Vesuvius plc (VSVS) Earnings Call Transcript & Summary

[Audio Gap] 2021 Results presentation. My name is Patrick André, Chief Executive Officer of Vesuvius. To my right, with me this morning is Guy Young, our Chief Financial Officer. I will start with some updates on our global performance in 2021, then Guy will give you more details on our financials. I will then conclude with some perspectives on our year 2022 before opening the floor for questions. We delivered a solid set of results in 2021 with a significant recovery on the low point of 2020. Our revenue increased 18% on an underlying basis. Our trading profit increased 50% on the underlying basis, but only 40% on a reported basis due to the significant impact of the pound appreciation during the year. Our return on sales increased by 190 basis points. Our continued focus on cash management enabled us to further lower our working capital to sales ratio to 20.9%. This focus on cash also enabled us to maintain our net debt-to-EBITDA ratio at a low level of 1.4 despite the acquisition of Universal during the year. Based on the positive results, the Board has confidence to promote a full year dividend of 21.2p, an increase of 22% versus 2020. We had a strong commercial performance in 2021 with sales growth of 21% and 20% in the Flow Control and Foundry divisions, respectively. This was supported by material market share gains in both divisions. But even more important, we demonstrated again in 2021 our ability to pass through cost inflation through price increases in all 3 of our business units, and this was completed by year end. The timing differences between cost and price increases during the year, however, had a negative GBP 14 million impact on our year-on-year results. We could also, in 2021, successfully complete the acquisition of Universal Refractories in the U.S., which is reinforcing our presence in the fast-growing Electric Arc Furnace sector in Vesuvius. The Flow Control capacity expansion in EMEA and Asia, which we announced in July last year, are fully on track and will be operational as of year end. Finally, thanks to our decision to maintain R&D spend during the COVID, we could launch 27 new products in 2021, double the number of last year. We also made significant progress in our sustainability road map in 2021. As you can see on this slide, we are well on track to achieve the 9 intermediate ESG targets for 2025, which we announced as of 2020 annual results. In particular, we are now clearly exceeding our year wise performance of target of CO2 reduction with already a 16.5% reduction in 2021 as compared with 2019. As you can see on the slide, we've made continuous and structural progress in the reduction of our carbon footprint since we engaged in our improvement journey in 2017. Thanks to these efforts, we've already been able to eliminate close to 1/4 of our emissions worldwide. We will continue our efforts going forward and are committed to reach net zero by 2050 at the earliest. How did we achieve those results? First, of course, by optimizing our energy consumption. We reduced by 9% of energy consumption pattern since 2019. But 2 other actions also played an important role. We engaged into a focused action plan to switch to non-CO2 emitting electricity sources everywhere in the world where it was possible. For the first time in 2021, more than 50% of our global electricity consumption is coming from non-CO2-emitting sources. Our objective is to reach 100% by 2030. We also introduced an internal carbon pricing to assess all of our management decisions, including investment decisions. This price is reviewed annually and has been set at EUR 90 per tonne in 2022. Besides reducing our own CO2 footprint, we are also now engaging in focused R&D efforts to develop new products having the potential to help our customers improve their own environmental footprint. More than 80% of our product R&D portfolio is now dedicated to products presenting an environmental benefit for our customers. All those progress on our sustainability agenda were recognized by external rating agencies, and in particular, our MSCI rating improved from BBB to A, and our EcoVadis rating progressed from silver to gold. Let's now have a deeper look at the performance of the Steel division. As you can see on this slide, where the size of the bubbles is proportional to Vesuvius' Steel division sales. The steel market recovered significantly in the world, excluding China, in 2021. In China, however, after a relatively good performance in the first half of the year, the steel market declined significantly in the second half, translating into the first year-on-year decline of Chinese steel production for more than 30 years. We believe this is not only a short-term phenomenon, but rather a structural trend and that Chinese steel production going forward should be flat or even slightly declining. In this market environment, our Flow Control business performed very positively, gaining market share in all geographies without any exception. You can see on this slide the relative performance of our Flow Control sales versus the Steel market in the most important regions. These Flow Control numbers only include a relatively moderate 3.5% average price increase on a yearly basis as price increases mostly took effect in the third and fourth quarter of the year. Another important highlight of the year for the steel division was the acquisition in December of Universal Refractories in the U.S. Universal is a niche refractory supplier, active in both the steel continuous casting area for around 90% of its activity and the foundry sector for around 10%. It will reinforce both our advanced refractories and foundry business units in NAFTA. The transaction was concluded at 6.6x Universal trading EBITDA of $8.6 million, and we expect to generate on top of this additional synergies of $4.5 million by the end of 2023. If we look at the financial results of the Steel division, we already discussed the very good sales progression of Flow Control. As you can see there, the sales growth of Advanced Refractories was more limited as priority was given to the implementation of price increases to compensate cost increases. This resulted in market share losses in some regions, and in particular, in EMEA and North America for advanced refractories. We believe that those market share losses are temporary and will revert over time. We are starting to see that beginning of 2022. Our price increases could fully compensate cost increases in both Flow Control and Advanced Refractories by year-end. Our Flow Control capacity expansions announced in July last year are proceeding on track and will be operational as from the end of this year. They will support the continuous growth of our Flow Control business going forward. The trading profit of the division improved by 42% on an underlying basis to GBP 102.1 million. Our return on sales improved by 150 basis points to 8.7%. Let's now have a look at the performance of the Foundry division. As you can see there, the important automotive end market performed poorly in 2021, as it continued to be negatively impacted by the worldwide shortage of semiconductors. The light vehicle market grew only 2% overall from the very low level of 2020. The medium and heavy vehicle market also performed poorly due to a strong decline in China, which you can see on this slide also, with an overall growth limited to 0.5%. Together, the light, medium and heavy vehicle market represents around 36% of our Foundry Division sales. The other foundry end markets, however, performed much better and recovered significantly from the low point of 2020, partially compensating the weakness in automotive. To understand the Foundry division results, it is also important to look at the evolution of end markets between H1 and H2, which you can see on this slide. Automotive end markets, in particular, weakened significantly between H1 and H2, with a negative impact on the sales volumes and performance, of course, of the Foundry division. Despite this weak automotive end markets, the Foundry division could grow itself by 20% year-on-year on an underlying basis. In particular, the division could achieve significant market share gains in China, in India, and in South America. Trading profit increased 79% to GBP 40.4 million, and return on sales improved by 280 basis points to 8.6%. This is a significant improvement from 2020, but we believe the potential for further improvement is very significant as full trading profit and margin recovery was delayed in 2021 by the situation of the automotive market by some time lag, as in the Steel division between price and cost increases and by operational issues in 2 of our important plants in Germany and in the U.S. On the technology front, globally Vesuvius, we continue to increase our R&D spend with the objective to reinforce our technological lead over competition. We launched 27 new products in 2021, more than double the number launched in 2020, and we are planning to maintain that pace going forward. As mentioned earlier, we also increased our R&D focus on products having a positive impact on our customers' environmental performance. You have on this slide 3 examples for each of our 3 business units of new products launched in 2021, and which, next to financial benefits, of course, also bring environmental performance improvements to our customers in terms of CO2 emissions, harmful substances emissions, or raw material consumption. I will now hand over to Guy, who will give you more details on our financial performance. Guy?

