Metal Engineering Division

Market environment and business development

The first half of the business year 2019/20 has delivered a mixed bag for the Metal Engineering Division. While the Railway Systems and welding consumables segments developed along a very solid trajectory, the wire technology and tubulars (seamless tubes used in oil and natural gas exploration) segments, which are part of the Industrial Solutions segment, were confronted with a difficult market environment.

The turnout systems segment met with good demand in almost all of its key markets worldwide. In China, state-sponsored stimulus programs have boosted the rail technology business, among others, whereas in Europe demand is being driven by the investment backlog that had built up in recent years. In North America, by contrast, a period of very solid development in the railway sector gave way to first signs of a weakening toward the end of the business year’s first half, which was triggered by the general downturn in the goods manufacturing industry.

Thanks to its strong focus on the European market, the premium rail technology segment benefited from largely satisfactory demand in the first two quarters of the business year 2019/20. However, pricing adjustments were unable to fully offset the massive increases in the cost of raw materials.

The globally positioned welding consumables segment delivered solid growth across all key markets despite the worldwide cooling of the economy during the reporting period. Besides positive effects from internal restructurings in recent years, expansions of the product portfolio as well as this segment’s ongoing development into a one-stop system provider of welding equipment and consumables have contributed to this positive development.

The wire technology segment, which manufactures wire and steel bars chiefly for the automotive industry, has faced declining demand as well as rising competitive pressures since the start of the current business year. This led to the elimination of one shift at the Donawitz, Austria, facility back in April 2019; the plant has been operating triple-shift operations since then.

On top of the impact of the U.S.’s protectionist Section 232 tariffs, in the first six months of the business year 2019/20 the tubulars segment (seamless tubes for oil and natural gas exploration) was also confronted with the gradual deterioration of its North American market. These developments also led to the reduction of operations at the Donawitz facility in April 2019 from four shifts to three.

Due to the softening economy and the ensuing cuts in the number of shifts in individual rolling facilities of processing operations, modes of production at the LD steelmaking plant in Donawitz were adjusted accordingly and the use of the burden (mix of raw materials) was optimized. In the first two quarters of the current business year, developments in the cost of raw materials, particularly that of iron ore, were driven by high volatility and generally rising prices. This put a damper on the division’s earnings, because the increase in raw materials prices could be passed on to customers only in part.

Steps to lower costs and boost efficiency are being implemented in all of the division’s entities. In addition, we continue to pursue our strategy of continually refining all products and expanding the product portfolio in the direction of an extended value chain, not least in order to circumvent the growing pressure on commodity products.

Financial key performance indicators

Year over year, the Metal Engineering Division posted stable revenue in the first half of the business year 2019/20. Declines in the Industrial Systems segment were offset through increases in the Railway Systems segment. Sales of wire and seamless tube products were substantially lower due to the intensifying downturn in both the automotive and the energy industry. As regards rail technology, deliveries of tracks increased by about 5% in the reporting period. Prices also rose because higher raw material costs were passed on to customers. The turnout systems segment, which succeeded in substantially expanding its business activities, was key to the generally good performance of the Railway Systems segment. Against this backdrop, at EUR 1,537.5 million the division’s revenue in the first half of the business year 2019/20 closely tracked that achieved in the same period of the previous year (EUR 1,547.4 million). The good earnings performance of Railway Systems was pivotal to the relatively moderate decline in EBITDA by 6.3%, from EUR 183.8 million (margin of 11.9%) in the first half of the business year 2018/19 to EUR 172.3 million (margin of 11.2%) in the reporting period. By contrast, the Industrial Systems segment’s performance was uneven. While the welding consumables segment posted stable earnings, the EBITDA of the wire technology and tubulars segments fell dramatically.

The outcome of the quarter-on-quarter comparison is similar, in that it pinpoints the effects of declining industrial activity in Europe on the Industrial Systems segment. In terms of both revenue and earnings, the performance during the business year to date of segments that are exposed to general economic developments continued to deteriorate. This was intensified by seasonally lower demand in the summer quarter. Both the revenue and earnings of the Railway Systems segment rose slightly from the first to the second quarter of the business year 2019/20. The division on the whole posted revenue of EUR 758.7 million for the second quarter of the current business year, down 2.6% from the previous year’s level of EUR 778.8 million. At 8.6%, the decline in EBITDA from EUR 90.0 million (margin of 11.6%) to EUR 82.3 million (margin of 10.8%) was a bit more pronounced.