Matthew Taylor - CEO Bruno Humblet - CFO, EVP, Regional Operations Latin America

Stefaan Genoe - Petercam David Vagman - Exane BNP Paribas Filip De Pauw - ING Sander van Oort - Kempen & Co

Okay, good. And good afternoon everybody, and thank you very much for joining us for the conference.

As you will see, I don't take -- my tie no, I don't take an awful lot of persuading in taking my tie off. So I jumped at the opportunity to make those without a tie feel more comfortable and Bruno will keep his on, so that we share the balance.

But we do have some limits, okay. Okay, well, Bruno and I will take you – my part fairly quickly through highlights and review and then Bruno will handle the financials and I will talk a bit about the outlook before we throw it open to your questions.

And I apologize in advance that I will do it all in English and well, you can ask you questions in Dutch, Bruno will translate for me and he can answer the hard ones. So take it easier on that front.

So it's also very good to be able to start your conference with some good results to talk about. We temper them a little bit in the outlook, but it's always a nice place to start.

And the highlights you've seen the press release, so you know the numbers that are in here, so I will be a bit selected and obviously, we are pretty pleased to see the volume growth that we have had through the first half of the year up nearly 4% on an organic basis. But obviously, the impact of currency in particular as well as low wire-up prices being pass on to customers who has a negative impact overall.

Profitability has been strong partly due to pricing actions probably due to product mix, the volume increase in itself and the flow through of cost savings we have been delivering over the last couple of years and so that's driven profitability quite high, in EBIT terms it then driven even higher by some non-recurring which Bruno will go through the details. Net results are that earnings per share moved up from €0.45 last year to €1.34 in the first half of this year.

Net debt is at €6732 million and that's a €100 million more than we where at it year end around about €100 million more than we are at year end reflecting the normal seasonality and working capital and again, Bruno will take you through the data on that shortly. But it is €100 million higher than – sorry, higher than we were at year end; €100 million lower than this time last year.

With that let me go quickly into the business view, and I will concentrate mainly on this slide, because the rest is what was really in the press release. As I say, we are pleased with the volume growth that we have seen in what is a fairly tough environment out there.

And one of the key elements that we wanted to highlight in that environment is the impact of the weakening of the growth in the Chinese industrial economy. So even though we have seen Chinese GDP come back in the second quarter really on the industrial side that's not where it is.

And that's have an impact of lowering demand within the Chinese industrial environment which then flows through into lower raw material demand which has an impact particularly on mining economies and for us that has a particular impact in Latin America as you will see in those numbers. But it also has an impact on pricing as with the over capacity in the Chinese environment – industrial environment trying to shift more product whether it's for material like wire rod or finished goods out into other markets and particularly in the commodity markets that has quite a big product on us and again, that is Latin Americas.

So really Latin America gets hit in three ways through the impact of lower demand on their own GDP growth – impacted more imported goods which is pushing pricing down in the market. And as you will see the impact of FX as well so there is a sort of triple impact in Latin America.

One of the highlights globally has been strong automotive demand and that's driven the tire business extremely well. For us, the tire cord business is strong globally but the pricing pressure is there because of over capacity in China.

The FX issues have hit us very much on a translation basis, let me look at our numbers, but they do have limited impact on the transactional basis because we generally sell build what we sell certainly within regions. And so only 10% of our production is shipped across regions it has a limited transactional impact on that basis.

Going through next page, I think I will leave it to Bruno to go into more details; I will skip this slide, its 40 already seen. This slide just highlights the impact of FX really I will call that out both on a consolidated and the combined basis as you see there, organic growth in a consolidated business of €54 million but offset by $85 million of FX.

When you look at the combined basis and we bring the Brazilian real into play, the FX impact is €158 million. So very significant impact in our business was 18% decline there.

We will move on to the next slide. Impact on business mix is what you would expect, so we have gone down a bit in mix of Latin America represents a total of the business and Europe has gone up as mix of the total business, automotive goes up and construction goes down with that mix shift as well.

The next slide, and so that segment just highlights again the key numbers here. On the combined and consolidated basis, you see Latin America down 16% so really a very big impact of currency as well the pricing in those markets.

EMEA strong but North America all the growth that we have achieved offset by FX impact and Asia Pacific still above prior year but only marginally despite actually significant volume growth. So Bruno will go into more detail on those now.

Thank you, Matt. And I will start on the slide number 13, which is financials as Matthew indicated our sales down 2.4% really an underlying volume growth close to 4%.

There is some negative price mix in there which is reflecting the factor that wire rod prices are below the same period last year and even in the second quarter they didn't pick up and actually went down slightly where we normally see wire rod prices going up in quarter two because overall global demand increases. We haven't seen this time around this year and that reflects to a certain extent of slow down in the growth mainly in the Chinese industrial environment and we come back on that as well.

The big negative here relates to a change rate movements, it is a strong euro which is impacting it and we see that reflected mainly in Latin America but also versus the dollar where we then see that effect in North America or in China which where the currency is still pretty much linked impact to the dollar. If we look at the gross – margin gross profit, we do see there an increase, the increase which you see there of €9 million is actually an underlying organic or an underlying growth of €23 million but there is a negative of about €12 million related to FX, so the translation impact on the gross profit line means that about half of the increase which we see is wiped out there.

And then there is some other changes. Now, the real strong increase is coming from the volume increase which we see of about 4% combined with the sustained cost effort and the impact which we have in there.

So our gross margin now is at 16%. If you then look at the indirect cost, you will see the total SG&A in absolute terms remains exactly the same.

There are still the final positive impacts of the ongoing efforts of all of the cost reductions which we have started during 2013 and now have there full year effect. They help to offset the underlying inflation because of course most of those are people related not only here in Europe but also in Asia, in Latin America.

