Voestalpine AG (VOE) Earnings Call Transcript & Summary

Good day, and welcome to the Voestalpine AG First Quarter BY 2022-'23 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Peter Fleischer. Please go ahead, sir.

Good morning, ladies and gentlemen, and a warm welcome to our results presentation for the first quarter of the business year 2022-'23. With me is our CEO, Herbert Eibensteiner who is happy to discuss the results and outlook and all your questions of course. But before jumping into Q&A right away, I'd like to mention a few highlights of the Q1 development. I think the results actually are well-known. We have to pre-release the figures in an ad hoc statement on 14 of July. So I assume there are no surprises with that respect today. The Q1 result is the highest we ever reported in a single quarter. And I have to say it was mainly driven by an excellent performance of the Steel Division, where we saw a decent margin expansion. But also the high performance Metals Division printed a really strong set of results, mainly driven by lag effects from the implementation of the energy surcharges. Metal Engineering and Metal Forming performed very solid as well. So I think there is no big surprise here. But nevertheless one topic I want to touch is the poor cash flow development of this quarter. The main reason is to build a working capital in an amount of EUR 1.3 billion is really massive build can mainly be attributed to build up inventories, which was built around EUR 1 billion in this quarter. And the largest part of this, around EUR 650 million is coming from a value uplift, driven the raw material prices driving up the value of the raw materials stocks they have finished into finished goods. And to be frank, they have finished into finished goods [indiscernible] largest part of this value uplift of the working capital. So this is something which was in -- which happened inevitably because of raw material price developments. The smaller part, around EUR 300 million is a volume effect. And this stems from deliberate increase of our raw material stock levels. First of all, we built up a natural gas storage for the first time ever. This amounted a bit more than EUR 100 million, so this is an additional -- or this is a working capital build of EUR 100 million we did for the first time. And on the other hand, we increased our raw material stock levels for safety reasons as well. The war in the Ukraine impacted our raw material sourcing directly and the actual problems with logistics in general made it necessary to increase our stock range. As you know, we are not selling our material on the spot market, but we have long term contracts with our customers and supply this customers and the delivery performance is absolutely crucial in our business model, which is the main reason why we had to build up the safety stocks. Nevertheless, I'm completely aware if it gets massive, but on the other hand, I think we really saw the peak of the working capital in this period, in this reporting quarter, and we are actually expecting a release in the coming quarter. So far my very brief remarks, and I'd like now to hand over to Herbert Eibensteiner. And of course to you as well to the audience for your questions.

Yes, good morning. Good morning, ladies and gentleman. I think Peter has given a short introduction. And I think we should right jump into Q&A. I think you have already went through the figures. And now we are ready to answer your questions.

[Operator Instructions] We will now take our first question.

I have 2 questions. Firstly on the working capital. So can you quantify the extent of working capital release that you expect into the current calendar year-end? If current commodity prices remain unchanged, and I guess assuming the macro situation is stable from here onwards.

Do you -- just to clarify. The question was until the calendar year-end or the fiscal year-end because we [indiscernible].

Yes, either or. Either or. I guess the guidance of the release for the next 2 or 3 quarters I'd say.

Yes, as Peter mentioned, the part of the volume path I think it's throughout EUR 200 million, the pure volume part coming from raw materials. I think this is safety -- this is safety stock for redirecting our supply chains for pellets and also coal. So I think this will disappear till the end of the year and the stock for gas I think will be sufficient. This is the safety stock in case we will see a gap stock in Europe as soon as we get a clearer picture. This is ready to release it. I think but depends on the further development of the war. Maybe this will remain at the end of the business year. And the devaluation of the remaining part, of this biggest part of this EUR 600 million, EUR 650 million, it's at the moment difficult to quantify. What we see is that it's clear the peak, the highest raw material prices I would say ever coming from these peaks after the Ukraine crisis and we see that the lower prices which are coming in at the moment mixing down their value also in the next quarter to give you, the final figure is I think difficult at the moment but what we see and there are several scenarios, but for sure we will see a positive free cash flow at the end of the year.

