Voestalpine AG (VOE) Earnings Call Transcript & Summary

[Operator Instructions] Good day, and welcome to the Voestalpine AG first through third quarter BY-2022/23 Conference Call. Today's conference is being recorded.

Good morning, ladies and gentlemen, and welcome to today's results presentation of our third quarter, respectively, of the first 9 months of our current business year, 2022/2023. I have with me, our CEO, Herbert Eibensteiner, who will give you a brief overview on what happened in the first 9 months and the outlook also on the remaining business year on what we can see from here. Thank you very much. Herbert, please go ahead.

Thank you, Peter. Good morning or good afternoon to everybody. Let me start with the group highlights in Q3 because it was especially relevant for us. So Q3 was quite difficult, driven by really poor economic sentiment, and there were few years that the strong recession will remain or will come in Europe and in addition, because of working capital and destocking activities, we were in such a destocking cycle. All our customers as well and that in an environment with reduced demand. In North America, you know that the high interest rates was where lowering the economic development and China, I would say, the expiring of the COVID measures was, I think, a positive decision of the government, but this infection wave has and will also in the actual quarter impacting the economic activity and -- but this is part of the outlook but with the chance of a quicker recovery afterwards. Nevertheless, in our product portfolio, we saw a very solid development and the focus on high-quality products and also, to a certain extent, the longer contract business was positive. And we have a very strong, very stable parts of our business sectors, very strong was energy sector adherence, especially OCTG business was really excellent with higher prices but all the other parts of this sector, even [indiscernible] was quite good. And we saw a further positive development in aerospace business and also -- and this is our very positive and stable business segment. Railway infrastructure was very strong coming from good demand of rails in Europe and switch system worldwide. And also storage technology, very solid, very long order book still very stable. Automotive, a big sector of Voestalpine was largely stable, I would say, on a moderate level. So the hopes that the supply chain topics would be solved. I think that was not the case, I would say. So that's why we were on a very moderate level. And maybe with the exemption of China and construction industry slowed down and also consumer goods extended their very weak demand. And mechanical engineering, I would like to add, was still good because of a very -- of the very strong order books of our customers so far. So let me come to the very positive figures. Revenue up 29% EBITDA from quarter 3 last year to this year from EUR 1.5 million to EUR 1.9 billion. EBIT margin, EBITDA margin a bit lower and EBIT also an increase of 19% with a lower margin and come to this profit after tax from EUR 700 million to EUR 860 million, which is again up 24% and earnings per share from EUR 3.8 to EUR 4.7. So these are the figures. And I think everything is green. What is not so positive for us is our working capital situation. And Peter Fleischer will lead you through the EBITDA walk and then present you our working capital situation in detail.

