Metal Engineering Division*

Market environment and business development

After a decline in revenue and operating result in the business year 2015/16 due to the extreme erosion of demand in the oil and natural gas sectors, the Metal Engineering Division has succeeded in stabilizing the development of its earnings during the business year 2016/17 thus far. The division attained this outcome even though demand in railway infrastructure, its most important sector, in the first half of 2016/17 was somewhat below the previous year’s excellent level; overall however, it remained solid. For example, the Rail Technology business segment was able to largely maintain its full capacity utilization in the first six months of 2016/17, due primarily to a solid stream of incoming orders from European markets. The market conditions in the rail segment in all important overseas regions were considerably more challenging.

A market environment that was highly differentiated from region to region marked the development in the Turnout Systems business segment. In the first half of 2016/17, a generally excellent level of demand in Europe, China, and India was contrasted with an only moderate performance in the mining regions of Australia, South Africa, and Brazil. However, this business segment profited from growing rail mass transit networks in a number of major cities both in Asia and in North America. Most recently, the unit received major orders in the signaling technology segment as part of the implementation of software-based monitoring systems in Germany and Austria.

The automotive sector generated a tailwind for the Wire Technology business segment, enabling it to maintain a solid performance; the new wire production line that is in the process of being launched is already contributing significantly to the business segment’s success.

Despite the fact that the oil price continues to be under pressure, exploration activities in the North American oil and natural gas industries increased recently after more than an almost complete year-long interruption. This was due to a decrease in crude oil supplies and equipment inventories for drilling activities as well as lower prices for oil and natural gas field equipment. This— largely short-term—increase in incoming orders made it possible to end reduced working hours in the Seamless Tubes business segment in early October 2016 and return to a regular three-shift operation. The increased demand has, however, not (yet) resulted in an improvement in prices and margins.

In the first half of 2016/17, the Welding Consumables business segment continued to deal with a persistent weakness in the energy sector. This applies primarily to demand from Europe, Brazil, and North America; the market conditions in China were significantly more favorable. The restructuring measures initiated in the previous year had an increasingly positive effect on the profitability in this business segment.

The division’s most important investment project, the state-of-the-art wire rod mill in Donawitz, Austria, is nearing the end of the run-up phase. Between early August and the end of September 2016, the scheduled renovation of one of the two blast furnaces in Donawitz, Austria, was successfully completed.

The Metal Engineering Division invested a total of EUR 79.6 million in the current reporting period (previous year: EUR 95.3 million).

Financial key performance indicators

In a twelve-month comparison, the financial key performance indicators of the Metal Engineering Division have weakened significantly, due primarily to non-recurring effects, but also to the fact that the market in some customer segments has cooled. Overall, revenue fell by 12.6% from EUR 1,525.3 million in the first half of 2015/16 to EUR 1,332.5 million in the first half of 2016/17. The operating result (EBITDA) fell considerably by 48.8%, from EUR 336.1 million to EUR 172.0 million, while profit from operations (EBIT) declined even more sharply by 63% in the same period, from EUR 258.4 million to EUR 95.5 million. However, it must be taken into consideration that the previous year’s results included positive non-recurring effects amounting to EUR 126.5 million reported in EBITDA and EUR 114.1 million reported in EBIT. The previous year’s non-recurring effects were the result of the acquisition of the controlling interest in the companies voestalpine Tubulars GmbH & Co KG, voestalpine Tubulars GmbH (both belonging to the Seamless Tubes business segment) and CNTT Chinese New Turnout Technologies Co., Ltd. (Turnout Systems business segment). In this context, reassessments were made based on fair value less depreciation of hidden reserves. The non-recurring effects in the current business year amounting to EUR –7.5 million recorded in EBIT result solely from the depreciation of hidden reserves in connection with the acquisition of the controlling interest in the companies cited above.

Adjusted for non-recurring income and expenses, the division’s earnings as recorded in EBITDA fell by 17.9% from EUR 209.6 million in the first half of 2015/16 to EUR 172.0 million in the first half of 2016/17. EBIT went down by –28.6% going from EUR 144.3 million to EUR 103.0 million. This was due primarily to the marked decline in activity by the oil and natural gas industries, which affected the Seamless Tubes business segment particularly dramatically, but also to the slight downward trend in the market environment for railway systems. Thus, the EBITDA margin, adjusted for non-recurring effects, dropped from 13.7% to 12.9% and the EBIT margin declined from 9.5% to 7.7%.

In a direct comparison of the first and second quarters of 2016/17, revenue decreased by 4.2% from EUR 680.4 million to EUR 652.1 million. As far as the development of earnings is concerned, the operating result (EBITDA) fell by 3.7% from EUR 87.6 million to EUR 84.4 million. In profit from operations (EBIT), in a direct comparison of the second quarter with the immediately preceding quarter, the non-recurring effects remained practically unchanged as a result of the previously mentioned depreciation of hidden reserves (first quarter: EUR –3.9 million; second quarter: EUR –3.6 million). EBIT went down by 7.8 % going from EUR 49.7 million (adjusted EBIT: EUR 53.6 million) in the first quarter of 2016/17 to EUR 45.8 million (adjusted EBIT: EUR 49.4 million) in the second quarter. In a direct comparison of the first and second quarters, the EBITDA margin remained stable at 12.9%, while the EBIT margin, adjusted for non-recurring effects, declined slightly from 7.9% to 7.6%.

As of the end of the second quarter of 2016/17, the number of employees (FTE) in the Metal Engineering Division was 12,709 or 2.8% higher than last year’s figure in the same period (13,080). The main reason for the adjustment in the number of personnel was the challenging market environment in the oil and natural gas industries that the Seamless Tubes business segment had to deal with in the past quarters. Compared with the figure at the end of the last business year (12,675), headcount rose slightly by 0.3%.