint so far. I'm gonna start with the trading bridges. Bear with me. As you can see, H2, H1 2023 revenue was GBP 995 million. That's 3% lower, allowing for an FX tailwind. Volume is down GBP 81 million, which is about 8%. 90% is end market related and includes an element of customer de-stocking, as Patrick has mentioned. The balance of 10% relates to market share losses, and these are in Advanced Refractories, where we have prioritized price, sorry, margin over market share.
There is a price benefit of GBP 46 million, which is mainly in Flow Control and Foundry. This price rise has a limited impact on market share, which once again demonstrates our pricing power, and of course, as Patrick said, the differentiation that we offer to our customers. Turning to trading profit, you can see there was a limited impact from FX on the trading profit line. trading profit decreased by 18% to GBP 105 million. The return on sales at 10.5% is very respectable, given the lower volumes we're currently experiencing. As you know, this includes the cyber costs, and we chose to report this within trading profit and not treat as an exceptional item.
Once again, we see the volume and price impact, so the volumes at GBP 32 million equate to 40%, which, as you know, will be a combination of gross margin and under-absorption on the fixed costs. Net pricing is GBP 11 million, and that's clearly the difference between price and raw material costs, and there is a small element of mix in there as well. The next slide shows our half yearly trends for the group and the divisions, and it's in constant currency. You'll note that there's a small element of seasonality, and typically, we would roughly think it's 52%, 48%, which has been the average over the last 10 or so years.
It does highlight the progress in Foundry, and it does demonstrate that we've been very stable over the last 18 months, with obviously a slight pickup between H2 and H1 2023. Looking at the full income statement, the trading profit of GBP 105 million, the return on sales is 10.5%, as I've mentioned. The net finance costs have actually decreased, which was contrary to expectations. The higher interest charges obviously are due to the higher interest rates, but we've got some deposits, mainly on, in cash in India and Argentina. You'll also know that 80% of our interest is fixed, given that it's on the U.S. private placement. Our effective tax rate of 27.5% is in line with guidance.
You'll also note that we've got a quite a large increase in our non-controlling minority interests, and that really can tell you in terms of how fast the Indian business is growing currently, so it's circa 60%. Headline earnings decreased by 22%, and headline EPS of GBP 0.245, but it is also 22% lower than last year. As Patrick's mentioned, we're pleased to advise a 5% increase in interim dividend from GBP 0.065 to GBP 0.068, and that reflects our confidence in 2024. Looking at cash conversion, was good at 67%, particularly compared to H1 2022, which was 26%. That includes an outfair working capital of GBP 31 million and net capital expenditure of GBP 40 million, and that includes some expansionary CapEx.
If you add back depreciation, we generated adjusted operating cash flow of GBP 71 million. Working capital is clearly an area of focus for us, let's look at the trends on the next slide. You can see there that on the bar charts, that we've had a steady increase since December. The green line is our 12-month average, and that's slightly increased from 23.9% to 24.1%. More encouragingly is the red line, which shows is our 3-month falling average, and that's improved from 24.7% to 23.3%. Now, obviously, the cyber incident had a part to play here.
While we recovered incredibly well and had a very low profit impact, it did impact the visibility of our sales and order planning processes, and then that basically meant that we had a challenge in terms of getting that inventory down as early as we would have liked. In terms of other statistics, in terms of looking at the quarter to June 2023 and the quarter to December 2022, day sales outstanding improved by almost 2 days. Inventory days improved by 1 day, and days payable outstanding increased by almost 3 days. You can see we're on the right track in the second quarter, we're obviously gonna focus throughout H2 to keep those numbers either on track or further improved. Lastly, what does this all mean from a net debt perspective?
Net debt was GBP 268 million at June 2023, which is a modest increase of GBP 13 million from GBP 255 million. The operating cash flow was offset by income taxes and, of course, the final 2022 dividend. I'm pleased to say that we've got a strong balance sheet, and that you know, it's demonstrated by our low leverage and our high liquidity. And obviously we expect to have strong further free cash flow in the second half. Back to Patrick for outlook and closing remarks.
