Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the presentation of Vesuvius 2019 results. My name is Patrick André, Chief Executive. And on my right is Guy Young, our Chief Financial Officer. I will start by giving you an update on our strategic progress and performance in 2019, then Guy will give you some more details on our financial performance last year. And then I will conclude with some word on the outlook before opening the floor for Q&A. We were confronted last year with challenging market conditions in both our steel and foundry markets. As a result, our revenue declined GBP 87.6 million or 4.9% on a reported basis. However, we reacted very early in the year, deciding to accelerate and intensify our restructuring efforts. And thanks to this, we were able to mitigate the negative impact on operating profit and limit the decline of our operating profit to GBP 15.8 million. Our return on sales at 10.6% declined slightly, thus a limited decline of only 0.4% as compared with 11%, which we reached in 2018. Even more importantly, we demonstrated the robustness of our high technology, but low capital intensity business model with a strong generation of cash flow, our cash conversion ratio was 120% last year after only registering 91% in 2018. And this enabled us to reduce our net debt level on a like-for-like basis, excluding IFRS adjustments by GBP 31.5 million. And this, despite the acquisition of CCPI beginning of the year; despite strong CapEx for the modernization of our manufacturing network, GBP 65 million, above our long-term average; despite GBP 30 million of cash restructuring outflow. Based on this strong cash flow generation capability across the cycle, our Board decided to propose to the next general assembly, an increase of 3.5% of our full year dividend to 20.5p per share. A few more to start the review on our markets, starting with the steel market. As you can see on this slide, all our main markets in steel saw significant decline or not as strong increase as usual in 2019. Very important decline in the EU and in Latin America, but also, if you look at India, for example, with 1.8%. We were, last year, well below the normal long-term growth rate of the steel sector in India. And North America, despite the Section 232 positive impact was more or less stable as compared with 2018. So globally, difficult and challenging market conditions in the steel sector. The only area where, at the end of the day, the steel situation was relatively still favorable was China. This decline of the steel market was progressively amplified all along the year. And you see on the bottom right table the difference between H1 and H2. The decline in H2 is quite significant. And if you look at Q4 only, the steel production outside China in Q4 in the world, excluding China, was down 5% as compared with Q4 2018. In these difficult market conditions, our Steel Division generally maintained its market share, with only one exception, India, which I already mentioned during the presentation of our first half results, where we lost end of 2018, an important customer, but this customer was fully, in fact, more than fully regained at the end of 2019. So we expect a reversal in 2020. In EMEA, the -- we didn't lose market share, contrary to what you may think looking at the graph. The fact that our sales was a bit lower than the normal steel market evolution is linked first to a significant destocking effect there, some exceptional sales in 2018 which didn't repeat in 2019. If you remember, we had more than 11% growth of our sales in this market in 2018 and also some increased restrictions to trade with some of the Middle Eastern countries. In Foundry also, we were confronted with challenging market conditions in 2019. In particular, the light vehicle markets showed weakness everywhere in the world, in all regions. But beyond this light vehicle sector, all other foundry end markets were also affected by the general slowdown in activity. The medium and heavy vehicle market in NAFTA, which registered relatively well in the year 2019, started also to show some signs of weakness in the second half of 2019, which are now continuing. Confronted with these challenging market conditions, we decided very early in the year to react and to accelerate our restructuring efforts. We were able to successfully close 8 plants in our manufacturing network in 2019 very rapidly. But at the same time, we invested in our remaining plants to preserve overall the same production capacity. It's very important for us because we continue to believe strongly that on the long term of 2 end markets of steel and foundry are growing markets, and we want, on one hand, to eliminate fixed cost to be more competitive, but to maintain the same production capacity, to be ready to catch opportunity and to follow the market when this market will rebound and recover. So we maintained fully our ability to follow the growth -- the long-term growth of our end markets going forward. We delivered GBP 16.4 million of recurring cash savings in 2019 after the GBP 14 million already delivered in 2018, and we expect a further delivery -- an additional delivery of GBP 19.4 million in 2020 this year and GBP 6.2 million in 2021. Globally, as compared with our previously announced restructuring programs, our target has been increased by GBP 3 million of recurring cash savings for an additional one-off cash cost of GBP 7 million. Regarding the cost, all our costs or the vast majority of our costs are already accounted for in our accounts at the end of 2019. We have in our accounts a significant GBP 30 million cash outflow in 2019 for this restructuring effort. And we only have relatively tiny GBP 2 million -- GBP 2.1 million remaining to be accounted for going forward. So costs are behind us, a significant part of the savings are still ahead of us and will be delivered mostly this year and GBP 6.2 million next year. But at the same time that we accelerated our restructuring, we keep the focus on our long-term strategy, revolving around our R&D efforts. We are a technology company, we deliver solutions to our customers. So we decided, despite the market conditions to accelerate our R&D efforts. We opened this year our new flow control R&D center in China, in Suzhou, close to Shanghai. We also expanded significantly our R&D center in Vizag for advanced refractory and our mechatronics robotics research center in Belgium, close to Brussels. We launched successfully more than 10 new products in 2019, and we are planning to launch a further 15 -- probably more than 15 new products in 2020. As a result, what we call our new product sales ratio, which is a percentage of our sales that we realized with