Swiss Steel Holding AG

SIX:STLN

Earnings Call Transcript 2022-Q2

[Operator]

Dear ladies and gentlemen, welcome to the conference call with Swiss Steel Group. At our customer's request this conference will be recorded. [Operator Instructions] May I now hand you over to Burkhard Wagner, who will lead you through this conference? Please go ahead.

[Burkhard Wagner, executive]

Yes, thank you very much, Dana. Good morning, ladies and gentlemen. I'd like to welcome you to Swiss Steel Group's Media and Investor Conference Call on the occasion of the release of the 2022 Half year Results. The speakers of today's conference are our CEO, Frank Koch; and our CFO, Marco Portmann. The slides for the presentation, which will follow immediately, the media release and the half year report have been made available on our website since 7:00 this morning. 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 forecasts of future development and may differ materially from actual results, performance or achievements. I now hand over to our CEO, Frank Koch. Please, Frank.

[Frank Koch, executive]

Okay. And thank you very much. And good morning, ladies and gentlemen. I also would like to welcome you to our conference call today, and thank you for following Swiss Steel Group on the continuation of its journey. I will be discussing the market outlook as well as the operational aspects. Further, I'm pleased to formally also introduce my colleague, Marco Portmann, who took up the position as CFO at the end of March after having spent the majority of his career within Swiss Steel Group. He will be discussing the financial matters. Let me begin by summarizing the key developments in the second quarter. Swiss Steel Group continues the positive trend and recorded a significant increase in earnings in the second quarter of 2022, with an adjusted EBITDA of EUR 96 million. This result is mainly driven by a margin increase as sales prices rose to EUR 2,442 per ton from EUR 1,621 per ton in Q1 2021 following the significantly rising energy and raw material costs. The higher sales prices compensated overall lower sales volumes, which in turn were mainly due to the stoppage of the steel mill in Ugine following the tragic accident early 2022 as seasonal effects. These solid results are dampened by the strain of exceptionally high raw material and energy prices, which also resulted in higher net working capital and net debt. Internationally stable market environment provides a solid basis for Swiss Steel Group's results despite high volatility. These were not only shaped by the increase in energy prices in Europe, but also by a distortion in the recovery of the global economy due to impact from the war in Ukraine and ongoing supply chain issues resulting from pandemic-related lockdowns in China. In the light of the global economy -- economic challenges, excuse me, pardon me, and increasing volatility, it is also modified that Swiss Steel Group is at its strongest and maximally market-oriented going forward. In this respect, we are making good progress with our SSG 2025 [ credited ] program and we have to reach a decisive milestone as our new division stainless steel, engineering steel and tool steel will go into operation in September 2022. As one of our strategic pillars and with the electric arc furnace technology as part of our DNA, our journey to further reduce our carbon footprint continues. We are committed to the science-based target initiatives, so-called SBTi that encompasses a reduction of carbon emissions by around 42% over the next 10 years. And finally, attributing to the tremendous efforts of the Swiss Steel team, the metal shop in Ugine has been ramping up again since June after the rolling mill resumed operations in March 2022, supported to a large extent by semi-finished materials from other group companies. I have been in charge of Swiss Steel Group for a year now and I am pleased to see my initial expectations confirmed. Our group has enormous potential that will be leveraged further in the course of reshaping the group. Through the SSG 2025 strategic program, we are laying the basis for a fully integrated Swiss Steel Group under a one strong brand. We are making progress towards consolidation operations at a group level in order to drive effectiveness and synergies. We are focusing our production assets even more on quality, service levels and cost efficiency. And finally, we have reached the decisive milestone in reorganizing our sales around the 3 divisions, stainless steel, engineering steel and tool steel. This new organization, which will go into operation in September of this year, allows a more holistic market approach and more effective and tailored customer service. Looking to the next chart. As we continue to Slide 5, we come to another topic rooted in our strategy. Today, steel production accounts for roughly 8% of global emissions and steel impact our daily life in so many ways that we at Swiss Steel Group consider