Voestalpine AG VLPNF CEO Herbert Eibensteiner on Q4 2020 Results

Ladies and gentlemen, welcome to today's press conference covering the elapsed business year 2019/2020. We are going to share with you some insight into our highlights of the year. Let me get started by the economic situation. We all of course are hit by this crisis; you all know what this means. There are lockdowns in all countries. Now the situation is improving a little bit finally, but if you look back, we have to say that as early as last year, the start of this business year, the economy has been suffering, has been deteriorating, particularly caused of course by some trade wars. First, Europe was hit by these, and we had to see that in particular export-oriented industries had to accept clear downturns in the course of the year. China got worse and worse, the dynamic situation there got weaker and weaker, and we had to see also and accept that confidence of consumers went down, and the automotive industries and in particular local OEMs suffered from a clear and steep downturn. It is obvious that it's a bit hard to win trade wars, and the industry in the US had to live with this as well. In the course of the year the situation has deteriorated considerably. And here we have to add however that the service area until the end of the business year remained quite stable. A segment which remained really stable was South America, there in particular Brazil; Brazil posted solid development across the business year until before the eruption of COVID-19. Here you can see on the basis of the directions of the arrows that we saw a global downturn which is still ongoing obviously, and all fields of the economy were concerned towards the end of the business year. Last quarter, end of January early in February, we saw a slight recovery, and all of this then of course was entirely destroyed first in China by the lockdown due to the pandemic, and then the virus as we know spread into Europe, the US, and now presently into Brazil and South America in general. What then have been the reasons for this business downturn? You see it here: it's the global economic downturn obviously, and these global trade wars. There were tariffs, countermeasures, retaliation tariffs, and we have seen also that due to some other trade obstacles, the intensity in the worldwide business situation of course was clearly reduced. We have seen furthermore that the automotive industry with a very important global supply chain in the course of the year went down even more. And for the steel industry itself, particularly in Europe, we had to see that in the face of rising raw material prices and low steel prices getting even lower, there were some negative effects. When I say raw material prices, I mean particularly iron ore, and the iron ore price itself was of course driven by a very good demand in steel production in China. And after those first three quarters, in January and early in February, the business situation and economic situation was clearly hit by the COVID-19 pandemic, with the effects we can all see now: a worldwide global recession. How has all of this impacted us? The negative consequences particularly were impairment losses and provisions of 480 million euros, which also meant that our EBIT turned into the negative with a minus of 89 million euros. And we then decided quite fast to react to such environment and to put in place cash flow optimization and efficiency boosting programs. We reduced our investments considerably, we tried and are trying to reduce our inventory and optimize our cash flow. Here you see the main key figures of the business year in question. The revenue fell to 12.7 billion. The EBITDA, the operating result, we could achieve 1.2 billion euros, which wasn't that bad. As to the EBIT, we had of course the special impairment for the first time in December, then for the second time early in April due to the pandemic. The total headcount went down by some 4% to 49,700. And within the management board, we have decided to propose to the Annual General Meeting a dividend of 20 euro cents per share, and that is a reduction by some 80% year on year. First, I've been mentioning some measures we have introduced. What is their impact now? Due to the cost-cutting measures and the efficiency improvement measures, we have succeeded in achieving an operating result to the tune of 1.2 billion euros, and this is the EBITDA, which thus is clearly positive. And it's also positive to see that the cash flow from operating activities rises to 1.3 billion euros, and if you reduce this by investment expenditure we have a free cash flow of 588 million euros, which here again is better than the year before. All of this has been made possible by us successfully reducing the working capital and in particular inventory, and that to the tune of 434 million euros. Now, in a very difficult phase and also with a view to the next few months, it's very important to see that we still have an available liquidity amounting to 1.7 billion euros for the next business year. This chart here shows you how voestalpine fares when compared to international competitors. It's the EBITDA margin which is shown here. I'd like you to see that voestalpine is indicated by the dark blue line here, and you see that towards the end of the business year, that is in its last quarter, due to some positive development of EBITDA as well, we have been clearly better than our peers. Thank you very much indeed for listening to this first round, and now I'd like to hand back to Mr. Velsbach.