And so cost inflation there is driving these two numbers up normally and we see them more or less stable reflecting the fact that there are indeed still some impacts of the cost reduction program. Of course, here we see -- the opposite we see a positive impact from exchange rates movements.

What we do see though is that some elements like for instances in selling we have created for about €1.5 million additional bad debt reserves where last year there was a small release of bad debt reserves. So year-to-year comparison there is about a delta of 3 in the selling expenses.

No major things, not like we had at the end of the year or what we used to have the years before but just explaining some of the small swings which then offset the positive impact from the exchange rate moment. So all-in-all pretty flat and then therefore giving a REBIT of €101 million.

Now, Slide 15, you will see that translates in 6.3% REBIT margin and here also the REBITs just to position it a bit, REBIT goes up with €10, the real organic increase is more €22 million and here we see the similar effect of a translation impact on the profits, it's about €6 million. But we also want to highlight the impact of Venezuela.

As we have already indicated to you earlier Venezuela still had a very solid volume for the first half in last year and it started -- the volume started to come down as of the second half and in the first half of this year, we are really have been struggling to get enough fireworks. We are shipping at about 50% of what we were doing last year, so the volume is basically cut in half.

As a result, we are currently running at about breakeven while we were making about €6 million or a €1 million per month last year. In the second half of the year, in 2013 we already had the situation that we were running at breakeven, so not making money any more.

But now, I think it is an important reconciling item first half to first half Venezuela currently running at breakeven last year, we were making some profits in there. If we then look at non-recurring, on the non-recurring you will see a positive of 17 which really is a combination of a positive of €25 million and then I would call the normal non-recurring which we have in the June of €8 million.

The positives are coming from three elements. One is more of an accounting related one, given that we have – are now fully owner of the ropes business in Brazil together with the integration of the entities in Costa Rica, all of that created a – what is called a negative good will of about €11 million.

So it's really the opening balance which – balance sheet of these entities which therefore show that €11 million which needs to be recorded as a non-recurring item here. Next to that there is a gain of the sale of real estate, this is mainly in Belgium.

And partly linked to that but also partly because we constantly review the environmental provisions which we are setting up, we had the release this time around of about €6 million. So there are really three through non-recurring items which had a positive in the first half of the year, one should not expect any of that in the second half of the year, while this is more normal, I would say is the minus €8 million which we had, which is about half of that is impairments in Malaysia and I will come back to that in a second and some other elements in there.

And again for the balance of the year normally the non-recurring is always a negative number on annual basis, we always give a guidance in the range of €15 million and that remains here. So not withstanding of course, the 25 one-off positives which we had, okay?

Now, all of that and brings the first half year EBITS to 7.3% and EBITDA cash generation of €190 million close to 12%. Let me then go a bit deeper into the different segments, starting with Europe, Europe, we have seen a very strong volume already in quarter one we were able to report very strong volume growth also quarter two still had the volume growth above the same quarter last year a bit lesser but we continue to see a very good volume and a good product mix.

However, reinforcements is strong but also within the specific segments, the high rent products are performing very well. As a result of that we now have profitability over 10% really driven by very high capacity utilizations and the impact of the cost reduction programs which are impacting Europe more than some of the other regions.

The non-recurring here reflects the sale of some of the real estate which we had in Belgium. If we then turn to North America, we are pleased here to say that the sales decline which we see is really completely related to exchange rate because actually from a volume point of view – from volume point of view we now see a increase for the half year of about 2%.

In the first quarter, we were still at about flat where quarter two we saw 4% volume increase versus the same period last year. So all-in-all for the half year 2% volume increase, modest increase but after the declines which we have seen in the past quarters and years and I think this is a good turn around.

Profitability picks up slightly because of that but it is still below where we expect it to be in the longer term. The more difficult one to explain and also to look at is of course Latin America.

We see a sales drop of 16%, now about 10% is due to exchange rate movements largely – the exchange rate moments in Chile as we indicated before Chile is about 40% of what we do in the consolidated parameter in Lain America. So this is excluding what we have in Brazil and there we see the evaluation of the Chilean peso with 21% so that in itself is already explains a big part of the exchange rate movements which we see.

On top, the impact of Venezuela partly exchanged but mainly because the volume is about half of what we have seen before. The important message for us in Latin America is that we were and continue to be able to keep our strong market shares; this comes at a very aggressive price because we have to be competitive versus Chinese imports.

There is overcapacity in China, the Chinese economy slowing down means that those local producers cannot put their product into their local markets, so therefore they are looking at exporting more of that and given that there was a lot of commodity products they hit mainly Latin America first. We are not losing market share which means we are able to defend against those imports because we ourselves are using Chinese wire ropes making products locally in a very competitive way and then also selling them in a cost competitive way.

Of course, this then also had some impacts on the REBITs, where the REBIT margin now dropped to about 4%. If we then look at Asia where we see a sales growth of 2% behind a volume increase of 10%, volume increase of 10% as you know about half of what we do in Asia is tied core to China and also there we saw a volume increase in that same tune, so very strong volume which is offset by the exchange rate movements for about 6% but then also by the fact that we do have very aggressive price competition in the market we are regaining the market share we lost in the second half of last year we are now back to a market share in the mid 20s.

So where basically we started about 12 months ago, so we were able to regain that. But it is a competitive market.

Similar for sawing wires so far in the sole industry that market itself started to grow again but there is still ample capacity and therefore, it remains a very cost competitive to be able to supply we have a leading market position in that area and we will continue to defend it as well. The non-recurring item in Asia relates to impairments in Malaysia about two years ago, we started a joint venture with Southern Wire.

We have invested – started grading these plants – these two plants which we saw in Malaysia but to turn around takes a bit longer than what we forecasted and hence to remain conservative in all that we are impairing for about for moving euro some of the assets which we have there. The turnaround is also made a bit more difficult because of the overcapacity putting pressure on prices in total Southeast Asia similar to what we see happening to us in Latin America.

