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Edited Transcript of STLN.S earnings conference call or presentation 3-May-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Schmolz & Bickenbach AG Earnings Call

Emmenbrücke May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Schmolz & Bickenbach AG earnings conference call or presentation Wednesday, May 3, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clemens Iller

Schmolz + Bickenbach AG - CEO and Member of Executive Board

* Matthias J. Wellhausen

Schmolz + Bickenbach AG - CFO and Member of Executive Board

* Ulrich Steiner

Schmolz + Bickenbach AG - VP of Corporate Communications & IR

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Conference Call Participants

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* Achuthan Balasingam

* James Gurry

Crédit Suisse AG, Research Division - Research Analyst

* Rochus Brauneiser

Kepler Cheuvreux, Research Division - Head of Steel Research

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Presentation

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Operator [1]

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Ladies and gentlemen, good afternoon. Welcome to the SCHMOLZ + BICKENBACH AG Analyst and Investors Q1 2017 Results Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Ulrich Steiner, Head of Investor Relations and Corporate Communications. Please go ahead, sir.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [2]

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Thank you, Alice. Good afternoon, and welcome to SCHMOLZ + BICKENBACH's Analysts and Investors Conference Call on the First Quarter Results. We are speaking to you from our corporate center in Lucerne, Switzerland this date. With me in the room are CEO, Clemens Iller; and CFO, Matthias Wellhausen. The slides for today's presentation are published on our website, along with media release and the interim report. During the call, we will make forward-looking statements as described in the disclaimer on Slide 2 of the presentation. Please note that all statements that address expectations or projections about the future are forward-looking statements.

Let me, with this, now give the floor to our CEO, Clemens Iller. Clemens, please.

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [3]

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Thank you, Ulrich, and good afternoon, ladies and gentlemen. Also, a very warm welcome from my side here from Lucerne. We will hold the presentation in the usual order, means after presenting the highlights of the first quarter, I will hand over to my colleague, Matthias Wellhausen, for a closer look at the quarterly figures. And after that, I will present the outlook on 2017. The presentation will be followed, as usual, by a Q&A session.

Let me start now with a review of Q1 on Chart #5. We had a good start into the year on the back of an improved business environment in the first quarter. Now what I mean with improved, I think we need to put this in relation to the steep decline in demand that the steel industry experienced during the crisis in 2015 and over the first half of 2016. In this context, I would best describe improvement as a return to -- of the steel industry to normal after

(technical difficulty)

in higher volumes, continuation of the favorable sales price trend and an improved product mix. Matthias will reflect those things in more detail later in his presentation. On the back of those 3 factors and supported by the positive effect from our restructuring and cost-saving measures, profitability further increased. We managed to improve the adjusted EBITDA to 9.4% after 4.1% 1 year ago. While the EBITDA rose strongly, free cash flow followed the usual seasonal pattern and was negative in Q1. Higher sales and raw material costs resulted in higher net working capital needs. Therefore, net debt rose compared to year-end 2016, but was still below the level recorded 1 year ago. Maybe our most important activity in recent weeks was the successful refinancing of our company. In April, we managed to refinance the outstanding high yield bond and extended the syndicated loans as well as the asset-backed security program in favorable conditions. We could push all maturities by 3 years into 2022, which gives us the financial flexibility we need to continue to improve the operating performance of our company.

Taking a closer look at the development in the first 3 months, let's go to Slide #6. You will see first that today, we do not show the nickel price development, but the scrap price. So the more that the uptrend was broad-based. Better demand came from a broad range of product groups and from all customer industries and regions. Higher raw material prices also supported our business. For example, as illustrated in the upper right, the average scrap price was roughly 38% higher than 1 year ago. Same is true for nickel and ferrochrome, both of which increased double digit in price over the last few quarters. Nevertheless, you can also see how quick the situation can change. In the last days, the nickel price fall down again. Another factor that contributed to the strong results was the slight improvement in the oil and gas industry, which, as you know, is an important end market for SCHMOLZ + BICKENBACH Group. Compared to the first quarter 2016, the number of rotary rig more than doubled. We take this figure as a proxy for the development in this industry, and therefore, also for our business, mainly for Finkl Steel in the United States and DEW in Germany. Both units have a significant exposure to the oil and gas industry, as you know. The slight uptick is also reflected in a growing order backlog at Finkl.

