AMAG Austria Metall AG

VSE:AMAG

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining the AMAG Austria Metall AG Conference Call on the Q1 2019 Results. [Operator Instructions] The forecast, budgets and forward-looking assessments and statements contained in this presentation are compliant on the basis of information available to AMAG at the time the report was prepared. In the event that the assumptions underlying these forecasts prove to be incorrect, targets are missed or risks materialize, actual results may depart from those currently anticipated. We are not obliged to revise these forecasts in light of new information or future events.

This presentation was prepared and the data contained in it verified with the greatest possible care. Nevertheless, misprints and rounding and transmission errors cannot be entirely ruled out. In particular, AMAG and its representatives do not assume any liability for the completeness and correctness of information included in this presentation.

This presentation is also available in German. In cases of doubt, the German language version shall be authoritative. This report does not comprise either a recommendation or a solicitation to either buy or sell securities of AMAG.

I would now like to turn the conference over to Felix Demmelhuber, Head of Investor Relations. Please go ahead.

[Felix Demmelhuber, executive]

Good morning, ladies and gentlemen, and a warm welcome to our conference call for the first quarter of 2019. Today, our CEO, Gerald Mayer, will present to you our development in the first 3 months. As usual, afterwards you have the chance to ask questions during the Q&A session.

Now Gerald, please start your presentation.

[Gerald Mayer, executive]

Good morning, ladies and gentlemen, from my side.

So we have today the summary of our first quarter 2019. All in all, it was a challenging, let's say, market development mainly -- which mainly affected our Metal Division. It was characterized by a lower aluminum price and high raw material prices, as we will see a little bit later. In downstream, the ramp-up of our plant in Ranshofen was successfully continued, so we are on the good track here. The revenue is up by 4% to EUR 274 million, and this despite, let's say, decreased aluminum price compared to the first quarter 2018. The EBITDA of EUR 33 million is roughly EUR 6 million below the comparing period first quarter 2018. The main reason, as you will see later, are the market developments, and the environment in the Metal Division, we did quite a good job I would say. And our downstream operations in Austria and the outlook for 2019 is rather difficult as early in the year and that as we see so many in high volatility in all our businesses, so we decided to go for a range from between EUR 125 million and EUR 155 million for the time being.

So if we go to the next slide, Slide 5, you see that the demand for primary aluminum is further growing. So we expect a 2.3% growth for the year 2019 compared to the year 2018. Interestingly, the demand in China is down compared to last year. So in 2018, we saw 4% growth. Now we expect 2.9% growth in China.

What we also see is that we are still in a deficit -- in the worldwide deficit, and the expectation is minus 1.5 million tonnes, means that the production is lower than the consumption. And the expectation is that the global stocks, which are LME stocks and other stocks, will decline to a level below 10 million tonnes. So fundamentally, this -- normally it should be good for our development.

So on the next slide, you see the aluminum price. You see that we saw a declining price compared to the first quarter 2018. So in the first quarter 2018, the level was around $2,150 to $2,200. Now in the first quarter 2019, the average was $1,880 per tonne of -- price of aluminum. This, of course, affected our results and our figures.

On the next slide, you see that the -- that we see still nice growth rates for our rolling business downstream. So the expectation is this year 3% growth on the worldwide basis to 28 million tonnes. And it's still unchanged that we expect in the mid-run 7% per annum growth in the transport sector. This drives basically also our demand in our downstream operations. And this is also the reason why we, of course, invested in expanding the rolling mill, in particular, in the last years. Of course, we also know and see and read and we see some volatility in the transport sector right now, many things really not clear how the development will be in the next weeks and months.

Turning the page to Slide 9. We, again, did a comparison how developed the alumina price and the aluminum price. We all know that year 2018 was characterized by, let's say, very high alumina prices, so that the year started quite -- 2018, the year started quite -- let's say, lower prices, also lower prices compared to the first quarter 2019. But then we saw skyrocketing prices of alumina. And the reason was, as you definitely remember, that the main, let's say, big refinery in Brazil had a reduced capacity to 50%. And we saw sanctions against the Russia, and there was one of the biggest suppliers affected, and this led to very high alumina prices throughout the year 2018. What you can see here on this chart on the left side that the prices are lower, of course. This is absolutely okay. But they're still above, let's say, the comparing year 2018 number. So with -- $386 was the average alumina price for the first quarter. On the other side, you see that aluminum price is down by $284 per tonne. And this, of course, the lower aluminum price and higher aluminum price, of course, impact and influence, let's say, financial significantly in the Metal Division, in particular. And I will talk about this a little bit later.

