Salzgitter AG (SZG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our analyst conference. Only a brief introduction from my side. We released the full set numbers for the fiscal year '21 yesterday and presented it to the press. As you have seen, the response was quite promising. So I'm really looking forward to this event and to your questions as well. With me on the stage are Gunnar Groebler, our CEO; as well as Burkhard Becker, our CFO. In this presentation, Mr. Groebler will introduce our strategies Salzgitter 2030 and comment the progress we have made with implementation. Finally, he will explain our new strategy scorecard. Then Mr. Becker gives a deep dive into last year's financials and presents our outlook for the current year. Afterwards, we are looking forward to your questions. [Operator Instructions] And now I'd like to hand over to Gunnar Groebler.

Thank you very much. Ladies and gentlemen, I, too, would like to warmly welcome you to this analyst conference, my first one. And I wish I had a lighter intro to this event. But before we start with the conference, I think I need to draw your attention to more urgent matters. We are hugely concerned to witness the escalating war in the Ukraine, and we feel great solidarity with the people over there as well with our Ukraine and Russian colleagues. As Salzgitter AG, we were affected directly and indirectly by this war in different areas. First and foremost, the impact on our employees as well as partners, customers and suppliers in that region. We're also required to respond appropriately to sanctions and their consequences and deal with other repercussions on us as a company. We will elaborate more on that during this conference. We have set up a crisis management team in order to channel and process all the information we're getting, and this team reports to us as a management team on a daily basis so we can take appropriate actions in this extremely dynamic situation. The most important thing for us is to support our approximately 20 colleagues and their families in the Ukraine, and to ensure their safety to the best of our ability. We are in regular contact with them as we are also with our colleagues in Russia for the very same reason. As this war is a humanitarian catastrophe, right in the middle of Europe, spontaneous humanitarian aid activities have been launched in many group companies, often organized by the employees themselves as well as by local works councils. Trucks full of supplies have left for Ukraine in the past few days to provide the local population with the basic necessities. We would like to express our heartfelt gratitude to everyone who participated by making donations or organizing the transport of the supply. This is pure solidarity and something that makes us as a company very proud. The Salzgitter Group itself also helps to alleviate the distress of the people affected. We're, therefore, donating EUR 500,000 directly, and we're going one-step further, and match the donations of our employees euro for euro. We also maintain close contact with our steel colleagues in Germany and have said about exploring how we, as an industry, can support refugees coming into Germany and also our peers in the Ukraine right now and in the future as well. Finding the way forward is not an easy task, but we can only offer sustainable support if we continue with our business and private lives in the appropriate form and in doing so, contribute to protecting our freedom and our values. With that, let us please start the conference and turn to Salzgitter. Looking at the highlights and certainly things we're going to touch upon through this conference. We're looking at the best pretax profit in 13 years, which is a great result performed by our employees. So again, a big thank you to all of them. We have performed as a management team, a strategic review over the last couple of months, and I have already sort of hinted at that in the August meeting we had together. And we will sort of reveal and discuss the strategy and also the development and earnings targets that are connected to that. The clear focus is on sustainability. The clear focus is on us being the front runner in low CO2 steel production. We will not be able to do all of this alone, so we need partners to secure the success of the transformation. We're going to get to that as well. We're looking at energy and steel markets that are very dynamic right now, and you certainly have questions around that. So we have done prudent preparation around that to really also match the upcoming or the already happening changes there. Looking back at 2021, given that this was a very good year, we also propose a dividend of EUR 0.75 per share, which is actually the highest since 2008. And the guidance for 2022 remains unchanged. We have reviewed the guidance after the events in the Ukraine. And despite the most recent developments, we're firm on the guidance. Of course, we have to observe what is happening now in the Ukraine and how things are developing there and also the connected developments. But as I said, we remain confident with that guidance. Let me have a short look at the strategy, and then Burkhard Becker will talk about the economic development and financials. Before going into strategy, something that is very important to us, I would like to highlight, and that is occupational safety. We have still a way to go. I think we have seen good developments. We have still a way to go in order to reach our group by goal of 0 accidents and also 0 incidents. I think the past has shown that measures that have been taken are hinting in the right direction. I think 2020 is an exceptional year, given the corona crisis and the short time work that we have performed in most of our companies. But also 2021, it actually looks good in the line that you see there over in the last 5 years. But this is certainly not enough. We will continue our efforts there and ensure that everybody that enters the premises of Salzgitter also leaves them as safe and as healthy as they came in. And I will talk about that from now on, on each and every analyst conference and keep you updated on that. When we met last in August, I talked about the strategic review that we were performing, and I talked about 4 main categories that we were looking at. Strategy as such, who and what do we want to be by 2025 and 2030? What is the right portfolio for us to actually reach that strategy? How do we generate efficiency gains in order to support the transformation we're in and what are actually enablers we have to look at management structures, organization of the group, et cetera, to enable us and to help us in the transformation. This strategy review is finalized, and we have launched the strategy on 2nd of February this year. As you can see here, the response was pretty big and wild, both internally and externally. I appreciate talking to you as analysts that the format of the launch has not been sort of designed for analysts. And you certainly also appreciate that we have other stakeholders that we want to also reach with that launch of strategy, but perhaps also today is a good day then to talk about what you are actually interested in. And I hope at least with the presentation here, we're touching upon most of those points. We have designed the strategy. We have looked at the portfolio, and we will go through all these items here in a minute. The program, 150-plus is an efficiency program. We have reviewed the organization. We have put all the elements together in a strategic scorecard looking at 2025 and 2030. And we have also put SALCOS, the Salzgitter low carbon steelmaking program into the very core of the strategy. SALCOS is not the Salzgitter strategy, but it's certainly one of the very important pillars of our strategy. If we now look at the strategy in what we call our blueprint. Well, we put circularity in the very center of our strategy. So anything we do or everything we do in the strategy angle is connected to circularity. And why is that? And why, yes, why is that? This is because we believe that steel actually is a perfect material, raw material, but also usable material for the element of circularity. We are already today circling steel, but we can do much more and focus much more on that. So circularity is and will be in the future in the center of all of our activities. And through that, we want to become the strongest steel and technology group in Europe. What does that mean to be the strongest steel and technology group? Well, certainly, we're not talking size, I think we're humble enough to say that this is not about size, but it's certainly about trustworthiness and focus in terms of transition. It is around innovation and solution focus vis-a-vis