© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the conference call of SCHMOLZ + BICKENBACH AG on the Third Quarter 2019 Results. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Ulrich Steiner, who will lead you through this conference. Please go ahead.
Thank you very much, Angela. Good afternoon, ladies and gentlemen. I would like to welcome you to this afternoon's telephone conference on the third quarter results of SCHMOLZ + BICKENBACH. 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 7:00 a.m. this morning. You would will also find the media release and the interim report on Q3 there as additional documents.During today's conference call, we will make forward-looking statements as described in the disclaimer on Slide #2. These statements are based solely on our expectations or projections of future developments and may differ materially from actual results, performance or achievements.With this note, I now give the floor to our CEO, Clemens Iller. Please, Clemens.
Thank you, Ulrich. Good afternoon, ladies and gentlemen. I would also like to welcome you to our telephone conference. Thank you for continuing to follow SCHMOLZ + BICKENBACH despite or because of the extremely difficult situation in which we find ourselves. As usual, my colleague, Matthias Wellhausen, and I will report together on the past quarter. In addition, we will present to you our plans and measures with which we intend to steer the company through the current perfect storm, or let us call hurricane. The exceptionally difficult market situation meant that we had to adjust our annual forecast several times downwards in the past quarter. The crisis in large parts of the steel industry is even more pronounced than we had expected and visibility has not improved at all. As a result, uncertainty in the industry's reserve remains high and will probably not change in the short term. In view of the global trade conflicts and their negative impact on economic growth, we therefore do not expect the order situation to improve in 2019. With this, I want to open the presentation and explain to you why I call the current situation a perfect storm at the beginning. Matthias will then explain the figures in more details before I take over again for the outlook for the last 2 months of the year. So let us start with this Chart #5, which shows the most important developments from July to September. As in the first half of the year, global trade conflict and political uncertainties weighted heavily on the steel market. The normal decline in demand in the seasonally weak summer months was therefore boosted by a further weakening of business activities in the third quarter. This particularly affected the most important markets in Europe, the most important sales region for us. In September, when in a normal market environment, order intake picks up, again, after the 2 summer months, the weak demand continued. The economic slowdown also led to a downward trend in commodity prices. An exception to this was nickel, whose price benefited from the Indonesian government's announcement that the export restrictions on nickel ore would come. The continued weakness in demand was reflected in order intake and order backlog where that trend remained downwards. A spark of hope, however, is that the downward trend slowed in Q3. We could cautiously interpret this as markets are slowly bottoming out towards the end of the quarter. This is also underlined by the fact that the destocking cycle among customers is now well advanced, and we expect it to normalize in 2020. Whether this will already be the case in the first quarter or somewhat later, we cannot say today due to the low visibility we've already mentioned. A more encouraging development is the free cash flow, which was positive in the third quarter as well as in the first 9 months, thanks to disciplined inventory management. Overall, however, the business moved in the wrong direction in the third quarter, so that we have to refinance the company comprehensively in this miserable environment. After examining various options, we decided to propose an increase in share capital to our shareholders. This will be voted on at an Extraordinary General Meeting December 2, 2019. You can find more detailed information about the capital increase on our website.Well, in this adverse market environment, we have not remained passive, but have tried to adapt as much as possible and as shown on Chart #6. We have introduced short time work at various locations and will continue to do so where and when necessary. We have reduced a number of external workers and the numbers of shifts, but we have also encouraged permanent employees to use up their overtime and holiday accounts. During the high maintenance summer periods, we closely monitored the maintenance work and only invested where it was necessary for the safety of employees or continuation of business operations. Of course, we also reduced general expenses, such as travel expenses and asked our staff to turn over every euro or dollar twice before spending it. We also maintained discipline in inventory management, resulting in a positive free cash flow at the end of the quarter. This also includes the renegotiation of existing contracts with suppliers of the raw materials, especially graphite, electrodes and the resulting savings. Unfortunately, and this is illustrated by the quarterly figures, the measures, which resulted in saving of EUR 30 million in the first 9 months did not fully offset the impact of the slump in demand. So we must continue to act accordingly and adapt to the lower demand. I will come back to this in a few minutes. Let's move to Chart #7, which shows the development of raw material prices and key industry figures. Here, we can impressively see the development of the nickel price, which is in contrast to most other raw materials and driven by Indonesia's export ban on nickel ore, with an increase of 27% compared with the second quarter of the current fiscal year. By contrast, other important raw material, such as scraps and ferrochrome fell by double-digit percentages. After an increase in the first 2 quarters, the crude oil price for WTI consolidated due to growth concerns and high crude oil inventories. Compared to the previous quarter, the average price per barrel was 6% lower.The figures from the industry, which account for about 2/3 of the group's total sales volume underlying the unpleasant picture I had already painted in my introduction, in German mechanical and plant engineering sector orders received in the third quarter were 8% lower than in the same quarter of the previous year. The German Engineering Federation, VDMA, continues to expect a decline of 2% for the year as a whole and is also not very optimistic for 2020 expecting a further decline of 2% in the next year. In the most important end market, the automotive industry, new passenger car registration in the EU fell by 1.6% in the third quarter. As far as production is concerned, decline was much smaller than in the second quarter. While in the second quarter, production in the 3 important markets of Germany, the U.S. and China were still down by more than 10% year-on-year, the picture brightened in the third quarter. Also China had still reported 7% lower production figures. Production in the U.S. was virtually unchanged and only a slight decline was recorded in Germany. These figures also fueled the hope that the bottom is slowly reached the automotive industry, and that we will return to a normalization of steel demand from this end market. Slide 8 now summarizes the most important key figures driven by the macro developments just discussed. The sales volume of 405,000 tons was 13.8% lower than the 470,000 tons recorded in the prior year quarter. Revenue fell slightly more sharply by 14.1% from EUR 780 million to EUR 670 million due to a slight decline in sales prices. The decline in volumes and revenue had a correspondingly unfavorable effect on operating performance. Adjusted EBITDA of minus EUR 32.9 million was roughly EUR 75 million lower than in the prior year quarter. The decline of the group result was even stronger, whereas the group result in the prior year quarter was only slightly negative at EUR 3.7. This quarter saw a loss of EUR 411.9 million (sic) [ EUR 419.9 million ]. In addition to the weak operating results, this was due to impairments totaling EUR 324 million, which we had to carry out in the course of a review of the values of our plans, which had already been publicly announced in September and has now been completed. Matthias will say more about this later. The picture is more positive for free cash flow. Free cash flow increased to EUR 6 million, while net debt remains almost stable at EUR 724 million compared to the end of the second quarter.A few words now about the regional revenue development, which is shown in Chart #9. As you can see revenue in all regions are falling at double-digit rates underscoring the global impact of trade dispute on economic growth. This will allow us to leave this chart and move on to the strategic and operational initiatives we will implement to improve the financial performance of our company after restoring a solid financial foundation through the planned share capital increase. Let me turn now to the last chart, which is number 10 of my speech. In the course of the possible options for refinancing the group, we had our business examined by an external expert and had an independent business review prepared in order to identify measures for the turnaround of SCHMOLZ + BICKENBACH. This report basically confirm that our company has a strong market position in the key markets of automotive, mechanical and plant engineering and oil and gas. Also, the growth prospects in these industries are subdued for the next 2 years. A longer term recovery is forecasted. In the short term, this means that we will have to push ahead with the major structural improvement measures that we have already initiated. This applies in particular to the turnaround of Finkl Steel, which is well underway, but will take some time and the integration of Ascometal. The business case for Ascometal is still valid. However, integration and the realization of synergies are progressing more slowly than originally planned due to the severe crisis in the automotive industry. In addition to these 2 projects currently being implemented, we took a provision of EUR 10 million in the third quarter from measures to increase productivity in our German business unit DEW. With the implementation of these projects and other adjustments yet to be defined, we intend to restore the company to its former strength.And with that said, I now give the floor to our CFO, Matthias Wellhausen, to take a closer look at the Q3 figures. Matthias, please.
Clemens, thank you very much. Ladies and gentlemen, I'm also pleased to welcome you to this call, and I thank you for taking the time to participate here. Clemens alluded already to it. In addition to the operating performance, we also have to report on a very high extraordinary write-down today. We had announced these write-downs already as part of the profit warning some time ago. Now the variations have been completed, and I will explain those in more detail. Let us first move to Chart #12, which shows the key figures for operational activity. The drop in demand becomes immediately apparent from the lower order backlog. Order backlog has indeed declined steadily over the past 4 quarters and has shrunk to almost half compared to 1 year ago. Although the decline has slowed recently, the data for October do not yet show any substantial trend reversal, and until the market comes back, we will continue to adjust our production accordingly. This approach is also reflected as in the previous quarters already in the crude steel production. You see that the output in the third quarter was down by 24% compared to the previous year. We produced only 395,000 tons. This level of crude steel was below the level, which is required for the sales volume of this quarter, or in other words, we continue to reduce inventories. Overall, the sales volumes fell by around 14% to 405,000 tons compared to the prior year quarter. Decline demand, which we saw on the previous quarters continued at practically the same pace, though slightly less. In addition to this continued weak offtake from the automotive industry, we experienced an increasing decline of demand also from the mechanical engineering industry during the third quarter, that was new. It means that the weakness has broadened into another industry, which is particularly important for our group. As a result, a differentiated picture emerged between our 3 product groups. Sales of quality and engineering steels and tool steels declined by 17% and 18%, respectively. These product groups are particularly strongly exposed to auto and mechanical engineering industries and they've felt the impact which was amplified by the destocking cycle in the supply chain most. On the other hand, the sales volumes of stainless steel even increased by 3%. The much broader diversification of stainless steel in terms of end markets supported this stability. As we said, overall, we did not see any sign of recovery or at least normalization in the end markets. You remember the downturn began as a seemingly temporary correction of the partially overheated demand from automotive at the end of previous year already, and now it has developed into a manifest downturn, especially in the industries that are particularly important to us. The weak order backlog still rules out a turnaround in sales in the fourth quarter and an upturn is no longer expected before 2020.Now let's continue with Chart #13, where we display revenue and prices. At EUR 670 million, revenue was down 14% compared to previous year's quarter, and the average sales price remained virtually unchanged at the previous year's price level. However, again, the segmentation of revenue shows a different development by product groups from the strong decline of 23% in revenue of quality engineering steel, you read that there was on top of the volume reduction, a 7.2% decrease in sales prices. And sales prices were significantly down due to the market pressure, which becomes apparent when you think that a significant part of our sales are supported by long-term agreements, so the spot market was extremely weak.In the case of tool steels, the 11.3% decline in revenue was less pronounced and in terms of volume, where we had minus 17.9%. This reflects the improved mix as well as comparatively good stability of revenues in our own distribution network because the surcharges were quite comparable. Average prices for tool steels increased by 6.7%. Now in the case of stainless steel, alloy surcharges have developed just the other way around due to the sharp decline in chromium prices, which weighed on the surcharge. The recent price spike for nickel has not yet fully taken hold in the revenues of the third quarter. Despite the 2.6% increase in unit sales of stainless steel, so revenues were slightly down by 3.6%, driven by a price decline of 5.9%. Overall, the base prices were under pressure across all segments due to the weak demand. However, we can expect further development to be in line with volumes. That means with the bottoming out of the volumes decline, we shall also see a trend reversal again on the base prices.And let us now turn to the development of the adjusted EBITDA. Chart 14 shows a drastic deterioration compared with the previous year. For the first time in a long time, we have to report a negative adjusted EBITDA, minus EUR 32.9 million, compared to a plus of EUR 41.8 million in the previous year. We have added here a small bridge to illustrate the drivers of this change. The decline of about EUR 75 million was largely and equally caused by a decline in sales volumes and a worsened margin per ton sold. In addition, there was a negative effect from the reduction of inventories, which led to a lower absorption of fixed cost. And whereas we had in 2018 a stock up of inventories to meet the rising demand. Now in Q3, the situation was just the other way around. We are also reporting a negative impact from the hedging of our nickel purchases. Due to the sharp rise in the price of nickel in August, the company had entered into corresponding hedge transactions, and viewed in isolation, the valuation has reflected as a negative item in other expense here.Now we have countered earnings pressures with intensive cost measures, Clemens spoke about this in