We had also some technical [indiscernible], and the receivables and liabilities I assume from this part of the working capital we might see a release of EUR 200 million to EUR 400 million in the next quarter. And then the value part very much depends on your assumptions on the raw material development. So this is also for us hard to quantify. But we think looking at what has happened on the raw materials, I think iron ore price has come down, coking coal prices have come down substantially. So I think we can expect that a substantial release of the value part of the working capital also until the end of the year, and the volume part as Herbert Eibensteiner mentioned, it's very much depending on how the war in the Ukraine and the logistics supplies, logistic routes situation will perform if we have a situation where we are sure we get all material in time. We will drive stock levels down to normal levels. If the situation is unchanged at the years and time that we have massive delay on the logistic routes and we have a real tightness in cargo space, I think then for safety reasons we will keep stock levels at elevated level, maybe not at today's level, but still elevated.

And my second question is on the HPI plant sale. So now that you have exited your HPI plant or at least 80% of it, should we expect it to recycle this capital into other investments and if yes, where would you be putting your money today that you are [indiscernible]?

Yes, the money for this -- you know that the debt levels are very low. And as I have mentioned before, we think also in growth -- in growing our business and we have plans for that and I think it will be part of the -- of our growth story in the upcoming years and it's investing in new products, but also in acquisitions to improve our markets. So I think this is the main topic of the Texas money.

We will now take our next question.

This is Seth Rosenfeld from BNP Paribas. I have a couple of questions, please, starting out with the EBITDA guidance, please. In this morning's presentation and the release, the commentaries will be quite sanguine on Q2 given the strong order backlog, but flagging much greater risk in the second half principally top down macro. Can you perhaps give a bit more color on the scale of earnings decline you expect by quarter? What's implied especially for fiscal Q2 and how should we expect that progressing into the second half? Is it really depending on the development of macro? Are you already seeing that scale of weakness factor in terms of your order book? I'll start there, please.

We see this record quarter now with everything was up and running at very good capacity. And in Q2 this is also normally affected in -- at first would have been with seasonal effects over the summer stops from customers. And normally lower volumes and looking at the price levels I think we, especially the long term contracts, clear at the end of the calendar year and also half year contract spread over the year. I would say when I can give you a figure around a bit lower EUR 500 million, EUR 550 million normally. And then I would say in Q3 and Q4 that is our estimation roughly divides the rest of our forecast by 2. Then you get a rough figure what we think in the last 2 quarters in quarter 3 and quarter 4 is our scenario for this outlook today.

That's very clear. Can I ask the second question on the outlook for auto demand and pricing? On the demand side, can you give us a bit more color on what you're currently seeing in off-takes early on in July and August? And what's the feedback from OEMs on their expectations for auto production post summer? Are they already seeing some alleviation of supply chain bottlenecks? And the last one, contracts. Could you give us a bit of an update on how contracts have reset in July and any impact of that on price realizations in second half of the calendar year?

Yes, we -- what we see -- so we -- the expectation for the year is not a big change in volumes I would say. I would say we expect volumes level on -- of this lower levels we have seen in the last quarters. July and August is normally the time of maintenance stops of the OEMs which are normal I would say, no surprises so far at least from the planning side. So I would say on the expected level so we have seen in the first quarter a slight improvement coming from the, I would say improvement of this wiring harness shortage. But at the end we think that till the end of the year, we do not expect a severe improvement in the semiconductor topic. So that's why we planned with this normal level also into autumn I would say. We have not very much contracts in July, also a minor part the next half year contracts negotiated in September, October. So we take over the contract from April, half year contract from April and also the yearly contract till the end of the businesses.

The contracts are as far as we have seen them so far it's largely you can say flip to maybe slightly up, but it's very much customer-specific depending from where they're coming from. I think largely speaking you can see contracts -- longer term contracts that just have to live, but what we see on the shorter term business, the quarterly business, is that we are now with this delay which is usual for Voestalpine. We're seeing now prices coming down. It's basically a delay of the spot market movement, 3 months ago. So on average we're expecting average selling price to come down. But the contracts which you mentioned in particular can be penciled in as a rather flattish I would assume.

We will now take our next question.

It's Patrick Mann from Bank of America. And I wanted to ask, given the changing dynamics in the natural gas market. Is that influencing your thinking around your decarbonization plans at all given that energy is in short supply? And then the second question is, I see your outlook is dependent on there not being gas rationing in Europe. I mean, from your discussions or your sort of scenario analysis with your customers and OEMs, what is the sort of range of potential outcomes if we get mild levels of rationing or if we remain constrained to winter, what do you think the impacts will be on volume? I know that you have now built up natural gas supply, right, but what about the impact on your customers in the end markets?

