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Edited Transcript of STLN.S earnings conference call or presentation 7-Aug-19 9:00am GMT

Q2 2019 Schmolz & Bickenbach AG Earnings Call

Emmenbrücke Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Schmolz & Bickenbach AG earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clemens Iller

Schmolz + Bickenbach AG - CEO & Chairman of Executive Board

* Matthias J. Wellhausen

Schmolz + Bickenbach AG - CFO & 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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* Glenn Zahn

Commerzbank AG, Research Division - Analyst

* Ingo-Martin Schachel

Commerzbank AG, Research Division - Head of Equity Reseach

* 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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Dear ladies and gentlemen, welcome to the Conference Call of SCHMOLZ + BICKENBACH AG on the Second Quarter 2019 Results. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Ulrich Steiner, who will lead you through this conference. 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, Regin. Good morning, ladies and gentlemen. I would like to welcome you to the SCHMOLZ + BICKENBACH investors and analysts conference also from my side. Today, I'm joined by CEO, Clemens Iller; and CFO, Matthias Wellhausen. The 2 gentlemen will shortly guide you through the presentation to our second quarter results. Since this morning, 7 a.m., you can download the media release and the interim report as additional documents from the group's website.

During today's conference call, we will make forward-looking statements as described in the disclaimer on Slide #2. These statements are based solely on our expectations or projections of future developments and may differ materially from actual results, performance or achievements.

With this note, I now give the floor to our CEO, Clemens Iller. Clemens, please.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [3]

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Thank you, Ulrich. Good morning, ladies and gentlemen. I would like to welcome you here to our telephone conference today at a, I would say, unusual time. Normally, we are doing this at 2:00. But also thanks for not losing interest in us even in the current extremely challenging situation for SCHMOLZ + BICKENBACH. In the next few minutes, my colleague, Matthias Wellhausen, and I will report to you on the tough market setting and its effects on our group.

Let me start with a personal remark. Me, I have been working in this industry now for 25 years, and what we're currently experiencing is not unusual in the cyclical steel industry. Our industry is going through periods of strong growth but also periods of very weak demand. What we and our customers are concerned about today, however, is the unusually low visibility into the coming months. Trade barriers, trade conflicts and political fightings weigh heavier than ever on the global economy and do not allow reliable predictions to be made at present. In addition, following the acquisition of Ascometal, we have not yet been back in the best shape to fully withstand the current market weakness. But let me make once again a clear statement here. It -- the long term, the industrial logic for the acquisition of Ascometal remains unchanged. We remain convinced that we have taken a major step in the right direction.

But now back to the presentation, which I will begin with an overview of the quarter. Matthias will then explain the figures in more details before I give you an outlook on the rest of the year. After that, we will answer the questions you may have.

So let's start with Chart #5, which shows the most important developments from April to June. Contrary to our expectations, the global economy continued to lose momentum in the second quarter. Having already seen a slowdown in growth in the preceding 2 quarters, the ongoing trade conflicts and the numerous political discussions have weighed heavily on the steel industry in general and, therefore, of course, also on us. In the course of this economic slowdown, demand from the automotive industry, our most important end market, fell sharply again in the course of the second quarter. In addition, the more restrained ordering behavior from other industrial segments such as mechanical and plant engineering already seen in the first quarter became more pronounced in the second quarter. Despite weak demand, however, a certain stabilization was observed in the second quarter as the pace of the decline in orders and order backlog slowed.

From this, we conclude that the inventory reduction cycle is likely to be at an advanced stage leading to a slight recovery in demand in the next few months, also at a much lower level than in the previous year. Nevertheless, it would be too early to speak of a sustainable recovery.

In the extremely challenging market environment described above we experienced a decline in sales volume and revenue and EBITDA. In contrast, we were able to turn free cash flow positive through stringent inventory management. For seasonal reasons, this was very rarely achieved in the second quarter but now helped us to reduce net debt. As you know, this is one of our top priorities.

Let's go to Slide #6. We summarize the most important key figures. Sales volumes fell by 16.2% from 580,000 tons in the prior year quarter to 486,000 tons. Revenue fell less sharply than volumes by 11.1% from EUR 908 million to EUR 808 million. This under-proportional decline reflects the so far robust average sales price of the past quarter.

The losses in volume and revenue then impacted operating performance further below. Adjusted EBITDA was less than half of what it was a year ago, exactly 52.3% lower. Compared to almost EUR 85 million in Q2 2018, EUR 40.5 million were achieved in Q2 2019. The bottom line was, therefore, a loss of EUR 13.6 million after a net profit of EUR 37.1 million in the prior year quarter.