Thanks, Patrick. Good morning, everyone. I'd like to start by looking at our sales and trading profit bridges. 2021 reported revenue of GBP 1.64 billion, it's some 13% higher than last year's GBP 1.46 billion. Stripping out the GBP 69 million impact of foreign exchange from 2020 gives our prior year underlying revenue of GBP 1.39 billion, on which we've reported an increase of GBP 251 million or 18% to reach this year's GBP 1.64 billion of revenue, excluding the effect of the Universal acquisition. It's worth noting that approximately 25% of the revenue increase in the year was due to price increases in reaction to raw material cost increases and supply chain friction costs. In terms of trading profits, our underlying trading profits after eliminating the effects of FX and the Universal acquisition, increased by 50% from GBP 94.8 million to GBP 142.6 million. The key constituents of this increase were GBP 57.7 million from increased sales and GBP 4.1 million of restructuring savings, partially offset by GBP 14 million of net inflationary costs as our selling price increases lagged cost inflation. If we take a look now at the full income statement, our trading profit of GBP 142.4 million provided a return on sales of 8.7%, an increase of 170 basis points over last year on a reported basis and 190 basis points on an underlying basis. Our share of post-tax JV results were similarly higher, and our net finance costs were lower, having benefited from a lower cost of debt following the successful refinancing of some of the USPP notes. The effective tax rate for the year was lower than the prior year at 26.4% and noncontrolling interest was higher given the higher earnings at our Indian subsidiaries. Headline earnings, therefore, increased slightly more than headline profit before tax and trading profit by some 53%, and headline EPS came in at 35.3p, 52% higher than 2020. If we turn now to cash, our cash conversion in 2021 was 32%, largely as a result of the higher investments during the year in both working capital of GBP 96 million and cash CapEx of some GBP 45.5 million, which, after adding back depreciation and taking into account other small deductions, resulted in adjusted operating cash flow of GBP 45.6 million. The increase in working capital was predominantly in inventory, some GBP 113 million, as we intentionally increased inventory to mitigate against the risk of supply chain-related customer disruptions. But despite the higher investment in working capital, our trade working capital to sales ratio showed another improvement year-on-year, finishing at 20.9%. Looking finally at our net debt. The balance as at December 2021 of GBP 277 million and net debt-to-EBITDA at 1.4x on a post-IFRS 16 basis is some GBP 102 million higher than 2020, largely due to the investment in working capital and the acquisition of Universal. We remain well within our comfort zone of 1.25x to 1.75x and satisfied, in particular, in relation to our capital allocation strategy for the year, where we've managed both significant investments in organic and inorganic growth during 2021, while still providing for an increase in returns to our shareholders. With that, I hand you back to Patrick to take you through the outlook.

