27 February 2020                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Results for the year ended 31 December 2019

Strategic progress and strong cash conversion despite challenging end markets

Vesuvius plc, a global leader in molten metal flow engineering and technology, announces its preliminary audited results for the year ended
31 December 2019.

Financial summary

		2019 (£m)	2018 (£m)	Year-on-year change	Underlying change(1)
Revenue		1,710.4	1,798.0	-4.9%	-5.7%
Trading Profit(2) (EBITA)		181.4	197.2	-8.0%	-9.0%
Return on Sales		10.6%	11.0%	-40bps	-40bps
Operating Profit		127.5	164.5	-22.5%
Headline Profit Before Tax		171.4	188.9	-9.3%
Profit Before Tax		118.6	156.2	-24.1%
Profit		86.5	145.1	-40.4%
Headline Earnings(2)		121.4	133.7	-9.2%
Headline EPS(2) (pence)		45.1	49.6	-9.1%
Statutory EPS (pence)		29.8	51.3	-41.9%
Adjusted operating cash flow(2)		217.7	179.4	+21.3%
Net Debt(3)		216.3	247.8	-12.7%
Dividend (pence)		20.5	19.8	+3.5%

 

 ⁽¹⁾ Underlying basis is at constant currency and excludes separately reported items and the impact of acquisitions and disposals

⁽²⁾ For definitions of non-GAAP measures, refer to Note 17 in the financial statements

⁽³⁾ Net debt excluding IFRS lease adjustment which is not included in the calculation of net debt under our debt covenants

Key Points

·    £87.6m drop in revenue, reflecting a significant deterioration in both our main end markets of Steel and Foundry after a strong 2018

·    Decline of trading profit (EBITA) limited to £15.8m due to the acceleration of our restructuring efforts

·    Resilient return on sales at 10.6% (2018: 11.0%) despite lower revenue

·    Acceleration and intensification of our restructuring programmes with £16.4m of recurring savings delivered and eight plant closures in 2019 without reducing overall production capacity

·    Strong cash conversion of 120% versus 91% in 2018 and adjusted operating cash flow up 21.3%, demonstrating our strength as a flexible, technology-led, low capital intensity business, capable of generating consistently strong free cash flow across the cycle

·    We accelerated our R&D efforts, launching more than 10 new products and new products as a percentage of sales increased to 16.3%, from 15.4% in 2018

·    Net debt reduced to £216.3m (2018: £247.8m) (net debt/EBITDA of 1.0x), on a like-for-like basis excluding IFRS 16 lease adjustment, despite cash utilisation for the CCPI acquisition, restructuring costs, modernisation capex and increased dividend payments

·    Full year dividend increased by 3.5% to 20.5 pence per share (2018: 19.8p)

Patrick André, Chief Executive of Vesuvius, commented:

"We delivered a robust operational performance in 2019, despite challenging conditions. Key end markets were especially weak during the fourth quarter of 2019 and we expect this abnormally low level of activity to continue at least in Q1 2020 and to weigh on performance in H1 2020. The potential impact of the Covid-19 health crisis is difficult to assess at this time but is likely to have a temporary negative impact on our end-markets. However, there are some signals indicating that the destocking phase experienced in H2 2019 is maturing and may shortly be coming to an end. Thanks to our restructuring efforts, our reinforced emphasis on innovation in the service of our customers and our dedicated workforce, Vesuvius is ideally positioned to benefit from the normalisation in our end markets as this occurs."

For further information, please contact:
Shareholder/analyst enquiries:
Vesuvius plc	Patrick André, Chief Executive	+44 (0) 207 822 0000
	Guy Young, Chief Financial Officer Euan Drysdale, Group Head of Corporate Finance Pamela Antay, Head of Investor Relations	+44 (0) 207 822 0000 +44 (0) 207 822 0027 +44 (0) 207 822 0057
MHP Communications	Andrew Jaques / Ollie Hoare / Peter Lambie	+44 (0) 203 128 8100

 

Vesuvius management will make a presentation to analysts and investors on 27 February 2020 at 10.00 (GMT) at Grocers' Hall, Princes Street, London EC2R 8AD. For those unable to attend in person, an audio webcast and conference call will also be available. Please register for the call via the following URL: https://edge.media-server.com/mmc/p/pbidikvr (Dial in details: UK participant dial in +44(0)20 3009 5710; US participant dial in +1 917 720 0178; confirmation code 6768305). The presentation will be broadcast live on Vesuvius' website: https://www.vesuvius.com/en/investors.html and an archive version of the presentation will be available on the website later that day.

 

About Vesuvius plc

Vesuvius is a global leader in molten metal flow engineering and technology principally serving the steel and foundry industries.

 

We develop innovative and customised solutions, often used in extremely demanding industrial environments, which enable our customers to improve their manufacturing processes, enhance product quality and reduce costs. These include flow control solutions, advanced refractories and other consumable products and increasingly, related technical services including data capture.

 

We have a worldwide presence. We serve our customers through a network of low-cost manufacturing plants located close to their own facilities, and embed our industry experts within their operations, who are all supported by our global technology centres.

 

Our core competitive strengths are our market and technology leadership, strong customer relationships, well established presence in developing markets and our global reach, all of which facilitate the expansion of our addressable markets.

 

Our ultimate goal is to create value for our customers, and to deliver sustainable, profitable growth for our shareholders giving a superior return on their investment whilst providing each of our employees with a safe workplace where he or she is recognised, developed and properly rewarded.

Forward looking statements

This announcement contains certain forward looking statements which may include reference to one or more of the following: the Group's financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, plans and objectives of management and other matters.

 

Statements in this announcement that are not historical facts are hereby identified as "forward looking statements". Such forward looking statements, including, without limitation, those relating to the future business prospects, revenue, working capital, liquidity, capital needs, interest costs and income, in each case relating to Vesuvius, wherever they occur in this announcement, are necessarily based on assumptions reflecting the views of Vesuvius and involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by the forward looking statements. Such forward looking statements should, therefore, be considered in light of various important factors that could cause actual results to differ materially from estimates or projections contained in the forward looking statements. These include without limitation: economic and business cycles; the terms and conditions of Vesuvius' financing arrangements; foreign currency rate fluctuations; competition in Vesuvius' principal markets; acquisitions or disposals of businesses or assets; and trends in Vesuvius' principal industries.

 

The foregoing list of important factors is not exhaustive. When considering forward looking statements, careful consideration should be given to the foregoing factors and other uncertainties and events, as well as factors described in documents the Company files with the UK regulator from time to time including its annual reports and financial statements.

 

You should not place undue reliance on such forward looking statements which speak only as of the date on which they are made. Except as required by the Rules of the UK Listing Authority and the London Stock Exchange and applicable law, Vesuvius undertakes no obligation to update publicly or revise any forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward looking events discussed in this announcement might not occur.

Vesuvius plc, 165 Fleet Street, London EC4A 2AE

Registered in England and Wales No. 8217766

LEI: 213800ORZ521W585SY02

www.vesuvius.com

 

Vesuvius plc

Results for the year ended 31 December 2019

 

Vesuvius made further strategic progress in 2019 in line with our objectives, despite the challenging end market environment.

 

Crude steel production declined 1.7% year-on-year in the world excluding China (as reported by the World Steel Association). The decline in production worsened during the year, with steel volumes increasing slightly in H1 2019 by 0.6% year-on-year in the world excluding China before declining by 3.8% in H2 2019.