detail. However, the low volumes did not support our efficiency enhancement programs because the lower capacity utilization inevitably also entails disadvantages in terms of variable cost. An increase of personnel cost from tariff agreements and a general rise in energy costs were also noticeable. So overall, the quarterly result benefited from EUR 18 million of our countermeasures, but the negative market effect could not nearly be compensated.Yes. Let us now turn to the other components of net income, and unfortunately, it becomes here very clear why we are talking about the perfect storm in Q3. Please have a look at Chart 15. Adjusted EBITDA does not include onetimes effect, which totaled EUR 19 million in that quarter. These relate in particular to provisions of EUR 10 million of personnel measures at DEW and cost of EUR 5 million for the industrial integration of Ascometal. During the -- for Ascometal, you remember that during the early closure of the rolling mill in Dunkerque, which we are now targeting, we will now have to devalue semifinished goods, which we had to offtake from Ascoval in the previous year. They will no longer be put to use anymore. Yes, including these one-off effects on an EBITDA results of minus EUR 51.9 million has to be accounted. Let us continue further down the P&L. While regular depreciation was at the previous year's level, the financial expense increased significantly by EUR 5.8 million. This was due to a slight increase in net debt, but also significantly higher interest rate and one-off cost in connection with the ongoing negotiations with our lenders. Yes, and as we already announced in the media release on the adjustment of the guidance at September, we have reviewed our assets for impairment due to the ongoing drastic slump in the relevant sales markets, the operating losses, but also in light of the sharp decline in our share price. And these impairment test, as you know, the carrying amounts are compared with the discounted expected future cash flows, and these impairment tests were now prepared and validated in October 2019, and they showed that the carrying amounts of DEW business unit in particular, but also Ascometal sink and steatite had to be adjusted.The impact of the operating assets -- the impairment of the operating assets totaled EUR 297 million, as reported here. Various sectors, again, simultaneously impacted this impairment. The sharp and pronounced decline in demand, of course, having a negative impact on the cash flows of all the business units and all the business units were also affected by the higher market volatility, which resulted in a significantly higher discount rate. So these 2 effects were across all units. However, in addition, at DEW, the productivity gap become more apparent, and you saw that as a first measure, we also created provisions for early retirement, as already mentioned here. The restructuring of Finkl and Ascometal is well underway, as Clemens was alluding to. However, it's delayed an economic effects because of the crisis. Finally, there's also the impacts on deferred tax assets, which is reflected in the amount of just under EUR 30 million and has to be added to the impairments from the operating assets. As a result of these higher write-downs overall, the group result was negative at EUR 420 million.Yes, of course, the impairment has no effect on the liquidity situation as it is an accounting adjustment. In fact, we were able to largely neutralize the extreme operating headwind with regard to our cash flow, and Chart 16 shows our cash flow and the financing. I can report a free cash flow of around EUR 6 million compared to minus of EUR 2.6 million in the previous year. This positive cash inflow in Q3 was mainly due to the strong destocking that we could achieve. As you can see on the chart in the lower right corner, we have again been able to significantly sell-off and reduce inventory levels despite the weak demand. Thanks to the good development of free cash flow, we were able to keep net debt at EUR 724 million despite the operational headwinds. It's almost the same level as at the end of the previous quarter. Despite the successful management of net debt, the financial leverage has risen due to the weak EBITDA. At the end of Q3, the leverage stood at 8.2. Obviously, this is not a sustainable level. Therefore, we have again proactively talked to our banks and agreed to a temporarily suspend a contractually agreed financial covenants for the third and for the fourth quarter of 2019. This gives us the time to find sustainable solutions. In this regard, our Board has decided to apply for a capital increase, and at the same time, to negotiate refinancing with the banks. In the past few days, we have already announced a capital increase, and yesterday, the invitation to the Annual General Meeting was sent out.In total, we want to raise capital of at least CHF 325 million. This amount is also guaranteed by BigPoint Holding, a company of Mr. Haefner under certain conditions. This would restore the equity ratio of 11.1% at the end of the third quarter to a more sustainable level of pro forma around 26%.In summary, we have to conclude that this perfect storm or hurricane has placed a heavy burden on the company and put in a very strained financial position. The extreme reduction in demand for cars and global economic turbulence have hit us very, very hard, given that the investments in Asco and Finkl and the new assets in Switzerland have not yielded a return. So looking forward, it will be more important than ever to implement the challenging and proven measures and productivity efficiency in all business units with the greatest precision, commitment and know-how. Yes. I'd like to give back to you, Clemens, for the outlook.
Thank you, Matthias. Ladies and gentlemen, we will then come to the outlook, and we can here immediately jump from the Chart #17 to the Chart #18. On Chart #18, we describe how we assess the general economic development and development of the steel industry in the final quarter. In short, we do not expect our business to recover in the remaining 2 months of 2019. Therefore, we also expect the steel industry to remain under strong pressure as the cyclical downturn in our business this time is longer and more pronounced than usual. This also means that the unusually low visibility we currently have for our business will continue. This statement is supported by order intake and backlog in the first weeks of the fourth quarter, both have not recovered significantly during this period.We do not expect the downward trend to reverse towards the end of the year either as the trade conflict will not be resolved quickly and the seasonal decline in demand will begin towards the end of the year as usual. This brings me to my last Chart #19. The further weakening of demand in the third quarter has severely restricted our financial leeway, which is why we are now focusing on -- all our attention on strengthening the balance sheet. The implementation of the capital increase in December is of essential importance for the group's continuation as there are no alternatives to refinancing and business will hardly pickup. First and foremost, we are, therefore, doing everything to -- in our power to restore our financial flexibility. We will also continue to reduce cost and implement our saving programs of EUR 50 million in 2019. As I said earlier, we have already realized around EUR 30 million; EUR 20 million still to follow in the fourth quarter. As I said in the first part of my speech, the industrial integration of Ascometal and turnaround of Finkl are necessary prerequisite for a turnaround of the group. We will continue to work on this at full speed. We'll also continue to work on efficiency and as profitability through continuous improvement measures within the group in order to cushion the effect of constant cost inflation, especially in wages and energy and to maintain the improvements achieved in current assets. We therefore confirm today our guidance for the 2019 financial year, which we revised in October. In view of the unusually low visibility, we are maintaining our EBITDA guidance of below EUR 70 million. This concludes the presentation of Matthias and myself. Thank you for attention and open the Q&A session.
