Klöckner & Co SE (KCO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to today's full year 2019 conference of Klockner & Co SE. For your information, this conference is being recorded. At this time, I would like to turn the call over to the host today, Mr. Felix Schmitz. Please go ahead, sir.

Yes. Thank you and welcome to our fiscal year 2019 analyst and investors conference call. With me today are Gisbert Rühl, CEO of the company; Oliver Falk, CFO; and John Ganem, member of the Board and CEO of Americas. They will guide you through the presentation. After the call, we are happy to answer your questions. With that, I'd like to hand over to our CEO, Gisbert Ruhl.

Yes, hello, everybody. Warm welcome also from my side. Yes. It's a bit strange probably to report on the last fiscal year because of current actions in the capital markets, which caught us yesterday, which are doing much better today and the corona crisis. But nevertheless, we have to do our homework here. And we're coming -- I'm coming back to the corona crisis and what this means for our outlook going forward in a few minutes. First of all, let's start with the last fiscal year, with the slide on Page 4. Yes, the last fiscal year was not really good for us. So we had shipments going down by 7.5%. Several reasons. On the one side, we had, of course, structural issues here in Germany. Because of lower demand of the automotive industry, also machinery and mechanical engineering was not really healthy in Europe and especially in Germany. In Germany, we depend very much on this business. On the other side, we also had some shift or some structural changes in our portfolio, especially in France and the U.K. So with the lower shipments, also our sales went down by 7%, and accordingly, also our gross profit, which was then, in addition, impacted very much by price decreases. So by windfall losses, especially in the U.S. I will come back to this issue on the next slide. EBITDA was down with this significantly, we're close to 50% from EUR 229 million to EUR 124 million, including material effect of EUR 15 million reported EBITDA came in as EUR 139 million. We also had some good news. One was our cash flow. So the operating cash flow was positive with EUR 204 million after EUR 60 million last year, also by the way, the free cash flow was very handsome, it's EUR 207 million. So we, again, had good cash flow development, and this was true, more or less for the last 10 years, where we had mostly positive operating cash flow. With this, also, net financial debt was down in principle. So without this IFRS 16 leases, net financial debt would have been down to EUR 250 million, including the leases, financial debt was -- it came in at EUR 445 million. Yes, we also reached our target concerning our digital sales, with 32% compared to 25% by the end of last year here, especially in Switzerland and the U.S., we made significant progress. Yes, next slide, our efforts in digitalization. So we made here significant progress last year. We already reported on this in focus call, which we had a few weeks ago. So on the one side, we made significant progress as Klöckner itself with our so-called Kloeckner Assistant. This is really a game changer for us because with this, we are able to automate the sales process in the end completely. So we will be able, going forward, to convert unstructured requests so they could come in by PDF, by Fax or by Voice or whatever. So that means the customer don't have to change anything going forward, but we will make out of every customer a digital customer because the whole process is then supported by AI automized. So we will implement having a logical interpretation of the converted -- of the digital converted content of, for instance, an unstructured request. We will match the products with our product base -- database also by AI. We will have an automatic pricing. So the customer will get a quote within second, which could take days today. So the process itself on average manually takes 30 minutes. But we, of course, and others as well are not answering every quote immediately. But with these artificial intelligence tool with the Kloeckner Assistant, we will be able to give a customer quotes within seconds whereas competitors need days. So we've seen this as a significant competitive advantage on the one side going forward. And on the other side, we will reduce with this significantly our administration costs. Next slide, our progress at some material here, we scaled so far the platform from -- successfully from the seller side. So we have meanwhile, 64 suppliers on the platform with more than 220,000 (sic) [ 22,000 ] products. And about 700 registered customers. We now started also to scale the platform from the buyer side with an eProcurement tool, which is partially also based on the Kloeckner Assistant. So with this, we will also be able to automate in the end, the procurement side completely. Also here, customers don't have to change anything in their progress, but we hit a big pain point customers have today when they're ordering more than only a few items, which is quite often the case, then this is typically a very cumbersome process to get all the quotes from the customers -- from the suppliers and then to compare the quotes. This will be done going forward automatically or by XOM. So we will scale on the one side, from the seller side and then from the supplier side, and this will then end up in the marketplace going forward. Our next slide, our targets. So for the first time, we now quantified our targets because of progress -- because of the progress we made and because we are very convinced that we achieved this target. This year -- okay, this is the year of implementation of this Kloeckner Assistant and eProcurement but already in this implementation phase, we expect an impact of EUR 10 million on our EBITDA next year. In addition, EUR 35 million. And then in 2022, an additional EUR 55 million. So in total, we want to improve our results with these digital tools by more than EUR 100 million from 2022 onwards. Yes. With this, I hand over to my colleague, Oliver Falk, for the financials.

