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 2021 results. At our customers request 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, Aurelia. 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 2021 annual results. Due to COVID-19 safety regulations and in the interest of health, we decided this year to hold the conference over the phone. The speakers of today's conference are our CEO, Frank Koch; and our CFO, Markus Boening. The slides for the presentation, which will follow immediately, the media release and the annual report have been made available on our website 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 now hand over to our CEO, Frank Koch. Please, Frank.

Yes, and thank you very much, Burkhard. Good morning, ladies and gentlemen. I would like to also welcome you to our conference call today, and thank you for following Swiss Steel Group on its new journey. In my new role as CEO, I will be discussing the market outlook as well as the operational aspects, while my colleague, Markus Boening will be discussing the financial matters. Knowing that we do our report in really tough times and facing the actual crisis between Russia and the Ukraine and conflict. And it appears hard to talk about the economical aspect of our last years. But anyhow, we are glad to present to you our results of the last year and of course, not having the final effects on the before mentioned crisis as of today, as we day by day have some sudden effects in our business, which may be appear in our discussion later on and maybe also in the Q&A. Let me first, as stated, summarize the key topics for 2021 on Slide #3. For 2021, Swiss Steel Group saw a rebound of profitability. Furthermore, the transformation is well underway and on track. Specifically, with regards to profitability, the sales volume increased by more than 20%, despite a softening in the automotive industry in the fourth quarter of 2021. Supported by higher raw material prices. Revenue for the full year rose by 40%. Consequently, adjusted EBITDA in 2021 came at EUR 191.6 million versus a negative one of EUR 68.9 million in 2020. The overall experienced higher raw material and energy prices also resulted for Swiss Steel Group in a net debt increase of EUR 80 million to an extent of in total EUR 720.5 million. With the successful completion of the capital increase in March 2021, we were able to significantly strengthen the capital structure and can now continue to drive forward the transformation accompanied by a broader market recovery. We are pleased to announce that our order book at the end of the year was 691 kilotons, which is 22% above the fourth quarter of 2020, and as such, only slightly below the third quarter of 2021. In addition to the improved economic environment, the cost saving effects of our transformation program further supported the strong rebound of activity and profitability in 2021. To further strengthen the transformation of our group, embedded in our strategy in SSG 2025, we have appointed 3 experienced steel managers to our Executive Board in December of the last year. They will support and steer our growth strategy in our core products, which means engineering, tool and stainless steel as well as our operational excellence improvements and leading carbon-neutral steelmaking position among the European and worldwide steel production. With respect to latter, we are in an excellent position to lead the Green Steel transition with our electric arc furnaces, which in a double sense and enable us to be green by nature. Circular economy and recycling is and remains part of our DNA. With our aspiration to become a leader in green steel, we will differentiate ourselves via technological excellence and customer focus and centricity that will foster Swiss Steel Group's success in the coming years. Light and shadow consequently belong together, talking about unfortunate events, we unfortunately experienced a fatal accident at our Ugitech plant right at the beginning of our fiscal year. A bridge crane collapsed while moving a ladle of liquid steel despite all other production stages being in operation, our steel mill currently is not producing liquid steel. The restart for our melting shop is planned by mid of this year. And the site output is currently limited as we are purchasing prematerial for the rolling mill and subsequent processes inside and outside of our group. I would now like to take a look into the future of Swiss Steel Group and share with you a small way forward to the year of 2025 on Chart 4. And first, we aim to become a robust and best-in-class player for special steel long products. Second, as mentioned here, we will grow profitably and expand our market share in our core product segments of engineering, tool and stainless steel. This is supported by a stronger cooperation across all our business units, bundling markets and technology competencies and setting a clear focus on our customers and customer centricity of all our actions. Third, with our individual product segment strategies and engineering, tool and stainless steel, we will not only leverage our electric arc furnace network across our European and North American businesses for increased efficiency and sustainability, but also pave the way for our growth targets, which indeed we need for the future. Fourth, we will lead the Green Steel transformation in Europe by strengthening our position as 1 of the most ecological and efficient steel producers. How are we going to do that? Our strategy for 2025 gives managers and employees in overall direction in 3 focus areas for achieving those targets. As mentioned, we have appointed 3 new members to our Executive Board at the Swiss Steel Group. They will not only represent their business units on group level, but as product group leaders, they will also take full group right responsibility for our 3 core product groups, which I just mentioned before, our stainless products, stainless steel products, engineering steel products and, of course, note of less important our tools steel products. Organic growth is driven by our core segments in the Green Steel transformation. Our cost efficiency programs embedded in our transformation initiative into financial stabilization and set the basis for our growth