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Good day, and welcome to the Q2 2018 analyst/ investors conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Christina Kolbeck, Head of Investor Relations. Please go ahead, ma'am.
Thank you, and good afternoon, ladies and gentlemen, and welcome to our Q2 investors and analysts conference call. With me today is Marcus Ketter, CFO, and Jens Wegmann, COO of the company. After the presentation, we are happy to answer your questions.With that, I'd like to hand over to Marcus Ketter, who will guide you through the presentation. Please go ahead, sir.
Thank you, Christina. Welcome, everyone, and thanks for joining this call. You all know from our ad hoc announcement that we are looking back to an outstanding positive Q2. We're now happy to present a full set of figures and information to you.Let's go directly to Slide #4 to see our Q2 highlights. Shipments are slightly higher than last year's Q2. They're up by 2.1% and are at 1.6 million tons. We have increased our sales substantially by 9.1% to EUR 1.8 billion. That was especially due to the higher price level.Gross profit is up from EUR 339 million to EUR 364 million in Q2 2018, but gross profit margin decreased slightly by 0.3 percentage points to 20.3% due to the less strong automotive sector at Becker Stahl-Service center. The gross profit increase and absolute terms was due to price effects although having to cope with negative FX effects.Let's take a look at our operating results. The adjusted EBITDA is at EUR 85 million, which is above our guidance of EUR 65 million to EUR 75 million. A very strong increase versus last year's Q2. In regards to digital sales this quarter, we surpassed the 20% mark of total sales, which was at 21% at the end of Q2, a plus of 2 percentage points compared with the end of last quarter. And not new to you, due to our ad hoc announcement, we are carefully raising our fiscal year guidance. EBITDA should be now at least slightly above last year's figures. To sum it up, sales increased substantially due to higher price levels. Gross profit is up due to price effect and despite FX.Please go to Slide #5, which gives you an update on our digitalization efforts. As mentioned before, our digital sales share has improved a lot. By the end of the second quarter, we already sold 21% via digital channels. Our proprietary online shop is meanwhile well-known in our industry and customer feedback is great. By now, our shop with marketplace functionality is live in Germany, France, U.K, Austria, Switzerland and the Netherlands and was recently rolled out in Belgium. Our digital union Berlin is also growing. By now, over 80 people are working for kloeckner.i.Let's switch from one platform to the other. Have you seen it? XOM is complemented by new name. It is now XOM Materials. Because new opportunities require new names sometimes. XOM has new participants on board and international technical plastics processor as well as another metal distributor. Now there are 5 vendors on our contract and there are currently negotiations with several further interested parties ongoing. As you can see, XOM is making great progress. Therefore, it's also very nice that it passed another milestone in the last quarter. Material of more than EUR 1 million was sold via XOM by the end of June. Keeping in mind that we just launched in late February. XOM employees work from Berlin, Duisburg, we have already 25 people also growing further.Let's turn our focus from digitalization to operating business.With that, I would like to hand over to Jens.
