Vesuvius PLC

LSE:VSVS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, and welcome to the Vesuvius 2019 Q1 Trading Update Call being held in conjunction with an AGM. I will now hand over the call to Patrick André, Chief Executive of Vesuvius plc.

[Patrick Georges Felix André, CEO & Director]

Good morning, everybody. So I propose to first give you the main highlights of our trading update and then answer your questions. Regarding the market, the trend in overall market conditions remain unchanged, since we announced our 2018 full year results at the end of February, which means that the slowdown in both the steel and foundry markets which we mentioned at that time is continuing as we speak. And as a result, our sales in Q1 remain in line with our sales in Q1 last year, but this improved the price components. The steel market has been declining in the world outside China by 0.8%, and if you exclude also the U.S., which remain a bright spot in the world outside China, the decline in the steel market is even bit more pronounced, minus 1.7%. In the foundry market, the market environment continues to exhibit some weakness in the light vehicle-related parts of this foundry market, especially in Europe, China, and India. In this environment, we continue to make good progress with our self-help and restructuring programs. Also, with the acquisition of CCPI, which we announced end of February, and where our synergy expectations are now higher than what we thought a few weeks ago, at the time of the acquisition. As a result of all these elements, we anticipate our trading profit for the full year to be in line with market expectations. Our cash generation in the period remains strong, our net debt has slightly increased since December, but largely due to first, the CCPI acquisition costs of GBP 33.1 million, and also the impact of IFRS 16, which we applied for the first time, and which has resulted in increase in our net debt of GBP 25.6 million corresponding to the lease obligations, which according to the IFRS 16 are now included in our net debt for the first time. So I propose now to go to the Q&A, and we will be happy, with Guy with me, to answer any questions you may have.

[Operator]

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

[Andrew Douglas, Equity Analyst]

Just 2 for me, please. Can you just give us a bit of an update on CCPI, first acquisition you've made in quite a while. It looks like you're raising your synergies, or synergy targets, that number's clear today, but can you just give us a feel for kind of how you have or what you found since you've owned CCPI, a little bit more on any numbers you can give us, or when you might be able to give us those numbers? And secondly, with respect to cost savings, you talked about the February results that may become the next wave, might be an opportunity for you guys, could you just give us an update on where you are with those too, please?

[Patrick Georges Felix André, CEO & Director]

Regarding CCPI, at the time of the acquisition at the end of February, if you remember, we made the acquisition for 8x EBITDA before synergies and we announced that post synergies, we were hopeful that this acquisition ratio would go below 6. We not only confirm that, but we are now more than a [ little before ] that the ratio will be not only below 6 but more than -- significantly below 6 and probably below 5. These are cost synergies and in those cost synergies, the SG&A cost synergies are in line with what we expected and the manufacturing synergies are, however, significantly higher than what we expected, now that we have the opportunity to dig into the details of the operating assets that we are now the owner of, and this translates into the fact that we have announced a few weeks ago, meaning very few weeks after the acquisition, a decision to close the Blanchester plant, which is one of the 2 plants of CCPI. The decision to close that plant was announced a few weeks ago, and the production of that plant will be conferred integrated into one of our older existing plants in the U.S. [ in Wakna ]. And this move will enable us to generate significantly more manufacturing synergies than what we were realizing [indiscernible] on being too cautious where at the time of acquisition, but it is good to be on the cautious side. So in that respect, we are expecting probably double the amount of synergies than what we expected at the time of the acquisition. All [ coming from these ] manufacturing synergies. On your second question, we are clearly continuing to work, as we announced end of February, on new ideas on restructuring, which I think are in line and I think lucky call, considering also the current market environment, and we are on track as we announced in February to conclude those [ for deals ] in the course of 2019, and most likely, as we see it from now when we will be -- at this time, we will announce the actual results.

[Operator]

Your next question comes from the line of Sam Bland from JPMorgan.

[Samuel James Bland, Research Analyst]

I guess the questions I would ask are on the level of raw material cost inflation. Just wondering if you could say a few words on what you're seeing [ from defined ] in terms of cost inflation from the cost lines?

[Patrick Georges Felix André, CEO & Director]

We are clearly as we feel it] it looks like we are at an inflection point regarding raw materials. As you know, in our business model, raw materials are now [ under control ] because it's a pass-through for us, we are passing through price variations. There are situations of raw materials, but what we see on the raw material market is that there is clearly no significant increase anymore, but we are more in the stabilization stage with more downward pressure or trends, whatever we call it than before. And if I had to make a guess, I think that the probability that raw material prices would decline in the coming months is clearly higher than the probability that they will increase. And on some raw materials we are now seeing since a few weeks clear sign of erosions, particularly in magnesia-related raw materials. Also, raw materials it's a bit less the case so far, but generally speaking on the industrial minerals [ for material ] France the trend is more than it was before it's clear now.

