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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Vesuvius Plc | LSE:VSVS | London | Ordinary Share | GB00B82YXW83 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 4.00 | 0.87% | 461.50 | 463.50 | 464.00 | 468.50 | 448.50 | 468.50 | 360,740 | 16:35:24 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Fabricated Metal Pds, Nec | 1.93B | 118.5M | 0.4409 | 10.51 | 1.25B |
From Apr 2019 to Apr 2024
TIDMVSVS
RNS Number : 3161G
Vesuvius plc
01 March 2018
1 March 2018
Results for the year ended 31 December 2017
Strong full year performance across all Regions and Business Units
Vesuvius plc, a global leader in molten metal flow engineering, announces its preliminary audited results for year ended 31 December 2017.
Financial summary
Hot Features
Premium
2017 2016 Year-on-year Underlying
change change(1)
(GBPm) (GBPm)
------------------------- -------- -------- ------------- -----------
Revenue 1,683.9 1,401.4 20.2% 12.5%
Trading Profit(3) 165.5 133.3 24.2% 16.1%
Return on Sales(3) 9.8% 9.5% +30bps +30bps
Operating Profit 109.7 92.9 18.1%
Headline Profit Before
Tax(3) 152.9 119.8 27.6%
Profit Before Tax 97.1 79.4 22.3%
Profit(2) 44.4 63.2 -29.7%
--------
Headline Earnings(3) 110.1 82.1 34.1%
Headline EPS(3) (pence) 40.7 30.4 33.9%
Statutory EPS (pence) 14.1 21.1 -33.2%
Operating cash flow(3) 171.5 125.0 37.2%
Net Debt 274.3 320.3 -14.4%
Dividend (pence) 18.0p 16.55p 8.8%
------------------------------- -------- -------- ------------- -----------
(1) Underlying basis is at constant currency and excludes separately reported items and the impact of acquisitions
(2) Year-on-year reduction in profit as a result of higher charges within separately reported items
(3) For definitions of non-GAAP measures, refer to Note 16 in the financial statements
Key Points
-- Reported 2017 revenue up 20.2% and underlying revenue and trading profit up 12.5% and 16.1% respectively
-- Global steel production up 5.3% in 2017 and positive momentum in the majority of Foundry end markets
-- Accelerating momentum in China with 9.2% underlying sales growth - Vesuvius is benefiting from growing demand for our higher quality products
-- Major progress made in mitigating both temporary headwinds of Flow Control EMEA intercompany supply and significant raw material cost inflation. GBP14.4m headwind in 2017 will substantially unwind in 2018
-- Restructuring savings of GBP16.2m achieved in 2017 and total targeted savings from the existing restructuring programme, mainly in Flow Control, increased from GBP55m to GBP60m
-- Launch of a completely new restructuring programme targeting GBP15m of annual savings by 2020 in our other businesses
-- Cash conversion of 104% and Working Capital / Revenues improved to 24.9% at year-end 2017, from 26.6% in 2016
-- Strong balance sheet with Net Debt / 2017 EBITDA at 1.3x
-- Full year dividend increased 8.8% to 18.0 pence per share. Final dividend of 12.5 pence per share to be paid on 25 May 2018
Patrick André, Chief Executive of Vesuvius, commented:
"I am pleased to report that Vesuvius has achieved a strong set of results in 2017, delivering our highest Trading Profit since we became an independent company in 2012. We benefitted from positive growth in both our steel and foundry end markets and also significantly increased the sales penetration of our value-creating solutions. We continued the timely delivery of our previously announced restructuring programme, mainly in Flow Control, and are announcing today a completely new programme focused on Advanced Refractories, Foundry and Group corporate functions, targeting GBP15m in savings by 2020. Looking forward, we are focused on accelerating the realisation of our core strategic objectives of delivering long-term sustainable and profitable growth."
For further information, please contact:
Shareholder/analyst enquiries:
Patrick André, Chief
Vesuvius plc Executive +44 (0) 207 822 0000
Guy Young, Chief Financial
Officer +44 (0) 207 822 0000
Euan Drysdale, Group
Head of Corporate Finance +44 (0) 207 822 0027
Virginia Skroski, Investor
Relations Manager +44 (0) 207 822 0016
Media enquiries:
Andrew Jaques/ James
White/
MHP Communications Ollie Hoare +44 (0) 203 128 8100
Vesuvius management will make a presentation to analysts and investors on 1 March at 10.30 (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 (UK participant dial in +44(0)33 0336 9105; US participant dial in +1 323 794 2551; confirmation code 5596276). This presentation will be broadcast live on Vesuvius' website, http://investors.vesuvius.com/investor-relations 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 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 accounts.
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 2017
Vesuvius continued to make further strategic and operational progress in 2017 in line with our objectives and strategy. We benefited in the year from 5.3% year-on-year growth in global steel production (as reported by the World Steel Association). However, steel production growth in the world excluding China was supported by a significant decrease in Chinese steel exports, which may not repeat in 2018. We also experienced positive momentum in the majority of Foundry end markets, with particular strength in heavy trucks and a recovery in mining equipment as well as construction and agricultural equipment after several years of weakness.
We successfully grew sales in excess of underlying market growth in our key developing markets of China, India, South America, Mexico and EEMEA (Eastern Europe, Middle-East and Africa), supported by increased customer interest in our value-creating solutions. Our performance in China was especially encouraging with 9.2% underlying revenue growth. We benefitted from the trend in China towards higher quality steel requiring higher quality products and value creating solutions.
Even in the relatively mature regions of Europe and the US, we delivered revenue growth in excess of underlying markets, achieving revenue growth of 7.6% and 8.0%, respectively. This outperformance was supported by increased penetration of our value-creating solutions; new product launches, especially in Foundry; and an increased focus on strategic customers.
GBPm 2017 Acquisition/Disposals 2017 2016 Currency Acquisitions/Disposals 2016 Reported Underlying
Reported Underlying Reported Underlying % change % change
--------- --------- ----------- --------- ----------- ---------
Revenue 1,683.9 (5.5) 1,678.4 1,401.4 90.6 - 1,492.0 +20.2% +12.5%
Trading
Profit 165.5 (0.2) 165.3 133.3 9.1 - 142.4 +24.2% +16.1%
Return
on Sales
% 9.8% - 9.8% 9.5% - - 9.5% +30bps +30bps
Group trading performance
Group revenue was GBP1,683.9m, an increase of 20.2% versus 2016 on a reported basis. Underlying Group revenue, adjusted for the effects of acquisitions and currency translation, increased by 12.5%. Trading profit for the full year was GBP165.5m, up 24.2% on a reported basis (2016: GBP133.3m) and up 16.1% on an underlying basis. Return on sales increased by 30 basis points on a reported basis and 30 basis points on an underlying basis to 9.8% in 2017 (2016: 9.5%).
Our financial performance would have been even stronger in 2017 if we had not been impacted by the temporary headwinds of increased intercompany imports to satisfy higher demand experienced by Flow Control in EMEA and significant raw material cost inflation. These headwinds were mostly mitigated by year-end and should continue to unwind in 2018, unless additional raw material price increases were to materialise.
Strategic progress
Our strategy remains centred around five key execution priorities, designed to ensure the achievement of our core strategic objectives of delivering long-term, sustainable and profitable growth. Each of these execution priorities saw significant progress in 2017:
-- Reinforce our technology leadership
o R&D spend in 2017 of GBP33.2m, representing c.2.0% of total revenues, significantly higher than most competitors
o New R&D centre in India inaugurated in November 2017, reinforcing our presence in this key market
-- Increase penetration of our value-creating solutions
o The growth of sales in our Steel and Foundry divisions outperformed underlying market growth in most areas, confirming the mounting interest of customers in our advanced solutions
-- Capture growth in developing markets
o Underlying revenue growth especially strong in China (+ 9.2%), India (+6.2%), South America (+17.5%), Mexico (+7.1%) and Eastern Europe, Middle East and Africa (+37.0%)
-- Improve cost leadership and margins
o GBP16.2m restructuring savings achieved in 2017, exceeding expectations and targeted savings from the existing restructuring programme, mainly in Flow Control, increased from GBP55m to GBP60m
o Launch of a completely new restructuring programme targeting GBP15m of recurring savings by 2020
-- Develop our Technical Services offering
o Global revenue from our Technical Services offering reached GBP88m in 2017, up 14% from 2016
o Strategic investment in Sapotech Oy, a Finnish technology company offering optical surface defect detection services for the continuous casting process
Temporary headwinds impacting 2017 results
Some of the key raw materials used by our Steel and Foundry Divisions experienced significant price increases in 2017, particularly during the second half of the year. The speed of these increases was such that it was not immediately possible to fully recover the increased costs through the sales price of our finished products, as we were bound by contractual obligations with some customers. This situation improved towards the end of 2017 due to prices stabilising for several key raw materials and major progress being made in recovering cost inflation through higher selling prices. Whilst the price of magnesite, the largest contributor to raw material price inflation in 2017, has now stabilised, the price of other raw materials such as bauxite, silicon carbide and zirconia are still on an upward trend. As a result, the process of price adjustment will continue into 2018, until realised cost increases have been fully recovered.
Additionally, the very strong growth of our Flow Control sales in EMEA temporarily exceeded the capacity of our manufacturing plants in the region, requiring the import of products from our facilities in Asia and NAFTA, incurring additional freight, export duty and overtime costs. Measures were immediately taken to increase the capacity of the Flow Control EMEA plants and this ramp-up is now complete, substituting imports from non-EMEA plants.
The total negative impact of these headwinds on 2017 Trading Profit was GBP14.4m (GBP7.6m Flow Control EMEA, GBP6.8m raw material inflation). These headwinds were mostly mitigated by year-end and should continue to unwind in 2018, unless additional raw material price increases were to materialise.
Foreign exchange
Average exchange rates of Sterling to US Dollar and Euro fell by 5.1% and 6.8% respectively between full year 2016 and 2017. This currency translation effect provided a trading profit benefit for the Group of approximately GBP9.1m for the year.
All things being equal, based on the average exchange rates in January 2018, and were month end January rates to persist for the remainder of 2018, this would have decreased our 2017 Trading Profit by approximately 2.9% (GBP4.7m).
Restructuring
We continued to make good progress in implementing our previously announced restructuring programme, mainly in Flow Control, with GBP16.2m savings delivered in 2017, which was ahead of expectations. The total savings delivered since launching the programme are now GBP43.2m. The total expected savings from this programme are increased to GBP60m by 2020 from the previously announced GBP55m. Total costs are increased to GBP75m from the previously announced GBP70m. The whole of the GBP75m has already been accounted for at the end of 2017.
We launched a completely new restructuring programme at the end of 2017 targeting the Foundry Division in Europe and NAFTA, the Advanced Refractories Business Unit in Europe, and Group corporate functions. This new programme is targeting GBP15m of recurring savings by 2020 at a cost of GBP16.0m, of which GBP4.8m has already been accounted for at the end of 2017. GBP5m in capital expenditure will also be necessary to support the implementation of this programme.
In parallel to these restructuring programmes, Vesuvius is reinforcing
its focus on operational excellence and continuous improvement in its
manufacturing operations.
