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Dear, ladies and gentlemen, welcome to the conference call of Swiss Steel Group on the Q3 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, sir.
Thank you, Kai, and good afternoon, ladies and gentlemen. I would like to welcome you to the Swiss Steel Group analyst telephone conference on the third quarter results 2020. As usual, our CEO, Clemens Iller; and our CFO, Dr. Markus Boening, will guide you through the quarterly presentation. The presentation has been available for download on group's website since 7:00 a.m. this morning. You will also find there the media release and analyst presentation and the interim report for Q3 2020. 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. Clemens?
Yes. Thank you, Daniel. Good afternoon, ladies and gentlemen. I also would like to welcome you here from Lucerne, it's foggy and cold. Thanks for joining the telephone conference, and thanks for continuing to follow Swiss Steel Group as the new name is now. despite these challenging times we are going through. Before we talk about our business, I just wanted to emphasize that I will make this presentation now the first time here with my new colleague, Markus Boening. While my former colleague, Matthias Wellhausen, is sitting here on the other side and wants to say goodbye to you in a minute. But before he's doing that, I also would like to mention that our new colleague Josef Schultheis is in the line here, and he will also answer questions that might come up. But before we do that, Matthias, please take the opportunity and say a few words about your future intentions.
Right. Clemens, thank you very much. Ladies and gentlemen, indeed, I've been with Swiss Steel Group 5.5 years as a CFO. But overall, I've been in charge for almost 25 years nonstop as the CFO in the steel industry now. Great experience, never die. Full of passion. However, I decided it is time to now focus on other aspects of life and/or work. So it was very important that we have an orderly succession, and I'm very glad that we could attract Markus Boening for that, a plan for succession. He is an experienced CFO and his experience also in steel. He took over the office on October 1. And he will work with a wonderful and weathered team that supported also me. So good continuation. I also think that this represents a particularly good timing for the company. After the double crisis in our markets, during the past 2 years, we were finally able to secure the growing concern in August this year, and the necessary funds were committed for the long term, and the restructuring plan was detailed out. So the company is, therefore, in a clean and stable status. It will now be required to execute the further recovery with continuity, energy and the precision during the coming years. Yes, the start looks very good. Clemens, Markus and Josef will report on this. Dear, ladies and gentlemen, many of you have followed us or partnered with us for quite some years now. I am very grateful for all the support, interest and trust, which many of us could enjoy from you. And I truly wish you all the best. Yes, Clemens, it's back to you. Thank you.
Yes. Thank you, Matthias. We'll come to you back at the end. Before we talk about the third quarter where we have seen for the first time, some signs of recovery this year. Just wanted to flag first. And most importantly that we have expanded the required COVID-19 safeguard programs and concepts enabling us together with our treasured employees to cope well until now with this ongoing, very difficult situation. The third quarter was very much in the focus to continue setting the guardrails to drive the turnaround of the group. Three very important key milestones have been achieved. One to mention right now is our renaming to Swiss Steel Group, which implies the turnaround and new beginning we are about to start in order to bring the group back on track to achieve in the long run, a sustainable future. Second, and to counteract the COVID-19 crisis, we have expanded our transformation program. And finally, our financing concept till 2025 has been completed. Let me summarize on the next Slide 5, the most important topics of the third quarter 2020. Also, the volume in the third quarter was for seasonal reasons and due to the current crisis, not at the same level as last year. We are seeing signs of normalization, especially in the automotive market. The market-driven increasing sales is also reflected in the order book. So we are still noticing very short-term ordering patterns among our customers. This makes it still difficult to assess how sustainable this recovery is. Consequently, our production for the automotive industry was scaled up again and short-time work has -- was reduced in the respective production areas. With the gradual implementation of our transformation program, we have already improved our cost position significantly despite the decline in sales volume and an unsatisfactory revenue situation compared with the same quarter last year. This has