Vesuvius plc (VSVS) Earnings Call Transcript & Summary

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

Good morning, everyone. So my name is Patrick Andre. I am the Chief Executive Officer of Vesuvius. And with me this morning is Mark Collis, our Chief Financial Officer. So we'll update you about our trading performance in Q1 this year. The key message is that we've performed well with both revenue and trading profit in line with our expectations. This was in the context of challenging end markets with, on the steel side, global steel production remaining at a fairly low level, declining by 0.8% as compared with last year in the world, excluding China, Iran, Russia and Ukraine. And in Foundry end markets, even more difficult markets, as you know, because Foundry end markets we assessed that they were down on or around 8% as compared with last year. This being said, as compared with Q1 last year, but remaining more or less flat as compared with the level of Q4 2024. The overall revenue top line was consistent with the one of the same period last year, thanks to market share gains, positive market share gains in all 3 business units and this -- thanks to our technological differentiation. We had a very slight price decline of 0.5%. So decline, but a very moderate one. Our trading profit, however, was lower than last year. This was expected, but it was lower than last year due to increase in our cost of labor and cost of raw materials, which in the first quarter, beginning of the year, we could not offset with price increases. However, we are now planning to pass price increases for the rest of the year to compensate at least part of these cost increases. We continue to make very good progress in our structural cost reduction program. And we are now very confident that we are on track to deliver at least GBP 45 million cost savings by 2028. And we continue to maintain, on top of this, a very tight control on all discretionary spend. The acquisition of PiroMet, which was completed earlier this year is giving satisfaction, and we are making good progress with the integration of PiroMet. Regarding the remaining of the year, we now anticipate our full year results to be slightly lower than our previous guidance on a constant currency basis with a level of uncertainty, which remains high, of course, in the current context. This revision slightly down of our forecast is linked to a more cautious approach of the second half of the year and as compared with what we were forecasting a couple of months ago. Looking ahead, we remain confident in the strength of our technologically differentiated business model, and we remain positive for the future years. Thank you very much for your attention, and I now propose to open the floor for questions.

[Operator Instructions] We will take our first question from the line of Lushanthan Mahendrarajah from JPMorgan.

The first is on pricing, please, just in terms of, I guess, a bit more color on sort of pricing power and sort of why you couldn't offset costs. I guess I appreciate markets are tough, but just to get some color by the 3 main businesses. And then I guess as a follow-up in terms of putting those price increases through now, I mean, how confident are you that you can do that, I guess, without losing market share going forward just given the backdrop is tough, but also, I guess, just speaking about tariffs, et cetera, as well. Just I guess, how confident are you sort of be able to offset all that just given the sort of commentary at the start of the year. So that would be my first question, please. And then the second is just on the cost savings. At least GBP 45 million, it sounds like you're a bit more confident than you were 2 months ago. I guess how does that translate to sort of this year and the sort of GBP 12 billion to GBP 14 million that you sort of guided for at the start of the year, I guess? Is there upside risk to that?

Thank you very much. On your first question, clearly, we see a more difficult pricing environment in all our 3 business units, both in steel and in foundry. And this is linked to the fact that, first, many of our customers and we understand that, that are in a difficult situation in most places in the world and especially in Europe. So they are requesting for price decrease in the current environment. And at the same time, we have a very aggressive competition everywhere, which creates an environment where passing price increases has been over the past few months, more difficult than usual. This being said, and even if we support our customers, we have to pass price increases. I believe that there is a global realization that those price increases are absolutely necessary to cover our cost increases. This is the right decision long term, including for our customers. And so we are now passing price increases in most parts of the world. And yes, I am confident even if the environment is sometimes a psychologically difficult one for understandable reasons. I am confident that we will be able to pass those price increases to compensate this year, probably only partially the cost increase, but we believe that our business model to fully compensate cost increases with price increases remains absolutely and completely valid. The speed at which we will pass those price increases will probably be a little bit lower than this year than usual, but the price increases will be passed. And by the way, are in the process of being passed as we speak because we are increasing prices as we speak. On the second point, cost savings, we are, I would say, a bit ahead of our expectations. We are doing well, even very well in terms of cost decrease with a very good job being done by our teams all over the world to show courage and determination in cutting costs. And it's not only short-term discretionary spend, it's really long-term structural cost improvement. I'm very happy with the job that our teams are doing worldwide. This is why we are now expecting to deliver at least GBP 45 million recurring cash cost savings by 2028. We will update the market regarding the year '25 -- in-year '25 savings at midyear, but we are working hard to do a bit better than what we previously guided on.

