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Edited Transcript of KCO.DE earnings conference call or presentation 4-May-20 12:30pm GMT

Q1 2020 Kloeckner & Co SE Earnings Call

Duisburg May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Kloeckner & Co SE earnings conference call or presentation Monday, May 4, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Felix Schmitz

Klöckner & Co SE - Head of IR, Internal Communications & Sustainability

* George John Ganem

Klöckner & Co SE - CEO of Americas, COO & Member of Management Board

* Gisbert Rühl

Klöckner & Co SE - Chairman of Management Board & CEO

* Oliver Falk

Klöckner & Co SE - CFO & Member of Management Board

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Conference Call Participants

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* Alan Henri Spence

Jefferies LLC, Research Division - Equity Analyst

* Carsten Riek

Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

* Matthias Pfeifenberger

Deutsche Bank AG, Research Division - Research Analyst

* Rochus Brauneiser

Kepler Cheuvreux, Research Division - Head of Steel Research

* Seth R. Rosenfeld

Exane BNP Paribas, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to today's Q1 2020 conference of Klöckner & Co SE. For your information, this conference is being recorded.

At this time, I would like to turn the call over to your host today, Mr. Felix Schmitz. Please go ahead, sir.

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Felix Schmitz, Klöckner & Co SE - Head of IR, Internal Communications & Sustainability [2]

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Yes. Thank you, and welcome to our Q1 analysts and investors conference call. With me today are our CEO, Gisbert Rühl; our CFO, Oliver Falk; and our Board member, John Ganem. After the presentation, we are open for your questions.

With that, I'd like to hand over to Gisbert Rühl.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [3]

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Yes. Hello, everybody, here from our officers in Duisburg. I don't know where you are, maybe some of you are still in your home office. But we started this year -- or this week with about 30% of our employees in the holding being in the office and another 70% is still at home.

Yes, with this, let's flip directly to Slide 4. As usual, our details for the first quarter. Shipments in the first quarter were significantly lower compared to last year, not because of corona. Corona -- the corona impact was only visible for the last 2 weeks of March, but shipments were anyhow relatively weak because of automotive in Europe; and machinery, mechanical engineering in Europe; and the energy sector in the U.S. was also relatively weak. And with this, shipments we're 8.9% below last year.

Sales were even more pronounced, lower by 14.9% because of the lower price level. Gross profit was EUR 285 million, came in slightly below last year despite the significant lower volumes because the gross profit margin went up by nearly 2 percentage points from 17.8% to 19.7%.

EBITDA came in with EUR 21 million, significantly lower compared to the first quarter last year. We had here especially also windfall losses in the U.S., which we mitigated to a certain extent by low OpEx. We reduced, for instance, our employees by already 500 people compared to last year. But okay, with this, we were not able to mitigate this effect completely of lower volume and windfall losses.

On the other hand, cash flow was much better with minus EUR 97 million compared to EUR 229 million last year. And with this, we were also able to reduce financial debt significantly from EUR 820 million to EUR 563 million. Also, good news that our digital sales increased further up to now 35%, coming from 20.7% in the first quarter last year and 31.5% by the end of last year.

So with this, let's flip to the next slide. Yes, we see the COVID-19 pandemic not only as a burden, it is, of course, currently and going forward for the next, at least, couple of weeks, if not months a burden, but we're seeing this pandemic also as a huge opportunity. So we were, on the one side, impacted, of course, because of the slump in demand, which was down about 30% in April. That is probably not as weak as the market because we were able to switch to home office more or less immediately. And with this, 90% of our branches are still operating. We currently see -- don't see that demand is worsening. But of course, visibility is on the lower -- on the other hand, relatively low. We had -- we will have negative impact, of course, of this 30% slump in demand. It will have, of course, a negative impact to our results, but we will also see strong positive cash flow, not only in the second quarter, also for the full year. And with this, we don't need any help from our government other than short-term work, which we have. In some countries, we don't need any further help.

So this is the impact on the one side. And the opportunity on the other side is that we will implement further restructuring measures. This goes hand-in-hand also with our progress in digitalization. We will be able, for instance, to consolidate in France smaller branches by switching the customers completely to online business and serving them, the customer, out of larger branches. So we don't need that many small sites in various regions in France anymore. We can here clearly consolidate them to larger sites.

Yes, then we're also accelerating currently the speed of our digital transformation in a way that, going forward, we want to completely or nearly completely automate our core processes, which are the purchasing process on the one side and then the sales process on the other side. And this is a significant change because with this, we not -- we're clearly changing the business model of Klöckner from a traditional business model to platform business model. And this also means that we need much less personnel in our core processes. We need other qualifications going forward, but not in our core processes, especially when they are finally completely automated. We expect that we can reduce our employees or our staff already this year by more than 1,000 employees, and we will implement this in the next couple of months.

