Half-year report 2008 of SCHMOLZ + BICKENBACH AG
The first half of 2008 was characterised by a good market situation, high production volumes, and increased raw material costs. It brought a substantial improvement relative to the second half of 2007. The weaker earnings by comparison with the first half of the previous year are mainly attributable to the one-time effects of the alloy prices in that period. Despite certain signs of weakening, the outlook is still seen to be positive. The consolidated financial statements as at December 31, 2008, will be published on the basis of the International Financial Reporting Standards (IFRS) for the first time.
Strong influence of the raw materials price development
In view of the strong market demand, in the first half of 2008 all of our production and processing works were operating at full capacity. We sold 3% more tonnage of steel products than in the first half of 2007,and 6% more than in the second half of 2007. Raw material prices, and above all scrap prices, developed dramatically. Since the start of the year, prices have doubled from a level which was already historically high. They could be largely passed on as higher product prices, but in many cases only with delay. Prices for various alloying elements such as chromium have also become very high.
A contrary development was displayed by the alloying element nickel, which is mainly required for the production of our stainless steels. In the first half of 2007, its price rose steeply, which in the financial statements for the corresponding period last year had a perceptibly positive impact on earnings. This was compensated again by the marked price decline in the second half of 2007, with a clear negative impact on our income statement for that period. In the first half of 2008, the nickel price oscillated in a narrow range at a lower level than one year ago. This contrary price development is the main reason for the drop in earnings in the first half of 2008 as compared with the same period last year.
Group revenue in the first half of 2008 was EUR 2,278.2 million (first half 2007: EUR 2,286.6 million, second half 2007: EUR 1,960.3 million). Operating profit before depreciation and amortisation (EBITDA) amounted to EUR 236.1 million (H1/2007: EUR 271.3 million, H2/2007: EUR 144.7 million). This yielded an EBITDA margin of 10.4% (H1/2007: 11.9%, H2/2007: 7.4%) for the total Group with its three divisions of Production, Processing, and Distribution and Services. Operating profit (EBIT) attained EUR 189.9 million (H1/2007: EUR 230.6 million, H2/2007: EUR 97.1 million). Consolidated earnings before taxes (EBT) were EUR 163.3 million (H1/2007: EUR 205.0 million, H2/2007: EUR 69.0 million), while consolidated earnings after taxes (EAT) were EUR 106.3 million (H1/2007: EUR 130.2 million, H2/2007: EUR 54.1 million).
Cash flow before changes in net working capital was EUR 140.7 million (H1/2007: EUR 212.1 million, H2/2007: EUR 58.7 million). In the first half-year, total assets increased to EUR 2,845.0 million (31.12.2007: EUR 2,465.6 million, 30.06.2007: EUR 2,557.1 million). The rise is mainly due to the higher trade receivables and higher value of inventories that resulted from the higher costs for more expensive raw materials.
The equity ratio was 27.7% (31.12.07: 29.0%, 30.06.2007: 26.3%). Net borrowings were EUR 844.5 million (31.12.2007: EUR 706.7 million, 30.06.2007: EUR 681.7 million).
In a difficult stock market environment, the price of the SCHMOLZ + BICKENBACH share developed relatively well. On June 30, 2008, it was CHF 80.95 per share, as compared with CHF 91.50 per share at the end of 2007.
High investment volume to secure the strategy
As already in the previous years, in 2008 we again invested significant sums in implementing and securing our strategy. The corresponding sum in the first half of 2008 was EUR 99.7 million (H1/2007: EUR 69.2 million, H2/2007: EUR 172.7 million). A major project is the phased relocation of A. Finkl & Sons Co. from Chicago North to Chicago South, combined with the construction of a new steelworks and a substantial expansion in the forging capacities. The respective work operations are progressing according to plan. They will be completed by the end of 2009.
Despite turbulence in the financial markets and weaker growth in the real economy, the outlook for the steel industry is still positive. The massive demand for steel products, as well as machinery and plant containing high-grade steel, especially in the emerging markets such as Asia, Eastern Europe and Brazil, guarantees the producers a high capacity utilisation also in the future. There is good demand in Western Europe, too. The development of raw materials prices is uncertain, but will probably remain at a high level. The strategic alignment of the three divisions Production, Processing, and Distribution and Services to high-grade steel products has proven itself. With our focal products of engineering steel, stainless steels and tool steels, we are systematically striving for further market expansion. Assuming an unchanged market situation, by comparison with the same period last year, with its requirement for value adjustments due to the fallen nickel prices, the second half of 2008 should turn out significantly better. Despite the uncertainties with regard to the development of raw material prices mentioned above, attainment of a result at a level similar to that of the previous year therefore appears to us to be not unrealistic.
Contact persons for further information are:
Benedikt Niemeyer, CEO, phone +41 41 209 50 50
Dr. Marcel Imhof, COO, phone +41 41 209 51 82
Axel Euchner, CFO, phone +41 41 209 50 35
Notes regarding the planned transition to IFRS
Transition to IFRS
As of December 31, 2008, SCHMOLZ + BICKENBACH will for the first time prepare consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS). These financial statements will also contain the comparative financial statements for the financial year 2007, as well as necessary reconciliation calculations. At the date of transition, the Group prepared an IFRS opening balance sheet as at January 1, 2007.
