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

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

Thank you, Luvinka. 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 2022 annual results. The speakers at today's conference are our CEO, Frank Koch; and CFO, Marco Portmann. The slides for the presentation which will follow immediately, the media release and the annual report 2022 has been made available on our websites since 7:00 a.m. 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 developments and may differ materially from actual results, performance or achievements. I'll now hand over to our CEO, Frank Koch. Please, Frank.

Yes. Thank you very much, Burkhard. Welcome and good morning to everyone. And ladies and gentlemen, I would like to welcome you to our conference call today and thank you for following Swiss Steel Group on its new journey. I will be discussing the market outlook as well as the strategic aspects while my colleague Marco Portmann will be discussing the financial matters. Please let me begin with a summary of the main topics in 2022. Last year Swiss Steel faced multiple challenges, ranging from skyrocketing energy prices to interrupted supply chain due to the volatile geopolitical environment and the shortfall from our operations in Ugine following the severe accident in early 2022. I am pleased that despite these challenges, we succeeded in securing a solid result of EUR 217 million in adjusted EBITDA. But the geopolitical and economic challenges were reflected in volatility in demand. Paired with the missing volumes from our usually main contributor in Ugine, this resulted in a lower sales volume of 10.7% across all product groups in comparison to the prior year. As a result of the introduction of an energy surcharge and due to higher raw material prices, the average selling price increased significantly in 2022, mainly by 42.1%. This led to revenues of EUR 4.051 billion, an increase of 26.9% on the prior year. The past year has demonstrated the necessity to stick to our strategy program SSG 2025. In the course of implementation, we are shaping the transformation of our group in order to create value to ensure resilience, increased performance and lay the foundation for further organic growth. In September last year, we set the cornerstones for building a fully integrated group with the debuts of our new Engineering Steel, Stainless Steel and Tool Steel divisions. Our new organizational setup leads to a more active steering of our group and a more effective focus on customer trust and innovation. We have also just begun to structurally reorganize our group in order to secure a solid foundation for increased performance. Of course, we have also continued and will continue our efforts in sustainable steel production. Based on our already low carbon emissions, our commitment to the Science Based Targets initiative so-called SBTi and our decarbonization road maps, we have set ourselves ambitious goals of reducing our carbon footprint to reach net zero before the year of 2030. Thanks to our unique expertise in electric arc furnace technology and highest operating standards, we are well-positioned for our future targets to become the leading player for green steel. Please allow me to explain our strategy program, SSG 2025. SSG 2025 was initiated in 2021 and had the target to build a strong and resilient Swiss Steel Group in a fast-changing environment. Through implementation, we will transform into a robust and best-in-class special long steel player who leads the green transformation in Europe. In order to achieve our goals, we are building these on 3 strategic pillars: first, resilience and profitability. SSG 2025 comprised of structural improvement measures to increase our profitability and important levers for organic growth, which will be driven by our core segments and green steel. Second, customer-centricity. We are reshaping and strengthening our organization, evolving from a collection of loosely connected companies into one integrated and actively managed Swiss Steel Group. In 2022, we refocused our phase organization around the 3 divisions, Engineering Steel, Stainless Steel and Tool Steel, which will allow a more holistic market approach and a more effective and tailored customer service. Finally, innovation and sustainability. With our customer-centric setup and the closeness to the market and value chain, we are ideally positioned for further innovation. Additionally, our approach on expertise in recycling and electric arc furnace technology, highest operational standards and use of energy from renewable sources have allowed us to use the carbon footprint of our products well below the industry average. As a consequence, our green steel approach empowers our customers and partners in their decarbonization effort to become a leading sustainable champion. Moving on to Page 5. In the first pillar of SSG 2025, we are focusing on our core business and driving improvement initiatives to become more resilient and stabilize our group. To achieve a long-term success and strengthen our group, we are adapting our organizational setup to respond quickly and flexibly in our continually changing business environment. And finally, with the same resolve and building on our strong foundation, we will intensify our efforts to see further growth opportunities. Let me give you a few examples. Knowing the sources of our profitability and their levers allow targeted steering towards business offering attractive margins. We have started to reassess the current and future viability of each of our entities in order to uncover leverage potential. Every entity in itself must be able to generate profit in a predefined target corridor. This will allow each entity to finance innovation going forward. We are taking a closer look at our cost structure, examining process efficiency and effectiveness. In this regard, one of our primary focuses in 2023 lies on our German entity, Deutsche Edelstahlwerke, where structuring reorganization is under evaluation. The program future DEW 2025 will lead the entity back to the target profitability and long-term success. In [ comp ] of refocusing our business, we also already communicated the divestment of 7 distribution entities in Eastern Europe last month. These entities have been selling mainly products that were not merited in our steel shops. And finally, with raw materials and energy prices having been on the rise and making up the largest portion of production cost, it is only logical to implement procurement optimization measures. We are bundling knowledge and activities across the group and increasing collaboration. On Page 6, we show the second pillar of SSG 2025's strategy that focuses on customer-centricity