Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Vesuvius Trading Update. [Operator Instructions] I would like to remind all participants this call is being recorded. I will now hand over to the CEO of Vesuvius, Patrick Andre, to open the presentation. Please go ahead.

Good morning, everybody. So I'm Patrick, CEO of Vesuvius, and I'm here this morning with Mark Collis, our Chief Financial Officer. The key message for our Q3 update is that we have performed robustly during the quarter despite a weakening of our market versus the first half, especially in the foundry markets. So starting with the market situation. Steel market has remained subdued outside of India and EEMEA. This mostly due to persistently high steel exports from China impacting steel production in most other areas. At the same time, on the more positive side, steel inventories seem to remain quite low everywhere in the world. On the foundry side, foundry markets have also remained quite weak outside of India. But this weakness was particularly pronounced in EU plus U.K., where markets were clearly weaker than what we were expecting at half year. In this difficult market environment, our business units, both Steel and Foundry, have performed quite well with, in particular, market share gains in both Flow Control and Foundry, a positive net pricing performance in the Steel division and quite a resilient net pricing in Foundry also. Our cost-saving program is proceeding ahead of plan and we are increasing our guidance for in-year recurring cash cost savings from GBP 6 million to GBP 9 million per year with an exit rate at the end of 2024 in our already announced bracket of GBP 10 million to GBP 15 million, but clearly, much closer to GBP 15 million than to GBP 10 million, which means that there will be further additional cost savings of a minimum of GBP 6 million flowing into our P&L in 2025. Our complete program remains fully on track. We are targeting at least GBP 30 million recurring cash cost savings by 2026. Our results in these market circumstances, considering this resilient performance, robust performance despite the market conditions, we expect our full year results to be in line with market expectations, meaning very slightly below full year '23 on a constant currency basis, with a very resilient return on sale margin, similar to 2023 on a constant currency basis on or around 10.2%. We had a good performance in terms of cash flow, in particular, good performance on working capital management. We are on track to reach our target of 23% working capital to sales ratio by year-end. And at the end of October, we were 90 basis points below last year at the same time. Two important information regarding our growth initiatives. First one, organic growth. All of our expansion program in Flow Control and in Asia are proceeding on track, should be completed by year-end, meaning that as expected, our CapEx needs will reduce as from 2025 and we will benefit in Flow Control and in Asia from this new capital expansion as from next year. But also from an inorganic point of view, we have finalized the acquisition of a controlling majority stake of 61.65% in a Turkish company called Piromet for a consideration of EUR 26.2 million, representing around 8x last 12 months EBITDA and before synergies. And we expect that after synergies, which we expect to implement in the next couple of years, it will be significantly below 6x. This acquisition will enable us to expand our presence in the growing and strategic market of EEMEA, the non-EU plus UK part of EMEA, in particular, Turkey, Middle East, North Africa, but will also complement our robotics strategy because Piromet also has an attractive robotics expertise, which will support our robotic development effort, both in Flow Control and Advanced Refractories. We are -- because we are confident in our free cash flow generation in the coming years, at the same time that we are completing this acquisition, we are announcing a second tranche of share buyback of GBP 50 million, which we expect to be completed relatively rapidly in -- on or around the next 6 months. Regarding our markets in terms of outlook. We expect both our steel and foundry markets to remain subdued for the remainder of the year, and we remain cautious on the timing of a recovery, which means that we don't expect a significant improvement beginning of 2025. If there is some improvement, we see that more happening towards the latter part of 2025. However, we remain confident in the attractiveness of the long-term global steel and foundry market, and we continue to focus on the execution of our self-help measures which will leave us very well positioned when end markets will improve. Thank you very much for your attention, and I now propose to open the floor for questions.

[Operator Instructions] And your first question comes from the line of Lush Mahendrarajah from JPMorgan.

I've got two, which I'll take in turn, if that's okay. The first one is just on India and the sort of comment in the statement that growth rates there have slowed. Just to get some clarification there. Is that sort of an increasing [ compensate ] that you can't keep growing as fast as you have and so this is sort of the new normal for India, still growing but just not as much before? Or is this related to Chinese exports and so is more temporary? And sort of when that subsides, you expect India to sort of reaccelerate against just sort of prior growth rates?