our customers. It is about financial performance and robustness, and it is, last but certainly not least, about being employer of choice in our industry and our respective regions, both for existing employees, but also for employees to come. Front-runner in low to no CO2 steel production is certainly what we aim at with SALCOS, and we're going to get to that. When we talk about growth, we're talking about business that is geared towards sustainability, so -- and circularity. So anything we look at in terms of growth should add to the angle of circularity and add to the strategic ambition that we have here. And again, you find the word partners, and this is because we are clearly convinced we cannot do this all on our own. We have to actually look different in value chains, which are linear today and we will be in circles tomorrow. So being part of that circle and being part of initiating such circles is certainly something we want to do and we need to do this with partners. And we want to tackle those changes with courage and leaning positively. So the positive attitude towards change, seeing change as a chance is what we try to also internally put forward and take our people along. Every strategy should be framed by a vision and a mission. And for us, the vision is to pioneer for circular solutions. Again, the circularity is in there and pioneering should express that we want to be in the forefront of those solutions. And on the mission side, we're looking at partnering for transformation. Transformation will be one of the key elements of our industry and of Salzgitter in the years to come. And again, we will not do this on our own. We will have to partner and we want to partner with other companies, with others that are sort of having a similar look on the developments in the industry. As I said, circularity is in the very center of the strategy and the ambition is to become a market leader in the circular economy around steel. And the picture here illustrates how we look upon that. You see the steelmaking process on the upper right side and then how we're going to use steel and how that steel then also returns to what we do. And just to pick an example, you see the wind farms on the upper left side. Well, the wind industry is looking at reducing CO2 emissions, and this is predominantly Scope 3. So they're going to need green steel in order to be able to reduce their Scope 3, green steel is what we produce. But what we need in order to produce green steel is green electricity, which they provide. And at the end of a life cycle of a wind farm, we're looking at high-quality scrap that we then can also use and can be -- that can be recycled in our facilities to then produce new green steel. And you find other examples here on the pipe sectors but also on the technology side that illustrates that we are taking a holistic view on circular economy and logistic view on processes and product developments and how to combine them in an intelligent way. Looking at the portfolio, and I recall a couple of questions on the portfolio already in August. We have done quite some extensive work on the portfolio and what is the right portfolio for our strategy. As said, circular economy will be the guiding star also for the portfolio going forward. So we're going to grow in areas where we can strengthen our circular economy approach. One of those elements is expansion in closed loop flows of material and ensuring that most of the material stays as long as possible in the material cycle. You have seen the partnering that we announced with Volkswagen yesterday, we have been successful also with teaming up with BMW earlier, those corporations are exactly around those closed-loop flows, and there's more to come certainly. Customer-centric solutions. We won't do anything that is not sort of geared towards the customer. So customer-oriented solutions in growth segments is clear, how can we support our customers best in their transformation, in their desire to reduce CO2 footprint and to increase their circular economy themselves is something where we see growth potential, and we will certainly want to explore that. And digital business models will help us here. Wherever there's light, there's also a shadow. So we also looked at areas that might not have a direct angle to circular economy. And the prospects for large diameter pipes and the market around that is something that we question on the long term. Certainly, with the war in the Ukraine, we have to review that on a short-term perspective, but as we see it long term, there's still a question mark on a reasonable market and market position for us in Salzgitter in this large diameter pipe market. And that's also why we have, together with our joint venture partner, decided to explore options of selling the EUROPIPE Group. We haven't been active in the market yet, but we are exploring the options around that, certainly also have to take into account the recent developments, as I just said, but that's how we look upon this market. I mentioned the 150-plus program, which is the efficiency program that we have set up together with the strategy. Perhaps let me first say, we have up and running efficiency programs, FitStructure 2.0 and others. Those we will continue and follow through no doubt. And on top of that, we are looking at this 150-plus program. 150-plus is because we're looking at EUR 150 million to EUR 200 million profit improvement to be fully visible as of 2026. So we have now 4 years basically to -- 3.5 to find the measures and implement them so that we have the full effect in 2026. And it is a profitability improvement. So we're looking at margin improvement. We're looking, of course, at cost reduction, and we're looking at the product portfolio, how can we sort of reshuffle the product portfolio in a way that it supports profitability. And if you look at EUR 150 million to EUR 200 million, who will then contribute with what in this area? And what you see is a rough split of those EUR 150 million to EUR 200 million. As you can see, steel production is covering almost half of it. And then we have a larger chunk in the steel processing and then trading technology and the industry participations will also contribute to that. And we're as it looks today, very confident that those EUR 150 million to EUR 200 million will be reached. We have not sort of found all the activities yet to fully capture that. But the first months into that process are very promising. As we also look more deeply into interfaces between different businesses and certainly an area we haven't tackled that intensively in the past, so there's certainly something to gain there. On the Enabler side, let me just highlight that we have adopted a new group structure and get to that in a minute. And also given the clear focus on ESG coming from the financial market but also from other stakeholders. We have started to create a dedicated ESG team, a department reporting directly to me, to really tackle all the different angles of ESG and requirements, EU Taxonomy to be one of them and have a straightforward answer to all the requests that also you might have to us in this respect. As said, it's about to be built up or we're in the process of building it up. And I think we will be at full strength in this team by summer. So certainly ramping up our capabilities there through this year. The new scorecard I will present in a minute. Let me just quickly look at the new group structure. You all recall that we had 5 business units, we have reduced them to 4. What remains unchanged is business unit technology and business unit trading. Those are, as you know them from before. On the steel production and steel processing side, we have sort of streamlined the organization to now only look at 2 business units: steel production comprises of Flachstahl and Peiner Träger. Why is that? Because with SALCOS and with the transformation that we're undergoing there, the basic technology that we're using with electric arc furnace is the same in both units, and it makes sense then also from a synergy perspective to put them together. With DEUMU, we also have the scrap company that is providing us with a high-quality scrap and processing the scrap that we need, also then serving both units. And on the steel processing side, we're basically looking at all the pipe business, but also the plate business, put that together as we have a clear customer interface there and want to also provide value to the customer in a sort of -- in a different quality than we could have done so far. So this new group structure is valid as of April 1. And again, we believe that this is clearly supporting the strategy and it's also more streamlining the organization and more focusing the organization