Klöckner & Co SE ($KCO)

Hello, everyone. This is Fabian Joseph from Investor Relations. Also on behalf of my entire team, I wish you a very warm welcome to our Q1 '26 conference call. With me today are our CEO, Guido Kerkhoff; and our CEO, Americas, John Ganem. They will guide you through the presentation. And afterwards, we're happy to take your questions. [Operator Instructions] With that, I'd like to hand over to you, Guido.

Yes. Thank you, and welcome to our Q1 '26 conference call. I'll now begin with the financial highlights of the quarter, followed by an update on our strategic progress and the voluntary public takeover of Worthington Steel. Before we look at our KPIs, I'd like to make some remarks. As you know, we sold 8 U.S. distribution sites at the end of '25. In order to enable a year-over-year comparison on a like-for-like basis, we've also included the delta for a divestment adjusted baseline. Shipments decreased considerably year-over-year mainly due to the divestment of these 8 U.S. distribution sites. Excluding the divestment of the 8 distribution sites, shipments increased by 2.1% year-over-year, supported by positive momentum in Europe. Sales came in considerably below the previous year's quarter as a result of a lower reported shipment. However, on an adjusted basis, excluding the divestment, sales increased slightly, also by 2.1%. Gross profit decreased considerably year-over-year due to lower sales volumes. However, gross profit margin remained constant compared to prior year's quarter. We achieved a considerable increase in EBITDA before material special effects, also driven by a positive contribution from our Kloeckner Metals Europe segment. We'll take a closer look at that on the next slide. Operating cash flow was at minus EUR 270 million, mainly due to seasonal net working capital buildup at the beginning of the year. As a result, financial debt increased to EUR 1,092 million at the end of the first quarter '26. Let's have a look at our performance in Q1 '26 by segment. Now Kloeckner Metals Americas segment shipments decreased considerably year-over-year in Q1, but just due to the aforementioned divestment of the 8 U.S. distribution sites. Consequently, sales in Q1 came in considerably below previous year's quarter as well due to the same reason. Adjusted for the divestment of these 8 sites, shipments in the segment were constant compared to the prior year quarter, while sales decreased only slightly. To put the like-for-like comparison into perspective, I would like to highlight that March '25 was largely driven by restocking activity, providing a temporary uplift in volumes. EBITDA before material special effects came in at EUR 37 million in Q1 '26. In our segment Kloeckner Metals Europe, shipments increased slightly, while sales increased considerably compared to previous year's quarter due to higher average price levels. This development was supported by the continued and effective implementation of our optimization measures. As a result, EBITDA before material special effects of the segment Kloeckner Metals Europe increased considerably to EUR 10 million, reaching its highest level since the first quarter of '23. Now let's have a look at our strategic progress in the recent past. We continue to reduce underlying volatility by focusing on higher value-added products and services. We further strengthened and sharpened our portfolio through targeted acquisitions and divestments, including Ambo Stahl, Haley Tool & Stamping, Simfloc, and Locher Bewehrung. At the same time, we divested the distribution business in the U.S. and Brazil in order to enhance strategic focus. We broke ground on a new aluminum flat rolled processing facility in Columbus, Mississippi, and launched a new heavy fabrication operation at the former Bauer Built manufacturing site in Paton, Iowa. Our strategic progress also includes targeted capacity and technology investments such as increasing electrical steel capabilities and installing a new coil fed Schuler laser blanking line in Queretaro, Mexico. As you can see on this slide, our efforts are clearly visible. We grew our HVAC and Service Center sales split from 63% in full year '25 to 87% in Q1 '26, a strong development. The higher sales exposure to HVAC and Service Center, our underlying volatility continues to decrease while we increase our profitability. Let me now give a brief and important update regarding the voluntary public takeover by Worthington Steel. As you know, Worthington Steel and Kloeckner & Co. signed a business combination agreement on January 15, after which Worthington Steel submitted a voluntary public takeover offer for all outstanding shares of Kloeckner & Co. After successfully reaching the minimum acceptance threshold, Worthington Steel was able to secure in total approximately 61.87% of Kloeckner & Co's outstanding shares by the end