Regarding India, we see the growth -- first India is still growing nicely. And -- but it's perfectly right, Lush, that the pace of the growth has been slowing down a little bit over the past few months in terms of steel production. Steel consumption has not been slowed down. So this is why we see this as very temporary. Steel consumption in India is continuing to grow very rapidly. Steel production has been -- steel pressure growth has been slowing down a little bit because of the pressure of Chinese imports. However, we see this as very temporary. There is -- there are many new production capacities coming on stream in India in the coming months. And I personally do not see the Indian government relying on Chinese steel exports to support the growth of its domestic steel consumption. So this slight slowdown of the pace of growth of steel production in India, we see that as very temporary. And personally, we -- growth for Vesuvius, we continue to grow quite nicely in India. We have inaugurated last week 2 new production lines in India in our new Vizag flagship plant, which we believe will enable us to continue to grow quite strongly in 2025 and in the subsequent years.

Okay. Perfect. That's really helpful. And the second one is just on cost savings, both in terms of -- you sort of alluded to sort of short-term cost reductions. Can you just sort of maybe quantify what those were and what you did and presuming do those reverse next year? And then also in terms of the sort of GBP 30 million cost saving, you started the year at GBP 3 million for this year, you're now guiding for GBP 9 million. Should we think about that phasing accelerating next year as well and then sort of do more of that GBP 30 million next year than perhaps we have in our numbers?

You're right that we should look separately at our recurring cost savings and our short-term cost savings, the 2 being -- the second one being in addition to the first one. In terms of recurring cost savings, we are accelerating. You are perfectly right. We are now guiding towards GBP 9 million in year '24 recurring cash cost savings, with a minimum of additional GBP 6 million next year, and we believe that we will do better than that. And in terms of a final objective, we had announced at our Capital Markets Day, GBP 30 million recurring cash cost savings. We are now targeting more than that, more than GBP 30 million. This -- so we are clearly accelerating, and we'll continue to accelerate next year. Regarding the short-term cost measures on top of these recurring cost savings, on top of this GBP 9 million this year, we are implementing short-term cost savings measures to mitigate the negative situation on the market. The order of magnitude of these additional short-term cost savings is in the mid-single digits order of magnitude, which we can maintain for some time. It doesn't mean that everything will stop on the 31st of December. We will maintain this as long as the markets remain weak. But at some point, this will [ reverse ].

Your next question is from the line of Andrew Douglas of Jefferies.

It's the obligatory three questions from me, and I'll jump back into the queue because I've got a couple more. Can we start, please, on the buyback? I guess, it's probably come a bit quicker or earlier than I had expected. Can you just talk through why now rather than waiting for potentially a couple of months and giving us a buyback with the 2024 prelims? The second question is a follow-up on Lush's question on China. It feels to me like this Chinese export phenomena is a potentially temporary thing rather than a kind of a long-term thing. Can you just give us a view on how long you think the Chinese export phenomena will continue? I guess because it's clearly playing a role in the steel markets. And then last one, I mean, at least is a bit more kind of big picture question. Clearly, the EU plus -- EU27+UK backdrop is difficult for steel. Have you guys thought about changing or further changes to your manufacturing footprint? I know that there's been a lot of change in the last couple of years. So maybe you can kind of just give us a reminder of what you've done over the last 6 years and whether you think more needs to be done just in terms of that kind of long-term kind of structural question about Europe?

