Vesuvius PLC
LSE:VSVS
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Vesuvius PLC
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Good day, and welcome to the Vesuvius Trading Q3 Update Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Patrick André, Chief Executive. Please go ahead, sir.
Thank you. Good morning, everybody. Thank you for being here. I know it's early in the morning, but as I'm currently in Japan, and I wanted to take the time to speak with you and to answer all your questions. In case you would not have the time to ask all the questions you would like this morning, we'll, of course, be happy to speak with any of you, Guy or myself, over the next few days.So the main topic of the conference is to inform you and the market that the market environment as compared with the situation at the time we published our first half results in July has continued to deteriorate. At that time, in July, we had reasonable expectations that after the deterioration of the first half, the market will stabilize. It has not been the case. The -- both our end markets in steel and foundry have continued to deteriorate since July and continue to[Audio Gap]As compared with our expectations, again, a few months ago, just before the summer. The region which has deteriorated the most is EMEA. This being said, we also see a continuation of weakening in both the steel and foundry market in all the areas. It is the case in India and in NAFTA, but not as pronounced as what we see in the global EMEA region.As a result of this continuing deterioration of our 2 main end markets, we have reviewed our forecast for the year 2019, and we now expect our trading profit, EBITA before separately reported items to be in the bracket from GBP 180 million to GBP 190 million. To elaborate a bit on the market situation, which is a main origin of this revised range of trading profit expectation for the year, the steel market, as previously mentioned, is continuing to deteriorate. Steel producers have announced production cuts, which are now equivalent to on or around 4% of their 2018 volume since the end of June in the EMEA region. And at the same time, the light vehicle production forecast is continuing to be negative, and we now expect in EMEA a 5.6% decline versus 2018, which is a deterioration as compared with the previous forecast.However, 2 important point to mention. The first one is that we -- despite the short-term weakness of these end markets, we do not see anything fundamental. We do not see anything which will change our vision of what the long-term fundamentals of 2 end markets are. We've had in 2017 and 2018, 2 years, which were clearly above long-term average growth trend, 2019 could -- will obviously be below the long-term average growth trend, but we still believe that our 2 main end markets should grow on average over a long-term trend on or around 1.5% per year.And in this context, we continue to implement and intensify our cost control and restructuring actions as well as our R&D efforts to progress and consolidate our position on the market. And for these reasons, we remain confident in our ability to achieve a 12.5% return on sales target. Obviously, when the market will revert to their long-term growth trends, which may not be in 2020, but as soon as the market will recover their long-term growth trends, we remain confident because we are doing all the right things in terms of cost control and restructuring and development in R&D. So this objective remains, in our opinion, perfectly achievable. The issue is the timing, which will be linked to the time needed for markets to recover to their normal long-term growth pattern.So I will now be happy together with Guy to answer any questions you may have.
[Operator Instructions] We will now take our first question from Andrew Douglas from Jefferies.
Just 2 quick questions for me, please. I missed the start of the call, so apologies if I missed this. So can you tell me, do you think any of this is market -- or do you think this is -- anything is market share loss for you guys? I'm assuming it is market, there was not anything else that we need to be concerned about. And also, can you tell me how much of the impact that you've seen in the second half was kind of temporary in nature, maybe some destocking that may well continue into 2020? So if you can just kind of get us a feel for the shape of 2020 as well as your new guidance for '19.
Thank you, Andy. On this response, we believe that this is mostly market related. In terms of market share losses, we are continuing to gain market share in many areas. One area which we already mentioned during our first half presentation, where we have loss of market share, but not recently, close to 1 year ago and beginning of this year, was India, and we expect to recover that in the months to come, mostly in the public sector in India. But we don't have any significant market share variation in other parts of the world. One point to mention, which is not a market share related, vis-?-vis competition is that contrary to the long-term trend. On a long-term trend basis, we are very confident that I would say, high-technology steel grows faster than the more commoditized part of the market. In 2019, we may see on a one-off an opposite phenomena with the most -- with a sophisticated technological part of the steel market being more affected than the rebound in the construction market. This is mostly a consequence of the difficult situation in the automotive industry. So in the year 2019, we may have a one-off phenomenon, but it's not a market share loss. It's most -- it's more a sector mix -- a negative sector mix impact, which we don't see as representative as a long-term trend.On your second question, yes, there is, obviously, some destocking. It's not easy to measure everywhere the extent of the destocking. The area where we have the -- I would say the primal vision of the destocking, I'm talking refractory destocking, not steel destocking here, of the refractory destocking impact, is mostly in India where we estimate, on our own turnover, the impact of destocking there to be close to GBP 3 million in 2019 and mostly in the second half of 2019. It's clear that some steel producers were, before the summer, still expecting that the steel situation in Europe will get better after summer. Now that they've realized that the situation is not getting better, they are adjusting accordingly their refractory inventory. There may still be, on top of this, some steel inventory destocking impact, but this we'll probably know more in the second half from now what is the extent of the effect exactly.
We will now take our next question from Sam Bland from JPMorgan.
With the change in the guidance this morning, should we just assume that that's the natural operational leverage within the business? Or are there any kind of specific profit impacts in that? For example -- I mean I presume that the cost savings, for example, are still being delivered as expected.