Thank you very much, Herbert. Just a quick remark on where the good -- the really very good results come from. You can see on the year-over-year comparison, EBITDA walk. You can see that it was not a perfect volume here. We lost earnings, we lost EBITDA by mix and volume, and that was mostly volume. I have to say mix was actually pretty good. But the real big positive on this slide is shown between price and raw materials. So you can see here that we were able to compensate or I would say, even overcompensate the real dramatic high raw materials and energy prices, and that led ultimately to this very high EBITDA figure. I think also is what usually cyclical companies are doing in an inflationary environment, and that's exactly what we have done here, what we've shown in this past quarter to do were able to pass on these high raw materials, this high energy costs to the market and in this very specific situation, we were able to even overcompensate and create the sort of extra margin. That's the main reason for this very strong EBITDA development and how did these earnings then translate into cash flow. Unfortunately, here I have to say more as positive as we would have liked. You can see we generated a cash flow from results of around EUR 1.5 billion, which is actually a good number. But we had a working capital build of around almost EUR 1.9 billion, quite a high figure I want to explain later on. Cash flow from operations that leads to cash flow from operations of around EUR 356 million negative. And then we had also a bit of funny figure here, cash flow from investments, a positive figure of EUR 267 million. Why is this number positive? We had CapEx, of course, CapEx in the range of around EUR 480 million, which is, of course, a cash out flow but on the other hand, we had a cash inflow of around EUR 750 million from the sale of the HBI plant in Texas and the net position is here shown as a positive cash flow from investing activities of this EUR 267 million. Nevertheless, the free cash flow from the first 9 months then ends up at minus EUR 89 million. Coming to this number of working capital, EUR 1.9 billion, some details on how this figure emerged in the first 9 months. We had -- you can say it is -- it can be broken down to inventories, accounts receivable and accounts payable. And what you can see is that we built up inventories quite a bit by around EUR 1.166 billion. This is the largest portion also here in these 9 months development. It happened mostly, I have to say this buildup of working capital of inventories, in particular, happened mostly in the very beginning of the financial year. So what we did we had to redirect our supplies, raw material supplies after the war in the Ukraine started and we built up stocks in the course of this redirection of supply chains of this inbound logistics. This is a very natural thing. First of all, the supplies from the East were decade-long optimized on the working capital level. And now instead of bringing in the material on very short way via the Danube from the Black Sea. We now bring in raw materials via Antwerp, Rotterdam and bring them down [indiscernible] down by rail or Rhine-Main-Danube Canal. So it's naturally -- it is clear that we have higher stocks just by redirecting our supplies from a very optimized supply chain to a global one, bringing in raw materials from all over the world and into the northern harbors of Europe. This is the smaller part, although this is the volume part of the story, which is around 1/3 of this build of inventories. And I have to say, apart from iron and coking coal, we also stored natural gas in an own storage facility, and this is roughly half of this volume effect in the working capital in the inventory, sorry. And 2/3 of the inventory build was a pure value uplift. I simply raw material prices, energy prices were moving north and so did our working capital value wise, this is something we couldn't help doing. But this has all happened mostly in the beginning of the financial year. And then we had a reduction of accounts receivable, which is a positive on the cash flow. This happened mostly at the end of the reporting period. And also we had a reduction of accounts payable, a massive one, EUR 866 million, and this is a negative effect on the cash flow, and this happened also basically at the very end of the reporting period in Q3. And speaking about Q3, I want to show and share also the cash flow development of the Q3 on a stand-alone basis. You can see we generated cash flow from results on the EUR 321 million. But then again, we had the changes in working capital in the last 3 months of an additional EUR 359 million. This brought us to cash flow from operations of minus EUR 38 million and the cash flow from activities -- from investing activities, which was pure CapEx that's in this period of EUR 162 million, leading to a negative free cash flow of EUR 200 million. Now speaking about these changes in working capital again in Q3, although we are running working capital optimization programs, how did that happen? How could that happen? And you can see, actually, we are on the right track. We started to implement this working capital programs. And you can see the first positive effects are already a reduction of inventories around EUR 124 million. So this is a positive from the cash flow. On the other hand, we also reduced the accounts receivable by around EUR 200 million, also an effect of this working capital program and also positive on the cash flow. But the largest element in this quarter, nevertheless, was a reduction of the accounts payable and the current provisions, but it's actually what we're talking about are the accounts payable here of minus EUR 680 million. This is a massive figure. And this is a leading effect due to the reduced purchase of raw material. So we -- in this working capital optimization programs, we reduced our purchases in order to draw the stock levels down. And this is what you can see already by the reduction of inventories. But of course, as a first effect, our accounts be able to go down. In addition, we have also seen raw material prices, but also energy prices coming down, which was a negative effect on the accounts payable as well because the purchasing value came down simply. So this is something we couldn't help either. So what you can see is that the accounts payable came down because we're running our working capital program. These accounts payable is a reduction is a technical effect, you can see happening in the cash flow. As our inbound logistics are our inbound supply chain is longer than our payment terms are. So this is why when we start our reduction of working capital, the first thing happening is that the accounts payable are going down before in the next step, the inventories are going down. So you can see, although the figures are telling a different story. We're on the right track here. Everything is working in the right direction. Everything is going as we planned. Today's lower accounts payables, today's liabilities are basically tomorrow's inventory. So we are on the track, reducing the working capital that's good, but it has a timing effect, which it does technically very negatively in this Q3 by end of December. And how we are proceeding from here? What the outlook is looking like? Herbert will give you a brief overview again.