products which didn't exist 5 years ago, rose again this year, reaching 16.4%. And as you can see, it was barely 7% a few years ago. It shows how we are progressively accelerating in R&D. And our objective is to bring this percentage to 20% in the years to come. You have there a few illustrations of our new products. On the left side, you have the picture of the new generation of slide gate plates and slide gate systems, which we are now introducing our to customers worldwide. This enables our customers to improve at their set up their cost performance, the safety of their operations, but also to increase the quality of the steel that they are producing. On the right part of the slide, you see the new tundish installation robots and lasers, which are currently being deployed by our Advanced Refractory Division all over the world. We gain in 2019, it was an important milestone for us, our first large size robotics customer in China which is the [ Baosteel Group ], so the first steel producer in China, and this will enable us to increase our consumable sales going forward. We now have more than 9 active robotics projects worldwide. And we expect this to increase in the years going forward. In the Foundry Division, we launched this year, a new generation of coatings to improve inner cleanliness of castings, which helps our automotive foundry customers produce engines which will reduce emissions and lower energy consumption. We also launched a new feeding technology, specifically targeting the fast-growing aluminum foundry sector to help the foundries there, improve their yield and also lower emissions in the workshop during the casting process. Let's now look in more detail into the performance of each of our divisions. The Steel Division's revenues declined significantly, as you can expect, in 2019 by 4.4% on an underlying basis. This decline was due to general market weakness, but also to a significant destocking impact; a slightly negative regional mix impact, for example, we sell more in the northern part of the U.S. than in the southern part of the U.S. for historical reasons and the northern part grew more slowly than the southern part of the U.S.; external regulatory changes, which have disrupted trade flows; and as mentioned earlier, some loss of market share in India, but again, this has been fully regained now and should not impact 2020. We could mitigate these negative market conditions with our restructuring efforts. We closed 6 plants -- 6 out of the 8 plants we closed were in the Steel Division, in NAFTA and EMEA. The CCPI acquisition beginning of this year, which we closed end of February, also had a positive impact of GBP 2.5 million on our trading profit. In the Foundry Division, revenue declined even more than in the Steel Division by 8.7% on an underlying basis. The main factor behind the decline was the weakness of the light vehicle and truck markets, but also reduction in activity in general engineering, in mining and in agriculture in most regions. We mitigated partly this negative top line impact with positive price adjustment without any loss of market share and also some restructuring actions, the closure of 2 plants in this division. However, we are not fully satisfied with the implementation speed of our restructuring actions in the EMEA region, which has been slower than planned and corrective actions are underway with the new management. Regarding management, after the reinforcement of our regional P&L leadership teams in 2018 and during the first half of 2019, we decided to appoint new entrepreneurial-minded business unit presidents with a combination of external and internal talent. On the left, you have Karena Cancilleri. Karena joined us in October 2019. She is now leading the Foundry Division. She is coming to us with a very strong experience -- management experience in both private equity and family-owned businesses after having started a career as one of high potential at Shell Chemicals. Thiago da Costa Avelar joined us about a bit over 1 year ago as regional Vice President for our South American steel operation and has been promoted in January this year to lead our Advanced Refractory business unit. Thiago, despite his young age, brings with us -- with him more than 15 years of experience and knowledge of the steel and refractory divisions acquired at both ArcelorMittal and RHI Magnesita. And on the right, you have Tanmay Ganguly. Tanmay is one of our most talented and experienced managers, has been with us for more than 10 years, has been very successfully leading over the past 5 years, the Advanced Refractory Division. And will now, as from April 2020, lead our flagship Flow Control business unit. With these changes, we now have more than 7 nationalities represented in our group executive committees, and we are reaching 25% female representation from 0% 2 years ago. We also decided in 2019 to reinforce our efforts on sustainability. Beyond already mentioned progress in diversity, we decided to intensify our efforts to reduce our energy footprint. We already achieved a 10% reduction in energy consumption per tonne of products manufactured since 2014. But we decided with the board to launch a renewed effort to, again, reduce by a further 10% of energy consumption by 2024. So investments necessary to achieve this objective are already underway. In parallel, we continue to develop new innovative solutions and products to help our customers reduce their own environmental and energy footprint. We also strongly believe that personal growth and job satisfaction of our employees is a key success factor to grow our business going forward. We launched, in 2019, the first ever for Vesuvius, the first-ever global employee culture and engagement survey, which -- with a 91% participation rate, so very high. We had 91% participation rate of over 10,000 -- more than 10,000 employees worldwide, showed a strong 69% positive engagement results. And this, despite the fact that we have been ongoing restructuring programs for close to 3 years now. We also got, through this survey, very useful feedback from our employees worldwide, about how we could improve even further this level of engagement and we've launched action plans everywhere in all regions accordingly. We are also increasing our focus to community support activity everywhere where we have a plant worldwide. And we are focusing on 2 areas specifically. The first one is the education of children and young adults in less-developed countries. And the second one, very important for us, is the support of girls and women's education in scientific and technical field. I will now hand over to Guy, who will give you some more information about our financial results.

