Salzgitter AG (SZG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our analyst conference. With the publication of the financial results in 2022, we are closing the financial year last year, a year which was exceptional in many ways. We not only have implemented or started to implement our new strategy, we made huge progress when it comes to our decarbonization program SALCOS. And finally, it also was, from an economic standpoint, a quite successful year. And as always, Mr. Groebler and Mr. Becker will give you more granularity on this in the presentation. [Operator Instructions]

Thanks very much, Markus. Warm welcome also from my side. Happy to be here in Frankfurt with at least some participants live. I understand that it has been quite cumbersome to get here today. So yes, well, it's a bit unfortunate after COVID where we couldn't meet now with the strike, but good to see you guys here in person and also a warm welcome to everybody on screen. We wanted to run you through our, well, financial result of 2022 or the result of 2022 financial and also strategically and also give you a short view on 2023. But let me start with something that is very close to my heart, in which is occupational safety. As you know, also from last year, we had a strong focus on occupational safety, really sort of pushing that through all the way because there's a very deep belief that a company that is good on occupational safety is also good on processes, is good on their procedural performance. And of course, we also want everybody to be as healthy and as safe when leaving the workplace in the evening as they came into the facility in the morning. So what you see here is a good development from '21 to '22. The LTIF went down from 9.5% to 6.8%, which is good. Certainly, this is not good enough so we will continue to focus on health and safety and really try to get to 0 accident as far -- as quickly as possible, as this is, as said, a very important measurement for us. Looking at the key financial data of 2022 and Burkhard Becker will go into details here. I think there's just a couple of highlights that we mentioned. On the steel production, we were relatively flat, slightly below 2021, which is predominantly caused by the economic downturn or normalization, you could say, in the second half of the year, firstly, has been very good in terms of production and also in terms of results. As you can see here, the earnings before tax, EBT, is at EUR 1.25 billion, which is quite an achievement, second best result ever for Salzgitter AG when it comes to external, actually the record year of EUR 12.5 billion on sales. So a very successful year from a financial perspective but also very successful from a strategic perspective. As you might recall, we have launched the strategy, Salzgitter AG 2030, in February last year. Everything is centered around circularity so we really want to shape a company that is focused on circularity. Circular economy is at the very heart of the company. So we expanded business in closed-loop agreements with our customers, predominantly OEMs, automotive. We have pushed forward SALCOS, our transformational program to decarbonize the steel-making, go through that a bit more in detail later. And we also have been able to negotiate with our customers a couple of contracts for green steel delivery as of 2026. So I think all in all, the circularity is taking shape here. Not to forget our activities on the scrap side, both closed-loop I mentioned but also buying ourselves into more business on that end. Get also to that in a sec. On the profitability side, of course, we are focusing on profitability and Burkhard will show our program, Salzgitter Performance 2026, where we intend to deliver bottom line, EUR 150 million to EUR 200 million. I think we're on the higher end of it as it looks today. And certainly, we also focus on growth. We are focusing on solutions that are customer-oriented and as much as we can also on the digital side. So I think this all sums up the strategy that we have launched. And we're well beyond PowerPoint at this stage, really into the making really into operational development and delivery on that performance with the ambition to become the strongest steel and technology group by 2030. And strongest doesn't mean growth necessarily but really strongest in terms of financial performance and also the ability to transform both on the technical side but also on the people side. We have translated that strategy into a scorecard. You have seen that scorecard before. We now added on the very right column to just illustrate the progress. So the scorecard defines the KPIs clustered according to the strategic direction. And we see on the circa economy 3 elements where of SALCOS, the FID that we took in July last year, of course, is the most prominent one. But also on the scrap side, as I said, we have developed a strategy to sort of engage further into the scrap business. You know that we are already processing 2 million tonnes of scrap and we want to increase that by at least 50% by 2030, which is organically and inorganically. We have moved into the acquisition of PPAs, power purchase agreements. First deals closed last year, both on the longer term, which is more focused on offshore with, for example, ENBW, with the power plant He Dreiht which they took FID on last week. So we are also sort of getting certainty on the delivery of the electricity there, but also shorter term with Engie on a PPA which is onshore and solar for this year, for example. So making progress there. Performance 2026, I mentioned already, then let me just jump to the ESG management. We have set up an own organization focusing on ESG and coordinating the different strengths that we have in the company covering ESG. This team is reporting directly to me. And we have set up, I think, the structure also to be more transparent and better equipped to actively manage and work on ESG also going forward. And I think first results are promising when it comes to grades that we have -- that have been given to Salzgitter in 2022. SALCOS, as said, is one of the key pillars of our strategy. We have initiated SALCOS phase 1. As of summer last year, we have heavy-duty equipment on site, preparing the ground for us to then cast the first foundation this year for both the reduction plant but also the electric arc furnace. The total budget has now been released by the Supervisory Board in Thursday last week. We are looking at total investment volume of EUR 2.2 billion to EUR 2.4 billion, which is slightly above the expectation that we had in Q3 last year. And this is predominantly basically 2 effects. One is that we have increased the level of certainty through a much more detailed engineering that we have done. And secondly, it's also, of course, hit by inflation as everybody else has been hit by. What is promised, we have been able to attract our customers towards green steel and with secured volumes that will be delivered in 2026 and also with a premium, with a green premium. So already today, we have secured more than half of the volume that we're going to deliver in 2026 through long-term contracts with a green premium. On the regulatory side, I think it was good to see the EU agreement on the Carbon Border Adjustment Mechanism just prior to Christmas. This solution works well for Salzgitter as we have quite a few CO2 certificates on our balance sheet that we can use up until 2023. So it matches nicely with our decarbonization plan and derisks the entire path that we are on. Yes, that we're talking 30% of the current production volume for SALCOS phase 1, I think, is well known to you all. Just to give you a view on what does that actually mean and that we are really beyond PowerPoint at that point, what you see here is the site in Salzgitter and everything that is colored is the new equipment. Everything that is colored is an area where we are working on right now to get the electric arc furnace and the DRI plant ready by 2026. Electric arc furnace is ordered since October last year, and the DRI will follow within the next couple of weeks -- sorry, weeks rather than months. So I think also here, we are on the safe side when it comes to availability, but also as I said before, on the budgetary side. Work is ongoing, so everybody who has the chance to visit us, warmly welcome. You're going to see a lot of heavy equipment and trucks on site preparing the ground and making sure that we are ready to deliver as one of the first ones in Europe in 2026. We entered 2022 with a devastating war. Ukraine fights against -- sorry, Russia fights against Ukraine, which also led to a very intense debate in Europe, how do we ensure that we get actually sufficient energy supply into Europe, especially in natural gas? And we're happy and, to some extent, also proud that we have been able to be part of the solution here by delivering pipelines to the LNG terminals, both in Wilhelmshaven and also Brunsbüttel. And we have done that in actually less than 9 months from the order to the delivery