Swiss Steel Holding AG
SIX:STLN
Earnings Call Analysis
Q4-2023 Analysis
Swiss Steel Holding AG
Sales volume dropped by 17% to 1,375 kilotons due to economic slowdown and reduced demand in sectors like automotive and mechanical engineering, which restricted production and sales efforts. The decrease in energy and raw material prices prompted significant inventory valuation losses and, when combined with lower asset utilization, contributed to a negative EBITDA. However, targeted actions to reduce net working capital led to a positive free cash flow of EUR 85 million for the year.
The average sales price saw a discreet drop of 3% to EUR 2,363 per tonne. Nonetheless, revenue fell by nearly 20% to EUR 3.244 billion while gross profit diminished by 24% to EUR 868 million. Consequently, gross profit margin decreased to 26.7% from 28.3% in the previous year due to lower sales volumes, production inefficiencies, and downward pricing pressure.
An 11% headcount decrease, primarily due to reorganisation initiatives, translated into modest personnel expense reduction of 2%. Future savings from these cost-cutting measures are expected to come into effect in 2024.
For the year, the group encountered a significant loss in adjusted EBITDA amounting to EUR 41 million, falling EUR 176 million short of the previous year's mark, amidst a challenging market environment and inventory valuation losses.
Equity decreased dramatically from EUR 531 million to EUR 234 million, resulting in an equity ratio drop to 12.1%. In response, a planned capital increase of EUR 300 million backed by BigPoint Holding AG aims to bolster the group's financial health, with capital and debt funding secured until 2028. This initiative is expected to infuse liquidity, support sustainable funding, and enable strategic market participation.
Strategic divestments and shedding non-core entities have streamlined operations and aided in reducing the workforce by 35%, enabling the company to focus on sales of Swiss Steel Group products in key markets.
Positioned as Europe's largest electric arc steel producer, Swiss Steel Group exhibits a significant competitive edge with a carbon footprint up to 83% lower than the industry average. This has been recognized with a German Sustainability Award, cementing the group's reputation in sustainable steel production. A growing interest in green steel aligns with the global sustainability trend, marking a path forward for Swiss Steel Group.
Looking into 2024, the agenda is set on strengthening the group through three pillars: executing a EUR 300 million capital increase to enhance liquidity and prepare for future growth, capturing the increasing demand for green steel, and continuing the SSG 2025 program for strategic renewal to improve the long-term viability of the group.
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Dear ladies and gentlemen, welcome to the conference call of Swiss Steel Group. At our customer's request, this conference will be recorded. [Operator Instructions]
May I now hand over to Burkhard Wagner, who will lead you through this conference. Please go ahead.
Yes. Thank you very much, Ana. Good morning, ladies and gentlemen. I'd like to welcome you to Swiss Steel Group's Media and Investor Conference Call on the occasion of the release of the 2023 annual results. The speakers at today's conference are our CEO, Frank Koch; and CFO, Marco Portmann. The slides for the presentation, which will follow immediately, the media release and the annual report has been made available on our website since 7:00 a.m. this morning. During the conference, the speakers will make forward-looking statements as described in the disclaimer on Slide 2. These statements are based solely on our expectations or forecasts of future development and may differ materially from actual results, performance or achievements.
I now hand over to our CEO, Frank Koch. Please, Frank.
Thank you very much, Burkhard. Good morning, ladies and gentlemen. I would like to welcome you to our conference call today, and thank you for following Swiss Steel Group on its journey. First, I will give you an overview of the most important facts and figures. Then my colleague, Marco Portmann, will provide a deep dive into the group's performance in 2023. Finally, I will give you an update on the strategic assets on our way forward. If we look at the figures on Slide 4, one thing is clear. Swiss Steel has had a very difficult year. We were hit by very weak market demand at a time when we were implementing far-reaching changes as part of the SSG 2025 strategy program. Activity from our most important sales markets, mechanical and plant engineering and the automotive industry, remained weak throughout 2023. In addition, customers destock-ed their inventories and increased imports further exacerbated demand weakness.
