AMAG Austria Metall AG (AMAG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome and thank you for joining the AMAG Austria Metall AG H1 2020 Results Conference Call. [Operator Instructions] The forecasts, budgets and forward-looking assessments and statements contained in this presentation were compiled on the basis of all information available to AMAG as of the present time. In the event that the assumptions underlying these forecasts prove to be incorrect, targets be missed or risks materialize, actual results may depart from those currently anticipated. We are not obligated to revise these forecasts in the light of new information or future events. This presentation was prepared and the data contained in it verified with the greatest possible care. Nevertheless, misprints and rounding and transmission errors cannot be ruled out entirely. In particular, AMAG and its representatives do not assume any responsibility for the completeness and correctness of information included in this presentation. This presentation is also available in German. In case of doubt, the German language version shall be authoritative. This presentation does not comprise either a recommendation or a solicitation to either purchase or sell securities of AMAG. And I would now like to turn the conference over to Christoph Gabriel, Head of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen. Welcome to our conference call for the first half of 2020 of AMAG Austria Metall AG. Today, Gerald Mayer, CEO of AMAG, will present the developments and results of the first 6 months of this year. As usual, after the presentation, you have the opportunity to ask questions during the Q&A session. Gerald, please start your presentation.

Thank you, Christoph. So good morning from my side. Warm welcome from the AMAG team to our half year presentation. I would like to start with our slides, with our highlights for the first half. I think if we look back 3 months, we had a very -- we presented a very good start into the year 2020. The Q1 results were very positive and quite good. After this good start, of course, COVID arrived in March, and we saw a significant, let's say, impacted second quarter, and I will talk about this in the next -- let's say, on the next slides. COVID, in particular, affected our aircraft demand, our automotive demand and also the distribution business, and this resulted in a reduced revenue top line, a number of EUR 463.8 million, and this translates into, let's say, a decrease of roughly 16% compared to the prior year number. I think we managed quite well to reduce structural costs, fixed costs according to the downturn in capacity utilization. So this was managed quite positively, and you will also see the impact on the next slides. EBITDA, as a result of this management of cost, was EUR 59.3 million after EUR 72 million in the previous year. I would say, not too bad. And net income was positive for the first half and also for the second quarter, despite the significant COVID effect. What was very positive was our cash flow position. If you -- we will talk about this in a little bit more detail later. We had a positive operating cash flow of EUR 70.6 million, and this is above the prior year's level of first half 2019. All in all, I think COVID resulted in many measures we undertook. On the one side, of course, we reduced costs. On the other side, we also pushed back some CapEx initiatives but we sticked to all the strategic necessary CapEx projects. And so of course, we will see a reduction, but not a significant one. For the outlook, 2020, I think despite the fact that it is very difficult to forecast, we are quite convinced that there will be in the range of EUR 80 million to EUR 100 million EBITDA as of today for the whole year 2020. So let us turn to the next page. This is the heat map page of the purchase manager index for our, let's say, industry. And if we look at the color code here, red is really, really bad. And this is exactly -- I would say this, for us, for our industry, a very good, let's say, early warning indicator. And it's dark red, of course, as we saw it April, May is really negative. But what I want to point out here is that we also had a year 2019 which was not too positive. It was in the red already, in particular, in the Eurozone and in Germany, which are very important markets for us. Then we saw COVID with significantly negative and dark red colored PMIs. And in June, it started to recover, at least a little bit and dark red turned into light red, which is still not positive. And this is also roughly the picture we saw in our order intake book. March to, let's say, April to June, we were down roughly, I would say, compared to the prior year, 40%, 45%. And in July, it's getting a little bit better. Slide #6, you see the comparison of aluminum price or development of aluminum price and alumina price in the last quarters. What we saw in the first half 2020 compared to the first half 2019 is a 12% decrease in aluminum price, which is, of course -- has a negative impact on our numbers. On the other side, it was compensated by a lower alumina price, which was reduced -- which was -- which decreased by roughly 30%, and I would say, normalized again. Let's look back 1 year when we discussed the first half numbers 2019. I reported that it was still difficult with alumina. It started to normalize at this, let's say, 1 year ago after a period of very high alumina prices. But we are more or less back to normal, I would say, with regard to alumina. Slide #7, shipments. Yes, COVID, of course, resulted in a decrease in shipments, in particular, as I mentioned before, for the aircraft industry, automotive industry and also for our distribution business. So we are down in terms of volume by 10%. If you look to the bottom of the slide, you see that in Metal Division, our primary metal business from Alouette is up 1,500 tonnes compared to the prior year, first half, first 6 months of last year. In Casting, we lost roughly 10,000 tonnes; in the Rolling Division, roughly 14,000 or 15,000 tonnes compared to the prior year, and this was mainly from aircraft and automotive, as I mentioned before. Next slide, Slide #8. You see here the impact of what I mentioned before to our top line. Of course, as the aluminum price is down and as volume is down, we also have a significant impact on our top line. It is down by 16%, roughly. And the bulk refers to our Rolling Division. If you go to the bridge at the bottom of this slide, you see, prior year, we saw a top line of roughly EUR 550 million. Now we have EUR 460 million. If we go through the