Rating Adjustment Scholz AG

Transcription

Rating Summary
Scholz AG
19 August 2013
Rating Rationale
Rating of 19 August 2013
Company Rating:
B
Outlook:
evolving
Rating Subject:
The core business of Scholz AG
(Group) comprises trade in and recycling of ferrous and non-ferrous
scrap metal. In addition, business activities entail trade in and recycling of
steel products, the operation of aluminium foundries in Germany and
Hungary and the provision of supplementary services. With an average of around 7,200 employees,
Scholz AG generated consolidated
sales of € 4.7 billion in 2012.
Strengths:
Internationally leading market
position in ferrous/non-ferrous
scrap recycling
Positive operating earnings in
ferrous/non-ferrous scrap recycling
High logistics and recycling
skills
Weaknesses:
Very weak financial flexibility
and high debt levels
Weak market position in strategic
peripheral segments
Opportunities:
Increasing focus on profitable
scrap recycling business
Medium- to long-term market
growth
Euler Hermes Rating is lowering its rating for Scholz AG from BB- to
B. Pending a final decision by the company’s financers on the restructuring measures, the outlook remains evolving.
The primary rationale for the downgrade of the rating from BB- to B is the foreseeable weakness in the company’s capital structure and financial flexibility as a result
of payment difficulties on the part of the Australian recycling company CMA Corporation Limited, which is likely to result in considerable impairments and liquidity outflows for Scholz AG. Given the current situation with respect to its liquidity and the
contractual payment obligations arising over the next few weeks and months, we
currently consider Scholz AG’s financial flexibility to be insufficient. Negotiations
are currently being conducted with financers on the necessary steps to be taken on
the basis of a comprehensive restructuring concept. No changes are currently provided for the bond. In our view, the restructuring concept provides a plausible and
sustainably positive forward-looking perspective for Scholz AG’s business. We
consider the restructuring concept as viable and therefore assume that the financers will for the most part approve the proposed measures. However, should they
fail to support Scholz AG’s restructuring measures, this will lead to a further deterioration in the rating. Assuming that the proposed measures are accepted, we expect the rating to remain stable on a twelve-month horizon. Pending a final decision
by the company’s financers on the restructuring measures, the outlook therefore
remains evolving.
In our view, Scholz AG’s strengths include its leading position in the international
market for ferrous/non-ferrous scrap recycling, the positive operating margins
which it achieves on its core ferrous/non-ferrous scrap recycling business even in
challenging market conditions, its logistic and recycling strengths and its good relations with collection points and customers. In addition to the points mentioned
above, we see further drawbacks in the company’s weak market position in strategically non-core segments (steel trading, aluminium production, forges) as well as
the high volume of capital tied up in steel trading and the muted profitability of aluminium production and forging business.
Opportunities arise from the increasing focus on ferrous/non-ferrous scrap recycling business, the withdrawal from strategically non-core activities in conjunction
with reduced working capital and debt levels as well as the implementation of further restructuring measures. We consider the raise of additional equity as an important measure to improve liquidity and the conditions for a sustainable future development of the group. Among other things, risks entail the extent to which the
major financial partners are willing to provide support, possible delays in the implementation of the restructuring measures, frictions in the execution of capital
measures, a deterioration in the macroeconomic environment and intensified competition.
Threats:
Impairments, write-offs and
guarantees
Rejection of necessary
changes by financers
Delays in the implementation
of restructuring measures
Frictions in the process of
raising equity
Further deterioration in the
macroeconomic environment
Increasingly intense competition
Key financials
2010
2011
2012
EBITDA margin
5.6
4.1
3.1
Return on capital employed (ROCE)
10.3
8.8
5.2
Equity ratio
15.0
15.7
15.5
Debt to equity ratio
78.9
77.2
77.4
Total liabilities / EBITDA
6.5
7.6
11.0
Net financial liabilities / EBITDA
4.3
4.8
6.9
EBIT interest coverage
1.4
1.2
0.8
EBITDA interest coverage
2.5
2.2
1.6
© Euler Hermes Rating Deutschland GmbH 2013
1
Rating Summary
Scholz AG
19 August 2013
Company
With an average of 7,202 employees, Scholz AG, Essingen, generated consolidated sales of € 4.7 billion from
trade in and recycling of ferrous and non-ferrous scrap in 2012. During this period, it handled a total volume of
more than 9.9 million tons. The company operates around 500 collection and recycling sites in Germany and
abroad with 30 shredders as well as hydraulic excavators, shears, presses and breakers. In Germany, it operates
130 facilities. All the recycling sites and all its major storage facilities have railway links. Over 80% of the recycled
scrap is transported by rail. In addition to this, the Scholz Group has a fleet of over 800 container trucks and more
than 100,000 containers. The logistics system also includes the use of ships on inland water and ocean-going
ships. Scholz AG chiefly comprises the following segments: Ferrous/Non-Ferrous Scrap (iron and non-iron metals), Engineering Steel (Steel) and Aluminium. Ferrous/Non Ferrous accounted for 87.6% of total revenues in
2012.
In addition to the warehouse and third-party trading business in ferrous, non-ferrous and aluminium scrap, Scholz
AG’s range includes sorting, processing and recycling scrap by breaking, pressing, shearing, cutting, shredding
and piling. In third-party trading business, it carries materials directly from the place of origin to the customers. In
storage business, the volumes are transported to the closest recycling site for processing. In this connection, the
Scholz Group chiefly buys scrap arising from the processing and recycling of metals, demolitions, gutting projects
as well as in connection with consumer goods such as cars, washing machines, refrigerators etc. in Southern
Germany, the Eastern German states, Eastern Europe, Austria, Denmark, North Africa and the United States.
