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

Dear ladies and gentlemen, welcome to the Conference Call of Swiss Steel Group on the full year 2020 results. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Daniel Geiger, who will lead you through this conference. Please go ahead, sir.

Thank you, Kai. Good afternoon, ladies and gentlemen. I would like to welcome you to the Swiss Steel Group Analyst and Investors Conference on the 2020 annual result. Due to the COVID-19 safety regulations and in the interest of health, we decided this year to hold the analyst and investor conference over the phone. The speakers at today's conference are CEO, Clemens Iller; and CFO, Markus Boening. The slides for presentation, which will follow immediately, the media release and the report 2020 has been available on our website swisssteel.com in 7 am in the morning. During the media conference, speakers will make forward-looking statements as described in the disclaimer on Slide 2 and 3. These statements are based solely on our expectation or forecast of future developments and may differ materially from actual results, performance or achievements. As previously and separately communicated for further information on the capital increase, we refer you to the information published in the press release dated March 2, 2021. As noted there in the prospectus is expected to be published on March 8, next Monday, 2021. With this remark, I now hand over to our CEO, Clemens Iller. Please, Clemens.

Yes. Thank you very much, Daniel. Good day, good afternoon, wherever -- from wherever you are listening us, ladies and gentlemen. I would like to welcome you to our conference. I'm very sad that, unfortunately we have to report also the annual figures only by telephone. But we thank you for continuing to follow Swiss Steel Group despite the challenging time in which we find ourselves. As the market has been very difficult to COVID-19, I cannot report too many good news about the annual results. However, there are cautious signs of recovery, at least in the fourth quarter. We will prefile effect on the past year's figures as a whole and then turn our attention primarily to the fourth quarter. In addition, the main focus will be on the expected refinancing and the progress on the transformation. Let me now begin by looking back at the 2020 financial year, which once again, we remember as one of the most difficult in the company's history after an already very difficult 2019. This was mainly driven by a downturn in demand in a way that remembers the financial crisis in 2008. Fundamentally, as a steel company, we are cyclical by nature and therefore, subject to normal economic fluctuations. We can cope with these somehow well as the past has shown, however, what placed an additional burden on us last year and could no longer be cushioned by our comprehensive transformation plan and further adjustments were the effects of the global COVID-19 pandemic and the containment measures introduced in various countries and regions, which led to a worldwide recession. In all our sales markets and particular in our home markets in Europe, these influences caused great uncertainty among our customers and led to a significant drop in demand for special long steel. While the decline was to be expected, the extent and duration of the weakness in demand was not. Chart #6 shows how we countered the measure -- this massive crisis in 2020. Let's remember that after a difficult fiscal year 2019, the first signs of an improvement in demand situation were recorded at the beginning of fiscal year 2020. This recovery was drastically interrupted by the COVID-19 crisis starting then in Europe in mid-March. The massive slump in demand left clear marks on both volumes and prices. In particular, the complete shutdown of almost all businesses activities of major European auto manufacturers and their suppliers had a drastic impact on demand. Production, CapEx, short time working programs and the flexibilization of the cost structure, we're only able to counter the decline in sales volumes to a limited extent. Even though the demand situation normalized towards the end of the second half of the year, significant losses had to be accepted in fiscal 2020. To counter this massive crisis, we introduced comprehensive stabilization measures, mainly comprising 3 areas on which we increased our focus in addition to the renaming as Swiss Steel Group. The first core element was the restructuring concept or transformation program, which has now been extended to 2025. As we emphasized in the same place last year, this concept was the core element of the restructuring opinion, which the banks requested for the release of the negotiated and amended credit agreements. As a reminder, this step involves a comprehensive analysis of whether the existing business model can be profitably transformed and whether the end customer markets will recover in the foreseeable future. As expected, this analysis was positive, and the transformation will be secure the company's successful future. The conclusion of the restructuring agreement in Germany was an important milestone in achieving the 2020 saving targets. We have systematically implemented further cost savings in France, particularly Ascometal. In addition, we achieved the repositioning of our sales and service organization. Overall, we expected our savings target with EUR 110 million. However, due to low volumes, these include various temporary and nonrecurring effects, which account for around half. The second core element was the financing concept to restore the balance sheet and secure the financial basis for the transformation. As we had reported to you over the year, the worsening of the COVID-19 pandemic resulted in an increased need for financing. As a result, this financing gap had to be closed. In the process, state guaranteed loans totaling EUR 98.5 million were secured, helping us to significantly reduce our cost of capital. Furthermore, as already publicly announced the entire bond of EUR 350 million could be repaid. Finally, the expected