 

In addition, we experienced a challenging environment in Foundry end markets in 2019, which also worsened through the year. Our Foundry Division was impacted by weakness in light vehicle production in all regions and a decline in the construction and agricultural equipment markets in NAFTA, India, South America and North Asia. There was also a reduction in activity in general engineering and mining in EMEA, India and North Asia and a decline in medium/heavy commercial vehicle production in most regions.

 

This deterioration of our markets was amplified by a general destocking throughout the supply chain, affecting both our products and our customers' products and by the external regulatory environment which disrupted trade flows.

 

 

£m		2019 Reported	Acquisitions / Disposals	2019 Underlying		2018 Reported	Currency		Acquisitions / Disposals			2018 Underlying			Reported % change		Underlying % change
Revenue		1,710.4	-23.8	1,686.6		1,798.0	+9.8		-18.3			1,789.5			-4.9%		-5.7%
Trading Profit		181.4	-2.5	178.9		197.2	+0.1		-0.7			196.6			-8.0%		-9.0%
Return on Sales %		10.6%		10.6%		11.0%						11.0%			-40bps		-40bps

 

Group trading performance

Group revenue was £1,710.4m, a decrease of 4.9% versus 2018 on a reported basis. Underlying Group revenue, adjusted for the effects of currency translation, acquisitions and disposals, decreased by 5.7%. Trading profit (EBITA) was £181.4m (2018: £197.2m), down 8.0% on a reported basis and down 9.0% on an underlying basis. Our return on sales was resilient at 10.6% in 2019 as compared with 11.0% in 2018, despite lower sales.

In addition to currency translation, underlying performance is adjusted for the divestment, in October 2018, of BMI, an Advanced Refractories installation business; and the acquisition of CCPI, completed on 1 March 2019.

Strategic progress

Vesuvius' core strategic objective is to deliver long-term sustainable and profitable growth. We have a clear strategy to achieve this objective centred around five key execution priorities. We made further progress on each of these execution priorities in 2019 and we remain confident in our ability to achieve a sustainable return on sales level of 12.5% when our end markets normalise.

·      Reinforce our technology leadership

o Expansion of our Advanced Refractories' R&D centre in Vizag, India

o Opening of Flow Control's new R&D centre in Suzhou, China

o Expansion of our mechatronics technology centre in Ghlin, Belgium

·      Increase the penetration of our value-creating solutions

o We accelerated our R&D efforts and launched more than 10 new products in the Steel and Foundry Divisions, including the following highlights by business unit:

§ Flow Control: new generation of ladle slide gate plates and systems and new high performance tundish slide gates

§ Advanced Refractories: optimised monolithic refractory formulations

§ Foundry: new coating helping automotive foundries meet the quality level of the next generation engines and a new unique feeding system technology for casting aluminium

o The percentage of our sales comprising products which didn't exist five years ago rose again in 2019 to 16.3% as compared with 15.4% in 2018

o More than 15 new product launches are planned for 2020

·      Capture the growth in developing markets

o 7.9% sales growth in China for our Steel Division

o 4.7% sales growth in EEMEA (Eastern Europe, Middle-East (including Turkey) and Africa) for our Foundry Division (excluding Fused Silica)

·      Improve our cost leadership and margins

o In 2019 we delivered an incremental £16.4m of recurring restructuring savings

o In July 2019, we announced a further set of initiatives focused on our manufacturing network in NAFTA and EMEA

·      Develop our Technical Service offering

o Our mechatronics activity is developing rapidly and during 2019 we gained our first important mechatronics customer in China. We now have more than nine active projects and our mechatronics technology centre in Ghlin, Belgium is being expanded to respond to the growing demand

Foreign exchange

As envisaged at the time of our H1 2019 results, the net impact of average 2019 exchange rates compared to 2018 averages has been broadly neutral, with a positive £0.1m impact at trading profit (EBITA) level.

 

Restructuring

Confronted with the significant deterioration of our main markets, we decided early in the year to expand and accelerate our restructuring programmes. During 2019 we delivered an incremental £16.4m of recurring cash savings. These savings were delivered according to plan with the exception of £1.2m due to some delays experienced in the Foundry EMEA and Advanced Refractories NAFTA restructuring projects. This is expected to be recovered in 2020.

The restructuring programmes are predominantly focused on rationalising our manufacturing footprint, consolidating production and streamlining various back office functions. During 2019 we successfully closed six plants in EMEA and two in the United States, without reducing our overall production capacity, and maintaining our proximity to customers in our regional markets. We acquired two plants in the United States through the CCPI acquisition of which Blanchester has already been closed and we opened a new Foundry manufacturing facility in Mexico. The net reduction of five plants in 2019 reduces our total manufacturing footprint from 59 in 2018 to 54 in 2019, with one further closure in 2020 in the United States already announced.

The restructuring programmes are now expected to deliver incremental recurring annual savings of £19.4m in 2020, £6.2m in 2021 and £1.9m in 2022, which is an increase of £3.0m in comparison to previously announced targets. This increase in recurring cash savings will be delivered at an additional one-off cash cost of £7.2m, of which £5.1m has already been charged and £2.1m will be incurred by 2021.

Changes to the Group Executive Committee ("GEC")

After the reinforcement of our regional P&L leadership teams in 2018 and early 2019, we decided to appoint new entrepreneurial minded business unit presidents, with a combination of external hires and internal promotions.

Karena Cancilleri joined Vesuvius as President of the Foundry Division in October 2019. Karena joined Vesuvius from Beaulieu International Group where she was Vice President engineered products. Prior to Beaulieu, she held various international leadership roles in companies such as Shell Chemicals, Kraton and FiberVisions.

Thiago da Costa Avelar, previously Vesuvius' regional Vice President for Steel Division South America, was appointed President of the Advanced Refractories business unit, effective 1 January 2020. Thiago joined Vesuvius in February 2019 and his experience working for companies such as ArcelorMittal and RHI-Magnesita spans various technical and commercial roles across geographies.

Tanmay Ganguly, previously President of the Advanced Refractories business unit, has been appointed President of the Flow Control business unit with effect from 1 April 2020.

With these changes, we now have seven nationalities represented in our Group Executive Committee and have 25% female representation, up from 0% two years ago.

Changes to the Board of Directors

As previously announced on the 4 December, Christer Gardell, Managing Partner of Cevian Capital, Vesuvius' largest shareholder, stepped down as a non-executive Director, following seven years of service on the Board. Providing continuity of representation for Cevian, the Board appointed Friederike Helfer, who is also a Partner of Cevian Capital.

Ms Helfer, who is a non-executive director of the Supervisory Board of thyssenkrupp joined Cevian in 2008. Prior to joining Cevian, Ms Helfer worked at McKinsey & Company. She holds degrees from Massachusetts Institute of Technology and from Vienna University of Technology and is a CFA charterholder.

With this change we now have six nationalities represented on the Board with 37.5% female representation.

Working Capital

Our adjusted operating cash flow was up 21.3% having benefitted from a £64.1m reduction in trade working capital during 2019, driven by an ongoing management focus and aided by lower sales volumes.

Our average working capital / revenue for the prior 12 months was maintained at 24.0% at the end of 2019, broadly in-line with the position at year-end 2018 despite the market slowdown. This was particularly due to strong discipline in the manufacturing network to adjust production to sales without building excess inventories.

Tax

A key measure of tax performance is the Effective Tax Rate ("ETR"), which is calculated on the income tax associated with headline performance, divided by the headline profit before tax and before the Group's share of post-tax profit of joint ventures (2019: £170.4m, 2018: £186.1m). The Group's ETR, based on the income tax costs associated with headline performance of £43.8m (2018: 48.4m), was 25.7% (2018: 26.0%).