on site, less than 9 months, which has been a huge work from our team to make that actually possible. We did that. We delivered on time, in the right quality. Of course, our pipelines are H2 ready, so they are also prepared for any hydrogen import that might come through those LNG terminals in the future. So those LNG terminals were operational at Wilhelmshaven at just around the New Year and Brunsbüttel following slightly after. As part of our H2 focus, we also initiated the construction of a completely new hydrogen laboratory for testing steel, different kinds of steel under H2 atmosphere. So we're also one of the leaders in -- or pioneers in building that kind of competence in the steel sector here in Europe. There is no other steel lab with that kind of sort of opportunities than what we are building right now here for Salzgitter Mannesmann Forschung on the site in Duisburg. I promised last time that we're going to review the portfolio and the leading criteria or the 2 leading criteria is actually here. One is, does it fit to circular economy? Does it fit to our circularity strategy? And are we best owner in that business going forward? And I'm happy to report back to you that we have made the first steps into a portfolio, more active portfolio management. We've been able to sell that Salzgitter Bauelemente to Falk, a Dutch company that is -- that has the core business in doing this kind of facades. So also from a strategic perspective, makes perfect sense for Salzgitter Bauelemente now to run under that flag. We're happy to continue to supply the steel to Salzgitter Bauelemente. So we're still sort of seeing them as customers but we are not any longer responsible for that business and strategically, it makes more sense to work with Falk than with us. For us, it always has been a niche market, and here, it is really the core of the core. On the scrap side, as I said before, we have also been active here, Must GmbH, which is now Harzer Schrott and Recycling, has been acquired in February. It's a smaller scrap collector in the area of Salzgitter so we are moving further down the value chain in scrap, recycling scrap collecting, which makes sense and is a good addition to the closed-loop activities that we have initiated and that we have also broadened in 2022. And certainly, it's not the last target that we're looking at to further broaden our scrap activity, not only in the region but in general. You might have heard, at least it was public, that we are in negotiations with Borusan Mannesmann Pipe on the sale of Berg Europipe Holding in the U.S. It's a pipe business that we own through Europipe in the U.S. A nonbinding letter of intent has been signed and we're in progress negotiations on a potential sale there. Let's see how far we get, but certainly we get more clarity in Q2 on that. And also in that regard, we have said in the past that we, together with the other co-owner Dillinger, look at Europipe GmbH in Mülheim, where they're also there, there might be a better fit strategically with another owner than the 2 of us. What is important, though, for us is that the plate feed through MGB, our daughter company in Mülheim remains or is at least sorted in any kind of disposal of Europipe. But that is to be seen. It's early in the process but it's still on the radar, as promised earlier. Looking back at 2022, I think we're also happy and proud to get the operational readiness for our hot dip galvanizing line 3. It was the intent and the strategic target to strengthen our position in the premium segment, especially for high and high-strength steel grades the operational readiness is there since October. Since then, we have been able to ramp up in a good manner. And it's very good to see the very positive customer response on our product that we are able to deliver there. So we are really sort of now one of the premium producer of HDG in Europe with, I would say, the most modern line that you can find in Europe right now. So that's, I think, a good endpoint to that investment and now going into the operational phase with, as said, good customer response. With that, let me have a short look at the development per business unit. Looking at steel production. Of course, we have seen the steel prices rising sharply in the beginning of 2022 due to the war with a flattening out and declining in the second half of that year. We have been able to partly compensate cost increases that we have seen on the raw material side, iron ore and coal as well as energy, through active hedging, not everything, but at least a good part of it, all in all leading to a record result for the Flachstahl GmbH. As part of steel production, we are also looking at Peiner for long products, which also had a very good year also basically through a very good first half of the year. Second half has been a bit lower in terms of production, and that was predominantly due to also the construction business slowing down. Looking at 2023, where we have started into 2023 better than expected, given that we have seen a price recovery on strip steel. We have seen prices at EUR 700 million and below per tonne of strip steel. Now we're back to EUR 850 million. We also see a pickup from the automotive business. So that is a positive signal into 2023, and the recession as such has been weaker than what we expected in November last year. However, looking at Peiner demand for long products, still low. Let's see how that develops also with construction activities picking up after the winter is over. Especially on the private sector, we see a very slow start into the year. On the institutional construction, it's slightly better, but there's certainly a bit of headroom for us going forward. All in all, a slightly positive view into 2023. Looking at steel processing. I would split that in 2. One is on the plate side. Demand and prices have been very, very good in '22. And we also see a good demand into '23. Q1 has been a demand side a good one. And also here, we have adjusted our outlook for the year compared to November last year, where it has been much more gloomy. I think right now, we're seeing good ask on plate. Steel tubes, a good market for larger diameter, given the -- all the activities on the energy side, as we just -- as I just mentioned. A bit more respective on the precision tube segment, and stainless remains challenging also for 2023. It has been a challenging year for them in 2022, given that they are very much dependent on automotive and automotive has been weak. So a challenging market environment also for precision and stainless into 2023 but also with potential upside. Let's see how the market -- OEM market develops there. Trading, of course, very strong in the first half of 2022, record year -- a record half year for trading and then sort of flattening out second half, we all, I think, have seen that. Right now, it is a, yes, a slow start into the year, also given that some of our customers still have their stock relatively well filled. So we expect the first quarter to be below expectation but still with the normalization for the rest of the year so that we sort of are not too negative on the trading side for 2023. What is positive is the international trading started well into '23 and also with a good outlook for the remainder of the year. Technology, last but certainly not least, has been record high order intake for KHS in '22 and also a good carryover of order intake into '23. We're well booked through the entire year '23, so -- and with healthy margins so that is certainly good. And also good to see that our efficiency growth program, KHS Future, is now sort of kicking in with operational performance improvements and further broadening of our -- how do you say that? Sorry, lost the word. Rolling of the manufacturing to the other sites globally, which moves us closer to the customers and also helped us in the situation with COVID where churning so cumbersome to really sort of deliver our projects there on time, in budget to our customers. So that is certainly a good development. And also for the two DESMA companies, difficult year, 2022, I think in line with the industry trend on machinery, now anticipating a recovery in 2023, so that should also look relatively good. So with all that, we anticipate very strong results for technology compared to former years' record result. We are riding here, so strong result for technology in '23. And I think there, we then also can prove the case that technology helps to flatten out the fluctuation that we see on the steel side. So all in all, I would say a stable and robust start into '23, a more positive outlook than what we have seen or what we have anticipated in November last year, and with some element of chance in there also for the future now as you followed well yourselves. Energy price is dropping significantly. Gas was close to [ 40% ] this morning, so that also, of course, helps us to stabilize our cost position. I'll stop here for a second and hand over to Burkhard Becker for the financial deep dive. Thank you.

