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Edited Transcript of SZG.DE earnings conference call or presentation 12-Aug-19 11:00am GMT

Half Year 2019 Salzgitter AG Earnings Presentation - Frankfurt am Main

Frankfurt Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Salzgitter AG earnings conference call or presentation Monday, August 12, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Burkhard Becker

Salzgitter AG - CFO & Member of the Group Management Board

* Heinz Jörg Fuhrmann

Salzgitter AG - Chairman of the Group Management Board & CEO

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Conference Call Participants

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* Alain Gabriel

Morgan Stanley, Research Division - Equity Analyst

* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Ingo-Martin Schachel

Commerzbank AG, Research Division - Head of Equity Reseach

* Ioannis Masvoulas

Macquarie Research - Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, a very warm welcome to the Salzgitter AG Analyst Conference here to Frankfurt and equally to those listening via the webcast and on the phone. Before we start, a few quick housekeeping things. (Operator Instructions)

And on that, let's start right away. And I give the floor to Prof. Fuhrmann. And after him, Mr. Becker will take you through the financials.

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [2]

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[Interpreted] Ladies and gentlemen, let me welcome you very warmly to our analyst conference first half 2019, and let me get started right away. On the one hand, if you take a look at the figures, we can all agree that it's quite a presentable balance sheet after 6 months. At the same time, we can see that the environment can be described as difficult. Steel market is characterized by declining sales. We have high import levels on the one hand. On the other hand, however, we can see volatile raw material markets. At least for the first 6 months, we could also see a dramatic surge of iron ore prices. And if you think of the coking coal price increases, unfortunately, they could not compensate for that. And when it comes to the iron ore prices, they do not only belong to the first half year, it is also something which can be reflected everywhere.

Now trade politics seem to threaten everybody at the moment. It is a threatening scenario, causes uncertainties in general but also in specific areas and industries. And this, of course, has also impact on your forecasts. Now as far as we are concerned, the second quarter was close with a pretax profit amounting to EUR 20 million, which is less than in the last quarter but still in the black. And all business units have generated, in the first 6 months, positive earnings contributions.

Here, I would like to underline that we had to work along the same lines as our competitors, which means that the KHS Group compared to last year, which was not that bad, showed a market rise in profits. And last but not least, I would like to mention that we improved our earnings by another EUR 25 million on the basis of our continuing operations.

If you take a look at the key data, you will see that less crude steel was produced. This is true for Peine and also for Salzgitter, no wonder. External sales have slightly declined by 2%, nothing dramatic. Earnings before tax, EUR 145.3 million. This is something -- if you put it on the basis of the present news, your forecasts and your analyses, if you see it against this background, it is a quite good result. Earnings after taxes, quite normal. Earnings per share, also okay.

ROCE has developed in line with our core workforce. We have not hired that many people. The economic cycle goes down. We're talking about consolidation effects. Respectively, we're talking about increased activities in foreign branches and subsidiaries doing a quite good job. At the moment, we have a challenging environment for some steel consumers at the moment, this is the headline of this chart, and this is true for everybody. And if you take a closer look, you can see that this chart does not really match with the headlines we're reading each and every day in the newspapers. And this underlines once again that the mood is much worse that the situation is such. But we are going to talk about that in a minute in greater detail.

Apart from that, we have an issue in the automotive industry, as we all know. But apart from that, the activities of the buyers are at the same higher level or is also higher than what we faced at the beginning of 2017. And this is also challenging for us, challenging for us Germans, even if we are known as pessimists, but we shouldn't be that pessimistic.

Iron ore. The first 6 months were characterized by a rapid increase after the dam break in Brazil. And then the prices dropped by 30%, and nobody knows how the curve will develop in the next months to come. What is not spectacular, what is right continues is the price of coking coal in the first 6 months and also after the first half year. We can see that the prices declined slightly. We're talking about 20%. But this 20% come from a completely different background than the 30% we witnessed in iron ore.

Steel prices have, as we all know, especially in the European steel market, not followed the raw material prices, especially when it comes to strip steel prices. Here, we faced a decline, which was not that small compared to the situation of last year, which means we had to face a margin squeeze, which comes from 2 reasons: reduced earnings and, on the other hand, higher costs when it comes to raw materials, on the other hand.