We also increased investments in XOM materials, our, yes, purely virtual platform, because here, demand from suppliers to be onboarded is clearly increasing. We currently have here a backlog because we are not able to onboard all suppliers right in time after we -- having signed the contract with them. And therefore, we need to invest in additional capacity. So what we can clearly say, and I'll come back to this in a minute, XOM is scaling. Yes, and this makes us so positive in the end. And this is why we're saying, look, this is a burden on the one side to this pandemic, but on the other side, we expect to really come very strong out of this crisis by being then also on the Klöckner side, a more platform-oriented -- very lean, very efficient platform-oriented business model.

Next slide. Here, you're seeing the progress we made on the kloeckner.i and Klöckner side and on the XOM side. So first of all, we increased, as mentioned, our digital sales. So we're seeing clearly more demand on the digital side. And digitalization will get a significant push through this because of this pandemic. This is -- not only we are saying this, I think, meanwhile, this is really common sense that digitalization and artificial intelligence will play a much larger role after the crises than before. And then, yes, we were able and -- able to switch. With our digital capabilities we have, we were able to switch everywhere, in every country, more or less, immediately to home office. And with this, we were able to keep our branches up and running. We only had to close some in France. But other than that, all our branches are still operational.

We also made progress by implementing the Kloeckner Assistant. This is one of the very important tools to, yes, -- for our transformation because this is the tool for the whole RFQ and sales process, which we will automate with the Kloeckner Assistant. We have implemented, since the beginning of the year, this Assistant in Germany, Netherlands, U.S.A. and Becker Stahl. And we will now roll out this system in Austria, Belgium and U.K. in the second quarter. 500 customers are already reached with the Assistant, and this number is increasing rapidly.

And then on the other side, we are also scaling XOM. So on the sales side, we have now already 70 suppliers under contract, more than 25,000 products are live, more than 1,000 customers are registered. Our eShop is a big success. Outokumpu, VDM and other companies are using our vShop -- eShop for their online business. And this is really -- this is a leading eShop for our -- in our business in Europe and North America, there's no doubt. And we see here further strong demand.

And then we also started, and this is very good news, to scale also from the -- to scale XOM also from the buy side because this is always a question, this hand-in-air problem. How do you scale a platform? We're scaling now from both sides with our XOM eProcurement solution. This is -- so we are currently in the pilot here with a couple of customers. And with this solution, the customer is forcing the suppliers on the platform, further suppliers on the platform, also on a local basis and -- which drives scale of XOM even further.

Then next slide. Yes, this is how we see in Klöckner in the future. So we will have, on the other -- on the one side Klöckner but no more as a traditional business model on a platform -- as a platform or as a platform business model. The difference is that as mentioned, that in the platform business model, the employees -- most of the employees are not working in the core processes. They're orchestrating the core processes, they're designing the core processes, they're controlling the core processes, but the core processes itself are finally mainly automated. This works, of course, only when they are AI-driven. This is the future. In the end, this transformation has to be done, in our point of view, by all corporates. But I think we are here much more advanced, not than our competitors, also than other companies in other industries. And proof-of-concept here that this is the case is, by the way, that the leading business school in Europe, St Gallen, has already published a case study of Klöckner in this transformation process. Then 3 weeks ago, Harvard Business School, published a case study, and we are currently working with the Stanford Business School on another case. So the 2 leading U.S. and the leading European business school teaching, if you like, our case as an example of a transformation. And this shows how unique this is what we're doing, and how far we've advanced here against other companies, which also have to follow, of course. And -- but -- and this makes it, I think, even more special. It's not only that we're transforming Klöckner itself, we also -- on top of this, we also launched XOM, which is scaling now, as mentioned, much faster than in the past and which will definitely create additional value for Klöckner. And the value which XOM creates could even be higher than the value of Klöckner itself going forward when the platform is successful.

So that's, I would say, really significant. We made here significant progress. And this is, again, the reason why we are, despite the crisis, in the end, very optimistic going forward.

And with this, we -- I hand over to Oliver Falk for the numbers. Thank you.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [4]

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Yes. Thanks, Gisbert. So let's continue with some more financial figures. On Page 9, you see the development of shipments and sales as well as gross profit and gross profit margins. So as already mentioned, shipments are down year-on-year by 8.9%, mainly due to the weakness of the automotive industry and the machinery industry. And of course, we had the first impact of the COVID-19 pandemic in the second half of March this year. So -- and as you can see, the shipments, quarter-on-quarter, they increased following the usual seasonal pattern. Sales decreased even stronger year-on-year by 14.9%, mainly due to lower average sales price. Quarter-on-quarter increase, it sums up to 6.1%, but less pronounced than shipments due to the lower price level.