Our sales volume and revenue fell accordingly. Decreasing energy and raw material prices led to significant inventory valuation losses. These onetime effects, in combination with an asset utilization well below breakeven, were reflected in a negative EBITDA. Because Swiss Steel Group has to rely on its reserves, our shareholders' equity has significantly diminished. As a countermeasure, we significantly reduced our net working capital so that we were able to achieve a positive free cash flow.
So much on the overall situation. As you can see, the picture does not look good. Our CFO, Marco Portmann, will now take you through the details of the group's 2023 performance. We will then look ahead, and I will be glad to explain the plan for the future of Swiss Steel Group.
Thank you, Frank. So turning to Slide 6. We will first look at our sales volumes, which declined by 17% to 1,375 kilotons. We were faced with headwinds primarily driven by the prevailing economic slowdown. We experienced a reduction in capital investments, notably in the mechanical engineering sector. European automotive production remained in the level below what we have seen before the pandemic. The impact was most significant in the Engineering Steel sector, where we saw the strongest decrease compared to our stainless and tool steel divisions, which declined slightly.
[indiscernible] slowdown has led to historical lows in term and steel production. According to the current [indiscernible], near 45 million tonnes of steel were produced in Germany, Europe's largest steel-producing country, marking the lowest production volume since the 2009 financial crisis. The steel production decline was particularly pronounced in the electric arc furnace sector, [indiscernible] by approximately 11%.
In addition, our own market participation since the summer break 2023 was not at its maximum, as we maintained strict control of our liquidity and strategically scaled back our production. Our order backlog also reflects these challenges, decreasing by 22% to 355 kilotons compared to the previous year-end. We have observed a higher rate of requests for quotation since the beginning of this year, However, the markets have not yet normalized overall, and we expect only gradual improvements over the coming months.
Leaving sales volume aside, we move to Slide 7. The average sales price for the full year 2023 was EUR 2,363 per tonne, and thus only 3% on average below the previous year. But this does not show the full picture. The price drop seen in 2023 becomes more evident in the half year overview that shows the record highs in the second half of 2022. Coming into 2023, we were facing a combination of declining input costs, energy and raw materials,, with increasing price pressure of weakening markets. This led to very significant valuation losses on our inventory.
As a result of this volume and price development, our revenue fell almost 20% to EUR 3.244 billion for the full year 2023, with an even more significant drop specifically in the second half year 2023.
On Slide 8, we are looking at gross profit. Gross profit, that is revenue less cost of materials, decreased by 24% to EUR 868 million in 2023, mainly impacted by the low sales volume as explained. We scaled down our crude steel production accordingly, which was about 10% lower in 2023 compared to even 2022 -- sorry, 2020, which was, of course, heavily influenced by the pandemic. It comes with the low production that inefficiencies are increasing as melt sequences decrease and conversion cost in the rolling mill forges are higher.
Simply said, our production activity in the second half year of 2023 dropped below thresholds that we can easily adopt to with our normally quite flexible production setup as an electric arc furnace producer. Market prices for raw materials relevant to our product portfolio, namely scrap, nickel and ferrochrome, exhibited a downward trend in 2023. Moreover, energy market stabilizing in 2023 following unprecedented price peaks and volatilities in 2022, and spot prices for electricity and natural gas declined significantly. Of effect, further the gross profit margin temporarily under pressure. Exacerbated by the before mentioned inventory valuation losses, the profit margin ultimately decreased to 26.7% in 2023 from 28.3% in 2022.
Moving on and looking at our personnel and headcount on Slide 9. In 2023, headcount decreased by 1,045 employees or by 11% to 8,812. This decrease was mainly driven by the ongoing reorganization of our Germa production assets, Deutsche Edelstahlwerke, as well as the adaptation of our workforce to the prevailing market conditions. The divestment of 7 Eastern European sales and distribution entities also led to reduction in headcount of 251 employees.