Thank you, Patrick. Good morning, everyone. Thank you very much for your time today in what is, again, a very busy reporting period. Before getting to the full income statement, I'd like to just run through our sales and trading profit bridges and give you a little bit more detail as to what happened during '19. After adjusting our reported 2018 revenue for foreign exchange and the disposal of BMI, our 2018 underlying revenue was GBP 1.79 billion, down GBP 102.9 million to GBP 1.69 billion in 2019. This is a decline of 5.7% on an underlying basis. If we add back the revenue from the CCPI acquisition, this gives our 2019 reported revenue of GBP 1.7 billion, a decline of 4.9% on a reported basis. If we just take a look at that in a trading profit environment, again, after adjusting for foreign exchange and disposals, it shows the total impact on underlying trading profit of a GBP 17.7 million decline. That GBP 17.7 million is effectively comprised of the impact of the reduced revenue of some GBP 33.8 million, partially mitigated by our restructuring savings, some one-off costs that we disclosed at half year and are repeating here, and the impact of IFRS 16 lease adjustments of some GBP 2.7 million. This gives us the underlying trading profit in 2019 of 1 point -- GBP 178.9 million. And after adding in the trading profit impact of CCPI, takes us to our reported trading profit of GBP 181.4 million and a return on sales of 10.6%. If we just take now a look at the slightly fuller income statement, beneath trading profit, I'd like to draw your attention to a couple of the key numbers. Our share of joint venture profits of GBP 1 million is lower than last year. This is essentially as a result of the disposal of our joint venture AVR, which we disclosed at the half year. Our finance costs were broadly in line with last year. Perhaps one of the bigger moves and certainly impacting on the EPS was our effective tax rate, which has fallen to 25.7% from 26% last year and our original expectations for the year of 28%. The difference between the 28% and the 25.7% is essentially down to the announced reduction in Indian corporate tax rates. We had an advantageous FX impact on tax payable in Mexico, and we've had a minor shift in the geographic mix of our profits. Our expectation going forward, at least for the medium term, is that our effective tax rate should be between 26% and 27%. Lastly, NCI, noncontrolling interest. This relates to the minorities in our 2 Indian subsidiaries. This has tracked slightly lower as profits in those 2 subsidiaries has tracked lower for the same end market reasons as the rest of our group. The end result is that we reported headline earnings of GBP 121.4 million as compared to the GBP 133.7 million of last year, translating into a headline EPS of 45.1p for the year. Based on what we still believe to be an attractive medium-term growth rates as well as the cash-generating capacity of the group, the Board has declared an increased full year dividend per share of 20.5p. Our cash-generating capacity is something I'd like to discuss a little bit further as it remains alongside the improvement in trading profit margin as a key focus area for us. We recorded strong cash conversion -- particularly strong cash conversion of 120% in 2019, significantly aided by the release of working capital as our sales declined. Our cash-generating capacity is, however, not a single or one-off event. The illustration in the graph behind me, tries to demonstrate where we have seen significant increases or outperformance in the growth rates of our trading profit and cash generation in comparison to steel production growth rates in the world, excluding China. The cash-generating capacity of our group is a strength which we'll continue to deliver against through improvements to our working capital, which I will touch on next, but underlines the relatively low capital intensity of our business. Turning to trade working capital. As a percentage of revenue, it remained broadly flat between this year and last. We were more successful in improving our debtors and creditors days year-on-year. And whilst inventory days did increase slightly, we feel that relative to our production levels and having to chase a deteriorating market, this was a relatively good result. As you can see here, the working capital release year-on-year was GBP 64.1 million, which, along with the depreciation add back more than offsets the cash that we spent on CapEx and other working capital. And this was the fundamental driver of the improvement in our operating cash flow to GBP 217.7 million in the year at a cash conversion rate of 120%. That GBP 217.7 million of operating cash flow was utilized in line with our capital allocation priorities. And importantly, as already covered, it was used to fully fund the acquisition costs of CCPI. Before adjusting for IFRS 16, this meant that our net debt fell by GBP 31.5 million from GBP 247.8 million at December '18 to GBP 216.3 million at the end of '19. Even after adjusting for IFRS 16, our net debt stood at GBP 245.8 million, marginally lower than last year as well. At GBP 216.3 million, our net debt-to-EBITDA is at 1x. And along with the strong cash generation during the year allowed for the very significant investments that we made totaling GBP 129 million into the 2 growth areas: organic, where we spent money on both CapEx and our restructuring; and inorganic in terms of the acquisition of CCPI. It also meant that we could increase the distribution to shareholders to a total of GBP 53.9 million, while still leaving us in a good position to be able to fund growth when end market growth normalizes again. With that, I'd like to hand back to Patrick for the outlook.