further strengthening of financing through the equity increase decided in December 2020 and expected to be completed in March 2021, together with a significant easing of further credit conditions will send an important message to employees, customers and suppliers, Swiss Steel Group is a reliable partner for the long term. The third element is the reorganization of the top management. My colleague, Markus Boening, is already on board. And here today, Frank Koch, my designated successor, will be joining latest at the beginning of 2022. Let's look further ahead. A cautious recovery is predicted for the global economy and our end markets in 2021. Although it will not immediately reach pre pandemic levels. This moderately positive outlook for 2021 is based on the one hand, on the start of the COVID-19 vaccination programs at the beginning of the year and the prospect of a return to normality in the coming months. On the other hand, the spread of mutations of the original virus and further streamlined containment measures are unsetting the customers and businesses and creating a high degree of uncertainty. Therefore, the economic consequences of a possible next wave of infection cannot be fully assessed at the present time and are characterized by a high degree of uncertainty. With the further strengthening of the financing structure of the Swiss Steel Group through the planned capital increase approved by the shareholders on December 22, 2020, we will achieve another important milestone, the entrepreneurial freedom thus gained and the significantly improved equity ratio will enable us to drive forward the ongoing transformation with strengthened resilient and confidence to implement our turnaround plan. I will come back to this later together with Markus. Let's continue with Chart #7, which looks at the key macro indicators. From these, you can easily see why our result in 2020 were weak. The beginning of the COVID-19 crisis, raw material prices, which are important for steel price development [ lumped ] sharply. However, raw material prices recovered steadily in the course of fiscal 2020. At the end of the year, for example, the price of German Scrap, Grade 2, was EUR 254 per tonne, an increase of 11% compared with the price of EUR 230 in January 2020. Nickel was supported in particular by growing demand from China, increased demand and production of electric vehicles and government regulations and subsidies stimulating economic growth. Despite the positive development also for ferrochrome, base prices for our steel products remained at a low level due to high price pressure. Figures for the mechanical and plant engineering sector and the automotive industry, which account, as you know, for around 2/3 of the same -- of the sales volume of the group as a whole underlying the downward trend, which continued throughout the year. The German mechanical and plant engineering sector, the impact of the COVID-19 pandemic materialized from April 2020 onwards. And looking at 2020 as a whole, order intake was 9% below the 2019 level. Our most important end market, the automotive industry experienced sharp declines in production due to the COVID-19 pandemic and the containment measures introduced in various countries and regions. With the gradual restart of automobile production in late spring and early summer, the production starts to rise again. However, automotive production did not return to 2019 levels and please remember that was not already exciting year for automotive. In China, in the U.S., passenger car production in 2020 was 7% and 23% below 2019 levels respectively, while in Europe, light vehicle production followed the same trend down 23% from the previous year. The automotive industry also presents a mixed picture in 2021. In January, Chinese passenger car production increased by 33% year-on-year, underlining the resumption of production activity and the recovery from a January 2020 production already affected by COVID-19. On the other hand, production in Germany, in January was still low at minus 24% compared to the unaffected month of the previous year. Forecast for 2021 depend on the success of the vaccination program launched in the end of the lockdown period. However, this is very uncertain at this stage. So any forecast should be interpreted with caution. Looking at 2020 as a whole, it was not possible to compensate the decline in demand caused by the pandemic, and we are now at Chart #8. At 1,535,000 tonnes 16.1% less steel was sold and the average selling price per ton was 8.5% lower than the previous year at EUR 1,490.8. Accordingly, sales declined by 23.2% year-on-year to EUR 2,288,400 million. The decline in sales is evident across all product categories with the reduction in quality and engineering steel being the most pronounced at 28.1%. Is product category, the slump in the automotive industry and the decline in demand from the mechanical and plant engineering had a particularly strong impact in the first and second quarter. Geographically, sales declined in all markets. In 2020, as a whole, the adjusted EBITDA was minus EUR 68.9 million, and was significantly below the previous year 2019, you remember, was EUR 51.2 million. The one-off effects accounted to EUR 30.1 million and are attributable, among other things, to consulting services as part of efficiency improvement programs, restructuring measures and the COVID-19 protective measures. Finally, a consolidated loss of minus EUR 310.2 million had to be accepted due to the poor operating results caused by COVID-19 and the impairment. In the full year 2020 and the free cash flow of minus EUR 100.8 million was significantly more negative than in the previous year. However, with the optimization of networking capital by EUR 75 million compared to the previous year, the cash outflow was reduced. This was achieved mainly through a systematic reduction in inventories in all business units. That brings me to the end of the discussion of the annual figures, and I will now pass the floor to Marcus Boening for the discussion on the fourth quarter figures, Markus, please.