Working Capital
We made significant progress in our efforts to reduce working capital,
with Working Capital/Revenues of 24.9% at year-end 2017, versus 26.6%
in 2016. Trade working capital increased by just GBP12.2m on a constant
currency basis in 2017 despite constant currency revenue growth of GBP191.9m.
Looking at the key components of trade working capital, debtor days were
a major area of success, falling 5% year on year, supported in particular
by marked improvements in China.
Financial position
Our Net Debt/EBITDA ratio has improved from 1.8x at year end 2016 to 1.3x
at 31 December 2017, a reduction of GBP46.0m from GBP320.3m at the end
of 2016, as a result of good cash generation. The main drivers of the
decrease were the impact of strong cash conversion partially offset by
higher restructuring costs and tax payments.
As announced on 14 December 2017, we raised EUR100 million with the completion
of a US Private Placement for the repayment of existing indebtedness.
Vesuvius' annual interest costs will decline by approximately GBP1.8m
as a result of this refinancing.
During the year, we also extended the term of our Revolving Credit Facility
by two years until 2022 and our liquidity including cash and undrawn credit
lines currently totals GBP360.8m.
The weighted average maturity of Vesuvius' committed debt facilities now
stands at approximately six years, versus approximately four years at
year end 2016.
Impact of US tax changes
The US Tax Cuts and Jobs Act ('TCJA') enacted in late December made significant
changes to the US tax system. A lower tax rate in the US, and a move closer
to a territorial system of taxation, will be positive for our US business
from a longer-term perspective.
A combination of the reduction in the Federal tax rate from 35% to 21%,
the repatriation tolling charge and other provisions of TCJA caused a
GBP25.7m reduction in our US deferred tax asset which, together with other
normal movements and foreign exchange revaluation, reduced from GBP65.9m
at the end of 2016 to GBP32.6m at the end of 2017. However, this write-down
did not impact our Headline earnings after tax, as the change in the asset
is reflected through separately reported items.
Although still subject to clarification as to how some of the provisions
will work, we estimate that the short/medium-term impact will result in an increase to the effective tax rate on our Headline profits before share of profits of joint ventures and separately reported items of c.0.7% in 2018, and c.1.2% in 2019. We expect the Group's effective tax rate for 2018 onwards to be between 27% and 28%, including the expected adverse impact of US tax reform, reflecting the tax benefit of initiatives being taken.
Board and senior management
As previously announced, Patrick André was appointed Chief Executive and Executive Director of Vesuvius plc with effect from 1 September 2017. Patrick replaced François Wanecq, who retired from the Board of Directors on 31 August 2017. On 1 October 2017, Roel van der Sluis, previously President, Vesuvius North Asia, assumed the position of President, Steel Flow Control for the Group, succeeding Patrick André.
On 3 April 2017, Holly Koeppel joined the Board as an Independent Non-executive Director. She serves on the Audit, Remuneration and Nomination Committees.
Quality, health and safety
Vesuvius places great emphasis on the importance of quality, health and safety in the workplace and in the communities in which we operate. 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. Our Lost Time Injury Frequency Rate has declined from 1.7 LTIs per million hours worked in 2016 to 1.6 LTIs in 2017, and we have seen a marked reduction of our LTI Severity rate from 75 to 63 Lost Days per million hours worked.
A new safety management organisation, updating responsibility and accountability for the management of safety across the Group was established at the end of 2017 and will be fully implemented in the first half of 2018.
Dividend
The Board is proposing a final dividend of 12.5 pence per share (2016: 11.40 pence per share), a 9.6% increase on the final dividend paid in 2016. This will result in a total dividend for the year of 18.0 pence per share (2016: 16.55 pence per share) and represents a 8.8% 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 10 May 2018, the final dividend will be paid on 25 May 2018 to shareholders on the register at the close of business on 13 April 2018. The last date for receipt of elections from shareholders for the Vesuvius Dividend Reinvestment Plan will be 3 May 2018.
Outlook
Our main Steel and Foundry markets remain positively oriented at the beginning of 2018. However, we expect a lower growth rate of steel production outside China in 2018 compared to 2017, as the significant decrease in Chinese steel exports which occurred in 2017 may not repeat in 2018. Our self-help and manufacturing optimisation programme will continue to develop and expand in 2018. The temporary raw material and product supply headwinds that impacted our 2017 results have now been mostly mitigated and will substantially unwind during the year, subject to any further raw material cost increases. We remain confident in our ability to further improve working capital management and generate strong operating cash flow. For these reasons, the Board is confident that in comparison to 2017, further strong progress will be made in 2018.
Operational Review
Vesuvius comprises two divisions, Steel and Foundry. The Steel division operates as three business lines, Steel Flow Control, Advanced Refractories and Digital Services.
Steel Division
According to the World Steel Association, global steel production in 2017 increased 5.3% compared with 2016. The majority of major steel producing countries were up year-on-year. Steel volume growth in the developed markets of Europe (EU28) and the United States was up 4.1% and 4.0%, respectively. The growth momentum also continued in our key strategic growth markets of China (+5.7%), India (+6.2%), Brazil (+9.9%) and Mexico (+6.3%).
Revenue in Vesuvius' Steel Division increased by 21.9% on a reported basis. On an underlying basis, Steel Division revenue was up 14.1%. This higher growth rate relative to global steel production is a result of higher penetration supported by increased customer interest in the value-creating solutions offered by Vesuvius which enable our customers to improve their manufacturing efficiency whilst at the same time raising the quality of their finished products. We were particularly pleased with our accelerating momentum in China where we benefited from the trend towards higher quality steel requiring higher quality products and value creating solutions.
On a reported basis, our trading profit improved 26.8% year on year. On an underlying basis, trading profit increased 18.9%, with return on sales increasing by 40bps.
Steel Division 2017 2016 Change Underlying
--------------------------
(GBPm) (GBPm) (%) change
-------------------------- -------- ------- ------- -----------
Steel Flow Control
Revenue 605.9 506.4 19.7% 11.8%
Advanced Refractories
Revenue 499.1 398.8 25.2% 17.4%
Digital Services Revenue 43.7 36.9 18.4% 8.9%
--------------------------- -------- ------- ------- -----------
Total Steel Revenue 1,148.7 942.0 21.9% 14.1%
--------------------------- -------- ------- ------- -----------
Total Steel Trading
Profit 100.4 79.2 26.8% 18.9%
--------------------------- -------- ------- ------- -----------
Total Steel Return
on Sales 8.7% 8.4% +30bps +40bps
--------------------------- -------- ------- ------- -----------
Steel Flow Control
Steel Flow Control supplies the stoppers and tubes used to channel and control the flow of molten steel from ladle to tundish and from tundish to mould; slide gate refractories for ladles and tundishes; slide gate systems; tundish and mould fluxes; and control devices to monitor and regulate steel flow into the mould. These products have been designed to resist extreme thermomechanical stress and corrosive environments. The majority of these products are consumed during the process of making steel and, consequently, demand is primarily linked to steel production volumes. Continuing innovation allows us to offer enriched solutions that create additional value in our customers' processes.
Steel Flow Control 2017 2016 Change Underlying
Revenue
---------------------
(GBPm) (GBPm) (%) change
--------------------- ------- ------- ------- -----------
Americas 201.7 168.5 19.7% 8.8%
Europe, Middle East
& Africa (EMEA) 240.1 193.6 24.0% 17.5%
Asia-Pacific 164.1 144.3 13.7% 7.8%
---------------------- ------- ------- ------- -----------
Total Steel Flow
Control Revenue 605.9 506.4 19.7% 11.8%
---------------------- ------- ------- ------- -----------
Year-on-year, underlying revenue in Steel Flow Control increased 11.8%. All regions outperformed underlying steel volume growth and EMEA was our fastest growing region in 2017, with underlying revenues up 17.5%.
In the Americas, Steel Flow Control's underlying revenues increased 8.8%, against a 5.9% increase in steel production volumes. As discussed in our H1 2017 results, our outperformance relative to steel production is due to market share gains in North America. In the US in particular, our market share is continuing to recover from the low point of the second half of 2015 when we were impacted by customer closures and volume losses due to market pricing pressure.
Steel production in EMEA increased 4.9%, and Vesuvius outperformed the market with underlying revenue up 17.5%, reflecting market share gains. A significant proportion of the increase in sales was provided by imports into EMEA from our plants located in China, India and Mexico, with significant additional freight, export duty and overtime costs. Measures were immediately taken to increase the capacity of the Flow Control EMEA plants and this ramp-up is now complete, substituting imports from non-EMEA plants.
Underlying revenue increased by 7.8% in Asia-Pacific, compared to a 5.7% increase in steel production volume in the region. Revenues increased faster than the steel market in the key regional markets of China, India and South Korea.
In December 2017, we finalised a strategic investment in Sapotech Oy, a Finnish technology company developing optical defect detection services for the continuous casting process.
Advanced Refractories
Products of the Advanced Refractories business line include specialist refractory materials for lining steelmaking vessels such as blast furnaces, ladles and tundishes, which are subject to extreme temperatures, corrosion and abrasion. These materials 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 and dams). Vesuvius is one of the world's largest manufacturers of monolithic refractory linings. Advanced Refractories delivers installation technologies, products adapted to fit customers' processes and effective and efficient logistics services. These factors are combined with significant R&D, a deep knowledge of customers' processes and project management capability to deliver market-leading solutions for customers.
Advanced Refractories 2017 2016 Change Underlying
Revenue
-----------------------------
(GBPm) (GBPm) (%) change
----------------------------- ------- ------- ------- -----------
Americas 152.8 132.6 15.2% 8.6%
Europe, Middle East
& Africa (EMEA) 236.2 172.2 37.2% 28.4%
Asia-Pacific 110.1 94.0 17.1% 9.4%
------------------------------ ------- ------- ------- -----------
Total Advanced Refractories
Revenue 499.1 398.8 25.2% 17.4%
------------------------------ ------- ------- ------- -----------
Year-on-year, revenue in Advanced Refractories increased 25.2% to GBP499.1m on a reported basis, whilst underlying revenue increased 17.4%. This outperformance relative to steel volume growth was supported by increased customer interest in our value-creating solutions and the successful launch of new products such as our Supergard(TM) Tundish line, which is a patented tundish lining for improving steel quality. We also benefited from customers seeking to diversify their supplier base in response to recent consolidation.
We achieved attractive underlying revenue growth in each of our key regions with the Americas up 8.6%, EMEA up 28.4% and Asia-Pacific up 9.4%. The particularly high growth level in EMEA was due to significant progress regaining market share in Europe despite competitive market conditions.
Advanced Refractories was the business unit most impacted by raw material price rises during 2017, with H2 2017 being the period most affected. We are pleased to report that we have made major progress in recovering this cost inflation through higher selling prices. This process of price adjustment will continue into 2018, until realised cost increases have been fully recovered.
Digital Services
Digital Services offers digitalised solutions to our customers to make their underlying processes more efficient and reliable. Digital Services complements existing product lines by providing new services to our existing customers. Digital Services focuses on the capture and interpretation of key manufacturing data, complementing Vesuvius' strong presence and expertise in molten metal engineering to create new technologies and integrate them into expert process management systems.