This brings me to the Slide #7 and a quick overview on the order backlog. In connection with the bond issuance, we have published an update on the order backlog as at the end of February 2017. Since then order backlog has further improved year-on-year. The backlog grew nearly 40% and stood at 620,000 tons on March 31. On that data, the backlog was even higher than in a strong Q1 2015. The good progress of our order backlog also gives us confidence that we'll be able to achieve a good first half year. But let me come back to the outlook later.

Now one more chart, which is #8, before I hand over to Matthias. In our major release today, we highlighted the fact that demand improved for a broad range of product group and for all customer industries and regions. Let me further elaborate on that statement in Slide #8. In the 3 product group, the sales volume growth ranking did not change since the fourth quarter, with stainless steel growing fastest followed by quality & engineering steel. In contrast, tool steel was still flat. If we take a look at gross figures, we note it has accelerated across the broad. This is not new for stainless steel where we had quite a good growth already in the fourth quarter of 2016. However, growth further accelerated to 9.2%, driven by the Western European automotive industry. As a proxy for the strength of that industry, you can use the new car registrations. Those exhibited double-digit growth in Western Europe in March, with ongoing strength in the German market. On the other hand, March figures from China or the United States showed that growth started to soften or was already negative in those regions. The biggest volume gain was achieved in the quality & engineering product group. After a decline of 2% year-on-year in the fourth quarter, we now achieved a solid growth of 6.9% in a quarterly comparison. Indeed, in quality & engineering steel, we have a large fraction of yearly contracts with the automotive industry. These yearly contracts are always negotiated in the fourth quarter more or less. Last but not least, the growth in the product group tool steel remains basically flat. Also, some pockets of growth were identified, for example, in China and India. There is currently no evidence for a widespread uptick in this product group.

So let me summarize the first quarter as follows. After a pronounced downturn in our industry in the last 2 years, demand returned to normal levels. Again, I would definitely stress this point there is no boom in our industry as some industry commentators suggest. The normalization of demand, coupled with our internal efficiency and cost-saving efforts, were the drivers behind the good result in the first quarter.

Now with this comment, I would like then to turn over things to Matthias to give us some more details on the first quarter numbers/figures. Matthias, please.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [4]

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Thank you, Clemens. Ladies and gentlemen, a warm welcome also from my side, and thank you for dialing into the conference call this afternoon. Clemens highlighted that we moved towards normality in the first quarter of '17 with respect to market conditions and business indicators. We have, therefore, prepared some slides for you to put the Q1 results into a 2-year perspective. So not only against previous quarter and same quarter of previous year, but as usual -- but also additionally 2-year perspective. So let me start with the volume on Slide #10. It's depicted here the quarterly volumes of crude steel production and of sales volume since quarter 1, 2015. While quarter '15 -- while that was a sort of normal quarter prior to the crisis. And indeed, we see that the crude steel production as well as sales volumes are approximately at the same level in the first quarter of -- quarters of 2015 and '17. Crude steel stood at 527 kilotons in Q1 '17. That was marginally lower than 2015. On the other hand, sales volume stood at 489 kilotons. That was slightly up versus 2015. So very close, and in short, this underpins volumes in Q1 '17 were back to precrisis levels.

Now if we compare these numbers versus Q1 '16, that was a trough of development. We were up by 11.2% and 6.1% for production and for sales, respectively. Now this strong increase in production also underpins the good trend in our business pipeline. Clemens alluded to the very strong order book, and hence, the improved production here also reflects on the expected shipments during the coming months. So as was said, the positive trend was set in all our production units, but particularly strong in our entities in North America and Germany, which were quite underutilized in the past. Overall, the capacity utilization, compared to 1 year ago for the whole group through this, went up by 10 percent points for the production segment. On a product-related view, Clemens already showed that stainless and engineering and quality were the strongest product lines in this development.

