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

Hello, everyone. This is Fabian from Investor Relations. Also on behalf of my entire team, I wish you a warm welcome to our Q2 '26 conference call. With me today are our CEO, Guido Kerkhoff; and our CFO, Oliver Falk. They will guide you through the presentation. And afterwards, we're happy to take your questions. With that, I'd like to hand over to you, Guido.

Yes. Thank you, and welcome to our Q2 '26 conference call. Let's begin with the financial highlights of the quarter. I'd like to remind you that at the end of the full year '25, we successfully sold 8 U.S. distribution sites in order to focus more on higher value-added products and services. As in our previous analyst and investor presentations, we also included the deltas for a divestment adjusted baseline to enable a true year-over-year comparison. At the group level, shipments in the second quarter decreased slightly year-over-year. Negative development is mainly driven by the aforementioned sale of 8 U.S. distribution sites at the end of fiscal '25. However, this was partly offset by positive momentum in our segment, Klkland Metals Europe. Excluding the divestment, shipments increased by 4.3% year-over-year. This is proof that our year, largely attributable to the write-down of Becker, which affects the comparability of year-over-year development rather than reflecting a deterioration in the underlying business. We achieved an EBITDA before material special effects of EUR 63 million, positioning us in the upper half of our guidance. Notably, Platinum Metals Europe delivered a significant contribution for the second consecutive quarter, marking another important milestone in the segment's turnaround. I will provide a bit more detail on the key drivers behind this performance on the next slide. Positive operating cash flow of EUR 10 million was achieved though it was considerably lower than the previous year's quarter. As a result, net financial debt increased to EUR 1.108 billion at the end of the second quarter '26. Let's have a look at our performance in Q2 '26 by segment. Starting with Platinum Metals Americas, reported shipments declined considerably year-over-year by around 8%, primarily reflecting the divestment of the 8 U.S. distribution sites as discussed earlier. As a result, reported sales were also slightly below previous year's level. However, on a like-for-like basis, the underlying business continued to develop positively. Excluding the divestments, shipments increased slightly by 4.7% compared with the second quarter of last year. Our sales grew strongly by 13.5% year-over-year, supported by a favorable pricing environment. EBITDA before material special effects reached EUR 42 million in the second quarter of '26, demonstrating the resilience of the segment despite the still challenging market environment. Turning now to Platinum Metals Europe. The segment continued its positive momentum. Shipments increased slightly by 3.6% year-over-year, while sales rose 10.4%, mainly reflecting the high average price level. At the same time, the consistent execution of strategic initiatives continued to support profitability. As a result, EBITDA before material special effects increased to EUR 20 million, marking the highest quarterly level since the first quarter of '23. This also represents the second consecutive quarter of positive earnings contributions from this segment. With that, I'd like to hand over to Oliver to have a closer look at the financials.