The picture for cash flow and debt is much more positive, whereas we recorded cash outflows of around EUR 68 million in the second quarter of 2018. We were able to increase free cash flow to almost plus EUR 60 million in the same quarter of this year. This extremely pleasing result was a consequence of a strict inventory reduction. On the other hand, we had high inventories until Q4 2018 due to a booming economy, and we had to build up safety stocks in the course of the takeover at Ascometal and for graphite electrodes in order to remain deliverable at all times.

We worked intensively on both inventories and achieved a significant improvement in free cash flow. As a consequence, net debt was reduced by EUR 43 million or just under 6% in the reporting period. My colleague, Matthias, will discuss this in more detail in his part.

Let's now come to the Chart #7, which shows the development of raw material prices and important industry indicators. The most important raw materials for SCHMOLZ + BICKENBACH, nickel, scrap, ferrochrome, were quoted lower on average for the quarter following a slight increase in prices in the first quarter. Nickel with the decline of 1% was only slightly below the level of the first quarter, whereas the quarterly average price for scrap was 4% lower and that for ferrochrome, 9% lower. It is to also mention that in July, August, we see a significant increase of nickel prices.

As in the first quarter, the crude oil prices for the grade WTI continued to rise in the second quarter. The rise to USD 58 per barrel was fueled by a further escalation of the conflict between Western countries and Iran. A look at the industry, that contributes for around 2/3 of the group's revenues, confirms the unpleasant picture of economic development in the second quarter.

In the German mechanical and plant engineering sector, new orders in the second quarter fell by 8% year-on-year, far short of the previous year's figure. In addition, the industry association, VDMA, recently adjusted its outlook for 2019 as a whole and now anticipates a 2% decline in mechanical engineering production in Germany.

In the most important end market, the automotive industry, new car registrations in Europe fell by around 3% in the second quarter as cars have been produced to stock. Production figures in the largest automotive markets, Germany, China and the U.S., fell even more sharply than registration. The double-digit percentage decline in all these markets indicates that production was cut back disproportionately compared to registrations. We interpret this in a way that inventories in the automotive value chain were sharply reduced in Q2, which, in turn, was reflected in our figures.

Finally, I would like to say a few words about the regional development on the Chart #8 now. What was already apparent in the first quarter but was concealed there by a month's additional contribution from Ascometal is now visible in the second quarter with a minus of 13.8%. Our business in Europe was hit hardest by the economic slowdown. The Asia, Africa, Australia region was also affected mainly driven by China. North America performed significantly better with an increase of 2.5%, and Central and South America was an increase of 16.7%. North America, we were able to sell more through our sales and service arm. While in Central and South America, the locations newly opened in the last 2 years contributed to double-digit growth.

In summary, the second quarter was even more challenging than the already difficult first quarter. Also, a downturn of this dimension cannot be fully absorbed. The rapid implementation of countermeasures has helped to mitigate the adverse impact on earnings.

My colleague and CFO, Matthias Wellhausen, will now explain what we have achieved operationally and how this has affected the figures in detail in Q2. Matthias, please.

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

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Clemens, thank you very much. Ladies and gentlemen, I'd like to extend a warm welcome to you, and thank you for taking the time today to join the conference call. As usual, I will give some additional information on the key financial figures. And these figures are now directly comparable with the same period in the previous year for the first time as Ascometal is now fully -- about fully consolidated for the entire quarter and the previous year already. So the differences in the comparison only arise from the application of rules from IFRS 16 accounting standard, and I will hint to the impact of these effects at the respective points there.

Now let us start with Table 10, which is related to the sales and production activity. The data show the extraordinary dynamic over the past 12 months. In the same period of the previous year, we had reported the highest production of crude steel and the best adjusted quarterly EBITDA since 2011. That was in the context of an almost overheated market demand then. While in Q2 2019, the market environment continued its reversal, as Clemens described, and the ongoing destocking in the supply chain was aggravating the reduction of the current demand.

The crude steel production in Q2 was lower by 22% compared to the same period in the previous year. That is 506 KT compared with 650. You will remember that we had already swiftly started to adapt our production beyond the lower demand in Q1 and also started to reduce our inventories with that. We continued this course of action in Q2. The decline in sales volume was therefore less pronounced than in crude steel production, which showed a drop of 16% from 580 to 486 kilotons. However, sales volume of 486 kilotons means a further decline versus the 551 that we had in Q1, and that was driven by a particularly weak month of June.

The sluggish demand was, first and foremost, driven by the pronounced and continued weakness from the automotive industry. This hit mainly the product group of quality and engineering steels where our sales volumes dropped by 20%. Stainless steel and tool steel held up much better, but also here, we saw a decline by 1% and 8%, respectively. Why that did not drop further? Well, this reflects a wider diversification by customer industries for these products.

Now the low demand is also reflected in the order book as the backlog continued to decline during Q2. It reduced further compared to the end of quarter 1 by 16% and was 30% below the year-end figure.

