Metal Engineering Division

Market environment and business development

Just as in the past two business years, the Metal Engineering Division’s performance during the current business year to date has been bifurcated. The global Railway Systems business segment succeeded in continuing along the positive trajectory that has characterized its business in recent years and was affected but temporarily or regionally by the spread of the COVID-19 pandemic. The Industrial Systems business segment, by contrast, was confronted with substantially more difficult conditions in the same period. Both the automotive and the oil and natural gas customer segments already had to contend with declining momentum over the course of the past business year, but COVID-19 depressed demand yet further. In the wake of these developments, the planned maintenance work on one of the division’s two blast furnaces at the Donawitz steel plant in Austria was moved forward by several weeks.

The performance of the turnout systems product segment, which is part of the Railway Systems business segment, was most satisfactory. Its project activities in Europe, Asia, Australia, and South America remained solid even though they were unable to fully escape the effects of COVID-19. In China, for example, activities related to the construction and maintenance of high-speed rail lines continued apace once the project stoppages triggered by the pandemic back in February 2020 were lifted. North America was the only region where maintenance projects in the rail technology segment were cut back owing to the substantial decline in the transportation of goods. Because the North American freight transportation business is private, maintenance work is predicated on macroeconomic developments. Activities in the rails product segment associated with the delivery of premium rails, which are focused mainly on Europe, were stable year over year. This translated into good capacity utilization in Donawitz, the Group’s rail technology plant.

As mentioned above, the economic environment of the Industrial Systems business segment in the first half of the business year 2020/21 was particularly challenging. Governmental short time work programs, which the Group utilized, helped to somewhat alleviate the negative development. Cost-cutting measures were intensified, as were comprehensive programs aimed at boosting efficiency. Wire technology was one of the product segments that was hit particularly hard by the COVID-19 pandemic. This segment had to contend with low capacity utilization rates at its production facilities during the reporting period. The weeks-long production shutdowns at the original equipment manufacturers (OEMs) had a powerful effect, given its strong focus on the automotive supplier industry. Wire technology did not benefit from the incremental easing of conditions in the automotive industry until later on because its customers reduced inventories from within their value chains first.

The tubulars product segment was exposed to an equally difficult market environment. Declines in exploration activity worldwide due to low crude oil prices triggered sharp declines in demand for high quality seamless tubes. In the United States, the segment’s main market, the administration’s protectionist Section 232 tariffs weighed on its competitiveness, as did the weakening market momentum. While oil prices have rebounded somewhat in recent months after collapsing in March 2020, the global oil giants will continue to curtail their drilling activities during the remainder of the current business year. Against this backdrop, voestalpine’s Metal Engineering Division utilized short time work programs and carried out necessary, structural cuts on the cost side.

Capacity utilization at the production sites of the welding product segment (welding technology) did shrink a bit during the first six months of the business year 2020/21, but the dampening of economic sentiment in this segment was not as pronounced as it was in the wire technology and tubulars segments. In contrast to China, where demand was very good overall, the momentum in North America remained very weak. The economic environment in South America was somewhat satisfactory despite high COVID-19 infection rates in Brazil, the division’s most important market on that continent.

Financial key performance indicators

Relatively speaking, the Metal Engineering Division was the division of the voestalpine Group that was least affected by declines in revenue during the reporting period—thanks to the very stable development of its Railway Systems business segment, which generates approximately one half of its revenue stream. Year over year, the division’s revenue fell nonetheless by 13.1%, from EUR 1,537.5 million in the first half of the business year 2019/20 to EUR 1,335.9 million in the first half of the business year 2020/21, owing to the exceedingly unfavorable environment in Industrial Systems, the division’s other business segment. Those product segments of Industrial Systems that are strongly aligned with the automotive industry as well as the oil and natural gas sector were hammered by huge declines in delivery volumes. The tubulars product segment already saw a significant decline in capacity utilization the previous business year. Plummeting drilling activities in the oil and natural gas industries further intensified the situation this business year. By contrast, the wire technology product segment, which is highly dependent on the automotive supplier industry, has seen an expanding rebound after demand evaporated early on in the business year.

The cost structure adjustments made in light of diminished demand acted as a break on the decline in the earnings of Industrial Systems, as did state-sponsored support and stimulus programs aimed at mitigating the fallout from the COVID-19 pandemic. Owing to the very robust performance of Railway Systems, as indicated by the following key performance indicators (KPIs), the division’s EBITDA for the business year’s first half dropped by only about one third to EUR 110.3 million, down from EUR 172.3 million for the same period the previous year. The EBITDA margin fell accordingly from 11.2% to 8.3%. The EBIT of the Metal Engineering Division for the reporting period is negative EUR 9.6 million (margin of –0.7%). Aside from plummeting demand, the Industrial Systems business segment was affected also by non-recurring effects. The segment took a total of EUR 30.9 million in impairments, most of which are attributable to the tubulars product segment. In the same period of the previous year, the division had still generated EBIT of EUR 76.3 million (margin of 5.0%).

The quarter-on-quarter comparison (QoQ) between the business year’s first and second quarters shows that its trends with respect to both revenue and earnings were stable throughout. Solely Industrial Systems exhibited diametrically opposed trends. While conditions in the tubulars product segment continued to deteriorate in the second business quarter, the environment of the wire technology product segment gradually brightened. Against this backdrop, the revenue of EUR 666.7 million in the second quarter of the business year 2020/21 was more or less equivalent to the revenue of EUR 669.2 million in the preceding quarter. The numbers for the Metal Engineering Division’s earnings also held steady. EBITDA for the second business quarter is EUR 55.7 million (margin of 8.3%) and thus almost exactly the same as for the first (EUR 54.6 million, margin of 8.2%). But EBIT entered negative territory on account of the aforementioned non-recurring effects. After EUR 10.3 million (margin of 1.5%) in the first business quarter, the division posted EBIT of EUR –19.9 million (margin of –3.0%) in the subsequent quarter.

At 12,878, the number of employees (FTE) in the Metal Engineering Division as of September 30, 2020, is 3.7% less than the previous year’s figure of 13,369. This is 3.2% lower than the number as of the March 31, 2020, reporting date (13,310 employees). The reduction in personnel is due to the challenging conditions in the Industrial Systems business segment.