Yes. Thank you very much, Gunnar. Having a short look on the P&L income statement, total output had been EUR 12.8 billion, deducting the cost of material leads us to EUR 600 million increase compared to '21 in the operating gross margin. Personnel expenses only influenced by tariffs and bonuses, no additional restructuring costs here. In this line, depreciation is lower than '21. Reason is mainly that we, in '21, had extra impairment of the assets in HKM in Duisburg. Other operating income and other operating expenses increased heavily, but they are blown up by currency fluctuations in the U.S. dollar. If we net these items, that leads nearly to 0. That is only something that has to do with accountings that we have to show these impacts gross and separately. Result from Aurubis, EUR 156 million here in this line result from investments. And so this comes to the EUR 1.25 billion. Look on the assets of our balance sheet. Fixed assets increased EUR 149 million. Nearly EUR 100 million of this is caused by expenses, cash out for SALCOS. At equity, I mentioned Aurubis. And in the current assets, I come back to this increase price driven in the inventory straight receivables working capital. The increase in the line cash and cash equivalents have to be seen in combination with the line on the next page, that is the financial liabilities. If we net this, you come to the conclusion that our net financial debt are nearly the same in end of '21 and '22, meaning EUR 550 million. Equity and liabilities. Equity, 2 sources of the increase of nearly EUR 1.5 billion, first, result after taxes; and second, the change in the pension liabilities. We applied end of '21 an interest rate of 1.3%. In end of '22, 4.1%, and this means an impact on the pensions of minus [ EUR 500 million ] and including deferred taxes, this increases the equity. Yes, the financial liabilities, I mentioned, corresponding to cash. Yes. Cash flow statement. If we look on the last line, end of December, we managed to increase our cash and cash equivalents to nearly EUR 1 billion despite the significant increase of higher working capital, driven by cash flow from operating activities and other changes in cash. Here, look on working capital from Q4 2020 to Q4 '22. End of 2020, yes, this number has to be seen before the background of the corona pandemic, where business was slow, then increased in '21, mainly price-driven and an additional price impact to the peak of end of the second -- of the first half year '22 to nearly EUR 4 billion. We managed it to bring it down, yes, both price-wise and volume-wise to EUR 3.6 billion. And we expect for '23, that's in the same range of EUR 350 million to EUR 400 million, we can reduce working capital again. Investment and depreciation, comparing the cash out for fixed asset, CapEx compared to scheduled depreciation. Since 2019, the amount spent for CapEx had been higher than scheduled depreciation. Reason that in the years 2019 to '22 was the investment we did in the plate business in Ilsenburg and hot galvanizing line 3 in Salzgitter. And in '22, the mentioned nearly EUR 100 million CapEx for SALCOS. Performance 2026. We, so to say, closed the program fee structure 2.0 and set up a new program with an impact of nearly EUR 200 million. That is happening in all of our companies. It is not only cost, it is also increasing market share. It is also complex actions to improve logistics in Salzgitter and it's also challenging programs in IT. So we started this new program impact in '22, small EUR 10 million, but step by step, it will be growing to this nearly EUR 200 million. For 2022, we asked for approving a dividend of EUR 1 per share after 2 years with 0 in 2019 and 2020 and EUR 0.75 for '21, we think that this EUR 1 is fairly balancing the interest of the shareholders on the one side for getting cash, and on the other hand, are securing the future, the cash needs for the SALCOS program.