[Operator Instructions] We received the first question that is from Ingo Schachel of Commerzbank.
My first set of questions would be on your impairments. And I think one of your bigger assets was not affected, Ugitech. I was just wondering whether you could explain why not was just the book value of assets lower? Or is it still holding up in a more profitable way? And was it a close call? Or do you still have some buffer there? And on impairment, I would also be interested in your underlying assumptions for Deutsche Edelstahlwerke. I mean do you still have a value and use of EUR 380 million? Just wondering if you could give us a rough indication, your midterm assumptions, how much higher midterm EBITDA you have maybe EUR 50 million, EUR 60 million higher than 2019 or what's the assumption?
Hello, Schachel. This is Matthias Wellhausen speaking. Yes, on Ugitech, as you rightly assume, there is just -- the profitability is very good, and as you saw also in the current results, they are less impacted just because they have wider or broader set of industries supplying to and as a degree of specialization, or let's say, the content of special products is particularly high. So they seem to be particularly robust against cyclical movements, so they don't have the same lack of cash flows. For DEW, of course, it's -- we don't give any long-term projections per unit. However, it is correct that DEW in order to achieve a ROCE at the level of the WACC, that the perspective has within the explicit period of 5 years eroded due to the apparent productivity measures that have to be taken.
Okay. Understood. My next question would have been the shipment decrease. Of course, it's not unusual and similar to what other listed competitors in Europe has reported for the respective product areas. But if you look at your segment decrease compared to the end market decline, probably being maybe 6, 7 percentage points worse than the rate of end market decline, would you explain that all with, let's say, destocking on your client sides? Or do you have the impression that you lost some market share? And then if so rather to European competitors or more to Asian imports, what's your current perspective on this?
I could answer that. First of all, I have to say, I mean, as you know, there is not full transparency on that. I mean we are here under competition and numbers are not available. So what we can do is, we can ask our customers and this is what we do now every time. So we ask our customers whether they are buying somewhere else, whether they are changing the portfolio and -- against SCHMOLZ + BICKENBACH. So far, this is at least the reports that we get from our customers this is not the case. Now I do not exclude that recently in the desperate moves of some guys in this industry that are selling below cash cost that maybe here and there we're going to lose some tons because we are not making this kind of nonsense. So I think this is something that you could see now. Is it huge? No. I could report here about some examples where I know that we have won against major competition and that competition has kicked out. So at the end, I would not really believe that we are losing any market share at the moment.
Okay. Understood. Maybe quick last question to -- on this market-related topic. I think this morning you were, in your press comments, talking about sparks of hope. Just would like to understand whether that was a discrete hint that in October, order intake you've seen, let's say, client destocking, coming to an end or slight end market recovery? Or would that be reading too much into your statement?
No. I think you'd be reading too much in this -- I mean, actually, what you -- Mr. Schachel, what can see this was our hint the -- I mean, oil and gas and also mechanical engineering are normally later. But what you can see in automotive at the moment is -- and this is indeed what you were saying some minutes before, you see that the new cars coming to the market or the production numbers are somehow either stabilizing on a low level or even increasing. I mean you saw in Germany, September numbers, for example, of new cars coming to the market were double-digit higher than before. So that is what we mean. I mean it's not all negative at the moment, and there's some signs. And also again from talking to our customers, we know that their stocks are pretty low now. So the reach is very, very low. Means if this turns around or at least stabilizes a little bit, there should be also a normalization and there should be then also a fit because we have the same issue like you. I mean why would our order intake go more down than the downturn of the production numbers of the cars, for example. Yes, and therefore, I think if this stock effect is over or even maybe reverses a little bit, then we also should see better already. If you look to our numbers, actually, that's what we said in the presentation, in the first weeks of Q4, we cannot see that.
Mr. Schachel, we also look at the last 12 months production of the European light vehicle production. If you see that, that, actually, in Q3 was first quarter since long time where it stabilized and was not shrinking further. So with some delay, we should see confirm what our sales force is also reporting here. The big unknown is, of course, mechanical engineering. Here, we have less insight of where we stand in this supply tracker, but for auto, we would expect, yes, some little improvement already, yes.
The next question we received from Rochus Brauneiser from Kepler Cheuvreux.
I have a couple of questions. First, let's start with the order demand. Similarly to what Ingo asked before, I'm also surprised that the tone how you talk about current order demand looks a bit worse than what we have heard recently from other players in the automotive supply chain. Can you give us a bit of a sense whether you are more hit maybe than others because the client relationships you have moved to the second, third tier producers? And in that context, would be very appreciate if you could give us a sense how your order exposure breaks down to -- exposure to OEMs Tier 1, Tier 2 and further beyond suppliers? That's the first question.
Mr. Brauneiser, I have to refer what Mr. Schachel was asking. The question and the answer from my colleague, Matthias, in regards to Ugitech, you know that Ugitech is also supplying quite a lot into the automotive industry. And you can see that even in the product, there is a difference right now. While stainless steel into the automotive industry seem to continue on a higher level than on engineering steel, I think it's difficult to make this kind of statement that you said other suppliers into the automotive industry, I have no information on that. I can only say, we are trying, of course, to find out ourselves, are we losing market share. And again, if this would be because we are restricting ourselves not to make crazy orders where we would have cash losses, I think then it would be the right decision. So this is all I can say. I mean the customers are not telling us even the opposite. As I've said we have some proof right now because we are making at the moment contracts for 2020 that we are not kicked out, but others have been kicked out. So therefore, I cannot follow what you are saying that others are better. But this breakdown, honestly, I mean, Tier 1 is very few. I mean we are supplying normally to the guys 2 or 3, so therefore, it's difficult to say.
