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Dear ladies and gentlemen, welcome to the conference call of Swiss Steel Group on the first quarter results of 2021. At our customers' request, this conference will be recorded. [Operator Instructions]. And after the presentation, there will be an opportunity to ask questions via the telephone lines. [Operator Instructions]. May I now hand you over to Dr. Andrea Gale, who will lead you through this conference. Please go ahead.
Thank you, Aurelia. Welcome to Swiss Steel Group's Media Conference on the first quarter 2021 results. The speakers today at the conference are our CFO and CEO interim, Markus Boening; and our Vice President, Corporate Accounting and Investor Relations, Daniel Geiger. The slides for the presentation, the media release and the interim report for the first quarter of 2021 are available on our website at swisssteel-group.com since 7 a.m. in this morning. During the media 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 forecasts of future developments and may differ materially from actual results, performance or achievements. With this comment, I hand over to our CFO and CEO at interim, Markus Boening.
Yes. Thank you very much, Mrs. Gale. Good afternoon, ladies and gentlemen. I would also like to welcome you to our conference call today, and thank you for your continuing interest in Swiss Steel Group. In my interim role as CEO, I will today discuss the macroeconomic and market outlook as well as the operational topics, while our VP of Corporate Accounting and Investor Relations, Mr. Daniel Geiger, will present the financial topics. I would like to take this opportunity to also thank our former CEO, Mr. Clemens Iller, who steered the group from 2014 until the end of the first quarter of 2021 and wish him all the best for the future. Before we talk about the first quarter of 2021, in which we see a broad-based market recovery, I would first like to point out again that we are -- that we have fully integrated the required COVID-19 safety programs into our day-to-day operations. This means that we can ensure that all production and sales processes along the value chain comply with the highest safety standards at all times in order to protect our employees. While the markets were very difficult in 2020 due to COVID-19, Swiss Steel Group started 2021 significantly stronger. In addition to the much improved economic environment, the cost saving effects of our transformation program played a major part. We expect this positive trend to continue in the coming months. With the successful completion of the equity increase in March 2021, we were able to significantly strengthen the capital structure and can now continue to drive forward the transformation supported by a broad-based market recovery. The focus remains on liquidity and cost efficiency, but we will actively take advantage of market opportunities and fund them accordingly. Let me first summarize the key topics for the first quarter of 2021 and Slide #5. The cautiously optimistic trend in the automotive industry during the fourth quarter of 2020 continued into the first quarter of 2021. Although production interruptions at some automotive manufacturers were foreseeable due to the shortage of semiconductors, overall demand remained positive. COVID-19-related containment measures in some sales regions also had only an insignificant impact. Accordingly, in the first quarter of 2021, we achieved positive consolidated earnings for the first time in 2 years. In the mechanical and plant engineering sector, we are also seeing the expected recovery. Overall, this will lead to improved and more broadly based sales and order volumes in our 2 main customer segments. Demand in the energy sector, particularly for oil and gas, remained sluggish. But we are also seeing some positive signals and increased request reputations in this sector. While the considerably increased production volume of 614 kilotons, 17% above the prior year quarter, we were able to utilize our production capacities at approximately 90%. With the simultaneous reduction in the workforce, we significantly increased our labor productivity. The instrument of short-time work was used very selectively for certain production lines or product categories, but remains at a very low level compared with last year. Our cost saving effects result from the transformation program -- resulting from the transformation program helped us to achieve a positive result, both on EBITDA level and for the first time since Q1 2019 at net profit level. The structural projects are progressing as planned. The merger of the Swiss business unit is being implemented, and the employees of the closed rolling mill in Les Dunes will now leave the Swiss Steel Group, supported accordingly by out placement programs. Implementation of the DEW personnel cost saving programs 2020+, is also progressing. Our equity increase in March was a great success and has received very positive feedback from investors. This will enable us, on the one hand, to save interest risk and advisory costs, and on the other hand, to significantly strengthen the equity ratio and bringing closer to an industry benchmark. In turn, we were able to reduce our debt and are thus, equipped to provide the necessary liquidity for our sales growth. Finally, the seasonal market recovery, coupled with significantly higher raw material prices, led to a material investment into our working capital and a significant cash outflow at free cash flow level. However, this did not catch us unprepared. We have always emphasized that we will finance the expected sales growth in order to maintain or expand our market share accordingly. Finally, I would like to say a few words about the accusations and complaints made by a former employee of Ascometal, about which we informed you a few weeks ago. After completion of the forensic