Digital Services 2017 2016 Change Underlying
Revenue
------------------------
(GBPm) (GBPm) (%) change
------------------------ ------- ------- ------- -----------
Americas 26.8 21.8 22.9% 11.9%
Europe, Middle East
& Africa (EMEA) 14.5 14.1 2.8% -3.9%
Asia-Pacific 2.4 1.1 142.6% 140.0%
------------------------- ------- ------- ------- -----------
Total Digital Services
Revenue 43.7 36.9 18.4% 8.9%
------------------------- ------- ------- ------- -----------
Digital Services generated revenues of GBP43.7m, an increase of 18.4% year-on-year on a reported basis. On an underlying basis, revenues increased 9.0%. This reflects market share gains in North America and India, and we also experienced significant success in South America as a result of increased penetration of our sensors and probes business.
In our Process Metrix lasers business, we had a record year of sales with shipments up over 50% versus 2016. Avemis, our mould level sensors and continuous temperature measurement products, also had a strong year with revenues up c.30% year on year.
Foundry Division
Vesuvius' Foundry division, trading as Foseco, is a world leader in the supply of consumable products, solutions and associated services related to the foundry industry. The foundry process is highly sequential and is critically dependent on consistency of product quality and productivity optimisation. The Foundry division's products, solutions and use of advanced computer simulation techniques allow foundries to reduce defects and hence reduce labour-intensive fettling and machining, minimise metal usage requirements, influence the metal solidification process and automate moulding and casting, thus reducing cost, energy usage and mould size. 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 2017 2016 Change Underlying
------------------------
(GBPm) (GBPm) (%) change
------------------------ ------- ------- ------- -----------
Foundry Revenue 535.2 459.4 16.5% 9.3%
------------------------- ------- ------- ------- -----------
Foundry Trading Profit 65.1 54.1 20.3% 12.0%
------------------------- ------- ------- ------- -----------
Foundry Return on
Sales 12.2% 11.8% +40bps +30bps
------------------------- ------- ------- ------- -----------
There was positive momentum in the majority of Foundry end markets during 2017, with particular strength in heavy trucks and a recovery in mining equipment as well as construction and agricultural equipment after several years of weakness.
Revenue in the Foundry division increased 16.5% to GBP535.2m in 2017 on a reported basis, whilst underlying revenue increased by 9.3%. Trading profit improved by 12.0% on an underlying basis. Our 2017 performance benefited materially from our commitment to technological leadership through investment in R&D, which resulted in 13 new product launches during the year. These new product launches supported revenue growth across Foundry's highest margin product lines - feeding systems, filters and coatings. Trading Profit also benefited from the ongoing organisational restructuring in North America, which is focused on delivering a flatter, leaner structure.
Foundry Revenue 2017 2016 Change Underlying
-----------------------
(GBPm) (GBPm) (%) change
----------------------- ------- ------- ------- -----------
Americas 111.2 92.5 20.2% 11.2%
Europe, Middle East
& Africa (EMEA) 238.9 205.8 16.1% 8.8%
Asia-Pacific 185.1 161.1 14.9% 8.8%
------------------------ ------- ------- ------- -----------
Total Foundry Revenue 535.2 459.4 16.5% 9.3%
------------------------ ------- ------- ------- -----------
In the Americas, underlying revenue increased 11.2% despite weakness in the light vehicle and rail sectors in North America and the closure of a number of customer plants in the steel foundry sector. This was offset by growth in heavy trucks as well as increases in iron casting output related to construction and agricultural equipment. We were successful in gaining market share as a result of new product introductions and we experienced significant success in Brazil growing our feeding systems, filters and non-ferrous metal treatment revenues.
Underlying revenue in EMEA increased 8.8% year-on-year as a result of growth across the majority of foundry end markets with particular strength in heavy trucks as well as high growth in the non-ferrous market. We were also successful in increasing our penetration due to new product introductions.
In Asia-Pacific, underlying revenue increased by 8.8%, with sales increasing in all major markets. Our revenues in China were up c.13%, due to significant growth in heavy truck production as well as our success developing a strong local sales force and marketing organisation. In India, our revenues were up c.5%, despite our prioritisation of working capital management and customer credit risk, mainly due to growth in light vehicle production as well as strength in construction and agricultural equipment and mining equipment.
Financial Review
The following review considers a number of our financial KPIs and sets out other relevant financial information.
Basis of Preparation
We have continued to adopt a columnar presentation format for our accounts separately identifying headline performance results, as we consider that this gives a better view of the underlying results of the ongoing business.
Dividend
The Board has recommended a final dividend of 12.5 pence per share to be paid on 25 May 2018 to shareholders on the register at 13 April 2018. When added to the 2017 interim dividend of 5.50 pence per share paid on 17 September 2017, this represents a full-year dividend of 18.0 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.
Key Performance Indicators
We have identified a number of KPIs against which we have consistently reported since demerger. As with prior years, we measure our results on an underlying basis, where 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 2017, we have:
-- Retranslated 2016 results at the FX rates used in calculating the 2017 results
-- Removed the results of our mould and tundish flux business in Brazil, Mastercodi, which was acquired in 2016
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 2017, we spent GBP33.2m (2016: GBP28.6m) on R&D activities, which represents 2.0% of our revenue (2016: 2.0%).
KPI: Underlying revenue growth
Reported revenue for 2016 was GBP1,401.4m, which after FX translation effects and removing the impact of acquired businesses, equates to GBP1,492.0m on an underlying basis. The reported revenue in 2017 of GBP1,683.9m, when adjusted for acquisitions made, is GBP1,678.4m on an underlying basis, which is an increase of 12.5% year-on-year. The growth has been as a result of stronger end-market demand and business gains during the period, particularly in EMEA and NAFTA.
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 GBP165.5m increased by 16.1% on an underlying basis versus last year whilst RoS on a constant currency basis was 9.8%, a 30bps improvement over 2016. The improved trading profit is due in part to the higher revenue, along with the ongoing delivery of benefits from the restructuring programme.
The Steel Division recorded RoS of 8.7% this year, an increase from 8.4% in 2016, despite the additional costs incurred in importing non-European based product into EMEA as well as the substantial increases in raw material costs experienced in Advanced Refractories. Foundry reported a 12.2% RoS, another improvement over the prior year (2016: 11.8%) with production efficiency gains and operating expense reductions offsetting raw material cost increases that started to impact results in the second half.
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 PBT is net finance costs.
Net finance costs in 2017 of GBP13.9m were GBP0.6m below 2016. The reduction in finance costs was largely due to lower net debt levels that triggered a more favourable interest cost on the Company's revolving credit facility. During the year this facility was successfully extended for a further two years to 2022 and $110m of the US Private Placement programme ('USPP') was redeemed and replaced by a Euro-denominated USPP of the same value but on more favourable terms.
Our Headline PBT was GBP152.9m, 27.6% higher than last year on a reported basis. Including amortisation (GBP19.5m) and the restructuring charges (GBP36.3m), our PBT of GBP97.1m was 22.3% higher than 2016. Headline EPS at 40.7p is 33.9% higher than 2016.
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 GBP93.1m for the year, which is all the more pleasing against a backdrop of revenue growth that inevitably requires some cash investment in working capital. Free cash flow from continuing operations in 2017 was GBP31.7m higher than last year on a reported basis because of the better working capital performance partially offset by higher cash restructuring costs. Our cash conversion in 2017 improved to 104% (2016: 94%).
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 2017 was 24.9% (2016: 26.6%), measured on a 12-month moving average basis. In absolute terms on a constant currency basis, trade working capital increased by GBP12.2m, well below the increase in sales and with an improved inventory and creditor position leading to an improvement as a percentage of sales.
GBPm 2017 Trading profit 2016 Trading profit % change
--------- ---------------------------------------------- -------------------------------------------- -----------------------------------
As As
reported Acquisition/Disposals Underlying reported Currency Acquisition/Disposals Underlying Reported Underlying
--------- --------- ---------------------- ----------- --------- --------- ---------------------- ----------- --------- -----------
Steel 100.4 (0.2) 100.2 79.2 5.1 - 84.3 26.8% 18.9%
Foundry 65.1 - 65.1 54.1 4.0 - 58.1 20.3% 12.0%
--------- --------- ---------------------- ----------- --------- --------- ---------------------- ----------- --------- -----------
Total
Group 165.5 (0.2) 165.3 133.3 9.1 - 142.4 24.2% 16.1%
--------- --------- ---------------------- ----------- --------- --------- ---------------------- ----------- --------- -----------
Operating cash flow and cash conversion
2017 2016
GBPm GBPm
------------------------------------------------- ------- -------
Cash generated from continuing operations 176.6 130.2
Add: Outflows relating to restructuring charges 27.3 16.8
Add: Net retirement benefit obligations 4.8 7.7
Less: Capital expenditure (39.0) (31.3)
Add: Proceeds from the sale of property, plant
and equipment 1.8 1.6
------------------------------------------------- ------- -------
Operating cash flow 171.5 125.0
------------------------------------------------- ------- -------
Trading profit 165.5 133.3
Cash conversion 104% 94%
------------------------------------------------- ------- -------
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 profits from joint ventures by our average operating assets (property, plant and equipment, and trade working capital).
As with most of our KPIs, we measure this on a 12-month moving average basis at constant currency to ensure that we focus on sustainable underlying improvements. Our RONA for 2017 was 24.2% (2016: 21.1%).
KPI: Interest cover and net debt
As at 31 December 2017, the Group had committed borrowing facilities of GBP563.4m (2016: GBP576.9m), of which GBP153.7m was undrawn (2016: GBP158.3m). The revolving credit facility term was extended to 2022 and $110m of the USPP was redeemed and replaced with a Euro-denominated USPP at better rates.
Net debt at 31 December 2017 was GBP274.3m, a GBP46.0m decrease from 2016, as a result of our good cash generation. The main drivers of the decrease were the impact of strong cash conversion partially offset by higher restructuring costs and tax payments.
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 2017, the net debt to EBITDA ratio was 1.3x, an improvement over last year (2016: 1.8x) and EBITDA to interest was 15.8x (2016: 13.4x).
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. As referred to in our Principal Risks and Uncertainties and Viability Statement, we consider the main financial risks faced by the Group as being demand volatility and the impact of financial uncertainty, leading to reduced revenue and profit as well as potential customer default, and a lack of liquidity, brought on by market volatility. Important but lesser risk exists in interest rate movements and cost inflation but neither is expected to have a material impact on the business after considering the controls we have in place.
Our key mitigation of demand volatility is to manage the Group's exposure through balancing our portfolio of business geographically and by end-market 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. The second main financial risk of a lack of liquidity is mitigated 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 2017 were GBP153.7m. 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.
Restructuring
We continued to make good progress in implementing our previously announced restructuring programme, mainly in Flow Control, with GBP16.2m savings delivered in 2017, which was ahead of expectations. The total savings delivered since launching the programme are now GBP43.2m. In 2017, we reported GBP36.3m of restructuring costs (2016: GBP28.5m) that were predominantly made up of redundancy and plant closure costs, along with related consulting fees. These costs included the final costs related to the previously announced restructuring plan as well as GBP4.8m of costs related to a completely new restructuring plan launched at the end of 2017, targeting the Foundry Division in Europe and NAFTA, the Advanced Refractories Business Unit in Europe, and Group corporate functions. The cash costs in 2017 were GBP27.3m (2016: GBP16.8m). We are carrying a restructuring provision forward into 2018 of GBP22.9m.