The scrap is bought directly from the places at which it arises, i.e. industrial and commercial facilities, under waste
disposal contracts. Alternatively, small volumes are delivered directly to the Scholz Group’s scrap yards. In addition to recycling scrap, the Scholz Group also trades in forgeable and compressible steel and tool steel (semimanufactured) in the Engineering Steel segment. As well as this, it examines these steels and offers heattreatment, peeling, polishing and sawing. The Engineering Steel segment also includes forging and shaping technology. The Scholz Group operates two aluminium foundries, one in Hungary and one in Germany. A steel mill
operated in the Czech Republic was sold at the end of 2012. Other services include the dismantling of rolling
stock, demolition work, container services, the development of integrated waste management systems, contract
briquetting and cable dismantling. Its main sell-side markets are Germany, the United States, Austria, Italy, Belgium, Turkey and China. Customers of scrap include electrical and converter steel mills, foundries, aluminium and
copper smelting plants.
The Scholz Group has its origins in a sorting business established by Paul Scholz in Lower Silesia in 1872. The
company moved to Aalen in 1945 and then to Essingen, which is located close by, in 1963. Mr. Berndt-Ulrich
Scholz entered the company in 1963 as the general partner and stepped up its internationalisation. In 1993, Mr.
Oliver Scholz joined the company as a limited partner. The Scholz Group’s holding company has been a joint
stock company since 1999.
25.1% of Scholz AG’s capital is held by Mr. Bernd-Ulrich Scholz and 74.9% by Mr. Oliver Scholz. The management board comprises Berndt-Ulrich Scholz (chairman and president), Oliver Scholz (CEO), Raphael Barth
(COO), Parag-Johannes Bhatt (CFO) and Markus Schürholz (CRO).
2
Rating history
26.08.2011
17.08.2012
21.05.2013
12.08.2013
Notation/outlook
BB/ stable
BB/ stable
BB-/ stable
B / evolving
Rating Summary
Scholz AG
19 August 2013
Earnings potential and profitability
In contrast to group accounting, other operating income and expenses are adjusted for extraordinary items. The
adjustments to earnings particularly entail book gains from the disposal of assets, income from the reversal of
negative goodwill, book gains from the disposal of financial assets, deconsolidation income and income from the
adoption of the provisions of the Accounting Modernisation Act. Adjustments to expenses comprise adjustments
arising from modifications to group funding, impairments, deconsolidation losses, extraordinary depreciation, expense arising from the adoption of the provisions of the Accounting Modernisation Act, expenses arising from
mark-to-market valuation of derivatives and non-recurring expenses. Other taxes were assigned to other operating expenses.
2010
Structural profit and
loss statement
T€
2011
%
T€
Change year on
year (%)
2012
%
T€
%
2011
2012
Sales
4,493,202
99.6
5,290,296
99.9
4,663,798
100.2
17.7
-11.8
Total revenues
4,511,805
100.0
5,296,588
100.0
4,654,058
100.0
17.4
-12.1
Cost of materials
3,729,707
82.7
4,489,476
84.8
3,953,372
84.9
20.4
-11.9
782,098
17.3
807,112
15.2
700,686
15.1
3.2
-13.2
62,454
1.4
61,824
1.2
56,819
1.2
-1.0
-8.1
Personnel expenses
209,366
4.6
241,462
4.6
228,953
4.9
15.3
-5.2
Other operating expenses
384,597
8.5
411,247
7.8
383,169
8.2
6.9
-6.8
EBITDA
250,589
5.6
216,227
4.1
145,383
3.1
-13.7
-32.8
Depreciation/amortisation
109,562
2.4
97,804
1.8
77,783
1.7
-10.7
-20.5
EBIT
141,027
3.1
118,423
2.2
67,600
1.5
-16.0
-42.9
Net finance expense
-79,840
-1.8
-80,103
-1.5
-61,498
-1.3
0.3
-23.2
100,650
2.2
99,042
1.9
90,381
1.9
-1.6
-8.7
Profit from ord. business activities
61,187
1.4
38,320
0.7
6,102
0.1
-37.4
-84.1
Earnings before taxes (EBT)
52,518
1.2
56,945
1.1
9,402
0.2
8.4
-83.6
Net profit for the year
30,920
0.7
28,568
0.5
429
0.0
-7.6
-98.5
Gross profit
Other operating income
Of which interest expenditure
Scholz AG’s sales rose substantially from € 2.4 billion to € 5.3 billion from 2009 to 2011 on account of greater
tonnage in the wake of the economic recovery and higher prices. This trend continued in 2011, albeit at a slower
pace. With 3.8%, tonnage in particular grew substantially less quickly than in 2010 (+ 25.8%). After measures
were taken in 2010 to boost profits and render costs more flexible, earnings potential subsided slightly again in
2011 on account of narrower margins and a disproportionately strong increase in structural expenses.
Business started to contract in the second quarter of 2012, with sales declining by 11.8% to € 4.7 billion in response to a cyclical reduction in tonnage and lower average sell-side prices. Tonnage shrank by 8.7% over the
previous year to 9.9 million tons. Ferrous/non-ferrous business accounted for 90.4% of sales and 97.8% of tonnage, while steel business contributed 4.2% and 1.3%, respectively, and aluminium production 2.4% and 0.8%,
respectively. The Scholz Group’s main market is Germany, which accounts for around 41.5% of its sales. Further
key markets are the United States, Italy, Austria, Turkey, China and Romania. As the cost of materials declined at
the same rate as total revenues, the gross margin remained largely constant. One decisive parameter in trading is
the ratio of gross profit to tonnage, which was down substantially on the previous year due to declining prices, the
negative effect of index-tied pricing and increasingly intense competition. The number of employees dropped by
7.7% to 7,202 particularly as a result of divestments. However, it was not possible to fully adjust personnel costs
to match the reduced sales. Other operating expenditure declined chiefly as a result of the lower tonnage. As in
the previous year, there was a further drop in depreciation and amortisation expense due to reduced capital
spending. All told, the disproportionately small decline in structural expenses in the previous year caused earnings potential to additionally weaken. As a result, operating earnings contracted by 40.1% to € 70.9 million, with
the EBIT margin coming to only 1.5% (previous year: 2.2%). Generally speaking, declining prices exert heightened pressure on Scholz AG’s margins, thus resulting in what in some cases is a substantial reduction in operat-
3
Rating Summary
Scholz AG
19 August 2013
ing earnings. In our view, this highlights the need to optimise margin management and structural expenses particularly in phases of declining prices. Measures to this effect are to be implemented over the coming two to three
years under the restructuring concept, which management has prepared in conjunction with a consulting company
(see “Strategic orientation”).