investigation by a renowned external auditing company, we can inform you today that the allegations and complaints have proven to be unfounded. In summary, we are positive about the further business development in 2021, but always depending on the future development of the COVID-19 pandemic. We expect to achieve an adjusted EBITDA of more than EUR 100 million for the full year. Let's continue with Chart #6, looking at selective macroeconomic factors. In addition to a third wave of infections and renewed measures to contain the pandemic, the recovery of the automotive industry in the first quarter was impacted in individual regions by shortages of key semiconductor products such as electronic chips and sensors. According to LMC Automotive's estimates at the end of March 2021, light vehicle production in Europe in the first quarter of '21 was 1% below the previous year level, and at the same time, 20% below the level of the first quarter of 2019. In the U.S., passenger car production was 27% lower than the corresponding prior year period, and 34% below the level of the first quarter of 2019. In China, passenger car production increased 85% year-on-year in the first quarter of 2021, but this was against the backdrop of a lower comparison base due to COVID-19. Compared with the first quarter of 2019, Chinese passenger car production was 5% lower. The German mechanical and plant engineering sector continued its recovery in January and February 2021. In monthly production levels, the decline -- the declines were further reduced when compared to the previous year's months, while new orders, which were already back above the prior year's levels in the fourth quarter of 2020, continued their growth in January and February 2021. Production in the mechanical and plant engineering sector was 3% down year-on-year in the first 2 months of this year, while orders received in the same period were 7% higher than a year ago. The development of prices for raw materials relevant to Swiss Steel Group showed a mixed picture in the first quarter of 2021. The clear upward trends in the average monthly price for German scrap grade 28 at the end of 2020, continued in January, followed by a price decline in February and the renewed price increase in March. Overall, the average scrap price in the first quarter was 43% higher than in the fourth quarter of 2020. Nickel prices continued their upward trends with significant growth in February to a peak of USD 20,000 per ton. Prices then fell to USD 16,000 per ton at the end of March. However, overall, the average price increase in the first quarter was still 10% above the average price for the fourth quarter of 2020. European prices for our ferrochrome continued to trend upward in the first quarter as well. The average price in the first quarter increased by 21% compared to the average price in the previous quarter. Higher prices were driven by strong demand, supply shortages, and the shortage of shipping containers. In the global oil and gas industry, the price of West Texas Intermediate crude oil continued its upward trend, reaching USD 66 per barrel in early March. It then fell slightly to USD 59 per barrel at the end of March. Overall, the average price of crude oil in the first quarter of 2021 was 26% higher than the year earlier, and 36% higher than in the previous quarter. In the North American oil and gas industry, also a key sales market for Swiss Steel Group, the number of active oil production units rose to as high as 573 by mid-February, subsequently falling to 498 at the end of March, driven by a declining number of active oil production units in Canada, which was not offset by the further increase in the U.S. On average, the number of active oil production units was 39% higher than the average for the previous quarter, while remaining 46% below the previous year's level. Moving on to Chart #7. Looking at the first quarter of 2021, we can summarize that Swiss Steel Group had a strong start and was able to significantly increase sales to 510 kilotons, or by 11.6%, compared with the prior year quarter. However, the positive demand trend did not yet have a sustainable impact on prices in the first quarter. Despite a significant increase in raw material prices, the average selling price was lower than in the prior year quarter. As a result, revenue did not increase to the same extent as volumes, but at EUR 752 million, revenue was still 6.7% higher compared to the prior year quarter. However, the trend is positive, so we expect an improvement in pricing in the coming months. Finally, we were able to significantly increase the result at adjusted EBITDA level to EUR 44.5 million, which ultimately led to a positive net result. In addition to the much-improved economic environment, the cost savings effects from our transformation program contributed significantly. Due to the positive demand trend, combined with high input prices, we had to invest considerable funds in the restocking of net working capital and recorded a cash outflow similar to that of the previous year. Even though the amounts here are roughly comparable to quality and purpose of the use of funds in this first quarter, it's naturally quite different from that of the previous year. Let me show our progress in the transformation program on Chart #8. In figures, we achieved a total of EUR 41 million in cost savings in the first 3 months of 2021. The strong increase in volumes has helped us to achieve higher savings than planned. In particular, the DEW 2020+ program, which will make the DEW business unit leaner and more efficient, is progressing according to plan. In this program, personnel costs are being lowered sustainably by reducing around 400 jobs. Before I explain our outlook for the full year 2021, I would now like to give the floor to Daniel Geiger for a detailed discussion of the financial results for the first quarter. Please, Daniel.
