Swiss Steel Holding AG (STLN) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Swiss Steel Group. This conference will be recorded. [Operator Instructions] May I now hand you over to Burkhard Wagner, who will lead you through this conference. Please go ahead.

Thank you, Tanya. Good morning, ladies and gentlemen. I'd like to welcome you to Swiss Steel Group's media and investor conference call on the occasion of the release of the 2024 half year results. The speakers at today's conference are our CEO, Frank Koch; and CFO, Thomas Loehr. The slides for the presentation, which will follow immediately, the media release and the interim reports have been made available on our website since 7:00 this morning. During the conference, the speakers will make forward-looking statements as described in the disclaimer on Slide 2. These statements are based solely on our expectations or forecasts of future development and may differ materially from actual results, performance or achievements. I'll now hand over to our CEO, Frank Koch. Please, Frank.

Thank you very much, Burkhard. Good morning, ladies and gentlemen. I would like to welcome you to our conference call today, and thank you for following Swiss Steel Group on its journey. Please allow me to begin by formally introducing our CFO, Thomas Loehr. Thomas has joined Swiss Steel Group in November 2023 and has been appointed Group CEO -- CFO late June this year. His extensive experience and strategic vision are valuable assets to our team and grateful for our collaboration and look forward to the advancements we will achieve together. Today, I will give you an overview of the most important facts and figures followed by the market overview. Then my colleague, Thomas Loehr, will provide a deep dive into the group's performance in the first half of 2024. Finally, I will give you an update on the strategic aspects and our way forward. Now let's take a look at the figures on Slide 4. It is clear that Swiss Steel Group is still operating in a challenging environment with weak markets, but we also achieved several strategic milestones. Activity in our most important sales market, mechanical and plant engineering in the automotive industry continues to remain weak in the first half of 2024. Consequently, our sales volume and revenue fell below the levels of the same period last year. Despite these challenges, Swiss Steel Group executed a series of major transactions as part of our strategy program, SSG 2025. These transactions aimed to free up resources for our core business, boost resilience and help deleverage the group's balance sheet. As a result, the group's net debt decreased significantly and the capital increase in April strengthened and increased our equity position. Our EBITDA increase supported by gains from this strategic transaction. However, due to a net working capital ramp-up designed to react more flexibly to customer demand, our free cash flow was negative. As we deep dive into the figures, I will start with the overall market environment and our sales volumes. Let me explain one thing beforehand. After Ascometal's management had sought for protection in March 2024, Swiss Steel Group handed over responsibility for these entities, leading the derecognition of the corresponding assets and liabilities from the balance sheet. Due to these changes in the group's scope of consolidation and to provide better comparability with prior year figures, we disclosed certain financial information on a pro forma basis. This means excluding the contribution of Ascometal. As we turn to Slide 6, we will first look at how the market environment impacted our sales volumes. After a weak second half year 2023, market demand from our main customer industries remained subdued in the first half of 2024. Key indicators for our main markets showed no signs of notable recovery. Our biggest customer segment, the automotive sector faced weakening demand. Production volumes in the European automotive industry dropped compared to the first half of 2023 and remain well below pre-pandemic levels of 2019. Similarly, the German mechanical and plant engineering sector saw a decline in orders during the first 6 months of 2024. In response, we adapted our production schedules flexibly. Crude steel production in the first half of 2024 was 765 kilotons, just slightly up from 739 kilotons in the same period last year, excluding Ascometal. Correspondingly, the sales volume for the first half of 2024 was 572 kilotons, a 6.2% decline from 610 kilotons in the same period of last year. Despite these weak market conditions, our order intake increased by 100 kilotons to 602 kilotons in the first half of 2024, again, excluding Ascometal. However, our order backlog decreased by 15.8% year-over-year, standing at 325 kilotons as of June 30, 2024. Now moving on from sales volume, let's take a look at Slide 7. Our pricing mechanism includes scrap, alloy and energy surcharges to manage raw material and energy price fluctuation. With falling raw material and electricity prices in the first half of 2024, our average sales price also dropped mainly by 10.8% to EUR 2,271 per ton, excluding Ascometal. Due to lower sales volumes, the decrease in average sales price and changes in our group scope of consolidation, our revenue fell by 19.9% in the first half of 2024, down to EUR 1.3 billion. This decrease in revenue was observed across all major geographical markets. The Eurozone and U.S. markets remain subdued. In our main markets, Germany, which accounted for 37% of our revenue in the first half of 2024, revenue decreased by 18.4%. Additionally, our exposure to the French market fell to 9.7% with Ascometal no longer being part of the group. Our CFO, Thomas Loehr, will now take you through the details of the group's performance in the first half of 2024.

