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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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[Abrupt Start]
...results presentation. My name is Patrick André, Chief Executive of Vesuvius. To my right with me this morning is Guy Young, our Chief Financial Officer.
I will start with some updates on the global performance in 2021, then Guy will give you more details on our financials. And we then conclude with some perspectives on the year 2022 before opening the floor of questions.
Delivered a solid set of results in 2021 with a significant recovery from the low point of 2020. Our revenue increased 18% on an underlying basis. Our trading profit increased 50% on an underlying basis, but only 40% on a reported business due to the significant impact of the bond depreciation during the year. Our return on sales increased by 190 basis points. Our continued focus on cash management enabled us to further lower our working capital to sales ratio to 20.9%. This focus on cash also enable us to maintain our net debt to EBITDA ratio at a low level of 1.4%, despite the acquisition of Universal during the year. Based on these positive results, the board felt confident to propose a full year dividend of £0.212, an increase of 22% versus 2020.
We have strong commercial performance in 2021 with sales growth of 21% and 20% in the Flow Control and Foundry divisions, respectively. This was supported by material market share gains in both business divisions. But even more important, we demonstrated again in 2021 our ability to pass-through cost inflation through price increases in all three of our business units. This was completed by year end.
The timing differences between cost and price increases during the year, however, had a negative £14 million on a year-over-year results. We could also in 2021 successfully complete the acquisition of Universal Refractories in the US, which is reinforcing our presence in the fast-growing Electric Arc Furnace sector in this area. The Flow Control capacity expansions in EMEA and India, which we announced in July last year, are fully on track and will be operational as of year end.
Finally, thanks to our decision to maintain R&D spend during [indiscernible] (00:03:38), we could launch 27 new products in 2021, double the number of last year.
We also made significant progress in our sustainability roadmap in 2021. As you can see on this slide, we are well on track to achieve the nine intermediate ESG targets for 2025, which we announced at our 2020 annual results. In particular, we are now clearly exceeding and will revise upward our target of CO2 reduction with already a 16.5% reduction in 2021, as compared with 2019.
As you can see on the slide, we've made continuous and structural progress in the reduction of our carbon footprint since we engaged in our improvement journey in 2017. Thanks to these efforts, we have already been able to eliminate close to a quarter of our emissions worldwide. We will continue our effort going forward and are committed to reach net zero by 2050 at the latest.
How did we achieve those results? First, of course, by optimizing our energy consumption. We reduced by 9% our energy consumption per tonne since 2019, but two other actions also played an important role. We engaged into a focused action plan to switch to non-CO2 emitting electricity sources everywhere in the world where it was possible. For the first time in 2021, more than 50% of our global electricity consumption is coming from non-CO2 emitting sources. Our objective is to reach 100% by 2030. We also introduced an internal carbon pricing to assess all of our management decisions, including investment decisions. This price is reviewed annually and has been set at €90 per tonne in 2022.
Beside reducing our own CO2 footprint, we are also now engaging in a focused R&D effort to develop new products having the potential to help our customers improve their own environmental footprint. More than 80% of our product R&D portfolio is now dedicated to products presenting an environmental benefit for our customers. All those progress on our sustainability agenda were recognized by external rating agencies and, in particular, our MSCI rating improved from BBB to A; and our Ecovadis rating progressed from silver to gold.
Let's now have a deeper look at the performance of the Steel Division. As you can see on this slide, where the size of the bubbles is proportional to Vesuvius' Steel Division sales, the steel market recovered significantly in the world, excluding China, in 2021. In China, however, after a relatively good performance in the first half of the year, the steel market declined significantly in the second half, translating into the first year-on-year decline of Chinese steel production for more than 30 years. We believe this is not only a short-term phenomena but, rather, a structural trend and that Chinese steel production going forward should be flat or even slightly declining.