it our duty to help shape the better, greener and even more sustainable world. We already operate on a most eco-friendly production route with our electric arc furnaces and in fact, the stainless steel production runs in our DNA. But we will continue our journey until the Swiss Steel Group name stands for climate-neutral steel. In May, our commitment to the science-based target initiative was approved. We are now committed to the further reduction of our carbon emissions by 42% within the next 10 years in accordance with SBTi. Further, we have bundled our various green steel products into 3 product categories. We give our customers decisive organization with regards to the respective CO2 emission. As Swiss Steel Group relied exclusively on EAF technology and thus the use of steel scrap, our CO2 emissions are around 78% below the industry's average. Generally speaking, this makes our entire product portfolio green. The footprint of our products is further reduced with Swiss Steel Green Steel Climate+, where exclusively electricity from renewable sources is used. With Swiss Green Steel Stainless+ our customers receive stainless products that are made from at least 95% recycled materials. We reduced emissions from the safe materials by around 90% by avoiding primary alloys. Finally, we are intensely working with partners up and down the value chain to reduce emissions and offer low emission steel solutions. Only recently, we were able to communicate partnerships with thyssenkrupp Aerospace, or the Swiss energy provider Asco. Let's turn to the overall market environment with the next slide. For the automotive industry, the war in the Ukraine added yet another layer of disruption to production, compounding the existing shortages of semiconductor chips. According to LMC Automotive's estimates, the light vehicle production in Europe declined by 7% in the first half of this year compared to the first half of 2021. On a quarterly basis, light vehicle production decreased by 16% in Q1, while increased by 3% in Q2, both compared to the respective prior year level. The mechanical engineering sector is also impacted by several supply chain issues, primarily resulting from the pandemic-related lockdowns in China as well as the war in the Ukraine. Especially the latter is resulting in order cancellations. VDMA has reduced production forecast for 2022 to 1% growth compared to 7% in December of '21. In the North American oil and gas industry, the upward trends continued in a year-on-year comparison. North American rig count increased by 58% in Q2 2022 compared to Q1 of last year, following a short seasonal decline. As we continue with Slide #7, we can see further effects of the current global uncertainties as price surges for raw materials and energy continue. While the upward trend for scrap prices has an effective quarter of 2022 compared to the second quarter of last year, prices for German scrap grade 2 and 8 has declined in May and June due to a weaker demand from Turkey. Nickel prices continued their upward trend until they reached an increase of more than USD 100,000 at the beginning of March. This led to an interruption in trading on the LME. European price for carbon ferrochrome continues to trend upwards. The average price in the second quarter of this year increased by 141% compared to the average price in the second quarter of last year. With mounting concerns about an economic slowdown and the strong U.S. dollar weighed on the market for industrial metals, prices show a slight downward trajectory. Energy prices have continued to skyrocket, increasing 211% for electricity and 298% for natural gas in the second quarter of 2022 compared to the second quarter of last year. This rise is compromised by increasing volatility, which is further accelerated by the current uncertainties in energy supply, mainly due to the war in Ukraine. On Slide 8, you will see in the top left corner that our order book dropped in the second quarter of 2022, reflecting both market uncertainties as well as seasonally based hesitancy of customers to place order prior to the summer break. Sales volumes decreased compared to the prior year quarter. This was mainly due to lost volumes from Ugitech and due to ongoing volatility in the automotive sector that led to lower sales in this segment. The average sales price per ton increased in the same time from EUR 1,622 per ton in the first quarter of last year to EUR 2,442 per ton in the quarter of 2022. Average sales prices increased mainly on the back of climbing raw material prices and the introduction of an energy surcharge in the pricing mechanism. Despite the lower sales volume, this led to sales revenues above the prior year quarter. In detail, revenue increased from EUR 839 million in Q2 2021 to EUR 1.116 billion in Q2 2022. That brings me to the end of Slide 8, and I will now hand over to Marco Portmann for the discussion of the half year and second quarter 2022 figures. Please, Marco.

