Good day, ladies and gentlemen. Welcome to the Vesuvius PLC H1 trading update. At this time, all participants are in listen-only mode. Later, we will conduct a question- and- answer session through the phone lines. Instructions will follow at that time. I would like to remind all participants that this call is being recorded. I will now hand over to the CEO of Vesuvius PLC, Patrick André, to open the presentation. Please go ahead.
Thank you very much. Good morning, everyone. I am Patrick André, the CEO of Vesuvius, and together with me this morning, we have Mark Collis, our Chief Financial Officer. We'll give you some updates about our trading performance since the start of the year. The most important message is that we've been performing well since the beginning of the year. Our trading year- to- date has been positive in both our Steel and Foundry divisions with both volumes and pricing slightly above our expectations.
We are particularly happy with the performance improvement in our Foundry division, where thanks to the market recovery and also good performance and good progress of the division, the results are starting to improve as planned. It's good to see that things are improving as planned, as planned. In the Steel division also, we have good performance with volumes more or less in line with general market evolution, which is normal, but resilient pricing in the year- to- date.
Regarding our end markets, we are also confirming that we are clearly starting to see, I would say the beginning of the recovery, since the low point of the Q4 last year. We are now clearly on the right side of the V-shape.
This recovery, the pace of the recovery is slow. The general market volume remain low. In absolute terms, we remain for the steel market, you may have seen the numbers of the World Steel Association, 6.8% below last year in Q1. In absolute terms, it remains slow. There is still a very significant potential for improvement going forward.
The important message is that, it's recovering, it's positive, even if it is, for the time being, at a slow pace. We are quite confident that, this recovery of end markets will continue in the months to come. For the time being, the pace of the recovery, is slow and, there is uncertainty about will it remain slow, will it be a slow positive in the coming months? Will it at some point, or when will it, accelerate? This, of course, remains, quite uncertain for the time being. The trend is positive.
In this environment, despite the uncertainty about the pace of the recovery going forward, thanks to the quite good results and quite good start beginning of the year, we feel very confident to maintain our expectations for the full year. We'll see when we announce in a few months our results for the half year, if it is justified or not to be a bit more optimistic. At this stage of the year, as always, now you know we are always cautious. We believe that the right thing to do considering the uncertainty going forward is to maintain our expectations.
In terms of working capital management, we are starting clearly to make some progress, we are starting to improve the working capital intensity of our business. We are not there yet in terms of what our objectives are, so we still have some work to do in the coming weeks and months.
We have engaged the move to reduce the working capital intensity as compared with what we believe are too high level, where we were last year. We are progressing well for this objective, but we still have some work to do to go where we want to be in the coming months.
Globally, we remain very confident and let me say even quite excited by the performance improvement potential that we see in our business when the market recovery will accelerate. Based on this, we are continuing at pace our industry leading investment in R&D. We are continuing our effort in R&D.
Our growth capital investment program remains fully on track. As I had mentioned during the presentation of our full year results, our new capacity will be fully on track by the end of the year, meaning that we believe that when the market recovery will accelerate, we'll be fully ready to benefit from it. I will stop there and I propose now to open the floor for questions. Mark and I will we are at your disposal to answer your questions.
Thank you. If you are dialed into the call and would like to ask a question, please press star and then one on your telephone keypad. If you wish to withdraw the question, please press star and then two to remove yourself from the list. Once again, if you wish to ask a question, you are welcome to press star and then one. Our first question is from Andrew Douglas of Jefferies. Please go ahead.
Good morning, Patrick. Good morning, team. I have just two quick questions for you, please. When we're talking about the steel market, there's not a huge amount of information in the statement. I understand that the cybersecurity incident has kind of clouded things a little bit.
Do you think you're winning market share anywhere in particular? How kind of your thoughts on your performance relative to the market across some of the geographies? If you could give us a little bit of help there.
Then just on R&D, can you just talk about how pleased you are, or otherwise, with, A, the internal progress on the R&D front, but also the customers', kind of uptake of recent new products. I know that, you know, during COVID, you couldn't get onto customers' sites, and we've kind of unwound that now. Is there a kind of growing interest in, you know, the benefits that you're putting into R&D from a customer perspective?