Nevertheless, there were signs of improvement. We saw in some cases the normalization of customer inventories. In these situations, we saw orders coming back from the customers. Also, the offtake for July was already significantly better than in June. However, as Clemens indicated, visibility remains low and we still value these developments as fragile.

Let us turn to Chart #11, which shows revenue and average sales prices. Revenue was down 11% year-on-year to EUR 808 million. Obviously, higher average sales prices could not completely offset the decline in volumes. The segmentation of revenues by product group largely reflects the picture in terms of volumes. The decline in the quality and engineering steel was most pronounced with a minus of almost 22%, whereas the revenue with stainless steel and tool steel declined by only slightly more than 1%.

The average sales price per ton of steel in the second quarter of 2019 was EUR 1,662 per ton. That was approximately EUR 100 per ton higher than 1 year ago. Now half of this increase approximately is attributable to the more favorable product mix, and that reflects the lower share of quality and engineering steels in the sales volume, which, as you know, structurally has a lower average sales price due to the low content of alloy.

The other half of the increase is reflecting the still better base prices than a year ago. However, these base prices have come under continued pressure, in particular with respect to carbon and engineering steel, and within this group, to the spot traded commodity grade. Stainless and tool steel remained virtually stable. So therefore, we think that sales prices probably have passed the peak in the second quarter, although we do expect the overall price environment to remain reasonable in 2019, also based on the relatively robust raw material prices.

Continuing with Table 12, EBITDA and group result. Adjusting for nonrecurring items, EBITDA stood at EUR 4.5 million (sic) [EUR 40.5 million]. That was around 52% below the EUR 85 million of the prior year quarter. There were 4 main reasons for the decline. You know them, but it's worthwhile maybe to reflect a second. First and foremost, obviously, there is a weak demand, simply the contribution of the missing -- of the unsold volumes is missing. But secondly, the disproportionate reduction in production resulted in a lower absorption of fixed costs. While last year, the inventories increased in order to satisfy the rising demand, the situation was now the other way around. We were unable to fully compensate for the pressure on production cost per ton despite the very rapid and intensive countermeasures we introduced. Thirdly, the efficiency of variable inputs deteriorated with decreasing capacity utilization. To give an example is the energy consumption, refractory utilization is a normally variable cost. However, the consumption of those increases per ton when your capacity utilization reduces. And fourthly, there was also pressure on sales price, as we just discussed, and an increase in energy and personnel costs as a result of collective tariff increases. So all coming together and weighing on our result.

We intend to further offset the higher costs by enhancing the efficiency program for 2019. We identified additional measures to bring the effect from EUR 40 million to EUR 50 million. In the first half of the year, we achieved around EUR 18 million of that with permanent savings. Obviously, some of the effects are now back-end loaded and will materialize rather in H2 and -- within H2, rather back-end loaded in Q4.

The application of IFRS 16 had a positive impact on EBITDA of EUR 3.1 million when we compare to the previous year's quarter. The lower adjusted EBITDA is also reflected in the lower margin obviously and the lower EBITDA per ton. The margin decreased to 5.0% after 9.3% 1 year ago. The adjusted EBITDA per ton reached EUR 83 after EUR 146 in the prior year quarter, was EUR 6 higher than in Q1 based on the better product mix.

One-off effects and the adjustments amounted to EUR 12.5 million and included, among other costs for the industrial integration of Asco, a provision of EUR 5.7 million for the closure of the business unit rolling mill in Les Dunes, which will be closed ahead of schedule. Including one-off effects, the EBITDA was EUR 28 million, which is down 66% from EUR 82 million a year earlier. The net loss amounted to minus EUR 13.7 million after a net profit of EUR 37.1 million in Q2 2018.

Now let us turn to the development of cash flow and financing as presented in Table 13. We see a very good development in free cash flow with a cash inflow of over EUR 59 million, reflecting the progress on adapting the net working capital investments. In the previous year, we reported negative cash flow of EUR 68 million. At that time, this was driven by the acquisition of Asco as well as the development of safety stock for graphite electrodes and the high demand of our customers. This year, along with the lower demand, we could reduce inventories by more than EUR 100 million during the first half 2019, and that was despite that overall prices -- price levels did not help here much, they were rather stable, as you know. So a good success in reducing our volumes and our electrode stocks.

This does not yet fully show in the ratio of net working capital to sales. That rose from 28% in Q1 '19 to 29%, which is mathematically attributable to weak sales in the short term. We continue to see a ratio of around 26% as realistic, and we will make further progress in this respect.

In line with the very pleasing development of free cash flow, we succeeded in reducing reported net debt by almost EUR 43 million to EUR 709 million. This was still higher than the reported figure of EUR 655 million at the end of 2018. However, the sole reason for this increase is the first time adoption of IFRS 16. If you eliminate that, the net debt is EUR 59 million lower and to that extent also slightly lower than at year-end.