bridge, there's just 2 things to mention. Volume-wise, we lose roughly EUR 60 million, where more than EUR 50 million referred to Rolling -- to our Rolling Division. Regarding aluminum price, we lose roughly EUR 30 million and also, I would say, more than half of it refers to Rolling Division. So this is the main deviation we see in our top line. EBITDA, next slide. Regarding EBITDA, we are down 17.5% from EUR 72 million to [Audio Gap] quarter. To my opinion, it is also -- it was -- we managed it quite well, and it's still a very good number, what we delivered here for the second quarter given the difficult environment. From aluminum price, we lose roughly EUR 12 million, and we have other prices for our downstream products. For example, we lose another EUR 5 million. So margins were also down. And in addition to that, we see positive impact from raw materials, thus EUR 26 million. The bulk refers to alumina, which, let's say, the positive effect, it's up to EUR 17 million from alumina only. And then we have other raw materials like pet coke. For our upstream business, we have scrap, which is down in terms of prices. And this all has positive impacts and supported, of course, our result here. It is not surprising given the past. It's always when aluminum is down and the markets are down, volume is down, that also raw material prices decrease. Volume-wise, we lost roughly EUR 25 million in EBITDA, and then there are some other effects in it. And so this adds up to EUR 60 million. What is worthwhile to mention is that, of course, we have positive impact as we adjusted our cost structure there. Short time work, of course, is quite helpful, but we also reduced all the -- I would say, all the fixed cost, structural cost line items according to the reduced -- let's say, to the reduced capacity utilization. So there are many positive impacts, I would say, in there. On the other side, we have some negative impacts like a settlement. It's a one-off settlement of hedges, which were necessary as we lost at the reduced, let's say, some volumes from our customers, which had an impact on adjusted FX settlements of EUR 5 million negative in this first half 2020. Yes, let's have a look to the segment, the EBITDA by segment. And what you see here is strong compared to the prior, very strong first half of our Metal Division and, of course, a very weak one from, in particular, Rolling. This is what this slide says. But let's look back 1 year. First half, if you remember, we can remember, first half 2019 was very positive in downstream, means Rolling, in particular, and Casting. It was very difficult in upstream because of tariffs and high alumina prices. The second half was vice versa, so it changed. So we had a strong, very strong first half in Metal Division, and we had a difficult first half for our downstream operations. What we saw in the first [Audio Gap] effect and Metal continued quite strongly as we ended the year 2020. And this has to be always included when you analyze the first, let's say, half and this deviation or this comparison of the 2 first half '19 to '20. And so this is the main reason why we are up in Metal. Of course, the lower aluminum price was more than offset and compensated by a lower raw material prices and, of course, reduced energy costs. As you might know that our energy contracts, power contract at Alouette for our smelting operation is more or less a formula that is directly linked to the price of aluminum. And so there, we also have a positive effect in the -- let's say, cost-wise. And then we have some positive currency effects also included in the plus EUR 14.5 million. Yes, I would skip the Casting, but the most interesting one is, of course, Rolling Division. We are down here EUR 28.4 million. Of course, it is the volume which has a significant effect here, if you look at that number. And as I mentioned before, it was a very strong first half last year. And we also would have had, I would say, a negative deviation here excluding COVID this year, as it was very strong last year in the first half. In addition to that, as I mentioned before, we have a EUR 5 million negative effect there from FX settlements, which we had to do as we lost some customer contracts and they were canceled and we had to reduce the numbers here. Yes, Service is slightly positive. This has to do with intercompany transactions, more services provided, in particular, IP-wise to our segments from our Service segment, shared services. Then, let's have a look at Slide 11 this. This is a view of Q2. Q2, quite similar to the first half. Of course, it's a little bit -- perhaps the effects are a little bit stronger here, of course, as it is the difficult quarter, second quarter only. But I think we don't have to go into details here, but you also can see the significant impact from volumes. And if you -- what I just explained to you that for the first half, we had a negative impact in volumes of EUR 25 million, just EUR 21 million only refer to the second quarter. So it has really significantly affected our numbers. Net income. Net income is first half EUR 12.4 million compared to EUR 18 million last year. I would say, not bad given this environment and also the second quarter was positive as I mentioned before. There are also some effects included from foreign currency translations, in particular, in the financial result at the bottom of, let's say, this slide, you see it in the bridge plus EUR 2.4 million. Next slide, the summary of our key figures also includes at the right of this graph the Q2 numbers. And you see here the EUR 1 million roughly net income after taxes for the second quarter, which was quite positive. Very positive on the next slide is our -- let's say, what we achieved regarding cash flows. Cash flow from operating activities was up compared to the prior year, EUR 70.6 million compared to EUR 63.7 million. Given the lower result, I would say, a positive achievement on the one side. On the other side, of course, it is also affected to a lower aluminum price. So working capital came down. Cash flow from investing activities. Yes, we simply -- I think also badly as planned, but we also pushed back some CapEx projects which are not necessary given the expected volume development in the next month, let's say, years. Free cash flow was positive at EUR 45.8 million, therefore, compared to EUR 24 million in the prior year. So cash flow-wise, very positive first half. On the next 2 slides, you see our financial position, which is also, I would say, very comfortable. You see that net financial debt came down to EUR 250 million roughly by 