Yes, thank you, Marcus and good afternoon also from my side. First of all on Page 6. I would like to give you an update on our VC2 initiative, which I introduced in the last call. VC2 is an abbreviation that stands for Value Creation at the Core, indicating our focus on our core business and as such, it drives the transformation towards achieving our Klockner 2022 strategy and related targets.As you can see, the initiative is clustered into 3 pillars. The first one called business models working on developing, existing and new business models with an increased vertical market focus. We are going into a dedicated vertical market with our products and services to create additional value for our customers to make them more successful in their marketplace and as such, we call that pillar customer focus. The second one is profitable growth. Here, we are focusing on improving our business mix, which consist of mainly our commodity business, contract and project business by increasing and improving our higher value-add business and as such, our product-related services. Our main goal is to work around on differentiating activities, thus, this pillar is called differentiation focus.The third one is operational excellence. And it is geared towards harmonizing and digitizing our core processes end to end. So from order intake to delivery. And the main focus here is to optimize our processes and related operational costs to make our supply chain more agile. As such, this pillar is called efficiency focus.Now on the bottom, you can see the reference to already existing programs on the next page with higher value-add business and efficiency improvements.And on Page 7, I would like to give you an update on these, which are, going forward now, an integral part of our VC2 activities. So first of all, on the upper left-hand side, and the status report on our shipyard business as we have previously indicated, we have gained 1 exclusive partnership with Meyer Werft shipyard business in the north of Germany. We have gained experience and know-how now to support this customer in that business and we experienced also our, let's say, supply chain model as a blueprint for other customers in this market segments and we were also able to secure a second large player, let's say, in this business.Another highlight as you know on the value-add businesses is our Becker Stahl-Service. The aluminum activity as reported and I can confirm again, the ramp up of the Cut-to-Length lines, the slitter and the high-speed cutting is on track and as such, our aluminum investment in Germany is concluded. We have a very promising order book with major OEMs. We have passed the qualifications and everything is moving in the right steps to allow us to supply about 15,000 tons in 2018 and we are targeting 80,000 for the next fiscal year. And with that, we can probably say, we are now Europe's most modern aluminum service center.On the right-hand side, you have an update on our efficiency program, One Europe and One U.S. as I said in the future as part of VC2. Here, we have essential gains in both activities. As you recall, in Europe, we are targeting EUR 30 million in 3 years. Basically last year, we captured EUR 10 million and this year, half year we are at EUR 6 million and for the U.S. business, we have a contribution of USD 4 million in the total program targeting $15 million.With that, I would like to hand back to Marcus.
Okay. Thanks, Jens. Let us start with the shipment, sales and gross profit for the second quarter now. Shipments increased year-over-year by 2.1%, quarter-over-quarter shipments increased by 1.3% due to the Section 232 tariffs in the U.S. In Europe, reposit shipments came down by 2.8% year-over-year. Whereas shipments in Switzerland improved year-over-year. Becker Stahl-Service shipments decreased due to a weaker auto sector. In the Americas segment, shipments were up substantially in Q2 2018, year-over-year by 9.0% due to the Section 232 tariff decision and our gaining in market share. Quarter-over-quarter, this increase was lower at 5.4%, but still significant.Sales increased year-over-year by 9.1% significantly, despite a weaker U.S. dollar. On a like-for-like basis, using prior year exchange rate, sales actually increased by 14.5%. In Europe, sales increased year-over-year by 4.8% due to higher average sales prices. Sales in the Americas segment increased by 16.1% due to higher average sales prices despite a weaker U.S. dollar. Adjusted for the currency effect, sales were up by 26.4% due to the positive impact of the Section 232 tariff decision on U.S. prices and due to our market share on taking.Gross profit increased by EUR 25 million year-over-year to EUR 364 million. On a like-for-like exchange rate basis, even by EUR 45 million. Gross margin came down slightly from 23.6% to 20.3% year-over-year due to the weakening auto sector in Europe.In the Europe segment, gross profit