enabled us to achieve a better EBITDA result. Due to consistent liquidity management, with a focus on working capital and more specifically on inventory levels as well as capital expenditure, we have kept net debt at a stable level. With a focus on adapting our business model and optimizing our cost structure, we have further expanded our transformation program. As an example, and for the purpose of improving our market presence and customer service, the 2 Swiss-operating business units are being combined under joint management to create 1 new strong Swiss production center. This step will allow us to further push ahead on customer centricity. On the cost side and to secure in the long run, the cost savings made from the usage of short-time work. We have pressed ahead with changes to our workforce through socially adequate measures, especially in Germany. The cost synergies that we will achieve in the future are about to be hedged through the conclusion of a collective restructuring agreement. As announced, this is still subject to further discussions with the works council and IG Metall, but it's on a very good way to completion. The total effect should be around EUR 39 million spread over the years 2020 to 2022. As I said before, and on top of the renaming, we have achieved 2 additional key milestones on the journey to turn around the group. As we mentioned, first, the expansion of the transformation program to counter the effects of the deepened COVID-19 crisis. This expansion is amounting to an additional EUR 25 million, bringing us up to a total now of EUR 298 million. This comprehensive program will allow us to achieve competitive margin of around 8% to 8.5% until 2025. Finally, and to complete the financing concept of the group, we have secured 2 additional state guaranteed loans in France and in Switzerland, amounting to EUR 69 million. There is a possibility under certain conditions to even increase the French loan by another EUR 20 million. Furthermore, and to achieve at a total of EUR 200 million, we have secured a loan of around EUR 130 million from our anchor shareholder, Bigpoint Holding AG. Looking ahead to the fourth quarter of 2020, we are expecting to see further recovery, at least for the automotive industry with sales volumes potentially increasingly matching the levels of the same quarter last year. This recovery will be driven more and more by supplier industries, replenishing the inventories and by positive signals from the automotive market. The mechanical and plant engineering, it will probably take some time for the recovery to appear. So we are not expecting any upswing before the first quarter of 2021. In the oil and gas industry, we are still not anticipating an immediately uptick in demand despite stabilization of the oil price and positive trend in rotary rig counts. Let us turn to Chart #6. The result in the seasonally weak third quarter of 2020 was still impacted by the effects of the COVID-19 crisis. Even so the demand situation had recovered somewhat by the end of the quarter, the sales volume was down to 332,000 tonnes from 405,000 tonnes in the same quarter of last year. In combination with the difficult pricing environment, revenue decreased by 24% to EUR 509.4 million. However, and this is directly impact from our execution and transformation, we have made changes to the cost structure, which resulted in an adjusted EBITDA of minus EUR 21.1 million, which was less negative year-on-year improving from EUR 32.9 million. Factoring in depreciation impairment, interest and tax, this brought us to a group result of EUR 66.3 million. On the very positive side, and despite ongoing negative operating results, net debt did decrease in comparison to Q2 2020. This is a reflection of our consistent and strict liquidity management with a key focus on working capital and investments, which resulted in a positive free cash flow of EUR 9.3 million. But more on that later by Markus. Let's continue on the Chart #7, an overview of important macro indicators. Whereas we see a positive development of commodity prices, the car production in Europe reached historical lows. The price of raw materials that are important for the Swiss Steel Group tended to rise further in the third quarter. Over the quarter, the price of nickel rose by 15% while the European price of high carbon ferrochrome went up by 6%. The prices for scrap grade 2/8 German scrap rose by 9% over the quarter. The price increases, particularly in the second half of the quarter were mainly driven by greater demand and, in the case of nickel, by delivery bottlenecks and speculations relating to the future demand from the electromobility. Crude oil price for West Texas Intermediate, or WTI, was relatively stable in the third quarter, fluctuating between USD 36 and USD 44 per barrel. The start of the third quarter also saw signs of recovery in the rotary rig at the close of the quarter. The rotary count was 332, up 19% over the course of the quarter, but more than 60% below the level of the start of the year. In the German