Now due to the weak adjusted EBITDA, nevertheless, the leverage increased from 3.6 to 4.3 compared to the Q1 2019 here, to the IFRS 16 has an impact of roughly 0.2 points. On a comparable basis, the leverage, which is important for the calculation of our net debt financing covenant, was 4.1.

In the short term, we do not see any improvement in the economic situation, as Clemens will allude to a little bit later. That is why the debt and leverage situation will not ease in the very short run. However, in order to remain within the covenants at the end of Q2, we had already proactively and successfully agreed with the banks in the first quarter to relax the covenants in order to ensure an increased headroom until the end of the year. We remain in a constant proactive dialogue with our banks and our Board on our business development. So if necessary, we will address any tensions proactively as we always did in the past.

In any case, we will focus on operational levers to improve our financial position. Additionally, to working on our inventories, we will also focus on tightening the spending side, for example, by reducing administrative costs, reducing the number of temporary external workers or postponing maintenance where this is not adversely affecting our operational performance and, of course, the safety of our workers.

As far as liquidity is concerned, headroom is sufficient and even better than at the end of first quarter. The group had EUR 395 million in cash and unused lines at its disposal at June 30. We therefore continue to have good financial flexibility.

Let me conclude by summarizing that the difficult market environment of Q2 is putting more strain on us than we would've liked. Well, we have introduced the right measures to consistently pursue our operational goals and at the same time, secure the financing of the group.

Clemens, I give back to you with respect to the outlook and our view on the future.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [5]

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Yes. Thank you, Matthias. Ladies and gentlemen, let's come to the third part of our presentation, the outlook, and then we are jumping over the Chart #14 immediately to Chart #15.

As described on Chart #15, the further development of our business in 2019 will be marked by considerable uncertainty. Due to the unusually low visibility we currently have to our business, we cannot be more specific in our statements for the second half of the year. Whereas in the last financial year, we had a good forecasting capability for -- of 4 to 5 months in a strong market environment, today we have a maximum view of the next 1 to 2 months. Short order backlog, the complexity of the global supply chain and mixed customer feedback do not permit reliably estimates. In addition, we are now in the middle of a seasonally weak period in which the order book are also thin and, therefore, not very meaningful. In our opinion, both a market recovery and a sustained economic slowdown are possible scenarios. Disruptive macroeconomic events such as an escalation for the trade conflict between the U.S. and EU or China may well accelerate the current downward trend. From today's perspective, however, we do not expect demand to gradually recover until the end of 2019.

This brings me to the outlook on Chart #16. The accelerated downturn of the last few months has led to a shift in our priorities. First and foremost, we are doing everything we can to maintain our financial flexibility and thus our entrepreneurial freedom, As Matthias has already explained, the main focus in our -- improving our operating performance.

In addition, we also keep our -- all options open in order to secure adequate financing for the group. In this context, the second element is strictly spending discipline. In addition to these top priorities, we press ahead with the industrial integration of Ascometal and accelerate part of our synergy concept, as Matthias was saying, for example, in Les Dunes. With the same determination, we will tackle the turnaround at Finkl to bring the business unit's profitability back to a level that can be expected in the current market environment.

In addition to these 2 special topics, however, we must also continue to work on efficiency and thus profitability through continuous improvement measures within the group in order to cushion the effect of constant cost inflation, especially for wages and energy. We have raised the cost reduction target for 2019 in the group from EUR 40 million to EUR 50 million. In addition, we will return investments in working capital to normal levels.

In view of this unusually low reliability of our forecast, we are maintaining a large EBITDA guidance range of EUR 40 million, contrary to our normally standard practice. Based on the assumption of a gradual recovery in demand towards the end of 2019 and further implementation of the measures at Ascometal and Finkl Steel, SCHMOLZ + BICKENBACH expects adjusted EBITDA for fiscal 2019 to range from EUR 130 million to EUR 170 million.

This completes -- concludes the presentation. Thank you for your attention, and let me now open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Ingo Schachel, Commerzbank.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [2]

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I would have 2 questions on your balance sheet. The first one would be on your second half net working capital reduction potential. Obviously, you had a very strong second quarter free cash flow, I think actually the best second quarter free cash flow since you started reporting quarterly numbers. So what does it mean with regards to the net working capital reduction potential in the second half? I think in the past, you usually had at least EUR 50 million free cash flow in the second half. Would you say that this year the number is fairly lower because you've already done some of the net working capital release that you usually do in the second half in Q2? Or would it rather be higher because you put so much emphasis on net working capital management?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [3]

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Yes. Good to hear you. So it is true that -- let's say, that the second half in terms of cash flow might be less pronounced in terms of progress. A lot will depend on the further development of prices -- of raw material prices. Obviously, chromium is going down. On the other hand, we see quite a hype on the nickel side. So it's a little bit difficult to assess the overall net effect of the situation. What I can confirm is that we will continue to reduce the volumes and stocks that will be pursued. So I need to leave it a little bit vague with dependency on the prices.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [4]

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Okay. And then when it comes to measures to strengthen the balance sheet generally, I think many other steel companies are selling their noncore assets, real estate or elevator companies to strengthen the balance sheet. Is there anything you can do in this area? I don't know if you have any specific assets in mind. I think in the past, I think it was sometimes mentioned that something that might be separate or divested, but I'd really be interested on whether you see any areas in this area of hidden assets or divestment potential where you could possibly raise more cash if needed.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [5]

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Yes, unfortunately, we have no elevator company, so this is something that we can...