Thank you, Guy. Both our end markets of Steel and Foundry remain positively oriented in 2022. In 2021, Vesuvius demonstrated its ability to successfully pass through cost inflation through price increases. We will continue to do so in 2022 as necessary. Our strategic R&D and capacity investments are proceeding as planned and will support our market share gains going forward. While we remain concerned about the potential direct and indirect impact of recent geopolitical events, which have led us to suspend our deliveries to Russian customers for the duration of hostilities, we are nevertheless confident that the group will deliver a significant improvement in financial performance in 2022. Thank you for your attention. We will now take questions from the floor.

Scott here from Investec. Could you just give us a feel for the price increases that you've put in through the second half and how that sort of annualizes through full year '22, i.e., what is the tailwind for prices that we didn't get the full year benefit in '21? And also just a bit of help on acquisition contribution. Just trying to get a feel for where we are before sort of deciding what we think volume should be?

Thanks, Scott. Nice to see someone face-to-face for a change. Scott, in terms of the price increases, very heavily weighted towards the second half, I think, as Patrick mentioned. If you split -- if you take that GBP 251 million and 25% of that, that gives you our price increases of roughly GBP 62 million. That GBP 62 million, GBP 55 million of it was in the second half. So arguably, that doubled up from a sales bridge perspective in 2022. I think kind of allied to the question, the GBP 14 million of headwind we would expect to see added back as well, subject to any price lags that we will experience during 2022, which I think is inevitable given that we know costs are increasing at the moment over Q4. In terms of the second question, Universal. The Universal contribution for 2022 should be about between GBP 4 million and GBP 5 million. The GBP 4 million to GBP 5 million includes the synergies that we expect delivered in the year. It, however, also has a deduct because, as you'll probably know, from an accounting perspective, we have to write up the value of stock to realizable value at acquisition. So we won't see all of the margin that we would expect in terms of long-term run rates in the first year, but GBP 4 million to GBP 5 million in 2022.

