Vesuvius PLC

LSE:VSVS

Earnings Call Transcript 2020-Q1

[Patrick Georges Felix André, CEO & Executive Director]

[Audio Gap] In Q1, steel production in China was relatively steady at plus 1.2%, but part of it -- part of this steel production was for inventory, which now needs to be absorbed. It is being absorbed and the good news is we are seeing steel inventory declining in China. But the same steel inventory buildup that we saw in Q1 in China may well be happening as we speak in the world outside of China.For this reason, looking a little bit more ahead, we would expect some improvement in the foundry market in Q3. However, I would advise some caution on the steel market in Q3 because these excess inventories, which are currently being accumulated will, at some point, need to be absorbed. So there may be some time lag between the rebound in steel production on one hand, and the rebound in real steel consumption on the other hand. For this reason, we advise caution on the steel market. It's probably more towards the end of this year that a significant improvement in the steel market maybe expected. We are a little bit more cautious in that respect than ArcelorMittal when they published a result a few days ago, but we prefer to be on the cautious side.Markets are what they are. But the good news is -- with difficult market conditions is that we are making very good progress in -- with our internal actions to mitigate the negative impact of the crisis on our results. We have very rapidly put in place mitigation measures, cost control measures, and we can confirm that on top of the GBP 19.4 million of recurring restructuring savings that we already planned to deliver this year, we have put in place an additional temporary cost reduction plan of -- on around GBP 10 million per quarter through elimination of all discretionary expenses, furlough, temporary unemployment everywhere in the world. These enable us to reduce our cost base significantly and to partly mitigate the negative impact of the crisis.In parallel, we are implementing strong liquidity preservation measures everywhere by, first, reducing our CapEx program for this year by 30%, meaning almost around GBP 20 million, managing very strictly our working capital in terms of payment terms. So we are not accepting anywhere in the world any extension of payment terms of overdues from our customers. We are managing our inventory very tightly, adjusting strictly the production of our plants to the real level of the demand. And deferring payment each time local regulations allow to 2021.Also, Guy and his finance team have been able to successfully raise a new U.S. private placement tranche over the past few days, which will enable us to redeem the tranche of USPP, which was due for redemption end of this year. And we have been able to raise our new tranche of USPP at interest rates, which are lower than the one prevailing for the tranche that we wouldn't be able at the end of the year. In parallel, we have also successfully accessed the [ Vesuvius ] facility of the Bank of India. With all these actions, we are now in a relatively comfortable situation in terms of liquidity, not only even if the crisis, I hope it remains at the same rate as Q2 till the end of the year, we will not have any -- not only no liquidity issue, but no -- a very significant headroom vis-a-vis [indiscernible].So with all these measures, we show [indiscernible] millions of capacity to be resilient during such crisis. First, to meet the impact on our results but also to maintain a very good free cash flow generation. And we are now fully equipped to be resilient to the crisis, even if the crisis would extend in 2021.And last point, we are, at the same time, keeping all of our plants fully ready to restart extremely rapidly the day the consumption will rebound. My experience, especially in the steel industry over the past 30 years, is that the day rebound happens it's very, very quick. So we need to be ready to follow on. Our plants, especially are in very good shape now after all the restructuring that we did over the past 3 years. Our manufacturing network is fully optimized, fully ready to restart and increase production very rapidly the day market rebounds. As both are requesting board, I'm not going go predict Q3, Q4 or even Q1 next year. But the day it happens, we will be fully ready to benefit from it.So thank you for your attention, and I now propose to open the floor for questions, and Guy and I will do our best to answer.

[Operator]

[Operator Instructions] The first question we have today comes from the line of Jonathan Hurn from Barclays.

[Jonathan Hurn, Research Analyst]

Just a few questions for me, please. Just firstly, coming to that minus 28% in April. Can you just give us a little bit more color on that? Can you just maybe split out what foundry was down in that month? And secondly, what steel was down? That was the first one, please.