Thank you very much, Markus, and also a warm welcome from my side. Let's start with the key economic data on Chart #10. Order intake in March 2021 was at a level which we have not achieved since 2018. At EUR 684 kilotons, the order backlog at the end of March was once again significantly higher than in the previous quarter, and also exceeded the prior year level of 431 kilotons by almost 59%. Demand in the prior year quarter was negatively impacted by the growing uncertainties surrounding the COVID-19 pandemic, and the complete shutdown of business activities by major European auto manufacturers. The recovery in the market environment, which began towards the end of the 2020 fiscal year, driven, in particular, by the automotive industry, continued in the first quarter of 2021. It is also being strengthened by the normalization of the demand situation in the mechanical and plant engineering sector and other sales markets. Order levels continue to be driven by inventory restocking effects in the supplier industries, as alluded to by Markus, but this trend is now increasingly leveling off. And we spend -- in response to the market recovery, crude steel production was ramped up further in the first quarter of 2021 and short-time work in the production areas reduced further. In total, our 8 electric arc furnaces were in operation for over 525 days in the first quarter. This corresponds to a utilization rate of almost 90% of the scheduled production shift. At 614 kilotons, significantly more crude steel was produced than in the prior year quarter at 525 kilotons. Steel sales in the first quarter of 2021 were 11.6% higher at 510 kilotons compared with 475 kilotons in the prior year quarter. This increase was mainly due to a 17.5% rise in sales of quality and engineering steel. This product group continuing recovery in demand from the auto industry is becoming apparent. In the tool steel area, shipments also increased compared with the prior year quarter. This upward trend will support, among other things, by the positive development of crude oil prices. Although demand in the stainless steel product group also recovered from the previous quarters, the sales level of the prior year quarter, if not matched. Let me continue with Chart 11. The average selling price per ton of steel in the first quarter of 2021 was at EUR 1,476, down from the average price of EUR 1,542 achieved in the prior year quarter. The price decline is primarily attributable to the change in the product mix with a larger share of quality in engineering steel product group at a lower average selling price. At product group level, the selling price of both quality and engineering steel and stainless steel increased compared with the prior year quarter. This was due, in particular, to the increase in raw material prices, which resulted in higher prices due to the widespread used surcharge mechanisms. But by contrast, prices in the tool steel product group decreased compared with the previous quarter, mainly due to the change in the product mix within this product category. The general market sentiment in Q1 2021 was predominantly volume-driven, but we now also see ourselves in a position to introduce corresponding price increases. Margins remain a challenge, mainly due to the continued pressure from raw materials and reinforced by the current product mix. Due to the overall lower average selling prices, sales in the first quarter increased less than volumes compared to the previous year's quarter. In the first quarter of 2021, sales of EUR 752 million were generated corresponding to an increase of 6.7%. While sales and quality and the engineering steel product group increased by 21.6%, sales of stainless steel decreased by 5.5%, and those of tool steel by 3.7% despite increased sales volumes. In regional terms, sales increased by 8.1% in Europe and by 23.7% in Asia Pacific and Africa compared with the prior year quarter. These regions, particularly in Italy, which is one of our key markets, in Europe and in China, measures to contain the COVID-19 pandemic were introduced earlier in the year ago quarter than in the other regions. This is -- this had a negative impact on sales in prior year quarter. The higher sales in the first quarter of 2021 mainly reflects the recovery in demand from automotive industry. In the Americas region, despite an emerging recovery in demand from oil and gas industry, sales did not match the level of the prior year quarter. However, we do see an uptick in activity. Chart #12. In addition to the volume-driven market recovery, the adjustment of the cost structure and further progress in the transformation program resulted in an adjusted EBITDA of EUR 44.5 million in the first quarter of 2021, significantly above the prior year quarter, which was at minus EUR 6.1 million. Nonrecurring items amounted to about EUR 2.6 million, and included among other things, personnel-related