Yes. Thank you, Gisbert. I'll switch over to Page 9. You see on the left-hand side, the development of the shipment and the sales for last year. So the shipments went down year-on-year by 10.5%, mainly due to the weaker economic environment in Germany and in the U.S. but also due to our margin over volume strategy, which we executed in France and the U.K. The decrease quarter-on-quarter was more pronounced with minus 12%. Talking about the sales, sales decreased year-on-year by 15.7% stronger than shipments despite to the higher U.S. dollar-euro exchange rate and mainly caused by the negative price effects, which we saw in the U.S. The quarter-on-quarter sales declined by 12.8%, largely in line with the lower volumes. On the right-hand side, gross profit and gross margin development. So gross profit is down year-on-year by 10.9% from EUR 301 million in Q4 2018 to EUR 268 million in Q4 2019. The main drivers were the negative windfall effects and general market decline in the U.S. was EUR 27 million and the demand-driven decline in Germany was EUR 9 million. Quarter-on-quarter, the gross profit decline was lower by 5.6%. The gross profit margin went up over the year from 18.6% to 19.6%, on one hand, due to the margin over volume strategy, mix effects, but also due to lower stock prices, mainly in Q4. I'll continue with Page 10. EBITDA development in Q4 on the top of the left. So in Q4, EBITDA came in at EUR 11 million compared to EUR 30 million in Q4 of last year. We were suffering heavily from the adverse market development. The negative volume effect of EUR 23 million was mainly caused by the weaker economic environment in Germany. And here, especially the slowdown of the automotive and machinery industry. We also saw negative volume effects in Switzerland. And in general, a market decline in the U.S. In addition to that, we saw a negative price effect of EUR 16 million, mainly caused by negative windfall effects in the U.S. and the weaker automotive and machinery business in Germany, partly offset again by the margin over volume strategy, especially in the U.K. OpEx improved by EUR 4 million. The initial application of IFRS 16 contributed with EUR 16 million, and we entered then with the Q4 EBITDA of EUR 11 million. We have posted material special effect of EUR 8 million, including here the restructuring expenses for the distribution in Europe in total of EUR 15 million. Thereof, for France, EUR 8 million; Germany, EUR 6 million; and Netherlands, EUR 1 million. On the positive side, the positive material special effect came from the sale of the Swiss site in [ land client ] with a gain of EUR 7 million. Talking about the full year, we had also strong headwinds over the year from the market and they led to both negative volume effects of EUR 65 million and even stronger negative price effect of EUR 136 million. The main driver for the volume effect was the decreasing demand in Germany and the general market decline in the U.S. as well as our margin over volume strategy, especially in France and U.K. The negative price effect was strongly impacted by negative windfall effect in U.S. and the weaker automotive business in Germany. We had a positive impact of EUR 80 million resulting from the margin over volume strategy. OpEx and other improved, especially due to lower personnel expenses of total EUR 19 million and a positive EUR 15 million effect came from the first-time application of IFRS 16. Material special effects of, in total, EUR 50 million then impacted on the results, which finally ended with EUR 139 million EBITDA for the full year. As Gisbert already pointed out, we had quite a positive cash flow and net debt development. So we saw a strong cash flow from operating activities with EUR 204 million compared to EUR 60 million in 2018. So starting from an EBITDA of EUR 139 million, the bar on the left-hand side, we had a positive cash inflow from the net working capital of EUR 177 million. Cash out then for interest was EUR 32 million, taxes EUR 18 million, and a gain on the sale of noncurrent assets, EUR 47 million and others led to the positive operating cash flow of EUR 204 million. CapEx was net at EUR 3 million, consisting out of a gross CapEx amount which summed up to EUR 52 million and counterbalanced by the inflows from the asset disposals of EUR 55 million. So that's our cash flow, our free cash flow was EUR 207 million. Net financial debt increased year-on-year, mainly due to the IFRS 16 implementation of the new lease standard by EUR 229 million. This effect could be compensated by the strong positive free cash flow of EUR 207 million, which I just mentioned and taking out the dividends, the FX swaps and others led to the net debt at year-end of EUR 445 million. If we deduct the EUR 205 million from the IFRS 16 effect, we are ending with, so to say, a financial net debt of EUR 240 million, which is EUR 143 million below the level of the year before. So with this, I would like to give back to Gisbert.