and reliability. The customer remains at the center of our efforts because we believe in a powerful partnership experience that moves our customers forward. And so we launched our customer-centric sales organization in September 2022. The 3 divisions: Engineering Steel, Stainless Steel and Tool Steel each leverage their sales and distribution networks. They have access to the full production network of our group. Nonetheless, best-in-class production remains the backbone of our group. While the divisions know our markets and their needs, our production assets ensure that quality, service levels and cost efficiency are spot-on. Beyond divisions and production assets, we prepared the third organizational entity of our target operating model, our group functions in 2022 and that began implementation in January 2023. Overall, our customers will benefit from more clarity about our portfolio, access to the entire group offering via one central point of contact, combined innovative strength and even stronger reliability when it comes to production, quality and delivery. As a consequence of the reorganization of the group, the former business unit brands are now being merged into one strong brand, Swiss Steel Group. Our logo will continue to combine the color of glowing steel with the shape of infinity, symbolizing our commitment to a sustainable value chain and circular economy. Finally, in the third pillar of SSG 2025 on Page 7, we are focusing on innovation and sustainability. Building on our expertise, we push to meet the challenges of our customers across industry. Our deep understanding of value chains allow innovative products and tailored advice for tangible improvements resulting step-by-step in safer, more efficient and more sustainable solutions for everyone. In 2022, we were able to launch our green steel product portfolio, allowing our customers to choose the most suitable product for their decarbonization needs. With our commitment to the Science Based Targets initiative and our decarbonization road maps, we have set ourselves ambitious goals of reducing our carbon footprint by 42% within the next decade and are finally reaching our net zero target no later than 2040 given the framework conditions are appropriately ensured. Finally, we succeeded in verifying all group carbon emissions according to the greenhouse gas protocol. This marks the necessary solid foundation for the declaration of the product carbon footprint for each of our products in 2023. This will further empower our customers to lower their footprint. Now let's turn to the external factors, starting with raw material and energy as shown on Page 8. Overall, elevated price levels for raw materials and energy placed a strain on our group's performance in 2022. Monthly average prices for German scrap type 2 and 8, a standard scrap rate trended upwards until April 2022. Following declines in May and June, average prices remained on an elevated level throughout the rest of the year in comparison to the pre-pandemic price levels in 2019. In 2022, the average price for German scrap grades 2 and 8 increased by 4% compared to 2021 and by 81% compared to 2019. Nickel prices continued their upward trend, reaching levels above USD 100,000 in early March, which even resulted in a disruption in trading at the London Metal Exchange. Thereafter, prices remained volatile with a stronger increase towards the end of the year compared to the prior month. The average price for nickel increased by 39% in 2022 compared to 2021. The average prices for European high carbon ferrochrome continued to trend upwards in 2022, increasing by 80% compared to 2021. The development of energy crisis showed a significant upward trend driven by the uncertainties on energy supply in light of the war in Ukraine as well as maintenance shutdowns at French nuclear power plant. After prices peaked in late summer, there was a slight relaxation at high levels due to the long and warm autumn. Overall, the average electricity price in Germany increased by 143% and the average gas price increased by 162% year-on-year. To date, energy prices remain volatile and elevated compared to historic levels. We are now on Page 9. The economic situation deteriorated over the course of 2022 due to the high volatility of the geopolitical environment affecting numerous industries relevant for Swiss Steel Group. Business climate indicators and consumer confidence indices generally trended downward throughout the year. Looking at slide, vehicle production in Europe, the year 2022 was impacted by the shortages resulting from the previously mentioned challenges and closed with an average increase of 5% year-on-year. LMC Automotive forecast production to increase by 8% in 2023. The mechanical engineering sector was impacted by the factors I mentioned before, leading the VDMA to downgrade its forecast for production in 2022. The order intake in Germany mechanical engineering declined by 6% compared to the previous year. The trend seems to continue as VDMA forecasts German mechanical and plant engineering production to decline by 2% year-on-year in 2023. Moving on to Page 10. In 2022, the volatility in energy and raw material prices, geopolitical and economic uncertainties were mirrored with volatile demand. Following a strong start to the year and an increase in the first quarter, the order backlog declined considerably in the second and third quarter of 2022. This was due to lower market demands in some areas, but also due to planned lower production capacities as the group focused on higher-margin products for growing certain volumes. The order backlog recovered slightly in the fourth quarter of 2022, but the order situation remains at a reduced level, providing limited visibility into 2023. Consequentially, full year crude steel production in 2022 was substantially lower than in the previous year. This was due to various production shutdowns during energy peak time, lower market demand, but also missing production volumes from Ugitech in the first half of 2022 due to the stoppage of the steel mill in Ugine following the severe accident in early January. Melt shop production in Ugine ramped up in June 2022, but remained at reduced capacity throughout the second half year of 2022 and will reach full capacity in the first quarter of this year 2023. The average sales prices continued to increase and reached EUR 2,438 in 2022, which despite a lower sales volume led to sales revenues above the prior year. In detail, the revenue increased from EUR 3.193 billion in 2021 to EUR 4.651 billion in 2022. That brings me to the end of Chart 10 and I will now pass the floor to Marco Portmann for the discussion of the full year and fourth quarter 2022 figures. Please, Marco.