The effective decrease in personnel expenses in 2023 to EUR 678 million was only 2% compared to 2022. Now this is due to the fact that onetime social plan costs relating to this restructuring of DEW were recognized as personnel expense in the second half year of 2023, and the headcount reduction was more pronounced towards the year-end and will also go further in 2024. Looking ahead, significant savings will, therefore, materialize or begin to materialize in 2024.
Looking at adjusted EBITDA on Slide 10, we see that we have a reasonable start into the year, that plummeted during the summer months and did not recover until the last quarter of the year. For the full year, our adjusted EBITDA came in at a loss of EUR 41 million, that is EUR 176 million lower compared to 2022. As explained, weak markets led to utilization of our production assets well below breakeven, whilst downward pressure on our input prices led to significant inventory valuation losses.
Additionally, and not included in adjusted EBITDA, the group onetime expenses of EUR 61 million, mainly linked to a performance improvement program, restructuring and personnel interest at our German production asset, Deutsche Edelstahlwerke. Ultimately, our performance in 2023 is obviously far off our goals and ambitions. SSG 2025 includes measures to restore a competitive cost structure and ensuring operational excellence throughout the remaining group. This program includes a comprehensive performance improvement program, with various measures relating to selling, general and administrative expenses, procurement and efficient operations.
Moving from our P&L to our balance sheet. On Slide 11, you can see the development of our working capital. Compared to the prior year-end, net working capital decreased from EUR 1.112 billion to EUR 826 million, as a result of net working capital reduction measures initiated in light of low demand and to safeguard liquidity. Inventory specifically decreased by EUR 251 million, driven by a successful inventory reduction initiative. This corresponds to a reduction of 24% year-over-year.
Further, in line with the lower sales volume, trade accounts receivable were reduced by EUR 132 million. These 2 effects outweighed decrease in trade accounts payable, which was EUR 97 million.
As we turn to Slide 12, you can see that despite the significant losses incurred in the second half year of 2023, the free cash flow for the full year was positive at EUR 85 million. This compares to a negative EUR 54 million in 2022. As discussed prior, the reduction in working capital was the main contributor to this positive development with EUR 286 million. In addition, the net proceeds from the sale of our noncore assets that included the disposal of 7 entities of our international business in Eastern Europe.
Lastly, moving on to equity on Slide 13. In 2023, we saw our equity decreasing from EUR 531 million to EUR 234 million, which is the result of the negative net income of EUR 295 million. Consequently, the equity ratio fell to 12.1%. We are glad that we will have the opportunity to restore our equity position by the contemplated share capital increase of an equivalent of EUR 300 million, backstopped by our major shareholder, BigPoint Holding. Frank will discuss this further in his part.
And with this, I hand back to you, Frank. Please?
Thanks, Marco, for your clear explanation here. So yes, 2023 was a very difficult year for our group. We urgently need to take action and not just because of the sub-foreign equity. The fact that equity has been too low for a company in the cyclical industry for years, especially in comparison to all of our competitors, has also meant that we have been unable to take advantage of opportunities arising from market distortions. In order to move forward, Swiss Steel Group has to strengthen its financial position and its balance sheet, enabling us to fully participate in the markets again. I will now explain the major challenges we currently face, how we are continuing our strategic path and the main drivers for a sustainably profitable future.
On Slide 15, you will see that in this difficult situation, we have 3 main challenges that we need to tackle quickly and efficiently. First, Swiss Steel Group needs to strengthen liquidity and its balance sheet. Second, Swiss Steel Group increases its resilience against external factors and downturns in economic cycles by rightsizing the portfolio, divesting nonstrategic and nonprofitable businesses. We are on the right path here. Finally, we continue to establish relevant competitive cost structures and further improve operational excellence, key to the business and prerequisites for sustainable profitability.
Let's have a specific look on our recapitalization and refinancing. Turning to Slide 16. Reading our 2023 figures, it appears obvious that the continuation of our restructuring, the strategic execution and full participation in our markets, needs a rightsized equity base and clarity on sustainable funding. This will take Swiss Steel Group into the next level of the foreseen development.
