Salzgitter AG

XETRA:SZG

Earnings Call Analysis

Salzgitter Q3 Results Show Resilience Amid Challenges

In the first nine months of FY2023, Salzgitter AG navigated growing economic difficulties, declaring results that were appreciable though not on par with the outstanding performance of 2022. A robust showing by the steel production and processing arms and the Technology Business in H1 underpinned the results. Significantly, net financial debt was cut in half, from EUR 800 million to EUR 400 million, affirming Salzgitter's financial stability. Even with declining shipment volumes and selling prices of rod steel products, the Group posted EBITDA of EUR 576 million with a pre-tax profit of EUR 254 million. Despite reduced sales forecasts due to market conditions, Salzgitter maintains its earnings guidance with EBITDA projected at EUR 650-700 million and pre-tax profits at EUR 200-250 million.

Financial Performance and Strategic Initiatives

The company's external sales decreased to EUR 8.4 billion, mainly due to a downturn in shipment volumes and a lower average selling price for many rod steel products compared to the previous year. Even with these headwinds, the company achieved an EBITDA of EUR 576 million and earnings before taxes of EUR 254 million. This includes a EUR 20 million contribution from a subsidiary, Aurubis. The net result after tax stood at EUR 194 million, yielding a basic earnings per share of EUR 3.5. Additionally, the firm managed a return on capital employed of 6.5%, with a nearly steady equity ratio at 45%. Despite economic challenges and substantial capital expenditures, they halved net debt from EUR 800 million to EUR 400 million as of the end of September.

The SALCOS Decarbonization Program and Efficiency Measures

The company continues to advance its 'Salzgitter AG 2030' strategy despite market adversities, making significant progress on its SALCOS decarbonization program. All primary components for the first stage of SALCOS have been ordered, and construction at the Salzgitter site is progressing well. The German government's recent decision to reduce the electricity tax was seen as a positive step but still lacks sufficient measures to ensure the competitiveness of energy-intensive industries amidst global competition and a capital-intensive transformation. The company is also realigning its Blast Furnace A to secure crude steel supply until SALCOS is operational. Additionally, the internal efficiency program 'Performance 2026' aims to deliver a cumulative effect of over EUR 200 million. Despite a reduction in sales outlook, they maintain their earnings guidance, projecting an EBITDA of between EUR 650 million and EUR 700 million and a pretax profit of between EUR 200 million and EUR 250 million for the near future.

Market Challenges and Competition

The company faces strong competition in the plate business, particularly from imports from Vietnam and India. They note the challenge of a level playing field with incoming imports and call for quicker decision-making processes in Germany, advocating for a clear roadmap and commitment from decision-makers to expedite the transformation process. The company sees the need for agility in infrastructure projects related to hydrogen and networks, emphasizing the importance of quick adaptability to maintain competitiveness.

Future Outlook and Guidance

Forecasting into the future, the company confirms their guidance for net debt to remain at the level observed in September, around EUR 400 million. They anticipate a slight decrease in working capital by approximately EUR 50 million, offset by a cash inflow from Borusan Mannesmann and cash outflow for SALCOS investments. Looking ahead, they project raw material price movement and a possible normalization of end product prices, which could lead to an increase in working capital but within normal fluctuations. The management expresses confidence in their long-term numbers, citing big projects in the wind industry and large diameter tubes as areas of growth, which reaffirms their positive guidance for the company's future performance.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the conference call of Salzgitter AG regarding the Q3 results 2023. Please be aware that this conference call will be recorded. I will now hand over to Mr. Burkhard Becker, CFO of Salzgitter AG; and Mr. Markus Heidler, Head of Investor Relations.

[Burkhard Becker, executive]

Yes. Thank you very much. Good morning, ladies and gentlemen. Welcome to the conference call on the results of the first 9 months of the financial year '23 in which we saw continuously increasing economic challenges. We, therefore, view the result in the first 9 months of the financial year as indeed presentable, although it was discernibly below the exceptional year of '22.