Okay. Fair enough. Is it -- when you look at supply chain contraction and destocking, is this primarily in -- let's say, in the third quarter, a function of the weaker-than-expected production data? Or do you think that your suppliers are primarily focused on trimming their own balance sheet and optimizing cash generation for year-end date?
There are some indications for the latter, meaning that because what we observed, for instance, changed pattern between these payers in the month -- the last month of the quarter and the first month of the quarter. Typically, the last month of the quarter used to be a particularly strong month. This is now the opposite. In Q2 and Q3, we saw the opposite. September was weak. June was weak, whereas, in July and October, were much stronger. So that is a hint of what you just say that there is a very conscious, let's say, offtake behavior in that area.And furthermore, the destocking effect that has been there since, I would say, November of the last year -- of the previous year has -- I mean, it has been tremendous. We get that -- obviously, we lack data, but -- however, it looks like the stock in the market has come down from rather something like 160 days to below 140 days in the supply chain from, let's say, estimations of our experts. So destocking is the name of the game or has been the name of the game over the past quarters. We think it is bottoming out, as Clemens was saying. There's still maybe some pockets where it's going on, but the supply chain is empty.
Okay. And maybe Matthias, you mentioned in -- before that the expectation is that the kind of recessionary environment is lasting there until 2021. Can you give us a better sense on what kind of analysis or why so -- what kind of tools are you using for that kind of statement?
I mean, we're crystal balls, sorry. That...
That's very unusual that you referred to until 2021. This is why I'm asking you.
No. It's a fair question. No, I'm -- I was just trying to give it a joking. And no, I mean, we -- as Clemens was indicating, we also involved external advice and tapped all sources that we can possible get hold of. And one of these is the -- basically, looking at average cycles in the past. If you look at auto, if you look at mechanical engineering, if you look at oil and gas, all those if you take average prices of the previous years and you see how deep they were and how long they were on average between peak to peak and the depth of the trough. And if you assume an average cycle, I mean, not taking into account 2008-'09, but other cycles, then you end up with something like that auto has a 2- to 3-year duration with a certain depth in mechanical engineering, a little bit longer, a little bit belated and not so deep. And these are the elements that we have at hand, but that's it.And what we can say is, we are very clear now about the longer-term perspectives of auto. We strongly believe that auto is intact, even though we may have -- tend to diversify, but we see auto as long-term intact despite all electrification and so on because hybrid is there and larger vehicles are there.
Okay. The other thing I struggled to understand is looking at your gross profit per tonne performance in the third quarter. So the gross per tonne has shrunk by EUR 68. I have kind of [tripped] over that, that have happened in the last 10 years before. And I just can't square together, how much that this performance is driven by lower base prices and how much by other factors? And maybe you can help us with the other factors.
Very strong, it's coming from the cost side because volume is extreme --- lack of volume is extremely toxic to the cost side -- on the cost per tonne. And of course, likewise, on the base price, you're fully right, the competitive pressure, and I have alluded to that also, is also there.So apart from the price, what is happening in the cost is, first of all, you see that we have an effect from the destocking, which is simply a lack of fixed cost absorption. Now because you cannot variablize everything, so it's -- as in the previous year, we had a positive impact of plus EUR 6 million estimated. It's a minus EUR 9 million effect this year in the first quarter from the destocking. The next thing is, we saw the strong reduction of scrap prices during the third quarter starting. That led also to significant devaluation and net -- and pick up of net realizable values deterioration. That's always a procyclical effect that you have in the balance sheet.Number three is, you have inefficiencies also on the variable cost side. I call that Apollo 13 effect. It's actually the name of the program that we have internally, meaning because we have to stop and start your equipment more often in the -- you have standstilled, that you have always inefficiencies, some, I don't know, generators keeping on running, light is on and so on and so forth, normally, variable cost, but they become more fixed and inefficient in this -- in those circumstances. These are just some examples of what's happening when you lose volumes. It's pathetic.
Is it possible to get a rough idea about this, how much the fixed cost burden and destock effect has weighed on that number?
Yes. The destocking impact -- so the fixed cost absorption is, let's say, in the quarter itself is EUR 9 million compared to the previous year quarter where we had in bunches of EUR 15 million. That's what we have in the bridge. We've EUR 15 million, but EUR 9 million of that is, so to speak, from the pure destocking in the third quarter. And let's say, some stock for the write-down for prices is roughly maybe EUR 10 million of what you have is for net realizable values is nonrecurring.
Yes. Okay. Very good. Then I -- my question refers to your future workforce setup. You are undertaking a lot of efforts to get the costs down. Maybe can you give us a sense how much of workforce is being reduced because when I look at the reported workforce number, it's actually going up despite all the cost efforts. Maybe can you help us how much employees are being reduced? And how much that is due to the temps? And how much due to co-workforce?
Yes. I mean the prime measure, and I think Clemens was alluding to it, is not that we dismissed specialists from our -- or permanent employees from our payroll. What we have done in the large scale is to reduce temporary workforce, particularly in Germany and in France at Asco. That is the measure number one. And as it was said, we prefer short-time work where we have it available and that is except for the U.S. basically and in Canada, basically -- or even in Canada, we have a scheme that is a preferred measure. Because, once again, we view this as a cyclical movement, and it's very hard in the steel industry to get the specialists back on the payroll once you shed them. Basically, once you have shed them, the crisis is over. So that's why we opted for the other initiatives. However, there are structural issues, as you rightly said particularly DEW, and this is how as a first step, we have done this early retirement scheme and the according [indiscernible] provisions of EUR 10 million. There's further activities on the way.