declined from EUR 240 million to EUR 209 million. One Europe measures contributed EUR 5 million to the gross profit. In the Americas segment, gross profit increased by EUR 30 million, despite a weaker U.S. dollar, adjusted for the effective tax, the increase would be even EUR 44 million.To sum it up, shipments increased year-over-year with a robust demand in the U.S. and lower shipments in Europe. Sales increased due to higher sales prices despite a weaker U.S. dollar.We will now focus on the EBITDA for the group. In Q2, EBITDA came in at EUR 82 million, after EUR 63 million in Q2 2017. Adjusted by the BPO expenses, that means for our shared service center, therefore EUR 7 million expense and the income from the British Petroleum Deep Water Horizon oil spillage claim was EUR 5 million gain in the U.S. The EBITDA increased to EUR 85 million. We saw a positive volume effect of EUR 5 million and a strongly positive price effect of EUR 35 million due to the Section 232 tariff decision in U.S.The EBITDA contribution of our One Europe and One U.S. measures was EUR 7 million. We also saw higher OpEx for shipping and personnel cost, partly volume driven. The other effects largely related to negative FX effect of EUR 8 million, mainly from translating our U.S. dollar results into euro currency. Overall, the EBITDA margin was without special effects, 4.7%. In Q2 2017 that was 3.9%.To sum it up, EBITDA for Q2 adjusted for special effect was EUR 85 million, strongly exceeding prior year's quarter of EUR 63 million. EBITDA benefited from higher prices in the U.S. as well as from our One Europe and One U.S. measures.So let's focus on our segments. EBITDA before special effect in Europe remained with EUR 35 million, nearly stable to prior year's amount of EUR 37 million. Predominantly as a result of the structure expenses incurred in the implementation of the shared service center of EUR 7 million, mainly for severance. Reported EBITDA came down to EUR 28 million. We saw a negative volume effect, EUR 7 million, mainly due to less toll processing at Becker Stahl-Service center, which was partly offset by increased shipments in Switzerland. One Europe measures contributed EUR 5 million. Thus, the EBITDA margin before special effects for the European segment came in at 3.3%.In the Americas segment, we saw a boost in operating EBITDA, that means excluding the BP Deepwater Horizon settlement gain of EUR 5 million from EUR 32 million to EUR 59 million in Q2. Even though a negative FX effect of EUR 7 million due to the weaker U.S. dollar. With a strong positive price effect of EUR 32 million and also a positive volume effect of EUR 12 million. These effects were driven from the gross profit growth following the mid-quarter Section 232 decision to apply tariffs of 25% and 10% on steel and aluminum imports, and also from our market share gains. OpEx increased, mainly volume driven by EUR 12 million primarily for shipping and personnel expenses, but also due to wage inflation. Accordingly, the operating EBITDA margin for the Americas segment came in at 8.3%. In Q2 2017 that was 5.2%.To sum it up, in Europe, operating EBITDA was largely stable with EUR 35 million compared to EUR 37 million in Q2 2017. In the Americas segment, we saw a strong positive price effect, which led to an overall strongly increased operating EBITDA from EUR 32 million to EUR 59 million.Let us focus on financing here. As you can see, our cash flow from operating activities came in with minus EUR 12 million. Starting from an EBITDA of EUR 82 million, cash out for networking and capital build up were also EUR 82 million. Cash out for interest and tax payments were EUR 40 million and cash in from other operating assets and liabilities were only EUR 2 million. In total, this resulted in a negative cash flow from operating activities of EUR 12 million.Cash flow from investing activities came in at a negative EUR 12 million, mainly from investments in property plan and equipment as well as intangible assets. Last, free cash flow resulted in minus EUR 24 million. Net financial debt caused a currency increase from EUR 472 million to EUR 552 million, also including the dividend payment of EUR 30 million to our shareholders. Negative effects of EUR 12 million and cash out of EUR 12 million for settlement of FX swaps used to hedge the company loans, mainly U.S. and U.K.Let me conclude some remarks on our financing portfolio. Financing remains very solid, with strong headroom on our committed debt facilities of EUR 1.4 billion, of which, currently only EUR 0.6 billion are used, a solid equity ratio of 40% and a low gearing of only 44%.To sum it up, free cash flow came in at minus EUR 24 million, net debt increased notably from the end of the previous quarter from EUR 472 million to EUR 552 million. Nevertheless, our balance sheet stayed very solid.On the next slide, Jens will give us an update on the business outlook for 2018.
