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Edited Transcript of STLN.S earnings conference call or presentation 6-May-20 12:00pm GMT

Q1 2020 Schmolz+Bickenbach AG Earnings Call

Emmenbrücke May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Schmolz+Bickenbach AG earnings conference call or presentation Wednesday, May 6, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clemens Iller

Schmolz + Bickenbach AG - CEO & Chairman of Executive Board

* Daniel Geiger

* Matthias J. Wellhausen

Schmolz + Bickenbach AG - CFO & Member of Executive Board

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of SCHMOLZ + BICKENBACH AG on the Q1 results 2020. At our customers' request, this conference will be recorded.

(Operator Instructions)

May I now hand you over to Mr. Geiger, who will lead you through this conference. Please go ahead.

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Daniel Geiger, [2]

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Thank you, Angela. Good afternoon, ladies and gentlemen. I would like to welcome you to the SCHMOLZ + BICKENBACH media telephone conference of the first quarter results 2020. As usual, our CEO, Clemens Iller; and CFO, Matthias Wellhausen, will guide you through the quarterly presentation.

The presentation has been available for download on the group's website since 7 a.m. in the morning. You will also find the media release and the interim report on Q1.

On Chart #2, I would like to call out that during this conference, the speakers will make forward-looking statements as described in the disclaimer on Slide 2. These statements are based solely on our expectations or projections about future performance and may differ materially from actual results, performance or achievements.

With this note, I now hand over to our CEO, Clemens Iller. Please, Clemens?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [3]

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Yes. Thank you, Daniel. Good afternoon, ladies and gentlemen. Daniel was saying, as usual, obviously, you have noticed that it's not as usual. We have a change here. Ulrich Steiner has left the company and Daniel took over the responsibility for Investor Relations. So welcome to the team. And then I'm going to continue.

So welcome to our telephone conference. Thank you for continuing to follow SCHMOLZ + BICKENBACH, despite the extremely difficult situation in which we found ourselves. As usual now, my colleague, Matthias and I will report together on the past quarter. In addition, I will present to you an update on the measures that are going on in order to transform the organization and turn around our group.

Let me start right now with a review of the first quarter, which is Chart #4 here, which, in general, from a social and economic perspective, overshadowed by COVID-19. For SCHMOLZ + BICKENBACH, it was a mixed picture with a lot of ambitions. We have never seen such drastic measures adopted by nearly all governments worldwide, almost at the same time. The impact on these precautionary measures against the COVID-19 pandemic will have yet uncertain impact on the economic environment and will continue to affect our core markets. As we are at the beginning of a transformation to achieve financial sustainability, the impact of this COVID-19 came at the very wrong moment for us.

Let me now summarize on Slide 5, the most important topics of the first quarter 2020. First of all, I want to start with a positive topic. We have successfully closed our financial restructuring with the capital increase in January and the refinancing at the end of March. As a result, we have improved our financial solidity and are back to a decent financial structure.

As we saw a continuing decline in business activities, most pronounced in the second half year of 2019, the start in 2020 was an optimistic one, starting from a low level. At the beginning, we saw a recovery in sales volume and an increase in our order book until about mid of March.

In the second half of March and as COVID-19 was spreading from Asia to Southern and Western Europe onto the U.S., most countries locked down noncore business activities. As a consequence, a majority of our customers had to shut down their production facilities for a month or even longer and are just about to slowly starting the ramp-up of their production as we speak here, especially the decline in demand from our main end customer markets, the European automobile manufacturers and their suppliers had a negative effect on our results. For example, in the northern part of Italy, where several customers of Swiss Steel are resident, we did see a complete shutdown from beginning of March onwards.

Furthermore, the collapse of the oil price did have a considerable effect on the business of Finkl in the U.S. This effect was not necessarily noticeable in our shipments until mid of March, at which point we were still on plan to slowly recover. However, the second half of March, the corona crisis escalated and led to a fast deterioration of the order book and a drop in demand.