ambition. A new target operating model makes the group fit for the future with group-wide harmonized standards and controlling mechanisms along with organizational structures as lean as possible with bundles transactional services leveraging cross-entity efficiencies. We want to better serve our customers by increased proximity and make market-driven measures such as reducing lead times. Our target is to develop new sales opportunities and gain back market shares we have lost in the recent years. With a look to Chart #5. We may concede that today's world is built on steel and tomorrow will even be more. Currently, steelmaking is responsible for approximately 8% of global annual CO2 emissions. Hence, the sector's transformation is essential to achieve a net 0 economy by 2050. Swiss Steel Group is already spearheading this transition today by only applying and investing into electric arc furnace technology, which on average produces about 80% less emissions than conventional steelmaking by blast furnaces. Additionally, sourcing power from renewable sources, we are already today able to reduce our steel footprint by almost 90% below the global average of that. We put a strong emphasis on a recycling economy with our Lighthouse project at Ugine, we are able to offer our customers steel from 100% recycled materials which immensely reduces our and our customers' Scope 3 emissions by completely sustaining from the use of high carbon footprint materials, such as ferroalloy. Additionally, our research and effects of hydrogen is enabling a future green hydrogen economy, which is indispensable for the transition of conventional steelmaking blast furnaces towards low emissions steel. With a look to Chart #6, it is quite obvious to become a global leader in Green Steel. We are pursuing a 3-pronged approach. First, we are working to even further reduce our low emissions, already low emissions with a clear decarbonization strategy with the aim to validate our decarbonization road map by the science-based target initiative. Second, in half year 1 of this year, we will start to report Scope 1, 2 and 3 emissions on a product level in order to transparently let our customers know the CO2 footprint of every single product supplied by Swiss Steel Group and to support them in their own decarbonization efforts. Finally, we will intently work with partners up and down the value chain to reduce Scope 3 emissions and to offer low emission steel solutions, which help reduced their individual emissions. Moving forward to Chart 7, the cautiously optimistic trend in the automotive industry during the first quarter of last year was negatively impacted by production interruptions due to the known semiconductor shortage and other disruptions of the supply chain. According to LMC Automotive estimates at the end of January of this year, light vehicle production in Europe in the fourth quarter of last year was still 25% below the previous year's level. In the mechanical engineering sector, we are also seeing the expected recovery. Overall, this should lead to improved and more broadly based sales and order volumes with a clear disclaimer of the actualities around the trend in prices of ore, which I just mentioned by answering in our statement. The German mechanical engineering sector continues its partial recovery in the last year 2021, and average order intake returned and exceeded the pre-pandemic level. In detail, the order intake in the fourth quarter of 2021 was 15% higher than a year earlier. In the North American oil and gas industry, also a key sales market for the Swiss Steel Group. We see an upward trend in the North American rotary rig count due to increased global oil consumption, production and crude oil prices and so far. Moving forward to the next chart, #8, looking at price inflation across all key input factors. The development of prices for scrap, raw materials and energy showed an upward trend mainly driven by increased demand from the industrial sector. The clear upward trend in average monthly prices for German scrap grades #2 or 8 and 8 at the end of the last year -- excuse me, at the end of the year 2020, continued in the last year, 2021. Overall, the average scrap price in the fourth quarter of 2021 was 92% higher than in the fourth quarter of 2020. Nickel prices continued their upward trend, the average price in the fourth quarter of 2021 was still 24% above the average price for the fourth quarter of 2020. European prices for high carbon ferrochrome continued to trend upwards in 2021. The average price in the fourth quarter of last year increased by 87% compared to the average price in the fourth quarter of the year 2020. The higher prices were driven by strong demand, mainly by the battery sector for electric vehicles and supply shortages. The development of energy prices also showed a significant upwards trend, heavily driven by increased demand from the industrial sector with higher demand for fossil fuels combined with supply constraints and higher CO2 costs. Overall, the average electricity price Germany during the fourth quarter of 2021 was 360% higher than in the fourth quarter of 2020. The average price for gas in the fourth quarter of 2021 was still 553% above the average price in the fourth quarter of 2020. Moving forward to Chart #9. Although the volatility in the automotive was foreseeable due to the shortage of mentioned semiconductor such as electronic chips and sensors, the average order backlog returned and exceeded the fourth quarter of 2020, but declined in the fourth quarter of 2021. As a result, the overall sales volume in the fourth quarter of last year 2021 decreased compared to the previous year quarter mainly driven by engineering steel, where volatility in demand mainly from the automotive industry led to a slight reduction. The average sales price per ton increased from EUR 1,491 in 2020 to EUR 1,716 per ton in 2021, that despite a lower sales volume led to sales revenues above higher prior year quarter. In detail, the revenue increased from EUR 2.288 billion in 2020 to EUR 3.193 billion in 2021. That brings me to the end of Chart 9, and I will now pass the floor to my colleague, Markus Boening for the discussion of the full year and fourth quarter 2021 figures. Markus, please.