Thank you, Mark. Despite difficult market conditions, especially in the steel sector, we have performed quite well in the first half of the year, exceeding expectations, thanks in particular to a very resilient pricing performance. We expect to maintain pricing discipline in the second half of the year, and we are progressing our efforts to gain market share through technological differentiation. As a consequence, noting typical seasonality and despite macroeconomic uncertainties, we feel confident to modestly increase our full year expectations. I would now like to invite questions, first from those here in the room, then from those joining us over the telephone line.
Good morning, gentlemen. It's Andrew Douglas from Jefferies. I'll start with the obligatory three questions and then come back with a few more if we're all shy. Can you just give us a feel for where you are with your M&A pipeline? Your balance sheet's really strong. You're doing a good job on cash. Is there an opportunity to spend some of that cash on M&A? I know you don't look at distressed assets, but what is the kind of quality of that kind of pipeline that would be helpful? Can we also talk about Advanced Refractories' market share? You've walked away from share, given pricing, which, well done. You talked about getting that back. What happens for that to come back?
Does the client realize that they've done the wrong thing, chasing price and come back to you, or is it a bit more complex than that? Then one for Mark. Working capital sales, you inherited a 22% target from your from your predecessor. If you're comfortable with that, can you do better than that? Can I just go initial thoughts on working cap? Thank you.
Thank you, Andy. Regarding the M&A pipeline, we have an appetite for M&A, but we don't need M&A, so we have an organic growth focus strategy. We have an appetite, a selective appetite for M&A, for those and only those potential targets, which could bring us something in terms of technology or geographical diversification, and which will be available at a reasonable price. We are prospecting, and we are continuing to prospect several M&A opportunities, but in a very disciplined way. We don't feel the need to do M&A for the sake of doing M&A. We are continuing to look at those opportunities. Maybe some of them will materialize in the coming months, maybe not.
We'll see. As you have rightly mentioned, we have a very strong balance sheet. In case none of the potential opportunities that we are looking at will materialize in the coming months, I'm pretty sure that the board will then look at opportunities to get back closer or at our comfort zone in terms of net debt to EBITDA leverage ratio in our balance sheet, which, as you know, is 1.25x-1.75x. We are a bit below. We have been a bit below for some time now. I'm pretty sure that the question will come on the table in case no attractive M&A opportunities will materialize in the coming months. We'll see.
On the second point, advanced refractory market share, as explained, is very simple, is that we have a very strong, strongly disciplined approach to pricing. We have been giving priority to pricing and margin over the past few months. Because of this, we've lost some market share in EMEA in particular. It's not in all regions. It's specifically the case in EMEA, where prices in the several advanced refractory products have been dropping relatively rapidly over the past few months. We've lost some prices. As usual, if you remember well, it happened to us 2 years ago already. The same as 2 years ago, I think this will normalize relatively rapidly on the way back up.
We expect to regain those market share in the coming months.
Yeah, on working capital, we are currently at GBP 480 million. I'm looking to reverse the increase since December. Effectively, I'm hoping to pull it back down to GBP 30 million. That gets us to 23% on a full year basis. As you rightly say, we've got a target of 22%, I'll be doing everything I possibly can to deliver the target, and then some if I can. I think maybe into the 21%-22% range is probably planning for 2024, definitely pushing for 2022.
Hi, I'm Mark Fielding from RBC. Can we just talk a little bit more about the expansion projects and the GBP 40 million of EBITDA, and maybe a little bit in terms of the phasing of that? I suppose specifically for my model, the EBIT part rather than the, you know, what is the depreciation, basically. In that context, have you got some of the costs now? I mean, is it a case of they have to ramp up to certain volume level, and then they become much more profitable, or is it pretty incremental and straight line profit gains from those?
Thank you. Our expansion projects are mostly in India. India, Southeast Asia is the first target, but also, we believe that we will have going forward, not this year, obviously, for plenty of reasons. Going forward, we expect a relatively strong growth in the EMEA region, in the non-EU plus UK part of EMEA. We have organized to be able to follow that growth in the market. Not only follow, but gain market share, which you know, is our objective, in particular, in Flow Control. It's a relatively low-cost CapEx program, huh? It shows the fact that it illustrates, again, the fact that Vesuvius is a very low capital-intensive business.