Thank you, Frank. Moving on, on Page 11. As already discussed, we had a strong start into the year that softened during the summer months and ended reasonably well in the last quarter of the year. For the full year, our adjusted EBITDA came in at EUR 217 million. That is a EUR 25 million improvement compared to 2021. We end the year on a solid basis with the fourth quarter of EUR 37 million, only slightly below the previous year's EUR 40 million for that fourth quarter. During the year, we benefited from a good market demand on impact of a continued COVID-19 recovery, but with high volatility of raw materials and energy prices. We were able to pass on these price increases through scrap and alloy surcharges, which are a long-time standard in our industry. And additionally, we implemented a new dedicated energy surcharge to cover unprecedented cost increases seen in 2022. So far, however, this new energy surcharge, which we implemented towards the end of 2021 is only covering the additional cost and these price increases still leads to a significant dilution of our reported gross profit and EBITDA percent margins. Ultimately, we achieved an adjusted EBITDA margin of 5.4% for the full year compared to a margin of 6.0% in 2021. No doubt, this is not where we would like it to be. Frank already referred to SSG 2025 and the main initiatives to improve our footprint, our sales approach and to lower our cost base. This reshaping of the group will remain key to ensure a significant improvement going forward. On the right-hand side of the page, we show the bottom line, our net income. For the full year, we ended with a slightly positive EUR 9 million compared with EUR 50 million for the previous year. The earnings were affected by an impairment of EUR 16 million in relation to the announced divestiture of distribution activities in Eastern Europe and we recorded higher onetime costs adjusted in our EBITDA relating to repairs of the flooding at our Hagen site in July 2021 and the accident in Ugine in January of 2022 as well as onetime spend relating to the assessment and implementation of our strategy SSG 2025. On Page 12, we start with the top left chart with development of our working capital. As we have stated before, the steady increase until the end of the first half of 2022 was mainly driven by higher prices for raw materials and especially also for energy. During that period, the value of the inventory increased by approximately EUR 220 million, while the actual inventory in kilotons was essentially unchanged. In the second half of the year, we have seen a stabilization of prices, which enabled us to achieve a reduction of our working capital towards the end of the year, supported by a planned lower activity through an extended winter-break. We believe that we have passed the peak in the perform valuation of our inventory, but we must also acknowledge the fact that working capital will remain elevated compared to historic levels for some time still, but with the potential for further easing in the midterm. Supported by the working capital release, the free cash flow in the fourth quarter was positive EUR 68 million, as you can see in the top right chart. This compares to the fourth quarter of 2021 with a negative EUR 54 million. Given the release of working capital towards the end of the year, we were able to limit the negative free cash flow for the full year to EUR 55 million -- EUR 54 million versus a negative EUR 223 million in 2021. The development of our working capital are also reflected in the development of our net debt as you can see in the bottom left corner. In line with the working capital fluctuations, net debt rose at the beginning of the year with a peak at the end of the second quarter to come down to EUR 848 million by year-end. Year-on-year, this is still an increase of EUR 127 million as higher prices for raw materials and energy has to be financed. Leverage, which is net debt over adjusted EBITDA as an indicator of that capacity has been fairly constant throughout the year and was at a ratio of 3.9 at year-end. It is our clear target to deleverage the company, which will require both operational measures and also strategic action. Moving on to equity in the bottom right chart. In 2022, we saw an increase of our equity ratio by approximately 2 percentage points from 20.2% to 22.2%. In absolute numbers, equity increased by EUR 82 million from EUR 449 million to EUR 531 million. Besides the positive net income, the result was significantly supported by valuation effects from pension liabilities due to rising interest rates and FX effect on foreign operations. We now move to Page 14. The end of the year with the lower crude steel production, we adopted our production to the lower demand and high energy prices during most of the fourth quarter 2022. As a reminder, when comparing to the previous year, the whole of 2022 was affected by the unfortunate accident at our Ugine plant in January 2022 as melting only started again in June with the reduced capacity, as Frank already alluded to. In the top right corner, we show the development of our head counts, which have come down steadily during the year, in line with the lower production volumes. And it is also worth noting that this is the fourth year in a row that we also have recorded a lower head count at year-end. CapEx spending, as depicted in the bottom left shows our usual seasonal pattern with higher investments in the last quarter. The total of EUR 115 million is slightly above last year's spending. As you may recall, we have spent only EUR 87 million of CapEx in the corona year of 2020 and we have gradually been catching up with the rebound in activity and demand. Going forward, we may see higher investments given the transition to become the leading green steel producer. Lastly, in the bottom right corner, we show the effects of our transformation of this. As we have stated already in 2020, we have a 5-year plan to achieve recurring EBITDA improvement of EUR 298 million and after 3 years, by the end of 2022, we continue to be slightly ahead of plan. We achieved EUR 214 million versus EUR 204 million as originally anticipated. This was achieved by implementing nearly all planned operational improvements, including some additional ones, resulting in a contribution above plan. This is a very good achievement considering the pitfalls of the accident in Ugine, which has led to a lower contribution as originally planned of Ugine to that program. That concludes my part and I hand back to our CEO. Frank, please.