Yes. Thanks, Frank. Also a warm welcome from my side. So let's continue with Page #10. Frank already said it, we rebounded strongly and showed significant growth also in terms of profitability. Our adjusted EBITDA for the year came in at EUR 191.6 million versus a negative EUR 68.9 million in 2020 as we benefited from a strong post-COVID-19 market recovery in all our main customer industries. In addition, we continued our focused cost management. As you are aware, we already posted at the beginning of the year 2021 with significantly increased business activity. This trends continued throughout the year despite the sudden drop of demand from the automotive industry at the end of the third quarter. At the same time, we experienced extremely high and volatile energy prices. In order to preserve our margins and liquidity, we adapted our production accordingly. In terms of adjusted EBITDA margin, it's fair to say that we are not yet at the level where we would like to be. However, coming from a negative 3% EBITDA margin in 2020, we significantly improved to a positive 6% for the full year of 2021. Further margin improvement will be a continuous focus. On the left side of the page, you can see the corresponding -- that corresponding to the increase in EBITDA, we also achieved a positive net income in every single quarter of 2021. For the full year, the group results amounted to EUR 50.3 million, compared to a negative EUR 310.2 million in 2020. That was besides the negative operating result also materially impacted by impairments of our asset base. On the next page, we start in the top left chart with our working capital. You will notice the very strong increase of net working capital throughout the year that was fueled by higher raw material and energy prices. The value of the inventory increased from EUR 650 million to EUR 1 billion. This is an increase in valuation of more than 50%, whereby the actual inventory in kilotons was essentially unchanged. This increase in value has naturally a negative effect on free cash flow for the year, which came in at minus EUR 224 million. In the previous year, we posted a negative EUR 100 million. Due to these effects on working capital, we saw a higher net debt increased from EUR 640 million to EUR 721 million is much lower than the negative free cash flow. As you will recall that we executed a capital increase -- an equity increase in the first quarter of 2021 to lower debt and to anticipate funding of our business growth. Leverage, which is net debt over adjusted EBITDA came down significantly during the year, given the materially increased adjusted EBITDA. An additional effect of the capital increase is, of course, an improved equity and in turn, equity ratio. Starting from an absolute equity level of EUR 166 million at the end of 2020 that was in particular affected by the impairments as mentioned before, the capital increase of approximately EUR 223 million bolstered the balance sheet. The equity ratio more than doubled from slightly below 10% to over 20%. We now move to Chart #12. Crude steel production was scaled up significantly in the first 6 months of 2021 in response to an increased demand. As usual, our third quarter was due to the summer shutdown seasonally affected, but we also cut back production in the fourth quarter of 2021 in order to adapt to lower demand from the automotive industry and higher energy prices. At 454 kilotons, the crude steel production in the fourth quarter was below the same quarter of the previous year with 501 kilotons. For the full year, we saw an increase of almost 25% to a level of 2,113,000 tons. In the top right corner, you can see how our headcount developed during the year, reflecting the realization of restructuring programs at Ascometal and DEW. Generally speaking, we reduced our headcount for the fourth consecutive year since the acquisition of Ascometal in 2018 as we continue to improve our operational efficiency and work with a more flexible cost structure using a higher share of outside contracted labor. With the rebound in activity and increased production, we also increased CapEx from the restructuring-related low levels in 2020. In 2021, as a more normal year in terms of our regular CapEx, we spent EUR 107 million. In the bottom right corner, we show the effects of our transformation office, as you are aware, we started in 2020 on a 5-year plan to achieve recurring improvement of EBITDA of EUR 298 million, and after 2 years, by the end of 2021, we are already ahead of plan. We achieved EUR 184 million versus EUR 138 million originally planned. We implemented nearly all planned operational improvements, including some additional ones, resulting in a contribution above plan as higher-than-anticipated volumes versus the initially more conservative turnaround scenario and the effect from the overall positive market environment amplified our progress on a cost per ton basis. With that, I'll close my part and hand it back over to Frank.