Thank you, Burkhard. Then let's perhaps close the presentation with a bit of an outlook on guidance. I think it's important to have a look at some of the indices, be it raw materials, be it energy. I think we have seen increasing prices on the raw materials since late last year. Now flattening out a bit, a bit unclear in which direction it will actually will go. It depends also a bit on the global situation, for example, with China. But we're actively also in the discussion how to hedge positions and reduce the risk we might actually see here. On the energy side, it's good to see that energy has come down significantly after the peak that we have seen in 2022. As said, gas is at roughly EUR 40 today so that is almost in a pre-corona space. Electricity, not that far off yet but also sort of with some positive signals to further normalize. On top of that, we are looking at the political debate, and we're engaging in the political debate for industry electricity prices as we have it in Germany right now. That debate, not the price yet, but the debate, which should also further derisk the position on that end. And as you -- as I mentioned already, as you heard, we are also looking at PPAs to further stabilize energy costs and derisk from developments that we have seen in 2022. So I think on a good path there. Looking at steel prices. Also here, good development since late Q4 last year with a stabilization and a slight increase. If you look at the prices on the left side, Northern Europe, flat steel, hot-rolled coil that has been south of EUR 700 million is now at EUR 850 million. And also the plate steel is developing nicely with also the necessary spread in between the 2, so that's good. Globally, we see U.S. picking up quite a bit also, I would say, in the light of the Inflation Reduction Act and the expectations there. Europe is, in that respect, a bit more modest but robust. And China, well, it depends a bit on how they further will now position themselves in further capacity increase or not. With that, with all what we have just talked about brings us to a management guidance for the year 2023, where we see sales in the region of EUR 13 billion, which is roughly in line with what we have seen in '22 slightly up vis-a-vis 2022 but in line. EBITDA at EUR 750 million, EUR 850 million, EBT at EUR 300 million to EUR 400 million, which is, of course, below 2022 but with a normalizing year, quite normal. On top of that, we shouldn't forget that we're also investing heavily in SALCOS, which is, of course, then reflected in the -- in those numbers as well and also will be reflected in the ROCE numbers, given that the capital employed will increase, whereas the returns on that capital will only kick in as of 2026 when those assets are operational. So hence, the ROCE will be below previous year level, which is, as said, quite a normal development from coming from a very strong year into a more normalized year. So in a nutshell, we have launched the strategy. We are sort of -- I think we could show first successes in 2022, and we are continuing with that also into 2023. SALCOS made a major step forward in '22, and we will move into further implementation in this year. We got the approval for the full funds first phase. We have the funding -- the public funding in place, EUR 1 billion. We are the first company in Europe to get also the EU notification on that -- those funds. So we're ahead of the pack when it comes to really getting financial stability also from that end. The hot-dip galvanizing line 3 is in -- is up and running and delivers nicely to the customer needs, and we can actually provide a good margin project there to our customers. We talked about the result in 2022. It is a good one. Dividend proposal, Burkhard Becker talked about. And yes, as said, we are normalizing in 2023 but it's going to be a solid year 2023 unless something extraordinary kicks in as we have seen it last year, which we certainly don't hope but also cannot foresee. So in that sense, I would say, we closed the year 2022 with a big smile and a big thank you to our teams, and we have still a slight smile on our face when we look into '23. I'll stop here and happy to take any questions. Thank you.

All right. Thank you very much. Let's switch to Q&A now. Please let me know by hand lifting or virtual hand lifting if you want to ask a question. And we start here in the room with Rochus Brauneiser.

Maybe can we start a little bit more about demand? I think you already mentioned the positive trends in the industry since Q4. When it comes to demand, how much of restocking are you seeing at the moment? We have seen this very sharp destocking process. And the improvement since the start of the year, is this just the end of the destocking or is there restocking as well? And what are the trends on the underlying demand side? Any major shift you're perceiving compared to maybe 3 months ago?

Well, thank you. On the -- yes, certainly, we see an element of restocking. I think the stockholdings have come down naturally, I would say, vis-a-vis the end of the year. But this is -- it's, at least from what we see, especially on the flat side, not only a restocking but also a fundamental pickup in the market. Slightly different, I would say, on the plate side. Plate is -- has started very strong into the year and this is well beyond restocking. So we are very sort of positive on the plate side.

And as an add on, how does that fit to the kind of high level concerns we are seeing in the market over the last couple of weeks, months, on the weakening of the economy at the expense of this high and rising interest rates? The banking crisis, which is raising some concerns about credit. What do you hear? What do you see when you talk to your customers?

Well, I would say those kind of concerns predominantly on the long side, so Peiner, given that this is predominantly construction and very sensitive to interest rate increases, so there, we have seen already in the second half of last year that especially for private construction, the private construction sector went significantly down. As mentioned, not that much on the institutional side. But there, we certainly have to see how that picks up again through the year. Right now, no clear signal that there's a strong pickup on that market side yet. No. But the rest, I would say, is as described, with a robust positive view into 2023, certainly much better than what we have seen in late '22.

And one other topic. I think previously, you said you're restarting blast furnace number C ahead of the bigger reline of one of the bigger furnaces. What is the current plan for blast furnace C for the time after the reline? Is the intention to keep it going or was this just a standby situation during the reline?

First of all, you're right. We are restarting blast furnace C now in May, prior to the relining of blast furnace A. So that is, I would say, normal procedure in order to sort of keep the volume streams stable through that relining. We keep the flexibility to decide what to do with blast furnace C once we -- the relining is done and is operational again. I think it's too early to say and the market is not that visible longer term to make a firm decision now and we don't need to.

Okay. Then Andrew Jones from UBS. Next, please.

A few questions for me. First of all, just on green premiums. You mentioned that some of these contracts, I think you said 50% of the SALCOS volumes have been locked up and pre-agreed pricing. Can you just give us an idea for how much those are in general, maybe as a percentage or something fairly vague if you can't give specifics? And then just on CapEx phasing. I'm curious with the higher CapEx budget for SALCOS, what does that mean for guidance for this year and for the sort of 2024 to 2026 average per year in total? And finally just on the pension, the number went up quite considerably in 4Q after declining through most of the year when rates were going up. I'm curious to understand why the pension number on the balance sheet's increased so much.