Thank you, Guy. Our 2 end markets of Steel and Foundry were especially weak during the fourth quarter of 2019, and we expect this abnormally low level of activity to continue at least in Q1 and to have an impact on our performance in H1 2020. The potential impact of the COVID-19 health crisis is obviously difficult to assess at this time. I'll be happy to elaborate more during the Q&A session, but it's likely to have a temporary negative impact on our end markets during the first quarter. However, there are now clear signals, especially on the steel sector coming from our discussions with customers and our observation from the ground, that the destocking phase experienced in H2 2019 is maturing and may shortly be coming to an end. Thanks to our restructuring efforts, our emphasis on innovation at the service of our customers and above all to our dedicated and motivated workforce, we are now ideally positioned to benefit from the normalization of our end markets as this occurs. So thank you for your attention. And now I will open the floor to questions.

Four quick questions, please, if I may, 2 for each. Can we just have a little bit expansion on, please, the destocking commentary on the slide in front of us? I think my understanding from listening to a couple of the conference calls in the last couple of weeks from your customers is that depending on what region you're in, we're kind of through destocking somewhere and kind of going towards the end in certain other areas. Can you just expand a little bit on that for us, just to kind of give us an idea where we are? I guess, clearly, Europe was the biggest challenge in '19. So maybe a focus on that. And then secondly, for yourself, on the CCPI acquisition. Just want to understand how well that's gone and kind of what lessons you've learned maybe from a different type of acquisition for Vesuvius. And then for Guy, just following up on your inventory comment or your working capital comments, can you just remind us what you think your inventory opportunity is going forward from here? And just really on CapEx, it peaked at GBP 65 million this year, kind of where we're going to get to maybe on a kind of 2-, 3-year view as that normalizes?