mechanical and plant engineering industry, the decline in production and the incoming orders also slowed down. However, according to German federal statistical office in the third quarter of 2020, these were still down year-on-year by 15% for production and 11% for incoming orders. In the automotive industry, recovery in the Chinese production and the flattening of the decline in production in Europe and the USA. also continued over the course of the third quarter. According to LMC Automotive's projections from the end of October 2020, production of light vehicles in Europe returned to growth year-on-year in September for the first time. However, production of light vehicles overall was still 6% (sic) [ 9% ] below the prior year level in the third quarter of 2020. It was a similar picture for the production of passenger cars in the U.S., which after reaching the prior year level in July and September was still down 3% for the third quarter of 2020. As a whole compared with the third quarter of 2019, in China, passenger car production in the third quarter of 2020 recorded a rise of 8% compared with the third quarter 2019. Let's move to Chart #8. Our progress in the transformation program. Over the course of the last 2 quarters, we continued to expand the transformation program by identifying additional measures across the 4 categories, amounting to in total EUR 25 million. These additional measures include besides the merger of our Swiss business unit, the rightsizing and further optimization of Ascometal through workforce adoption, centralization of SG&A activities and capacity utilization improvements. This in response to the deepening COVID-19 crisis which will generate a cumulative effect of EUR 298 million until 2025. Overall, we can confirm that we are on track with these measures. Putting this progress into numbers, you can see the achievement of EUR 68 million, which we realized over the last 9 months of 2020. This is very well a reflection also, of course, of the appointment of our new CRO, Josef Schultheis, who is in the line here, who is further enforcing the execution and expansion of the transformation. Before I explain our outlook for the full year, I now would ask Markus then to detail the discussion on the second -- sorry, on the third quarter results.
Clemens, thank you very much. Ladies and gentlemen, a warm welcome also from my side. As previously announced, I have taken over from Matthias Wellhausen, the CFO office as of October 1, 2020. It's a great pleasure for me today to present you the operational and financial performance of the Swiss Steel Group. So we will dive in right away and start with the top line drivers on Chart #10. After 2 disappointing quarters due to the COVID-19 crisis, the third quarter of 2020 got off to a cautiously positive start. Demand and sales levels normalized in the second half of August after production capacities were ramped up smoothly following the summer break. After orders were lost, due to COVID-19, in the second quarter of 2020, we noticed an improvement in the overall order situation, specifically in the automotive sector in the third quarter of 2020. Leaving behind the bottom in June with 304 kilotons backlog. We see a cautious but positive trend towards stabilization. Consequently, the order backlog at the end of September increased to 359 kilotons. However, remaining 8.4% below the prior year level of 392 kilotons. We also continue to observe very short-term customer order behavior resulting in low order intake visibility. This continues to make it very challenging from a production planning and shift modeling perspective. With demand still weak, we accordingly adjusted the electric arc furnace smelting capacity. In total, our 8 melting furnaces have been out of operation for over 234 days in the third quarter. This corresponds to around 60% usability of our production shift capacity. Consequently, we reduced the production in the third quarter of 2020 to 348 kilotons, less crude steel was produced than in the prior year quarter with 395 kilotons. As the recovery in demand from the automotive industry is taking a while to affect the sales volume, we sold less quality & engineering steel, particularly at the start of the third quarter of 2020. Sales volume for the second half of Q3 2020 was on par with Q3 2019. Nevertheless, with 332 kilotons, we sold 18% less steel in the third quarter of 2020 than in the prior year quarter, ending up at 405 kilotons. In addition, the drop in demand in mechanical and plant engineering, which is another key end customer market for quality & engineering steel continued in the third quarter of 2020. Let us continue to Chart 11 with a look at price dynamics. The average sales price per ton of steel was at EUR 1,534 in the third quarter of 2020, 7.3% lower than in the prior year quarter. This was despite the slightly positive movement in prices for scrap and alloy surcharges following the COVID-19-related slump. The overall market sentiment is still predominantly a hunt for volume, which price increases remain