Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Welcome to Vesuvius Half Year 2022 results presentation. My name is Patrick Andre, Chief Executive of Vesuvius. And 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 the first half, then Guy will give you more details on our financials. I will then conclude with some perspective on our full year 2022 before opening the floor for questions. We delivered a strong set of results in the first half 2022, our strongest ever performance since we started trading as an independent company in 2012. Our revenue increased 21% on an underlying basis. Our trading profit increased 69% and our return on sales increased by 350 basis points to reach 12.5%. Despite the need to reinvest in working capital to follow the growth of our top line and to protect our customers against the risk of supply chain disruption, our focus on cash management enabled us to further decrease our net debt-to-EBITDA ratio, which reached 1.3 midyear versus 1.4 end of 2021. Based on these positive results, the Board felt confident to propose an interim dividend of 6.5p per share, an increase of 5% versus H1 2021. The reason why we could achieve these positive results are that we were able, at the same time, to fully compensate all of our cost increases with the necessary price increases and to continue gaining market share through technological differentiation. Starting with the mitigation of inflationary pressures. All cost inflation incurred in both 2021 and 2022 has now been fully recovered through price increases in both the Steel and the Foundry divisions. Regarding market share gains, the steel division volumes grew 2% in the world, excluding China, when the corresponding steel production was declining 4%. The Steel Division also gained market share in China. Similarly, the Foundry Division continued to gain market share in most geographies. This could not present, however, deterioration of foundry volumes of around 3% due to the very difficult persistent situation of the automotive market in the first half of the year. Thanks to this simultaneous successful mitigation of inflation and market share gains, our return on sales reached 12.5% during the first half. This performance achieved despite a difficult market environment, confirms the long-term profitability potential of our activity and the relevance of our technology-driven business model. Looking forward, all our key strategic initiatives to support future growth and further profitability improvements are now fully on track. On the M&A front, the integration of Universal is proceeding better than planned and expected synergies will benefit both the Advanced Factories and the Foundry business unit in 2022 and 2023. We have an appetite for these midsized bolt-on acquisitions, which have proved very successful for us so far. And we will continue to explore further opportunities in the coming months and years. Our strategic CapEx expansions in Flow Control in India and in EMEA are proceeding as planned. On top of the previously decided Isostatic and Slide Gates expansions, we have also decided end of June to engage the construction of a new flux production facility in India. This new facility, which will cost GBP 5.8 million will be operational beginning of 2024. These flow control capacity expansions will support our market share gains ambitions in the key growth regions of EMEA, India and Southeast Asia. In parallel, we observed a growing interest of our steel customers worldwide for our robotic solutions, which provide them safety, cost and reliability advantages as compared with traditional solutions. In Flow Control we are planning to double our robotics casting technology installations by 2025. Advanced Refractories is also now successfully developing and rolling out its own robotic solutions. You will find on this slide, 2 examples of our innovative robotic solutions. On the left side of the slide, you can see a picture of our new Flow Control robotic solution for the ladle makeup area. This is the area where steel ladles are being prepared and where Slide Gates plates are being changed when they reach their end of life. Our robotic solutions improve the ergonomics of the workplace by reducing the number of operators needed and by placing the remaining ones in a remote position, not exposed to the dangers of the Ozone. At the same time, our robots improved the consistency and productivity of the operations through their ability to perform fast and repeatable operations. Our robots also helped to increase the refractories performance, thanks to smart inspection tools, extending the life of refractories under very safe conditions. On the right side of the slide, you will see a picture of our new Advanced Refractories robotic gaining installation, which coupled with our proprietary software interface, enables a fully automated repair gaining of basic oxygen furnaces. These high-speed automated gunning equipment can deliver material at up to 200 kilos per minute having the repair time of basic oxygen furnaces with a strong positive productivity impact on the steel plants where BOFs are the bottleneck of capacity. On the sustainability front, based on the very positive results we've been obtaining so far, we've decided to increase further our ambition by doubling our reduction target for 2025 to 20%. And by setting ourselves a new intermediary target of reducing our carbon footprint by 50% by 2035. We built a detailed industrial road map to achieve this objective. This will imply process and plant optimization and a progressive move to 100% non-CO2 emitting electricity sources including investment in solar in most of our plants and facilities worldwide. We will also initiate pilot studies to develop technology to replace natural gas in ceramics firing. But we are also stepping up our efforts to develop innovative solutions to support our customers in their drive to reduce their own carbon footprint. And you can see on this slide, a real life recent case study with one of our steel customers. There, the use of our laser technology enables the customer to optimize the useful volume of its steel levels and to simultaneously increased its steel production output by 1.75%, reduce its refractory consumption. And last but not least, decrease its CO2 emissions by 6,500 tonnes every year. Let's now look in more details into the performance of the Steel Division during the first half of the year. As you can see on this slide, where the size of the bubbles is proportional to Vesuvius' Steel Division sales. Steel production declined during the first half of '22 in all main regions in the world, the only notable exception being India. On average, steel production in the world, excluding China, declined 4%, decreased even further 6.5% in China. In this difficult market environment, our steel division continued to gain market share through technological differentiation. And as a result, our volumes progressed more than the underlying steel market, both in China and outside China. And within the Steel Division, our Flow Control volumes, which you can see on this slide, increased faster than average by more than 5% in the world, excluding China. Our flow control volumes outperformed steel production growth in all key regions of the world without any exception. Let's now have a look at the financial results of the Steel Division. We already discussed the continuous and very significant market share gains of Flow Control, but Advanced Refractories also regain market share during the first half with its cell volumes at constant perimeter, meaning excluding the Universal acquisition, declining only 1% when the steel market was declining 4% at the same time. This is a reversal of last year's situation when advanced refractories lost market share, you remember, due to the disadvantage of having been the first mover in raising prices to compensate for cost increases. The trading profit of the steel division in the first half improved by 97% on an underlying basis to GBP 101.7 million, equivalent to the full year trading profit of the division in 2021. Our return on sales improved very significantly by 500 basis points to reach 13.7%. Let's now turn to the Foundry Division. The division results continue to be negatively impacted by the persistent weakness in the automotive sector. And as you can see on this slide, with the exception of India and to a lesser extent, NAFTA. The evolution of the automotive sector continued to be very negative in the first half as compared with last year. And this was not compensated by the other sectors where activity remains. You can see that on the right part of the slide, more or less stable as compared with first half last year. And as a result, the global volumes of the Foundry Division during this first half were down around 3% as compared with last year. But despite this decline in volume, the Foundry Division could grow itself by 13% year-on-year on an underlying basis. This was entirely due to price increases, which could fully compensate all cost increases incurred in both '21 and '22. And as a result, and despite the volume decrease, trading profit increased 9% to GBP 25.7 million. Return on sales, of course, slightly declined as compared to first half last year to 9.5%, but -- and it's an important point, improved significantly by 240 basis points as compared with the second half 2021, thanks to the price increases and to the resolution of operational issues in Germany and the United States. We believe the potential for further improvement in the Foundry division is quite significant and will materialize when automotive markets will recover. I will now hand over to Guy, who will give you more details about our financial performance.

