Danieli & C. Officine Meccaniche S.p.A. (DAN) Earnings Call Transcript & Summary

Welcome to the Annual Meeting for the presentation of the Danieli Group's financial statements, a strongly desired moment of sharing and an opportunity to take a look at what has been done at future projects and the challenges that await the group. The following people will be speaking on these issues with detailed figures and achievements. Audit Competitiveness, Vice Chairman, Michele Marinutti; Finance and Administration Director, Andrea Deana; Danieli Group Chief Executive Officer; Giacomo Mareschi Danieli; Danieli Group Technical Manager, Rolando Paolone; Danieli Automation, Digi and Mets Chairman, Antonello Mordeglia; Danieli Automation, Digi and Mets CEO, Alessandro Ardesi; ABS Chairwoman, Carla De Colle; ABS Chief Executive Officer, Stefano Scolari, ABS Vice Chairwoman, Anna Mareschi Danieli; ABS Chief Operating Officer, Giacomo [indiscernible], Danieli Group Vice Chairwoman, Camilla Benedetti; Group Vice Chairman and Chief Financial Officer, Alessandro Brussi, Danieli Group Chairman, Gianpietro Benedetti. Together, we will analyze the results of the 2020 to '21 financial year for the Danieli Group, results that have exceeded expectations. This can be seen in the numbers, i.e., revenues, EUR 2.8 billion; EBITDA, EUR 250 million; net cash flow, EUR 1 billion. These data confirm the stability of the group, which in a continuous search for innovation, is developing and implementing new green technologies. What has been done is, therefore, the first question we'll be answering today focusing first of all on the plant making division, specialized in the design, manufacture and installation of plants for steelmaking, nonferrous metals and energy production industries.

Michele Marinutti, what were the economic results for this sector?

The plants making division ended the 2020, 2021 financial year with earnings amounting to EUR 1.8 billion, an EBITDA of EUR 153 million, an operating result of EUR 100.7 million, showing 30% growth over the 2019, 2020 financial year; and an after-tax profit of EUR 62.6 million. The economic results are improving in spite of a 14% decline in earnings confirming the work we're doing with a focus on augmenting performance. We're feeding a virtuous circle whose starting point is per capita productivity which sums up our ability to size the structure in keeping with the real workload quickly, flexibly and without suffering oscillations on international markets. The second key factor is competitiveness that we have increased by cutting inefficiencies in half, optimizing the third-party structure and completing the program of redeveloping the unprofitable product lines. The 30% increase in the operating result is thus the sum of restored per capital productivity and increased competitiveness. This results in a greater ability to generate cash flow, which is essential for new investments. supported by this virtuous circle and by an order backlog, that in June came close to EUR 3 billion. Over the next 2 years, our objective is to hold steady but well above EUR 2 billion in turnover and to further consolidate all the economic and financial indicators.

Andrea Deana, how would you characterize the group's financial position and in particular, for the plant making sector?

The group's financial position continues to be strong and positive, exceeding EUR 1 billion of net cash on hand. It is important to bear in mind that Danieli has been able to maintain this level of liquidity for many years now in spite of the uncertain economic situation. This is certainly one of the keys to the group's present and future success. In fact, maintaining this level of cash flow allows us to face without significant financial stress, the technological challenges connected with the manufacturing of increasingly innovative plants, while at the same time, handling the inevitable market fluctuations or exceptional events, like COVID-19. Looking up the numbers in detail, the plant making sector has a positive net cash flow of about EUR 1,130 million, which offsets the debt of about EUR 130 million for the steel making sector, necessary for financing the working capital in support of turnover and funding new investments like the QWR wire rod rolling mill.

Let's talk about the sustainability report. What is it? And what does it tell us.

According to economic and financial indicators, we've seen that we are capable of generating wealth, and it's important to stress how we've distributed it among the areas in which we operate. After deducting the intermediate costs of production from revenues, the total added value was distributed as follows: primarily for personnel, EUR 441.4 million for both wages and company welfare policies, followed by the public administration on the rise in both absolute and percentage terms. Shareholders are also to be mentioned, who receive dividends amounting to EUR 11.1 million in 2020, 2021, but every year, invest almost all their profits back into the company's equity. And there's also Danieli's significant and constant commitment to initiatives for the cultural development and artistic upgrading of the urban areas where it is present.

This then is the financial year in numbers. Now let's talk about start-ups. Rolando Paolone, what were the most significant events of the past financial year as it relates to start-ups of new plants and technologies?