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [6]

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Well, there's one for sale, but it's too expensive for you.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [7]

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Nothing we can offer. But as we have said, it's -- all options are on the table. Clearly, I mean we also look at sales of assets. But the good thing is we are not under pressure. As Matthias said, our liquidity is okay, so we are not under pressure. And you know that we have a new Board composition at the moment. So I think it's fair also for the Board that we take enough time to look on all these assets strategically, what do we need, what makes sense and what does it contribute. Finkl, we have just a while ago agreed on a kind of turnaround plan that is executed. It's on a good way. And therefore, there is no fire sales necessary. But again, all options are on the table, all.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [8]

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Okay. Very clear. If I may just -- 2 quick housekeeping questions. Can you tell us what your expectation for restructuring expense in total would be this year? I guess it's probably a bit higher in light of the accelerated Ascometal integration. And if you could also tell us what your CapEx expectation for 2020 would be, that would be helpful.

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

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For the restructuring expenses in H2, you should expect single-digit amount to go into the P&L. This will relate to Ascometal as planned, I should say. And as we have said in the beginning, when we acquired Asco, it will not exceed, so to speak, in total accumulated what we had incurred as a positive bandwidth during 2018. So it will be single-digit in the second half, and it will, in total, not exceed that amount. In terms of CapEx, it is a little bit early to guide for next year, so I would not want to extend that at this moment.

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Operator [10]

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The next question is from Rochus Brauneiser, Kepler Cheuvreux.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [11]

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Yes. First question is on automotive. I think you talked in detail about the weakness of volumes you saw in the second quarter. Based on what you're seeing now, how is your feeling about the seasonality in Q3? Will it be the normal summer weakness? Or could it be lower because of what you have already suffered in the first half? And maybe you can also talk about the different speeds in the auto volume decreases in the second quarter, how that differs between the parts going into production and the tools going for -- tools and dies going into -- as a production equipment. And then on the auto, how do you see as of now any risks coming from the new test scheme in September? Maybe I'll encompass the other questions afterwards.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [12]

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I'll start maybe from the back, this new test scheme. You mean this WLTP 2 standard most likely. And there, I can only say that -- I mean it will not hurt us more than WLTP 1. Actually, I think it was a bottleneck issue more than really a testing issue. For the steel that we are producing, there is no change in whatever dimension or grade or whatever. So that is something that might be a problem then again because there are not enough test equipment available for all the new models, so difficult to say.

For the question of -- I understood it like this way that you said between the product because indeed, what we see at the moment is that tool steel by far is not as under pressure as we see that for the engineering steel. So yes, there is certainly also a slight decline, but by far not as thick as for the engineering steel. For the other 2 questions, Matthias maybe...

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [13]

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The -- you mean whether the seasonality -- whether we expect the same seasonality than in the previous year, whether it's strong or less strong. What we have been seeing, Mr. Brauneiser, is of course, that the steel demand from auto was decreasing low -- stronger than the production of cars. So to that extent, we have a stronger impact on the apparent demand from the auto industry than for the real demand. And that is indeed also part of the optimism that we still carry that volumes are normalizing ahead of us.

Whether this -- how this is materializing in Q3 or in Q4 that, so to speak, stocks are back to normal level in the total supply chain is part of the lack of visibility. So we don't know. That's why Clemens was saying we keep this EUR 40 million of wide -- of EBITDA assessment. This is unfortunately our situation. We cannot guide more precisely because we don't have more insights on the stocks in the supply chain. We only know that there is a destocking happening. How long it will continue is very hard to assess.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [14]

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Okay. Got it. Second question is on your OpEx. I think you made quite a progress in getting your other OpEx down 15%. And also when I square it against volumes, it was down. How does that fit together with what you said before that you had fixed cost equation issues because your production was further down than shipments? How does that fit together? And how sustainable are those lower OpEx for the second half?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [15]

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So partly, these are onetime measures. Not all of that is sustained. You are fully right. We have obviously undertaken all what I have said in terms of variabilizing fixed costs. This is, for example, reducing external workforce. This includes postponement of projects. This also includes having a real look at maintenance activities, a little bit like with your car. You -- do you have to bring it now to inspection or maybe you postpone it. So these actions also have been undertaken. So to that extent, there are -- there's a certain portion of onetime effect in it but without exposing any of our safety or operational ability.