The guidance issued at the H1 2019 results forecast an ETR of 28.0% for the full year. The actual ETR for the 2019 year was impacted by: the reduction in the Indian corporate income tax rate announced in September 2019; a reduction in our Mexican corporate income tax as a result of taxable foreign exchange losses; and changes in the geographic mix of realised profits.

We expect the Group's effective tax rate on headline profit before tax and before the share of post-tax profits from joint ventures to be between 26% and 27% in 2020.

Financial position

Our net debt / LTM EBITDA ratio (excluding IFRS lease adjustment) has remained constant between 2019 and 2018 at 1.0x. Net debt at 31 December 2019 decreased to £216.3m, versus £247.8m at year-end 2018 as the higher adjusted operating cash flow of £217.7m was partially used for the £53.9m of dividend payments; the £32.4m acquisition of CCPI; and restructuring costs of £30.0m. This calculation of net debt excludes the adjustment of £29.5m to reflect the reclassification of leases under IFRS 16 at 31 December 2019, which is aligned with the calculation of net debt under our debt covenants. Including the IFRS 16 lease adjustment the net debt / LTM EBITDA is 1.1x at 31 December 2019.

The weighted average maturity of Vesuvius' committed debt facilities now stands at approximately four years. Our 2010 US$140m USPP will mature in December 2020 and we plan to refinance this during the course of the year.

Quality, health and safety

We are committed to rapidly evolve towards a global best in class organisation in terms of safety. Several new initiatives were launched in 2019 to enable us to reach this objective. In particular, our new independent Group safety audit team is now fully operational, auditing each of our locations at least once a year. Reliability in quality and delivery is vital to our customers as they use Vesuvius' products in critical areas of their own processes. The level of risk attached to a catastrophic failure is often such that, for people and equipment, no compromise can be accepted.

Despite our focus in this area, we are not satisfied with our safety results in 2019. Our Lost Time Injury Frequency Rate increased in 2019 to 1.5 LTIs per million hours worked versus 1.3 in 2018, although it remains lower than the 2017 and 2016 level of 1.6 and 1.7, respectively. Our LTI Severity rate has increased slightly in 2019 to 78 Lost Days per million hours worked versus 77 in 2018.

We will strive to make significant progress in 2020 and resume our journey towards our goal of zero accidents.

 

Environment and sustainability

Our environmental footprint is limited due to the low energy intensity of our manufacturing processes, the low percentage of bricks in our product mix and our strategy of not being integrated upstream in mining.

However, for many years now we have been an active contributor, to the extent of our ability, in the fight against climate change. In 2011, the Vesuvius Energy Conservation Plan was launched with the objective of reducing our normalised energy consumption (per metric tonne). In 2015, the Group set a target to reach a 10% improvement by 2018, which was surpassed with a 10.2% improvement. The Board has now agreed a further objective, targeting an additional 10% improvement by 2024.

In 2019 we achieved a 12.0% reduction in global Greenhouse Gas ('GHG') emissions (kg of CO₂e). In 2018 we achieved a reduction of 6.6%. Our GHG emissions are limited to CO₂, with no material emissions of other GHGs. In reporting GHG emissions, we have used the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) methodology to identify our GHG inventory of Scope 1 (direct) and Scope 2 (indirect) CO₂e. We report in kg of CO₂ equivalent ('CO₂e').

Managing our energy intensity not only has an environmental benefit but is also part of our long-term strategy to enhance our cost-competitiveness.

Our biggest contribution to reducing global emissions comes from the work we do with our customers to develop products and solutions to improve their productivity, driving efficiency and reducing the environmental impact of their operations. We also assist our customers in developing solutions that support their ability to use recycled materials and to manufacture components and finished goods that utilise thinner, lighter materials thus reducing the environmental footprint of their products.

The Group also meets all its obligations in relation to the Carbon Reduction Commitment Energy Efficiency Scheme, the Producer Responsibility Packaging Waste regulations and the Energy Saving Opportunity Scheme by which the UK has implemented the EU Energy Efficiency Directive.

Final dividend

The Board has recommended a final dividend of 14.3 pence per share (2018: 13.8 pence per share), a 3.6% increase on the final dividend paid in 2018, reflecting confidence in our trajectory. This will result in a total dividend for the year of 20.5 pence per share (2018: 19.8 pence per share) and represents a 3.5% increase to the full year dividend. The Board remains committed to delivering long-term dividend growth, provided that this is supported by underlying earnings, cash flows and is justified in the context of capital expenditure requirements and the prevailing market outlook. If approved at the Annual General Meeting on 13 May 2020, the final dividend will be paid on 22 May 2020 to shareholders on the register at the close of business on 17 April 2020. The last date for receipt of elections from shareholders for the Vesuvius Dividend Reinvestment Plan will be 1 May 2020.

Corporate activity

In March 2019 the Group completed the acquisition of CCPI Inc, a specialist refractory producer based in Ohio, USA, focused on tundish (steel continuous casting) applications and aluminium. The transaction valued the company at £33.3m on a cash and debt free basis. The integration of CCPI is proceeding as planned and during the year we closed CCPI's main facility at Blanchester and absorbed its production volume into our existing North American manufacturing footprint. The transaction is highly synergistic and these synergies are included in the announced restructuring savings targets.

In June 2019, the Group disposed of its 50% interest in Angang Vesuvius Refractory Company Ltd for a cash consideration of £6.8m, resulting in a profit after foreign currency adjustments of £1.1m.

Outlook

Our two main end markets of Steel and Foundry were especially weak during the fourth quarter of 2019 and we expect this abnormally low level of activity to continue at least in Q1 2020 and to weigh on performance in H1 2020.

The potential impact of the Covid-19 health crisis is difficult to assess at this time but is likely to have a temporary negative impact on our end markets.

However, there are some signals indicating that the destocking phase experienced in H2 2019 is maturing and may shortly be coming to an end.

Thanks to our restructuring efforts, our reinforced emphasis on innovation in the service of our customers, and our dedicated workforce, Vesuvius is ideally positioned to benefit from the normalisation in our end markets as this occurs.

  

Operational Review

 

Vesuvius comprises two Divisions, Steel and Foundry. The Steel Division operates as three business lines, Steel Flow Control, Steel Advanced Refractories and Steel Digital Services (Sensors & Probes).

 

Steel Division

According to the World Steel Association, global steel production in 2019 increased by 3.4% compared with 2018, however, global steel production excluding China declined by 1.7%. On a regional basis, crude steel production contracted in all regions except in Asia and the Middle East (incl. Turkey). Production in China, India, the Middle East (incl. Turkey) and South East Asia increased by 8.3%, 1.8%, 5.1% and 9.7%, respectively. Production decreased in Europe (EU27+UK), NAFTA and South America by 4.9%, 0.8% and 8.3%, respectively.

 

Vesuvius' Steel Division reported revenues of £1,195.3m in 2019, a decrease of 3.3% compared to 2018. On an underlying basis, Steel Division revenue was down 4.4%. Markets deteriorated in the majority of regions during the course of 2019 after a strong 2018. The 'high technology' segment of the steel market, key for the Flow Control business unit, suffered in 2019 proportionately more than the more commoditised construction steel market, due in particular to weakness in light vehicle volumes. This deterioration of our markets was amplified by a general destocking throughout the supply chain, particularly in EMEA. Our sales were also affected by the external regulatory environment, which disrupted trade flows.

 

On a reported basis, Steel Division trading profit decreased 6.5% year-on-year. On an underlying basis, trading profit decreased only 7.7%, with the decrease in return on sales limited to 40 basis points thanks to restructuring savings. Those savings were delivered according to plan with the exception of Advanced Refractories in NAFTA where some delays were experienced. This is expected to be recovered in 2020.