In this market environment, our Flow Control business performed very positively, gaining market share in all geographies without any exception. You can see on this slide the relative performance of our Flow Control sales versus the steel market in the most important regions. These Flow Control numbers only include a relatively moderate 3.5% average price increase [ph] runway (00:08:27) basis, as price increases mostly took effect in the third and fourth quarter of the year.
Another important highlight of the year for the Steel Division was the acquisition in December of Universal Refractories in the US. Universal is a niche refractory supplier, active in both the steel continuous casting area for around 90% of its activity and the foundry sector for around 10%. It will reinforce both our Advanced Refractories and Foundry business units in NAFTA. The transaction was concluded at 6.6 times Universal trailing EBITDA of $8.6 million and we expect to generate, on top of this, additional synergies of $4.5 million by the end of 2023.
If we look at the financial results of the Steel Division, we already discussed the very good sales progression of Flow Control. As you can see there, the sales growth of Advanced Refractories was more limited as priority was given to the implementation of price increases to compensate cost increases. This resulted in market share losses in some regions and, in particular, in EMEA and North America for Advanced Refractories. We believe that those market share losses are temporary and will revert over time. We are starting to see that beginning of 2022.
Our price increases could fully compensate cost increases in both Flow Control and Advanced Refractories by year end. Our flow capacity – our Flow Control capacity expansions announced in July last year are proceeding on track and will be operational as from the end of this year. They will support the continuous growth of our Flow Control business going forward. The trading profit of the division improved by 42% on an underlying basis to £102.1 million. Our return on sales improved by 150 basis points to 8.7%.
Let's now have a look at the performance of the Foundry Division. As you can see there, the important automotive end market performed poorly in 2021, as it continued to be negatively impacted by the worldwide shortage of semiconductors. The light vehicle market grew only 2% overall from the very low level of 2020. The medium and heavy vehicle market also performed poorly due to a strong decline in China, which you can see on this slide also, with an overall growth limited to 0.5%. Together, the light, medium and heavy vehicle market represents around 36% of Foundry Division sales.
The other Foundry end markets, however, performed much better and recovered significantly from the low point of 2020, partially compensating the weakness in automotive. To understand the Foundry Division results, it is also important to look at the evolution of end markets between H1 and H2, which you can see on this slide. Automotive end markets, in particular, weakened significantly between H1 and H2 with a negative impact on the sales volumes and performance, of course, of the Foundry Division.
Despite these weak automotive end markets, the Foundry Division grew itself by 20% year-on-year on an underlying basis. In particular, the division could achieve significant market share gains in China, in India and in South America. Trading profit increased 79% to £40.4 million, and return on sales improved by 280 basis points to 8.6%. This is a significant improvement from 2020, but we believe the potential for further improvement is very significant as full trading profit and margin recovery was delayed in 2021 by the situation of the automotive market, by some time lag [indiscernible] (13:26) between price and cost increases, and by operational issues in two of our important plants in Germany and in the US.
On the technology front, globally Vesuvius, we continue to increase our R&D spend with the objective to reinforce of technological lead over competition. We launched 27 new products in 2021, more than double the number of launch in 2020, and we are planning to maintain that pace going forward. As mentioned earlier, we also increased our R&D focus on products, having a positive impact on our customers' environmental performance.
You have on this slide three examples for each of our three business units of new products launch in 2021 and which next to financial benefits, of course, also bring environmental performance improvements to our customers in terms of CO2 emissions, harmful substances emissions or raw material consumption.
I will now hand over to Guy, who will give you more details on our financial performance. Guy?
Thanks, Patrick. Good morning, everyone. I'd like to start by looking at our sales and trading profit bridges. 2021 reported revenue of £1.64 billion is some 13% higher than last year's £1.46 billion. Stripping out the £69 million impact of foreign exchange from 2020 gives our prior-year underlying revenue of £1.39 billion, on which we've reported an increase of £251 million or 18% to reach this year's £1.64 billion of revenue, excluding the effect of the universal acquisition.
