Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for attending our trading update this morning. I am with Guy Young, our Chief Financial Officer. I will start by giving you some highlights on this trading update and then open the floor for questions. So the most important point of our trading update today is a very strong sales performance for the first 4 months of the year, both from a pricing and volume point of view. Starting with pricing, we had a strong success of our pricing initiative, which enabled us to confirm the resilience and strength of our pricing model and our pricing power associated with our business model based on technological differentiation. We could fully offset, in fact, a bit more than fully offset all cost increase which we had to incur, be it raw material, energy, freight, labor, all this was more than fully compensated successfully by our price increase initiatives. And this has been done without negative impact on our volume, because at the same time, we had a positive performance in terms of volume where our volume grew at or above the level of our underlying markets. We continued, in particular, to have stronger volume growth in Flow Control than the underlying steel market, meaning we continued to gain market share in Flow Control. We also regained some market share in Advanced Refractories. And our market share in the Foundry division was more or less stable with our sales in volumes evolving in sync with the underlying foundry market. Our balance sheet remains strong despite the fact that we have to continue to invest in working capital, both to support the growth of our top-line, but also to protect our customers against the lack of reliability of the supply chain, lack of reliability, which remained very high during the first month of the year, in particular because of the COVID situation in China. So despite the fact that we have to maintain some level of investment in working capital, we expect our net debt to EBITDA ratio to remain healthy and stable at mid-year as compared with a very good and solid level where we were at the end of last year. And we expect in the second half of the year, this net debt to EBITDA leverage ratio to decline, meaning that we expect to release some cash out of our balance sheet in the second half and to improve further the strength of our balance sheet going forward. From a strategic point of view, the integration of our recent acquisition, Universal in the U.S. progressed -- continue to progress well. The result of Universal are now beginning of this year better than what we thought at the time of acquisition or plan to exteriorize synergies is proceeding as planned and we expect synergies, at least as good, probably a little bit better than what we thought at the time of acquisition. Second important point, our capital investments to increase our capacity in Flow Control especially in our most profitable product line are proceeding as planned. They will come on stream. The new capacity will come on stream progressively between the end of this year and the first month of 2023. And this will enable us going forward to continue to grow our volume in Flow Control and to continue gaining market share in a structural way in growing markets everywhere in the world. Looking forward, despite the fact that our end markets are slowing down more than what we thought a few months ago, you have seen the latest downward revision by WSA, the World Steel Association, in the steel market. You also, I'm sure, have seen the downward revision done by IHS in the automotive market, which you know is important for our Foundry division. So despite the fact that from an external environment point of view, the perspective are less positive today than what they were 2 months ago. Thanks to this very good start of the year and even after incorporating what we consider as healthy and normal dose of caution at this time of the year, we confirm the resilience of our guidance that we made a few months ago when we announced our full year results. So we fully confirm this guidance even after incorporating some dose which we consider a legitimate, some antidote of caution for whatever may happen in the second half. I will stop there and now propose to open the floor to any questions you may have. So please feel free to ask any questions you would like.

[Operator Instructions] And we have a question coming from Andrew Douglas from Jefferies.

Sorry that I joined this call a little bit late. So hopefully you haven't covered it off. But I've got 3 quick questions, please. Within steel, you continue to win market share in Flow Control, and I understand that you've been winning market share in Advanced Refractories. Can you talk to that in a bit more detail because that's an area where we've been kind of walking away from share that hasn't maybe been as profitable as you'd like over the last kind of couple of years? So how is that going to reverse or what's driving that reversal? Secondly, I just want to make sure your GBP 40 million of timing differences was used back in the last year. Have we -- has that now all been caught up in the first half? And then with regards to your Flow Control expansion in EMEA and India, I just want to see if you can give us any guidance on how we should think about that in terms of impacting the '22 and '23 numbers? I'm assuming there's no costs being incurred inside '22?

