Rating Summary Scholz 2012 1026

Transcription

Rating Summary
Scholz AG
17 August 2012
Rating Rationale
Rating of 17 August 2012
Company Rating:
BB
Outlook:
stable
Rating Subject:
The core business of Scholz AG
(Group) comprises trade in and recycling of iron and other scrap metal. In
addition, business activities entail
trade in and recycling of steel products, the operation of a steel mill in
the Czech Republic and aluminium
foundries in Germany and Hungary,
as well as the provision of supplementary services. With over 7,800
employees, Scholz AG generated
consolidated sales of € 5.3 billion in
2011.
Strengths:
international network of facilities
high logistics skills and capacity
good supplier and customer
relations
good risk management
Weaknesses:
capital structure and financial
flexibility in need of improvement
earnings burdened by steel mill
and forges as well as aluminium
production
Euler Hermes Rating rates Scholz AG BB for its creditworthiness
and sustainability. We expect the rating to remain stable over the
next twelve months.
With 135 collection and recycling sites in Germany, around 365 locations abroad
as well as supplier and customer relations which have arisen over decades, we see
the Scholz Group as having a strong and secure market position. Competition in
storage business is regionally limited due to the transport costs. As it is almost impossible to obtain permits for new scrap yards, there is a high entrance barrier for
competitors in many markets. We consider the Scholz Group’s logistic skills and
capacity to constitute a further strategic strength. In Germany, all of the Scholz
Group’s recycling sites and all its major storage facilities have railway links. The
fleet comprises around 1,000 container trucks and more than 100,000 containers.
We consider the Scholz Group’s integrated risk management system to be capable
of identifying and limiting material risks, particularly those caused in the volatility of
raw material prices.
Given the large volume of funds tied up in inventories and trade receivables, weaknesses arise from the capital structure, which has room for improvement, and the
tight funding situation. However, in this connection it should be remembered that liquidity can be released at short notice thanks to the high and regular turnover
caused by the reduced purchasing of scrap. Moreover, the volume of funds tied up
varies according to scrap and steel price levels, which generally decline in an economic downswing. The Group’s profitability is currently coming under pressure
from the losses sustained from steel and aluminium production.
Opportunities are arising from the growing importance of secondary materials in
global steel production. In addition, Scholz AG increasingly wants to focus on recycling business and continue implementing the planned measures for optimising
trading, logistics and production processes which may be able to enhance its profitability and capital structure.
Risks include the heavy cyclical business, unexpected volatility in raw material
prices and currencies, delays in the planned improvements in stock turnover rates
and increases in productivity as well as a reduction in the utilisation of production
capacity.
Opportunities:
growing importance of secondary raw materials
Key financials
2009
2010
2011
greater focus on recycling business
EBITDA margin
2.7
5.6
4.1
further optimisation of logistics
and production processes
Return on capital employed (ROCE)
-2.0
10.3
8.8
Equity ratio
14.7
15.0
15.7
Debt to Equity ratio
81.5
78.9
77.2
Total liabilities / EBITDA
23.6
6.5
7.6
Threats:
high cyclicality
unexpected volatility in raw
materials
Net financial liabilities / EBITDA
18.0
4.3
4.8
EBIT interest coverage
-0.7
1.6
1.4
currency risks
EBITDA interest coverage
1.5
2.9
2.6
© Euler Hermes Rating Deutschland GmbH 2012
1
Rating Summary
Scholz AG
17 August 2012
Company
With over 7,800 employees, Scholz AG, Essingen, generated consolidated sales of € 5.3 billion from trade in and
recycling of iron and metal scrap in 2011. During this period, it handled a total of more than 10.8 million tons. The
company operates around 500 collection and recycling sites in Germany and abroad with 32 shredders as well as
hydraulic excavators, shears, presses and breakers. In Germany it operates 135 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 1,000 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 comprises the following segments: Ferrous/Non-Ferrous, Aluminium, Steel and Other Services. Ferrous/Non Ferrous accounted
for 96.7% of tonnage and 89.2% of sales in 2011.