[Samuel James Bland, Research Analyst]

And in terms of other cost lines across the group, are they running at similar level of inflation as in previous periods or are they [ significantly ] changed?

[Patrick Georges Felix André, CEO & Director]

Yes. I think the other cost, which are mostly labor cost in our case, are yes, type of inflation where they are related to the order of magnitude is more or less inflation.

[Operator]

Your next question comes from the line of Mark Davies Jones from Stifel.

[Mark Davies Jones, Associate]

Three quick things, if I may. You mentioned the price element in your own volume growth, can you give some indication of price versus volume and what your expectation is going forward on that? And the second one is, you reference in the statement increasing regulatory restrictions, if you could just be a bit more specific about what you're referring to there? And then finally, one of your refractory peers was suggesting that in the first month or so of the year there was a certain amount of destocking going on in some of the steel customers and the picture has improved a bit subsequently, have you seen any change in trend through the quarter? Or has it been fairly smooth and consistent through the period?

[Patrick Georges Felix André, CEO & Director]

Thank you. On your first point, yes, there is a real price component in the turnover or variation between Q1 '19 and Q1 '18. And meaning that if you eliminate this price component, the volume component is slightly lower in Q1 '19 as compared with Q1 '18. Going forward, because of the evolution of raw material prices which I was mentioning earlier, we are not forecasting any significant price movements going forward for the rest of the year. Regarding regulatory effect I think if you compare the booking of last year at beginning of '18 and beginning of '19, you have in the world an increase of sanctions taken by some countries vis-a-vis other countries as it is a group policy to operate everywhere in the world respecting all regulations, including sanctions-related ones, it means that some markets, which were -- into which it was possible to operate one year ago, are markets where it's less possible today when operate, than it was one year ago. So in practice some market are closing, especially in the Middle East, over the past 12 months and we are following this normally and adapting it as most Western refactory producers. On your last question about destocking is, we don't see significant either stocking or destocking. I think that the, if we take a [indiscernible] view of the steel market today, I don't think that we can explain by any stocking or restocking or significant stocking or restocking. I would never say that there is not a little bit of this or little bit of there, but I don't think that we could explain what is happening today in the steel market by any kind of significant stock valuations. There is weakness in the steel market in the world outside of China. That's the way we see it on the ground and real consumption is slowing down and this translates into the level of steel production. I think that the way that the structural variations on the ground after that from 1 month to the next or 1 quarter to the next, you may have short-term variation of stock, but I don't think that the issue is stock variations today in the world of steel.

[Operator]

Your next question comes from the line of William Turner from Goldman Sachs.

[William Turner, Research Analyst]

Related to the raw material input prices, if you are entirely effective at passing through sort of your raw materials to customers and your bottom line kind of stays safe, then it will ultimately will make your margins look better. I'm wondering given that also like you said the steel market have got a little bit worse in recent months as steel prices come down, what is the risk of your customers being more aggressive on pricing and pushing beyond the kind of pass through that you initially suggest?

[Patrick Georges Felix André, CEO & Director]

I think mathematically you hope that you're right, because if the raw material prices will go very, very significantly down, this will have a mathematical impact, a positive impact in terms of a level of profitability because we will pass through. But I think that it's nearly impossible to model because I have no crystal ball, I don't know how to -- the extent to which raw material prices will or will not decrease over the coming months. But mathematically, you're right, our margin tends to decrease a little bit when raw material prices go up and increase a little bit when they go down because of this pass-through mechanism. Regarding the behavior of customers, I think the customers are always aggressive, [indiscernible] to me that's the way they are doing their job, it's perfectly normal as they're our customers are aggressive towards the [ deal ] department [indiscernible] there and as we only see our performance as always been to as I will say as trusted and good discussion with our customers.[Audio Gap]lead us to accept price variations, which we will be justified. So I don't see a scenario where our prices will reduce beyond the raw materials, the potential raw material price fluctuations. This didn't happen in the past and I don't see that as happening in the future. Conversely, when we increase our prices we have always increased our prices in a reasonable way, in line with raw material prices. So these all the way up all the way down, we have a level of trusted relationship with our customers, which makes our price situations I would say normal ones. So to answer very precisely your question, no I do not expect in the coming months any [ reduction ][Audio Gap]in any case exceed [Audio Gap]

[Operator]

Your next question comes from the line of Robert Davies from Morgan Stanley.

