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Edited Transcript of VSVS.L earnings conference call or presentation 28-Feb-19 9:30am GMT

Full Year 2018 Vesuvius PLC Earnings Call

London Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Vesuvius PLC earnings conference call or presentation Thursday, February 28, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Guy F. Young

Vesuvius plc - CFO & Executive Director

* Patrick Georges Felix André

Vesuvius plc - CEO & Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* David Barker

BofA Merrill Lynch, Research Division - Equity Research Analyst

* Harry Philips

Peel Hunt LLP, Research Division - Analyst

* Jonathan Hurn

Deutsche Bank AG, Research Division - Research Analyst

* Mark Lewis Fielding

RBC Capital Markets, LLC, Research Division - Analyst

* Michael John Blogg

Investec Bank plc, Research Division - Capital Goods Analyst

* Richard Paul Paige

Numis Securities Limited, Research Division - Analyst

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Presentation

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [1]

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Ladies and gentlemen, welcome to the presentation of Vesuvius' Full Year 2018 Results. My name is Patrick André, I'm the Chief Executive of Vesuvius; and to my right is Guy Young, our Chief Financial Officer.

Firstly, I will present an overview of our strategy and performance during the year. Then Guy will go into more detail on our financial results and then, I will conclude to give you some considerations on our outlook for 2019.

We announced this morning our best results since we became an independent company in 2012 with 10.7% growth, underlying growth in revenue, 24.1% growth in trading profit underlying, but even more important, sharp increase in our profitability with our return on sales reaching 11%, so 120 basis points move of 2017 performance.

With these results, we remain fully on track with our objective to reach 12.5% return on sales by 2020. Thanks to these good results and efficient working capital management, we could improve further our balance sheet, reaching a net debt-to-EBITDA ratio of 1.3 at the end of the year versus 1 -- to 1 at the end of the year versus 1.3 at the end of 2017. This gives the board confidence to increase our full year dividend by 10%, bringing into 19.8p per share.

The main reasons why we were able to achieve these good financial performances, first, our flow control and foundry business units were again able to outperform the underlying market growth volume-wise, without taking into account the price, the positive price effect. At the same time, we were able, in 2018, to fully mitigate the headwind, which have impacted our 2017 performance. First, regarding prices, we could successfully increase the prices of our product across-the-board to fully mitigate both raw material and other cost increase during the year. We again were able to demonstrate the pricing power of our high technology products in our portfolio. Second point, we also could completely eliminate the manufacturing bottleneck in our flow control manufacturing network, which also had negatively impacted our 2017 results.

Last point, but not the least, we remain in 2018 fully on track for the implementation of our restructuring programs. We were able to deliver, during the year, a level of recurring cash savings of GBP 14 million per year, slightly ahead of our own expectation and we expect to repeat this in 2019, delivering a further GBP 14 million of recurring cash savings this year.

We conducted in 2018 a full strategic review and could confirm 5 execution priorities; reinforce our technology leadership, increase the penetration of our value-creating solutions, capture the growth in emerging markets, improve our cost leadership and margins and develop our technical services offering. But also, we could identify where to accelerate the delivery of this strategy by reinforcing our presence in the high-end, high-technology segments of the Steel and Foundry market, where our solutions can create the most value for our customers by accelerating our efforts to optimize our cost base and by adopting and this is now fully operational, decentralized entrepreneurial and nonmatrix organization within the group. Thanks to this, you will see that we were able in 2018 to reach good result for each of our 5 execution priorities.

But before digging further into our 2018 results, I would like to announce this morning the signing of an acquisition yesterday. It's the acquisition in the U.S. of a small specialty refractory producer called CCPI. So the acquisition is signed, not closed yet. The closing should happen in the coming few days. So I would say the probability for completion is probably 95%, but not 100%. And this specialty refractory producer has strong synergies with our existing flow control and advanced refractory activities. The acquisition price is slightly over $43 million enterprise value, representing 8x EBITDA before synergies and we expect significant synergies in the coming 12 months, both from manufacturing cost base optimization and SG&A. So the EBITDA multiple of the acquisition after synergies should be significantly lower than the 8 number.