On the right-hand side, gross profits dropped from EUR 303 million in quarter 1 2019 to EUR 285 million in the first quarter 2020, a drop of 5.7%. The main drivers were demand-driven declines. In Germany, it was EUR 6 million, and the U.S. also was EUR 6 million. Quarter-on-quarter, the gross profit increased by 6.4%.

The gross profit margin year-on-year went up from 17.8% to 19.7%, or if you measure that in euro per ton from EUR 200 per ton up to EUR 209 per tons. And this, of course, is impacted by the prices on the sales side and the purchase side, and we are benefiting in the last two quarters from our stock management here.

On the next slide, you see the waterfall bridge between Q1 2019 and Q1 2020. As you can see, the headwinds on the demand side with a negative volume effect of EUR 27 million. This was mainly due to the weaker economic environment in Germany, including the automotive and the machinery slowdown and the general market decline, which we saw in the U.S. And as already said, the first impact of the COVID-9 (sic) [COVID-19] pandemic at the end of the quarter impacted the volume effect as well.

We saw positive price effects in Switzerland due to the rebar business and the margin-over-volume strategy, which we followed at the Kloeckner Metals Distribution in Europe. This was partly compensated by the negative price development in the U.S. and at Kloeckner Metals Services Europe. Overall, the net price effect came in at EUR 3 million.

OpEx and others improved by EUR 11 million. Main drivers were, as Gisbert already said, the lower personnel expenses and the volume-driven lower expenses for shipments.

The next slide shows the cash flow and net debt development. So the cash flow from operating activities came in with EUR 97 million, and this is significantly below the amount, which we saw in Q1 2019 of EUR 229 million. The main reason is a favorable development of our net working capital management. So net working capital change impacted by only EUR 96 million, and this was, by far, less than the impact was in Q1 last year with EUR 234 million. Interest was minus EUR 7 million; taxes, minus EUR 4 million; and others, minus EUR 11 million, then led to the cash flow from operating activities of EUR 97 million. If you deduct the net CapEx, we come to the free cash flow of EUR 107 million.

The net financial debt increased compared to year-end from EUR 445 million to only EUR 563 million. And this was due to our strict net working capital management, which was significantly below the level of Q1, and therefore, impacted the net debt significantly.

On the next slide, you see the maturity profile of our financing. So you know from the previous conferences, the committed lines are unchanged. The drawn amounts in Q1 ended with a net debt of EUR 563 million, and this is only EUR 118 million above the year-end figures. Total debt are at 684 in comparison to EUR 628 million at the end of 2019.

End of April, we extended our syndicated loan with our core banks, and the extension of the term was from May 2022 to May 2023. And of the total volume of EUR 300 million, the extension was successful with EUR 277.5 million. So meaning, only EUR 22.5 million could not be extended. And I think this is a very strong signal given the COVID-19 situation. We also think that the result would certainly not have been different in normal times, and this underlines our excellent access to the European banking market and our good credit standing.

Some further comments on the upcoming maturities in 2021. So we intend to renew our European ABS and our U.S. facilities in the course of 2020. So we postponed both projects for a couple of weeks due to the COVID-19 situation.

So given our existing cash reserves, our low utilization of our ABS and ABL facilities and the unused syndicated loan, we are well prepared for this crisis situation. And to sum it up, our financing is very solid with a strong headroom under the committed facilities. We have a solid equity ratio of 41% and a low gearing with 47%.

So with this, I would like to hand over back to Gisbert.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [5]

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Yes. Thanks, Oliver. Yes, with this, we're coming finally to the outlook. First of all, to the second quarter. Yes, as mentioned already, we expect a significant decline in shipments. I mentioned that April was 30% below last year. Could this be -- I mean, the visibility is still not very good, and it's very volatile. And we're doing in some countries like, for instance, Germany, it's still relatively good. In other countries, like France, demand is much weaker. So difficult to say, but this could also be a number for the second quarter, this 30% plus/minus.

And EBITDA. We expect EBITDA to be negative, but only a low-digit million euro range, not only because of lower shipments but also because of windfall losses. Prices were under pressure -- came significantly under pressure in the U.S. and were probably also weakening somewhat in Europe, and this has then also tremendous impact on our EBITDA. But cash flow will be positive. Double-digit -- mid-range double-digit number, I would say, is the expected positive operating cash flow. And same is, more or less, true for the full year. So we will see a considerable burn on our earnings. I mentioned the measures which we're implementing this year, so there will be some counter effect, but of course, also some restructuring costs are in this, having an impact -- will have an impact on our full year numbers here. So it's currently difficult to say how negative, but of course, the burden will be considerable. But on the other side, we're clearly expecting also and -- yes, I would say, significant positive cash flow from our operating activities. And in crisis and situations like this, when you are in a crisis, the most important is cash. And cash, we have enough available. And with this, as also mentioned, we don't need any other help than the short-term work, we need no other help from the government.