Taxation
A key measure of tax performance is the effective tax rate, which the Group calculates 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 (2017: GBP151.6m, 2016: GBP118.8m). The Group's effective tax rate, based on the income tax costs associated with headline performance of GBP36.4m (2016: GBP31.4m), was 24.0% in 2017 (2016: 26.4%). This was lower than expected due largely to better profit performance in countries where we had tax losses, the impact of the weakening of the peso on our Mexican tax position and the release of provisions due to favourable tax litigation outcomes.
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 India, Mexico, Germany and Belgium, nil effective rates in the UK and US due to the availability of unutilised tax losses, and rates that lie somewhere in between.
Other key factors impacting the sustainability of the Group's effective tax rate are set out in Note 10.6 to the Group Financial Statements.
The income tax charge on separately reported items of GBP18.0m (2016: GBP5.0m credit) comprises GBP6.0m non-cash deferred tax movements relating to the amortisation of a deferred tax liability arising from the 2008 acquisition of Foseco plc (2016: GBP3.7m), GBP4.3m tax credits relating to restructuring charges (2016: GBP3.8m), and a net reduction in the deferred tax asset previously recognised in respect of US tax losses and certain other temporary differences of GBP28.3m (2016: GBP2.1m) largely caused by US tax reform enacted in late December 2017 in the form of the US Tax Cuts and Jobs Act ('TCJA'). A combination of the reduction in the US Federal tax rate from 35% to 21%, the repatriation tolling charge and other provisions of TCJA caused a GBP25.7m reduction in our US deferred tax asset which, together with other normal movements and foreign exchange revaluation, reduced from GBP65.9m at the end of 2016 to GBP32.6m at the end of 2017. However, this write-down did not impact our Headline earnings after tax, as the change in the asset was reflected through separately reported items.
Based on our initial interpretation, the Base Erosion and Anti-Abuse Tax provisions introduced by the Act may increase the Group's effective tax rate by approximately 0.7% in 2018 and 1.2% in 2019.
We expect the Group's effective tax rate from 2018 onwards to be between 27% and 28%, including the expected adverse impact of US tax reform, reflecting the tax benefit of initiatives being taken.
The net income tax charge recognised directly in the Group Statement of Comprehensive Income of GBP3.1m (2016: GBP0.7m) comprises a GBP2.4m charge (2016: GBP0.7m charge) in respect of deferred tax on pension obligations and GBP0.7m (2016: GBPnil) UK tax in respect of foreign exchange differences arising on hedged positions.
Capital expenditure
Capital expenditure in 2017 of GBP44.3m (2016: GBP35.2m) comprised GBP34.0m in the Steel division (2016: GBP23.7m) and GBP10.3m in the Foundry division (2016: GBP11.5m). Capital expenditure on revenue-generating customer installation assets, primarily in Steel, has been increased to GBP10.7m (2016: GBP6.5m).
Pensions
The Group has a limited number of historical defined benefit plans mainly in the UK, US, Germany and Belgium. The main plans in the UK and US are largely closed to further benefit accruals and 56.5% of the liabilities in the UK have already been insured. The total net deficit attributed to these defined benefit obligations at the end of December 2017 was GBP16.5m (2016: GBP29.4m), representing an improvement of GBP12.9m. The key movements giving rise to this were increases of GBP1.8m to the deficit arising out of changes to actuarial assumptions (attributable to increasing discount rates; updated mortality assumptions and pension membership data) and additional accrual and administrative expenditure paid for the year (GBP6.8m); offset by reductions to the deficit of GBP10.2m from asset returns and cash contributions of GBP11.6m.
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 2017, cash contributions of GBP12.6m (2016: GBP10.8m) were made into the defined contribution plans and charged to trading profit.
Principal Risks and Uncertainties
Risk Management
The Board is responsible for setting the Group's risk appetite and ensuring that appropriate risk management systems are in place. The Group undertakes a continuous process of risk identification and review, which includes both a top-down and bottom-up process, independently gathering views on risk from each business unit, and from operational, functional and senior executive management, and the Board of Directors. Building on the process conducted in 2016, where a clean sheet review of the Group's principal risks was undertaken, the Group's assessment of principal risks has been reviewed and considered against a further group of emerging risks and uncertainties identified through our 2017 Board 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.
Board Monitoring
The Board defines the Group's risk appetite, considering the nature and extent of the principal risks that the Group should take. The Board's oversight of principal risks also involves a Board review of the processes by which the Group manages those risks, establishing a clear understanding at Board level of the individuals and groups in the business formally responsible for the management of specific risks.
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 2017
The Board believes that there has been no material change to the Group's principal risks and uncertainties during the year. However, the Board reflected on the implications of certain emerging 'macro' trends during the year. These included the increase in automation in manufacturing as a competitive disruption and the potential for negative implications for the business from the Brexit process, the outcome of which remains unclear, but which is not expected to be material in the context of the Group. The Board also discussed the risks that could arise from a failure by the Group to foster the correct culture for success. In addition to these wider trends, the Board focused on identified risks where issues had arisen during the year - the interruption of supply of quality raw materials, the related challenges of instigating price increases as input costs go up, the more protectionist approach being implemented in certain major markets, and the potential for financial instability and worldwide recession. Finally, the Board continued its oversight of cyber issues as an emerging risk. The Board's view on each of these issues was integrated into management discussions on risk and factored into the approach the Group takes to successful mitigation. The risks and uncertainties are summarised below:
Risk and context Potential impact Mitigation
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Demand volatility
Vesuvius' * Unplanned drop in demand and/or revenue due to * Geographic diversification of revenues
expectations reduced production
of future trading
are based upon an * Product innovation and service offerings securing
assessment of * Margin reduction long-term revenue streams and maintaining performance
end-market differential
conditions, which
are subject to some * Customer failure leading to increased bad debts
uncertainty. * Increase in service and product lines by the
Vesuvius' development of the Technical Services offering
end-markets are * Loss of market share to competition
historically
somewhat cyclical * R&D includes assessment of emerging technologies
in nature. * Cost pressures at customers leading to use of cheaper
solutions
* 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 &
Globalisation * Restricted access to market due to enforced * Highly diversified manufacturing footprint with
Local, national or preference of local suppliers manufacturing sites located in 26 countries
regional political
requirements
conflict * Increased barriers to entry for new businesses or * Strong local management with delegated authority to
with the quality expansion run their businesses and manage customer
and efficiency relationships
delivered
by scale and * Increased costs from import duties or taxation
standardisation. * Cost flexibility
* Loss of market share
* Tax risk management and control framework together
with a strong control of inter-company trading
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Financial
uncertainty * Customer and other counterparty default * Capital allocation discipline
Fluctuations in the
value of currencies,
interest rates, or * Restricted access to capital hampering ability to * Capital structuring, including fixed rate borrowing
rates of inflation fund growth and matching of debt to cash flow earnings currency
may adversely impact
the Group's
financial * Reduction in earnings from increased interest charges * Alignment of cost structure with revenue where
position or results possible
of operations.
Availability * Reduced market liquidity and increased cost of
of sufficient capital * Effective planning of the debt refinancing profile to
capital avoid exposure to short-term market disruptions
is critical to allow
Vesuvius to deliver
its business plan.
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Complex and changing
regulatory * Revenue reduction from reduced end-market access * Globally disseminated Code of Conduct highlighting
environment ethical approach to business
Vesuvius is subject
to worldwide legal * Disruption of supply chain and route to market
and regulatory * Worldwide confidential Speak-up procedure
regimes,
some of which impose * Increased internal control processes
extra-jurisdictional * Compliance programmes and training across the Group
obligations on
companies * Increased frequency of regulatory investigations
and are continually * Independent Internal Audit function
updated.
* Reputational damage
* Experienced Internal Legal function
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Business
interruption * Loss of a major plant temporarily or permanently * Diversified manufacturing footprint.
The Group is subject impairing our ability to serve our customers
to operational risks
including natural * Disaster recovery planning
catastrophe, * Damage to or restriction in ability to use assets
terrorist
action, fire / * Business continuity planning with strategic
explosion, * Denial of access to critical systems of control maintenance of excess capacity
environmental processes
regulation,
industrial actions, * Physical and IT control systems security, access and
supply chain issues * Disruption of manufacturing processes training
and cyber risk.
* Inability to source critical raw materials * 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
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Failure to secure
Innovation * Product substitution by customers * Enduring and significant investment in R&D, with
Not maintaining market-leading research
and/or
developing the * Increased competitive pressure through lack of
necessary differentiation of Vesuvius offering * A shared strategy for innovation across the Group,
sustainable deployed via our R&D centres
differentiation
in products, systems * Commoditisation of product portfolio through lack of
and services by development * Stage gate process from innovation to
driving commercialisation to foster innovation and increase
innovative alignment with strategy
solutions. * Lack of response to changing customer needs
Competitive
advantage * Programmes of Manufacturing and Process Excellence
derived from * Loss of intellectual property protection
proprietary
intellectual * Quality programme, focused on quality and consistency
property
is lost through
inadequate * Stringent intellectual property registration and
protection. defence
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Attracting talent
and performance * Organisational culture of high performance is not * Internal focus on talent development and training,
management achieved with tailored career-stage programmes and clear
Failure to attract performance management strategies
sufficient new
talent * Staff turnover in growing countries and regions
to the Group based * Contacts with universities to identify and develop
on industry talent
perception * Stagnation of ideas and development opportunities
and competition.