The interim financial statements for the first half of 2008 were again prepared according to SWISS GAAP FER. Based on these interim financial statements, the main differences between accounting according to the present and future financial reporting standards are then illustrated. For this purpose, as at June 30, 2008, a balance sheet and income statement were voluntarily prepared according to IFRS along with a reconciliation for shareholders' equity and net income.
These reconciliations must still be regarded as temporary, since auditing of the IFRS opening balance sheet as at January 1, 2007, and the IFRS comparative financial statements as at December 31, 2007, is preliminary, and the applicable financial reporting standards may undergo amendment before the end of the year, and therefore only become definitive on the date of the first preparation of the Group financial statements according to IFRS on December 31, 2008. Despite these limitations, in our opinion the present reconciliation calculation presents the main transitional issues and their effects on the balance sheet and income statement.
First-time adoption of International Financial Reporting Standards (IFRS 1)
When preparing the opening balance as at January 1, 2007, IFRS 1 "First-time Adoption of International Financial Reporting Standards" was applied. As from that date, the accounting policies that were valid on the date of the first-time preparation of consolidated financial statements according to IFRS must be applied retrospectively when preparing the IFRS opening balance. When preparing the IFRS opening balance, any differences that results on the date of transition due to accounting policies that differ from those of the former accounting standard must be recognized in retained earnings with no effect on profit or loss.
In accordance with IFRS 1, SCHMOLZ + BICKENBACH has availed itself of the exceptions to the retrospective application of IFRS that are explained in detail below:
- Business combinations
SCHMOLZ + BICKENBACH has availed itself of the exceptions from IFRS 1 and decided to retain the evidence in the balance sheet of business combinations from the time before January 1, 2007. Accordingly, in the IFRS financial statements, for business combinations before January 1, 2007, the practice under SWISS GAAP FER of offsetting goodwill resulting from the purchase price allocation against retained earnings is maintained.
- Employee benefits
The Group has decided to recognise in the balance sheet on the date of transition all accumulated actuarial gains and losses in defined benefit pension plans. According to IAS 19.92, actuarial gains and losses that occur after the date of transition are only recognized if they exceed 10% of the higher of the amount of the obligation and the plan's assets (corridor method).
- Accumulated foreign currency differences
SCHMOLZ + BICKENBACH has decided as from January 1, 2007, to no longer report separately the accumulated foreign currency differences that result from translation of the financial statements of subsidiaries into the reporting currency EUR, and to recognise them directly in retained earnings (fresh start). Currency translation differences that occur after the date of transition are again reported separately within shareholders' equity. In the case of a subsequent divestment of a company, only those foreign currency translation differences are taken into account by calculating the gain/loss from the divestment that occurred after preparation of the opening balance.
Material differences between SWISS GAAP FER and IFRS
The adoption of IFRS has resulted in the following material changes in the accounting policies of the Group:
Under SWISS GAAP FER, positive or negative goodwill that occurs when companies are acquired is offset directly against retained earnings. According to IFRS 3 "Business Combinations", positive goodwill is capitalised, whereas negative goodwill (badwill) is recognised immediately in the income statement. Goodwill that occurs is subjected at least annually, or on signs of impairment, to an impairment test. Any impairment is immediately recognised as an expense in the income statement. According to IFRS, reversal of an impairment in a subsequent period is forbidden. Application of IFRS 3 to company acquisitions on and after January 1, 2007, results in capitalised goodwill in the balance sheet of EUR 5.7 million. This is offset by an increase in shareholders' equity of the same amount on June 30, 2008. There are no effects on the income statement as at June 30, 2008.
(2) Acquired trade marks
In accordance with IFRS, the trade marks that were acquired in 2007 along with the acquisition of A. Finkl & Sons Group (USA) and Boxholm Stal AB (Sweden) were classified as intangible assets with an indefinite useful life, since these trade marks can continue to be used and their useful life can therefore not be determined with certainty. Similar to goodwill, intangible assets with an indefinite useful life are not systematically depreciated, but subjected to an impairment test at least annually or when signs of an impairment occur. An impairment is recognised as an expense in the income statement immediately; subsequent reversal of an impairment is allowed. In contrast, under SWISS GAAP FER, trade marks must be systematically depreciated. For this purpose, SCHMOLZ + BICKENBACH assumes a useful life of 15 years.
The different handling of trade marks causes an increase in intangible assets of EUR 1.0 million. For the first half of 2008, the amortisation of intangible assets in the income statement reduces by EUR 0.4 million.
(3) Property, plant and equipment (PPE)
Under IFRS the components approach according to IAS 16 must be applied, whereas under SWISS GAAP FER no special rules exists. According to the components approach any significant identifiable component of PPE must be separately recognised and depreciated over its useful life.
As at June 30, 2008, application of the components approach results in an increase in fixed assets of EUR 4.8 million. Due to the higher basis for depreciation, earnings before taxes for the first half of 2008 reduced by EUR 0.7 million.
