Welcome to the Vesuvius trading update call. I would like to turn the call over to the management team. Please go ahead.
Good morning, everyone. My name is Patrick André. I am the Chief Executive of Vesuvius, and I am here this morning with Mark Collis, our CFO, to give you some update on our trading in the third quarter and year- to- date. Before we start, as you know, we are operating under the Takeover Code. For clarity, I will not be going to comment on the ongoing discussions with RHI, other than to say that, as you will have seen the PUSU extension notice last week, now set for 24 November, the board is unanimously working very hard and with diligence to form an opinion on what would be the best interest of our shareholders. To be back to our trading update, strictly speaking, important point is that our operational issues impacting North America are now largely addressed.
Our production backlog has already been materially reduced, and we remain fully confident that those issues will be substantially resolved by the end of the year. Turning to the various business units, our trading in Flow Control is ahead of the same period last year and fully in line with our expectations, despite these operational difficulties in North America. In particular, we continue to have a strong net pricing, positive pricing performance in Flow Control. Our trading in Foundry division is also ahead of last year and in line with our expectation, with, in particular, continuing strong benefits from the MMS integration, the Morgan Crucible integration.
Advanced Refractories, the Advanced Refractories business unit, however, remains challenging and impacted not only by the operational issues in North America and, to a lower extent, in India, those will also disappear by year- end, but also by a persistently difficult pricing environment in Europe. Globally, our steel markets remain positively oriented outside of China, with a 3.1% growth year- to- date in September. Going forward, you may have seen the announcement by ArcelorMittal this morning, which is rather positive regarding developments in Europe starting in Q4, but mostly in 2027. Our own analysis is in line with the analysis of ArcelorMittal. The Foundry markets there remain positive in Asia and North America, but they also remain challenging in Europe and South America. No change in that respect globally as compared with what we communicated on at half year.
We remain on track to deliver our cost savings of at least GBP 55 million by 2028. GBP 10 million of those will be delivered this year in 2026. We also continue to make good progress in cash management, with working capital intensity continuing to decrease, and we expect to continue to do even more than that going forward. All this being taken into consideration, we expect our trading profit in 2026 to be broadly in line with the one of 2025 on a constant currency basis, and this despite the operational difficulties in North America and, to a lower extent, in India. I now propose to open the floor for questions.
Thank you, sir. If you'd like to ask a question, please press star one on your telephone keypad. If you change your mind and want to withdraw your question, it's star two. Please ensure your lines are unmuted locally, as you'll be prompted when to ask your question. To ask a question, please press star one. We have the first question coming from the line of Stephan Klepp from BNP Paribas. Please go ahead.
Yeah. Hi, good morning. I have two questions, please. Can you go a little bit more into detail how the unwind of the operational issues is proceeding? I mean, you're saying you're on track, it's going to not give any issues for 2027, but what have you done? I mean, we went quite into detail what was going wrong in terms of having the capacities, having not invested enough, having the manpower to execute in North America. So, where are we there? Then secondly, if we think about the European business, can you talk us about I mean, you mentioned ArcelorMittal, but can you talk us about, can you tell us a little bit about how you see the business in Europe developing. Earlier in the year, you said that European clients are getting ready to ramp up their production again.
Where are we there, and how are things proceeding for you in Europe? Because you said it's still subdued.
Thank you, Stephan . On your first point, we are doing what we said we will do. First, we are catching up in maintenance in our key plants, CapEx/maintenance in our key plants. This is not completed as we speak, but very well advanced, and we have a plan. You cannot do everything in two days. We are completely on track with our catch-up plan regarding maintenance and CapEx in our plants, and it shows already. We expect further improvement in the weeks ahead, but already today, the production capabilities of the key plants which were the most affected in North America is already significantly better than what it used to be at half-year.
Considering the positive progress that we have already made, we are quite confident that by the end of the year, the production capabilities of those plants will have been reestablished at the level where we want it to be and where we need it to be. What it means is that in practice, our production backlog that we had accumulated during the first half is still not completely eliminated, but it has very significantly decreased as compared with what it used to be at half-year. Based on the current trend, we are confident that it will have been eliminated by the end of the year. Another important point is that we have been hiring many competent people in our operations to fill the vacancies, upgrade some positions when they needed to be upgraded.