Yes. Thank you very much, Markus, and for your report. Ladies and gentlemen, I would like to briefly summarize the today's conference as follows. The year 2021 ended with rising uncertainties with regards to the spread of the Omicron variant, including related absence, partially absences of employees as we could see it in the normal spreads in our industries. As an outlook for 2022, we could have been cautiously optimistic if there wouldn't be a war on our continent. We yet cannot consider finally the consequences unless the fact that there will be such. Some additional uncertainties will remain with the ongoing supply chain disruptions in the automotive industry that should decrease in the second half of the year. In addition, the recently seen extreme volatility and price levels for electricity and gas will be a challenge and that current geopolitical uncertainties will likely lead to price turbulences in the energy markets. By nature, we will have to overall the increasing cost factors of energy to our markets consequently. We, by ourselves, will nonetheless continue our change program. It is a substantial part of the ongoing transformation program to grow closer together as a group. To foster the efficiency of all our group's processes and to bundle market and technology competencies towards growth, innovation and sustainability. Based on targeted investments in low carbon production processes and process innovations based on various ideas of our employees, we take a worldwide leading role in the Green Steel transformation. With our electric arc furnace technology and the input of scraps for steel production, we are already 1 of the world's most ecological efficiency producers and get closer to our ecological goal of sustainable steel production. This severe accident at our Ugine plant led to damage and business interruptions that will have a material effect on our operations. The steel mill is currently not in operation, but we ensure that we put all our efforts on the planned restart in the recent weeks. Actually, we are on track in the scheduled project plan so far. On the other hand, we have ended the year 2021 with a solid order book and price increases across our markets, enabling a reasonable start into 2022 despite many challenges. With generally good demand from key end user markets and all deceived premises. We expect an adjusted EBITDA for the year 2022 and in the range between EUR 160 million to EUR 200 million, assuming a material disruption due to current geopolitical instability. With this outlook, I would like to end my presentation, please feel invited to our Q&A session.

[Operator Instructions] And the first question is from Rochus Brauneiser from Kepler Cheuvreux.

Yes. Yes, a few questions from my side. I guess you mentioned working capital buildup before. Can you give us a sense what kind of magnitude of nickel inventory you're holding and how you see the incremental working capital financing needs arising from this search in or sort of raw materials and metal pricing in the current environment? That's the first question.