Governmental regulations and demands by the unions also require stoppages. While our French production sites were initially affected the most, step-wise, all production sites experienced cancellations of orders, disruptions in shift organization and partial or complete temporary shutdowns. To protect us against a further drop in profitability, we started to make use of short time work and other cost-saving measures. Nevertheless, these measures were predominantly only show effect in the second quarter. Given the severity of the situation, this could not be sufficient to compensate the predicted continuing negative effects.

To secure sufficient liquidity, we were using and are further considering COVID-19 governmental aid instruments in order to limit the impact on our business. Apart from this very unpleasant development, we are continuing to implement our turnaround plan, which I will talk about in a minute. In advance, we are on track with the measures to achieve the planned saving potential.

Yes, for the full year 2020 and given the ambiguity and uncertainty, we don't have enough visibility to give an adjusted EBITDA guidance, but more on that later.

Let's go to Chart #6. Especially the still weak market conditions left the marks on the first quarter 2020 KPIs as presented here in this chart. We had to accept a 17.1% decline in sales volume from 551,000 tons to 457,000 tons. However, considering COVID-19 implications and the very low order book in the fourth quarter, the sales volume and the correlating revenue is still one of the positive notes to mark -- to make.

Again, the prior year quarter, the fall in prices and sales volume led to revenue of EUR 704.5 million, down 20.3%. This is attributable to all product groups and geographical regions.

Adjusted for onetime effects, the adjusted EBITDA totaled at EUR 6.1 million negative, which was considerably below the prior year quarter. The lower profit contribution and the seasonally higher working capital led to a negative free cash flow of minus EUR 87.3 million. So unfortunately, we cannot show here a positive development in these numbers.

Let's continue with Chart #7, an overview of the important macro indicators. From this, you can easily deduct why or deduce where our earnings in the first quarter were so weak. We saw an overall downward trend in price and activity, especially our most important alloy metal, nickel fell sharply by 20%, which translate into a significant drop in the surcharge. Also, scrap fell, but to a far less extent by 6%. European prices for ferrochrome, on the other hand, rose by 4% over the first quarter, driven by mine closures in South Africa. The global oil and gas industry was rocked by an increasing uncertainty from the decline in demand from China and the inability of the OPEC and Russia to reach an agreement on production cuts, resulting in a price war. As a consequence, the price of WTI crude oil fell by 67% to a record low of around USD 20 per barrel during the quarter.

Figures from the 2 industries, which account for nearly 2/3 of the group's total sales volume underscore this downward momentum. On top, the German mechanical and plant engineering industry reported a 3% decline in new orders already in the first 2 months of 2020.

In SCHMOLZ + BICKENBACH, most important end market, the automotive industry production collapsed in all important countries and regions. This resulted in Europe in a drop of 21%, China reduced even 49% in the first quarter and the U.S. declined in January and February by 3%, with a given continuation towards an even bigger dip. Except from China, these numbers will most probably further decline in the second quarter. Also, forecast for 2020 have become even more difficult in recent weeks. Most experts expect the global automotive market to continue to weaken in 2020, translating into a drop of 20% of the global production and the corresponding bigger negative effect of 25% in the European production.

Let's move to Chart #8 here, and give you an update on the progress and status of our restructuring measures within the turnaround plan. As already mentioned in my last presentation, the basis for this comprehensive program with 4 main pillars was developed in the course of an independent business review late last year and verified in a so-called restructuring report, or S6. This S6 report is also an essential component of the loan agreements that we have concluded with our lenders in March 2020.

Within the area of structural measures, we are intending to reduce the number of central functions at Deutsche Edelstahlwerke business unit in order to make it leaner and more efficient. This is associated with the simplification of organizational structures, such as with a reduction in personnel.

At Finkl, the strategic sales program is progressing according to plan with the strengthening of the sales organization and the key focus on the customs forging market. The structural measures also includes the closure of the rolling mill, which is in preparation to be concluded mid of this year at Ascometal in Dunkirk, and will lead to permanent savings of EUR 8 million already in 2020.

