Vesuvius plc ($VSVS)

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. My name is Patrick Andre. I'm the CEO of Vesuvius. And I'm joined this morning in the call by Mark Collis, our Chief Financial Officer. So today, I will update you about our trading performance over the first 4 months of this year. Most important message is that steel markets are confirming their improvement and their positive momentum in the world outside of China, Russia, Iran and Ukraine with a growth of 2.5% over last year during the first quarter, accelerating to 2.9% at the end of April. The foundry market as far as they are concerned, remain more or less stable as compared with last year with a positive situation in India and China both markets remaining relatively soft in the rest of the world with no signs for the time being of a significant improvement. In this commercial background, we maintain successfully our priority on pricing discipline with positive pricing developments over the first 2 months of the year, both for the steel and for the Foundry division, more than offsetting the evolution of our cost base. Our volumes were positively oriented in the Foundry division. In the Steel division, however, beginning of the year, our volumes were slightly lower than last year, mostly due to 2 reasons. One is the fact that some important customers where we had 100% market share in North America closed around mid last year. So the comparison over one is, of course, slightly negative. And the second reason is that we had operational issues, internal operational issues in some of our operations, mostly in North America to a lesser extent in India, but mostly in North America beginning of this year. These internal operational issues have been corrected, understood, corrected and will not impact the rest of the year. Our cost reduction program is successfully proceeding as planned. We still expect to deliver at least of recurring net cash savings in 2026 and our objective of a cumulative GBP 55 million of net cash savings by 2028, remain completely on track and will probably be slightly exceeded. The integration of the Morgan [indiscernible] division, which we acquired end of last year, is proceeding very smoothly and successfully. We have started to generate significant synergies as planned. And we expect in from today not only to achieve fully the synergies which we expected to deliver at the time of acquisition, but probably to slightly exceed those synergies. We had a good work on cash management and a good focus on cash management. Our leverage remains under control, as we speak, stable as compared with the end of last year, but considering the good work ongoing, we are confident -- we remain confident that the leverage will progressively decline during the second half of the year to an overall reduction this year as compared with last year. Our revenue up to date is only slightly ahead of last year on a constant currency basis due to the operational issues that I mentioned earlier. However, and even if we remain mindful of the Middle East conflict impact, and despite the operational issues, which I mentioned, considering the positive trends, the confirmed positive trend in our market and in particular in steel, our full year expectation remains unchanged as compared with our previous guidance. I now propose to open the floor for questions. So please, if you could proceed.

[Operator Instructions] Your first question comes from the line of Stephan Klepp from BNP Paribas.

Can we talk about your guidance again and about the issues that you had? I mean we talked about it this morning already, but can you talk about what really went wrong in terms of your internal value chain and the production. And will that not eat into the guidance? Or can you make up for the loss of production? Or is it basically eating into your buffer that you had with the guidance anyhow?

So our internal operational issues in North America were mostly related to quality issues, faulty raw materials, which was not detected early enough and impacted the production. Fortunately, our quality will operate very well. So no customer was impacted, but the time to correct this faulty raw material issue to source other raw material and to restart production correctly. We lost a significant percentage of the capacity for this particular product line. This is an important one for us in North America for several months beginning of this year. So this resulted in a temporary but not recoverable loss of production capacity for some months which prevented us from delivering all of the demand which was addressed to us. Some of our customers could postpone the delivery and this will be recovered in the coming weeks and months. Some other customers because they are running full speed have to find alternative the temporary loss of market share will be recovered, but some sales will not be recovered, but it's a one-off impact. I hope it answers your question. This, of course, had a negative one-off trading profit impact on our results. Despite this, we maintain our full year guidance. We simply means that we would have been, I would say, even more comfortable maintaining our guidance if this operational issues would not have happened.

Okay. Understood. So in other words, there's a little bit -- you had an H2 buyers before, now the H2 buyers for execution is a little bit stronger because of these issues, right?

Yes. And also because of the confirmed positive trends in our market. You remember when we discussed a few weeks ago, a few months ago, that we were not counting on the European improvement to happen. We was continuing to happen rather towards the end of this year. We are already seeing some positive trends in the European market, and it is now confirmed that the new European quota system will be in place as from the first of July which is, I would say, on the positive side of our previous assessment in terms of timing range. So we believe the situation in Europe is improving probably faster than what we had in mind some time ago.

