Börsen-Zeitung

Mr. Rühl, foreign corporate groups have recently been setting their sights on German MDax companies. First Hochtief, then Demag Cranes. Is Klöckner & Co the next company to be threatened with a takeover?

When 100% of a company’s shares are held in free float, as ours are, there always tends to be a threat of a takeover. While there’s nothing we see at the moment that would suggest a takeover, it also cannot be excluded. But naturally, we are well prepared for such an eventuality.

How can one prepare for something like that?

If it really happens, we have to deal with a potential takeover attempt in a professional manner. For example, we need to know what the legal rules are that we need to comply with, and be aware of the way we communicate inside and outside the company. It’s not a matter here of putting a defensive bulwark in place right at the outset. But the important thing is to have a team of advisors that can be put into action from one day to the next.

Your current market capitalization of 1.1 billion euros isn’t really a protection against takeovers, or is it?

With 100% free float, protection is difficult in principle. I am also not a believer in looking for any sort of protection from the outside. The best takeover protection that you can provide yourself with is a high valuation, and that, when it comes right down to it, is what our new strategy is aimed towards. The potential takeover threat, however, doesn’t change a thing about the direction we wish our company to take over the medium to long term.

Since the new strategy was presented, the price of Klöckner & Co stock hasn’t significantly risen – even though your announcement was one of strong growth and global market leadership. Has the market failed to understand your strategy?

The issue for us was long-term strategy, not giving a short-term boost to the stock price. Right after our Investor Day, when we made a presentation of the strategy, our stock price initially went down. Possibly that was because a few investors pulled out who had a short-term orientation with regard to Klöckner, holding the stock in their portfolio as a kind of proxy for the steel market. That sort of pull-out certainly doesn’t have to be a negative.

In the past, you had frequently criticized the fact that the price of Klöckner & Co stock was too heavily dependent on the price of steel. Does the new strategy change this?

There is a fundamental correlation between steel prices and our earnings, and hence our stock price. This correlation will always be there one way or the other. But since steel prices are very volatile, we are seeking to reduce this dependency. Providing a different focus for our customer portfolio is meant to contribute towards this goal. We want to get further away from business closely associated with commodities. The percentage of sales represented by the construction business is intended to drop, because it’s harder to achieve higher and more stable margins there through add-on services or specialized products. That’s also part of our acquisition strategy.

Going forward, acquisitions are to be more strongly focused on larger companies. Have the smaller acquisitions not added sufficiently to returns?

The larger acquisitions that we made have had more of an influence. Our three largest acquisitions in recent years represent 77% of the sales volume added by companies purchased. The other 18 acquisitions contribute only 23%. Larger acquisitions are not only greater generators of growth, but are for the most part more professionally managed. The cost of integrating them isn't necessarily greater than with smaller companies.

Analysts have been pointing out that acquisitions will probably be getting more expensive. They said that, in the future, Klöckner & Co will probably have to pay more like six to eight times EBITDA, and that the four-to-six range for EBITDA multiples probably can’t be held to any more.

I don’t see that necessarily being true. The fact is that we continue to be prepared to pay four to six times EBITDA. In principle, this also applies to the emerging markets that we want to get into – even though we still don’t have figures based on experience here.

So how much money do you still have available for additional company purchases?

At the moment, we still have more than 500 million euros for acquisitions. That is quite a lot, if you consider that our market capitalization currently comes to somewhat more than twice this amount. So we could add on nearly half of Klöckner & Co again with the funds available for purchases.

The market has already speculated that, in view of the growth track you’re planning on, there will be another capital increase coming up in the foreseeable future.

Given the funds on hand, probably not in the foreseeable future. But to us, equity capital in essence is also a financing tool for securing growth – just as it’s been up to now.

Indeed you do have quite a high equity ratio, and in the future you also want to stick to above the 30% mark. Why is that?

In our view, the economic and financial crisis is not over yet, even though we’re probably past the peak. For this reason, we’ll also continue to be conservative in our accounting. The same goes for financing. For example, at the moment we are holding a disproportionate amount of cash. You can also look at that as our insurance against the crisis. As long as the economic and financial crisis isn’t over, we will stay cautious on the accounting and financing side of things, even though we want to grow aggressively.