to what we need to deliver. The strategy, which is a group strategy has been broken down also to the different business areas or business units, excuse me. And what you see here is how we have looked upon strategy in the different pillars like circular economy profitability and growth for the different business units. Just highlighting on the steel production side, SALCOS, we have reviewed the time line of SALCOS, I'm going to get to that in a minute. It is a clear sort of focus area for steel production, of course, but also sort of the full utilization of the electric arc furnaces in Peiner and how we can integrate them in the overall SALCOS project is -- program is part of the strategy in steel production. And there are also things that you know from what we're already working on the expansion of products with high added value. I'm happy to also announce that the hot dip galvanizing line 3 that we're building right now will be operational as of end of Q2 as planned despite COVID, despite sort of some logistical issues that also we had to face as it looks now, we're still on time to deliver first products by end of Q2, which I'm actually very proud of. On the steel processing side, expanding our product portfolio in green markets. Hydrogen is a topic, of course. CCS, perhaps not that much in Germany, but certainly outside Germany, something that is -- the market is picking up. But also growing in the renewable sector, as you can see on the bottom of that page, here, especially in the wind area with plates, but also tubes. And I think our recent partnership that we announced with Ørsted that is hinting in that direction. For the 2 other business units, Trading. Let me highlight again here the renewable energy sector, establishing trading as a one-stop shop for steel components, both plate and tubes to customers that are in the renewable space and not only producers of turbines, but also producers of substations, offshore and onshore is something that we're targeting here. And on the technology side, it is about resource saving and CO2 reducing in our production chains, but also for our products, be more efficient there. And then also look at more innovative new products like the FRESH SAFE PET that we have started to further explore. Organic expansion, for example, in the nonfood filling business, but it should stay close to where we have our key competence in order not to sort of get too broad, but I think there are opportunities there as well. A short word on SALCOS given that this is so important in our strategy. As you can see here, and I might remind you that the initial plan to implement SALCOS was to start Stage 1 in 2027 and Stage 3 in 2045. Now we're looking at a much more compressed time line where basically cut out 12 years from -- in this transformation. So we already want to start with Stage 1 in late 2025 and end the full transformation SALCOS in 2023. The technical concept is there. The discussions with manufacturers of equipment are going very well, and I'm very confident that the business plan for Stage 1 will be robust enough by summer this year to also take an investment decision upon -- or on Stage 1. Certainly, we have to still work on policy and policymakers also when it comes to public funding. But I think we're on a good way there to also receive public funding, receive the signals we need to feel sufficiently comfortable by summer this year. When looking at SALCOS, there are a couple of controlling choke points that we want to enter into and to secure. You see the 5 ones on the left of this chart, so it's about scrap. We're going to need more scrap than we use today. Today, we're roughly processing 2 million tonnes, and we certainly want to step up to 3 million tonnes of high-quality scrap that we then need for both our facilities in Peiner and in Salzgitter. Green hydrogen, a DRI plant is only CO2 free if you use grain hydrogen. So even though we are pretty sure that we're going to start with natural gas. Our ambition is to switch to green hydrogen as quickly as it is commercially possible. Same goes for renewable energy. If you want to reduce the CO2 footprint, you need to feed, especially the electric arc furnace with green electricity. That's certainly something that we also look at. And again, Ørsted here is one of the partners we're discussing that with very intensively. On the pellet side, so input material, iron ore material. We are in good discussions to secure the volumes and DR-grade pallets that we're going to need for the DRI plant. And last but not least, you need the equipment. We can have whatever concept we want without getting access to the equipment, DRI and electric arc furnace, we were not going to be able to build this SALCOS project. So very happy that we have been able to secure a partner with Tenova to build the DRI plant here on site. And I mentioned already a couple of names, and that shows you how serious we are with the whole question of partnering in this transformation. And what you see here is just a snapshot of the last 2 months and the partners that we were able to convince about our strategy, our SALCOS project, and that want to chip in from their end to make us successful and ultimately also make them successful as well. It's Ørsted, it's BMW, it's Uniper, it's Tenova and it's Volkswagen. And they all address different control points, as just mentioned, Ørsted, certainly on the green electricity side and on scrap. BMW with a closed loop as well as [indiscernible] closed loop, so more on the scrap side. Uniper, an expert on gas, be it natural gas or be it hydrogen. And Tenova, as I mentioned, on the equipment side. So I think we're addressing those control points in a very good way already today. And we're certainly going to continue in this partnering efforts to make our strategy and the whole SALCOS program as robust as possible. All of this is summarized in what we call our strategic scorecard. And we're going to use that scorecard also as a communication tool towards you going forward. As you can see, the strategic directions, and for each strategic direction, you see the different relevant KPIs and what kind of target we set on ourselves for 2025 and 2030. So this will be our guiding star, if you want to say so, to ensure for ourselves, but also for you to hold us accountable on our strategy and what we want to accomplish here. Perhaps picking up on some of the elements, and certainly we're not going to go through all of it. We talked about green electricity. Our ambition is to be roughly at 50%, above 50% of green electricity by 2025 and 100% electricity sourced from green sources by 2030, which is an ambitious target given that we increase our electricity need. The more we implement electric arc furnaces. But still, we believe this is the right way to go, and it's certainly one of the focus areas that we already start today. We have been able to close a couple of smaller PPAs already in the last months. And we're observing the market very closely, and we are very active also in the market to secure more green electricity as we speak. And then perhaps things that you might be more interested in EBITDA margin. We see an EBITDA margin potential of 8% to 10% by 2025 and north of 10% by 2030. And the dividend yield that should be constantly across -- above 2% already 2025 and then all the way through. On the employee side, let me draw your attention to the very last line here. The steel industry is, I would say, a pretty conservative industry also in terms of diversity. And in order to also to put some emphasis on that, we have set ourselves a target on gender diversity, not only on the leadership end, but also on the non-tariff employees because those are basically the ones that will become leaders in the future. So that's why we have to start. And given the starting point that we look at today, I think those numbers for new hires in our company are quite ambitious, but we also mean it very, very seriously because if you want to be employer of choice also for the people to come, this is certainly something people look at. If you look at the result distribution, I talked about the 10% -- above 10% EBITDA margin. How does that then break down on the different business units? As you can see here, again, a bit less than 50% will come from steel production; and then steel processing, 20%; technology 15%, there's quite some potential there; trading with 10%, which I think is normal in that kind of business; and also the industrial participations where Aurubis is part of, whether then also contribute with 10%. With that, I would like to close for now. Happy to get your questions, but I would perhaps first let Burkhard Becker look into the economic development and into the financials. Thank you.