If you take a look at the other products, you can see, for example, the piping business. This has nothing to do with the steel production as such, but with scrap prices here, we have quite stable prices. And when it comes to plate steel where we started with a quite low level some quarters ago did not react in such a way as strip steel reacted. If you take a look at the right-hand side, you can see that the skyrocketed earnings for strip steel in the U.S., as we could see them 1 year ago, went down dramatically, but they are still higher than the European domestic prices.

And now you can see that the prices went up again. They recovered from that slump. But if you take a look at the Northern European prices, Southern European prices are EUR 20 lower for the same product. Northern European prices have been below the domestic Chinese prices for many months. Here, we can say, if there is something like a protection for the European steel market, this protection does not come from the safeguard quotas and measures which were imposed, but comes from the low prices, from the unprofitable prices at the European steel price level, which means that importers try to get the steel from other countries.

And this led to a situation that in some production groups, we had to face less, which means lower exports than in the years before, not everywhere, but in some areas. Safeguard quotas are based on record levels of imports. This is something you should not forget. And we're talking about very high levels of imports in the years 2015 to '17. They served as a basis for the free-of-tariff contingents, which were left by the European Union. Only after exceeding this kind of contingents, a tariff of 25% has to be paid, but this has hardly ever happened. For on the one hand, this kind of contingents are quite high, the reference period, especially 2017, '15 and '16, maybe a little less, were good years, successful economic cycles with a high steel consumption on the one hand. And on the other hand, we had a low domestic earnings situation.

Now let me carry on with our business units. Strip Steel, if you take a look at order intake situation, you can see smaller declines in a 1-digit percentage range. Earnings before taxes, EUR 60 million in the first 6 months. This is quite reasonable, quite good in view of the pricing situation.

Plate and Section Steel, this is the next business unit. We have a declining order intake situation. External sales have this decrease higher than the entire sales situation. And please allow me to underline that normally, the internal and external sales develop in parallel lines. But here, the internal sales went down by only 50% compared to the external sales. And internal sales can be found, for example, in trading and also in the EUROPIPE segment but a little bit less in this area. Earnings before taxes are black 0. However, we have to say here that when it comes to Peiner Träger and the DEUMU and the profits they have generated, then the 2 Plate/Section Steel companies have used that as in their losses -- compensated for that in their losses.

Mannesmann, the order intake has declined slightly. EUROPIPE is not considered here. If we had considered EUROPIPE in this respect, the order intake would be higher for Mannesmann. Sales have went up, once again without EUROPIPE, the situation has not changed or hasn't changed much. And this comes from the good business operations in the U.S. and from the MLP producing medium line pipes.

Trading, shipments and sales slightly lower due to the internal business. Earnings before taxes went down to EUR 4 million. And here, the main reason is, once again, the lower margin situation in the stock-keeping steel business and the lower volumes in the international trading business. However, here, the situation is not as extreme as before. Not as extreme when it comes to the DEUMU and Peiner Träger earnings and loss situation or the losses made by DEUMU and Peiner Träger. And the losses made in the Plate business, we're talking about EUR 10 million to EUR 20 million. Here, the situation is much more balanced, also if you take a closer look at the individual parts.

Technology. Here, you can see order intake and sales, a very pleasing situation, and the same holds true for the earnings before taxes situation, profiting from the positive developments from the KHS Group. And you might remember last year, in 2018, we were pleased about the record profits generated by the 2 DESMA business units. We're talking about EUR 10 million each generated. But this is something which could not be continued due to understandable reasons in 2019. The DESMA is fighting with a black 0 with a breakeven situation. And if you wanted to summarize the reasons for this development, then you might come to the declining investment made by the automotive industry. And the same is true for less investment from the supplier side. And on the other hand, when it comes to DESMA, you have a nice profit. I mean if we have not compared it with a profit year, we'd still be very happy with it. The situation has normalized. However, the situation is not as dramatic as it would have been with the [goby] machines. So we are pleased about the situation, the positive situation of KHS. This is overwhelming after so many programs which have been implemented in the past 10 years, programs which are now showing their effects. And now we can say when it comes to KHS, we have paved the way for further progress, for further success. We have done that with our own measures. We were helped by a positive economic development and which means that we can be quite optimistic if we look ahead. So we were not part of the pessimistic group.