of the additional acceptance period. Furthermore, on March 27, '26, Worthington Steel informed the Management Board of Kloeckner & Co that it intends to enter into a domination profit and loss transfer agreement between Worthington Steel GmbH as the controlling company and Kloeckner & Co SE as a controlled company. Strategically, this takeover marks a new chapter in Kloeckner & Co's corporate history and fully aligns with our strategic focus on higher value-added products and services across North America and Europe. Closing of the transaction remains subject to regulatory approvals and is currently expected to take place in the second half of '26. With that, let's have a closer look at the financials. Overall, we experienced a favorable pricing environment in the first quarter of '26 after the pronounced volatility of the previous year's quarter. Prices continued to rise in the first quarter of '26 in both U.S. and Europe, supporting our operating income. The U.S., unlike previous cycles, the increase has generally been slow but steady, which results in a rather limited positive windfall. We achieved an EBITDA before material special effects of EUR 46 million in Q1, a considerable increase both quarter-over-quarter and year-over-year. Due to the seasonal net working capital buildup at the beginning of the year, operating cash flow came in negative at EUR 270 million. Looking ahead, we're confident that we'll continue to convert the currently positive pricing momentum into strong operating results in the second quarter of '26 and beyond. In addition, we continue to leverage our digitalization automation initiatives. The numbers of digital quotes increased by around 7% year-over-year in the first quarter of '26. With that, we continue to release salespeople from manual work related to [indiscernible]. Let's take a look at the development of our shipments, sales, gross profit and gross profit margin in the first quarter of '26. We're also providing the figures for the group, excluding the divested U.S. distribution sites, enabling a like-for-like comparison. Shipments decreased considerably year-over-year, mainly due to the divestment of 8 U.S. distribution sites at the end of '25. Sales decreased considerably year-over-year, mainly due to the lower shipments in the Kloeckner Metals Americas segment. As already stated on a like-for-like basis, both shipments and sales slightly increased by 2.1%. This is proof that our growth strategy is intact and remains intact like last year. Gross profit came in at EUR 298 million in Q1 after EUR 317 million in Q1 '25, a considerable decrease year-over-year due to the negative development of sales. Meanwhile, gross profit margin remained constant year-over-year at 19%. On a like-for-like basis, gross profit increased slightly, while the gross profit margin was also increased. We will now focus on the EBITDA development in the first quarter of '26. We've adjusted the EBITDA for Q1 '25 for the divestment of the 8 U.S. distribution sites to enable a like-for-like comparison, therefore, starting with the EBITDA before material special effect for Q1 '25 of EUR 34 million. All year-over-year effects visible here have also been adjusted to enable the like-for-like comparison. In Q1, EBITDA before material special effect came in at EUR 46 million, a considerable increase year-over-year. In the first quarter of '26, we had a positive volume effect of EUR 6 million and a positive price effect of EUR 20 million, supporting our operating result. OpEx, however, was slightly higher at EUR 9 million year-over-year, mainly due to higher personnel expenses and high expenses for shipments and operating supplies. Further, we had negative ForEx effects of EUR 4 million, mainly resulting from the U.S. dollar. Lastly, we recorded negative material special effects totaling EUR 6 million, mainly related to expenses resulting from share-based payments due to the gains in the share price since the beginning of the year. And now coming to the cash flow and net debt development. The first quarter of '26 had seasonal net working capital buildup of EUR 279 million. I would like to stress that this buildup is temporary and is expected to reverse over the course of the year, ultimately resulting in a positive operating cash flow. Taking into consideration interest tax payments and other items totaling EUR 32 million, our cash flow from operating activities came in negative at EUR 270 million in Q1. Including net CapEx of EUR 36 million, free cash flow was negative EUR 306 million. Let's look at the net financial debt. Additional negative impacts were visible for ForEx, leasing and other items totaling EUR 77 million. Consequently, our net debt increased from EUR 709 million to EUR 1.92 billion in the first quarter of '26. I'll now hand over to John to have a closer look at our end markets in North America.