Andy, on your first part, we could improve market share in both Flow Control and Advanced Refractories. However, the situation is different in Flow Control and Advanced Refractories. In Flow Control, I would say, it's a little bit business as usual, meaning that we have been continuing last in the previous years to slowly but surely grow our volumes faster than the underlying steel market. We've been doing that last year already. We are continuing to do it now. And we are planning to continue to do that in the future. And this -- our market share gains are mostly based on the technological differentiation that we continue to maintain and even in some cases increase vis-a-vis the majority of our competitors. We are continuing to invest heavily in R&D to launch new products. We are accelerating the launch of new products and our investment in R&D. So it's really our business model in action in a regular and continuous way in Flow Control continuing this year, and there is no reason for this to stop. In Advanced Refractories, which is a more price-sensitive market than Flow Control, we lost, if you remember, some market share last year because we have been a little bit precursor. We have initiated price increases last year a little bit before the rest of the market, the rest of our competitors did it. Now the important change between last year and this year is that the vast majority to say the totality of our competitors have now followed in terms of price increases. So the general price level of the market has been not only out, has been going significantly up over the past few months with, I would say, most if not all, of our competitors also themselves engaging -- has seen a legitimate price increase initiative. And as a consequence of this, our Advanced Refractories division, very naturally, is regaining some of the market share that we lost last year, returning closer and closer to what our original market share were beginning of last year or the year before. So different situations, different reasons, but in both cases, good progression in volume, both in the Flow Control and Advanced Refractories as compared with the underlying market. Your second question, the GBP 40 million, yes, [Indiscernible] and we've had very -- but we did what we said we would do. So simply, we implemented the price increase. So thanks to that, we have been able to catch up completely. So this GBP 40 million have completely disappeared. And I don't expect any significant time lag to repeat this year. Regarding your third question, the impact of this new initiative, there is no impact in '22 because the new capacity will come on stream starting end of this year, but it will start having an impact in 2023 and forward because the new capacity will support our continuous growth and market share gain in Flow Control for the next 5 to 6 years. So this will have a positive impact in our results over the next 5, 6 years, ramping up progressively as from 2023.

We have the next question coming from the line of Dominic Convey from Numis.

A couple of questions, if I may. First, whether you could just be a little bit more explicit specifically on what the volume price mix has been in the first 4 months through April in terms of revenue impact year-on-year? And secondly, it definitely feels as though you've been more successful and perhaps more aggressive than we had assumed on your price management in the first half of this year. I mean, you suggested that it hasn't had any detrimental effect on volumes. But can you just give us some color perhaps on the way that competitors are responding? Are they following suit? I know you're confident that you won't see any sort of impact or share loss in the second half as a result of those price gains? And then I think for me really just in terms of the broader industry comments, if you could give us your perspective on inventory levels? And I'm thinking here both that of finished steel stocks in the system, but also perhaps from your customers' inventory levels of your products or whether you've seen or got any hint of over-ordering that might become a bit of a concern in the second half if demand softens?

On the first point, if I start with the steel division, in our -- in the steel market, which has been declining, you've seen the WSA figures for the first half. So the steel market is down on the first half of the year as compared with what it used to be -- in the first quarter of the year as compared to what it was last year, both in China and in the world outside of China. In the steel market, which was declining, we have a positive volume growth in both Flow Control and Advanced Refactories beginning of the year. So our volume, excluding any price impact, we have a slightly positive volume growth. It's not a hugely positive, but a slightly positive volume growth in an underlying market which has been declining. So this is the reason why I mentioned that our volumes are growing faster than the underlying market, meaning that we are gaining market share. There is no other rational explanation. But the major impact on the top-line is price, because even if the volume impact is positive in terms of value, the most important impact on our top-line is price beginning of this year. And if I will compare this volume and price performance as compared with what we saw a few months ago, I will say that not because we have lost market share or because our market share gains are lower than expected, our volume because of the underlying markets are a bit lower than what we thought they would be because the market is softer than what we thought it would be. And conversely, our price increases are probably a bit better than what we thought they would be as compared with our forecast a few months ago. Are we worried about market share losses? I think by definition, we are always worried about market share losses. I think that otherwise we'll be extremely complacent. We have very good and respectable competitor reach for 30 years are running after us and are trying to catch up. And they are good, they are investing in R&D, they are making very good progress. And in some respects, they are right to do so because they are keeping us on our toes. They are forcing us to be even better and better. So we have very good competitors, several of them. And because of that, we are continuing to invest more and more in R&D, not only to maintain the distance, but our ambition is to increase the distance between us and our competitors. We are -- we welcome and we are energized by competition. We are a competitive animal. We like competition. And yes, we are always worried that competitors will gain market share overall. Does it mean that they will do it in the coming months and year? I can tell you that we are doing everything we can that it will not be the case. And for the time being, it's not the case. And I don't see any reason why -- any objective reason why it would be the case in the months to come because we are continuing to make a lot of effort to maintain our pace and to continue to run faster than competition. In terms of inventory, we don't have precise figures. So what I will tell you is more qualitative than anything else. And it's an impression, so please take it with all the necessary level of humility on our side and necessary brackets. But I suspect that the level of inventory in steel is probably a bit higher than it should be. I don't have our data to support that. When I look at the pattern of steel inventories in China, it's not a normal pattern for this time of the year. So I suspect that the steel consumption is slowing down faster than the steel production. The steel -- net steel export out of China are not increasing so far, but it doesn't mean that they will not increase at some point in the coming months because they're going to be a temptation to export more and because the market -- the demand is slowing down in the world outside of China. This is generally a period where I suspect that steel inventory -- my gut feeling is that steel inventories are probably comfortable. It's a gut feeling, and please take it with all the necessary bracket and maybe I'm wrong. But I would rather believe that steel inventories are probably on the comfortable side today. And as far as our own products are concerned, for the time being, I don't see any overstocking of our products. No, I don't really see today any overstocking of our own products on the market. But on the steel side, I will not say too high, but probably comfortable level of steel level, yes.