very challenging to achieve. Consequently, there's ongoing price pressure, which has particularly affected the stainless steel product group. The negative development in prices and the contraction in sales volume led to revenue of EUR 509.4 million, down 24% on the prior year quarter. This decline was most pronounced in the quality & engineering steel product group, which posted a drop of 27.5%. Revenue from stainless steel was down by 21.3% and revenue from tools steel by 19.9%. Nearly all regions of the world posted a double-digit decline in revenue compared with the prior year quarter. Only China positive -- only in China, positive growth was recorded of 10.6% year-on-year. Now turning to profitability, Chart 12. EBITDA adjusted for onetime effects was at minus EUR 21.1 million and less negative than the minus EUR 32.9 million in the prior year quarter despite the decline in revenue. This demonstrates that the initiated cost reduction measures and the execution of our transformation program show results. While we achieved an improvement in our gross profit margin by almost 3% up to 32.4%, specifically the reduction in personnel cost of EUR 24 million supported the bottom line improvements. This was due to the adapted shift models, short-time work programs and headcount reduction in various countries. Overall, in the third quarter 2020 Swiss Steel Group received EUR 8.5 million in compensation for short-time work. With the current headcount of 10,041, the group has 410 employees less than it had at the end of the third quarter of 2019. Onetime effect amounted to EUR 7.7 million and are attributable to consultancy services in connection with efficiency improvement programs, restructuring measures and to procurement of COVID-19 protective materials. As a result, the adjusted EBITDA margin increased to minus 4.1% versus minus 4.9%. In the seasonally weak third quarter of 2020, which was also impacted by the consequences of the COVID-19 crisis, the group posted a negative result of minus EUR 66.3 million. In the third quarter of 2019, this was significantly higher at minus EUR 432.2 million, which was predominantly driven by the impairments amounting to minus EUR 297.4 million. Let us now turn to the financing ratios on Chart #13. Compared to December 31, 2019, net working capital was reduced from EUR 773.1 million to EUR 739.2 million. In terms of the overall level of net working capital and compared to the same period last year, we were able to reduce a total of EUR 133 million from EUR 872 million to EUR 739 million. This is the result of consistent management of net working capital in plan, especially with regard to our inventories. Q3 was the seventh consecutive quarter with a reduction in inventories, bringing the total reduction since the end of 2018 to EUR 339 million or 33%. This very positive trend overcompensated the reduction in trade accounts payable, which was caused by generally shorter payment terms on the part of suppliers. We also tightened the controls of our CapEx spending and reduced maintenance CapEx to the lower production levels. However, it is important to note that we will not compromise the functionality of our planned equipment. Also, strategic CapEx projects that have already been started will be continued. With these measures, we are on course to reduce capital expenditure by up to EUR 50 million or more than 1/3 below the previous year's level. In summary, we achieved a free cash flow of EUR 9.3 million positive, well above Q3 2019, and were able to decrease net debt compared to Q2 2020 to EUR 610.4 million. This is significantly below the December 31, 2019, value of EUR 797.6 million. Despite all these measures, COVID-19 effects the impairment of EUR 8.2 million at Asco and the negative effect on pensions, negatively affected the equity ratio such that it now stands at 10.9%, still slightly above the figure for December 31, 2019, of 9.6%. So before I hand it back to Clemens for the outlook, let me share an overview on the financing measures we have taken to address the COVID crisis [ also ] in the longer term and to assure that Swiss steel group reliably weathers this unprecedented downturn. As already announced in Q2, we were able to secure state guaranteed loans in both France and Switzerland of EUR 69 million with a potential upside of up to EUR 20 million. Furthermore, we complemented the financing concept with a shareholder loan of EUR 130 million. This comprehensive financing mix, which generates funds of almost EUR 200 million put Swiss Steel on very solid ground and should secure the financing through 2025. With this secured financing, we will continue to be a reliable partner for our customers and suppliers. However, in addition, we are examining how to further improve our capital structure. Several options continue to be on the table and are being thoroughly discussed. Finally, we will call the outstanding portion of our bond in order to buy back the remainder of EUR 21.2 million. With this, I would like to hand it back over to Clemens for the outlook.