Yes. I mean, obviously, it shows you also that we have done quite a lot in the past already like in the U.S. For example, there is not too much room or here in Switzerland. Now what is clearly in our plan is quite a substantial reduction in the German plant in DEW. Now you know that this is a unionized plant. So things have to be discussed with the IG Metall and with the union, but also we do not want to pay a lot of redundancy fees or money. So these things have to be seen on a kind of 3 to 5 years plan, where we would use the normal fluctuation and not to replace, but here, we are talking about a substantial decrease that is planned and discussed at the moment with the union.
Okay. Then maybe one last question is on the capital increase based on your earlier remarks, where you see equity ratio plus the rights issue of 26%. That tells us that this would imply that you expect the capital increase to be at around CHF 325 million, CHF 350 million level. If I -- based on estimates, this would lead to an improvement of net debt to EBITDA in a range probably 2%, 3%, 3.5%. Just want to understand how comfortable you would be with such a level?
Yes. We think it's a first -- or, it is a sufficient step to, let's say, improve the balance sheet structure again after these impairments, which of course, have also reduced the asset base. If we would -- but we have always said that, going forward, a leverage at 2 or below is desirable. So for that reason, if we are successful in acquiring more equity for that purposes, we'll be highly welcome. But because as Clemens was laying out, there is a potential that the downturn may last for some time. And in that case, we'd find it more suitable if more would come in. However, the sustainability will already make a huge leap forward -- good leap forward at the level of EUR 325 million.
The next question is from [indiscernible] of Nordea Asset Management.
As it stands right now, I struggle to see how the capital increase is actually going to meaningfully improve your liquidity buffer to withstand a prolonged period of weakness considering that the way I understand, and then correct if I'm wrong, basically, almost all of your cash is going to be immediately paid out to the bondholders as a change of control put. So could you please explain or maybe clarify what do you mean by inadequate refinancing package? Does that involve a change of control waiver of the bonds or any other financing measures?
Well, thanks for the question. There are always obviously 2 aspects to financial restructuring. One is the equity, which clearly needs to be restored and prepared for the future. That's the equity part, and I explained just why I think it's the right move, also the order of magnitude.From a liquidity point of view, you are right that there is a provision of a put option in case of a change of control. However, this is an option. It doesn't say that it is going to happen. It will all depend obviously on the development of prices if the equity increase come through as it is.Second is, yes, we are very pleased that we have the support of BigPoint here. However, there are the -- as we have laid out, the increase is structured in such a way that it is always providing EUR 325 million with or without the participation of BigPoint in it. So obviously, we will have to provide for a decent financing structure and improvement of the liquidity in the discussions with the other lenders accordingly, but this is underway and will be -- will have finished before the AGM.
Okay. So could you please clarify whether the lenders have been involved in this discussion, i.e., whether they're actually very happy to put another EUR 150 million into your company to pay another debt that is actually [indiscernible]?
Of course, we're discussing, as I said, with the lenders currently. These negotiations have not yet concluded.
Okay. Would you be able to also tell me if there is any indication from the SCHMOLZ + BICKENBACH family foundation on what they think of the capital increase? And also what they believe that their position would be on the Board change that was requested by Liwet?
Yes. Maybe, first of all, I can say, I mean, we are normally not talking to the shareholders directly. We can only listen to what their representatives and our Board are saying. And here, I can only report that both Liwet and SCHMOLZ + BICKENBACH representatives have a couple of times confirmed that they are supporting this capital increase.
Sorry. So the family is supporting?
Yes. And also Liwet has said that they do everything to support the company. So that's all I can say. I mean I don't know what if families -- behind the representative, what they are discussing, but the representative in our Board has not said anything differently.
Okay. Sounds good. And one final question for me is, you mentioned that basically your prices have been protected by the fact that your contract duration limits the impact on price from this weakness of volumes and that spot prices were much lower. Would you be able to maybe give a bit more visibility on basically what could have been the additional impact on your EBITDA and revenues from the -- if you were selling these at spot prices as opposed to contract prices, which presumably are higher?
Yes. Maybe I can give you an indication on that. From an engineering steel, you can say a good thumbs up is that half of it is, basically, on yearly contracts, which doesn't give you the full details that is necessary to do these calculations because, obviously, there is a mix impact from that. There are also renegotiations, and some extent, both ways by the way. So -- but it gives you the feeling that half of it is more or less on yearly contracts and other half is not. So from that, you can -- this is the best thumbs up I can give you.
The last question is from [indiscernible].
Can you hear me?
Yes.
Of course, yes.
Just a few follow-up questions actually from the session just before. It's still unclear to me actually what's the management position really with regards to the use of proceeds -- the desired use of proceeds from their capital increase? And basically, that's probably linked as well to another question, which is what's your estimate of a liquidity position that you need to have to maneuver through the storm that you were describing a little bit earlier in the presentation and kind of until things turn around? You mentioned that put is an option -- it's an option in the hands of the bondholders. So it's not necessarily an option that you guys have some say on. So I'm still trying to figure out actually what is the maneuverability post the capital increase assuming that it's successful and that we get at least EUR 325 million or EUR 350 million?
So you are right that, obviously, we have to deal with an equation with several unknowns. So we have to prepare for different outcomes of the capital increase, and that's what we are going to do. And I have to say that on the liquidity side, the, let's say, situation is less dramatic than on the equity side as you saw from the numbers. I think we also have proven during the course of the year that we are quite able to countercyclically steer our working capital. So to that extent, I can say that the liquidity side is of a limited severity as opposed to the equity. And once again, we will provide for all outcomes in the course of our lender discussions.
So if I understand that correctly, you guys are not that worried about the cash that you are going to have to manage the business with you're -- more worried about how much leverage the business is able to sustain right now and how much equity contribution you have. So you wouldn't be unhappy actually if the bonds are repaid and you have a reduced leverage?
Let me make another sloppy comment a CFO can never make that. But once again, I think, in both cases, we will provide solutions. That's what we have to do.
In both cases, meaning, a case where the bonds are repaid and the bonds are not repaid, you're saying? Or what are the both cases?
Correct. Correct. Correct.
Okay. I just don't see it path actually to the bonds not being repaid if the equity contribution is successful and the conditions of Mr. Haefner are fulfilled?