You have confirmed concrete acquisition talks in Brazil. Can any details be given at this point?

No. It’s true that we are moving towards making acquisitions in Brazil, but that also applies to other regions as well. We are continually on the look-out for opportunities.

Why is Brazil a country of interest to you?

It’s a country with very strong growth; particularly with regard to steel consumption. Over the next ten years, it is expected that steel consumption in Brazil will rise just under 20% a year. On the other hand, to some extent the country already has well-developed distribution structures in the steel and metals area. That tends to be helpful to the business and also leads to higher margins.

After entering the Brazilian market, are you expecting synergies with your North American business?

With purchasing, there could certainly be a reasonable amount of synergy. But basically the two regions need to be viewed separately. For us, the Brazil story is about growth and not about synergy.

In China, your aim is to enter the market there by developing your own service center. Why aren't acquisitions playing a role in China?

The Chinese market is highly complex and can be tapped from the outside only with difficulty. Our Greenfield strategy is a first step for getting into the market at all. Once we’ve established ourselves, I also don’t want to exclude acquisitions. For the time being, plans are for getting a start in China in the first half of 2011.

Who are your potential customers in China?

We are initially concentrating on European customers who are having difficulties with steel supplies in China and who possibly also are having problems with the associated services and with steel processing and quality assurance. These companies are, in some cases, still getting their steel from Europe. And that was certainly not the original aim of these firms when they made their decision to set up production in China.

What kind of plans does Klöckner & Co have for the growth market of India?

To start off with, over the next five years we want to establish ourselves in Brazil and China in any event. Beyond that, the intention is to create the prerequisites for a further expansion into other emerging markets. In that context, India is naturally of interest, and possibly also Russia or, outside the BRIC countries, countries like Mexico for example. Our goal is quite clear: We want to position Klöckner & Co as the Number 1 steel and metal distributor in the world. We want to be the first to establish a global network.

In ten years, the emerging markets and North America are each supposed to contribute between 20% and 30% of sales. Are the European markets the ones losing out on this development?

That’s not the way to put it. North America and the emerging markets are supposed to grow more strongly than Europe, that’s correct. But in absolute terms, we are aiming for further growth in Europe as well by 2020 – both organically as well as through acquisitions. Since, however, we already have a relatively high market share in a number of European countries, further growth here is only possible to a limited extent. After a market share of 25% to 30% in a country, we get too much overlapping in our activities. At that point, one plus one doesn't necessarily still equal two.

What significance does the German business have for the future?

With our most recent acquisition, Becker Stahl, the percentage of sales represented by Germany has risen to just under 30%. Previous to this, it was just about 20% in pure distribution. Over the next five years, the percentage will fall back down to below 20% due to the stronger growth in other regions.

The new strategy, as we know, is targeted on changing the customer portfolio. You already mentioned that the percentage represented by construction would drop. What would an ideal portfolio then look like?

Today, we still have construction representing a share of slightly less than 40%. That corresponds to the average level in our industry. Machinery and equipment makes up a bit shy of 20% of our sales, and car construction about 12%. In the future as well, distributors’ most important demand will be coming from construction, and so construction will always continue to play an important role, for us as well. But the ideal would be for the construction business to be at 30% and for the share represented by the automotive industry and machinery and equipment to go up accordingly. We would then be better balanced among the three most important customer groups.

What are the most important linchpins you aim to use in accelerating organic growth? Of late, you’ve seemed dissatisfied with the way things have gone.

Indeed. We are dissatisfied with the fact that our organic development over the last few years hasn’t done any better than the market. However, with the outbreak of the financial crisis, the situation today is not the same as it was before. Up to 2008, we were selling into a growing market. Volumes and prices were steadily rising. Our internal efforts were thus focused, first and foremost, on the optimization side of things, above all in purchasing and the overall distribution network.

Today it’s different?

Today we have a completely different situation. The market in 2009 collapsed by about a third, and thus far has not yet come back to its former levels. It will probably need a few more years to do so.