Thank you, Frank, and a warm welcome from my side. I'm looking forward to establishing a trustful and concise dialogue with you. We will now continue with Slide 9 to gross profit. As already pointed out by Frank, I will also focus on the like-for-like comparison when discussing the numbers. That means due to the changes of the group's scope of consolidation, the relevant comparison will exclude the former production asset, Ascometal. This being said [Technical Difficulty]

Hello to the conference room. Can you still hear me? Hello? Just 1 second. We are getting the speakers back. Okay. So the speakers are with us again. Hello?

So sorry for the technical problems. I will continue. We've been on the Slide 9, the gross profit, and I would like to start with the explanations on the gross profit. So this being said, the gross profit, that is the revenue less than cost of materials decreased by 10% to EUR 441 million in the first half year compared to the first half of 2023, as Frank said, excluding Ascometal. Main reason for the decline is the lower sales volume. In turn, we scaled down our crude steel production. It is unfortunately the result of the low production resulting from a lower sales volume that inefficiencies are increasing as melt sequences decreased. And conversion costs in the rolling mill and forges are higher. Simply said, our production activity dropped below threshold that we can run out of our production assets in an optimal way. Nonetheless, as we are producing our steel exclusively on the electric arc furnace, we can adapt our capacities more flexibly to swing in demand. In addition, market prices for raw materials relevant to our product portfolio, namely scrap, nickel and ferrochrome continue to trade lower. Likewise, energy markets stabilized further following unprecedented price peaks and volatilities in 2022, and spot prices for electricity and natural gas declined significantly. The gross profit margin, however, recovered from the low levels observed in 2023 that had been negatively affected by significant onetime valuation losses of our inventory. The margin in the first half year of 2024 came in at 32.4% compared to 29.6% in the corresponding prior year period. On the next Slide 10, we are looking on the development of our head count. The change in our group scope of consolidation and our strategy program, SSG 2025 led to a future reduction in head count of 1,155 employees in the first half of 2024. You will recall that we already decreased head count in 2023 significantly from the highest of above 10,000. That was mainly due to the ongoing reorganization of our German production assets, Deutsche Edelstahlwerke, as well as the adoption of our workforce to market conditions. In addition, the divestment of 7 Eastern European sales distribution entities also led to a reduction in head count of 251 employees in the second half '23. The decrease in personnel expenses in the first half of 2024 of EUR 339 million was 1.8% or EUR 6 million compared to the same period in 2023. As already disclosed this year, this is mainly due to a positive onetime effect from amendments to the group's pension plan in Germany, recognized in the first half year 2023. Additionally, personnel expenses and the reporting period were affected by provisions related to the ongoing restructuring of the group. On a comparable basis, personnel expenses increased 1.5% year-over-year. Looking ahead, significant savings begin to materialize in 2024. On the next Slide 11, we look at our EBITDA. We recorded EUR 72 million in the first half of 2024 compared to EUR 58 million in the first half of 2023. The profitability was supported by onetime effects that amounted to EUR 93 million as we booked a gain from a divestment of land and building in Dusseldorf, Germany. We also received the settlement of an insurance claim in relation to the crane incident in Ugitech at the beginning of 2022. And finally, we had recognized a gain from the changes in the group scope of consolidation. It is, however, fair to say that the underlying performance was severely affected by the weak market and an underutilization of our production assets below breakeven. Our current performance is unfortunately far off our goals and ambitions. We will continue to work hard to restore a competitive cost structure and ensuring operational excellence throughout the remaining group. Our SSG 2025 program includes a comprehensive performance improvement program with various measures relating to selling, general and administrative expenses, procurement and efficient operations. Moving now from our P&L to our balance sheet. On Slide 12, you can see the development of the working capital. In the first half year of 2024, net working capital increased from a very low level of EUR 826 million at the end of 2023. The ramp-up was EUR 92 million in that period, which is quite normal for us and follows the general seasonal pattern. In addition, in the first half of 2025 (sic) [ 2024 ], the cautious increase was attributable to, first, the production of order backlog from 2023 and second, the increased incoming orders in Q1, which were pretty good. Working capital is currently being readjusted to the actual market conditions. As we turn to Slide 13, you can see the effects of the buildup in the net working capital in our free cash flow for the past period. Free cash flow, which is cash flow from operating activities less than cash flow from investing activities was minus EUR 112 million in the first 6 months of the current year. The cash flow from investing activities was positive at EUR 45 million as we received proceeds from the divestment of land and buildings at our sites in Dusseldorf, Germany. On Slide 14, we show the development of our net debt. We significantly deleveraged our balance sheet in the first half year 2024. The main contributors were net proceeds from the capital increase of EUR 286 million, proceeds coming from the divestment of land and buildings in Dusseldorf as discussed earlier, as well as the effects from changes in the group scope of consolidation. As a result, net debt decreased significantly from year-end '23 by EUR 198 million to EUR 631 million as of June 30 of 2024. On the next slide, we show the development of our equity. As we have discussed in March this year, we bolstered our equity with the capital increase executed in April '24. Net proceeds amounted to EUR 286 million, which supported the balance sheet, our liquidity and gave us more resilience to weather difficult periods. As a consequence, the equity ratio more than doubled to 26.6%. In addition, we extended all material debt financing on the group. This includes: first, our syndicated credit facilities of EUR 375 million, the ABS program of EUR 300 million and the shareholder loan by BigPoint Holding for EUR 200 million. This concludes my part, and I will hand back to Frank.