Ladies and gentlemen, let me show you some outlook and before that maybe some figures in order to show you where we are standing now. In every phase of the pandemic, health of our employees and workers has had highest priority. And due to containment measures and due to very strict hygiene and distancing rules, we have succeeded in having a very low number of diseases or infections. And it has been very important that across the group these rules have been respected and followed very accurately. Now, step by step we are getting back to more or less normal operations in many countries. Measures are being loosened, and our customers gradually are restarting their production. We accompany them in doing so. And it's interesting to see that this week is the first week where all our facilities are operational again. And we have to see that slowly but truly, together with our customers, we do all these startups and restarts. It's interesting to see that in China there is rapid recovery already there. We are having a capacity utilization which is close to 100%, and we see a very good trend there, which is a sector counting some 600 million euros in terms of revenue. And what impresses me very much is the railway infrastructure system—that is tracks and rails and turnouts—which even during the pandemic had a very good capacity utilization. And then of course storage systems, which benefit very much from the favorable e-commerce situation, so there is even 100% capacity utilization there and they produce at full swing. Of course in certain areas we have to adapt to reduced capacities of our customers, and there are also some temporary production shutdowns. For instance, one small blast furnace here at Linz has been shut down, and in Donawitz, Austria, there will be a relining of a blast furnace which will be anticipated in time, so one will be shut down. We do not yet know precisely when we will restart both. And one good means of course to adapt to reduced capacities is short-time work. In Austria we have some 10,000 employees which are in short-time work, and some 3,000 in Germany. This is a bit less than half of the employees which we are having in the respective countries. And in addition, of course, internationally some 2,000 further employees are subject to some schemes which are similar to the Austrian and German short-time work. So it's a good way of adapting, but we do have to see that there are some areas or there will be some areas where we find it difficult to work in the long run, and there, even after this summer, some further capacity reductions will have to be implemented. How much reduction that will mean, we cannot yet say. It will of course depend on the further development of the business situation. Presently, in Q1 of this business year we see a market environment characterized by the economic milestone and lockdown. It will remain the most difficult quarter for us. There are many analyses telling us that in the second half year the business situation will improve. All of this of course is not yet certain at all, and volatility in our economic environment will certainly remain high for us. Now it is important to implement the appropriate crisis management, and the topics are very obvious. We will have to further improve our cost-cutting programs. We are focusing on the working capital and storage systems and inventory reduction. That is and will be decisive how we can generate cash flow. And that's why we have opted for a further reduction of investment. So it will be, according to our plan, some 600 million euros in terms of investments. And all of that in a very volatile environment, which means of course that there will be some outlook of a larger bandwidth than in the past. We expect for the EBITDA operating result between 600 million euros and 1 billion euros. Thank you very much for listening, and of course we appreciate your questions in English or German.

As to the first question: in Linz we are having one large and two smaller blast furnaces. The small one, that's some 20% of raw iron capacity of the location, and that one we shut down in the second half of March, and it will not be operated for a while. The other two blast furnaces at least remain in operation. And in Donawitz, there is a plant. They are having two blast furnaces there as well, and one of them is being relined. It's not a damage; it's a relining of the blast furnace which has been planned anyway, but now it's just done earlier. And second, on the almost doubling of the raw material prices: I'm speaking of an index which has always been a reference parameter. That's the index for 62% iron ore. And that index between early January last year and before summertime has gone from some 70 to more than 120 US dollars per ton, so almost a doubling of the value. Thank you very much.

Maybe that's for me again. First, we have succeeded from the technical perspective to get the Texas plant into very stable condition year on year. The technical availability of the plant has been stepped up by some 10%, so the technology does work very well. And we then went over to regular operation. The first quarter of the elapsed business year was a very successful one. But as described before, we also had with raw materials prices, particularly also iron ore related to market prices, which are also characterized by raw iron and scrap—the substitute products—so here again that has made a very difficult situation at the margin squeeze, particularly in the second half year of that business year.