Slide 10, total shipments, positive development here. You see here, this reflects the ramp-up of the plant in Ranshofen. You see 9% increase for our rolling operation from 54,000 tonnes to 59,000 tonnes, plus 9%, more or less on plan. So -- and the main drivers here, again, is aircraft and automotive customers who drive here also our increase. And this is exactly what -- how we see the market. We also have a sharp increase or had a sharp increase for our Casting Division. Again, you perhaps know that last year, we had a major change in one of our facilities, so the number for the first quarter was perhaps a little bit lower than normally. In addition to that, now we take advantage of new equipment which is more efficient. So they did an excellent job here, our casting people.

We had a flat development for our Metal Division. We had 28,000 tonnes for the first quarter. We are still in the first half of 2019. We are peaking pot relinings at our stake in Alouette, and then things should normalize. We are well on track here. And again, some additional words a little bit later.

So that's a review of Slide 11 to the revenues. You see a slight increase in revenues in the first quarter, so it was driven by volume growth. And this despite, lower aluminum prices, we still managed to increase total revenues from EUR 263 million to EUR 274 million. And in the bridge, you can exactly see that there are just 2 things which stand out. And one thing is the volume increased by roughly EUR 20 million, and the aluminum price, which is, of course, it's a burden on the revenue, and it's EUR 11 million. So -- but all in all, I would say nothing spectacular here.

The next slide, the development of the results, the EBITDA. As I said before, we are down EUR 6 million. And on the right side of this chart, you can see that in the Metal Division, we saw sharp decrease by EUR 10 million roughly. And we managed to compensate the barrel feed by an increased result in particular in the rolling and casting operations. So on the one side, the reduction in metal was driven by market, as I mentioned before. On the other side, we had also some -- let's say, we had a good development because of the ramp-up of the rolling mill on the one side. On the other side, there's also part in it, and I will talk about this on the next slide, which refers to IFRS 16, a new standard accounting for leases, which has an impact on our divisions but not on the bottom line, not on the group results.

If we talk about this leasing effect, you see it on page -- or Slide 13. What changed, and you definitely know that now, as soon as -- if you have a lease contract, now you are obliged to capitalize the right of use of an asset and depreciate it instead of, let's say, realizing or recognizing just the rental expense. So this is what changed. And for AMAG, there's no change on the group level, more or less no change on the group level, but there is a change between these divisions. And we see a shift from the Service Division to Rolling Division, means Rolling Division and Casting Division has a slightly higher positive impact on the result and in Service Division, it's a negative. And all in all, there's no impact on the overall EBITDA level of AMAG. This is what you can see on Slide 13, and this is just IFRS-associated.

Slide 14, the EBITDA reconciliation, the bridge. Again, we started at EUR 38.9 million, first quarter 2018. The aluminum price had an effect of minus EUR 4.4 million. Prices, premiums in general had a negative effect of EUR 4 million. We had some tailwinds last year, in particular, from premiums in Canada. Then raw materials, as I said, alumina is still more expensive but also other raw materials, like coke, like pitch compared to last year. They result in minus EUR 4 million all in all. And the volume increase made it possible to compensate at least a part of it, so plus EUR 7 million from particular volume, and so we ended up at EUR 33 million EBITDA.

On Slide 15, you see the key figures. So just one thing to add here. I think we do not have to lose time here on this slide. But the overall depreciation level we expect for the year 2019 is roughly EUR 82 million.

On Slide 16, you see additional key figures, in particular, cash flow. If you look cash flow from operating activities, we have negative impacts on the one side, from volume wise, so we had to increase the volumes, and so this accounted for roughly EUR 10 million negative. And also the, let's say, the price level of aluminum compared to the year-end 2018 increase slightly the overhead, a negative impact on working capital. So this is what is reflected in cash flow from operating activities. Capital expenditures are roughly at the level of last year. And all in all, we still, of course, have a very solid and -- balance sheet and a sound financial structure.