More importantly, this acquisition will be accretive with our result, not accretive from an earnings per share point of view because this is too easy, but accretive from a return on sales profitability point of view even before synergies and even more after synergies.

Last point. This acquisition is an easy plug-in with our existing operations in North America. So the implementation risk of the acquisition and the risk of delivery of the synergies, of the expected synergies is quite low.

Going back to our 2018 results, starting with the steel market, we benefited in 2018 from favorable steel market conditions with, in particular, good performances of the steel market in North America, U.S., The United States, in particular, as you can see on the graph. China also showed very positive number in the statistics. As usual, we have some question mark about the low reliability of the Chinese statistics. We don't believe that the real growth of steel production in China was as high as the 6.6%, which is indicated here, but it was clearly positive.

On the less positive note, you can see that the EU28 area witnessed some decline, limited, but some decline of steel production last year 0.3%. In this market environment, our Steel division clearly outperformed the market. You see on this slide, when the bubbles are above the dotted line, it means that our sales outperform the underlying market growth. However, if you dig a little bit more further, the situation is not exactly the same between our flow control business unit and our advanced refractory business unit. In flow control, we clearly had significant market share -- again, for those who are here, significant market share gains volume-wise even after eliminating the price impact.

However, in the Advanced Refractory division, we decided to accept some limited loss of market share in some countries where we could not increase prices as much as we thought was necessary and we gave clear priority in a very disciplined way to price increase initiatives and to profitability over market share in Advanced Refractories. So globally grows, but market share gain, clear market share gain in flow control, very limited market share losses in Advanced Refractory.

You have on this slide, to illustrate the way we gain market share in flow control, an interesting example of the way we develop in the high-technology steel segment. And to illustrate this high-technology steel segment, I didn't choose what you could usually think about like exports, automotive or fancy type of steel, but something more, I would say, immersed in your day-to-day life related to the food packaging industry. I think you are all eating sometimes some canned food, but you don't imagine that the steel used for this canned food is so high-technology, in fact, it is because with the new packaging being developed by the food industry, you need to reach the complicated combination of very thin gauge and high rigidity, high strength. It's not that easy to reach. And in 2018, one of the well-known food producers posed a problem to one of the most important steel producer in Europe, asking them to imagine a new type of steel for them to be able to develop a new type of fancy steel packaging for their food. And this steel producer in Europe was able to do it with our support, with our help. We completely redesigned the flow of molten steel in the conditions, the continuous testing area of these steel producers, enabling this producer to be able to manufacture the right type of steel to satisfy the needs of the food producer.

Next time you eat canned food, you can think about Vesuvius. The foundry market were also quite favorable in 2018, however, in a more contrasted way. You can see here that the general engineering and construction agriculture section of the foundry market where extremely positive and more or less everywhere. However, we had especially in the second half of the year, some slowdown and even some weakness in some parts in China, from other parts of the foundry market and in particular, the light vehicle market, you all know the weakness of the light vehicle market in China. This is showing in this slide.

Again, here, you have an example of the way we gain market share and we grow more than the underlying market in foundry. The example on the left part of the slide is an interesting one because it is a new product, which initially was not invented in the Foundry division. It was invented in the digital service business unit and transferred and supplied for foundry customer. This device that you see on the left side of the slide enables our foundry customer to achieve a tighter control of the iron during the casting process, enabling to reduce the waste during the casting for this foundry customer.

On the right side, you have an example of a new generation of feeding products which we introduced last year, specifically for the trucks heavy vehicle market. This enables our customer to improve the metal yield during the casting and to minimize the defects, improving the quality of the casting during the production process.

In 2018, we were also able to continue increase of penetration of the emerging market and to capture the growth of this emerging market and you can see the quite high overall increase, which we are able to achieve in those main areas. So EEMEA, which is EEMEA excluding the European Union, it's a nonmature part of EMEA, China, India, of course, Latin America and Southeast Asia. These fast-growing areas in the world, which represented 38% of our sales in 2014 now represent 45% of sales. We are gaining market share year-after-year in these regions because the underlying growth even if it's high obviously just is below the sales growth number that you see on this slide. And this 45% number should be expected to grow regularly over the coming year.