Failure to maintain * Career path planning and global opportunities for
and develop a talent * Loss of expertise and critical business knowledge high potential staff
pipeline and
internal
succession options * Reduced management pipeline for succession to senior * Internal programmes for the structured transfer of
for middle and positions technical and other knowledge
senior
management
positions. * Clearly elucidated values to underpin business
culture
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Quality, Health &
Safety * Injury to staff and contractors * Active safety programmes, with ongoing wide-ranging
Vesuvius works in monitoring and safety training
highly challenging
manufacturing * Product or application failures lead to adverse
environments, financial impact or loss of reputation as technology * Quality management programmes including stringent
providing products, leader quality control standards, monitoring and reporting
systems and services
that are mission
critical and for * Health & safety breach, manufacturing downtime or * Experienced technical staff knowledgeable in the
which reliability damage to infrastructure from incident at customer application of our products and technology
is paramount. plant
* Targeted global Insurance programme
* Customer claims from product quality issues
* Experienced Internal Legal department controlling
third party contracting
--------------------- ------------------------------------------------------------ ------------------------------------------------------------
Group Income Statement
For the year ended 31 December 2017
2017 2016
---------------------------------- ------------------------------------
(1) (1)
(1) Separately (1) Separately
Headline reported Headline reported
performance items Total performance items Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- ----------- ---------- --------- ----------- ---------- -----------
Continuing operations
Revenue 2 1,683.9 - 1,683.9 1,401.4 - 1,401.4
Manufacturing costs (1,219.8) - (1,219.8) (1,018.6) - (1,018.6)
Administration, selling
and distribution costs (298.6) - (298.6) (249.5) - (249.5)
---------------------------------------------- ----------- ---------- --------- ----------- ---------- -----------
Trading profit 2 165.5 - 165.5 133.3 - 133.3
Amortisation of acquired
intangible assets - (19.5) (19.5) - (17.1) (17.1)
Restructuring charges 3 - (36.3) (36.3) - (28.5) (28.5)
Gain on employee benefit
plan 10 - - - - 5.2 5.2
Operating profit/(loss) 165.5 (55.8) 109.7 133.3 (40.4) 92.9
----------- ---------- --------- ----------- ---------- -----------
Finance expense (17.5) - (17.5) (17.4) - (17.4)
Finance income 3.6 - 3.6 2.9 - 2.9
----------- ---------- --------- ----------- ---------- -----------
Net finance costs 4 (13.9) - (13.9) (14.5) - (14.5)
Share of post-tax income
of joint ventures 1.3 - 1.3 1.0 - 1.0
Profit/(loss) before
tax 152.9 (55.8) 97.1 119.8 (40.4) 79.4
Income tax (charge)/credits 5 (36.4) (18.0) (54.4) (31.4) 5.0 (26.4)
---------------------------------------------- ----------- ---------- --------- ----------- ---------- -----------
Profit/(loss) from:
Continuing operations 116.5 (73.8) 42.7 88.4 (35.4) 53.0
Discontinued operations 13 - 1.7 1.7 - 10.2 10.2
---------------------------------------------- ----------- ---------- --------- ----------- ---------- -----------
Profit/(loss) 116.5 (72.1) 44.4 88.4 (25.2) 63.2
============================================== =========== ========== ========= =========== ========== ===========
Profit/(loss) attributable
to:
Owners of the parent 110.1 (72.1) 38.0 82.1 (25.2) 56.9
Non-controlling interests 6.4 - 6.4 6.3 - 6.3
---------------------------------------------- ----------- ---------- --------- ----------- ---------- -----------
Profit/(loss) 116.5 (72.1) 44.4 88.4 (25.2) 63.2
============================================== =========== ========== ========= =========== ========== ===========
Earnings per share -
pence 6
Continuing operations
- basic 13.4 17.3
-
diluted 13.4 17.3
Total operations - basic 14.1 21.1
-
diluted 14.0 21.0
============================================== =========== ========== ========= =========== ========== ===========
(1) Headline performance is defined in Note 16.1 and separately reported items are defined in Note 1.5.
Group Statement of Comprehensive Income
For the year ended 31 December 2017
2017 2016
GBPm GBPm
---------------------------------------------------- ------ ------
Profit 44.4 63.2
Items that will not subsequently be reclassified
to income statement:
------ ------
Remeasurement of defined benefit assets/liabilities 8.4 9.5
Income tax relating to items not reclassified (2.4) (0.7)
Items that may subsequently be reclassified
to income statement:
Exchange differences on translation of the
net assets of foreign operations (38.3) 207.7
Exchange differences on translation of net
investment hedges 9.8 (41.6)
Income tax relating to items that may be
reclassified (0.7) -
------ ------
Other comprehensive (loss)/income, net of
income tax (23.2) 174.9
Total comprehensive income 21.2 238.1
====================================================== ====== ======
Total comprehensive income attributable to:
Owners of the parent 15.3 226.2
Non-controlling interests 5.9 11.9
Total comprehensive income 21.2 238.1
------------------------------------------------------ ------ ------
Total comprehensive income attributable to owners of the
parent arises from:
Continuing operations 13.6 216.0
Discontinued operations 1.7 10.2
------------------------------------------------------ ------ ------
Total comprehensive income attributable to
owners of the parent 15.3 226.2
------------------------------------------------------ ------ ------
Group Statement of Cash Flows
For the year ended 31 December 2017
2017 2016
Notes GBPm GBPm
-------------------------------------------------------- ----- ------ ------
Cash flows from operating activities
Cash generated from operations 9 175.8 130.2
------ ------
Interest paid (15.6) (14.5)
Interest received 3.5 2.4
------ ------
Net interest paid (12.1) (12.1)
Income taxes paid (38.2) (34.2)
Net cash inflow from operating activities 125.5 83.9
Cash flows from investing activities
------ ------
Capital expenditure (39.0) (31.3)
Proceeds from the sale of property, plant and equipment 1.8 1.6
Acquisition of subsidiaries and joint ventures, net
of cash acquired - (7.7)
Dividends received from joint ventures 1.7 2.0
------ ------
Net cash outflow from investing activities (35.5) (35.4)
-------------------------------------------------------- ----- ------ ------
Net cash inflow before financing activities 90.0 48.5
Cash flows from financing activities
------ ------
Proceeds from borrowings 8 103.5 (26.3)
Repayment of borrowings 8 (92.2) 25.7
Borrowing facility arrangement costs 8 (1.0) -
Settlement of forward foreign exchange contracts (10.4) 20.6
Dividends paid to equity shareholders 7 (45.6) (43.9)
Dividends paid to non-controlling shareholders (2.5) (2.5)
------ ------
Net cash outflow from financing activities (48.2) (25.0)
-------------------------------------------------------- ----- ------ ------
Net increase in cash and cash equivalents 8 41.8 23.5
Cash and cash equivalents at 1 January 101.0 67.0
Effect of exchange rate fluctuations on cash and
cash equivalents 8 (2.8) 10.5
Cash and cash equivalents at 31 December 140.0 101.0
======================================================== ===== ====== ======
Free cash flow from continuing operations (Note 16.10)
Net cash inflow from operating activities 126.3 83.9
Net retirement benefit obligations 4.8 7.7
Capital expenditure (39.0) (31.3)
Proceeds from the sale of property, plant and equipment 1.8 1.6
Dividends received from joint ventures 1.7 2.0
Dividends paid to non-controlling shareholders (2.5) (2.5)
-------------------------------------------------------- ----- ------ ------
Free cash flow from continuing operations 16 93.1 61.4
Discontinued operations (0.8) -
-------------------------------------------------------- ----- ------ ------
Free cash flow 16 92.3 61.4
======================================================== ===== ====== ======
Group Balance Sheet
As at 31 December 2017
2017 2016*
Notes GBPm GBPm
------------------------------------------- ----- --------- ---------
Assets
--------- ---------
Property, plant and equipment 311.3 323.6
Intangible assets 743.0 781.9
Employee benefits - net surpluses 10 92.4 78.8
Interests in joint ventures and associates 17.5 18.0
Investments 1.4 2.6
Income tax recoverable 0.4 1.0
Deferred tax assets 61.0 92.1
Other receivables 30.9 30.4
Derivative financial instruments 15 0.2 -
--------- ---------
Total non-current assets 1,258.1 1,328.4
Cash and short-term deposits 8 161.9 144.4
Inventories 222.8 207.7
Trade and other receivables 422.2 394.1
Income tax recoverable 5.2 3.9
Derivative financial instruments 15 0.1 -
--------- ---------
Total current assets 812.2 750.1
Total assets 2,070.3 2,078.5
=========================================== ===== ========= =========
Equity
--------- ---------
Issued share capital 27.8 27.8
Retained earnings 2,370.3 2,370.0
Other reserves (1,369.4) (1,341.4)
--------- ---------
Equity attributable to the owners of the
parent 1,028.7 1,056.4
Non-controlling interests 45.4 42.1
------------------------------------------- ----- --------- ---------
Total equity 1,074.1 1,098.5
------------------------------------------- ----- --------- ---------
Liabilities
--------- ---------
Interest-bearing borrowings 8 410.5 330.8
Employee benefits - net liabilities 10 108.9 108.2
Other payables 17.3 16.5
Provisions 14 34.4 39.9
Deferred tax liabilities 42.7 48.6
--------- ---------
Total non-current liabilities 613.8 544.0
Interest-bearing borrowings 8 25.7 133.9
Trade and other payables 292.6 239.7
Income tax payable 34.3 34.9
Provisions 14 29.8 26.6
Derivative financial instruments 15 - 0.9
--------- ---------
Total current liabilities 382.4 436.0
------------------------------------------- ----- ---------
Total liabilities 996.2 980.0 ------------------------------------------- ----- --------- Total equity and liabilities 2,070.3 2,078.5 =========================================== ===== ========= =========
*Restated as a result of a change in accounting policy and the recording of a provision for which a related asset exists (Note 14).
Group Statement of Changes in Equity
For the year ended 31 December 2017
Issued Owners
share Other Retained of the Non-controlling Total
capital reserves earnings parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 2016 27.8 (1,501.9) 2,346.5 872.4 32.7 905.1
Profit - - 56.9 56.9 6.3 63.2
Remeasurement of defined benefit
liabilities/assets - - 9.5 9.5 - 9.5
Income tax relating to items
not reclassified - - (0.7) (0.7) - (0.7)
Exchange differences on translation
of the net assets of foreign
operations - 202.1 - 202.1 5.6 207.7
Exchange differences on translation
of net investment hedges - (41.6) - (41.6) - (41.6)
-------- --------- --------- ------- --------------- -------
Other comprehensive income,
net of income tax - 160.5 8.8 169.3 5.6 174.9
------------------------------------ -------- --------- --------- ------- --------------- -------
Total comprehensive income - 160.5 65.7 226.2 11.9 238.1
-------- --------- --------- ------- --------------- -------
Recognition of share-based payments - - 1.7 1.7 - 1.7
Dividends paid (Note 7) - - (43.9) (43.9) (2.5) (46.4)
-------- --------- --------- ------- --------------- -------
Total transactions with owners - - (42.2) (42.2) (2.5) (44.7)
------------------------------------ -------- --------- --------- ------- --------------- -------
As at 1 January 2017 27.8 (1,341.4) 2,370.0 1,056.4 42.1 1,098.5
Profit - - 38.0 38.0 6.4 44.4
-------- --------- --------- ------- --------------- -------
Remeasurement of defined benefit
liabilities/assets - - 8.4 8.4 - 8.4
Income tax relating to items
not reclassified - - (2.4) (2.4) - (2.4)
Exchange differences on translation
of the net assets of foreign
operations - (37.8) - (37.8) (0.5) (38.3)
Exchange differences on translation
of net investment hedges 9.8 - 9.8 - 9.8
Income tax relating to items
that may be reclassified - - (0.7) (0.7) - (0.7)
-------- --------- --------- ------- --------------- -------
Other comprehensive income/(loss),
net of income tax - (28.0) 5.3 (22.7) (0.5) (23.2)
------------------------------------ -------- --------- --------- ------- --------------- -------
Total comprehensive income (loss) - (28.0) 43.3 15.3 5.9 21.2
-------- --------- --------- ------- --------------- -------
Recognition of share-based payments - - 2.6 2.6 - 2.6
Dividends paid (Note 7) - - (45.6) (45.6) (2.6) (48.2)
-------- --------- --------- ------- --------------- -------
Total transactions with owners - - (43.0) (43.0) (2.6) (45.6)
------------------------------------ -------- --------- --------- ------- --------------- -------
As at 31 December 2017 27.8 (1,369.4) 2,370.3 1,028.7 45.4 1,074.1
------------------------------------ -------- --------- --------- ------- --------------- -------
Notes to the Financial Statements
1 Basis of preparation 1.1 Basis of accounting
The Group Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention, with the exception of defined benefit pension plans, certain provisions, available-for-sale investments and derivative financial instruments.