Dom Convey from Numis. Three questions, if I may? Just you mentioned in terms of the outlook, positively oriented. But it just feels actually that there has been a marked softening in the broader outlook for 2022 versus what we might have thought 3 or 4 months ago. Looking at some of the slides that you presented on Foundry, it feels that China is very much weak across the board. So I just wonder whether you could give a little bit more color on the volume type growth by geographies that you anticipate this year? Secondly, just in terms of a bigger picture question, that increase in R&D and obviously, the strong new product pipeline coming through, whether you could just give a bit more color around how you see the sustainability value proposition and how you can best capture that? And I guess just a quick technical 1 really for perhaps Guy, a GBP 14 million drag, what was the divisional split last year between Steel and Foundry?

Thank you. You're perfectly right. As compared with the vision we could have had 6 months ago, the markets, evolution perspective, are a bit weaker, but they remain, in our opinion, positive, and even significantly positive outside of China going forward. China, following Chinese New Year, the traditional rebound of the Chinese economy following Chinese New Year is pretty soft for the time being. But in the world outside of China, the situation is relatively positive and remains positive as we speak. In the Steel market, you may have seen the numbers of January as published by WSA, there is a significant drop year-on-year in China, but there is a progression year-on-year in the world outside of China. Now if you look at the world outside of China, overall progression, and to give you an overall global figure, we are expecting ourselves a positive growth all regions together of on or around 5% in 2022. But of course, you have differences between regions. And in the world outside of China, the regions where the growth will probably be the slowest is Europe, where we see some, not decline, but softening, some softening. There was beginning of the year a decline year-on-year of steel production in EU plus U.K. And so this will probably be the softest region outside of China. But globally, the world outside of China, we see that growing in 2022 because other regions, India, Southeast Asia, South America, Middle East, Africa, and probably North America, we believe will have a positive growth in 2022. Regarding R&D, we are focusing more and more on this environmental value proposition, but of course, next to traditional, if I may call it like that, financial value proposition to our customers. And we see a growing interest from our customers, especially in the steel industry, for this leading sustainable products. And this interest is, of course, a difference between regions. So there are some regions, particularly in Europe, as you could suspect, where the interest is higher than average. There are some other regions where there is still a maturation of the psychology of our customers, but everywhere it's growing. So it's not growing, the interest and awareness of our customers, it's not growing everywhere at the same pace, but it's growing everywhere. And clearly, in some regions like Europe and also in North America, we see a growing interest of some customers for these leading sustainable products. And we believe that it will only increase going forward. We are not even -- we are even engaging -- some customers have proposed and we have accepted, of course, to engage with them in some joint R&D project with a specified objective to work together on ways to help them reduce their CO2 footprint.

And Dom, in terms of the split of the GBP 14 million, it's GBP 3 million is Foundry and the rest is Steel.

Any other questions from the room? If there are no more questions from the room, I will propose to take questions from the line.

[Operator Instructions] And our first question is coming from George Featherstone from Bank of America.

I'll go 1 at a time. I wondered if, firstly, Guy, you could break out the cost inflation by frictional costs in the supply chain and also that we faced from raw materials in 2021? And also if you can split H1 versus H2, and also how you see that evolving in 2022?