The second block is summarized under the heading, Operation Excellence. There, we started the ramp-up of measures along the plan. This includes a large number of individual projects. These will compensate for the annual recurring cost inflation through continuous improvement, but will also lead to higher efficiency in operating performance.

The third package of measures comprises the strategic CapEx project. I have spoken repeatedly about this over the past 2 years, including the investment in a new walking beam furnace at Swiss Steel, the Nadcap-certified heat treatment at Ugitech. The walking beam furnace at Swiss Steel is already in the commissioning phase.

In addition to these projects already planned in detail, we have developed additional measures that will increase our resilience against a negative market development, help leverage synergies at group level and eliminate certain overcapacities at Asco and DEW. Within this pillar, we are establishing overarching work streams, detailing out measures and validating project potential.

In order to ensure that the individual project teams are able to carry out the often complex implementation to measure progress and to take corrective action, if necessary, we have established a strong transformational office here in Lucerne, consisting of internal and external expert teams. They are tracking the progress of more than 250 measures on a bi-weekly basis per business unit.

Putting this progress into numbers on next Chart #9, you can see the achievements we realized in the first quarter. Overall, we expect the restructuring progress to make a cumulative contribution of EUR 273 million to the adjusted EBITDA. All in all, we can confirm this target and that we are on track with these measures. Even though COVID-19 had an impact on the volume-based measures, we have already achieved around EUR 17 million.

Before I explain to you our outlook for the full year 2020, I now give the word and the floor to Matthias for detailed discussions on the first quarter results. Please, Matthias?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [4]

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Yes, Clemens, thank you. Thank you, very much, ladies and gentlemen, a very warm welcome also from my side to you. Yes, you already heard. The financial year this quarter was kind of a roller coaster. On the one hand side, we were able to conclude the financial restructuring of SCHMOLZ + BICKENBACH, and we are standing now on much more solid ground. But on the other hand, we are facing these unprecedented and sudden headwind from COVID-19 just after having experienced a very difficult 2019, particularly in those industries where we are engaged.

Yes. Let me give you a bit more detailed background to the quarterly results. As usual, I will start with the top line drivers. This is on Slide #11. We had already reported during our full year results presentation that the order book has started to improve week-by-week since its low in October 2019. The recovery was somewhat slow, but it was steady. By mid-March, we stood at 457 kt, that was approximately 100,000 tons higher compared to that low in October. However, it was also 100,000 tons lower than a year ago. That means the activity was still somewhat subdued compared to the previous year after the difficult development during most of 2019. However, we had moved within the expected modest bandwidth during the majority of the first quarter, but that then ended abruptly. The accelerated spread of COVID-19, the government actions and the shutdowns and production of our customers, especially, again, in the automotive industry, impacted us drastically. The -- starting mid-March, we experienced, within just 2 weeks, a reduction of 26 kilotons in the order book. The customers rescheduled their orders, and they also postponed the offtake of finished materials. As a consequence, we ourselves started to partially shut down the operations. The sequence started actually in France, with Asco and Ugitech. Then later, it reached also Swiss -- our Swiss operations and finally, Germany. We did not lay off, as Clemens said, but we did apply short work and we also took further measures to reduce costs and also cash out. The dedicated organization of the transformation program and the identification of the improvement measures were in so far very helpful, we can say the reaction time was, so to speak, is 0. We were already alert. So the crude steel production went down by 11.3% to 525 kt compared to the previous year. Sales were lower by 17.1% at 457 kt, again compared to the previous year.

This decline in the sales volume was mainly attributable to the quality engineering steel products. They were down 21%. This was mainly driven, as I said, by the offtake from the automotive industry. So once again, there it hit hardest. But the customers in the mechanical engineering industry also indicated lower demand, but we did not get reports on significant shutdowns within March from -- so the sales into this industry were much more stable.

Crude steel product group was particularly impacted by the oil price shock that Clemens mentioned, but the reduction in sales was less pronounced with a minus of 10.8%. Stainless steel products, once again, I can say, because you have heard that throughout the year 2019 held up relatively well with a decline of only 3.2%.

