Salzgitter AG (SZG) Earnings Call Transcript & Summary

Hello, everybody. My name is Markus Heidler. I cordially welcome you to our Analyst Conference. After the corona break last year, we are happy to be back in Frankfurt. Unfortunately, due to the travel restrictions, we will not make it to London tomorrow. But I'm sure we'll catch it up as soon as possible. What's new this year is not only the composition of today's speakers, besides our CFO, Mr. Becker, who is well known to you; our new CEO, Mr. Groebler, is here for the first time. Also new and as requested by many of you, this conference will be held in English language only. With our ad-hoc release from June 15, we already have increased our guidance to a pretax profit of between EUR 400 million to EUR 600 million for Salzgitter Group's annual results in 2021. Today, we also present the best half year results since more than 10 years and also the prospects for the remaining part of the year are excellent. The presentation consists of 2 parts. Mr. Groebler will evaluate on sustainability and strategy, while Mr. Becker will discuss the economic development as well as the financials. After this, we are looking forward to take your questions. Mr. Groebler, the floor is yours.

Markus, thank you very much, and welcome also from my end to everybody here in the room and also to the colleagues on the call. Prior to getting started, let me -- first, for the benefit of those here in the room just to mention that the -- there is no fire drill planned for today in this building. The emergency exit is through the entrance where you came in and the Muster Point is in front of the building. So in case there is an alarm, this one is for real, and then I will also excuse us for the guys on the call, then we might leave this building, but we will do this in an orderly fashion. Prior to getting started with the content, let me perhaps introduce myself quickly to all of you as I'm most probably new to most of you. Gunnar Groebler, I am 49 years old. I'm married, 4 kids, based in Hamburg, but now through the weekend in Salzgitter and our other premises. I have -- I'm an engineer from background and have spent the last 21 years in the utility sector. Basically, you can cut those 21 years into 2. First 10 years predominantly on corporate level, corporate development, strategy, M&A and restructuring. And the second half was then more in the operational part with a couple of years in the hydrogen -- hydro business, running the German hydro operations. And then the last 7 years in the renewables business, predominantly wind and large-scale solar, and there doing everything from project development, project execution, operation to decommissioning. So first year is mainly a restructuring task and then the second half of the operational phase more on the growth side. I'm now with the company since mid-May, and I have the pleasure to helm the company since beginning of July. I'm very excited to be here and to run the company, together with the management team. Why did I sort of leave the renewables business and join steel and technology? Well, pretty simply, I have spent the last 15 years, I would say, in a very sort of intense transition of an industry, seen sort of things that go well and have seen things that go not so well. And with the steel and technology industry ahead of a large or perhaps even within the larger transformation, I think there's quite some things I can add to the situation in Salzgitter. I like very much the strong focus on sustainability that we have, not only with SALCOS, our low CO2 steelmaking process, but also beyond and I think that's a very good combination for -- hopefully, for Salzgitter, but certainly for me to add sort of the value that I have been able to collect through the last years, and add that now to Salzgitter. If there's any questions, we're happy to take them also later in the Q&A session. Jumping into content. Starting with occupation and safety, which is one of the most important elements that we look at from a managerial perspective. What you see here is a decent development of the occupational safety and the work-related accidents per person rate. You see an increase because it's an accrued rate that we look at over the year. But still looking at the target that we have set for 2020, we're confident that we're going to meet that target for occupation and safety. For me, occupation and safety is, and you will see that also in future presentations is highly important because it is basically a good indicator for high performance on operations. If you have your health and safety and order, you basically also can have a high performance in running your operations. So in that sense, I will certainly continue to focus on occupational safety. There's this kind of strong correlation that I see between high performance and high level of occupation and safety. And as you can read in the bottom, our goal and our ambition is to have zero accidents. And I would add to that zero harm to our people, not only the own people, but also people that work on our sites. I would wish for a situation where everybody enters the site in the morning in good shape and also leaves the site in the afternoon and the evening in the same conditions when they entered in the morning. One element of that. And of course, given the current situation, is that we have focused a lot on vaccination on COVID-19, especially in the area of Salzgitter, we have put a lot of emphasis on actively vaccine ourselves with our -- with support of our own medical staff. Up until now, more than 10,000 doses have been vaccinated through our own medical staff. On top of that, we have additional vaccination coordinated by the external medical services in the smaller locations. So I think that's a good contribution to the current situation and there's a continued focus on further vaccination in order to also stabilize the situation, not only on our premises, but also beyond in the upcoming fall. Now looking at the decarbonization and the contribution towards decarbonization and what we have done now only in the first half of this year. Let me start from the upper left corner. We have -- we did join the GET H2 initiative, which is an initiative of 7 companies across the industries, production, transportation, storage and use of hydrogen. And through this initiative, there's at least a potential to reduce CO2 emissions in that consortium overall by minus 60 million tons in 2030 if we really sort of progress with that, which we intend to do, we progress with that as planned. Another element, which is actually just a couple of days old is our MOU that we reached with Anglo American to jointly sort of research and work on further optimization of the iron ore to supply DRI plants, basically to look at the lowest possible CO2 footprint both in processing the iron ore, but also in the supply chain, which then ultimately leads to the green strip steel that we see in the middle. We have recently announced that we are -- that we will deliver in 2021, first green steel coming out of our facility in Peiner to Mercedes-Benz, will be used for structure and body parts to -- in regular production, which is then basically the new thing here, we're one step further in how to implement and use green steel. It's not only research and development, we're now sort of really feeding into the regular production here. More on the longer-term perspective, next couple of years is what you see on the right-hand side. Our µDRAL direct reduction plant that we have -- that we're building as we speak, is one of the elements that we built on site in Salzgitter to really showcase the entire value chain from -- and you see that in the bottom from getting the green electricity through our wind mills, roughly 30 megawatts installed capacity, transforming that green electricity into green hydrogen and then using the green hydrogen in the µDRAL project to then also produce green DRI that will then be used in our facilities. Through that whole value chain that we have built up there, which is, of course, a test and demonstration, we will gain a lot of insights into the process. We were going to get a lot of insights also into material to then be able to further develop our project SALCOS and have a high level of certainty when buildings SALCOS that we are on the right track when it comes to technology and procedure and processes. Just as a reminder, and most of you most probably have seen that slide is what is SALCOS all about. It's basically a transformation of our location in Salzgitter. From today, roughly 8 million tons of CO2 to tomorrow, a reduction up to 95% of CO2 emissions. We do that in steps, First step will be launched in the next couple of years, which will basically reduce 1 blast furnace and will be replaced by an EAF combined with a direct reduction plant and an electrolyzer. That already gives us a CO2 reduction on the total of that side of 30%. And then as you can see in the following steps, we're going to reduce even further by reducing other blast furnace in Stage 2 and then going to the full extent in Stage 3, where no blast furnace will be no longer operational on site in Salzgitter. Looking at the current environment around green steel, there has been a lot of discussion and a lot of talks around green steel in the last couple of months. So how do we look upon it, basically in 3 buckets. Our belief is that green steel is marketable, it is fundable and it is economically viable. If you look at the marketability, there is a certified production and we have that certified production in Peiner for CO2 reduced and green steel. And we are delivering green steel, as we have just showcased into industry, R&D but also beyond in the regular process. Secondly, we recognize a strong interest from customers beyond those that we have showcased already, we see a strong