The trend was mainly driven by the still satisfactory results of the steel production and steel processing business unit in the first half year and the continued outstanding performance of the Technology Business unit. Compared with year-end '22, Salzgitter Group's net financial debt decreased by more than EUR 150 million despite the high level of investment. This achievement once more demonstrates the Salzgitter Group's robust balance sheet and sound financial position.

External sales decreased to EUR 8.4 billion, mainly due to a downturn in shipment volumes and the lower average selling prices of many rod steel products compared with the year earlier period. EBITDA of EUR 576 million and earnings before taxes of EUR 254 million include a contribution of EUR 20 million from Aurubis. The after-tax result came in at EUR 194 million, which brings basic earnings per share to EUR 3.5. Return on capital employed amounted to 6.5%.

The equity ratio remained virtually stable at 45%. We are particularly pleased that despite the economic headwinds and the high level of CapEx, our net debt halved from EUR 800 million at the end of September '22 to EUR 400 million this year.

We have relentlessly pursued our Salzgitter AG 2030 strategy also in this financial year, first and foremost, by continuing to work full steam ahead on rapidly implementing our SALCOS decarbonization program. By now, we have placed orders for all primary facility component of the first stage of SALCOS. The construction work at the Salzgitter site is making good progress. The German government's agreement reached at the end of last week to lower Germany's electricity tax serves as a demonstration of the political will to back the reduction in electricity prices in Germany so urgently required. It is worth noting, however, that the solution essentially affirms the current status quo for the energy-intensive industry. We are unable to detect substantial safeguarding for the industry that currently finds itself not only in global competition, but also right in the middle of capital-intensive transformation. More effort is needed here.

In order to secure our crude steel supply until SALCOS is realized, we are in the process of realigning our Blast Furnace A in the DRI plant at the moment that should be concluded by the end of this month.

We have also continued to vigorously pursue our internal efficiency measures in the past months. Our performance 2026 program of measures is meanwhile aimed at delivering a plant overall effect of more than EUR 200 million. While the development of shipment volumes and prices for many products required us to reduce our sales outlook, we are adhering to our recent earnings guidance of EBITDA of between EUR 650 million and EUR 700 million, a pretax profit of between EUR 200 million and EUR 250 million. The reduction of our working capital, and therefore, also of our net financial debt is meanwhile progressing as planned.

Thank you very much so far my speech. And with that, I would like to start the Q&A session with you. Thank you very much.

[Operator]

Patrick Mann, may we have your question, please?

[Patrick Mann, analyst]

I just wanted to ask about the outlook for markets maybe next year. If I think about the kind of key end markets, construction still looks weak. And I see in your outlook statement, you say the call-offs in the auto sector have been fairly constant because of the order backlog, but that's starting to run down now. And then maybe linked to that, in terms of bringing Blast Furnace A back online and what to do with Blast Furnace C. Do you see any adjustment to your production plans going forward?

[Burkhard Becker, executive]

Okay. Let me start with the second question. The Blast Furnace A, as scheduled, be back on stream end of November and no change from our side planned. And Blast Furnace C is a small one, the capacity of this 500,000 metric tons per annum, is back onstream several weeks now and same for this furnace we will operate them -- both furnaces.

Yes, outlook for market. Yes, construction, meaning PTG sections, it's still very big, no momentum in the demand for Peiner Träger and yes, you are right, the order intake in automotive is, let me say, by around 5% to 10% lower than the shipments. And we see a slight movement for this. So -- and yes, it's too early. We are in the middle of the budgeting process to speak about '24. But at least first quarter will be quite challenging for all what is steel -- not for technology. Technology is still very strong.

[Operator]

Mr. Christian Obst, may we have your question, please.