15%, of course, given the fact it's very, very positive. We also did, in particular, in the beginning of COVID, everything to secure liquidity and, let's say, the financing position of AMAG for the next years. And on the other side, we prepare ourselves because we will pay back roughly EUR 100 million at the end of the year existing facilities. Equity-wise on the next slide, you see that equity is up by 4% compared to 31st of December 2019. Of course, it still does not include the dividend because we just paid it out this week after our General Annual Meeting. And gearing is down from 47.3% to 39% roughly. So we are very well prepared also for a longer-lasting COVID. And for me, I am convinced that we will see the impact from COVID, let's say, also in the next month, most potentially also for some years. Metal Division, Slide 17. As I mentioned before, it was really positive the first half. First quarter was positive. Second quarter was positive, of course, with some impacts of a lower aluminum price, but on the other side, more than compensated by lower raw material [ flat ] prices. We had a good production level compared to last year, roughly 3,000 tonnes more higher production than we had last year. Operations are doing quite well. Last year, there was still an impact of our, let's say, ongoing pot relining activities. We completed those pot relining activities in the first half of last year. This is also the reason why we could produce more. And all in all, the operations are very well and running very well. At Alouette, we are running the operations 24/7 at full capacity. In addition to that, I mentioned in the third bullet point here that we had positive valuation effects with regard to currency fluctuations. The amount here is EUR 2.5 million roughly. Let us go to Casting Division. In Casting, I would say, given this environment and given the fact that we are really depending on automotive, was also very positive with EUR 1.7 million. This also reflects that for us, as we are an integrated plant, we manage to support our Rolling Division from Casting. So this is a win-win, I would say, an internal win-win-win and this softens the effect when automotive demand is reduced. And if you look at the external shipments, which are at 23,100 tonnes compared to 31,400 tonnes, this is more or less -- translates into reduction of automotive demand. Next slide, Rolling Division, our biggest division. As I said, the impact is significant here. Second quarter Rolling EBITDA is down from EUR 33 million to EUR 14 million or EUR 15 million roughly. Total shipments are at 105,000 tonnes roughly with a strong first quarter. As I mentioned before, in the second quarter, we still have 50,000 tonnes roughly. And what we expect here in the next month is simply based on our order intake and on our order backlog position. We entered into this, let's say, COVID time with a strong, I would say, order book and this softened, of course, the effect of the lower order intake. And to give you a flavor, the order intake is down roughly in the second quarter compared to the prior year by 40%, 45%, all in all. So it's really significant for a capital-intensive company like AMAG. In July, however, it is better, doing better. So we are right now, as we speak, down by roughly 20% or 25% compared to the prior year. So order intake is way better than it was in the last 3 months, but it's still on a very low level. But I would say this, perhaps, we see some light at the end of the tunnel, in particular, for some industry -- industries. What we expect internally is that it will be a challenging time or will stay quite challenging for the aircraft industry also for the next year and perhaps 2022 as well. It should turn better in automotive. This is also what we see in the current order intake from automotive which is doing way better than in the last, let's say, 3 months. And so we'll see. It's still foggy, I would say, out there. The visibility is quite low, but what we see is some improvements here in particular in the last 3 weeks. Yes. And I mentioned, I think the EUR 5 million effects of FX settlements before many times. So I would like to skip it here. On the next slide, you see that we paid out the dividend. The shareholder structure, I would like to skip this as well, and let's talk a little bit about the outlook. All in all, if we have a look at the market and what CRU says and expects regarding demand of rolled products and also primary aluminum, the expectation is that we will be -- we will see a decline compared to prior year of roughly 9%, which would reflect in a minus of, I would say, roughly 12% compared to the expectations we had at the beginning of this year because we, of course, expected growth number and not a lower number. Of course, these reductions, in particular, come from one sector, and this is transportation. Aircraft and automotive are down definitely, definitely way higher than minus 9% for this year. So we expect really a way bigger downturn in demand here for aircraft and automotive and communicated build rates by aircraft suppliers and also [ during ] the situation from automotive [ rules ] that, I would say, all over the world right now. Although distribution is down because distribution, to a big extent, also supplies the transport industry in these sectors. Yes, our positioning, strategic positioning, I will say, is definitely supportive. We have also -- we're also supplying, as you know, the packaging industry, for example, which is not down, which is slightly up this year. So there, it is, I would say, a big advantage right now having a widespread portfolio. We have also other industry products, for example, for cathode sheets for the zinc electrolysis industry, just one example, which is at -- let's say, at our budgeted number. So quite okay. So some plus, some minus. And all in all, it is and it will stay a difficult year. And what is helpful right now is our order book from the first -- from the pre-COVID time. And this will be useful also in the next month. For the next month, you also have to bear in mind that this is our normal period of maintenance. So in August and in December, we have maintenance weeks. So the volume, all in all, is quite normal that it is lower in the second half than in the first. And so this all -- having all this in mind, this adds up then, and we did our forecast scenarios and those add up to EUR 80 million to EUR 100 million range of EBITDA roughly with all the uncertainties we have right now. So -- and this was now my presentation, and now we are very happy to answer your questions. Thank you.

