Salzgitter AG (SZG) Earnings Call Transcript

Looking at the TV, I guess, we have a very well-attended analyst conference. So ladies and gentlemen, hello from Salzgitter, and welcome to our analyst conference regarding the results of the first half 2022, 6 months that were, obviously, exceptional in many ways. Our CEO, Mr. Groebler; and CFO, Mr. Becker will comment on that in a minute. Concerning today's procedure, as you are used to it, we will start with the presentation of our CEO and CFO before jumping into Q&A. Since most of you seem to have another appointment in an hour, so without further ado, I'd like to hand over to Mr. Groebler.

Thank you very much, and a very warm welcome also from my side. I would like to guide you through some of the topics and then hand over to Burkhard Becker for financials. If you look at the highlights of this first half, we'd like to point out 5 points, and we certainly will go through them in more detail through the presentation. Of course, we are very proud to deliver the highest operating result for a first half year in company history, which is, I would say, a very good combination of high productivity of our assets and our people and high prices across all sectors, and we will go through that later. We have taken an investment decision or our Board has taken an investment decision and allocated own funds in the order of magnitude of EUR 223 million (sic) [ EUR 723 million ] to realize the SALCOS program, Stage 1, which would allow -- will allow us to deliver green steel as of the end of 2025, with a target of 1.9 million tonnes of green steel, once this first phase is completely operational. We also continue to work with the -- with our strategy. As you might recall, our mission is partnering for transformation. Hence, we have further developed partnerships with partners like customers, like suppliers of energy and raw material as well as plant manufacturers to ensure that the strategy that we're on is well-accompanied by partners and is also safeguarded on the critical points. Of course, we are also looking at energy and how to overcome the energy crisis that we're, I think, all facing these days. We, as Salzgitter are happy to be part of the solution, how to overcome this crisis by delivering pipes for the German LNG terminals to be built. So we are supporting both Wilhelmshaven and Brunsbüttel with pipes coming out of Salzgitter to enable them to get operational as fast as possible. Last but not least, our guidance that we laid out in June is confirmed with all the aspects that we can look at these days. We can confirm our guidance, which I think is a strong signal for a very good year 2022. We have a short look at the economic development or let me perhaps start with occupational safety. You know by now that this is something that is very, very important to us as a company, very important to me as a CEO. We are looking at the right trend when it comes to occupational safety. 2022 looks much better than 2021, and you see the trend since 2018, so we're on the right path here. Still, there's a way to go, given that our group-wide goal is to have zero accidents throughout the entire company. So well underway but still a bit to go and work also for us in the future. I think what is important in this context is also to say that this is not only a technical question, how to make some workplaces safer. It's also a culture question, how to approach health and safety as an individual, for myself, but also for me and for my colleagues. So that's certainly -- those 2 elements are part of the program that we're looking at. Now looking at the economic development. We have seen and you all have followed that sharp rising raw material prices in the second quarter, especially after the breakout of the Ukrainian war. We have seen also steel prices with a sharp increase at the same time. We now also see a certain normalization, especially on the raw material side. And as you can see on the right-hand side of the graph, also spot prices for steel have come down a bit, and we're back to levels that I think we all know from the past. What is important, though, to mention is, even though normalization, both of raw material and steel prices is ongoing, we operate still at positive margins based on total cost. I mentioned energy before. So if you look at energy supply a bit more in detail, the situation is tense that is not only for Salzgitter. I think it's for the entire industry. It's for the entire German situation. And it cannot be ruled out that the situation deteriorates further. However, I think that's also always important to remind ourselves on is that the gas supply right now in Germany is stable. And for the foreseeable future, also no changes inside. However, we have seen high prices, very volatile prices for electricity but also for natural gas, which, of course, affect also our production. We have seen production cuts, especially at Peiner Träger, PTG, as a response to hourly electricity price peaks. So we cut those peaks by reducing our consumption, especially at the electric arc furnaces in Peiner. Of course, we have a continuous monitoring in place of the risk coming out of the energy supply right now, and we are taking actions on those as well. So we're really looking at possibilities to reduce energy consumption at the price levels. Energy efficiency measures might become viable, so we're looking at those and implementing those, wherever possible and meaningful. But we also look at alternative operation with the focus of saving energy to the detriment of