Sure, George. Thank you for the first question with 3 parts. George, if we take a look -- I'll probably just concentrate on the 2 key categories. There is broader cost inflation. But in terms of raw material, which was the biggest constituent part of the cost increase last year, that was some GBP 40 million across the group. And that splits, roughly speaking, into GBP 7 million and GBP 33 million first half versus second half. The other significant category is excess freight costs, and that was about GBP 20 million for the full year. And that, again, splits roughly GBP 9 million and then GBP 11 million. On top of those, and we call it excess freight costs because there are still higher freight costs in terms of inbound logistics that we haven't included in that, and then we'll have store, salary and other energy costs, which have also increased. But the broad split then of the GBP 60 million cost increase is GBP 40 million raw material, GBP 20 million excess freight, and then that splits H1 to H2, as I outlined. In terms of the costs going forward, I can only tell you what we can see now rather than trying to predict what's going to happen going forward. But we've still seen some very significant energy cost increases between the end of Q4 and where we sit today. Arguably, that's only going to get worse. In addition to that, we think that there are increasing pressures from a logistics cost perspective that we'll be seeing at least during Q1. And then last, but not least, we've got a number of raw materials that have started to increase in Q4 and continue to increase in Q1, predominantly aluminas and zirconias and anything that requires energy, so a lot of our fused materials. All of those we're expecting to see impact our cost base in the first quarter.

Second question would be more of a kind of high longer-term thought. Given the cost pressures that your customers are facing, I wondered if you could talk about whether the conversations around total cost of ownership of some of the new, more efficient products or those that involve automation have become easier and if customers are looking to start new investment cycles?

It's a very good question. Our customers are -- as we are, but our customers are also confronted with increasing cost base. They have been quite successful, as you know, in increasing their own prices. And considering the recent geopolitical events, you know that steel prices have been going slightly down over the past few months, you should expect that this downward trend should probably stop and that we will not be surprised to see the steel prices going up again. So the financial situation of our customers is good and will remain good going forward. And this, of course, gives us the means to implement long-term strategies to consolidate their competitiveness on the long term. So we see our customers open to investing in their operations to make those operations more competitive structurally on a long-term basis. And this is a favorable environment for our own offering, and in particular, our own robotics offering to support the automation effort of our customers. And we see there was already a significant interest from our customer base for our robotics solutions. We see an even bigger interest of those customers going forward. We have a significant increase of the number of inquiries coming from our customers for robotics projects.

And we do not have any further questions at the moment on the audio line. [Operator Instructions] And there are no further questions on the conference line. We will now address the questions submitted via the webcast page. And the first question here is coming from Andrew Douglas from Jefferies. Please, can you explain how you managed to win such significant market share when you already have such high levels of market share?

We are not magicians, Andy. So as long as you do not have 100% market share already, it's always possible to gain further market share. So the only limit is 100%. And we are never satisfied with our market share, even when the market share is already high because we believe that our customers can bring benefit to those customers which are not already using our products. It is in Flow Control and Foundry that we are gaining and that we have a real continuous market share gain strategy. And in both those divisions, as you have seen last year, and you will continue to see this year and going forward, we simultaneously increased prices to compensate for cost increases and increased market share. And the reason why we are able to do that is because our products, thanks to our R&D investment, and again, I can only stress the fact that R&D is a cornerstone of our growth and market share gain strategy, it's thanks to R&D that we can propose to our customers products which create superior value in the process of those customers as compared with what our competitors are able to do. And thanks to that, despite the fact that we have, I would say, fair pricing strategy, compensating for cost increases, it creates incentives and growing incentives for customers worldwide to switch to our products. So this is exactly the reason why we continue to invest and even to accelerate to increase our investment in R&D, because R&D is a fuel of our market share gain strategy in both Flow Control and foundry. And more and more, you will see that in the coming years in Advanced Refractories because there also our ambition is not to remain in the commoditized part of the Advanced Refractory market, we also want inside this Advanced Refractory world to focus on a limited number of product lines where we believe that, thanks to R&D, we could create a similar model as the one which worked very well for Foundry and Flow Control and progressively become a specialized Advanced Refractory producer concentrating on high-technology products.