Net finance expense shrank despite virtually unchanged debt levels primarily as a result of the reclassification of
fees arising from the ABS programme as other operating expenses compared with the previous year and the partial expiry of the interest-rate hedge, which exerted greater pressure on interest expense in the previous year due
to relatively less favourable terms. In addition, interest income rose particularly in connection with the loan receivables owed by FER Kladno from the sale of the steel mill activities. The increase in investment income was accompanied by higher other operating expenses of the same amount at the level of the US companies due to the
realisation of tax advantages for local partners. Given the muted earnings, profit before tax dropped substantially.
At the same time, growth in earnings in the Steel segment was not sufficient to offset the substantial decline in
core ferrous/non-ferrous business.
Earnings potential (%)
2010
2011
2012
EBITDA margin
5.6
4.1
3.1
Total return on capital
8.4
7.0
5.1
ROCE
10.3
8.8
5.2
Cashflow ROI
13.0
11.0
7.7
In the light of the trends outlined above, margins and also returns on capital employed continued to shrink last
year. Consequently, we now consider Scholz AG’s earnings potential and profitability to be weak.
As of 30 June 2013, tonnage was 14.1% down on the previous year but in line with the forecast underlying the restructuring concept. Average prices were substantially down on the previous year in the first half. At € 2.0 billion
(previous year: € 2.6 billion), total revenues were 2.8% down on the budget. Gross profit declined over the previous year (€ 300.8 million; previous year € 389.7 million), with average gross profit per ton also down on the previous year’s level. Personnel and operating expenses decreased only at a disproportionately lower rate. Operating
earnings (EBITDA) came to € 70.2 million, down 36.4% on the previous year but in line with the budget. EBIT
(€ 32.6 million) and operating EBT (minus € 3.1 million) were also substantially lower compared with the first half
of 2012 (EBIT down 51.5%; EBT down 112.6%). The core Ferrous/Non-Ferrous segment contributed € 3.9 million
(previous year: € 39.5 million) to the Group’s EBT in the first half of the year. The Steel segment recorded operating EBT of € 0.6 million (previous year: loss of € 6.5 million), while the Aluminium segment sustained a loss at the
EBT level of € 1.2 million (previous year: EBT of € 1.5 million). All told, total revenues and earnings before tax for
the first half of 2013 were well down on the previous year.
Last year, Scholz AG’s sales dropped considerably over the previous year due to reduced tonnage and
lower average sell-side prices. This resulted in a further decline in earnings potential, causing margins
and also returns on capital employed to shrink over the previous year. Overall, Scholz AG’s earnings potential and profitability were weak in 2012. In the first half of the current year, total revenues and operating earnings before tax were weaker than in the previous year.
Capital structure and indebtedness
Some reclassifications were made to the consolidated financial statements in order to calculate the financial ratios: For the purposes of calculating economic equity, deferred income tax assets and the discounts reported
within prepaid expenses were eliminated. Half of the special item for investment advances and grants was allocated to economic equity. Goodwill and other financial obligations under operating leases were excluded due to
their minor significance relative to the capital structure as a whole. Similarly, ongoing funding under ABS, forfaiting and factoring schemes were not adjusted in the light of the agreed transfer of risks and the existing credit insurance contracts.
4
Rating Summary
Scholz AG
19 August 2013
Change year on
year (%)
31.12.2010
31.12.2011
T€
%
T€
1,926,770
100.0
1,959,501
100.0
1,895,490
100.0
1.7
-3.3
815,237
42.3
792,154
40.4
753,313
39.7
-2.8
-4.9
640,805
33.3
614,692
31.4
585,125
30.9
-4.1
-4.8
1,111,533
57.7
1,167,347
59.6
1,142,177
60.3
5.0
-2.2
of which inventories
444,130
23.1
481,954
24.6
386,971
20.4
8.5
-19.7
of which trade receivables
353,944
18.4
351,605
17.9
342,054
18.0
-0.7
-2.7
37,545
1.9
46,705
2.4
43,576
2.3
24.4
-6.7
1,926,770
100.0
1,959,501
100.0
1,895,490
100.0
1.7
-3.3
289,642
15.0
308,058
15.7
293,599
15.5
6.4
-4.7
52,705
2.7
52,200
2.7
38,759
2.0
-1.0
-25.7
1,584,424
82.2
1,599,243
81.6
1,563,132
82.5
0.9
-2.3
321,872
16.7
406,304
20.7
375,050
19.8
26.2
-7.7
1,119,988
58.1
1,090,453
55.6
1,046,821
55.2
-2.6
-4.0
Structural balance sheet
Assets
Fixed assets
of which property, plant and
equipment
Current assets (including prepaid expenses)
of which cash and cash equivalents
Equity and liabilities
Shareholders’ equity
Provisions
Liabilities (including deferred income)
of which trade payables
of which financial liabilities
31.12.2012
%
T€
%
2011
2012
Reflecting trends in sales, adjusted total assets contracted by 3.3% to € 1.9 billion in 2012.