To be very -- a little bit -- with a loose language, I would say, yes, this is the usual torture list that you go through when there is a business downturn. We are very much used to that situation, unfortunately, and that's what we have done. So there is no harm of what we have done, but not all of it is sustainable.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [16]

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Okay. Third point is on your covenants. Can you remind us to what extent the covenant has changed in alignment with the IFRS 16 adoption?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [17]

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The -- if I may say, the covenants calculation itself is independent of changes in the accounting rules. That is the structure we have established. So IFRS 16 does not do anything to achieving the covenants.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [18]

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Okay. Can you remind us the covenants level you have agreed?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [19]

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Well, we did not establish them in public, so we -- it's a private information. But I can assure you that in Q2, we did not -- so we were well within these covenant limits. But they have been amended during quarter 1.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [20]

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Okay. And last question, can you just give us a bit of a sense to what extent the Ascometal losses have -- on EBITDA level have widened in Q2 versus Q1?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [21]

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Sorry, say that again? In Q2 versus Q1?

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [22]

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Yes.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [23]

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Yes. Asco is, of course, also impacted from the strong volume decrease in auto. They have actually -- they have the highest share of auto within our units. And to that extent, the result was close to the -- to a 0 line.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [24]

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But Mr. Brauneiser, I can say that definitely this impact is far less than what you would see in Swiss Steel or in DEW. So from that point of view, I think it's the normal downturn.

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Operator [25]

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(Operator Instructions) And the next question is from Glenn Zahn, Commerzbank.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [26]

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Just help me out with something here. During the conference call, you were -- during your first part, you were mentioning that you saw some stabilization in volumes as the quarter -- second quarter was progressing. But then you mentioned that you're starting to see other end markets starting to soften. I mean can you just explain in more detail the trend? I mean is it a clear trend downwards as we head into the third quarter? Are volumes still down at the same magnitude? Because one would think, as you're starting to see the prices of nickel come up, that people are going to get a little frightened and they're going to go out to prebuy. Are you seeing any of those trends? So if you could just clarify that, that would be great.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [27]

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Yes, I can try. I mean, first of all, if you -- what I was saying in the first part is that the speed is slowing down. So what we have seen is in January still somehow the decline was not so dramatic, but then it accelerated in February and March and then April. And unfortunately, in the automotive industry, the communication, at least to us, is not so good. So what we normally experience is that they are not taking off from the consignment stock because most of our contracts have, of course, a kind of flexibility in the volumes. From their point of view, they do not have to inform us early enough. And that kind of slowdown is coming quite surprising. But this is a slowing down.

Now secondly, what you also see is just looking at the statistics, that you see the amount of new registered cars has not come down so dramatically, which means -- and you compare to the production. And if you look to the last numbers, you can say 3% less in registration, 12% less in production, at least in Europe. Then you can imagine that most likely, they have produced before just on stock, and then they have sold these cars now and produced less.

For us, it's very important now, and Mr. Brauneiser was asking a little bit in the same direction because normally what happens is now in these summer months, they would do maybe also some unplanned still stand or, let's say, additional week of vacation or anything like that. And therefore, we will see now in August, when everybody comes back, how then the order intake will develop. But clearly, we have seen in June, come then July that the order intake is somehow stabilizing. And this would correspond certainly then also to a kind of normalizing in this stock level.

Now you remember that the automotive industry, when we had the downturn in '15, '16, the segment automotive was going quite well. So we have now since years a very good situation, and that's most likely what everybody in this chain have built up some safety stocks. And I think this is what we see at the moment, this slowdown.

Now for us, it's not a secret. 50% of our sales goes into the automotive segment. The plant engineering, so this, what we call, machine invoice is far less. But it's true that we are also seeing there now -- after, I would say, 6 months where the automotive industry was already struggling, that we see now also a kind of slowdown there. What it means in terms of tons for us is not clear at the moment.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [28]

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Can you just give us -- in that last section there, can you just give us a little bit of a granularity? I mean where -- in which end markets within the mechanical and plant engineering are you seeing the weakness? Is it in the products that are eventually destined for the export market? Is it domestic manufacturing? Or what kind of manufacturing is it? Or is there no -- or is it just broader throughout the whole sector?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [29]

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No, it's -- I mean, first of all, maybe if we ask the customers, they would tell us. But for us, we don't even know at the end where these machines are going to. I mean they are ordering steel for pieces that they are finally implementing in a machine, and we do not ask. But I think, as you said, it's a little bit of all. It's exports, but it's certainly also EU markets.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [30]

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Okay. And then on the -- a question on the base prices. I mean can you give us an idea or thoughts of the magnitude of the pushback and pressure that you're getting from customers on the base prices? And is this involving contracts that are annual contracts or more -- are they more short-term contracts? And kind of where do you see these base prices going towards the end of the year? And in relation to that, are you seeing any of your larger customers trying to be a little cheeky and trying to extend their payment terms?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [31]