If I start with destocking, we have now everywhere, clear indications that the steel destocking is coming to an end. It's clearly probably behind us already in South America. In North America also, probably not completely yet in Europe. And you may have seen the new WSA numbers of January where steel portion in EU-27 plus the U.K. was down 12% in January, which is even further down than Q4. Q4-over-Q4 last year was 10% and January, even more. So it means -- it shows that in January, the destocking phase was not completely over in the EU but it's also clear that it's probably difficult to go below 0. And then -- and so our observations from the ground and we are visiting all steel plants nearly every week is that we are relatively confident that it's about to come to an end. It was -- we also see already an improvement in India. So the destocking phase is also there. And China is a very specific situation because in beginning of January, I would have told you the same, that the destocking phase was over in China. But obviously, with the impact of the coronavirus, what we are seeing today is that first ourselves, our manufacturing network is operating at normal capacity. We have absolutely no supply chain issue in China, to receive raw materials in our plant, to send raw materials out of China to our manufacturing network everywhere in the world and to operate our plants in China and to service our customers. So as far as we are concerned, our manufacturing network, which was already last week working at close to 90% capacity. This week is working at 100%, and we have clear signs that the situation is improving there day after day in China. As far as our customers are concerned, our steel customers are operating in China. I mean, are operating, more or less, at normal capacity today. However, it's also clear that their own customers have not completely restarted yet. And we have clear information -- indication that about some stock building of steel in China over the past few weeks. But at the same time, we see that the general level of activity is getting better in China beyond steel. And so we see this building of steel inventories in China, provided China continues to improve at the rate where they have been improving over the past couple of weeks as most probably temporary. I don't know if it will continue at the same rate. But if we assume that the rate of improvement of the situation in China continues, then there are good reasons to believe that the new buildup of steel inventories in China will be temporary. So this is for the destocking in steel. Regarding CCPI, it has been an important success for us and it's not only a success of acquisition, but more important, it's a success of integration. This -- it has been some time since Vesuvius has not only acquired, we have done it, but integrated very rapidly a company -- CCPI in our existing operations was something a bit new for the management teams in Vesuvius, and it was a good training exercise, if I may, for them because the acquisition was closed end of February and end of July, it was fully integrated. The Blanchester plant which we acquired was closed. So production was fully integrated into our existing plants in the U.S. We were able to manage our customers as SG&A synergies were achieved, and all this in 5 months. So I think that for the team this 5 months were probably a bit difficult with a lot of pressure, but they did it, and -- we see that very positively because we remain interested in acquisition opportunities going forward. And this CCPI exercise in 2019 is a good way to train our teams for potentially future acquisitions integration.

And on the trade working capital in total, inventory, you're right, it's probably one of the areas that we can expect to improve. That's predominantly on the basis of a more consolidated manufacturing footprint in the first instance. But that doesn't mean that we can't improve either in debtors or creditors either. So I think the shorter answer to your question is, given that we're at 24% now, we would be expecting to improve between 50 and 100 basis points on that. That is across all 3 categories of our trade working capital. In terms of CapEx, yes, you're right. We've had a heavy year of investments as we flagged. Bearing in mind, the GBP 60 million that we put up on the slide is a net number. So it was a gross GBP 65 million, net of proceeds, bringing it down to GBP 60 million. So if we take GBP 65 million as the year's CapEx invested, that is going to likely reduce over the next couple of years down to what we would believe to be a more sustaining CapEx-type level of the 2 -- of around GBP 45 million per annum. That's a gradual reduction as investments for restructuring and like programs start winding down.

It's Sam Bland from JPMorgan. Could I have maybe a couple of questions, please. First one's the cost savings plan. Just talk about why maybe there's a little bit of a pause in the plan or -- just talk about why that's the right thing to do now given the market environment and the growth that you see coming back maybe later on this year, rather than for example, extend the plan and have more plant closures, et cetera. And the second question is just have a little bit of an update on the competitive environment by some of the different countries. I note -- I think, for example, India has been slightly problematic in previous years from that perspective.