In addition to the storage and transportation of ferrous, non-ferrous metals 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, the United States, Australia and New Zealand. 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
scrapyards. In addition to recycling scrap, the Scholz Group also trades in forgeable and compressible steel and
tool steel (semi-manufactured), examines these steels and offers heat-treatment, peeling, polishing and sawing.
The steel segment also includes forging and shaping technology. The Scholz Group operates a steel mill in the
Czech Republic and aluminium foundries in Hungary and Germany. 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. In March 2012, Scholz AG issued its first corporate bond for € 150 million with a maturity of five years.
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) and Parag-Johannes Bhatt (CFO).
2
Rating history
26.08.2011
17.08.2012
Notation/outlook
BB/ stable
BB/ stable
Rating Summary
Scholz AG
17 August 2012
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 and expenses arising from
mark-to-market valuation of derivatives. Total adjustments resulted in extraordinary income of € 38.4 million in
2009, extraordinary expense of € 6.8 million in 2010 and extraordinary income of € 19.1 million in 2011. Other taxes were assigned to other operating expenses.
2009
Structural profit and
loss statement
T€
2010
%
T€
Change yearon-year (%)
2011
%
T€
%
2010
2011
Sales
2,389,575
99.5
4,493,202
99.6
5,290,296
99.9
88.0
17.7
Total revenues
2,402,218
100.0
4,511,805
100.0
5,296,588
100.0
87.8
17.4
Cost of materials
1,924,561
80.1
3,729,707
82.7
4,489,476
84.8
93.8
20.4
477,657
19.9
782,098
17.3
807,112
15.2
63.7
3.2
58,962
2.5
62,454
1.4
61,824
1.2
5.9
-1.0
Personnel costs
181,689
7.6
209,366
4.6
241,462
4.6
15.2
15.3
Other operating expenditure
290,591
12.1
384,597
8.5
411,247
7.8
32.3
6.9
EBITDA
64,339
2.7
250,589
5.6
216,227
4.1
289.5
-13.7
Depreciation/amortisation
92,864
3.9
109,562
2.4
97,804
1.8
18.0
-10.7
EBIT
-28,525
-1.2
141,027
3.1
118,423
2.2
-594.4
-16.0
Net finance expense
-40,024
-1.7
-79,840
-1.8
-80,103
-1.5
99.5
0.3
61,415
2.6
100,650
2.2
99,042
1.9
63.9
-1.6
Profit from ord. business activities
-68,549
-2.9
61,187
1.4
38,320
0.7
-189.3
-37.4
Earnings before taxes (EBT)
-30,386
-1.3
52,518
1.2
56,945
1.1
-272.8
8.4
Net profit/loss for the year
-32,279
-1.3
30,920
0.7
28,568
0.5
-195.8
-7.6
Gross profit
Other operating income
Of which interest expenditure
After tumbling by 48.9% in 2009 due to the crisis-induced decline in demand and lower price levels, Scholz AG’s
sales increased by 88.0% to € 4,493.2 million in 2010, materially driven by the increase in sales volumes in the
wake of the economic recovery and higher prices. Spurred by the 25.8% increase in tonnage to 10.4 million tons
and the measures implemented to boost earnings and render costs more flexible, the company’s earnings returned to a satisfactory level in 2010 following the loss sustained in 2009.