one-off payments and cost for the efficiency enhancement program. Including the onetime effects, EBITDA amounted to EUR 41.9 million compared to minus EUR 7.6 million in the prior year quarter. Gross profit, in example, sales less cost of materials increased by 17% to EUR 208.1 million in the first quarter. Despite continued high pressure, the gross margin increased by 3.3% to 37.3%. Fixed cost capitalization due to inventory buildup contributed slightly more than 1/3. Personnel expenses decreased by 2.2% to EUR 172.5 million in the first quarter due to the lower headcount. With 9, 929 employees, Swiss Steel Group employed 307 fewer people in the first quarter of 2021 compared to the previous year, with a significantly higher production volume compared to the previous year. Swiss Steel Group received a total of EUR 1.8 million in compensation for short-time work, which was offset against personnel expenses. This was at a similar level for the first quarter of 2020. Depreciation, amortization and impairment charges in the first quarter were at EUR 21.6 million, lower than in the same quarter of the previous year. This still includes impairment losses of the Ascometal business unit of EUR 3.9 million. At minus EUR 10.7 million, the financial result in the first quarter was less negative than in the previous year quarter. As part of COVID-19 support programs, the Swiss Steel Group received government-guaranteed bank loans in the fiscal year 2020, with an interest rate below the market rate, which led to lower borrowing costs. In addition, the capital increase carried out in the first quarter of 2021 reduced net debt by optimizing its capital structure. The Swiss Steel Group will be able to save significant borrowing costs in the future. Let us now turn to Chart 13. Net working capital increased from EUR 698 million as of December 31, 2020, to EUR 827 million. This development is the result of increased market activities and higher production volumes, and is also inflated by rising raw material prices. Trade receivables increased by EUR 128 million, and inventories by EUR 104 million. These 2 effects were outweighed by the increase in trade receivables of EUR 104 million. So basically, these 2 effects outweighed the increase in trade payables by EUR 104 million. Due to the sales growth, the ratio of net working capital to sales as of March 31, 2021, was optimized at 27.5% compared to 28.9% at year-end 2020. In line with the market turnaround, we now see a buildup of net working capital for the first time in 8 quarters, after previously reducing it by approximately EUR 362 million, or 36%, since the end of 2018. With an increase from EUR 698 million to EUR 827 million, net working capital was 4% lower compared to EUR 862 million in the prior year quarter. We were able to stabilize the payment terms for trade payables, and we expect that the increase in equity will be positively appreciated by our supplies and trade credit insurers. With regards to our capital expenditure, we remain focused. It should be noted that we continue to ensure the functionality of our production capacities. Strategic investments already initiated will continue to be implemented. Free cash flow, which is calculated as cash flow from operating activities, less cash flow from investing activities, was at minus EUR 86.3 million in the first quarter of 2021, slightly less negative than in prior year's quarter of EUR 87.6 million, obviously, also a minus. Net debt, which comprises current and noncurrent financial liabilities, less cash, and cash equivalents, was at EUR 522.5 million, down from EUR 640 million as of December 31, 2020. This is mainly related to the equity increase, which results in a NAV net cash inflow of EUR 219.2 million after deduction of the transaction costs. And with that, I end my speech, and hand over back to Markus.
Yes. Thank you, Daniel. And this brings me to the assessment of the market environment in the current fiscal year, the priorities and the outlook for the year on Chart #15. The focus for the second quarter of 2021 will continue to be on improving our cost position while at the same time optimizing liquidity. Also, we want to take advantage of market opportunities and support them with the required personnel and financial resources. In doing so, we will continue to ensure the greatest possible flexibility in our production and in our cost structure. Our focus will remain on implementing the transformation program. We are well on track and are also making steady progress in the structural projects. This progress will be systematically continued. Based on the improved order situation in the first half of the year and depending on the further development of the COVID-19 pandemic, we expect to achieve an adjusted EBITDA of more than EUR 100 million for the full year 2021. With this outlook, I would like to close my presentation and open the Q&A session.