Then I will move back on Slide 22, the financial part so I'm back into the total company balance sheet P&L now. If we look at interest cost first, we see a decline in interest cost reflecting the lower net debts which we have.

There is also some impact on the fact that the most expensive long-term debt which we collected back in 2009 when we issued some bonds amidst of the crises are now rolling off our books and the new long-term debt which we have is coming at lower cost. There is a very limited to no impact on the convertible bonds in here as well, of course, the next half it will be impacted for the convertible bond and just as a reminder for you the coupon on the convertible bond was 75 basis points but from an accounting treatment point of view, its use it's different, we need to assume a normal interest rate which will be in the tune of 3% so even though we don't have that as a cash out from a P&L point of view it will be recorded in interest cost.

So something to take into account for the second half of the year on the interest cost. If we then look at the tax line, €23 million reflecting the cash or the current tax levels which we have in the different countries where we are paying taxes, so withholding taxes on dividend repatriation as well as royalty payments.

There is some positive effect in here from reserves related to prior years in the tune of €2 million to €3 million, otherwise that number which has been about €25 million to €26 million that also indicates that for the full year, the forecast which we provided between in absolute terms between €50 million and €60 million is still the right number to assume for the full year. And that then gives us our total results, now the two elements which we need to add on Slide number 21, is the share in the joint ventures i.e., largely Brazil, the after-tax impact of what we see in Brazil.

It's a €12 million versus a €17 million in the first half last year. Last year, we had some one time positive effect which we don't have this year and of course, there is this translation impact here as well, the Brazilian real being down 18% means that there is also an impact of course on the after-tax proceeds which we get there.

The part attributable to non-controlling interest i.e., the money which we need to give to the minority joint venture partners in businesses which we have is low. And that has been lowered because the impairments which we have in Malaysia for 45% are with our joint venture partners, so it's bringing that number down as well.

And the partners which we have in Latin America of course are also impacted by the lower profits which we see in Latin America, so therefore this number for the moment is actually much lower than we used to see it. The total profit for the Group, therefore, is at €78 million.

On the cash flow, I don't think there is anything specific you see the cash flow from operation being impacted by the working capital increases we always have it. Maybe one number to look at is the investments activity last year minus 20; you see it now at 46.

Last year the capital expenditure which we had in the first half of the year was very low at €32 million now it is at a higher level at about €58 million as we indicated already in the second half of last year we have started to accelerate a bit of the capital expenditure and also now for the next half of the year, we expect a further acceleration for a total to be in the range of about €150 million for our CapEx in total. And that reflects – so the €40 million there to a large extent reflects a €58 million in CapEx, which we see.

Looking at working capital, typical seasonal effect where you mainly see the accounts receivable going up reflecting the higher sales in the – to a large extent in the month of June versus what we see typically in the month of December at year end. Important to note that versus the same period last year, the working capital is still below, so we are continuing to put a lot of emphasis and effort in trying to maintain the improvements which we have seen and have made in working capital over the past quarters and years.

If you then look at the balance sheet, the key reflects here is the impact of the convertible bond where we have not used those proceeds yet which to a large extent are there of course to pay for the tire cord Pirelli acquisition. So that is not closed yet.

We had some positive news as we indicated in the press release that we have clearance in Europe. We of course, still need to go through and we are in the process of trying to get the clearance in Turkey and in Brazil, but the positive clearance in Phase 1 in Europe will be also hopefully a very important signal and support for the filings which we are doing in the other countries.

If we then look at the overall net debt already indicated in absolute levels, you look at the gearing and also the net debt to EBITDA is well in line with our long-term targets. And the seasonality – the working capital which is increasing but also the dividend payment and some effects of the share buyback already being in the first half of 2014.

For total year, I think we still expected to be in the range of €650 million to €700 million reflecting the fact that we will accelerate our capital expenditure and that we also will have more impact from the share buyback. So therefore, this is where we currently forecast our net debt to be.

The next Slide then give a bit more ratios but I think we talked to all of them, the numbers per share on Slide 27, I think no surprise there. So with that I would like to give it back to Matthew to provide our view, his view on the future.

Thank you, Bruno. I hope is our view.

Yes, absolutely.

Overall, from a business climate perspective, we are anticipating half year fairly stable business climate even in sort of turbulent world environment, but a relatively stable business climate. One other thing that we do see as a negative in terms of our business potential going forward is is an acceleration of pricing pressure within the Chinese tire cord market.

We see more capacity come on stream in the second quarter and we think there is going to be a bit of a spike in terms of the rate of decrease, it's always been a fairly steady decrease which we have in the Chinese market on pricing, but we think there will be a bit of a spike particularly in the third quarter. The Europe remains strong for us and we anticipate in terms of demand in the overall market to continue basically on the same trend that is seen in the first half of the year.

What we do see a slightly different first year seasonality which is a normal impact that you would see predominantly in Europe, it's the market most affected by seasonality as you have the holiday period in the summer as well as a drop in demand in December as businesses look to bring their inventories down. But on top of that, we see high tires stock around Europe at the moment, so we think there is going to be a bit of a slowdown within the tire cord sector in Europe in the second half of the year as well.

In LatAm, as Bruno has gone through there is quite a lot of bad news out there at the moment, but again, we believe that's bottoming out right now. When we look to the volumes we saw a significant shift between first and second quarter in the volumes and particularly if you net out the impact of Venezuela, we actually saw volume growth from first quarter to second quarter.

So we think there has been a bottoming out in LatAm from a market perspective, we still think there is going to be significant pricing pressure there because of imports of Chinese both raw materials pushing down the wire rod pricing and therefore that being passed on to customer as well as pricing in the market. But we think there will be some volume benefit to that in particular LatAm market really began its decline in the second half of last year.