After intense negotiations, our team, my CFO, Marco Portmann, the shareholders and financing partners are forward-looking transactions. A capital increase for an equivalent of EUR 300 million, which is fully backstopped by BigPoint Holding AG, and debt funding of more than EUR 800 million have been extended until September of 2028. This underlines the commitment of all relevant stakeholders to Swiss Steel Group and our strategy.
In relation to the anticipated capital increase, Swiss Steel Group and BigPoint Holding have obtained 2 rulings from the Swiss Takeover Board. They have granted a restructuring exemption without conditions for Martin Hefner and BigPoint Holding AG from the obligation to make a public takeover offer. And second, declare the possible introduction of a transaction-specific opting out clause to be submitted to the shareholders of Swiss Steel Holding. The Swiss Takeover Board has approved all applications submitted by Swiss Steel Group and BigPoint, meaning that the legal requirements for BigPoint to carry out the capital increase have been met.
The Board of Directors has invited the shareholders to an extraordinary general meeting today, which will take place on April 4, 2024. The capital increase will be put to vote there. After a thorough examination of various options within the restructuring concept, the approach presented today stands out as the most promising for success. It will be of existential importance for Swiss Steel Group that our shareholders support this proposal at the upcoming Exceptional General Meeting.
Continuing with challenge #2 on Slide 17. It is crucial for our Swiss Steel Group that we gain resilience against future economic downturns. Where do we stand there? Swiss Steel Group was a collection of loosely connected companies without proper integration into one group in the past. Consequently, this resulted in redundancies and processes and non-leveraged synergy potentials. Major acquisitions in earlier years turned out to be false in retrospect.
A lack of strategic fit into the group and long-lasting lack of financial performances turned out to the huge financial burden for our group. 2-week portfolio and market performance means we performed below average in positive economic cycle, and significantly below average in downturn or recession cycles. We consequently decided and started portfolio divestments as one part of the SSG 2025 strategic program.
Swiss Steel Group successfully divested 7 distribution entities in Eastern Europe as well as a distribution entity in Chile and the group's share in the joint venture in China. We are removing complexity and SG&A-related costs from our global distribution network, leading to a headcount reduction only there of approximately 35%.
Our future distribution network will focus on sales of Swiss Steel Group products in relevant markets only. We will stop external trading activities. As a consequence of focusing on core activities and necessities, we signed a binding agreement to sell our former headquarters in the drill areas in Düsseldorf, with an anticipated closing of the transaction in the first half year of 2024.
The contemplated divestment of Ascometal France, Aganang, Mare and Christine, as announced in December 2023, has not been signed yet. While taking negotiations and decisions to a final state, we remain committed to fully divest our Ascometal activities through examination of various strategic options. Our Finkl Steel activities will be kept as a classical participation. The divestiture is currently under evaluation. A lack of strategic and intragroup synergies is obvious.
In summary, it can be said that our unfavorable group portfolio bind is proportionate amount of management and financial resources, and burdens and restrict our core businesses. The results has been being vulnerable in years like 2023, where the economic downturn coincided with our restructuring efforts. This has the potential of a perfect storm. Going forward, Swiss Steel Group's portfolio shall consist of 4 remaining production entities only, compared to at most 11 in the past. We will count on the strong assets of Steeltec in Switzerland, Ugitech in France, as well as a restructured Deutsche Edelstahlwerke in Germany.
As we turn to Slide 18, I will address challenge #3. A competitive cost structure, operational excellence, wealth quality and delivery reliability are prerequisites to fulfill customers' requirements in a decarbonized value chain between steel and final applications. Since we started our [ 20th ] journey in summer 21, several black swan events like the suspension of our profitable activities in Ugitech overall, most entire year of 2022, the surge of energy prices since autumn 2021, a German flood event have swallowed a significant triple-digit million euro amount before we even entered the current recession.