[Marco Portmann, executive]

Thank you very much, Frank, and a warm welcome from my side as well. Let us continue on Slide 9. And Frank has already pointed it out. We had a strong second quarter and showed very good profitability. Our adjusted EBITDA came in at EUR 96 million. That has increased by more than EUR 20 million versus [indiscernible] EUR 75 million in the first quarter of 2022. Adding it up, we reached EUR 170 million in the first half versus EUR 110 million in the same period 2021. We have benefited from a good market demand with a continuing COVID-19 recovery, but at high volatility for raw materials and energy. We have, however, been in a position to pass on such price increases, also by implementing the mentioned dedicated energy surcharge. This surcharge is so far only covering the 2 additional costs. Consequently, in terms of adjusted EBITDA margin, it is fair to say that we are not yet at levels where we would like to be. Whilst we have improved the margin to 8.6% in the quarter compared to 7.3% in the first quarter and 7.8% in the second quarter of 2021, we believe we can do better. Frank already referred to SSG 2025 and the main initiatives to better our footprint, our sales approach and our cost base. The reshaping of the group will remain key to ensure further improvements. On the right side of the page, you can see the corresponding increase. You can see that -- you can see that corresponding to the increase in EBITDA, we also continue to achieve a positive net income in every single quarter. For the half year, the group result amounted to EUR 74 million, which is more than double compared to 2021 with EUR 35 million. Continuing on the next page, we start on the top left chart with the development of our working capital. This steady increase is mainly driven by higher prices for the raw materials and consumed energy. The value of inventory increased by approximately EUR 222 million during the course of the first half of 2022, while the actual inventory in kilotons was essentially unchanged. This increase in value has naturally negative effect on free cash flow that amounted to minus EUR 66 million for the second quarter and minus EUR 174 million in the first half of the year. In the previous year, we posted a negative EUR 67 million and a negative EUR 152 million respectively. These effects in working capital also led to higher net debt. Since the beginning of the year, net debt rose from EUR 721 million to EUR 936 million. Still leverage, which is net debt over adjusted EBITDA, came down slightly to a ratio of 3.7 given the naturally higher profitability, apology. In the bottom right chart, we show development of our equity with strong operational results amplified by valuation effects from pension liabilities due to the rising interest rates, supported a further increase of more than EUR 18 million in the quarter. In total, this resulted to EUR 595 million equity at the end of the first half 2022. The equity ratio also increased to 21.8% compared to 20.1% at year-end 2021. Moving on to Slide 11. We had already started our full year media conference, the drop includes the production after the seasonally low third quarter 2021. As a reminder, that was due to the summer break and cutback of production in the fourth quarter of 2021 in order to adapt to lower demand from the automotive industry and already high energy prices. We increased again production in the first quarter of 2022 and had another slight increase also in the second quarter with EUR 534,000 [indiscernible] at a lower level compared to the previous year quarter due to the lack of steel merchants at or from in Ugine as Frank already alluded to. In the top right corner, we show the development of our head counts that have come down slightly further in the quarter, reflecting the realization of restructuring programs at [ Optimal ] and [ EW ], but also the somewhat increased hirings towards the end of the last -- towards the end of last year when the effects of the COVID-19 pandemic subsided. Generally speaking, we have reduced head count for the fourth consecutive year since the acquisition of Ascometal in 2018 as we continue to improve our operational efficiency and work with a more flexible cost structure. CapEx spending, as you can see in the bottom left corner is seasonally low before the summer break and also unchanged when compared to the second quarter in 2021. In the bottom right corner, we show the effects of our transformation office. As a reminder, we started in 2020 a 5-year plan to achieve recurring improvements of EBITDA of EUR 298 million. We are on-track to achieve this goal and captured more than EUR 200 million as of today. We were successfully implementing nearly all planned operational improvements from new measures, which results in a contribution of both plans. This progress was amplified by higher-than-anticipated volumes versus the initially more conservative turnaround scenario despite the effect of the downtime in Ugine. With that, I'll close my call and hand over back to our CEO. Please, Frank.

