Salzgitter AG (SZG) Earnings Call Transcript & Summary

[Interpreted] Thank you. [Foreign Language]. Ladies and gentlemen, welcome to the analyst conference on the first half year of our fiscal year 2020. Due to the fact that the pandemic is still on, this conference happens as a pure online conference again. Nevertheless, we are quite happy that so many of you are participating. Our English-speaking audience. As you might have noticed, unfortunately, there has been a translation error that affected the English version of our guidance and which made it into the report despite numerous checks and balances. We have since corrected the error and informed you of the mishap. As the proofreading of the English translation falls into my responsibility, I can only beg your pardon for this mistake and the resulting in convenience for you and apologize to Professor Fuhrmann, Mr. Becker and my team for letting them down on this. [Interpreted] So we continue with the ordinary agenda. As usual in the analyst conference, Professor Fuhrmann will begin by giving you an overview of the course of business, the environment and our strategic measures. Then, Mr. Becker will elaborate on the results of the first half of 2020 and the outlook, the guidance. [Operator Instructions] And I'll hand on to Professor Fuhrmann.

Thank you very much, Mr. Lesemann. Ladies and gentlemen, I would like to welcome you very warmly to today's analyst conference. And let me get started right away. The order of my presentation and the different information I've written down have not changed during corona times. First of all, I would like to talk about the market situation. But first of all, let me show you this chart here. And you know from own experiences that we should have been ready for this kind of situation because at the latest, since the mid of March, we have witnessed that, on the one hand, we need to protect our employees. And on the other hand, we have to secure our operational business. Now as far as health management is concerned, protecting the health and safety of our employees. It's not only the immediate measures which were taken, but also regulations and guidelines were launched for the entire decentral group. And apart from that, something which was not necessary so far, within a few days only, we created a full transparency over the infection situation and the absenteeism in the group. And we presented that and transferred it into an ongoing continuous monitoring program. This is nothing you can take for granted. And despite our decentralized organization structure, with the support of the cooperation of our employees, all the people working for us, not only in Germany and abroad, could be protected and protection could be coordinated. We all know that short-term working in order to mitigate the employment risks is something which is not being used in the same extent and in the same social measures as in Germany. And this is why also our foreign subsidiaries outside of Europe did not have to wait for the benefits of short-term working. On the contrary, we also took over social responsibility in a country like India. Internally, apart from answering the question about health and safety, we had to secure operational business, and liquidity management was a top priority in this respect against the backdrop of the transitional and also quite drastic reduction of production in parts of the group having also a consequence, which could be seen in short-time work. We had to take measures, consistent ones, on the one hand, to safeguard our liquidity and to underline that. And on the other hand, we had to save money without putting our future at stake. New investments, unless they were really necessary, were postponed or delayed. Our strategic investment projects, however, which already started, were continued. And the first one will become operational at the end of this year, which means it will be commissioned. Which means, so far, we have managed very well, been very persistent, been very stringent in our liquidity management and to master the crisis. Now how the environment will develop is something which will be seen in an exemplary way in the group, especially in Germany. It is visible if you take a look at the order intake situation of selected branches of the German industry since January 2018. And here you can see that car manufacturing, so the automotive sector, starts with the change of the year 2018 and '19, is no longer as successful as it was in the years before. As you know, that I'm talking about the diesel crisis, about worried consumers, people who do not know what kind of drive trains they should use. And especially in the year 2019, car purchases were delayed. Now with corona, there was a decisive slump in the automotive industry. In April, in Germany, 11,300 passenger cars were produced. Whereas in an ordinary month in the years before that, it was more than 400,000 vehicles. And of course, this shows very clearly that this had also an impact on our business, but also other industries. For example, mechanical engineering or the metal industry suffered from a severe slump. When it comes to the construction industry, this kind of problem was not that big because we're talking about bigger projects, which are still in the pipeline and which are being finished as a rule, especially when it comes to public owners. And we assume that in the construction industry, we will have a slump, but it will not be as severe as in the consumer areas. This is something we will probably witness in the course of the year. Now let's come back to the steel industry. The prices for raw materials have changed in the course of 2020. The prices went up and down. And the prices which are relevant for us for the integrated steel production went up dramatically. On the one hand, the iron ore price increased and now stabilized at a level which is above EUR 100 , decisively above EUR 100. And on the other hand, something which rarely happens because I can't think of when that happened for the last time that coking coal is cheaper than iron ore per ton. This kind of weather situation was used. And of course, I have to mention that the coking coal market is much smaller and much more special than the iron ore market from the global perspective. And taking a European perspective, you can, of course, explain the prices of the iron ore. However, this is nothing which will be influenced by the European steel production but rather influenced by the Chinese production and consumption at the Chinese industry in general and the steel industry, in particular, have both after the change into the new year and after the pop-up of corona gained speed again very quickly. The European price for hot-rolled coil products from integrated steel production was a price, which in the course of 2020, and this is nothing astonishing in view of the demand decline and in view of the high imports at the same time, had a focus to the south. In the past few weeks, however, we can see a stabilization. And meanwhile, also a trend, which is reversing, which is showing us higher prices. And my colleague, Burkhard Becker, will give you the details of these figures. Here, a short overview of the key data for 2020 comparing the 2 half years and the 2 quarters, which is very important, quarter 1 and quarter 2 of 2020, which can be seen on the right-hand side as well. Four, this cannot be lined enough. In the first quarter, we have the decline in the automotive industry and we can also see a general decline in the economic output, for example, it being mechanical engineering, which was also suffering slightly in Europe, in Germany, but also at the global scene, but it was still some kind of normal. And this is why our pretax result with EUR 431 million and EUR 19 million from the equity Aurubis investment, this is something which resulted in almost 0. Now sales revenues of crude steel production more or less normal. The slump, the decline, however, happened in the second quarter, with a decline of the crude steel production, especially in the integrated steel plants. The production in Peine, for example, was quite -- still quite stable, and sales went down slightly. And the result before taxes was something we expected, amounted to minus EUR 94 million -- EUR 96.4 million. It is negative. However, you have to compare it to other companies in the same sector. And we were still doing quite well. And this is not only due to our group's portfolio for Aurubis has a very positive sales result, which contributed to our figures. It was not only that, it is also due to our countermeasures, which were taken very consistently and quickly. And of course, we did not want to exaggerate them and then putting our future at risk. So all in all, we have a half year result, earnings before taxes of minus EUR 127.8 million; earnings after tax, minus EUR 144.7 million; and ROCE, minus 6.3%; and the core workforce amounts to 23,009 people, reduced by 630. Now business units. Order intake in strip steel went down from 2.3 million to 1.8 million tons. And here, we also have to distinguish the first quarter when it comes to order intake to the second quarter. In the second quarter, we had to witness a slump of almost 50% compared to the first quarter. Sales, I don't want to comment on them because they can be seen as a result of the entire situation. And the result before taxes can also be explained by what happened in the second half year. We're talking about minus EUR 62.4 million. Now let me carry on with plate and section steel. Here, the order intake situation does not look as dramatical as in plate steel. That's the way it is. However, you have to distinguish between plate steel and section steel because here, we had minus 50% in plate steel in the order intake in the second quarter. Now as far as consolidated sales are concerned and earnings before taxes, you can see that in the first half of 2019, we had a quite balanced situation, but then it went down to minus EUR 27 million. And this can be referred to plate steel only. And as far as Peine is