Okay. Let me start with the green premium and then Burkhard will take over. So we see a considerable interest from our customers to buy and to secure green steel volumes. Why is that? That is predominantly because they have own CO2 reduction targets. And one way of getting there is to reduce their Scope 3 emissions, which is then, to some extent, also our product, our steel. So that's the logic why there is an interest for green steel. And yes, we see a green premium which is triple-digit euro per tonne of steel. I think that gives you at least a view on how high it is. And it's both -- it's pre secured volume and it's also fixed contracts. In some countries, we even have a prepayment of that premium. So cash in already now for volume to be delivered in 2026. And on CapEx, I'll hand over to Burkhard.

Yes. For CapEx, SALCOS, we assume that in the years '23 to '26, the net amount -- net, meaning the total volume, the EUR 2.2 billion, EUR 2.3 billion minus the subsidy is quite evenly spread over the years. So for '23, we expect between EUR 280 million and EUR 300 million net. And that is more or less, we have a peak of nearly EUR 400 million in '24, and then it's declining. And we can assume that we cash in the subsidies pro rata, so that is what we assume from the information we have. With regards to pension, I understand your question comparing September '22 to year-end '22. You have to see the following. After or according to German law, excuse me that I do not have the English expression, the [Foreign Language]. That is the regulation, how you have to adjust for inflation, the pension scheme, we have an impact from '23 on. And beyond that, we have various parameters. For example, one is the so-called salary trend, Gehalts trend in Germany, to calculate the pensions according to IFRS, yes? And because of the inflation, we had to adjust this. And we did not do that end of September, yes? And because these two impacts had not been incorporated end of September, we had the additional impact beyond that, what I described, interest rates for pension calculation.

The next one is Alain Gabriel from Morgan Stanley, please.

A couple of questions from my side. Firstly, on SALCOS. Given there has been a significant increase on the budget versus what you initially mentioned, what can give you confidence that there will not be any or it's unlikely to have a similar increase in the future? And what parts of these projects have been locked in? And what parts are still pending or exposed to price escalations? That's one. And on SALCOS as well, do you think there is scope for a commensurate increase in the government grants, given that your budget has also increased for Phase 1? And I'll stop here.

Well, thank you. We have a high level of confidence that with that budget increase that we have now shown to the Board and has been approved, we will be able to deliver SALCOS Phase 1. Why is that? Because we have put a lot of effort into detailed engineerings over the summer and the winter up until now. We have locked-in prices for some of the electric arc furnace, which is already signed contract. And also on the electrical side, we have been signing the contracts. So there is stability in the budget there. And as said, on the DRI facility, we're expecting to sign the contract within the next couple of weeks. So also there, we have quite some stability on budget. So all in all, I would say the budget or the stability on the overall project has increased a lot since we took the FID in July. Hence, I'm pretty convinced that this is the budget that we're going to see for SALCOS Phase I. And also, I don't want to go to the Board a second time to ask for money for that phase. So that's -- but that's my personal thing. On the -- on your question whether we could go back to the state to ask for more support given the cost increase, well, yes, that's, of course, always possible. But you know yourself that this might be a very difficult question to ask our government, and we also would have to go back to Brussels as well to get the notification. And that is certainly a process with a certain level of risk where we should be very sort of careful in opening that box. What we're doing, though, is to have a very active discussion on OpEx support. So we have a notification of EUR 1 billion in CapEx. There is a notification also of a certain amount in OpEx that has already been notified in Brussels. So that is the discussion we're having right now on top of the so-called Klimaschutzverträge, the carbon contracts for difference for that transformation that the Ministry of Economy is discussing with the industry right now. So there is certainly a good probability that we're going to get OpEx support for SALCOS Phase I, hence, further help from the state. Not so much on CapEx, I would doubt that.

Now Xin Wang from BNP, I guess. Can't hear you.

Can you hear me now?

Yes. The line is really bad. Xin, we can't hear you, maybe we move to Patrick and try again later.

Gentlemen, can you hear me okay?

Yes.

In terms of the OpEx, you were talking about the assistance from OpEx. Can you maybe give us an idea of the current cost per tonne difference between sort of SALCOS steel and the low-carbon steel and your kind of traditional method of making it today, even if it's just kind of ballpark figures. How to think about the green premium, the emission cost and then the OpEx difference? Or maybe another way of asking that question is at what sort of carbon price does it become breakeven between the 2 methods of making the steel? And then I've got a pretty boring final question, just on the working capital development. I did see in the annual report, you said you do expect a bit of a release from inventory this year and your net financial position to improve. Could you maybe just give us a little more detail around that?

Thank you, Patrick. Let me start with your question around SALCOS. Well, first of all, I don't know what the support level will be for our peers because none of them has actually been granted a support yet. They have put forward their application, as far as I know. I don't know the applications. I'm not supposed to know them. But none of them has been notified by EU. Hence, none of them -- for none of them, we actually know what the support level is. We have read numbers in the paper when we're talking our colleagues from Duisburg, that there is a certain level that the federal state of Northern Westphalia wants to support. But whether that will be notified in the end by EU, we don't know. So that's a bit difficult to say what the difference actually will be. And of course, there should be a difference given that every company runs their model with slightly different assumptions, I would at least assume. So on the OpEx support or your question on breakeven between gray and green. Well, that's a tricky question, Patrick, because we don't know. There are a couple of factors that actually play in here. The carbon price, for sure, is one. But also energy prices like hydrogen/natural gas, electricity versus coal as well, as you said, the OpEx support that you would get. And the OpEx support would, primarily if you follow the lines of the Ministry of Economy, would be to match the current cost of energy with the future price of hydrogen, so that -- to sort of to match that price differential here. That's the logic that they are following without having seen the latest way of calculating that. So we are, from our side, very optimistic or very sure, not only optimistic, but sure, that with our current price model, with the green premium that we're seeing in the market, with the fact that we have locked in CO2 certificates at a very low price compared to the market right now, we have a very positive business case for our investment into SALCOS. And we're competitive vis-a-vis gray steel and CO2 intensive steel. On the other one, the...