Yes, thanks very much for listening. And with this, we are now open for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Carsten Riek.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [2]

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A few questions from my side. Gisbert, you mentioned that you also see the COVID-19 pandemic as an opportunity, and you mentioned consolidation. In what form are we talking about? Is that only internally, putting other parts of the business on the same platform? Or do we mean also M&A activities? And if so, what kind of M&A activities we are talking about? Do we talk about big size acquisitions? Or do we talk about rather smaller acquisitions? That's the first one.

The second one, you mentioned you're more comfortable on the cash flow side, and you mentioned the operating activity, activities or cash flow from operating activities. What about the free cash flow guidance? Would you be already, I would say, almost brave enough to say, we will also be free cash flow positive by the end of the year?

And the third question, and I will leave it like that then. Becker Stahl, we know it's very exposed automotive. Could you give or shed some light on the utilization rates there at the moment and the profitability because this was, historically at least, one of the big earnings drivers?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [3]

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Yes. Thanks, Carsten. Yes, first of all, M&A or consolidation. Yes, we see here also opportunities on the M&A side, but probably more smaller ones, but only when we can really add value in terms of digitalization. So the idea is that we -- yes, whenever feasible, acquiring small or maybe mid-sized distributors, and then putting our digital model, if you like, on them and transforming them also digitally. And with this, we could -- and this is, I would say, also a significant change against the past where this -- where it was always difficult really to realize synergies and to add value to these kind of companies. And -- but now this could really make sense again also, by the way, for businesses, which are more commodity-oriented. So everyone in our industry is looking for higher value add. But with our capabilities now to make the business much more efficient through digitalization, also, commodity business could be attractive, and also, acquisitions in this area could be attractive with, of course, relatively low multiples, we also have to say. So if so, then this is probably the time to do these kind of acquisitions. And by the way, also Becker Stahl was done in the last crisis, during the financial crisis. And I think, yes, so when everyone is hesitant, then it's probably the best time to do these kind of acquisitions.

Yes, cash flow, this is easy to be answered. Also, the free cash flow will be positive. Why? Even if we close branches, then we typically have at least breakeven, if not positive, cash flow because a lot of branches are still owned by us. And we also can then slash net working capital when we're selling these or consolidating these branches. And therefore, free cash flow will also be significantly -- I have to say, will also be significantly positive.

Yes, then Becker Stahl. Yes, Becker Stahl was indeed heavily impacted by the downturn in the automotive business. We're currently operating on 1 shift at Becker Stahl because there was -- at least so far, there is more or less no automotive business anymore. That might change now going forward when the OEMs start production again, but demand has suffered here significantly, I think about 50% against previous year. So with this, Becker Stahl is currently not really a contributor to the results, but this is also something which we will then change going forward. We also implemented already some restructuring measures. We also reduced personnel at Becker Stahl. And with this, we are also optimistic here not to come back to EBITDA margins of 8%, 9% or 10% last year already or so, that might take some time, but at least to move Becker in a better situation than right now.

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Operator [4]

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Next question comes from the line of Seth Rosenfeld.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [5]

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If I may, I have a couple of questions with regard to inventory management and also the risk of windfall losses. When it comes to inventory, can you comment on, in general, how aggressively you're looking to destock inventories going through this Q2 downturn? And how that's tied into your strategy going into the second half of the year, assuming that we are approaching nearing something of a stabilization or recovery in demand over the coming months?

And then tied to that, if you can give us a little bit of sense of the scale of windfall loss risk we're looking at going into Q2, perhaps putting it in a quantifiable context compared to what we saw in the first quarter? Would you expect something larger or smaller? And would that perhaps be more concentrated in the U.S. or also in your European business?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [6]

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Yes. Thank.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [7]

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Okay. I think starting with the inventory for Q2. So we reported about the turnover decline of 30%, which we have reached so far. So what we did, we adjusted our stocks already during the last couple of weeks, but we did not adjust our inventory to, let's say, the same turn rates which we have seen before the crisis. So we keep, let's say, a certain volume ready to serve our customers. And this volume is also already, let's say, to facilitate the restart of the business after our customers are back and have opened their companies for business.

Why are we doing that? On one hand, if you would stop radically the goods receipt process in our warehouses, we would get into difficulties because also the fast movers would not be replenished. And secondly, we need to be stocked in an appropriated way for the restart. So assuming that we would drop drastically also by 30% our stocks, then we have not enough stock, let's say, to restart the business. So that's our strategy here for the inventory development on Q2. The decline in inventory will help us for the positive operating cash flow, as already mentioned, and again, facilitates the start so that we are well prepared for the restart.

Windfall losses, I think Q1 is, more or less, a U.S. effect. Would you like to comment, John, on that?