[Christian Obst, analyst]

Moving to the cash flow. So it was quite remarkable of the debt reduction. You mentioned that what do you expect for the fourth quarter as there more to come. And going into the next year, do you think there is a meaningful change when it comes to the entire -- how suppliers and customers are dealing with their cash because of the rising interest rates or high interest rates. Do we expect any meaningful change in the entire structure of cash development going into the next year? This is the first question.

[Burkhard Becker, executive]

Yes. Cash flow Q4, I hope, let me answer in terms of net financial position. September, EUR 400 million debt and I confirm this as Salzgitter's expectation in December. Why? I see just a little -- further decrease in working capital. But you may be aware that we are in the process of selling the participation of Borusan Mannesmann to Borusan in Turkey. The cash of a little more than EUR 50 million will be cashed in end of November. But on the other hand, we have cash out for SALCOS for the entire year. Our gross cash out will be EUR 400 million. And in September, we had EUR 250 million. So this will be financed by, what I said, a little restructuring working capital, Borusan and Mannesmann and this and that.

Yes, meaningful change in economic environment, interest rates, et cetera. What we see is that some of our customers wait for further reduction in prices, but we are quite confident that this is indeed what we see that this stabilizing of the end product prices, customer in Q1 or end of Q1 will decide on their investment decisions, although I expect the interest rates with a slight movement on the level we have here and that we will see some restocking effects during Q1, but not very early. I think the next weeks will be challenging.

Construction business is not -- we don't expect such an increase. So overall -- then we see now the stabilizing of the prices and products, then more and more customers will decide on their projects and some restocking beginning of the new year.

[Christian Obst, analyst]

Another one is on heavy plate and EUROPIPE, do you see in heavy plate any special situation, what we expect going forward when it comes especially to the wind industry, which is some kind of [indiscernible] currently? And next one then to EUROPIPE and all the related infrastructure development, do you see some additional uptick when it comes to the new year?

[Burkhard Becker, executive]

Yes, although definitely for EUROPIPE. There are several projects under discussion with the customers, and we can say worldwide, worldwide, even Australia, Papua New Guinea, I never believed that we are able to deliver in this region. No, [ that for the drought ]. Anyhow, there are many, many projects, but decision expected in early summer or late spring '24. So that means that the load for EUROPIPE and for plate here, Mannesmann Boru plate in Mülheim will be low for 5, 6 months, now, but good expectation. And winds, we see that both for Ilsenburg and for Mülheim as an opportunity and we are present in this market.

[Christian Obst, analyst]

Another question then, concerning EUROPIPE and all the maybe upcoming new orders. Can you say something about the pricing environment there? And how do you secure that you make a decent margin on that if it comes, of course.

[Burkhard Becker, executive]

What you have to be aware of is that some competitors in Asia for the tube business are not longer serving this market that, by the way, is the rationale behind that we can deliver to Australia also. And that also helps that we expect to earn a reasonable margin on that securing, if I understand your question, so yes, when EUROPIPE gets this order and the delivery time is longer, then we -- meaning, EUROPIPE is hedging the iron ore dollar content for this timing that we do.

[Christian Obst, analyst]

Okay. One last question is on imports. Where do you see the main strategy. You mentioned that in your 3Q report, of course, several times, where do you see the main threat coming from import to the next year?

[Burkhard Becker, executive]

Yes. The imports are strong for plate business. There we see Vietnam, India that are -- that is the strongest impact for quarto plate business.

[Operator]

I will connect now telephone participants.

[Alain Gabriel, analyst]

This is Alain from Morgan Stanley, Alain Gabriel. Two questions from my side. Firstly, was there any sizable hedging gains that have improved your cost performance in steel production during the quarter? And how should you expect the raw material costs to evolve during 4Q and then subsequently in 1Q 2024? That's my first question.

[Burkhard Becker, executive]

No, hedging impact in significant reason is that with this high level for coking coal, we did only small volumes, and we did some for iron ore, but yes, maybe 1 digit million euro number positive, so not significant. And for iron ore and coking coal, raw material prices we assume that -- we see a slight movement on the level we have today.

