Castings P.L.C. (CGS) Earnings Call Transcript & Summary

Good afternoon, and welcome to this webinar with Castings P.L.C. hosted by Yellowstone Advisory. We're delighted to have with us today, Adam Vicary, the CEO of Castings and Steve Mant, the Finance Director. Before we start today's presentation, could I just go through a couple of points. [Operator Instructions] We've had a few questions sent in ahead of time, and we'll cover all questions at the end of the presentation. The format today is a presentation of the full year results from Adam and Steve, and then we'll follow that by Q&A. There is a pole up on screen, asking if you are a shareholder. I'd really appreciate it if you could complete that poll. And I think that is all the admin points now. So I'd now like to hand over to Adam to start today's presentation. And Adam, just before we start, just to let you know, we have about 70% of the shareholders of Castings on the call today and 30% are non-shareholders. So let's hand over to you, Adam, to start today's presentation.

Okay. Thank you very much, Alex, and good morning to everybody. Good afternoon should I say, because it's a mid-day. Can you see this second page, Alex, because we can see on our screen here, but it's not showing on the projector.

It's not click-through. No.

So you're still looking at a blue picture of Castings P.L.C., I take it?

Yes, we are.

Yes. Okay.

If you want, I can share my screen with the presentation at this end, and walk it through. Let's see if this will work.

Okay. Let's just try one more time.

Not a problem. I've got the presentation here. I'll share it. And let's -- if you just stop sharing, and then I will take over. Okay, Adam and Steve, the presentation is up now on Page 2. Hopefully, you can all see that. And I'll hand over to you to start the Castings presentation.