interest and they are underpinned with MOUs to really get access to green steel and green steel via the hydrogen route, which I think is very important because you also have that notion of green steel through optimizing the existing and then sort of balancing. But we are talking hydrogen route and our customers are talking hydrogen route. So we see more and more MOUs for green steel through the hydrogen route. And the third element, which I think is very important is that through the process that we designed with SALCOS, we're able to use natural gas as a bridge technology and swiftly move from natural gas to green hydrogen as soon as green hydrogen is available to the extent necessary. So there we don't need to do major overall, so a major transformation in technology, but rather sort of can swiftly switch between the 2. So marketable. Fundable, yes, we see it is fundable. We have applied for EU and federal state programs to get support for the funding of the first phase. Both the innovation fund and through the IPCEI process, we have -- we are in the process of application there, and we expect a binding response by end of 2021, beginning of 2022. I think the deadlines are set in 2021. But as you all are very well aware of, sometimes you see delays there. So around new year, we expect binding response from there. And on top of that, as you are well aware of, and we're going to get to that in a second, we have acquired quite a few CO2 emissions allowances that serve as additional security for the fundability of our SALCOS project. Thirdly, we also think it is economically viable, not only from the start, but also later on. In the beginning, we expect higher prices for green steel as there will be an added green value to the customer and a supply shortage because just adding up the demand that we see from the customer side and the availability of green steel by mid-20s, just shows a certain supply shortage. So we see at least a good opportunity for higher prices on that end. On the mid- to longer horizon -- time horizon, there should be higher competitiveness of green steel versus the gray steel due to increasing CO2 regulations and also rising prices in general. And on top of that, we believe that there will be price pressure on the gray steel given the overcapacity, oversupply on that end vis-a-vis the demand. So our ambition, just to put it in a nutshell, our ambition here is to produce green steel to really implement the first phase of SALCOS at the Salzgitter sites by end of 2025. That's the ambition that we set out. There are some questions still to be answered. But the ambition is there, and let's -- we all, I think, the entire company is striving to realize that. It will bolster our competitive ability and I think underpins also our commitment to be one of the front runners in the green transformation on the steel side. If you look at the 2 qualities, green steel and gray steel, as said, we see a price premium in Europe, at least in the beginning. That price premium will diminish following the increase of supply. And to me, that means that focus on efficiency, focus on costs will remain a clear target or a clear sort of focus for us, to really ensure that we are also from the cost side in the first quartile and able to also run the green steel in -- on the mid to long term and are able to supply at favorable prices to the market. On the other side, the gray steel, well, the additional burden coming from CO2 emissions and rising CO2 prices is in my book evident, right? That is something that will happen. And I think Fit For 55 just underlines that in a very visible way. Long term, we see lower demand as a result of substitution, gray to green, hence, higher cost pressure as there will be an oversupply of gray steel in the market. So bottom line for us. There is a high competitiveness for steel for the green steel versus the gray deal. And ultimately, gray steel will be made obsolete in Europe. That's at least the perspective we take on the longer. And that we're well positioned in that transition period is also underpinned by the acquired CO2 emission allowances that we have in our books and that increase in value and also can be used for the transformation. I think the early move into those CO2 emission allowances underlines the strategic commitment that Salzgitter has towards the transition and is a good fundamental backing to also fund the transformation. But we're not only active in Salzgitter. We are also active in other places. You might have heard of the feasibility study that we have been part of for a DRI site in the -- at the harbor side of Wilhelmshavenn. That feasibility study shows that it is doable possible to build a DRI plant at the coastline in Lower Saxony at the port of Wilhelmshavenn. There is infrastructure already there. It's a coal-fired power plant from Uniper that will be closed in a couple of -- in the near future. And using that site, using the infrastructure to -- and the port infrastructure that we have there to transform that place into a DRI plant is something that is feasible, 2 million tons could be -- a 2 million tons plant could be installed there. Excellent site conditions, as I said, deepwater port, renewable electricity, if the -- and we expect so, the build-out of offshore wind continues as planned. It will be predominantly -- at least in Germany, predominantly in the North Sea, and there Wilhelmshavenn is excellently positioned to be one of the energy hubs for the North Sea. Hence, access to renewable electricity and also green gas would be very suitable in Wilhelmshavenn. And on top of that, I think that is important. There's a strong political support to develop that region and that area further. For us, it is no either/or decision on whether to build the DRI in Wilhelmshavenn or Salzgitter. For SALCOS, we're clearly looking at a DRI facility in -- at the site in Salzgitter. They are sort of technically and economically economic -- it would be more beneficial to be in Salzgitter. But as a strategic additional option, Wilhelmshavenn might be well suited for us. So that's the way we look at for that project. Next to all the sustainability, we're also looking at a couple of investment projects that we are running and that you're very well aware of, just to give you a short update on that. We are building a new heat treatment line in Ilsenburg. This is now in commissioning, and we have delivered first plates to our customers. Customers really appreciate the quality of the plates coming out of this new heat treatment line. So we're very confident that this will pay off in terms of economic benefit, but also in terms of customer satisfaction and customer loyalty going forward. Second big project, the Hot-Dip Galvanizing Line 3 on the side in Salzgitter. Also here, we are well on track, on time, on budget with that project, which is not easy under COVID restrictions. We're installing the equipment as we speak and expect the commissioning then next year. So both projects, I would say, well underway and will help us to grow the steel business in terms of quality, press not in terms of volume, but certainly in terms of moving the output quality wise to the right. One of the questions I at least got quite a bit over the last couple of weeks. So what is it that you're going to do strategically with Salzgitter. So I think you're going to respect that I won't be able to tell you a lot about it to at least give you a short procedure update on where we are. I think what is important is that we have a strategy. So it's not that we start from scratch. We have that strategy as Salzgitter 2021. That strategy is well implemented and basically is the foundation of what we see today, a pretty robust and well-positioned company in the European steel market. On top of that, we have a couple of efficiency programs, FitStructure 1.0 and 2.0 that we have started, 2.0 at least started in 2019, and that runs until the end of 2022 with quite some improvement potential, of which more than half of it is already realized. And we will relentlessly sort of work on really also realizing the rest of the identify potential and no ifs and buts about that, this will happen. But we also have kicked off a process around a new group strategy that will then carry us through this decade, and that strategy entails basically 4 elements. The core strategy, so who and what do we want to be by 2030 as this is still 9 years to go, I would say we need an interim point at roughly 2025. So what -- and who do we want to be by then? So what kind of company will Salzgitter actually be? That has an implication on the portfolio. So what is then the right portfolio -- business portfolio to support our strategy, to support the way we want to go as a company. Efficiency, I mentioned cost consciousness and cost efficiency earlier. We will continue to focus on that. This is just a necessity to really do that, even though FitStructure 2.0 will deliver substantial efficiency gain by end of 2022. Any new strategy will continue to focus on efficiency. And as an underlying enabler there, we will also review management structures, we will review management instruments, how we organize the group but also have a look at the corporate culture, how can we sort of also develop the corporate culture in a way that will support the strategy that will support also our path on the transformation side. As said, I won't be able to sort of tell you a lot of content on that. Appreciate your patience there, and we will get back to that on the new strategy in Q1 next year. So we're going to take the time now, roughly 6 months, review what we have and then carry out the strategic work to be able to inform you and let you and take you along on that journey starting Q1 next year. With that, I'd like to close for the moment and hand over to Burkhard Becker to run you through the numbers.