 

Steel Division		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Steel Flow Control Revenue		626.3	662.6	-5.5%	-5.8%
Steel Advanced Refractories Revenue		539.8	541.1	-0.3%	-2.3%
Steel Digital Services Revenue   (Sensors & Probes)		29.2	33.0	-11.2%	-9.6%
Total Steel Revenue		1,195.3	1,236.7	-3.3%	-4.4%
Total Steel Trading Profit		120.1	128.3	-6.5%	-7.7%
Total Steel Return on Sales		10.0%	10.4%	-40bps	-40bps

 

Steel Flow Control

The Steel Flow Control business unit supplies the global steel industry with consumable ceramic products, systems, robotics, digital services and technical services. These products are used to contain, control and monitor the flow of molten steel in the continuous casting process. The consumable ceramic products that Vesuvius supplies have a short service life (often a matter of a few hours) due to the significant wear caused by the extremely demanding environment in which they are used. These products must withstand extreme temperature changes, whilst resisting liquid steel and slag corrosion. In addition, the ceramic parts in contact with the liquid steel must not in any way contaminate it. The quality, reliability and consistency of these products and the associated digital services we provide are therefore critical to the quality of the finished metal being produced and the productivity, profitability and safety of our customers' processes.

 

Steel Flow Control Revenue		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Americas		214.8	216.2	-0.6%	-2.1%
Europe, Middle East & Africa (EMEA)		229.5	266.2	-13.8%	-13.0%
Asia-Pacific		182.0	180.2	+1.0%	+0.4%
Total Steel Flow Control Revenue		626.3	662.6	-5.5%	-5.8%

 

Steel Flow Control reported revenue of £626.3m in 2019, a decrease of 5.5% compared to 2018 on a reported basis, whilst underlying revenue decreased 5.8%. Underlying regional performance was mixed, with Americas and EMEA revenue decreasing by 2.1% and 13.0% respectively, and Asia-Pacific revenue increasing by 0.4%.

 

In NAFTA, Steel Flow Control's underlying revenue decreased by 4.3% due to unfavourable customer mix. In South America, Steel Flow Control's underlying revenue was stable, as the decrease in revenue due to steel market weakness was offset by market share gains. Steel Flow Control's underlying revenue in EMEA decreased by 13.0%, contributed to by steel market weakness and destocking at steel plants. Underlying revenue in Asia-Pacific was up 0.4% with revenue in China increasing by 4.6%, continuing our track record of growth in this important region.

 

Steel Advanced Refractories

The Steel Advanced Refractories business unit supplies complete value-added solutions to its customers including specialist refractory materials, advanced installation technologies (including robots), computational fluid dynamics capabilities and lasers. The specialist refractory materials are subject to extreme temperatures, corrosion and abrasion, they are in the form of powder mixes, which are spray-applied or cast onto the vessel to be lined ('monolithics') and refractory shapes (e.g. bricks, pads, dams and other larger precast shapes). The service life of the products that Advanced Refractories supplies into the steel making process can vary (some a matter of hours and others for a period of years) based upon the type of refractory and the level of wear caused by the demanding environment in which they are used. An integral part of our success depends upon our best-in-class installation technologies (including robots) and lasers to track the performance of installed Vesuvius' refractories as well as the high level of collaboration with our customers.

 

Steel Advanced Refractories Revenue		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Americas		180.6	171.1	+5.5%	-0.5%
Europe, Middle East & Africa (EMEA)		236.3	254.4	-7.1%	-6.7%
Asia-Pacific		122.9	115.6	+6.3%	+4.7%
Total Steel Advanced Refractories Revenue		539.8	541.1	-0.3%	-2.3%

 

Our Steel Advanced Refractories business unit reported revenues of £539.8m in 2019, a decrease of 0.3% compared to 2018 on a reported basis, whilst underlying revenue decreased 2.3%. This resilient performance, despite a challenging market environment, was supported by market share gains in China and the CCPI acquisition.

 

Underlying regional performance was mixed, with Asia-Pacific revenue increasing by 4.7% and Americas and EMEA revenue decreasing by 0.5% and 6.7%, respectively. The strong revenue growth in Asia-Pacific was due to increased penetration of our value-creating solutions in China, Vietnam, Malaysia and Indonesia. In NAFTA, the positive impact of the CCPI acquisition partially offset weaker end markets and an unfavourable customer mix, whilst the revenue decrease in South America was due to weak market conditions. In EMEA revenue decreased on the back of unfavourable market conditions as well as on priority being given to return on sales.

 

Steel Digital Services (Sensors & Probes)

At the beginning of 2018, the activities which used to belong to the Technical Services business unit, and which have strong synergies with our consumable sales, were integrated into our Flow Control and Advanced Refractories business units. The part of Technical Services related to discrete sensors and probes was maintained in the Steel Digital Services (Sensors & Probes) business unit, which now offers products to our customers to enable them to measure certain key characteristics of the molten metal during the steel-making process and make their underlying processes more efficient and reliable. The products supplied by Steel Digital Services (Sensors & Probes) include temperature sensors, oxygen, hydrogen and sublance probes, iron oxide and metal sampling for the steel, aluminium and foundry industries. By using these technologies, customers can focus on critical parameters within their processes, enabling them to refine their production methods to improve quality, lower production costs and maximise efficiency.

 

 

Steel Digital Services (Sensors & Probes) Revenue		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Americas		19.4	20.5	-5.2%	-2.9%
Europe, Middle East & Africa (EMEA)		9.7	12.3	-20.7%	-20.0%
Asia-Pacific		0.1	0.2	-43.2%	-42.8%
Total Steel Digital Services (Sensors & Probes) Revenue		29.2	33.0	-11.2%	-9.6%

 

Steel Digital Services (Sensors & Probes) generated revenue of £29.2m, a decrease of 11.2% year-on-year on a reported basis. On an underlying basis, revenue decreased 9.6%. This decline in revenue reflects the challenging market environment particularly in EMEA.

Foundry Division

The Foundry Division is a world leader in the supply of consumable products, technical advice and application support to improve the performance and quality of ferrous and non-ferrous castings. Vesuvius operates under the brand FOSECO in the foundry market.

The casting process is highly sequential and is critically dependent on consistency of product quality and productivity optimisation. Working alongside customers at their sites, our engineers provide on-site technical expertise in addition to advanced computational fluid dynamics capabilities to develop the best customised solutions. The conditioning of molten metal, the nature of the mould used and, especially, the design of the way metal flows into the mould are key parameters in a foundry, determining both the quality of the finished castings and the labour, energy and metal usage efficiency of the foundry. Vesuvius' products and associated services to foundries improve these parameters.

 

Foundry Division		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Foundry Revenue		515.1	561.3	-8.2%	-8.7%
Foundry Trading Profit		61.3	68.9	-11.0%	-11.3%
Foundry Return on Sales		11.9%	12.3%	-40bps	-40bps

 

There was a challenging environment in Foundry end-markets during 2019, with weakness in light vehicle production in all regions. There were also declines in the construction and agricultural equipment markets in NAFTA, India, South America and North Asia, a reduction in activity in general engineering and mining in EMEA, India and North Asia and a decline in medium/heavy commercial vehicle production in most regions.

 

Consequently, revenue in the Foundry division decreased 8.2% to £515.1m in 2019 on a reported basis, whilst underlying revenue decreased by 8.7%. Underlying trading profit and return on sales decreased by 11.3% and 40 basis points, respectively. Our performance in 2019 was also impacted by delays in the realisation of restructuring savings in EMEA. These are expected to be achieved in 2020.