So what is the outlook for the remainder of the year? So I think the recession fears diminished somewhat. That means the economy is better than forecasted. Also we have these uncertainties in Europe above all do the Ukraine war but for the U.S., we expect only, if any, a very mild recession and also very positive for us is our activity in Brazil. There is no final clarity about the economic activities after the elections, but what we see and what we discussed with our people there, there are very stable conditions so far also for in the next quarter. And yes, the COVID infection wave in China will impact our Q4 activities to a certain extent. But as I mentioned before, for me, at least from my perspective, it's positive also into next year because this is then when it's over, it's positive it will have a positive impact on the activities in China. Again, aerospace, energy sectors will extend the upward trend, especially the energy sector, I would say, OCTG, again, very high prices at the moment. And I think unchanged demand in railway infrastructure, good and stable in -- on a very good level, I would say, Automotive, as I mentioned before, very stable on a lower level. I do not expect a quick recovery coming from the supply chain issues. We see here and there some OEMs are better in supplying their factories. Some have still problems, and I would say also mechanically engineering, as I mentioned before, with a good order backlog, I think we will see good development until summer, at least till summer. And it's clear that we have to live with the lower demand in consumer goods and also construction industry. And for us is that industrial steel buildings is expected on a lower level. That all leads to -- with all this positive and on the other hand, also negative effects, this will lead to a forecast for a better forecast compared to last to the last forecast of around EUR 2.5 billion. Just to remark that this figure includes a positive one-off effect from a potential sale of land of EUR 120 million. Why do we add this year? I think it's not -- it's not 100%, but it's contingent to also administrative approvals in the course of this business year. So that's so far, very brief our outlook, and I'm sure you have a lot of questions.

[Operator Instructions] We'll go first to Alain Gabriel with Morgan Stanley.

I have two questions from my side. Firstly, on the energy hedges that you have in place. Can you give us a bit more color on how you're approaching the energy hedges? And are you able to quantify a little bit more? How we should think about the hedges going to Q1 and Q2, given the sharp reversal in energy costs? That's the first question.

Energy hedging is quite a complex topic. But what I can say is that we -- most of our hedges, energy, raw material is back to back. That means we try to back our moving parts of longer-term contracts and project business. And this is mostly done by energy and iron ore coal and all those things. So this is more or less the main strategy in our hedges, I have to admit that the energy has become a more important topic and will remain a topic also in the next year as well. But when you look at our contract structure, so we are not on the spot business, mostly, we have contract business in all our business segments. We think that this back-to-back hedge strategy is, how should we say? The best summary to explain what we are thinking about it.

Okay. Are you able to quantify a little bit the energy cost implications going to Q1, calendar Q1 and Q2, just to get a sense of the magnitude of the benefit, if any, as these hedges are being rolled out?

As I said before, so there are -- when it's back to back, then we have frozen the margin more or less. And this is the benefit, and we are free of volatilities in this sector. But when we have longer-term topics, I think it's evident that the energy prices are now lower than in Q3. I think that was the high -- in Q3, we had the highest energy prices in the course of the year. And I would say, when it comes to raw materials, it's a bit lower. I think not that big -- at the moment is lower than in the first -- lower than in the first two quarters. But I would say, at the moment, very stable development.

Okay. And my second question is on your guidance, which implies an EBITDA of around EUR 500 million in calendar Q1. Should we see this as a calendar 2023 low, given that prices and volumes for steel are rising? And obviously, energy costs are also fading sequentially. Is that a fair assumption to make?

It's an interesting question. So I think in the third quarter, is this 120 land sale included. And what I would say is a quarter. The question is what do we expect in the next quarters?

Yes. Or should we see this EUR 500 million as the low for 2023? And then should it start driving sequentially the run rate as we go into calendar Q2 and calendar Q3 onwards. No, I think when you -- I think quarter 3 was a very weak quarter. Also, we have to consider we have this stops around Christmas, which has a seasonal effect as well. I think this was the lowest point.