[Robert John Davies, Equity Analyst]

Just a couple, maybe if you could give us a little bit more color. You mentioned the light vehicle market, the foundry, perhaps you could give us a little bit more color on the various [ fits ] across foundry, if you could provide some additional color there would be helpful. And then just perhaps what's going[Audio Gap]sort of products are coming to market given the way customer engages in some of your digital offerings that would be helpful?

[Patrick Georges Felix André, CEO & Director]

When you're in the foundry market, I would say the light vehicle market are generally not good more or less everywhere, but this weakness of the light vehicle market is even more pronounced in 3 geographies. China obviously and you may have seen the April figures which were published yesterday, I think, and they're as bad as the previous months. So there is no use improvement in fact there, so China, India and Europe are 3 areas where the light vehicle market is not only weak, but I would say it's in retail below average, and there is no up use sign of this improving on the short term business. The heavy light vehicle market then is mostly in Asia, China, India and South Korea where the market is relatively weak. Less so in Europe and the Americas where it's still holding relatively well. The wholesale market excluding -- the wholesale foundry end-market, excluding light and heavy vehicles for the time being have all been relatively well. Again, I have no crystal ball about to know what will happen over the coming months, but as we speak the other non-auto related markets are all doing relatively well.

[Robert John Davies, Equity Analyst]

And then on digital?

[Patrick Georges Felix André, CEO & Director]

On digital service, we are continuing our push on robotics, this is clearly gaining momentum as we speak. We have a clear acceleration of customers demand for a robotics solution in flow control in all geographies now, including China. We have moved our first significant robotics orders in China recently, and so we are currently ramping up our capabilities in our robotics excellence center in Belgium to be able to face this, what we see as a accelerating customer demand. So these will be the orders to pick today in terms of vehicle-related offering. We are working on some other subject, but which are at a less advanced stage as we pick.

[Operator]

[Operator Instructions] Your next question comes from the line of David Larkam from Numis.

[David Alexander Larkam, Analyst]

I'm just wondering sort of how you see the shape of the year from here. Mainly on the steel side, obviously. U.S. steel has obviously been very strong, but the comps get a lot harder as you move into the second half. So I imagine that is going to be flat at best. So just give us a feel of what you expect the shape of the year to look like?

[Patrick Georges Felix André, CEO & Director]

Thank you for the question. We'll -- I'm looking at my crystal ball. To be perfectly frank, I'm expecting the unexpected. I think the whole of the game today is very high level of uncertainty. And I consider that what we have the ability of is systemic flexibility to adapt to whatever the coming months could be. I think it's a [indiscernible] I'm among those believing that the world with the trade agreement between the U.S. and China is and will be different of the world without a trade agreement, as [indiscernible] would be under the trade agreement, but I think it's our duty to prepare for both upfront. And so I consider that the level of uncertainty about where the real demand will be in the second half is intriguing mainly and the reason I'm sure that you are reading the same as we do. I don't know if I should say forecasting or hoping for a better second half than the first one [ our EBITDA ] is still a little bit high, but I think it's our duty to prepare for all options, in that we will be fully prepared to take advantage in case second half is better than the first half, but we will be also prepared in case it will not be the case.

[David Alexander Larkam, Analyst]

Okay. So as we look at it[ my only guess ] is to say organic growth is going to be pretty flat for the year in the steel business?

[Patrick Georges Felix André, CEO & Director]

I think it all depends on where the steel market will go, and again, I'll refrain from making a forecast at this stage about where the steel market will go. I've been reading recently some analysts saying they were expecting a rebound in H2 a little bit like the automotive market, but again, I'd be happy if this is the case, I do not consider that it is 100% chance that it will be the case.

[Operator]

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

[Harry Philips, Analyst]

Just a couple for me. First of all, in terms of foundry how much of the planned cost savings are in foundry because if I remember rightly foundry was an earlier program under the steel-related businesses and if there is not much in foundry are you reevaluating that? It obviously suggests you are. And then secondly, does the current market backdrop change your approach to sort of high-technology steel in any way or does make it more significant and important to adopt it?

[Patrick Georges Felix André, CEO & Director]

On your first question, yes, you're looking at the [ executive level ], but foundry was a [indiscernible] part in the global restructuring program, there is more in steel than in foundry. So there is more than 50% of the restructuring program is in steel, but foundry is not insignificant, I would say in the global restructuring program. And your second question about high-tech steel. I think that this is completely [ concerned ], there is no doubt that irrespective of which direction the steel market is going, what we see over the beginning of the year and over the past 6 months is, I would say, a confirmation of the trend that what you call high-tech steel is growing a bit faster than average steel market. This remains true whatever the market conditions.