Regarding R&D, we continue to continuously improve our R&D expenditure year-after-year to not only maintain, but increase the technological gap between us and our main competitor. We could again increase last year one of our important KPI, which we are following to measure the performance of our R&D because it's not only about spending money, we want to spend money well. So we could increase our new product sales ratio, which is as a percentage of our sales, which we are doing with products, which didn't exist 5 years ago to 15.4% in 2018 as compared with 14.5% the year before. And our objective is to regularly progress towards our objective of the 20% new product sales ratio.

At the same time, we are continuing our progress. We are on track to expand our Mechatronics Robotics Research Center in Belgium, in Ghlin, and to develop further our new Asian Research Center Suzhou in China and Vizag in India.

We also were able to accelerate the growth of our technical services offering. I'll remind that what we call technical services offering is everything that we sell, which is not classical consumables in all of our divisions, not only, of course, the digital service division, but also the flow control, advanced refractory and foundry division. And you can see that our sales of technical services reached close to GBP 100 million last year with a clear acceleration, which conflate the positive impact of the decision we took end of 2017 to transfer part of the product line, which we have previously hosted only inside the digital service division to other division.

We are fully on track to deliver the savings associated with our restructuring program. As you can see on this slide, the cost, the P&L costs of these programs are already integrated, mostly in our costs with the exception of GBP 2 million, so the costs are already in the account. The benefit GBP 24.8 million, GBP 16.4 million plus GBP 8.4 million remains to be delivered in '19, '20, '21, you have the split on the slide. And in 2019, we expect to deliver only half of it, the GBP 14 million recurring cash savings equivalent, to what we delivered last year in 2018.

An important point, we have also decided to engage into further study to further expand this restructuring program. These studies are currently ongoing and we expect the results of these studies in the course of 2019. So you may expect an expansion of these programs going forward.

Looking a little bit in more details at the 2 main divisions, you see here that the 2 divisions had quite strong performances in 2018 with a return on sale up 160 basis points and to 10.4%. Flow control grew above the general market growth. Price increase were quite successful, very successful in both flow control and Advanced Refractories, again, confirming the pricing power associated with our positioning in the high-end part high-technology part of the market. We accepted the temporary loss of market share in Advanced Refractory in very specific areas, not across the board. It's mostly in North Asia and in Europe, and even more precisely, in South Korea and Germany.

Our flow control manufacturing network in Europe is now fully operational, delivering as much volume as we need to satisfy our customers and restructuring, which was in 2018, mostly Advanced Refractory related considered quite smoothly and according to plan.

In the Foundry Division, we also had good performance with good revenue growth of 8.2%, significant market share gains volume-wise in our key priority product lines, the most profitable product lines of feedings, filters and coatings. However, on the negative side, there were longer time lags than what we would have hoped for into action to increase prices to compensate for raw material cost increase. It was fully achieved at the end of the year, but we would have liked it to be achieved a bit sooner. We are probably missing because of this time lag effect GBP 2 million or GBP 3 million in our P&L of foundry last year. And this explains that even if we have improvements of our return on sales by 30 basis points. This improvement in return on sale was a bit lower than what we would've hoped for.

I will now hand over to Guy to give you some more details on our financial performance.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [2]

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Thank you, Patrick. Good morning, everyone. As usual, I'm going to, before looking at a revenue and trading profit analysis, just explain a number of elements, other elements in our income for the year.

So just reading down our income statement, if I could start with the share of JV profits, our JV profits at GBP 2.8 million is higher than the prior year. This was the case at the half year as well. This is primarily down to better results in one of the 3 joint ventures that we have in particular, to the Chinese joint venture where we had a fairly significant amount of price increases that went through in the year, some of which were retrospective adjustments.

Our net finance costs have reduced in comparison to 2017 and this is largely due to the full year benefit of the lower cost of the renegotiated USPP loan notes.

Our ETR has increased, sorry, our effective tax rate has increased to 26%. This increase is largely due to a reporting change. We have decided to take the utilization of our U.S. deferred tax assets through headline, rather than in separately reported, which is where we used to do it. This has contributed to, roughly speaking, 4% increase in our effective tax rate, that has been offset by 2 elements, which combined is 2% giving us a net 2% increase. The 2 positives were a Indian litigation found in our favor and in recognition of 2 other deferred tax assets in Italy and Australia.