Turning now to prices and revenues, on slide #11. In the upper display, we show here the revenue that the revenues were lower in Q1 than 2 years ago and that was despite the volumes, as we just said, were similar. That reflects, obviously, that we are not yet back at the same level with respect to average sales prices. However, compared to 1 year ago, revenues were up by 17.2% since the trough in Q1 '16. Not only volumes recovered, in particular, prices have been improving continuously since then. And we had guided to you earlier that average prices would go up further. They stood in quarter 1 at EUR 1,447 per tonne. That was compared to Q4, an increase of further EUR 55 per tonne, and compared to Q1 '16, an increase by EUR 138 per tonne. The driver for further recovery in average sales prices were both price components: the surcharges as well as the base prices. On surcharges, the better scrap prices and the strong levels on chromium helped here. On the base prices, the momentum remained with stainless, but also on engineering and quality steel. Here, as Clemens was saying, in particular, the yearly contract negotiations in Q4 and partly in Q1 contributed favorably, and these improvements as yearly contracts are there to stay for the full year 2017. Thirdly, we also noted a positive impact from improving product mix. The good order situation supported a much more selective intake and an improvement towards higher value-added volumes. So also, from that side, a favorable impact. Then just one word on the segmented view. When you may have looked through the detailed published report and our segment report introduction in sales and service there and -- what is visible is that compared to the trough in Q1 '16, the revenue growth in the sales and service segment was lower compared to the production segment. Actually, the growth rates were 10.7% and 19.8%, respectively -- production, 19.8%; sales and service, 10.7%. So this reflects to a large extent that the sales and services were more robust during the trough, because their volumes had been largely stable on the back of expanding outlets, and that underpins that the sales and service network is important in our business model and also to address cyclicality. Just wanted, as we haven't spoken about this for a while, mention that.

Turning now to the bottom line, Slide 12. We see the indicators on gross profit and EBITDA, also starting with a 2-year comparison. And you see that same as the sales volume, gross profit recovered to comparable levels of Q1 '15. In terms of absolute values, it stood at EUR 284 million, and per tonne, at EUR 581 per tonne. Now -- however, this was achieved despite average sales prices being 8.7% lower than in Q1 '15, or respectively, EUR 138 per tonne. So together with certainly -- some lower cost for raw materials, our cost improvements are contributing here to this improved robustness of our gross profit. The progress is then further emphasized when you go from the gross profit to EBITDA and EBITDA margin, which we see in the graph below. The EBITDA stood at EUR 66.6 million and was EUR 10 million better than 2 years ago, though the gross profit was the same. So that means that EBITDA per tonne also improved from 2 years ago from EUR 117 per tonne to EUR 136 per tonne. And the margin climbed by 2 percent points to 9.4% in Q1 '17 now.

We then further compare these figures to Q1 of previous year, which represent the trough, as we have said, and if we further compare also to Q4 of previous year, which was seasonally impacted, of course, then all these improvements of gross profit and EBITDA are just more pronounced. I don't want to comment on that much further. That is clear. Now important to say here that we continued our performance improvement program according to plan. The additional sustainable cost savings on an annualized basis for 2017 amounted to EUR 10.7 million. And I'd just like to remind that profit improvement target, sustainable cost savings of in total EUR 70 million for the period 2016 to '17, we achieved already or completed EUR 42 million in 2016; EUR 28 million shall come this year. So comparing that to the EUR 10.7 million that we have brought underway in quarter 1, we are very well underway to continue with it.

I, at this point, also must mention that there were in total some favorable one-time effects. The higher prices for chrome and scrap had also positive impact on the stock valuation. But on the other hand, we also saw electricity prices soaring on a temporary basis. Spot prices went up in Q1 during the winter season in some of our plants, and that was quite significant. So at the end, the net of these both effects, inventory revaluation and temporary impact from the electricity, is around EUR 5 million favorable. So that was one time. Now opposed to all of these favorable developments, if you look into more detail into our costs, what we find is that the indication that we need to very consequently need to continue our planned restructuring initiatives with respect to productivity and with respect to footprint. Because if we adjust the personnel costs to once-off impact in Q4 '16, then what you see is there is an increase of approximate EUR 15 million from Q4 '16 to Q1 '17 in the personnel costs. Now this is certainly partially associated with higher business activities over time, some more hirings in America and so on. However, there is also a strong element of wage inflation. So the restructuring at Steeltec in Düsseldorf and DEW remained a priority for this year. And though also where we saw an uptick in demand, the structural challenges remain apparent.