And just specifically on this price point, sorry to batter on on this. But as we're trying to calibrate our models, should we be thinking sort of mid-to-high single-digit price impact year-on-year for the first 4 months?

In terms of price impact, you said -- could you repeat your question?

Just specifically the pricing impact, specifically on the revenue increase in the first 4 months of the year.

It's double-digit.

[Operator Instructions] We have a question coming from Bruno Gjani from BNP.

I just have a couple of questions on my side, if I could just take them one at a time. So I guess, if we just start off on the volume side and if you could touch upon the run rate trend that you saw in Q1 and I guess how the start of April or April trended relative to that?

I think the first 4 months of the year were good. So it's not like we have a very good 3 months and a catastrophic first month. The -- of course, you have differences from one month to next. But I would say, the most of it [ fraud ] was not fundamentally out of line with the rest of -- with the beginning of the year.

Understood. And I guess, just coming back to pricing and not looking for a precise number here, but just if you think about the relative contribution of pricing to total organic sales growth in the period. So looking back to H2, price was up 7.5% and it explained about 50% of the organic sales growth in the period. My assumption is that this time around it accounts for much more of the organic sales growth. I would assume close to 75% to 80% of the growth that you've seen in the first 4 months of the year. I guess, could you please comment on that?

Bruno, those ratios are about right. So if you think about overall, price constituting 80% of the revenue growth is a reasonable ratio.

And I guess, just finally, just on profitability and margins. So at least on my calculations, it looks like margin is up strongly relative to Q4 and also the prior period and perhaps the peak levels in 2018. So I guess, could you confirm this and give us a feel of profitability in the business today in this period?

We cannot at this stage communicate to precise way. But you've seen in our filing early that we have mentioned a material improvement of our return on sales. And this means that you should expect a double-digit level beginning of the year.

And I guess, do you think this margin is sustainable in the quarters to come? Say, if volumes are flat or they weaken and declined in H2 or competitors start to price more aggressively, they do see a volume decline in H2 and perhaps customers start to destock that? Do you think this level of profitability is sustainable for the remainder of the year assuming input prices stay where they are so on and so forth?

Qualitatively, I expect a market environment softer in the second half of the year than in the first half of the year which will have an impact on everything from the top-line to the margin at the level of activity. So the level of profitability in the second half of the year should be lower than the level of profitability in the first half of the year, almost lower. Honestly, today, it's too early to make specific comments on that. At this stage of the year, we are incorporating a healthy dose of caution, as I mentioned in our guidance. Maybe we are overcautious, but it's better to be overcautious than the other way around. And so at this stage, qualitatively, we believe that the second half will be softer than the first one.

Sorry, if I just may, just a quick clarification just on Flow Control and Advanced Refractories. So you believe all of that outperformance is solely due to market share gains. So there is an element of customers restocking and perhaps they take a more cautious view on their inventory levels or perhaps try to get ahead of the price increases that your competitors might get through? Do you think it's solely market share gains and there's no element of restock within that outperformance? Is that correct?

I do not see in Flow Control any element of restocking as we speak. It doesn't mean that the stocks are low, they are normal. I don't think that there is any specific element of restocking. The Advanced Refactories, we may have one or 2 customers having taken some precautionary measures, but really not something sizable or significant at a global scale.

Locally, I will say no to you. If I take a step back globally, I don't think so.

We have the next question coming from Mark Fielding from RBC.