What does that mean for Klöckner & Co?

We are fighting over a smaller pie. That means that there needs to be a significant increase in the focus on customers. In the future, that will be a significantly more important linchpin. Customer wishes will be front and center, more strongly even than before.

When will Klöckner & Co’s new long-term strategy be showing up in the financial statements?

In our income statement, certainly, the growth strategy will be reflected relatively soon after being implemented – both the planned purchases of higher-margin business as well as the additional internal optimizations.

Will the new strategy also improve your not exactly satisfactory rating?

The topic of ratings is a provocative one, and not just for us. At both Standard & Poor’s and Moody’s, we currently have a rating in the Non-Investment-Grade area. Against the background of our relatively strong balance-sheet structure, with low debt and large cash holdings, this is not so easy to understand. Over the short term, I see no chance of an improved rating, because our aim in any case is to continue to grow, including through acquisitions. Rating agencies, however, take a dim view of that, since this again requires cash and our indebtedness could also climb back up. But naturally, we don't let the rating agencies dictate our strategic focus. Ratings, anyhow, don't have that much significance for us, fortunately. All of our financing facilities are on terms independent of ratings.

So there’s no target rating you want to steer towards?

If the aim is for strong growth, and one is also prepared to increase debt as the need arises, then there’s virtually no possibility of an improved rating. Our investors also would not endorse an alternative path, one with no growth and no acquisitions. Our clear focus is on our growth targets and not on the rating. Our most recent credit negotiations have yet again shown that, in this approach, we have the support of our banks.

For your investors, the topic of dividends is also important. Will anything be changing about the payout rate of 30%?

The 30% is merely a good compromise. On the one hand, we can’t pay a disproportionately high dividend and grow strongly at the same time. The two of them don’t jibe. Our payout rate, 30% of net profit, is hence accepted by the majority of our investors, retail and otherwise.

Will there be a dividend again for 2010? The dividend, as we know, has been omitted twice.

Yes. We are on a very good path towards resuming the dividend payment. We are sticking with our forecast of earning EBITDA of over 200 million euros in 2010. And then we will also be in a position to pay a dividend once again.

How high could the payout be?

We probably won’t be back yet to the pre-crisis level of € 0.80/share. But if we assume EBITDA of 200 million euros or more, under the stated formula for dividend calculation we could come out at about € 0.25/share.

How high will the operating margin be this year?

Although uncertainties are still present on the market, the EBITDA margin will be around 4%. We have stated that we are basically looking for a minimum margin of 6%. We want to reach that starting with 2011. But to do so, we need to grow organically by at least 10%. And whether the overall market will yield this remains to be seen: There are still many uncertainties.

If in 2011 you reach your targets for sales, income and return on capital – can Klöckner & Co then check off the crisis as being over and done with?

Things will not be that quick; the collapse of the overall market was too strong for that. Even if we are developing better than the market, without acquisitions we won’t be getting back to the sales strength we already had preceding the crisis. With the inclusion of acquisitions, though, we will be back to the pre-crisis level.

How long will there continue to be overcapacity on the market?

For steel producers, we are continuing to expect overcapacity. For that reason, we also think that capacity in Europe needs to be definitively taken out of the market. On the distribution side, it is true, overcapacity also exists. But since the business is not that capital-intensive, this is not so critical. It is not quite as much of a problem for warehouses to be only half-used. But until the producer side gets back to a capacity utilization rate of at least 85%, the volatility in prices will also not be quick to drop.

What further plans does Klöckner & Co have on the financing side?

Basically, we are very satisfied with our financing. Today we possess broadly diversified financing and are not dependent on specific financial instruments or on banks. We have a very clear structure: Our Net Working Capital financing needs to be able to adapt to market fluctuations. So here, working closely with the banks, we have flexible financing available, supplemented by securitized instruments. For acquisitions, on the other hand, we need fixed, long-term secured financing. We cover this using capital-market products like convertible bonds. In addition, for the first time we have become active on the market for promissory notes, even though this type of financing is not normally available to non-investment-grade companies. At the start of the year, we took our maturity profile out to 3.2 years. Here too, we see no need for action at the moment.