Good afternoon, ladies and gentlemen, and welcome to today's Q1 2024 conference of Klöckner & Co SE. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Fabian Joseph. Please go ahead, sir.
Thank you very much, and welcome to our Q1 call. With me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; and our CEO, Americas, John Ganem. They will guide you through the presentation, and afterwards, we're happy to take your questions. With that, I'd like to hand over to you, Guido.
Yes, thanks, and welcome to our Q1 2024 call. I'd like to start right away with the highlights of this quarter. As in our full year 2023 presentation, financial statements were prepared according to IFRS 5. Hence, the results only include our continuing operations. Q1 2023 figures have also been adjusted in accordance with the requirements of IFRS 5. Shipments came in above previous year's level, driven by the continued strong performance of our segment, Kloeckner Metals Americas, including our acquisitions in the second half of the year, and despite the ongoing challenging macroeconomic environment in Europe. Sales went down year-over-year as a result of the overall lower price level compared to last year's quarter. U.S. prices, however, stabilized at the end of the quarter after falling sharply during .
Although gross profit decreased in absolute terms, we achieved an increase in gross profit margin as a result of our consistent net working capital management. EBITDA before material special effects came in at EUR 42 million despite the ongoing challenging macroeconomic environment, especially in Europe. Mainly due to a net working capital increase, operating cash flow was negative in Q1 2024. Net debt came in at EUR 790 million, increasing year- over- year. However, this has to be seen in the context of our NMM acquisition, which we closed in Q3 2023. Compared to this quarter, net debt already decreased significantly. Let's now focus on an important lever for us to achieve profitable growth while also generating less volatile earnings, higher value-add business. As you all know, we closed the divestment of our distribution business in France, the U.K., the Netherlands, and Belgium already in this quarter.
The country organizations we sold were exposed to the highly cyclical and low-margin commodity distribution business, which is especially characterized by high dependence on steel price development. Hence, this divestment enables us not only to focus on our strong footprint in North America and the DACH region, but also to strengthen our focus on HVAC. Our HVAC is generally characterized by higher profitability and more stable demand due to the long-term contractual relationships and strong customization. As you can see on the right-hand side of the slide, HVAC does contribute significantly to the group EBITDA while being also considerably less volatile. Every year, including 2020, a very challenging year. You can clearly see that we increased our share of HVAC in the past to around 1/3 of the sales in 2023. Despite HVAC generating around 1/3 of sales, it generated more than half of our EBITDA before material special effects.
Going forward, we have the clear goal to further increase our exposure towards HVAC, and the progress of our strategic initiatives will be visible in the coming quarters. With that, I would like to hand over to Oliver to have a closer look on the financials.
Yeah, yes, thank you. As Guido stated, the market environment remained challenging during quarter one, with a significant steel price correction in the US. Despite this challenging market environment, we achieved an EBITDA before material special effects of EUR 42 million, within our guidance range, a considerable increase quarter-on-quarter. After positive cash flow generation in each quarter of the year 2023, leading to strong EUR 287 million in the full year 2023, our operating cash flow in quarter one 2024 came in at EUR -44 million, mainly due to the quarter-on-quarter net working capital buildup. The divestment of parts of our European distribution business, which is now completed, lowers our dependence on steel price developments and increases our profitability level further. In addition, we continue to leverage our digitalization and automation initiatives.
The number of digital quotes for the continuing operations, meaning quotes handled automatically by the Klöckner Assistant, increased by more than 50% year-on-year in quarter one 2024. Let's have a look into shipments, sales, gross profit, and gross profit margin for the first quarter 2024. Shipments were slightly up by 4.8% year-on-year and considerably up by 11% quarter-on-quarter, again driven by the strong development of our segment, Kloeckner Metals Americas. Sales decreased from EUR 1.8 billion in quarter one 2023 to EUR 1.7 billion in quarter one 2024 due to the overall lower average price level. Gross profit went slightly down year-on-year and came in at EUR 297 million in quarter one 2024, after gross profit of EUR 311 million in quarter one 2023. Gross profit margin, however, went up year-on-year from 16.9% to 7.1%.