So I would not call it the normal leverage impact because you are -- we always calculate what we call the normal leverage impact assuming that everything else is not fluctuating. In fact, you have 2 negative impacts and 1 positive one, which are more or less control balancing each other. The negative impact are the sector mix impact, which I just mentioned with Andy, and the destocking impact, which I also mentioned with Andy, which are amplifying the trend. And at the -- on the other hand, we have our restructuring efforts, which are playing positively to help us mitigate part of -- unfortunately, not all, but part of the consequences of the negative situation in the market.And regarding the restructuring, seen from today, we expect to deliver, in 2019, slightly less, around 90%, 90% plus of what we had initially planned to deliver. We had initially planned to deliver between GBP 17 million and GBP 18 million of recurring cash restructuring savings in 2019. We'll be probably on or around GBP 1.7 million below that. And this GBP 1.7 million are mostly related to some CapEx in the U.S. and [ Andy ] where the deliveries will be more in 2020 than in 2019. But more than 90% of what we have planned to deliver in terms of restructuring in 2019 will be delivered, which will be -- which will help us mitigate the impact of the market downturn. And even more importantly, for 2020, as these restructuring actions in 2019 will have a full year impact in 2020, this will also greatly help us for our results in 2020, independently of what the market situation will be, which I don't know yet, as you can imagine, because we are in a very volatile market environment.
We will now take our next question from David Barker from Bank of America.
I think H1, you talked about pricing power still being quite strong despite the end markets weakening. Have you seen any price erosion over the last 3 months? And can you talk about pricing trends going into the end of the year?
Thank you, David. In terms of pricing, of course, there is pricing pressure, as you can imagine. But we are not -- we do not have any price pressure. We are adjusting our prices based on raw material situations. But as far as, I would say, all prices, excluding raw material, which for us is important because, as you know, we are not integrated upstream, we are able to maintain, not improve, obviously, but we are clearly able to maintain our prices. We are, as we always said, we would -- giving back to our customers, fluctuations in raw material, which for us is a pass-through, but the pricing excluding raw materials is more or less stable. So the negative impact for us is not the price impact, is only volume.
[Operator Instructions] We will now take our next question from David Larkam from Numis Securities.
First of all, just give us a feel between different steel and foundry as to where the biggest downside is.
David, both are affected, both steel and foundry, for -- which are for different reasons. The steel, as you know, there was general weakness. And with foundry, it's a little bit more affected than steel. But in steel, flow control is a little bit more affected than advanced refractory because advanced refractory we sell more or less the same to any type of steel worldwide, whereas flow control we are more biased towards high-technology type of steel, which in the current downturn this year, but again, it's not representative of the long-term trend, it's a this year's phenomena, is more affected than rebars or long products. And so I would say the 2 most affected part of the business are foundry and flow control. Advanced refractory a bit less.
Okay. And just, you don't seem to be talking about sort of North America yet, but obviously, it's been a very strong steel market over there, but it seems to be rolling over a little bit. Are you -- is that sort of a concern as we go forward to you guys?
When you say North America, in fact what we described about most is U.S. situation. The U.S. was strong since a few months after the establishment of the Section 232 protection measures. And clearly, we see the situation in the U.S. softening. And -- but if you look at NAFTA as a whole, it's also softening. But as I said, you have kind of the opposite phenomena in Mexico and Canada, which have suffered a lot over the past few months, and we -- which are getting a bit better now. So NAFTA as a whole is softening, but less so than the U.S. The U.S. is clearly softening more than the average of NAFTA. For us, it's not a specific issue. It's a little bit of an issue because we are selling on average, a little bit more per ton of steel in the U.S. than in other places of the world. But it's still [ not a concern ]. So we don't see that as a major phenomenon because we are also selling in those countries, which have been negatively impacted by the fact that the U.S. was growing positively over the past few months. So it's also benefiting some of our other customers in other parts of the world. And clearly, today, Mexico and Canada are a bit better than a few months ago.
Okay. And then you've got your cost actions out there. Will you increase those in light of this weakness?
We are already accelerating. And we have been since a few months ago, we were, if I may, open for the best, but also preparing for the worst. And I think we should do in this kind of downturn. So we decided already a few months ago to accelerate all of the restructuring actions that we anyway plan to do over the coming year. So there are some things that we are initially planning to spread over 2, 3 years that we have decided to accelerate. It's a case, in particular, of some difficult plant closure that we have anyway planned to do, but which we are accelerating. And in particular, in Europe, but by doing so, as we strongly believe that our markets are structurally growing long term, we are very careful not to decrease our overall production capacity and to maintain the capacity to resume growth the day market will recover, hopefully, sometime from now. So we are positioning ourselves in the, if I may say in such kind of difficult circumstances, which is the best possible situation to benefit fully from recovery of the market the day this recovery will happen. We have no doubt that this recovery will happen because we believe that both steel and foundry remain structurally growing markets long term. So it's a question of when, it's not a question of if.
Okay. So I think it depends, with an GBP 18 million of savings from 2020, that could be a bit higher? Obviously, you've got some of the 2019, which is going to roll into 2020 as well.
Our global program remain the same, and it's -- that the one we announced in July. We will have GBP 1.7 million rolling over from '19 to '20. And it's clear that we are currently leaving no stone unturned. And that, if we have the opportunity to go beyond what was announced in July, we will clearly do it.
[Operator Instructions] As there are no further questions at this time, I would like to turn the call back for any additional or closing remarks.
I would like to thank all of you for attending this call this morning, again, despite the early hour in the morning. I really appreciate. And once again, Guy and I, we completely remain at your disposal any time, should you have any question in the coming few days. Thank you to all of you and have a nice day. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.