Then with respect to exceptional items, you saw that there is very little difference between the adjusted EBITDA and the unadjusted EBITDA is limited to EUR 300,000, and it actually pertains to projects that we started already previous year. As guided earlier for 2017, we expect a maximum of EUR 8 million during the course of the year in these one-time expenses for restructuring program. As we have said, no such expenses shall be incurred anymore from 2018 onwards. So also here, we are quite prudent on our way. Then finally, we see that all with this favorable development in EBITDA, we also come to a positive net result. After depreciation, interest and taxes, the quarter net result was EUR 21.2 million positive, whereas 1 year ago, we were EUR 22.4 million negative.

Turning to cash on Slide 13. In Q1, we saw an uptick in working capital demand. The regular seasonal increase here was though aggravated by the higher raw material costs and also the sales prices and by the higher activity, along with market normalization. So the net working capital especially the receivables, rose accordingly. Free cash flow then was lower than in the same period in the previous year despite the better EBITDA. And net debt rose against year-end 2016 by approximately EUR 50 million. However, this increase is fully in line with our expectations and with our strategy. Why? Firstly, the efficiency. The efficiencies could be further improved. This is reflected in the further reduced ratio between net working capital and revenue, which reached a new historical low for the company at 25%. It could be mentioned here that especially the tonnage of metal inventories could be further reduced along with an increased demand. We target that we can keep this ratio in all quarters of this year below the levels that we had in those quarters and respective quarters in the previous year. Secondly, in comparison with the same period previous year, the net debt was approximately EUR 20 million lower despite the market uptick. And thirdly, you saw the combination of higher net debt and the strongly improved EBITDA resulting in a better leverage. The ratio between net debt and last 12 months' EBITDA improved to 2.4.

Turning to Slide 14 and the usual display of our financing structure. Well, this time, there's not much to say here. It's rather for the record. As you are all aware that we concluded the comprehensive refinancing of -- after the end of Q1. So let me come to that straightaway on Chart #15. Actually, we had been reiterating the buyback of our high-yield bond with you several times in the past. So finally, we did not want to hear the paining questions from you anymore after we went to the market. No, jokes aside, always dangerous via telephone. Actually, we concluded that the market conditions had improved and that the company development was now sufficiently mature, that a proactive refinancing at this point would be beneficial. Therefore, during April, we embarked on such a process and executed a comprehensive refinancing of all of our 3 pillars, meaning the revolving credit facility, the ABS and the bond. As Clemens said, maturity could be extended. We also could improve terms and conditions of all these pillars. Overall, compared to 2016 levels, the total package will bring our bill for financing cost down by approximately EUR 8 million per annum in the future for a full year. So -- however, there are some one-time effects in the short run that you should be aware of. And as you look at our Q1 results, it is a variation gain in the financing cost, which is relating to the repayment option, up to the tune of EUR 11 million in Q1. This was partially, though, offset by expenses of EUR 6.6 million for unamortized transaction costs and the redemption premium for the old bond. So nevertheless, bottom line, the financial expense in Q1 was favorably impacted once off by the net of these 2 one-time entries. Please note that in Q1, we shall then see a reversal of the variation gain of EUR 11 million. So financing costs will be accordingly higher then. Only in Q3, we will then see the new normal of the interest.

With respect to the bonds, you see them in more detail on that slide. The new bond of EUR 200 million was very well received in the market and significantly oversubscribed, rightly went quite well down to a coupon of 5.625% compared to the 9.875% of the old bond, so more than 4 percent points better. We have, in the meantime, made use of the call option and the old bond will be paid back on May 15.

On the last slide, you see the illustration of how the financing looks like now or will look like in the future on a pro forma basis. You see the new liquidity and debt maturity profile.