It's worth noting that approximately 25% of the revenue increase in the year was due to price increases in reaction to raw material cost increases and supply chain friction costs. In terms of trading profit, our underlying trading profit after eliminating the effects of FX and the universal acquisition increased by 50% from £94.8 million to £142.6 million. The key constituents of this increase were £57.7 million from increased sales and £4.1 million of restructuring savings, partially offset by £14 million of net inflationary costs as our selling price increases lagged cost inflation.
If we take a look now at the full income statement. Our trading profit of £142.4 million provided a return on sales of 8.7%, an increase of 170 basis points over last year on a reported basis and 190 basis points on an underlying basis. Our share of post-tax JV results was similarly higher, and our net finance costs were lower, having benefited from a lower cost of debt following the successful refinancing of some of the USPP notes. The effective tax rate for the year was lower than the prior year at 26.4%, and non-controlling interest was higher given the higher earnings at our Indian subsidiaries. Headline earnings, therefore, increased slightly more than headline profit before tax and trading profit by some 53%, and headline EPS came in at £0.353, 52% higher than 2020.
If we turn now to cash. Cash conversion in 2021 was 32%, largely as a result of the higher investments during the year in both working capital of £96 million and cash CapEx of some £45.5 million which, after adding back depreciation and taking into account other small deductions, resulted in adjusted operating cash flow of £45.6 million.
The increase in working capital was predominantly in inventory, some £113 million as we intentionally increased inventory to mitigate against the risk of supply chain-related customer disruptions. But despite the higher investment in working capital, our trade working capital to sales ratio showed another improvement year-on-year finishing at 20.9%.
Looking finally at our net debt. The balance as at December 2021 of £277 million, and net debt-to-EBITDA at 1.4 times on a post-IFRS 16 basis is some £102 million higher than 2020, largely due to the investment in working capital and the acquisition of Universal. We remain well within our comfort zone of 1.25 to 1.75 times, and satisfied in particular in relation to our capital allocation strategy for the year where we've managed both significant investments in organic and inorganic growth during 2021, while still providing for an increase in returns to our shareholders.
With that, I hand you back to Patrick to take you through the outlook.
Thank you, Guy. Both of end markets of Steel and Foundry remain positively oriented in 2022. In 2021, Vesuvius demonstrated its ability to successfully pass-through cost inflation through price increases. We will continue to do so in 2022 as necessary. Our strategic R&D and capacity investments are proceeding as planned. And we'll support our market share gains going forward. While we remain concerned about the potential direct and indirect impacts of recent geopolitical events, which have led us to suspend our deliveries to Russian customers for the duration of hostilities, we are nevertheless confident that the group will deliver a significant improvement in financial performance in 2022.
Thank you for your attention. We will now take questions from the floor.
Thank you. Scott here from Investec. Could you just give us a feel for the price increases that you've put in through the second half and how that sort of annualizes through full-year 2022, like, what is the tailwind for prices that we didn't get the full year benefit in 2021? And also, just a bit of help on acquisition contribution, just trying to get a feel for where we are before sort of deciding what we think volume should be. Thank you.
Thanks, Scott. Nice to see someone face-to-face for a while – for a change. And Scott, in terms of the price increases, very heavily weighted towards the second half, I think as Patrick mentioned, if you split, you take that £251 million and 25% of that. That gives you our price increases of roughly £62 million. That £62 million, £55 million of it was in the second half. So, arguably that doubled up from a sales bridge perspective in 2022.
I think kind of aligned to the question, the £14 million of headwind we would expect to see at the back as well subject to any price lags that we will experience during 2022, which I think is inevitable, given that we know costs are increasing at the moment over Q4.
In terms of the second question, Universal. The Universal contribution for 2022 should be about between £4 million and £5 million, the £4 million to £5 million includes the synergies that we expect delivered in year. It, however, also has a deduct because as you will probably know from an accounting perspective, we have to write up the value of stock to realizable value at acquisition, so we won't see all of the margin that we would expect in terms of long-term run rates in the first year, but £4 million to £5 million in 2022.