Thanks, Patrick. Good morning, everyone. I'd like to start by looking at our sales and trading profit bridges. 2022 H1 reported revenue of GBP 1 billion is some 26% higher than last year's GBP 808 million, adding back GBP 13.7 million impact of foreign exchange, gives you our prior period underlying revenue of GBP 821.7 million, on which we reported an increase of GBP 175.8 million or 21% to reach this year's H1 GBP 997.6 million of revenue, excluding the effect of the Universal acquisition. It is worth noting that the vast majority of the revenue increase in this year was due to price increases in reaction to raw material cost increases, general inflation and supply chain friction costs. So turning to our trading profit. Our underlying trading profit after eliminating the effects of foreign exchange and the Universal acquisition, increased by 69% from GBP 73.6 million to GBP 124.5 million. The key constituents of this increase were, firstly, GBP 6.1 million from volume and market share gains, some GBP 10.3 million, which is a recovery of the lag to our profits in H1 '21. And lastly, a net price impact of GBP 34.5 million. As mentioned previously, this means that the price lag we experienced last year has now been fully eliminated. Finally, adding back trading profit of Universal of GBP 2.9 million to our underlying profit gives our reported trading profit of GBP 127.4 million. If we take a look at full income statement. Our trading profit of GBP 127.4 million and the return on sales of 12.5%, being an increase of 340 and 350 basis points on a reported and underlying basis, respectively. Our share of post-tax JV results were similarly higher and net finance costs also increased, mainly as a result of higher drawdowns and interest payable on retirement benefit obligations. The effective tax rate was 27.5% in line with guidance and noncontrolling interest was higher given the higher earnings at our Indian subsidiaries. Headline earnings has increased by 75% and headline EPS came in at 31.4p, also 75% higher than last year. In terms of cash, our cash conversion in the first half was 26%, largely as a result of higher investments in working capital of some GBP 93 million and cash capital expenditure of GBP 37 million, which after adding back depreciation and taking into account other working capital movements resulted in adjusted operating cash flow of GBP 33.1 million. This increase in working capital, which we've touched on was intentional. As indicated at the time of our full year results, we've been building inventory levels in Q4 of last year in reaction to the supply chain issues we were facing and to ensure we minimize any customer disruptions. We also stated that this trend would continue into 2022 as we had no evidence of a significant improvement in the global chain issues at that stage. As a result, our trade working capital to sales has increased to 22.8% as of June 2022, driven, as you can see by the graph on the right, predominantly inventory. The inventory build has been in both raw materials and finished goods. In the expectation of a slowdown in the second half, we have started to reduce our inventory, which is on a downward trend as at the end of Q2. Our focus in the second half is going to be to continue to reduce our inventory levels, including the extension of shutdowns where necessary and taking the inevitable profit impact of lower fixed cost absorption. Finally, in terms of our net debt position, net debt at the half year was GBP 327.7 million, an increase of just over GBP 50 million from the December position with operating cash flow being more than offset by income taxes and dividends paid. Our net debt to EBITDA improved from 1.4x on a post-IFRS 16 basis at December to 1.3x, well within our comfort zone of 1.25 to 1.75x. We feel we remain in a strong position from a balance sheet perspective and expect to further improve this in the second half with the focus, as I mentioned, on working capital reduction, which will both improve cash flow and help fund our organic growth. I'll now hand back to Patrick for the outlook. Thank you.