The favorable pricing environment we saw in the first quarter continued into the second quarter of '26, particularly in the U.S., providing ongoing support for our business. Against this background, we achieved an EBITDA before material special effects of EUR 63 million, representing a considerable increase compared with the previous quarter and only a slight decline year-over-year despite lower shipments. This performance demonstrates our ability to translate supportive market conditions into strong operating results. Operating cash flow was positive at EUR 10 million during the quarter. Further, the number of digital quotes increased by around 9.5% year-over-year. We continue to reduce manual processes, enabling our sales team to focus more on value-added activities. Let's take a look at the development of our shipment sales, gross profit and gross profit margin for the second quarter of '26. To provide a meaningful comparison we are also showing the figures excluding the 8 U.S. distribution sites that were divested at the end of '25, allowing for a like-for-like view of the business. Reported shipments decreased slightly year-over-year, mainly due to the divestment of U.S. distribution sites at the end of '25, primarily reflecting the impact of the divestment. -- partly of that by stronger demand in Europe. In contrast, sales increased slightly year-over-year, mainly due to the overall higher average price level compared with the prior year quarter. As Guido already highlighted, the underlying performance of the business remains strong. On a like-for-like basis, excluding the divestment shipments increased by 4.3% while sales grew by considerable 12.1% year-over-year. This demonstrates that our strategic initiatives continue to support our growth. Gross profit amounted to EUR 243 million compared with EUR 320 million in the second quarter of '25 million. The year-over-year decline was primarily attributable to the write-down at Becker, which weighted on the reported gross profit. As a result, the gross profit margin declined to 14.4%. We we will now focus on the EBITDA development in the second quarter of '26. We have adjusted the EBITDA for the quarter 2 '25 for the divestment of 8 U.S. distribution sites to enable a like-for-like comparison. Therefore, starting with an EBITDA before material special effects for quarter 2 '25 of EUR 56 million. All year-over-year effects visible here have also been adjusted to enable the like-for-like comparison. In Q2 '26, EBITDA before material special effects came in at EUR 63 million, a considerable increase year-over-year. We faced a positive volume effect, which totaled EUR 13 million and a positive price act of EUR 21 million, supporting our operating result. Furthermore, in total OpEx increased EUR 27 million by year-over-year, mainly due to the higher personnel expenses and higher expenses for shipments and operating supplies. Further, we had no significant FX effects. Therefore, our EBITDA before material special effects reached EUR 63 million in quarter 2 '26. Lastly, adjusted by material special effects mainly resulting from the planned divestment of Becker the EBITDA was reported at a negative EUR 108 million. We are now coming to cash flow and net debt development. In the second quarter of '26, we benefited from the change in net working capital, which amounted to EUR 156 million. After interest and tax payments as well as other cash outflows totaling EUR 38 million Cash flow from operating activities remained positive at EUR 10 million for the quarter. With net CapEx of EUR 3 million, we generated a positive free cash flow of EUR 7 million. Let's look at our net financial debt. The positive free cash flow was more than offset by several items during the quarter. Negative effects were visible for leases, FX and the dividend payment to our shareholders totaling EUR 33 million. Partly offsetting these effects were the EUR 9 million IFRS reclassification related to the planned divestment of Becker and EUR 2 million from other items. Consequently, our net debt increased from EUR 1.092 billion to EUR 1.18 billion in the second quarter of '26. Let's now focus on the outlook for the full year '26.