I would say probably today, as we speak, 75% of our people upgrading and complementing needs have been addressed. We have another 25% to do by the end of the year, but considering the pace at which we are progressing, I am also confident that it will be okay. Globally, we are on track to solve these operational problems by the end of the year, which means that our operations in North America should not be a drag anymore on our volume performance as from the end of the year. We should be able to satisfy all of the demand which will be addressed to us going forward.
Can I have a follow-up on this one, please?
Sorry. Yes, please.
Yeah, can I have a follow-up on this one? Okay, so you have been upgrading positions and hired more staff. Is it meaning that, because you talk about volume is not an issue anymore, is that meaning that you're going to have a lower margin quality in the North American market going forward because the labor market for blue-collar has been running quite hot, and there's obviously labor cost inflation? Or will you be able to get back as well to the desired margin level that you should see in North American operations?
Yeah, it's the opposite. The margin will increase significantly in North America because the fact that you add a little bit of operational cost because you hire the right people. Hiring the best people is the best investment you can do in the business. It pays off. That's the best rate of return that you can get in the business. Clearly, the fact that hiring the best people not only allows you to better run your plants and increase capacity, satisfy demand, and you know that leverage in our business is extremely high, meaning that the contribution margin on incremental sales is extremely high, significantly higher than the average profitability. So when you can increase volume, you increase profitability.
At the same time, when you have the right people, the good people in your plants, that allows you to progress faster in your cost reduction initiatives in your plants, because you need brains in your plants to progress in cost reduction initiatives. Cost reduction is not about reducing people, in particular, not reducing management in the plants. Reducing cost is about investing in management in the plant to have the right level of quality of people and brains in the plant to develop cost reduction initiatives.
Super. Thank you.
On your second question regarding the European business, again, I could not summarize it better than what ArcelorMittal did this morning. Q3 in Europe in steel was still relatively soft. The Q3 steel production in Europe was, if my numbers are correct, on or around 1% below last year. However, it was not unexpected because we knew that some inventories had been accumulated before the deadline of the 1st of July of the new European regulations and protection measures. It is only starting in Q4, but mostly in 2027, that we were expecting to see the benefits of the new EU steel safeguard measures introduced as from the 1st of July. Again, we don't have a crystal ball.
We have an opinion on this, a very humble opinion on this. It looks like this opinion is clearly being shared by some actors which are even more aware of what is happening on the market than us, like our customers, and in particular ArcelorMittal. Because our vision of the market and the fact that things should start, we don't see Q4 as being a fantastically good quarter, but we should start seeing some first improvement in Q4 and accelerating in 2027. It is more or less what ArcelorMittal said this morning. Again, maybe we are all wrong, but at least we have the same vision.
Yeah. Thank you so much.
As a reminder, if you would like to join the queue for questions, please press star one on your keypad. The next question comes from the line of Lacie Midgley from Bloomberg. Please go ahead.
Morning, Patrick. Thanks for the time this morning and the questions. Two to start with, I think. Firstly, on Flow Control, can we just talk a little bit about how much of the previously lost business has actually been won back? I think in July, you discussed a 6- 12-month timeframe for customers returning. Any sort of update there would be helpful. Secondly, on Advanced Refractories, just trying to get a sense of what proportion of weakness is the operational versus structural pricing share pressure. You talked a little bit on this. Just trying to think about Europe pricing and stabilizing, and whether we should expect further weakness into 2027. OK first, please.
Thank you very much. Regarding Flow Control, what we have regained so far is a very minor part of it. It is not that we had lost, what we could not deliver, which is not exactly the same thing as losing. We have started regaining, but very in 2026, it will be only a minor part, which shows, by the way, the potential for 2027, because when in 2027 we will be able to accept all requests addressed to us without limitation and gain market share, and have more possibilities to gain market share, I expect a significant improvement in 2027, in particular in North America. But for the time being, and for 2026, yes, we are regaining, but it is only a very minor part, because this will mostly be for 2027. Regarding Advanced Refractories, in India, it is really 100% the operational issues.