Thank you, Guy. We expect a further deterioration of our market environment in the coming months. Vesuvius is, however, well prepared to conform this temporary slowdown thanks to our lean, decentralized and entrepreneurial organization. This, together with the very positive result of the first half makes us confident that full year group trading profit will be towards the top end of the range of current analyst expectations. Beyond the current temporary slowdown, we remain fully confident in the longer-term growth potential of both our Steel and Foundry end markets. And we are continuing at pace the implementation of our expansion capital investments, in particular, in Flow Control. Thank you for your attention and I propose to open the floor for questions.

Mark Davies Jones from Stifel. If I can just start on the supply chain issues and logistics because obviously, that's part of the inventory build. Can it be part of the unwind to? Are you seeing any easing of that situation, either in terms of cost reliability of delivery. We are hearing some tentative signs that things are looking a little bit better. What are you seeing?

It's a very good point. As you know, we have increased voluntarily our trading working capital intensity in the ratio of trading working capital to sales by a couple of percentage points from 20.9% to 22.8% because we wanted to protect our customers against those risks of supply chain disruption. We are starting to see, you're right, the beginning of further improvements. I would -- but we believe it will take time and that these improvements should materialize progressively over the coming months in terms of reliability and these are important points, somewhere between now and midyear next year. We don't believe that from 1 month to the next with magic on, everything will become wonderful. We believe that it will take several months before things get back to normal in terms of reliability, somewhere in the course of '23, and in my opinion, probably not before the mid of 2023. When this happens, it will enable us, obviously, to get rid of this buffer that we build over the past few months. And we believe that progressively between now and would say the second half 2023, we'll be able to bring back down our working capital intensity a couple percentage points on or around between 20% and 21%, which we believe we are now able to sustain in normal supply chain conditions.

Can I ask a slightly unfair one. I know it's difficult to see what happens in the next few months a little further ahead of that. But obviously, there's a very sharp differential implied in guidance between the first half and second half profit. There were some exceptional positive factors in the first half seeing exceptional negative factors in the second half as you unwind that inventory. Can you give us a bit of help on the moving parts looking into next year, both in terms of cost and price, but also some of those incremental investments coming on stream, some of those moving parts.

Unfair questions are for the CFO.