Thank you very much, Andy. On the first point, the share buyback is obviously because we have an opportunity to do it now and quickly because our share price, we believe, is significantly undervalued. Buying our shares at the current share price is an opportunity that we don't want to miss. And we cannot know in 6 months, it will still be there. So clearly, we saw with the Board this as a very good opportunity to buy our shares at what we see at a very low point, which we cannot be sure will maintain forever. That's the reason why we decided not to wait for our full year announcement and launch immediately our share buyback program. On the second question, I wish we had a crystal ball. So -- but I -- there are still a few things we can say about Chinese steel exports. First, that I don't think it is sustainable. There is -- I have very little doubt on the fact that the current level of very high Chinese steel exports is not sustainable long term and will decrease at some point in time, first, because Chinese steel is not particularly competitive as compared with steel being produced elsewhere. China doesn't have any specific structural advantage in terms of steel production as compared with the way steel could be produced in other parts of the world. And steel always ends up being produced close to where it is consumed. This has been the case for the past 150 years, and I don't see any structural changes for that. So the current extraordinarily high level of Chinese net steel export is bound to come down at some point in time. Where there is uncertainty is about the timing. And this type of phenomena can take some time to correct. They always end up correcting, but it can take some time to correct. I think that the most likely scenario is that Chinese net steel export should start to go down at some point in '25. But there is no guarantee that it will be in '25, it could be in '26. But it will not last many years. At some point, it will come down. So in terms of strategic vision of where we are going and the dynamics of the market outside of China, I think it's very legitimate to integrate that at some point in time, in the relatively near future, net Chinese steel exports will start to go down. Again, it doesn't mean that it will start to go down in '25. It could be a bit later than that. On your last point, EU+UK, we have, for quite a long time, have relatively cautious approach on the evolution of our end markets in EU+UK. And over the past 6 years, we have heavily adapted our manufacturing footprint in EU+UK. In the Steel division, we have closed -- I don't know if everybody is aware, but we've closed over the past 6 years 8 out of our 11 manufacturing plants in EU+UK. And we have redeployed heavily and at a fast pace our manufacturing footprint outside of EU+UK, in India, in the Americas, in the EEMEA, this non-EU+UK part of EMEA. And this positions us in a good position. So we have anticipated the fact that the steel production in EU+UK will gradually transfer, at least FOR part of it, outside of EU+UK. So if I may, we are talking not a Volkswagen type of situation. We have a restructure of manufacturing footprint already. So this is behind us, not in front of us. In the Foundry division, it's -- we are in the process of doing it. So the Foundry division started a little bit later than the Steel division to redeploy outside of EU+UK. We have already closed 3 plants, 3 foundry plants in Europe, and we are continuing with the closure of the Tamworth plant in the U.K. and with the transfer of some labor-intensive and difficult-to-automatize production line from Germany to Turkey. By the way, the acquisition of Piromet will probably enable us to accelerate even in the Foundry division, this redeployment of foundry production lines from EU+UK to Turkey. Because the foundry market is growing quite strongly in Turkey. So we will continue in this direction for the Foundry division to catch up with what has already been done for quite some time now over the past 6 years in the Steel division.

Your next question is from the line of Stephan Klepp from HSBC.

I hope you can hear me well. I have a few questions. Let's start with automotive. So our economists are talking about the recovery of the German carmakers and the German car industry. Are you seeing that already in your current trading in Foundry with regard to the automotive industry? Secondly, Advanced Refractories. Can you talk us through where you are with regards to pricing, the market share losses that you had in the past? Can you reverse them? And is the Turkey acquisition helping your footprint in Advanced Refractories? Because there's a lot of steel production, foundry activity in Turkey going into Europe. And last but not least, Flow Control. I mean, you're very successful with your innovation-led strategy. How can we long term see this innovation-led strategy as well be active in Foundry? And is it possible as well to improve your footprint Advanced Refractories from that?