[Patrick Georges Felix André, CEO & Executive Director]

We don't disclose precise numbers for foundry and steel, but the decline in foundry is significantly more pronounced than the decline in steel. The real decline in steel. But the decline in foundry is more pronounced. And because the impact between reconsumption in the end market of foundry is more direct so foundry is more directly affected. It's dropping quicker and further. But we also believe that, as I mentioned earlier, that one of the reasons why the decline in steel -- even if it is significant, is a bit less significant than foundry is because some steel producers are producing for inventory, unfortunately, and are not adapting their production as much as they should. So this will have an impact probably in Q3.

[Jonathan Hurn, Research Analyst]

Okay. The second one, André, I just wondered if you could, as we sort of go through or go into Q2, if you can just give us some kind of sort of indication of what the drop-through rates would be -- or negative drop-through rates would get at foundry and steel, please?

[Patrick Georges Felix André, CEO & Executive Director]

Guy?

[Guy F. Young, CFO & Executive Director]

Jon -- Thanks, Patrick. Jonathan, we stick to what we've said in the past, which is at these levels of movement, a drop-through rate of between 30% and 35% can be expected. What we've seen in Q1 is that we've managed to mitigate that drop-through successfully with the delivery of some of our restructuring savings. Our contention is that we will be able to continue to mitigate that drop-through going forward for the remainder of the year. Based on, a, the same restructuring savings continuing through 2020, alongside the process cost cuts that we've mentioned of around 10 million a quarter. So for us, the overall drop-through will certainly be mitigated below the 35%.

[Jonathan Hurn, Research Analyst]

And then just the final one. I was just looking at some raw material prices out there such as a [indiscernible]. Obviously, these continue to fall. Does this mean that you still have to reduce prices as you go through the year? And if that is going to happen, when do those sort of price reductions start to hit the top line, please?

[Patrick Georges Felix André, CEO & Executive Director]

Yes, you're perfectly right. The price of raw material is declining -- is continuing to decline everywhere. Then the benefits from our model of not the integrated upstream in raw material. This -- it takes a few months for the spot decline in raw material market to reserve the rate into our old cost structure simply because you have a pipeline of raw material inventory. And generally, when we contract our raw material prices, it's quarterly or sometimes half yearly. And so we expect to have a continuation. It started a few months ago already, but we expect to have in the coming months, a continuation of the positive impact of raw material price decline in our P&L.But at the same time, our customers, very legitimately, are requesting adaptation in the pricing of off-bound products to pass through this raw material decline, and our policy has always been and will remain the same. It's a question of fairness in dealing our customers. On the way up, we pass through the price increase of raw material, on the way down, we are passing through the price decrease of raw material. So as soon as it will impact our cost base, we will pass it through to our customers. But clearly, the raw material price decline has no negative impact on our P&L.

[Operator]

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

[Harry Philips, Analyst]

Can you hear me?

[Patrick Georges Felix André, CEO & Executive Director]

Yes, we can, Harry.

[Harry Philips, Analyst]

Yes, just wondering about the gap between -- and you already mentioned that steel is sort of lagging inventories, if you like. How wide the gap do you think is in terms of real consumption and where inventories actually currently sit? So because as -- are you at 28% decline...

[Patrick Georges Felix André, CEO & Executive Director]

Unfortunately, I don't have a crystal ball. And you know that the reliable data on steel inventories are scarce. So my comment is more a qualitative one. Based on discussions on the ground, observations on the ground, I believe that there is steel -- excess steel inventories to deal with. Not as much as what would have happened 15 years or about 20 years ago, I think that the steel industry has made a lot of progress as compared with what it was 15 or 20 years ago. In terms of reactivities, they are much more reactive. Companies like ArcelorMittal have been leading the way to change the mindset of the steel industry over the past few years. They are very quick at cutting production, idling [indiscernible] or electrical alternatives.So the reactivity of the steel industry to the drop in demand is nothing to be compared with what it used to be 20 years ago. But still, you have some producers, notably ArcelorMittal, and we have some producers who are a bit slow in reducing production because they hope that they will be better covering their fixed cost by keeping a high level of production, which, as you know, is not generally a very good bet in the steel sector.So because of this, we really think that it's accumulating. How much? Honestly, I don't know. But several million tonnes of steel are being currently accumulated and will have to be absorbed. This is why I advise definitely caution as far as Q3 is concerned. Sorry to be only qualitative, Harry. but I advise caution on the steel market in Q3 to give time for the market to absorb this excess inventory.