In Austria, actually, we mainly reduced least—so temporary workers—and I would say it will be more or less half of all of them, half of 2,000. And that's of course in full-time equivalent, and overtime is being included as well. So 1,000 FTEs precisely. And how many people—how many persons as it were move this? Some 600. Thank you very much.

Let me get started with your second question? We are now having some 10,000 staff in short-time working in Austria. We believe that in some further areas, the second short-time work round will be needed as well. We have some areas performing very well, like railway systems, rails, turnouts, casting foundry—they are much better...

In some segments we will require a second round of short-time work. The government has announced that they will have something after September, and I believe we will need it in certain areas – we will need an additional scheme we can benefit from.

We are having 23,000 staff – or 22,000 rather – in Austria, and the 10,000 mentioned are in short-time work.

We can't say no. Probably we can tell you more in the first quarter, in August. As for state aid or state support alongside short-time work, we have also benefited from the government's offer to defer some payments of insurance and social schemes, meaning we will only pay in autumn or towards the end of the year. But we will have to pay everything later. Otherwise, in terms of fixed-cost allocations or funding, we have not been benefiting from any further schemes.

May I answer your first question? All protectionist measures that existed before the corona crisis – like Section 232 tariffs, China as well – are still valid. Presently I also do not see any trend showing that those protectionist measures might be loosened or stopped after the crisis. I cannot say whether there will be additional further measures. I believe – and that's my personal view – we have to see the total economy in Europe and the rest of the world get up to full swing again, and such measures are certainly hampering this. As to the further evolution of the global steel market after corona, I would say that China has sailed out of these difficulties; they are producing at max capacity again. In some other countries, since March it is too early to say whether there will be concentration, new groupings, or to anticipate how the steel configuration and panorama will develop. So you cannot yet say where there will be changes in supply and demand. No, it depends on the individual segments and how they evolve. But I understood your question as: will there be concentration, new groups, mergers – that we cannot say now, it is too early. Not only concentration of companies but maybe some fields in production which after the crisis, due to measures implemented or due to other products not in such high demand any longer, might see a shift. I believe in the present phase it is definitely too early to speak about such elements. I believe it is very important that the automotive industry be backed and supported; it is one of the most important supply chains we have in Europe and globally. It will be decisive to see how consumption will pick up again. In China, as an example, they have succeeded very well.

As to the first question: a sustainable shutdown – that is, forever – of that blast furnace is not our intention. We are having one large and two small ones in Linz, so we can react very flexibly to the mountains. As soon as demand picks up again and stabilizes more and more, the small blast furnace will also be started and taken into operation again. As to HBI in the blast furnaces: this makes sense when the blast furnaces are a bottleneck in order to step up our production capacity, but that is not the case. So a more focused use of HBI in the blast furnaces is not our intention or plan presently. As to the capacity utilization of steel works: I am under the impression that all European steel plants are being hit very much by a slump in demand. The figures you keep reading are at least 50% and depend very much on which product portfolio is the focus of the plants and which market segments are served mainly.

For Linz, in April where the lockdown of the automotive industry, one of our main customer segments, came across the board, it was a bit more than that. And we are seeing already a cautious and slow recovery of the situation.

As to capacity adaptations: there are two areas which are in a very difficult environment – on the one hand, the aviation or aerospace industry, and on the other hand, the oil and gas field, as we got OCTG. And there are some other segments as well where some adaptation necessities exist, like in the automotive industry and, as you know, portfolios as well.

Miss Brandt, of course we do not announce detailed results of individual companies, but your interpretation is correct. Texas, both in the individual operating result, was worse than expected and was also hit by those impairment losses. Mr. Zaichik has said it already: in particular in the second half here, the ratio of pellet, billet prices, iron ore, and scrap meant a negative operating result, and of course also the impairment loss even more so. As regards Carter's Will: you know that in 2018/19 we had a very bad result because of the startup problems. Charts will in the elapsed business year 2019/20 still was not positive, but on a clear way towards improvement. Carter's Will is part of an asset CPU, the so-called hot farming CKU, and there in the new evaluation of future perspectives there has been an impairment loss. So in both companies mentioned by you, there has been a mix of operational worse performance and non-recurring effects due to impairment losses.