Yes. Thank you, Gunnar. I present some details on the economic development and the financials. Today, we are happy to present to you a significant improvement compared to the year 2020 that was characterized by the COVID situation and a significant profit of more than EUR 300 million for the Salzgitter Group. This improvement is based and this is that slide here is based on significantly better order intake in selected branches for the German industry sector. We see here in April 2020, this tremendous slump down in automotive in metal processing and mechanical engineering, whereas the construction sector in Germany stayed rather stable. In the late summer or fall 2020, we saw this kind of recovery in the mentioned industries. And that had been the drivers for the impact on prices and volume. Prices, we look here on the right part of this slide, the prices for hot-rolled coil and heavy plate saw really dynamic development since the start of the year '21 with prices, for example, for hot rolled coil above EUR 1,100. And yes, on the other side, we saw increases in the raw materials, first and foremost, on the iron ore side. The prices here doubled within the short period, and we had seen in May, more than $233 per ton, the all-time high here. And yes, coking coal, to some extent, more volatile, but increased also. But taking on the one side, the product prices and on the other side, the raw material prices together, we saw by that a significant margin increase. And that margin increase is substantially responsible for that result we show and go into details further. So key data, EUR 306 million earnings before taxes with an increased external sales EUR 4.4 billion. Crude steel production increased. And with that result, we have an LCE of 16.4%. Workforce, further reductions that is in line with what Gunnar told you, that is our fee structure program, especially in Mannesmann Precision and also in the Plates business. So although we have this up about trends in volumes, we stick to our program and look on the productivity and here in terms of workforce. The different segments, strip steel, order intake and consolidated sales increased. And with the higher shipments and the selling prices with record levels towards the end of this first half of '21, the strip steel business reported profit before taxes of EUR 105 million. Plate and Section Steel, same is for order intake and consolidated sales. They are higher than the reporting period '21, whereas the earnings before taxes do not show significant improvement. The reasons for that is that the Plate business before the background of a quite challenging situation in the fourth quarter of 2020, took some orders with small margins, and that were shipped before in the first half year. So in other words, we will see there higher earnings in the second half of the year, definitely. Trading, both shipments and sales up and earnings by taxes, EUR 149 million. So that is around half of the reported EUR 300 million. Sorry, I skipped Mannesmann. Mannesmann, yes, order intake and consolidated sales up. The reason is here the improved business of Mannesmann Precision. Mannesmann Precision, 70% driven by automotive industry, 30% industry and energy is driven also by our Stainless Tube business, line pipe business that is a business for the medium diameter line pipes was also doing quite well. On the other side, our large diameter business did not book so significant the orders. Earnings before taxes improved, and that is the businesses I mentioned, Precision, Stainless Tubes, Medium Diameter line business. Yes. And here now, indeed, we have the trading. So shipments and consolidated sales up. The earnings numbers of EUR 149 million is roughly the half of the -- for the total group, reported result of EUR 306 million. Yes, the reason is the high dynamic upward trend in the prices, I showed to you on the second slides. And here, our trading business could benefit from this dynamic development. Technology, that is mainly the KHS for filling and packaging business, but also our small DESMA companies. Order intake is fine, is increased, same true for the consolidated sales. In the earnings is a onetime effect from selling a small business in the United States, the Pouch business, with an impact of EUR 20 million. Industrial participations, there we have the Aurubis and Aurubis contributed EUR 91 million earnings after taxes. And in our reporting significantly higher than the year before. That is driven by good operational performance in the Aurubis company and by increased metal prices. Short look on the income statement. Looking on the sales, higher EUR 805 million. And on the other side, the cost of material. The net of it is around EUR 300 -- EUR 250 million. So the improvement overall, and that is reflected here is driven by the improvement of business and margins. Whereas operating income and operating expenses nearly net out personnel expenses higher by EUR 25 million, reason is clear. All our plants are fully loaded compared to the prior year where we had significantly short time, and the reason is the higher load. So we have more personnel expenses here. And yes, the results from equity assets, that is Aurubis impact. Consolidated balance sheet assets here, significant changes in inventories and trade receivables, reason are the higher volume, higher prices. And because that is compared to end of 2020, some seasonal impacts on the equity, liability side, you have -- if you look here on trade receivables and liability from contracts compensating positions. So that netting these positions, the additional working capital compared to end of 2020 is around EUR 140 million. For the cash flow, this means that the cash flow from operating activities of more than EUR 220 million is around the cash flow from investment activities, minus cash flow from financing activities, EUR 105 million. So the cash and cash equivalent end of the period ends up with EUR 545 million. And I would expect that we see a slight movement until end of '21. Guidance, we expect for the entire year, an increase in sales to more than EUR 9 billion pretax profit between EUR 400 million and EUR 600 million. I do not assume that it is a surprise for you when I add that we expect this ending up more at the top of this range, so near the EUR 600 million rather than to EUR 400 million, yes, and that means ROCE tended to be above previous year's figures. Yes. Thank you, so far my presentation.

