Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Welcome to the Vesuvius plc Half Year 2020 Results Presentation. Today's presenters are Mr. Patrick André, CEO; and Mr. Guy Young, CFO. [Operator Instructions] We will endeavor to get all of your questions during the time that we have, but in the event we don't get to your questions, the company will endeavor to follow up with you directly. I will now hand it over to Patrick André, CEO, to start the presentation.

Thank you very much. Good morning, ladies and gentlemen. Welcome to the webcast presentation of the Vesuvius 2020 half year results. My name is Patrick André and I am the Chief Executive of Vesuvius. And with me today is Guy Young, our Chief Financial Officer. I will start by giving you some updates on our business performance during the first half of this year, then Guy will take over to give you some more details on the financials. I will then conclude with a few considerations regarding the outlook for the rest of the year. Due to the COVID crisis, which strongly affected our main markets of steel and foundry, trading conditions were very difficult in H1 and our revenue declined 19% year-on-year, representing a decrease of around GBP 170 million. The decline of our trading profits, however, even if it was significant at minus 48.3% versus last year, was limited by the very strong savings measures, which we could successfully implement as from April very early in the crisis. And I would like to congratulate the whole of Vesuvius team for this achievement. Our return on sales decline was also limited at 7.1%. Even more importantly, we generated a very significant adjusted operating free cash flow of GBP 70.8 million despite the crisis in the first half, representing a cash conversion ratio of 139%. This cash flow performance demonstrates, again, the resilience of our flexible non-upstream integrated business model. It enabled us to maintain a quite stable net debt-to-EBITDA ratio at 1.2x versus 1.3x last year in June and 1.1x end of 2019. When the magnitude of the crisis became apparent end of Q1, we reacted very strongly and rapidly to adapt our cost structure and preserve our cash. Not only were we able to continue to deliver the planned recurring savings of our previously announced restructuring program with GBP 12.3 million delivered in H1 but we could also deliver an additional GBP 18.6 million of temporary crisis-related savings during the second quarter alone. We are now on track to continue delivering at least GBP 10 million per quarter of these temporary savings in H2, assuming market conditions would persist at current level. We were also able to efficiently manage our working capital with nearly stable inventories in H1 despite the sharp drop in sales and no increase in payment overdues despite the liquidity difficulties of several of our steel and foundry customers. The last important point to mention, we fully maintain our global R&D efforts during the crisis to prepare for the future and the coming rebound of markets. We also maintain our new product launch program despite the crisis. Let's now have a closer look at the situation on our markets in H1, starting with steel. As you can see on this slide, the decline of steel markets in the world, excluding China, was quite spectacular in H1 due to the pandemic with EMEA, excluding Iran, and NAFTA, our 2 main geographical markets today, declining 13% and 17.6%, respectively. Even India, usually one of the most dynamic steel markets, declined 24.2%. The steel market in China, however, proved surprisingly resilient with a growth of 1.4% year-on-year despite the COVID crisis in [ Q1 ]. At the same time, Chinese steel exports continued to decline and imports increased, signaling a quite healthy domestic steel consumption. If we now turn to the foundry market. You can see on the slide that with the exception of China, all geographies were strongly affected by the crisis. EMEA, representing slightly over 40% of our sales in the foundry division, was the most affected region. From a sectoral point of view, light, medium and heavy vehicles, representing together around 1/3 of our end markets, were the most affected sectors, with light vehicle and medium and heavy vehicle production worldwide now forecasted to decline on a full year basis around 22% to 25%, respectively, versus 2019. When confronted with this sharp deterioration of our markets due to the pandemic, our first priority has been and remains the health and safety of our employees. We reconfigured the layout of all our plants and our offices everywhere to allow for social distancing measures. At the same time, we made personal protective equipment available to all of our employees who needed to maintain physical presence at work. We also encourage in parallel and we continue to encourage remote working whenever possible. We now have close to 2,000 employees working from home in very good conditions. Thanks to these measures, all of our plants in the world are now fully operational. We have adapted our cost and production levels to the weaker demand using mostly furlough schemes or equivalents in other countries rather than redundancies. This enables us to maintain a high level of readiness and flexibility to follow the growth in demand as soon as market will