Vesuvius plc (VSVS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Vesuvius plc 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. My name is Patrick Andre. I'm the Chief Executive Officer of Vesuvius. I'm joined this morning by Mark Collis, our Chief Financial Officer. Today, we will talk about our trading performance from the 1st of July to the 31st of October this year and our outlook going forward. The main message is that our key end markets of Steel and Foundry remain stable at a low level for the past few months. But that for the first time in quite a long time, we start having some clear sign of better midterm prospects for this market. If I start with the Steel market, where the steel production outside of China increased only 0.5% over -- since the beginning of the year. So the level remained quite subdued outside of India, of course, which keeps growing at a good pace. Thus, this 0.5% would have been 3x higher at 1.7%. So if the Chinese net steel exports have remained stable. In fact, they increased close to 10%. That's the reason why the steel production outside of China grew only 0.5%. But it shows that the underlying steel consumption in the world outside of China is quite healthy as we speak. It's been hidden for the time being by the -- it has been hidden by the increase in Chinese net steel export. But when the Chinese net steel export start stabilizing or declining, the positive impact on steel production outside of China could be quite significant. And it's quite important for Vesuvius considering that we are doing more than 90% of our sales outside of China. And we have now clear signs that on a midterm perspective, not short-term and not in the next 6 months or 12 months, but midterm, the prospects of this net steel export from China stabilizing or even declining are getting much better. First, because you have a very large number of countries having taken measures to prevent these imports of Chinese steel. You have more than 60 countries now in the world having taken some kind of restriction measures against steel export. And also the Chinese government itself is taking more and more measures to restrict and limit steel production in China. One of the more positive measures having been announced very recently is the one by the European Union, which should have a very positive impact midterm on steel production in the EU, probably an increase of more than 10 million tons, which could bring the utilization rate in Europe from the current low of 65% to close to 85%. So short term, stable at a low level for the steel market. But clearly, some light now at the end of the tunnel, the horizon is probably around 12 months from now. The Foundry end markets have also stabilized at a low level. But we also believe that going forward, at some point, the decline of interest rates should have a positive impact sometime in 2026 on the end consumption of the industry consuming the castings of [indiscernible]. So in this short-term, still difficult environment, during the H1 so far, the Vesuvius Group was mostly in line in terms of revenue with our expectation. And this, thanks to continuing market share gains in both the Steel division and the Foundry division. At the same time, and this is quite important, considering what we discussed during the first half, we were quite successful in passing price increases in line with our objectives, which enables us in the second half of the year to compensate -- fully compensate, even a little bit more than compensate our cost increasing, including salary inflation. Our net price effect for the full year will still be negative, but less than it was in the first half, meaning that we are starting to catch up, and we will continue to catch up in 2026. On the cost side, we continue to deliver fully on our cost savings plan. We will deliver this year GBP 18 million of recurring cash cost savings, so broadly in line with what we did during the first half. It was GBP 10 million in the first half, GBP 18 million for the full year. And we confirm that our objective to exceed GBP 55 million of recurring cash cost savings, cumulative for our program by 2028. We are clearly on track now to not only reach but probably exceed this objective. Only one negative we had, during the second half, temporary manufacturing issues in our Foundry division, which will cost us [ GBP 230 million ] in [indiscernible] profit in H2. These are temporary in nature linked to the restructuring and some ramp-up difficulties in some of the plants which have been receiving the production of proposed plants which we have closed. We are in good way to solve these issues. We believe that these issues will be solved by the end of the year. So there should be no impact on 2026. So despite the short-term difficult environment, thanks to our efforts in terms of both cost and pricing, we anticipate trading profit for the full year to be broadly in line with our previous guidance. I will now open the floor for questions.

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

I think just first on price costs improved in the second half. And also just wanted to [ workout ] mix as well [indiscernible] some customer maybe. [indiscernible] But just want to know about mix reducing down the sort of also improving second half as well. And then the second question is on India. It sounds like good growth still there. One of your competitors is talking about taking market share. I was just wondering what you're seeing there in terms of market share. Is that a mix? Is that sort of [indiscernible] or what do you think sort of happened there?