Thank you, Guido. While some extremely challenging weather disruptions impacted our shipments early in 2026, we continue to expect a decent recovery in this year with North American real steel demand increasing between 1% and 2% compared to the prior year. Of course, there remains significant uncertainty and some downside risk related to the current conflict in the Middle East and the continued unpredictable trade policy shifts that can negatively impact the outlook. Now turning to the expected development in specific market segments. Looking first at construction activity, building starts for both residential and nonresidential investments are expected to be generally flat to slightly higher versus prior year. While underlying long-term demand should remain strong, affordability remains a significant growth constraint. Lower mortgage rates would certainly provide further upside potential to the outlook. Nonbuilding and infrastructure investments should continue to grow in 2026, albeit more moderately than last year. Data centers as well as grid expansion and modernization will continue to lead the way for the next several years. Turning to manufacturing. Activity as indicated by the ISM Manufacturing Index has expanded during the first 4 months of 2026. This is a very positive development considering the index indicated contraction for almost all of 2025. In line with this indication, we expect overall new orders for industrial and off-highway equipment to increase modestly by between 2% and 3% in 2026 with some variation depending on the specific segment. Some larger OEM customers forecast in these sectors continue to indicate even substantially stronger growth rates heading into the second quarter and second half of 2026. Trade policy clarity and lower interest rates could also help these key consuming segments regain even more positive momentum as the year develops. Turning to transportation. The Automotive segment has been the most impacted by changing trade policy as well as the removal of the EV tax credit. For 2026, current forecasts indicate stable auto production in both the U.S. and Mexico. Subdued consumer confidence, higher for longer interest rates and the recent spike in gas prices will likely limit growth prospects in the near term for auto. On a more positive note and after a significant pullback in 2025, we now expect a solid recovery of more than 5% in the heavy truck and trailer segment. On the defense shipbuilding front, activity remains very robust. Kloeckner has been recently awarded a number of large multiyear programs, and we remain extremely well positioned to take advantage of what is expected to be a very significant increase in defense shipbuilding investments over the next decade. Appliance, HVAC and Electrical, which are key segments for KMC Americas, are expected to remain challenging in 2026 as OEMs work to rebalance supply chains to be better aligned with forward demand. After a slow start in Q1, we do see signs of a modest recovery in the second quarter, but we don't expect these segments to deliver material growth in 2026. Energy, on the other hand, will continue to be the strongest steel consuming segment this year. Power transmission will remain extremely strong in 2026, generating growth of greater than 15% year-over-year after achieving a similar result last year. Modernizing and expanding the North American transmission infrastructure is imperative in order to support the significant forecasted increase in demand for electricity across North America. This is especially critical for data center investments. While renewable energy growth was expected to come under pressure after last year's changes in government policy, we are now expecting a strong growth of almost 10% in 2026 as both wind and solar continue to be the most immediate solution to help bridge the growing deficit between surging demand for electricity and constrained supply. With that, I will quickly summarize the North American outlook as follows. While the current variance in growth expectations between industry segments is nothing short of unprecedented and despite potential downside risks that still need to be navigated, we remain firmly optimistic when it comes to the overall North American outlook for 2026. Additionally, the significant reduction in imports resulting from the Section 232 tariffs has clearly created better balance between U.S. supply and demand, which is likely to result in a higher for longer and potentially more stable pricing cycle. With these positive market dynamics at our back and with our continued focus on higher value-added products and services, we are very confident that Kloeckner America's continuing operation will once again deliver strong year-over-year growth, record market share gains and further improved financial results in 2026. With that, I will turn it back over to Guido to provide an update on Europe.