So when you are doing the year-on-year comparisons, I think that's where we will see some positive benefit. And Venezuela is an uncertain environment for us; a lot of how we perform in Venezuela will be dependent on the availability of wire rod to us.

And we have had some fairly good signals coming out of the government on the ability to import wire rod at the back end of the year. So that's not built into our numbers, but we hope there is something that might come to fruition.

North America, it's a very slow recovery when you look at it across the board, Bruno has gone through the different sectors within North America. We expect automotive to continue to grow moderately.

We expect the other sectors that we are in to continue to be relatively tough. What we haven't baked into our assumptions is the fact that the agri market or the agricultural market will recover a bit from where it's been in the first half of the year.

It was obviously, extremely hard hit by the very severe weather in the first quarter. And so there is a potential that you will see a seasonal impact as they recover some of their momentum actually into the full season for them.

So there maybe a positive impact of that but it's not built into our numbers. We don't see any real change in the public sector spending environment either.

So we don't see things like the cable arm ring business recovering in the second half of the year. And also there is market situations are going on, so we see that relatively stable environment with a couple of negatives there from the pricing in China and the seasonality in automotive sectors in Europe.

We continue to push hard to leverage our scale and take control of our costs within our own environment so that we can focus the right resources on driving growth in the sectors where we think there is still going to be growth in the high value sectors that provide us a better margins. So really that's the message we want to do give today, now, I want people on the phone, who I should have also welcomed at the beginning, so apologies for that.

But, would now really invite you to ask us questions on the business and where we are? And I think we need to have an indication of how we are going to handle any phone questions before we open it up.

Yes. So bear with us a second.

Okay, let's start. Yes.

Yes. Thank you.

Stefaan Genoe from Petercam. In Europe, you indicated that volumes were very strong but you didn't mention the number.

Could you indicate us the number of volume growth in Europe and different in growth between the first quarter and the second quarter?

On volume, the overall growth in the half of 7% on volume and it was about 11% first –, yes?

10% to 11% in the first quarter.

In the first quarter and 3% in the second.

Okay. Thank you.

And related to Europe also you mentioning that you are close to full capacity or you mentioned that you are running at very high capacity, how close to full capacity, are you in Europe. And do you think you could need additional capacity to be opened up to fulfill demand?

No. I think we still got more flexibility in terms of brining more capacity on stream as well in how we utilize the capacity we have got.

We were at a better level of capacity utilization; I think there is still more room for improvement on that. So I wouldn't expect us to see any expansion of capacity as this stage.

There is some restructuring going on in part of our capacity as to what we can do where to become more efficient and therefore get more out of the capacity that we have got some of that we have already talked about the shift between saving them and our operations in the U.K. where we bought some production over here.

But that's all really about driving better utilization overall with the capacity. We are not at that capacity yet and we should be pushing hard to increase even without added capital investment to increase the ability to use more – get more after that capacity anyway.

And then the – maybe just to add, some of the investments which we are doing therefore is more in broadening our portfolio getting a more high rents type of applications in more than just a fewer capacity increase per se.

Okay. Thank you.

And then a final question on China, can you give us some more color on the pricing behavior of competitors, capacity expansion that is taking place in the Chinese market and with wire rod prices continuing to trend down, what's the overall impact tire cord is not declining at the same pace price as – or wire rod prices are not trending down at the same pace as tire cord prices, I have got the impression certainly probably in Q3 what do you fear to be the impact on your margin in China?

I think we will share this. I will start.

We have seen Xingda in particular bring on stream a new factory in the first half of this year. And they will be building up capacity after they go through the year.

And it looks like they are very keen to reach a high level of occupation of that capacity quite quickly. So that's I think given a spike, and that's why I talked about it being a spike in pricing pressure here.

I think the underlying growth in the Chinese market says it actually – capacity does keep getting or capacity utilization keeps improving until you get another significant shift in terms of the amount of capacity. And as that happens then the pressure on the pricing reduces a little bit.

Right now, we are at a point where you are got a combination both of the reduced demand level in the Chinese market, you got the impact of the U.S. legislation on anti-dumping which is also going to have an effect on local tire or Chinese tire suppliers together with less raw material being utilized so therefore wire rod pricing being pushed down.

Those three effects come together to drive a spike in the pricing pressure, I don't anticipate that spike being there long-term, but I think it is gong to hit us particularly in Q3 and probably a little bit in Q4.

Yes. And with that I think where we – before we are looking at overall price decreases year-on-year of mid single digits, I think what we now looking at most probably it ought to be see and has seen in the beginning of quarter three that it's more going to be in the range of 10%.

So we really get into on an annualized basis, of course, not the impact now, but if you've done with compare on the full year basis, it continues a bit like that and that of course remains to be seen but then we get close to 10% year-on-year price reduction. Some of it relates to lower wire rod prices but that only would be a few percent of that meaning that there is indeed an important impact really of what I would call true price decrease reflecting the competitive landscape, I would say to a large extent.

Now, of course, we are as Matthew indicated, we are doing everything to also have the offsets from in our overall cost structure, the higher volume which we have this year versus what we had last year, of course, helps also to mitigate at least to a certain extent the impacts on profitability and I think that's also what you see on the profitability in Asia, which remains about stable in spite of -- versus last few in spite of the price decreases which we have seen in the year.

Great. Thank you.

Particular on China, that is quite a sharp slowdown in the second quarter and it looks like a market extent, they made reference to minus 5% OEM flat replacement market. This is something we don't – is it something that (indiscernible) reflected than your numbers, is this something you recognize and that's additional to what you warrant for?

I think it is something that we do recognize up to the point again, we have seen a significant impact on the new tire market on truck, much less so on the replacement. So when we are dealing primarily in China with the Chinese tire makers it's really not so much the big five there.

Dealing with the Chinese tire makers, we have seen less of that impact. That we have seen the passenger car market for tires continue to grow quite strongly.