Some words to the divisions. Slide 17 is the Metal Division. Metal Division, as I said before, it's the same story, and I would say you can reduce the story of the first quarter to the Metal Division. And the ramp-up in the Metal Division, of course, were affected by the higher raw material and lower aluminum prices, and this adds up to this roughly EUR 10 million decrease in result for the first quarter. What we see right now, at the end of the last quarter, things were getting better, so we expect, yes, that it will definitely be better in the next month for Metal Division.

Casting Division, I would say a very decent and good first quarter, so shipments were significantly up. As I mentioned before, we had the new melting furnace. We measured the modernized, and so it was possible to also, let's say, get some productivity gains and higher volumes, and this ended up in a increase in the results. There's also an impact from the shift from Service Division to Casting Division because of this new IFRS 16 standard of EUR 0.4 million. So -- but it's all in all, Casting, as we always say, is our smallest division, but they did a very good job. And I would say we expect also a stable and good year 2019.

In Rolling Division, Slide 19, the -- I would say the development and the ramp-up continued successfully. We had positive, of course, influences from higher volumes. We had some lower ramp-up costs compared to the prior year. And we had, of course, support from this IFRS 16 shift from Service to Rolling in an amount of EUR 3.6 million. And shipments were significantly up, as I mentioned before, and we said consolidated too with our ramp-up, which was quite successful. And as I think I also mentioned before, the main drivers for the volume increase is aircraft business, our automotive business, but we also saw increases in foil-stock and tread plates and so on. So it was quite positive volume wise and -- yes.

Then on the next slide, just some words on the outlook. It is really difficult right now. No one knows how long this situation at Alunorte, for example, will last with the capacity of reduction of the refinery in Brazil, which affects the market on the one side. On the other side, we have fundamentals, we would expect higher aluminum prices, but we don't see them in the market. So it is difficult to make a forecast, in particular, for the Metal Division on the one side. On the other side, it is also difficult right now to, let's say, forecast with regard to, let's say, the general economic development, trade conflict, sales development in the transport industry, which is -- makes it really difficult and therefore we decided to go for a wide range in the earnings forecast and go for EUR 125 million to EUR 155 million for the time being, as I mentioned before.

So this was our quick update on our first quarter, which was, as I said, highly influenced by market developments, in particular, in the primary Metal Division and metal, and we are happy to answer your questions. Thank you.

[Felix Demmelhuber, executive]

Thank you very much, Gerald. Now we can start with the Q&A session.

[Operator]

[Operator Instructions] And there are no questions at this time. I hand back to Felix for closing comments.

[Felix Demmelhuber, executive]

Okay. Then thank you very much for joining this call, and we wish you all a nice day. Thank you. Oh, now I think there is a question from Stephan Trubrich.

[Operator]

The question is from the line of Stephan Trubrich of Kepler Cheuvreux.

[Stephan Trubrich, analyst]

I have 2 questions, if I may. First, on the guidance, I mean, I totally understand the wide corridor and obviously the uncertainty. You see that you give the range between EUR 125 million and EUR 155 million. But if you were to assume that everything stays as it is now, would it be fair to assume that we are more towards the EUR 155 million or more towards the EUR 125 million? This would help. And then the second question would be, as you are now, Gerald, on the helm and I mean thinking longer term and, let's say, ramp-up of your facility in Ranshofen runs well, what could be further expansion projects or what do you think might make sense to add to the AMAG portfolio?

[Gerald Mayer, executive]

I fully understand your question regarding the guidance. It is really difficult. And if you say everything stays like now, then we would have definitely -- my opinion, we would have difficult year for the Metal Division on the one side. But on the other side, we see the things are improving for Metal Division. So costs are trending down. As you know, alumina is at $380-something, and other raw material prices also going down a little bit. On the other side, we see that also the price for aluminum went down in the last days again. So after seeing a level of more than $1,900, now we are at $1,800, and now [ $1,850 or $1,840 ] yesterday. So it's really difficult, also saying, if everything stays the same, that we wouldn't have a good result in primary metal. And you definitely need an increased result in primary metal in the next quarters to reach, let's say, the EUR 155 million you said. On the other side, we see this is good, I would say, first quarter in rolling. In rolling, many things are unclear. In particular, with regard to the transport sector, we know difficulties with the plane, which makes things unclear for us. Will we be affected? Why not? After -- now we don't see big effects here. On the other side, we read on a daily basis about the German automotive industry, which is always very difficult to really understand the impact. And based on the -- let's say the trade conflicts, what you can see here and there is some margin pressure on some type of products, and no one knows how this really will develop. For us, believe me, I'm now here for 12 years, and it's really, really tough. It was never been that tough to do forecast as it is right now, so many things are unclear. We are somehow traveling in the fog, and this is why we are so cautious and why I do not want to do a precise forecast. This is for the first question.

