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Dear ladies and gentlemen, welcome to the conference call of Schmolz + Bickenbach AG on the Half Year 2020 Results. At our customers' request, this conference will be recorded. [Operator Instructions]May I now hand you over to Daniel Geiger, who will lead you through this conference. Please go ahead.
Thank you, Aurelio. Good afternoon, ladies and gentlemen. I would like to welcome you to the Schmolz + Bickenbach Media Telephone Conference on the Second Quarter Results 2020. As usual, our CEO, Clemens Iller; and CFO, Matthias Wellhausen will guide you through the quarterly presentation. The presentation has been made available for download on the group's website since 7:00 a.m. this morning. You will also find the media release and the interim report on Q2. During the 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.
Yes. Thank you, Daniel. Good afternoon, ladies and gentlemen, also here from my side, a very warm welcome to our telephone conference. Thanks for joining and continuing to follow Schmolz + Bickenbach despite the extremely difficult situation in which we are finding ourselves at the moment. Daniel was saying in his introduction as usual. It's not really as usual because today, we have an additional person here, but I will come to that in a minute. So it's true, my colleague, Matthias, and I will report together on the past quarter. But in addition, I will also introduce our new Chief Restructuring Officer to you, Josef Schultheis, and give you also an update on the ongoing transformation of the organization and the discussion on the future financing structure. Let me start right now with you here on Chart #4, review of the second quarter, which was heavily hit by COVID-19. But before that, first of all, I would like to say that at Schmolz + Bickenbach, we took every necessary measure to protect our employees. So the crisis has been well managed from this perspective. Thankfully, all 43 employees who fell sick have recovered and are back on board. From a market perspective, however, the COVID-19 crisis caused a dramatic slump in demand like never seen before. Let me summarize on Slide 5, the most important topics of the second quarter 2020. It was already apparent in the second half of March, the second quarter of 2020 fell firmly in the grip of the COVID-19 crisis and the effects have spread over all our key end markets. The biggest impact came from the extensive shutdowns of major European automobile manufacturers and their suppliers. From April, a negative trend also materialized strongly in the mechanical and planned engineering industries. We had no other option but to carry out extensive and prolonged shutdowns in our plants and continue to scale back production. Besides that, the spotlight is being increasingly placed on personal measures at all sites, especially through adaptive shift models and extensive short-time work. Additionally, job cuts are considered throughout the group. For example, in the Corporate Center, around 20% of jobs will be cut until the end of the year. DEW, we are in constructive negotiations with the work council on a collective restructuring agreement and have received positive signals from IG Metall in that context. The outcome should be concluded during the second half of 2020. Unfortunately, in the second quarter, we had to further impair our net assets of DEW by around EUR 82 million and of Ascometal by around EUR 4 million. More details on that will be provided by Matthias later. Despite the hardship, we continued to make good progress with the structural improvement measures from the transformation plan. This should improve EBITDA by EUR 274 million by 2024. At the end of the second quarter, we are now on track to achieve the key milestones, withstanding this difficult environment. To further strengthen our transformation organization, we have brought on board and a restructuring expert. As a fully-fledged member of the Executive Board, Josef Schultheis will be leading the transformation to success as the Chief Restructuring Officer or CRO. This will enable Schmolz + Bickenbach to counter the drastic effects of the COVID-19 crisis even more effectively. I will tell you more about Josef in the next slide. Another focus is to secure the long-term financial stability of our group to adapt to the COVID-19 situation. We are currently revising our financing concept, which may take some time before we can finalize it. In this context, the company is in proactive and constructive discussions with public lenders, banks, anchor shareholders and potential investors. We are well on the way to achieving this adjustments. For example, we have already agreed a long-term backstop facility with our anchor shareholder, BigPoint AG, to secure the financing of a possible market upturn. Based on current market intelligence and projections, we are not expecting a cautious, very limited recovery to emerge until the fourth quarter at the earliest. Lower inventories in the supplier industry will increasingly translate into rising demand, and there are positive signals from end customers. Since June, we have seen an increase in demand and order intake. Finkl Steel, for example, is in advanced state to receive a bigger defense industry order, which underlines our custom forging strategy to diversify our North American business. We also get positive signals from some of our European automotive customers, especially in relation to the Eastern European market. However, we do not expect to be able to make up the negative adjusted EBITDA recorded in the first half of the year by the end of 2020. The seasonally weak third quarter and very low volume of orders are working against this. It is, therefore, not possible at this moment to give a reliable estimate of adjusted EBITDA in the current phase of uncertainty, but more on that later. Let me now introduce Josef Schultheis to whom we -- to you whom we appointed as the new third member of our Executive Board yesterday. Josef Schultheis has more than 30 years of management and consulting experience, and he will explain himself in a minute in operational restructuring, liquidity management and financing negotiations. As a full member of the Executive Board, Josef Schultheis will use his experience as CRO to drive the transformation even more intensively. This will enable Schmolz + Bickenbach to counter the drastic effects of the Corona-19 crisis more effectively. But please remember that it's not only Josef Schultheis whom we brought on board recently. We have also appointed in DEW and Ascometal additional experts, and we are about to appoint somebody in Finkl to support this transformation. But Josef, maybe you speak on your own.