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George John Ganem, Klöckner & Co SE - CEO of Americas, COO & Member of Management Board [8]

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Sure, Oliver. Yes, in the U.S., the windfalls were mainly driven from our contract business, which -- much of which is based off of a lagging CRU pricing index. So essentially, as we entered the first quarter, with spot pricing moving up, our transactional business was basically operating at very normal margin levels. But our contract business actually -- pricing on our contract business adjusted down pretty significantly as we headed into the first quarter, and that's because it's based off of the change between the average CRU price in the third quarter of 2019 as compared to the fourth quarter of 2019. So it's just kind of a lagging effect of how the contracts work. You'll have kind of the opposite effect as we head into the second quarter where the contracts will actually be adjusting up, or started to adjust up already. But unfortunately, we also saw at the end of the first quarter that transactional business come under some significant pressure as resale prices really started to come down as our competitors realized the severity of the COVID-19 crisis, the potential for reduced prices. And of course, everybody kind of went into a very aggressive selling mode to make sure that they were getting out ahead of what looked like to be a pretty sizable downturn in demand.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [9]

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Yes. Thanks, John. I think it's very difficult to give a number at this point. But it could be lower double digit, let's say, in the end.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [10]

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If I may, just a follow-up. If it's a low double-digit in Q2, can you just clarify how that would compare versus Q1?

And then lastly, I believe in some past public comments, you mentioned expectation for European steel prices to potentially go up in the second quarter. That doesn't appear to have been the case thus far. Does that elevate some risk of windfall losses in Europe as well in the second quarter?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [11]

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Yes. In the first quarter, the windfall losses were single digit. So -- and single-digit -- or higher single digit. And yes, I don't know when we were saying that prices are going up, maybe in our last call, but yes, situation has obviously changed somewhat. And so we're currently expecting that this with low demand and also with the -- so I think the difference in the -- there's also one big difference in the end that the European steel industry is much less flexible because they have all this integrated steel plants, or mostly integrated steel plants, other than the U.S. mills like Nucor. And therefore, under the current environment, the prices will probably -- are more under pressure than -- also in Europe.

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Operator [12]

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Next question comes from the line of Alan Spence.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [13]

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Just coming back to working capital, in 2015, I believe it was over EUR 275 million of working capital was released. Can you talk about the shape of the business now versus 2015 to give us a sense of if that type of scale of release could be feasible?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [14]

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I'm looking to our CFO.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [15]

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Yes. So the current net working capital level, of course, is impacted by the lower stocks, which we have in place in comparison, so quarter-on-quarter. So we have taken care -- and this was really independent from the COVID-19 situation, we have taken care on our stock turns. For the first quarter, it was more constantly and efficiently managed than last year's first quarter. And this is the strongest impact on -- represents the strongest impact on our net working capital. We -- in addition to that, we have slightly, slightly improved turns of our trade receivables, but the main impact is coming from the stock situation.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [16]

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Yes, I think this went much better than last year. So last year, we stopped relatively heavily, and too heavily in the end. So that -- and that was, I think, much better managed this year.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [17]

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Okay. And then two more quick ones, if I may. Just on the additional restructuring measures, does that, in any way, impact the timing of the efficiency targets? And if you could just give a sense of where you think CapEx might be for the full year, please?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [18]

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Yes. No, so these measures will be implemented relatively quickly. And if so, they have a positive impact, of course, on -- so we might be able, in the end, to realize these benefits, efficiency benefits earlier than initially expected. And CapEx will be -- I would say, so could be between EUR 60 million and EUR 80 million or so, depends, but maybe more on the low side. So because one thing is also important to mention, when we're implementing now these measures and also these measures -- by the way, also measures in each country to make sure that each country provides a positive EBT going forward. So that is the minimum, which each country has to be reached going forward, and -- but not with further investments. So first of all, I think -- and therefore, this is something which is prudent to do in a crisis, I think. In a crisis, you have to set a new basis. And on this basis, your business has to be profitable. And then you can expand on this basis, and this is what we're doing. So not that we're taking any possible or potential investments into account, which might generate potential revenue. No, the other way around, so under -- in a normalized year with no further investments here, the question is what do we have to do to make these country -- all these country organizations profitable? And therefore, CapEx will be maybe on the lower end of this EUR 60 million to EUR 80 million, which I mentioned.