Yes. Markus, thank you very much. Ladies and gentlemen, this brings me to my assessment of the market environment and the current financial year and the annual outlook, which we will start here on Chart #15. In the recent weeks, the uncertainty regarding the future global economic growth have again risen as a result of the intensifying negative effects of COVID-19 or the so-called second wave. It remains to be seen whether the effect of the rise will have another lasting or only temporary impact on economic growth and the recovery we have seen, at least in the automotive side. The only thing which is certain is that volatility continues to be very high. Consequently, the steel industry as a whole will remain under intense pressure in a downturn that is longer and deeper than the normal cyclical downturn. In order to counteract these developments, the focus for the fourth quarter of 2020 will remain on optimizing liquidity and executing the transformation program. We will support the normalization of the demand with human and financial resources wherever needed. We will continue to ensure that our production and with this our costs structure are as flexible as possible. We expect that the automotive industry will continue to recover in the fourth quarter of 2020. And I can say here that October is continuing this positive signals that we have seen in September, narrowing the gap to the prior year level while recovery will be slow in the mechanical and plant engineering as well as in the energy sector. With securing the long-term financing and expanding the transformation program, we believe that we are now well equipped to protect ourselves against negative future developments. Before I finish this highly uncertain outlook and open the Q&A session, I just would like to take the opportunity to say thank you to my old colleague, and old doesn't mean in terms of age. But in terms of cooperation, Matthias Wellhausen for the always fruitful and constructive work during the last years. Both of us had to cope a very demanding and changing world. Just to name the oil crisis in '15, '16, the protectionism and the trade restrictions, then the automotive crisis beginning end of '18. And last but not least, the corona crisis only to mention some of the topics we had to face. Many thanks, Matthias. You've always been a very valuable and reliable colleague, wish you all the best, stay healthy. And with that, I would like to finish. And then Daniel, I think you open the Q&A.
Yes. Kai, I'll just hand it back over to you, and you can probably give us the first questions that we can answer them.
[Operator Instructions] And the first question we received is from Rochus Brauneiser of Kepler Cheuvreux.
Yes. And let me first express my base best to Matthias and all the best to his future.
Thank you.
Yes, and then maybe a few things on the quarter. I think you talked in detail what do you think of and what do you see at the moment in terms of the outlook. What I was wondering is that you're sounding a bit more constructive for the rest of the year because of automotive demand. And still, as you are nearly close to mid of November, you're not giving any more specific or numerical guidance for 2020? Maybe you can explain a bit what's the message behind or what are the main risk factors you're seeing that you're refraining from getting more specific, and then maybe have a few more questions.
Thank you, Rochus Brauneiser. The reason is very simple. As I said, this second wave that we are seeing actually coming. And I think it's not any more deniable that the numbers everywhere in the world are going up drastically. And we don't know what kind of measures will come. And the second lockdown would definitely very suddenly interrupt this positive momentum that we were reporting. As I said, September -- we have seen an uptick from July now month by month. August was maybe weak, but that is seasonally weak. This is the summer month. September was better than the July. October, the order intake, again, better than before. So this somehow -- and also sales. I mean it is somehow gives us a kind of positive feeling. But it could be interrupted very quickly. And therefore, I do not really dare to make a projection at the moment.
Okay. So let's assume there is no big disruption to the industrial landscape and the order pattern is as it is, would the improvement in the fourth quarter mean that you are still kind of slightly loss-making? Or would you expect that you could be already positive in your fourth quarter adjusted EBITDA?
So that really depends on how things are going. As we said earlier, it is our order intake. It's extremely -- and the customers are acting on a very, very short-term basis. If consider -- if things continue in a positive way that we have seen in October. It is possible that we get to a breakeven EBITDA level or even a little bit better. But that remains to be seen, and that's under a lot of conditions. That's why we hesitate to make statements like this in the moment.