1.2 Basis of consolidation
The Group Financial Statements of the Group incorporate the financial statements of the Company and entities controlled by the Company (its "subsidiaries"). Control exists when the Company has the power to direct the relevant activities of an entity that significantly affect the entity's return so as to have rights to the variable return from its activities. In assessing whether control exists, potential voting rights that are currently exercisable are taken into account. The results of subsidiaries acquired or disposed of during the year are included in the Group Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
The principal accounting policies applied in the preparation of these Group Financial Statements are set out in the Notes. These policies have been consistently applied to all of the years presented, unless otherwise stated. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those detailed herein to ensure that the Group Financial Statements are prepared on a consistent basis. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's interest therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination together with the non-controlling interests' share of profit or loss and each component of other comprehensive income, and dividends since the date of the combination. Total comprehensive income is attributed to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
1.3 Going concern
The Directors have prepared cash flow forecasts for the Group for a period in excess of 12 months from the date of approval of the 2017 financial statements. These forecasts reflect an assessment of current and future end-market conditions and their impact on the Group's future trading performance. The forecasts show that the Group will be able to operate within the current committed debt facilities and show continued compliance with the Company's financial covenants. On the basis of the exercise described above and the Group's available committed debt facilities, the Directors consider that the Group and the Company have adequate resources to continue in operational existence for a period of at least 12 months from the date of signing of these accounts. Accordingly, they continue to adopt a going concern basis in preparing the financial statements of the Group and the Company.
1.4 Functional and presentation currency
The financial statements are presented in millions of pounds sterling, which is the functional currency of the Company, and rounded to one decimal place.
1.5 Disclosure of "separately reported items"
IAS 1 Presentation of Financial Statements encourages the disclosure of additional line items and the reordering of items presented on the face of the income statement when appropriate for a proper understanding of the entity's financial performance. The Company has adopted a columnar presentation for its Group Income Statement, to separately identify headline performance results (as defined in Note 16), as the Directors consider that this gives a better view of the underlying results of the ongoing business. As part of this presentation format, the Company has adopted a policy of disclosing separately on the face of its Group Income Statement, within the column entitled 'Separately reported items', the effect of any components of financial performance for which the Directors consider separate disclosure would assist both in a better understanding of the financial performance achieved and in making projections of future results.
Both materiality and the nature and function of the components of income and expense are considered in deciding upon such presentation. Such items may include, inter alia, the financial effect of exceptional items which occur infrequently, such as major restructuring activity, initial recognition and subsequent increase, decrease and amortisation of US deferred tax assets, together with items always reported separately, such as amortisation charges relating to acquired intangible assets, profits or losses arising on the disposal of continuing or discontinued operations and the taxation impact of the aforementioned exceptional items and items reported separately. The amortisation charge in respect of intangible assets recognised on business combinations is excluded from the trading results of the Group since they are non-cash charges and are not considered reflective of the core trading performance of the Group. Restructuring charges are excluded from the trading results of the Group due to the material nature of these non-recurring transformational initiatives. In its adoption of this policy, the Company applies an even-handed approach to both gains and losses and aims to be both consistent and clear in its accounting and disclosure of such items.
1.6 New and revised IFRS
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and have not been early adopted by the Group. The Group's assessment of the impact of these new standards and interpretations is set out below. Other new or amended standards or interpretations are not expected to have a significant impact on the Group Financial Statements.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments (effective from 1 January 2018, for the year ending 2018) addresses the classification, measurement and derecognition of financial instruments, introduces new rules for hedge accounting and a new impairment model for financial assets. It replaces IAS 39 Financial Instruments guidance and comprehensive updates have been made to IFRS 7 Financial Instrument: Disclosure and IAS 32 Financial Instruments: Presentation. The Group will apply IFRS 9 and the updated IFRS 7 disclosure requirements from their effective date.
The impact assessment performed by the Group included a review of the classification and measurement of financial instruments; the impairment of financial assets and the Group hedging policy which resulted in the following conclusions:
-- The Group reviewed the classification and measurement of each of its financial instruments. Although, the classification of instruments is altered under IFRS 9, this does not result in any changes to the measurement approach apart from the impairment of trade receivables which is addressed below;
-- The new impairment model for financial assets requires the recognition of impairment provisions based on expected credit losses ("ECL") rather than only incurred credit losses as is the case under IAS 39. The Group will apply the simplified approach to its trade receivables as per the scope exception in IFRS 9 in which all loss allowances for trade receivables will be measured at initial recognition and throughout its life at an amount equal to lifetime ECL. This is consistent with the nature of the Group's trade receivables as they do not include a significant financing component. Based on the assessments undertaken to date, the Group does not expect a material movement in the loss allowance for trade debtors.
-- The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk management practices. The Group has confirmed that its current net investment hedge relationship will qualify as a continuing hedge upon the adoption of IFRS 9.
Based on our assessment of the adoption of IFRS 9, the Group does not believe there will be a material impact on its Group Financial Statements. From 1 January 2018 onwards, the Group will amend its financial instruments and hedging accounting policies to reflect IFRS 9 terminology and prepare the appropriate disclosures regarding the classification and measurement of financial instruments, impairment of financial assets and hedging.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers (effective after 1 January 2018, for the year ending 2018) establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The Group will apply IFRS 15 from its effective date.
The impact assessment performed by the Group included a review of revenue streams and customer contracts to identify distinct performance obligations and the appropriate method for allocating the transaction price. Based on our assessment of the adoption of IFRS 15, the Group does not believe there will be a material impact on its Group Financial Statements. During 2018, the Group will revise the revenue recognition policy to reflect IFRS 15 terminology, prepare the additional disclosures for the Group Financial Statements and continue to review contracts across all Segments. The Group will continue to disaggregate revenue over Steel and Foundry in the Segmental Analysis note (Note 2).
IFRS 16 Leases
IFRS 16 Leases (effective from 1 January 2019, for the year ending 2019), replaces the existing guidance in IAS 17 Leases. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The present value of the Group's operating lease payments as defined under the new standard will be shown as lease liabilities on the balance sheet and included in net debt. There are a number of differences between the two definitions; for example, where there is an option to extend the lease, payments for the extension period will be included in the IFRS 16 liability if the Group is reasonably certain that it will exercise the option, but are not included as commitments under IAS 17.
The Group is currently assessing the potential impact on its Group Financial Statements resulting from the application of IFRS 16.
IFRIC 23 Uncertainty over income tax treatments
IFRIC 23 Uncertainty over income tax treatments (effective from 1 January 2019, for the year ending 2019, not yet endorsed), clarifies how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over tax treatment under IAS 12. The Group is currently assessing the potential impact on its Group Financial Statements resulting from the application of IFRIC 23.
IFRIC Interpretation - Interest and Penalties on Tax
Previously, the common understanding and interpretation of IAS 12 allowed a company to include in its tax charges, liabilities and provisions any associated delayed settlement interest and penalties. Vesuvius followed this approach. The recent clarification by the IFRS Interpretations Committee (previously the International Financial Reporting Interpretations Committee, IFRIC), however, is that a company should include in its tax charges, liabilities and provisions only items meeting the strict definition of taxes under IAS 12. It confirmed that items not meeting that definition should be reported in accordance with IAS 37. Vesuvius has accordingly changed its accounting policy to include interest and penalties on tax in trade and other payables in accordance with IAS 37. This has resulted in a change to its Group Balance Sheet as at 31 December 2016 to reclassify GBP7.0m from its liabilities and provisions previously reported as tax to trade and other payables. The effect of this change on its 2016 performance statements is immaterial and no restatement is therefore required to be made.
2 Segment information
Operating segments for continuing operations
Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Directors of the Board, who make the key operating decisions and are responsible for allocating resources and assessing performance of the operating segments. Reflecting the Group's management and internal reporting structure, segmental information is presented in respect of the two main business segments: Steel and Foundry. The Steel segment aggregates the Flow Control, Advanced Refractories and Digital Services divisions which are subject to a similar risk profile and return.
Segment revenue represents revenue from external customers (inter-segment revenue is not material). Trading profit includes items directly attributable to a segment as well as those items that can be allocated on a reasonable basis.
2.1 Income statement
2017
-----------------------------
Continuing
Steel Foundry operations
GBPm GBPm GBPm
------------------------------------------- ------- ------- -----------
Segment revenue 1,148.7 535.2 1,683.9
------------------------------------------- ------- ------- -----------
Segment EBITDA 128.9 80.3 209.2
Segment depreciation (28.5) (15.2) (43.7)
------------------------------------------- ------- ------- -----------
Segment trading profit 100.4 65.1 165.5
------------------------------------------- ------- -------
Return on sales margin 8.7% 12.2% 9.8%
Amortisation of acquired intangible assets (19.5)
Restructuring charges (36.3)
Operating profit 109.7
Net finance costs (13.9)
Share of post-tax profit of joint ventures 1.3
------------------------------------------- ------- ------- -----------
Profit before tax 97.1
------------------------------------------- ------- ------- -----------
Capital expenditure additions 34.0 10.3 44.3
------------------------------------------- ------- ------- -----------
2016
----------------------------
Continuing
Steel Foundry operations
GBPm GBPm GBPm
------------------------------------------- ------ ------- -----------
Segment revenue 942.0 459.4 1,401.4
------------------------------------------- ------ ------- -----------
Segment EBITDA 107.0 68.6 175.6
Segment depreciation (27.8) (14.5) (42.3)
------------------------------------------- ------ ------- -----------
Segment trading profit 79.2 54.1 133.3
------------------------------------------- ------ -------
Return on sales margin 8.4% 11.8% 9.5%
Amortisation of acquired intangible assets (17.1)
Restructuring charges (28.5)
Gain on employee benefit plan 5.2
-----------
Operating profit 92.9
Net finance costs (14.5)
Share of post-tax profit of joint ventures 1.0
------------------------------------------- ------ ------- -----------
Profit before tax 79.4
------------------------------------------- ------ ------- -----------
Capital expenditure additions 23.7 11.5 35.2
------------------------------------------- ------ ------- -----------
3 Restructuring charges
The 2017 restructuring charges were GBP36.3m (2016: GBP28.5m). The Group-wide restructuring programme initiated in 2015 continued, resulting in charges of GBP36.3m (2016: GBP28.5m) reflecting redundancy costs of GBP22.8m (2016: GBP21.4m), plant closure costs of GBP0.5m (2016: GBP4.2m), consultancy fees of GBP6.8m (2016: GBP2.0m), an inventory/asset write-off of GBP5.5m (2016: GBP0.9m) and travel of GBP0.7m (2016: GBPnil).
The net tax credit attributable to the total restructuring charges was GBP4.3m (2016: GBP3.8m).
Cash costs of GBP27.3m (2016: GBP16.8m) (Note 9) were incurred in the year in respect of the restructuring programme leaving provisions made but unspent of GBP22.9m (Note 14) as at 31 December 2017 (2016: GBP18.5m), of which GBP2.7m (2016: GBP2.7m) relates to future costs in respect of leases expiring between one and six years.