Strategy, let me carry on with the strategy. And ladies and gentlemen, we were quite astonished by one news. When we heard about that, when we accomplished it, we did not know whether you would have been pleased with it or not, but you hardly even noticed it. It is something which simply disappeared in the large number of Twitter messages sent around the world. Why have we done that, not buying the CO2 allowances loan? I mean this is clear why have we published this ad hoc message. Well, the value of the allowances cannot be taken from our balance sheet. We have acquired the CO2 allowances of the market for a low price, and they have reached now a part of the stock value of Salzgitter AG, and this is why we were obliged to give that ad hoc statement. It was not for advertising for the company for giving some impetus to the share price. No. We have recognized that the price of the CO2 allowance has reached a certain ratio, a certain amount of our stock price. And this is why we had to publish this piece of information.

But we were quite astonished that hardly anybody reacted to it. No reaction at all, we could say. And this is really quite astonishing. After 2 decades of experiences in the financial market, we could see that people are thinking in much shorter terms than we initially thought. But we did not only deal -- we did not only have to deal with the CO2 allowances, which refer to the years 2022 to 2030, which are allocated and nonallocated. Now we are also following a technological project, SALCOS, Salzgitter low CO2 steelmaking. You have heard about that. And this is a project we are very focused on in order to make sure that we can have steelmaking activities in Salzgitter also beyond 2030, with using hydrogen instead of CO2 only.

We're also investing. We're investing in quality and not in quantity when it comes to steelmaking. Next year, the new heat treatment line in Ilsenburg will start its operation. And 2 years after that, the Hot Dip Galvanizing Line 3, which was recently ordered, will start its operation in Salzgitter.

The programs of measures have also shown positive effects. All in all, we're talking about EUR 250 million in additional effects from these optimization programs. 50% of these measures can be harvested in the first 6 months, but we will do more than that. This is something which is being discussed at the moment very lively, and we are making the preparations. But of course, you know it from us, from Salzgitter, that we're only talking about the measures as soon as we started implementing them. We're not talking about them beforehand. This belongs to our mentality typical for people coming from the north of Germany. We are not boasting with everything we're doing. We think that it is a better idea to prepare everything very thoroughly, and we do not want to disturb our activities by our own marketing, which means we are very focused on these programs of measures. We are in the middle of that process.

Having said that, having given you the good outlook on our own activities, I'm done with my part, and I would like to pass on the microphone to my colleague, Burkhard Becker.

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [3]

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Thank you very much, and I'll continue right away with moving over to actually confirming some of the statements made previously. EUR 145.3 million of pretax profit, which are quite unevenly distributed admittedly. First quarter EUR 126 million and about EUR 20 million for the second quarter, and the programs of measures were already covered by Professor Fuhrmann.

Aurubis, once again has contributed significantly and has thus compensated for the market-driven burdens that we have to feel in the other business units. We still have a very solid equity ratio of about short of 35%. Equity, and I'll show you the amounts in a minute, was decreased because of the reduction of the discount rate for the pension provisions down to 1.0% as per 20 -- 31st of '12, 2018, was a reduction by 75%. Then there's a decrease of the net financial position, down to minus EUR 164.4 million, which is due to mainly 3 reasons. One is the buildup of working capital. We'll return to that later. And the increase of our shareholding in Aurubis, which is now 30% minus 1 share and the aforementioned continuation of the strategic investment project covered by Prof. Fuhrmann. The balance sheet total as per 30th June has increased by EUR 300 million, and there are 2 effects contributing to this. One is the lasting nature because we've now applied the new leasing standard. One, we have EUR 128 million extra in financial assets and liabilities. And those liabilities, as in the past, because other than the past, when it was minor amounts for [air splitters] for Salzgitter, for example, were recognized in the balance sheet. And just like in the past, that was not reduced and recognized in the net financial position.