In 2011, Scholz AG’s sales rose by € 797.1 million (17.7%) to € 5,290.3 thanks to a slight increase in volumes
and higher average sell-side prices. Tonnage increased over the previous year by 3.8% to 10.9 million tons. Ferrous/non-ferrous business accounted for 89.2% of sales and 96.7% of tonnage, while steel business contributed
5.2% and 1.6%, respectively, and aluminium production 6.7% and 1.6%, respectively. The Scholz Group’s main
market is Germany, which accounts for around 40% of its sales. Further key markets are the United States, Austria, Italy, Belgium, Turkey and China. The ratio of cost of materials to total revenues increased again last year for
price-related reasons and is reflected in a lower gross margin. The decisive parameter in trading is the ratio of
gross profit to tonnage, which was more or less unchanged over the previous year in 2011. With an increase of
9.2% in employee numbers to 7,807, personnel expenses rose by € 32.1 million to € 241.5 million. One of the
reasons for this increase was the delayed payment of staff bonuses for 2009 and 2010. Other operating expenses
rose by € 26.5 million to € 411.2 million chiefly as a result of the increased tonnage. Depreciation/amortisation expense dropped to € 97.8 million in 2011 primarily as a result of reduced capital spending. All told, the slight increase in gross profit was more than offset by the disproportionately sharp rise in structural expenses. As a result,
EBIT dropped by € 22.6 million over the previous year to € 118.4 million. This decline was particularly due to the
cyclically induced weak business performance in the second half of 2011, which was chiefly reflected in lower
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Rating Summary
Scholz AG
17 August 2012
price levels and tonnage. Generally speaking, declining prices exert heightened pressure on Scholz AG’s margins, thus resulting in what in some cases is a substantial reduction in operating earnings. In our view, this highlights the necessity of margin management particularly in phases of declining prices. Scholz AG plans to implement this with the introduction of the “Trading Cockpit” planned for the second half of 2012 (see Planning and
steering instruments).
With financial indebtedness largely unchanged, net finance expense remained more or less at the previous year’s
level and accounts for 1.5% of total revenues. Despite the deterioration in operating earnings, earnings before tax
climbed by € 4.4 million to € 56.9 million. This was primarily due to extraordinary income from the disposal of assets (€ 19.4 million) at the site in Denmark. Whereas earnings before tax of € 74.8 million were generated in the
Ferrous/Non-Ferrous segment, the Steel and Aluminium segments again sustained losses of € 11.8 million and €
3.2 million, respectively, before tax. However, it should be noted that the loss sustained by the Steel segment was
almost halved compared with the previous year.
As of 30 June 2012, tonnage was 5.1% down on the previous year but 1.1% up on the revised June 2012 forecast. Average prices remained relatively stable in the first half of the year and were more or less in line with the
budget. The total revenues of € 2,591.3 million (previous year: € 2,883.1 million) as well as average gross profit
per ton roughly matched the budget. At € 389.7 million, absolute gross profit was 1.2% up on the budget as tonnage was slightly higher than forecast. Personnel and operating expenses were very largely in line with the
budget; accordingly, operating earnings (EBITDA: € 110.4 million; EBIT: € 67.2 million; EBT: € 25.0 million) were
slightly up on the budget (EBITDA: +1.3%; EBIT: +1.7%; EBT: +7.7%). Compared with the first half of 2011, however, operating earnings were substantially down in the current year (EBITDA: -29.9%; EBIT: -37.6%; EBT: 58.2%). The core Ferrous/Non-Ferrous segment contributed € 39.5 million (previous year: € 77.9 million) to the
Group’s EBT. The Steel segment sustained a loss at the EBT level of € 6.5 million (previous year: loss of € 2.6
million), while the Aluminium segment reported EBT of € 1.5 million (previous year: € 0.6 million). All told, total
revenues and earnings before tax for the first half of 2012 were well down on the previous year but are more or
less in line with the budget revised in June.
Overall, Scholz AG’s earnings and profitability were satisfactory in 2011. In the first half of the year, earnings were
slightly above the budget on total revenues which matched expectations but were substantially down on 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. Goodwill was considered to have a recoverable value in view of profitability levels. Half of the special item for investment advances and grants was allocated to economic equity. 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.