Thank you very much. We were asked to keep it short, and maybe also simple. This is what we have done, I hope. Now we are ready to take your questions. We start here in the room. [Operator Instructions] Bastian, please.

So just my first question is one for you, Mr. Groebler. So in your mandate, have you been given any constraints in terms of the structure in the portfolio, which you should be operating by the Supervisory Board?

Well, as I said, we are reviewing sort of the current position, and we are reviewing what is necessary actually to be successful in the upcoming years. So again, I ask for a bit of patience to -- for us to do a proper work internally, and then I'm happy to provide you with clear sort of answer to that question once this is done.

And my second question is just on the announced cooperation with Anglos. So obviously, that's something we've seen now a couple of times also by some of your peers, some of the peers actually also did share the actual CapEx burden with some of their strategic partners. So is there -- are there any thoughts along those lines? And is there a chance that Anglos or maybe some other company may get involved in participation in either the first phase of your transition or maybe in -- at a later stage?

I think in general, what I would expect in the market is that you see more cooperation in the future, both on the downstream and on the upstream side. How that will then play out for us, again, is one of the questions that we're trying to get our head around right now. And so -- I'm sorry, but it's going to be the same answer. So give me a bit of time to really get into it and then I'm happy to also allude on that later on.

Fair enough. And one more question actually also on SALCOS. I guess we've been given a couple of CapEx numbers. And I guess many of your peers have been discussing CapEx numbers as well. And what we have been seeing over the last 2 years that there was actually a certain degree of CapEx deflation for decarbonization. So some of the preliminary drafts have been revised and most of them have actually been revised downwards. So I just wanted to see whether you're still sticking with the previously flecked budget for the first transition phase of transition or whether you see any potential that, that may actually come in lower?

Well, we're in the detailing of the project, including also the engineering part of it, and we're engaging with the supply side on how that project could actually be realized. And so far, I think there's no update on the CapEx numbers that we have provided that is sufficiently stable and sufficiently sort of backed that I would like to share with you here. So we're sticking with the number for now.

My very last question. Obviously, we now have a slightly changed framework for also the way the ETS may be working in the future. I guess, before the message was always your fully covered for the next trading period. Given those changes, until when would you be comfortable to say your certificates will basically cover your needs? So until which year will be covered as far as you can see that depends on demand and supply, et cetera, but within like at least a broad spectrum?