Thank you, Thomas. Ladies and gentlemen, dear listeners and excuse again, the technical problem that we had in between, and I hope that you can now follow properly to what my colleague, Thomas Loehr and myself are reporting about. Ladies and gentlemen, as you can see we as the steel and basic materials industry in Europe are still facing challenging circumstances. I will continue by explaining on how we are advancing on our strategy program, addressing our challenges head on and unlocking our potential. When we presented our full year figures in March, we highlighted 3 critical challenges and priorities that Swiss Steel Group needed to address swiftly and effectively. The first priority was to strengthen our liquidity and balance sheet. As Thomas mentioned earlier, we have successfully completed the capital increase, significantly deleveraging our balance sheet and enhancing our equity. This has been a top priority for us in the first half of the year. The second key challenge has been to increase our resilience against external factors and economic downturn by rightsizing our portfolio and divesting nonstrategic nonprofitable businesses. In the first half of 2024, we made substantial progress in optimizing our portfolio. Lastly, our focus for the remainder of the year will be on continuing to establish competitive cost structures and further enhancing operational excellence, which are essential for sustainable profitability and remain our key priorities for the second half of the year. But now let's explore our progress on portfolio rightsizing as we turn to Slide 18. As we explained in March, enhancing Swiss Steel Group's resilience against future economic downturn is essential. So where do we currently stand? In the past, Swiss Steel Group consisted of loosely connected companies, lacking proper integration into a unified group. This lack of cohesion led to redundancies and processes and missed opportunities for synergies. The absence of a strategic fit within the group, coupled with prolonged financial underperformance became a significant financial burden. Our weak portfolio and market performance caused us to underperform during economic upturns and suffered even more during downturns. Thus, we initiated portfolio divestments as a key component of the SSG 2025 strategy program. Focusing on our core activities, we should -- excuse me, we sold our former headquarters and industrial areas in Dusseldorf in the first half of 2024. Additionally, Swiss Steel Group successfully divested its distribution entity in Portugal. We continue to streamline our global distribution network, reducing complexity and SG&A related costs there. Moving forward, our distribution network will concentrate on selling Swiss Steel Group products in relevant markets only, seizing external trading activities. Another major aspect of our portfolio adjustment in the first half of the year involves Ascometal. Early in the SSG 2025 strategy program, we identified Ascometal as a noncore asset for Swiss Steel Group. Due to worsening market conditions earlier this year, Ascometal's management sought court protection in March 2024, leading to judicial reorganization proceedings. As a result, Swiss Steel Group handed over responsibility for these entities, which led to the derecognition of the corresponding assets and liabilities from our balance sheet. Today, we are pleased that Ascometal has found new owners, and we wish our former colleagues all the best. Finally, our Finkl Steel activities held as a stand-alone financial investment were under study for a possible divestiture. However, given the current market conditions and the industrial political climate in the United States, we decided to retain Finkl Steel. In summary, our unfavorable group portfolio had consumed a disproportionate amount of management attention and financial resources, hindering our core businesses. Moving forward, Swiss Steel Group's portfolio is anchored by strong assets such as Steeltec in Switzerland, Ugitech in France, a restructured Deutsche Edelstahlwerke in Germany and the strength in Finkl Steel in North America. The aforementioned transactions mark the completion of the first phase of SSG 2025 aimed at stabilizing the group. Turning to Page 19. It is clear if you want to operate profitability and profitably optimizing the cost base and ensuring operational excellence are not enough. The You also need markets with strong industrial production and corresponding demand, and this undoubtedly exist for Swiss Steel