But if you now in this comment, I think just taking the guidance for our fiscal Q4, which, as you mentioned, is around EUR 500 million EBITDA multiplied by 4 million to have an annual EBITDA figure, I think might be a bit on the optimistic side to be frank. I mean.

After season, summer and winter.

Yes. First of all, exactly usually, our Margalit is one of the strongest one in the normal seasonal pattern. Of course, this year was everything. I mean the year '22, '23, was everything else than normal. But I think also going forward from here, I think it's difficult -- most difficult to forecast is the steel business, of course, which is your main job to know the future of what the steel business is doing. I think the other business segments or the other divisions are a bit more stable in their development. But one thing is still the case. I think we have still very moderate forecast when we talk about the building industry when we speak about consumer goods, when we speak about why goods industry going forward. So I personally would consider 500 multiplied by 4 to be very optimistic for the year '20.

I would say when you ask me, is the actual guidance of EBITDA a possible scenario, I would say, yes, under the given circumstances, when you look with a certain positive momentum, I would say this can be a goal where should go. A consensus, sorry. Peter said that not the guidance, that the consensus -- it was -sorry, I was wrong. So when you asked about the consensus, I would say that's a possible scenario.

We'll go next to Tristan Gresser with BNP Paribas.

Yes. I have two. First, how do you see free cash flow evolve in Q4 on a full year basis? And what kind of working capital release should we expect? And how much CapEx should we see as well in Q4, maybe some catch-up there. I'll start there.

You got the presentation of Peter. I would say in our plan, we should see at the end of the year a free cash flow of around 800 -- of around EUR 800 million that would be EUR 800 million, maybe a bit plus between cash release of working capital release between EUR 700 million and EUR 900 million, considering that there is a certain carryover of CapEx into next year.

All right. Just to clarify on that, the CapEx you expect for Q4 will be then below the initial guidance? And then can you give us a bit of a sense for fiscal 2024, what kind of CapEx you're looking at, given those effects you just mentioned?

I think that will not be a big issue into next year, but we -- our budget is around EUR 900 million CapEx. And I think 10% -- 5% to 10% can be carryover -- can be carried over to next.

Okay. That's clear. And my second question is a bit more bigger picture. Maybe if you can give us an update on the BETA 3 investment and also what kind of EBITDA uplift you're looking at with the new facility, let's say, in normalized market conditions in the past, your still EBITDA per ton average maybe EUR 100 per ton as now the market is kind of settling down and hopefully, we get less volatility moving forward. Do you think with the changes in the marketplace and the changes you've implemented yourself on your product mix and cost base that you could see higher margins than in the past?

Gets you the CapEx program you were referring to, which project was that? We understood the BETA project?

Yes, the BETA 3 line, the investment you're making on your core roll facility, the 2 million ton picking line and more, let's say, an update on that and more bigger picture in terms of a normalized profitability for the steel business, will it be higher in normalized market conditions moving forward than what we've seen in the past, given the change in the product mix and the changes you've made and if you're able to quantify, that would be really helpful.

That's a very detailed question, I would say. What I can say that this investment in this BETA 3 is that we have a continuous mill that means for us that we get a better yield and the better cost base, which is especially very interesting for us also for electrical steel and -- but also other high strengths grade. So that's, I would say, it's a mix of more efficient production and also a higher quality mix. And this -- when we look at the high demand in electrical steel, especially for the automotive industry. I think it will be a positive -- will have a positive impact of our products there. But I would say, we talked about 200,000 to 300,000 tons of our products. So it's a part of our business, which will improve our mix and also has a positive cost impact. But the final figure, I have not -- have no available at the moment.

Okay. And the facility is still scheduled to ramp up by calendar year-end, right?

Yes, yes. It's actually in the commissioning and will then be up and running.

We'll go next to Rochus Brauneiser with Kepler Cheuvreux.

