Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to today's Q1 2023 Conference of Klockner & Co SE. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Felix Schmitz. Please go ahead, sir.

[Felix Schmitz, executive]

Yes. Thanks, and welcome to our Q1 call. With me today are our CEO, Guido Kerkhoff; and our CFO, Oliver Falk. They will now guide you through the presentation. After the presentation, we are happy to answer your questions. With that, I'd like to hand over to you, Guido.

[Guido Kerkhoff, executive]

Thanks a lot, and welcome also from my side to our Q1. Let's directly jump into the highlights of this quarter. Again, such a strong result. Shipments were slightly down year-over-year, but this has to be seen in context of the exceptionally strong demand we experienced back in Q1 '22. In fact, shipments were very considerably up on [indiscernible]. Sales came in below the previous year figure due to the overall price decline. Gross profit went down year-on-year because of the less pronounced pricing dynamics compared to the unprecedented price movements in Q1 '22. The same applies for EBITDA before material special impact. However, despite the challenging market environment and supported by our proactive net working capital management, we achieved a strong result of EUR 69 million. Due to our strong operating results and our proactive net working capital management, we generated a strong operating cash flow of EUR 64 million. Accordingly, net debt came down significantly year-over-year and was also reduced quarter-over-quarter. We continue to operate with lean inventories going forward and expect a strong operating cash flow for ‘23. Now let's come to an update on our strategy. In Q1, we continued our strong track record of executing our spreads materializing the opportunities behind the sustainability transformation in our sector is at the core of our strategy. In the recent quarters, we've successfully demonstrated our leadership role in a sustainable steel industry by enabling our customers to build CO2 reduced value chains through and with us and by thanking our services all the way to our customers' gain. Our German country organization recently took exposed electric truck from Daimler to service, the launch of the first eTruck in our logistics fleet in Germany [Indiscernible] of the mobility transformation of our truck fleet. Our CO2 reduced services manage the last mile of logistics with virtually emission-free delivery to our customers. This service perfectly complements to our [ exogen ] products and services and is fully integrated into the CCF values that we delivered. Last but not least, the eTruck is not just supporting our customers to build CO2 reduced value chain. It also helps us to reduce our own CO2 emissions and will further accelerate our ambitious path to Net Zero. In addition, we continue to pursue our digitalization and automation initiatives. Our proprietary AI solution custom systems and more than EUR 280 million sales volume in Q1 '23, a strong level. Now, let's slide into the financials of this quarter.

[Oliver Falk, executive]

Yes. Thank you, Vito. As we stated in previous calls, we are committed to a strong through-the-cycle performance has demonstrated the new crane normal of higher highs and higher lows in the recent months of full year 2022 and now also in quarter 1, 2023. Our initiative of actively driving down our inventory in the second half of the year 2022 clearly paid off and demonstrates our ability to perform in any market environment, be it in an upward or downward cycle. As a result of our proactively enforced inventory reduction, we mitigated a large part of negative windfall risks and have reset our stock price in the recent months. All this was achieved in an environment of rising prices. The result is visible in our P&L and our cash flow statement for quarter 1 2023. Let's take a look into shipment sales, gross profit and gross profit margin for the first quarter. Shipments were only 3.6% below the previous year's level despite the extraordinary high demand in quarter 1 2022 and were seasonally driven by -- up by 15.9% quarter-on-quarter. Sales were down at EUR 2.1 billion coming from EUR 2.4 billion in quarter 1 2022 due to the overall lower price level. Gross profit came in at EUR 357 million after gross profit of EUR 482 million in quarter 1, 2022, but was considerably up by EUR 88 million quarter-on-quarter. Gross profit margin went down from 19.8% year-on-year but up from 13.5% quarter-on-quarter to 17.2%. We will now focus on the EBITDA of the group. This quarter once again strong. EBITDA before material special effects was at EUR 69 million. Reported EBITDA came in at EUR [ 48 ]million. The negative price effect of EUR 130 million year-on-year resulted from the overall lower price level in all segments. We also saw a negative volume effect of EUR 17 million year-on-year due to the base effect against the background of the very high demand in quarter 1 2022. I was up, driven by higher expenses for shipments, operating supplies, repairs and maintenance and travel expenses, partly offset by lower rents and leases. Thus, the increase in OpEx was mainly driven by overall increased prices. Lastly, we had material special effects of EUR 21 million, mainly from the implementation of the hub structure in order to support further growth in France. We are now coming to the cash flow and net debt. We had a net working capital release of EUR 34 million, sustainably driven by our smart networking capital management initiatives. Cash flow from operating activities came in at EUR 64 million in quarter 1, 2023, taking into consideration interest and tax payment of a total EUR 17 million. Gross CapEx of EUR 16 million was partly offset by the sale of a noncore business in Germany of EUR 7 million. Accordingly, free cash flow was at a strong EUR 56 million. As a consequence, our net financial debt was further reduced from EUR 584 million at the end of the year 2022 to now EUR 539 million. I'll hand back now to Guido.