Yes. Thanks, Clemens. And a warm welcome from my side as well. Let's start with the key economic parameters for the fourth quarter of 2020 on Page #10. At 566 kilotons orders in hand at the end of December were significantly higher than in the 2 previous quarters, and they also exceeded the prior year level of 417 kilotons and this was more -- 35.7% more than in the prior year. This reflects the recovery in demand from the automotive sector and is reinforced also by restocking effects from the supply industries. The mechanical and plant engineering sector also recorded initial improvements in demand towards the end of the year. But the demand from oil and gas industry remained at a very low level. In response to the normalization of demand, crude steel production was ramped up again in the fourth quarter and short time working in the production areas was significantly reduced. In total, our 8 electric arc furnaces were in operation for over 436 days in the fourth quarter. This corresponds to a capacity utilization of 80% of the possible production shift. At 501 kilotons, significantly more crude steel was produced than in the 2 previous quarters and the prior year quarter. At 445 kilotons steel sales in the fourth quarter of 2020 were 14.7% higher than in the prior year quarter. This increase was mainly due to 20.8% higher sales volumes of engineering steel. This product group also reflects the recovery in demand from the auto industry. By contrast, volumes sold in the 2 product groups, stainless steel and tool steel were lower than in the same quarter of the previous year. Despite signs of recovery in the key segments, and stabilization of the oil price, demand remained at a low level overall in the fourth quarter. Let's continue with a look at the development of selling prices on Chart 11. The average selling price per ton of steel in the fourth quarter of 2020 was EUR 1,358, significantly lower than the average price achieved in the prior year quarter. General market sentiment in Q4 2020 was mainly volume-driven and price increases were difficult to implement. Although raw material prices increased in the fourth quarter, we were not yet able to realize significant increases in our base selling prices. On the other hand, the lower average selling price also reflects the changed product mix with a larger share of the engineering steel product group. As a result of the weak price environment, revenue in the fourth quarter decreased by 2.3% year-on-year to EUR 605 million. While sales in the engineering steel product group increased by 7.3%, sales of stainless steel decreased by 6.5% and those of tool steel by 18.9%. In regional terms, sales in Europe were 1.3% higher than a year earlier, reflecting the recovery in the automotive industry. In the Americas region, which is dependent on the oil and gas industry, sales did not yet improve. In addition to the volume-driven market recovery, the adjustment of the cost structure and further progress in our transformation program resulted in an adjusted EBITDA of EUR 4.1 million, which was significantly higher than in the prior year quarter despite the decline in sales. Gross profit increased by EUR 13.7 million with our gross profit margin improving by 3 percentage points to 34.5%. Personnel costs remained at a similar level with a significantly higher production volume compared to the previous year. It is important to understand that the savings effect from the restructuring labor agreement of EUR 6.6 million and short time working compensation of EUR 3.6 million were offset by restructuring expenses. Due to the progressing implementation of our transformation program, our headcount of 9,950 is below a level of 10,000 employees for the first time since the acquisition of Ascometal at the beginning of 2018. Onetime effects amounted to EUR 13 million and included restructuring charges of EUR 7.9 million at the Ascometal business unit including the onetime effects, EBITDA as reported was negative EUR 8.9 million. Depreciation, amortization and impairment charges in the fourth quarter were lower than in the prior year quarter at EUR 19.9 million. This includes impairment charges of EUR 3 million in the Ascometal business unit at minus EUR 14.2 million. The financial result in the fourth quarter was significantly less negative than in the prior year quarter. State guaranteed loans at below market interest rates made it possible to finance part of the debt at favorable conditions. Let us now turn to liquidity KPIs on Chart #13. Compared to December 31, 2019, the net working capital decreased from EUR 773 million to EUR 698 million. Q4 2020 was the 8th consecutive quarter in which the value of inventories was reduced. Since the end of 2018, this corresponds to a reduction of EUR 362 million or 36%. We were able to stabilize payment terms for our suppliers. We expect the increase in equity to be positively appreciated by our suppliers and the trade credit insurers. With regards to our capital expenditures, we continue our very disciplined spending approach, however, without compromising the conditions of our production equipment. Strategic investments already initiated will continue to be implemented. As a result, we achieved a free cash flow of negative EUR 18.9 million through the implementation of the measures described. This was around EUR 30 million improved compared to the cash flow in Q4 2019. We ended the quarter at a net debt position of EUR 640 million, well below the December 31, 2019, level of EUR 799 million, also partly due to the capital increase in January 2020. Next, I would like to briefly explain the further steps in the capital increase, which is on Chart #15. As publicly announced yesterday, the equity and offering prospectus will be published next Monday. After that, this subscription period will start, and the order book will be filled accordingly. After analyzing the offers, we will publish the offer price on March 16. the first trading day of the new share will be March 23, 2021. Assuming gross proceeds of EUR 200 million, we would have achieved a pro forma equity ratio of approximately 19.1% as of Q4 2020. Compared to the currently available shareholder loan of up to EUR 130 million, the equity increase provides additional liquidity and improved equity structure and reduced financing and advisory costs. Our calculations indicate that we will achieve savings in the low double digit million. Management and the Board of Directors, therefore, believe that this will provide with Swiss Steel Group with an improved resilience to handle future business uncertainties. The strengthening of the balance sheet and our credit rating will also have a positive effect on all stakeholders. With that, I close my part of the presentation and hand it back to Clemens.