4 Net finance costs
Total net finance costs for the period of GBP13.9m is analysed in the table below.
2017 2016
GBPm GBPm
------------------------------------------------ ----- -----
Interest payable on borrowings
Loans, overdrafts and factoring arrangements 15.9 15.1
Obligations under finance leases 0.2 0.2
Amortisation of capitalised borrowing costs 0.6 0.5
-------------------------------------------------- ----- -----
Total interest payable on borrowings 16.7 15.8
Interest on net retirement benefits obligations 0.6 1.3
Adjustments to discounts on provisions
and other liabilities 0.2 (0.2)
Adjustments to discounts on receivables (0.1) 0.3
Finance income (3.5) (2.7)
-------------------------------------------------- ----- -----
Total net finance costs 13.9 14.5
-------------------------------------------------- ----- -----
5 Income tax
The Group's effective tax rate, based on the income tax costs associated with headline performance of GBP36.4m (2016: GBP31.4m), was 24.0% (2016: 26.4%).
The Group's total income tax costs include a charge of GBP18.0m (2016: GBP5.0m credit) relating to separately reported items comprising: a credit of GBP4.3m (2016: GBP3.8m credit) in relation to restructuring charges; a credit of GBP6.0m (2016: GBP3.7m credit) relating to the amortisation of intangible assets; a charge of GBP28.3m (2016: GBP2.1m charge) in respect of the recognition of US temporary differences and a net charge of GBPnil (2016: GBP0.4m charge) relating to the gain on employee benefit plan. The net income tax charge reflected in the Group Statement of Comprehensive Income in the year amounted to GBP3.1m (2016: GBP0.7m), GBP2.4m of which related to tax on net actuarial gains and losses on employee benefits plans. In addition, GBP0.7m (2016: GBPnil) related to UK tax in respect of foreign exchange differences arising on hedged positions.
The US Tax Cuts and Jobs Act ('TCJA') enacted in the US in December 2017 has had a material impact on the value of the deferred tax asset the Group recognises in the US. It has reduced the asset by $33.1m (GBP25.7m), of which $31.5m (GBP24.5m) is charged to the Group Income Statement and $1.6m (GBP1.2m) is charged to the Group Statement of Comprehensive Income, as it relates to the effect of the change in the US Federal rate of tax on the value of the deferred tax asset on pension deficits recognised in that statement.
6 Earnings per share ("EPS")
6.1 Earnings for EPS
Basic and diluted EPS from continuing operations are based upon the profit attributable to owners of the parent, as reported in the Group Income Statement, of GBP36.3m (2016: GBP46.7m), being the profit for the year of GBP42.7m (2016: GBP53.0m) less non-controlling interests of GBP6.4m (2016: GBP6.3m); basic and diluted EPS from total operations are based on the profit attributable to owners of the parent of GBP38.0m (2016: GBP56.9m); headline and diluted headline EPS are based upon headline profit from continuing operations attributable to owners of the parent of GBP110.1m (2016: GBP82.1m). The table below reconciles these different profit measures.
2017 2016
GBPm GBPm
--------------------------------------- ----- -----
Profit attributable to owners of the
parent 36.3 46.7
Adjustments for separately reported
items:
Amortisation of intangible assets 19.5 17.1
Restructuring charges 36.3 28.5
Gain on employee benefit plan - (5.2)
Income tax charge/(credit) 18.0 (5.0)
------------------------------------------- ----- -----
Headline profit attributable to owners
of the parent 110.1 82.1
------------------------------------------- ----- -----
6.2 Weighted average number of shares
2017 2016
millions millions
-------------------------------------------------- -------- --------
For calculating basic and headline EPS 270.3 269.9
Adjustment for dilutive potential ordinary shares 1.3 0.8
---------------------------------------------------- -------- --------
For calculating diluted and diluted headline EPS 271.6 270.7
---------------------------------------------------- -------- --------
For the purposes of calculating diluted and diluted headline EPS, the weighted average number of ordinary shares is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all potentially dilutive ordinary shares expected to vest, relating to the Company's share-based payment plans. Potential ordinary shares are only treated as dilutive when their conversion to ordinary shares would decrease EPS, or increase loss per share.
6.3 Per share amounts
Continuing Discontinued 2017 Continuing Discontinued 2016
operations operations total operations operations total
pence pence pence pence pence pence
-------------------------------------------------- ---------- ------------ ----- ---------- ------------ -----
Earnings per share - basic 13.4 0.7 14.1 17.3 3.8 21.1
- headline 40.7 30.4
- diluted 13.4 0.6 14.0 17.3 3.7 21.0
- diluted
headline 40.5 30.3
-------------------------------------------------- ---------- ------------ ----- ---------- ------------ -----
7 Dividends
2017 2016
GBPm GBPm
---------------------------------------------- ---- ----
Amounts recognised as dividends and paid
to equity holders during the period
Final dividend for the year ended 31 December
2015 of 11.125p per ordinary share - 30.0
Interim dividend for the year ended 31
December 2016 of 5.15p per ordinary share - 13.9
Final dividend for the year ended 31 December
2016 of 11.40p per ordinary share 30.8 -
Interim dividend for the year ended 31
December 2017 of 5.50p per ordinary share 14.8 -
------------------------------------------------ ---- ----
45.6 43.9
---- ----
A final dividend for the year ended 31 December 2016 of GBP30.8m (2015: GBP30.0m), equivalent to 11.40 pence (2015: 11.125 pence) per ordinary share, was paid in May 2017 (May 2016) and an interim dividend for the year ended 31 December 2017 of GBP14.8m (2016: GBP13.9m), equivalent to 5.50 pence (2016: 5.15 pence) per ordinary share, was paid in September 2017 (September 2016).
A proposed final dividend for the year ended 31 December 2017 of GBP33.8m, equivalent to 12.5 pence per ordinary share, is subject to approval by shareholders at the Company's Annual General Meeting and has not been included as a liability in these financial statements. If approved by shareholders, the dividend will be paid on 25 May 2018 to ordinary shareholders on the register at 13 April 2018.
8 Reconciliation of movement in net debt
Balance Foreign Borrowing Balance
as at exchange facility Non-cash as at 31
1 Jan 2017 adjustments costs capitalised movements Cash flow Dec 2017
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ----------- ------------- ------------------ ---------- --------- ---------
Cash and cash equivalents
Cash at bank and
in hand 144.4 (4.5) - - 22.0 161.9
Bank overdrafts (43.4) 1.7 - - 19.8 (21.9)
-------------------------- ----------- ------------- ------------------ ---------- --------- ---------
101.0 2.8 - - 41.8 140.0
Borrowings, excluding
bank overdrafts
Current (91.1) 4.1 - - 82.7 (4.3)
Non-current (331.9) 12.8 - - (93.0) (412.1)
-------------------------- ----------- ------------- ------------------ ---------- --------- ---------
(423.0) 16.9 - - (10.3) (416.4)
Capitalised borrowing
costs 1.7 - 1.0 (0.6) - 2.1
Net debt (320.3) 14.1 1.0 (0.6) 31.5 (274.3)
-------------------------- ----------- ------------- ------------------ ---------- --------- ---------
In December 2017 the US dollar portion of the US Private Placement ('USPP') debt of $100m matured. This debt was replaced with a Euro-denominated USPP comprising two EUR50m tranches. These were issued with maturity dates of 2027 and 2029 respectively. Furthermore, an option was exercised to extend the maturity date of the GBP300m syndicated bank facility from June 2020 to June 2022.
9 Cash generated from operations
Continuing Discontinued 2017 Continuing Discontinued 2016
operations operations total Operations Operations total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- ------------ ------ ---------- ------------ ------
Operating profit 109.7 1.7 111.4 92.9 1.2 94.1
Adjustments for:
Amortisation of intangible
assets 19.5 - 19.5 17.1 - 17.1
Restructuring charges 36.3 - 36.3 28.5 - 28.5
Gains relating to employee
benefit plans - - - (5.2) - (5.2)
Depreciation 43.7 - 43.7 42.3 - 42.3
---------------------------- ---------- ------------ ------ ---------- ------------ ------
EBITDA (Note 16.12) 209.2 1.7 210.9 175.6 1.2 176.8
Net increase in inventories (19.4) - (19.4) (8.9) - (8.9)
Net increase in trade
receivables (36.9) - (36.9) (18.6) - (18.6)
Net increase in trade
payables 44.1 - 44.1 14.5 - 14.5
Net decrease/(increase)
in other working capital 11.7 (2.5) 9.2 (7.9) (1.2) (9.1)
Outflow related to
restructuring charges (27.3) - (27.3) (16.8) - (16.8)
Net retirement benefit
obligations (4.8) - (4.8) (7.7) - (7.7)
---------------------------- ---------- ------------ ------ ---------- ------------ ------
Cash generated from
operations 176.6 (0.8) 175.8 130.2 - 130.2
---------------------------- ---------- ------------ ------ ---------- ------------ ------
10 Employee benefits
The net employee benefits balance as at 31 December 2017 of GBP16.5m (2016: GBP29.4m) in respect of the Group's defined benefit retirement plans and other post-retirement benefits plans, results from an actuarial valuation of the Group's defined benefit pension and other post-retirement obligations as at that date. As analysed in the following table, the net balance comprised net surpluses (assets) of GBP92.4m (2016: GBP78.8m), relating largely to the Group's main defined benefit pension plan in the UK, together with net liabilities (deficits) of GBP108.9m (2016: GBP108.2m).
2017 2016
GBPm GBPm
-------------------------------------- ------- -------
Employee benefits - net surpluses
UK defined benefit pension plans 91.4 78.6
ROW defined benefit pension plans 1.0 0.2
---------------------------------------- ------- -------
Net surpluses 92.4 78.8
---------------------------------------- ------- -------
Employee benefits - net liabilities
UK defined benefit pension plans (1.9) (1.9)
US defined benefit pension plans (32.2) (37.7)
Germany defined benefit pension plans (49.4) (45.3)
ROW defined benefit pension plans (18.9) (16.4)
Other post-retirement benefit plans (6.5) (6.9)
---------------------------------------- ------- -------
Net liabilities (108.9) (108.2)
---------------------------------------- ------- -------
Total liabilities (16.5) (29.4)
---------------------------------------- ------- -------
The total net charge of GBP7.4m (2016: GBP2.8m) recognised in the Group Income Statement in respect of the Group's defined benefit pension plans and other post-retirement benefits plans is recognised in the following lines.
2017 2016
GBPm GBPm
--------------------------------- ------------------------------------------------------------- ---- -----
In arriving at trading profit
(as defined in Note 16) * within other manufacturing costs 2.4 2.0
* within administration, selling and distribution costs 4.4 4.4
In arriving at profit before tax * within restructuring charges - 0.3
* gain on employee benefit plan - (5.2)
* within net finance costs 0.6 1.3
--------------------------------------------------------------- ---- -----
Total net charge 7.4 2.8
------------------------------------------------------------------------------------------------ ---- -----
11 Contingent liabilities
Guarantees given by the Group under property leases of operations disposed of amounted to GBP1.1m (2016: GBP1.6m).
Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius' subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Provisions are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims.
Certain of Vesuvius' subsidiaries are subject to lawsuits, predominantly in the US, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by Vesuvius. These suits usually also name many other product manufacturers. To date, Vesuvius is not aware of there being any liability verdicts against any of these subsidiaries. A number of lawsuits have been withdrawn, dismissed or settled and the amount paid, including costs, in relation to this litigation has not had a material adverse effect on Vesuvius' financial position or results of operations.
As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty.
12 Related parties
All transactions with related parties are conducted on an arm's length basis and in accordance with normal business terms. Transactions between related parties that are Group subsidiaries are eliminated on consolidation.
13 Discontinued operations
Discontinued operations income during 2017 of GBP1.7m related to a release of provisions no longer required. Discontinued operations income during 2016 of GBP10.2m comprised a GBP9.0m tax credit relating to the release of a provision for possible China taxes and a GBP1.2m release of provisions no longer required.
2017 2016
GBPm GBPm
------------------------------------------- ---- ----
Other income 1.7 10.2
--------------------------------------------- ---- ----
Profit before tax - attributable to owners
of the parent 1.7 10.2
Earnings per share - pence
Basic 0.7 3.8
Diluted 0.6 3.7
--------------------------------------------- ---- ----
14 Provisions
Disposal
and closure Restructuring
costs charges Other Total
GBPm GBPm GBPm GBPm
----------------------------------- ------------ ------------- ------ ------
As at 1 January 2017 * 41.1 18.5 6.9 66.5
Exchange adjustments (2.6) 0.3 (0.4) (2.7)
Charge to Group Income Statement - 36.3 11.7 48.0
Unused amounts released to Group
Income Statement (1.7) - - (1.7)
Adjustment to discount 0.1 0.1 - 0.2
Cash spend (1.9) (27.3) (11.9) (41.1)
Transferred to other balance sheet
accounts - (5.0) - (5.0)
----------------------------------- ------------ ------------- ------ ------
As at 31 December 2017 35.0 22.9 6.3 64.2
----------------------------------- ------------ ------------- ------ ------
*The opening balance has been restated by GBP7.9m to present a provision for which an associated insurance asset exists.
In assessing the probable costs and realisation certainty of provisions, or related assets, reasonable assumptions are made. Changes to the assumptions used could significantly alter the Directors' assessment of the value, timing or certainty of the costs or related amounts.
15 Analysis of derivative financial instruments
2017 2016
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
------------------------------------- ------ ----------- ------ -----------
Derivatives not designated for hedge
accounting purposes 0.3 - - (0.9)
------------------------------------------ ------ ----------- ------ -----------
Total derivative financial
instruments 0.3 - - (0.9)
------------------------------------------- ------ ----------- ------ -----------
All of the fair values shown in the table above are classified under IFRS 13 Fair Value Measurement as Level 2 measurements which have been calculated using quoted prices from active markets, where similar contracts are traded and the quotes reflect actual transactions in similar instruments. All of the derivative assets and liabilities reported in the table above will mature within a year of the balance sheet date. The method for determining the hierarchy and fair value is consistent with that used at year-end, as disclosed in Note 20 of 2017 Annual Report.
Loan notes, included in interest-bearing loans and borrowings, are measured at amortised cost using the effective interest rate method. The carrying value of the loan notes and other current and non-current assets and liabilities are deemed to equate to fair value as at 31 December 2017.
16 Alternative Performance Measures
The Company uses a number of Alternative Performance Measures (APMs) in addition to those reported in accordance with IFRS. The Directors believe that these APMs, listed below, are important when assessing the underlying financial and operating performance of the Group and its divisions, providing management with key insights and metrics in support of the ongoing management of the Group's performance and cash flow. A number of these align with KPI's and other key metrics used in the business and therefore are considered useful to also disclose to the users of the financial statements. The following APMs do not have standardised meaning prescribed by IFRS and therefore may not be directly comparable to similar measures presented by other companies.
16.1 Headline
Headline performance, reported separately on the face of the Group Income Statement, is from continuing operations and before items reported separately on the face of the Group Income Statement.
16.2 Underlying revenue, underlying trading profit and underlying return on sales
Underlying revenue, underlying trading profit and underlying return on sales are the headline equivalents of these measures after adjustments to exclude the effects of changes in exchange rates, business acquisitions and disposals. Reconciliations of underlying revenue and underlying trading profit can be found in the Financial Summary. Underlying revenue growth is one of the Group's key performance indicators and provides an important measure of organic growth of Group businesses between reporting periods, by eliminating the impact of exchange rates, acquisitions, disposals and significant business closures.
16.3 Return on sales (ROS)
ROS is calculated as trading profit divided by revenue. It is one of the Group's key performance indicators and is used to assess the trading performance of Group businesses. A reconciliation of ROS is included in Note 2.
16.4 Trading profit
Trading profit is defined as operating profit before separately reported items. It is one of the Group's key performance indicators and is used to assess the trading performance of Group businesses. It is also used as one of the targets against which the annual bonuses of certain employees are measured.
16.5 Headline profit before tax
Headline profit before tax is calculated as the net total of trading profit, plus the Group's share of post-tax profit of joint ventures and total net finance costs associated with headline performance. It is one of the Group's key performance indicators and is used to assess the financial performance of the Group as a whole.
16.6 Effective tax rate (ETR)
The Group's ETR is calculated on the income tax costs associated with headline performance, divided by headline profit before tax and before the Group's share of post-tax profit of joint ventures.
16.7 Headline earnings per share
Headline earnings per share is calculated by dividing headline profit before tax less associated income tax costs, attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year. It is one of the Group's key performance indicators and is used to assess the underlying earnings performance of the Group as a whole. It is also used as one of the targets against which the annual bonuses of certain employees are measured. Headline earnings per share is disclosed in Note 6 of the Group Financial Statements.
16.8 Operating cash flow
Operating cash flow is cash generated from continuing operations before restructuring and additional pension funding contributions but after deducting capital expenditure net of asset disposals. It is used in calculating the Group's cash conversion. A reconciliation of cash generated from operations to operating cash flow can be found in the Financial Review in the 2017 Annual Report.
16.9 Cash conversion
Cash conversion is calculated as operating cash flow divided by trading profit. It is useful for measuring the rate at which cash is generated from trading profit. It is also used as one of the targets against which the annual bonuses of certain employees are measured. The calculation of cash conversion is detailed in the Financial Review in the 2017 Annual Report.
16.10 Free cash flow
Free cash flow is defined as net cash flow from operating activities after net outlays for the purchase and sale of property, plant and equipment, dividends from joint ventures and dividends paid to non-controlling shareholders, but before additional funding contributions to Group pension plans. It is one of the Group's key performance indicators and is used to assess the underlying cash generation of the Group and is one of the measures used in monitoring the Group's capital. A reconciliation of free cash flow is included underneath the Group Statement of Cash Flows.
16.11 Average trade working capital to sales ratio
The average trade working capital to sales ratio is calculated as the percentage of average trade working capital balances to the total revenue for the year, at constant currency. Average trade working capital (comprising inventories, trade receivables and trade payables) is calculated as the average of the 12 previous month-end balances. It is one of the Group's key performance indicators and is useful for measuring the level of working capital used in the business and is one of the measures used in monitoring the Group's capital.
16.12 Earnings before interest, tax, depreciation and amortisation ('EBITDA')
EBITDA is calculated as the total of trading profit before depreciation and amortisation of non-acquired intangibles charges. It is used in the calculation of the Group's interest cover and net debt to EBITDA ratios. A reconciliation of EBITDA is included in Note 9.
16.13 Net interest
Net interest is calculated as interest payable on borrowings less interest receivable, excluding any item separately reported. It is used in the calculation of the Group's interest cover ratio.
16.14 Interest cover
Interest cover is the ratio of EBITDA to net interest. It is one of the Group's key performance indicators and is used to assess the financial position of the Group and its ability to fund future growth. This measure is also a component of the Group's covenant calculations.
16.15 Net debt
Net debt comprises the net total of current and non-current interest-bearing borrowings and cash and short-term deposits. Net debt is a measure of the Group's net indebtedness to banks and other external financial institutions. A reconciliation of the movement in net debt is included in Note 8.
16.16 Net debt to EBITDA
Net debt to EBITDA is the ratio of net debt at the year-end to EBITDA for that year. It is one of the Group's key performance indicators and is used to assess the financial position of the Group and its ability to fund future growth and is one of the measures used in monitoring the Group's capital.
16.17 Return on net assets ('RONA')
RONA is calculated as trading profit plus share of post-tax profit of joint ventures, divided by average net operating assets, at constant currency (being the average over the previous 12 months of property, plant and equipment, trade working capital and other operating receivables and payables). It is one of the Group's key performance indicators and is used to assess the financial performance and asset management of the Group and is one of the measures used in monitoring the Group's capital.
16.18 Constant currency
Figures presented at constant currency represent 2016 amounts retranslated to average 2017 exchange rates.
17 Exchange rates
The Group reports its results in pounds sterling. A substantial portion of the Group's revenue and profits are denominated in currencies other than pounds sterling. It is the Group's policy to translate the income statements and cash flow statements of its overseas operations into pounds sterling using average exchange rates for the year reported (except when the use of average rates does not approximate the exchange rate at the date of the transaction, in which case the transaction rate is used) and to translate balance sheets using year-end rates. The principal exchange rates used were as follows:
Income and expense Assets and liabilities
Average rates Year-end rates
----------------- ----------------------- -----------------------------------
2017 2016 Change 2017 2016 Change
----------------- ------ ------ ------- ------ ------------------- ------
US Dollar 1.29 1.36 (5.1)% 1.35 1.23 9.8%
Euro 1.14 1.22 (6.6)% 1.13 1.17 (3.4)%
Chinese Renminbi 8.70 9.00 (3.3)% 8.79 8.56 2.7%
Japanese Yen 144.44 147.62 (2.2)% 152.24 144.17 5.6%
Brazilian Real 4.09 4.75 (13.9)% 4.48 4.01 11.7%
Indian Rupee 83.83 91.13 (8.0)% 86.25 83.82 2.9%
South African
Rand 17.15 20.00 (14.3)% 16.70 16.94 (1.4)%
----------------- ------ ------ ------- ------ ------------------- ------
Alternative performance measures - Supplementary information
5-year history at constant currency
2013 2014 2015 2016 2017
---------------------- ------- ------- ------- ------- -------
Revenue (GBPm) 1,596.0 1,643.3 1,546.3 1,492.0 1,683.9
Steel 1,087.1 1,123.9 1,044.2 1,002.2 1,148.7
Foundry 508.9 519.4 502.1 489.8 535.2
Trading Profit (GBPm) 149.3 167.3 146.1 142.4 165.5
Steel 96.8 113.6 91.8 84.3 100.4
Foundry 52.5 53.7 54.3 58.1 65.1
Return on Sales 9.4% 10.2% 9.5% 9.5% 9.8%
Steel 8.9% 10.1% 8.8% 8.4% 8.7%
Foundry 10.3% 10.3% 10.8% 11.9% 12.2%
---------------------- ------- ------- ------- ------- -------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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