Going forward, we expect our effective tax rate to be in, and around, 28%. That is not considering full utilization of the U.S. deferred tax asset through headlines going forward. After minorities, we reported a headline earnings increase of 21.4% to GBP 133.7 million and a similar increase of 21.9% in our headline EPS to 49.6p.

If I could now just turn to the analysis of our revenue, underlying revenue in 2017 after adjusting for foreign exchange and disposals was just over GBP 1.6 billion. Our underlying revenue growth of some GBP 172 million or 10.7% was made up of both price and volume increases. If we take that 10.7% total increase, 4.9% of it was volume and 5.8% of it was price, giving us then the GBP 1.78 billion of revenues -- underlying revenues reported for 2018.

If we take a look at the trading profit analysis, again, after adjusting for the negative foreign exchange impact of GBP 6.8 million and a minor adjustment for acquisitions and disposals in '17, our underlying trading profit was GBP 158.3 million in 2017. This increased by GBP 38.2 million or 24.1% to GBP 196.5 million in 2018.

If I just take you through the key constituent parts of that movement. Firstly, from a positive perspective, a GBP 32.2 million increase as a result of our higher revenues. This was offset by a poorer comparative performance in Fused silica, which Patrick mentioned earlier, of approximately GBP 1.4 million.

Two additional positive variance relating to the GBP 14 million of restructuring savings and then the unwind of the flow control EMEA friction costs that we reported in 2017. A number of higher costs that I think worth highlighting. We have increased our OpEx investment in sales and R&D personnel by roughly GBP 4 million year-on-year. This is, as stated, the half year end previously, an intentional move in order to ensure that we have sustainable revenue growth going forward and we expect this to continue into 2019.

We had a combined organizational cost increase of some GBP 6.6 million, which is predominantly made up of a combination of redundancy and recruitment costs. And finally, an increase in provision for environmental liabilities, which we flagged at the half year.

After adjusting some GBP 0.7 million for acquisitions and disposals in '18, it brings us to our reported trading profit of GBP 197.2 million, which is a pleasing 11% return on sales, well ahead of the 9.8% we reported last year. Clearly, we remain focused on our return on sales. So I think it's important not to lose sight either of our return on capital. Presented here is a constant currency comparison of growth in our revenue and trading profit from 2015 to 2018 versus a similar constant currency growth in our property, plants and equipment and net working capital. With sales and trading profit growth having far outstripped the growth in asset base, we've managed a fairly significant improvement in our return on net assets which has increased from 21.1% in 2015 to 29.9% this year.

We have consistently targeted the lowering of our trade working capital, which improved a further 100 basis points to 23.9% in comparison to last year. The 2 key drivers of the improvements were debtors and, in particular, we've seen an ongoing improvement in the reduction of our overdues and therefore debtors risk as well as creditors having increased. We have been less successful with our inventory, which we have, at times, had to increase to guard against customer disruption as we sought to restructure our manufacturing footprint. However, this remains too high and is the key area that we're aiming at improving on this year.

Overall, we are pleased with cash conversion in 2018, which was 91% in a year of relatively strong revenue growth. Our net CapEx was slightly lower than our depreciation charge and the improved working capital sales ratio meant that we recorded a GBP 179.4 million of operating cash flow. This was used on a net basis to reduce our net debt after cash payments totaling some GBP 123.3 million, which went to interest charges, income taxes, restructuring payments and dividends.

The GBP 29.8 million disclosed as other is made up of a purchase of some GBP 13.4 million of treasury shares for the employee share plan and GBP 11.7 million of FX-related debt revaluation. The net debt decrease of GBP 26.3 million took our year-end net debt total down to GBP 248 million.

This net debt of GBP 248 million is 1x our EBITDA, a healthy reduction from the 1.3x that we reported at the end of last year. This does leave us, in our view, in a strong balance sheet position with significant liquidity. This allowing us to take advantage of both opportunities as well as being able to maintain sufficient financial flexibility to manage any potential market volatility.