Because we are not integrated upstream into mining, and we don't want to be integrated upstream to mining. We are in the transformation of minerals product, so it's a low CapEx intensity. The total value of the CapEx program is under around 70 million GBP. This 70 million GBP, which are enabling us to debottleneck our existing capacities, which for Flow Control, we were in those regions very close to full capacity, is enable us to follow the growth of the markets and to generate incremental EBITDA.
These GBP 70 million, again, mostly India, Southeast Asia, but also in the part of Europe, which allows us to serve not only the traditional EU, UK, but also the growing part of EMEA markets, Turkey, Middle East, North Africa, will generate progressively over the coming years. Up to, and I expect a bit more than that, GBP 40 million of incremental EBITDA. We believe that we will reach the full 40 million EBITDA incremental capacity by 2026, 2027. I'm reasonably hopeful that it could be 2026, and we are already starting to use this capacity. I was giving, during the presentation, the example of our isostatic expansion in India. The plan started beginning of this year.
We are already extremely happy to have it, because we are already using significant part of this new capacity, because we are growing extremely fast in India. Because we are outperforming. The market is growing strongly, but we are outperforming, as you have seen on the slide, the markets. We are increasing as rapidly as we can, our capacity in India.
I think from a phasing point of view, you know, some of it's still to be spent, because we've only had some of it recently approved. There's a chunk that obviously has been approved and is being incurred, and some which is already operational. I don't know about a straight line, but there's certainly a phasing impact between, you know, 0 and 40. Maybe it's a gradual kind of curve up as you move towards the back end to that last year.
In terms of CapEx, and to give you an illustration, the CapEx have been mostly last year and this year. There will be already a decline in our total CapEx program next year. It will be the end of the investment program and a significant reduction as from 2025. First step reduction in 2024 and final reduction in 2025, and at the same time, the incremental EBITDA will ramp up, I would say, more or less proportionately, between now and 2026, 2027. The GBP 40 million will flow into, will flow into our, into our P&L progressively between now and to 2026, 2027.
One follow-up on that. You've obviously, as you said, got some of the plants already up or some of the projects already running. Is there a small contribution this year, just to give us a context of, is there a few million of EBITDA from projects this year, given you've already got some running?
We already have some EBITDA of this project this year, especially in India. We would not be able to achieve our result in India this year without this investment.
Thank you.
Hi, good morning. It's Jonathan Hurn . I just have a question about the sort of sales and profit bridges that you have for the first half. I just wonder if you can sort of extrapolate that for the full year and sort of talk us through some of the main moving parts there, just in terms of what we're seeing in volume and price on the sales bridge, and also mix on the profit bridge, please.
Mark will give you more details, but globally, to go from the first half to the second half. First, it may, I know that in the context, current context is a bit gloomy. It may surprise you, but we expect in the second half, very similar volumes than in the first half, including in the Steel Division. Why? Because we are not that much exposed to the construction sector. Of course, we are exposed to steel, but we are not exposed mostly to the part of steel serving the construction sector. We are more exposed to the part of steel, flat steel, serving other sectors which are not as affected as the long sector. Maybe some of you have seen the presentation of ArcelorMittal this morning, where there is, it's really a tale of two stories, huh?
There's an evolution of the steel between the long sector. Stainless is also relatively affected by the situation of the construction sector, but flat steel, flat steel for automotive in particular, still doing relatively relatively okay. So we expect and we believe that it is a relatively cautious and prudent assumptions, stable volumes in H2 as compared with with H1, knowing that our in H1, our second quarter was better than the first one. In terms of pricing. So no volume impact. In terms of pricing, we also maintain, expect to maintain a strong pricing discipline.
We don't take into account, we don't expect, and again, I believe this is a cautious assessment, any negative pricing impact on our trading profits in the second half. Our cost will evolve, but we believe that our constant policy of evolving of our prices in line with our cost evolution, we'll be able to maintain that. We are not taking into account possibility to do better than that. This, we never do that in advance, but we are quite confident that we will not have any negative impact on pricing. No negative impact on volume, no negative impact of pricing.