Group. First, our business model and knowledge of recycling and circular economy puts us at a competitive advantage as the rate for decarbonized product continues. Second, our steel is part of just above anything that we need for our daily lives, which means our products are a key success factor for global decarbonization. Third, our dedicated and experienced employees with their mindset for progress are the motor for our transformation and the progress of our customers. Turning to Slide 20, I would like to discuss the decisive milestone we achieved in the first half of 2024. Steel is the backbone of social welfare. Without steel, we wouldn't have the infrastructure and tools that shape our world, no buildings, bridges, cars, trains, essential tools like surgical instruments or microchips. In short, without steel, our daily lives would look completely different. As one of the biggest CO2 emitters, the steel sector plays a key role in achieving the EU's climate goals for 2050. And as Europe's largest electric arc furnace steel producer, Swiss Steel Group is committed to living up to its responsibility. Swiss Steel Group has made a conscious decision to base its targets on an established science-based framework to ensure credible and verifiable measures. In this context, we joined the Science Based Targets Initiative, SBTi in short in spring 2022. In April 2024, Swiss Steel Group has had its decarbonization target validated according to the sector-specific guidelines published by SBTi in 2023 as the world's first steel producer. This validation by SBTi reinforces our commitment to our customers, demonstrating that Swiss Steel Group not only currently operates with carbon emissions significantly below the industry average, but is also dedicated to a continuous journey of further reduction. On the back of our low carbon emissions, Swiss Steel Group supply sustainable steel known as Green Steel to all essential future markets, including mobility, energy generation, medical and aerospace and thus makes a significant contribution to the decarbonization of our society. To achieve the decarbonization of end products, efforts must be integrated and leveraged along the entire value chain. Steel is a crucial link in this chain and thus plays a viable role in the essential process of decarbonization. Against the backdrop of climate change and the decarbonization requirements in our customers' value chain across various industries, the Green Steel segment is expected to continue to grow. Already today, we see increased interest and demand for greener products, supported by a number of significant contracts as we communicated in the recent months. On Slide 21, we turn to the outlook for 2024. For the remaining year, we will focus on, first, capturing Green Steel potential participation in our markets. We will focus on capturing the potential of the Green Steel market and on positioning ourselves to participate effectively in markets once recovery becomes imminent. Second, continuation of the SSG 2025 program despite the challenging market environment, Swiss Steel Group remains committed to its strategic direction. To navigate these dynamic conditions, our focus will be on achieving production excellence through quality, cost effectiveness, speed and operational efficiencies. We will also implement structural measures to enhance flexibility and resource utilization. As part of our ongoing SSG 2025 program, we are prioritizing the implementation of the new sales organization and strengthening cost control measures. The initiatives already underway, along with newly defined actions will contribute to the long-term strengthening of our group. Ladies and gentlemen, as we conclude today's discussion, it is clear that the market environment remains challenging, not just for Swiss Steel Group but for the entire steel and European primary industry. We have made significant progress with our SSG 2025 strategy program, successfully completing the stabilization phase. Our focus now shifts to the strengthening phase where we will continue optimizing our cost base and improving sales effectiveness. The decisive competitive advantage provided by our low emissions aligns with the growing global demand for sustainable steel. Once markets begin to recover, we will be fully prepared to capitalize on emerging opportunities. We would like to thank our employees for their commitment, our customers for their loyalty and our shareholders for their continued trust on the path to a successful transformation.