We will now focus on the EBITDA for the first quarter of 2024. EBITDA before material special effects for our continuing operations came in at EUR 42 million. In quarter one, we had a positive year-on-year volume effect of EUR 2 million and a negative year-on-year price effect of EUR 17 million. OpEx increased by EUR 9 million year- on- year as a result of higher personnel expenses, mainly resulting from recent acquisitions. Lastly, we had negative material special effects of EUR 4 million resulting from the divestment of parts of our European distribution business. We are now coming to the cash flow and net debt development. In the first quarter 2024, we had a net working capital buildup of EUR 50 million.
Taking into consideration interest, tax payment, and others, of in total EUR 31 million, our cash flow from operating activities came in at EUR -44 million in quarter 1 2024. Including net Capex of EUR 23 million, free cash flow was at EUR -67 million. Let's look on our net financial debt. Negative cash effects were visible for FX, leasing, and others. A positive effect of EUR 75 million from the divestment of parts of our European distribution business, which we closed in quarter 1 2024. Our net financial debt increased year-on-year only from EUR 775 million to EUR 790 million. All in all, we maintained a very strong and solid balance sheet with equity of around EUR 1.7 billion. I now hand over to John to have a closer look at our end markets in North America.
Thank you, Oliver. Looking at the economic outlook in North America, the only material change since our last update is the expectation that monetary policy is now likely to stay restrictive for longer as the Federal Reserve works to address continuing inflationary pressures. In the U.S., overall GDP growth is moderating, as expected, but should stay positive as the labor market remains on very solid footing, which in turn continues to support consumer spending. While we remain highly optimistic on underlying demand fundamentals in North America, near-term growth is likely to be constrained as investment activity may be limited by a higher-for-longer interest rate scenario and election year uncertainty. For 2024, we see moderately positive demand growth in North America of 0%-2%, with Mexico likely outperforming the U.S. thanks to continued reshoring and near-shoring activity.
Turning to the specific market segments, looking at construction, residential remains stable at what are healthy levels from a historical perspective and does have the potential to move higher on strong underlying demand and positive builder sentiment. However, lower mortgage rates remain the key to unlock this higher growth potential. Non-residential spending remains higher year- over- year, but growth is seen as moderating, with gains in infrastructure investment partially offsetting weaker trends in certain non-residential building segments. Turning to manufacturing, activity is stable, with the ISM index hovering around the neutral threshold for the past couple of months. Again, the situation varies by segment, but overall, we see year-over-year activity to be flat to down very modestly. Turning to transportation, auto production has been somewhat stronger than expected to start the year as higher dealer inventories, more aggressive discounting, and still strong consumer demand have resulted in good sales activity.
Demand from this key sector should remain positive in 2024, but the rate of growth will be more moderate than what we've seen in recent years. Shipbuilding activity continues to improve on growing naval activity, helping to offset moderately weaker growth in the smaller barge segment. Looking at appliance, no material change from the March update, with demand expected to remain steady, supported by continued stability in the housing sector and resilient consumer demand for replacements. And finally, looking at energy, [audio distortion] growth in the energy sector to be net positive, and certainly investment in renewable energy and transmission modification projects. [audio distortion]
The overall picture is to some degree the same as in the U.S., so the expectation that the monetary policy could be helpful for the second half is not as exposed anymore as it used to be.
It has never been as exposed as in the U.S., but it came down there as well. So let me come to our sectors in Europe as well. Construction industry, there is no major change since our 2023 presentation in March, with a high interest rate still dampening the overall sector development. As I already said, we expected some easing for the second half. We'll see how much that will be there, so residential building is down. But that has been already the case when we gave our previous guidance, and we're talking about the year. So that's why, for the full year, we expect a stable development in 2024, with long-term growth drivers being still intact. The demand for buildings and for rental buildings is there, especially in the residential sector. So there is an underlying demand that one day will be served.
Manufacturing, machinery, and mechanical engineering, also here, no major change since the last call. The existing order backlogs continue to enable production. However, these backlogs are declining. Transportation, same for automotive. We have order backlogs that continue. Their downward trend will likely provide less of a support to future production. And the commercial segment in shipbuilding is still under pressure. We position ourselves to benefit from the opportunities of the site and then the gray ship sector. Household and commercial appliances, segment with marginal impact on our European business, still, we expect a slightly positive development in 2024, driven by the continued shift to energy-efficient appliances. The energy industry, also here, no major change since the last call, but general trajectory towards green energy generation remains intact, where we will definitely participate.