Well, thank you very much, Markus. Ladies and gentlemen, let me then continue on chart number -- with Chart #16, where we try to explain and demonstrate what we have achieved in 2020 as part of the transformation program. This comprehensive program with 4 main pillars was reviewed and expanded again in fall. The first group of structural measures essentially comprises 3 elements and will make a total positive contribution of EUR 84 million to the EBITDA by 2025. In this work stream, in addition to the aforementioned realignment of sales at DEW 2020+ project was launched, which will make the DEW business unit leaner and more efficient. The long-term personnel costs are to be reduced, sustainable by cutting around 400 jobs. The first quarter of 2021, the management of Deutsche Edelstahlwerke was able to reach agreement with IG Metall on a collective restructuring tariff agreement after some key projects has already been agreed in November 2020. This will enable the SST Group to save a total of EUR 39 million in personnel costs in Germany from 2020 to 2022 in the structural measures also include the closure of the rolling mill at Ascometal in Les Dunes, which will lead to permanent savings of EUR 8 million and has already been implemented. Overall, these 2 projects have so far resulted in permanent savings of around 250 jobs. Compared with the previous year, the Swiss Steel Group has reduced its workforce by around 4% and now has just a little under 10,000 employees. In addition to these structural measures, tactical measures, such as short time working, are also being implemented in the plans to improve the earnings situation in the short term. However, these measures are not sustainable and accordingly not all elements, will reduce our cost base in the long-term on a recurring basis. The second block is summarized under the headline operational excellence. This covers a large number of individual projects. This will compensate for recurring annual cost inflation through continuous improvement but will also lead to higher operating performance. All measures will make an EBITDA contribution of EUR 129 million by 2025. In 2020, we have achieved various saving potentials in this area, in particular, cost saving effects in energy, procurement and the purchase of chrome. The third set of measures comprises the strategic investment project. I have spoken here repeatedly about these over the past 2 years, including the investments in the new walking beam furnace at Swiss Steel and the net cap certified heat treatment at Ugitech. We expect the strategic investment projects to make a positive contribution of EUR 26 million by 2025. Various other projects are underway. In addition to the project already planned in detail, we have developed additional measures to reduce our dependence on market development to leverage synergies at group level and to eliminate certain overcapacities at Ascometal and DEW. These include the evaluation of the introduction of a shared service concept, streamlining of administration, but also specific measures at Ascometal and DEW, which I will now not go into the detail here due to the time constraint. The sum of these subprojects will contribute EUR 62 million to EBITDA by 2025. In this area, we have now developed a shared service concept, which is being further evaluated. In addition, as already communicated, we have reduced the workforce we had the headquarter by around 20%. This brings me to the assessment of the market environment in the current fiscal year, the priorities and the outlook for the year on Chart #18. The global economy and many of our key end markets were severely impacted in 2020 by the economic consequences of COVID-19 pandemics and the measures taken in various countries to contain it. In 2021, the global economy and our end markets are currently expected to recover to some extent, but not immediately