In long products, we have 2 media, mini mills, Nucor Sedalia and Nucor Florida, confirming that in North America, endless rolling is the best available technology. China saw the startup of Pinggang, the media but delivers 1.3 million tons per year, the world's most productive. In North America, Nucor Gallatin is the benchmark for strip plants in that area, a complex revamping successfully managed during a period when production is the priority. With Hoa Phat in Vietnam, we've already attained and surpassed 1 million tons of strip steel produced. And in flats products for Severstal in Russia, we've completed 1 million tons per year picking line, among the world's largest. We've strengthened our presence in China of steel works with electric furnaces, thanks to the plants in Anuchangjang, [indiscernible] and [indiscernible]. The electric furnaces with continuous charging at Deacero in Mexico and Severstal in Russia, further consolidates Danieli's technology. In Italy, Daniele Centro combustion has completed the startup of 2 heat treatment furnaces for Marcegaglia. Danieli Breda continues to spread its extrusion prices throughout the world, the last 3 in South Korea, [indiscernible], Canada, Spectra and Spain. At Erdemir in Turkey, Hanjin and Janus Chegg in China, DCMK has started up 3 slab and billet grinding lines. But above all, the year that has just ended the start-up of the quality wire rod mill at ABS, where among other things, we produced wire rod at a speed of 476 kilometers per hour, a world record.

And looking to the future, what are the most important orders.

Two direct reduction plants with low CO2 emissions ready to reduce them to zero as soon as hydrogen is economically available: in Russia, for OMK; and in China, for the Hebei Group. We're consolidating our relationship with many of our historic customers. For example, BSRM in Bangladesh with a new wire rod and bar mill; Costco in Korea, with our bar rolling mill; Evraz Tanker in Russia, with the revamping of a continuous casting plant; Met Invest in Ukraine and are Arvedi in Italy with 2 cold complexes and a grinder mill to process ferrous metal scrap. Danieli Corus consolidates its leadership in the world of integrated plants with orders for major revamps for JSW in India, Severstal in Russia, Isela Mittal in Kazakhstan and Cliffs Natural Resources in the United States. We would particularly like to congratulate our Dutch colleagues for an excellent performance, historic sales record and economic result. A major order in Germany with Thyssenkrupp for Danieli's Centro combustion with 2 slab heating furnaces, each with a capacity of 380 tons per hour. Long products have consolidated their presence in the world with orders for rolling mills, spooler lines, welding machines. in Turkey, China, the United States and Russia. Electric furnaces also confirmed their leadership with orders in China, Russia and Egypt. Important after many years is the first British steel project in the United Kingdom to increase the capacity of the continuous caster up plant . I would also point out the 2 casters for 1,200 millimeter big rounds in China for Zhenglong and continuous casters on this scale are unique in the world. I would like to point out that 2021 was one of the most important years in the company's history in terms of order intake. And that's not all, we're expecting further growth in '21, '22.

A key issue at Danieli and crucial for always staying a step ahead. Digimet is the business unit that handles digital promotion for the Danieli Group. What kind of year was it for Digi and Met?

It was an important year. We implemented 3 major projects that are the Danieli Group's response to the customers' needs in the field of digital technologies. These are software solutions based on IoT technology, addressing crucial aspects in the operating life of a metal production plant, such as running the process, product quality control and analysis and monitoring and optimizing energy consumption. With Danieli intelligent plant installed for the first time at the ABS quality wire rod mill, we created a new mode of interaction between operators and a highly automated production process.

What is the human machine relationship model that you intend to develop?

The operator is an integral part of continuous improvement and by dialoguing with software, he or she becomes a key player. The same guiding principle led to the development of Q3 premiums, a tool that supports customers in promptly and actively managing the product's quality requirements, exploiting the use of advanced techniques of data collection statistical forecasting and artificial intelligence. On the same technological basis, we have developed a consumption collection platform that relates to the production schedule to the use of the different energy carriers that power the plant. This is a tool in the hands of energy managers to optimize the energy cost of reduction but also the first piece of an intelligence system that will make it possible to draw from the different available energy sources, both conventional and renewable, thus minimizing the environmental footprint of production.

In terms of sustainable industry, what is Danieli automation doing?

Danieli Automation's road towards green industry began several years ago. The global trend towards sustainable industry is now irreversible. Today, we have a large number of digital industrialized and high-performance products. suited for both supporting the operator and respecting the environment. And this gives us a technical and time-related edge on the market, placing us far ahead of our competitors.

Can you give us an example?

We've recently installed a Digi melter at Tokyo Steel in Japan with an energy consumption of EUR 12 million per year for processing. It guarantees an overall cost reduction of approximately 25%. This saving can significantly change the company's economic result but also drastically reduce CO2 emissions into the environment. This was achieved, thanks to the skill, vision and undisputed economic and moral support of our shareholders. The global green trend requires everything to be based on electric power as the sole source, both for direct use and for hydrogen production. Having the product's know-how and the economic resources to further grow in the green sector will allow Danieli automation to maintain its undisputed global leadership in this sector.

Now let's talk about the group steel making division, ABS, which makes special steels for sectors like automotive and energy. What kind of year was it for you?

