Schmolz + Bickenbach slowed down by weak market development
by Hans Diederichs
Schmolz + Bickenbach today reported a 16.2% decline in sales volume from 580 kilotons in the second quarter of 2018 to 486 kilotons. Due to higher sales prices, revenue decreased proportionally less sharply to EUR 807.6 million (11.1%) from EUR 908.3 million in the prior-year quarter. Adjusted EBITDA was 52.3% lower at EUR 40.5 million compared to EUR 84.9 million in the same quarter of the previous year. EBITDA reached EUR 28.0 million, 65.8% less than the EUR 81.8 million achieved in the second quarter of 2018.
Business development in the second quarter of 2019
A difficult first quarter was followed by an even more challenging second quarter. Both the Group's order intake and order backlog continued to decline. Like all manufacturing industries, the steel sector also suffered from the unfavorable market setting, triggered primarily by the trade conflict between the USA and China. In addition, threats from the United States to introduce new tariffs on EU products, the Brexit process and other global crises weighed on the confidence of consumers and producers. In the second quarter, Schmolz + Bickenbach initiated further measures to mitigate the impact on earnings in the short term. Administrative costs were reduced, the number of contract workers reduced, ongoing projects prioritized, and maintenance works postponed where this poses no risk to our operational performance vis-à-vis customers and to employee safety. In addition, production was cut back in order to adjust inventories to the current low demand, particularly from the automotive industry. In terms of structural improvements, the focus was on implementing the turnaround plan of Finkl Steel and the continued integration of Ascometal.
At 486 kilotons, sales volume in the second quarter 2019 was 16.2% lower than in the same period one year ago with 580 kilotons. This decline was mainly due to a 20.0% decline in sales volume of quality & engineering steel. The weakness of the automotive industry had a significant impact here. Sales in the other two product groups, stainless steel and tool steel, was also lower than in the same quarter of the previous year. However, the decline of these product groups was more moderate than in quality & engineering steel as the end markets for stainless steel and tool steel show a higher degree of diversification.
The average sales price per ton of steel was EUR 1,662 in the second quarter of 2019, 6.1% higher than in the prior-year quarter (Q2 2018: EUR 1,566). The increase is mainly attributable to the more favourable product mix with a larger share of higher-priced steel grades from the product groups stainless steel and tool steel.
However, the positive price trend could not offset the lower sales volume. As a result, revenue fell to EUR 807.6 million, 11.1% lower than in the prior-year quarter. The decline is primarily attributable to the quality & engineering steel product group with a decrease of 21.5%. Revenue of stainless steel fell by 1.5% and of tool steel by 1.1%.
From a regional perspective, revenue declined in almost all regions compared with the prior-year quarter. Only in the Americas revenue was up 3.8%. This mainly reflects the success of the expansion in growth markets in Latin America. Revenue declined by 13.8% in Europe and 5.3% in Africa/Asia/Australia.
EBITDA adjusted for one-time effects was EUR 40.5 million (Q2 2018: EUR 84.9 million), 52.3% lower than in the same quarter of the previous year. The one-time effects amounted to EUR 12.5 million and mainly comprised restructuring costs and other expenses for the industrial integration of Ascometal. Including the one-time effects, EBITDA decreased by 65.8% to EUR 28.0 million (Q2 2018: EUR 81.8 million). Accordingly, the adjusted EBITDA margin was lower at 5.0% (Q2 2018: 9.3%) and the EBITDA margin at 3.5% (Q2 2018: 9.0%).
At EUR –10.2 million, the financial result was exactly at the previous year's level. Earnings before taxes (EBT) amounted to EUR –7.8 million compared to EUR 45.3 million in the second quarter of 2018. At EUR 5.8 million, tax expenses were lower than in the prior-year quarter (Q2 2018: EUR 8.2 million). In the second quarter of 2019, a net loss of EUR 13.6 million was recorded compared to a net income of EUR 37.1 million in the second quarter of 2018.
Free cash flow was positive compared to the second quarter of the previous year thanks to stringent measures to reduce net working capital – namely the reduction of inventories – and reached EUR 59.8 million after EUR –68.2 million in the second quarter of 2018.
At EUR 709.3 million, net debt was higher than at the end of 2018 (EUR 654.8 million). The only reason for the increase is the first-time application of IFRS 16, which increased net debt by EUR 59.0 million. Compared to March 31, 2019, net debt was reduced by EUR 42.6 million. The ratio of net debt to adjusted EBITDA (based on the last twelve months) increased from 2.8x as of December 31, 2018 to 4.3x. Of this, an increase of 0.2 points was due to the first-time application of IFRS 16. On a comparable basis, the leverage was 4.1x.
CEO Clemens Iller said: "Contrary to our expectations, the gradual normalization of demand from the end markets did not materialize in the second quarter. Unresolved trade conflicts and political uncertainties affected our business and led to reduced growth in the end markets. The automotive industry was hit hardest, with demand remaining at a persistently low level. There are still no clear signs of an acceleration of demand. Therefore, we do not expect a broad-based recovery before the end of the year. In the current unfavorable market setting, we have taken further measures to keep the adverse effects on the Group as small as possible. At the same time, however, we are sticking to our strategic investments in order to be ready for a possible economic upswing in the coming months".
Outlook for the 2019 financial year
The focus of Schmolz + Bickenbach in 2019 will be on the next steps in the industrial integration of Ascometal. The takeover has created the conditions for further strengthening of the market position of Schmolz + Bickenbach in the medium to long term. The company intends to consistently exploit this opportunity while at the same time working on the efficiency, profitability and optimization of inventories. A further focus will be on measures to improve the earnings position of Finkl Steel.
The gradual normalization of demand expected by Schmolz + Bickenbach in the course of the second quarter with continued recovery in the second half of the year has not materialized. In view of unresolved trade conflicts and political uncertainties, the visibility regarding further business development is unusually low, which is why Schmolz + Bickenbach is currently not in a position to narrow the range for the forecast. Both a marked recovery and a sustained economic downturn are possible scenarios. From today's perspective, the company does not expect demand to gradually recover until the end of 2019. Based on this assumption and the continued implementation of the measures at Ascometal and Finkl Steel, Schmolz + Bickenbach expects adjusted EBITDA in a range from EUR 130 million to EUR 170 million.
Source: Schmolz + Bickenbach Photo: Fotolia