Mark, I think the -- so the H2 you've touched on, we have got positive and negative and both, but the second half is definitely going to be impacted predominantly by that fixed cost absorption, which I think we've touched on. The one thing that we haven't gone into a lot of detail on is 1 other positive in the first quarter of this year, which was essentially a number of Middle Eastern customers and North African customers had preemptively taken a full year's allocation of, in particular, Advanced Refractory product. And that was done at the time when they were concerned both price increases and security of supply. So there is an incremental GBP 4 million in the first quarter or first half that won't be repeating as well. I can only reiterate your own adjective, I think this is an unfair question because as we've sought to try and underlying the uncertainty that we're feeling about the second half, it only extrapolates into 2023. But if we take a look at our second half as it stands, we, by definition, are looking at a volume reduction. That volume reduction, if we assume is a similar scenario for next year, we would add back our fixed cost absorption issues, which we expect to see in the second half. And that, along with any incremental volume means that we should be looking at a slightly stronger like-for-like first half of next year versus the second half of this. So for us, whilst '23 is inevitably going to be lower than 2022, it's very difficult for us to give you any kind of exact parameters. We do feel that we've organized ourselves from a cost perspective to be ready for the upturn. And where consensus stands at the moment on '23, we're not suggesting we should go up or down. We don't really have a sufficiently well through or evidence-based perspective on '23 to give you much more, I'm afraid.

It's Andrew Douglas from Jefferies. I have five questions. They will all be quick, hopefully. Let's start at the top. Can you give us an update on where you believe your customers' inventories are? I'm under the impression that they might still be a touch high, which is one of the reasons you're a bit cautious on the second half as well as the macro backdrop. Second question, I do want at a time, if you want.

I can start to this one. Yes, I think you're right. We believe that our customers' inventories in steel, in particular, are too high. And that, coupled with the fact that, as you know, steel prices are going down, creates a strong incentive for decreasing inventories in the coming months, which is an effect which we are factoring in our guidance. It's one of the reasons we are integrating significantly lower volumes in H2 for apparent consumption as compared with H1. And I think it's relatively sound that probably mostly in Q3, we see some reduction of steel inventories, which needs to happen.

The second question relates to the RCT installations. I seem to have been talking about robotics for quite a while now. It looks like you're targeting a doubling by 2025. Is that a bit back-end loaded? And kind of what's driving that? Is this new products that come to market where the customers can't do without or they've been waiting for a couple of years to do it, and now they feel they should. I'm interested in kind of what's changed for that doubling to come through?

We have around 25 of such RCT installations up and running today worldwide. We think that we would reach on it over 150 by 2025. I think it's a very classical phenomenon just industry. The industry is relatively for good reasons, a conservative industry. Adoption takes time. So you have some acceleration of the adoption curve. I think that many steel customers when they see that our robotics installation, which are really new and innovative as compared with historical practice, when they see that it's working. And we are, of course, organizing visits and the proposing visit to the aspiring customers to visit on to existing customers to see that it really works because when you use sales robots that work robots that you will install and which will work 2% of the time. So they really work all the time. We maintain our robots, and we propose to our customers to maintain and guarantee the operating rate of our robots during the last time. And then it creates confidence. It creates -- it's a different circle, it creates more and more confidence for our steel customers to adopt those solutions. So it's welcome, but relatively predictable pattern towards this kind of acceleration of adoption of new solutions.

Secondly, on India, we've got additional capacity being put in there. I think remember the debate about India 3 or 4 years ago as to how strong India might be on a 10-year view if you listen to the Indian steelmakers, they're going to take over the world. Are we getting a bit more optimistic about the Indian market on a 5-, 10-year view? Or is this how well you guys are doing relative to the market?

It's both. We are fairly optimistic in terms of the steel production evolution in this part of the world, and it's not only India, it's India and Southeast Asia and Vietnam in particular. We believe that East India plus our Southeast Asia region will be in the 20 years to come, by far, the fastest-growing region in the world instead in terms of steel production evolution. And very logically, we are reinforcing or steel production base in this part of the world in a very selective way, we are reinforcing mostly in Flow Control or in Advanced Refractories, very specific product lines where we believe we have a technological differentiation. We don't go in the commodity part of the advanced refractories market where everybody wants to go and which we believe will be a blood bust for various producers. So we go where we have differentiation. And thanks to that, we are progressing quite well, not only on top line, but our profitability in this part of the world.