[Alain Gabriel, analyst]

That's very clear. And my second question is on SALCOS. Do you mind giving us an update on the project. How -- is it going as planned? Any updates on the overall budget? And do you see any risks from today's point of view of further escalations in the budget?

[Burkhard Becker, executive]

With respect to the budget, definitely no risk. What is the reason? We could set up all the contracts for the primary equipment. For all important treatments we have now in the contract, so we locked in the prices and the timing, et cetera. So definitely no risk that we'll see an overrun in the budget. And so far, when you look here what is going on, on the sites of the construction work, the preparation of the ground, et cetera, no, it's going well. And I would assume if outside temperatures, et cetera, and we get mild winter here, that will help also.

[Operator]

Next question, Mr. Andrew Jones.

[Andrew Jones, analyst]

So just a couple of things. On the U.S. tariff situation clearly, I mean, it looks as though you're going to be facing the Section 232 tariffs that some stage if we don't get some sort of breakthrough. Can you just give us an idea for your exposure to that change in tariff regime, what that could mean in terms of maybe a ballpark estimate for the potential EBITDA hit?

And then just secondly, on your steel processing unit, I think in the second quarter, you were talking about EBITDA for this year, somewhere around EUR 300 million. And I think you were saying that like structurally, the business has improved with high utilization in the Ilsenburg plants, and you were -- I think you threw out a number of about EUR 250 million per annum going forward. In light of the weaker numbers for 3Q, I mean, do you still stand by that sort of mid-cycle profitability level? And is it that still like to say that we've seen structural improvement driving the strong first half? Or was it more a reflection of a strong energy market that's maybe even reverting now?

[Burkhard Becker, executive]

Yes, steel processing first half of '24 compared to expectation for the entire year and midterm, I would expect that also for steel processing first half weaker than the second, and one of the reasons is that decision on bigger projects, as I told for EUROPIPE is also true for Mannesmann line pipe, for Mannesmann Grossrohr in Salzgitter and also for stainless company, Mannesmann Stainless Tubes.

For midterm, I'm still confident that the numbers we talked about, as a kind of guidance for this business, can be performed because plate, wind industry, we will participate, they are large diameter tubes, as I told you, big projects. And that is not only true for '24. For example, EUROPIPE and Mannesmann Grossrohr, PVC, several projects, not only hydrogen, carbon capture storage, for example, et cetera. So I'm optimistic to confirm that midterm first half lower than second half, '24.

And exposure OS, not really so significant for us. I mean we have stronger for the company in the Mannesmann Line Pipe business. They are delivering in good times, around 80,000 metric tons to the United States. But nothing really worth to discuss for Salzgitter Group as [ a proportion ].

[Andrew Jones, analyst]

Okay. So fairly immaterial impact, you think?

[Burkhard Becker, executive]

Yes.

[Operator]

So there are no further questions. Sorry, we have one more. Moses Ola, may we have your question, please?

[Moses Ola, analyst]

So just 3 questions from myself, please. So the first question, just on working capital and net debt guidance. So previous guidance was the EUR 500 million working capital release. Net debt for EUR 400 million at the end of the year. Do you have any revised targets on that now that you're tracking well ahead at Q3? And just again, on working capital into next year, how much do you think is there left structurally to squeeze out of the business?

[Burkhard Becker, executive]

No, as I said, we confirm guidance for net debt on the level of September, means debt of EUR 400 million. And maybe we see a little decrease working capital, a little means for me around EUR 50 million. But on the -- and then we have a cash in Borusan Mannesmann, another EUR 50 million, and we have cash out for SALCOS. So balance of this is that I confirm the EUR 400 million.

And for the next year, the one aspect is the pricing of material. And as I said, I expect raw material side movement and maybe a little normalization of end product prices and hopefully, some higher volume, it would need some additional working capital, but not in really material terms, normal fluctuation.