Thank you.
Hi. Good morning. Dom Convey from Numis. Three questions, if I may, just you mentioned in terms of the outlook positively oriented, but it just feels actually that there has been a marked softening in the broader outlook for 2022 versus what we might have thought three or four months ago, looking at some of the slides that you presented on Foundry. It shows that China very much weak across the board. So, I just wonder whether you could give a little bit more color on the volume type growth by geographies that you anticipate this year.
And secondly, just in terms of a bigger picture question. That increase in R&D and obviously the strong product pipeline coming through, whether you could just give a bit more color around how you see the sustainability value proposition and how you could best capture that. And I guess just a quick technical one really for perhaps Guy, that £14 million drag, what was the divisional split last year between Steel and Foundry? Thank you.
Thank you. You're perfectly right, as compared with the vision we could have had six months ago, the market evolution perspective are a bit weaker, but they remain, in our opinion, positive and even significantly positive outside of China going forward. China, following Chinese New Year, has a traditional rebound of the Chinese economy following Chinese New Year, is pretty soft for the time being. But in the world outside of China, the situation is relatively positive and remains positive as we speak.
In the Steel markets, you may have seen the numbers of – January as published by WSA, there is a significant drop year-on-year in China, but there is a progression year-on-year in the world outside of China.
Now, if you look at the world outside of China, overall progression, and to give you an overall global figure, we are expecting ourselves a positive growth all regions together of on or around 5% in 2022, but of course, you have differences between regions. And in the world outside of China, the regions where the growth will probably be the slowest is Europe, where we see some – not decline but softening, some softening. There was beginning of the year, a decline year-on-year of steel production in EU plus UK.
And so, this will probably be the softest region outside of China. But globally, the world outside of China, we see that growing in 2022 because all the regions, India, Southeast Asia, South America, Middle East, Africa and probably North America, we believe, will have a positive growth in 2022.
Regarding R&D, we are focusing more and more on this – on the year and month old value proposition. But of course, next to a traditional, if I may call it like that, the financial value proposition to our customers and the – we see a growing interest from our customers, especially in the steel industry, for these leading sustainable products. And this interest is, of course, different between regions. So, where there are some regions, particularly in Europe, as you could suspect, where the interest is higher than average, while some other regions where there is still a maturation of the psychology of our customers but everywhere it's growing. So, it's not growing – the interest and awareness of our customers is not going everywhere at the same pace, but it's going everywhere and clearly in some regions like Europe and also in North America, we see a growing interest of some customers for these leading sustainable products, and we believe that it will only increase going forward.
We are not even – we were even engaging some customers have proposal, we have accepted of course, to engage with them in some joint R&D project with a specified objective to work together on ways to help them reduce their CO2 footprint.
And Dom, in terms of the split of the 14%, it's 3% is Foundry and the rest is Steel.
Any other questions from the room? If there are no more questions from the room, I will propose to take questions from the line. [Operator Instructions]
We will pause for a moment to assemble the queue. As a reminder, participants can also submit questions through the webcast page using the Ask a Question button. And our first question is coming from George Featherstone from Bank of America. Please go ahead. Your line is open now.
Hi. Morning, everyone. Thanks for taking my questions. I'll go one at a time. Wondered if firstly, Guy, you could break out the cost inflation by frictional costs in the supply chain and also that you face in raw materials in 2021, and also, if you can split H1 versus H2 and also how you see that evolving in 2022?
Sure, George. Thank you for the first question with three parts. George, if we take a look, I'll probably just concentrate on the two key categories. There is broader cost inflation. But in terms of raw material, which was the biggest constituent part of the cost increase last year, that was some £40 million across the group. And that splits roughly speaking into £7 million and £33 million first half versus second half.