Yes. Thank you, Gunnar. The year 2021 ended up with earnings before taxes of EUR 706 million. This number was driven mainly by the good profit situation of flat steel, of trading and also of Aurubis and was mainly driven by an increase in margins. And the situation had been that in February, March 2021. After the first pandemic year of 2020, we saw an increase in demand and this against the supply was not so sufficient, so this leads -- led to quite better situation in the product prices. And we had the opportunity to increase margins as well. The reduction in workforce was based on the consequent execution of reduction under our programs in management and in plate. In addition, we sold a small activity in KHS U.S. with 70 employees. Looking on the quarter-by-quarter EBT, we see increasing EBTs. The operational result in Q4 2021 had been in line with that because you have to eliminate the burden of the impairment of EUR 243 million and adjusted, we stood in that quarter alone at EUR 338 million. Looking on the income statement, total output, EUR 10.3 billion, meaning an increase of EUR 3.4 billion. Cost of material here by EUR 2.2 billion higher means that we could increase our margin by EUR 1.2 billion. That is the driver of the increase of our EBT. Other operating income and other operating expenses, more or less balanced. We have significant changes. That is due to the fact that we have here in these lines impacts from currency fluctuations and from our hedging activities. Moreover, the other operating expense includes logistic costs, outside transport costs, et cetera, and by the higher volume in '21, this position increased also. The personnel expenses, plus of EUR 116 million. You remember that in 2020, we had, in the months from March to late summer, in all companies, a lot of short time working because of the higher volume, we did not see that in '21. So the personnel expenses increased. Moreover, due to the higher EBT we pay more bonus to our employees and not only to the management, but also to the shop floor people. Depreciation, EUR 200 million is in Mannesmann and the increase for the equity shareholding. This is in Aurubis on the one side, positively EUR 117 million and negatively in our participation EUROPIPE. Looking on the balance sheet, the noncurrent assets, the main impact here is that depreciation. We have here in the Mannesmann activities and on EUROPIPE, the investment last year was again mainly in Salzgitter Flachstahl as Gunnar Groebler mentioned, we have this hot dip galvanizing line. And this was the main impact here, and we have the increase in -- by the profit after taxes in Aurubis. Yes, current assets that is driven here by increase of inventories and trade receivables because of the increasing business and the pricing in '21. Equity, our equity increased by the profit. The pensions a little reduction because we calculate with the interest rate of 1.3% instead of 1.1% in 2020. And on the current liability side, we see that the trade receivables increased but not to the extent the increase in inventories and trade receivables. That has to do with the payment terms that are shorter in the trade payables than on the trade receivables. However, our cash and cash equivalents increased by EUR 120 million because of strong operating cash flow, cash flow of investments, minus EUR 362 million. The working capital increased by nearly EUR 800 million. That is quite a lot, but it's strictly related to the change of our business. So including cash flow from financial activities, our cash position strengthened by this EUR 120 million. We proposed a dividend of EUR 0.75 per share after 2 years without a dividend. That is the highest dividend payment since 2008. That means a cash out of around EUR 40 million. We will see after the decision in the general assembly in June. Yes, some words about the war in Ukraine, yes, we have a dramatic situation with the people, approximately 3 million refugees or more. Brutal war here, and we have several impacts on the sanction side, both in industrial related and also financial like Russian banks excluded from the SWIFT system. We have impacts on the steel industry, the supply chains are disturbed, especially with the impact of the automotive industry. And we have impact on the energy prices. Cyber-attacks, yes, we observed that very carefully, for the time being we are not impacted. Salzgitter has activities in Ukraine and in Russia, that is 17 people in Ukraine and 50 employees in Russia. We try to try the utmost to care about them. We try to keep contact to them, yes, we understand from what they tell us in how difficult situation they are. Salzgitter AG does not procure iron ore from Russia or Ukraine. We are, to some extent, not so significantly impacted by the shortage of nickel of the extreme price increases for nickel and to some extent, for some other alloys. We have seen a supply constraint in the automotive sector. For example, for the cables and wiring systems. Our trading had been about 50,000 metric tonnes per annum. So that is not so much. Our turnover -- and that is what I said. And the KHS business is below 1%. The exposure we see on the price risk for natural gas and electricity and shortages here. Part of our energy volume is hedged, but we are surely exposed to that. On the other side, we have chances, steel prices, especially in the heavy plate business increased. And yes, we have to observe all the activities on that, especially of how the safeguard will react to this situation. We have also observed the development of the raw material prices. Iron ore is fluctuating at the time being around $130, $150 per tonne, whereas coking coal, extremely went up to EUR 650 million, really a huge increase. We are lucky so far that we have some significant hedges on coking coal on a very comfortable level. Prices, here, the spot prices for Northern Europe reacted also. And these prices allow us to confirm our EBT profit EUR 600 million to EUR 750 million pretax based on a turnover volume of little under EUR 11 billion. And this means that [ ROCE ] '21 had been 16% can be repeated in this year. Yes, this all to be seen against restricted and limited visibility of the Ukraine crisis. But as Gunnar Groebler said, what we can't see. Yes, we have judged and confirm this guidance and forecast. Thank you very much.