The decline in fixed assets is primarily due to divestments in connection with the greater focus on core ferrous/non-ferrous business. Property, plant and equipment declined due to disposals at carrying amounts (€ - 15.7
million) and deconsolidation (€ - 22.9 million); at the same time, there was a reduction in loans to nonconsolidated companies (€ - 14.8 million). Mirroring the lower tonnage and decline in buy-side prices in the course
of the year, inventories contracted sharply. This particularly applied to products and merchandise (€ - 73.9 million)
and raw materials, supplies and consumables (€ - 10.7 million). Trade receivables dropped to a lesser extent;
however, in gross terms including the receivables sold under ABS, forfaiting and factoring programs, the decline
was sharper in line with business trends. As far as possible, risks in inventories and trade receivables are hedged
in a range of 50% to 85% and credit insurance is taken out to cover around 65% to 75% of sales. There is no major exposure to individual customers. Trade working capital (inventories + trade receivables - trade payables),
which exerts a material effect on Scholz AG’s liquidity, dropped by 17.2% to € 354.0 million as of 31 December
2012. On the other hand, receivables from affiliated companies rose by € 19.0 million particularly in connection
with funding for the growth of non-consolidated subsidiaries, as did other financial assets (€ + 62.0 million). This
was particularly due to the loan receivables owed by FER Kladno in connection with the sale of the steel mill activities. As of 31 December 2012, trade receivables and other assets had also included loan and trade prefinancing receivables owed by Australian company CMA. The receivables are held directly as well as indirectly by
Scholz Invest GmbH and a further shareholder. In the first half of the year, these receivables continued to widen
due to an increase in trade prefinancing and currently stand in the high double-digit millions.
Economic equity declined by 4.7% to € 293.6 million last year chiefly due to the muted earnings and deconsolidation. However, the equity ratio remained at the previous year’s level. Provisions were lower particularly as a result
of reduced personnel obligations. Liabilities were down due to a decline in trade payables (€ - 31.3 million) and financial liabilities (€ - 43.6 million). On the other hand, other liabilities climbed primarily as a result of deferred income in connection with the bond and the ABS programme and consolidation changes. Scholz AG’s funding
structure was revamped in 2012. To this end, the existing syndicated loan was refinanced by means of various
funding measures. In this connection, the company had a bond (€ 150.0 million), a medium-term syndicated loan
comprising two tranches (A: € 140.0 million, RCF € 279.0 million (utilised)), a long-term syndicated real estate
loan (€ 59.0 million) and medium-term syndicated borrowing-base finance for the Steel segment (€ 29.0 million
(utilised)) as of 31 December 2012. This resulted in a general improvement in the maturity structure. In addition,
there were promissory note loans of € 153.0 million and bilateral loans (€ 72.5 million), bilateral facilities (€ 123.4
million (utilised)) and credit facilities with proportionately consolidated companies (€ 43.0 million).
5
Rating Summary
Scholz AG
19 August 2013
As of 31 December 2012, there were off-balance-sheet contingencies of € 75.8 million. Of these, guarantees in
connection with Australian company CMA were valued at € 24.8 million and currently stand at around € 20.0 million.
31.12.2010
31.12.2011
31.12.2012
Equity ratio
15.0
15.7
15.5
Debt to equity ratio
78.9
77.2
77.4
Total liabilities / EBITDA
6.5
7.6
11.0
Net financial liabilities / EBITDA
4.3
4.8
6.9
EBIT interest coverage
1.4
1.2
0.8
EBITDA interest coverage
2.5
2.2
1.6
EBIT net interest coverage
1.6
1.4
1.0
EBITDA net interest coverage
2.9
2.6
2.1
Capital structure (%)
Degearing potential
Interest coverage ratios
There were only minor changes in Scholz AG’s capital structure in 2012. However, the maturities structure was
improved thanks to various refinancing measures. By the same token, there was a material deterioration in deleveraging potential and the interest coverage ratios due to the substantial weakening of earnings potential. Accordingly, we consider the capital structure as well as the deleveraging potential and the interest coverage ratios to be
generally weak as of 31 December 2012. In this connection, we have taken account of the fact that a large proportion of funds are tied up in current assets, meaning that it should fundamentally be possible for part to be released in the short term particularly if the macroeconomic environment weakens, causing tonnage and price levels to drop.
As of 30 June 2013, Scholz AG’s unadjusted total assets stood at € 1.9 billion and were hence only slightly lower
than on 31 December 2012. At the same time, trade working capital rose by 9.2% over 31 December 2012 to €
386.5 million. Reported equity dropped to € 293.1 million as of 30 June 2013 (equity ratio: 15.4%). At € 1.1 billion,
financial liabilities were up on 31 December 2012. The net interest coverage ratios deteriorated substantially in
the first half of 2013 to 0.9 (EBIT) and 2.0 (EBITDA). Generally speaking, we consider the capital structure to be
weak in the current year.
CMA Corporation Limited is a listed Australian recycling company, which is not part of the Scholz Group. Oliver
Scholz holds 47.5% of the capital of CMA Corporation Limited via Scholz Invest GmbH. According to information
supplied, the investment was entered into with a view to entering the Australian and Asian market to be followed
by integration into the Scholz Group. The Scholz Group holds high receivables against CMA Corporation Limited.
In addition, it has issued guarantees in CMA’s favour. Given the current payment difficulties facing CMA Corporation Limited, which has been placed under voluntary administration in accordance with Australian law, we expect
heavy impairments and a further outflow of liquidity from Scholz AG, which will also exert considerable pressures
on the Scholz Group’s equity.