And now we have this effect of EUR 128 million, which increased the net financial assets and debt. And also as part of our investment activities -- or rather the reissue of the bonded loan, we, on a temporary basis, had an extra EUR 200 million on the balance sheet, which we then obviously repaid as per July. And the earnings forecast, as you just saw, has been confirmed.

The group result. As for EBITDA and its various components, is structured like this. Starting at EUR 353 million, EBITDA; then depreciations and amortizations worth EUR 176 million, which are roughly below the total inflow of EUR 158 million, which gives us an EBIT of EUR 177 million. Net interest is minus EUR 32 million. And then there's taxes which are quite in keeping with the expected tax rate, but there's only a minor difference because of the revaluation of the deferred tax assets and the tax losses carried forward. So that gives us a total earnings after tax amount of EUR 96 million.

Now this is to illustrate the influencing factors or levers influencing our earnings situation. Here, comparison EBT half year 2018 versus EBT half year 2019. Volume and margin, when combined, resulted in minus EUR 80 million. The measures just explained showed a positive effect of 25. Aurubis gave us plus EUR 31 million. And then there's minus EUR 30 million from other. That can be collected borrowing influences, personnel costs and also the changes in head count explained by Mr. Fuhrmann when he talked about the consolidation of companies.

For the income statement, we can see that -- the changed business situation, on the one hand, is reflected in sales, down by a EUR 119 million, which isn't fully reflected in the total profit because, first, there's a reduction in cost of materials as well of about EUR 76 million. Other operating income and other operating expenses of minus EUR 50 million or EUR 43 million, respectively. They have to be taken together since -- at least when it comes to the change, not when it comes to the absolute figures, but the change in those figures reflect the additions and also reductions of the derivatives activities. It's quite a regular thing, dollar exchange rate, raw material hedging. And since this is shown in gross terms, add market valuation at the due date, that gives this kind of influencing factor. That's pretty much all that there is to say about this. Nothing else meriting comment. Personnel expenses, EUR 28.4 million up, then results from investments accounted for when applying the equity method, that mostly, of course, reflects Aurubis and EUROPIPE. Finance income and expenses, nothing spectacular.

As for the balance sheet, when it comes to the long-term assets -- or noncurrent assets rather, there is, again, the increase in Aurubis amounting to EUR 96 million. Under the intangible assets, property, plant and equipment, we see this EUR 128 million from the first-time application as of 1st January 2019 of the new leasing standard, as referred to earlier. And reversely, it's obviously also reflected under the debt figure. Trade receivables, I'll come to the working capital in a minute. Again, as per 30th June at EUR 54 million and EUR 14 million here, those are the figures. And other receivables, they always reflect some changes in the derivatives, financing of raw material hedges which, for as long as the contracts are not fulfilled, are covered by the equity line item. The counter position would be either on the asset or liability side. At the moment, we're doing fine and, therefore, the total here is a positive figure and has actually gone up. And later on, I'll come to the liability side when it comes to the issue of the new bonded loan.

Equity and liabilities. Equity, I have to immediately point out the reserves for pension payments or provisions for pension payments. And I mentioned that we reduced the interest rate here from 1.75 to 1.0. You won't find the figure one-on-one reflected here. And why not? It's because you also have to take into account the tax effect, the deferred taxes, which is reflected on the asset side. Those who follow with me closely will see that on the asset side, we saw the very same effect. As for financial liabilities, it has to be said that we've issued a new bonded loan quite successfully, worth more than EUR 350 million, which obviously is also reflected in this line item. Liabilities and contractual liabilities have both decreased. But to give you a proper perspective here, looking at the asset side, receivables, inventory and liabilities. If you add all of them up, the situation for the first half year was characterized in such a way that we have 270 million of working capital that have been built up. And a key component here at about a EUR 130 million was Strip Steel. Raw material price to a certain extent only -- or due to raw material price situation. Then another EUR 160 million from trading activities.

And here again, the situation is characterized by international trading. And one needs to know here that when it comes to international trading, over the past, we've successfully managed to handle terms and conditions on the liability side to extend for longer than for receivables. So that generally resulted in a positive balance. But since business was declining, as explained earlier, it means that on the trading side, we now have excess liabilities that we've reduced. In other ways, we didn't go into massive inventories in stocks. It's simply to be explained with the regular business volume changes.