I think, first of all, we need to fully understand sort of what the Fit For 55 really means and how the CO2 emission rights will be granted in the future. So that is still a part of the discussion. And then, of course, as an element of that discussion also how the C-band will play out, that is certainly very important for us. We have those CO2 emission rights in our books, which is, of course, very comfortable. And it will carry us a long way into the 20s. How long is again a question of the political development as well as our speed of transformation. As you can imagine, the sooner we sort of implement SALCOS Phase I, the less we need CO2 certificates for that part of the emissions, right? Because we're not going to have them anymore. So -- but that's, I think, to -- there are too many variables in the discussion right now to be more firm.

[indiscernible] Thanks a lot for amazing presentation. It's really amazing to see that the whole steel industry going in the green direction, and Salzgitter is really one of the leaders on market. And the question is, are you planning to get an international ESG rating for the Salzgitter Group? Or as for now, you have not decided regarding this issue?

The ESG is an integral part of whatever strategy we're going to come up with. So sustainability will be in a strong element of that. And of course, we will also discuss internally how to rate that and how to make that also visible to the market, both to the investors community, but also to our customers. So I wouldn't rule out at all that we're also going to participate in this kind of ESG rating, international ESG ratings.

As I'm not further on, say, professional analyst, I am surprised that you're wording regarding Wilhelmshavenn project has been changed a little bit, say, to the original wording when as I understood, that you will be definitely a partner in the Wilhelmshavenn project. And how you -- yes, that's just an option. And from say, an outside view, one might think that the costs will be definitely higher when you will say, transform Salzgitter to a fully integrated plant. That means including the electrolysis. And the disadvantage that you are not, say, that you are landlocked -- yes, place to convert the iron ore.

Well, thanks for the question because it gives me the opportunity to sort of to rephrase perhaps a bit the situation around Wilhelmshavenn. What we see with today's analysis that we have done is that there are a couple of pros and cons for doing the DRI on-site in Salzgitter. You're right. It is a land or a site that has a different logistical situation than Wilhelmshavenn, but also there, the HBI would have been -- you would need to transport that to Salzgitter as well. So in that sense, not really. On the other hand, there are a couple of opportunities that you would have because you could transport the hot DRI directly into the electric arc furnace. Hence, you would save some energy and cost in using the hot DRI directly. But -- just to be clear on Wilhelmshavenn, we're not ruling out at all to be part of Wilhelmshavenn. The question is what kind of partnership is the best option for us as a Salzgitter but also for the site in Wilhelmshavenn. Having Wilhelmshavenn built as a DRI plant, gives a lot of opportunities to us, but also to the rest of the market. And it's not for any other reason that we have other players interested also in joining us in Wilhelmshavenn. So I'm not ruling out Wilhelmshavenn at all. I'm not saying that we don't want to build that. We will certainly review our position in the project and what kind of benefit Salzgitter can bring to the project, but also with the necessary focus that we need to have in order to make -- ensure that the transformation on site in Salzgitter is successful. So I think we have to also be aware of the resources that we have and focus those resources where it suits best to the company. I hope that clarifies the position a bit.

Question on that. What will be the time line of the decision-making on that project for you?

Well, as we're not the only ones in that project, we are not sort of in full control on the time line for the Wilhelmshavenn project. It is a project where we also need quite a bit of political support in that area. And I cannot give you a defined answer when the project will be ready for a decision on an investment decision. That is not fully in our hands.

My last question. It is on the share of public funding on the CapEx, say, for the first stage until 2025. Will be, say, in the range of around 50% of public funding?

Well, which is -- the public numbers on that is that we have applied for 2 elements of public funding, the innovation fund in Brussels and the IPCEI program. Those 2 numbers add up to roughly EUR 900 million. Whether that will then be granted, it's not in our hands, unfortunately. So there are others to decide upon that. if we would be eligible to that, then it's certainly above 50%.

So my question is regarding the contract nature of Salzgitter. We assume that the short-term contract nature has supported the company in the increasing steel prices environment current year. So how do you see it going forward end of 2021 and next year?

So -- yes, I think we have, I would say, a pretty healthy contract structure in the flat steel business in general. I think it's 1/3 short term, it's roughly 1/3 midterm and 1/3 longer term. That has helped -- certainly helped us. The short-term part has helped us through this year. But longer term, of course, is a bit of a hedge then for a period where prices might go down. That -- I think that general structure will remain. There are no plans to change that.

Yes. And before that background, in the first half, as I showed to you, the profit beside Aurubis was driven by the trade business. I think it's reasonable to assume that for the second half of the year, having this high but constant level, not so much increasing dynamically as we had in the first half year that in the second half year, we will have the situation that earnings are driven by -- more driven by Flat Steel and by Plate business rather than by the trading business. So that we're more or less the other way around.

All right. Thank you. If there are no further questions in the room, I'd like to hand it over to Bonalle for the questions from the telephone conference.

[Operator Instructions] And the first question comes from Ingo Schachel from Commerzbank.

The first one would be on portfolio. And of course, we'll give you the time 6 months that you would like to have to come to a final decision on portfolio matters. But I think when you look -- when we look at Salzgitter past, of course, 2 very leading principles have always been a strong preference for remaining independent and a very strong openness to having a very high percentage of the company's value and at equity investment like Aurubis. Just in terms of your perspective as an outsider when you look at these situations and something that Aurubis -- Salzgitter is very successfully and differently from how other companies might have done it, do you agree with Salzgitter's current stance on equity investments and any independents? Or do you also need the 6 months to completely come up with your own basic philosophy of whether you think that's the right setup?

Yes. I'm sorry to basically give you the same answer as I have given to the colleagues in the room. I appreciate that you asked the question. And I think it's one of the questions that are relatively obvious if you look at Salzgitter from outside in. But now me being inside and no longer outside, I really would like to take the time to really sort of understand the position that we're in and why we are where we are and from there, develop that further. So if you bear with me for a couple of months, I would highly appreciate.