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Rating Summary
Scholz AG
17 August 2012
Change yearon-year (%)
31.12.2009
31.12.2010
T€
%
T€
1,780,480
100.0
1,926,770
100.0
1,959,501
100.0
8.2
1.7
Non-current assets
868,013
48.8
815,237
42.3
792,154
40.4
-6.1
-2.8
of which property, plant and equipment
699,092
39.3
640,805
33.3
614,692
31.4
-8.3
-4.1
Current assets (including prepaid expenses)
912,467
51.2
1,111,533
57.7
1,167,347
59.6
21.8
5.0
of which inventories
396,169
22.3
444,130
23.1
481,954
24.6
12.1
8.5
of which trade receivables
193,077
10.8
353,944
18.4
351,605
17.9
83.3
-0.7
29,769
1.7
37,545
1.9
46,705
2.4
26.1
24.4
1,780,480
100.0
1,926,770
100.0
1,959,501
100.0
8.2
1.7
262,036
14.7
289,642
15.0
308,058
15.7
10.5
6.4
55,800
3.1
52,705
2.7
52,200
2.7
-5.5
-1.0
1,462,645
82.1
1,584,424
82.2
1,599,243
81.6
8.3
0.9
172,624
9.7
321,872
16.7
406,304
20.7
86.5
26.2
1,185,179
66.6
1,119,988
58.1
1,090,453
55.6
-5.5
-2.6
Structural balance sheet
Assets
of which cash and cash equivalents
Equity and liabilities
Shareholders’ equity
Provisions
Liabilities (including deferred income)
of which trade payables
of which financial liabilities
31.12.2011
%
T€
%
2010
2011
After a substantial increase of € 146.3 million in 2010, adjusted total assets rose by € 32.7 million to € 1,959.5 million last year. Once again, the decline in non-current assets was accompanied by an increase in current assets,
resulting in a further decline in the ratio of non-current assets to total assets. Property, plant and equipment
dropped by € 26.1 million over the previous year due to the refocus on the Ferrous/Non-Ferrous segment. This
was chiefly due to capital spending (+ € 94.3 million), depreciation/amortisation (- € 77.0 million) and disposals at
book values (net - € 40.4 million). The increase of € 37.8 million in inventories was primarily caused by the higher
raw materials and supplies in connection with greater trading and production volumes as well as the higher supply-side prices. Trade receivables were roughly on par with the previous year. Trade working capital (inventories +
trade receivable - trade payables), which exerts a material effect on Scholz AG’s liquidity, dropped by € 48.9 million to € 427.3 as of 31 December 2011. Risks in inventories and trade receivables are hedged in a range of 50%
to 85% and credit insurance effected to cover around 65% to 75% of sales. There is no major exposure to individual customers.
Economic equity increased by € 18.4 million to € 308.1 million last year chiefly as a result of the net profit recorded for the year. The equity ratio widened slightly to 15.7% as equity grew more quickly than total assets. Liabilities climbed by a total of € 14.8 million to € 1,599.2 million chiefly due to the increase in trade payables. This
in turn was due to increased inventories as of the reporting date. The opposite effect arose from the reduction in
other liabilities and liabilities to banks. The increase in the volume of the syndicated loan and the renewal of individual promissory notes was more than offset by the repayment of promissory notes. At € 1,090.5 million as of 31
December 2011, financial liabilities were down on the previous year. Material funding instruments forming part of
debt included the syndicated loan with three tranches A/B (€ 454.1 million) and C (€ 237.8 million), the promissory
note loans issued (€ 157.3 million), bilateral credit facilities (€ 84.8 million) and bilateral loans (€ 85.8 million) as
well as credit facilities of the proportionately consolidated Group companies (€ 26.3 million) as of 31 December
2011.
As of 30 June 2012, Scholz AG’s unadjusted total assets stood at € 2,032.8 million, i.e. € 67.4 million higher than
on 31 December 2011. This increase is due to higher trade receivables chiefly caused by a shift in the regional
sales mix. At the same time, inventories contracted by € 77.5 million, meaning that trade working capital rose by a
total of € 6.7 million to € 434.0 million as of 31 December 2011. Reported equity rose to € 325.1 million as of 30
June 2012 due to earnings achieved (equity ratio: 16.0%). Liabilities to banks (including the promissory note
loans) stand at € 1,089.5 million, i.e. roughly unchanged since 31 December 2011. The net interest coverage ratios improved slightly in the first half of 2012 to 1.6 (EBIT) and 2.6 (EBITDA). All told, net debt in the current year
is more or less unchanged over the previous year; even so, there is room for improvement due to the large volume of funds tied up in business.
5
Rating Summary
Scholz AG
17 August 2012
Due to the nature of its business, Scholz AG’s balance sheet structure is characterised by a large volume of working capital. The volume of capital tied up depends on sales volumes and prices. Rising volumes and sales prices
lead to a greater volume of working capital and hence heightened funding requirements. The group’s funding
structure is currently heavily determined by financial liabilities. With an economic equity ratio of 15.7%, the capital
structure exhibits room for improvement in our view. We consider deleveraging potential and interest coverage ratios to be just barely satisfactory at the moment.