Due to the nature of its business, Scholz AG’s balance sheet structure is characterised by a large volume
of working capital. Fundamentally speaking, working capital varies according to sales volumes and
prices. The group’s funding structure is currently heavily determined by financial liabilities. With an economic equity ratio of 15.5%, the capital structure displays room for improvement in our view. We consider
deleveraging potential and interest coverage ratios to be weak as of 31 December 2012. The insolvency of
CMA Corporation Limited could exert considerable pressure on the company’s equity as a result of impairments and liquidity outflows. We consider the issue of fresh equity to boost liquidity, possibly with
the involvement of external investors, to constitute a material measure for stabilising the Scholz Group’s
capital structure and financial flexibility and for creating the foundations for sustainable business performance.
6
Rating Summary
Scholz AG
19 August 2013
Internal financing potential and financial flexibility
Cash flow (T€)
2010
2011
2012
Cash flow from current operating activities
122,999
104,714
96,842
Cash flow from investing activities
-43,609
-53,712
-52,732
Free cash flow (total)
Cash flow from financing activities
79,390
51,002
44,110
-72,323
-45,485
-47,224
Cash flow from operating activities subsided in 2012 due to weaker business. Cash flow from investing activities
was only slightly down on the previous year due to lower capex together with a lower level of divestments. As a
result, free cash flow continued to weaken. Cash flow from financing activities chiefly includes the repayments of
€ 43.8 million made towards financial liabilities. Cash and cash equivalents contracted by a total of € 3.1 million.
All told, Scholz AG thus had access to funding of € 1,135 million (excluding off-balance-sheet funding possibilities) as of 30 June 2013. Including guarantee drawdowns of € 3.0 million, utilisation of these facilities came to €
1,051 million (not substracting the cash of € 32.9 million). Given market volatility and what in some cases is the
limited availability of individual facilities, we consider the unutilised facilities of € 83.4 million to be insufficient for
central group funding. In addition, credit facilities with proportionately consolidated companies were utilised at a
total amount of € 39.6 million.
In the light of the current liquidity forecast, we consider the acceptance by the finance partners of the applications
for modifications in connection with the restructuring concept to form a crucial basis for safeguarding Scholz AG’s
financial flexibility on a sustained basis. Among other things, the applications provide for stand-still agreements,
an increase in and renewal of credit facilities and the continuation of credit insurance limits. These applications
have not yet been approved. The financing concept accompanying the restructuring currently does not provide for
any changes to the bond.
The company’s internal financing potential continued to deteriorate in 2012 due to weaker operating earnings potential, accompanied by contracting free cash flows. Financial debt was again trimmed. Given the
current liquidity situation and foreseeable payment obligations, we consider the company’s financial
flexibility to be insufficient. Based on the restructuring concept, Scholz AG is currently conducting negotiations with its finance partners on measures for securing a sustainable funding structure in the interests
of enhancing its financial flexibility. As we consider the restructuring concept to be plausible and economically viable, we assume that the financers will support the proposed measures.
Market conditions
Trade in secondary raw materials, i.e. recycled ferrous and non-ferrous scrap, depends on the output of iron and
steel plants, the consumption of the metal-processing industry and inventories along the value chain. Depending
on the quality required and the intended utilisation of the materials, iron and steel works use differing proportions
of primary materials (iron ore, pure metals, alloys) and secondary materials (new or old scrap) in the production of
ferrous and non-ferrous metals. Whereas scrap accounts for only around 20% of crude steel production in China,
this figure stands at around 50% in the United States. In Europe, the proportion of scrap stands at around 40%.
Crude steel and non-ferrous metal production is an indicator of the business performance of trading and recycling
companies. Production output is particularly determined by the capacity available in the market.
Crude steel production (in millions of tons)
Act. 2010
Act. 2011
Act. 2012
FC 2013
World
1,429
1,543
1,600
1,620
EU-27
173
177
168
166
China
637
710
702
750
Germany
43.9
44.3
42.6
42.2
Aluminium production (in millions of tons)
Act. 2010
Act. 2011
Act. 2012
FC 2013
7
Rating Summary
Scholz AG
19 August 2013
World
Copper production (in millions of tons)
World
Nickel production (in millions of tons)
41.1
Act. 2010
19.0
Act. 2010
43.4
Act. 2011
19.6
Act. 2011
47.6
Act. 2012
20.1
Act. 2012
49.8
FC 2013
21.1
FC 2013
World
1.5
1.6
1.7
1.8
Sources: Ernst & Young 2013, Eurofer 2013, HSBC 2013, MEPS International 2013, Ministry of Industry and Information Technology China 2013, RWI 2013, Wirtschaftsvereinigung Stahl 2013, World Steel Association 2013
The macroeconomic slowdown, particularly in China, and destocking by steel and metal-processing companies
mainly in the fourth quarter in particular resulted in slower 3.7% growth in global crude steel production in 2012
(previous year: 8.0%). At around 80%, capacity utilisation remained at a persistently low level and reflects prevailing surplus capacities (OECD 2012). Crude steel production is expected to widen by 1.3% in 2013 chiefly driven
by a 6.8% increase in output in China (Wirtschaftsvereinigung Stahl 2013). Production volumes are expected to
shrink slightly in Germany and the EU-27. Given lower surplus capacities, global crude steel production should
expand again in 2014 and grow by a CAGR of 3.8% to roughly 2.6 billion tons in the long term due to increases in
Asia and South America. Declining demand from industrialised nations should be more than made up for by
heightened requirements in India, China and South Korea due to infrastructure projects, amongst others (PwC
2013). Production of aluminium, copper and nickel is expected to continue rising.
Market supplies (deliveries plus imports minus exports
in millions of tons)
World
Available capacities (crude steel production less market supplies in millions of tons)
Act. 2010
1,312
Act. 2010
World
117
Sources: Ernst & Young 2013, World Steel Association 2010-2012
Act. 2011
1,373
Act. 2011
170
Act. 2012
1,422
Act. 2012
178
FC 2013
1,486
FC 2013
134
Buy-side market supplies mirrored steel production in 2012, increasing by 3.6%. An increase of 4.5% is generally
projected for 2013. At the same time, global capacity utilisation will remain flat at around 80% (RWI 2013).