concerned, Peine's result was most 0 in the second quarter. Now Mannesmann. Here, I have to underline that EUROPIPE is not being consolidated. And this is why in order intake and in the external sales, we do not have a major change. Here, you can see minus 44% in order intake and consolidated sales compared to last year and compared to the last quarter, which means here, again, we have a dramatic decline. This is also due to the automotive sector's problems and can also be mentioned in view of the development of the oil and gas prices worldwide. This is the respective products were affected by that. As I'd said, consolidated sales, the decline is not that dramatic as we had some shipments to make, some product to deliver and the earnings before taxes situation goes back to a loss of minus EUR 18 million in the second quarter. Trading. Shipments in the second quarter went down by 24% compared to the previous quarter of minus 29% year-on-year. And the first quarter, as I said, was not that bad. And the earnings before taxes were only affected in the second quarter with minus EUR 16 million. Now as far as technology is concerned, we have a decline of 35% in the order intake segment. In the second quarter, earnings before taxes were negative. Whereas in the first quarter, it was still -- or they were still slightly positive. In the business units, which have some automotive impact, we could see some problems resulting from the reasons I've just explained. In the second quarter, minus EUR 15.6 million EBT and a EUR 10 million result from KHS, where the impact not that dramatic. But when it comes to the spare parts sector, the service area, we work from front there dramatically -- affected there dramatically by the closing of the borders. And if I compare on that, and in a minute, we will come back to that topic, I assume, the diversification of our group is important. And if somebody believes that it was not important, then the figures of the first half of the year proof that it's absolutely necessary to be so diversified. Think of Aurubis or other company segments where we are holding a stake. If you think of all the consolidated parts of the business, then you know that we are in the face of an economic crisis which is unique, which has not been seen since the Second World War. And therefore, it is important to be diversified. This is absolutely important. I mentioned it already as far as Aurubis is concerned. In the first half, after the first quarter was assessed and evaluated on the basis of metal parts and the figures as of the 31st of March were not so positive, things have changed. We have taken the assessment deadline, the 30th of June. And now we can see a very satisfying performance of Aurubis, and we have a contribution which is being taken into account at equity of EUR 334 million. And now let me carry on with strategy. You know that when not creating new charts once in a while, we are quite consistent when it comes to our strategy and the diversification of our growth. For 22 years now, we've been very persistent. We've always navigated at eyes' length, never too ambitious, but always focused when necessary. This is something which also holds true with regard to the goals. In 2016, after what has been done in the past 15 years and what was quantified, we have a at parry situation when it comes to the creation of value and sales revenues, which means we have steel-related and less steel-related goals. And it does not matter whether it's been consolidated or not, but we have to regard everything, which is being owned by the group and something which is not owned by 100% will be assessed at its specific ratio. And it is a fact that in the first 6 months of this year, this target, this goal of 60% steel-related and 40% less steel-related goals was achieved. And I believe this is another proof of the fact that this strategy of diversification of the group is something which especially holds true in economically difficult times. The different key performance indicators which belong to the goals are, for example, qualitative growth. Rolled steel production parts of the tubes production can only grow qualitatively, not quantitatively. However, quantitative growth is important because we have so many investment projects. And quantitative growth is possible exclusively in activities apart from steel, especially in the Technology Business Unit. And external growth, on larger scale, is not mandatorily necessary for the development of the business units. Can, however, be desirable if -- and this kind of external growth can be seen, especially with the increase of the Aurubis investment, to 30%, minus 1 share. And if I take a look at all that, not only today, but also when it comes to the last weeks and months, then we can say that this is a commitment which is still correct, which is still invaluable, which still holds true, especially in these days of the crisis. Which means it's not only holding shares, it's also something which can be extended. And now let me carry on with the growth strategy. The qualitative growth of the steel-related areas can be strengthened with the 2 investments, the new heat treatment line in Ilsenburg at the Hot-Dip Galvanizing Line 3, which are extending our product portfolio and optimizing it. Commissioning will take place in 2021 officially, which means the first plate steel can be expected in December this year. And the construction of the Hot-Dip Galvanizing Line 3 is in budget, is following the schedule, and it will be commissioned in 2022. Now as far as the factory of the future is concerned, belonging to DESMA Schuhmaschinen GmbH, it was inaugurated in July 2020, which means just recently and can expect a higher order intake situation, which means the factory will be filled up. Now Mannesmann Precision Tubes, the expansion of the plant in Mexico took a little bit longer than initially planned. And this is what was commissioned in the third quarter of 2019. In between, there were also some corona-related hiccups. But now we are in the flow. Work is in progress with the qualification of the product, and it was a good decision, a good measure. And the same is true for the Aurubis participation. We increased it to 29.99%. Together with the Swiss company, Ferrum AG, we started a cooperation for can seaming, a highly interesting cooperation, and KHS GmbH will have a wonderful can seaming partner and will be able to offer can seaming in its own portfolio, which is very important for competition. And Ferrum has a very prominent partner in the KHS business. Then SOTEP, a company in France, was acquired in order to extend our stainless steel tube portfolio, at the moment is not a top seller at the moment, as a major part of the sale that has been generated in the aviation industry. But this might come back one day. And our joint venture with Salzgitter Hydroforming GmbH in China acquired the first order, signed the first contract just recently and is making good progress. Ladies and gentlemen, two years ago, I very modestly said that I do believe that a topic which was not discussed and questioned back then very much, decarbonization and CO2 certificates, are much more important than the question of many tons of iron ore are being hedged to which price or hedged at which price. And I think this topic has reached everybody. Our way towards a low CO2 hydrogen-based steel production is clear. On the one hand, we are in a very good position, a solid position, when it comes to this. For we have the necessary CO2 allowances for the fourth trading quarter, which ends in the year 2030, we could compensate it, we could get it at a very low price. And this is why the present market value of the acquired CO2 allowances exceeds the figure accounted for the amount we have on the balance sheet and which amounts to EUR 300 million. Of course, we're not going to rest on our laurels in this respect with what we have acquired in excess. We are still making progress in our SALCOS problem, Salzgitter lower hydrogen steel production. With this product -- project, we want to gradually reduce the CO2 emissions of Salzgitter AG. And finally, we would like to reduce the CO2 emissions to 95%. There are, of course, interim steps which have to be made on this way, no showcases at all. These are things which make sense, of course, in the medium and long run. And one step which has to be taken is, for example, the Salzgitter Wind Hydrogen project, the first industry sector coupling, which means producing hydrogen and electricity with renewable energies. We have, for example, also an industry consumer. It is Salzgitter Flachstahl and the wind turbines are already there. We have 7 of them with 30 megawatt of output, and we have the highest wind turbines which do exist onshore in Germany. And until the end of 2020, we will get a 2.5 megawatt PEM electrolysis plant and the hydrogen, which is being produced, the help will cover the entire hydrogen need of the Salzgitter plant, which means it makes sense from the industrial point of view. And as I said, it's not only a showcase, this is something want. We're not aiming at this kind of showcases. And now let me carry on with the feasibility study for the direct reduction of iron ore at Wilhelmshaven. Agreed upon with the project partners, the federal state, Lower Saxony; then Wilhelmshaven, the city; Rhenus Logistics. And Wilhelmshaven is a city which has a wonderful infrastructure, starting with the harbor they have. Then they have a direct availability of offshore wind electricity. We have already existing lines, pipes and different kind of kind of [ knots ] for natural gas. And we are carrying out a feasibility study together, which results should be available at the latest by March 31, 2021. The goal of this feasibility study is a very realistic one. We would like to have 2 million tons directly reduced iron ore for the processing into high-grade environmentally compatible strip steel products in Salzgitter. And this brings me to the end of my presentation. And now I would like to pass the microphone to Burkhard Becker.