Thank you very much for the question. Starting with automotive, I'm very, very happy to hear the comments about the automotive production which could get better in the coming months. The only truth is that for the time being, we don't see it in our trading. It doesn't mean that it will not happen. But clearly, as we speak, we do not see any improvement in the end demand coming from the automotive sector in EU+UK. This being said, it always takes a bit of time to slow down the supply chain. So in case these analyses are correct and the automotive will be starting to improve a bit in EU+UK, this will be a positive for the year 2025 in Foundry. But I remain very cautious at this stage. I will wait to see it in the numbers and to see it on the ground before believing that it's really happening. Regarding your second question on Advanced Refractories. We have, in the Steel division as a whole, a resilient performance in terms of net pricing. Regarding market share, the system is differentiated between regions. In Asia, we are continuing to perform well and to gain market share in India, in China. India, in particular, the fastest-growing market for Advanced Refractories, we have inaugurated last week 2 new production lines in India, which will continue to support our growth and our market share gain in India in the coming months and years. So very positive on the development of Advanced Refractories in Asia. In Europe, where we had lost some market share over the past couple of years, the year '24 as a whole, we're probably still a bit negative in terms of market share, but we have started regaining market share as from midyear, as from summer. The inflection point is behind us. And I'm quite confident that progressively, we are not trying in the current difficult market circumstances to rock the boat. But without rocking the boat, we are on track to progressively, slowly but surely, regain over the coming months and years the market share lost over the past couple of years. So clearly, a positive feedback on the trend in Europe and in EMEA globally. The Americas has remained a little bit the pain point, where also like in Europe, we've lost market share over the past couple of years, as we've said during the past presentations. Then we see the inflection point coming rather sometimes in '25. We are not yet at the inflection point in the Americas, but the team is building the foundation for that. And I expect that sometime in '25, we will start regaining some market share. And regarding your third question on Flow Control and Foundry. Clearly, our innovation business model is working well in Flow Control. It's also working well in Foundry. Foundry is gaining market share. By the way, if it would not be gaining market share, the situation would be even worse considering the market conditions. So part of the difficult market conditions in Foundry are being mitigated by market share gains through technology in Foundry. Already now, we are -- we have in mind to accelerate that even more in the coming months and year. But clearly, the market backlog is so negative, in particular in Europe, that even market share gains through innovation cannot fully compensate for the significant market weakness that we are experiencing for the time being. But at the same time, it's quite promising for the future because it means that when markets will start recovering, and I hope that what you hear about automotive will materialize, in particular, when markets will start recovering, our Foundry division could recover quite nicely.

Just one follow-up on this one. In Foundry, obviously, everything that you produce is consumable. Do you see high stock levels of your clients in the Foundry division, particularly in Europe? Or is that more or less -- the inventory level is more or less normalized and there's nothing to destock anymore?

The statistics are not -- they are not super precise statistics. However, from, I would say, corridor discussions, we don't believe that there are inventories in the system as we speak. Because the difficult market condition has been lasting for quite some time. And to preserve cash, the level of inventories in the pipeline has already been, I think, brought back down to a relatively normal, if not low level. So we don't see today any accumulators. We have no sign of accumulated excess inventories in the supply chain of Foundry. By the way, it does the same for Steel. In Steel, inventories are normal or low also. That's the same.

Your next question is from the line of Andrew Simms of Berenberg.

Just I suppose a couple of more questions, firstly, on China. Can you remind us your exposure to China in terms of group revenue? What sort of growth rates you're seeing there and whether you're sort of -- you're benefiting, I suppose, from the overproduction in the exports of some of the steel products that are coming out of China? And then secondly, just on Foundry. Obviously, your comments around Europe and I'm guessing, by implication, the automotive sector. Can you perhaps give some color around some of the other regions and some of the other end markets as well in Foundry?

Thank you. So regarding China, China represents, give or take, on or around 10% of productivity. And we are doing quite well in China. It may seem surprising because the Chinese economy as a whole is not doing very well. But ourselves, we are doing relatively well in China with top line growth in both our Steel and Foundry division because of our high-end positioning. The part of the Chinese market which is suffering is -- especially in steel is the low end, long steel bar for construction typically is the one suffering the most. We are not positioned on this market. Our growth in the Steel division in Flow Control -- in China is mostly Flow Control. And then we are growing nicely because steel -- production of sophisticated high-end flat steel, high-strength steel for automotive, electrical steel, grain and nongrain-oriented for EVs, all this is progressing quite nicely. And we are -- this is where we are positioned in China. So we are growing in a declining market in China. So China is a good story for us so far, and we don't see any reason why it would change significantly going forward. Regarding Foundry Europe, could you remind me your question on Foundry Europe?