[Operator Instructions] The first question is from Rochus Brauneiser from Kepler Cheuvreux.
Let me maybe touch first on the demand you're describing. So you're seeing a continued recovery from COVID, and this has, obviously, driven the automotive. What I'd like to understand is, over the last 3 months, what you are observing in terms of the contributions to your order intake from underlying demand and from restocking? Had the restocking component got less or more? And how shall we look at the sustainability of the current order intake levels? Would you think that the order intake trend is more flattening now in this -- the second quarter? Or would you expect that there's still positive upward trend in the intake in the coming -- in the current Q2? That's the first question, and then maybe a few others afterwards.
Okay. Thank you, Mr. Brauneiser, for your first question. Yes. So what we see in Q2 is certainly a certain flattening in the order entry, so, which means that in Q1 and also in the Q4 of last year, we saw an increased order entry activity due to destocking to a certain level. However, the markets and the demand of automotive, we are always talking about the recovery. It's still below the 2019 level, what we are talking about. So we are not at extraordinary demand levels at this point. It's below 2019 from a volume perspective, and significantly below 2019 from a price perspective. So we are still not in a great market environment. It is recovering, it is getting better, the destocking is ending, however, it looks like it's going to continue on a stable and very high level, also on the automotive side.
All right. This brings me to the guidance. Obviously, the second quarter will be not necessarily worse than in Q1 based on the positive momentum you see. So what -- how should we think about the guidance of over EUR 100 million? What the kind of risks for the H2 you're baking in, in this guidance? How -- maybe you can elaborate a little bit more on that.
Yes, sure. So certainly, we are expecting a relatively strong second quarter as well. The uncertainty lies after the summer at this point. So we really don't know how the demand will develop in the second half of the year. And as you know, many of our customers take a summer break in July and August. And at this point, it's unclear how strong the demand and the order book will continue after the summer. This is why we are a little bit cautious about our forecast for Q3 and Q4 at this point.
Okay. Maybe can you comment whether you had any kind of windfall effects in the first half coming from, how shall I say, kind of financial turbulences among one of your competitors? Has that in any way supported your business so far?
Not significantly, I would say, in Q1. Obviously, we took -- in some specific situations, we took advantage of some additional orders, but it's -- overall, in the grand scheme of things, it's not significant. It's more -- when you look at it from an overall market perspective, it's more a situation where we are in a position that we have not fully implemented in Q1 all the price increases towards our customers, the price increases that we need to implement coming from the raw materials side, yes? So this is also one aspect that we try to bring across here, that the steep raw material price increases, specifically on the scrap side, we usually -- we pass them on to our customers, but there is a certain time lag there. And this is also not fully reflected in the Q1 results, the full handover of these price increases to our customers. So there's more to come in that area in Q2 as well.
All right. I think you're touching a point on the margin. When I look at your gross margin improvement in Q1 versus the fourth quarter, I think, it was quite a strong increase we haven't seen for a while. So I think EUR 90 per ton of high gross margins. Can you help a little bit what the main contributions were? Was that more a question of operational leverage? Or to what extent did you really see price increases in the beginning of the year from contracts or ongoing price increases?
It was more, let's say, operational leverage, less volume increase rather than pricing. If we just look at our metal margin, just purely looking at the sales price versus our raw material basket that has not increased compared to Q4. It's quite the contrary. It has been reduced a little bit. So it's operational efficiency plus higher production levels that helps us here, yes.
And last question is on your personnel. Maybe help -- you can help me to understand the evolution of your personnel from fourth quarter to the Q1. Costs went up by 13%. Can you give us an idea how much of the personnel cost are fixed? And to what extent is it variable? So is this -- have you had a higher increase of temps? Or is this just because of variable labor you have to pay on more business activity?