We will have, if you want to go from first half to the second half, you have to integrate first, the GBP 3.5 million of the cyber security incident, which is a one-off of first half. Which you should bring back in. We expect a negative foreign exchange impact of only around GBP 8 million during the second half due to the evolution of exchange rates. We also expect in the second half to do what we had initially planned to do in the first half, to reduce a bit our inventory, and to have because of this reduction of inventories, not because of a reduction of sales, because of a reduction of inventories, some negative fixed cost absorption of, let's say, GBP 5 million-GBP 10 million.
When you put all these together, it should lead us to our modest improvements in our full year expectations.
There you go. I mean, that was all the details. Let me just give you the, the main points again, just in case you missed them, because it was quite a lot there. No change in volume, no change in price. You've got, you've got to obviously consider the fact we had a GBP 3.5 million charge in the first half for cyber, which is gonna obviously not be there in the second half, but is there for the full year. You've got FX headwinds of about GBP 10 million. What we're anticipating is if we bring our inventory levels down, we are gonna have an under-absorption of fixed costs. As Patrick André says, that's production-related rather than sales volume-related.
We would estimate that somewhere to be between GBP 5 million and GBP 10 million, depending on the level of inventory that we manage to pull down.
Morning, Lushanthan Mahendrarajah from JP Morgan. Just a couple of questions. The first is on the sort of pricing volume outlook for H2. I think your pricing commentary seems a bit more optimistic than one of your peers that reported. At the same time, it sounds like, you know, you're gonna hold volumes, you know, potentially take market share, I guess. How do you marry those two things together? I get the innovative side, but I guess in a, in a softer backdrop, how are you confident that you can, I guess, maintain pricing and then sort of maintain market share and potentially push it on as well?
First thing, in terms of volume, we are really confident. We have a very strong relationship with our customers through the quality of service and the technological differentiation of our products vis-à-vis our competitors. We discuss with our customers, and the customers consuming mostly our products, we have some type of visibility on the second half. Again, it's not mostly the construction sector, it's important to stress.
For example, the flat steel production for automotive should rather increase in the second half in India, for example, which is counterintuitive, or at least which is not what what people have in mind when they talk about the decrease of the, of the steel sector. Long sector will be affected, flat steel, which is important for us and the most sophisticated type of flat steel, less so. No, we are relatively confident. You have some plant restarting, plants which were idle end of last year, beginning of this year, which are restarting. All this makes us relatively confident on our volume prospect for the next half year.
Regarding pricing, I'm talking about the impact of pricing on the trading profit. You will probably have, in the second half, some evolution of the cost. Some costs are going down, some costs are going down, we expect that our pricing will evolve, as always, in line with cost. We don't expect to have any negative impact, and again, I believe this is a cautious assessment. We don't expect to have any negative impact on our trading profit, which could result from the cost dropping less rapidly than our prices. We don't see that. Conversely, out of caution, we do not integrate in our guidance, any positive impact of pricing.
... sort of one follow-up on that sort of flat steel, long steel comment. Do you have a rough split of the exposures to both those across the Steel Division?
could you-
What's the exposure to long steel and flat steel? Just to get an idea.
The Advanced Refractories business unit, long steel, flat steel is irrelevant. They are exposed to everything more or less the same time. And by the way, the real distinction we should make is construction, non-construction. The long steel, flat steel is a little bit of a shortcut. It's mostly construction, non-construction. Construction is all under around 50% of the steel sector. Advanced refractory is exposed to steel, I would say, construction or not construction does not make any difference. Flow Control is much more exposed to non-construction than construction.
The share of Flow Control products going into steel, which goes into the construction sector, is very significantly less than the 50% of which construction represents in the global on the global steel market worldwide. An exact percentage is always difficult to give, but it's at least only half that, not much more.
Thank you.
It's Harry Phillips from Peel Hunt. Just on Foundry, just again, maybe a little more detail on pricing, just a much more fragmented market and therefore slightly different dynamics in play. Then just in terms of what mills are saying, when you look at the tone out of North America so far this result season, it's a slightly more optimistic picture than what we've seen in Europe so far. Is that sort of being echoed in your own sort of business experience at the current time?