And sorry, can I just have a follow-up on that on the first point on pricing. So all your competitors now increasing pricing as well? Just to clarify on that point.

We see globally a realization that prices have to increase. Is it all of our competitors? We will see in the coming months. But I would say we see at least in the way they talk about it, including in open communication. We see a gradual realization that when your cost increases, when your cost increase, you have to increase your prices. So I'm -- I believe that, generally speaking, the industry is realizing that price increases are absolutely necessary, yes.

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

Yes. I'm a little bit confused. So the last time we sat together was on the 6th of March when you updated on the full year. Q1 was nearly done. And we didn't talk about any price inflation and cost pressure at that point in time. And that prices are down, we didn't mention as well. So what has changed? I mean at that point in time, in March, the quarter was nearly over. Now you're telling us everything is in line with regard to your expectations. You're flagging that topic for the first time. So why is, when everything is in line with expectations, that you're taking down your guidance for the full year? Can you just tell you all these things up, please, for me?

Okay, Stephan. So it's quite simple. Regarding prices, the difficulty -- the more important difficulty to pass price increases was completely integrated in our guidance. So this is nothing new. It's a fact to explain the fact that our Q1 trading profit is lower than last year. But this, as we mentioned in our communication, is in line with our expectations. So there is nothing new there as compared with what we were expecting. What is different from our discussions of 2 months ago is our vision of the level of economic activity in H2. Nothing to do with pricing. There is nothing different in pricing today than what we were forecasting 2 months ago. What is different is that we see we are more cautious on the magnitude of improvement of market in H2 today than what we were 2 months ago. That's -- I hope I'm clear, Stephan, but it's really what has changed is market is not absolutely not the situation in pricing. As you are very right to say, we already on the 6th of March and already end of last year, we could see that the pricing environment was more difficult than usual. So this was integrated in our guidance, including, by the way, the fact that we will increase prices at some point and recover and compensate, but slower than usual. And so this has not changed. What has changed is our vision of the level of economic activity worldwide in the manufacturing sector, in particular, which is our customer sector in H2, where we are more cautious -- clearly more cautious today because we see uncertainty remaining for longer than planned. The only information that people have about the economic environment where they operate is for the next 90 days. As long as this -- as long as we -- people do not have a longer horizon to plan in, they will remain in a wait-and-see attitude with a negative impact on the level of consumption and the level of demand. This is exactly what we are seeing today. And as we are already in mid-May, and we still do not have a clear vision of which economic environment we will operate in -- our customers will operate in the coming months, but they are being even more cautious than what we were planning, forecasting in the coming months. So this is the only difference between today and the previous guidance.

Cautiousness of customers, I get that, and the low visibility, I totally get that as well. Can you talk about your different segments in steel and as well about foundry, what client behavior is looking like at the moment?

So what kind of...

Customer behavior.

Client behavior is looking like. So yes, customer behavior is looking like.

First, everywhere, our customers are adapting their level of production to what they see of their own end demand. And you can see that even in the United States, Cleveland-Cliffs announced a few days ago that they would idle 3 steel plants in the United States, despite the fact that the United States is protected by important barriers for steel. The demand for steel is slowing down because the economy is slowing down. So the steel prices are good in the U.S., but steel production is not extremely good because end demand is weakening. So we see everywhere, and I think it's a good thing, our customers adapting their level of production to the level of steel demand to avoid inventories going up, which I think is a very sound behavior. And you have some regions where our customers are in more difficulties than others. Clearly, the regions which remain the most difficult in terms of situation of our customers is EU plus U.K. where our customers not only are confronted with a relatively weak level of demand, but the situation on the energy sector is not favorable to them and is not helping our customers improve their cost base. So Europe remains today, by far, the most difficult region for our customers. we see more, I would say, more nervous customers in Europe than in the rest of the world.

And foundry still, sorry, if we can touch about foundry, same story with foundry?

Foundry is a bit the same story, but we don't see our customers in foundry. We don't see a degradation of the mood of our customers in foundry. It's more of a stabilization at a relatively low level. The -- we see a degradation of the mood of our customers in steel in Europe. We don't see a degradation of the mood of our customers in foundry. They -- we don't see a recovery yet in foundry, but there is no degradation in foundry. In steel, the level of production remains stable at a low level in Europe, but we can see that some of our customers are becoming probably more pessimistic about their future.