That takes us to cash flow statement. The cash and cash equivalents at the start of the period, EUR 556 million, changed mostly due to cash flow from financing activities, both in a negative and a positive way. Again, that's the bonded loan, the EUR 364 million that are contained in that figure. And we had a net -- on the asset side, a net line of financial equivalents of EUR 107 million. So it's simply a question of taking the left-hand and the right-hand side pillar together, which takes us to the guidance.

For Strip Steel, we continue to assume a high import pressure on the European market. Raw material costs, despite of a decline that we expect in total, will still remain above 2018 and taking that together, gives us a forecast of stable sales and due to the margins tangibly reduced before tax profit.

For Plate and Section Steel, we expect a persisting general weakness of the market and also continued low utilization in the large-diameter pipe segment. Section Steel still has satisfactory margins. And all in all, this means that we have sales somewhat below previous year and we expect a pretax loss.

Mannesmann. Large-diameter pipe mills continue unsatisfactory for Germany, Europe and [Wilhelm], that is. The U.S. companies, the [berg] companies that is -- are booked well, sold them into the year 2020. The medium line pipes, doing okay, doing fine, a positive contribution. Precision tubes is overall stable and stainless tubes, profits from slightly improved market situation. So on the whole, there's a moderate downturn in sales and a positive pretax result that we expect.

For trading, it is our perspective that international trading, given the restrictive trade policies, will continue to be under pressure. Margin decreases and international sales continue to materialize and especially a drop in sales prices versus year-end. So in all, a discernible sales growth but earnings before taxes still gratifying, although notably below previous year.

And then technology, Professor Fuhrmann mentioned already, the KHS Group, positive development also versus previous year, only selective order intake, which is paying out. In other words, we avoid doing business with expected losses. Service business is being further extended and then measures -- I mean, employees are to be reduced but all of that according to plan,

DESMA, as explained, also slightly decreasing. And all in all, this means that we expect a moderate increase in sales, but as a mix for both companies, we still expect, in total, a lower pretax profit. However, above the average of the previous years.

And all of this means that, on the whole, our earnings and sales guidance can be confirmed by saying that we expect a slight decrease in sales compared to the previous year and above the EUR 9 billion mark. Pretax profit is expected between EUR 125 million sand EUR 175 million and also the ROCE is expected to be tangibly below the previous year's figure, where we have this nice year 2018 at EUR 347 million. Thank you very much.

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Unidentified Company Representative, [4]

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Thank you very much, gentlemen, and now let's have our Q&A session. Mr. Wagner, you are the first.

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Questions and Answers

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Unidentified Analyst, [1]

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My first question refers to the decline of the iron ore prices. Is that good or bad? For in the past, it was very often as such, people hoped if the price of iron ore goes up, you have the better arguments for increasing your prices as well. What about the situation now?

Secondly, how high is the hope that when it comes to the safeguard measures posed by the EU Commission, there will come even more from their side? And I'm asking this question also in view of something like a CO2 tariff which might be introduced.

And thirdly, I would like to know whether there is a visibility when it comes to orders placed with EUROPIPE.

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [2]

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Let me start with the price for iron ore. This price has, in the months January to July, dramatically increased. And the revenues, the earnings generated for the steel products went down dramatically which means this kind of mechanisms was the one which did not really work in the first 6 months of 2019. A mechanism we could witness on several occasions.

If the iron ore price goes down, then you might be tempted to say that something which was not earned with the increasing ore prices is not necessarily something which is then followed by the mechanisms which come with declining iron ore prices. And here, we have to wonder whether all the measures we are taking are really implementable, are feasible in the market. I mean you have to analyze the demand and the office situation. The market price does not come from a specific, logical explanation or our production prices necessarily.

But I think we have good chances, good opportunities, quite good opportunities. Based on what I already mentioned, the EU market has become less attractive for imports than it used to be some years ago due to the low price level which means we have the price level as an effect and not for safeguard measures. And this leads to something like a counter-reaction. A counter-reaction is implicit, so to speak.