Yes, thank you. All right, let's get started with Europe. Last week, Thursday, the European Commission imposed provisional safeguards to protect the European market. In general, we welcome this decision. Of course, it is only provisional. We have to see what happens next. There will be announced another definite ruling until the beginning of 2019.So with the safeguard measures in place, we feel the market's protected from diverted steel, which is good in terms of stability. In the very short time, there might be some volatility in pricing due to the quota frame but nevertheless, prices should find support on the upcoming months. Quota in this respect means, the average over the last 3 years. But in general, we think we will see stable to slightly increasing prices in the current quarter.We're looking at our core markets. It is to say that nothing has changed materially compared to our last call. So overall, the market is good and most of the order books are pretty full.So let's go into the market segment. Get started with construction. This is rather flat this year. Of course, construction business is running good in many countries, but again, we have the uncertainties in the U.K., in particular due to the insolvence of Carillion.Machinery and mechanical engineering is well on track and further growth is expected. Order intake is a positive and right investment growth in 2017. That gives further support for this segment.For energy, we did not see any especially positive indicators. Subsequently, you see it is flat for 2018. Marcus must have mentioned already that automotive is a little bit weaker than expected before because the European industry has to face, let's say, major challenges, especially calming factors are under pressure due to the diesel scandal and some main players are waiting what is to come. One of the other things we're looking at is the so-called WLTP, which is the Worldwide Light Vehicle Test Procedure. Basically a very strong standard to focus on the car emissions and that also creates some uncertainties in some countries.Shipbuilding is building a booming moat in Europe and we expect the market to grow decently in 2018. As we told you before, with our Meyer Werft contract, we are building 3 to 5 crew ships per year. And this order is secured until 2022. And, I guess, this is pretty good news for this sector.Now let's take a look at the U.S. There's also no material change from previous segment outlook. Overall, we are still forecasting approximately 3% growth year-on-year. Although current trends are even slightly better than this.Our construction is running well. Infrastructure construction as well as residential building are promising, and as mentioned before, the infrastructure bill remains a wildcard. If it comes, it would push the sector very much, so of course.Manufacturing and machinery are also very good, underway 2018. Going forward, all subsectors are foreseen to grow decently in 2018. The heavy equipment is expected to grow significantly mainly due to the developments in the oil and gas and mining industry. So expectations for the energy sector remain very strong. Oil and gas, renewable power generation and power transmission continue to grow. Some do extremely well.When it comes to automotive, we are rather flattish in our expectations. The year started slower than expected, especially because fuel is now on a high level since 30 months. However, tax cuts in place, strong job reports, and earnings growth should support the sector for the near-term future. And we still have same expectations for shipbuilding. Currently, we do not see any positive indicators, nor are there any downturns to be expected for the U.S. Therefore, we still see a flat year for this particular sector. Also for the U.S., we think we will see stable, slightly increasing prices in the third quarter, and I think for now, this is it for the outlook of 2018 in Europe and the U.S.
Very good. Let's take a look into Q3 and the fiscal year. The picking season of the year comes to an end. As you all know, our business in Q3 is mostly not as strong as in Q2 due to the seasonality. We anticipate Q3 sales to be rather stable. Our EBITDA is expected to be between EUR 55 million and EUR 65 million, since we're expecting less price effect in the coming month. For the fiscal year as a whole, we expect higher sales due to a higher price level. Due to the latest price increases, we are carefully raising our EBITDA guidance again. [indiscernible] in our ad hoc announcement. We expect that the fiscal year EBITDA should be now at least slightly above last year's results.Thank you for listening. We are now open for questions.
[Operator Instructions] We will now take our first question from Rochus Brauneiser from Kepler Cheuvreux.
The first question is on your digital business. Can you give us an update where you stand in terms of the planned financing round for the materials business? I guess, previously, you pushed back the deadline into the second half. Can you give us a sense, is this more front or back-end loaded? And can you give us a sense, what kind of -- what are the kind of next milestones in terms of the revenues on the platform and in terms of how many vendors do you want to have by September or December? Just if you could give a little bit more data, what we should think about that? In terms of this VC2 first initiatives. Is there anything specifically in the pipeline beyond this outsourcing initiatives you have just built the provisions for? And then thirdly, can you give us a bit more flavor on this quarterly weakness and volume weakness on Becker Stahl-Service. Can you give us a -- kind of a sense how much lower you are in the second quarter versus the first quarter? And how you now expect the second half to progress? Is this just now another weakness in Q3 and you expect some improvement in Q4 when the tests are -- the test results are being provided? Can you probably give us a bit more sense on that?