Thank you, Jörg. The EBITDA at EUR 50 million was positive. Depreciation and amortization of EUR 145 million (sic) [ EUR 148.7 million ] was about EUR 18 million lower than in the previous year. You will remember that in 2019, we had impairments of just below EUR 200 million that we put into effect as the balance. What is resulting from that is an EBIT of minus EUR 99 million. Net interest, EUR 29 million, leads to what Jörg Fuhrmann already presented, the loss of EUR 128 million. Taxes at EUR 17 million, proved to be a burden for us. Essentially, those who are taxes on positive foreign results of KHS. So the balance is minus EUR 145 million result earnings after taxes. So let's take a look at the income statement. Let's take the balance from the decline -- the decrease in the total point of EUR 954 million and the reduction of the cost of materials of EUR 565 million. So we've got a reduction of the so-called gross earnings of EUR 390 million. So there is a strong change of business that caused that as already described by Jörg Fuhrmann, that is reflected in quantity and volume. In personnel expenditure and in material expenses, you can see the other operating expenditure. We did a lot. EUR 45 million was a reduction of personnel expenses. The other operating expenses were reduced by EUR 35 million. And the depreciations, as mentioned, they are caused by the change to the impairments of the previous year. Other than that, we've got the results then from the companies in the balance sheet at equity, minus EUR 22 million. And Mr. Fuhrmann already made the comment about Aurubis. So that brings us to the change of the earnings before tax of EUR 273 million. A look at the balance sheet. There are some minor changes in long-term assets, the increase of intangible assets and property, plant and equipment reflects the continuation of the investments being made in adjusted to Ilsenburg and the Hot Galvanization 3. Apart from that, it's not really very spectacular, the inventories and the receivables, trade receivables. And here, we have included the contractual assets. So there's a reduction of about EUR 230 million there as a consequence of the reduced business. The change in financial assets reduced by about EUR 300 million. That's the cash outflow based on the business situation for once, but predominantly coming then from the payment of the antitrust fine of EUR 211 million in the first quarter of 2020. On the passive side, the liability side, the equity reflects for once the loss-making situation. On the other hand, we have got an interest rate for the provisions for pensions that we had a slight increase from 1.4 to 1.5 percentage points, which correspondingly then, with regard to the provisions of pensions, leads to a reduction of EUR 158 million. With regard to financial liabilities, the changes in the long-term segment and short-term segment have to be seen altogether. You know that we had a residual term below 1 year. We had a convertible bond on our own shares, which was outstanding, that had to be replaced then in May. On the other hand, we made a refinancing at a bank in just about the same amount, EUR 150 million, which means that the 2 items are more or less offsetting each other. The strong change of the other liabilities is connected with the payment of the liabilities, the antitrust fine, which would have been shown under other liabilities. So all of this leads to a cash flow statement, where we've got an initially EUR 700 million cash and cash equivalents. We've got cash outs from operating activities and from investment activities. They added up to around EUR 280 million, negatively. And with minor changes in cash flow from financing services, it leads us to roughly EUR 400 million cash and cash equivalents at the end of period. What remains to me is the guidance, the forecast that we made for the overall group. I think it's quite clear. There's a question, will there be a second wave of COVID-19, yes or no. We don't have to dwell upon that. Forward visibility continues to be restricted. Nevertheless, we would assume that the second and third quarter will likely mark the bottoming out of the current crisis. And with the expected upswing in the fourth quarter, we are presenting a guidance forecast, which assumes that there will be significantly reduced sales, a low negative pretax result in the lower to mid triple-digit million euro range, and thus, a return on capital employed that is tangibly below the previous year's figure. That is ROCE. Thank you. That was my additional remarks.