to pre-pandemic levels. Based on market data from steel and metal market research or in a short version, we expect a partial recovery in 2021 following the slump in demand in all 3 special long steel segments. Strategically, however, the trend towards more demanding production and steel applications will continue unabated, which for the industry is in mines with long-term structural growth. However, the actual level of growth will depend to a large extent, on the overall economic situation, which is difficult to forecast at the present. With the further strengthening of the financing structure of the Swiss Steel Group through the planned capital increase approved by shareholders on December 22, 2020. We expect to reach another important milestone. The entrepreneurial freedom, thus gained and the significantly improved equity ratio will enable us to drive forward the ongoing transformation with strengthened resilience and confidence to implement our turnaround plan. We also expect the improved credit rating to have a positive effect on our customer and supplier relations, and our reputation as an attractive employer. As part of the merger of the 2 Swiss operating units, we will now push ahead with the necessary steps in the first and second quarter of 2021. This will strengthen our market position in the Emmenbrücke side and combine the know-how of steel production with that of downstream price steel producer under one roof. This will enable us to achieve more efficient product improvements and process innovations along the entire value chain. Finally, we will continue to restructure our workforce with the necessary consistency and in the most social responsible way possible. This will mainly affect our 2 units, DEW and Ascometal but we will, of course, also evaluate additional measures. This moderate positive outlook for 2021 is based on the one hand, on the start of this COVID-19 vaccination programs worldwide at the beginning of the year and the prospects of a return to normality in the coming months. On the other hand, the spread of mutations of the original virus and further string and containment measures are unsetting consumers and businesses and creating a high degree of uncertainty. As a result, the economic consequences of a possible next wave of infections cannot be fully assessed at the present time and are characterized by a high degree of uncertainty. Finally, I would like to make a personal comment. I think that with all these changes and measures that I have described my colleague and I have now put the company back on a solid foundation and the company has once again -- can look in the future with confidence. I will, therefore, hand over an orderly situation to my successor. With this outlook, I would like to close my presentation or our presentation. Thank you for attention and now opening the Q&A session.

[Operator Instructions] And we received the first question by the phone from Rochus Brauneiser of Kepler Cheuvreux.

A couple of questions from my side. Maybe let's start with the Q4 performance first. Can you give us a sense how much the quarter was impacted by windfall gains, given they described improvement in nickel prices in other metals? And maybe you can go through the question number one.

The impact in Q4 of those windfall gains was approximately EUR 4 million.

All right. Is it possible to get a bit of a sense how much the decrease in your gross profit per ton between Q3 and Q4 was attributable to the pricing and how much to the change in the mix towards lower-margin engineering steels?

I think Mr. Brauneiser, this question is quite difficult to answer, at least immediately. Maybe then it would be better that you call in here and we try to -- because it's -- actually, you would have to go really order by order, product by product. This is somehow not at least in a serious manner, not possible to answer like that.