[Moses Ola, analyst]

Okay. My second question is on BA technology. So again, continued upward improvement in this segment. Do you currently have -- so given the order book visibility that you have in that business, what would you -- how would you class earnings expectations into next year? Could we be looking at a triple digit earnings before tax performance there technology for next year?

[Burkhard Becker, executive]

Answer, yes.

[Moses Ola, analyst]

And then finally on the electricity taxes. So you commented here that more is still needed from German -- from the German government. What specifically would you like to see here? I think previous reports mentioned on subsidies for electricity users. But this time around it's been revised into taxes. Which model do you think is better here? Would you prefer the subsidies or taxes? Or what were your comments alluding to?

[Burkhard Becker, executive]

Yes. It's not only that we see demand for subsidies. We think that all decision processes in Germany in this structure. And that is not only on federal stage that is in the several countries here and on local authorities and so on so that all the decision processes for infrastructure, for network, tubes, hydrogen, et cetera. All this has to be quicker because we think this transformation process, the demand is clear what we have to do, but we need a road map and commitment of all decision-makers to do it quicker.

And as we always said, subsidy for the electricity price is always seen from our side as a temporary so-called -- call it a bridge price for a certain time period, not forever. So decision process is quicker, level playing field with incoming imports. So nothing really new but we like to see it happen.

[Operator]

Mr. Bastian Synagowitz, may we have your question, please.

[Bastian Synagowitz, analyst]

I would like to go back to the performance of the Production segment, which seems to have gone quite a bit better versus, I think also what you indicated in the last call, despite all of the headwinds. Can you maybe help us to understand what has been driving this? And maybe also help us whether you expect to keep that run rate in the fourth quarter? And maybe also in that context here, maybe help us understand where you stand in terms of the ramp-up of your new galvanizing line and whether we can expect even more contribution next year versus this year?

[Burkhard Becker, executive]

Unlikely not but joke away. What we have to see is that the performance of steel production in Q2 was not quite there where we expect this, but this better result in Q3 is not an indicator for a trend [indiscernible], definitely not. You are aware as a long-term observer of Salzgitter AG that Q4 anyhow is always a difficult one in terms of Christmas season, when automotive, especially demand what material that is sitting in our stock, et cetera, et cetera. So not a trend reversal and what I said for '24 means that Q1 in steel production will be a challenging one.

[Bastian Synagowitz, analyst]

Okay. Then my second question is SALCOS. I guess for the electrolyzer equipment, you've been choosing pressurized alkaline, which is the same technology, which you also used for your pilot phase. But I think you changed -- you switched to a different supplier now and from my understanding, Hydrogen Pro has so far not built a single plant in industrial scale so far. Of course, they're generally very few industrial live or industrial scale electrolyzer plants, which have been built. But maybe can you please talk about what led you to go with this supplier? And maybe also how far you've been considering the execution risk here in that choice.

[Burkhard Becker, executive]

Yes. I have to admit that I'm not so close to that, but it was a normal process. You are talking about Andritz, and it is -- they make the best performance in the entire process, in the quotations, technical layout, et cetera.

[Bastian Synagowitz, analyst]

I was actually referring to Hydrogen Pro. I think Andritz is only the EPC provider, but I think the technology provider is Hydrogen Pro, so that was the one I was referring to here. Nothing in the pilot phase, you've been using Sunfire. So I was just wondering why you switched here and -- but yes, just in case there's any more color on that.

[Burkhard Becker, executive]

I suggest that you work this out later with Mr. Heidler.

[Operator]

There are no further questions.

[Markus Heidler, executive]

All right. Then if all questions are answered, I guess we are ending the Q&A session here. And thanks for the discussion. Talk to you soon. In case there are any further questions, just give [indiscernible] a call. Thank you.

[Operator]

Thank you to everyone who participated in this conference. Goodbye.

[Burkhard Becker, executive]

Goodbye. Thank you.