Thank you, gentlemen. After the presentations, we now move on to questions and answers. As announced, we begin in the German language area. Ms. [indiscernible], please take over.

Thank you so much, Mr. Lesemann. [Operator Instructions] Our first question now comes from Rochus Brauneiser from Kepler Cheuvreux.

The first question relates to the development in order intake in the second quarter. Professor Fuhrmann, maybe you can comment on the trend that you are seeing since June? And maybe you can share some thoughts with us about the order of magnitude and your scenarios in which you are considering the loss.

Mr. Brauneiser, now we can hear you again. So we kind of lost you when you were in the process of formulating your second question. So the keywords I still heard was loss development in the scenarios.

That was exactly it, yes.

So were you through with your questions then?

Well, I've got a follow-up question afterwards.

Well, order intake trends since the 30th of June. Well, altogether, as a sum total, this is -- can be felt to be more positive. Let me try to summarize it, in particular, for those areas that are related to high-quality consumer goods that relates to the white merchandise and our deliveries into that sector. That's also true for the automotive industry, which doesn't mean, however, with regard to white merchandise, it does. I mean, in terms of order intake, we are already above the previous year in these white goods. But it's needless to say that with regard to the order intake from the automotive industry, we are far from -- in a similar situation. So in the second quarter, we had, in part, declines of far more than 50%. All the way to a situation where, in part, more orders were canceled rather than new orders coming in. So if that is our point of departure, then the development in July and in August can be considered to be expressly encouraging. Of course, the question is how will it be continued after the summer plant holidays of the automotive companies? I mean, probably even the automotive people don't have an answer to that question yet. So initially, we are able to take a certain optimistic look at the things that have already come in. Beyond that, at KHS, we did have a stable order intake. However, not fully in line with the level of the previous year. The two DESMA companies in July and in August, they are rather -- they're underway in a rather strong way. July for both companies was as good as we hadn't seen it since spring of 2019. The order intake for products that are going into the oil and gas industry, on the other hand, moderate, but they didn't get less. They didn't give in even more than they had already in the first and second quarter. So quite naturally due to the project business, the difference wasn't that significant. I believe that with this, I've elaborated on the essential sectors and segments. So altogether, taking everything together, the picture that came to be formed after the 30th of June is quite encouraging. Now on the topic of the earnings or loss development in conceivable scenarios for the time in front of us, I would like to pass on to my colleague, Burkhard Becker.

Yes, I'm very happy. Initially, we have to see that the positive order intake situation, as described by Jörg Fuhrmann, comes with a time delay into production and shipments, especially as -- especially in the heavy plate plants in the third quarter. Well, we traditionally have production standstills for planned maintenance also in the precise tube plant in France. So it successively and with a time staggering that we implemented into production and delivery. That's, of course, also very true for the project orders of KHS. And accordingly, we would assume that the loss of Q3 will be significantly higher than what we are expecting for the conclusion of the year for fourth quarter, under the proviso that we don't experience any swing back, and we wouldn't assume that this would happen. So the loss of Q3 can still be in a high double-digit range.

Okay. A general question on what you did in strip steel. In strip steel, do you -- you have the swing from plus 30 to minus 30 between the first and second quarter. And at first glance, there was a situation about the fixed costs. I mean you were able to compensate through short-term work and other things. There are quite a few other things. Maybe you can comment on that.

So unfortunately, we received your question only in a very staggered way. The technical quality wasn't that good. Maybe you rephrase it?

Yes, I'm sorry. Must be due to the Internet connection. So EBITDA swing per ton from the first to the second quarter was my question. In the first quarter, you still had plus EUR 30. So obviously, the compensation hasn't worked. And Professor Fuhrmann says...