either other expenses like personnel costs, so more people or people working longer for the same volume or also to the detriment of volume, especially given that the third quarter is a bit weaker than what we have seen before. We are also looking at that. Early on, we have done an analysis for all technical equipment, in case continuous gas supply cannot be secured anymore, and we have contingency plans in place. So there is no danger for any technical equipment if gas supply is cut as long as it is cut in a controlled manner and we have, at least, some time to act upon that. So all in all, I think we have taken the measures we can take, and we are prepared also for the worst when it comes to shortages again. Right now, we don't have them and we don't see them for the foreseeable future. But I think nobody knows how the autumn will actually develop, hence, we're well-prepared for that as well. Looking at key data. Only picking up some highlights here and Burkhard Becker will go through the numbers in greater detail. I think what you can see here is that the production has been basically stable if you compare first half of '22 with the first half of '21, basically, at par here. So the uplift in terms of results comes solely from prices. So I think that's what we have seen. We have seen sharp price increases. We have seen the graph before. And those now are reflected also in the numbers here. Sales have increased by roughly 50%, and we were able to actually capture that in the -- on the EBT side with a threefold result compared to last year's first half, EUR 970 million compared to EUR 305 million. I think that shows very nicely sort of how we have been able to really capture those prices and deliver the results that you have seen here. If we have a look at a short look at strategy, I think there's one highlight I would like to mention. On July 13, we have had the Supervisory Board meeting of Salzgitter AG and the Supervisory Board approved an investment into SALCOS Phase 1, EUR 723 million. Own funds have been approved for the realization of the first stage. So we are actually now entering in the delivery of SALCOS as we have talked about now for some time. Now it's really happening. These are own funds. I think it's important to state also here that this is no public funding included. There's no public funding included for the time being. We have applied for public funding, and we expect an answer from EU within the -- this quarter, Q3 2022 to then have the full funds available to implement SALCOS Phase 1. What is important and also shows the confidence that we have when it comes to public funding is, we have an early start of measures allowed by the Ministry of Economy in Berlin. This actually allows us to maintain the ambitious schedule leading to first green steel by end of 2025. With that, and this is something you have heard before, we are able to produce 30% of the current volume via SALCOS in 2026. Hence, roughly 1.9 million tonnes of steel through SALCOS, hence green steel in the second half of this decade. Funding -- total funding for Stage 1 is roughly EUR 1.5 billion to EUR 2 billion. We're still in discussion with some of the suppliers, hence, the number is not yet fully fixed. In the graph, you see sort of the technical concept. We have walked you through that before. The core of the SALCOS process is the direct reduction plan, which you see in the middle. It's fed by iron ore pellets and hydrogen in the end, knowing that we won't have sufficient hydrogen by 2025. We can start with natural gas. So a combination of natural gas and hydrogen gives us direct reduced iron that we then melt in the electric arc furnace, together with scrap to get the crude steel. And then from there on, we move into existing facilities with a secondary metallurgy in the whole downstream activities that we have here on site. So that's the process. And unlike the blast furnace, which emits carbon dioxide, the direct reduction plant emits H2O, which is then water. So that's the very core of the CO2 reduction that we're going to have with SALCOS. I talked about partnering before. This is just to show you how we have been able to attract partners for the SALCOS transformation. And if you look at -- especially at the customer side, I think it's very important and also comforting to see that more and more customers are interested in getting access to green steel. So we're signing contracts with customers for green steel deliveries as of 2026, and also with a definition of a green steel premium. So there's a lot of momentum in the market right now, a lot of momentum for us right now, and gives us a lot of comfort that green steel will be a premium product as soon as available. Energy crisis. I said that we are part of the solution. What you see here are the 2 LNG terminals that Germany is working on right now in Wilhelmshaven and in Brunsbüttel. Both of them will be connected with pipes coming from Salzgitter, coming actually from the site here in Salzgitter. And for Brunsbüttel, on top of the 57 kilometers of connection pipe, we're also delivering 3.5 -- roughly 3.5 kilometers of high-pressure pipes to then connect to the high-pressure network. So we are part of the solution, and we have done a lot of work internally here to make sure that those pipes will be delivered ahead of schedule, if possible. In Wilhelmshaven, we have been able to do so, so that actually, the early works could start in Wilhelmshaven already and pipes are laid as we speak. And with that, I would hand over to Burkhard Becker for the financials.

