Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Good morning, and welcome to the Vesuvius Trading Update Conference Call. With us today is Patrick André, CEO; and Guy Young, CFO. Mr. André will give us a short speech, after which, we will open the lines for Q&A. I would now like to hand the conference over to Mr. André. Please go ahead, sir.

Good morning, everybody. So it's good to have you here all today to present you the trading update of Vesuvius. I will start by giving you a short introduction, and then we will open the floor for Q&A. So the main points to be noted for our trading update are the following. So first, in terms of safety, our priority remains the safety of our employees. Despite the second wave in some parts of the world, we are now able to maintain a very good level of protection for all of our employees worldwide. And also very importantly, to maintain our manufacturing network in full operating order to service our customers. And in particular, considering the rebound of activity that we are starting to see in the various markets where we operate. We are glad to have our manufacturing network be able to respond swiftly to this increase in demand without any interrupt anywhere. Regarding the market activity, we are since a few months and weeks now, seeing a clear improvement in the activity on both end markets of steel and foundry, even if the absolute level of activity remains significantly below last year and a normal level. In the steel sector, in China, the level of activity is already significantly above last year with no sign of weakening. But beyond China, in the rest of Asia, we are also seeing a positive increase of activities since a few months, but in the rest of Asia, the level of activity remains despite this rebound significantly below last year. In South America, Southeast Asia, we are also seeing a good rebound of activity. The 2 areas where despite an improvement, the improvement remains relatively slow are Europe and North America. In Foundry, the situation is relatively similar, but percentage-wise, the improvement in the foundry market is more pronounced than in steel simply because the foundry market has been declining more than the steel market over Q2 and the beginning of Q3. But in steel, we've seen some significant improvements in Asia and South America. And also some improvement, but significantly slower in Europe and in North America. In this context of improving market conditions, our sales are improving 7% from Q3 to -- from Q2 to Q3. And this is a significant improvement as compared with what we had in the previous month. Our Q3 sales are down 14.3% as compared with last year, which is an improvement as compared with Q2, where our sales were down 26.2%. In October, we've seen a significant improvement of sales. Our October sales are down only 7.5% as compared with October 2019. And we see this trend continuing in November. At the same time, our cash generation remains good with good performance in trade working capital management. Our trade working capital calculated over the past 3 months is down at 20.4% as compared with 26.7% at the end of June. So improvement of top line and good management of working capital translates into a good cash generation, which is continuing since the end of June. Looking forward, we expect our end markets to continue to improve. This being said, we believe we should remain cautious because we [ did ] see for the time being, the impact of the second wave. We have no negative news from our customer, but we believe that it's necessary to remain cautious for the month of December and probably Q1 2021, before a more significant improvement afterwards. So we confirm in terms of guidance that our results should be for the full year 2020 broadly in line with the current consensus, which is around GBP 99 million for EBITDA. Thank you for your attention. So now I propose to open the floor to questions.

[Operator Instructions] Your first question comes from the line of Andrew Douglas from Jefferies.

Three quick questions, please, for me. Can you give us an update on how you see stock levels across your customers? And also, I guess, for yourselves, just where we are in the destocking cycle. Clearly, we've made good progress on cash and working capital. So Guy, can you just give us a feel for how much of that may unwind as you come into the back end of the year? Or is this more of a structural kind of lowering? That will be helpful. And also, your balance sheet is in good mix. Can you just give us a few updated thoughts on M&A and M&A going into next year, please?

Thank you. I will answer the question on inventory and M&A, and then I will hand over to Guy. Regarding inventory, we feel that the level of inventory in the market today, both on the refractory side of [ own ] products and on the steel side is relatively low. Clearly our own level of inventory is low. And we believe that it is a general situation in the industry. And when looking at our customers, we do not see anymore any excess steel inventory in the market, which means that when the end demand sometimes in the course of next year will start to recover more strongly. The impact on the market and on the supply chain should be relatively quick. On the M&A side, we remain clearly interested to look at M&A opportunities. However, we are very disciplined in our approach, and we have no intention of overseeing any potential opportunity. So we keep a proactive approach to possible M&A opportunities, but there is no guarantee that any would materialize in the coming months. It will all depend on the existence or not of a common ground in terms of valuation between us and potential sellers. Guy, would you want to take over on the other part of the question?