 

However, against this backdrop, we were successful in increasing prices where necessary to compensate for the historic raw material and other cost inflation, which we highlighted in our 2018 results.

 

Foundry Revenue		2019	2018	Change	Underlying
		(£m)	(£m)	(%)	change (%)
Americas		115.4	119.2	-3.2%	-5.3%
Europe, Middle East & Africa (EMEA)		224.3	253.6	-11.6%	-10.2%
Asia-Pacific		175.4	188.5	-6.9%	-8.9%
Total Foundry Revenue		515.1	561.3	-8.2%	-8.7%

 

In the Americas, underlying revenue decreased by 5.3% due to weak end markets in both NAFTA and South America. Underlying revenue in EMEA decreased by 10.2% year-on-year as a result of the challenging market environment, with weakness in the light, commercial vehicle production and general engineering end-markets. In Asia-Pacific, underlying revenue decreased by 8.9%. In North Asia and India, Foundry Division revenue was down 11.1% and 11.5%, respectively due to weakness in all Foundry end-markets.

 

   

 

Financial Review

The following review considers a number of our financial KPIs and sets out other relevant financial information.

Basis of Preparation

All references in this financial review are to headline performance unless stated otherwise. See Note 17.

Introduction

Our resilient operating performance and cash conversion enabled capital allocation across all or our priority areas.  We invested in both organic and inorganic growth, while also paying an attractive dividend to our shareholders. This was possible despite a backdrop of challenging end markets and while at the same time further reducing our net debt.

2019 Performance Overview

A challenging market environment in 2019 has resulted in reduced demand in our key end-markets for both Steel and Foundry and led to a decline in our results. Reported revenue decreased by £87.6m over the prior year and by £102.9m on an underlying basis. The restructuring programmes continued to deliver during 2019 with a total of £16.4m of incremental benefits reported. The impact of the reduction in revenue was partially mitigated by the restructuring benefits with an overall reduction in trading profit to £181.4m, 8.0% lower than prior year. Return on sales for 2019 on a reported basis at 10.6% was lower than the prior year by 40bps. In a year of reduced sales growth, and a focus on working capital management, our cash management performance was strong, achieving a 120% cash conversion.

Dividend

The Board has recommended a final dividend of 14.3 pence per share to be paid, subject to shareholder approval, on 22 May 2020 to shareholders on the register at 17 April 2020. When added to the 2019 interim dividend of 6.2 pence per share paid on 20 September 2019, this represents a full-year dividend of 20.5 pence per share.

It remains the Board's intention to deliver long-term dividend growth, provided this is supported by underlying earnings, cash flows, capital expenditure requirements and the prevailing market outlook.

Capital allocation

We believe that the ideal leverage ratio for Vesuvius is in the range of 1.25x - 1.75x net debt to EBITDA. This gives us a reasonable comfort zone to be able to cater for any potential economic downcycles. However, given we are currently below this range at approximately 1.1x net debt to EBITDA, it is increasingly relevant to consider our capital allocation priorities. In order of priority these are:

1.  Organic growth. We have capital expenditure and restructuring programmes that we believe deliver the best possible returns to our shareholders.

2.  Inorganic growth. We review acquisition opportunities against a strict set of assessment criteria, including: strategic fit; margin relative to Group target return on sales of 12.5%; and return on capital.

3.  Return cash to shareholders. In the event that our organic and inorganic growth opportunities leave us with residual cash, we will seek to return that to our shareholders.

Key Performance Indicators

We have identified a number of KPIs against which we have consistently reported. As with prior years, we measure our results on an underlying basis, which we adjust to ensure appropriate comparability between periods, irrespective of currency fluctuations and any business acquisitions and disposals.

This is done by:

·      Restating the previous period's results at the same foreign exchange ('FX') rates used in the current period

·      Removing the results of disposed businesses in both the current and prior years

·      Removing the results of businesses acquired in both the current year and prior years

Therefore, for 2019, we have:

·      Retranslated 2018 results at the FX rates used in calculating the 2019 results

·      Removed the results of the BMI refractory installation business, which was disposed of during 2018

·      Removed the results of CCPI which was acquired during 2019

Objective: Deliver growth

KPI: Underlying revenue growth

Reported revenue for 2018 was £1,798.0m, which after FX translation effects and removing the impact of disposed businesses, equates to £1,789.5m on an underlying basis. The reported revenue in 2019 of £1,710.4m, when adjusted for disposals and acquisitions, is £1,686.6m on an underlying basis, which is a decrease of 5.7% year-on-year. The decline has been as a result of weaker end markets across all divisions.

 

£m	2019 Revenue			2018 Revenue				% change
	As reported	Acquisitions/ (Disposals)	Underlying	As reported	Currency	Acquisitions/ (Disposals)	Underlying	Reported	Underlying
Steel	1,195.3	(23.8)	1,171.5	1,236.7	6.9	(18.3)	1,225.3	(3.3%)	(4.4%)
Foundry	515.1	-	515.1	561.3	2.9	-	564.2	(8.2%)	(8.7%)
Group	1,710.4	(23.8)	1,686.6	1,798.0	9.8	(18.3)	1,789.5	(4.9%)	(5.7%)

 

Objective: Generate sustainable profitability and create shareholder value

KPI: Trading profit and return on sales

We continue to measure underlying trading profit of the Group as well as trading profit as a percentage of sales, which we refer to as our return on sales or 'RoS'.

Trading profit of £181.4m decreased by 9.0% on an underlying basis versus last year whilst RoS on an underlying basis was 40 basis points lower. The reduction in trading profit follows the decline in revenues, partially mitigated by the ongoing delivery of benefits from the restructuring programmes.

In a weakening market environment, our Steel and Foundry Divisions reported reduced volumes which were only partially offset by cost savings measures and the ongoing delivery of benefits from the restructuring programme. As a result, the Steel Division recorded RoS of 10.0% this year, a decrease from 10.4% in 2018 whilst Foundry reported a 11.9% RoS, a decrease from 12.3% in 2018.

£m	2019 Trading profit			2018 Trading profit				% change
	As reported	Acquisitions/ (Disposals)	Underlying	As reported	Currency	Acquisitions/ (Disposals)	Underlying	Reported	Underlying
Steel	120.1	(2.5)	117.6	128.3	(0.2)	(0.7)	127.4	(6.5%)	(7.7%)
Foundry	61.3	-	61.3	68.9	0.3	-	69.2	(11.0%)	(11.3%)
Group	181.4	(2.5)	178.9	197.2	0.1	(0.7)	196.6	(8.0%)	(9.0%)

KPI: Headline PBT and headline EPS

Headline profit before tax ('PBT') and headline earnings per share ('EPS') are used to measure the underlying financial performance of the Group. The main difference between trading profit and headline PBT is net finance costs.

Net finance costs in 2019 of £11.0m were £0.1m below 2018. Movement in finance costs includes a £1.4m increase in interest on lease liabilities following transition to IFRS 16, offset by a £1.4m gain resulting from interest on an indirect tax rebate in Brazil.

Our headline PBT was £171.4m, 9.3% lower than last year on a reported basis. Including amortisation of acquired intangibles of £10.0m (2018: £12.9m), restructuring charges of £39.8m (2018: £15.3m) and vacant site remediation costs of £4.1m (2018: nil), our PBT of £118.6m was 24.1% lower than 2018. Headline EPS at 45.1p was 9.1% lower than 2018. Statutory EPS at 29.8p was 41.9% lower than 2018.