Well, on this occasion, I'd like to thank our partners here also who supported us with such extraordinary professionalism during this period and with true and relentless passion. That was the lead banks, that was our book runners, that was debt advisers, our auditors and law firms; they all did a good job here in cooperation with our SCHMOLZ + BICKENBACH teams, especially to get to the market with quality in such a short period of time. So I also like to thank all the banks involved in our RCF for their trust and corporation, because for SCHMOLZ + BICKENBACH, this rock solid financing will enable us to really better focus -- even better focus on the necessary continuation of our efficiency improvements.

So, as Clemens said, we achieved a good result in the first 3 months of the year. All the restructuring and cost-reduction measures we implemented over the previous 2 years, they contributed to the improved result. However, the target improvements are not all executed yet, and this will certainly keep us busy through 2017. Thank you.

With this, I'll hand over to Clemens.

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [5]

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Okay. Thank you, Matthias. Ladies and gentlemen, let me now turn to a short outlook for 2017, and this is Chart #18. For the time being, we look forward, optimistically, for the second quarter, thanks to, also, the strong order backlog. We expect the pleasing trend from the first quarter to continue, and this will result in a good -- finally in a good result for the first half year. For the second half year, however, the outlook is largely uncertain, as there are still several political and macroeconomic risks. Therefore, we will not update our quarter -- outlook or our guidance for the year before the end of the second quarter.

And with that said, I will then thank you, and I think we can go to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rochus Brauneiser from Kepler Cheuvreux.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [2]

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Rochus Brauneiser, Kepler Cheuvreux. A few questions from my side. The one is on the guidance. I think it's a bit surprising that there hasn't been an update on the guidance at this stage. If I listen carefully to what you said, we can expect that the second quarter will be probably comparable to the first quarter level, which would bring us to a previous -- to a result eventually well over EUR 100 million. And so the existing guidance is implying a significant step down in profitability for the second half. You referenced only to general lack of visibility. Is there anything you can see right now, which is contributing to this kind of cautiousness? That would be first question. Second one is on the volume outlook. I think previously, you expected kind of a flat volume. Q1 was clearly stronger than that. Can you give us an indication how much better you are seeing volumes now for 2017? Then thirdly, I think the tone today was you're returning back to normality, you had a pretty tough September, October time frame. It's difficult to see where the real normality is. You now have a backlog, which is as good as I can't remember when. It's definitely more than 5 years. I recall that you had been at this kind of levels. And so you're 50% above what you had in the third quarter. Is that the kind of backlogs you see now as a normality? Is this a reflection of restocking or anything else, which would explain why the backlog is now so much higher compared to the demand, which is probably slightly up? Can you maybe, in particular, elaborate what has been the main driver for the business and the intake in March? I think at that time, the nickel was already range bound or downwards oriented. Maybe let's stop at these ones.

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [3]

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Thank you, Mr. Brauneiser. I think at the end, all 3 questions relate to the same background. So I'm going to start maybe with the guidance. Mathematically, of course, I think you did the right thing. If Q2 is in the same range as Q1, that it's clear we will be more on the upper end of the guidance. Nevertheless, we have said with -- and this was your question, do you see any risk? Nothing has changed. You were in the last call, I remember. Nothing has changed. We have -- still we're looking on the elections in France and so on. We still don't know what this U.S. changes mean for us. And therefore, we are just cautious. And we said that after the first half, we will be able to see then also a little bit already into the second half and then it's much easier to make kind of reliable prediction. So from a volume, same thing, of course, with the order intake now. And if it continues like this, the volume will be higher. I think this is also something that is not too difficult to calculate. Now on the backlog, I think, please have in mind we were always saying that Swiss Steel, and you should take they are running more or less pretty flat out there full. So if you have interest on the automotive industry at the moment, it means that you are adding in terms of time. You cannot give more. The production is full. On the other hand, you also have heard from Matthias yearly contracts. So in this 620,000 tons, there is a bunch of kind of yearly contracts. So that is something that you have committed to. And then you have to see why is that positive trend for us? I think there are several answers. Look to our German plant, I think you remember in 2015, '16, we reported that we had also homemade problems. So we have done our homework. But just remember too our delivery problems and to the maybe also the frustration we have caused here and there with customers. And we've done a lot to prove that we are reliable again, and I think now we are getting the invoice for that. We see that whatever your call it, people are coming back, and they are giving us more confidence and more trust, more orders. So we are gaining from that. We have used the time in the U.S., and it's not only about the oil and gas industry performing a little bit better, we have used the time 2016 to introduce new grades into the industry and that was maybe also something useful. They are coming back now and saying, "Okay, we want to utilize now the new grades, which contain nickel, which are lasting longer, which are more reliable," and so on. So all that together, I think, shows finally in that number.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [4]