So it's a really truck market dynamic I think they are referring to there. And it's a new car – new truck market as opposed to a replacement market.

So in terms of the volume of business, we actually still see this business pretty promising. Our volumes grew as you saw around 10% in tire cord part of that was we gaining share that we lost, the underlying there is still strong growth in the tire market.

Still bulk of your capacity in tire cord is truck tires?

It's truck. A lot of it is replacement as well.

Having that's the volume of – the volume of tires in the Chinese market is driven in a very different way to the rest of the world. There is no retreading business in the Chinese truck market.

So it means that actually replacement tire market is much, much more significant and that's really where we are seeing the volume coming through.

Then two smaller questions, if I may. One, you guys go for higher capital expenditure in the second half, could you give us some guidance for the full year number?

As I mentioned, expect the full year number to be in the tune of about €100 million. So we had about €58 million in the first half and €150 million, it is most probably where of course, it will depend on the project and the ability which we have to do that but there will be or there is expected to be some acceleration.

And then at this stage, what is your best guess for the expected completion of the Pirelli acquisition?

We got nothing built into this year's assumptions in terms of closing the Pirelli deal. So we anticipate to close by year end is I think how we look at it.

We are very pleased about the ruling from the European commission, it was actually a very positive judgment as a whole and if you read it, it was very positive about it and very little issue from the customers or the competition on the proposal and as Bruno said in his notes, we do hope that there is something to get recognized when it's being discussed in Brazil as well.

Okay. Thank you.

Okay. Let's maybe take a question from the callers and then we will conduct.

Yes. Thank you.

Two question, the first of both the possible impact of the tariff, the anti-dumping tariff in the U.S., if you could some how quantify the – I mean the potential impact on Chinese exports let's say. And second question on the cost inflation that you say is to a large extent offsetting your cost savings, if you could some how explain this and in the end you still achieve to increase your margin in some of your key division?

On the tire side, I'm not so really what proportion of the tires that we sell into are exported to the U.S. from China.

In terms of our own direct exports out of China on tire cord that actually is lesser than issue, we are still able to export the tire cord out of China that isn't subject to the same tariffs. The key areas are subjected to tariffs, our tires themselves and also raw materials and wire rods.

Those are both subject to fairly significant tariffs. And actually in some ways that make the attractiveness of Chinese sourced tire cord a little bit better in the current circumstances.

So there maybe some opportunities there for us but we are also seeing more demand on tire cord in the U.S. as a whole as there has been more investment in tire making there and recognition that not as much is going to be imported.

Net impact for us, I think is probably relatively clean overall.

I think you are right. I mean while about 35% of these tires are exported, how many are going to the U.S., it's also not that clear yet whether it's only in passenger or also on bus and trucks.

So therefore, that impact remains to be seen. If I maybe take the question on the cost inflation, when I referred to it was mainly in area of indirect cost.

It's a bit through for all of our cost but if you look at our indirect cost where you normally typically would expect inflation to be in the range of 3% to 5% depending a bit in the countries in which are in, like knowing there is a lot of it is people related some costs are of course – other costs there. But that's what we are looking at.

And given that we were able to a large extend to be able to offset that inflation that also gives you a feel of the ongoing effect which we still had from the cost reductions interventions which we made in 2013 as part of our €100 million cost reduction program. On the direct cost, what you see in the gross margin also there.

We of course have the focus on trying to really start to leverage our scale much better and much more – more efforts to be done in that area. But also, if you look at the gross margin increasing to about 16% part of that is reflecting that we are improving our overall – also direct cost structure which includes -- there is some fixed costs in those areas as well.

Thank you. And do you have any targets or long-term targets for your gross margin?

It's not – no we do not have any specifics there because there is of course always a huge mix impact which can play. For instances look between the different regions that could be quite some differences and also between the different product areas there.

So we really need to instead of trying to come up with one number for total, I think it's much more important that we look on country-by-country or business-by-business and region-by-region to ensure that we are cost competitive versus the key competitors which we have whether it's local or the threat of imports like in Latin America.

Thank you very much.

Okay. Maybe a question here from the room?

Yes. Good afternoon, Filip De Pauw, ING.

Two question from my side, the first question is on the bridge and REBIT from the first half of last year to this year. Bruno said earlier that the gap underlying is roughly €22 million in REBIT from both years.

The growth factors are volumes and cost savings, and I wonder if you could quantify a bit how much of the €22 million is volumes and how much is cost savings that's the first question.

It's really is a combination of both and extremely difficult because there will be different elements, there will be some mixed impacts, I mean getting some higher end products which was probably if you look at Europe, you will immediately see that the margins which we are running in Europe now off 10% is not just from more volume but also from having some high-end products which are performing – which are performing well. There is of course the impact of getting in total 4% volume increase, but I would really think if you would look at it, it's most probably evenly split between positive product mix which we have there, the volume and then also the cost elements which we have in there.

It's not one which kind of jumps out which takes all, it's a really combination of these three different elements.

Thank you. And then the follow-up question on the capacity or the overcapacity in China.

I think it would be helpful if you could quantify a bit where do you seek a factor level in China where capacity – utilization is now at the moment, is this 70%, 75% somewhere in that range or is it a fair assumption that…?

No. I think it's higher than that.

I think it's higher than that overall. I think it's probably somewhere in the 80%, 85% range overall.

I think that as the market as continued to grow asset utilization has improved and was getting up to a much better level really at the back end of last year. Having the new capacity that's come on stream in the first quarter, at this stage it's not all that so we think there is probably in the region of somewhere under 50,000 tons of capacity in there.

But we think it's targeted to go up to more like 100,000 tons and it's a question of how quickly they would like to take that on board. We think their pricing activity suggest that they will not climb quite quickly.