Well, actually, as we said, business activity has increased significantly. The raw steel production went up, and not only the raw steel production, production went up in all areas, and we had to slightly adjust on the active labor side, we had to slightly adjust for that. Usually, we try to -- when we are building up labor, we try to build up temporary labor to remain on the flexible side here. But overall, the adjustment is, let's say, under proportional compared to the production increase.
And there are currently no further questions. [Operator Instructions] And we've received a question from Patrick Frey.
My question is, your competitors, are they sitting next to you regionally? Or is it more also by transport and imports from other regions?
It depends on which market and which products we are talking about. Automotive is -- I mean, it's not a secret, this is a very competitive environment, and we have several competitors also in Europe, yes? So this is more a European business. Tool steel depends on which region in Europe, it's also mainly supplied by European suppliers. But obviously, we are also selling tools in other regions, where we then compete also with Asian or American suppliers.
Could you tell me, is it then the competition itself that -- and who else?
You mean competition in which market segments?
In Europe for automotive and for then the tools.
Yes. I mean you have several steel producers in Europe. Just to name a few, you have Salzgitter, you have Georgsmarienhütte. You have voestalpine on the tool steel side. Also, on the automotive side, you have Lechstahl, you have Ovako, just to name a couple. I mean there are certainly 5 or 6 more that I -- we cannot -- I'm not -- I haven't mentioned now, but on the automotive side, also on the tool steel side, it's a competitive business.
So it's a handful of competitors and no exits yet? So nobody went bust?
No. Nobody went bust recently. In Europe, at least.
Okay. Okay. That's why you have this pricing pressure, everybody is now coming up with capacity, not yet at 100% and the price pressure still on for you?
Yes. But that's kind of normal in a recovery phase that first volumes go up and later the prices go up, yes? So first of all, the volumes go up and then the production capacities are being filled, which is then the point to talk about price increases.
Okay. And are you negotiating the prices quarterly or monthly? Or is it yearly fixed alloys and scrap contract? Or how is it working with your customers?
It's all of the above. So we have different pricing models. In some instances, we negotiate annual prices, and obviously, also with adjustment mechanisms for alloys and scrap. And it also happens that we have quarterly prices and monthly prices. So it's -- we have all pricing -- different price models in place.
Okay. Last question. Your furnaces, do you need to invest normally? Or is it something foreseen that you have to make huge CapEx to be -- for innovation to be on top of production competitiveness?
No. The electric arc furnaces are all state-of-the-art, and they are all in reasonable shape. So there's no significant CapEx other than the usual maintenance CapEx.
And we have a follow-up question from Rochus Brauneiser.
Yes. Just a few housekeeping things. Can you clarify how much windfall gains you have recognized in your Q1 earnings? And can you also talk a little bit about what you expect in terms of normalized tax rate this year? I think Q1 was pretty high at 50%, maybe you can put it in context. And finally, can you recap what you're budgeting or planning for CapEx this year?
So windfall profit in the sense of extraordinary items in the P&L, there were no significant one, if that was your question.
I mean on inventory.
Yes. On inventory, there is a smaller number, a small one-digit million number of inventory valuation-related profit. But again, it's also -- in the grand scheme of things, it's not very material.
Tax rate?
Tax rate is -- it really depends on the distribution of our income, yes? So we have, obviously, some countries like Germany and Switzerland, where we have tax loss carryforward. In other countries, namely where we have service center operations from our sales and services unit, we do not have those because they were, for the most part, profitable over the last couple of years. So this is the explanation of the relatively higher tax rate for the first quarter. I would believe that, for the year, the overall tax rate will be lower than in the first quarter. And on the CapEx question, we have a CapEx budget of roughly EUR 100 million. So if you look at our spend in Q1, it was above -- or actually below the prorated amount of EUR 25 million that you would expect. But this is a normal pattern that we have seen over the last couple of years that projects are getting started and the spend at the beginning of the year is usually a little bit slower than towards the end of the year. So it's a timing that we are currently below the EUR 25 million, which would have been the average, is more timing than anything else.
[Operator Instructions] And we haven't received any further questions at this point. So I'll hand back to the speakers for closing remarks.
So thank you very much for attending today's conference and for your interest in Swiss Steel Group. If you have any further questions or comments, please let us know. We look forward to continuing the dialogue with you, and thank you for your participation, and goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.