Thank you, Lush. In terms of price, your first question, I think that we have been successfully passing price increases, normal price increases to start catching up with the negative effect of the first half. And this has been true everywhere in the world, including in India. The only place in the world where it's more difficult is remain China. But China, if I may, we stopped the bidding. We have not started catching up yet, but we intend to do that in '26. But everywhere else in the world, including in India, we have been passing price increases in various degrees, but it has been working quite positively with sometimes difficult discussions, but I think our customers understand that at some point, costs have to be covered. Regarding the mix impact, we have not seen any further deterioration in -- since the beginning of the second half. Even some customers are now starting to ask some questions about did they make the right decision or not. We remain of the firm opinion that especially when production will start to ramp up in the world outside of China and when customers will need and will be willing to operate closer to capacity with a higher utilization rate that this negative mix impact of the first half will gradually reverse. It will not happen overnight in 2 weeks. But over the next 6 to 12 months in the course of '26, I'm convinced that this mix effect will gradually reverse and we have the -- in the tough times -- regarding India, it's clear that I would say, not all players have been as disciplined as we have in terms of pricing. I think that each company has its own strategy. But as far as we are concerned, we believe that moderate and reasonable to cover our cost price increases are necessary. It's not our strategy to gain market share on price. And so we leave that to others. And we will continue to manage our pricing proactively everywhere, including in India because we believe it is the right thing to do.

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

I was just wondering if you guys have modeled what an 85% capacity utilization in European steel would actually mean for your business and the ability that you -- your ability to ramp up to what will potentially be some pretty good growth in Europe. We've spent a lot of time reducing our capacity in Europe. Are you guys ready for a ramp-up. Second question is on year-end leverage. I think that year-end leverage is below 2, but if you can confirm that. And if you could just give us some -- help in understanding what next year's leverage looks like given MMS comes in that it's GBP 20 million and some additional equity, but if you could just help us model that. And then last question is on market share in Advanced Refractories and [indiscernible]. It feels like most regions are seeing market share gain. If you can just give us a bit more detail on what you're seeing there, that would be great.

So in terms of impact, of course, it's difficult to model, but order of magnitude, an increase of 10 million to 15 million tons of production in Europe would simply in terms of direct impact, increase by a bit over GBP 5 million. At the same time, this is the direct impact because when producers produce closer to their full capacity at high utilization rate, the quality, performance of steel products in particular -- even more resistance than usual. So people -- customers want to minimize the incident to -- so they give priority even more than usual to the quality and performance of the product. So this indirect impact would probably amplify the positive direct impact of this. GBP 5 million-ish is probably a number estimation of the positive impact of a higher level of production in the EU would have on our selling profit. On the second question, I will let Mark answer. I will get back to the third one on market share.

Net leverage this year. So ex MMS, it's in the low 1.9s. And then with MMS on a pro forma basis, it's just slightly above 1.92, 1.93 with a pro forma benefit of MMS. And if you did it on a raw basis, you're broadly at 3 with MMS, if you don't take into account the trading earnings that you get because the acquisition obviously will take place if we have fingers crossed tomorrow. And so what that basically assumes is a further reduction in working capital where we are from today, we're quite confident on and the level of profit, obviously, that we've effectively guided to. So I think we're fairly comfortable with a raw leverage of 2 and a pro forma leverage of just a tad over 1.9. For next year, we're obviously not giving guidance. But I think what we can say is that we would expect to make further progress on working capital. The CapEx is now solidly down at the kind of GBP 70 million mark, so somewhere between GBP 65 million and GBP 75 million of CapEx. We're comfortable with that now. We're definitely seeing the end of the CapEx project. And the profit, I think, broadly in line with consensus. If you take all of those things next year, I'd be thinking about 1.5, 1.6 would be my gut feel today.

And on your last question, Andy, regarding the market share. Generally speaking, the Steel division as a whole have been gaining market share in both regions. Advanced Refractories has been regaining some market share. You remember over the past 2, 3 years, we have lost some market share in both North America and Europe. We are now regaining some of this market share. But our objective in Advanced Refractories is not that much to gain a lot of market share. We are regaining a bit as factual, but it's mostly what we had lost over the past 2, 3 years. And our objective in Advanced Refractories is profitability improvement, not that much gaining market share. We have no intention of growing excessively at the expense of profitability in Advanced Refractories. In Flow Control, we are continuing to grow slowly but surely on average everywhere to be also the case this year with some differences between regions. We will probably lose a little bit market share in North America this year, mostly because of the closure of 3 plants of Cleveland-Cliffs where we had close to 100% market share, but there is a mechanical product mix impact there. But on average worldwide, we will continue to gain market share. That's the case in Asia. That's the case in Europe, and in South America. So we have some years which are more strong than others. But on average, we continue to gain market share in Flow Control because there it's clearly one of our objectives.