[Frank Koch, executive]

Yes. And thank you very much, Marco. Ladies and gentlemen, I would like to briefly summarize today's conference as follows: With a slight slowdown towards the end of the first half of 2022, the second half of 2022 will require continuous adaption to the market development. This includes the expected softening of the market demand due to the current geopolitical instability, likely continued disruptions in supply chains, energy prices and availability. In light of this, we will focus on further operational measures to secure the group's liquidity. Also in light of this, more than ever, it is imminent we continue our strategic change program. Our priorities lie with the implementation of the sales organization to enable a more holistic market approach and a more effective and tailored customer service and to continue to form one fully integrated Swiss Steel Group. Further, we will continue our efforts to reduce our carbon footprint. The road map to get one step closer to our ecological goal of sustainable steel production is in finalization. Operationally, the focus will be ensured a strong performance of the restarted steel mill in Ugine to regain the group's strength in stainless steel products. Based on our reported earnings in the first half of 2022, we are raising our guidance for adjusted EBITDA. As we look to the second half of 2022, volatility and uncertainties have increased. The geopolitical situation remains unstable, supply chains continue to face many-fold challenges. Inflation is on the rise and a potential economic slowdown has become imminent. We cannot conclusively assess the material uncertainties facing the energy sector at this time, neither in terms of price development nor availability. In consequence, we expect lower market demand and the resulting slight decline in margin. Assuming only immaterial additional disruption, we expect adjusted EBITDA in the range between EUR 220 million and EUR 260 million. With this outlook, I would like to end my presentation. Please feel invited to our Q&A session, thanking you very much for your listening and participation.

[Operator]

[Operator Instructions] We'll take our first question, [ Dominique Fregas ] from [ NBC ].

[Unknown Analyst]

Well, I was wondering, I mean, why you will expect some lower market demand, I mean, the response I see or are quite mixed from companies. I mean some are not so worried, others are a bit more worried. I mean -- but it's not that -- it does not seem to me that the industry really is in a crisis more than now we're really weakening with a downturn we get a prolonged or a strong downturn, but maybe you can correct me on that. And then I would like to just get to this energy or shortages or especially these shortages of electricity we might face here in Switzerland. I mean, how do you get prepared for them? And if you could tell us again, I mean what implications that maybe has already on demand from customers. Is it really that customers now are starting to shun Switzerland and ordering their products rather from, let's say, from North America or Asia, where there is enough electricity?

[Frank Koch, executive]

Okay. Hope we got everything as the line was not always too clear. And for your question, first of all, your comment, I understood it more than a comment, the downturn in the second half of the year. And I would like to point out again that we have to differentiate between 2 factors. First of all, the industry has a normal economic swing like in every normal economic year. And the second half of the year is due to the fact that we have the summer breaks, the maintenance part and also the vacancy times, especially in western and southern parts of Europe, always weaker than the first half. This is a matter of fact over the case. But this is now accompanied by high uncertainties. And this is not only that in our opinion account on what we say here. And it is -- this maybe already leads to your other part of the question. The energy shortages and the energy prices are somewhat showing already price levels which really make it doubtable if consumers, so means fee processes and the end users of the final products are really capable and willing to consume and this is our doubt, and we don't want to really downright our economy and economic trend. But what we see in the discussions with our worldwide customers, it is a general trend that we see a slight slowdown in the order intake and also in the processing of steel dedicated to our products. I cannot comment about competitors who maybe see it slightly different. But what I have seen so far in automotive industry, steel processing industry and also in steel production all over Europe, the sentiment is comparable to what we said here. Of course, and to ask on that price and cost for the energy. This is why we already discussed last year, of course, with another perspective to implement an energy surcharge for electricity and gas. And by far, we have not thought that the tremendous effect like the war in Ukraine could take place. This only sharpened the energy crisis and that actually we see here. And therefore, we have to continue that and immediately bypass an increasing cost on that side to the market as we do. And then, of course, with that, we surely get an increase of cost for our product. And if you ask something like the competitiveness compared to other worldwide markets, yes, as a matter of fact, if we compare European products to Asian products or American products, we have a disadvantage in terms of production costs over the year under the circumstances given. And then the last question that I could note of and it is really a matter of fact that customers are moving away from Switzerland to countries which are less expensive in terms of that, it can only be a very general answer on that. There are customers who have the flexibility and the possibility due to their products and to assess them and purchase them also in other markets. And they move away as they come back when the situation is changing again over here in Europe or in Switzerland. So this is a general issue that is not so much driven by the actuality that is a matter of fact that when you have floating prices and sensitivities in commodity products that one of the other customers moves along and finds a cheaper source, but not only given to the actual, I would be very careful in just saying it gets more expensive and the customers start to move away from Switzerland. This is not what we want to say.