Thank you. As announced, we are now starting the Q&A session. [Operator Instructions] Okay, we start with Carsten Riek.

Markus, Mr. Groebler, Mr. Becker. The first question I have is on the new structure. You mentioned that you integrate the long steel operation into the flat steel operations, calling it, I think steel production unit. While I understand it reduces the number of business units, it does not necessarily reduce the complexity of the business you operate as such. What is the rationale and given the different demand drivers? Will you provide volumes and profitability of the different businesses going forward as well to keep the level of transparency? And the second question related to it, could you share some light why -- you integrated Salzgitter Mannesmann Stahlservice, Bauelemente and [ platin ] in the steel production unit and not in the steel processing business unit. Second question would be CapEx on -- third question, CapEx guidance for SALCOS. Thank you very much for rehashing the strategy there. Is there already any guidance which you could give us with regard to what it will cost to actually transform your steel operations into green steel operations with regard to 2025 as well as 2030. Thank you very much.

Thank you, Carsten, for the question. So first of all, on the structure. The driver here was that the production -- the way of producing the steel is coming closer together with electric arc furnaces being the endpoint of it. So us driving the process through the electric arc furnace, both in Peiner and in Salzgitter and also using scrap and certainly also DRI pellets in both units was -- has been sort of the driver for it. And certainly, we will try to keep the transparency that you are used to also in the future. When it comes to the small activities, Europlatinen, SMS in that unit. Of course, you could say this is not really sort of in line with the overall idea. But given that the interfaces for those smaller activities, are very close to flat steel. We thought that ripping apart those synergies by putting those small entities into the other business unit would most probably be less advantageous than keeping them where they are accepting that it's not a 100% cut, as you rightly point out. On the SALCOS CapEx, we're still confident that the overall transformation will cost a mid-single digit billion euro number. Certainly, we also see sort of price developments on the CapEx side on our end. So it's certainly something we have to discuss with our suppliers for SALCOS Phase 1. We're talking -- yes, we're talking 1 billion plus.

All right. Then we still have the question open concerning volumes and profitability, again, transparency of the new steel business unit.

As I said, we will try to keep the transparency that you're used to. So we're not trying to decrease transparency here, certainly not.

Next one is Bastian from Deutsche Bank.

I've got a couple. Just maybe starting with your strategy. Can you maybe give us a bit more color on what you plan to do to get to your earnings improvements and sales growth targets. I understand that, that seems to be early stage, but maybe you can give us a bit more detail and also maybe say how far M&A is part of that again. That is my first question.

So it was a bit difficult to hear you. But if I got you right, you want to get more visibility on the earnings improvement, the 150-plus program. Is that correctly understood?

Precisely, yes. Absolutely.

Okay. The EUR 150 million to EUR 200 million that we try to increase profitability by 2026 is a bundle of different measures. It is, of course, looking into cost reduction, we're having a work stream clearly looking into procurement, both from a more structural perspective, but also into more bundling and a different approach towards suppliers here. So we expect some outcome there. We're looking into digitalization as a means to improve efficiency of those parts of equipment that are bottlenecks. And through that, increase the throughput of material in the entire value chain and debottleneck processes as much as we can and increase flexibility there. And thirdly, perhaps as an example, we're also looking into a different sales approach in terms of margin calculation and approach to customers, especially in the flat steel side. That's perhaps as an example, sort of what kind of measures are in there. So it's already pretty concrete whether M&A is -- well, M&A is part of the strategy, of course. We are screening the market. We are looking at interesting opportunities coming by. We also set up a, I would call it an M&A radar that is aligned with the strategy to look out for things that might be interesting for us. But also, as mentioned, to divest activities where we don't see sort of us being best owner going forward. I mentioned the large-diameter pipe business as one example. So it is not an explicit element of the 150-plus program but rather an element to implement the overall strategy.

And then just on the areas where you're interested. When you look at the active M&A, i.e., where you may be buying, do you look for more technology type of add-ons to support SALCOS, or is this something where you maybe just add on rather revenue growth or you basically close some of your gaps in the portfolio? Or do you look at things like scrap collection? Or so what are the areas of focus here?