Actually, I'm going to do that. So I want to sit on me that slightly annoying analyst where we try and put different bits together. But if I start from, I'll sort of pick this up. Firstly, I know you've talked about double-digit pricing obviously just now in terms of the start of the year. I suppose maybe following on Dom's question earlier, could you give us some help, if you were us providing a model and trying to get the revenue number broadly in the right place for the full year, not where are we now, but what's -- because the comps are a bit different later in the year, is the sort of pricing number we should be thinking about for the full year that sort of ballpark area for that? And then I'm very aware of the comments just made about expecting a softer second half environment. But just to clarify, there's no significant comp effects as profits move through the year. So actually, if profitability stayed at its current run rate, you would still be around 60% above where you were last year as you have been in Q1. And then the final bit and this is the annoying analyst bit. If I take consensus roughly where it is today and if I was to assume, and you might just correct me on this in a second, the pricing was a double-digit percentage for this year. The implication would be that to get to -- on the revenue number you come out with, to get to sort of consensus profits, you would be having margins flat to down slightly year-on-year. So that doesn't quite fit. I suppose it ties into that point of maybe softer volumes in the second half, et cetera. But just if you can help me out on those bits?

Where to start with. That's a great set of questions. I think, Mark, so in terms of revenue -- and I will start with a similar caveat to Patrick because I think it's worth reiterating. We don't have great visibility over the second half. So we are facing most of our answers on third-party data sets which suggest that volume in the second half is going to be worse than the first. That's both for Steel and for Foundry. So using that as a guidance, given what we've seen in the first quarter and mathematically putting in a volume decline in the second half would mean that we should see revenues not miles away from where we expected 2022 to be, but the mix in getting there is an organic growth substantially lower than what we had originally predicted, which was between 4% and 5% for 2022. So I expect that 4% to 5% to be very low and may be marginally positive given the start to the year, but that the revenue line overall is flat year-on-year, and that's being made up in essence by higher pricing. To the margin point, which is slightly more difficult to try and unpack verbally, but I think one thing I'd point to is our previous guidance on drop-through. We are seeing the levels of drop-through that we had expected. So the volume increase that we've enjoyed in the first 4 months has seen the right level of drop-through. In the event, as predicted using the third-party data set, we see volume declines in the second. I would expect that drop-through to be again within our predictable range. That will necessarily drive a lower margin in the second half. So whilst we are maintaining guidance, you can probably deduct that the first half is going to be a better half in our view from where we sit today, both from a volume and a profitability perspective, with the second half of next year at this stage, simply being predicted as lower than the first. I hope that's somewhat helpful now, but happy to take any follow-ups if I've missed anything that you need to follow-up on.

So can you just remind me if you get [Indiscernible] the drop-through range you think is sensible?

So we've always suggested that the drop-through is probably in the range of 25% to 35%. I prefer to look at a drop-through closer to the bottom end of that range for significant percentage increases in revenue, volume that is. And it's closer to the top end of that range if we're looking at incremental.

We have the next question coming from Jonathan Hurn from Barclays.

I just have one question on raw materials, please, if I may. Obviously, if we look at the prices of raw materials, they looked to have peaked and are starting to come off. So I'm just wondering if you could just sort of remind us of the percentage split or importance of the key raw materials to you? And also, how much of your cost of goods sold is currently raw materials? And then the sort of third part of the question is, how long does it take for you or how much sort of, I suppose, a period of time do you have before you have to start passing through those lower raw material prices to your customers?

So first, the raw materials that we use are industrial minerals, but they are not the same depending on the divisions. For example, magnesia, we use magnesia in Advanced Refactories, but we don't use magnesia at all in Flow Control. So it's very, very tiny. So the important material for Flow Control will be various type of aluminas, graphite, zirconia and a few others, but next to nothing in terms of magnesia. If you go to Advanced Refactories, the most important raw material will be a little bit of magnesia because we have some magnesia-related activity. But alumina, not zirconia, zirconia would be much more important for Flow Control than for Advanced Refactories. So they are all industrial minerals, but the mix is different. In the Foundry division, you will also find various type of alumina, but you will also find aluminium. You will also find some organic compounds, not only industrial minerals, also some organic compounds. So the basket of raw materials is relatively different between the 3 divisions, even if -- you will find alumina everywhere, for example. You will find alumina everywhere in all 3 divisions, but you will not find zirconia everywhere. You will find zirconia in Flow Control. And in Foundry, you will not find zirconia, a very little in Advanced Refractories. You will find magnesia in Advanced Refractories, not at all in Flow Control. And nearly next to nothing in Foundry also. So very different from one division to the next. The share of raw materials is, I would say, it depends on the price of raw material obviously because which can vary a lot from -- but an order -- a long-term order of magnitude, please bear with the uncertainty because as raw material prices can sometimes be multiplied by 2 or by 3, of course, the percentage. But based on long-term average pricing, the order of magnitude will be on or around not very far from 50% in Flow Control, closer to 70%, 80% in Advanced Refactories and somewhere in the middle for Foundry.

And then -- sorry, just the last point, just in terms of...