Okay. So -- we'll try again. Is that screen going to -- Okay. All right. Fair enough. So yes, if we summarize where '24, '25 was, that's pretty much in the first slide that you can see Slide 2. We saw volumes down about 20% during the year, which made it a pretty challenging year, perhaps worse than that, the quarter-by-quarter, which I think is on Slide 10, you'll see in a bit. The things deteriorated quarter after quarter, which made life a bit of a challenge in terms of labor planning and so on and so forth. Q4 did pick up a little bit. And where we are at the moment, 2 months into the new financial year. We can see modest improvement over last year, probably 3% or 4%, something like that. So the sort of summary of it is that the profit was pretty much in line with the market expectations. The final dividend was held, and we paid a small increase on the interim. So the full dividend was slightly higher. We've got the new line, which we'll talk about in a moment, the new production line, which is coming on really well, but I'll elaborate on that in a moment or two. And we have the plant, the new Foundry plant in Scunthorpe, so we're very much positioned for a new growth phase in the company, which I'm sure will come through over the next few years. So, on to Slide 3. I don't know -- that, Alex. Just some bullet points really about the sales volume and particularly tough markets in Europe and especially Germany, which we saw our German clients down a lot more than clients who weren't so focused on Germany. That has bounced back a little bit. Our main German customer is doing a lot better, quite pleasing, and we've just won some new business from them. So that's going a lot better. Our U.S. business was very stable, actually through '24 and '25, compared to '23 and'24, it's around about GBP 16.5 million. That was one shining light really in terms of volume. That U.S. business has continued. We are subject to tariffs. The tariffs for our products will be 10% thus far, that hasn't led to any loss of business. But there's certainly some uncertainty within the purchasing paternity at our U.S. customers because we haven't been converting recent inquiries into new business. So hopefully, as time passes on and the tariff landscape becomes the norm, we'll start to see continued growth in the U.S. market. Energy and the whole issue around energy pricing and surcharging and so on, there's been something of a challenge for the group for the last few years since the Ukraine invasion. We obviously surcharge all of our energy costs. And we saw energy costs start to decrease in the last financial year, and they will decrease much more sharply in the current financial year but we unfortunately had future forward hedges, which as the volume dropped we didn't require that amount of the power -- the electrical volume, but we had to pay out the extra hedges, which resulted in an effectively a forward purchase of circa GBP 1.5 million, which was very, very annoying. Some of that relates to this financial year, but we took the hit all in last financial year. So there are no further hits to come from that problem. In terms of the -- going around the group, the 2 main foundries found life quite tough with the lower volume. The machine shop whilst their volume dropped pretty much in proportion, maintained a pretty good gross margin, actually the same gross margin a year before despite much lower volumes. So quite pleased with the progress we've made in the Machine Shop. The Castings Ductile -- Ductile Castings is up in Scunthorpe. We've basically purchased assets back in June. We reemployed people by July and quite quickly try to reestablish supply to customers who have been let down. And we turned a profit quite quickly, which was quite, well, a surprising and somewhat rewarding for the effort we put in. But then we saw quite a drop-off in demand, and the demand is pretty lumpy anyway through the winter and the spring. We put a sales force in place in the autumn. And it's quite pleased to report we are now seeing the fruits of that. And certainly from June onwards, the month through now, we are as busy as we've been since we acquired the assets. I'm pretty hopeful that the business will start to make a meaningful contribution to the group during this financial year. The new line is in terms of the building of it is well underway. We'll be finished by the end of July, and then we'll be into the commissioning phase. It's going really well. I'm very pleased the build quality is excellent, and it gives us an extra 12,000 to 15,000 tonnes of capacity going forward, of which we've already sold 3,000 tonnes, albeit some of that doesn't come on stream until '26, '27. And as we said earlier, we've maintained the dividend. So Slides 4 and 5 show the new plant going in, interesting, this was a week or so ago and where my colleague is standing at the moment, you wouldn't be able to because the rest of the plant is going in. It gives you an idea of the sort of size of the equipment and the plant and it's going quite well. A bit about the plant, it's say, 12,000 to 15,000 tonnes of capacity depending on how we work the shifts. It is a plant which gives us a slightly bigger envelope to work in, which opens up some markets that we were perhaps unable to -- we weren't able to satisfy in the past. Certainly, some larger truck brackets for electric trucks, some wind energy, cable protection castings and some agricultural parts and some parts on off-road vehicles where they are typically a little bit bigger and this plant has given us the opportunity to win that sort of work. So it's going okay. We've got off to a reasonable start on the sales side and pretty confident over the next 2 or 3 years, we will be utilizing this asset more fully. In terms of Casting Ductile or Ductile Castings we call it, which is page 7, it's a bit more detail on what I've already reported in Castings is up to 7 tonnes. A lot of the businesses is in power generation, Siemens Energy, Howden Compressors. They're both associated with power generation. They are 2 of our larger customers. And I'm quite pleased to report British Steel has come back to us for the first time since the Chinese were involved and pretty still have placed quite a nice order with us through June and July, and we're hopeful that, that will become more of a baseload for that -- for the business. And we've got a number of new customers have come on stream, maybe 20% or so compared to where we started. And some of the customers who we lost in the original start-up have started to come back to us. So we're quite pleased with that. Nevertheless, been a painful 12 months. We've made losses operationally, and we've had to put some one-off costs in particularly around foundry plant and equipment where we've bought things up to date, and we're pretty well through that whole process now of a few bits of coming to this financial year, but not a huge amount. And we're pretty much there with it now and ready to really set the business forward. We only operate at the moment, that's about 30% of capacity. So we've got a lot of capacity, so a lot of opportunity to grow in that business. The Slide 8 is a sort of volume bridge, where you can see that the vast majority of the issues we had in terms of the operation of the business related to volume in the 12 months. We've not really lost any business. It's just the products that we make, the customers have taken fewer of them because they're building less trucks. And Slide 9 illustrates that quite well, and we typically follow this particular slide. You see a quite a drop-off from -- into '23 into '24 and '25. But things do appear to have stabilized, and we are seeing small improvements in demand. I don't want to over play maybe 3% or 4%. We can also see as we get into the autumn schedules that they are also a little bit better. But obviously, we're not there yet. The quarterly sales graph, which is on Slide 10, which is quite interesting. It shows that we were down last year, sort of 17%, then 20% and then 27%. So we -- each quarter got worse, which the schedules weren't suggesting that. And clearly, that's quite a challenge to manage. And then in Q4, we did see a slight improvement, and that's come through into this year. We kept all of the shift patterns in place, but we've reduced the headcount across the group by about [ 80% ] from some productivity initiatives that we fast-tracked and some tidying up in a few areas. So Slide 11 gives you the European OEMs. We supply all of them except for IVECO. And you can see the -- how they've all fared. Scania in particular was impacted '21 into '22 by semiconductors. They seem to have more of a problem on supplier sourcing semiconductors and the likes of -- and the likes of Volvo. But you can also see Mercedes drop-off was quite severe into 2024 largely on the back of the exposure to the German market. So I'll just pass on to Steve to give you a bit more flavor on the financials.