Our field has historically been a highly dynamic one. During the 2020, 2021 financial year, we experienced 2 distinct moments. In the first half of the year from July to December 2020, our customers' propensity to purchase was very low due to the reduced confidence connected to the health situation. In early 2021, the trend rapidly changed, and we soon returned to full production capacity, thanks also to our time-tested ability to be flexible and reactive in response to market oscillations. During the tax year, our order backlog saw a significant improvement. We went from playing by year and being able to see only a few weeks ahead to having an order book of several months. This is surely thanks to our improved customer confidence, but it is also an effect of our solidity, well represented by the continuous innovation of our processes and the development of new products.

What were the significant events of the last year?

We restarted and are carrying out production at full capacity at our site in Croatia at Sisak. But in particular, in early June, we inaugurated the new QWR quality wire rod 4.0 plant at EUR 190 million invested for the production of quality wire rod at a plant unique in the world for its technological and digital solutions that allows us to expand our range of products and be Europe's only producer that can at a single site, offer a complete range from 5 millimeters to 500 millimeters.

What challenges did you face? And how did you respond to them?

The market we operate in is subject to fast changes. Unlike the past, these variations are occurring more and more frequently and require us to be increasingly re-active and flexible. We have been able to respond to outside factors and to the strong fluctuations resulting from them. With tenacity and everyone pulling together, we transformed difficulties into opportunities. by capitalizing on our strong points while working as one and with passion.

Can you give us in detail some numbers for the 2020, '21 tax year?

We shipped just under 1.2 million tons of steel to 46 countries. Operating revenue amounted to EUR 937 million, more than 40% better than last year, and we achieved an EBITDA of EUR 97 million. In spite of the economic situation, we continue to invest. EUR 92 million was the amount allocated to a variety of areas such as safety, digitalization, plant efficiency and the development of new products. We're satisfied with the results, but we must always have the ambition to improve with our values as a beacon of customer centricity, people and sustainability are our priorities. Through constant commitment to improving ourselves, we wish to satisfy our customers' needs by proposing innovative and sustainable solutions. Internationalization is therefore another key issue and a factor for success.

Anna Mareschi Danieli, what are you doing in that area?

The future of ABS hinges depends on an increasingly decisive presence on the European market. We're, therefore, assessing a series of investments to achieve this goal within the next 3 to 4 years. We're focusing particular attention on the raw material sector, given that steel is produced either from iron ore or from scrap. We are in a transitional phase. In China, there is currently a high imbalance in favor of integrated plants and has declared its unilateral unconditional commitment to decarbonize the economy by 2060. Europe, too, with the green new deal, has stated its intention to proceed with a robust decarbonization of production, focusing on other forms of energy, like hydrogen.

How is this transition to be pursued?

The most effective and efficient way to do it is to transition from integrated to electric processes. Consequently, there will be increased demand for scrap, which we know is becoming more and more scarce and therefore, a highly desired resource, a fact that will lead to the need to find alternatives to this raw material. But we're not stopping here. We are considering investing in plants for the production of finished products also through potential partnerships. We think that over the next 6 to 8 months, we'll select 2 or 3 possible investments and then choose the definitive one in relation to industrial added value. ABS' consolidation in Europe will be handled through the ad hoc institution of a purpose sister company.

So the theme is green, green steel, steel produced by wind. Let's talk about this subject as well as the group's significant events with the Danieli Group's Chairman, the engineer, Gianpietro Benedetti.

Good morning. Steel produced with the wind, what a great expression. Behind me is a direct reduction plant powered by wind energy. We, from the electric steel works, are, by definition, CO2-free. Since an integrated plant, which is to say, coal-powered with a blast furnace, produces 2.3 tons to 2.5 tons of CO2 for every ton of steel. Well, an electric steelmaking plant produces 0.35 tons. Producing steel in an electric melt shop, our main product is clearly green. In spite of this, with our electric steel works, we're working towards reaching net zero or zero emissions over the next 10 to 15 years. And to reduce by 25% to 50%, the emissions from steel production using coal. So in 2030, we'll achieve the goals proposed by the European Union, and we hope in 2050, too. But hopefully, the same rules will be adopted by third countries, too, so as not to compromise the competitiveness, and therefore, the very existence of Europe's steel works. In fact, to pursue this objective, Steelworks must invest heavily in plant upgrading. So we have the technologies. We have a positive attitude because it's a major opportunity for many, but also for Danieli. As regards to the year's main events, I'd say, the first place goes to the successful start of Zhao Zhang, Zhengtang in China, the first direct rolling plant, meaning that it operates without reheating furnaces. This means less CO2 emissions and more competitive product costs. A plant that gives us the opportunity as the coming months will show to be frontrunners in flat product technology as well. In America, what we call Midas, which is to say, regional mini mills perfectly suited to making green steel are enjoying success and no less than 15 years after the start of the first one, Another series composed of 4 plants has been ordered, and many more orders are likely to come soon. So I'd say that the main event has rewarded the research we've done over the past 10 years and the prospects for the future are positive and challenging.