Higher material costs offset bumper steel market for Vesuvius

The FTSE 250 firm said that at the same time, it was continuing to experience headwinds related to rising raw material prices and inter-company imports required by Flow Control in Europe.

As a result, its trading profit expectations for the 2017 full year remained unchanged.

“Looking ahead, the growth in steel volumes implies positive prospects for trading profit growth during 2018, when we expect the headwinds of increased raw material cost and European Flow Control supply to have been substantially mitigated,” the board said in its statement.

As it previously announced, Patrick André was appointed chief executive and executive director of Vesuvius with effect from 1 September.

He replaced François Wanecq, who retired from the board on 31 August but was remaining with the group until 31 December to assist with the transition of responsibilities.

On 1 October, Roel van der Sluis - previously president of Vesuvius North Asia - assumed the position of president of Steel Flow Control for the group, succeeding Patrick André.

Van der Sluis was continuing to serve on the group executive committee in his new role.

Looking at trading, Vesuvius said that In the third quarter it benefitted from 6.7% year-on-year growth in global steel production, as reported by the World Steel Association.

In the year-to-date, steel volume growth of 5.6% exceeded market expectations, resulting in the World Steel Association's recent upward revision of their demand growth forecasts for full-year 2017, to 2.8% from 1.3%.

In Foundry, the market environment remained “broadly positive” across the majority of Vesuvius’ end markets, and the expected seasonality in sales in the second half had been confirmed, the board said.

“As noted in our 2017 half year results, we started to experience significant price increases towards the end of the first half for several raw materials,” the board explained in its statement.

“The severity and repetitive nature of monthly increases since then have been greater than expected and are affecting several more of our key raw materials.”

Whilst the firm’s Advanced Refractories business had been most affected by the increases, the board said it remained “confident” in the company’s ability over time to recover all cost inflation through higher selling prices.

“As in the first half, we continue to rely on inter-company imports to meet growth in European Flow Control demand, which - as a region - has represented a significant proportion of the higher sales in the year to date,” the board added.

“These inter-company imports have a higher cost base due to freight, overtime and export duties.”

Vesuvius said the process of ramping-up European capacity so that reliance on those imports could be reduced remained on track, but was unlikely to have a material impact on reducing costs until late in the fourth quarter.

The board also said it was continuing to make progress in the delivery of its restructuring programme.

“As reported previously, the incremental savings in the second half will be relatively small, with almost all of the additional £20m of annual targeted savings announced in May and July 2017 due to be delivered in 2018-2020.”

Average exchange rates of sterling to the dollar and euro fell by 6.1% and 6.4% respectively between the 2016 full year and the first nine months of 2017, the board noted.

That provided a trading profit benefit of approximately £7.6m in the year-to-date.

“Assuming current foreign exchange rates continue, the estimated benefit would increase to £8.4m for the full year.”

Looking at the books, Vesuvius said its net debt-to-EBITDA ratio was 1.4x as at 30 September, down from 1.6x on 30 June.

“Despite the continued increase in sales, we have successfully reduced working capital in absolute terms, as a result of ongoing optimisation initiatives and a decline in the excess inventories built up in late 2016 related to closure of the Italian plants.

“Working capital as a percentage of sales improved to 25.8% at 30 September, down from 26.2% at 30 June.”