Yes. Thanks, Oliver. Yes, our outlook, as you can imagine, the outlook is really quite difficult to give currently because of this corona crisis. What you are seeing here on the slide is more or less, I would say, the situation before this crisis. Here, we expected a slight growth in Europe as well as in the U.S. If this is still the case, it's difficult to say. So we can -- generally, we can say we have industries, which are more impacted or will be more impacted from this crisis. Compared to other smaller firms, construction is not that impacted -- construction's not impacted on this global supply chains. And therefore, we see a relatively healthy business for us. For instance, in Switzerland, we are -- our exposure to construction is 75%. Also the U.K., we will have here a positive impact. On the other side, machinery and mechanical engineering, is, of course, getting more difficult going forward, especially here in Germany, where this industry was somewhat weak anyhow already in the second half last year. We are -- energy, as you can imagine, with the oil price drop or the sharp oil price drop yesterday, tracking in the U.S. is, for instance, not really attractive anymore. On the other side, will lower oil prices help the economy going forward. So also here, it's not -- short term, I would say, more negative impact on our business, mid and long term, maybe more positive impact. Then automotive, here, we have anyhow seen last year, especially here in Europe and Germany, already the structural effects and now this crisis effects came on top. And with this, it will be a tough year for our automotive business. Shipbuilding on the hand is more long-lasting business. Here, we, at least, short term, don't expect any negative consequences. Yes. Maybe, John, maybe you can give us your expectation, a bit more specific expectation from the U.S. side.

Yes. I mean, again, as Gisbert mentioned, this is kind of a developing situation. If we've had this this call a month ago, I would say that we fully expected that the U.S. economy was on solid footing. The consumer continues to drive growth. We felt that construction was going to be -- going to provide solid growth year-over-year, specifically residential in the short term. And then we really felt that the positive impacts from the lowering of interest rates in the middle of 2019 were going to have a positive effect on overall manufacturing as we headed towards the middle of the year to the second half. Clearly, energy was weak to begin with. Yesterday's and this weekends' developments, clearly, are a significant risk for energy demand, and that would also flow back into heavy machinery. We saw that in 2015 when oil prices dropped this low. And then automotive, sales have held up relatively well. Early in the year, again, strong consumer spending, but we -- most people feel that there's going to be some modest decline year-over-year. Again, this could be further impacted if consumer confidence is impacted over the long-term here as a result of recent developments, and then I agree on shipbuilding, it's longer term industry, and we have some positive developments for KMC, Kloeckner Metals, here in the U.S. with new contracts so we're quite positive on shipbuilding for 2020. We don't see that really being impacted in the short term.

Yes. Thanks, John. And with this, we finally come to the outlook for Q1 and for the full year. Yes, for Q1, we still expect a slightly decreasing -- the slightly decreasing shipments. And because of the lower price volume considerably decreasing sales. So, so far, we -- our business was not that much affected from the virus but we had first effects, for instance in the -- or impact in -- the first impact, for instance, in the U.S. where the last 1 or 2 weeks for business is a bit quite. And we -- yes, we expect an EBITDA for Q1 between EUR 20 million and EUR 30 million. This has not changed. For the full year, we so far expected slightly -- so before, corona, we expected a slightly increasing shipments and stable sales. I would make a question mark. And would probably expect when the crisis takes not that long that shipments will be on last year's level, when the crisis is getting even severe than shipments could also be down. EBITDA -- but will be considerably above last year. This alone because of -- already because of lower or probably even no windfall losses. As Oliver reported, we had last year significant losses due to the -- especially in the U.S. due to the price decline of U.S. steel. And this is not really expected this year. And therefore, EBITDA will already better for this reason, even if they are -- would be on the other side impact of this corona crisis. So that means we are cautiously -- at least with our results -- concerning our results, cautiously -- at least cautiously optimistic, more mid and long term, we are optimistic anyhow especially because now the impact from our digitalization kicks more and more also into our results. So with this, we are now open for the Q&A session.