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Operator [19]

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Next question comes from the line of Marc Gabriel.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [20]

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Three questions, if I may. First of all, how many of your employees are currently on short-term work? And how much will be the restructuring cost for the full year? And when will you account the provision for those restructuring costs? That's first question. And tack in the other two afterwards.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [21]

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Yes. So we currently have 1,900 employees in short-term work. 370 in Germany, 250 at Becker, by the way, and 120 in our German distribution business. Our restructuring costs -- so typically, we have 50,000-or-so employees. And yes, as mentioned, we will reduce them by at least 1,000 this year. So about EUR 5 million restructuring costs, which will then be booked in -- mostly in the second quarter.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [22]

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And the second question is comparing the current crisis with the financial crisis, it surprises that you are only forecasting a lower double-digit million loss on EBITDA level for Q2. What are the differences today compared with the financial crisis when you reported 2 quarters in a row with EUR 130 million losses on EBITDA level?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [23]

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Yes. First of all, as Oliver already mentioned, we went with significantly less net working capital into this crisis because, yes, net working capital didn't went up that much at the beginning of the year. That is a significant difference. And then I think -- so in the -- because of our -- also because of our capabilities we have, of course, also because of the digital capabilities, on the one side, switching to home office, on the other side, providing all our products also through online channels, with this, we are not that much impacted than our -- most of our competitors. And in the financial crisis, so we lost also -- so we lost significantly more sales also in the beginning of the crisis. I think for the full year 2009, when I remember correctly, we had about 50% lower sales compared to the previous year.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [24]

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That was Q2, was that, in 2009, yes.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [25]

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Yes.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [26]

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And then the final question is on XOM Materials, that seems to attract more new vendors since COVID-19 crisis. How long does it take to go live for a customer? I'm asking, as we saw, for example, eBay accelerating its offer to bring small businesses online. I think even if your platform is much more special, speed seems to be an important point in this crisis. And what are your thoughts on that situation? And how many of your employees are really affected by -- infected by COVID-19 currently? Or are there none?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [27]

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Yes. So at XOM, this is right. We -- and because the demand has increased so much, we currently have this bottleneck. And this is the reason why we now doubled the investments for XOM for the second half of the year. So we're adding currently capacity to reduce the bottleneck. So we have, I think, about 20 -- currently, about 20 suppliers, which signed a contract with us, but which are not online yet because, yes, we are not able to serve them all at the same time with the capacity we have. This is the reason why we're increasing capacity on XOM side.

Yes, how many...

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [28]

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Affected employees.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [29]

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Affected?

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [30]

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Infected, infected.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [31]

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Infected...

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [32]

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17.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [33]

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Yes. About -- so about 17 overall. We had 1...

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [34]

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Fatal.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [35]

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One fatal also. One driver died in the U.K. 3 weeks ago because of COVID-19. And then we have another, yes, 17 or 19 currently who are infected.

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Operator [36]

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Next question comes from the line of Rochus Brauneiser.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [37]

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Quick question on the demand situation for the second quarter. I think, Gisbert, you mentioned the minus 30% you're envisaging now for the month of April could be kind of a number for the second quarter. If you look at your upper and lower end for the earnings range for the second quarter, what do you think could be the likely corridor for the volumes? And how does that, in your view, compare roughly with the growth trend -- negative growth trend for the whole industry?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [38]

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Not easy to answer. So yes, so this 30%, yes, we had -- in the last -- what I can say is that in the last 3 weeks, it was relatively stable. We also have some countries who are a bit more optimistic going forward. So for instance, our French organization thinks that they are through the trough and that business is getting a bit better. Switzerland is also -- obviously, they went not that much down anyhow, but they also started to recover.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [39]

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Becker might recover.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [40]

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Yes, Becker. Yes, yes, right. Becker, who lost, more or less, all their automotive business expect to have at least some more volumes on the automotive side going forward. So I would say this 30% is probably a relatively realistic number.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [41]

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We might get up to 25%, so to kind of the upper range.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [42]

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Yes, yes, yes.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [43]

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And sometimes we have weeks with maybe 33% or something like this.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [44]

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And yes, John, maybe for the U.S., how do you see the...

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George John Ganem, Klöckner & Co SE - CEO of Americas, COO & Member of Management Board [45]

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Yes. I think we saw, certainly, April, the big hit came on the contract side of the business. We had a number of large customers who shut down unexpectedly either because of a COVID-19 problem that they were having in their facility and/or because they were seeing some issues on the demand side. So -- and those have been very sporadic, but very painful, certainly in April, and very substantial. So -- but interestingly enough, our transactional volumes in the more construction-oriented business held up better than the contract business. As we head into May, we kind of -- again, we have very little visibility. Forecasting is next to impossible at this point. But we would expect that, that contract business would start to improve as a lot of those large guys are coming back on stream now. But at the same time, we do expect to start to see some impact on the construction segment because you had a big pipeline that was already in process that was working its way through. But now really, I think you're going to start to see the impact of some construction projects getting taken off the table, so you're going to kind of have a balancing effect. So I agree. I think kind of a stable situation in May as compared to April is probably the most likely outcome. And then, hopefully, we'll start to see some glimmers of recovery as we get into June and the third quarter as the shelter-in-place lockdown start to get let up on.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [46]