Yes. Thank you very much, Marco. Ladies and gentlemen, I would like to briefly summarize today's conference as follows. In the current environment of geopolitical and economic volatility, the outlook for Swiss Steel Group for 2023 is characterized by a degree of uncertainty, as is the case for the macroeconomic and industry outlook in general. Following the partial recovery in 2021 and a partial contraction in 2022, we are anticipating a degree of uncertainty for special long steel demand in 2023. However, the trend towards more sophisticated production and steel applications will continue unabated, which means long-term structural growth for the industry. We anticipate a growing trend towards CO2 reduced green steel products favoring our electric arc production route, which, in turn, will create growth opportunities for Swiss Steel Group beyond pure market growth. After a strong start in 2022, the challenging environment weighed on our business, but we still proved right. So Swiss Steel Group pushes ahead with the further implementation of SSG 2025 and expect the strategic measures beginning to take effect. As part of SSG 2025, we will continue to focus on our core business and drive improvement initiatives to become more resilient. To do so we will reassess the current status and future viability of each of our entities in regard to profitability and ability to finance innovation. We are taking a closer look at our cost structure, examining process efficiency and effectiveness. In terms of customer-centricity and market effectiveness, we are focusing on transformation to become a fully integrated partner. We will continue to bundle expertise across the group, roll out our single brand strategy and build on our innovation competencies to drive efficiency at all levels. And finally, we will continue to forge our chosen path as a pioneer of decarbonization in the steel industry. In line with our commitment to the Science Based Targets initiative, we will start with the implementation of our decarbonization road maps aiming to reach our net zero target before 2040 given the appropriate framework conditions. With an economic slowdown starting in the fourth quarter of 2022, we have observed a weaker start into the year. This led to a lower yet acceptable order backlog and shorter lead times, which in turn enables us to react flexibly to market opportunities. On average, we anticipate lower energy prices compared to last year, which would result in a lower working capital on a comparable basis. On the other hand, the sudden drop of energy prices has put pressure on margins in the short term. On this basis, we expect an adjusted EBITDA for the year of 2023 in the range between EUR 160 million to EUR 200 million. Please note, as of now Swiss Steel Group will only be reporting half year results. With this outlook, I would like to end my presentation. Please feel invited to our Q&A session.

[Operator Instructions] And there is one question from the telephone conference coming from Rochus Brauneiser, Kepler Cheuvreux.

A few questions from my side, please. One is maybe just as a bit of a recapitulation of last year. I think when you compare to what you have been guiding at the first half stage for 2022, you finally arrived at the lower end of that guidance range. What I'd like to understand is what differed in the end compared to what you were expecting in last summer, maybe taking reference to the midpoint of your previous guidance range? That would be my first question.

Sure. So this is Marco Portmann speaking. Indeed, as we already alluded to, we have seen 2022 beginning strong, very strong on the back of the corona recovery. And you may recall that we had originally a lower guidance, which we had updated indeed in August on the back of a strong first half year. But we have seen, of course, some slowdown in overall activity and we have seen an extended winter-break now between November 2022 and the early days of 2023, which also meant that considering the energy development, overall, we had a slightly lower margin than we had foreseen and anticipated with our update in August of 2022, which then ultimately led to the reported EUR 217 million of adjusted EBITDA versus our guidance midpoint.