Internal financing potential and financial flexibility
Cash flow (T€)
2009
2010
2011
Cash flow from operating activities
-174,730
122,999
104,714
Cash flow from investing activities
-143,406
-43,609
-53,712
Free cash flow (total)
-318,136
79,390
51,002
286,214
-72,323
-45,485
Cash flow from financing activities
Cash flow from operating activities contracted by € 18.3 million to € 104.7 million last year chiefly due to the decline in operating earnings. With cash flow from investing activities slightly up over the previous year in 2011, free
cash flow as a whole dropped by € 28.4 million over the previous year. In addition to dividend payouts of € 22.9
million, of which a sum of € 8.7 million was reinvested to increase the company’s capital, and € 14.2 million chiefly
for the tax payments to be personally made by the minority shareholders, the free cash flow was used to reduce
net debt (- € 31.3 million). At the same time, cash and cash equivalents rose by € 9.2 million.
All told, Scholz AG thus had access to funding of € 1,136.7 million (excluding off-balance-sheet funding possibilities). Including guarantee utilisation of € 5.5 million, utilisation of these facilities came to € 1,095.0 million (not excluding the cash of € 48.3 million). Given the market volatility and what in some cases is the limited availability of
individual facilities, we consider the available facilities of € 41.7 million to be too tight for central group funding.
Still, it should be remembered that cash can be released at short notice due to the high turnover rates in shortterm assets, resulting in a reduction in the volumes bought.
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
steel and non-ferrous metals. Whereas scrap accounts for only around 15% of crude steel production in China,
this figure stands at around 55% 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.
6
Rating Summary
Scholz AG
17 August 2012
Crude steel production 2009-2012 (in millions of
tons)
Act. 2009
Act. 2010
Act. 2011
FC 2012
World
1,236
1,429
1,543
1,600
EU-27
139
173
177
177
China
577
637
710
750
Germany
32.7
43.9
44.3
44.0
Aluminium production 2009-2012 (in millions of
tons)
World
Copper production 2009-2012 (in millions of tons)
World
Nickel production 2009-2012 (in millions of tons)
Act. 2009
37.2
Act. 2009
18.3
Act. 2009
Act. 2010
41.1
Act. 2010
19.0
Act. 2010
Act. 2011
43.4
Act. 2011
19.6
Act. 2011
FC 2012
43.8
FC 2012
20.5
FC 2012
World
1.3
1.5
1.6
1.7
Sources: London Metal Exchange 2012, MEPS International 2012, Stahl-Zentrum 2012, Triland Metals 2012, World Steel Association 2010-2012
Macroeconomic growth and the effects of unleashed pent-up demand on capital spending caused a substantial
increase of 15.6% in crude steel output in 2010. After continued growth in the first half of 2011, weaker economic
impetus, particularly in Europe, a slowdown in growth in China, India and elsewhere and inventory destocking in
the steel and metal processing industry led to slower growth in crude steel production in the second half of year;
as a result, growth in 2011 came to 8.0%. An increase of 3.7% is projected for 2012. In Germany and EU-27, production should remain unchanged at the previous year’s level, with growth expected in Asia and South America in
particular. Global crude steel production should expand by 2.6% per year by 2015 (Ernst & Young 2012). Production of aluminium, copper and nickel is generally expected to be up in 2012.
Market supplies 2009-2012 (in millions of tons)
World
Source: World Steel Association 2010-2012
* Market supplies = deliveries plus imports minus exports
Act. 2009
1,125
Act. 2010
1,312
Act. 2011
1,373
FC 2012
1,422
Buy-side market supplies mirrored steel production. After a substantial increase of 16.6% in 2010, growth weakened to 4.6% in 2011. Market supplies should expand by 3.6% in 2012. Whereas growth of 1.1% is expected for
the industrialised nations as a whole, market supplies in the EU-27 are set to contract by 1.2%. This growth will
continue to be underpinned by the developing and emerging markets, which will expand by 4.6%.