Thanks, Adam. Yes. So I set out on this slide some of the key, sort of, KPIs of current year compared to prior year. Obviously, we talked about weak economic backdrop in Europe, heavy truck volumes down around about 20%. So group revenue of GBP 177 million, which is a 21% decrease on the prior year. If you break that down, about 89%, 90% of that is due to the volume reduction. 17% due to energy surcharges reducing, an 8% increase due to the proportion of machine work, which generates obviously higher price which was kind of alluded to on Adam's revenue bridge side earlier. Volume variations have a significant impact on the profitability of the group with the operational gearing that we have. So that 20% reduction really, really does impact the results for the year. Obviously, the opposite is true as well. So as we see a volume increase, then that profit comes back quite quickly. We've continued our progressive dividend policy by maintaining the final dividend. So that gives an overall increase on the total dividend for the year of just under 0.5%. Within the investment about GBP 11 million, just shy of GBP 11 million in respect of the new foundry that Adam talked about the [ Savelli ] line. There's about GBP 5 million more to come on that, and that will flow through in the current financial year. And in terms of CapEx for the current year, we'd anticipate around sort of GBP 10-ish million to come through. We then click on to the next slide. We think it's quite a useful one to measure the performance, obviously, volume-related performance reduction this year. But -- so grades down profit per tonne sold. When you're looking at revenue, there's lots of energy surcharges and other surcharges factored into that number. So it's quite difficult to gauge. Looking at margin because that's clearly impacted. So this just sets out profit per tonne. The blue line is the Foundry businesses and the orange line includes the Machine shop as well. So it's the total group. So you can see the drop-off in the current year, very similar to the sort of COVID impacted year of FY '21. Also interesting, it kind of demonstrates the performance of the Machine Shop that people have been following us for a while, the last 3 years, you see the orange line is ahead of the blue line. So the overall group result is better than the Foundry results. There was a period to be sort of FY '18 and FY '22 when the Machine Shop was loss-making, and therefore, it was taken away from the overall group profit. So flicking on to the next slide. So this just sets out -- we talked about progressive dividend policy. We do always look to at least maintain and increase if we can. So this gives a good track record of the dividend over the last 25 years. So you can see every year, we have had an increase by the 2 COVID years where we maintain the dividend at the level it was. Next, couple of slides just breaks down Foundry performance and Machining performance. So as you see external revenue decreased 21% to GBP 176 million in the Foundry businesses. The weight of castings sold reflects that cyclicality that we talked about in heavy truck sector, which has moved into a period of lower demand in FY '25, having been particularly elevated in the previous year. The average selling price decrease reflects the greater proportion of machine parts sold. So that's pushing it up, but it's offset by the electricity surcharge reduction because we've seen those prices come down. So overall, the average selling price has dropped. So the overall result for the Foundry segment was GBP 2.9 million profit and compared to GBP 16.2 million in the prior year. Foundry result has been impacted by the 2 exceptional items. Firstly, Scunthorpe, we've seen a loss of GBP 1.3 million in the period for that business. Obviously, it's just starting up. We have seen just shy of GBP 0.5 million of setup costs in that business as well. And then the other one is the GBP 1.5 million that Adam talked about on the electricity-related penalties that we've incurred for the lower volumes. So if you back those out, the adjusted margin would be 3.3% compared to 6.5% in the prior year. Clicking over on to Slide 16, sets out CNC performance and another solid machine performance really, revenue down a little -- external revenue down [ GBP 400,000 ] as we've said before that the Machinery business is very much positioned to service the Foundry customer base. So that external revenue line between sort of GBP 1 million and GBP 2 million is about where we'd expect it to be. In terms of segmental results, GBP 2 million compared to GBP 3.7 million in the prior year. As Adam mentioned, it's maintained its gross margin around 30% level. It's been helped by the investment we've done in the [ older ] machines and replacing those, which we've seen come through in lower repair costs in the year, also that extra uptime because those maintenance guys are focused on keeping other business kept running. So EBITDA, GBP 6 million compared to GBP 7.5 million and slightly cash generative during the year. The CapEx of GBP 3 million, again, is on replacement capacity, more efficient plants. And as we said, we're placing that older kits and seeing some real benefits from that. On the next slide just sets out the cash flow for the year. Obviously, lower profit to start with depreciation pretty similar. Working capital fairly flat this year. Capital expenditure much higher than the typical levels of -- sort of GBP 4 million to GBP 5 million that we'd normally be running at. As mentioned before, GBP 5 million of that is due to the new Foundry line. And so overall CapEx will remain at a bit higher in the current year FY '26 as that and new Foundry line comes to completion. Those who are not familiar with this, we do have a slightly old arrangement with our pension schemes and that we pay the pensioners and the admin costs on behalf of the schemes and then recover it after the year-end from the schemes. In this year, we've actually recovered that a little bit quicker. So that's why there's that pension inflow of [ GBP 1.7 million ], it's just to do with the admin of the scheme. It's not to do with the surplus and the wind up and that kind of thing. So overall, a net cash outflow of GBP 17 million for the year off the back of that and heavy CapEx and maintaining the dividend. So, back to Adam.