Thank you very much. On your first question, globally speaking, our restructuring plan is broadly similar to what we studied and decided to implement a couple of years ago. We are simply doing it faster. It's not that far different. The plants that we are closing are the same that we have already decided to close before these studies, we are just accelerating. We are expanding a little bit because you may have seen that our global restructuring target is GBP 3 million of recurring cash savings higher than the previous one, but it's an adjustment, a positive adjustment, but it's an adjustment. So we are closing those plants, which we feel we need to close. And at the same time, as Guy mentioned, we are investing in the remaining plant to develop their capacity so that our overall capacity remains the same. We have no intention for the time being to go further because we consider that now our manufacturing network, after this restructuring, there is last plant in the U.S. in Texas, which we'll close end of March, but it was announced several months ago. Once this is done, we consider that our manufacturing network would be in the right shape, in the right structure to simultaneously give us the right level of competitiveness, and we probably have now some of the lowest costs in the -- lowest manufacturing costs in the industry and will enable us to follow the growth of our markets going forward. An important point I would like to mention there is that we have decided, and I believe it is the right thing to do, to continue producing in those regions where we serve. So we produce in Europe for sales in Europe; in NAFTA or USMCA for the sales in North America; in the MERCOSUR for selling in the MERCOSUR; in India for sales in India; in China for the sales in China. We believe that there is a probability that interregional trades may not be as easy in the coming years as it has been over the past 20 years. So we have an important part of our manufacturing strategy, which explains why we are -- we have no plans to go further today is that we want to continue being able to supply from inside the regions where we are selling to protect ourselves against any risk of increased trade tensions in the coming few years. In terms of competitive environment, there is not much change. Our competitors are more or less the same today than 1 year or 2 years ago. We have good competitors, which we deeply respect. But we -- they are the same than a few months ago. And we see our competitive positions as compared with our competitors as either stable or improving due to the fact that now in terms of manufacturing cost base, I think we have at least as good, in many regions, better manufacturing cost base than most of our competitors. And in terms of innovation, the acceleration of our R&D effort has rather been increasing the technological gap between ourselves and our competitors over the past 2 years.

It's Jonathan Hurn from Barclays. Just a couple of questions, please. Can we -- firstly, just talk a little bit about the pricing in steel. If we strip out deflationary raw material environment, what's the base pricing like in steel? That's the first question.

Regarding pricing, as you know, our strategy has and remains to adjust prices, globally speaking, according to raw material prices evolution. So we have been doing that on the way up. And if you look at the year 2019 -- on average for the year, not at the end, but on average for the year, the raw material prices were slightly higher than 2018. So we have adjusted our own finished product prices accordingly. Now we are on the way down for raw material prices. And over time, our own finished product prices, which is the contract of choice that we have with our customers are following accordingly. But we are protecting our transformation margin. There is no negative evolution of our own margins. This is the way we are managing the pricing.

And the second question is just on that capacity that you put -- or you're maintaining. Where is the utilization currently within the business? And secondly, within your ongoing businesses, I assume there's an element of overhead under recovery coming through. Can you just tell us the extent of that? Or maybe just what level of growth you need to get through the business to start recovering that?

So the capacity utilization of 4 plants, you mean?

Yes. Yes.

We are -- we have maintained, despite the restructuring, more or less, the same overall production capacity that what we had before the restructuring. So as markets are down as compared with what they were 1 year ago, it means that we have significant available capacity in our plants today worldwide. By region, we can adapt between regions based on our vision of where the demand is the most susceptible to restart rapidly. But globally, worldwide, our overall production capacity is at least the same as what it was before the restructuring. And what it means is that our manufacturing network today is fully ready to follow any increase in demand, which could materialize in the months to come.

In terms of the actual utilization rate. I understand the capacity has been maintained. But in terms of what's actually being used within that capacity, can you just give us a feel for percentage?

No, I can't, but that's what I can -- I will not quantitatively, but qualitatively, we have significant available capacity, several tenths of a percent. In other terms, the day market resumes a normal growth rate, it will take -- it will need several years -- not months, several years before we would need to increase capacity. We have enough to face several years of normal growth rate of our markets the day this normal growth rates will resume.