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. All told, we expect to see rising volumes of recycled steel 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. Short to medium-term risks to trade in ferrous and non-ferrous metals include a decline in demanddue to, among other influences, a further economic slowdown as well as more restrictive monetary and capital spending policies particularly in China and India.
The profitability of trade in recycled steel 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
7
Rating Summary
Scholz AG
17 August 2012
and if prices are expected to rise a smaller volume is supplied. However, scrap suppliers have the same possibility, meaning that the effects may compensate each other.
The prices of the various scrap qualities fluctuated in the course of 2010 but were higher at the end of the year
than they had been at the beginning. After a brief increase at the beginning of 2011, scrap prices softened in the
course of the year and were slightly below the level at which they had entered the year by the end of 2011 (European Confederation of Iron and Steel Industries 2012). Prices of aluminium, copper and nickel consistently
dropped in the course of the year (London Metal Exchange 2012). Despite low inventories in some cases, ferrous
and non-ferrous metal prices should generally decline in 2012 due to weaker macroeconomic conditions and
heightened uncertainty, although they are likely to rebound towards the end of the year (Commerzbank 2012). 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 volumes to widen in trade in recycled ferrous and non-ferrous metal scrap in 2012 and 2013 in
the wake of a small rise in crude steel and non-ferrous metal production and the growing importance of
recycling. In the short to medium term, risks include the possibility of a further deterioration in macroeconomic conditions.
Strategy and Organisation
Business segment
Heightened focus on trading in and recycling ferrous and non-ferrous scrap
Development of innovative recycling technologies
Utilization of economies of scale
Extensions to services for collection points
Organisation
Further development of logistics structures
and systems
Personnel and young potential development
Further development of the trading and IT platform
Markets/customers
Active development of business with new collection points
Expansion of US business
Expansion of international sales and partner network, including in Asia
Financials
Improvement of capital structure and financial
flexibility
Stable sales and earnings
Reduction in working capital through the optimisation of inventories
Scholz AG plans to extend its leading market position as a provider of recycling services with an international
network. In this connection, the Group is pursuing the strategic mission statement of being a “local collector/value
creator and global distributor”. Here, the main strategic focus is on trading in and recycling ferrous and metal
scrap.
In Germany, the Scholz Group holds around 20% of the market for ferrous scrap, around 15% for metal scrap and
some 5% for aluminium products. In Europe excluding Germany, it additionally focuses on Eastern and Southern
Europe, where it also holds a leading market position. In the NAFTA region, the Scholz Group still has only a
small share of the market; regionally, however, it has a strong market position in the US states of Ohio, Pennsylvania, Arizona and New York as well as in northern Mexico. The global market position is to be consolidated and
expanded in the short to medium term by means of international expansion of the distribution organisation and the
establishment of strategic partnerships. In recent years, new markets have been entered via joint ventures with
local partners or majority holdings with an option for full takeover at a later date. Economies of scale in logistics,
scrap recycling and services are exploited as strategic advantages by means of active consolidation in regional
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Rating Summary
Scholz AG
17 August 2012
markets, i.e. by taking over a number of local recycling companies within a particular region. In our opinion, typical
acquisition and integration risks were well managed via systematic, specifically scaled processes for the selection
of target regions and target companies as well as their takeover and integration. The Scholz Group is one of the
few recycling companies with an international network.
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. However, 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.
Logistics planning is to be centralised to a greater extent to ensure optimum capacity utilisation and a high level of
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 direct sales (drop shipments), which account for 30% to 35% 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 ferrous scrap 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 ferrous scarp 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 ferrous scarp. 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.