Safeguarding liquidity to reach our target to get to today's refinancing and recapitalization consequently forced us to limit production and sales, even before the year of 2023. In the case of our strategy program, SSG 2025, we initiated a comprehensive restructuring program for our Deutsche Edelstahlwerke in Germany. This initiative comprises performance improvement program designed to cut structural costs by over EUR 130 million between 2023 and 2025. It mainly targets overhead areas, so-called SG&A, procurement and operational efficiency. In 2023, we reached all anticipated targets there. In collaboration with DEW representatives, we have reached comprehensive agreements on the reduction of over 350 jobs, primarily in indirect areas. The majority of this reduction has already been successfully implemented by the end of 2023. The program also includes the organizational separation of Deutsche Edelstahlwerke into 2 legal production entities. The organizational separation has been successfully completed and will allow enhanced focus on the relevant businesses.
With all the mentioned measures, our group's headcount has come down by 10% during 2023, as Marco already explained. We additionally launched measures to increase flexibility in personnel costs, including implementing short-time work where necessary and flexible working our accounts. But there is more work to be done in 2024. This will remain a continuous process. We see further potential to streamline and rightsize our workforce, particularly in administrative functions. This not only as part of our ongoing commitment to operational efficiency, but also to address demographic trends and the shortage of skilled workers.
To summarize, in pursuit of competitive profitability, Swiss Steel Group is diligently lowering costs and optimizing processes to strengthen the group and prepare necessary future growth.
As we then come to Slide 19, we have to look at another important angle to secure a profitable future. It is clear if you want to operate profitability, optimizing the cost base, ensuring operational excellence are not enough, you also need markets with corresponding demand. And these undoubtedly exist for Swiss Steel Group. I would now like to show you what Swiss Steel Group's future potential looks like and how we intend to unlock it. I want to explain why raising capital is crucial for us and also highlight the existing opportunities it brings for Swiss Steel Group in partnerships with our anchor investor, BigPoint.
Turning to Slide 20. I have already explored the main challenges we currently face and how we have made or are making progress in solving them. Now I would like to draw your attention to the 3 major strengths that we will leverage to unlock a sustainably profitable future for Swiss Steel Group. First, our business model and knowledge of recycling and circular economy puts us at a competitive advantage as the race for decarbonized products continues.
Second, our steel is part of just about anything that we need for our daily lives, which means our products are a key success factor for global decarbonization. Third, our dedicated and experienced employees with their mindset for progress are the motor for our transformation and the progress of our customers. I will begin with why our business model and knowledge of recycling and circular economy puts us at a competitive advantage as we turn to Slide 21.
Swiss Steel Group is the largest European electric arc steel producer, which gives us exceptional competitive advantage. Let me explain in brief. There are 2 established methods for steel production, one involves using iron ore and coking coal and blast furnaces, while the other utilizes electric arc furnaces to melt these scraps. Swiss Steel Group exclusively operates electric arc furnaces technology. In short, we may scrap to create steel products which then undergo further processing in the value chain, ultimately being incorporated into products like cars.
When these products reach the end of the life cycle, the collected and processed scrap returns to our mills completing the circular process. On a global scale, we process approximately 2.2 million tonnes of scrap annually. In Switzerland, around 1.5 million tonnes of scrap are generated each year. Swiss Steel Group processing about half of this amount. This practice prevents potential cars on railways and roads, as exporting tons of scrap would be built ecologically and economically in practical.
But there is more. Through the exclusive use of electric arc furnaces, Swiss Steel Group is already implementing future steelmaking technology today. Our electric arc furnace and scrap-based production eliminates the need for coking coal, resulting in minimal direct emissions. Our proficiency in recycling and circular economy, combined with the low emissions electricity, result in carbon footprint for our products that is up to 83% lower than the industry average.
We've received recognition for our efforts such at the German Sustainability Award, which acknowledges pioneering steps towards sustainable future and is one of the most prestigious awards of its kind in Europe. In conclusion, Swiss Steel Group not only leads the way in environmentally friendly steel production, but offers a competitive edge through its low emission steel.