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

Three questions, please. The first is just thinking on the China remittance and what have you and the tax incurred on that. And I was just wondering, in my very moderate accounting, I would have liked that tax through as an exceptional rather than put it through as you're doing. So just wondering about the rationale around that. The second is thinking about the tariff sort of commentary of 2 months ago in the context of your guidance and then how that fits into the current guidance. So does that sort of a tariff analysis of 2 months ago still apply now, and that's sort of factored into what was -- slightly below comment. And lastly, just thinking of the first half, second half split with these variables in there, if you had a sort of idea of how everything might work through in that context would be a great help, please.

Thank you very much, Harry. I will let Mark answer your first question. I will take the second and the third before handing over to Mark. Regarding the tariff, we -- the direct impact of tariff will probably be lower than planned because we have a few millions of impact, but we will compensate -- we are compensating this with price increases in the U.S. So at the end of the day, the net impact on tariff will probably be relatively low, close to 0. What has changed as compared with 2 months ago is the indirect impact of uncertainty on the tariff environment, and we really see the level of activity, and in particular, the level of activity that we are forecasting in the second half lower than what we thought 2 months ago because the uncertainty is remaining longer than planned. And this brings me to your third question. In terms of balance H1, H2, we are more 45-55, if not 47-53. So some improvement. We are still weighted on -- with an improvement in H2. But our improvement in H2 as compared with H1 is more moderate than what we thought a couple of months ago. We believe there is good reason to remain cautious on the magnitude of improvement in H2. We see the improvement coming more in '26 than -- the magnitude of improvement being more in '26 than in '25. Mark, maybe you can take the first question.

Yes. So thanks, Harry. So it's a good question. So a one-off tax cost of GBP 3.4 million is right on the broader line of whether it would be treated as a separately reported item or not. So I suspect I will kind of reconsider that at the first half when we formally produce our results and discuss them with our auditors. I think you're right, though, it's a withholding tax charge. Obviously, every time we do a dividend, you pay withholding tax. But what we're doing here, obviously, is repatriating, first, a significant amount of cash that was surplus in China and then drawing down on a nonrecourse loan in China. And the reason we're doing that is basically to benefit from the differential interest rates between China and the U.K. and Europe. So there is clearly a cost incurred to achieve, and there is clearly a recurring benefit on the lower interest charge. So I think I'll take that into consideration. And if I can push it through the Audit Committee auditors, I'll probably end up putting it in separately reported items.

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

I just have a few questions, please. Firstly, I just wonder if you could talk a little bit about the level of profitability that you're seeing in the 2 divisions thus far this year. And also just maybe focusing on foundry. Obviously, you talked about foundry revenue being flat sequentially Q1 versus Q4. Can we expect profitability in foundry to be flat H1 versus H2 of last year? That was the first question. The second one, just on India. I just wanted you to give a little bit more detail. Obviously, we're hearing about pricing pressures there, sort of price downs coming through in that market. Could you just sort of spin out what you're seeing between your sort of Flow Control business there and also your Refractory business? And then the third and final question was just actually on capital allocation and the share buyback. It looks like we're pretty much through the GBP 50 million in terms of returning that back to shareholders. But obviously, you're a lot more cautious now on the outlook for H2. In terms of sort of future capital returns to shareholders, is that going to get pushed further out? When is the next possible chance of that probably 2026? Those are the questions.

Thank you very much, Jonathan. In terms of profitability by division, the Steel Division clearly remains, as we speak, more profitable than the Foundry Division. The Foundry Division, we are making good progress to redress profitability, but the Steel Division remains more profitable than the Foundry Division, as we speak. And inside the Steel Division, that Flow Control is more profitable than Advanced Refractories. So the usual patterns remains true today. This being said, I think that even in a difficult market environment, we are taking strong action, which I believe will improve the profitability of the Foundry Division progressively over the next 2, 3 years. And we are taking structural actions, which I'm very positive will improve the profitability of the Foundry Division from the low level where they were in H2 last year. Where will we be in Foundry in H1 this year? It's a little bit too early to tell because some of the deep restructuring actions that we are taking will take time to produce an impact. At this stage, I would not give a guidance on the H1 profitability of Foundry because actions take place to -- take time to produce an impact. But I'm quite positive about the fact that progressively over the coming months, the profitability of Foundry will increase. Regarding India. India, we are doing quite well. India is and remains and will be a very, very bright spot for Vesuvius. We are growing fast in India in a very profitable way in both Steel and Foundry. In the Steel Division, both Flow Control and Advanced Refractories are growing fast and profitably. We are taking advantage of the new capacity increases that we had invested in India over the past 3 years. And these capacities are filling fast, especially in Flow Control, where we -- our sales are growing and will grow even more in the coming months and years because we have contracts -- new contracts that are being signed and negotiated. And we are already starting the engineering studies for further expansion in Flow Control in India. So we are very happy with the way things are moving in the country. And Advanced Refractory also is doing extremely well in India, growing fast -- faster than the market in a very profitable way. So our -- it's not only volume, it's also profitability, which is good in India. India is a difficult market because everybody -- that's basically the most important, the fastest-growing market in our sector worldwide. So everybody wants to be there. But we have a very strong team. We have made the right choices in terms of industrial investment with this top-of-the-art investment in top-of-the-art new capacity, the best technology, the best production cost, both in our historical Kolkata plant and in our new Vizag plant. So this gives us a huge momentum on the market. Customers are happy to see us developing. So we are developing fast profitably, I insist on that profitably. And we continue -- we clearly will continue to do so in the coming years. Regarding the share buyback, so our last program just completed.

