Special Steel Division*

Market environment and business development

The market environment of the Special Steel Division in the second quarter of 2016/17 was marked by momentum that remained persistently modest.

A moderate increase in revenue in the tool steel segment is due largely to the regional expansion of the sales network in Spain, Portugal, and China as a result of the most recent acquisitions. Despite the challenging market environment, earnings remained largely stable by virtue of the strategic focus on products with unique selling points and continuing expansion of service offerings within the sales organization.

The past quarter did not see any significant revitalization of demand in the oil and natural gas segments, as hardly any projects involving the development of new oil and natural gas reserves are being undertaken. Companies in these industries are reacting to the challenging framework conditions with increasing consolidation. In this difficult environment, voestalpine can differentiate itself significantly from the competition not only by the high quality of its products, but by the fact that it maintains local inventories both in the USA and in Asia. There are cautiously optimistic signals for the second half of the business year.

In the aerospace sector, on the other hand, the second quarter again had a strong showing. Both the volume and the value of the division’s deliveries are substantially higher than in the same period of the previous year, making it necessary to develop projects that adjust the capacity to growing demand.

In the energy engineering industry there are some slight positive signs for a market recovery, the first improvement in quite some time. Although Europe has largely abandoned this industrial segment, the division reports increasing revenue in comparison to the previous year, driven primarily by necessary maintenance on existing power plants.

Development in the automotive industry continues to be positive. Especially in China, the division has been able to continually expand its leading position with regard to steel for highly sophisticated tools used in automobile production due to its comprehensive local service.

In recent months, the North American special steel market continued to lose momentum, in part because of the persistent weakness of the oil and natural gas industries. Furthermore, the increasing artificial isolation of the US steel market has slowed the division’s business development in this region.

In South America, the crisis in Brazil continued unabated in the second quarter of the business year. It was not until the most recent changes at the highest political level had occurred that somewhat more positive expectations regarding the country’s economic development have emerged. The significant upward revaluation of the real, the Brazilian currency, has, however, led to increasing pressure on exports. Thus far, extensive lean management measures and the development of new business fields have been able to largely compensate the negative effects.

On the other hand, the market environment in some parts of Asia, in particular in China and increasingly in India as well, continues to be positive. The division’s focus on a product range whose technology sets it apart from its Chinese competitors and the most recent local acquisitions bolster its growth strategy in this region.

Generally, the policy of the Special Steel Division of differentiating itself from the competition by focusing on top quality products and premium services results in a relatively low level of price volatility, a largely stable market position, and, ultimately, profitability that is higher than the industry average as well—even in a difficult market environment.

In the Special Steel Division, expansion of activities in service and sales continued in the first half of 2016/17 as planned. Furthermore, activities in the coating technology segment maintained their growth trajectory. For example, the first coating center in India for the coating of tool steel was put into operation in Pune. In Querétaro, a hotspot for the automotive industry in Mexico that is experiencing strong economic growth, the opening of a new processing and coating center was celebrated with an inauguration ceremony in June 2016. This investment in Mexico was undertaken to strengthen service for the automotive industry, which is continuously increasing the technological requirements in this region. Overall, investments made by the Special Steel Division declined by 23.3% from EUR 68.7 million in the first six months of 2015/16 to EUR 52.7 million in the current reporting period.

Financial key performance indicators

In a market environment that continues to be challenging, the first six months of the business year 2016/17 saw a slight decline in revenue in the Special Steel Division, which was due largely to a downward trend in sales prices. However, the division was able to increase earnings in the same period in comparison to the first half of 2015/16, primarily as a result of the strong performance of the aerospace sector.

Revenue declined in the first six months of 2016/17 (EUR 1,306.0 million) compared to the same period in the previous year (EUR 1,368.8 million) by 4.6%. At the same time EBITDA improved by 4.0% from EUR 186.1 million to EUR 193.5 million, and EBIT went up by 3.3% from EUR 117.7 million to EUR 121.6 million. Accordingly, the margins rose as well: the EBITDA margin increased compared to the first half of 2015/16 from 13.6% to14.8%, while the EBIT margin went from 8.6% in the first six months of 2015/16 to 9.3% in the first half of 2016/17.

Comparing the second quarter of 2016/17 with the first quarter of 2016/17, the Special Steel Division saw a drop in revenue of 4.2% from EUR 667.1 million to EUR 638.9 million in the second quarter of 2016/17. This decline was largely due to the seasonal weakening in demand during the summer months. At the same time, the operating result (EBITDA) decreased by 4.9% from EUR 99.2 million to EUR 94.3 million, whereby the EBITDA margin remained practically constant at 14.8% (first quarter: 14.9%). Profit from operations (EBIT) fell in a comparison with the immediately preceding quarter by 8.2% from EUR 63.4 million (margin: 9.5%) to EUR 58.2 million (margin: 9.1%).

The number of employees (FTE) in the Special Steel Division was 13,573 at the end of the first half of the year or 1.0% above the figure on the previous year’s reporting date (13,434). This increase is primarily the result of the acquisitions of Sermetal and Advanced Tooling Tek (ATT). Compared with the figure at the end of the last business year (13,470), the number of employees has gone up by 0.8%.