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Okay. As a follow-up, when you said annual contracts signed and a backlog, can you give us some indication how that compared to the previous years? On Slide #18, you showed the order backlog trend from 500 to 556, and now 620. What would that -- how much of that increase would have come from your contacts?

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [5]

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I think, Mr. Brauneiser, your question was more towards the additional tons you are seeing there, because (inaudible) we are having with our large customers, and this is part of this kind of industry relationship. Automotive companies are not changing from one year to the other rapidly. I mean, they want to have reliable suppliers. So they will maybe take something off if you are not performing well, if you have quality problems. And you're getting more if you are performing well and you are somehow, let's say, in the right price range. So I think 2017 now, this is what I was saying and Matthias was being more detailed. In 2017, we have got the contracts and we have got the volume that we have expected. Now in addition to that, we have now additional from engineering steel, we have now additional volume coming and same for the LSI for the stainless steel. Additional volume has come to us, because maybe we have been reliable again or quality was good. There are several reasons. But this is the delta really that you would see now today compared to maybe what you have seen in the years before.

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Operator [6]

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The next question comes from James Gurry, Crédit Suisse.

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James Gurry, Crédit Suisse AG, Research Division - Research Analyst [7]

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I've got a couple of quick ones. Can you give us an outlook? Did you just say in those remarks that the outlook for tool steel is not expected to see an uptick? Can you just confirm that or give us a clearer outlook for tool steel? Can you also remind us of the one-off costs that you've got from the unions that I think you have to give back to the workforce in the year ahead? Just a reminder of that. And looking into the next quarter, if earnings are going to be at a similar level or better than the first quarter, how do you think the free cash flow might look in that environment?

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [8]

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Maybe I'm going to start with the tool steel. Please have in mind that tool steel has a different logic than the stainless steel or the engineering steel. You would see stainless or engineering steel in every car in the injection system or in the brakes or whatever. So it's really -- if you have good car sales, they need more steel. Tool steel, you would see when you have a lot of new models, where they need to make plastic molding or whatever, cutting tools and so on. So therefore, yes, it's true that at the moment it's flat, but it has a different logic. The amount you are talking about from the unions were EUR 15 million for '16 and for '17. This is nothing we have to give back. I mean, this is something that the workers are giving to us, because they are not getting their Christmas salary. From '18 onwards, we are going to pay them this '13 salary again. Matthias, maybe you can...

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [9]

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Yes, it's exactly as you say. So basically, starting January 1, 2018, all these costs jump back into our P&L. The agreement with the unions is that until when we do have time together with the management of DEW and with them to identify sustainable measures to replace these forfeited '13 salary. And that's why we put into place the provisions at year-end, and that's why we are working on these solutions to reduce or to improve the productivity, and this is what I was alluding to is what we need to achieve this year in order to not have a net -- unfavorable net effect on our costs next year, but that still needs to be done. So this is a challenge for us. Then on the earnings in Q2, -- sorry, the cash flow in Q2, what will happen there is, right, we didn't have any cash outflow in Q1, which was related to the provisions that we have taken at the end of Q4. So no cash out for the restructuring in DEW yet. A portion of that is going to come in Q2, and that has to be balanced with a -- will be balanced, of course, on the other hand with more or, let's say, less pronounced uptick in the working capital. So overall, these 2 effects will be there. The net result, will mean that the net debt is substantially reducing? Will it stay at the same level? That remains, to some extent, to be seen. The trigger is a little bit, not exactly fully plannable, because it also involves tax payments that are not precisely known at this point of time. But what I can tell you again also it is very important for me you really take that message is, in terms of efficiencies of working capital, we really press hard and that will not deteriorate like the previous year. So on that part, we don't see any deterioration coming.