Working capital.

Working capital.

Yes. If I got your question correctly, you'd like to have more color on actions and assumptions with respect to 2023. For '23, again, we see and budget that we can decrease working capital by a number -- by an amount of, again, EUR 400 million. What are the sources for that? One is the large diameter pipe business that is now generating cash from the projects that are in the order backlog, and that will positively impact both Europipe, 50% for us and Mannesmann Grobblech -- yes, Mannesmann Grobblech in the supply chain and to some, but that is a smaller impact on Mannesmann Grossrohr. Secondly, we will having finished and completed the relining of the furnace C in September or so. And we have stocked to overcome the shortage of capacity during May to September by slabs on the ground. And after September, there will be a release of around EUR 100 million working capital. And the third source will be the international trading. Gunnar told in his report that international trading is again picking up again. And traditionally, this business is one that, net-wise, generates cash. So by these three main sources, we are confident to make this happen.

Okay. Great. Then Bastian, it's your turn now.

Just maybe starting off again with the decarbonization again. Of course, if we look at the CapEx expansion of about like 30% to 40% versus the original budget, that is really quite considerable and technically would cut off probably about 1/3 of your ROI target. Now during the next two phases, you will basically spend, I think, another 1.5x of what you're planning to spend on Phase 1 now. How convinced are you about taking those investments today without any additional funding support if the EU would not be willing to clear any further support here? That is my first question.

Well, of course, we have looked at the entire program when starting it also from a financial perspective. And as of today, we're very confident that we can run the entire program up until 2023. We will discuss internally in the course of this year and perhaps the beginning of next year what is the right sequence of events in terms of that decarbonization. And through that, also steer a bit the CapEx deployment over time. But all in all, there's no ifs and buts about it that given a certain level of return and not -- certainly not as we have seen it in 2022, but rather normalized one, we're able to finance the full SALCOS program without any extensive capital measures.

But maybe coming back actually more to the rate and loss spending. So if you look at the current economics of building Phase 2 before Phase 1, you received another EUR 1 billion budget. Would those economics still add up for you as well in the current environment with CapEx where they are?

First of all, we need to see whether CapEx stays where it is or whether there is a change also there because, of course, we have seen also an overheated market in that respect in the steel sector in the second half. And we still see that, whether that remains the same way to be seen. But as far as we look upon the business case, it still adds up. Otherwise, we wouldn't do it.

Okay. Then just coming back on the policy front. So you talked about the OpEx-related measures. I guess there also has been still some talk about another incentive basically for your customers and for the end markets. Can you maybe just update us on this front? Because my understanding is that so far, at least if we look, for example, at the auto sector as one of your key end markets, the incentive to take out emissions is still very much on the engine front rather than on the unit and the chassis. So maybe you could just give us a quick update on what you see happening here.

Yes, happy to. There's an ongoing discussion on political level whether they -- we should implement, what I call, green markets, so markets that should target the green transition upfront. The automotive market is one of the ones discussed, but also the public procurement area is certainly one where we're going to see -- at least that's my expectation, we're going to see sort of more push towards a CO2-reduced procurement. Hence, also then creating more space for green products like green steel. So I think that's a shift we should be able to see in 2023. First signs of that are visible, but too early to sort of to really put a pinpoint at a specific market. But clearly, that discussion is on.

Okay. Great. Then a very last question, if I may, just moving over to your guidance. You seem to be assuming a very significant drop in the contributions from your production segment. While a lot of the spot trends, at least, seem to be pretty favorable, to say the least, and I guess on the other side, then you still have the relief in energy costs as well, which is significant. So could you maybe be a bit more specific on what you expect in terms of EBITDA for the first quarter in that business or EBIT, whatever you prefer? That would be very helpful.

Yes. EBIT or EBITDA first quarter will come mainly from plate business, will come from flat steel business, will not come from trading and, to some extent, from technology. And I'm confident that, yes, it's nearly touching 3-digit euro number or slightly above. Positive, of course.

For the group. And if we zoom in on the production unit, obviously, where you did like EUR 124 million stand-alone, I think, pretax in the last quarter. So logically, that would obviously imply that you're basically dropping like almost close to breakeven in that business. Is that correct?

In which business?

In -- I think in production because, technically, [indiscernible] like almost impossible to get to those levels.

We have to see that the order backlog, the order backlog end of December in steel production and in Peiner Träger had still a quite good margin incorporated in combination with the lower energy prices, significantly -- a significant contribution for EBITDA will come from steel production and from plates business.

Bastian, never over promise but over deliver. I guess next is Christian Obst from Baader Bank.

Yes. Hello. Do you hear me?

Yes, loud and clear.

Okay. Perfect. First, I'd like to have a question concerning your financing going forward. If I calculate it right, your gross debt is approximately EUR 1.7 billion so far, of which EUR 1.2 billion is approximately current. So -- and the average coupon on that, if I calculate with the EUR 80 million interest expenses, is a 4.6% coupon. So what do you expect going forward to pay for your interest expenses? And do you think about the entire financing also of SALCOS going forward to reorganize your debt structure a little bit towards more capital market instruments? This is the first question.

Yes. With respect to financing of SALCOS Phase 1, everything is under assumptions. We assume that in the next 2, 3 years, we have an environment that we can achieve for '23. What we announced here is guidance and that '24 and '25 EBIT or EBITDA is not lower than that. Second, if we achieve then the reduction of working capital, the EUR 400 million plus in '23, we have the second source for covering the cash out. That leads us to the statement that for Phase 1, we can finance this from internal sources without restructuring significantly our debt structure. For Phase 2 or 3, this is not yet figured out precisely. So we're not -- today, we are not really able to answer this question, what will happen in '27.

I would actually add to that, if I may. We still have sort of the basket of options. We need to -- those options off the table to [ find one ], then use them also for Phase 2. I think that's the way I, at least, would look at it. There's optionality for us in the game for Phase 2 and 3.