Yes. Thank you, Gunnar. Good afternoon, ladies and gentlemen, from my side also. As Gunnar Groebler pointed out, the steeply increased steel prices gave us the opportunity to earn an EBITDA of 1.8 -- EUR 1.138 million (sic) [ EUR 1.138 billion ] and then EBT tripled to EUR 970 million. Aurubis EUR 82 million is part of this EUR 970 million for our participation of nearly 30% with after -- earnings after taxes. The increased working capital is a consequence of the steeply increased prices, the product prices, the margins and the raw material and energy prices. For the details, I get back in a minute. Financial statement. The turnover increased by EUR 2.2 billion. On the other side, you see the steep increased cost of materials from increased coal prices as Gunnar Groebler showed a slide from the energy prices. And if we now net out the increased sales and the increased cost of material, you come to a difference of precisely EUR 769 million. And from that number, you have the main driver for the increased EBT, EUR 665 million. On the other side, some increased expenses, personnel expenses, especially -- you see here big differences in the magnitude of EUR 300 million to EUR 400 million on other operating income and expenses. That is from accounting because the impact from hedging have to be reported gross and not as in the past, net hit. So we have to net this out to see the operational picture. Consolidated balance sheet. Noncurrent assets, the main difference here is the deferred income taxes. This has to be seen in correspondence with the changes in the pension liabilities. As end of December, we had to apply an interest rate of 1.3%. And end of June, 3.4%. We have a decrease in the pension liabilities. And on the other side, this impact on the deferred income taxes. So that has to be seen in combination. And in the current assets, it is the increase in inventories and trade receivables from the business as we described it. Looking on the equity and liabilities. We have this increase of EUR 1.4 billion in equity, meaning that our share equity to total asset is now 42%. Two sources, one is the results after taxes, and the second is the difference in the pension liabilities that goes neutral to the equity. The expectation is that the 3.4% we have to apply, end of June, will be the interest rate in the forecast, end of December 2022. Yes, other changes is on the financial liabilities side, that is a consequence of the higher demand for working capital financing. Our view is mainly on the net financial position. Our net financial position, end of December 2021, had been EUR 544 million. And end of June, we had EUR 901 million so we have this difference of EUR 357 million. Expectation is all impacts, including from working capital, from investments or CapEx, second half of the year, from result that we bring this down again to the EUR 500 million net financial debt. The contribution from reduction of working capital in the second half of this year is around EUR 400 million. Fine. So look, on the steel production. Here, I look on the EBT, EUR 559 million, that makes clear that this segment provides in relation to the EUR 970 million. The biggest part coming from the margins we have seen especially in the 3, 4 months after the start of the war against Ukraine. The steel processing, the improvement here. Last year '21, we had a loss. The improvement here comes from the plate business, mainly driven again by the prices and the shortages in the market after the start of this war. Trading. Yes, again, very good performance, EUR 249 million EBT. That is partly from shipments. They are also increased by 10%, roughly, but the major impact comes again with the prices. Technology. Yes, I look here now on the order bookings. You see here that technology is on a very good way. The order backlog increased, covers the next 10 to 12 months in the project, and machine business and also good in the spare part and service business. The reason why we see here the decreased number of EBT is that we, in the previous year, had a positive impact by a one-off effect coming from the sale of a small activity in KHS United States. Industrial participations here beyond the smaller service companies of Salzgitter. We have the contribution from Aurubis, EUR 84.3 million in the first year. Working capital. Yes, we have a significant increase. We have here the development by quarter since end of '22. I can assure you that the performance, measured by KPIs like turnover of inventories, days sales outstanding, et cetera, is as good as in the past. The reason is that, we have these increased prices -- only to give you a little color. Beginning of '21, we had average per tonne in flat steel in Peiner Träger, in plate business, around EUR 500 to EUR 600 per tonne. In the peak, meaning Q1, Q2, we had for these products, between 1,100 and 1,300. And that drives the capital -- working capital increase here. And again, expectation is that we bring this down from the end of June number by around EUR 400 million. Investments and depreciation. First half year, CapEx and depreciation is more or less on the same level. I expect for the second half of the year, around EUR 350 million, including around EUR 120 million for SALCOS. Expectation for next year is that after the big investments, galvanizing line 3 here in Salzgitter that went on in time and in budget, on stream, end of June. And after the investments in Ilsenburg, we come back to a normal level of Salzgitter, meaning around EUR 300 million. And we are still in negotiations, that is clear with the manufacturer of the equipment for SALCOS. But first, preliminary view on CapEx. SALCOS '23, net is around EUR 200 million, EUR 250 million, in addition to the EUR 300 million we have normally. Yes, guidance. Sales in the region of EUR 13 billion, EBITDA between EUR 1.4 billion and EUR 1.6 billion, and EBT as announced, EUR 1 billion to EUR 1.2 billion, and this would lead to a return on capital above the previous year's figure. Thank you very much.

Thank you very much and...