The one thing I would stress though is that there is underlying growth and there has been underlying growth in the tire cord market in China for a long time. And so yes, there has been overcapacity for most players.

But, I would say if you look at some of the key players in the market. They have actually been building pretty much that capacity for the last sort of 12 months or so.

And so that's why I say overall I think it's probably a bit better than that 70% to 75%. I think it's probably 5% to 10% more than that.

And it's most probably also true to say that the smaller players in the market has more under capacity utilization, if you look at (indiscernible) reports to be at maximum capacity which is why they install, while if you look at SCCHL, they are number three in the market to really reported much lower utilizations. But, all-in-all that's a bit of mix, the real bigger players most probably have better utilization versus some of the smaller ones coming up most probably with some lower utilizations.

Then, one very small other question, on the impairment in Malaysia, they are actually quite quick in taking the impairment, is that you being very, very cautious or do you think that this in the foreseeable future likely not going to get to profitability levels that you had let's say 12 months ago.

We are always trying to reflect what we think is reality. So it's not cautiousness but we -- I think it's fair to say that we try to remain in the conservative side when we look at these things.

But, what is impacting it more than anything else is that we are increasing and the investments which we are doing there is really to upgrade the overall plant also be able to produce high rent type of products because what we see more than what we expected in our original plan is that in the lower end products competition and the price levels have dropped further over the last two years. And therefore, we – the adjustments which we make is not in the newly installed lines which we don't think will work it's more in the original plant which we bought where the rebounds and the expected – getting into profitability of the older – let me call older products.

And is more difficult given the over capacity which there is in China and therefore immediately getting into the market in Southeast Asia which is a target market for our facility in Malaysia.

Thank you very much.

We have another question from the phone.

Yes. Good afternoon Sander Van Oort, Kempen & Co.

Few questions, if I may, first of all on the wire rod prices which didn't increase in the second quarter of the year, we actually would have expected them to increase given the seasonality. So I was wondering, is it likely to increase in the second half of the year or is it just a year without wire rod price increases.

And then maybe related to that probably you have or you anticipated price increases for wire rods in your price move, so is there a fair chance that you need to revise your prices in the second half of the year? And the second question on the Chinese tire cord, I was wondering the new volumes you are getting in, is that mostly more business with existing clients or is this just new client wins which started doing business with Bekaert?

And maybe you can elaborate whether the new volumes or the additional volumes are mostly in commodity related products or whether it's more highly innovative products. And then a third question on the margin differences between a different regions which are fairly significant I would say 11% for Europe, just about 5% for the U.S., what kind of margin trends can be expect going forward, 11% for Europe is it a sustainable level or is it likely to fall back again a bit and given the fact that you are running a through capacity and what kind of upside in the U.S., can we see that go to 11% which equals the margin in Europe or is it structural lower margin business?

That's it for now.

Okay. Maybe I will start talking on the wire rod pricing.

We don't expect to see much movement on wire rod pricing, I would tell you in the second half of the year. I think the impact has already happened in pulling it down in the second quarter as opposed to going up.

So it's left little room for the prices to come down further in the second half I think. So our assumption is, there isn't a huge movement on wire rod pricing and therefore, the assumption isn't a huge impact on our own pricing neither in terms of the flow through of that.

So that I think on the first question. In terms of customers on tire cord in China, I think that was the second question.

A big part of it is actually been continuing to grow share with some of our existing – our existing customers. But we have very specifically gone out this year to target customers where we had either no share or very low share.

Some of those have begun to bear fruit but actually I think that's slightly longer term as we adapt our products to their requirements. But we are seeing opportunities to win more business across new customers.

But we are balancing that ability to growing those customers with the required pricing that it takes to win that business across and trying to make sure we get the right balance, so it doesn't have a too negative of an impact on our overall pricing strategy. And in terms of growth, it comes across both the sort of more standard product as well as specialty products across the market.

It's not an either all when you are doing new business for the customer or increasing the business for the customer it tends to be across their range of requirements not just singular requirements. So I think I won't split it down between commodity or let's say more in the two products particularly within the tough tire cord side, I really don't think there is a big difference there.

Bruno, you want to take that?

Yes. Let me take the question on margin, as you know, we don't give specific guidance on some of these things but while you can see in Europe now with margins above 10% very good capacity utilization, very solid mix as we indicate for the second half of the year volumes will be somewhat lower because of seasonality so that will have some negative impact there as well as the fact that's rather reinforcement there quite some inventories which we see in the tires themselves.

So those will normally have some impact – not dramatic impact, but some impact on the margins. I think the margins which you see above the 10% is actually very, very solid margin, reflecting all of the good work which we have been able to do in Europe, a combination of moving to a very cost competitive production location and base and continuously upgrading our product portfolio with higher end products getting to very solid market shares.

And that I think is an immediate also the big difference with what we see in North America. We announced in our meeting in February that we are restarting investments in North America to actually start upgrading our overall product portfolio because that will be required to get our margins up.

So in North America that as we indicated the margins which we make now mid-single digit is not good enough assuming that those margins very quickly will go to the levels of Europe is also not realistic. For the very simple reason that the market itself in North America is very different.

There are many more integrated players i.e., players who have wire rods product and also produce wires. So there is more of a competition there.

And secondly, there is a less demand for high end products, the industrial development, if I can call it like that so the high end industrial work is bigger in Europe and more important in Europe than in North America part of their industry is still a bit outdated. I mean they haven't invested in a lot of high end industry not like what we see for instances in Germany.

And in Europe, we have the benefit of also having a growth market. Europe is a combination of the old Western Europe and the former Eastern Europe, we cannot call it like that anymore.

But the reality is, we see much more growth in the Poland's or I mean part of it driven by Germany but Poland, Romania, Slovakia those are the growth markets much more than the traditional Western European markets. We don't have that combination in the U.S.