(4) Receivables sold within the ABS programme
Under SWISS GAAP FER, receivables that have been sold are no longer reported in the consolidated balance sheet (off-balance reporting). Under IFRS, assessment of the derecognition of sold receivables takes place essentially using a risk and reward approach. Under IFRS, the international asset-backed security (ABS) financing programme of the Group on the basis of the currently valid contractual situation must be presented on-balance.
The on-balance presentation mainly results in a change in trade receivables of EUR +221.8 million, in other receivables of EUR -25.8 million, in short-term borrowings of EUR 245.9 million, and in other liabilities of EUR -49.9. The off-balance presentation has no effect on net income.
(5) Derivative financial instruments
In the financial statements according to SWISS GAAP FER, SCHMOLZ + BICKENBACH values derivative financial instruments at their fair value. Gains or losses due to fluctuations in the fair value are immediately recognised in the income statement.
In contrast, under certain circumstances, IAS 39 allows the application of special rules for hedge accounting. Under these rules, the effective part of the change in fair value of the hedging instrument is first recognised in shareholders' equity without affecting profit or loss, and only reclassified into the income statement in the period in which the hedged item is also recognised in profit or loss. On the other hand, the ineffective part of the hedging instrument must be shown in the income statement immediately. At SCHMOLZ + BICKENBACH, for some of the derivative financial instruments that are used, the conditions for the application of hedge accounting are fulfilled. These are cash flow hedges with which future cash flows in the procurement area are hedged against fluctuations in raw material prices.
Due to the application of hedge accounting, in the first half of 2008 there is a change in earnings before taxes of EUR -0.3 million.
(6) Retirement benefit plans
In the consolidated financial statements under SWISS GAAP FER, with the exception of the retirement benefit plans of the Swiss companies, SCHMOLZ + BICKENBACH has measured all pension provisions by the projected unit credit method. This method of measurement is also prescribed as binding by IAS 19.
In the transition to IFRS, the option of IFRS 1 was utilised under which actuarial gains and losses that had not yet been recognised due to application of the corridor method were recognised directly in retained earnings as at January 1, 2007. In consequence, as at June 30, 2008, there is a change in the pension reserves of approximately EUR 1.6 million, along with a corresponding reduction in shareholders' equity before taking into account tax effects. After offsetting the pension provisions against reimbursement rights recognised as a separate asset under SWISS GAP FER there is an increase in pension provisions of EUR 0.1 million.
In addition, as at January 1, 2007, the retirement benefit plans of the Swiss companies are measured according to the rules of IAS 19 for the first time. The interpretations of IFRIC 14 that are relevant for the Swiss pension funds are also taken into account. As a result, the existing excess cover together with the assets from the employer contribution reserve that were already capitalised under Swiss GAAP result in an additional economic benefit of approximately EUR 9.6 million, which is also reflected in a corresponding increase in shareholders' equity as at June 30, 2008, before consideration of tax effects.
The effects described are based on the assumption that the corridor method will also be continued under IFRS. However, the alternative is currently being evaluated of SCHMOLZ + BICKENBACH changing over to application of the SORIE method.
In the income statement according to IFRS, the interest costs of retirement benefit expense is additionally reported in the financial result, so that by comparison with SWISS GAAP FER, in the first quarter of 2008, personnel expenses were reduced by EUR 2.7 million and a corresponding charge was made against the financial result with no impact on net income.
(7) Accumulated foreign currency differences
SCHMOLZ + BICKENBACH has availed itself of the option of IFRS 1 and offset the accumulated foreign currency differences as at January 1, 2007, of EUR -8.6 million against retained earnings. This has no influence on the total amount of the reported shareholders' equity.
(8) Other transitional effects
Other transitional effects result in total in a change in shareholders' equity as at June 30, 2008, of EUR +0.1 million, and in earnings before taxes of EUR -0.2 million. In addition, some reclassifications were made due to different structures of the balance sheet and income statement under IFRS and SWISS GAAP FER.
(9) Income taxes
Deferred taxes have been calculated on the foregoing differences between SWISS GAAP FER and IFRS. As at June 30, 2008, this results in a change in deferred tax assets of EUR -0.2 million and in deferred tax liabilities of EUR +3.2 million. In the income statement for the first half-year, this causes a reduction in income taxes on the foregoing effects of EUR 0.2 million.
(10) Change in the scope of consolidation
Within the transition to IFRS, S+B Iberica S.A. (Spain), a Group company which under SWISS GAAP FER was formerly not consolidated for reasons of materiality, was included in the consolidated financial statements under IFRS as from the date of transition at January 1, 2007. This is to take account of the future increased importance of this company, which results from the merger into this unit in 2008 of Ugitech S.A. (Spain), which was already fully consolidated under SWISS GAAP FER. As at June 30, 2008, inclusion of this company results in a reduction of EUR -4.9 million in consolidated shareholders' equity, which is mainly attributable to offsetting a positive goodwill against the retained earnings on the date of the first-time offsetting of the investment value the corresponding portion of shareholders' equity. The contribution of this company to earnings before taxes in the first half of 2008 was EUR +0.1 million. In principle, inclusion of this company affects all line items of the balance sheet and income statement.
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