Now moving to Chart #12 and looking at the price dynamics. It's clear. The decline in demand during 2019 in conjunction with the falling raw material prices that had impacted the price environment for Q1, very negatively. Unfortunately, or as a consequence, you can say the yearly contract, which were largely renegotiated in quarter 1 had to be settled significantly below the previous year.

If you split by product, the development for the sales prices displays a very similar pictures for the volumes, meaning that quality & engineering steels again were impacted strongest with a decline of 13.5%. Tool steel and stainless were more stable with a decline of 7.1% and 0.3%, respectively. Even though the product partially compensated -- sorry, the product mix partially compensated the negative impacts from lower base prices and lower surcharges, the average sales price overall declined by EUR 63 per ton, that is a 4%, bringing us to EUR 1,542 per ton.

Now the simultaneous drop in volumes and in sales prices then reflect the sharp deterioration of the revenues. The sales -- sorry, the quality & engineering steels went down 31.5%, tool steel down 15.7% and stainless down by 3.6%. For the average for altogether, that is the 20.3%, down to EUR 704.5 million of the revenue. Geographically, Clemens alluded to that, all regions and countries suffered a double-digit decline in revenue year-on-year.

Yes. When we then move to the profitability on chart 13, it's clear that this drop in volumes and prices hit the bottom line very strongly. The adjusted EBITDA was down to minus EUR 6.1 million compared to EUR 42.2 million in the previous year. And that was despite the strong countermeasures that we took. Clemens alluded to the achievements from our transformation program. We're very fast in addressing the short work. Also energy and electrodes could be sourced at significantly better rates. However, all this did not suffice to offset the adverse market development. Additionally, I have to say that the subdued sales -- and to the -- subdued sales and compressed margins, we had a one-off impact from the lower valuation of inventory due to the declining raw material prices. The adjusted figure that you see here is excluding EUR 1.5 million of cost related to the turnaround management -- to our transformation program, that is basically consulting costs. These were excluded from the adjusted EBITDA according to our policies that you know.

Yes, I go to Slide #14. Turning to the financial structure and to the liquidity. We had, upon the presentation of our full year results, already reported the successful completion of the capital increase of EUR 291 million on January 8. Then subsequently, we could also finalize the restructuring of our debt. That time when we spoke to you, that was not yet finalized, that has been done in the meantime. The existing syndicated loan was, in this frame, increased by EUR 9 million to EUR 465 million, and the maturity was extended to March 2025 that went together with the same extension of our ABS facility, which remained at approximately EUR 300 million. Furthermore, we concluded on a shareholder loan of EUR 95 million from our major shareholder, BigPoint, again, with the same maturity.

On March 31, we then repaid publicly-tendered bonds, and it's the amount of EUR 328.8 million. You remember this was triggered by a change of control as a result of the capital increase. The remaining portion of the bond amounts to EUR 21.3 million, and it's outstanding further and is due on July 15, 2022. Now this new financial structure increased our credit lines by overall EUR 185 million. And the maturity until 2025 is consistent with the time line for a successful completion of our transformation program. Clemens already described a very detailed nature of this program, which is the best possible grounds for a sustainable turnaround of our group.

Yes. This step was very important end of March to now approach the challenge emerging from COVID-19. I'll come back to that.

Let's move to Slide #15. You see displayed the development of cash flow and financing key figures. The free cash flow was, as usual, negatively impacted by the seasonally higher working capital compared to year-end. You know that picture always in the first quarter when activity picks up. However, this time, the operating result, as reflected by the EBITDA, was significantly below the previous year. That's why the free cash flow is negative at EUR 87.3 million this year as compared to previous year where we saw a more favorable picture where the cash flow was only negative by EUR 23.7 million.

