Vesuvius : Half Year 2022 Results

Vesuvius Plc Half Year 2022 Results | LSEG | July 28, 2022

Patrick Andre:

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.

Patrick Andre:

We delivered a strong set of results in the first half of 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 profits increased 69% and our return on sales increased by 350 basis point 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 hit 1.3 midyear versus 1.4 and of 2021. Based on these positive results, the board felt confident to propose an interim dividend of 6.5 pence per share an increase of 5% versus H1, 2021.

Patrick Andre:

The reasons why we could achieve this 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 a 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.

Patrick Andre:

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 prevent however, the deterioration of foundry volumes of around 3%, due to the very difficult persistent situation of the automotive markets in the first half of the year. Thanks to this simultaneous successful mitigation of inflation and market share gains, or return on sales reach 12 and half percent 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.

Patrick Andre:

Looking forward, all our key strategic initiatives to support future growth and further profitability improvement are now fully on track. On the M and A front, the integration of Universal is proceeding better than planned, and expected synergies will benefit both the Advanced Refractories and the foundry business unit in 2022 and 2023. We have an appetite for these mid-sizebolt-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.

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Patrick Andre:

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 gate 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 £5.8 million will be operational beginning of 2024. This flow control capacity expansions will support our market share gains ambitions in the key growth regions of EEMEA, India and Southeast Asia. In parallel, we observe a growing interest of our steel customers worldwide for our robotic solutions, which provides 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.

Patrick Andre:

You will find on this slide, two 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 make-up area. This is the area where steel ladles are being prepared and where slide gate 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 hot zone.

Patrick Andre:

At the same time, our robots improve the consistency and productivity of the operations through their ability to perform fast and repeatable operations. Our robots also help to increase the refractory's 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 gunning installation, which coupled with our propriety software interface, enables a fully automated repair gunning of basic oxygen furnaces. This high speed automated gunning equipments can deliver material at up to 200 kilos per minutes, halving the repair time of basic oxygen furnaces with a strong, positive productivity impact on the steel plants, where BOFs are the bottleneck of capacity.

Patrick Andre:

On the sustainability front, based on the very positive result 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 ourself a new intermediary target of reducing our carbon footprint by 50% by 2035. We've built a detailed industrial roadmap 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.

Patrick Andre:

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 ladles and to simultaneously increase its steel production output by 1.75%, reduce its refractory consumption and last but not least, decrease its CO2 emissions by 6,500 tons every year.

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Patrick Andre:

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 cells. 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%. It decreased even further 6.5% in China.

Patrick Andre:

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 regained market share during the first half, with its sales 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 £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, point to reach 13.7%.

Patrick Andre:

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 remained, 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 a 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 £25.7 million.

Patrick Andre:

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.

Guy Young:

Thanks, Patrick. Good morning, everyone. I'd like to start by looking at our sales and trading profit bridges. 2022 H1 reported revenue of £1 billion is some 26% higher than last year's 808 million. Adding

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back the 13.7 million impact of foreign exchange gives you a prior period underlying revenue of 821.7 million on which we've reported an increase of 175.8 million or 21% to reach this year's H1 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.

Guy Young:

So turning to our trading profit, our underlying trading profits after eliminating the effects of foreign exchange and the Universal acquisition increased by 69% from 73.6 million to 124. 5 million. The key constituents of this increase were firstly, 6.1 million from volume and market share gains, some 10.3 million, which is a recovery of the lag to our profits in H1 '21. And lastly, a net price impact of 34.5 million. As mentioned previously, this means that the price lag we experienced last year has now been fully eliminated.

Guy Young:

Finally, adding back the trading profit of Universal of 2.9 million to our underlying profit gives our reported trading profit of 127.4 million. If we take a look at the full income statement, our trading profit of 127.4 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 draw downs and interest payable on retirement benefit obligations. The effective tax rate was 27.5% in line with guidance and non-controlling 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.

Guy Young:

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 93 million and cash capital expenditure of 37 million, which after adding back depreciation and taking into account other working capital movements resulted in adjusted operating cash flow of 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'd been building inventory levels in Q4 of last year in reaction to the supply chain issues we were facing and to ensure we minimized any customer disruptions.

Guy Young:

We also stated that this trend would continue into 2022 as we had no evidence of a significant improvement in the global supply chain issues at that stage. As a result, our trade working capital to sales has increased to 22.8% as at June, 2022. Driven as you can see by the graphs on the right, predominantly inventory. The inventory build has been in both raw materials and finished goods. Given 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 the half year was 327.7 million, an increase of just over 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 1.4 times on a post IFRS 16 basis at December to 1.3 times. Well within our comfort zone of 1.25 to

1.75 times. We feel we remain in a strong position from a balance sheet perspective and expect to

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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.

Patrick Andre:

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 Davis-Jones:

Okay, fine. Thank you very much. Mark Davis-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 too? Are you seeing any easing of that situation either in terms of cost or reliability of delivery? We are hearing some tentative signs that things are looking a little bit better. What are you seeing?

Patrick Andre:

It's a very good point. As you know, we have increased voluntarily our trading working capital intensity, means the ratio of trading working capital to sales, by a couple of percentage point from 20.9% to 22.8%. Because we wanted to protect our customers against those risk of supply chain description.

Patrick Andre:

We are starting to see, you're right, the beginning of the 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 this is an important point, somewhere between now and mid-year next year. We don't believe that from one month to the next, with a magic wand, 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 middle of 2023.

Patrick Andre:

When this happens, it will enable us obviously to get rid of this buffer that we built over the past few months. And we believe that progressively between now and I would say the second half of 2023, we'll be able to bring back down our working capital intensity a couple of percentage points on or around between 20% and 21%. Which we believe we are now able to sustain in normal supply chain conditions.

Mark Davis-Jones:

Great. Thank you. Can I ask a slightly unfair one? I know it's difficult to see what happens in the next few months, let alone further ahead of that. But obviously there's a very sharp differential implied in guidance between the first half and second half profit. There are some exceptional positive factors in the first half, some exceptional negative factors in the second half as you unwind that inventory. Can you give us a bit of help in 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.

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