So your last question about the time lag. I would say, we are getting better and better at reducing the time lag. So because we've learned a lot in terms of timing. We have always been able to pass through in terms of timing because the volatility has increased in the market and the speed of situations has tended to increase. 3, 4 years ago, we needed 6 months to one year to be able to pass through raw material cost increase to our customer. Now it's a couple of months.

I was actually asking more on the downside. So obviously, prices -- raw material prices are starting to fall. Obviously, you have in your pricing a higher, obviously, level of raw material price. So obviously, you get that sort of short-term tailwind. How long does that sort of tailwind last for you? That's what I was just trying to get at.

For the time being, we don't have a tailwind. Over the first 4 months of the year, there is no tailwind. So -- but you're right, there may be expectations. We will see these expectations materialized or not. There may be expectations that in the months to come, some raw material prices may start to decline. We are not incorporating any tailwind in our guidance. If there is a tailwind, it will come on top of our guidance. But we are not incorporating because our commitment vis-a-vis our customers is that it is a pass-through. So we are not incorporating any tailwind in our guidance. We'll see what the reality is on the ground. But clearly, in the first 4 months of the year, there is no tailwind.

And then maybe just one very quick sort of follow-up just in terms of obviously your European plants and their production. I mean, is there any dependency there on Russian gas? Is there any sort of risk to production? I mean, I know you've got some big plants in Germany, for example. Could we see something possibly in Q2 if you could sort of hedge that possibility?

We have -- first, we have -- we are a low energy-intensive business because of the nature of our activity. It's an important point. It's one of the difference between us and several of our competitors. We are structurally a low energy-intensive business. We don't do [ bricks ] these kind of things in Europe. We do very little bricks. So our manufacturing process are structurally because of the niche high value-added products we are working on, we are structurally low energy-intensive. It's one of the specifics of Vesuvius as compared with our more generalist competitors. And so we are proportionately less -- significantly less impacted by energies. This being said, even if it's less, several times a small number and not by being not that more. And so we have a very active energy management, both in terms of hedging, in terms of specific energy consumption, and we have -- we didn't start this year, but we always have had a very active program for years now of reducing year-after-year specific energy consumption in all of our plants worldwide, not only in India, not only in Europe. And this pays off now because this -- we are not isolated, unfortunately, but this limit the magnitude of the energy crisis impact on our cost structure. And what is left, what we cannot eliminate through active specific consumption management. Of course, it's part for us. Energy is the raw material like any other. So it's being passed through to the customers.

We have the next question coming from the line of Mark Davies-Jones from Stifel.

Patrick, just a quick one for me. Could you update us on the regional picture you're seeing across steel? And in particular, whether you're seeing any benefit in any of those key Vesuvius markets from the need to replace either Russian supply or constraints that lie out of China? Is any of that coming through in the first quarter?

From a regional point of view, you have some differences. And I think the weakest is, as compared with last year, the region where we have seen the biggest weakness is China. So the steel price in China is down 10.5%, if my recollection is right, over last year. So a significant slowdown. But it's not only more everywhere in the world with the only exception being India, Southeast Asia, India. With a significant exception of India, all regions in the rest of the world are down as compared with beginning of last year, the most down being China, but the other ones being also relatively down. And going forward, we -- and you've seen the WSA forecast for the year. We expect that in the coming few months, not a lot in a structural way long-term, we believe that our market -- the [indiscernible] of our market remains as extremely positive. We share the view of ArcelorMittal in that respect. But short-term, we expect a confirmation of the slowdown in the world outside of China, including probably in India. So we expect that the rest of the year in India will not be as good as the beginning of the year. And we expect that the rest of the year in the world, excluding China and India, will also be relatively maybe not weak, but we don't expect a huge growth in the steel production in the world outside of China and India in the coming 2 months. So it's rather a slowdown. And despite the fact that the consequences of the Russia-Ukraine conflict, which is obviously reducing the net export of Russia-Ukraine towards the rest of the world, we see short-term that despite this, there is some weakness in steel production more or less everywhere. There is a question mark about China because the -- what will happen in China after COVID restriction measures are being lifted. This, I would love to have a crystal ball. Unfortunately, I don't. There may be some improvements in China in the second half of the year, but I'm cautious about this because the reality is we don't know. But normally, the situation should improve in China later in the year, but the magnitude of the improvement, again, I don't know.

There are no further questions on the conference line. I will hand over to Patrick Andre for closing remarks.

Thank you very much to all of you for having taken the time to attend today. Guy and myself remain of course at your disposal anytime to answer any questions you may have in the coming weeks and months. And I wish you all a very nice day. Good bye.

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