Our long-established and well-publicized comfort zone in terms of leverage still remains between 1.25x and 1.75x and our capital allocation remains unchanged at this stage as well being firstly, organic growth. We will continue to seek opportunities to invest in organic growth in our business, including restructuring opportunities, which we are evaluating across the group. Secondly, inorganic growth opportunities. We have mentioned before we continue to evaluate these against fairly strict financial criteria and CCPI is a good example. Thirdly, we will seek to return cash to our shareholders. Thank you very much for your attention. I will hand back to Patrick now for the outlook.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [3]

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Thank you, Guy. Now to give you some few words about our outlook for 2019. Despite a moderate slowdown in both our end markets of Steel and Foundry since the fourth quarter of 2018, we still expect today a positive growth for these 2 main end markets of Steel and Foundry in 2019, however, at a lower growth level than what we benefited from in 2018 and 2017.

In this environment, we plan to continue growing our top line, gaining market share, especially in flow control and foundry. And we are planning to accelerate and intensify our efforts to cut cost and to reap the benefits of our self-help restructuring measures to support or drive toward profitable growth and we have a clear objective to remain on track with our objective to reach the 12.5% return on sales by 2020.

For these reasons, we are confident that, in comparison to 2018, further progress will be made in 2019. So thank you for your attention and now, I propose to open the floor for Q&A. And Guy, and I would be happy to answer any questions you may have.

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Questions and Answers

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [1]

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Michael Blogg from Investec. Struck by the comparison between your so-called comfort zone of leverage and the level at which you finished the year. Clearly, you could see -- you could foresee today's acquisition coming. But with cash generation likely during the coming 12 months, does this imply that you're reasonably confident that you'll be doing more M&A during the course of the next 12 months?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [2]

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I would not use the word confident that we will do M&A in the next 12 months. We conducted a comprehensive strategic review in 2018. One of the elements, not the only one, one of the elements of the strategic review was to identify what could be potentially attractive targets for M&A. And since we conducted this review, we now have a list of targets. We know very well what could be of interest for us and what would not be of interest for us. So we are ready and interested to seize potential M&A opportunities. But to seize these opportunities, you also need first, a willing seller and a willing seller at what we will consider a reasonable price. And I think that with this CCPI acquisition, we demonstrate or we give some hints about what could be, what are our financial criteria as I had the opportunity to mention before, earnings per share acquisition is not a criteria for us. We are only interested by those acquisition opportunity, which will have positive acquisition impact on our profitability on our return on sales and which of course, will be at a reasonable acquisition price in terms of EBITDA multiple and what reasonable means, there is no one-size-fits-all definition of this. It all depends on the level of synergy that you can generate positive. But this CCPI acquisition is a good illustration of the type of acquisition we may be interested in, but there is no guarantee that also will materialize in the coming 12 months. In case there would be opportunity, we will start looking at it.

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David Barker, BofA Merrill Lynch, Research Division - Equity Research Analyst [3]

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It's David Barker from Bank of America Merrill Lynch. Just 3 quick questions. You talked a little bit about some softness in pricing in certain markets in advanced refractories. Are those market-specific issues? Or is there any kind of broader read in terms of refractory products? Two, I think, you talked again about some softness in auto markets in the U.S. and Europe. Have you seen any kind of change in that trend in January and February? And finally, I guess, one for Guy. How do we think about IFRS 16 for this year or is it not something we have yet?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [4]

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On your first question, I will not really call the story of 2018 a story of softness in prices in advanced refractory. I see it the other way around. We have had quite a dynamic and successful price increase in advanced refractory in 2018. And we have not lost market share anywhere, except on 2 specific places where we slightly lost market share. So globally, it was a very successful operation. I know there is no specific softness in prices in advanced refractory. And by the way, the market share losses, the slight market share losses that we experienced last year, we see that as a top priority, there is no reason why it should continue. I think that our competitor has the same problem as we do. They also need to increase prices. They may be a bit slower than we are, but over time, they will at some point. On your second question, you're right. There is a slowdown and even in the case of China, weakness in the light vehicle market end of the year. And it is continuing beginning of the year. You may have seen the statistics of -- for light vehicle in China in January. They are more or less in line with the one of November, December, meaning relatively weak.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [5]

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Should I take the IFRS 16 or you?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [6]

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I think you should.