Yes. Hello, all together. Thanks very much. I'm really looking forward to this engagement here at Schmolz + Bickenbach. I was active in restructuring for the last 30 years after starting mechanical engineering and business administration at a technical university in Berlin. I started the 1990 year with restructuring consulting in West and Eastern European countries, and switched more to the management role, beginning in 1999, being present in various companies in various industries supporting their restructuring. Latest, I worked with worldwide companies to cover the consequences for the COVID-19 situation here. And I am happy to join my colleagues here at Schmolz + Bickenbach as today.
Thank you, Josef. Let's move on to Chart #7. COVID-19 is also mirrored in our KPIs on the second quarter 2020. It is you can see here in Chart #7, we had to accept 38.1% decline in sales volume from 486,000 tons to 301,000 tons. Against the prior year quarter, the decline in prices and sales volume led to revenue of EUR 470 million, down 41.8%. This is attributable to all product groups and geographical regions. Adjusted for onetime effect, the adjusted EBITDA totaled at minus EUR 45.8 million. The lower profit contribution led to a negative free cash flow of minus EUR 1.9 million. While most of the operational KPIs were drastically negative, we at least managed to compensate through strict liquidity management to keep our free cash flow as well as the net debt at a reasonable level, more on that by Matthias. Let's continue with Chart #8, an overview of important macro indicators where we see a positive development of commodity prices. The car production in Europe reached historical lows. The prices of commodities that are important for Schmolz + Bickenbach tended to rise in the second quarter. Over the quarter, the price of nickel rose by 14% while ferrochrome went up by 5%. Scrap prices rose by a total of 4% over the quarter. The price trend for scrap and ferrochrome was mainly driven by supply bottlenecks on account of lower availability, but also falling demand. In the case of nickel, the critical factors were a rising demand from China as well as the expected higher demand for battery production. Developments in the global oil and gas industry continued to be sharply -- sharp by declining demand. According to July estimate, demand in the second quarter was 16% lower than in the prior year. However, after a sharp drop in the price of crude oil, it rose again to USD 39 per barrel at the end of the quarter. This corresponds to a price increase of 39%. In the North American oil and gas industry, also an important sales market for Schmolz + Bickenbach, the rotary rig counts fell sharply in the second quarter from 705 to 278 at the end of the quarter. The figures from the 2 industries, which account for nearly 2/3 of the group's total sales volume underscore the historical downward momentum. On top, the German mechanical and plant engineering industry reported a 31% decline in new orders in the second quarter. In Schmolz + Bickenbach, most important end market, the automotive industry, production collapsed, especially in Europe and in the U.S., The Chinese automotive industry, the recovery in car production that began in March, continued over the course of the second quarter and ended with an increase of 6% compared to the prior year quarter. On the other hand, in Europe, we saw a drop of 63% in the same period. And in the U.S., car production declined from April to May by even 89%. With the cautious optimism, we are expecting production levels to increase again in the third quarter. Nevertheless, experts expect the global auto market to remain weak in 2020, translating into a drop roughly 22% in the European car production compared to 2019. Let me show you on Chart 9, our progress in the transformation program. Despite the protraction by COVID-19, we are on track with our initiated transformation measures, putting this progress into numbers. You can see the achievements we realized in the first half of 2020. As already mentioned, we have appointed Josef now to enforce the transformation process as CRO. Overall, at the moment, we expect the transformation program to make a cumulative contribution of EUR 274 million to the adjusted EBITDA until 2024. All in all, we can confirm this target that we are on track with these measures. Due to COVID-19, we are in the course to identify new measures to compensate for the volume-based protraction -- protractive effects. Amongst others, these new measures include temporary and structural personnel measures, but also for example, the improvement of contractual terms for energy and chromium. Taking this into account, we have achieved around EUR 45 million in improvement in the first half of 2020. Before I explain now the outlook for the full year, I'll now give to Matthias, the floor for the detailed discussion on the second quarter results, Matthias, please.