Well, the compensation worked very well indeed because, Mr. Brauneiser, we succeeded -- well, with the kind of levers that we could apply, we were able to achieve a remarkable reduction of what I would like to call the OpEx, the operating expenditure. Not only the ones that resolved naturally in terms of material consumption and the like, but also with regard to short-term work and the like. So I am not at all in agreement with you. But if the revenues are declining, then we can't do more short-term work, it's well employment dependent. And so along these lines, we will continue that accordingly, of course, to the extent and in degree which is in line and corresponding to the employment decline. But we don't make any empty bookings or postings now in order to leave a special impression on whomever. Rather more, we are posting the things that are up and imminent.

Okay. Now a question about the outlook and guidance for strip steel. In the previous quarter, you talked about a triple million decline or loss -- this half sentence was left out now. Do we expect the results to be developing better than expected?

And the answer is in terms of the trend, yes.

Question on the volume development. You still assume that there will be seasonality in strip steel from Q3 to Q3? Or will it be on a comparable level?

Well, it's good that you are raising the questions once again in this very explicit manner. Thanks for that. In the second quarter, we restricted production rather strongly. And so the seasonality in Strip Steel will definitely not be felt as much in the third quarter as in ordinary years, as it would have happened in ordinary years. Rather more, there is going to be a trend that is going to be stable or increasing.

Next question is about heavy plate. So your sales expectations were taken back. And does that have an effect in the same way on the loss situation in 2020?

I didn't quite understand that question. Could you be so kind to repeat it again?

In the guidance, therefore, heavy plate and section steel, so in terms of volume sales, you went down as compared to the previous guidance. So will that have an effect on the loss situation there?

Of course, it will. It will have an effect, of course. We will have less business, less employment and the results will be worse in spite of all measures to the contrary, all countermeasures being taken. So the situation in plate all together with regard to our group is kind of twofold. Also because of the higher fixed cost there, the site at Ilsenburg is particularly meaningful. I believe that we have bottomed out there. The significantly smaller plant at Mülheim continues to have a certain dependency, even though it's declining, from the large tube market, which, at the moment, is a rather tough thing. And with regard to Peiner, it very much runs to our satisfaction.

Our next question comes from Christian Obst from Baader Bank.

Few questions about the market, a few structural things. First of all, something very simple. The order of magnitude of depreciation, so can we take 2 times EUR 150 million for the total year? That's my first question. The second question goes on the election of cash flow, inventories. Inventories were more or less unchanged. First half year receivables is minus 300, payable is only half of that. So the inventory policy for the second half year, what -- how can it be expected under the expected cash flow from these 3 areas? Then a brief question on intangibles, what is the proportion of the CO2 certificates in this field? And the fourth and last question is around the CO2 reduction. You have shown the entire framework very well. You are very well underway in this area. Are there any binding promises of contributions of third states? Or do you expect in the next 12 months concrete promises and funding in terms of the policy of CO2 reduction for your group?

I think my colleague Burkhard Becker should answer the majority of the questions. I will elaborate on question #4. Yes. We are already receiving certain funding promotions, subsidies for the initial part projects in order pave the way of cell costs. And I would assume that the intensity of this is going to be increasing in the near future. In the European Union, of course, we are dealing with a considerable jungle in terms of subsidies and grants. It's not that you go there and show them a convincing project, and then you go to 4 director general and then you're through with the topic and the issue. No, the programs keep changing, and there is something like Brexit and the financial volume is lower, then corona comes into play, and then the financial neutron bomb is being ignited and so on and so forth, that's a troublesome path to travel. But we are on this pilgrimage, as I would like to say and we covered the first meters in order to -- without getting to our feet -- blisters on our feet.

Can you mention in order of magnitude, as a follow-up question, as to how high the subsidies are, probably a low double-digit million amount?

Well, you are more or less roughly correct on that, yes.

Yes. The regular depreciation, we do, in fact, expect it to be at a level which is 2x the depreciation of the half year, especially then also the adjustment too in December is going to go into operation. And then we will no longer have depreciation additionally there that would be significant. We don't expect anything like that. Then with regard to your questions on working capital and the like, first of all, so that we can share the common basis of figures, if we take a look at the asset side, we've got a reduction from the 3 items, the provisions and the inventories and the contract values. I mean those are the things that are tied up at KHS of EUR 230 million, while then we've got a reduction. So things moving in the other direction from the 2 items, liabilities and contractual liabilities of EUR 145 million, results in a balance of EUR 85 million, which is what I would also expect as the swing-back if and when the business starts growing up again. In qualitative terms, I can comment on that that KHS, as they are taking onboard more projects, they are generating more payments, which is positive for working capital, whereas the tie-up in the steel-related business, the growth of business is running in the opposite direction, so EUR 85 million saved towards December. And that's something that I would also want to expect as a swing-back.

And the last question was about the intangibles. Apart from the CO2 certificates, how high was that ratio?

The ratio, the amount is not that high. Here, we're mainly talking about intangible assets coming from license fees referring to software. So this is what has been generated. Something we buy centrally from our gas company, so this belongs to the intangible assets apart from the CO2 allowances. So we're talking about licenses for software products. Okay. So the present value of the CO2 allowances is EUR 500 million if the EUR 300 million book value can be added to that.

To be clear, EUR 300 million reserve and the CO2 allowances of the book value is only a fraction of that.

The next question comes from Bastian Synagowitz from Deutsche Bank.

I have a few questions, and the first one refers to the steel business. As far as the third quarter is concerned, we expect lower margins due to the higher iron ore prices and the higher prices in the spot markets. And now this mix, do you think that it will compensate the margins loss, which means that the margin will grow in its net component?

Well, it is a very difficult topic you're addressing here because the present raw material prices do not go 1:1 which means 100% to our results. You can see them being mapped everywhere. Let me look at Mr. Becker.