Thank you very much, Andy. On your first question to cybersecurity, we are now confirming that the cost of this cybersecurity incident will be limited to GBP 3.5 million. This GBP 3.5 million are integrated in our trading profit with above the line.
It's, I would not say it's a normal cost, but it's a cost that we have to incur, so we are it's completely integrated in our guidance. We are now fully recovered. We have derived all the lessons of this incident. I believe now that the level of our protection is even higher than what it used to be before.
We are quite confident that we are equipped to minimize the risk of a repeat. I will never dare to say that we are eliminating the risk, but I think that we are quite solid now in terms of cybersecurity resilience.
Our performance relative to the market, we are more or less in line with the market evolution beginning of the year. It's very difficult beginning of the year to have a clear estimate of market share evolution. Roughly speaking, all indications we have at this stage is that our volumes are more or less evolving, roughly speaking, in line with the market evolution.
When we see, we'll see clearer during the rest of the year. For the time being, nothing which would indicate a drastic change of terms as compared with the past. Regarding our R&D, we are quite pleased with the progress and with the response of our customers to the new product that we are introducing into the market. Especially within all three divisions, clearly, especially in Flow Control, but also in Advanced Refractories and in Foundry.
This I think indicates the decision we made a couple of years ago not to cut our R&D expenses during the pandemic and to continue to invest in R&D. We are seeing the benefit now with we are quite a positive response from our customer to the new product that we are now introducing to the market.
We know that there is a very important event in Germany, beginning of June, GIFA/METEC, which happens once every four years. Where there will be a significant presence of METEC, and where we intend to showcase all our new innovations in front of our customers coming from all over the world.
I'm quite confident about first indication is that makes me very confident in the feedback that we will receive from our customers when they will visit our stands and presentations at GIFA/METEC in Düsseldorf, beginning of June.
Perfect. Thank you very much.
The next question is from Moses Ola of J.P. Morgan. Please go ahead.
Hello. Thank you very much for taking my question. I just wanted to circle back to your guidance and your expectations for the year. At the H2 call, you talked about your expectations for the year and assumed on a quantitative guidance basis, -5% sales volume decline in steel and +2% volume growth in Foundry.
Can you just confirm that, as you've mentioned about maintaining expectations for the year, that those growth assumptions are still intact? Could you perhaps give us more color on which regions you're seeing any surprises in?
Thank you. Thank you for the question. At this stage, we are more or less in line with our expectations. I don't see obvious reasons today to change drastically our expectations for the year. We have I would say quite a good beginning of the year. Confirmation of a good situation in a region like India. Southeast Asia has been a bit weaker for the time being. We believe that for the part of the market where we are active, things should improve going forward.
We see also some improvements in China. The long product sector is suffering in South America, but the flat sector is not that bad, which is important for us. In the U.S., it's holding relatively well for the time being, b ecause we are maintaining what I would call again, always at this time of the year, a healthy level of caution. I think that my answer to your question is that we remain in line with our expectations that we expressed during the full year result early March.
We'll see going forward if there are reasons to be or not a little bit more optimistic than that. For the time being, our base assumption remains the same as the one we communicated on at the time of the full year results.
Okay. Thank you very much.
The next question is from Bernard Jani of BNP Paribas Exane. Please go ahead.
Thanks for taking my questions. I just wanted to circle back just on that outlook message. I'd just be interested in the development of trading through the first four months of the year, were, say, declines in April shallower than the average of Q1, or is the opposite true, and it's the case that trading has actually been a little bit bumpier through the first four months of the year.
Hence it's another reason why you reserved some of that conservatism in the guidance. Is there any color that you could perhaps provide in how trading fared through the first four months of the year, just the shape of it?
No, I think, if I understand your question, I think it's fair to say that the trading since beginning of the year has been better than what we were expecting. Now the fact that w e maintain our expectation does not mean that we have any bad news for the rest of the year. It means that at this stage, and because there is a lot of uncertainty on the market, we are cautious. Clearly, the beginning of the year is for us a bit better than what we were expecting.