I think we will disclose this in the equity prospectus once it is out.
I was going to say that -- why don't you let us come to the end of the year, then we will have these capital increases finalized, and then we can tell you how much came in, and then we can discuss about these ifs and whens and what.
The next question is from Akshay Shah of Kyma Capital.
It was more of the same question on the bonds. So it's probably been answered. Thank you.
And we go to the next question, it is from Fabian [indiscernible] of Bloomberg News.
Also, my question has been more regarding the bonds and has been mainly answered. Just one more thing on the financing and the negotiations with banks. Could you maybe elaborate on how much flexibility the company still has under the RCF at the moment? And that was it.
I think the headroom at the end of the quarter was roughly EUR 370 million, if I remember that. And the -- particularly, under the RCF, there was EUR 200 million, but it's just from memory of what we had. I think it's somewhere in the report.
The next question we have is a follow-up question of Rochus Brauneiser from Kepler Cheuvreux.
One final point is on your outlook for '20 and 2021 based on the environment you described in the beginning. Could you give us kind of a rough sense how -- where you see the potential EBITDA range? Or at least, can you give us a figure where you think cash cost of your business will be after the restructuring measures you're currently conducting?
Mr. Brauneiser, which outlook for 2020 and '21 do you mean? Because, I think, we have not really given any outlook for next year.
No. I mean the environment you described for your business as a recessionary for the next 3 years. What would -- how would that translate in a rough normalized EBITDA for your business?
I mean -- Mr. Brauneiser, I mentioned before that the -- actually we are talking to customers. We are, as every year, by the way, in this time, trying to make our contracts for the next years. This is just ongoing. The hope is definitely as we said for the current situation versus what we see in the auto industry that it somehow normalizes. On what level, lower level or same level? Honestly, no visibility at the moment. Indications from the customers are not very clear in this sense. So it would be really too early to give you, but we -- for next year, we definitely hope that it is better than this year.
Okay. And can you give us any help on the cash costs of your business going forward in 2020 after the restructuring measures are fully implemented?
Yes. We're in the process of refining this. Again, also, it is a little bit too early to preempt the situation because negotiations, as Clemens was indicating, still have to be conducted. They have just started and are not finalized. So for that reason, it's unfortunately a little bit too early to give targets here. I think we will have to wait together until the next earnings release for the full year, which will be the time when we should have -- when we will have progressed on that aspect.
At the moment, there are no further questions. [Operator Instructions] We have received another question, it is from [indiscernible] of Seaport.
I just wonder if you can go back to the cost side and just talk a little bit about the costs that you had in the third quarter. I mean, you first mentioned that you had some cost savings, you threw out a EUR 50 million number. Then that -- you said, I think, EUR 30 million of it was already done this year, EUR 20 million for the fourth quarter. Then you also mentioned something about EUR 18 million, I think, of costs -- an EUR 18 million number. What I can't understand is that you have all these cost savings, yet the third quarter, especially in the personnel costs, that is up significantly. And also I was wondering if you could talk a little bit about the costs, I mean, the -- on the commodity side. The nickel costs were, I think, the LME is up like 20-something percent on a year-over-year basis. How is that working itself through? Just so we can kind of get an idea of what the costs are going to look like in the fourth quarter. I mean are we expecting like on a gross margin for this -- to see the same type of deterioration on a year-over-year basis that we saw in the third quarter? Or do you expect it to get worse?
First of all, on the personnel costs, please consider that there's -- this EUR 10 million of provision for the early retirement program in DEW is part of these labor costs that you have seen that supports the picture.And second is, you calculated rightly. So YTD, September, we had a range of EUR 30 million of measures that we had implemented. Out of which, half was practically coming from the third quarter itself. This does include, by the way, other than we have said in the past. In the past, all of our measures were always sustainable. This is not the case this year because the situation is so dramatic that also the, let's say, temporary measures are being considered. So not all of the EUR 50 million that we are quoting will be sustainable. To give you an example, if we, for instance, postpone certain maintenance measures without exposing, of course, operational stability, then this would be also a saving measure in this context now. And if you consider such measures, we will reach this EUR 50 million that we are quoting, which means that another EUR 20 million is expected for the fourth quarter. That's ambitious, we know that, but that's what we are working on.
But when you say these cost savings, are these fixed costs that you're trying to take out? And what kind of fixed costs are they?
Okay. Fixed cost means, in particular, the external workforce that we have been speaking about, so where we released substantial number of external workforce. By the way, we also reduced the workforce internally. Of course, I didn't speak about that much, but it's mainly in the U.S. where we have reduced internal workforce. But this is what is mainly in the area of fixed cost, yes.
And then on the nickel side, have you been able to mitigate those costs going into the next quarter? Or do you still see them as a huge headwind?
No.
I think there must be a mistake because, actually, we have a lot of surcharge where this cost is passed to the customer. By the way, it's -- I have to say higher nickel cost is even supportive of our business because normally they also -- sparks the demands. So therefore, this is not considered for us as a cost increase.
Okay. And then going into that -- once on the gross margin, do you see a similar gross margin deterioration in the fourth quarter?
As we have said, there is -- there were a number of one-time effects in the third quarter, which came from the destocking, in particular, and also from the provisions for net realizable value depreciation. So unless, we will see further drastic reductions in scrap cost and/or sales prices, these one-time effects of roughly EUR 20 million should not repeat. So to that extent, this picture will not repeat it -- in the same way. That's it.
Okay. And just one final question. I'm going to try to take another stab at this. But back to the capital raise, I mean, you've upped the -- from EUR 300 million up to a maximum ceiling of EUR 600 million. I mean that amount of additional cash that you need, that's a big chunk of cash. Can you just give us like a kind of a roundabout idea, what you plan on doing with the -- why the extra amount? And I know we've talked -- people talked in the phone about the bonds. But on the liquidity side, if we look at the last downturn, I think you needed somewhere, but correct me if I'm wrong, somewhere around EUR 200 million or EUR 300 million. As you were going in the upturn, you were burning so much inventories, you needed to replenish your inventories. Is that what's part of that cash is being used for?