I wouldn't say that we can expect dramatically changing or were dramatically deteriorating specific margins in the raw steel business.

Okay. Now let me come to the next question, referring to the Strip Steel business. If we take a look at specific markets, I think of China, we can see a dramatic recovery. The prices went up not only in China, but also in Turkey. So we can see that imports are getting less and less interesting. In Europe, the demand is also going up, but still the margins are very low. And if you listen to the automotive manufacturers, we can see a much more positive sum. So is there any hint in your company for price recovery in the second half of the year?

Well, Mr. Lesemann and the colleagues have already mentioned that in the charts.

But if you take a look at the margin, I mean there must be a huge catching-up process. And do you think that this catching up will take place in the fourth quarter? And what is your point of view when it comes to the entire delivery chain, if you think of the customers and not only on the warehouses?

When it comes to the intermediaries, they don't have too much on stock. I mean they're all focused on their liquidity as well. And the order intake situation is something which might refer only to 1 customer, then I'm not going to buy anything in addition. I have to make sure that I survive as an automotive industry supplier. I mean the situation of the industry is well known to everybody. And the automotive industry has not done that overnight with a long announcement, things happened, of course, they need to happen. Some warehouses are for, and unless we get a second infection wave, and if, once again, the entire economic sector runs into a lockdown, then in the second half of the year and the fourth quarter we will have a similar situation as we had it in the second quarter, and I'm modestly optimistic.

I have a last question, probably for Mr. Becker, a question on the cash flow. If you take a working capital and the revenues you generated from this sale of the real estate, you will end up with a cash flow of EUR 200 million, which is quite a lot in view of the present situation, but maybe not even surprising. Were there any onetime payments, maybe annual payments, which ended up in the second quarter which are higher than what is normal for a second? Were all of the EUR 200 million quite normal for the cash drain in the present situation?

Well, the exceptional cash drain happened in Q1, the EUR 211 million we had to pay in antitrust fines. But apart from that, there was nothing, et cetera, no exceptional one-off cash drain.

And I would like to add. From the consumers' perspective, in view of what I get delivered not at the end of quarter, but more or less on a daily basis. Our net financial position in the group has remained quite stable in the second quarter, notably stable. And what we reduced in view of the working capital was enough to compensate for the cash results. And to mention the figure, net financial debt Q1, Q2 amounted to EUR 60 million.

Okay. I have a question on the strategy. I mean you already mentioned it, you said that in certain sectors. And what you've shown is very selected, it's focusing on steel and nonsteel areas and also on external growth. Is that still true? Are there any major other topics you are analyzing? Or is your focus still on the internal growth?

Even if our present situation is quite comfortable, it is still survival, which comes first and not trying to conquer the world and get hold of everything we can get. And the M&A market was nearly dead. There was nothing to acquire. There was nothing in the market, which was offered. And I mean, we have always been quite cautious, especially if acquisitions were not comparable to Mannesmann or Klöckner-Werke, which were opportunities resulting from special situations where we had to put cash on the table and we considered very carefully and Corpoplast was an amendment for KHS at the end of last decade. And Aurubis was also a careful acquisition and a good one at the end of the day. And at the moment, our priority is to master the crisis in such a way that we do not have to ask anybody for money at the end of the crisis. We would like to overcome the crisis with our own means.

And now we've come to David Varga's question from Bankhaus Metzler.

Current trading and Strip Steel, could you please tell us how the capacity utilization was in July, and how capacity utilization is in August? I mean the big drop was in May and slight recovery could be seen in June and July. Is the recovery still ongoing? And secondly, in the guidance of the different segments, do you still assume that technology will have a positive pretax result at the end of the year? Now in view of the order intake situation of Q2, what makes you so optimistic? And then Q3, may -- 3 -- thirdly, maybe you could give us some insight into the CapEx we can expect. Were there any investments postponed? And now the heat treatment process and production, do you see any orders coming? What about the order intake situation? What is the volume expect? How many products are being ordered, and how long in advance do we have to order them, that people have to order them?

Thank you very much for your question. Well, the capacity utilization of the Strip Steel business unit, and I would like to take the existing capacities as a basis. And here, we have to distinguish between metallurgy and the plants being in charge of the hot-rolled products. The capacity utilization was around 80% to 85% on average, and this is something we expect for August. We also had discussions where almost 100% capacity utilization were managed. We're slightly below that. But we have overcome this dramatic slump we had in May and June. Now technology in the second half. I mean here, we hope that we won't get locked down in Germany, and this is especially important for technology. It is important that the situation in China, India, Brazil, Mexico internally, but also as far as order closures for material and people is not deteriorating. We hope that the situation in this respect will slightly improve. And then it is no exaggerated optimism to expect that the business unit technology will make a slight profit by the end of the year. The orders for the specific products from the heat treatment line in Ilsenburg can only be accepted if the line is up and running. I mean nothing worse than getting orders for specific products and then parts of the plants are not fully operational, have not been commissioned yet. But there is no doubt that we will have very good sales potential there, especially due to the fact that a part of the product will have a very good quality. Part of the plant are almost 20 years old, and I mean it is not a completely new market we're conquering or opening up for us. It is a market we know and we will deliver completely new products to this market. Now as far as CapEx in the second half of the year are concerned, Mr. Becker is going to tell you more.

CapEx can be expected in the amount of a 2-digit million amount, which means more than in the first 6 months.

And now we come to a question of Marc Gabriel, Bankhaus Lampe.