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The last question, I can say, at least to my knowledge, there is not customers coming up for intended payment -- extended payment terms. At least, it must be in very small things that come -- do not come to my attention. But on the -- in general, on the prices, what we have seen is that during the 4 quarters of '18, we had quite a rise, and you have seen this in our reporting, quite a rise in the prices now. Very, very roughly, we have these 3 product groups where we say stainless, tool steel and then engineering steel. And in the stainless, for example, and in tool steel, until now the prices are fairly stable. And again, it's not easy to compare because sometimes you do some other kind of composition -- metallurgical composition and then, of course, the prices are changing back maybe down or up. But roughly speaking, there is not a big change at the moment.

Where we definitely see pressure is on engineering steel that goes into automotive. Yes, customers are trying to renegotiate, but until now, we have been able to resist. But the new orders, if you want to get new orders in this situation, clearly there is a price trend downward.

Now what we see -- because you said looking forward, what we see, and this is, I think, also known from the past that many of our competitors that are using blast furnaces and, not like us, electric arc furnaces, they are seeing right now a heavy cost increase because iron ore and coke is becoming much more expensive. And this -- the expectation at least is that these competitors have to increase prices in the fourth quarter. And there are some rumors already on the market now. I cannot tell you in which extent and how much, but there are some rumors that the big players are talking about price increases. And we always compare our route, this electric arc to these blast furnaces. We had a disadvantage there because scrap was somehow stable and the other prices were low. And now we see that it has changed, and we have significant advantage in terms of costs. So the expectation is that in Q4, for this grade engineering steel, prices are going up.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [32]

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Okay. And then just lastly, just to help remind us, you talked about the enhanced efficiency program, the EUR 40 million to EUR 50 million. EUR 18 million, I think, you said in the first half so far. How is it going to -- you see this going moving forward? When do you think you're going to get the entire amount? How does that play out?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [33]

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Yes, that is quite ambitious. You're fully right because obviously on the level of lower volume, it is even harder to achieve. However, there is -- I can tell you that the huge momentum is in total 350 additional measures that we have identified. In the meantime, there is a huge momentum on this topic. And this is in a very -- happening in a very organized way. We have this program also established in quite a while. We have beefed it up with additional, I would say, very good resources. And this is on a -- is being monitored very closely. We use all our resources also to reinforce best practices across the company.

And I must say that this is -- I'm now with the company 5 years. What is happening here is really an openness in our group that has been developed over the past years to such activities. There's a very good understanding of our situation and a very big, let's say, preparedness to execute. So this is basically what contributes to the big momentum. It is ambitious for the second half, but it's doable. And once again, the measures are identified, and they are being tracked and they are being monitored.

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Operator [34]

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The next question is from [Alexander Katznov], Barclays.

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Unidentified Analyst, [35]

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I actually have a couple of questions. Some have been answered already. Just one actually on your cost cutting plan of the EUR 40 million to EUR 50 million of the cost reduction. Does this actually include the one-offs you were speaking before? I think it was roughly EUR 19 million or so. Or is this additional cost cutting you're planning for this year?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [36]

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Yes. It does include also the tactical measures, like I have mentioned, the postponement of maintenance activities, for instance. So to that extent, not all of the EUR 50 million will be sustainable.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [37]

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On the other hand, if I may add, Matthias was talking about this postponement. But very often, it's not really a postponement because like your car, if you drive less, you have to go less to the inspection, and this is the same for us. If you could use that, we don't need to make every month a change of our oils or whatever, the oil. So therefore, it's not that we are jeopardizing the equipment with that. It's just adaption to the production level.

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Unidentified Analyst, [38]

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Okay. And actually, on your Finkl Steel plant, could you actually give us a bit more color, actually, around the EBITDA impact probably of the issues you were having on that plant? So basically, what was driving then your -- yes, your change in guidance so much? I think as far as I understand, it's not all just about a decline in the automotive demand but also actually the issues you had on Finkl.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [39]

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Well, I mean, Finkl, as you know from the past reporting, we have seen there a very specific issue which was very much related to the oil and gas industry, not so much to the automotive industry, and also to the increased competition situation. So what we are doing at the moment is that -- and we said that last time, it's not a matter of investment, the CapEx necessary, it's a change in our sales strategy. We have been in the past not really attacking one of the biggest markets for this kind of forged products, which is the customer-made pieces, customer forging, as we call it. And this is now what we are attacking. What it requires is -- and this in the past was not possible because we have moved the plan. There was still a lot of issues to solve and so on. So we were not too reliable in our delivery performance.