Okay, very good. So let's start with are digitalization question. We have pushed the financing out simply for the reason that we said we need to have more gross merchandise value on the platform and then the value actually is higher. Therefore, we actually shifted this into the second half and we're still of that opinion. So I think that you're probably going to see it more back than front-loaded when we do the financing in the second half of the year. Numerous parties are strategic about -- from the finance side have said that they are interested in participating in that -- in the first part of financing, where we would give up a certain amount of shares, but we will not go below 50% in the first step just to make that clear. In regards to revenue, we are on the ramp-up phase. So the only thing I can tell you right now is, that of course, [indiscernible] it's not a business plan, but we will keep you posted as we did today, how the gross merchandise value is evolving on the platform. But there are no milestones out there in which we publicly say it for the platform. However, it's in the ramp-up phase right now. Before Jens comes to VC2, Just one remark to the provisions we were taking. The provisions were actually not for the VC2 initiatives Jens was just telling us about. But for the shared service center for our finance organization, where we have approximately 146 people and around 95 people or the jobs of the 95 people are going to be BPO there, and that's why we took provision for -- mainly for severance payments. That is independently of the VC2 initiatives we were presenting. Jens?
Yes, that's correct. Maybe more concrete. What is VC2 all about? It's about creating, let's say, a sustainable plan for growth of the asset and cash to achieve our 2022 EBITDA target, which has been defined as 5%. So starting in 2017, where we achieved 3.6%, it's our starting reference, we want to go towards 5%, and this is a very concrete program. We have now more than 70 initiatives, let's say, defined, only to contribute in our countries and businesses. We have cost reduction measures, but we also have investments to take into our profitable growth activities and business models. And this is what we are working on with the, let's say, entire management team. And we will update you in the next calls, basically about the investments and the anticipated effects.
Rochus, third question was in regards to the auto weakness, first half year and second half year in comparison at Becker.
Yes. Well, basically what we see in the automotive sector is already a very, let's say, precaution of the car manufacturers that, with them we have typically a contract business, where they have the prices negotiated once a year and then throughout the year they can withdraw their quantities and some of the OEMs start to be a little bit more careful now. They're not taking the overall anticipated volumes. It's not a point to be very worried yet, but we are monitoring it, let's say, very closely and in line with that also goes, let's say, the diesel scandal as I mentioned with the WLTP, where we have this emission norm very strictly into place, so the car manufacturers have to qualify and pass a very tough test and once you have done that, you are free to sell your cars. So also here there's a certain uncertainty with what model and with what car we are able to pass this test, not we, our OEMs. Does that answer your questions?
Yes. Maybe on some -- I understand that you don't want to get specific on the revenue target. Is it possible to say from the launch, you now have 5 vendors on the platform. How much longer would it take to get another 5 on the platform? Is it just a question until the next -- until September or what is the kind of thinking we should have on that?
Well, I think September is just around the corner with the summer part. Basically, we already are mid of -- middle July, but we expect to see that actually Q4 that we have more vendors on there. But September, as I said, is just 1.5 month. So that's already another one lined up and we are talking to many others.
[Operator Instructions] We will now take our next question from Christian Obst from Baader Bank.
I have one question concerning your aluminum ramp-up at Becker Stahl. The quantity this year was 15,000 tons, if I got it right? And you are trying to reach the 80,000. What is the impact on financing and working capital? What do you expect? And is there some kind of onetime effect or negative effect on working capital because you have to ramp up the working capital? And how do you try to mitigate any volatility in the aluminum price, that we just have seen the aluminum price comes under pressure. Is there any impact from that kind of volatility in the aluminum price in the Q2 numbers already and how do you handle that going forward?