Congratulations on the way you're mastering the crisis. I have a question about next year. You said that you are expecting a slight plus in the pretax result. And in view of the statements you made, you said if we don't get a second infection wave, we will come out of the crisis even stronger due to the fact that costs can be reduced. And in view of the 2 programs you have fit for structure wherein 2020 and 2021, EUR 100 million can be saved. This is a savings potential, which was mentioned even before the crisis. And then you have growth with another savings potential of EUR 15 million, then it is quite clear that you will to make a 3-digit profit next year. Or is it something you don't dare to mention it today?

Mr. Gabriel, we would -- we are very pleased to hear you with your encouragement and your praising us for the mastering of the crisis. Mr. Gabriel, it's always like that. If you are in the slum, at the bottom of an economic cycle, then you can see that when it comes to the economic solutions, and we have not discussed them yet, the crisis with all these surplus capacities and all that that this is always something we'd try to solve as quickly as possible, but not every solution is bringing its fruit. Think of 2009 and '10. 2010 was a good year and 2011 was a real good year. And nobody can promise that, and you do not want to get this promise, but I would like to make a bet, and a box of champagne is at stake, that 2021 will be a good year, and it can even be a 3-digit million profit.

So I accept your bet because I have the same opinion.

I mean there are also some professional pessimists amongst your peers, amongst journalists, so contact Mr. Lesemann and then we will get in touch. And the second question is, I mean, we have some new investors on board. And this second investor is a classical value investor. And in view of the evaluation of your share in the share market, even if you're quite hesitant and disrespect, it's a joke. I mean if it's 30% -- if it's the 30% at equity subsidiary, which is more worth than the rest then this is a joke. I mean think of management and KHS, the market is clearly ignoring that. Is there anything you would like to say on that? Do you dare to make a comment in this respect?

Now it's getting even dangerous. I'm commenting the owned share price is dangerous. Let me put it like that. If you differentiate it like that, you have to follow it, the share price of the Aruba share is well known, the share price of our share as well. And now let's assume that KHS, without any doubt has an extremely positive value, a clearly positive value. And there is a competitor, which is stock-listed, had to suffer some losses. But if we take 1/3 of this competitor, for example, then we will end up in a situation where, of course, with all the pension provisions, which had to be made as a counter-position, the deal-related activities were evaluated at a very low level. And then you don't only have to wonder how you assess the operational performance of the respective subsidiaries of Salzgitter AG, but you also have to consider your future prospects for this market for the products in Germany and in the entire EU. And here, you have to be really pessimistic if you don't see a specific upside.

What about the pension provisions? I mean they are, after all, available to you in the long run. And basically, you only have to take them into consideration if there is a threat of insolvency, but we are far from that.

Yes. As a matter of fact, we are far away from insolvency. Of course, that has to be served, something has to be paid there year-for-year, but it's a long-term loan without covenants, which isn't exactly bad in these days.

Then a final question maybe on the topic of speculation around steel activities of the competitor from Essen coming again. That's been said that if they want to get rid of their steel business or merge it with, let's say, Sweden, or whatever the potential other partners might be, you've always been very reluctant in your statements in that regard. But you haven't excluded the solution either. Let's assume that they go together with a partner that's not named Salzgitter, but that partner is not interested in HKM, would you then be willing to discuss about HKM and to take over some shares, if applicable?

Let me say something about the overall topic that you touched upon. And I'm not saying that with a view to just any competitor, I would like to make a very general statement. And let me call the topic of German Steel AG. For more than 20 years, we have been following, as described by myself, the strategy of diversification of our business units, always steadily, always with vision, taking opportunities whenever they come into play, whenever they are offered. The target has been defined as being a balanced ratio of 50-50 between steel-related and not so much steel-related business in our portfolio. Everything that we own has to be considered on a pro rata basis and that is obviously successful. And let me repeat it once again, this is ultimately also being shown by the end of the first half year 2020, which, as it were, is the stress test for an industrial company. And as we did it and treated it, German Steel AG is seen as a pure steel corporation, which diametrically runs against our strategy because our group would have to disintegrate itself before anything happens there. And we consider that to be a little convincing in every which way. And with a view to Salzgitter AG, we consider it to be absolutely unattractive. So for talks on such basis, well, we don't see any reason whatsoever, after all, we do not want to deteriorate our point of departure for the future. And that's perfectly clear. If we were to change our corporate policy, then our perspective for the future would have to get better. It wouldn't have to get bleaker. The statement that I've just made on that opportunity doesn't contain anything new at all. Anybody who would have listened to my speech at the Annual General Meeting and my interview in WELT AM SONNTAG on the 12th of July, will find the same content. This, as a point of departure, this being said first, now with regard to the topic of HKM, which is trilateral between Vallourec, thyssenkrupp and ourselves, I personally cannot imagine that we would take over larger shares of HKM. It's rather that we've got the task in front of us with the colleagues from Vallourec and thyssenkrupp to make HKM a company that is on a solid, sustainable basis for the future. And it's not always corona, there's also life after corona. So here again, I'm rather confident that together with the colleagues from the other companies, we will succeed in that. But then again, it's not exactly easy. And I don't believe -- and with a view to the contractual situation, it's not possible to just do it at short distance. None of those involved, including ourselves, with a short run go out of HKM.

We're now going to take our next question from Seth Rosenfeld from Exane BNP.

If I may, I want to come back to some of your earlier comments with regard to the outlook for oil and gas exposure and what that means for your order backlog, please. Can you just talk through the current state of order backlog both in plates and also in the pipes businesses, including EUROPIPE? I remember at the time of Q1 results, you noted EUROPIPE's U.S. business had utilization secured through year-end. But today's release touches on some delays and cancellations. Where do things stand today as regards to order backlog across those businesses? I'll start there.