So a bit more about business -- we're now considered to be or flagged as a green iron producer. That means that we don't use any virgin material. We are 100% renewable power supply. And we have a degree of our own home power generation that we have our first solar panel project producing about a megawatt of green electricity, if you like. The business is a complete process recycler. So we only melt scrap. We don't melt any virgin material, which we think over a period of time, should -- will give us a competitive advantage. A lot of our competition, particularly in Mainland Europe is still using both virgin material and using coal products, i.e., metallurgical coke to fire their furnaces. Slide 19. Quite interesting, you can see we continue with automation. There was an amount of automation in the recent year's CapEx and the automated feed line sales, as we call them, which carry out the work that the operators would do is now approaching [ 70% ], and we're continuing on that investment. So we're pretty much there on that particular area of automation. We are -- we've had a number of projects going with AI, on metal treatment and inspection. I have to be honest that the technology isn't quite there for industrial applications yet. I kind of joke that it's good at cheating in exams and the people playing computer games. But when it comes to real-life applications in industry, it's not quite there, but we're working on a number of projects anyway. Page 20 gives the customer mix, ABCD. That's Scania, Volvo, Daimler and DAS or PACCAR group in that order. You can see we've seen reasonable amount of growth over the years with Daimler was a new customer a few years ago. And although we -- it was very challenging for Daimler last year. And hopefully, they recover a bit more this year, we say we've already started to see some signs of -- and Volvo, we've also seen some improvements. So if we go to sort of summarized outlook, which is Slide 21. The truck demand has plateaued, if anything, it's a bit better 3%, 4%, maybe 5%, does appear to be a bit better still in the autumn, but we'll see when we get there. The new line and the plant in Scunthorpe is giving us cost selling opportunities, which we've already capitalized on, particularly in the areas of the likes of wind energy. And some agricultural products, which we have a new -- very exciting new customer on board, which is just starting up now. The sort of headwinds remain with energy costs in the U.K. even after the falls that we're going to see this year, we'll still be 30%, 40% higher than Europe and probably 5x higher than the U.S. and labor costs. Labor cost, particularly this year have been a real challenge. The minimum wage. We don't -- we pay more than the minimum wage. But nevertheless, it's kind of set up that's been set in a bit of a bar. And obviously, the NI increase has added significant costs. So there are some headwinds. It's not all -- it's not all positive stuff. So on the CapEx side, the new Foundry will be finished in the summer. We've largely finished the Machine replacement program. There'll probably be 1 or 2 a year after this year. CapEx will settle back down in the GBP 4 million to GBP 5 million range with a degree focusing on continued automation and multi manning of various machines to reduce the labor impact. In terms of electrification, the pace of implementation is very, very slow. But we are actually picking up a few new products on electric trucks, but the volumes are a few hundreds a year as opposed to the tens of thousands on the diesel trucks. Some development with biofuels and so on. But the technology remains a number of years ahead. And as it stands, we are seeing some opportunities on the electric truck side that we perhaps would have otherwise not have seen. And yes, and the competitive position is a challenge, not least because of energy prices and the NI hike. And then on to Page 22. We do feel that we are -- we're through -- virtually through this ramp of CapEx. We've maintained the dividend if all else is equal and we carry on this even at this sort of lower level, cash levels will be restored. And we are in a very good position for growth with plenty of capacity now on the upside of the cycle and the ability to diversify into some -- in some of the markets. There is an appendix that follows. People are really, really new to Castings and it gives you a bit of history, if you wanted to go through that. I don't propose to go through that now, but please feel free to have a look at that. So, that's pretty much it. I think we go to Q&A now.

[Operator Instructions] So let me start off with the first question. Can you explain how you manage your energy costs and energy hedges? What should we expect for energy costs in the current year? And are you expecting another electricity penalty cost?

