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Castings Plc is a market leading iron casting and machining group based in the UK, supplying both the domestic and export markets. The company is listed on the LSE main market and has a market cap of £155m. Full year results to 31 March 2024 were released on 12 June 2024.
We were delighted to welcome CEO Adam Vicary and FD, Steve Mant, to a webinar for private investors to talk about the excellent full year results and the prospects for the current year . A recording of the webinar is available here.
The full year results to 31 March 2024 was another year of strong truck demand and near record operating profit. In terms of the highlights operating profits rose 21% to £19.8m and the machine shop posted a very strong performance, contributing £3.7m to operating profits. The first solar panels were fitted which are anticipated to provide 10% of the power to the machine shops. The first 9 months of the year were very buoyant with strong demand but truck customers cut their schedules towards the end of the calendar year and an anticipated 10% drop in demand turned into a near 20% drop. Truck demand has remained at these lower levels although is expected to improve later in the year.
Price increases were passed through to recover labour and general cost inflation as was energy cost inflation although this is now beginning to fall. Operating margins rose to 8.8% and there was good demand from the US business and this still presents a growth opportunity and they are engaging with existing and new customers here.
On the capacity side there has been continued investment in new machinery for the machine shop which is now almost complete. There was further Investment in robots and AI is beginning to be implemented into quality inspection processes. All these investments are improving the production process and delivering productivity gains. Some of the foundry production was outsourced during the year due to the increased demand and this has now returned in house.
Looking at the financials in more detail there was a 12% increase in revenue to £224.8m. Volumes fell 5%, all of it coming in the fourth quarter reducing revenues by £10m. Offsetting this there was an increase in higher valued machined parts, the energy surcharge contributed £13m and price increases added a further £16m. Operating profits rose 20.7% to £19.8m and the operating margin rose from 8.1% to 8.8%. ROCE almost touched 20% and is the highest since 2016. The company has a progressive dividend policy and increased the dividend by 5.6% to 18.32p. The supplementary dividend was 7p reflecting the needs of future investment and the fact the company delivered the third best operating profit performance in its history. Overall cash was down 8.7% to £32.5m.
One of the metrics the company likes to look at is profit per tonne sold. This metric fell in 2020 and 2021 but there have been steady increases since then and it is currently at its highest level at nearly £400/tonne.
A slide on the progressive dividend policy shows the dividend increasing every year bar the financial crises in 2008/09 with a supplementary dividend being paid fairly consistently since 2016.
Turning to the divisions, the foundries produced a solid result despite volumes falling 5%. External revenues rose 11.8% to £225.1m. Average selling prices rose due to a larger proportion of higher value products, surcharges and price increases. The margin was down slightly at 6.5% and if you adjust for the electricity surcharge impact margin would be 8.3%, a small decline on the previous year.
The machining division produced a very pleasing performance with revenues primarily driven by internal group demand. Operating profits rose to £3.7m compared to £0.2m in the previous year. There was a much improved margin at 9.9% and the division generated £2.3m of cash. Capex at £5.3m was higher than previous years and reflects the investment in new machinery. From a cash flow perspective, the strong operating profit was a good starting point. Higher levels of capex, investment in stock to bring it back to more normal levels and the paying of the basic and supplementary dividends contributed to a £3m net cash outflow.
A slide provided a longer term picture of the cyclicality of the truck market which represents 80% of revenue. There is no clear reason as to the peaks and troughs of truck demand but its cyclicality has been a constant over the last 20 years. The market is now experiencing a slight downturn in demand. The new foundry line which is being brought on will look to win business outside of the traditional truck market which may mitigate against some of this cyclicality.
In terms of customers, Castings supplies all of the top 6 European manufacturers with Scania being their biggest customer, followed by Volvo and Daimler/Mercedes.
An update was also provided on the investment in new foundry capacity. The £17m investment will have a capacity of 12,000 tonnes per annum. The project is on track and to budget and equipment has been ordered although none has been installed yet. This is the first new foundry capacity since 2008. The investment reflects the desire to remain at the forefront of the foundry business and invest in new technologies. The new capacity will make it easier to win new business in other areas like agriculture, wind and energy which have slightly different product specifications. The final factor behind the thinking is that Castings is a “green iron” producer in the UK. Casting is 100% electric smelting, uses 100% recycled scrap and 100% renewable power. One of the first in Europe to posses this credential. On the sustainability front the company has installed its first set of solar panels which are operating very effectively, the first Head of Sustainability has been appointed and an energy efficient cooling system has been installed for the machine shop.
The automation investment is continuing with over 60 robots installed since 2016. Another 3 are coming in the summer at Brownhills and in the machine shop. The potential of AI is also being explored especially around metal treatment and inspection.
Looking to the future, Castings expect the currently lower demand schedules to increase in the Autumn and there will be a positive volume impact from 2025 when the Scania CBE engine is also used in MAN trucks. Some business has been won on light truck electrification albeit at low volumes. The new foundry capacity will allow the company to market themselves more aggressively in the US and in the agricultural, wind and energy sectors. On the energy front prices are expected to fall marginally over the next 12-18 months. There does not appear to be an EV solution to heavy trucks and diesel is likely to continue for a long time and the company is less worried about this threat. Hydrogen looks a more likely substitute for diesel.
In terms of the investment proposition, Castings has a strong net cash balance sheet, they are agile and have the ability to take advantage of opportunities as they come along. The pension is in surplus and having gone through a buy-in situation could progress by the end of 2025 to a buy-out situation which would eventually provide some additional funds for shareholders. The new foundry will spread risk and there are opportunities for good growth in the US and elsewhere. Demand is likely to weaker in the current year but the long term future remains attractive.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com
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