[Operator]

[Operator Instructions] We have another question here from the line of Andrew Douglas from Jefferies.

[Andrew Douglas, Equity Analyst]

I have 3 questions, please, if I may. Can we quickly just start up on competition and how you guys think you're faring versus your peers in this kind of current challenging environment, particularly you've been optimizing your cost base over the last 3 years? I'm just wondering if that could put you in a better position for you to win market share as they're worrying about things that maybe are behind you and maybe in front of them? Secondly is on R&D. Are you slowing down any of your R&D efforts? Or is there still a desire to bring new products to market? Again, trying to win some more market share. And then thirdly, it's a slightly more very bigger picture question. Do you think there's any requirements for you guys to do more structural restructuring as opposed to just kind of managing your variable costs? Or do you think that the work you've done over the last kind of couple of years to put you in the right place for the market going forward?

[Patrick Georges Felix André, CEO & Executive Director]

Thank you, Andy. The first point, you know we don't comment on competition. We have very good competition, and we are very respectful of our competition. Not all of us have adopted the same business model, but I think that each business model has its advantages and disadvantages. We think that, if I may, we are on the same boat with our competition. We are fighting the same battle. And I'm pretty sure, I don't know the details of what they are doing, but I would suspect that they are doing very similar things to what we are to withstand the storm as best as possible. So I think that, again, we have a lot of respect for our competition and they are keeping us on our toes. And it's very good like that. It's the best thing to motivate my team. So I love to have good competition.The -- regarding R&D, we -- not only we are not cutting, but we are accelerating R&D. R&D is a long-term gain. It's the cornerstone of business model. So the only hiring, which are not cuts, as you can imagine, we have been freezing hiring everywhere in the world, with one exception, which is R&D. We are still hiring people in R&D. We are increasing our R&D spend. This is long-term gain, gaining market share. And to answer your first question, yes, of course, we are -- we remain as interested as ever and as energetic as ever to try to gain market share, but we gain market share through technologies, through R&D. So not only we are not decreasing our R&D spend, but we are increasing our R&D spend, hiring new talented researchers to complement our existing ones, everywhere in the world. It is -- where we have a research center in the U.S., in Europe, in India and China.So we are trying to maintain as much as we can the speed of launch of new projects, which would, as we speak, we are keeping the pace. So we are planning to launch as many new products that we initially planned during the year. Obviously, visiting customers to demonstrate all the quality value product is a little bit less easy in the current context than in normal times, but we are trying to be creative about how to do it, how to keep in close contact with customers. I think technological exchange, technological discussions, technological training are also very good ways to maintain contacts with customers during this crisis times. So we are, I would say, accelerating our efforts in R&D and in the introduction of new products because it's really the cornerstone of our growth going forward.Your last question, Andy, regarding the changes. No, I do not believe that the fundamentals of our markets have changed. The virus will not be there forever. It will probably be there a little bit longer than what we think, bit longer but not forever. And that the structural growth trend of our 2 main end markets of steel and foundry will resume at some point. And the -- after the optimization work that we've been doing over the past few years, we now have a fully optimized manufacturing footprint with the right capacity level to serve our vision of the long-term situation in our market, which has not changed as compared with what it was 1 year ago.So we will have a difficult year in 2020. But markets will recover, will get back to their long-term trend after some time, probably more than 1 year, a little bit more than 1 year to resume the complete growth, but it's not 5 years either. So we believe that our manufacturing footprint is now in pretty good shape is fully optimized. So we are not planning any new structural actions in the coming few months.

[Operator]

[Operator Instructions] Thank you very much. There are no further questions coming through over the phone. Please continue.

[Patrick Georges Felix André, CEO & Executive Director]

So if there is no further question, I would like to thank you all for participating to the call today. And -- so I wish you a very nice day and stay safe. Goodbye.

[Operator]

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.