recover. Thanks to our decentralized entrepreneurial and nonmatrix business model, we could react very rapidly to the crisis, and we are able to generate GBP 18.6 million of temporary crisis savings during the second quarter. These savings can be split between GBP 7.8 million of reduced employment costs excluding incentives, this is coming mostly from furlough schemes worldwide; GBP 4.9 million of reduced discretionary spending like values consulting, travel; and GBP 5.9 million of reduction in planned incentives of managers as compared with a normal average level of those incentives. We stand ready to continue delivering at least GBP 10 million per quarter of those savings in H2 in case markets would remain weak and would not recover significantly from their Q2 level. We also reduced our CapEx program by 30%, representing around GBP 20 million reduction while maintaining our key strategic projects. At the same time, we continued to deliver, as planned, the recurring cash savings of our previously announced restructuring program with GBP 12.3 million delivered in H1 out of total target for the full year of GBP 19.4 million. We are now on track to deliver additional cash savings of GBP 7.1 million in H2 2020, GBP 6.2 million in 2021 and GBP 1.9 million pounds in 2022. Looking at the sales of our steel division, we could outperform the market in most geographies, thanks to market share gains. This was the case in EMEA, in NAFTA, but also in India and in South America. The only notable exception was China where our customers, mostly sophisticated flat steel producers, were more affected than the average steel market by the pandemic. Long products benefited from the good situation of the construction sector and from the stimulus program of the Chinese government, but we are selling mostly to these flat steel producers. To be noted on this slide that the sales figures that you can see there include a negative average price effect of 1.2%, meaning that the volume evolution is better than the sales evolution that you can see on the slide, as we pass through to our steel customers, as announced, the decline in our raw material prices. If we look a bit more in detail at the evolution of our sales during Q2, you can see on the slide that our overall sales declined 26.2% as compared with Q2 last year. This is a bit less than the 28% decline for April, which we previously reported. And this translates a slight improvement of the market situation at the end of the quarter. You can also see that the foundry division sales, despite not losing any market share, were significantly more affected by the crisis than the steel division sales due to the foundry's higher exposure to the automotive market. Despite the crisis, we continued to focus on strengthening our technological leadership to prepare for future growth. We fully maintain our R&D efforts at 2% of our turnover and we continue to ramp up our new R&D centers in India and in China. We launched 5 new products in the first half despite the crisis and we plan another 10 launches in H2. You can see there 2 illustrations of product launches in the steel division during the first half. On the left side of the slide, you can see our new robot ready ladle gate enabling to improve the safety, quality and consistency of our customers' operations. Flow control is now installing this new technology at customers in China and in Brazil. On the right, you see an example of new products introduced by advanced refractories. This is a new family of low moisture repair material for cement plants, bringing higher efficiency and resistance to abrasion and thermal shocks to our cement customers. On the next slide, you can see our new energy-efficient ENERTEK foundry crucible, helping our foundry customers to reduce their energy consumption and CO2 emissions while at the same time improving the quality of their finished products. Let's now have a closer look at the performance of each of our 2 divisions, steel and foundry. Starting with steel. The revenue declined 15.5% globally on an underlying basis, but only 13.3%, including 1.2% negative price impact in the world, excluding China and Iran, versus a 15% steel production decline, thanks to market share gains. In China, where we essentially sell flow control products, our sales are mostly directed towards flat steel producers, which didn't perform as well as long product produces. In Iran, we stopped supplying the steel sector in August 2019. Our trading profit at GBP 38.9 million declined as compared with last year, but was supported by strong temporary crisis savings and the continuing delivery of our restructuring program. Our steel return on sales at 7.5% was quite resilient, considering the magnitude of the market downturn. The foundry top line was impacted even more than the steel one due to the higher exposure to the automotive market. To be noted, however, a very strong performance in China despite the crisis with 2.8% top line increase year-on-year, thanks to an increased penetration rate of our value-adding solutions. The foundry trading profit decreased significantly despite the cost savings actions and the return on sales declined to 6% versus 12.2% last year. I will now hand over to Guy who will give you some more details on the financials for the first half.