Maybe in addition to what my colleague Marco was just stating, you rightfully state midyear and the second half of the year, we should allow ourselves that we as a management team coming back from the summer break and the maintenances that we had to go through. We anticipated it already a recessional trend by a lower order intake and actively -- proactively decided to slow down our production with regard to year-end also a necessity of net working capital activities. And all in all, this led then to the adjusted cuts and the fact that we ended up on the lower end of the guidance.

Okay. Understood. That brings me to my second question. So on your new guidance now, the EUR 160 million to EUR 200 million, that's basically below what you were achieving last year. Can you provide us a bridge what the main contributors are that you're seeing the earnings lower than last year?

Well, if you look at now 2023, then we must acknowledge that not only, of course, have we seen some slowdown towards the end of 2022, but we see the same impact also persisting now in the early 2023. And nonetheless, while we do expect to achieve solid margins on a per tonne basis in the next couple of months, we also must be quite vary on the many, if not to say, several uncertainties, of course, in our overall outlook, specifically with the visibility towards the second half year. And if we -- if you look at the further development of prices and margins, then we concluded that indeed the guidance as we communicated of EUR 160 million to EUR 200 million to be the most appropriate as expectation now for the full year of 2023.

And in addition to that, we have, of course, been discussing if or if not going with the guidance and what to forecast with the guidance. It will put the whole train around in the business here and just being started the year and we should not deny that the fact of a recession that is named everywhere and it's somehow slowly walking into the European industry. And we still see several disruptions in between in the supply chain that we are supplying into. So having said all that, on the one hand, we really see a slowdown in the production of our relevant industries. Of course, if you see a company with our footprint and technology, we depend very much on energy. We are energy-intense. Fortunately, the energy prices came down, but we should not forget that all in all, if we take economical trends and do not forget that some of our competitors are outside Europe, we are exposed to what we have at hand. And this all leads to, let me call it a decent approach. We want to gain trust with our businesses. We do not want to start with guidance, which in a few months, we have to downgrade.

On the -- on your outlook chart, Page 14, you're saying that you expect, obviously, earnings very much second half balance, so you're going for a stronger second half. Can you allude to what the main drivers for the H1, H2 sequence is? Is this Ugitech or what is driving the earnings dynamic in the usually weaker second half?

It is correct. We are expecting a little bit of a skewed 2023 seasonal development, if you compare it to our own normal seasonal pattern, so to speak. And indeed, again, one of these aspects is our extended winter-break, so we have a slow start in 2023. That does affect quite a bit, obviously, the earnings potential, therefore, for our first quarter because we'll have comparatively on a seasonal part in a lower volume than usual. Indeed, you mentioned Ugitech. As you know, we have just recently in the very early days of this year, only been able to fully ramp up again to the internal capacities of the plant in Ugine. To remind again, we basically began production of the accident with the melt shop beginning in June of 2022, but it has taken us until the early days now 2023 after last actions done over the winter-break to reach again the full capacity. And so of course, that in operation ramp up have a negative implication still that we feel. On top, we have other elements. We also should not forget, for example, in France, that we have 2 business units, Ascometal and Ugitech. We have a couple of strike days that we feel from the French pension reform, which is leading to some negative implications. And so we have a couple of these elements that just lead us to the fact that indeed the early days of 2023, we'll see some implications. And we, nonetheless, despite the uncertainties, therefore, expect a slightly unusual seasonal pattern with a comparatively decent, if not to say, stronger second half year.

And then one question is on energy. I guess you talked about energy surcharge. What I didn't really understand is what you said in your presentation is that you expect the lower energy price to be a cause for temporary margin erosion. So maybe you can clarify that? Because usually, I would expect lower energy costs, you have less of a problem, but maybe I'm missing an element here.

Well, maybe let me specify. So what I said is on the explanation of 2022 with an EBITDA margin of 5.4%, that this is affected by dilution of the margin. Obviously, now if energy prices are going to reduce further as we have already seen some reduction in the very last stage of 2022 and early 2023 so far, then indeed, that dilution of the percentage margin in both gross profit and adjusted EBITDA will reverse at least to some degree and potentially fall away eventually. But mechanically speaking and mathematically speaking, if you, of course, have a significant additional cost that would involve our customers, essentially at a cost 1:1 ratio without additional margin that is diluting our reported margins. And so that's what the explanation on the change between the 6.0% adjusted EBITDA margin and the 5.4% adjusted EBITDA margin of 2022.