Pricing in Foundry has been quite good. We have a positive impact of a net pricing positive impact in our result in the first one, and the majority of this positive impact was in the Foundry Division. It shows, again, the progress made by the Foundry Division, first in terms of management, the quality of the management, but also in terms of introduction of new products, which also have a positive impact on our margin. We capture that in the pricing impact, but it's product and pricing. In fact, the volume impact is still a bit negative in the Foundry Division.
The improvement of the Foundry Division result during the first half, as compared with first half last year, were not due to volume at all. They were due more than 100% to pricing and performance. This shows again, the important progress that the Foundry Division is achieving with its new management. Going forward, we expect volume to improve in foundry. This makes us confident in the potential for the Foundry Division to improve even further during the coming years, 2024, 2025 and beyond. Regarding your question regarding markets in NAFTA have been better than in Europe, huh?
The beginning of the year, it's clear that NAFTA has been holding up quite well. NAFTA is difficult to predict because they have been predicting a recession or in the next 6 months since quite some time. This seems to be a sliding 6 months. It doesn't mean that it will not happen at some point. The second half doesn't look particularly bad. We remain again, quite cautious, but we are not overly pessimistic for the second half of this year. Next year, we'll rediscuss later on when we have later in the year. I would not dare to make forecast for next year at this stage.
The second half will probably not be that bad in NAFTA.
Just I was gonna add, like another way to look at it is the volume impact is mainly in steel, when the pricing benefit is mainly in foundry.
Interesting, you've seen that Cleveland-Cliffs and Nucor have recently presented some results. What's interesting, it illustrates quite well what I was mentioning before. Cleveland-Cliffs, very positive. Nucor, a little bit less. Very logical, because they are not exactly on the same type of market. Nucor is more exposed to construction than Cleveland-Cliffs. Cleveland-Cliffs is more automotive. The illustrates quite well this discrepancy in communication, which correspond to their situation. The differentiation today in terms of situation on the steel market, depending which type of end market you are serving.
Morning, Dominic Connolly from Numis. Two questions, really, if I may. Foundry, you mentioned about the destocking drag in the first half. I wonder whether you can give us a little bit more color on how you expect that to play out, specifically through the second half, and perhaps just quantify what you think the drag has been there in H1. I think second question, really, I'm not expecting to draw you on a sort of crystal ball forecast for the market for 2024, but I think the anticipated shape of earnings 2024 versus 2023, given the self-help levers that you've got, would be useful. I'm thinking particularly, talk about the growth CapEx, just following up from Mark's question.
Should we be thinking that incrementally, maybe there's GBP 5 million-GBP 10 million of EBITA to drop in 2024 versus this year, or is that too aggressive? The second part really relates to the lower fixed cost absorption.
The implied circa GBP 10 million drag in the second half versus H1, does that basically get you to where you want to be at the year end for working capital? Do we think there'll be a residual impact into next year from lower fixed cost absorption?
I will let Mark answer on the destocking and fixed cost absorption part. Regarding destocking in Foundry, contrary to Steel, you don't have a widely available real-time statistics in Foundry, except in some parts of the world. We don't have the same access to the same quality type of statistical data. However, we have some clear indication by customers, by or in those parts of the world where you have statistics, North Asia is one of them. Japan, for example, has very good statistics about the evolution of casting volumes nearly in real time.
That some significant volume of stocking took place during the pandemic 2021, even beginning of 2022. In North Asia in particular, it's very clear. You have a great discrepancy, a great increase of casting inventories, and then data is available. We are now seeing this inventory starting to reduce, which means that, for example, in North Asia, which is a very important region for the Foundry Division, we are the leader in Japan, in the Foundry Division for the products that we are manufacturing. We are not benefiting today, in terms of volumes, of the improvements of the Japanese automotive industry, because of this inventory.
It's a bit of a crystal ball exercise to know exactly when the destocking will come to an end, but our best educated guess on this is towards the end of the year. We are not counting on the destocking being over for our guidance on the second half 2024. This is why we are expecting Foundry volumes, Foundry sales volumes, to remain more or less stable between H1 and H2. As in Steel, beginning of the year, the simple fact that the destocking will come to an end towards the end of the year should bode well for the year 2024, at least.