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

Just a question on foundry and it's being flat through the period and slightly down in Europe and North America. If we could -- if you just go through the geographies in a little more detail because general industrial sort of seems to be a little bit better, reflecting PMIs in general country from peers, broad peers through this reporting season. So I'm just slightly surprised to see Europe down unless that's -- I'm guessing that has to be down to auto primarily. So is it possible to sort of give an outline as to where foundry is maybe ex auto, and it does just mean sort of auto headwinds?

Thank you. It's a very good question to understand what happened. So when we look on a regional basis, you have 2 regions, which are going quite well. which are India and China. And in fact, the reason why they are doing quite well is because these 2 regions not only have remained -- retail a good domestic market, but in the case of foundry consumables are foundry products, not for the consumer, foundry products, castings are exporting more and more to the rest of the world. And what we see in the rest of the world so far is that even if some -- in some regions, some manufacturing activity is getting better. We see this manufacturing activity being more and more assembly with the components, including castings coming more and more -- being more and more imported. When you look at some of the automotive Chinese automotive transplant, for example, there are more assembly plants than full automotive plants, importing a significant part of their components, including castings from overseas. So you have, at the same time, a kind of an apparent manufacturing improvement in some regions. But when you look at our level of what is important for us, which is not , for example the final automotive production, but the casting products used in the automotive, we see imports from India and China, gathering momentum. What is happening in this background is that we now see and it's typical case in typically the case in North America, some protection measures being implemented, not only vis-a-vis automotive, for example, but vis-a-vis components used to produce and to manufacture in automotive with companies -- with countries requiring a higher and higher level of value-added being realized in the country for the automotive or any other goods being considered as being really manufactured in the country. Mexico as in the framework of their discussion with the U.S., Mexico is now also introducing tariffs vis-a-vis some parts used in automotive and so this is the reason why in North America, in particular, we have a reasonable hope that there should be some improvement in the North American market for foundry going forward because these type of measures going one level further are being progressively implemented Europe, for the time being, is not doing anything. So we have some first level production measures, but we don't have yet protection measures for the components being used in manufacturing activity. What is interesting is that the base is starting to shift in Europe with the new Industrial Act having been -- the draft, the proposal of a new industrial [indiscernible] starting to tackle these issues a little bit following the North American playbook. And there is a probability that over the coming years, but it will be slow in Europe as usual. Europe will start to protect also the Tier 2, Tier 3 supplier to manufacturing activity. And that this could lead to an improvement in the foundry market in Europe. But for the time being, Europe remains completely open to the import of casting. The same is okay, is the same for South America. So I don't expect short term, meaning the next year, significant improvement in Europe and South America. North America could be on an improving trend for foundry going forward, thanks to the measures currently being introduced. So for the long answer, but I think it was a very good and important question, which we follow closely to assess the foundry market in the different regions going forward.

And then just one, possibly for Mark. Just thinking about the profit bridge for the current year, particularly with those operational issues in North America. I mean, if I remember correctly, sort of the FX headwind you anticipated was sort of 4 or 5 in cost savings, 10, but obviously sort of performance-related pay sort of taken quite a lot of that away you've gotten Morgan contribution. So is there any sort of major change in any of those sort of particular parts, Mark?

No, nothing particularly, you're right, FX was 4 and it's now 5. So that takes consensus down from GBP 170 million to GBP 169 million. We think the supply chain issues will have cost us about GBP 4 million of TP in the first half. But what we're seeing obviously is a better market backdrop generally. So we think we'd recover that 4 in the full year, either through price or volume. So hence, we're comfortable to maintain guidance at that level. So I guess the challenge for us there will be this is obviously driving the first half [indiscernible] -- because you've obviously got the supply chain issues, but you've also got the need to reinstate the variable compensation, which was, if you remember, GBP 9 million for the full year, of which will end up in GBP 4.5 million in the first half. So it's going to -- it's adding to the H1, H2 weighting.