So therefore margins in U.S. for these different regions are expected to remain below the countries of Europe.

But we are targeting to get an increased somewhat versus where they are today.

I think we will always have some businesses in the U.S. which tend to be lower margin businesses and that's why I think sometimes just focusing overly on the margin is not really where we need to be.

But there are also lower investment businesses. Their value creation is still the opportunity that we go after.

So things like the fencing business is in the agri business tends to generally lower margin businesses, it's not like our Latin America business as well. But actually are still strongly cash generative and value creating if we manage to do it in the right way.

Okay. Thank you.

Going to the room maybe here.

Yes. Thank you.

Perhaps a follow-up on Asia. You are increasingly talking about sawing wires again I would say to a limited extent.

Could you phase (indiscernible) to a large extent, is it possible if you phase a revaluation of those assets. And then secondly, you have also been hinting before I think about reallocating some of the capacity dodged tire cord business, is this still a possibility or an opportunity to further increase capacity in tire cord?

On the revaluation of the assets that is not – we don't expect it for the simple reason that we had the solar related investments on a faster depreciation of about 4 years. So by the time you would do that those four years are gone, so technically you don't have to do that either and it wouldn't make any sense.

So no, this is not the invention those assets have been impaired. Now, if you look at the absolute amount of lines which we had there, they are still quite some which are impaired and we started to use them and ship them all over the world, some of these lines here being installed already in India, we have installed and transferred some of them through Indonesia, grading them to be able to make tire cords with it.

And we have further opportunity and possibilities to do so. So it's not that we are currently at levels of the peak where we were back in 2010 or 2011, the levels of production is still are significantly below that.

But, it is true as we have been indicating over the last few quarters that the overall market is growing again and therefore we are supplying more but it still is a way less for just the capacity we had installed in the peak period. That also is by the way true for our key competitors which is why there is still a more than enough capacity in the sawing wire market.

We went from a few hundred percent overcapacity to maybe 100% overcapacity, so there is still a lot of overcapacity. It's not that market is not running in full capacity.

You had EBIT margin of about 9% in Asia in the first half given as you guide for an accelerated price pressure in the second half 10% on an annual basis and expectations for some cost savings, where do you expect margins go in there?

We will see, we will try to have enough cost savings to offset all of the price reduction which will be an extreme high challenge. We think there might be some erosion of the margin to be expected.

But this is where we are working hard to see how we can mitigate most of the impacts which you see there. But overall, I think we don't know, we know what a price erosion is or what we saw in the month of July and as we indicated that inch towards a double-digit on an annualized base, we will need to see – we need to see if that type of trend continues in the next months because what we are trying to do is try to have agreements with our customers for instead of having an agreement on price for one month to have that at least for a quarter.

So therefore, if you don't have month-after-month it decreases, if we are successful in doing so it would ease a bit and then we need to see what comes in quarter four, which is why it's really very difficult to predict. We have been as transparent as we can be with you and we have indicated that it is – that the price erosion was there.

We now indicated accelerating hopefully some point in time we can say that it's getting back to a normalized or no level anymore but we don't see that for the time being so.

Then two real small questions, first, in non-controlled interest were exceptionally low in the first half, what would be a more normal number there?

I think low or mid to high single digit like we had 9 million last year. Again, you know, you have a few million related to the impairment you had very low results in Latin America, those are the two of the key ones, so normally I would expect it to be at the higher end of single digit.

It depend of course on the overall profitability on the half year, last year it was 9, it's not that easy because it's entity-by-entity in some of them we have a partner, in some of them we don't. With different partnerships, so it goes up and down a bit.

But, this number is exceptional because of the two elements I just indicated.

And finally, on your reported EBITDA number, what kind of memory growing elements are in that number? Or otherwise what is your guess of a recurring EBITDA in the near term?

All of the elements which are not – I mean all of the exceptional elements are not taking into account like the elements which we have from an accounting point of view and so they don't impact our REBITA. Then is there anything else which is excluded there.

No? Yes, negative that will as I said, yes, that one is.

I have some small questions. Talking about high margins in EMEA because of the higher end products you are producing what is the risk that will attract new comers or increased competition, how will you protect yourself there?

I think we are reasonably well protected from a manufacturing capability perspective. The competition in Europe is less of errors as Bruno said, it's a bit different structure of competition from North America and particularly from the sort of industrial still a wire type products is not that cost effective to ship them around the world, so where we have got that ability have strong manufacturing process that delivers good product.

And these are technically quite difficult products as well so they tend to be thick a diameter wide with thicket coatings that's really the key differentiators on them. We are fairly more protected I would say both from a process and technology perspective.

And it's half the people to come in to those markets if they haven't already been quite involved in them. It's not a sort of thing for example the Chinese would be able to export in those markets.

I certainly don't have that processing technology. It's not a big demand in their home market so they haven't invested in it where we do have specific competition in Europe, they probably benefiting from it as well.

So but they don't seem to be taking business way in fact quite the opposite way of growing share in the high end arena.

Again, relative importance between the so called high-end products and low-end products through the regions or the evolution of something more is very difficult of course for this high-end or low-end or middle-end or…

Well, this is – well, okay. I will try to give it, I won't just base numbers on it because it's – what is high-end and what is a low-end, it's not easy to describe it for sure.

If you look to the different regions, let me start with the easiest one, which is Latin America where most of it is more of a commodity type of product. Yes, 70% of what we do is construction related, we have rebars, we have nails, and these type of low-end products and a lot of fencing.

So that typically to a very large extent and this is with the exception of Brazil. But, to a very large extent it's really low end commodity type of products, which is why we also – we see more impact of import out of Asia which is this typical, they have overcapacity and as Matthew saying it's really come up with higher end products.