And ESG targets, clearly quite punchy. Can you talk to us about the costs associated with that? My understanding, again, it's reasonably sensible. And from a P&L perspective, we might actually see some benefits rather than costs. Is that a fair comment?

Yes, it's a fair comment. I think that to give you an order of magnitude, is that to reach -- our assessment is that to reach this 50% reduction of our carbon footprint in 2035 as compared with 2019, we will reach -- we will need between today and 2035 to invest an incremental GBP 60 million as compared with our normal run rate of capital investment. We mean a little bit less between GBP 4 million and GBP 5 million every year. It's significant, but it's not that significant to achieve such an ambitious target of 50% reduction. And on top of that, we believe -- as we believe we are quite confident because based on these studies, that not all but a significant number of this incremental investment will have a profitability associated with it because they will improve our energy efficiency. And all in all, this will have a positive impact on our P&L over the coming 12 years because we are clearly when we dig -- we are not the only one, but we dig, we really discover that there are probably -- there are some low-hanging fruits in terms of potential for energy efficiency improvement, which is the right thing to do.

Okay. And then last but not least. If we think about the sequential evolution of the end markets in the second half. We can pick our number for organic declines. Are you guys still pretty happy with 30%, 35% drop through? And how does it need to evolve before you kind of start taking some cost action in terms of structural costs or temporary costs? Just think how are you thinking about that?

And the 30% to 35%, we think, still stands. Again, just to underline it, though, on top of that 30% to 35% is the fixed cost absorption we've chatted through. In terms of further cost reduction, at this stage, we're looking at an H2 that is projecting significant volume declines. As we sit here at the end of Q2, we've seen certain weakness in order books and offtake in comparison to forecast, but not significant enough that we can read through, whether that is simply seasonality or the start of something else. I don't think we should be looking at this point in time for any significant cost reductions over and above normal drop-through until this time is we have got: a, confirmation that the decline is there; and b, that it's going to last longer than we might expect because we remain fundamentally convinced that our end market growth is going to be there. There are 2 markets that continue to grow, and we believe should be invested in. So we shouldn't be taking too much cost out at this point in time. Our belief is that we have got -- we are rightsized for volume increases. So we would need to be converted to something more than temporary before we took much further action.

No further questions.

We can go online.

Some questions online, maybe.

We don't have any questions on the phone line.

Andrew Douglas again. Can you give us some idea of your M&A pipeline? You've talked about your desire to do some bolt-on acquisitions. Just what's that looking like and are price expectations sensible? Or do we have to meet in the middle somewhere.

Okay. So no, I cannot give you some ideas, as you can imagine, on the M&A pipeline, but I can say something about our many pipeline. Together with Guy, about 4 years ago, we have screened the landscape, and we have identified on or around 20 potentially attractive M&A opportunities. We've been able over the past few years to materialize 2 of them CCPI and Universal, out of the around 20 attractive targets we had identified with Guy. The vast majority of them, more than 80% are midsized bolt-on acquisitions. So it means that there are some remaining on our list. The only 2 that we have already implemented, and we are continuing to adopt a proactive approach in this regard. So we have ongoing contacts with a certain number of companies on that list, but there is not looking no certainty that any of those could materialize will materialize in the coming months. As you know, there is always uncertainty. But clearly, we have an appetite because we like these bolt-ons, they are easy to integrate. The level of synergies is generally high. They fit very well with our strategy. So we have clearly a strong appetite to continue beyond Universal and CCPI, this bolt-on strategy acquisitions.

Certain extent in terms of markets you can move into [indiscernible] business 4 years ago by the -- does that strategy still stand?

You're right. When we bought CCPI, there was one of the subsidiaries of CCPI, which we bought at the same time. It's called Permatech, which is a very good company, active only on the aluminum sector. So it's metal flow engineering, but in the aluminum sector. We are -- first, this acquisition has had positive impact on our organic growth because in Advanced Refractories, we have been transferring the technology, and we are in the process of transferring the technology of this Permatech subsidiary to all of our operations worldwide, which allow us to reach new aluminum customers everywhere in the world. And yes, among the several companies that we would be potentially interested in, some of them are active in the aluminum sector. If there are no further questions online. No, there doesn't seem to have any further questions on line. Thank you very much to all of you for attending today. both in the room and online. I wish you a very nice day. And as usual, you can reach Guy and me in between calls for any questions you may have. Thank you very much for your attention.