[Operator]

Your next question comes from the line of Michael Blogg from Investec.

[Michael John Blogg, Capital Goods Analyst]

The question I have is really what your assumptions are for the market in order to maintain your guidance. Clearly you have seen some deterioration in underlying conditions and that's offset by cost savings either in the acquisition or your other program. Are you basing this guidance on current forecasts for the world steel market or are you basing this on more cautious assumptions?

[Patrick Georges Felix André, CEO & Director]

We are basing our forecast on, I would say the current consensus of analysts writing on both the steel and foundry markets, which is on 1 end regarding the steel market a continuation of the softness that we are seeing today. And on the foundry market, some kind of improvement in the automotive part of the market in H2.

[Operator]

Your next question comes from the line of Mark Fielding from RBC.

[Mark Lewis Fielding, Analyst]

A couple of questions. Sorry, I know you have talked about prices quite a lot, but obviously 1 of your main competitors has announced in the trade press recently sort of a generic 5% price rise, [ obviously writing this stuff ] across the business. Just any thoughts you have around that? And secondly, in terms of growth, could you just talk a little bit about what you're seeing in China and India yourself as a business, those are obviously key links to fuel future growth outlook? So if you might talk a little bit about how they've been involved and how you see that going forward?

[Patrick Georges Felix André, CEO & Director]

Actually, I have a [indiscernible] could you repeat your second question?

[Mark Lewis Fielding, Analyst]

Yes, so the second question was just in terms of what you're seeing in China and India specifically in the steel business? So obviously that key factor in your potential growth outlook in the future high-growth market opportunities for you, just how you're seeing the trends there now currently?

[Patrick Georges Felix André, CEO & Director]

Okay. On the first question, I think we're always keen to hear any of our competitors make a public announcement on price increase, but I think that what is important is what is happening on the ground, and I will not comment on competitors' announcements, they -- we have our own independent pricing strategy and our pricing strategy is clearly to, and it is true and has always been to pass through all material fluctuations, which we will continue to do up and down irrespective of what our competitors are doing or are announcing. But we always welcome any sign of our competitors announcing these kind of things, but it doesn't influence our own price management on the market, which remains the same today as what it was 6 months ago, meaning a reasonable price strategy. On the second point, I don't see anything changing in our structural vision of India and China as compared with what it was 6 months or one year ago. We have 2 different things, you have the short-term, which is what it is, and you have the structural long-term which may appear as no challenge at all as compared with what it was 1 year ago. Where we are in India, we are still building, and I think that all the parameters are there to justify being quite optimistic on the growth of the of steel production and consumption in India going forward. We are planning for on average a 5% to 7% growth rate over the coming years of the steel production and consumption in India, even if the year 2019 may be a year below average, it doesn't change our vision of the long-term structural average in India. And I would say the other way around in China, I'm a bit surprised by the 9.9% published in steel production in China in Q1. I -- we are not changing our whole vision of the structural long-term [ firm ] of steel production in China, which is, in our opinion, close to stability. So even if the year 2019 may be about average in China it doesn't change our vision that steel price in China should remain more or less stable in the years to come. And I remind that in this stable environment we are planning ourselves to grow because of we are [ in treating of beneficial ] in China year-after-year, so of all sales we will continue to grow in China over the years. Despite what we feel will be structurally a stable environment. So to cut a long story short, India we think '19 will be a long-term [ firm ] but we don't stand on regional long term firm. And in China [ all we go hope ] long-term firm and we are not changing either our vision on long-term structural trend in China.

[Operator]

Your final question comes from the line of Jonathan Hurn from Deutsche Bank.

[Jonathan Hurn, Research Analyst]

One question from me. Just going back to the outlook for steel in 2019. I think first if you just go back to 2018, is characterized by strong outperformance versus underlying buying of the -- sorry, versus underlying markets in a number of geographies. So you're obviously outperforming the underlying market. And then as you look to 2019, how do we think about that? Can you still deliver that outperformance relative to the underlying market? And if so, where do we think the outperformance can be?

[Patrick Georges Felix André, CEO & Director]

I think it's too soon, it's too soon to have a vision for what the global year will be in terms of outperformance or not of the market. So I would not take into account into assumptions so far because it's too early in the year, any significant outperformance, or underperformance by the way, vis-a-vis the underlying market.

[Operator]

There are no further questions.

[Patrick Georges Felix André, CEO & Director]

Thank you very much all of you, for having attended the call this morning. So I wish you a very nice day.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.