Well, I said before: we will decide upon this after summertime. We will see how the business situation evolves and where the trend will go. We cannot yet say so.

Well, as to Kapfenberg: the initial timetable had been that mid-2022 this special steel plant would become operational. From today's perspective, in conjunction with the delay caused by the pandemic, we say that it will be three to six months later – say autumn or end of 2022. I hope your question was not whether we are out of the crisis already. But in the last few months, on a global basis we have had a lockdown in China in February where the economy has developed very fast. How fast the other countries will develop is fraught with so many uncertainties still. But we are very far away from a total standstill, so in so far it's an improvement. Many of our customers are starting up again, yet slowly. So I think, in terms of capacities and outlooks, we have to be very conservative and very patient because we can't estimate that certainly – not in all our areas. As to the hydrogen: the hydrogen plant is a pilot plant, a research project that is underway. The plant is being tested under different operating conditions; that is working well, and the plant is or was in full operation. Sometimes they do 100%, sometimes they don't. It is a research project with a lot of trials. Strengthened after the crisis? You can be sure that all staff – and by the way, they are working excellently, my thanks go to all our staff in this very difficult phase – everyone is working for us to be strengthened after the crisis.

I believe it's most important presently in the next few months to overcome the crisis. I've said it before: the focus is on adaptation to the present situation, our cost programs, our efficiency programs. Obviously we will try to see that we do everything in order to have the focus there.

A short addendum: you have to see this in such a way: it is a pilot plant which is being operated, and the efficiency is measured; some coatings are changed. The idea is, as said by Mr. Amsterdam, that until 2021 these activities are planned in such a way: how can you start it up, how can you reduce its operation? It does work very well already and it also delivers as expected and planned. It is a research program; there shouldn't always be 100% of its operation, but the boundary conditions should be investigated much better in order then to be in a sustainably optimized condition.

We know the automotive industry's plans. We keep accompanying our customers in their plans as to their respective restarts. And it will be decisive how fast consumption will pick up and when people will buy cars again. If that picks up again, that area will develop very fast, and I believe it's also important to give new impetus to the business situation and think about support for that field across Europe.

May I add to this? In the past we always had two lines of our dividend policy: on the one hand, the dividend yield of three to four percent – based on a low dividend, we are clearly below this this year. On the other hand, also a payout ratio. Based on the negative annual result, of course this payout rate is very high, almost not measurable. So the 20 cent against this background chose to do basic guidelines spot in the last decades. I can say, in the meantime, at roadshows and also at the capital market, so as to those giving money to us, we have always mentioned our consistent respecting of our financial obligations towards our money lenders. For our money lenders, it's always very positive also to have and keep this policy, and it has helped us to always have very good conditions as to the financing of Voestalpine. This also means that in this difficult situation we also believe that it's good to pay a dividend. Since we have some 180 million shareholders, it's 36 million euros.

As regards the negative EBIT: I've been in the management board for 16 years, and during that period it has never been negative. And as far as I know, since Voestalpine started as a listed company in the 90s, there has never been any negative EBIT. As to the other two questions: how to be fair compared to the peers? I have shown one parameter, the EBITDA. But I think that Voestalpine as a group has such a clear-cut strategy, our subscribing to innovation and to quality, using high-quality niches, that gives us some autonomy which distinguishes us from many competitors. There is also our USP, and like Robert Hotel has said, it will mean that we will be even stronger after the crisis. As to your question related to Asia: China is some 600 million of revenue for us, so a very important part of Voestalpine. Yet when compared to the exposure we are having in Europe, it's a smaller part. There we are in special niches we are acting in, and also the automotive industry where we followed our European customers. So as always, our strategy will be evaluated, but in China you cannot expect a 180-degree turnaround. Your question about European competitors related to COVID state support: we have not asked for any state support. When you say we are getting public support at least for short-time work, of course in those areas there are some minor differences, but when comparing us to Germany, there are similar short-time work schemes and this seems to be comparable.

Well, thank you very much for your keen interest in our business and our situation, your interest also in the figures of the elapsed business year. I'm very happy to see you physically next time, and I wish you all the best. Thank you very much.