Thank you, Patrick. Good morning, everyone. Before getting to the full income statement, I'd like to take you through our H1 revenue and trading profit bridges between 2019 and 2020. After adjusting our H1 reported 2019 revenue for foreign exchange and the CCPI acquisition, our 2019 underlying revenue of GBP 867.8 million was down GBP 159.7 to GBP 708.1 million in 2020, a decline of 18.4% on an underlying basis. Adding back revenue from the CCPI acquisition gives our H1 2020 reported revenue of GBP 720 million, a decline of 19% on a reported basis. Turning to trading profits. Again, after adjusting for FX and disposals, the total impact on underlying trading profit in the period was GBP 46.9 million. This is comprised of the impact of the reduced revenues of GBP 56.8 million, mitigated to some extent by temporary COVID savings; one-off restructuring costs of GBP 1.4 million in H1 taken above the line and partially offset by our restructuring savings of GBP 11.3 million. This gave us underlying trading profit in H1 2020 of GBP 49.3 million. And after adding back the trading profit impact of CCPI and their synergies, our reported trading profit of GBP 51.1 million and a return on sales of 7.1%. The difference between the GBP 12.3 million of total restructuring savings and the GBP 11.3 million shown here is because we've included the CCPI synergies in the GBP 1.8 million adjustment between underlying and reported trading profit. In terms of the rest of the income statement, below trading profit, a marginally higher share of JV profits of GBP 0.7 million with better results coming out of China, assisted by COVID savings; our finance costs which are broadly similar year-on-year; and the effective tax rate of 27.2%, which is an improvement on last year's 28%, but in line with our expectations. Lastly, our share of NCI, which relates to minorities in our 2 Indian subsidiaries, also trended lower as a result of lower profits for the same end market reasons as the rest of the group. The end result being headline earnings of GBP 31.3 million as compared to GBP 63.8 million last year, with headline EPS of 11.6p for the half year. Given the ongoing uncertainty in our end markets as a result of the COVID pandemic, the Board has not declared an interim dividend at this time and will review the position as the year progresses. If I could turn now to cash flow. Our cash generation remains a structural strength that has been shown again during the H1 downturn. Through a combination of controlled cash CapEx, which is being focused on minimizing staying business CapEx whilst protecting our strategic project CapEx and cash from reduced trade working capital, we generated an adjusted operating cash flow of GBP 70.8 million on reported trading profit of GBP 51.1 million, giving the cash conversion rate of 139% as compared to 83% same time last year. The trade working capital is detailed next and shows as of June our trade working capital stood at GBP 344.2 million, some GBP 7.8 million below December 2019 and GBP 82.6 million below June 2019. Between December '19 and June 2020, we had a traditional seasonal build in our working capital post year-end from which we've managed balances down and generated some GBP 22 million of cash flow in the second quarter. Particularly pleasing results were achieved in inventory with strict raw material management and foundry finished goods. We also benefited from an unwind of receivables and well-managed reduction in overdues at the same time. Our trade working capital to sales of 24.6% is slightly higher than the year-end position of 24%. Our net debt improved as a result of the positive operating cash flow. In the 6 months to June, there were also lower restructuring cash costs than last year. And despite an FX-related increase of GBP 20 million, net debt reduced by GBP 16 million to GBP 229.7 million. Our net debt-to-EBITDA is at 1.2x on a post-IFRS basis, well within our covenants. I'd like to finish with a brief look at our covenant headroom position, which is currently 3x, but will increase to 3.25x once we redeem the $140 million USPP due this year. This leaves us with significant headroom at current and foreseen leverage levels. As you are aware, we raised new USPP finance in H1 in order to redeem the $140 million, and we'll be repaying this in August. Our overall liquidity position has been strengthened following refinancing actions in H1, including the new USPP financing I just referred to, as well as access to the U.K. government's CCFF scheme. We're confident that our liquidity position provides us with the required balance sheet strength and flexibility to be able to manage through current market conditions. I'd now like to hand back to Patrick to take you through the outlook. Thank you.