[Operator Instructions] The first question is from Markus Remis of RCB.

Let me start with the question on Q2 cost base. Can you help us understand the savings effect from the short-term -- short-time work scheme at [ Ranshofen ]? To which extent or how much was the relief here? And then going on into the third quarter, if you will still have the same magnitude of short-time work or if it will basically impact lower number of employees?

Yes. Thank you, Markus. I would say, look, what we did is our target, and this was how we do this approach. We said to our people and to our operating units, we have to -- the target is to reduce fixed costs, structural costs, also labor costs minimum at the level, let's say, of reduction of capacity utilization. This is for some areas easier than for others. All in all, we managed it quite well, as I mentioned before. And I would say, the total number of reduction of labor costs in the second quarter was roughly EUR 8 million. And this includes everything from short-time work effects also from, of course, consumption of vacation time and, of course, of reduced bonuses and so on. So many things add up to this number, roughly. And yes, I expect a similar effect also for the third quarter now. And for the fourth quarter, of course, we have to wait a little bit how things will develop. But believe me, one thing, in case things do not get better, we will see a similar number. This is simply my expectation as of today. But right now, we are working and steering our company from week to week, from fortnight to fortnight. So this is how we do it right now. But yes, this is roughly the approach.

Okay. Then on the product mix in Rolling, we're getting some bad news from the aircraft industry with regards to lower production rates and so on and some 747 being stopped in a couple of years. I mean to which extent was the lower production of aircraft already reflected in the second quarter? Or is that something that will only be realized in the second quarter?