Yes. Thank you, Oliver. Let me now provide you with an update on the market environment and the outlook for our key North American and European end markets. starting with North America. After a generally weak start to the year, we've seen improving demand growth trends developing over the second quarter '26 in both U.S. and Mexico. . Given the current positive momentum, we continue to forecast a decent recovery in '26, with North America's real steel demand increasing by 1% to 2% compared to the prior year. Of course, there remains significant uncertainty and downside risks related to the current conflict in the Middle East and continued unpredictable trade policy that can negatively impact the outlook. Now turning to the expected development in specific market segments. Looking first construction activity building starts for both residential and nonresidential investments are expected to be modestly higher 0.6% versus 25%. While underlying long-term demand should remain strong, fability and persistently higher mortgage will remain growth constrained for the foreseeable future. Nonbuilding and infrastructure spendings are likely to expand by 11% in '26 after increasing by almost 22% in '25. Manufacturing activity, as indicated by the Institute for Supply Management manufacturing index has expanded during the first 6 months in '26. This is a very positive development considering this index indicated contraction for almost all of '25. In line with its indication, we expect overall new orders for industrial off-highway equipment to increase modestly by 1% to 2% and in '26 with some variation depending on the specific segment. Some larger OEM customer forecast in these sectors continue to indicate even substantially stronger growth rates heading into the second half of '26. Turning to Transportation. The Automotive segment has been the most impacted by changing trade policy as well as the removal of the EV tax credits. For '26, current forecasts indicate stable to slightly negative order production growth in both the U.S. and Mexico. Subdued consumer confidence, higher for long the recent spike in gas prices will likely limit growth prospects for the near term or order. On a more positive note and after a significant pullback in '25, we now expect a very positive recovery of above 12% in the Heavy Truck & Trade segment. The defense shipbuilding front, Tivity remains robust. Plug has recently been awarded a number of large multiyear programs remains extremely well positioned to take advantage of what is expected to be a massive increase in defense shipbuilding investments over the next appliance, HVAC and electrical which the key segment of KMC America remained challenging with modestly negative growth expected in '26 on to significantly slow start in early clear reduction increases and referred to more positive growth trends through the second half of '26. Energy. We'll continue to be the strongest catenin segment in '26, a major driver of overall steel demand growth. Power Transmission will remain extremely strong, generating growth of above 16% year-over-year after achieving a similar result last year, modernizing expanding North America's transmission infrastructure is imperative in order to support the significant forecasted increase in demand for electricity across North America especially critical for the previous comment related to data center investment. While renewable energy growth was expected to come under pressure after last year's change in government policy, we're now expecting strong growth of almost 15% in '26 as both wind and solar continue to be the most immediate solution to bridge a growing deficit between surging demand for electricity and trend supply. With that, I will quickly summarize the North American outlook as follows. With the current variance and growth expectations between industry segments, nothing short of unprecedented and despite potential downside risks that still need to be navigated. We remain optimistic about the overall North American ARPU for '26. Additionally, the significant reduction in imports resulting from the Section 232 tariffs has clearly created a better balance between U.S. supply and demand, which is likely to result in higher for longer potential stable. With these positive market dynamics, -- and with our continued focus on higher value-added products and services, we're very confident that Putnam Metals America's continuing operations will once again deliver strong year-over-year growth, record margin gains and further improved financial results in '26. That Overall, we continue to expect real steel demand in Europe to increase been 2% unchanged from the outlook presented during our conference call in March. Nevertheless, the anticipated recovery remains moderate and uneven European steel consumption continues to be well below pre-pandemic levels for underlying industrial activity remains subdued, particularly in Germany. In addition, geopolitical uncertainty remains elevated. 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 to grow slightly in '26, driven by infrastructure investments and pent-up demand. That's continuing manufacturing, machinery and mechanical engineering, a sector in which we now expect a constant development. Higher defense spending and selected infrastructure investments provide some support at the same time, trade policy uncertainty Elevated energy caused weak global demand and challenging financing conditions continue to weigh on investment and production activity. Transportation, starting with the automotive sector, automotive, is now expected to have a constant development in '26. This represents a downward revision from the forecast we made last quarter. 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 center shipbuilding. While the commercial segment in chip building could face increase actually due to economic uncertainty, we're well positioned in the brace ship sector to benefit from upcoming demand. Household and commercial appliances. No major change compared to our previous conference call in March, segment with marginal impact on our European business, but we still expect production to increase slightly in '26. Nevertheless, strong competition peas structural challenge on high-end uncertainty weighing energy to our previous conference call, Iranian conflict still weighs on the forecast. However, slight growth is still expected in the energy industry, driven by the continued electrification of transport and heating as well as further growth in the data center sector. Let's now come to the financial outlook for the full year '26 this year performance in the first half of the year and our current market expectations we forecast a slight decline in shipments and a slight increase in sales for the full year compared to our prior year. In total, we expect a strong EBITDA before material special effects in the full year '26 EUR 170 million to EUR 250 million. Moreover, we also expect operating cash flow to come in positive, however, below full year '25 figures. Glad we're now happy to answer your questions.

[Operator Instructions] The first question comes from Lars Vom-Cleff, Deutsche Bank.

Two quick questions, if I may. I mean, Q2 shipments and especially revenue showed a very solid organic growth. So I would be interested in your view on how Q3 has progressed so far, especially with regards to shipments.

The start of this third quarter was as well in line with what you saw in -- so for us, a strong start. .

Okay. And combining that with still satisfying steel price level. taking your now quantified EBITDA guidance for this year at the midpoint, you would already have reached 52% of that -- to me, that sounds -- looks relatively conservative. So I would be interested in your view on that as well.

Well, I mean, you never know what happens in the near future. So there is always a lot of uncertainty, but the start into Q3 was pretty promising.