With that, let's come now to the financial outlook for the second quarter of this year and full year 2024. As John and I pointed out, we still expect the macroeconomic environment to remain challenging, especially in Europe. However, for the ongoing quarter, we expect a considerable increase of shipments and sales quarter-over-quarter. Further, EBITDA before material special effects is expected to come in at a level between EUR 30 million and EUR 70 million. In addition, we anticipate a positive operating cash flow in Q2 2024 and for the first half of 2024 in total. Our expectations for the full year 2024 are unchanged and remain optimistic, with shipments, sales, and EBITDA before special effects anticipated to considerably increase year-on-year. We're now happy to answer your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw a question, press nine and star a second time. The first question comes from Thomas Schulte-Vorwick, Bankhaus Metzler. Please go ahead with your question.
Hey, good afternoon, and thanks for taking my questions. I hope you can hear me?
Yep, we can hear you, Thomas.
Okay. Thanks so much. I would have two questions. First one would be on your Q2 guidance. You're now guiding in a relatively broad range of EUR 30 million-EUR 70 million adjusted EBITDA as you did in Q1. Maybe you could highlight the sequential changes that you're expecting compared to the first quarter and also what it would take to reach the upper half of the guidance range here. The second question would be on your full year guidance. The consensus currently stands at EUR 270 million. Is this still an achievable level given the significant increase that you would require in the second half of the year? Could you perhaps comment briefly on how you currently see this and to what extent a significant step up in operating earnings versus the first half of the year seems realistic to you? Thank you. That would be my question.
Let me maybe start with the guidance for the second quarter and the range. It may sound a broad range of EUR 40 million, but the overall size of our EBITDA and the effect NRVs and the valuation and windfalls can have, it is not that big. That's why we said we better give this kind of range because to see how volatile to some degree sometimes price developments can be, we're just one month in the quarter. So many things can happen and change, and that's why we think the visibility to see exactly what's going to be the outcome of these NRVs and the price development and windfalls, it's too early to give a smaller range. That's the reason why. But it's the same level as the previous quarter, and we will be stronger on operating cash flow.
To get to the upper level, if prices stabilize or increase slightly, that will give an impact and will help. But that's largely the driver. As you could see, volumes, we're very strong in volumes. We have improved, and shipments will continue to increase despite the challenging environment. So there, we're positive. So it's largely a question of where will the price side be overall. For the full year, I mean, you gave out, we don't give a precise guidance for that. You referred to the consensus. Look, if the second half and what we see in the first quarter, and we will see most likely a little bit in the second quarter as well, that the price development downwards have an effect on the P&L.
And if we continue to shift in the volumes, that it will grow and that we will see that, on the other hand, the price development will not tend further south, then we feel comfortable with it. And the likelihood that we will see some improvements on the price side and some positive developments in demand overall in the market, not only us, is there. So therefore, we feel comfortable with a number that we see on the consensus. But again, it's too early in the year, too early to adjust the second half. That's why we never give out a full year guidance. This is not something you can give out realistically.
Yeah, understood. Perfect. Thank you.
The next question comes from Lars Vom Cleff, Deutsche Bank. Please go ahead with your question.
Yes. Thank you very much for taking my question, and good afternoon. It's just a quick one. I really appreciate you splitting your sales by business with HVAC, SSC, and distribution. Maybe if you could help me understand, service center business is simply the cutting, and everything else, including the formula, is HVAC, or what exactly does the HVAC business portfolio consist of?
Service center is splitting and cutting length. The rest is HVAC.
Okay. HVAC. Perfect. Understood. Thank you very much.
At the moment, there seem to be no further questions. If you would like to ask a question, please press nine and star on your telephone keypad. We have one more question coming from Christian Cohrs, Warburg Research. Please go ahead.
Yes. Hello. Good afternoon. Also from my side, just a follow-up on the HVAC business. You mentioned that you have launched a strategic initiative to increase the footprint. Does this actually mean more acquisitions to come, or is there also a possibility to increase your footprint in this particular better margin business also by organic means?