The other significant category is excess freight costs, and that was about £20 million for the full year and that again splits roughly £9 million and then £11 million. On top of those and we call it excess freight costs because there are still higher freight costs in terms of inbound logistics that we haven't included in that, and then we'll have still salary and other energy costs which have also increased. But the broad split then of the £60 million cost increases, £40 million raw material, £20 million excess freight, and the net that splits H1 to H2 as I outlined.
In terms of the costs going forward, I can only tell you what we can see now rather than trying to predict what's going to happen going forward. But we've still seen some very significant energy costs increase between the end of Q4 and where we sit today. Arguably, that's only going to get worse. In addition to that, we think that there are increasing pressures from a logistics cost perspective that we'll be seeing, at least, during Q1. And then last but not least, we've got a number of raw materials that have started to increase in Q4 and continue to increase in Q1 predominantly aluminas and zirconias, and anything that requires energy. So, a lot of our fused materials, all of those we're expecting to see impact our cost base in the first quarter.
Thank you very much for that. Second question would be more of a kind of higher longer-term thought. And given the cost pressures that your customers are facing, I wondered if you could talk about whether the conversation is around total cost of ownership of some of the new, more efficient products for those involve automation have become easier and if customers are looking to start new investment cycles.
It's a very good question. Our customers are as we are, but our customers are also confronted with increasing cost base. They have been quite successful, as you know, in increasing their own prices and considering the recent geopolitical events that steel prices have been going slightly down over the past few months. You should expect that this downward trend should probably stop and that we would not be surprised to see those steel prices going up again.
So, the financial situation of our customers is good and will remain good going forward. And this, of course, gives us the means to implement long-term strategies to consolidate their competitiveness on the long term. So, we see our customers are open to investing in their operations to make those operations more competitive structurally on a long-term basis, and this is a favorable environment for our own offering and, in particular, our own robotics offering to support the automation effort of our customers. And we see there was already a significant interest from our customer base for our robotics solutions. We see an even bigger interest of those customers going forward. We have a significant increase of the number of inquiries coming from our customers for robotics projects.
Thank you very much for that.
And we do not have any further questions at the moment on the audio line. [Operator Instructions] And there are no further questions on the conference line. We will now address the questions submitted via the webcast page. And the first question here is coming from Andrew Douglas from Jefferies. Please, can you explain how you managed to win such significant market share when you already have such high levels of market share?
We are not magicians, Andy. So it's, first, as long as you do not have 100% market share, it's already – it's always possible to gain further market share. So, the only limit is 100%. And we are never satisfied with our market share, even when the market share is already high because we believe that our customers can bring benefit to those customers which are not already using our products.
It is in Flow Control and Foundry that we are gaining and that we have a real continuous market share gain strategy. And in both those divisions, as you have seen last year and you will continue to see this year and going forward, we simultaneously increased prices to compensate for cost increases and increased market share. And the reason why we are able to do that is because our products, thanks to our R&D investments – and again, I can only stress the fact that R&D is a cornerstone of our growth and market share gain strategy.
It's thanks to R&D that we can propose to our customer products which create superior value in the process of those customers, as compared with what our competitors are able to do. And thanks to that, despite the fact that we have, I would say, fair pricing strategy compensating for cost increases, it creates incentives and growing incentive for customers worldwide to switch to our products.
So, this is exactly the reason why we continue to invest and even to accelerate, to increase our investment in R&D because R&D is the fuel of our market share gain strategy in both Flow Control and Foundry. And more and more, we will see that in the coming years in Advanced Refractories because there, also, we are – our ambition is not to remain in the commoditized part of the advanced refractory market; we also want inside this advanced refractory world to focus on the limited number of product lines where we believe that, thanks to R&D, we could create a similar model as the one which works very well for Foundry and Flow Control and progressively become a specialized advanced refractory producer concentrating on high-technology product.
