Schmolz + Bickenbach with cautious optimism for 2020

by Hans Diederichs

Schmolz + Bickenbach, a global leader in special long steel, today reported 12.6% lower sales volume of 1,830 kilotons for the 2019 financial year compared to 2,093 kilotons in 2018. The decline in turnover was lower in percentage terms and fell by 10.0% to EUR 2,980.8 million. Adjusted EBITDA reached EUR 51.2 million after EUR 236.7 million in the previous year. At EUR –7.1 million, free cash flow was negative (2018: EUR –159.8 million), but improved year-on-year as net working capital was reduced by around EUR 160 million to EUR 773.1 million since the end of 2018, mainly due to disproportionate inventory reductions

Business development in the fourth quarter of 2019

In the fourth quarter of 2019, the tense market situation continued to have a significant impact on the financial figures. Due to weak demand, sales volumes and thus revenue fell significantly year-on-year. Adjusted EBITDA and net profit decreased accordingly. Net debt increased both compared with the end of 2018 and the end of the third quarter of 2019.

In the fourth quarter of 2019, 388 kilotons of steel were sold, 22.1% less than in the same quarter of the previous year (Q4 2018: 498 kilotons). This decline was mainly due to 26.5% lower sales volumes of quality & engineering steel. The crisis in the automotive industry and flattening demand from the mechanical and plant engineering industry had a marked impact on this product group. Sales of tool steel and stainless steel were also significantly lower than in the same quarter of the previous year, declining by 8.6% and 7.7% respectively.

The average sales price per ton of steel in the fourth quarter of 2019 was with EUR 1,595, slightly below the average price achieved in the same quarter of the previous year (Q4 2018: EUR 1,597). The decline is due to increased price pressure resulting from low demand and lower raw material prices. The change in the sales distribution in favor of stainless grades largely compensated for the decline.

Revenue decreased by 22.2% to EUR 619.0 million compared to the same quarter of the previous year. The decline was primarily due to significantly lower volumes in the quality & engineering product group. Revenue of stainless steel fell by 8.7% and tool steel by 7.0%. From a regional perspective, revenue declined in all regions compared with the prior-year quarter.

At EUR 1.4 million, adjusted EBITDA in the fourth quarter of 2019 (Q4 2018: EUR 39.2 million) was significantly lower than in the same quarter of the previous year. The one-time effects included in the adjustments amounted to EUR 16.5 million and comprised inventory write-downs in various Business Units. Taking these effects into account EBITDA declined to EUR –15.1 million (Q4 2018: EUR 28.0 million). The adjusted EBITDA margin declined to 0.2% (Q4 2018: 5.0%) and the EBITDA margin to –2.4% (Q4 2018: 3.5%). At EUR –19.4 million (Q4 2018: EUR –14.3 million), the financial result for the fourth quarter was down year on year.

As a result of the unfavorable business development, earnings before taxes (EBT) in the fourth quarter were EUR –72.2 million (Q4 2018: EUR –122.4 million). Tax expenses amounted to EUR –3.7 million, resulting in a consolidated loss of EUR –75.9 million (Q4 2018: EUR –93.1 million).

Free cash flow of EUR –48.6m was significantly lower than in Q4 2018 (EUR 13.6 million) despite the reduction of inventories in Q4 2018, mainly due to lower EBITDA.

Business development in fiscal year 2019

The year 2019 was significantly influenced by the weak demand situation and the impairment of assets of individual Group companies. Significantly lower sales volumes led to lower revenue, significantly lower profitability and higher debt.
In the 2019 financial year, the net assets of DEW, Ascometal, Finkl Steel and Steeltec had to be written down by EUR 312.7 million. In the consolidated income statement this is included in the item depreciation, amortization and impairment losses. An additional value adjustment in connection with the assets was made on the deferred tax assets in the amount of EUR 46.2 million, which is included in tax expenses.

At 1,830 kilotons, 12.6% less steel was sold in 2019 than in the previous year (2018: 2,093 kilotons). The reason for this is the general weakness in demand and the resulting decline in sales volumes in all three product groups, i.e. quality & engineering steel, stainless steel and tool steel.

The average sales price per ton of steel sold was with EUR 1,629 higher than the previous year's EUR 1,583. The increase is mainly due to the more favourable product mix with a larger share of higher-priced steel grades in the stainless steel product group. Nevertheless, due to subdued sales volumes, revenue declined by 10.0% to EUR 2,980.8 million compared to the previous year, which was mainly due to the 17.5% reduction in quality & engineering steel. The decline in stainless steel was 2.6% and in tool steel 3.5%. In geographical terms, declining revenue were recorded in almost all markets.

EBITDA adjusted for one-time effects decreased by 78.4% to EUR 51.2 million. The one-time effects amounted to EUR 63.7 million and included restructuring provisions of EUR 15.3 million for planned personnel measures in the Business Units Ascometal and DEW as well as the antitrust fines of EUR 12.3 million. EBITDA amounted to EUR –12.5 million and was significantly lower than in the previous year at EUR 251.4 million. The adjusted EBITDA margin was thus 1.7% (2018: 7.1%) and the EBITDA margin –0.4% (2018: 7.6%).

At EUR –57.5m, the financial result was more negative than in the previous year (EUR –43.4m) due to the higher level of debt. As a result of the unfavorable business development, earnings before taxes (EBT) amounted to EUR –482.9 million. Tax expenses include a devaluation of deferred tax assets in the amount of EUR 46.2 million in connection with the impairment of assets. The consolidated loss for the full year 2019 was EUR –521.0 million and therewith significantly higher than in the previous year (2018: EUR –0.7 million).

Free cash flow was negative at EUR –7.1m (2018: EUR –159.8m). This significant improvement in cash flow despite the lower EBITDA mainly reflects the success in inventory level adjustment.

At EUR 797.6m, net debt, which comprises current and non-current financial liabilities less cash and cash equivalents, was higher than on December 31, 2018 (EUR 654.8 million). Accordingly, the ratio of net debt to adjusted EBITDA increased from 2.8x to 15.6x compared to December 31, 2018.

Outlook for the 2020 financial year

Following the successful capital increase at the beginning of the year, SCHMOLZ + BICKENBACH will continue to push ahead with the restructuring of the Group. The aim is to lead the Group to lasting profitability and, at the same time, to create corporate value. This is to be achieved on the one hand by the consistent continuation of measures already introduced, and on the other hand by additional structural adjustments within the framework of a transformation plan. This transformation plan details the path to sustainable competitive profitability. Among the existing measures, the industrial integration of Ascometal and the related efficiency improvement measures, the turnaround of Finkl Steel in North America, the restructuring of Steeltec in Germany, but also personnel measures and operational improvements at DEW and the investment results at Swiss Steel are on the agenda.

Despite a persistently challenging market environment, Schmolz + Bickenbach expects adjusted EBITDA for 2020 to be substantially improved compared to 2019, driven by the initiated restructuring program and an improved inventory situation in the end markets.

Source and photo: Schmolz + Bickenbach

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