Sure. That's understood. But still, if I make the point of independent, for example, in the stand-alone entity, of course, one could have thought that at this point, you already know that maintaining the stand-alone structure and the independent is a very important strategic goal for you. So we could also interpret your openness the other way around that at this point you do not preclude concluding in, let's say, 6 months that may be tying up with another global player or European player could be the better option?

Well, look, what you need to keep in mind is that any corporation, be it an equity stake or be it sort of contractually needs to make sense for the company, right? And if there are situations arising where it would make sense for the company to consider those, we will certainly do that. But as it looks today and as it looks right now, those opportunities do not seem to be around and nothing that we pursue at that point. So again, let us do our homework, let us sort of have that discussion internally and then see how we best position Salzgitter to be successful in the '20s.

Okay. Sure. I know we're starting to give the climate and curious to hear the update then next year. then just a simple one on the dividend policy, I think, on the dividends, you've always had a philosophy of continuity without reflecting the cyclical swings in the company's earnings too much. But when it comes to the dividend for the fiscal year 2021, should we think of the 2018 dividend, let's say, a baseline for continuity and would you strive to match or exceed the old dividend level or continuity from previous levels with 2 years of a dividend break or will we see a complete reset of the dividend level following the dividend break over the last 2 years?

Yes. If it's okay for you, I'll answer this question. the intention of the Board of Salzgitter is to continue the dividend policy of the past. So before the background of the guidance with that profit this should be seen and reflected in the dividends we suggest to the Board and the general assembly.

Next question is from Rochus Brauneiser from Kepler Cheuvreux.

Yes, I have a follow-up question on SALCOS. I think this quarter, you pointed out the position on Wilhelmshavenn. Allow me maybe to push a little bit further on that. I think you said from a strategic point of view, this plant in Salzgitter would make much more sense because you have the ability of charging its on-site and probably also unions would like to hear that. So what would be from today's standpoint, the main advantage for doing this project in Wilhelmshavenn, is it because such big projects would get better public support. What -- and how do you think about DRI projects outside of Europe for the various reasons. Eventually, as you mentioned, Anglo as a corporation partner, why not doing this along Anglos value chain. That will be the first question.

Yes. I don't know whether I got the last part of the question. If you could repeat that, please.

The last part was why not considering an alternative project outside of Europe eventually along where Anglo has its value chain in terms of ore pellet production?

Okay. Well, thanks for the question. Coming back to the Wilhelmshaven, again, let me stress, we're not ruling out the Wilhelmshaven. I think there might be strategic angles to stay close to Wilhelmshaven, and that's why we're continuing to pursue that opportunity. We're continuing to engage with the other companies and the political stakeholders on site to make sure that this will be realized, yes, it might have a strategic angle to the company. When it comes to DRI sites, outside Europe, well, that is not something we have discussed internally so far. I wouldn't rule it out, but it needs to make sense to our needs of DRI and HBI and needs to make sense also from a commercial perspective, to us and to a potential partner. That's how we place it right now.

Okay. Got it. And then maybe a few operational questions. What I noticed in the Q2 reporting is that both crude steel production and steel shipments at strip steel were down quarter-on-quarter and below their capacity. I'm not sure why you're not using all your headroom in times when steel is obviously perceived as being cash.

Yes, I answered this question in this number on the key data slide, there the Hüttenwerke Krupp Mannesmann our joint venture in Duisburg. Those numbers are in there also. The situation is as follows: the HKM, as you may know, is partly used in the supply chain plate plant in Mülheim to EUROPIPE for the pipe business. And as I pointed out, the large diameter business is not so good at the time being. And therefore, we are they not fully using it. Beyond that, HKM is supplying partly to Salzgitter where we use all the opportunities we have, is delivering also to the Precision Tube business for the seamless tubes. But as I said, large diameter business is not so good at the time being.

Okay. But I guess, the production level was also lower just for strip steel without HKM at 107 million tons.

Yes, it has only some seasonal reasons at the beginning of June. We had some impact from a thunderstorm there, and we used some 50,000 metric tons, but it has nothing to do with the demand, but there was a thunderstorm, fifth of June that impacted the electrical supply there. And so we had some turbulences there, but we will catch up in the second half of the year.

Okay. Great for clarifying that. Can you remind us on your plans to restart the blast furnace #3 in November, I think this is still confirmed.

Yes, this is -- yes, definitely, that is confirmed. We are in preparation for that and that will happen in November.

So implicitly, this means that you're expecting that the allocation from HKM is being better absorbed because of the line?

Yes, yes.

And then you have the incremental usage of these tonnage?

Yes.

Is this linked to the Mercedes order?

No, no, no.

It's not linked to Mercedes.

Okay. On this Mercedes project, maybe can you give us a bit of a color how much volumes you're planning to ship in 2021 and also next year?

It is low volumes that we're going to ship into Mercedes. So it is really sort of a first step into that kind of business. So we don't expect big volumes to go into that for the time being. Of course, the intention is there, at least from our side, but what I also understand from Mercedes to potentially increase that, but for now low volumes.

Okay. Makes sense. And finally, on the trading business, I think the second quarter was even more impacted by winter gains in Q1. How should we think about Q3? If you look to some of your competitors, I think there's still the expectation of high windfall gains. Is this something you would see as well?

Trading business will contribute too in the second half of the year also significantly to the group, EBITDA that is for sure, but I would not assume that it is reasonable that we expect a level of Q2 across the dynamic, is a trading business. Let me put it in this way, is buying cheap and selling at higher prices. And we have now the expectation of a site movement of these high prices. So yes, we have significant margins but do not assume that we repeat this high profit of Q2 in the trade business.