KPI: Return on net assets ('RONA')

RONA is our principal measure of capital efficiency. We do not exclude the results of businesses acquired and disposed from this calculation, as capital efficiency is an important consideration in our portfolio decisions. It is calculated by dividing trading profit plus our share of post-tax profits from joint ventures by our average operating assets (property, plant and equipment, trade working capital, interests in joint ventures and associates, investments, and other operating receivables, payables, and provisions).

As with most of our KPIs, we measure this on a 12-month moving average basis at average exchange rates for the year to ensure that we focus on sustainable underlying improvements. Our RONA for 2019 was 26.4% (2018: 30.4%) and reflects the reduction in profits, partially offset by the underlying reduction in working capital.

Objective: Maintain strong cash generation and an efficient capital structure

KPI: Free cash flow and working capital

Fundamental to ensuring that we have adequate capital to execute our corporate strategy is converting our profits into cash, partly through strict management of our working capital. Free cash flow from continuing operations was £126.6m for the year, £20.5m higher than last year on a reported basis due to a reduction in working capital, partially offset by additional capital expenditure during the year. Our cash conversion in 2019 was 120% (2018: 91%). Excluding the impact of the IFRS 16 adjustment to adjusted operating cash flows, cash conversion in 2019 would have been 113%.

We measure working capital both in terms of actual cash flow movements, and as a percentage of sales revenue. Trade working capital as a percentage of sales in 2019 was 24.0% (2018: 23.9%), measured on a 12-month moving average basis. In absolute terms on a constant currency basis, trade working capital decreased by £54.4m, reflecting continued management focus, and assisted by the reduction in sales.

KPI: Interest cover and net debt

As at 31 December 2019, the Group had committed borrowing facilities of £609.7m (2018: £573.7m), of which £174.2m was undrawn (2018: £119.2m).

Net debt at 31 December 2019 was £245.8m, a £2.0m decrease from 2018. The decrease was a result of strong cash conversion partially offset by restructuring costs, acquisition costs for CCPI, shareholder dividends, and the impact of adoption of IFRS 16.

The Group's debt facilities have two financial covenants: the ratios of net debt to EBITDA (maximum three times limit) and EBITDA to interest (minimum four times limit). These ratios are monitored regularly to ensure that the Group has sufficient financing available to run the business and fund future growth. At the end of 2019, the net debt to EBITDA ratio was 1.1x (2018: 1.0x) and EBITDA to interest was 21.8x (2018: 22.8x). Excluding the impact of the IFRS 16 adjustment to net debt in 2019, the net debt to EBITDA ratio was 1.0x, in line with 2018.

Objective: Be at the forefront of innovation

KPI: R&D spend

We believe that our market-leading product technology and services deliver fundamental value to our customers and that the primary mechanism to deliver that value is to invest significantly in research and development. In 2019, we spent £29.1m (2018: £33.6m on a constant currency basis) on R&D activities, slightly lower than 2018 due to a timing lag between the restructuring of certain activities and the subsequent relocation and expansion of our R&D centres.

Financial Risk Factors

The Group undertakes regular risk reviews and, as a minimum, a full risk assessment process twice a year. As in previous years this included input from the Board in both the assessment of risk and the proposed mitigation. We consider the main financial risks faced by the Group as being those posed by a decline in our end markets, leading to reduced revenue and profit as well as potential customer default. We also monitor carefully the challenges that come from broader financial uncertainty, which could bring lack of liquidity and market volatility. Important but lesser risk exists in interest rate movements, foreign exchange rate movements and cost inflation, but these are not expected to have a material impact on the business after considering the controls we have in place.

Our key mitigation of end market risk is to manage the Group's exposure through balancing our portfolio of business geographically and to invest in product innovation. We do so through targeted capital investment in new and growing businesses and a combination of capital and human resource in emerging markets. When considering other financial risks we mitigate liquidity concerns by financing, using both the bank and private placement markets. The Group also seeks to avoid a concentration of debt maturities in any one period to spread its refinancing risk. The Group's undrawn committed bank facilities at 31 December 2019 were £174.2m. Counterparty risk and customer default are mitigated by our relatively widespread customer base - with no customer being greater than 10% of revenue - and credit control procedures.

Other Relevant Financial Information

Restructuring

Confronted with the significant deterioration of our main markets, we decided early in the year to expand and accelerate our restructuring programmes. During 2019 we delivered an incremental £16.4m of recurring cash savings. These savings were delivered according to plan with the exception of £1.2m due to some delays experienced in the Foundry EMEA and Advanced Refractories NAFTA restructuring projects. This is expected to be recovered in 2020.

The restructuring programmes are predominantly focused on rationalising our manufacturing footprint, consolidating production and streamlining various back office functions. During 2019 we successfully closed six plants in EMEA and two in the United States, without reducing our overall production capacity, and maintaining our proximity to customers in our regional markets. We acquired two plants in the United States through the CCPI acquisition of which Blanchester has already been closed and we opened a new Foundry manufacturing facility in Mexico. The net reduction of five plants in 2019 reduces our total manufacturing footprint from 59 in 2018 to 54 in 2019, with one further closure in 2020 in the United States already announced.

The restructuring programmes are now expected to deliver incremental recurring annual savings of £19.4m in 2020, £6.2m in 2021 and £1.9m in 2022, which is an increase of £3.0m in comparison to previously announced targets. This increase in recurring cash savings will be delivered at an additional one-off cash cost of £7.2m, of which £5.1m has already been charged and £2.1m will be incurred by 2021.

In 2019, we reported £39.8m of restructuring costs (2018: £15.3m) within separately reported items that were predominantly made up of redundancy, plant closure costs, and asset write downs. The cash costs in 2019 were £32.8m (2018: £19.3m). We are carrying forward into 2020 a restructuring provision of £19.1m (2018: £17.4m).

Vacant site remediation costs

The Group owns a disused property in the US, which does not form part of our trading operations. Costs are being incurred at this site to address the significant increase in the volume of water run-off occurring in 2019. We have engaged waste management specialists, are taking actions to reduce the level of water (including hydrological studies) and are in contact with the relevant regulatory authorities. We estimate that it will take 18 months to finalise remediation. The costs for this remediation are estimated to be £4.1m. These have been treated as a separately reported item due to the materiality and one-off nature of the costs. There has been no impact upon headline performance.

Financial Reporting Council review of the 2018 Group Financial Statements

The 2018 Group Financial Statements are subject to an ongoing review by the FRC's Corporate Reporting Review team as part of the usual cycle of reviews of listed Company's accounts. Further details of the scope of the FRC review are provided in note 1.1. This has resulted in us making a number of enhancements to our disclosures in the 2019 Group Financial Statements. As part of that enquiry, we have also reconsidered our application of IAS 36, Impairment of Assets. Previously, the Group identified cash generating units as Steel and Foundry. We have now performed goodwill impairment testing at an operating segment level which are Steel Advanced Refractories, Steel Flow Control, Steel Digital Services (Sensors & Probes) and Foundry. This has shown that the carrying value of the goodwill and certain tangible assets held in the Steel Digital Services (Sensors & Probes) operating segment could not be supported by value in use calculations as at 31 December 2017. Therefore the goodwill has been fully impaired at that date, resulting in an impairment of £17.4m. We have also identified an impairment of tangible fixed assets of £10.2m. The effect of these impairments is a decrease in net assets of £27.6m as at 31 December 2017, 31 December 2018 and 31 December 2019. There is no material impact on the reported profit or cash flow for the years ended 31 December 2018 and 31 December 2019. Further details are provided in note 10.