Thank you, Clemens. And ladies and gentlemen, good afternoon to you. Well, at the end of Q1, we were able to report to you that after the difficult year 2019, we had developed a detailed transformation and implementation plan that would lead the company back to attractive profitability. We were also able to secure the necessary long-term financing, especially from our anchor shareholders and our banking partners. Now that was hardly done and successfully started, this COVID crisis kicked in with its extreme effects on demand and production. And along, came the associated high uncertainty on depth and uncertainty of the crisis and long -- length of the crisis. I now like to use the usual key figures to show how the crisis has affected us in the short term, how we have reacted and how we will successfully master this development. Turning to the top line drivers on Chart 11. After first recovery in January and February, the order intake dropped sharply from mid-March onwards. Unfortunately, this weakness persisted then throughout the second quarter. As a result of the accelerated spread of COVID-19 and the government measures, there were pronounced production stoppages at our customer site, particularly in the auto industry and in the mechanical and plant engineering. The order backlog reached a historic low of 304,000 tons at the end of the quarter. That was 37% below the already weak prior year quarter. Customers canceled or postponed orders and in many cases, the offtake of finished products was also postponed at short notice. There was pronounced planning uncertainty throughout the supply chain. Fortunately, we finally saw a first normalization of incoming orders in July, and Clemens will discuss this in the outlook. However, we were forced to adjust our production accordingly and carried out extensive shutdowns in our plants. As you know, we produce through electric arc furnaces, which do provide flexibility and allow such short-term adjustments. In total, our 8 melting furnaces had been out of operation for over 350 days, which is over 40% of the capacity. We have so far been able to avoid layoffs, and we have made use of government measures to facilitate short-term working extensively. In many cases, however, vacant positions were not refilled, and we also used almost 300 less temporary staff. Crude steel production fell by 34% to 332 kt compared with the same quarter a year ago, while sales volume fell by 38% to 301 kt. This decline in sales volumes was mainly on the back of our quality and engineering steel products, which fell by 42%. This was due to the decrease in demand from the auto industry as we started. And then mid-April, our customers in the mechanical engineering joined them, so to speak. Sales volume of stainless and tool steel products decreased by 28% and 22%, respectively, meaning they were also strongly impacted, but not as hard as engineering steels. I'm turning to Chart #12 to look at the price dynamics. The decline in demand, obviously, had a negative impact on the base prices, especially for spot business, but also the annual contract that had supported our prices during the difficult year 2019 had to be settled below the level of the previous year. The more favorable product mix due to the higher share of stainless steel partially compensated this development, but it could not offset the erosion. Overall, average sales prices fell by 6% compared with the second quarter a year ago and went down to EUR 1,561 per ton. Broken by product group, we see a decline of 13.5% for engineering steels. Tool steel and stainless steel recorded a decline of 15.5% and 7.3%, respectively. Tool steel, which has the highest decline here was additionally affected by the significantly lower alloy surcharges. The 1.2% increase in average sales prices compared to first quarter is attributable to the even higher share of stainless steel sales. It does not represent yet a turn in the pricing environment. The simultaneous decline in volumes and sales prices is accordingly reflected in the sharp deterioration of the revenues. At 50%, the decline was most pronounced in the quality and engineering steel product group. The total revenue for the group amounted to EUR 470 million, that corresponds to a decline of 42%, quite heavy. Now turning to profitability on Chart 13. Despite the strong countermeasures and the sacrifices also of our employees, we still had to accept a negative EBITDA in the quarter, which is usually positive for seasonal reasons. As you follow us, you will know that. Costs should -- could be made largely variable. However, despite short-time working, this applied only to a limited extent to the personnel expenses, this was partly due to the extremely low visibility, which restricted the planning of block standstills. The efficiency parameters of the production processes are, of course, also negatively affected by these downtimes and also by the small batch sizes. Nevertheless, we have made overall progress, according to plan in our transformation program, Clemens alluded to that. We were able to achieve additional improvement, particularly in purchasing, to compensate for these production inefficiencies. Overall adjusted EBITDA fell to negative EUR 45.8 million in the quarter compared with a plus EUR 40.5 million in the previous year, so almost EUR 100 million lower or difference between the 2 quarters. The adjusted figure included onetime expenses of EUR 7.9 million in connection with restructuring measures as well as turnaround management and consulting. In addition, in the second quarter of 2020, the net assets, in particular, of the business unit DEW had to be written down again by a total of EUR 86 million. This was recorded under depreciation, amortization and impairment. Let us now go to the financing ratios on Chart #14. Despite the negative EBITDA, the ongoing expenditures on maintenance investments and the payment of interest, the increase in net debt was kept within narrow limits. The increase was limited to EUR 16 million during Q2, bringing the net debt then to EUR 625 million. Free cash flow was largely balanced. This is a result of consistent management of net working capital in the plants, especially with regard to our inventories. Q2 actually was the sixth consecutive quarter with a reduction in inventories, bringing the cumulative reduction since the end of 2018 to EUR 273 million, that is 27% off. In terms of the overall level of net working capital when compared to the same period last year, we were able to reduce a total of EUR 118 million from EUR 938 million to EUR 820 million. We also tightened the steering of investments. We carry out a continuous evaluation of our CapEx. That means that strategic investments that have already been started are being continued. On the other hand, maintenance investments are being adjusted to the lower production level, without exposing the fitness of the capital stock. We are on course to reduce the capital expenditures this year by EUR 50 million compared to previous year, that is a 37% off. The equity ratio improved to 14.9% compared to 9.6% at the end of last year. This improvement reflects the capital increase during the first quarter, of course. However, compared to Q1, the operating loss and the impairment drove the equity ratio down again by 8 percentage points. Now before I return to Clemens for the outlook, let me share an overview on the financing measures we have taken to address this unprecedented COVID crisis also in the longer-term and to assure that Schmolz + Bickenbach reliably weathers off this protracted downturn. We have taken the following measures: Number one, you already heard that we strengthened our organization through decentral CROs and now here with our new colleague, Josef, a renowned top expert in this field. We are also in the process of further adapting our transformation plan through this protracted crisis. That means additional measures will aim once more at all cost categories, and it will now also address particularly a rightsizing of the workforce and personnel costs. The work on this is launched. Number two, we are integrating now government COVID loans into our financing. And for that, we have already been successful to secure commitments in France and in Switzerland. Contracts have been signed or are ready to be signed. In Germany, the process has been initiated to achieve that also there. Number three, Clemens mentioned that. Our main shareholder, BigPoint, has given us the commitment for a long-term, so-called backstop. This commitment ensures that we will be able to cover the financing needs resulting from growth in the coming years. Number four, with these measures, the liquidity of Schmolz + Bickenbach is on solid ground for the foreseeable future, liquidity on solid ground. However, we are also examining how the balance sheet structure can be further improved with regards to our strategy. For that, all options are on the table and are being thoroughly discussed. Number five, we are, therefore, in constructive dialogue with our banks with a view to incorporating these elements into the financing agreements. We have obtained sufficient time to implement and execute this. Yes, Schmolz + Bickenbach, therefore, remains on course, even the deep COVID crisis, and it remains to be a reliable partner for customers and suppliers also. Clemens?
Thanks, Matthias. Ladies and gentlemen, this brings me to the assessment of the market environment in the current financial year and the annual outlook on Chart #16. The uncertainties regarding future global economic growth have increased massively in recent months as a result of negative effects of COVID-19. It remains to be seen whether the effect of the virus will have a lasting or only temporary impact on economic growth. Will we see a second wave or not, nobody knows. 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, deeper than normal cyclical downturn that we know and that we are used to. We are expecting some normalization in the supply chain, not before the fourth quarter of this year with positive trends in automotive. First priority for us is to expand the short-term liquidity protection measures in order to safely overcome this COVID-19 crisis. The rigorous implementation of the individual projects as part of the comprehensive transformation to achieve the turnaround plan has gained momentum and is well on track, and with Josef now on board as CRO, I think we are even more powerful for the months to come. According to the implemented structural measures in most of the business units, temporary and structural personnel measures at all sites will increasingly take center stage now. As mentioned several times, the ultimate focus will now be to secure the medium to long-term sustainable financing concept. Important to stress again is that the backstop facility by our anchor shareholder, BigPoint, is securing any market uptick until final terms have been concluded to complete the concept. Based on the current evidence, we are not expecting a cautious, very limited recovery to emerge until the fourth quarter at the earliest. However, it is becoming clear that the negative adjusted EBITDA will not be effectively offset until the end of 2020 due to seasonal and market-related factors. Given all these many uncertainties, particularly as a result of COVID-19, it is still difficult to make a reliable forecast for the fiscal year 2020. It is therefore impossible at this time to produce a reliable serious estimate on adjusted EBITDA due to the current uncertainty. And with this said, I would then pass or open the Q&A session.