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Guy F. Young, Vesuvius plc - CFO & Executive Director [7]

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So thank you. I don't think I've ever had an IFRS question before. We have done the analysis. We've been running that for some time. I think we probably have -- we have some room to improve in terms of data collection around the group of people's fundamental understanding of what we need to do, but we do not see a material impact. We think it's somewhere in the region of GBP 30 million to GBP 40 million, but not significant given our business model now.

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Jonathan Hurn, Deutsche Bank AG, Research Division - Research Analyst [8]

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It's Jonathan Hurn from Deutsche Bank. Just a couple of questions, please. Just if you look at Steel Flow Control, obviously, relative to the market, is strong outperformance coming through in 2018 from that business. It looks like a lot of that was down to pricing. How do we think about that dynamic going into 2019, just in terms of sort of putting through price increases? That was the first one. And the second one just coming back to the CCPI acquisition. Obviously, you flagged synergies. You say they're quite small, but can you just give us a little bit more detail? Are they cost synergies, are they revenue synergies? What kind of level of synergies you're actually going to get from that deal, please?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [9]

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Relative to flow control, our pricing initiative was quite successful and you're fully right, we were able to completely compensate any raw material or other cost increase, which we had in 2017 and '18. However, the volume growth was also quite significant and the volume growth of flow control business unit clearly outperformed the underlying volume growth of our markets. So what we see in the performance of flow control is not only price, it's clearly also volume.

Going forward, we intend to continue fully compensating some price increase, any cost variation that may impact us, be it in raw material or other cost. And because flow control is mostly on the high end part of the market, there is a good pricing power associated with those products, which we handle carefully because we have a long-term relationship with our customer and we are not looking to overcompensate beyond reasonable the cost increase of, I would say our mode in contract with our customer, with that we simply pass through, in particular, the raw material cost increase. We are not -- it's not our business to make neither profit nor losses on raw materials. You know that our strategy is not to be integrated in raw materials, in mining, which is the reason why we have a good free cash flow generation and, vis-à-vis our customer, we pass through up and down. If at some point, the raw material would go down, we would also pass it through to our customer.

Relative to your second question, the significant synergies I was mentioning are SG&A and manufacturing optimization. This CCPI activity is really a plug-in -- is a plug-in in our existing North American operations. We know the product, we know the customer, our plants are very similar. So the extent of synergies is relatively significant with low risk of implementation.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [10]

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It's Andrew Douglas from Jefferies. I have 3 quick questions, if I may. I'll start with Guy. On the inventory opportunity this year, I know that yourself and your team are very focused on cash generation going forward. How easy is it to reduce inventory? I'm working on the assumption that kind of lack of disruption this year compared to maybe a couple of years means that this year really is an opportunity to get firm inventory and how meaningful could it be if you start now?

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Guy F. Young, Vesuvius plc - CFO & Executive Director [11]

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Sure. Andy, I think, so it does break down slightly differently. We have raw material, semifinished, finished plus consignment. Our business model given our manufacturing footprint plus the way in which we deal with customers means that we have a relatively significant chain of inventory in the system. What we are trying to do is take a relook from a strategic category management perspective. We have a new Head of Procurement who has joined the group. We will be taking a look at those key raw materials. We have a variety of action plans in place to improve our sales and operations planning pull-through on our inventory. And as we've now sought to reestablish a new manufacturing footprint, there must be inventory reductions in total coming out of that. As far as target is concerned, we have internally got a significant target that we hope to achieve and at least at the half year, I hope to be able to show you some improvement.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [12]

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With respect to kind of the big picture stuff, the move to the decentralized model clearly is starting to already have benefits, it would appear, from your comments. How pleased are you with the progress there? And do we really kind of start to see that really matter in terms of benefits coming through in 2019? Are you happy with how that's progressed? Because it's quite a big change for Vesuvius I think as we discussed, 6, 12 months ago.