Taxation

A key measure of tax performance is the effective tax rate, which is calculated on the income tax associated with headline performance, divided by the headline profit before tax and before the Group's share of post-tax profit of joint ventures (2019: £170.4m, 2018: £186.1m). The Group's effective tax rate, based on the income tax costs associated with headline performance of £43.8m (2018: 48.4m), was 25.7% (2018: 26.0%).

 

The utilisation of our US tax losses and other temporary differences has increased the headline tax charge in 2019 by £7.4m (2018: £7.8m), increasing the effective rate of tax on headline profit before tax and share of post-tax profits from joint ventures by 4.3% (2018: 4.2%). The utilisation of US tax losses and other temporary differences includes the impact of the Global Intangible Low-Taxed Income ('GILTI') rules which were introduced as part of US tax reform. The GILTI rules have increased the headline tax charge by £1.2m (2018: £2.4m).

 

The Group's effective tax rate is sensitive to changes in the geographic mix of profits and level of profits and reflects a combination of higher rates in certain jurisdictions such as Brazil, China, Germany, India, Mexico and the US, a nil effective rate in the UK due to the availability of unutilised tax losses, and rates that lie somewhere in between.

We expect the Group's effective tax rate on headline profit before tax and before the share of post-tax profits from joint ventures to be between 26% and 27% in 2020.

The income tax credit on separately reported items of £11.7m (2018: £36.8m credit) comprises £2.5m non-cash deferred tax movements relating to the amortisation of a deferred tax liability mainly arising from the 2008 acquisition of Foseco plc (2018: £2.8m), £9.2m tax credits relating to restructuring charges (2018: £1.8m), and a net increase in the deferred tax asset recognised in respect of US tax losses and certain other temporary differences of £nil (2018: £32.2m increase).

The net tax credit reflected in the Group Statement of Comprehensive Income in the year amounted to £1.9m (2018: £6.0m credit), comprising a £1.9m credit (2018: £1.3m charge) related to tax on net actuarial gains and losses on the employee benefits plan and in 2018 there was a £7.3m credit for additional recognition of US pension deferred tax assets.

Capital Expenditure

Capital expenditure in 2019 of £74.7m (2018: £48.4m) comprised £53.6m in the Steel Division (2018: £34.4m) and £21.1m in the Foundry Division (2018: £14.0m). The increased spend in 2019 reflects investment in infrastructure to support our restructuring activities and includes the addition of £9.2m of right of use assets, now classified as capital expenditure under IFRS 16. Capital expenditure on revenue-generating customer installation assets, primarily in Steel, was £7.8m (2018: £7.7m).

Pensions

The Group has a limited number of historical defined benefit plans located mainly in the UK, USA, Germany and Belgium. The main plans in the UK and USA are largely closed to further benefits accrual and 58.4% of the liabilities in UK have already been insured. The total net deficit attributed to these defined benefit obligations at 31 December 2019 was £8.5m (2018: £15.3m), representing an improvement of £6.8m.

The improvement is driven by £9.8m from cash contributions and payments of unfunded benefits and £5.7m from foreign exchange movements. These were offset by £3.6m from changes to actuarial assumptions (attributable to reducing discount rates; updated mortality assumptions and pension membership data) and; additional accrual and administrative expenditure paid for the year of £5.1m.

The majority of the ongoing pension plans are defined contribution plans, where our only obligation is to make contributions, with no further commitments on the level of post-retirement benefits. During 2019, cash contributions of £11.3m (2018: £11.4m) were made into the defined contribution plans and charged to trading profit.

Corporate Activity

In March 2019 the Group completed the acquisition of CCPI Inc, a specialist refractory producer based in Ohio, USA, focused on tundish (steel continuous casting) applications and aluminium. The transaction valued the company at £33.3m on cash and debt free basis. The integration of CCPI is proceeding as planned, and during the year we have closed CCPI's main facility at Blanchester and absorbed its production volume into our existing North American manufacturing footprint. The transaction is highly synergistic, and these synergies are included in the restructuring savings targets.

In June 2019, the Group disposed of its 50% interest in Angang Vesuvius Refractory Company Ltd for a cash consideration of £6.8m, resulting in a profit after foreign currency adjustments of £1.1m.

 

 Principal Risks and Uncertainties

 

Risk Management

The Board's oversight of principal risks involves a specific review of the processes by which the Group manages those risks. This establishes a clear understanding at Board level of the individuals and groups within the business formally responsible for the management of specific risks and the mitigation in place to address them. The Board also establishes the Group's risk appetite, considering the nature and extent of the principal risks that the Group should take and the associated adequacy of the steps being taken to mitigate them.

The Board has overall responsibility for establishing and maintaining a system of risk management and internal control, and for reviewing its effectiveness. The Group undertakes a continuous process of risk identification and review, which includes a formal process, conducted annually for mapping risks from the bottom-up, with each major business unit, and key operational, senior functional and senior management staff identifying their principal risks. This assessment undergoes a formal review at half year. The results are compiled centrally to deliver a coordinated picture of the key operational risks identified by the business. These are further reviewed by the Group Executive Committee. In conjunction with this process, each Director contributes their individual views of top-down strategic risks facing the Group - drawing on the broad commercial and financial experience gained both inside and outside the Group. The results of this assessment are then overlayed on the internal assessment of risks to build a comprehensive analysis of existing and emerging risk. This review process extends to cover both financial and non-financial risks, and considers the risks associated with the impact of the Group's activities on employees, customers, suppliers, the environment, local communities and society more generally. As in previous years, in 2019 the Group's assessment of principal risks was also reviewed and considered against this group of emerging risks and uncertainties identified through our Board review process.

Risk Mitigation

The risks identified are actively managed in order to mitigate exposure. Senior management 'owners' are identified for each principal risk to manage the mitigations of that specific risk and contribute to the analysis of its likelihood and materiality. This is reported to the Board. The risks are analysed in the context of our business structure which gives protection against a number of principal risks we face with diversified currencies, a widespread customer base, local production matching the diversity of our markets and intensive training of our employees. Additionally, we seek to mitigate risk through contractual measures. Where cost-effective, the risk is transferred to insurers.

Principal Risks

The risks identified are those the Board considers to be the most relevant to the Group in relation to their potential impact on the achievement of its strategic objectives. All of the risks could materially affect the Group, its businesses, future operations and financial condition and could cause actual results to differ materially from expected or historical results. These risks are not the only ones that the Group will face. Some risks are not yet known and some currently not deemed to be material could become so.

Changes to Risk in 2019

The Board believes that there has been no material change to the Group's principal risks and uncertainties during the year.

During 2019, the Board continued to focus on specific, identifiable risks where those arose during the year - the challenges of the global economic situation, particularly the slowdown in our underlying markets, the supply of quality raw materials and the potentially disruptive effects on global trade from increasing geopolitical tensions - which we note in the table of Principal risks and uncertainties. End-market risks, protectionism and globalisation, and the changing regulatory environment were identified as key areas for attention and mitigation.

As issues of climate change climb up the global agenda, the Board has examined how this may affect our internal processes and our external environment - understanding both the drivers of sustainability at our customers and focusing on increased analysis of our operating performance.

As a result the Board resolved to identify ESG risks as a separate element of the Group risk register - recognising the work Vesuvius can do to mitigate the pressure our end customers experience to drive energy efficiency and reduce their carbon footprint, together with the need to focus internally on the action the Group can take to drive business sustainability. This risk also encompasses social and governance issues that were already incorporated into the Group's risk analysis.  

In addition, the Board continues to monitor the implications of certain other emerging 'macro' trends such as automation in manufacturing and increasing digitalisation, both of which could act as disruptors to industry. During 2019 the Board has engaged with the workforce to ensure that Vesuvius fosters an appropriate culture and that Vesuvius' values are embedded throughout the Group, reflecting the Board's recognition of the challenges that could arise from a failure by the Group to support the retention of appropriate talent and to foster the correct culture for success.