Now this is done. Everything is more or less up and running. And so we are able, if we promise a customer, to make a customer forging, to deliver also in time. So this is the market we are attacking right now. So it's very much a kind of sales issue and we are seeing the first fruits. So it's developing. Nevertheless, you have to gain also confidence from your customer, if you have for years and years being out, or maybe you have tried it and you were not reliable, then customers are not trusting you from the first moment. So you have to gain the confidence, and then it will develop in the right direction. But I think Finkl was, to a very less extent, responsible for the change in our guidance.

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Unidentified Analyst, [40]

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Okay. And the last one is actually again on the covenants, you've changed basically your levels there. Is this for the whole year? Or which quarters do you stop the testing? Or is it basically just a change in headroom?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [41]

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It's a change in headroom. So it's not a waiver or something like that, and it's for 2019, yes.

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Unidentified Analyst, [42]

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And then the headroom, I mean you're -- you didn't disclose the levels. But the -- how much headroom basically do you still have there? How comfortable are you there?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [43]

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We observe the situation, of course, on net debt development and our EBITDA forecast. So for the time being, we are -- we have no hurry, as Clemens was saying, from the liquidity side. And we currently evaluate obviously what is the cost ahead of us in more detail. There's a difference whether it's really coming out at EUR 130 million or at EUR 170 million on the EBITDA. And depending also on what the prices and for the working capital side are doing. So on that -- based on that, we will decide whether the headroom going forward would recommend to us to talk or to not talk for further adjustment in this area. So this decision has not been taken yet.

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Operator [44]

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We've just received another question on the telephone line. It's from [Karsten Singimi], [SLP].

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Unidentified Analyst, [45]

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One more question on liquidity, if I may. On the ABS facility, so I think there's about EUR 90 million of available liquidity. How much of that should we assume that is really drawable? Does it have any kind of conditions attached to it?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [46]

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There are no conditions to it. But we don't put 100% of our receivables into this program. A typical -- when you look at the historical figure, a typical figure is around 60% of the receivables are being utilized for the ABS. But there is no condition to it as such.

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Unidentified Analyst, [47]

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Understood. And secondly, could you give a little bit more color on the Federal Cartel Office fine -- potential fine that you disclosed in the Q4 report? What's the expected amount, likelihood and timing?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [48]

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Well, actually I have to say there is no news. We are still waiting for a kind of feedback from this investigation. I mean they have announced that they want to come this year, so these remaining 5 months. So anyway at this time, hopefully, we will hear now what exactly they have found and what they are giving us. And then we can continue to evaluate.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [49]

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As you have observed, there is no provision in the balance sheet so far because there are no grounds on which we could do that.

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Unidentified Analyst, [50]

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Got it. And what's the nature of the -- kind of the investigation?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [51]

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The nature?

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Unidentified Analyst, [52]

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Yes. Is this a new development? Or is it something that's from the legacy back?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [53]

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No, no. That's on the legacy back.

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Operator [54]

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There are currently no further questions on the telephone line, so I hand back to Ulrich Steiner for the questions raised in the webcast.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [55]

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Okay. Thank you very much. So now we have several questions in the webcast.

First from [Onido Singh] from (inaudible) Capital. He wants to know -- well, the question is as follows. Start to bottom end of the full year EBITDA guidance, i.e. EUR 130 million, require an improvement in conditions from where they are today? Or is that the EBITDA we should expect if trends continue on the same path?

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [56]

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I didn't catch the one. Is it the upper or the lower end? Or what was the question?

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [57]

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The lower end. If it requires an improvement in conditions from where they are today? Or is that the EBITDA we should expect if trends continue in the same path?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [58]

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Yes. The lower end would be at the level of where we are today with subdued demand.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [59]

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Okay. Another question, again from [Onido Singh]. Where are you with respect to your banking covenants? Have you received the waiver? If so, what are the new levels of net debt to EBITDA? Must it stay below? I think that's already been answered before.

Then we can go to a question from [Salen] from Atlantic Capital. Is there any covenants on your ability to grow on the RCF or ABS facility?

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [60]

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No. No restrictions.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [61]

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Okay. And yes, that was it basically from the webcast. And back to Regin.

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Operator [62]

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Thank you. We haven't received any further questions on the telephone lines either.

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Ulrich Steiner, Schmolz + Bickenbach AG - VP of Corporate Communications & IR [63]

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Okay. Good. So if this is not the case, then I would like to thank you for attending today's conference call and for your interest in SCHMOLZ + BICKENBACH. If you have any further questions or comments, please let us know. We look forward to continue our dialogue with you in the future. Thank you very much for listening. Have a good day, and goodbye.

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Clemens Iller, Schmolz + Bickenbach AG - CEO & Chairman of Executive Board [64]

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Thank you.

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Matthias J. Wellhausen, Schmolz + Bickenbach AG - CFO & Member of Executive Board [65]

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Thank you.

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Operator [66]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.