The Steel segment entails trading of and processing of semi-finished stainless steel products. Scholz AG has extensive inventories of special stainless steel types that are partly in storage for over one year. Scholz manages to
stand out from its rivals thanks to its extensive product range. On the other hand, the inventories in storage give
rise to significant resources being tied down and to storage risks. Scholz is seeking to optimise its inventories
management while taking due account of the profitability of trading in special types of steel with lower turnover
rates. The Steel segment also includes drop forging and hammer forging units. However, these do not form the
main focus of the Group’s business strategy. In the Aluminium segment, the Scholz Group plans to concentrate
more closely on niche markets in future, focusing on special formats and alloys. A small special-purpose steel mill
in the Czech Republic as well as the aluminium smelting works in Hungary and Germany shall be returned to
profitability by means of adjustments to personnel and operations. As the Scholz Group is refocusing on international trade and scrap recycling, these operations have no substantial significance for the Group’s strategy. They
are to continue operating profitably as non-core activities. The sale of some of these activities has not been ruled
out.
The further development of operational and organisational excellence forms part of Scholz AG’s corporate mission statement. The Group’s structures, processes and systems are to be enhanced as a basis for implementing
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Rating Summary
Scholz AG
17 August 2012
its strategy. The central aspects of Scholz AG’s operational and organisational excellence entail the further development of the Group-wide global trading, logistics and IT platforms, various process optimisation measures as
well as personnel development and the encouragement and recruitment of young potentials. Given the heavy
cyclicity of recycling business and the risks arising from another macroeconomic downswing, the Scholz Group
has enhanced its instruments for the early detection of risk in order to reduce response times. However, the company also has graduated plans of action allowing it to implement measures to cut costs and secure liquidity at
short notice if necessary.
One of the primary tasks in risk management at Scholz AG involves identifying, quantifying and hedging the risks
arising from open commodity, interest rate and currency positions. The risks are continually monitored and managed by means of hedge quotas and key value-at-risk figures specified in the relevant directives. Commodity positions are monitored daily by Commodity Risk Management and hedged by means of forwards transacted on the
London Metal Exchange. Strategic management of these positions is handled by a risk committee comprising
members from different departments. The management board members of Scholz AG and Scholz Recycling AG
& Co. KG as well as the risk committee receive a weekly risk report with information on risk positions, hedging
quotas and values at risk in the Group’s various fields of activity. In addition, daily risk reports are submitted to the
management with an overview of risk positions, volumes in storage and hedging quotas of the key member companies of the Scholz Group. Currency and interest rate risks are monitored by Corporate Finance and the management board on a daily basis and hedged by means of forward exchange transactions and interest rate swaps
with banks. Counterparty risks are mitigated by the allocation of credit ratings and the diversification of banking
relations.
Given Scholz AG’s market position and the skills and resources available within the company, we consider the
strategic orientation to be generally plausible. In terms of its management and structures, we think that the company is well positioned to continue pursuing its strategy. Organisational structures and processes as well as management capacities are being systematically developed to meet the rising requirements arising from strategic
goals and changes in market conditions. In our view, the planning and management systems are appropriate in
the light of the company’s complexity and the nature of its business and can be considered to be good. The planning and management systems are to be enhanced in the future by integrating the subsystems more closely. We
consider the Scholz Group’s integrated risk management system to be capable of identifying and limiting material
risks.
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Rating Summary
Scholz AG
17 August 2012
Rating Process
This report is a condensed summary of the detailed rating report of 17 August 2012. The detailed rating report,
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 1 February 2012. The company was visited on 24 July
2012. This rating report was presented to the client on 17 August 2012, 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 17 August 2012 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.
We have prepared this report to the best of our abilities and knowledge.
Euler Hermes Rating Deutschland GmbH
Hamburg, 17 August 2012
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Rating Summary
Scholz AG
17 August 2012
Analysts
Holger Ludewig, senior analyst and project manager
Kai Gerdes, director
Sascha Heller, analyst
Rating Committee
Dörte Mählmann, director
Gundel Bergknecht, senior analyst
Principal sources of information
Consolidated financial statements for 2009, 2010, 2011
Extracts from internal reports
(e.g. business reports as of 30 June 2012, analysis of bank liabilities etc.)
Market analyses
Strategy paper and corporate planning
Commodity Price Risks Guideline and risk reports
Documents on corporate structure
Conversations with management
Rating method
Issuer rating, company rating manual of Euler Hermes Rating GmbH, March 2012 version
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Rating Summary
Scholz AG
17 August 2012
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 socalled “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.
13

Rating Summary Scholz 2012 1026

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