It was more just, I suppose, outside Europe and outside automotive. I assume that the European piece is related to the auto deterioration in Europe. But I suppose outside of both of those regions or markets, is there some color that you can provide?

For the other market than Europe, you mean. So the -- India is continuing to do quite well. The foundry market in India is doing well. Mexico is doing well. [ We think ] that North America as a whole is not that bad with Mexico being -- growing nicely. South America is a bit weak, and absolutely not a collapse and nothing to compare with Europe, but some relatively weak market there. And North Asia is weak. So the 2, if you recall, powerhouse of EU+UK and North Asia are really concentrating a lot of the weakness in the foundry market. However, for historical reasons, we are strong in this area. So it's a challenge for us. But these 2 important regions are clearly experiencing a significant weakness. And we see that as, for a large part, structural, not only cyclical. Part of it is cyclical. I think the current level is too low to be sustainable. But part of it is also structural. Neither North Asia nor EU+UK will come back to the pre-pandemic level, we think. And growth will be concentrated and we start to see that in India, Mexico, Turkey. Turkey is also a fast-growing market for the foundry activity. So this is where the growth is. And naturally, these are the regions which are suffering less today in the overall subdued environment.

Your next question is from the line of Harry Philips from Peel Hunt.

A couple of questions, please. The first is just on Foundry and sort of ongoing sort of situation where clearly, Foundry in terms of revenue split is sort of very underweight in North America. And just thinking about M&A opportunities there. There have been some deals sort of done around the periphery, and just wonder how important that is to get some balance with Europe to sort of mitigate the swings we're currently seeing. The second is on the Chinese exports and sort of how that limits. Is that a limit because Chinese government continue to rein in domestic steel production? Or is it simply tariffs and stuff like that which act as the sort of driver on that? And then lastly, just maybe continuing Andy's comment on the buyback. Just obviously, great. Totally agree, buying back cheap stock is the right thing to do. But you then look at your debt numbers going forward out into '26 and beyond and would still give you substantial thresholds. Sort of how far in advance -- this is probably a very naïve question, but how far in advance do you sort of scope out the buyback opportunity and sort of do you take it on a rolling basis, I guess, please?

Thank you very much, Harry. Regarding your questions regarding North America, yes, we are, I would say, structurally more optimistic on the long-term -- mid- to long-term prospects of the foundry market in North America. I'm globalizing USMCA. At this stage, we may revisit this vision next year when we know a little bit more about what Mr. Trump will do. But I'm talking North America under the current context. So we are globally positive, in fact, more positive than EU+UK regarding North America. It will not be the fastest-growing area in the world. But we believe that the foundry market will continue to grow slightly in North America going forward. So the idea of reinforcing our presence in North America in Foundry is something that is on the table for us. First, organically, we have invested over the past few years in the new plant in Mexico to capture the growth in the Mexican market. And we have also modernized our North -- our U.S. plant in Cleveland to give us the opportunity, if I may, whatever the decisions of Mr. Trump to maintain or not to maintain USMCA to benefit from the growth in North America. And if there would be some bolt-on acquisitions in North America, this is something we will probably look at with a positive mindset. But there is nothing on the table for the time being. Regarding Chinese export, I think it will be a combination of 3 things which will gradually bring down this Chinese net steel exports. The first one, and if you allow me, I will start with the one you didn't mention, is simply market. Chinese steel producers are losing money. They are not particularly more competitive than many other products. They are, by the way, rather less competitive than many other steel producers in the rest of the world. At current level, the Chinese steel industry is [ bidding ]. And so there are limits to what they can do in terms of continuing to export for many of them below their cost. And so simple market behavior will exercise some curb on the Chinese steel exports. At the same time, I think you will have a double phenomena, is that you will see a rise in tariffs all over the world. We already see that. And this would be probably the quicker thing, that we will see more and more -- we believe we will see more and more areas, not only the U.S., of course, but other areas having no other choice but to raise protection barriers versus Chinese or other countries still being pushed by Chinese exports. And even if we don't see very clear signs of that for the time being, we remain convinced that it is not in the long-term interest of the Chinese central government to promote export of steel production. So we also feel that steel production capacity in China will continue to reduce over the years. What is happening today is that the reduction is slower than the reduction in domestic consumption. The domestic consumption, at some point, will not -- will remain relatively important in China, even if it gradually decreases and the reduction in capacity will catch up with reduction in consumption. So I think it's a combination of the 3. Normal market forces, increasing tariff from importing and consuming countries outside of China and some level of self-limitation from the Chinese government, which will progressively, over the coming years, bring down the level of Chinese net steel export. Regarding your third question, Harry, share buyback. Yes, we do not -- we discussed it long in advance, but we don't decide long in advance. The Board, as it should normally do, put regularly on the table the idea of share buyback from discussion. So I'm pretty sure that after the second tranche of share buyback will have been completed sometimes in -- during H1 next year, there will be further discussion around the Board table about indeed the right time to do another one. Because as you rightly said, our balance sheet will enable us to do it, and we will decide based on what circumstances would be when the topic comes on discussion. I'm pretty sure that if the second [ sources ] would be very similar to today, I can only suspect that there will be a positive bias vis-à-vis continuing further. But we'll see if the circumstances are the same or if they are different.