Let's turn to Slide 22 to see why Swiss Steel Group's products are key success factor for global decarbonization. Steel is the backbone of social welfare. Without steel, there would be no roofs over our heads, not tunnels, no bridges, but also no cars for trains, no molds for glasses or PET bottles, no tools, surgical instruments, no watches, microchips, landing devices and airplanes. In short, without steel, our daily lives would look completely different.
As one of the biggest CO2 emitters, the steel sector plays a key role in achieving the EU's climate goals for 2050. And as Europe's largest electric arc furnaces producers, Swiss Steel Group committed to living up to its responsibility. On the back of our low carbon emissions, Swiss Steel Group supplies sustainable steel, known as green steel, to all essential future markets, including mobility, energy generation, medical and aerospace, and thus, makes a significant contribution to the decarbonization of our society.
Efforts must be integrated and leveraged along the entire value chain. Steel is a crucial link in this chain and thus plays a vital role in the essential process of decarbonization. Against the backdrop of climate change and the decarbonization requirements in our customer value chains across various industries, the green stell segment is expected to continue to grow. Already today, we see increased interest and demand for greener products. This confirms the trend to sustainably produce steel, and it supports the global transformation.
Now there is one decisive element missing as we turn to Slide 23. Our employees with their dedication and experience are the drivers of our transformation. It is the dedication, their continued curiosity and strive for improved as going and which will bring our business strategy to reality. The mindset of our employees, curious for new topics, active in their approach and united in execution, especially in the current circumstances, is what keeps us afloat.
Our current approximately 200 active innovation projects are the best proof point. With Ugi’Ring’, we have initiated a project to build the world's first circular steel mill, which is supported by the French government. We are also initiators of the HYDREAMS consortium, which has received a contribution from the European Union that focuses on harnessing green hydrogen from renewable sources to eliminate carbon emissions from heat steel treatment processes.
To sum it up, we are intensifying share development to create new products and meet the growing demand for green steel. We see this as our key to capture more market opportunities. But to really make the most for green steel has to offer, we need to invest more across the board from improving our processes and equipment to expanding our knowledge and easing the way we think. As you can see, with these 3 key strengths, Swiss Steel has every right to play.
On Slide 24, let's turn to the outlook for 2024. Also this year, the main target, of course, is to strengthen our group by focusing on 3 major pillars. First, the capital increase. The envisioned capital increase of EUR 300 million will strengthen liquidity and balance sheet. It shall support our business so we can call the next economic cycle ours. It will allow us to make target investments in product and sustainability innovation. And finally, it will help restore confidence among customers and suppliers. It is of essential importance for Swiss Steel Group that our shareholders support and follow this proposal at the upcoming Exceptional General Meeting.
Second, participation in recovering markets, backed by a capital increase, we will be able to participate in the markets. We've observed a higher rate of request for quotations since the beginning of the year, even if the market has not yet normalized overall. We expect a gradual improvement in earnings in the first half year of 2024, followed by a stronger second half of the year with all respect to the development upcoming days. Further, we will continue to push our green steel portfolio to capture the respective markets demand.
Third, continuation of the SSG 2025 program. Finally, although 2023 was a very challenging year, Swiss Steel Group is determined to continue along a strategic path, a path that has been confirmed by an independent business review. The measures that have already been initiated and that have been additionally defined will contribute to strengthening the group in the long term.
Ladies and gentlemen, it's been a difficult year for us. However, today, we were able to present a plan. The injection of funds by means of a capital increase not only means financial reinforcement, but also serves as a vital step towards securing our future. Looking ahead, Swiss Steel Group will be equipped with the right products and market presence. As we navigate this next chapter, resilient and strategic decisions will guide us. With our and your continued support, we are prepared to face challenges head on.
We would like to thank our employees for their commitment. Our customers and suppliers for their loyalty and our shareholders for their continued trust on the part of a successful transformation. Thank you.
[Operator Instructions] As of now, there seems to be no questions. So I'm returning the floor over to the host.
Yes. Thank you very much for attending today's conference and for your interest in Swiss Steel Group. If you have any further questions or comments, please let us know. We look forward to continuing the dialogue with you. Thank you very much. Goodbye.