Of course. In addition on that, am I right that most of the current refinancing is -- has a flexible coupon in this time of rising interest rates?

No, that is not true. With Phase 1, we have the Schuldscheindarlehen that is fixed to be refinanced in '24. And for swaps on CO2, it's fixed. Yes, it's a fixed rate of 4.8%. But what you have to see is also that for the time being, as I showed on one of my slides, we have quite significant amount of cash available, and we are available for this to earn an interest rate of around 2%. So the net impact is not 4.8% or 5% or so, it's more in the range of 3%.

Okay. And then last question on this cash item. How much cash do you need for your current business? So for the normal operating business.

You mean for normal CapEx? Normal CapEx...

No, no, not the CapEx. But you need a certain cash to run the business operationally, so EUR 300 million, EUR 400 million whatsoever.

Yes. As back up, so to say, as back up, this is around EUR 300 million to EUR 400 million. Yes.

Okay. And you stated a little bit concerning demand, so it's better when it comes to the auto industry, everything around the plate industry. And on the lower end, you see the Peiner. Do you see that there's something which can go even worse when it comes to Peiner so that you're going into some kind of to not fully employ all the employees during the entire year, some kind of short working?

Well, we have the flexibility in Peiner to do that if necessary, and we have also shown that we are willing to do that already last year. And certainly, that option is there. If there's a shortage in demand on long, we certainly will also consider to go into short-term working conditions there in Peiner. Yes. We're used to that.

Thank you, Christian. Let's check with Xin if the line is better now.

Hey, guys. Can you hear me better now?

Yes.

Great. Okay. So a lot of my questions have been answered. If I can just follow up on steel processing. So in your guidance, you guided for earnings to be significantly higher year-on-year. Could you discuss in more detail what's driving this? Is it structural going forward? That's my first question.

So okay, good. Sorry, I didn't get -- quite got it. So Markus had to fill me in here. Sorry. On the steel processing side, I think what we're seeing here is a clear improvement on the plate side, which is part of the steel processing. And here, we see a much better outlook for the year 2023 than we have seen in Q4 last year. So that's where sort of the main impact on steel processing comes from. And whether that is structurally, the market will tell, but this is what we see right now.

Okay. Great. And if I can just follow up on net working capital. I think Patrick already asked a question on full year 2023. But could you maybe give us more color on whether the blast furnace C restart and blast furnace A reline will alter the normal seasonality of working capital investment and relief in each quarter?

If I got your question correctly, the amount we have to spend for relining the big furnace is around EUR 100 million. And because of some material, we had expenditures in '22. The cash out for '23 is around EUR 75 million to EUR 80 million, and I would assume that the bulk of it hits us in the second quarter.

Okay. Great. And my last quick one is still on net financial position. You guided for marginal improvement in 2023. Can we interpret marginal to be 2% to 5%, like in your earnings guidance?

Our guidance for the net financial position is that in -- for December '23, so year-to-year, we will keep it in the range of EUR 550 million to EUR 600 million net financial debt, assuming the inflow of reduction in working capital, as I said, and that the gross cash out for SALCOS expenditure is pro rata covered by the grants. But that is an important assumption. If that is not true, yes, then this does not fit because we assume around EUR 200 million to EUR 250 million cash in from grants in '23.

And perhaps to add on that, which is in line with the current discussion we're having with the ministry. So this is not all our assumption, but this assumption is based on the information we have received from the ministry, so how that netting out of our investments will happen. It will happen on a quarterly basis, so that should work out, as Burkhard described.

Next question is from Patrick Mann, Bank of America. Okay. Then we have [ Moses ] as next, please.

So I just wanted to clarify on your total CapEx expectations moving forward. Have there been any revisions to your normalized base CapEx expectations? And obviously, with the conversion from blast furnace to EAF, could you please maybe give us a steer on what your expectations are from the savings in SIB CapEx, let's say, beyond 2026, 2030? And then my final question was just how should we assess your overall capital allocation framework, given materially higher CapEx. Specifically, your appetite for shareholder returns. Is a 3.5% dividend yield something we can expect going forward?

Well, on the CapEx, if I -- could you please -- maybe it was difficult for me to follow. Could you please repeat your question on the -- of your first question on CapEx? Then I can certainly give you a straight answer to that.

Yes. It was just on the expectations for normalized base CapEx. Have there been revisions to that? And could there be potential savings in that base CapEx post the conversion to EAF capacity from 2026?

Yes, sure. Of course, we will sort of -- we have revised the CapEx plan in terms of what kind of CapEx we're going to spend on the existing blast furnaces and adjusted that to the lifetime of those, right? So if you take the relining of blast furnace A, this is the last relining we're going to do in Salzgitter. There won't be any further relining in any of the blast furnaces after that. So we're adjusting the CapEx there. And when it comes to CapEx post 2026, once the first blast furnace is taken out of operation, of course, the overall CapEx per ton of steel produced should -- at least for the first year should go down, given that we're now then running on completely new equipment. So -- but there is no reduction plan on other assets when it comes to CapEx. We will keep the level of CapEx for the -- for maintaining our asset base as productive as it is today on the same level. I don't know whether that answers your question, [ Moses ], but this is how I interpret that.

Yes, that's a good answer. And then the other one, just shareholder returns.

Well, as we have said in the scorecard and then showed that earlier in the presentation, we're targeting a dividend yield of above 2%, which is sort of doable and also feasible and meaningful also when it comes to shareholder returns. This year, we are above 3.5%, which also reflects a very good year, and our ambition also to give shareholders a fair share of that good year. Long term, the ambition is above 2%.

Okay. Then we continue with [ Maxime ] from Oddo BHF. [ Maxime ], we cannot hear you. Unfortunately, it's not working. I suggest we continue. And either it's working or you just write me an e-mail, and then I will read out loud. [ Andrew ], then it's your turn.