Next question comes from Tristan Gresser from Exane BNP Paribas.

Just maybe following up on the volumes. Taking into consideration, you have this kind of the alleviation of 50,000 tons because of the lightning strike, what are your expectations for strip steel volumes in Q3? Do you think given market strength, do you expect less severe seasonality. And maybe with the restart of the blast furnace in Q4, if you could give some perspective also in general for Q4 and H2 in general, for volumes?

I don't know whether I got the question in full, but let me start and Burkhard, you might then please add to that. So first of all, as Burkhard alluded earlier, we expect the volumes that we lost there in beginning of June to be able to recoup them through the year. So we don't see a volume sort of decrease in total over the year. And I think what you see right now is that the pull from the market is still strong. We see prices sort of going side where it's on a high level, but we see sort of still a strong pull from the market, and that's also sort of one of the reasons why we started with the blast furnace C and we are very confident that we will be able to sort of to place the volume in the market. I don't know whether that was a question, it was difficult to understand, but I hope that I got it.

Yes, that's helpful. I was just wondering, usually, we see some negative seasonal impact in Q3 and some of your peers have noted that given market conditions are really good. Actually, we'll see less severe seasonality this year.

We see ahead of us a strong Q3. And as seen in the past, yes, in Q4, we had always and we will have this Q4 also some seasonal impact during holiday season, Christmas, et cetera, that happen this year also. But all the indicators is that we have a strong Q3. And also maybe might be the back one of the question also from the semiconductor issue we have here in the -- with the customers in the automotive industry. We do not see a significant impact negatively.

All right. That's helpful. If I may, just one more question on the guidance. The full year guidance was left unchanged. I was wondering what kind of price outlook does it incorporate in Europe, do you expect steel prices rather stable in H2 or some normalization at lower levels?

I mean, fluctuation around, for example, this is 1,100 level, yes, that is something that we see as quite normal. So expectation for the rest of the year and even for the first quarter of '22, yes, is that we see this kind of price level, because we see still a strong demand from the customers. We see shortage in the market. And therefore, we are confident that we see this price level with some fluctuations as we always have for the upcoming months.

All right. That's helpful. And maybe just one last question on working capital performance in Q2 was quite good. What are your expectations for the second half and maybe Q3 also given you have a restart of blast furnace that could impact maybe working capital flows. What should we expect for the second half of the year?

Yes. As I showed in the beginning, the working capital is driven self-understanding on the one side on the volume and on the price side of the raw material, yes? I assume that we have seen for the iron ore, and that is the predominant factor in supply that we have seen in May with a $233 per ton, the highest level at the time being, the iron ore price is softening, yes, we are in the range now $160, $175 or so. So that will help to some extent in the cash situation. Yes, coal is fluctuating much on a higher level, but anyhow, yes, from this side, at least, I do not see an upward trend, maybe somewhat down and somewhat softening, yes. So overall, yes, I would say that we make sidewards movement with the working capital.

The next question comes from Krishan Agarwal from Citi.

Most of them are already asked, but I already got the drop-down big picture question from Mr. Groebler. On the SALCOS, I mean, you've given a very impressive picture in terms of time line by 2025. Just a quick question on the backward integration. So which school of thought do you believe in terms of steelmaking companies sticking to steel production aspect of the greenfield or you are okay to participate on an equity basis to own and operate the hydrogen production part of the value chain as well.

I'm very sorry. It was very difficult to hear. Could you please repeat the question, it was impossible for me to grasp what you are after?

Yes, yes. I mean, my apology for the bad line. So that's a very big drop-down question on SALCOS. I mean do you believe in sticking to the steel production aspect of the green steel or you are okay in terms of participating with the equity or ownership in the hydrogen production part of the value chain?

If I got it right, your question is around SALCOS and whether we are -- whether we intend to own and operate the hydrogen part ourselves or whether we could think of a corporation and a partner in there in the equity side. Is that what your question?

Yes.

Okay. Well, thanks. Of course, sort of if you look at the situation today, we're buying our raw material, including also, to some extent, at least energy. And I would see hydrogen as part of that. Yes, hydrogen will be produced at least at the beginning on site in Salzgitter. However, I would at least be open to discuss a structure in which the electrolyzer would only be partly owned by us and perhaps operated by us or not. And we would talk about a hydrogen delivery contract into the core of our business, which then would be the DRI and the electric occurrence. Is that an answer to your question?

Yes, yes. Yes. Okay. And then on the broader strategic review aspects of it. I mean majority of your peers actually uses EBITDA as a key metric for guidance and the performance driven perspective while you are using EBIT. Is there any kind of a thought process or internal decision to switch over to EBITDA to align the Salzgitter with the sector?

Well, thanks for that question. That is part of the review that we're pursuing right now. And thanks for the comment. I'm listening very actively right now to the analyst side and the equity and debt side to understand sort of what is best suited for you guys to have a fair view on the company. And we certainly will take that in and discuss it internally what to -- whether to change and if so, in which direction to change.

I appreciate that. My final question is for Mr. Becker. If you could comment on your existing raw material hedging position for the next 6 to 12 months?

Sorry, the question -- the iron ore hedging for the next 12 months, that was the question, right?

Yes.

Yes. We do this hedging for iron ore and for the coal since we do several years now because we have now the high prices of iron ore, we do not hedge so much volume at the time being in the iron, on the iron ore side, we offer before. We do it on a high level and prices going down that makes no sense. So we do it in consistency with the past. But overall, the volume is lower. But yes, I can confirm overall, we are still benefiting from it. So the hedging contributes to some extent, but lower compared to the past to our EBIT.