And the next question from Andrew. Please, can you give us an update on stocking levels in the market across your customers? I understand that there has been some restocking in the year.

Yes, you're right. Over the past 3, 4 months, in the steel market, in particular, if you remember, 3, 4 months ago, we were at a very low -- abnormally low level of inventories in the steel market. And over the past 3, 4 months, we've seen small, but regular restocking effect in the steel market worldwide and steel inventories have moved from abnormally low to normal. They are not abnormally high. Despite the fact that they are increased, they're absolutely not abnormally high. Now we are most probably reaching another inflection point because Russia and Ukraine are very significant net exporter of steel towards the rest of the world. Ukraine alone exports on or around 15 million tonnes of steel to the rest of the world, and this export has stopped. So we will probably have, I don't have a crystal ball, but the most likely scenario is that in the coming weeks and months, we will see a further decline of steel inventories and steel prices will probably stop to decline and maybe even going up again. So the Russia-Ukraine situation will have an impact on the steel market outside of Russia and Ukraine because there will be a need to fill the gap created by the interruption or disruption of export from Russia and Ukraine to the rest of the world.

And the next question from Andrew is, can you please talk about your M&A pipeline and particularly the size of potential deals and our price expectations at the right level?

Could you repeat the question? I could not catch the beginning of the question.

Absolutely. Can you please talk about your M&A pipeline and particularly size of potential deals and our price expectations at the right level?

M&A pipeline. So thank you very much for the question. Our M&A strategy has not changed as compared with our previous discussion last year. We have a strong appetite for M&A. Together with Guy, we conducted a few years ago a global strategic review of all potentially interesting, attractive M&A targets worldwide for each of our 3 divisions. We ended up identifying around 20 potentially attractive targets. This list is mostly unchanged as compared with what we elaborated together with Guy 4 years ago. And we have been and we continue to engage proactively with the owners of these potential targets. As far as we are aware, none of them are officially for sale, as we speak. And what we see is a progressive evolution of some of the owners being ready to consider some sales, which is what enabled us to realize the CCPI first and the Universal acquisitions over the past 3 years. So we continue to be interested. And if one of the owners that we have approached will become open to a transaction at a fair price, what we consider a fair and reasonable price, we will, of course, be interested. In terms of size and yield, there again, it does not change. Out of these 20 -- around 20 potential targets, the vast majority of them are small to mid-sized bolt-ons like CCPI or Universal. These mid-sized bolt-ons are very attractive for us. Their integration is easier, synergies are high. So we are quite attracted by this, and a small minority of these acquisitions are larger size. But of course, the probability that such larger size acquisitions will materialize is lower than bolt-ons. But we continue to be proactively interested in M&A, and we'll see what will happen or not in the coming months. But we remain extremely disciplined in our approach; proactive, interested, but disciplined in our approach to M&A.

And the next question from Andrew is that do you believe that any more restructuring is needed? Are you happy that your footprint is in the right place given your expectations for your end markets over the next few years?

Thank you. And several questions in the same question. The heavy lifting of restructuring is behind us. Clearly, we've done the job over the past 5 years. So the heavy lifting of restructuring is behind us. We still have many opportunities of optimization of each of our individual plants to get more out of those plants, and we are strongly engaged into that, in particular in our flagship plants -- in our 4 flagship plants of Skawina in Poland, Suzhou in China, Borken in Germany and Monterrey in Mexico. We have a strong improvement program. So we have room to make positive progress there. But heavy lifting of restructuring is behind us. Could you remind me the second part of your question, Andy?

So no further questions. Ladies and gentlemen, that concludes today's question-and-answer session. I will now hand back to Patrick André for his concluding remarks.

Thank you. Thank you very much to all of you today, all of you who have made the effort of being present physically with us in the room, but also all of you online. Thank you for your attention during the presentation. And I wish all of you a very nice day. Goodbye.

Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.