It's both. Look, I'll give you one example. Last year, we acquired IMS here in the U.S. that is doing largely for Caterpillar all kinds of high-value adds. We have sites that are nearby. The biggest problem for that asset in the past was they couldn't grow their capacity. By reusing some of our assets that we have, we can shift and therefore overcome these issues. So it's going to be a combination. First of all, with M&A, we buy into the competencies, and then we can leverage that across our network, and we can prove to our customers and to competitors of the current customer base that we do have that we have the capacity, and there is a proof point for it. That's why we can then enter into further negotiations with other customers and then reuse our asset base that we have.
That's this combination of organic and inorganic that we do. If we find other targets, we will definitely look into them, and if they fit, we buy them. If you want to add, John.
Yeah. And I think it also lends to the fact that we can transform much of our distribution business as it stands today and change that business model into a much more higher-value add type of business in that generates much higher returns more consistently. And again, it just lends itself to overall creating this much more consistent result. And those opportunities are absolutely right in front of us, as Guido outlined, by leveraging this know-how and expertise that we're acquiring to expand more exponentially across the entire network.
Okay. Understood. Thank you. Maybe just a second question that relates actually to the European or German steel market. There are news that a big steel producer is evaluating to lower its production capacities. So do you expect that this will mid-term help to stabilize or to reduce volatility in overall steel prices, or do you think that impact is negligible simply due to the global capacities in place?
Look, I think addressing overcapacities is always helpful in the steel sector, especially if blast-furnace-related suppliers are reducing capacity because they're always under more pressure to sell their volumes. They cannot react as flexible as, for example, electric arc producers can do. The fixed costs incurred in idling and blast-furnace are always huge, and it takes a long time to do it and to bring it back online. So therefore, by addressing it, I think it's something that's always helpful. The overall issue of overcapacity or too much supply is driven by imports as well. We have to see how that develops. You can see that, be it in the U.S. but in Europe as well, that politicians are deeply taking a look into what they can do with tariffs to stop too many imports and dumping prices with that.
So all these effects can be helpful, that one as well. But I think largely, I mean, you're talking about ThyssenKrupp. They're addressing that they're not selling the volumes they can produce and cannot efficiently use their current production base.
That's helpful. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. We have a question from Klaus Schlote, Solventis AG. Please go ahead with your question.
Yes. Good afternoon. Thanks for taking my questions. I have three questions. First is the development at Thyssen Steel with Mr. Kretinsky buying a share there. What's your view on this development? Then an acquisition, up to what size could you buy another company without a capital increase? And could you make comments on the recent changes on your shareholder structure, please? Thank you.
Yeah. Well, look, the acquisition from Mr. Kretinsky, I cannot comment. I'm not an insider to that. So please understand that I don't want to raise any kind of speculations around that. If they did the deal and both parties like it, then and if it gets approved, then that's fine. So for us, that doesn't have any kind of meaning. So therefore, I cannot comment on that, and I don't want to comment on that. Regarding our financial power, if you take a look at the current debt levels and especially the refinancing we're doing and the power that is there, we're not thinking of capital increases so far.
We could do all the acquisitions we did last year, which was a big chunk, but what we could do and we could finance it ourselves, largely backed by working capital-based financing, which goes up and down with the market prices and the demand. So I think our financial position is solid, and we can afford further acquisitions. The change in our shareholder base, the increase of Mr. Loh and the SWOCTEM Group from almost 30 to 41.5 by doing this no premium takeover bid, we supported that very much, as you could see in our statements, because he's extremely supportive to our strategy. That took away this burden of the 30% range and allows more flexibility for him and for us as a company to work with a share. Therefore, it's highly welcomed.
His position within the company remains largely the same with his almost 30%. He usually has the majority of the voting rights on the AGM. That's why his legal position didn't change, and he didn't change anything on the supervisory board. With his statements, so far, he has always supported our strategy and us as a management team. The whole process of this takeover bid has been done largely jointly. Indeed, that is a very good cooperation. He was a big supporter, I can clearly say, of our development and our acquisitions in Mexico and the other acquisitions we did.