Yes. Thanks again for the explanation on some of this stuff. I just wanted to just clarify a couple of things. On the green premium, again, I mean, you talked about 3 digits a tonne sort of figure. Clearly, I'd imagine it would vary depending on the amount of CO2 reduction. So for example, if you use a lot of natural gas in the DRI initially, presumably, the premium will be lower and obviously then higher if you've got a largely hydrogen produced product. I mean is that the sort of structure these contracts will all typically take? And how -- I mean could you give us an idea as to how that sort of relationship works? And then just on -- I think a few people asked about sort of CapEx overall. Can we just have a guidance number for 2023 and in total CapEx for the group, including your base CapEx, plus any usage or project CapEx sort of hanging over from last year plus SALCOS? What's the total number? And what does sort of typical 2024 to 2026 profile look like in total?

Yes. Starting with the CapEx, so normalized level of CapEx is roughly EUR 300 million. This year, '23, on top, this is the EUR 100 million that Burkhard just mentioned on the relining blast furnace A. And you should also add the roughly EUR 300 million net for SALCOS. That's the level of CapEx in broad terms. On the green premium, look, we are looking at a situation 2026, where we will only be able to deliver a certain amount of hydrogen into the process, given that we are not connected to any pipeline by '26 yet. So what we're discussing with our customers is the level of CO2 that we can reduce by using natural gas with some hydrogen that we feed in through our 100-megawatt electrolyzer that we're building ourselves, and that will also reduce the amount of natural gas necessary. So that's the CO2 level that we're discussing with our customers. Of course, the customers are interested to further reduce the CO2 footprint, but the contractual discussions we're having is on that CO2 basis that I just described. And the more we reduce the CO2 footprint, of course, the more it's going to be attractive to our customers. Hence, the premium might further increase. But we're not there yet.

No, that's clear. So you're saying it's a 3-digit number for the CO2 reduction. Probably about 60%, something like that, for sort of natural gas.

Yes.

Clear. Thank you.

Good. Thanks. Can we go to [ Maxime ] again, please? And unfortunately -- can't unfortunately hear you, Maxime. So it's still not working.

Can you write your question in the chat?

Are there any questions -- further question in the room? Yes?

To the increased budget for SALCOS 1, can you split the delta, which is about EUR 300 million, EUR 400 million? How much of that was attributable to cost inflation? Was it like 50-50 between planning and cost inflation or what?

Yes. I think, broad terms, it's roughly 50-50 that we're going to see. And it's 50% inflation and then 50% including contingency on the scope side, yes, and planning side. Yes.

Okay. Xin, do you have an additional question? Or is it just -- [ Maxime ], are you still typing?

Yes. Can you hear me now perhaps?

Yes. It's much better. Thanks.

Okay. Sorry for that. No, I had just a question first on the precision tubes and the stainless tubes businesses. Can you confirm whether or not they were profitable last year and whether you expect them to be profitable this year? That would be my first question.

Yes. The stainless steel business, Mannesmann Stainless Tubes, was unprofitable last year in the number included as an impairment. The operational result was in 1 digit minus in euro amount. And yes, we can confirm that a lot of actions are on the way and project business, especially in the United States, is picking up so that we are confident to reach a profitable situation in '23, yes.

So this is the case for the two businesses, precision tube...

Yes. Precision tubes, yes. Also -- and this comes mainly from some -- from all the actions they took. They reduced head count quite heavily during the last two and three years and worked on pricing schemes towards the customers and with some support of lower energy prices, yes. For Mannesmann precision tubes, also, we expect profitable situation in '23. Yes.

Yes. And second question is regarding the shutdown of your blast furnace A. So will you be able to fully offset the impact on production given that blast furnace C is much smaller?

Yes. That's a fair question, [ Maxime ]. And the answer -- the straight answer is yes because we have already started to pile up slabs through second half of last year. So we are not fully dependent on blast furnace C, but we have been piling up slabs to be able to fully operate our downstream business once blast furnace A is out of operation. And thank you, Burkhard. And on top, we, of course, have access to HKM, which also is able to provide slabs also for Salzgitter. So that will do.

Okay. And just a clarification. So you said profits for Q1 would be close to EUR 300 million figure. So were you talking about EBITDA or EBIT earlier, Mr. Becker?

Sorry. I didn't get that question, [ Maxime ], please.

He talked about EBIT, and it was in the range of EUR 100 million.

Okay. EBIT, okay. Close to EUR 100 million for Q1. Okay. That's it.

Are there any further questions? Xin, are you still there?

Yes. I want to ask a quick question on technology, please. So because you also guided for significant improvement year-on-year, again, what's driving this? And how do you view the normalized EBITDA or EBITDA margin level for this segment? And do you expect significant contribution from technology to your EUR 100 million EBIT improvement?

As to the last question, yes, certainly, technology is part of the group, hence, also delivering to the EUR 150 million to EUR 200 million bottom line improvement. So they also have their fair share of that in the program. And then on technology, I think what we have seen is a very strong order intake in 2022, driven not at least through our Plasmax technology, where we're able to sell quite a few lines in the Asian and Indian market with good margins and also the improvement on the aftersales market or after sales business. So that considerably improves the profitability of KHS and delivers the result as shown. Does that answer your question, Xin?

Do you think this -- yes, partly. Do you think this is -- this strong order intake is continuing?

As far as we see it right now, it is continuing. We are already booking now orders for the 2024 market period. So we don't see a cutoff on the order intake yet, and there are no signals in the market that there's any kind of cutoff. So we are expecting a continued good order intake also for the months to come, yes.

Okay. Since we have answered all the questions, just the last one in the room? No? Then thank you for your interest today. Thank you for the lively discussions. See you next time, and stay with us. Thanks.

Thank you very much, guys. Thanks. Bye.