Well, first of all, the EUR 600 million is -- EUR 614 million is not necessarily the, let's say, medium-expected value that can come in. It's also for technical reasons. As we have said, we have to position it at that level, in case that BigPoint would not be able to inject what they would wish to do if they don't reach or can't fulfill or see their conditions fulfilled.As I said, we are targeting for the minimum of EUR 325 million, and that implies given the structure of the capital increase that the upper limit has to be where it is now at EUR 614 million. That's a mathematical exercise. However, it does give to all holders the opportunity to participate in the shareholding. So for that reason, it's okay. However, this is not the term planning. Once again, if the capital increase would go beyond EUR 325 million, we would be able to deleverage the balance sheet accordingly, which will certainly give us sufficient solidity for all of the gross project we can have in mind at any point in time, so that would be good.
So let me ask the question again. You've been through the -- down cycles before. You've been through this business for quite a long time. How much cash do you generally need as you're finishing the downturn, you're going to the up-cycle, how much cash does this business need? How much liquidity are you going to need?
EUR 100 million to EUR 150 million.
The next question is from [ Thomas Manion ] of [indiscernible].
Thomas Manion. Sorry, I just wanted to go back to right at the beginning you were talking about destocking at the customers' level and the supply chain. Can you just expand on whether you are seeing it all the way from the OEM levels? Or is it just intermediaries? So where are you seeing the destocking? And is it across all sectors?
Yes. I mean, I mentioned that before we are having here quite a modern CRM, where we are asking all customers, and this is independent. One of your colleagues were asking, is it tier 1s, tier 2s? No, every customer in this supply chain. And here, we are asking generally the question, how much stocks do you have, how long does it last and so on. And all these customers together at the end, we are building here a number for us. And then this clearly shows that in September compared to, for example, in August, there has been a further destocking.
And do you think it's going to be -- do you think it can return quickly? Or how do you think the level of destocking? What would that leave them -- what level of stocking would that leave them with enough inventory for? We're now moving into -- limit the -- stocking the inventory levels.
It's -- we cannot answer this question for our customers and for everybody in the supply chain. But we can only refer to the past. And in the past, we have seen that if this automotive downturn is going the other way, and it's going up, we have seen that then the shouting and the cries for material is quite heavily from the customers. So -- and then this is a little bit our worry also because if they are then coming and the supply chain is empty, there will be quite a huge pressure from the other side again. But I cannot answer for every customer how long they would be safe and so on.
The next question is from Constantine [indiscernible].
Just a quick clarification on the sort of change of control and the rights issue. So is it fair to say that the rights issue is not conditional on bonds waiving change of control. So basically, the sequence of events is going to be the following. So the rights issues is going to hopefully happen on the back of the AGM on the 2nd of December. There are various permutations in terms of how the sort of shareholdings could settle on the back of the rights issue, but a very likely outcome is that sort of BigPoint Holding is going to get to 37.5%. So BigPoint Holding is not a permitted holder as long as not permitted holder crosses 33% shareholding, then automatically is going to trigger change of control. And then there is a put on the bond side to exercise or not to exercise the change of control, but the idea is that in that scenario, the company will just follow the bond docs, and basically, kind of respect the bond doc and exercise whatever the bondholders decide to do. And in that scenario, potentially, the company might need more liquidity. And for that, the company is talking to the banks to have a sort of plan what to do in this scenario when they have to sort of repay the bond at 101. Is it kind of fair to say? Or am I missing something?
No. I think, it's factually absolutely correct. These are the effects around the bond. What I should add, again, is that BigPoint has in its commitment letter made explicit that they are expecting a reasonable and solid through financing of the transaction. So -- and that is the task that we are currently in to fix that up. As I have outlined, this is in the middle of the process. We are confident that lenders' share, this is a good opportunity for the company, and will work here with us to a successful outcome. But there is no...
And the last question we've received is a follow-up question of Fabian [indiscernible] of Bloomberg.
Just one quick follow-up question on the job situation, Clemens. Just this one is you said that there was a substantial decrease planned in Germany. Well, I was just wondering whether you could elaborate on the potential figure and where the negotiations are with the unions? And whether it's correct that this is considering the DEW facility?
Yes. No. Absolutely, it is DEW. I think we can -- but I have to say in a smaller scale, we have a second ongoing process with the IG Metall for Steeltec also in Germany. So it's, of course, the numbers are much smaller. We know the numbers, of course, but it would be unfair because this kind of negotiations with unions, you should give them a chance to discuss before you are going out to the market so. If I say substantial, it doesn't mean 1%. It means double-digit, and therefore, I think we should follow the procedure. The positions are identified. This is the important thing. The management team has identified the positions, which we are thinking about. So now you have to do the work. Again, the question is, would you do this in one step? Would you set off x amount of people in one step? Or is it better to save the cost and use the normal fluctuation and early retirement? And Matthias was saying already, we have a little package here with EUR 10 million already for some early retirement. But we have normal fluctuation, and we can still use early retirement. So far, in Germany, we have not used really hard terminations in the steel industry. What we -- I think you speak German as well, we call that [indiscernible], this is something that we are normally not doing in order to keep this -- the social piece in these companies. But it's going to discuss -- also, I mean, I can say that we are in very concrete and detailed discussion with IG Metall for some other things in order to help the company. And this is, of course, relating also to this. So let's see, at the end, we hope to have a package that is satisfying and enough for the company.
Okay. And so you're saying double-digit in terms of percentage of the overall workforce in Germany? Or could you just clarify that?
No. It's related to DEW.
Yes, in terms of percentage or amount of employees or...
Yes, in terms of percentage.
As there are no further questions, I would like to hand back to Ulrich Steiner.
So thank you, Angela. Thank you for the live participation and many interesting questions. If you have follow-up questions, just let [indiscernible] myself know. Thank you for attending today's conference call and for your continued interest in SCHMOLZ + BICKENBACH. We look forward to continuing our dialogue with you. Thank you very much again, and have a nice afternoon. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded, you may disconnect.