Thank you, Clemens.
[Operator Instructions] And the first question is from [indiscernible].
Can you hear me?
Yes.
A couple of quick questions. On working capital, one on inventories, kind of to what level do you think you can reduce this further? Because if I look at it kind of quarter-on-quarter, the decrease hasn't actually been that meaningful. So is there more that can be done? And secondly, on receivables, there was quite an impressive decline this quarter. However, kind of the pay-down in the ABS was significantly less. So should we expect more of the ABS to pay down after quarter end? So -- that's on working capital. And on the financing side, can you give a bit more color on the backstop facility? Kind of how big is it? What are the terms?
I take that. Yes, thank you for the questions, [ Torsten ]. The inventories -- to reduce inventories, I think I tried to demonstrate that it is indeed quite a long journey that we have been having here, by 27% over the past 6 quarters, which is always quite a challenging measure if you are in a down scenario because you have the double whammy from reducing production and dispose the inventories into a declining market. So we are quite satisfied with that on the one hand side. On the other, you're right. There is still some stocks of finished goods in there, which, as I tried to outline, are not being off taken as reliably by our customers as in the past. So meaning that when the sales hopefully will increase again in the fourth quarter, we will see an improvement, particularly in that area of finished goods. And then, of course, there are limitations by production processes as such, simply by lot size and so on. I don't want to go into the detail. So your question, would it go down further? We do not expect a significant reduction in inventories going forward. However, we also are confident that in the first phase of the upswing, we will also not have to increase it significantly because we'll be able to furnish a lot of the orders from stocks. On receivables, the decline in receivables is, of course, related to the lower revenues that we have been seeing. And you're right that in terms of ABS, you also saw a certain decline in the ratio between ABS and gross receivables. One of the reasons for that is that, of course, not all of our receivables get sold in this ABS program. Because either the amounts are too small or we have currency topics here. And indeed, it's a matter of mix because our sales and service organization, which is currently running still quite well, is to a lesser extent, represented in the ABS program. So that means the eligible portion of receivables currently is lower than normal times of business. On the backstop, what I -- there is very little I would want to convey here, which is still private information. However, what I can submit here is that the magnitude is sufficient to cover our liquidity demands even in conservative cases of projections. It is a long-term commitment. So it's not for a limited or short period of time. It's for the period of our restructuring plan available and it does kick in whenever there would be a demand not being covered by other means. So to that extent, it is complementing also the public financing.
Got it. And if I may, 2 very quick follow-ups. On the revenue side. So the decline we saw in Q2 was more moderate versus the end market decline. So auto was down 63%. Sales were only down 42%. So do you kind of expect some of that weak end market demand to spill over into Q3 and Q4 in terms of Schmolz sales? And kind of when you -- so I think the data point you gave is for the -- for FY '20, you're expecting 22% decline in production for autos. Is that kind of what you would expect for Schmolz volumes as well?
I think it's very difficult to compare these numbers. What we are clearly seeing, and I think this is what makes us a little bit more confident and positive, we are getting forecasts. I don't know if you can imagine the last weeks and months where the auto industry was refusing even to give us the forecast what's going to come in the next weeks. So now it seems that there is also more reliable estimations on their side. And I would not -- I mean, this 22% is an overall number by the automotive industry statistic kind of forecast for the following year. This does not reflect one-to-one, the Schmolz + Bickenbach situation.
[Operator Instructions]And we haven't received any further questions at this point. So I hand back to Daniel Geiger.
Yes. Thank you, Aurelio. 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.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.