Yes. I am Rochus Brauneiser from Kepler. I have a question on the metal engineering business. As I understand it, can you give us a bit more color what shall we expect from that business in the years ahead? I think on the one hand side, you are flagging that the way business is very stable and strong. And probably there's more to come. On the other side, you are benefiting from very good contributions in the OCTG business right now, which might not be staying at that high levels. When we put all these bits and pieces together, what is the kind of directional earnings trend you're seeing for this business? Are we talking more like EUR 400 million a year? Or is it more like, I don't know, EUR 500 million. Is that the kind of range we should think of? And maybe particularly on the oil and gas business, can you help us to -- how we shall think about that business moving forward with all the headwinds for fossil fuel investments, how you see this business trending in the years ahead in your portfolio.

You are right that OCTG business is very good at the moment. So we are fully utilized. And the improvement is at the moment on the price side. And this will not take forever. That's clear. But what I see or what we see is that demand is still very high and driven by the LNG production, especially in the U.S.A. I think this is a business we can expect on a high level also into the next -- also into the next years. Maybe the price level will change a little bit. But I think volume-wise, and we are focusing on these high-quality tubes. I'm relatively optimistic when it comes to railway, I think we are -- the switch system business, I think this is a very stable business. And when you look at the basic business model, which is 90% maintenance and repair and the rest, 10% or 15% is always new railway infrastructure. So we exactly at the sweet point -- sweet spots, sorry, where we should be because especially in Europe, the infrastructure is in the next years has to be repaired significantly in the Western country, Germany, France and so on. Positive is maybe in the next years that we are part with switches in Egypt, where they have big plans to extend the railway infrastructure. So this would add to this 10% of new railway infrastructure. And what's worth to mention is that in the last years, we were benefiting from the high-speed infrastructure in China. With new infrastructure, now I think this is a more mature activity so far. Now we are coming in this cycle of maintenance and repair. So that's the reason -- the main reason for this very positive and very stable outlook also for the next years. And in this area, we have also more volatile businesses in wire rod and which is also affected by industrial activities. But on the other hand, it's welding consumable, also consumables, also a very stable activity, but on a lower EBIT level compared to the others. So all in all, this is why I think that this Metal Engineering Division will be also in the next years a very positive and stable division in our portfolio.

Yes. In terms of earnings wise, is it more like in the range for the years ahead, what you're expecting for this fiscal? Or is it more in the bracket of what you had the year ago.

Okay. I think with this year and maybe next year, we will be benefiting from this OCTG business. But normally, I would say, over the cycle between EUR 400 million, 450 million, EUR 500 million EBITDA. I think that's a reasonable figure that you can take.

Right. Okay. Cool. Then maybe on steel, -- can you already give us a bit of an indication where you see the steel business trending for your fiscal Q1. So Q4 will be a seasonally better one. How -- what is your current thinking about the Q1? And the levels you may be seeing in your fiscal Q1, would you consider that as kind of a normalized margin in the current macro environment?

Yes. I think we see that the volume is in -- now in -- we are still in January. But what we see is that the volume is by far better than in Q3. So I think it's -- this is -- I would say Q4 is more volume-driven until the end of the business year, you asked into Q1 next year. In the meantime, the price has increased around EUR 100 per ton, 100, 120. And I think this is a price for next quarter, especially when it comes to shorter-term quarterly business. So I would say that this is a positive start in the new business year.

We'll go next to next to Patrick Mann with Bank of America.

Most of my questions have been answered. I suppose the one that I've still got left over is the working capital release, the EUR 700 million to EUR 900 million. Can you just talk about the use of that cash where you're going to deploy it? And then is that it? Do you think you'll be down to normalized levels of working capital, assuming stable raw material prices and stable steel prices. Would you didn't feel like you're at normal levels of working capital at the end of the year at the end of the fiscal year?

Yes, I think it's evident that we will have in the next years bigger projects when it comes to Greentech steel. On the other hand, we want to pay our dividends also out of our cash so far in next year, we have I think -- I think these are the big -- the main point is to prepare for these bigger investments in the next years and also, for sure, but this is normal also dividends.