In North America, it is also 100% the operational issues. In Europe, we have no operational issues. It is market. I expect going forward significant improvement in what are the two key regions for us in Advanced Refractories, which are Asia, India, and North America, because this is really 100% an issue of operational problems. Europe is more structural because the competition and price pressure in Europe, especially with increasing Chinese imports, is more structural. But we are adapting by restructuring in Europe and adapting our cost base to the circumstances which we see in Europe.
That is helpful. Thank you. Can I take one more?
Just one point I would like maybe to add as my answer is that in Europe, Flow Control is doing very well. We do not have at all the same difficulties in Flow Control than in Advanced Refractories in Europe. Flow Control is doing extremely well in Europe.
Understood. Perfect. Thank you. Very quickly, just on leverage, if I can. I think it is obviously similar to the half year, despite that working capital improvement. Any sort of main Q4 kind of items that we should be thinking about unwinding or improving from here? And any sort of thoughts on kind of what the leverage range we should be looking for at year- end? If you can give any sort of comment on that would be also useful. Thanks.
Yeah. Hi, it is Mark here.
Thanks, Mark.
As you rightly say, we saw improvement in working capital intensity in the period. So, we are down below 23% now, heading into our kind of long-term target of 21%. Leverage is pretty much consistent, bang on actually, at the half year. We will see further absolute improvement in working capital because December's a quiet month. But typically, the H2 is always kind of similar or sometimes a few million less than the H1, just from a seasonality point of view. So, I would expect leverage to basically be bang on the number at the half year and last year. So, on or around two, with the ability to perhaps maybe do kind of one tick less if we have a good working capital improvement.
That's really helpful. Thanks, Mark. Thank you, guys.
The next question comes from the line of Mark Fielding from RBC. Please go ahead.
Yeah. Morning. I just want to really sort of expand to a degree on the answers that Patrick was just giving in terms of the moving parts. I suppose I'm just trying to contextualize and think about how we move into 2027. If I think about the fact that with the revised guidance today, the sort of organic change to consensus this year has been around GBP 25 million downwards. There's obviously been a mix of the initial supply quality issues in the U.S., followed by the wider operational issues, as well as the operational issues in India, and the Advanced Refractories pricing. I suppose what I'm trying to get a sense of is how the headwind, that GBP 25 million, basically, how it breaks up. Because obviously, it feels like the operational issues in the U.S. are largely resolved.
India is getting better, but I don't quite get the same feeling that that's all just going to be perfect as we head into next year. I suppose it's basically I'm trying to work out the building blocks that I add back into next year versus the bits that are more permanent.
Thank you, Mark. As you know, we are never at this stage giving any guidance for 2027. This will be more when we will announce our full year 2026 results beginning of next year, when we will know more. However, a few qualitative reasoning that I could give. First, in terms of market, we do not see any sign of weakness for the time being, any sign of weakness in North America or in India. The European market, our perception, as I mentioned earlier, similar to the one of ArcelorMittal, is that it should get better next year. How much better is anybody's guess at this stage. We will comment on that when we comment on beginning of next year, when we know more. But the direction of travel is relatively clear. Our operational issues are on the way of being solved, both in North America and in India.
We never had any operational issues in EMEA. When you put all this together, the direction of travel qualitatively is clearly positive between 2026 and 2027. Regarding the competitive pressure for Advanced Refractories in EMEA, this is here to stay, but we have also a certain number of ongoing action which will produce their full results as from Q1 next year, which will go a long way to adapting our cost base of Advanced Refractories to the new reality of the European market. I will not comment further. I will pass over to Mark to add anything. But the direction of travel, which is the only thing I can comment on, is clearly positive between 2026 and 2027.
Yeah. Hi, Mark. I think just a few things I would add to just give a bit of context and color. I think it's important to recognize that despite a challenging year, we're ahead in Flow Control and Foundry. That doesn't happen by accident. That's good pricing and good management of the cost base. So we recognize we've lost a bit of volume in Flow Control in terms of market share. But the reality is, where we've had the issues in North America, we are still making as much money in North America this year than last year. As we've always said, what we've been impacted by is the opportunity that we've lost as opposed to having gone backwards, without trying to really understate the challenges that we've had. But it's really been about lost opportunity rather than lost profit.