First of all, one thing to add to your first question. There was also a positive effect included in the first half of jubilee provisions as interest rates change from roughly EUR 1.5 million. If you look to our mix situation, you know that we supplied in the first quarter also, and this is our general, I would say, mix, roughly 15% to the aircraft, roughly 11% directly throughout the automotive industry [Audio Gap] So this adds up to head to 20%. Those are the 2 most affected, I would say, industries. Regarding aircraft, what I can tell you here is that we started really strong into this year with a good order intake, high production levels. We maintained high production levels for aircraft, in particular, also in the second quarter. As the process started, then you do not stop to produce those materials. So the value add, more or less, was done, the production is done, and now we wait to ship the aircraft blades or sheet. What I expect for the second half is hardly production, just minor volumes to be produced for the aircraft industry. This will start then again next year. So -- but we are -- we simply finished off the workloads that we do not have then, let's say, semi-finished aircraft products on stock as they are so sophisticated and complicated to produce on the one side and to maintain the high level of quality, and do not risk then, let's say, a quality issue there. So means the production for those -- for this area is more or less done as of 30th of June. But the shipment will happen then throughout the rest of the year. This is aircraft. And we only -- we also do not have official numbers up to now from, let's say, our customers there. We have some numbers for, let's say, this year, into March, perhaps 2021 from our biggest customers, means Boeing and the others, of course. And for them, I would say, what we produce right now is reflected in those numbers. So this is what I expect. And this is what I personally also expect for next year. And we will have perhaps a different way to produce it, which is then spread throughout the year. Regarding automotive, yes, it was also -- of course, order intake was more or less 0, let's say -- 0 is perhaps too harsh, but it was not really there in the second quarter, but it's picking up again. As I said, we had a very good order intake in the first quarter, also from automotive. So perhaps we will end up, I don't know, at the 70% for automotive compared to our plan, which is not so bad, I would say, for this year. And this is our expectation, which is also reflected in the outlook numbers. And for the rest, packaging will stay positive, cathode sheet for zinc electrolysis will stay positive, more or less at plan. And distribution business will be interesting. We also see some recovery here. But we also supply significant volumes to the states, for example, and they are late, and they're a little bit delayed regarding the COVID development. And so it will take some weeks that we see, let's say, picking up demand there. So this is my expectation. But it's difficult. Visibility is low, as I mentioned.

Okay. How is the pricing [Audio Gap] for 2020, you could share that with us? And then also the dynamics in terms of the working capital development in the second half. The maintenance [Audio Gap] until the end of second...

CapEx, my...

[indiscernible] business?

Yes. CapEx, my expectation is between EUR 60 million, EUR 65 million for the whole year. As I said, we pushed back some of the projects a little bit to stay cautious here, but we did not -- we did definitely do not push back strategic necessary CapEx projects. For example, we had one project which is referring solely to the aircraft industry, which should have, let's say, eliminated a bottleneck. Of course, it is not necessary to push on that too hard right now, and this is easy to -- let's say, to be postponed. And this is what we do right now. But we do not stop in terms of R&D. We do not stop in terms of doing important CapEx projects. And also regarding manning and then our employees important and qualified, if you get now well-qualified people, then, of course, we hire them as well. So this is what we do right now. And regarding working capital. The bulk of, let's say, the positive effect was -- is referred to the lower aluminum price. Volume-wise, it was more difficult. As I mentioned before, we produced aircraft sheet and blade, in particular, blade, for example, which is now a semi-finished or finished product at our site in Ranshofen store and waiting for being delivered. So this also was -- this was even -- I would say, volume-wise, we are definitely higher than we would be in a normal environment. So what I expect now for the second half, we see right now an aluminum price which was picking up in the last weeks. We have more than USD 1,700 right now. So here we will see, again, perhaps a negative impact. On the other side, I expect the positive impact from the reduced, let's say, volumes are now on stock for the second half until year-end. Perhaps all in all, it should be worse. We'll see.

The Next question is from Christian Obst of Baader Bank.

Most of my questions, of course, have been answered and asked by Mr. Remis so far. Nevertheless, I have [Audio Gap] possible impairments. So there are discussions starting with auditors and within several companies that they have to look for assets impairments because of lower expectations going forward. Are you in discussion with your auditors concerning these kind of impairments as you have invested very heavily over the last years to improve your capacity? This is one question. And then concerning structural adjustments, of course, you gave some indication concerning aircraft industry or automotive industry and so on and so forth. But when short-term work is running out, so what is your current plan? Maybe it could take more structural adjustments. Or when you have to take more structural adjustments on your cost side going forward, is it at the end of the year in Q4 or first half 2021 when things are not really improving?