[Operator Instructions] Your first question comes from the line of Rochus Brauneiser from Kepler Cheuvreux.

Few questions. Maybe Gisbert, can you talk a bit more about guidance? I think the expectation of a considerable increase is leaving the wide door open. So we talk about maybe 5% higher EBITDA. I guess you mentioned that windfalls have been a big hit last year. So maybe can you remind us what was the windfall effect last year? I guess, something like EUR 60 million maybe. So why couldn't you -- why this kind of cautious expectation? Because usually, this should be a significant cushion for the earnings in 2020. Maybe you can get a bit more specific on the moving parts here. And second, based on the expectations on EBITDA, what is your current thinking about the direction of the free cash flow in 2020? And then I have another question.

Yes. Thanks, Rochus. Concerning the guidance, so the negative impact from windfall losses was last year, about EUR 60 million to EUR 65 million. And yes, with this. So when nothing will change. So our result -- and this is what we're saying, would already be significantly better than last year, if you add this EUR 65 million to previous year results. And yes, this could be already some kind of a guidance. And then there will be maybe some positive, but maybe also some negative effect, which we don't know yet. But this is more broadly, the result what we are expecting this year. Is this close enough?

Yes. Yes. So yes, I was just wondering why this is, obviously, a definition function considerably is only kind of a 5% increase. I was wondering if that there is any hidden message because you could have said, okay, this EUR 180 million ballpark plus minus, that ends up with a range, I don't know EUR 20 million, EUR 30 million plus/minus around the EUR 180 million. So I was wondering why being so...

So we typically -- so, Rochus, we'd typically, as you know, might not give -- we are typically giving no specific guidance in our annual call for the next year but -- especially in this currently difficult situation, we have visibility for all of us, it's not that big. It might help when I have now specified this considerable increase a bit more.

Okay, fair enough. The second question is on your volume expectations, I think you just said it could be up. Volumes could be up, could be down. What do you think about your shipments relative to the market, particularly in Europe? Do you think you can be in line with the market because in the recent year, very often, your volume trend was below the market because of this price before volume strategy. And in that context, can you give us a bit of more color how you arrived at this EUR 18 million positive earnings effect coming from price before volume?

Yes. So I would say, in -- we indeed have this price before volume strategy in certain countries, especially, for instance, in the U.K., where we were too much dependent on the commodity business. By the way, on the other hand, with our progress in digitalization, even the commodity business could be attractive going forward, especially in the U.S. So when our -- when we're really at the bottom of the cost curve, and this is what you -- where you have to be when you want to make money in the commodity business. Yes, as mentioned then, even this could be getting, again, attractive going forward. So I would say for the U.S., we will be this year because the strategy is more or less implemented, more or less in line with the market. And maybe, John, your expectation for the U.S.?

Yes. I mean, I think the original plan -- or current plan is we had assumed relatively flat year-over-year growth in the U.S. from our core business, but we also expected growth associated with increased OEM contract market share, which we have secured in our contract negotiations last year. So we were quite positive that, that growth was going to be accretive year-over-year. I would say, last year in the U.S., our shipments were down 2.5% and the overall industry average reported by the MSCI was down 7.5%. So the strategy that Gisbert referenced is clearly in place. We are maintaining share and looking to grow share. And that was our plan for 2020. And again, we just have to take into account now the recent developments and figure out what that really means and what the market is going to do overall.

All right?

Okay. And then maybe as a last point, can you give us an indication what do you expect in terms of CapEx? And are there any major asset sales targeted again in 2020?

So there are not any larger asset sales, which we have in mind right now. CapEx will be more flat so I've just explained the volumes for 2019. So it will be on that level also for 2020. Yes. And of course, the cash flow, operating cash flow and free cash flow are very much depending on the volume development, which we just have elaborated. So therefore, I think that we will be anyhow free cash flow positive. The question is then how will the market and the prices develop moving forward?

So we will not reach last year's number of EUR 200 million or so. So it will be probably mid- to higher digit, let's say, double-digit number. Yes, mid- to higher double-digit number. Yes. Mid- to high.