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Okay. When -- I think when you talked about your benefit in the crisis because you're much more ahead of the curve in terms of digitalization. Can you just give us a bit of color how that is playing out for you at the moment? What's happening among your smaller competitors? Were they out of the market during this first phase of the lockdown if -- as they couldn't maybe move that quickly to the home office? Do you observe that, relatively, your competitors have more facilities shut than you? Maybe can you give us a bit of color how that works out in terms of crisis response in the market? How are you perceive it right now?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [47]

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Yes. We have seen this across the board. And for instance, in the U.K., our 2 largest competitors had to close down their facilities in the beginning of the crisis. They might come back now. But we have seen this, more or less, everywhere that competitors really had difficulties, especially to switch to home office. So that is our industry, and I would say there's no one else digitalized as we are. And therefore, we were able to switch really from one day to the other to home office. And then on the other hand, we had increased digital sales. So this 35% number by the end and relatively immediately, more or less. And -- because we had -- for the full year, we had, I think, 30...

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [48]

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A bit lower, 32%.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [49]

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A bit lower. Yes, yes, we had -- yes, yes, right. And so we reach more or less already our half year target by the first quarter. And this is clearly a trend we're seeing also going -- which will also stick after the crisis. So someone who started to order online will not go back to manual. And with the additional offering we have now with the Kloeckner Assistant, for instance, and with some material, for instance, for XOM eProcurement, we will see -- so we are very optimistic that demand for all these online activities will also increase further after the crisis. Currently increasing, but we think that this really sticks.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [50]

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Okay. And then maybe on your working capital. You said that from a negative working capital in Q1, you want to release it during the rest of the year. Can you give us a sense about the timing? How much is going to come in the second quarter? How much is in the second half? Just to get a sense about the speed of your collection of cash.

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Oliver Falk, Klöckner & Co SE - CFO & Member of Management Board [51]

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So for the second quarter, we are talking about a figure between EUR 50 million and EUR 100 million, which is coming from the stock reduction, which I explained a couple of minutes before. And for the second half, it will be a mixture between a restart of the business and therefore, operating cash flows, based on more positive EBITDA for Q2 and Q3 and Q4. And it depends -- the adjustment of stocks in Q3 and Q4 is depending on the volume which we will see in the second half. So it's hard to say which part is coming, let's say, from the EBITDA. If we will have a strong restart and a higher turnover, then we will definitely have a contribution from the EBITDA side. If the volumes stay on a lower level, then, of course, we are going to adjust our stocks to the volumes, which are then visible. And let's say, we have not reached those stock turns -- we will not reach those stock turns in Q2, which we have had before the crisis, so there's a lot of volume, which we can work on. So it depends a bit on the development -- on the volume development of the second half.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [52]

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Okay. Last question then on the restructuring. To what extent are the measures you're planning to do triggered by the expectations on how you see the speed and magnitude of demand recovery in the second half? So what should we expect? Is it -- is there the first wave in the Q2? And is there a lot of -- you make dependent on the second half? Or shall we rather expect that you will put everything you think is feasible in Q2, and that's it for the rest of the year?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [53]

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Yes. You can expect that all decisions will be made in the second quarter, and with, this probably also all restructuring -- also all restructuring costs. And this will -- by the way, these restructurings will not limit us when market is coming back. And -- because it's not that we're saying now we have to restructure because the demand is 30% lower. This is really more consolidation, and also, as mentioned, driven by our digital capabilities that we need -- don't need as much branches, for instance, going forward. And -- but the decisions -- so the decisions will now be made relatively quickly, within the next 4 weeks.

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Operator [54]

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Next question comes from the line of Matthias Pfeifenberger.

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Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [55]

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A couple of questions from my side. And so everybody keeps coming back to this, but it seems like EUR 20 million windfall losses and probably also the provision, the restructuring provisions baked into the Q2 guidance already, maybe you'll correct me on the provisions, but it's only EUR 5 million. So looking at the 30% volume hit, it's breakeven EBITDA on an underlying level. I mean it's quite good. So is it really a fair assumption to say the 30% sales decline might be sustained in the next month because, obviously, you have a big dependency on construction? You -- some of the construction sites are being resumed in the markets. We hear about oil production being resumed gradually. I mean it's more likely it's going to be 25%. So is April the low point?

And then also, would you agree to the EBITDA calculations? And also looking at the share price today, I mean, of course, there's China/U. S. again, but is this -- we've both lived through the -- all the steel crisis together, and you've also been trading in the bonds and stocks quite well. So is this buying opportunity for you?