So maybe referring back to Stephan's point, just it would be fascinating to know which obviously won't give us what level of contingency you have in there. But I doubt you'll provide us with that, unfortunately.

Correct.

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

Firstly, can we just dig a little bit more into the North American steel market. Domestic production data, we're seeing looks good, weekly production kind of in that mid-single digit, high single-digit range from AIS with the customer closures you talked about, can you just help us think about how should we be bridging this underlying kind of domestic production picture to your performance, I guess, to dig into that market share dynamics question. Is there anything we need to be thinking about before kind of extracting that performance kind of out further out once you've annualized the customer closes? And that's the first question.

So the North American steel production is clearly now increasing. You remember last year, it was more or less a wash with an improvement in the U.S. being more or less compensated by a decline in Mexico and Canada. So it was kind of a less right pocket game. Now it's changing. Overall, the North American steel production Mexico plus U.S. plus Canada consolidated, is increasing 3.5% over last year as compared with over the first 4 months of the year. So we have a positive trend, and we expect this positive form clearly positive and to be maintained. So globally, the market is growing now in North America, and we expect the outcome of the ongoing discussion for renegotiation of the to result in even more globally protected North American market with probably even Mexico being included in [indiscernible] North America, came call it like that. So we see a positive trend starting and we are quite confident that it will be confirmed going forward for seed production. Now how to relate that to ourselves? it's a complex relationship because we don't have the same market share at all customers. I mentioned earlier that around end of H1 last year, 3 important plants, important for us plants in the U.S. closed where we had 100% market share, the steel which was being produced in those plants is now being produced by other plants in North America, where our market share was lower than 100%. So of course, if the steel is being produced in the plant where we are now 60% market share, whereas it was -- it used to be produced in a plant where we had 100% market share this mechanically results in a consolidated loss of market share for [indiscernible] it's not that we lost market share at a given customer against somebody else simply a customer mix issue, which on a global basis, results in apparent loss of market share. This is by definition of one-off phenomena because this -- for example, the H2 comparison will be much less unfavorable because those plants were closed in H2 last year. So on a comparison basis, the negative impact is a one-off and will disappear over time. I don't know if I'm clear if it answers your question.

No, no, that's clear. Just a second question from me just on mix. Just how does that start the year particularly in steel? Have you seen this move in places like North America if that production picture is picking up slightly.

In terms of product mix, you mean?

Yes. I mean like control line margin mix yourselves as well, those dynamics.

No. We have some -- remember, some trading down of product last year when the markets were difficult. We don't see that anymore now. I would even say that in Europe, where the trading down impact was the most important last year. we are doing quite well in flow control in Europe. And so what we were expecting is happening. So now that customers are ramping up in Europe in preparation for the new quota system, which will be introduced on the first of July. Of course, maintaining good operating efficiency running as close as possible to their maximum capacity becomes more and more important. And as a consequence, the quality of the flow control products that they are using, remains more and more important for them in terms of value in news. So we have the performance of our flow control operations in Europe beginning of the year is better than expected. I would say, we had good expectations, but it's even better than expected. And this is completely in line with improvements of the overall European steel market, which we had planned and which is now happening and which will accelerate in H2.

Your next question comes from the line of Jamie Murray from Bank of America.

If I could just ask follow-on question about the European steel tariffs, which we expect to be effective in July. Have you guys started seeing any change in customer behavior ahead of the implementation? And how do you see volumes evolving after implementation in terms of speed and scale?

We have seen some several customers preparing for a ramp-up of production in Europe in the months to come. You may have seen the news that [indiscernible] is restarting some operations in Poland, in Spain, in France in force. So and you have other examples of customers clearly anticipating the improvements of demand addressed to European-based steel producers in H2 by ramping up already now starting to ramp or prepare for the reopening of some of the capacity in Europe. So this is clearly apparent. And we have ourselves increasing our own capacity in Europe by staffing, increasing the staffing of some of our operations so that we can run more shifts in some of our plants and to make us able to meet what we believe will be an improvement in demand in the coming months.

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

Thank you very much. I would like to thank you all for attending our call this morning. We remain, as usual, with Mark and Rachel at your disposal, should you have any questions and we wish you all a very good day. Goodbye.