Thanks, John. In total, we continue to expect the real steel demand in Europe to increase as well as in North America by 1% to 2% in '26, which is, in this case, unchanged compared to our last conference call in March. However, it is important to acknowledge key geopolitical risks could weigh on our outlook and escalating tensions in the Iran conflict could trigger sustained oil price spikes negative implications for the macro economy, inflation and ultimately adverse effects for our core customer industries. Coming now to our sectors, starting with the construction industry. No major change compared to our previous conference call. We continue to expect the construction industry in '26 to grow slightly with structural drivers intact and pent-up demand providing growth. Manufacturing, machinery and mechanical engineering, a sector in which we continue to expect a slight growth in Europe, driven by the emerging effects of past monetary policy loosening and rising defense spending, especially in Germany. However, uncertainties in trade policy and competition from Asia will dampen the used domestic mechanical engineering sector. Transportation, first focus on automotive, also a sector where we see no major change compared to our last conference call. The industry association still expects a slight increase of 2% in '26 though absolute volumes will remain far below 2019 record levels. Demand is expected to remain on rather low levels for as long as there is no significant improvement in the broader economic outlook, including global trade and consumer sentiment. Now coming to shipbuilding, we continue to expect increased pressure on the commercial shipbuilding segment due to economic uncertainty while remaining well positioned in the gray ship sector to benefit from upcoming demand. Household and commercial appliances segment marginal impact on our European business. We still expect a constant development in '26 with increasing pressure from the U.S. and China, resulting in a negative impact on the competitiveness of the EU sector. Energy industry, no major change compared to our previous conference call, slight growth expected in the energy industry, driven by the continued electrification of transport and heating. Let's now come to the financial outlook for the second quarter of this year and the full year '26. John and I pointed out, we expect the macroeconomic environment to remain challenging, especially due to geopolitical uncertainties. For the current quarter, we expect a slight increase in shipments and a considerable increase in sales each quarter-over-quarter. EBITDA before material special effects in Q2 '26 is expected to come in between EUR 40 million and EUR 80 million. For the full year '26, we're now forecasting a slight decrease in shipments for the full year '26, mainly due to the before mentioned divestment of 8 U.S. distribution sites. Sales are now expected to increase slightly year-over-year. We still expect the EBITDA before material special effect in the full year '26 to considerably increase year-over-year. Moreover, we also expect operating cash flow to come in positive, although below previous year's figures. We're now happy to take your questions.

Our first question comes from Boris Bourdet, Kepler Cheuvreux.

Do you hear me?

Yes, we can hear you.

Yes, I would be interested in getting your view on the potential change in customer behavior in Europe and that might be related to your inventory buildup. How much is linked to the price increase? How much is linked to some restocking ahead of the new [ TR2 ] in Europe that might require some volume availability? And maybe also connected to that, what are the reasons for the slight downgrade in your operating cash flow outlook? Is that also related to this potential increase in demand? And maybe I will have a last one on [indiscernible] Group. You point in the press release that you are in the due diligence phase with some nonbinding offers. What kind of price are you looking for, for this asset? And what would be the profile of those acquires?

Thanks, Boris. The customer behavior that we expect, I mean, is a bit more cautious going forward as customer sentiment has declined a bit in Europe. We've seen some price and prestocking developments that underlying, honestly, the year started more positive than we expected beforehand. So although we see a decline from -- or slight decline from what we've seen at the beginning of the year, we remain positive that it's going to be an increase throughout the year. The price and prestocking behavior was there, but not that big and not that strong. Now the cash flow, yes, it's slightly reduced. You see higher price levels and a bit more increase in volumes and shipments that we expect for the year that will require a little bit more of working capital buildup. That's mainly reflected in this cash flow going forward. On [indiscernible], I can understand your question, but you will understand my answer as well. We're in the due diligence phase, and we have a couple of good offers that we'll continue to elaborate on, and then we'll see what will come out and how the pricing will look like. But the process is running very well, and there is more interest than we originally expected.

Okay. And maybe then related to that, we know that [indiscernible] Group is working on a potential IPO of its Metal Services business. I would be interested in getting your thoughts on the potential for consolidation in that space in Europe.

Look, I can't take a look into -- and I don't know what they are doing. I think currently, they are busy with preparing their kind of decoupling from the group, and we'll have to see how that works. But I think that will have a big impact on us and what we're doing.

[Operator Instructions] There seems to be no further questions at this time. So I would like to hand over to Guido for some final remarks.

Yes. Thank you all very much for joining the call. And if there are any outstanding questions you'd like to raise, Fabian and his team just waiting for it. So call us. Thank you very much.