W e believe it's. At the same time, there is a lot of uncertainty. W e all read the same newspaper and, so there is a lot of uncertainty in the going forward for the general economy. I don't think it is the time now to drastically change our expectation for the full year. Obviously, it's better to start a bit above expectation than below, huh, so. I don't think we should be carried away. It's too soon to be carried away. It's a positive start. Let's wait to see if it is confirmed or not.
Sure. Sure. While expectations for the year aren't changed, is it fair to assume that the weight of profitability, say, of H1 over H2 has changed though? By that I mean, because Q1 is stronger than expected, you know, there's less of a H2 leaning towards your financial performance this year, than, say, you would have expected at the start of the year. Perhaps less risk associated around the guidance that was communicated.
I see your point. I think that o ur expectations, the fact that we maintain our expectations for the year, you are fully right, implies that the balance between H1 and H2 is probably more balanced than- would imply that the balance between H1 and H2 is more balanced than what we thought a few months ago. Yes, you're right.
Sure. Sure.
Again, I would not want.
if I could ask?
I would not want to derive that there is a negative perception about H2.
No, of course.
There is a strong feeling that we should be cautious.
I just wanted to ask around pricing. I was wondering if you could shed some color around how it's developed. I was interested in the year-over-year impact in the trading period, and how it's also developed sequentially, so the first few months of the year relative to Q4.
For the time being, our pricing has been quite resilient. Has been quite solid, quite resilient. I would say more or less in line with the end of the year. At the same time, we have always said our policy is that raw material prices are for us a pass-through. We increase our prices when raw materials go up. We are fair with our customers when raw materials go down. At some point in time, the decline in raw material, in freight, will start to materialize in our cost structure.
When it does, we will continue to behave in a fair way vis-à-vis our customers, by passing it back through, at least what we, the part of it which will translate in our cost structure, to passing it back through to our customers. It's a progressive move, because we are not at all in for those raw materials that are important for us, which are different raw materials than the one important for some of our competitors.
For the raw materials which are important for us, there is an erosion in prices. There is no, there is no huge decline in prices. When this erosion will translate into our cost structure, then, as a matter of fairness for our customers, we'll pass this through. For the time being, our pricing is relatively resilient.
Understood. Given where spot prices are for raw materials that you purchase and freight, if these spot prices hold, what is your expectation in terms of how much prices will have to come down or how much you pass on from today's current price level? Are we talking around 5%, or is it slightly more than that? What is your expectation? I appreciate it.
It is difficult-
-but .
It is difficult at this stage to give you a global percentage because, in fact, the evolution of raw material prices is very, very different from one type of raw material to the other. The raw materials which are probably where we see the biggest most pronounced decline is more or less everything related with magnesia type of products.
The magnesia-based products, obviously the market prices is declining because for some time now, the price of those magnesia-based raw materials has been declining quite significantly. As is normally the case and always the case, you have an adaptation of the same.
Got it. That's very, very clear. Thank you very much. I'll leave it there.
Magnesia is more an Advanced Refractory type of raw materials, not at all a Flow Control one. For those products that we are manufacturing, where magnesia is not used, then the movement of raw material is much more, I would not say anecdotal, but is significantly more limited. We do not have the same pricing situation for all of our operations. It's mostly the decline in prices is concentrated mostly on those magnesia-based products. Which for us is a minority, yeah.
The next question is from Harry Phillips of Peel Hunt. Please go ahead.
Yeah. Good morning, everyone. Just a couple of questions, please. The first is sort of capital allocation. I mean, obviously, Mark, you're now well in situ. I'm thinking particularly around M&A, where there's been quite a lot of activity and obviously PE as well as trade being quite busy and thinking particularly around Foundry, and what you might need to do there.
Given the fragmented nature of Foundry, are you seeing more opportunities appear on your radar screen at this point in time? Just coming back to China, clearly China's had a very good start to the year. There's sort of expectation it tails off second half. I'm just wondering how your Chinese exposure, particularly in Flow Control, sits around that, please.