Whereas growth of 1 - 2% is expected in Germany, market supplies in the EU-27 are set to contract by 0.7%. At
around 85%, capacity utilisation in Germany will remain at a relatively high level. In China, market supplies should
expand by 4.0%, with capacity utilisation coming to around 78.0%, i.e. on par with the previous year. At the same
time, available capacities are expected to widen to 50.0 million tons (previous year: 39.0 million tons)
(Wirtschaftsvereinigung Stahl 2013). However, they are likely to recede from 2014 onwards given the extensive
investments planned by the Chinese government. Growth of market supplies will continue to be underpinned by
the developing and emerging markets, which will expand by 7.0% in 2013 (Ernst & Young 2013). Existing surplus
global capacities will be dissipated by 2015 due to a recovery in the general economy, mounting market consolidation and public-sector spending programmes particularly in China.
We expect to see rising volumes of recycled ferrous and non-ferrous metal scrap in iron and steel works in the
medium to long term and therefore forecast favourable market conditions for trading in secondary materials. Primary materials on their own are unable to cover demand for input materials. In the industrialised nations, electric
steel mills, which are chiefly configured to melt down scrap, are increasingly being used as sufficient scrap is
available in these regions. In addition, they are more flexible and more energy-efficient than converter steel mills
and produce fewer harmful emissions. Risks to trade in ferrous and non-ferrous metals include a decline in demand as a result of the existing surplus capacities, increasingly intense competition and more restrictive monetary
and capital spending policies particularly in China and India.
The profitability of trade in recycled ferrous and non-ferrous metal scrap hinges on trends in absolute margins per
ton as well as the prices of raw materials. Whereas the absolute margin per ton can be influenced by bilateral negotiations on the buy and sell side and is largely independent of price levels, commodity prices - particularly in
storage business - impact trading companies’ profitability. Declining prices exert pressure on earnings via a reduced gross profit, whereas higher prices generally result in increased gross profit. In addition, inventories may be
partially adjusted to price trends by oversupplying or undersupplying by up to 10% of the agreed volume in line
with standard industry practice. Thus, if prices are expected to decline, a greater volume than agreed is supplied
8
Rating Summary
Scholz AG
19 August 2013
and if prices are expected to rise, a smaller volume is supplied. However, scrap suppliers have the same possibility, meaning that the effects may cancel each other out.
The prices of the various scrap qualities fluctuated in the course of 2011 and were lower at the end of the year
than they had been at the beginning. After a brief increase at the beginning of 2012, scrap prices softened in the
course of the year and, after recovering in the final quarter, were slightly below the level at which they had entered the year by the end of the year (European Confederation of Iron and Steel Industries 2013). Prices of aluminium, copper and nickel moved in a similar direction in 2012, with a recovery emerging in the third quarter
(London Metal Exchange 2013). Prices of these metals are expected to rise in 2013 (ABN Amro 2013, Commerzbank 2013). A further reduction in existing surplus capacities should ensure flat steel prices in 2013 and an increase in the medium to long term (Ernst & Young 2013). In the longer term, the prices of primary and secondary
raw materials should tend to rise due to growing demand and the heightened cost of extracting primary materials.
Volatility is likely to strengthen in the future due to the price correlation between ore and scrap in connection with
shorter terms for commodity contracts, among other things.
We expect trade in recycled ferrous and non-ferrous scrap to come under pressure in the short term.
Market conditions are currently chiefly being dampened by weak demand as a result of existing surplus
capacities. Existing surplus global capacities should subside by 2015 due to a recovery in the general
economy, mounting market consolidation and public-sector spending programmes. We expect the market
to grow in the medium to long term. Risks to trade in ferrous and non-ferrous metals include a decline in
demand as a result of the existing surplus capacities, increasingly intense competition and more restrictive monetary and capital spending policies particularly in China and India.
Strategic orientation
Business segment
Markets/customers
Focus on trading in and recycling ferrous/nonferrous material
Focus on profitable core regions in Central
Europe and the United States
Optimisation of the branch network and recycling capacities
Exit from insufficiently profitable markets
Complete exit from strategically non-core aluminium and steel activities
Long-term establishment of access to Asian
and South American markets
Organisation
Financials
Reduction of group complexity
Restructuring of corporate financing
Measures to reduce operating costs
Establishment of a steering committee to
monitor restructuring measures
Stand-still agreement with suspension of
covenants and additions to limits as of August 2013
Addition of a chief restructuring officer to the
management board
Reduction in working capital and debt
Sustained improvements in earnings
potential
Possible issue of fresh equity with the involvement of external investors
According to the restructuring concept dated 25 July 2013, Scholz wants to place a strategic focus on growth markets in the future to achieve reasonable profitability, which is less exposed to market cycles. Over the past few
years, Scholz AG has already been pursuing a policy of concentrating on ferrous/non-ferrous recycling. In line
with this, the steel mill in the Czech Republic was sold in 2012. To date, aluminium production, forges and steel
trading have not yet been spun off. Given the tight liquidity and continued high debt levels, however, the restructuring concept of 25 July 2012 provides for stepped-up efforts to focus on ferrous/non-ferrous recycling in the core
9
Rating Summary
Scholz AG
19 August 2013
markets of Central Europe and the United States with their sustained profitability. On the other hand, Scholz AG
wants to withdraw from less lucrative markets. In the core markets, it plans to restructure, sell or close unprofitable facilities. In the medium term, Scholz AG wants to expand its global marketing capacities in growth regions
such as North and South America and Asia. Non-core activities are to be jettisoned over the next few months. In
addition, further measures for enhancing operating costs and improving the Group’s manageability are to be put
in place. Sources of losses are to be eliminated or restructured to improve the Group’s sustained earnings potential and to lower debt levels. In addition, thought is being given to the option of issuing fresh equity possibly with
the involvement of external investors. We see the issue of fresh equity to bolster liquidity as a key measure to
stabilise and improve the company’s capital structure and financial flexibility. In our view, there are risks with respect to the implementation of the measures within the planned schedule. In this context, we welcome plans to
establish a steering committee comprising representatives of management, the financers and advisors to closely
monitor implementation of the planned measures.