Thank you very much. And the next question from Andrew. Please, can you give us an update on stocking levels in the market across your customers? I understand that there has been some restocking in the year.
Yes. You're right. Over the past three, four months ago, in the steel market in particular, if you remember, three, four months ago, we were at a very low – abnormally low level of inventories in the steel market. And over the past three, four months, we've seen a small but regular restocking effect in the steel market worldwide. And steel inventories have moved from abnormally low to normal. They are not abnormally higher, despite the fact that they are increasing, absolutely not abnormally high.
Now, we are most probably reaching another inflection point because Russia and Ukraine are very significant net exporter of steel toward the rest of the world. Ukraine alone exports on or around 15 million tonnes of steel to the rest of the world, and this export have stopped. So, we will probably have, I don't have a crystal ball, but the most likely scenario is that, in the coming weeks and months, we will see a further decline of steel inventories and steel prices will probably stop to decline and maybe even going up again. So, the Russia-Ukraine situation will have an impact on the steel market outside of Russia and Ukraine because there will be a need to fill the gap created by the interruption or disruption of exports from Russia and Ukraine to the rest of the world.
Thank you very much. And the next question from Andrew is, can you please talk about your M&A pipeline and, particularly, the size of potential deals and are price expectations at the right level?
Excuse me, could you repeat the question. I could not catch the beginning of the question.
Can you please talk about your M&A pipeline and, particularly, size of potential deals? And are price expectations at the right level?
M&A pipeline. Thank you very much for the question. Our M&A strategy has not changed as compared with our previous discussion last year, we have a strong appetite for M&A. Together with Guy, we conducted a few years ago a global strategic review of all potential – potentially interesting, attractive M&A targets worldwide for all, each of our three divisions. We ended up identifying all of around 20 potentially attractive targets. This list is mostly unchanged, as compared with what we elaborated together with Guy four years ago.
And we have been and we continue to engage proactively with the owners of these potential target. As far as we are aware, none of them are officially for sale as we speak. And what we see is a progressive evolution of some of the owners being ready to consider some sales, this is what enable us to realize the CCPI first and the Universal acquisitions over the past few years. So, we continue to be interested and if one of the owners that we have approached would become open to a transaction at a fair price, what we consider a fair and reasonable price, we will of course be interested.
In terms of size, Andy, there again, it has not changed. Out of these 20 – or on and around 20 potential target, the vast majority of them are small- to mid-sized bolt-ons like CCPI or Universal. These mid-sized bolt-ons are very attractive for us. Their integration is easier, synergies are high, so we are quite attracted by this. And a small minority of these acquisitions are larger size but, of course, the probability that such larger size acquisition will materialize is lower than bolt-on. So, we continue to be proactively interested in M&A and we'll see what will happen or not in the coming months. But we remain extremely disciplined in our approach. We're proactive interested but disciplined in our approach to M&A.
Thank you very much. And the next question from Andrew is that, do you believe that any more restructuring is needed? Are you happy that your footprint is in the right place – [ph] shape (00:42:36) given your expectations for your end markets over the next few years?
Thank you. And several questions in the same question. The heavy lifting of restructuring is behind us. Clearly, we've done the job over the past five years, so the heavy lifting of restructuring is behind us. We still have many opportunities of optimization of each of our individual plans to get more out of those plants, and we are strongly engaging to that. In particular, in our flagship plant – in our four flagship plants of Skawina in Poland, Suzhou in China, Borken in Germany, and Monterrey in Mexico, we are – we have strong improvement programs. We have room to make the positive progress there. But the heavy lifting of restructuring is behind us.
Could you remind me the second part of your question, Andy?
There are no further questions. Ladies and gentlemen, that concludes today's question-and-answer session. I will now hand back to Patrick André for his concluding remarks.
Thank you. Thank you very much to all of you today, all of you have made the effort of being present physically with us and in the room, but also all of you online. Thank you for your attention during the presentation, and I wish all of you a very nice day. Good bye.