To the second question, portfolio, how would we develop in future. We started a strategic process in our business at AMAG. This is one of the main jobs we do this year. And we definitely will inform you as soon as we know more how we want to develop the company and -- for the future. But for me it is crystal clear that we have to, let's say, define the direction where to go in the next, let's say, 5 years plus. And we are in discussion right now with customers, with suppliers and trying to get a good view on not just our market, on many markets, and then we define where to go, and then we share it with you. It's too early.

[Operator]

The next question is from the line of Markus Remis of RCB.

[Markus Remis, analyst]

Technical question first please regarding the IFRS 16 effect. The shift we've seen within the segments from Services to -- from your Rolling, should we assume a linear development in Q2, 3 and 4 as well, so is there shift towards...

[Gerald Mayer, executive]

Yes, it is from now on the new standard. So it was -- it is. So the point is up to now you saw rental expenses in Rolling and Casting. As perhaps some background, the Service Division at AMAG, builds the buildings where our facilities are in and in the -- in Service Division, we saw up to now depreciation. And we saw income from, let's say, rental expenses on the one side. On the other side, the rental expenses were then accounted for in the operating divisions. And what changed is that now the operating divisions have to capitalize this right of use, as it is called in IFRS, means, the asset is now intangible asset somewhere are capitalized, and they have to account for -- they have to depreciate. But you will not see a rental expense anymore. So therefore, it is a linear development from now onwards.

[Markus Remis, analyst]

Sure the dynamics are clear. But so 5 -- sorry, EUR 4 million per annum from services into the other divisions, that was basically the question.

[Gerald Mayer, executive]

Per quarter.

[Markus Remis, analyst]

Per quarter, yes. Okay. Then secondly, on the metal volumes, I would have actually assumed that the pot relining has peaked already in the last year. Now you're still not...

[Gerald Mayer, executive]

It is a 2-year -- no, it's -- we had a peak second half of 2018, first half of 2019. This is unchanged. So we have 2 years of peak, and this is '18 and '19. And we will be at the normal run rate, more or less at the normal run rate in the second half of this year. So we are doing an excellent job. We are now relining 6 pots per week, so it's a fantastic job they do. And I'm convinced, second half, it will be quite in a normal -- again, normal mode.

[Markus Remis, analyst]

Okay. And then in terms of trading conditions, can you maybe provide some color on how the call-offs from the auto sector are developing at the moment? And then similar question relating to Boeing, if you see any repercussions from the recent incidents?

[Gerald Mayer, executive]

Yes. So there -- I would say 2 -- there are 2 ways to answer this question. On the one side, in automotive, AMAG saw a 21% decrease -- increase, sorry, increase first quarter 2019 to first quarter 2018, so a significant increase. This is the first part of the answer. The second part of -- this is really super and -- but it is not as we planned because we planned even a higher increase. So there is some sort of an impact which we also now see on our side. So that's the first time that we had plans how and, let's say, contracts, plans and things which we agreed. And we saw some slight decreases, let's say, based on our plan, but still strong increase compared to prior year. And this is how we think it will develop also in the next month. And so yes, there is some also impact, but all in all, for us, it is very positive. If you look at the 7% market growth for transport in general, and we saw a 21% growth Q1 to Q1 at AMAG, it is positive. For aircraft, similar, we saw a sharp increase compared -- if we compare Q1 '18 to Q1 '19, it was even a higher increase than in automotive for AMAG. And up to now, we do not have a negative reaction from Boeing, and they, up to now, did not reduce, let's say, the orders from AMAG. So it is -- we are still some sort of very cautious because it simply -- in my opinion, it simply depends how long the situation lasts, the grounding situation, because when they really refuse for a longer period of time, let's say, the build rates, then it has further impact, of course. But up to now we are still, yes, as normal.

[Operator]

[Operator Instructions]

[Felix Demmelhuber, executive]

Okay. There is no further question I see. So thank you very much, and have a nice day. Thank you.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.