Well, certainly, scrap is an area of focus. Let's see sort of -- we're not the only ones that are actually active in that market right now. So we need to also remain cool headed here and not go into deals that are ultimately not supporting the strategy or too expensive. On the other hand, we're also looking at adding to existing portfolio. For example, in the area of technology, they are smaller businesses that would add to the activities that we already have and fill gaps that we have in our product offerings or that could actually help us to improve certain technologies and products that we already have. So it is a wider range of activities. But yes, not in the first place major transactions that we look at, but rather really sort of focused transactions to improve our positions in the markets we're in.

Okay. Okay. Understood. And just staying on the topic of portfolio. Could you please talk about your involvement in Aurubis in terms of your circularity focus, there's clearly a very good fit, but then Aurubis obviously still only a financial investment, with no actual operational overlap. So is this something you want to hang on to? Or is this a case of where you basically keep all options open.

I've been waiting for that question. So thank you for that. Of course, sort of the whole question around circularity fits very well with Aurubis. I think if you look at their strategy and they have redone their strategy as well. And I think we're pretty close in terms of our view on circularity. So that adds to the picture. And if you look at the current development of Aurubis, we are very happy with that as well. So no plans short term at least to change that position.

Okay. And then my very last question, I promise. Just on your scorecard on your target for dividend yield. I guess that's generally something which is obviously problematic because ultimately, it makes your dividend yield and your whole policy very procyclical rather than actually adding stability. So how do you think about this in terms of like generating over the cycle returns to the investors because, obviously, where the cycle is very strong, you're going to pay a lot, the cycle is weak. You may not pay anything. But obviously, you just remove a little bit the option to basically add a bit more stability to the share price here. But I'm just curious how you think about it.

Well, the ambition, of course, is to create more stability in the annual earnings and through that also sort of counter the question that you had rightly so. So that's the ambition and that's also sort of where we -- with the strategy aim to, that we sort of create robustness in the overall business and are less affected by cycles than we perhaps have been in the past.

I have a few more, but I will get back into the queue.

Right. Next question is from Rochus Brauneiser, Kepler Cheuvreux.

I hope you can hear me. I have one general question on your steel production outlook. I think we are all seeing the kind of shortage concerns in the European market since the outbreak of the war in Ukraine. What does that situation now mean for you in terms of, a, reactivating the blast furnace C, which could help you to fill the void in the market. And you could -- to what extent would there be also a discussion at HKM stage to make the utmost out of this at least perceived steel shortage right now. That's the first question.

Thank you. Yes. Actually, on the reactivating blast furnace C, we have taken the decision to reactivate blast furnace C, and we intend to be back up and running in May. It takes a while to get the blast furnace fully operational. So May is what we look at right now for blast furnace C. In terms of increasing the slab production, we should, though, keep in mind that we also start to pile up slabs in order to then take blast furnace A out of operation next year as we have to do a major overhaul there. So there's a combination of both increasing slab production in order to serve the market, but also to pile the slabs that we're going to need then for the 100 days where blast furnace A will be out of operation. In terms of HKM, we're running HKM at the level we can right now. So we're sort of trying to sort of get any slab out of HKM possible.

Okay. Understood. I think in your outlook statement, you were still describing the planned recovery in terms of auto demand in 2022, like what the consensus view was before the war means a faster recovery after the summer in the second half. In light of what you see now, how -- what is the possibility -- in what direction what do you think this could change in any current environment?

So I don't know whether I fully got your question. Could you repeat?

I mean, I think the way you described the expected auto demand recovery is what the market consensus was before the outbreak of the war, i.e., that we see a gradual improvement in the first half and then probably more progressively after the summer in the second half. Not true whether this kind of fuel in the market is still holding firm now.

Okay. The way we look at it and what we sort of receive as feedback from our customers is that actually production is ramping up again. Slowly you might have seen Volkswagen going into the second shift. I think as of this week for the production of Golf in Wolfsburg. So things are developing to at least sort of the information we have. And I haven't heard anything that they are revising their targets for this year. So we are confident that the volumes that we have in our plans are still realistic.

Okay. Another question is I think you discussed a bit on your improvements in the range of EUR 150 million to EUR 200 million. At the same time, when I look at your Q4 statement, I think there have not been any incremental restructuring charges booked. How shall we think about potential for streamlining operations, workforce reduction. Is that part of this EUR 200 million? Would that kind of consideration come on top at some point in time?

Yes. Well, well spotted. The improvement program that we are setting up is not in first place a personnel reduction program. Hence, we have not sort of foreseen any restructuring costs for the EUR 150 million to EUR 200 million program.

Luke, you will be next.

Can you hear me clearly?

Yes.

Three from me. Firstly, just on SALCOS, if I may, and there's sort of a few sub questions within this. Broadly just on the decarbonization targets you previously put out there. I think you had 26% by 2026 and then 50% by 2030 and then obviously fully decarbonized by 2033. Can you just clarify whether that is at the group level or whether that is just at Flachstahl, just given now there's much more integration between the 2?

We're looking at group level here. But acknowledging that Flachstahl, of course, has the major part of it. So the big steps you're seeing here are coming from through the implementation of SALCOS. But we are looking at group level.

Okay. And then I suppose just on that given the relevance of Peiner and it's already EAF-based. Can you just talk through how you're thinking around DRI capacity. I think under SALCOS, it was sort of like a DRI for an EAF replacing a blast furnace. What additional capacity, if any, in DRI would you require to maintain the spec for your product qualities by sort of a 2030 time frame?

Well, what we're looking at right now, Luke, is, as you said, a DRI installation. For the first phase of SALCOS, this is roughly 2 million tonnes of steel, and then an additional one for Phase 2. And then we will certainly also have to have a look at the grades of -- to which extent we use DRI versus scrap. The scrap will -- the use of scrap will increase, as I said before. And in terms of quality of steel, we are already today able to produce roughly 90% of the different qualities through the EAF route. So -- and the remaining gap is something that we are looking with our R&D colleagues into as we speak. And you might know or you certainly know, you might recall that we are installing a micro DRI facility on site here in Salzgitter, which should be operational by summer this year that gives us DRI material to then do further R&D work on how to close the gap with a different percentage of DRI versus scrap in an EAF also as of 2026. So quality wise, we're not at all concerned to be able to deliver the qualities that our customers are used to and develop new qualities together with the customers with those 2 DRIs that we have planned together with scrap.