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [13]

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I'm quite happy with the way the new implementation -- the new organization is starting. During the capital market day, I had the opportunity to say that we were on track to change 75% of our regional vice president, meaning that our real P&L manager close to the ground and to the customer. This is now in place. All the new, the right people are in the right positions. All of them without any exception, having a good start and we see now flowing the first benefit of this increased dynamism and increased speed of reaction, vis-à-vis the customer needs on the market and I'm confident that we see more to come in the coming year.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [14]

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And then last from me. Just with respect to steel markets, bigger picture, I think, most people are assuming modest growth kind of global production ex China. If we look at China, it's going to be reasonably tough this year. Are you guys still happy that your penetration opportunity is still significant so that you can outperform that Chinese market going forward, is that still a fair assumption?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [15]

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Our vision of the market is relatively close to the one presented by ArcelorMittal a few days ago, when they presented their results, meaning that if I start with China, we see a slowdown in consumption and we agree with the vision of ArcelorMittal that this year, there will most probably be a slight decline, minus 0.5 or something like that percent of steel consumption in China. Despite this, in this environment, we remain quite confident in our own inability for our own sales to continue growing at a healthy pace because of maybe in China is a penetration game, as you know. And our solutions are more and more widely adopted by Chinese producers. So we significantly outperform our underlying market in China, especially in flow control and there is nothing beginning of this year, in the number I see beginning of this year, which will lead me to a different analysis. For the world outside of China, ArcelorMittal was forecasting a few days ago, a 2% to 3% bucket in the evolution of steel consumption, apparent consumption. We are rather on the lower end of this market. We believe more in the 2% than in the 3% for the year 2019, but we have no more crystal ball than anybody else.

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Mark Lewis Fielding, RBC Capital Markets, LLC, Research Division - Analyst [16]

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Mark Fielding from RBC. Could we maybe just delve a little bit more into how you see your cost outlook. Obviously, you've talked about offsetting the costs that are coming through. Maybe how you think about raw materials, but not just raw materials, other cost evolution in 2019, but maybe beyond that as well. And then secondly, just a sort of theoretical question. Obviously, you're pretty clear that if material costs went down, you would pass that through to your customer, but you do have some more vertically integrated competitors. If they were slower to pass it through themselves because maybe they want to keep their profits high, how would you react? Would you always stick to your principles and move your pricing down even if all the market wasn't around you?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [17]

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On your first question, we are confident in our ability to pass through to our customer and to continue to pass through to our customer the raw material and all the cost increase that we may experience going forward. We've done it in very difficult circumstances, complex circumstances over the past 12, 18 months. By the way, Vesuvius has been doing that for the past 20 years. So it's not the episode of the past 12 months was a complex one, but Vesuvius had already known or saw complexity even before. So we have now demonstrated over a long period our ability to pass through some price increase the potential raw material or other cost increase.

Now your second question is a very important one. What would happen if the raw material prices would go down and some of our competitors would not decrease the prices of their final product. I think that our policy on this is very clear. We have a tight relationship with our customer. We will pass through declines in raw materials cost. It's not our business what our competitor do or do not do -- is not our problem. We have a policy to be neutral vis-a-vis raw material prices and it's part of the long-term tight relationship we have with our customer. The average relationship with our customer is more than 15 years old. So we will not jeopardize this kind of tight relationship for short-term gain.

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Mark Lewis Fielding, RBC Capital Markets, LLC, Research Division - Analyst [18]

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If I could just follow up briefly on the first part of that, how do you see the outlook as far as for magnesia prices in this year and then into next year? Just do you think the current levels are the long-term levels? Is that how you plan?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [19]

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I will take my crystal ball. If you asked me what the magnesia prices would be in the next 6 months, I have no clue. If you ask me what the long-term trend of magnesia prices over the next 10 years will be, then I feel a little bit less, not that much, but a little bit less than comfortable. I think that if you look on the long-term trend and the fundamentals, the current level of magnesia prices, in my opinion are above long-term sustainable level. How long will it take for the magnesia prices to go back to their long-term sustainable level? I don't know. But I don't believe that the current level of prices is representative of what it should be long term. It doesn't mean, conversely the very low-level of prices we had 2 years ago, I don't see that as more representative either, these were abnormally low. So the long-term sustainable level, in my opinion, is probably in between what we had 2, 3 years ago, and what we see today.