[Operator]

[Operator Instructions] We will take our next question. [ Johannes Primus ] from AWP.

[Unknown Analyst]

[Foreign Language].

[Frank Koch, executive]

[Foreign Language]. Excuse me, we have to switch to English to make our people better understand, excuse me. You asked in German and that was reflecting in German, and we answer in English. It will be a shared question, Marco Portmann, my CFO colleague will answer and refer to the GAAP implication. With regards to Ugine. Ugine has a liquid capacity of roughly 600,000 to 650,000 tons in their electric arc furnace. And the accident that we had there and to better understand was in a very decisive place, it was after the melting shop and just in front of the casting shop. This is the most critical point to get a stoppage. And this meant and we have this kind of starting in January until June. So you can consider half of the volume that we normally have in the year, not being produced as liquid steel. So the entire works and maintenance issues have been done, as we said, we restarted our production there in June. And if we try to compensate the loss of our own steel by an internal supplies and you could consider at least a lot of dispatch and production. It will make it at a net-net-net and look 60,000 to 80,000 tons of material that could not be shipped during this year.

[Unknown Analyst]

60,000 to 80,000 tons?

[Frank Koch, executive]

Yes.

[Marco Portmann, executive]

Continuing that, regarding your question with Russian gas exposure, I need to first point out that we have usual contracts with our supplier for the supply of natural gas. There's no specific origin of that gas associated with our contracts. So it's not that we have any specific contracts that we can say this is Russian gas or this is not Russian gas. After the other participants, we're just consuming gas indeed at quite a significant scale. But that's just as a basic statement on the supply. And that means consequently that yes, we are specifically in Switzerland and in Germany, we are exposed to the use of Russian gas. We see in the statistics that, of course, these 2 countries are heavily dependent on the Russian natural gas imports. And so we are exposed to that extent to such imports. Obviously, we are carefully monitoring the situation. We are preparing all potential scenarios. We believe we are quite well-prepared for most scenarios, including even if there would be scenarios with potential slight shortages. So we are quite confident that we can manage the business and adapt our production. Because keep in mind, we have electric arc furnaces, so at least from a production standpoint, technically speaking, we are quite able to, on a short term, ramp up or down the production capacity and do not have an issue with an adaptive production to counter whatever then will happen in terms of energy supply going forward and going through the winter months of 2022-2023.

[Frank Koch, executive]

And then coming back to the EBITDA question that you have there, and this is what Marcos Portmann just described. One of the key to be on a raising and view on the EBITDA level that you requested there in the range that we just mentioned. First of all, it is a flexibility that we better have to use. So every order that is in the market will be taken. And even if we had a rundown or a slowdown on the 1 week, we are able to adopt immediately with our technology. And please don't forget that we have ongoing programs also on the cost side. And even if we see -- we named it a slight slowdown in the second half of the year with uncertainties, which we don't know. We will continue to work on also our cost basis and to maintain what we discussed here.

[Operator]

[Operator Instructions] There are no questions at this time. I would like to turn the conference back to Mr. Burkhard Wagner for any additional or closing remarks.

[Burkhard Wagner, executive]

Yes. Thank you, Dana. 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. Thank you very much, and goodbye.

[Operator]

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