Okay. That's very clear. Then maybe just pivoting away to the raw material side. Can you just again remind us what the hedging profile is for iron ore and metallurgical coal? And I know your comment earlier on a sort of a significant amount of hedging on the net coal side. Just trying to get a sense to what extent or when these potential pricing effects may roll in into the P&L?

Yes. Our hedging is volume and price-wise dominantly for the Coke side. We have for the demand and necessity we have, here in Salzgitter, hedged a volume of around 20%. And this will give us a positive impact in 2022, around EUR 100 million to EUR 130 million.

Which is already included in the guidance.

Okay. Very clear. And very last question for me. Just on working capital. Obviously, I suppose, more around the blast furnace reline A next year. With the 100-day shutdown, can you maybe just talk to or maybe quantify to what extent or how much volume, how much working capital effect we should be building in this year ahead of that shutdown?

Yes, we will pile up around 50,000 to 70,000 metric tonnes until December '22.

All right. Nexus is David Varga.

Can you hear me?

Yes.

Okay. So I have 3 questions, if I may. The first one is on your secularity targets. Do you see any limit for the achievable share of circularity or closed-loop products. And secondly, you mentioned that the future of the large-diameter pipes is questionable. I was wondering if you could share your thoughts on HKM and how do you think about it? The JV setup and if it's a possibility to leave this. And lastly, on current trading, we have seen this massive surge in European steel prices in just a couple of weeks. Are you afraid or concerned of any reluctance on the customer side?

Well, thank you. On the circularity targets, I don't know whether I fully get what you mean with limits to it. Our ambition here is to circle or to drive as much material as possible in circle. There are no limits as to, for example, plastics, where you have to insert new plastics after sort of 10 rounds given that the structure is then getting weak. I don't think we see that on the iron side, on the steel side. So I would say, from that perspective, no limits to how far we can get with circularity on the steel side. On the future of large-diameter pipes, as said, we're hesitant when it comes to the long-term outlook. Certainly, we have to observe what now happens short term in -- especially in Europe, with the decoupling or the ambition at least to decouple from Russia energy-wise. So that might actually give some additional work and volume in those activities that we certainly -- if the prices are right, would cover. On the HKM side, well, I think it's publicly known that 1 of the 3 partners has decided to pursue other options when it comes to HKM. There is a long-term contract binding them and we don't have any reason to believe that they will not honor the contract. So -- but certainly, there is a necessity and we're doing so to discuss the future of HKM coming from the need of output from HKM then to basically calculate back what a future HKM could look like. So that's what we -- what we do right now, this is a process ongoing, but will certainly take a bit of time. And there is no need to rush into solutions there, but it is certainly on the table.

And the last question was if steel customers hesitate...

Yes, thanks. On the -- yes, of course, sort of we observed the price development on the steel side, both with positive eye given that sort of this is certainly helping us, but there are limits to it. So far, we have not seen larger customers canceling projects, but we're certainly getting into discussions around that. On the other hand, we also have to acknowledge and our customers acknowledge that as well that our input material also spikes in terms of prices and Burkhard Becker mentioned the coke coal being $650 plus per tonne, an all-time high, never seen before. So people acknowledge that as well. And -- but it is certainly also difficult for them to calculate their projects with a dynamic steel price development as we see it today. But so far, we haven't seen people actually canceling projects or reducing the contractual volume they have with us. On the contrary, actually, people are urgently looking especially for plate steel, which makes the dynamic development of prices.

Next is Christian Obst.

Can you hear me?

Yes.

Okay. Thank you. I'll take one question at a time. First, start again also with cycle. So these are quite ambitious plans. So you have to ramp up the facilities and you have to certify the products going forward. Are there any fines or penalties you have to pay if you are not able to deliver 2025, '26 to BMW or Volkswagen. This is the first question.

No.

Okay. Thank you. Then we have EUR 100 million plus in deferred taxes in just 1 quarter. Is this only related to increasing expectations for earnings?

Yes.

Very good. Then KHS guidance. you expect higher sales but an operating EBT below 2021. Can you give us some kind of an indication why this is the case?

Yes, the onetime impact in KHS is mainly from the sale of the small pouch activity in the United States with a product name [indiscernible]. And that was sold in '21, and that is the main impact there.

So the underlying operating profitability should increase, especially for the DESMA companies I would suppose.

Yes, operationally view in all 3 companies, KHS, DESMA, [ feeding ] and DESMA are same compared to '21 EBT is improving, yes. Also in KHS, by eliminating this onetime impact from selling [indiscernible]. The guidance is that KHS, especially will improve very nicely. And this is by a very high order backlog and an increase of the turnover in the service business.

Perfect. So then I have another question concerning HKM. So what is the underlying assumption for the impairment. So currently, of course, you say you can -- you try to get as much as the product out of HKM as possible. Nevertheless, you're discussing in the future, of course, everyone can accept that. But what is the underlying assumption for the impairment.

Yes, the underlying assumption of the impairment is twofold. The one is in Salzgitter, we have a concept for decarbonization whereas in HKM, we are still in discussion for that. And therefore, the burden of the CO2 certificate price impacts HKM more than it will do when we in Salzgitter invest here SALCOS. And the second is that the volume of HKM is under pressure for our share. You know from the 4.2 million tonnes of capacity, our share is EUR 1.1 million. And in the long run, the question how to fill this. At the time being, it's no problem. We can fill it by EUROPIPE orders, we can fill it for trade plates via Mannesmann Grobblech. We can fill it even to Ilsenburg onto Salzgitter Flachstahl but the question is in the long run. And yes, these are the 2 drivers, CO2 price and pressure how to fill capacity.