In Asia itself given that about two-third of what we do is tire cord that in itself, already there are more commodity types of products but that in itself already gives you an indication of what we do there. All of the other products we entered through the acquisition through the low-end like the facility which we acquired in Malaysia but also Xinyu now in China – Xinyu.

In China those typically we acquired low-end and are in the process of upgrading. So they are outside of tire cord and sawing wire I would say, there is quite some lower end which we are upgrading in Asia.

In North America, I think if we compare the product portfolio then North America to Europe that we have more higher end products in Europe partly also related to the fact that will be of course divested some of the lower end products back in 2005 like with the fencing products which we still have in North America, so the mix must be probably somewhat richer in Europe, which we therefore also see reflected in the margin, but also in the capital employed. It is a higher assets business where we just want to see in North America.

And this is as we indicated part of the trend which we try to change there is important investment program in North America, which we started about a year ago and which will estimate 12 months at least to upgrade the facilities to also get into a bit higher in product. So, hope that helps a bit, but it's not easy to just put very specific numbers on it.

And then on the joint ventures, I mean, in Latin America. Can you say something about the cash position – the disposition is possibility that you – do you get regular dividends or…

Yes.

It's not that you can get the one here, higher amounts, something on.

No, I mean, it's normal dividends stream, which is coming in from those entities that might be some strings year-on-year, but with conceptually there is – it's a rather over the cycles, it's a rather constant pattern of dividend repatriation.

Okay, then, may be final question on Russia, nobody talks about it or.

It has at this stage very little direct impact on our business. And our business in Russia is relatively self-contained business.

So, we've progressively done more and more vessels in inside Russia. So, we build from Russian raw material, full customers primarily in Russia in a Russian factory and the combination of that means has been remarkably little impact on that business.

The demand internally inside Russia continues to be reasonably strong. The one maybe advantage we're seeing is our capacity utilization is up there because they're importing less tire cord from our competitors.

We're the only tire cord manufacturer there. So inevitably there is a bit of an opportunity and if they cut off import altogether, I'm sure we'll be challenged to see whether we can put more capacity into play there.

But, right now, I would say that there has been no negative impact for us on the activity in Russia.

Thank you. No questions from the phone anymore.

Anymore questions here? One more from the phone, okay.

Yes, hello. Thank you for taking some follow-up questions.

There is actually two, first of all, may be you can talk about the trends during the quarter whether you entered or whether the momentum in a quarter improved or you saw a kind of a slowdown, maybe you can also talk about developments in July. And second and final question is on the net debt guidance you provided of €650 million, €700 million.

A little bit surprised because it's – I think it doesn't suggest a little operating free cash flow for the second half of the year or you would expect of course, and the release it's a working capital already have a quite a bit of an positive impact, so maybe you can elaborate on your calculations how to end up with €650 million to €700 million at year end debts. Thank you.

I'll talk about the trends during the first half of the year. It's too early for us to get on July numbers at this stage, we will provide later.

And actually again it's a quite a mix picture by region. We've already talked about Europe, if I look clearly volumes, Europe was up around 11% in the first quarter, about 3% in the second quarter, North America was flat in the first quarter not nearly 4% in the second quarter, Asia Pacific was up 7% in the first quarter and up 12% in the second quarter.

So the complete opposite trend of Europe, Latin America, view include Venezuela, Latin America was down 8% in the first quarter and then under 3% in the second quarter. So we saw the improving trend there.

If you net out Venezuela because as I mentioned that was a fairly significant shift there, actually it was down about 3% in the – down about 3% in the first quarter and up 8% in the second quarter, so some quite significant shift, so very different by region.

On your net debt question, I think there are three elements which you need to take into account. First of all, on working capital, it is true that we do expect of course working capital towards was year-end to decrease again, but we are starting from a lower base.

So what we've seen constantly is – if you start from really high base we improve, we are now at the lower base so our starting point is much lower. Our business is bigger.

So the opportunity to continue to lower this working capital is way less than what we've seen in the last two years where we made some very important interventions there. Second element as I indicated is that we are accelerating our capital expenditure.

So our CapEx will be higher and that is also expected, you will have therefore direct impact into our net debt. And finally, something which we also didn't have last year is – as we report on the regular basis in the process of doing some share buybacks and that also of course then as an impact on the overall net debt position.

Taking those three elements into account while it's extremely difficult to do a very good cash and net debt forecasting we all know, but I just wanted to give some kind of flavor that people don't assume that our net debt while being €100 million below same period last year that you don't take that into your models also for the end of the year because that will not be realistic. And of course all of that is excluding the Pirelli acquisition, of course, if the authorities in Turkey and in Brazil all of a sudden shift into second gear and get everything fastly approved then our net debt will be higher because of that we all hope for that but we don't calculate.

I think there is another question in mic.

Okay. Thank you for taking the question.

One more from the phone.

Just maybe on 2015 in China and U.S., any of you on the business environment the pricing utilization rate (indiscernible). What's your view basically on 2015?

Early to say still at this stage, but our view as I expressed before, I think the pricing impact that we are seeing right now is more of a spike. And I think would get back to more normal patterns of pricing activities as we go into 2015.

The underlying industrial economy in China is, as we said is at the slow point right now, but I think there is a very focused activity from their central government on looking it how through government funded project. They restimulate that and get it back moving.

We do believe that there has been actually a bit of a slow down as a result of the corruption purge because I think that's frozen spending a lot of the local and provisional governments as well. I think now that they have taken some of the moves they have that will also begin to free up.

So our view is, China will continue to be relatively positive in 2015 and probably back to more normal levels of pricing activity and pricing pressure. That does mean our assumption is on going price reduction.

So…

Thank you very much.

No more questions from the phone. No more questions from the room.

Then I would like to thank all of you for calling in. And also for being here for the once who are here in Brussels, we now invite you to a nice drink in the Sun outside.

For those of you on the phone, I hope you can enjoy a drink over there. So thank you very much.