Thank you very much, Harry, for the good question, as always. Of course, now we are looking very closely at M&A opportunities. You know that our priority is organic growth. We are concentrating on that. At the same time we have a very solid balance sheet. We continue to have a good cash generation.
We are continuing, and we will continue to maintain a very solid balance sheet and low leverage on our balance sheet, which means also that we have the financial means in case there will be attractive opportunities to look at M&A. We are looking at some opportunities. However, we are extremely selective regarding what we are looking at.
We have two criteria which are always the same. The first one, there needs to be any acquisition needs to be a complement to our portfolio in terms of technology. It needs to bring us something in terms of technology. The second point is that the price should be reasonable. We have been looking at potential. We are looking at potential acquisition both on the Steel side and also, you're right, there may be some opportunities on the Foundry side.
However, for the time being, we need the two conditions to be met. We do not have yet on the Foundry side opportunities which will meet the two conditions at the same time. We are continuing to look at it and discuss.
Lovely. Thank you.
The second point regarding China, your second question regarding China. Yeah, we have, we are rather. I was in China last week, and it was the first time I had the opportunity to go back there since the over the past three years. I had a very positive trip in China. I have- we have a fantastic team in China who has been making very good progress over the past three years, despite their isolation. The market is clearly getting better, both in steel and in foundry.
I think that the China performance is one of the elements, China performance beginning of the year and in all likelihood for the rest of the year, is one of the elements which makes me confident for the evolution of our overall results for the year going forward. Yeah, it's a rather positive, I thought of a rather positive situation in China when I was there last week.
Great stuff. Many thanks indeed.
The next question is from Sanjay Jha of Panmure Gordon. Please go ahead.
Yes. Thank you for taking my question. I wanted to get my head around your working capital statement. You mentioned that the volumes were probably better than you had expected. I'm trying to understand why you've not seen a much better improvement in your inventory levels. Could you just remind us what is your target for inventory days, for this year or next year? Thank you.
I will pass on to Mark to give you more details about the number of days and. To first answer qualitatively. First, we are seeing some improvement. The improvement, my job as CEO is to be never satisfied, so I'm not happy with the improvement by definition. We are seeing some improvement, a nd I would like my team to be even to go even stronger and even faster because again, my job is never to be satisfied. They are making. I sometimes have to recognize that they are also making some progress.
But one of the important point to remind is that, yes, volumes are a bit better than our expectations, but they are very low. They are very low. They remain very low in absolute terms, as compared with anything normal. We need to get better. I will not hide that. I think that, I'm not completely satisfied with the pace at which we are making progress, but at least we are making progress. We intend to accelerate those progress going forward.
The cybersecurity incident beginning of the year has not helped because we have been managing without dashboards for quite some time, for many weeks, . We have- which never helps. I think even with this cybersecurity incident, we've been making some progress. I believe that now this progress will accelerate in the coming in the coming weeks and months. I will hand over to Mark who will give you some more flavor about what our objectives are in terms of days.
No, thank you. Thanks, Patrick. I guess first thing is we tend to look at high level up. We'll look at working capital as a, as a potential revenue. We're aiming at to improve by about 0.8%. In terms of absolute terms, inventory, we're not, you know, it's broadly in line with December. We expect it to be relatively flat over the course of the entire year.
We've seen most improvement in debtors and creditors, and we've already experienced that so far in the first quarter. Inventory's ticked up a bit, but it's not to the point of being material, to be honest. Just not quite as much as an improvement that we would have liked.
I would say in terms of days, I would expect it to be broadly consistent because in absolute terms it's gonna be consistent and we're not expecting a, you know, huge pickup in revenue. I think Patrick's already made the point really that the improvement in Q1 has really been driven by price, not by volume. That's why we've not really seen the reduction that you are proposing is in terms of inventory values.
Okay. Thank you very much.
There are no further questions on the conference line. I will now hand over to Patrick for closing remarks.
Thank you. Thank you very much to all of you for attending our call this morning. Don't hesitate to contact Mark, Rachel, and me if you have further questions. I wish you all a very good day and we'll meet again when we announce our share results in July. Thank you very much and have a good day.
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.