Okay. That makes sense. Maybe can you give us a bit of a flavor, how much is -- how much we shall expect in terms of these new restructuring measures. I think the one you mentioned in the release is that you are still in talks with the labor side on about Les Dunes? And then also on DEW, how much in total is that in terms of restructuring charge, which will book Q4, maybe a little bit later than it?
Josef, do you want to take that answer or...
Yes. So we have around EUR 7 million in the June, which were effected in -- for the year 2021 for Ascometal. And then as we are quite in line with the schedule here. We're confident that we will meet these figures. And for Germany, we had an agreement with the union, IG Metall, a couple of weeks ago that we reached. And this -- Clemens already mentioned that we reached EUR 39 million over the years 2020 to 2022. So this year is almost over more than EUR 7 million, we can expect this year. And the rest will be divided between the years 2021 and 2022. This is on the personal side. Yes.
If I may add, Mr. Brauneiser, I think one thing, and I don't want to be right all the time. But I think what I wanted to point out is that some 6 to 8 months ago. We have talked about the amount of people that we maybe have to set off. And you know that we were cautious. Matthias and I were cautious. We said, look, nobody knows how deep the crisis is. Nobody knows how long it will take. So let us really do this with care because these people are valuable people. They have been trained. They are experienced and so on. So it's difficult to get them back. And what we see now is that -- and especially in October -- and obviously, we are reporting Q3. So it's not about October. But I can tell you that this is a time where customers, all by a certain are calling in here to say, can you move and push orders forward so it shows us that everything is possible. So we are happy that we had the chance in France and in Germany and Switzerland with this short working time to keep the people, yes, at a much lower level, had a compensation from the government. But -- so this allows us to be flexible now. And this is, I think, where we are all here happy that this step was done like this. Nevertheless, there is further restructuring to come. We have a program, especially with the IG Metall that Josef, maybe you want to mention. About the next years, we will lay off additional people. But again, reasonably without paying a lot of redundancy money. But Josef, maybe you want to take that?
Yes. Thank you. So the program agreed with the German union is as such that we keep a balance between getting rid of people and then keeping the most important and experienced guys we had. And there is a mixture between losing people, between educating people to different job classes. And so overall, this will affect 400, more than -- a little bit more than 400 people in Germany. But this will, as Clemens said, have only a slight effect on the overall capacity due to our approach that we will need the experienced guys for further development.
Okay. When -- based on this transformation program, as I sense now, what is the workforce by the end of the program? So it is 500 less than now because...
Yes. Mr. Brauneiser, let's be a little bit cautious because I think -- you, Markus, mentioned, what, 10,040 something that we are now at the end of the year?
Yes.
So this is a reduction. Now you can take the 400 from Josef and deduct it. But we are hoping, obviously, that in the next 4 years that this growth will come back. And then hopefully, we also have a chance maybe to expand somewhere. We are still keen in growing in China, for example. So let's see, I don't want to commit to a number for the next 5 years here.
No, I fully understand that, of course. One question is about your -- another question is about your state guaranteed loans or state loans. And I -- if I recall correctly, I think you wanted to apply for those in all the 3 main markets you're active in Europe. Is there more to come from Germany? Or is it finally now concentrated on France and Switzerland?
No, the discussions for Germany are still ongoing, but there is nothing final, yet.
Okay. And on your working capital, I think you made big progress in the third quarter. How shall we think about the direction in Q4? Is there any snapback? Or can you just squeeze out a bit more towards the year-end date?
Well, there will be with the business coming back, certainly in the automotive business, there will be a slight increase in working capital. However, we have built this into our forecast and into our budget plan.
[Operator Instructions] As we received no further questions right now, I hand back to Mr. Geiger.
Yes. Thank you, Kai, and 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 for your continuing participation, and goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.