I think the thing to remember, Harry, is that we've got free cash flow. We're quite confident in our free cash flow projection next year. So that's really enough free cash flow to do the buyback and fund the acquisition. And therefore, subject to not going up too high in our leverage ratio, it's really logical that we would think about doing another one after the first tranche.

No, exactly. No, that's really helpful. I just wanted to make myself -- get myself clear rather on the sort of parameters around it. So that's very helpful.

Your next question comes from the line of Tom Elgar from Deutsche Numis.

First question for me on the M&A announced this morning. Can you give us a flavor really for the margin and growth profile expectations here kind of given the robotics angle that you've mentioned? The technical capability you've mentioned this morning, is this opening new content opportunities? Or is this more compounding sort of your leading position in current areas? And then my second question is, what's the view on pricing outlook for next year given the resilient performance you've spoken to this morning this year?

Thank you very much. On the first question, the margin of the company of Piromet are today a bit higher than the Vesuvius Group current margin. So good level of profitability of Piromet despite this being an advanced refractory/robotics business. So a good level of profitability. We believe that it also improves the growth profile because it will position us clearly in a situation where we will be much better positioned than today to benefit from what we see is a strong growth prospect going forward of the Turkish, North African and Middle East market. And a production base in Turkey is an important asset to be ideally positioned to benefit from this growth. We are clearly -- this gives us clearly the possibility beyond the existing manufacturing footprint of Piromet to expand further our manufacturing footprint in Turkey going forward in the coming years, both to benefit from the positive dynamics of the Turkish market and GCC, North African market, but also continuing to progressively shift some of our production capabilities from EU+UK to Turkey. So we expect a positive development in terms of growth being supported by this acquisition of Piromet. On your second question regarding pricing, of course, the pricing situation will be a challenge next year. And we perfectly respect and understand the fact that our customers, these in Steel and Foundry, are themselves in the more difficult economic conditions than what they were a couple of years ago. At the same time, our policy to -- that cost should be a pass-through remains absolutely valid. We believe that this is the way the global industry has to go. So each time we have the possibility because the raw materials or whatever are going down, we will be very happy to support our customers by adapting our pricing economy at the same time for some raw materials like alumina, where the trend is rather upward. Then there, it will be necessary to pass through these prices of increasing raw materials to customers. And we have already started doing that. So there will be some price increases. There is already or are already some price increases especially for those products where the alumina content is important because there is no other way. The refractory industry as a whole, and it's not specific to Vesuvius, has absolutely no other choice than to pass through this cost increase to our steel or nonsteel customers.

And this does conclude our Q&A session for today. I would like to hand back over to management for closing remarks.

Thank you very much to all of you for attending today. We remain, Mark Collis, Rachel Stevens and myself, at your disposal any time if you do have any questions. And I wish you a very nice day. Thank you very much. Goodbye.