Thank you, Guy. Vesuvius demonstrated the strength and resilience of its flexible business model in H1 with a strong positive free cash flow generation. Our quick and decisive implementation of COVID-related cost savings measures, in addition to the planned delivery of the recurring savings from our restructuring program, allowed us to limit the negative impact of the pandemic on our results. Looking forward, the first signs of improvement are now apparent in both steel and foundry. But we expect the pace of a recovery to be slow over the coming months and in Q3 in particular. Consequently, the Board has not declared an interim dividend at this time and will review the position as the year progresses. Likewise, until we have greater certainty on the shape of the recovery, we cannot provide meaningful guidance as to our full year results. However, thanks to the optimization of our manufacturing footprint over the past 3 years, Vesuvius is now very well positioned to benefit from the recovery of end markets when it occurs. Thank you for your attention, and we will now be opening the floor for questions.

Audio operator, you're welcome to queue up the questions for the management team, please.

[Operator Instructions] Your first question comes from Jonathan Hurn from Barclays.

Just a couple of questions for me, please. I think in terms of the first question, historically, obviously, you've talked about inventory building steel impacting the speed of recovery for Vesuvius products. Is that inventory now unwinding in the system? And if it is, how long do you think it would take for that to unwind? That was the first question.

Thank you, Jonathan. We believe that some excess inventories as with steel inventories has been created during the course of Q2, meaning that even if the decline in steel production was significant, we believe that the decline in real steel consumption was even bigger. And we feel that this excess inventory is now unwinding as we speak. So we have now entered a period where steel inventories -- excess steel inventories are being progressively absorbed. Obviously, as it's difficult to have a meaningful reliable data on this, we are not 100% sure, but our best estimate is that we feel relatively confident that most of this excess inventory should have been eliminated before the end of Q3. So we expect Q3 in terms of apparent consumption to be relatively to show only a soft recovery as compared with Q2 because of the need to absorb these excess steel inventories. However, we feel that Q4 should see the beginning of a more significant steel inventories because this extra steel production because of steel inventory should have been mostly absorbed.

That's very helpful. And the second question, obviously, you talked about sort of a slight improvement as you exit the Q2. Can you just give us a feel for the exit rates maybe for foundry and steel in June, please, just in terms of sort of organic performance there? That would be very helpful.

In both steel and foundry, June was a bit better than the average of Q2. I think that the magnitude of improvement was relatively similar in steel and foundry. As compared with our expectations of, I would say, a few weeks, a few months ago, we feel that steel is probably getting out of the crisis a little bit quicker than what we thought. And conversely, foundry is still a bit slower than what we thought. But as a matter of fact, the rate of improvement end of the quarter of steel and foundry was relatively similar.

Very helpful. And then maybe just one last one for me. Just in terms of sort of the bigger picture for steel, obviously, COVID has impacted operations. But are you seeing a sort of a move in your customers more towards sort of automation within the steel plant? Are you seeing more demand coming through maybe for your sort of robotic offerings?

We see very sustained demand from our robotics offering, which has not been slowed down by the pandemic. It was there before. We saw an acceleration of the demand from -- for our robotic solution already in the course of last year and early this year. And we see our customers not only maintaining their projects, but some of our customers, especially in China, wanting now to accelerate those projects. And so the crisis has had -- so far, but I don't see that happening, no -- has had no negative impact on the prospects of our robotics offering. We even see some kind of acceleration.

Any other questions? We have a question from Sam Bland from JPMorgan.

I've got 2 questions, if I may, please. The first one is just on the impact of raw material prices. I think they've come down long way recently. Was there any impact on the results in the first half from that? Or would there likely be one in the second half or you still expecting basically to pass on the price reduction fully? And the second question is on the expectation for H2 cost savings. I think you did about GBP 18 million of these sort of temporary savings in Q2, expecting about GBP 10 million per quarter in the second half. I guess, might the GBP 10 million be conservative? Or does it imply that maybe revenue trend -- is because revenue trends will get a little better in the second half and so scope for these temporary cost savings reduces a little bit?

On your first question, our policy remains and has remained over the first half and will remain in H2 to pass through to our customers the variation in raw material prices. This is why we have a negative price impact of 1.2% on average in the top line of steel division. This is linked to the pass-through of raw material price decline to our customers with little or no significant impact on our margin, and we don't expect that to change materially during H2. So generally speaking, raw material fluctuations have a very limited impact on our profitability, and we expect this to remain the case going forward. Raw material prices, as you said, have been declining quite significantly. Probably now we see them more or less stabilizing at a low level. And so since a few weeks, a few months, we see some kind of stabilization in raw material prices. It's difficult to make any forecast about where they will go from there. But we have no sign of increase, no sign of further decrease either for the time being. Regarding your second question, the cost savings, we -- you should not expect that we will repeat in each of Q3 and Q4 the same GBP 18.6 million savings per quarter that we could achieve in Q2. However, we've taken -- we are continuing to take strong action. We still have close to 1,800 of our people on furlough as we speak today. So we continue to take strong action to limit our costs and strictly keep the people necessary to produce what our customers purchase. So in fact, the amount of savings is pretty much related to the evolution of our top line. And assuming the top line would not increase significantly in H2, then we should be well on track to deliver at least this GBP 10 million per quarter COVID-related savings during H2. But you're right. There is a link between the top line and the savings. If, as we expect, top line will improve mostly towards the end of the year, in Q4, then this will have an impact on our capability to deliver savings because we will call back some of the people being on furlough to be able to produce and service our customers -- service increased demand of our customers.

[Operator Instructions]

No further questions? If there is no further questions, I would like to thank you all for your attendance today. I sincerely hope...