You ask when we see a gas stop in Europe?

Yes, not a full stop. But if we see some rationing.

So rationing. Okay. It's -- I think it's a question of how much it is. So normally I would say, even when gas supply is becoming tight, will be coming tight in wintertime, I think maybe there are some reductions in production, but it depends how much it is this is -- there are different plants in Europe and some countries are not really affected, some countries are more affected like Germany, I think. But what we see is I think this is part of this expectation of lower volumes. So far, we see that everybody is preparing gas storage in all the countries. So at least we think that with all the measures which are taken at the moment, there is a scenario that this gas rationing is not necessary. And this is why we are also prepared for -- with our gas storage which is possibly in Austria. And we have also physically stored these 3 months full production gas volume. And when you think of rationing, so if you're, I don't know 20% or 30% lower, then it goes even longer, so we can keep up production.

Maybe worth mentioning this as well that the big gas-consuming industries are rather in the beginning of the supply chain. So our customers and many of our customers are not really the big consumers, but we're supposed the question will be which of their suppliers will stop their production, and we don't want to be the one to do so. So this is why it's extremely hard to estimate what the gas rationing would mean on our customers because our thinking is that it's mostly the bigger effect is that our customers will be shut down from their suppliers and not from their own gas needs. And as Mr. Eibensteiner just mentioned, with all the storage and with all the preparation we've done, we just try to be exactly not the one who will shut down our customers.

Yes. And I think it's worth to mention that we have a responsibility for our customers, especially when we talk about this longer-term contracts we normally have, and we are not so much in the spot business. I think that this is a responsibility to produce their products. So this is very important for us. And that's why we do this gas storage. Your second question or first question, gas markets, any changes in our decarbonization plans. Not yet. I think we still stick to our decarbonization goals, and we have the rules and regulations in Europe to decarbonize. And we -- our plans are that we will start the first plant in 2027. And I think in the course of this year, we have to decide. Are there any delays or not so far, we stick to our plan.

[Operator Instructions] We will now take our next question.

It's Carsten Riek from Credit Suisse. I have 3 questions, if I may. The first one is on the steel operations. I noticed that the production and shipments were comparably low, especially in June. Could you talk about the reasons here? Is it more the demand? Is it the low water levels in the rivers and drying? And how long do you expect that will last? That's the first one. I'll come back with 2 more.

There is a clear answer. It's outbound logistics. And it's a mix of different topics. You have mentioned some of that. We are not so dependent on the Rhine, more of the venue. It's some volumes for ships heavy placed. So we have to move to railway and with some shortages in logistics as well in other areas. So that's the reason why we are behind, especially in Steel Division. It's nothing to do with lower demand so far. It's only, I would say, lack of railway wagons and trucks.

Okay. Perfect. The second question I have is, you mentioned in your presentation that the OCTG recovery continues. Do you believe that you could even increase your volumes in seamless types further in the coming quarters? And did you increase actually your offers to the North American market in particular?

Yes, I think the biggest portion of our business is coming from our relation to North America. I think we are nearly fully utilized, I would say, with our production. So volume-wise, I think it's not that big increase possible. So we are working quite on a maximum level.

But we are pushing hard for higher prices. If it's clear.

Understood. Last one is on the gas consumption. You had a comparably high gas consumption compared to your peers, but that was to a large extent also because of the Texas HBI plant. Could you give us a rough estimate by how much your group gas consumption will decrease post the disposal of the Texas HBI plant?

So we -- [indiscernible] I think we -- EUR 4 million of -- or 4 terawatt hours was excess and the remaining gas consumption for [indiscernible] is now 5.5 million -- 5.5 terawatts.

We will take our next question.

It's Rochus Brauneiser from Kepler Cheuvreux. Just a few follow-up questions on demand, maybe. I think Mr. Eibensteiner, you talked about auto ready. What do you observe in other compartments like white goods, household appliances and in the construction space, which seem to be the areas which have been hit first by this economic slowdown? Any color on what you see out in the demand would be great. That's my first question.