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Harry Philips, Peel Hunt LLP, Research Division - Analyst [20]

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Harry Philips from Peel Hunt. Just a couple of quick questions. In terms of the foundry business, you talked about the delay in passing through raw materials. Was that a normal delay or abnormal one? How long can CapEx remain below depreciation? Is that just a '19 issue or a more sustainable one? And then, in terms of aluminum, you tend to be -- you seem to be mentioning it a little more regularly. Is that clearly a focus going forward as a strategic opportunity?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [21]

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Could you repeat your first question? I didn't catch your first one.

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Harry Philips, Peel Hunt LLP, Research Division - Analyst [22]

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It was the lag in passing through the raw materials factory in foundry. Was it a normal lag or an abnormal lag?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [23]

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So your first question, in my opinion, any lag is abnormal. So I like the world where we can do it instantaneously. Now the real world is the real world. But I think, we've been a bit slow. I think that I can accept a normal time lag. But if I compare the performances of the Steel division with the performances of the Foundry division, I'm more satisfied with the reactivity of the Steel division than with the reactivity of the Foundry division, but better late than never.

Regarding the CapEx, we are structurally a low capital intensity business. Our stay-in business, our stay-in business CapEx level to maintain our manufacturing network in good shape is whatever GBP 30 million, GBP 35 million worldwide, not more than that. We invest a bit more than that because we improve our plants, okay. We are today with what we spent today, we have to do what we need to maintain our plants in good shape. We are investing to transform our plants, to automatize them, to make them real good 21st century plants and not only good late 20th century plants. So we are quite comfortable with the level of CapEx we have today. And by the way, we have a strong support of our board to do, not more, but you have seen in our manufacturing network because we are an industrial company so we need a top notch manufacturing network.

Aluminum is an area -- we are molten metal flow engineering companies. So we serve those sectors, we serve industries which have to manipulate large amounts of molten metal in their own manufacturing process and we help these companies improve their process and the quality of their finished products very naturally, which is the reason why, our 2 most important end markets are Steel and Foundry because these are the 2 industries manipulating the biggest amounts of molten metal. But after that, aluminum industry is also an industry manipulating large volumes of molten metal in their production process. So we are -- I will not say justifying it. It will be absolutely not the right wording, but we are exploring how we could year-after-year improve our presence because some of the solutions and expertise that we have developed for the Steel and Foundry market are clearly applicable for the aluminum industry. So we are progressing our presence in the aluminum industry but still very minor end markets for the time being as compared with the 2 most important other one. But for the CCPI acquisition, we also acquired some technology and know-how, which we can probably leverage beyond the current existing market of CCPI.

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Richard Paul Paige, Numis Securities Limited, Research Division - Analyst [24]

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It's Richard Paige from Numis. Just a brief question on Slide 14, your sort of dynamic regions page. The foundry growth in India of only 1% sort of stands out. Could you just elaborate on what happened there and whether it has any impact on your growth expectations in the region in 2019, please?

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Patrick Georges Felix André, Vesuvius plc - CEO & Director [25]

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I also would not know. We have [really can't comment] by the way, I had the opportunity to make a comment on that when we presented already of first as [figured] because the situation was a bit similar already. The foundry market in India is growing, but it's a relatively specific market, even if it's changing a bit now with a very, very large number of quite small foundries where payment practices are sometimes creative. And for us, we are here to make good money and to make good cash, not only to make good accounting results. So we have a very -- and I should point the policy, the foundry management on this. We have a clear and strict policy, vis-à-vis customers, which do not pay their bill. So at some point, we only deliver those customers who pay regularly their bill and on time. Keeping our working capital under control, under strict control is one of our important management criteria in India like anywhere else. And foundry, we take this into account. And for the time being, for the past 12 months, it has been slowing down a little bit of progress in India, but we have no intent of tampering with this management criteria. We will continue to develop in India in line with our ability to collect cash from our customers.

Now I'm confident that we would not remain at 1% forever. We will, at some point, as the market is progressing in India, and also, our competitor at some point needs to get paid. So these kind of things may take time, but they fall back in line after some time. So I'm confident that over a longer period, the foundry business will progress significantly in India.

Any more questions? If there are no more questions, I would like to thank you again with Guy for your presence this morning and I wish you a nice day. Thank you.