The restructuring concept is divided into three phases, which are assigned to the years 2013, 2014 and 2015 respectively. The focus in 2013 will be on implementing operational measures and on securing finance on a sustained basis. During this period, the market is expected to shrink. The bulk of the divestments and deleveraging
activities will be completed in 2014, by which time market conditions will have stabilised. Scholz AG is then to return to a growth trajectory in 2015, underpinned by favourable market conditions.
Thanks to the high density of locations in the southern and eastern states of Germany, Scholz achieves favourable logistics costs, high flexibility as well as high capacity utilisation of its recycling facilities. In Germany in particular, there are high market entry barriers for competitors as permits are only rarely issued for new scrap yards
and high, challenging requirements need to be met. With regard to processing facilities, the Scholz Group pursues a decentralised strategy with a number of smaller, distributed shredders. At its site in Espenhain in Saxony,
it has a unique float-sink recycling facility for residual shredded materials. Furthermore, Scholz AG has internally
developed processing technologies and methods some of which are patented. Its skills in recycling secondary raw
materials are to be additionally extended by the continued development of technological innovations. The positioning along the existing value chain comprising the core skills collection (access to places at which scrap
arises), recycling (mixing quality, post-shredder technology) and trading/marketing (access to the customer) is to
be fundamentally retained. However, recycling structures are to be aligned more closely to specific market conditions. Accordingly, recycling will only be performed in markets in which viable payment is received for this service.
In addition to a dense network of storage and recycling sites, the establishment of sustainable supply relations
with the collection points, i.e. industrial and commercial operations in which scrap is generated, represents a critical success factor for the scrap metal trade. Sell-side scrap metal prices are essentially dictated by the global
market. Longer-term framework agreements have been signed with a number of large collection points with firm
prices which are tied to industry indices. In order to stand out from competitors and strengthen supplier loyalty,
Scholz plans to systematically extend its range of services for the collection points. Collection points with which
no supplier relationship have yet been established, e.g. in the case of new industrial operations or commercial estates, are to be systematically identified and actively addressed by the field service. On the customer side, marketing is handled by the traders of the Scholz Group in direct contact with customers across the globe. As a rule,
supply agreements are concluded up to the middle of the following month. There are no major price risks in thirdparty trading business, which accounts for 30.0% to 35.0% of trading revenue, or in the case of back-to-back
agreements. Price risks arise in storage business in connection with an average storage period of approx. 20
days for scrap iron and 180 days for stainless steel semi-finished products. Opportunities for hedging risk positions are utilised by means of forward transactions for aluminium, copper and nickel within the scope of the guidelines and bandwidths laid down by Scholz AG’s risk committee. There are no adequate hedging opportunities for
scrap iron and steel products in the form of derivatives on account of the lack of market liquidity in trading in steel
futures. However, the Scholz Group actively participates in establishing liquid trading by entering into small hedge
positions with steel futures and, in addition, is currently collecting experience with hedge opportunities by means
of bilateral OTC transactions arranged by banks. The agreed quantities and qualities must be delivered to the
purchasers by the agreed dates. The Scholz Group’s high logistic skills, particularly in the area of railway transportation, play a crucial role in this respect. Larger steel mills can receive monthly deliveries of up to 200 wagon
loads of scrap iron. To this end, Scholz needs to be able to ensure that the volumes of scrap and the wagon and
rail distance capacities are available on schedule. Domestic logistic structures are to be increasingly aligned to future growth markets to secure access to sea ports.
10
Rating Summary
Scholz AG
19 August 2013
We consider the strategy of focusing on profitable ferrous/non-ferrous recycling to be plausible and economically viable. In our view, there are risks with respect to the implementation of the planned divestments and deleveraging activities as well as the issue of fresh equity. It may not be possible to find suitable investors or the process may take longer than expected. Friction may arise in the process of issuing
fresh capital. We welcome the establishment of a steering committee allowing the finance partners to
closely monitor progress in implementing the restructuring measures. With the addition to the management board and further enhancements to organisational structures and processes, we think that the
company has taken suitable measures for implementing the restructuring concept and for improving the
Scholz Group’s manageability. In our view, the planning and management systems are for the most part
appropriate in the light of the company’s complexity and the nature of its business. We consider the
Scholz Group’s integrated risk management system to be fundamentally capable of identifying and limiting material risks. With respect to the strain on earnings coming from index-tied sourcing and sales contracts as well as the high risks in connection with CMA, we see evidence that risk management has not
always been systematic enough in the past. Accordingly, there is room for improvement with respect to
the systematic implementation of risk management.
11
Rating Summary
Scholz AG
19 August 2013
Rating Process
This report is a translated condensed summary of the detailed rating report of 19 August 2013. The detailed rating
report in German language, which is submitted to the company and is not being published by Euler Hermes Rating Deutschland GmbH, forms the basis for the rating notation.