For your second question, as you know, we are always resisting giving assessment of the year 2024. At this time of the year, it's a bit early, especially in such an uncertain environment. This being said, I don't see anything today which would make me overly pessimistic on 2024. We will need to revisit this assessment when we get further closer to the end of the year, but I don't see today, I'm not particularly pessimistic for the year 2024. Mark?
Yeah, just on that last point, I think it's fair to say we're not uncomfortable with the 2024 consensus. Going to your working capital point, if we get down to 23% by the end of the year, that is, you know, effectively flipping out a GBP 30 million increase in the first half, which eliminate it in the second half. That's gonna give us this GBP 5 million-GBP 10 million of under-absorption. If we push for the 22%, which is what we wanna do, because we want to run the business for cash, that's where you could get another GBP 5 million-GBP 10 million. I don't think we've really built the CapEx upside into consensus. You know, I think it's...
I go back to, we're not uncomfortable with 2024, arguably, maybe the CapEx returns offset with the under-absorption.
Okay.
Hopefully with some upside.
I would like to bring your attention and to a very interesting slide in the presentation of a very important customer for us, ArcelorMittal. This when they made this presentation this morning. In the presentation, they made, they are planning to see an increase in demand of 300 million tons of steel for the next 10 years outside of China. I think it's a very important thing. At some point, we have been living in a world over the past 30 years where all the growth in steel was in China, and the world outside of China was gloomy about steel. We share the vision of ArcelorMittal in that respect.
I don't know if it will be 300 million ton or 250, but that's the we share the vision that there is a trend for objective reasons why the steel demand in the world outside of China will increase significantly in the years to come, including in region like North America with the infrastructure builds, IRA build, and including in India, for the energy transition. There is a rupture, there is something different in what is going to happen over the next 10 years, as compared with what happened over the past 20 years, or 30 years in the world outside of China. That's a very important point. We completely share this assessment.
Just a follow-up question, actually, on sort of the more optimistic tone you're obviously making around Foundry towards the future. Within your sort of past 12.5% margin target, there was an aspiration to get Foundry to 15%. There's obviously still a reasonable gap from where we are today. Can you just talk a bit more about, you know, what are the key blocks to closing that gap?
... for our aspiration for Foundry was 15% before central cost. If the numbers we are publishing are after central cost, so we would need to, we would need this to compare with the numbers that we that you know that we are publishing. We will need to bring Foundry to 13.5%. I am personally quite confident that they will achieve this, because again, today, the volumes of the Foundry Division remained extremely low as compared with historical figures. When markets are recovering, and when the destocking movement will have ended in some important region for Foundry.
What really is a strong improvement of the technological setup of the Foundry Division. I think the Foundry Division is reestablishing a strong technological leadership month after month worldwide. I am quite confident that in the next two, three years, the Foundry Division has the potential to reach this 13.5% return on sales, and it's probably not a ceiling. They can probably be, they can probably do better than that, even.
I think we're definitely gonna cover that off in the Capital Markets Day, and, kind of three themes we're currently developing is, you know, volumes, moderate growth, operational efficiency, and pricing. I think on the operational efficiency point, if you go to, you know, a site like Borken, and you go to a site like Toyokawa, you can see that the amount of automation that we can still implement in the place, places like Japan compared to Borken. I definitely think we've got three avenues of attack to get those margins up.
Thank you. Any further question? If there is no further question from the room, may we ask if there are some questions online?
If you'd like to ask a question, please press star and then one on your touchtone phone or on the keypad on your screen. If you wish to withdraw the question, you may press star and then two. Once again, if you would like to ask a question, please press star and then one. We will pause for a moment to assemble the queue. It seems we have no questions from the conference line. Ladies and gentlemen, that concludes today's question and answer session. I will now hand back to Patrick André for his closing remarks.
Thank you very much, all of you, for your attention today. I would like to invite you all to a Capital Markets Day that we'll organize this year, the 16th of November, here in London. You will, of course, receive more details. This will be our first Capital Markets Day since 2018. We are hoping to see you all attending this Capital Markets Day. Thank you very much again for your attention this morning.