Thanks, Patrick. Andy, in terms of cash generation, we are fairly satisfied with the performance year-to-date. The key driver has been working capital. We quite naturally unwind our working capital with sales declines. But in -- on top of that, we've actually seen what we believe to be a better performance, in particular, with regards to inventory. We've managed to improve the process and planning between our sales and our operations. And this has led to a fundamentally lower level of inventory, which has definitely assisted in the working capital unwind and some cash generation. If we look towards the remainder of Q4, on the assumption that sales stay at the sorts of level that we're expecting, that kind of subdued recovery is going to lead to a degree of investment in working capital. So whilst cash generation might not continue to be as positive as we've seen from a year-to-date perspective, we do believe that the overall improvement that we've got in working capital management will be maintained. And therefore, our current levels of trade working capital to sales would be what we would expect to see at the year-end, so in and around 24% of sales improvement over the last year and the half year.

[Operator Instructions] Your next question comes from the line of Harry Philips from Peel Hunt.

Just coming back to North America. I'm still slightly surprised not seeing more of a pickup there. I mean, U.S. also is getting very strong. So foundry should be pretty good there. And obviously, the steel data for North America is, in terms of a weekly basis, is getting better and global steel production ex China was down only single digits in September. So if you just develop that a little more, I'd be very grateful.

Thank you. Just to give you a few numbers to illustrate, you look at the WSA steel production number and if you look at NAFTA, if you compare NAFTA and EMEA, year-to-date, the steel production is down in NAFTA, 18.2%, but is down in EMEA only 9.7%. If you look at the month of September, the decline in steel production in NAFTA, September '20 over September '19 is down 17%, but only 6.7% in EU. Of course, in EU, the non-EU part of EU is more dynamic than the part of EU. But even if you look at the EU, strictly speaking, the EU 27 plus U.K., in September, it's down 14% whereas NAFTA is down 17%. And the U.S. alone is down 18.5 -- 18.5% as compared with last year. So globally, in EU the -- if you compare EMEA and NAFTA, the steel production is less impacted or recovering better in EMEA than in NAFTA and so this is what we are seeing in the market. I hope it clarifies.

And your next question comes from Anthony Plom from Berenberg.

Maybe just following on from that a little bit. Just wondering, can you mind just talking a bit about the kind of competitive environment. I'm just wondering if you think you maybe taken any market share in some of those regions or maybe lost the market share, just based on those sort of regional growth comments?

I think that generally speaking, the competitive environment is not fundamentally changed as compared with what it was a few months ago. We don't believe that we would have made a significant market share gain, probably a little bit market share gain [ through control. ] But I don't see, on average, that we've made significant market share gains in Advanced Refractories. And probably in Foundry, we may have also made some small market share gain, but nothing very significant. Globally speaking, except maybe for control where we have been doing some -- in some regions some market share gains, I don't see any fundamental changes of the relative market share positioning of the main players over the past few months.

Your next question comes from the line of Jonathan Hurn from Barclays.

Just a few questions for me. Firstly, can you just talk a little bit about pricing and sale? I think it was a negative in the first half. Has it continued to be that in the second half? And as we go into 2021 and hopefully things recover, do you still think pricing would be a headwind to performance? That was the first one.

In pricing, our policy, as you know, is to pass through the situation of raw materials, up or down, to our customers. So this is what explains the relatively small negative pricing impact that you saw in our first half results when we published end of July. Since then, raw material prices have been relatively stable. So it means that prices have been relatively stable as compared with what they were at the end of H1. So we don't see today big movement in raw materials. So it seems that prices are more or less stable. Again, you have differences from one region to the next. But relatively small, and on average, you have relative stability of prices.