The rating request was submitted by Scholz AG (client) on 21 May 2013. The company was visited on 31 July
2013. This rating report was presented to the client on 19 August 2013, meaning that the rating process has now
been concluded. The notation proposal and the report on which it was based were reviewed by the Rating Committee on 19 August 2013 and approved in their current form. If this rating is not made public, the rating assessment refers to this date. If the rating assessment is published on the rating agency’s website (www.eulerhermesrating.com), it will be followed by a subsequent one-year monitoring process. During this period, the company and
the environment in which it operates remain under observation. The rated company is subject to unrestricted disclosure obligations during this period. Any change in the rating agency’s assessment will result in a change in the
published rating, meaning that the rating as shown on the internet represents the current rating assessment at all
times. Continued publication after the expiry of the monitoring period is contingent upon a follow-up rating being
conducted.
The client is solely and exclusively liable for any errors or omissions in the documents and information supplied
openly and willingly in response to our requests for information. The client has reviewed the rating report and confirms that all of the information which it contains is correct and complete in all significant respects, that no major
aspects have been concealed and that any forward-looking statements which it may include are based on plausible, verifiable and current data and have been prepared by the client with the diligence of a prudent businessman.
However, the client cannot be held liable if actual results differ from the forward-looking statements, in particular
the projections, presented in this document. Changes in the economic environment and unforeseen events may
impair the validity of the forward-looking statements and projections. The client’s management has submitted to
Euler Hermes Rating Deutschland GmbH a written letter of representation.
The rating report may not be construed as constituting a recommendation to participate in certain facilities. All recipients of the information should conduct their own independent analyses, credit assessments and other reviews
and evaluations which are customary and necessary to reach a final decision about the participation in certain facilities. It should be noted that the summaries of contracts, legislation and other documents included in the report
are no replacement for examination of the corresponding full texts. As of the date on which this information is published, it is not possible to guarantee that the information has not changed since being collected and that all information provided is still valid. The client is under no obligation to update the information. The publication of this
rating report may be prohibited by law in certain jurisdictions. The client therefore requests that any persons who
gain possession of this information enquire about and comply with any such restrictions. The client does not assume any liability of any kind towards anyone with respect to the dissemination of this rating report in any jurisdiction whatsoever. All liability on the part of Euler Hermes Rating Deutschland GmbH is excluded with the exception
of wilful misconduct or gross negligence on the part of the statutory representatives or employees of Euler Hermes Rating Deutschland GmbH or their representatives.
The client’s management has submitted to Euler Hermes Rating Deutschland GmbH a written letter of representation.
We have prepared this report to the best of our abilities and knowledge.
Euler Hermes Rating Deutschland GmbH
Hamburg, 19 August 2013
12
Rating Summary
Scholz AG
19 August 2013
Analysts
Holger Ludewig, senior analyst and project manager
Sascha Heller, analyst
Rating Committee
Kai Gerdes, director
Gundel Bergknecht, senior analyst
Principal sources of information
Consolidated financial statements of Scholz AG for fiscal years 2010, 2011 and 2012
Restructuring concept for the Scholz Group dated 25 July 2013
Market analyses
Conversations with management
Rating method
Issuer rating, company rating manual of Euler Hermes Rating GmbH, March 2012 version
13
Rating Summary
Scholz AG
19 August 2013
Rating Notations
category
explanation
AAA
AAA rated companies demonstrate an excellent credit quality. Such companies are characterized by an extremely positive future outlook and are viewed as being “first class” business partners. Although the various
security elements can certainly change, such changes – to the extent this can be assessed - are highly
unlikely to adversely affect the fundamentally strong position of such companies.
AA
AA rated companies demonstrate very high quality with respect to future security. Along with the AAA rated
companies, this group forms the so-called “quality class.” Security margins may, however, be comparatively
thinner, the solidity of the security elements may fluctuate more or individual assessment components may
indicate a greater long-term risk than is the case for AAA rated companies.
A
A rated companies demonstrate high quality with respect to future security. They show many favourable features which secure their future. Nevertheless, there may be isolated factors which reveal a slightly in-creased
susceptibility to the worsening of circum-stances and general economic conditions in the future.
BBB
BBB rated companies demonstrate reasonable quality with respect to future security. Compared to A rated
companies, however, it is more likely that worsening of general economic conditions could weaken the capability of fulfilling financial obligations.
BB
BB rated companies still have structures adequate to secure their future. Yet they are subject to greater insecurities. Negative business developments or changes in the general financial and economic conditions can
make it impossible for them to fulfil their financial obligations in a suitable manner.
B
B rated companies lack the usual structures to secure their future. Negative business developments or
changes in the general financial and economic conditions will most likely make it impossible for them to fulfil
their financial obligations in a suitable manner.
CCC
CCC rated companies have structures which greatly endanger the security of their future. Capital service is
in jeopardy. Such a company is dependent on a favourable development of general economic conditions if it
is to be able to meet its financial obligations in the long term.
CC
Companies receiving a CC rating have very little security for their future. Capital service is in great jeopardy.
C
C rated companies have the least future security of all. The basic conditions enabling such debtors to fulfil
their financial obligations are extremely poor. Default is imminent.
D
Companies with a D rating are already in default of payment or have filed for bankruptcy. The D rating is irrelevant for the future; it documents solely the bankruptcy of the company.
If an issuer defaults with respect to a certain financial liability or class of liabilities but is still able to honour its
SD
payment obligations under other financial liabilities or classes of liabilities within the requisite period, it is assigned SD (selective default) status.
NR
PLUS (+)
MINUS (-)
A debtor or an issuer not rated by Euler Hermes Rating is classified as NR (Not Rated).
Rating notations from AA to CCC may be complemented by a PLUS (+) or MINUS (-) if required, in order to
show their relative position within the respective rating category.
Euler Hermes Rating Deutschland GmbH is registered as Credit Rating Agency (CRA) in accordance with Regulation (EC) No.
1060/2009 of the European Parliament and European Council (CRA) and is accredited by the Federal Financial Supervisory Authority (BaFin) as an external credit assessment institution (ECAI).
14

Rating Adjustment Scholz AG

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