Do you want to take that one?

Yes. Okay. How do we manage electricity costs? If we go back a few years, we'd always look to manage it through having fixed contracts to give us the certainty and also give our customers the certainty because, as Adam mentioned before, it is a surcharge and element. So that's how we typically do it. Our last 6 contract ended in October '22. Obviously, at that point, was at the height of the energy crisis and fixed contracts just weren't available or if they were, they were at such a high cost, you just wouldn't touch them. So we went to a flex arrangement, whereby we were predicting what we were intending to use and buying forward those -- that energy consumption. We believe at the time that we have tolerance levels as part of that, therefore, if we didn't need everything that we bought, we wouldn't be penalized for that. Clearly, that wasn't the case, and we ended up under using by around about 20%, which is what has resulted in the penalty costs that we've seen this year. Going forward, so the new contract starts in October this year. We are buying -- at the moment, we're hedging around 50% of our expected consumption and we'll increase that to around 75% and then maybe close to 100% as we approach the period of use, i.e., trying to remove that penalty element that we've had this time around. But at the same time, trying to balance that we're taking risk off the table and the prices might spike on something that we haven't hedged. So that -- hopefully, that explains how we do it and why we do it, how we do it. In terms of energy costs for this year, we do see a reduction coming through this year because of the rates that we've contracted for. And it's probably around about the GBP 6 million to GBP 8 million mark that we'll see a reduction of energy costs in the current year. As we say, they are surcharged. So that flows through to a reduction in the selling price as well. In terms of penalty cost for this year, no, we've provided for that at the end of last financial year. So there's about GBP 650,000 provision of that GBP 1.5 billion was relating to the year we're in now. So that just gets released against that higher cost.

Thank you, Steve. Next question here. Why do you -- why are you investing in capacity when volumes or demand has fallen so much?

Okay. I mean the when is the right time to invest? What we saw in '23, '24 was a record year for the company. We've been going since [ 1835 ] , and we were over busy. And in certainly my time in the business, it was 15 years. Every time we have a peak of the cycle, we don't have enough capacity, and we end up under significant stress and we run the risk of losing business. So, the first thing is we need to have some more headroom when the cycle is in its peak to be able to manage without stressing the business. Secondly, we are a Foundry business at the end of the day, that's what we do. That's what we are believe we are experts in. We should be investing in new Foundry technology in our opinion. And that's the second reason. The third reason is that we would very much like to -- well, first of all, in place that we -- the market is heavy truck, and it's been good to us. It's been good to the company. It's been good to the shareholders. It's been good to the employees, but it is cyclical. And we very much like to be able to find some countercyclical work or at least some work which is outside of the heavy truck sector. The problem we have it is that when the truck sector is busy, we don't have the capacity to go and find that work. So we typically don't do it. So we found ourselves somewhat stuck, but a new line gives us the opportunity to start looking in these other areas and to bring in some new business whilst maintaining our current heavy truck business. So third step, heavy truck, I mean, it's 75% ideally, and this is a sort of ideal scenario in 3 to 5 years' time, perhaps every truck is 65%, but we're still -- but still growing. So hopeful that answers the -- answers the question.

Yes. Adam. One last question that's come in here. And let me ask it, when are you expecting Castings Ductile to be profitable? And what needs to be done to achieve this?

Yes. I mean -- it's a in very, very lumpy demand of what it needs is a degree of background work to cover the overheads. We think we're very close with that. I'm trying to the first part of the question, when do you think it will be profitable. Well, we think June this month will be profitable. April will have made some small management account losses but we expect June onwards, it will be profitable. That's on the back of some quite nice orders that we've had not least British Steel. Have we got enough of a base load yet? I'm not too sure, but we're definitely getting more of a base load, and that's what we need to cover the overheads. But I think we're getting much closer. We've got a very nice opportunity that presented itself in the last few months as well that we're working hard on. Hopefully, we can pull that off. So what do we need? We need a good baseload and when do we like to see profitability, we think fairly soon.

Fantastic. Look, there are no further open questions at the moment. So let me thank you, Adam, and Steve, for presenting. So clearly on the Castings full year results and the outlook going forward. Thank you to everyone for attending. And just to remind you, as you do exit today's webinar, there are a couple of short questions to ask in terms of giving feedback to the management team here and really appreciate it if you could just spend a couple of moments completing those questions. So look, thank you very much for attending, and we look forward to seeing you soon.

Thank you.

Thanks.