I think you mentioned all those sectors which are very inflation-dependent, I would say. And this will be, for sure, the first sectors with lower demand. We see that white goods are a bit down. And here from the construction market that new contracts -- or the order intake is lower. That's the reason why we can expect in the autumn here and there, the first reduction, similar situation will be in mechanical engineering. And yes, we think that we will see a bit lower volumes in those areas. And this is also part of our forecast or outlook that we expect those market sectors a bit lower.

All right. And what kind of volume decreases are we talking about here compared to the levels in the first half?

Good question. At the moment we see only the first time. But I think it's too early to give you a clear percentage figures. The first signs we've seen in household appliances, so far, I think this is 5%, 6% at the moment.

And I think what's worth mentioning is also that construction and where we see the deterioration at the moment is rather in the [indiscernible] business. And there it is volume, but I think at the moment, it's predominantly a pricing issue. And the volume is in this downstream business not such a big driver of the earnings equities in the Steel Division. So even if we see -- what we see there is a slowdown in demand volume-wise, but it's accompanied by falling prices, which is, I would say, the large ratio at the moment. And our basic assumption for the full year is that despite the cooling of the economy, the steel plant in [ Links ] will produce around 5 million tons shipments, roughly 4.9 million to around 5 million. So which is not a bad volume figure for the full year despite the cooling of the economy. And in the downstream businesses, we might see lower volumes, but there the deleverage on earnings is not as high as in the steel plant.

Okay. No, that's great. Maybe from a top-down point of view, how do you see the regional performance altering because of the macro slowdown? Is there anything you can flag like Brazil, which might be doing better in that environment compared to U.S. and Europe? Any directional color would be great.

Yes, Brazil is always a interesting market so far, high inflation, high interest normally environment, which is very difficult. But what we see at the moment and also for the next upcoming months that we see a very solid development for our business there. We make products for sugarcane for photo dike and so on, and this is holding at the moment. And this is very interesting. So Brazil will be a very stable similar level as we have seen last year, when we look at USA, United States in the America. So I think so far, I think there is no increase in employment, but still pressure on jobs. So I think at least my expectation is of lending for the U.S.A. So U.S. business will stay at least in the next quarter on a very good level, but with the same situation that we will see a price reduction here and there and some volume decreases and China was at a very low level, and we will see how they can pick up in autumn, I think they have increased the efforts in infrastructure again. So we will see how the outcome will be. I think Europe is hit most. Brazil, very stable, U.S. less problems. And China is, for me, at the moment, a bit a question there -- question mark because at least from my perspective, I think China will improve compared to the very weak first quarter we have seen so far. And yes, that's at least the expectation at the moment.

Okay. That makes sense. And then finally, on gas and electricity pricing, I guess, compared to the last time we spoke, we have seen further inflation on both parts in Europe. What is your thinking about how this is impacting the competitiveness of Voestalpine and globally? It was not -- in Europe and also globally and are there any efforts you're seeing at the moment that the European Commission is acting in any way to keep the industries on a level playing field with other parts of the world?

Good question. Should I be open or not? No, let's start with your first question. I think when it comes to European markets, we can say that we have passed on the higher prices to the market. And this -- you can see that we -- in this first quarter and when you add this structure -- contract structure we have in most of our businesses, we can say, yes, we are -- we have a level where we have passed this on to the market. Second thing, U.S. has also higher gas and higher energy prices, but nothing comparable to Europe. So we cannot pass all these higher energy prices to the market. And in a similar situation is China where we give up or have to give up a part of our margin because we cannot pass this higher cost to the market. So Europe, yes, U.S. not full and China difficult. So that's our view. So most of our business in China is local business, is multi-domestic. So in -- when it comes to railway systems or car business, I think it's less complex. When it comes to high-performance metals, I think it's a margin squeeze there. And when we look at the level playing field in Europe, I think there are a lot of efforts ongoing that we get some -- the industry get some compensation for the higher energy pricing, strong bright compensation energy compensation in Germany and also is now discussed in Austria. So I think the level playing field in Europe is -- will at least improve from Voestalpine's point of perspective. I have -- and to your question, EU commission and politicians. We get a lot of -- we hear a lot of discussion how to save energy and so on. But the word competitiveness, I think was not part of this actual discussion. And at the moment, it's not really room in the political discussion to fight for this level playing field. I think at the moment, we are in the middle of a war between Russia and Ukraine with all the negative aspects for Europe as well. So I think this is the main focus of our competitiveness is not in the focus so far [indiscernible].

We will take our next question.