Nevertheless, we continued very successfully to optimize our inventories. Please recall that we had reduced the inventories during 2019 already by EUR 246 million, so almost EUR 250 million. And during Q1 2020, we could now progress by another EUR 20 million to a really new low -- historical low despite the higher activity compared to Q4 2019. So that went very well. The total net working capital compared to the previous year period went down by EUR 127 million.

Yes, we continue to preserve cash, means we continuously address our CapEx spend. Also in 2020, the maximum capital expenditure will be approximately EUR 40 million below the prior year levels. On the back of the equity injection, the net debt decreased to EUR 609 million. The equity ratio recovered to a level of 22.9%.

Yes. A couple of words now still on this situation after the financial restructuring. The planning for the financial restructuring considered already a certain impact from the COVID-19. That was, so to speak, a blessing in disguise. Just so like because we -- the conclusion of the whole financial restructuring could at least consider this to some extent. With this close link also to the detailed improvement measures, this provides a very sound basis to master this global challenge coming from the closures. It provides us headroom. However, as Clemens already indicated, it's currently still impossible to reliably assess how long and how deep all the restriction will be for our customers and for the economy. Therefore, we are in the process of exploring the available governmental aid programs. We are already utilizing the means to postpone payments, especially for energy taxes, for social security and for VAT that had been offered. And we are currently also, additionally, exploring the potential participation in public loan programs to strengthen our liquidity headroom further.

Yes. So far, Clemens, for the assessment of the further development, I hand back to you.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [5]

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Thank you, Matthias. So that brings us to the last part of the presentation, and we are jumping to the Chart #17, annual outlook.

The uncertainties regarding future global economic growth have definitely increased massively in the recent weeks as a result of this negative effect of COVID-19. The visibility is correspondingly low, I wanted to say here, but I have to say there is no visibility. And the improving trend in our end markets observed that the beginning of the year has recently been protected again. It remains to be seen whether the effect of the virus will have a lasting or only temporary impact on economic growth. The only thing certain is that volatility is very high. Consequently, the steel industry as a whole will remain under intense pressure in a downturn that is longer and deeper than a normal cyclical downturn.

This brings me to the last chart 18 with our priorities for 2020 and the outlook. First priority is to expand the short-term liquidity protection measures in order to safely overcome this COVID-19 crisis. The rigorous implementation of the individual project as part of the comprehensive transformation to achieve the turnaround plan has already gained momentum and is well on track. We will tackle these overarching challenge with determination. We are to see the expected positive financial effect on earnings as early as 2020. Main measures are the transformation and restructuring of Ascometal, the turnaround of Finkl Steel and the restructuring of Steeltec as well as the execution of personal measures and operational improvements at Deutsche Edelstahlwerke.

From our current perspective, we do not expect a gradual normalization of demand to set in until the end of the first half of 2020 at the earliest, with a positive continued recovery expected in the second half of the year. While we are increasingly focusing on the implementation of the restructuring plan, a reliable estimate for adjusted EBITDA is not possible at this time due to these existing uncertainties.

And with that said, I would like to say thank you for listening, and I'm opening then the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We've received the first question. That is from [Alexander Dressler] of Barclays.

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Unidentified Analyst, [2]

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Actually, just a quick one. Just wanted to know what are your planning actually to do with the EUR 21 million remaining of the bond outstanding at the moment? I mean, I think the original intent was to basically repay all of it. But just wondering, what are you thinking about it at the moment?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [3]

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Yes. Thanks for the question. There's nothing to further announce. As you rightly say, we did not buy back that part. That is still outstanding. This is remains part of our ongoing optimization. But there is nothing to announce at this point in time about this. The normal maturity is in 2022. And we have the option to call it any time on our discretion. So that is -- that remains in that situation.

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Operator [4]

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As there are no further questions, I would like to turn back to you.

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Daniel Geiger, [5]

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Okay. Thank you, Angela, and thank you very much for attending today's conference and for your interest in SCHMOLZ + BICKENBACH. If you have any further questions or comments, please let us know. We look forward to continuing the dialogue with you. Thank you for your participation, and goodbye.

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Operator [6]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.