Perfect. And then I have a last one. If I have seen it right, Mr. Becker, you are responsible now going forward for the steel processing unit also. Where do you see the main charge to improve results in that area.

Yes. What we have to do is that we consequently execute the programs we have. You have to see, and that is also true not only for steel fabricating and Mannesmann and Ilsenburg but also for the whole group that from the running FitStructure 2.0 program, yes. We have still to go and to execute EUR 120 million, yes. And that is quite significant even and especially for those companies in that group that we bring all this program to an end. And we will see additional impacts from that in '22 and '23 that will be the main focus of the next 6 to 9 months in that division.

Okay. Thank you very much, and all the best for your long-term plans.

Well, thanks, Christian. Next one is Alain Gabriel.

My question is on your guidance, given that you provide divisional guidance in the annual report, we will need to assume a sharp decline in trading profits to hit your group guidance. But with steel prices where they are now rising to record highs, how conservative is your trading guidance? And also your strip steel business as well, given that your contract structure resets every quarter. And as an extension to that question, given that you guys reported EBT, are there any nonoperating items included in that guidance?

I got your last question. I have to admit, not the first. Maybe you have to repeat it. There are no nonoperational items in the guidance.

I guess I'll repeat the first part is with the steel prices in Europe pricing to record highs, how conservative is your trading profit guidance? And also, the same applies for strip steel given that your contracts reset every quarter. Thank you.

Let me take that one, Alain, I think what you look at is a balanced guidance where we have sort of taken into account the recent development that you just described, to the extent we see it, and also match that with the contracts that you also mentioned in the strip steel. So I think overall, what you look at is a balanced view taking into account all the visibility that we have from the different units, both trading but also strip steel and the others.

All right. Then it's David Varga again, please?

Yes. One follow-up on the guidance practices. Did you consider switching your guidance -- your key metrics on EBITDA rather than EBT, in particular, to tackle the impairments and stuff like that.

Yes, we did, and we decided to switch to EBITDA. And I think besides that we come visit latest in reporting June 2nd quarter.

Okay. Just to confirm, so you will switch to an EBITDA guidance by June?

Yes.

Also for this year? Okay.

All right, Christian, please?

A quick follow-up from my side as well. Just coming back to SALCOS and your whole decarbonization approach. So I have to say, I think you made really good progress when it comes to aligning your efforts with a couple of key strategic partners both on the upstream side, but then also obviously on the client side, where you signed a couple of agreements just on these agreements with your customers, how will you handle the pricing for the low CO2 steel here? And how far has this already been defined in the supply agreements with the likes of Volkswagen and BMW, et cetera?

I think there's a common understanding that green steel has a different price point than grey steel. And that those -- this different price point has to be reflected also in deliveries. There is no -- as of now there's no price point -- there's no delta defined in there, but there's this common understanding there.

Obst?

Yes. I'm not sure whether that has been tackled in the beginning of the presentation today. Regarding the blast furnace reline next year, have you quantified the good steel shortfall and the earnings impact associated to that.

Yes. In 2022, there is no shortfall.

No, in '23?

The budget is for the next year. But this year, there is no impact from that. It's only a CapEx issue because we have already some material here, and we will have some prepayments for the suppliers in a range of EUR 40 million to EUR 50 million in this year.

And what's the actual volume shortfall in '23 during the shutdown?

Sorry, Obst, could you repeat that question? It was difficult to understand that one.

Sorry for that. How long is this blast furnace reline is scheduled to take place, i.e., how much is the crude steel volume loss you're expecting? And what is the earnings impact of the whole measurement?

Because we now pile up for the sales volume, there will be no shortfall. It's only the expenses we have for the repair and relining of the furnace.

And on SALCOS more generally, now with natural gas prices going to the moon. How is that, in your view, altering the plans, how likely is it that this all been done by 2033 because the gap between the existing coal world to the gas world and the hydrogen world is obviously getting even bigger than it has been before the outbreak of the war.

Well, first of all, I think the gap between natural gas and hydrogen is closing as we speak through that development, whether that is good or bad, well, a different question. But the -- it is pretty clear to us, we are firm on performing SALCOS as I presented it here today. The team is working on that. We're trying to get everything together to take an investment decision by mid of this year. And then I think we also have to look a bit at the time line. We are looking now at a war in Ukraine, which is horrible and which has an impact, of course, on gas prices, that's what we see right now. With the implementation of SALCOS, we're talking end of 2025 where we would need more natural gas than we need today. So our assumption is that by then, we will have a more stable situation when it comes to natural gas. Hence, we're able to then make sort of a clear decision whether to switch on the DRI and the electric arc furnace. And you shouldn't forget, we still have the option to keep the blast furnace running for a bit longer in order to stabilize the situation. But the ambition is very clear to be -- to make it 100% clear. We are going to propose the transformation to the Board with the ambition mid this year. And then on the gas side, be it natural gas, be it hydrogen, I think the signals we're receiving right now also from German government are positive that latest by then, we should have a new stable situation.

All right. I do not see any raised hands anymore. So last call? 1, 2, 3, no? Then I really like to thank you for this lively discussions. And I'm looking forward to continuing this in the near future. Would you like to say some final words?

Just also thank you very much for your participation for all the questions. I think it's very relevant to us that you also understand what is interesting to you and to be even more to the point next time and learn ourselves. Hope that we have been sort of sufficiently to the point today. Any feedback on this session highly appreciated. And then you all stay safe. See you next time. Thank you.