And then the last one, you mentioned consolidation in the release, but you talked about small-scale M&A. So covering the stock for quite some time, it's -- you probably would have said engaging in M&A, but you said consolidation. So is there more to read into that? Like what's the situation with some of the steel businesses? Are you sending a signal to be again more open for talks? Or what's the view of your major shareholder in that regard? I mean the stock is basically trading on below net inventory value, and so it's maybe worth asking.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [56]

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Yes. I think the -- yes, the stock is really trading low, no doubt. And when you take into account the opportunities we have going forward, this is really difficult to understand. And yes, there might be some -- so for instance, XOM Materials is not priced in the stock and -- on the one side. But on the other side, we're scaling here the leading platform for the steel and metals industry. And this is really also difficult to understand. So I mean, obviously, the business schools, as mentioned, they're understanding what significant transformation is taking place here on the Klöckner side, so on the Klöckner side itself and then with XOM on top. And it's really -- yes, maybe it's -- I don't know, maybe it's because of costs, we have no real tech investors in our -- so maybe this is something we have to work on now going forward to make us also more attractive for this kind of investors because, of course, platforms are typically -- the valuation plan typically is, of course, completely different than to valuate traditional business. And even -- and it's not only XOM. So even on the -- in the traditional business, we're seeing this huge potential.

And also regarding growth, and this is what I mean with consolidation, so in the past, you cover us, I don't know, 15 years or so, and you know that we had, okay, Becker. We had some good acquisitions, but we had also some bad acquisitions, especially the smaller ones didn't work really well or smaller ones in the past. But the reason was, finally, that we couldn't really add something because, typically, they had also a low-cost position and when it was a mom-and-pop store. But now it's our digital capabilities, we really came to add something. We can digitalize such a business. I mean I know people in the private equity business who are currently buying traditional assets to digitalize them and then selling them or divesting them as a digital business going forward. And this is also what we expect to do, and especially also in the commodity business, which is not attractive for anyone in this industry. And therefore, we also think that we can really buy or acquire here companies really at the low end of the price of the -- concerning the metals. So this is really an opportunity. Why this is not seen by the market? I don't know. Maybe we -- it's still difficult to understand, or we don't explain it in the right way, I don't know. But I'm convinced that this is going to come going forward. There is a huge potential in this share. And this is supported not only by our Supervisory Board, this is also supported by our main shareholder. So there is -- so we're not thinking here in a different direction. And this makes us also -- and also myself so positive going forward.

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Matthias Pfeifenberger, Deutsche Bank AG, Research Division - Research Analyst [57]

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And on the low point in terms of 30% in April, I mean, as far as I can see by historic synergy, you didn't slash the inventories as much as we saw in previous crisis with big effects on the EBITDA. And you're also saying you're basically keeping some stocks for your customs to start up. So that doesn't sound like the minus 30% will remain for the next couple of months, right?

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [58]

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Yes. Yes, so when the automotive business comes back to a certain extent, that, of course, has a positive impact on -- not only on Becker Stahl, by the way, also on our German business as well, which is very much related to machinery, mechanical engineering. And -- but John, maybe you can give us also some flavor here from the U.S., how you see it?

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George John Ganem, Klöckner & Co SE - CEO of Americas, COO & Member of Management Board [59]

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Yes. I mean, as I mentioned earlier, I mean, it's -- we really have very limited visibility. Our customers, when we're talking to our customers, they have very limited visibility. When they tell us they're going to close, it's a week after they told us everything is fine. Again, I think everybody is struggling with the same problem, we just can't see very far forward with any level of confidence. I think it's hard to read what's going to happen with construction. You would think that it's going to be impacted negatively at some point here in the -- as the second quarter goes on, but I do think some of these other industries are coming back. Is it -- is April the low point compared to May? I think it's very, very difficult to say. In the U.S., we have a further struggle. We have 10 facilities located in Texas, Oklahoma and Louisiana, which is the heart of energy country. And as you know, oil prices are under extreme duress, and that certainly has an impact not only on the direct energy type of customers but also on the overall economies in those states. And that's really where we saw, I would say, the most significant volume loss so far this year, and I would expect that, that's going to continue. I can't see a situation in the near term where that's going to get any better with oil prices as low as they are. So we have that kind of overhanging us as well. So I'm comfortable with a flat versus April. Hopefully, it's better than that, but again, no real visibility.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [60]

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Any other questions?

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Operator [61]

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There are no more questions on the line. Please continue.

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Gisbert Rühl, Klöckner & Co SE - Chairman of Management Board & CEO [62]

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Yes. Thanks very much, also for the interesting questions and interesting discussion. And I don't know when we you'll see us physically again, but hopefully, anytime soon. And with this, I wish you all good health. Stay healthy, keep care, and then we talk latest in 3 months from now. Bye-bye, everybody.

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Operator [63]

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This concludes the conference for today. Thank you for participating. You may all disconnect.