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Operator [10]

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(Operator Instructions) The next question comes from Mr. Achuthan Balasingam from Tikehau.

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Achuthan Balasingam, [11]

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Could you please make a comment on how the recent decline in prices of iron might have an effect on your business, just very quickly?

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [12]

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Sorry, we didn't get your question, could you repeat please? Your line was pretty poor.

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Achuthan Balasingam, [13]

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Okay, so can you hear me now?

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [14]

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Yes, better.

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Achuthan Balasingam, [15]

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Just the -- recently there has been a decline in the prices of iron. Just any comment how that affects your business?

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [16]

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I guess, you're referring to the raw material prices.

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Achuthan Balasingam, [17]

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Yes, exactly.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [18]

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There are sensitivities with respect to EBITDA, and of course, also with respect to working capital. So what is most pronounced as a risk at this point in time what we would think is it's chromium and it is scrap, because both are at levels that are well above what we have seen in Q1 2015. So we don't really publish sensitivity factors here on that. However, you get a feeling, I think, if you look at what has happened in the second half of 2015 when prices came down very fast. We wouldn't see the same thing happening now to that extent. It would ever happen even if H2 goes bad. But it is possible that these things can amount in a sharp decline up to EUR 10 million as we have seen or even more in 2015. That is certainly something that has occurred in the past, even though it started from higher levels, of course. So the likelihood for the full amount is less. But something like EUR 10 million, if you would go back to levels below EUR 200 on scrap and if you would go to chromium back to levels of EUR 2,400 or something like that, then you would see such figures.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [19]

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Alice, are there any questions coming in? If not, I will take one that we received through the Internet. So then I have a question from BlueBay Asset Management from Duncan Farley, and he wants to know how should we think about the quarter-end backlog in terms of potential Q2 sales? What is the physical maximum of quarterly sales volumes?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [20]

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Physical maximum order, I don't know, but that is a bit hard to define. But what we internally use is that the Q2 2014 that was in the recent years the highest that we have seen. Actually, I don't have it at hand right now. Maybe, somebody can help me Q2 2014 what the sales were.

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Unidentified Company Representative, [21]

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(inaudible)

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [22]

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So 500,000 tons, that is more or less the highest that we have seen. So that would be kind of physical limit, because it's related to dispatch capabilities and so not a production thing, it's rather on dispatch. So that is a physical thing. Will we reach that? Obviously, we don't give a guidance on that at this point in time.

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [23]

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Well, I think it's also fair to say once again, don't mix it. If you see we -- at the moment, if we say we could do 500,000 tons in a quarter, we would not produce now 500,000 out of the 620, because in this 620, you have some long-term orders in sight. So they are due for shipment maybe in September or October. So you would not produce them now. And of course, in some of our mills, we could do overtime. Would you do that? Normally not, because the cost is higher. This is something when you take the order, you have to tell the customer also the lead time for that, and you would say that it will be delivered at this and this time, and it will be booked into the system, and it will appear in the backlog. So you would have really to divide the backlog in kind of reaches, what the customer expects, when it has to be delivered, and I think then you will see that it would not make sense to start now running every plant with overtime to produce as quickly as possible the 620,000 tons of backlog. Nevertheless, there is also a kind of technical restriction, because some of these things you cannot do at the same time and so on. So therefore, one has to devise the backlog really before answering. Okay. Thank you.

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Operator [24]

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(Operator Instructions) Gentlemen, there are no one more questions on the phone.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [25]

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Okay. So then thank you very much for joining us in today's conference call. Thank you also for your interest in our company. If there are further questions or remarks, please let us know. We are looking forward to continue our dialogue with you. Thank you, again. Enjoy the afternoon, and see you. Talk to you soon.

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Clemens Iller, Schmolz + Bickenbach AG - CEO and Member of Executive Board [26]

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Thank you.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO and Member of Executive Board [27]

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Thank you.

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Operator [28]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.