Yes. So perhaps the last question first, that was the easy one there. So no specific -- there's no real volatility due to aluminum in the Q2 results. I mean, the volume is still way too low in the second quarter to really bring volatility into the P&L. There will be, of course, a certain network and capital effect, but in comparison actually to our overall network and capital we are having, it will be a slight increase. But I don't think that -- we don't expect that this would be really material there. Then also to the aluminum contracts...
Yes, we have contracts and we buy in a very timely way. So our risk is rather limited of the volatility. So in that respect.
So, I mean, additionally, if there are -- we're looking actually to hedge aluminum, but due to the contracts we are currently having, there's no need to hedge, but if there's a big gap between what we are buying and what we are selling in the sense of time. Time like that, actually we could be hedging aluminum because there are nowadays very liquid contracts out there to such a hedging the nonmetal extension.
Okay. And then I have another question concerning net working capital and the impact from your digitalization process. I thought before that selling more via platform via whatsoever on the digital space, would reduce your working capital. So far, I cannot really see this in the numbers if I compare all the quarters. Can you explain the effect this change in your sales mix has on working capital or should have on working capital going forward?
Yes. We actually once said that we will be down by 35% in comparison to 2014, the year to 2019. However, the assumption, of course, was that we were looking at stable prices. Now 2 things actually happened: one is, of course, prices increased significantly as we all know; and secondly, our inventory in tons had some fluctuation because last year, Becker had actually some additional tons in inventory because we saw the prices are strongly rising and that's why we had quite wonderful results at Becker. This year, actually we're taking the inventory now considerably at Becker, which we already did by the way. So we -- that's what it is. So there are always effects in there, which are positive or negative, but still our goal is, what we once said, 35% less net working capital in comparison between 2014 and 2019. However, prices -- any price changes need to be eliminated on this.
Okay. Maybe last question on that. In my calculation, taking the balance sheet on a quarterly basis, the net working capital to sales was approximately 22% in June now, and it was in the years before end of '15, '16 and even end of '17, it was around 18%. Do you think that you can reach this number again at the end of this year?
Well, I'm -- we also have this KPI question, and so I'll tell what we're looking at. We're looking at net working capital of third party and if you take the sales of the last 3 months, multiply them with 4 to get to 12 months to do the division. So we had actually then at the end of June, we had 20.0%, while last year we had 19.9%. So we were actually at the same ratio as at the end of 2017 with that calculation. Perhaps you calculated it a little bit differently, but that's how we calculate it.
Okay. Do you think that we see some kind of a release going forward? Going over the next 2 to 3 years, selling more over the digital channels?
Yes. We will definitely see this. But we also have here the peak this year. So we would expect that actually from now, we will be going down especially in regards to the inventory in the second half of the year, so we expect actually to have positive cash flow coming in and also with the digitalization, we are very much closer to the suppliers and also to our bigger customers and therefore also would expect that inventory net working capital will go down further.
We will now take our next question from [indiscernible] from Jefferies.
I was just wondering if you could give us some color on CapEx for H2. From what I see, H1 is running maybe a bit low. Should we expect a pickup in H2?
Yes. You should expect a bigger CapEx actually, especially at Becker and also in the U.S., we had lower cash out in the first half of the year than in the second half of the year. We still plan actually to have around EUR 80 million to EUR 85 million in CapEx for the total year. We don't -- yes, that's what we made on a gross basis.
[Operator Instructions] There appears to be no further questions in the queue. I'd like to turn the conference back to yourself for any additional or closing remarks.
Thank you, yes, for your participation and yes, have a good afternoon.
Okay. Thank you everyone.
Thank you.
Bye-bye.
Bye.
This concludes today's call. Thank you for your participation ladies and gentlemen. You may now disconnect.