The Board has discussed the potential impact of Covid-19 on the business, and in particular the actions being taken to respond given the Group's operations in China. This remains a matter of close attention for the Board.

Finally, the Board continued to monitor the developing issues posed by cyber threats. Further focused work was undertaken during the year on analysing and increasing the integrity of our system security. The Board received reports from the Group's multi-disciplinary committee appointed to assess the Group's controls in this area as well as from external experts to enhance the Board's understanding of and respond to emerging cyber trends.

The Directors' views on each of the above issues, and on emerging risks in general were independently gathered and integrated into the management discussions and actions taken on risk.

Brexit

Following the exit of the UK from the EU on 31 January 2020 under the Withdrawal Agreement the UK is currently subject to a Transition Period which will run until the end of 2020 (unless extended). During the Transition Period the UK remains in the Single Market and the Customs Union of the EU while the terms of a new trade agreement are negotiated. If those negotiations are not completed and ratified before the end of the Transition Period, World Trade Organisation rules may apply.

Vesuvius has analysed the potential challenges posed by Brexit, including the possibility of a 'no trade deal' situation occurring at the end of 2020, and identified mitigation strategies to address those challenges.

For our customers located in the EU27 countries, most of our products are manufactured by Vesuvius outside the UK, so we would not envisage a material impact from Brexit after the Transition Period. For those customers located in the UK or located in the EU27 and supplied from our UK plant, we have contingency plans and we are working with these customers to meet their needs in a cost-efficient way.

Principal risks and uncertainties: 

Risk	Potential impact	Mitigation
End market risks Vesuvius suffers an unplanned drop in demand, revenue and/or margin because of market volatility beyond its control	·      Unplanned drop in demand and/or revenue due to reduced production by our customers ·      Margin reduction ·      Customer failure leading to increased bad debts ·      Loss of market share to competition ·      Cost pressures at customers leading to use of cheaper solutions	·      Geographic diversification of revenues ·      Product innovation and service offerings securing long-term revenue streams and maintaining performance differential ·      Increase in service and product lines by the development of the Technical Services offering ·      R&D includes assessment of emerging technologies ·      Manufacturing capacity rationalisation and flexible cost base ·      Diversified customer base: no customer is greater than 10% of revenue ·      Robust credit and working capital control to mitigate the risk of default by counterparties
Protectionism and globalisation The Vesuvius business model cannot adapt or respond quickly enough to threats from protectionism and globalisation	·      Restricted access to market due to enforced preference of local suppliers ·      Increased barriers to entry for new businesses or expansion ·      Increased costs from import duties, taxation or tariffs ·      Loss of market share ·      Trade restrictions	·      Highly diversified manufacturing footprint with manufacturing sites located in 26 countries ·      Strong local management with delegated authority to run their businesses and manage customer relationships ·      Cost flexibility ·      Tax risk management and control framework together with a strong control of inter-company trading
Product quality failure Vesuvius staff/contractors are injured at work or customers, staff or third parties suffer physical injury or financial loss because of failures in Vesuvius products	·      Injury to staff and contractors ·      Product or application failures lead to adverse financial impact or loss of reputation as technology leader ·      Incident at customer plant causes manufacturing downtime or damage to infrastructure ·      Customer claims from product quality issues	·      Quality management programmes including stringent quality control standards, monitoring and reporting ·      Experienced technical staff knowledgeable in the application of our products and technology ·      Targeted global insurance programme ·      Experienced internal legal function controlling third-party contracting
Complex and changing regulatory environment Vesuvius experiences a contracting customer base or increased transaction and administrative costs due to compliance with changing regulatory requirements	·      Revenue reduction from reduced end-market access ·      Disruption of supply chain and route to market ·      Increased internal control processes ·      Increased frequency of regulatory investigations ·      Reputational damage	·      Compliance programmes and training across the Group ·      Internal Audit function ·      Experienced internal legal function including dedicated compliance specialists ·      Global procurement category management of strategic raw materials
Failure to secure innovation Vesuvius fails to achieve continuous improvement in its products, systems and services	·      Product substitution by customers ·      Increased competitive pressure through lack of differentiation of Vesuvius offering ·      Commoditisation of product portfolio through lack of development ·      Lack of response to changing customer needs ·      Loss of intellectual property protection	·      Enduring and significant investment in R&D, with market-leading research ·      A shared strategy for innovation throughout the Group, deployed via our R&D centres ·      Stage gate process from innovation to commercialisation to foster innovation and increase alignment with strategy ·      Programme of manufacturing and process excellence ·      Quality programme, focused on quality and consistency ·      Stringent intellectual property registration and defence
Business interruption Vesuvius loses production capacity or experiences supply chain disruption due to physical site damage (accident, fire, natural disaster, terrorism), industrial action, cyber attack or global health crisis	·      Loss/closure of a major plant temporarily or permanently impairing our ability to serve our customers ·      Damage to or restriction in ability to use assets ·      Denial of access to critical systems or control processes ·      Disruption of manufacturing processes ·      Inability to source critical raw materials	·      Diversified manufacturing footprint ·      Disaster recovery planning ·      Business continuity planning with strategic maintenance of excess capacity ·      Physical and IT control systems security, access and training ·      Cyber risks integrated into wider risk-management structure ·      Well-established global insurance programme ·      Group-wide safety management programmes ·      Dual sourcing strategy and development of substitutes
People, culture and performance Vesuvius is unable to attract and retain the right calibre of staff, fails to instil an appropriate culture or fails to embed the right systems to drive personal performance in pursuit of the Group's long-term growth	·      Organisational culture of high performance is not achieved ·      Staff turnover in growing economies and regions ·      Stagnation of ideas and development opportunities ·      Loss of expertise and critical business knowledge ·      Reduced management pipeline for succession to senior positions	·      Internal focus on talent development and training, with tailored career-stage programmes and clear performance management strategies ·      Contacts with universities to identify and develop talent ·      Career path planning and global opportunities for high-potential staff ·      Internal programmes for the structured transfer of technical and other knowledge ·      Clearly elucidated Values underpin business culture
Health and safety Vesuvius staff or contractors are injured at work because of failures in Vesuvius' operations, equipment or processes	·      Injury to staff and contractors ·      Health and safety breaches ·      Manufacturing downtime or damage to infrastructure from incident at plant ·      Inability to attract the necessary workforce ·      Reputational damage	·      Active safety programmes, with ongoing wide-ranging monitoring and safety training ·      Independent safety audit team ·      Quality management programmes including stringent manufacturing process control standards, monitoring and reporting
Environmental, social and governance (ESG) criteria Vesuvius fails to capitalise on the opportunity to help its customers significantly reduce their carbon emissions as environmental pressure grows on the Steel Industry or Vesuvius fails to meet the expectations of its various stakeholders including employees and investors	·      Loss of opportunity to grow sales ·      Loss of opportunity to increase margin ·      Loss of stakeholder confidence including Investors ·      Reputational damage	·      Development of appropriate ESG measures for the business ·      Investment in R&D to develop products to assist our customers in reducing their carbon emissions and improve their own ESG measures ·      Skilled technical sales force to develop efficient solutions for our customers ·      The group wide Code of Conduct, ABC Policy with a zero tolerance regarding bribery and corruption ·      Internal Speak up mechanisms to allow reporting of concerns ·      Extensive use of due diligence involving existing and potential investments, business partners and customers

 

 

 

 

Group Income Statement

For the year ended 31 December 2019