[Guido Kerkhoff, executive]

Thanks, Oliver, and we'll now come to the business outlook. Generally, the economy in our regions remains [indiscernible]. While it has to be outlined that the US performing very strongly in outperforming the European market so far. Let's directly dive into the outlook for our sectors, starting with Europe. Construction, we see, of course, somewhat decreasing demand as expected due to the interest rate increases, especially in residential. Infrastructure projects are expected to partly compensate with a special focus on clean materials. Machinery and mechanical engineering, no major changes since our last call. We still spend reasonably full order books with no negative trend in size. The risk of production disruptions mainly due to energy scarcity, still present, even though the situation improved. Automotive, general consumption remained stable with the industry association expecting plus 5% new vehicle registrations in ‘23 versus ‘22. The risk of supply chain constraints is to presence in the form of delivery issues for major [ mill ]semiconductors and other unique specific components, such as [indiscernible] we're following such development very closely. Energy also had no significant changes since the last call to place positive market trends between our energy generation continues, which represents a window of opportunity to accelerate real steel offering. Shipbuilding, no significant change since our last call sectors still under heavy pressure. I will now switch to the North American market, construction, residential construction now seems to be stabilizing as markets adjust to higher interest rates and falling home prices. However, I would like to point out that due to our footprint and infrastructure and nonresidential as well as our strong presence in the East and particularly Southeast of the U.S., where markets have been more resilient, pressure and residential construction not touching us in a meaningful manner. Hence, we see ourselves well positioned to benefit from the ongoing investments in the U.S. infrastructure. Machinery and Mechanical Engineering with sectors facing headwinds from a moderately slowing economy and therefore, declining business investment. However, it was partly offset by infrastructure investment with last 5 potential due to a large order backlog. Energy demand from oil and gas is expected to see a continued albeit slow recovery on structurally higher oil prices. Furthermore, demand for renewable energy continues to grow strongly. Automotive, order production improved strongly in Q1 '23 year-over-year, supported by still decent consumer demand, improving fleet sales and dealer inventories despite weaker economic conditions. Shipbuilding factors should deliver modest growth in '23. Let's move to the next slide. Let's now come to the outlook for the second quarter of this year and full year ‘23. As Oliver pointed out, we delivered a strong operating performance in the first quarter despite a challenging but further improved environment compared to H2 ‘22. Nevertheless, the macroeconomic conditions will remain challenging. However, we have proven our ability to perform in such context and to deliver strong results. Therefore, we expect another strong EBITDA before material special effects of between EUR 60 million to EUR 110 million in the second quarter. Furthermore, we anticipate a positive cash flow from operating activities. This all goes back to our smart, proactive and disciplined net working capital management. Our expectations for the full year '23 are unchanged. We remain optimistic with shipments anticipated to considerably increase against the background strongly demand. We're now happy to answer your questions.

[Operator]

[Operator Instructions] And your first question comes from the line of [ Ahu Panzer ] from Kepler.

[Unknown Analyst]

Maybe let's start about volumes. I think Q1 was pretty remarkable in terms of volume performance with 16% higher shipments quarter-on-quarter. Was there anything else than the usual seasonal factors, the end of the destocking and some catch-up from a weak second half of last year, which you see in your business on top of what you just commented on demand trends in general. And when it comes to Americas, specifically, I think the plus 19% quarter-on-quarter was quite a strong number. Would you see further room for volume growth into the second quarter from that Q1 level you've recorded this morning?

[Guido Kerkhoff, executive]

Let me direct it to someone on to that one. On the volumes, no, it's seasonal development and what I explained, nothing else to be said. America is strong with the 19%, I agree, and we see that continuing.

[Unknown Analyst]

Is there any reason why we have not given any volume guidance for the second quarter. I think the trend seems to be fairly okay at the moment. Any particular reason why you just guided EBITDA?

[Guido Kerkhoff, executive]

Yes, yes. No, but that one trend is okay. But as you can see on the range of the EBITDA, there are quite some uncertainty. So that's why we said, look, it's more important to focus on the cash flow and the EBITDA and see where the volumes then will be and what orders we take.

[Unknown Analyst]

Okay. And then maybe also on the non-AU segment, which was falling a bit behind the rest with minus 60% year-over-year. Any particular dynamics which have been pointing to kind of relative weakness of that segment?

[Guido Kerkhoff, executive]

No. It's seasonally because of the winter. So it's largely Switzerland. So the rebar business, which is a strong one, and that will pick up in the second quarter. No worries about that.

[Unknown Analyst]

Okay. And then on the cash flow, I think, positive OCF is not necessarily what's happening in your first quarter, not a big working capital build. Any particular -- are you positioning now for a tougher business into the second half? Or what should we read from the working capital movements in the first quarter?

[Guido Kerkhoff, executive]

Look, again, it's a question of how the larger outlook in the future will be. That's why we said we don't want to take any risk on our balance sheet there. And so that's why I said we, on the inventory side, we stay conservative. We all know what we need and try to keep it for to not have any risk on the goods whatever might come. Yes, just cautious. We're not negative on the development, but we're cautious.

[Operator]

[Operator Instructions] There are currently no further questions. I will hand the call back to you.

[Guido Kerkhoff, executive]

Yes. Thank you all. I think for the quarter where everything was basically set. So thank you very much. And if you have any other questions, don't hesitate to call Felix or us, and we'll answer it. Thanks a lot. Bye.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.