Well, thank you so much. We didn't have any cancellations of orders from this range, from this area. However, we had an order intake that was visibly going down recently, both for large tubes and from medium pipeline tubes that is ultimately the essential exposure that we have in this area. At EUROPIPE in Germany, we've got a very bad employment situation, which in part also has an aftereffect of the employment at our small plant in Mülheim in Germany. With a medium-sized pipeline tubes, there is something like a little life in the desert by now. Taking it all together, the situation isn't very satisfactory. Also the order reach at EUROPIPE in the U.S. continues to be quite good. But it's an expressly cyclical business that we are talking about, as you know, at the moment, based on manyfold causes, this proves to be a very mixed picture, a very mixed bag, or let me say, well, it couldn't get much worse if the oil prices are picking up again and the gas prices, which doesn't appear to be improbable, then this business will be revived as well also, and I want to be very clear about that. I do not believe that it will soon back -- develop back to a situation where it could be the star of our business unit, Mannesmann, or not to speak of our entire group.

And just to clarify, I mean, in the past, you've been able to give us some time lines with regards to how many additional quarters of order backlog you already have secured for these different businesses. Is it possible to provide that again today?

I apologize, the line was very bad, really, the connection was very bad. I just got in touch with Mr. Lesemann about what he understood from your question. Large incoming orders and with regard to the large tubes, I would say, on top of 50,000 tonnes as large orders intake, so this didn't happen in the past few months. There were some smaller orders coming in for large pipes. And for the medium-sized pipes, where the lot sizes, the batch sizes are different anyway, in that area, we recently did have a slightly lively order intake.

And a separate question, please, with regards to fixed cost management in the course of Q2. You touched on earlier the benefit of utilizing the short time work or furlough schemes. Are you able to give us a sense of how large that benefit was either in euro terms or relative percentage-wise of overall cost savings? How big was the benefit from short-time work? Now can you please confirm going into H2, when do you expect that government support include? Or do you expect it to be ongoing until demand fully recovers?

Yes. Although the -- well, the savings from short-term work amount to a low double-digit million amount every month, so that's really significant in terms of the effect that is generated through that. With regard to the employment perspective for the second half year, we tend to be slightly more optimistic compared to what happened in the second quarter. So this would mean that the revenue -- or the benefit and gain from short-term work will be declining accordingly.

We can now take our last question from Luke Nelson from JPMorgan.

Just a question on the CO2 targets, which you've provided of a 95% reduction by 2050. Can you give a bit more color around the cost to get to that, including the CapEx associated with DRI and ultimately, any associated infrastructure with hydrogen electrolysis? And also if you have any indication on the relative CapEx costs because there obviously is a CapEx associated with new relines, et cetera, over the course of the cycle. So any indications on the relative cost of no CapEx or no investment in decarbonization. That's my first question. And then a follow-up on that is just when you look at the cost to invest in decarbonization, do you think about it in the context of targeting a 12% return on capital through the cycle?

I'd like to tell you something about that. My calculation is, I expect for our integrated iron mill at Salzgitter, well, up to the achievement of the goal for 2050, which is reduction of the CO2 emissions by 95%, I expect very roughly about EUR 3 billion in investments and capital expenditure, which includes not only the direct reduction plant but also the electrolyzers, the corresponding amounts of hydrogen. This is very important to note because some competitors, they don't include electrolysis in their calculation. On the one hand side, this sounds like a lot of money, but I have to tell you that if we accept -- if we take for granted, that the transformation in the direction of decarbonization, neither for the steel industry in general, nor for Salzgitter AG in particular, nor for the entire civil society, it won't come as a free lunch at 0 cost. So compared to other industries and sectors, measured by the amount of CO2 reduction that can be achieved, this is, economically speaking, very beneficial, very affordable. Let me just give you 1 example. For the first step of SALCOS with roughly 25% CO2 reduction, we need slightly above EUR 1 billion in capital expenditure. Once again, including electrolysis, what we can achieve with that in terms of CO2 reduction, that's roughly 2 million tons of CO2 per year. And I hope that you are well seated in your chair now, but this translates into the equivalent of no less than 1 million battery-driven electric cars. These battery-driven electric cars, they are now being -- by now, being subsidized in each and every state. And if I take a look at the situation in Germany now and so then taking their call for an increase within the scope of the corona fighting measures, then the subsidization of the electric car alone per tonne of saved CO2 is 5x to 6x as high as what we are investing and what we are having to invest in cell costs in order to achieve the appropriate and corresponding CO2 reduction. A classical calculation on return -- on capital return on investment is not possible with these measures, but this applies to all sectors. There is no measure for CO2 reduction, which would achieve a positive return on investment. Some national economists pretend to show that, then they calculate the indirect costs of climate warming. They take them against that on the other side, like, there are some calculations of that nature in Germany as well from DGB, for example. But I cannot relate that to a company, a single company. This is a look under the national economy and going as far as tsunami and floods. And if I take the cost caused by that and take that against that, then in the longer run, this may be beneficial for a national economy, but I cannot then relate it to the isolated calculation of a single company. But I'm quite optimistic that we will be realizing and implementing cell costs, and I'm also very optimistic that the European steel industry based on this concept. And by now, most of the competitors have joined it that they will be making an offering to politics which is very attractive indeed and which will, therefore, also be implemented and realized. Thank you.

Ladies and gentlemen, at the current point in time, there are no further questions.

So I would like to say thank you very much indeed to all of you. Thanks for participating in this special event because it's a virtual event and not a physical conference. I think we can all look forward to a situation where maybe 1.5 years from now or 1 year from now, we can go back to doing it physically. So for the time in between, Mr. Becker, Mr. Lesemann and myself wish you all the very best. Stay favorable for us, but above all, stay healthy. Thank you so much, and the best of luck. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]