[Operator Instructions] And first question comes from [indiscernible] from [indiscernible]

Yes. I have quite a few questions, a couple of questions, if you allow. Maybe we can start with the question in your most important market in Germany, especially here in the German automotive and machinery industry. I mean what is happening there? Why is demand so low? What is not working there? Then I would like to ask you about grant. If you just could say then what the share of revenue used to be in the past and what it is now, as well as that of the U.S.? And please could you, again, state or explain a bit more why you have now decided to keep Finkl Steel? Yes, let's -- I mean, maybe if you allow me then later on to ask some further questions, but let's stick to those just for the timing.

So if you allow, we would share the answers between Thomas Loehr and myself. I would like to answer question number one and three, respectively, in the automotive industry in Germany, and then the third question, why Finkl. So an answer to question number one, to be very clear on that, we all do not really know what's happening in the automotive industry in Germany. We just see the consequences and what we are doing here is just an interpretation of what's happening in the German automotive market. It appears like a big uncertainty everywhere amongst producers and, of course, the suppliers about future mobility strategies. And you are well aware of what is happening between mobility as such, e-mobility, hybrid and combustion engines and mobility. And so -- and there are so many aspects moving along. Germany is changing its energy and philosophy and strategy. Behind that, there is also the production of mobility, and the change to e-mobility is by far not being done properly. People cannot afford EV vehicles as such as now the support for EV vehicles have been canceled by a German government. And in between that, there are so many uncertainties, which kind of mobility is the future mobility. It is our interpretation, not more, that the uncertainty leads to a back holding of consumption of cars and especially passenger cars. And that again relates then to what we see there in combination with everything around it. We have not been talking about inflation, about financing costs and about available money in the market. So people are back holding also their investments if it comes to various and general consumer goods, and cars are only one of that. So that is our interpretation for the time being to your question number one. And to your question number three, about Finkl Steel, we have been communicating that we are investigating if an divestiture of Finkl Steel makes sense. And as the industrial climate as such in America is quite favorable, and the headline would be Inflation Reduction Act. A lot of companies intend to move to the U.S. So you have an industrial trend environment for the time being there, despite the fact that business also there is a bit calmer. And in that environment, with calm business and the political situation there, we were quite sure that a reasonable pricing on the divesting -- divestiture of Finkl Steel is the wrong momentum or would be the wrong momentum, and we decided to keep Finkl in the sense of shareholder value and owner value, and we took that decision in the prior weeks. Coming to your question number two, it is Thomas.

Yes. The last question is the revenue stake in France. It's been 9.7% in half year 2024, and the previous year was 11.1%.

And in the U.S.?