Yes, 1st of April.

1st of April. And yes, there will be a regular discussion at the Board about what do we do next. And I don't know if it will be this year or next year, but what I can tell you is that it's a regular topic of discussion at the Board level. And that's the share buyback at some point, I'm sure, will be rediscussed at the Board level. So it's -- the last program, which has been completed, even if nothing is decided today, should not be seen as the last one going forward.

And just to give you a bit of color, Jonathan, I mean, we will -- we are seeing our CapEx coming down now in terms of the full year guidance we gave. So it's logical, we would just look at where we stand as we head towards the end of next year, so where we are on leverage, where we are with potential acquisitions, et cetera, et cetera.

[Operator Instructions] And your next question comes from the line of Andrew Douglas from Jefferies.

Most of my questions have been covered. I've just got 2 more, please. Can you give us an update on how you see the Chinese export market for steel? I think when we discussed this in March, you were pretty confident that this was going to be a good thing for you and that the Chinese government and the Chinese steel market wouldn't change their view. Is that still the case? And then secondly, on Advanced Refractories. We've been hoping for some regain of market share from -- in both America and Europe. You talked about market share gains in all business units. So whereabouts are we seeing the Advanced Refractory market share gains, please?

Thank you, Andy. On the first point, we keep exactly the same position as the one we had a few months ago. We believe that it's very positive that the Chinese government is now openly taking a stand in favor of reducing overcapacity of steel in China. And the Chinese government has even now given a goal and objective of reducing capacity by at least 50 million tonnes. So we see -- we remain positive about the impact of that going forward. However, we also keep the same opinion that we expressed, I think, already at the time of our full year results at the beginning of March that it takes time for the Chinese government to get its wheel implemented on the ground, at least 12 or 18 months. So we are positive about the fact that going forward, steel exports from China will decline, which will be a very positive impact for steel production outside of China. But we don't see that happening much in 2025. Maybe we'll have a good surprise, but we are not betting on it. We see that more for '26 or '27 based on past experiences in China. So we don't expect a relief in '25. And by the way, if you look at the Chinese net steel exports since the beginning of the year, they are more or less flat at an elevated level of 10 million-ish per month. We don't really see that declining rapidly in the next few months, so in '25. But as from '26, yes, this should be a boost to the steel market and so to our own sales outside of China, where we realized 90% of our sales. Regarding Advanced Refractory, things are progressing well. We are now clearly regaining market share in Europe. So we are past the inflection point regarding Advanced Refractory in Europe, as we said. And it's progressing nicely in a moderate way because we are not trying to disturb prices too much. That's not the right period to do these kind of things, obviously. But we are naturally regaining a little bit of market share in Europe. And we have very good signs about the evolution of our situation in North America with very positive signals. And I don't believe that we will regain market share there in the first half, but we have ongoing discussion, negotiations and some of them already concluded, which makes me very confident then the inflection point in terms of market share in North America will be this year, sometime in the second half. So quite positive news about not only stabilization, but a regain of market share, the start of a regain of market share of Advanced Refractory in both Europe and North America, which were the 2 regions where our market share had been eroding over the past years.

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

Me again, sorry for that. It's a question for Mark. Unfortunately, Patrick mentioned too many times that India is growing very profitably. Can you tell us about your forecast about the minority position in your P&L for 2025? How should that develop?

Well, I know, I think, Patrick repeated it because it's true. And what I can tell you is that there will be a ticking up of the minority interest charge based on the results that I'm seeing. But I think it's not -- we've got other things in that minority interest charge. So if I had to give you a ballpark number, I would at least think it's GBP 0.5 million of additional minority interest charge today.

There are no further questions on the conference line. I want to hand over to the management for closing remarks.

Thank you very much to all of you for your attention this morning. We remain, as usual, at your disposal for any questions together with Rachel and Mark. I wish you all a very good day. Goodbye.