Yes. Okay. So thanks for the question, Mr. Brauneiser. So we are having currently a nickel inventory of about 5,000 tons, and that's obviously valued at the prices that we had when we purchased nickel. And right now, of course, 1 of our challenges is to observe the market and to make sure that we continue to secure our supply chain on the 1 hand and also to make sure that we -- as Frank has already pointed out, that we have to pass on any price increases that we see in the market on raw materials as well as on energy to our customers.

Yes. Just for clarification, I would consider in Europe, you're largely relying on stainless steel scrap or kind of scrap-based sourcing, can you give us a sense how much you're depending on like virgin nickel in whatever form? Is this like 10%? Or is it much higher than that?

So yes, we are also obviously purchasing ferronickel and the percentage is, well, the percentage of ferronickel is below 50% of our demand.

5-0. Did I get it correct? 5-0, yes.

Yes.

Okay. You mentioned the pass-through risk. Usually, in functioning markets you have the alloy surcharge mechanism medically passes on the alloying metals to the customer, do you see any deviation from that? And how the formula deal with the inflation coming from electricity and nat gas?

So you're completely right. We have a search mechanism for the raw materials in the first step. We had it already since a long time for all our product groups that we have in the group, and it remains unchanged for the future. So whatever happens there, we will bypass it to the market, as mentioned before. With a question or with regards to the question of energy. We recently, at the end of last year, implemented the same for gas and electricity. So our products, please apologize that we cannot put official details of how we do that, but the mechanism generally spoken, is the same then for the raw material surcharges, which we had in place, repeating for electricity and gas, we installed the same by end of last year, already valid for this year and with immediate effect of January 1.

Okay. And this is also applying in the end for the longer-term contracts?

Absolutely, especially there, when you have a long-term contract, and we have to cover the cost drivers and the factor cost drivers there and especially with regards to those metastatic, yes.

Okay. Okay. Makes a lot of sense. Maybe can you say something about the current conditions on the auto space. I think you already said you're expecting some sort of an improvement on -- in terms of auto build rates in Europe on the back of an improving semiconductor supply, I think this was the kind of consensus you until 2 weeks ago. What kind of evidence do you have that there could be new clouds for the car guys arriving from any disruptions in palladium, hexane on gas, and I don't know, maybe wiring harness, which is to some degree, built in Ukraine and that kind of region. What kind of sentiment or signals are you receiving from your customers at the moment?

Thank you very much for the further question. You are putting the finger into the wound that is exactly what we are trying to chase every day. Unfortunately, we do not have a final conclusion on that or an answer on that. As all our customers and also the producers of, for instance, and the chips or semiconductors in general, do not have the final answer. There is an effect from what you mentioned there, for instance, for the gas from neon for welding and things like that. But unfortunately, we do not have a final or an aggregated and objective answer on that as we have to follow it on a day-to-day basis. It is quite unclear for the time being.

Okay. And what -- are there any other customer industries you're serving or main customer industries you're serving where you could also see any demand destruction risks other than from general consumer behavior and things like that?

Yes. So we have different effects. Of course, we also need to watch our competition, yes, who are maybe in a difficult situation in terms of procuring their raw materials. So there may also be opportunities in the market. On the other hand, for example, when you look into the U.S. and the strong increase in demand from the oil industry due to the higher oil prices. This is also an opportunity for our single business unit.

Okay. Of course. That makes sense. Then maybe a final point, I missed that in the beginning. You talked about Ugine and the accident there. What kind of EBITDA impact is embedded in your guidance you have provided today to what kind of magnitude is that.

Thanks for that question. As you may know, we do not report on business unit level. We have our consolidated view on that. And therefore, we have the guidance out that in principle and is on a reasonable level for what we saw there. So I apologize, we do not report on a business unit level there.

Okay. No, I understand that. The question is, are you putting a number behind the cost EBITDA effect from this disruption?

For us internally, of course, but not external.