I think the other thing that's important to note is the issues in India, while frustrating, are probably in the order of a couple of million. So, when you look at our Indian performance, again, it's frustrating, but we've not gone backwards. We've just not gone as far forward as we would like. Lastly, I think we make a lot about the EMEA pricing pressure because it is a challenging market. But ultimately, EMEA Europe, which is where we are seeing the competitive pressures from Chinese imports, is 10% of our business. It hurts us financially because every million pound of profit impact in Vesuvius with our kind of level of profitability margin and fixed cost matters to us. But fundamentally, if you can get beyond the operational issues, which we really firmly believe that we are, our business is in actually very, very good health.
Working capital's coming down, leverage is down, or coming down rather. Flow Control doing really well despite the operational issues in North America. Foundry ahead, both in terms of MMS and in terms of the underlying business. We've just got a couple of black spots which we're trying to rub out voraciously to kind of get things back on track.
If you don't mind, can I just clarify though, because in the statement, you're pretty clear that you're progressing in terms of the operational issues in North America. I know you also make a comment on India, but is it equally going to be as completely resolved at the year- end, or is it a little bit more, I know it's small, but some ongoing bits that probably take a little bit into next year to fix as well?
Today, we are on track. We have another 1.5, two months to go. But today, we are on track to resolve this by the end of the year. And in particular, in terms of capacity availability, we are confident that this will be solved by the end of the year, seen from today. But you are right, and you are always right to say there is another 1.5 months to go. But seen from today, all lights are green.
I will.
Sorry, Mark.
Sorry, go on.
Yeah, I would also just add that when we talk about India, again, the Flow Control business is going really, really, really well, to the point that we are running out of capacity, and we are having serious conversations about needing to invest further in our Flow Control business in India.
Just to put, we are not running out of capacity, but at the pace at which we are progressing, at the pace which we are progressing, we have now engaged engineering studies to be able to increase even further our capacity in Flow Control in India, because we can increase at a very low cost. We have still some marginal expansion opportunities, quite large marginal expansion opportunities in Flow Control in India. And we are now seriously thinking about activating them, so that we can put online this new capacity in 2028, 2029, to be able to continue to progress at the same pace at which we are progressing today. So, it is rather good news.
Yeah, it is very good news when the CFO worries about running out of capacity. But my point is, it is going very, very well. We can see future demand. We can see the need to invest. And then you look at the Advanced Refractories business, again, it is disappointing because you do not want to have ramp-up issues and miss opportunities. But the level of profit that we are missing probably is in the region of a few, it is in single-digit millions in AR. So, we are not looking at some kind of disaster in India. We are looking at a frustrating level of profit that we are missing, as opposed to a major issue in that particular part of the business. Because ultimately, it is the smaller half of our Indian business. The other part is going really, really well.
And this Vizag plant, once these operational issues will be solved by the end of this year, will be a fantastic asset for the growth of Advanced Refractories in the coming years in India to follow the growth, and I hope outperform the growth of the market. So, the strategic interest of this is not because you have a few hiccups during a few months in the ramp-up on the plant, which is not completely unheard of in the industry. That it jeopardizes the strategic interest of this, what I believe will be a fantastic new plant in Vizag.
If I can just clarify one thing. I totally understand that obviously you are not guiding on 2027, but when I think about the profit warning back in July and the roughly GBP 20 million impact that you cited was sort of three-quarters broadly operational issues, one-quarter the competitive pricing. I mean, all the comments you are making suggest to me that as we move into next year, the majority of that operational issue impacts, therefore about GBP 15 million, that just goes away, admittedly maybe with a time lag on some of the sales you have to win back, et cetera. There is nothing else in that bit. Obviously, the pricing bit is the pricing bit.
I think, as always, Mark, you are very good at reasoning, but I will only confirm your reasoning when we will talk about 2027 beginning of next year. But I can understand the logic of your reasoning.
Perfect. Thank you.
Yeah, I think you are right when you say timing is the issue around sales. That is the hardest thing to predict, is how quickly do you regain, how quickly can you recapture unmet demand? That is always the question that is hard to estimate, particularly this far out from the year- end and into next year.
Thank you.
Thank you. There are no further questions, so I will hand back over to your host for closing remarks.
Thank you very much to all of you for attending our call this morning. As always, Mark, Rachel, and myself remain at your disposal should you have any further questions. We are wishing you all a very good day. Goodbye.
Thank you for joining. You may now disconnect.