And the next question comes from Patrick Mann from Bank of America.

Look, most of -- almost all of the questions have been asked. I mean, maybe just a follow-up on the last question there on the raw materials. You said you are still benefiting. Can you just make it clear, is that in the second quarter in Q2 that you benefited? Or are you talking about given declining iron ore prices, that's a net benefit going forward, even though you may have hedged some of your volume at a higher price? Or is it both?

No, our hedges contributed both Q1 and Q2. And if we today look on the market valuation of all our hedges for iron ore or coal, et cetera, are -- there will be a contribution also for the second half of the year and even some of the contracts are covering some volume in '22. But however, volume this year will around for the entire year, between EUR 20 million to EUR 30 million. So that is not so much, yes. The reason is clear. The high iron ore prices, yes, we hedged lower volume. So the contribution from that is lower, yes, because of lower volume.

Sure. Okay. That makes sense. And then maybe just 1 more on the free cash flow. And I think this links back to the previous question around working capital. I mean kind of suggesting that working capital would trend sideways in the second half of the year. But how should we think about cash generation for the year? Because it's been a very strong price environment and first half was not -- didn't generate much cash. So you would expect the second half to be more cash generative after prices stabilizes and maybe working capital unwinds a little bit. But now after your comments around sideways working capital, I'm a little bit unsure of that. Can you maybe just talk more around that?

Yes. Beyond the working capital, you have to take into account the CapEx situation. As you can learn from our numbers, the cash out for CapEx in the first half year was EUR 160 million. For the second, we expect around EUR 240 million, summing up to around EUR 400 million, yes. The reason is the cash out for the big projects Gunnar described, the heat treatment in Ilsenburg, and the hot annealing line in Salzgitter. And that because this EUR 240 million is around [indiscernible] depreciation will consume some of the cash we generate by EBIT in the second half of the year. And yes, compared to the past where we had losses. Unfortunately, we have to pay some taxes also.

Okay. And so will working capital decline in the second half of the year in absolute terms?

Yes.

The next question comes from Faisal Qureshi from Jefferies.

Most of my questions have been answered. I guess the one remaining question I had was in your outlook, you alluded to kind of stabilizing or better situation in the Plate Section business. So taking your guidance for between EUR 400 million to EUR 600 million into account, what -- in terms of the moving parts, what part of this if you could elaborate, comes from, let's say, improvement in -- incremental improvements in the trading business and Plate/Section steel and what part of it would be coming from the core Strip Steel business.

Yes. If I catch your question correctly. Your question is how much do Strip business on the one side and Plate and Section business on the other side, contribute to EBIT in the second half of the year. And in absolute terms, clearly, that will delivered by the Strip business. That has something to do that part of our Plate business in Mülheim is still not fully loaded. Again, Plate business, Mülheim is in the supply chain to large diameter pipe business. That is the reason that the Plate business -- yes, will be profitable in the second half, yes. But in absolute terms, Strip business will contribute much more compared to the Plate business.

Okay. And then considering that the trading business saw like a material kind of uplift because of the relative quarter-on-quarter increase in prices. Would you not expect -- I'm guessing you probably wouldn't expect that to recur in the second half of the year.

No, as I said, and so far, I repeat myself. The first half in the trade business, yes, that benefited from the price dynamics. So they're buying at a certain, let me say, cheaper level and then price dynamic upwards. And there from that -- from the stocks valued lower, yes, they generate margin and the profit that we do not expect for the second half in the same way because yes, we do expect the prices remaining on the level, yes, but not the same upward dynamic. So the trend is not the same. The level, is that what we see now, but we do not have the price dynamic. And therefore, the trading business, yes, will perform in the second half, but not on the same EBIT level as in the first half of the year.

Now we're coming to the next question is Christian Obst from Baader Bank.

Yes, and thank you for your patience. Two questions. One, Mr. Groebler is on your thoughts about contribution to cash to shareholders. If there is any, of course, what do you think? You prefer dividend payments? Or what do you think about shareholder -- share buybacks? And how do you like to handle the treasury shares. This is our first complex. Second one is a little bit about pipes and tubes. The entire hydrogen business, of course, also needs an additional infrastructure going forward. Do you so far see any rise in demand from building up these infrastructures. And are you as I repeat technically able to deliver products to transport hydrogen?

Going to start with the second one. Yes, we are technically able to deliver products that would be able to transport hydrogen. So far, I would say that we don't see a huge pickup in market when it comes to tubes and pipes for the hydrogen business. There are some positive signals and trends visible but so far, not big volumes that have been locked into the order book. So we're observing the market. We're trying to understand what the dynamics will be. But so far, not visible in the order book. And coming to your first question, again, let me -- I'm very sorry to not be able sort of to be firm on the answer. This is, of course, one of the questions we're asking ourselves in terms of what this company needs to do going forward with the transformation ahead, and part of that is, of course, how to finance the transformation. And your first question is exactly sort of pointing into that direction. Allow me to have that time to review and to then come back with a meaningful answer in the first quarter.

At the moment, there are no further questions. [Operator Instructions]. There are no further questions.

All right. Thank you very much, Mr. Gunnar, would you like to...

Yes, then let me sort of close this conference call. Much appreciated that you joined in. Thanks for all the questions. Again, my apologies for asking for a bit of patience, but I certainly sort of -- saw your acknowledgment that we need to do some proper work first and then happy to share the outcome of that in the months to come. Yes, I think with that, we close the call today. You all stay healthy and safe and hope to see you and hear you soon again. Thanks.

Thank you.