Your next question comes from the line of Alan Spence from Jefferies.

Just thinking about Q1 guidance and thinking about it sequentially, the increase in the EBITDA, can you tell us how much of that is perhaps volume-driven versus pricing driven? And my second question is on the exposure to energy, if you could just tell us broadly in your European versus U.S. businesses, how much of that is tied to energy?

Yes, let's start with the second question first. So in Europe, we are not very dependent on energy, mostly only in Netherlands, but it's not a big business. It's different in the U.S., John?

Yes. And no question in the U.S., we are more heavily dependent on the energy sector, certainly in the Southwest region. I think in 2015, we definitely saw a significant impact from the drop in energy prices in those markets. I would say that energy over the last 4 years is a much bigger component of the overall U.S. economy. So I think there's a significant risk here on the demand side, overall, for the steel market and certainly for Klöckner. Probably not as significant with the overall market, but definitely, in certain regions, specifically in the southwest, which is really our Texas and Oklahoma facilities.

Thanks, John. And, Oliver?

Yes, regarding the volume development, we will be quarter-on-quarter, of course, up as the Q4 is seasonality driven lower. So we see typical Q1 volumes, margins have some support because we see increasing sales prices. And yes. I think there is not really a trade-off between volume and margin right now. So we are in line with our expectations so far.

All right?

Sir, if I could just follow-up on the U.S. and the energy, could you help -- perhaps give us just a rough range of the percentage of your shipments going into the energy market?

It's -- we've tried to dial that in. I would say, if I just look at pure energy customers, it's 15%. It's kind of an estimate that we use, but what we've seen in the past is, when energy goes, there's all kinds of -- the associated industries, whether it's storage, transportation, heavy machinery, they all tend to be impacted as well. So it's probably a higher percent for the overall, but if we're specifically talking about energy-specific customers. We put it around 15%.

And just one last one from my side. Do you expect any more restructuring expenses in Q1?

No.

[Operator Instructions] Your next question comes from the line of Tom Zhang from Crédit Suisse.

Just 2 on the next quarter, please. So first, on your order books, normally, I guess, you'd see this improve quarter-on-quarter into Q1 seasonally. Can you talk about the momentum of new orders in late Feb and March? And whether or not you're seeing any indication that Q2 might be a little bit worse than we would expect it seasonally? And then second question, just on net working capital, please. So you're saying, I think that you'll see some amount reverse in Q1. Can you give us an idea of how much, especially given your guiding to lower shipments year-on-year as well and lower sales as well?

So regarding volumes and the momentum at the end of February, we do not see right now that there is a negative momentum because the impact -- the potential impact of corona -- of the coronavirus is not yet visible by the end of February. So we are on the same, let's say, daily volume levels which we have seen in January. Regarding the net working capital, of course, we have an increase of net working capital in comparison to what we have seen at year-end, and the increase is mainly coming from the trade receivables, which are higher than at year-end. So the net working capital will be higher than year end, but reasonably below the levels of Q1 of last year. I think that's the most important information I can give you.

Okay, very clear. Can I just ask a quick follow-up actually on the volumes? So distribution in Europe, shipments were quite weak in Q4, down quite a lot year-on-year. Can you talk about whether or not some of this was destocking or some kind of caution from end markets that you think reverses in Q1? So should we -- is there any aspect of that, that you're seeing from customers?

No, we did not do any destocking by the year-end because we managed our stocks last year quite consistently over the months. So we are really trying to avoid to run any kind of destocking as we see that from other market players. We are running...

Sorry, I meant from your customers?

I think -- Destocking from our -- sorry, I misunderstood that. Regarding our customers, no, there was not a reason for destocking because the price trends, which we saw by end of November, December last year, were positive. So there was no reason for destocking at the moment. The stock levels in our customers -- with our customers, were quite normal. So we will not have any stock -- customer stock impact in Q1.

Okay, understood. So was there any other exceptional reasons -- sorry, sorry to keep going on, but for the distribution drop in shipments. Was there anything else that you would flag for why it was down so considerably year-on-year?

No, other than also our portfolio shift, I would say, no. Thank you. Any other questions?

[Operator Instructions]

Yes, if this is not the case, then, thanks, everyone, for participating in our call and see you next time around. Thank you. Bye-bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.