Secondly, I would like to say that the demand should not be worse, especially when it comes to the demand from the automotive industry. It is stabilizing and I have to admit at a lower level, but it still stabilizes.

And this is why different to the ordinary situation as the ordinary situation has not made progress in the months since the beginning of this year. We have developed a realistic chance, a realistic opportunity that we will witness some stability on the earnings side with the slightly lower raw material prices. However, we have to meet one precondition or one precondition has to be met, which means the iron ore prices should not go up again.

Then EU safeguards. I do believe that the recent development in the EU steel market are not only the recent economic results generated by the companies working in this segment. I'm also talking about our competitors. And this also refers to specific questions on employment, refers to working methods, stopping the operation of some parts of a plant or closing down entire plant. This is something which is seen by Brussels.

This is why I do believe that the safeguards with regard to the way they are made and with regard to the tariff-free contingent will be analyzed once again. This was told us by Brussels. The new commission is up and running and has started its operation and this is why we have enough time until 2020 to react accordingly. So everything will be checked once again forwardly.

And this border tax adjustment is, from my point of view, a brilliant proposal as somebody put a finger into a wound which was rather neglected, which was forgotten. For here in Germany and some other countries in the EU do the same, as if they were alone and trade relations do not play a major role in the deliberations, only if they belong to the same ethical framework.

And a company, which is not headquartered in Germany, was told some months ago that if we do not only start this difficult investment in the transformation phase, which means changing from the CO2-based production form to the hydrogen/natural gas technology for steelmaking, that this is something which can only be accepted by the European steelmakers if we're not flooded by cheap steel products, sold at dumping prices from non-EU producers, which have -- do not have to comply with CO2 emission standards, which do not have to -- or do not want to comply with these standards, depends on how you want to see it.

So this is the transition and the transition means that we have to end up with some companies having survived this kind of transition. And this is something which definitely needs to be pushed on the agenda. EUROPIPE Europe is not only a few projects which are being thoroughly discussed. We had some order intake and I'm not talking about an order intake volume comparable to the one of [Olga] or Nord Stream. But still, the order intake situation meant work, meant employment. At the same time, I have to be honest here. This is not a change in the trend. We can see some slight rainfall on a very dry ground, very dry soil. It is not a change of the entire trend. In the U.S., however, the picture is completely different. Attractive orders were placed just recently, which will make it possible that we will go beyond the year 2019/2020, and that we will have a good capacity utilization in the course of 2020 as well.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [3]

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Gabriel, Bankhaus Lampe. Prof. Fuhrmann, you were hedging better for iron ore and coking coal than many of your competitors so far. In the past, at the respective dates, you also carried out the corresponding risk provisioning against an increase in raw material prices. Can we expect the same for Q4? That would be my first question.

And to return to the automotive industry. Considering that Volkswagen, for example, continues to say they want to produce as many cars or even more than in the previous year. And VW, in the first half year, showed minus 2.8% less production volume. That would indicate that for the second half year, we would be likely to see clear increases. Do you feel that in your order intake? Or what's your take of it? Or is that maybe excessively euphoric?

And then another question, what about profits due to buying the Aurubis shares bought under book value? If say, theoretically, you were to hold the majority and could fully consolidate Aurubis, would those fall away? Or would that make for complete new valuation?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [4]

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I'd refer Burkhard the questions 1 and 3, to my colleague, Burkhard Becker.

As for your second question -- although the third question admittedly is highly speculative, regarding where you're coming from. But for the sake of completeness, after all, it's about an accounting principle.

Now your question on the automotive industry. We found, and this is quite natural, that OEMs, and in particular in the supplier industry, were a lot more hesitant with the orders that they placed with us compared to the actual production volume, which is quite understandable, especially in the supplier industry where here or there, there may be some additional financial constraints compared to the big OEM, It is quite understandable if they, first of all, tend to reduce their stocks. And secondly, they don't know which models will continue to be produced and which won't. So that kind of uncertainty was quite tangible already over the last 12 months.

So this means the order intake, as we see, it from the automotive industry was conceptually lower than the volume of order of vehicles produced. And that would indicate or suggest that maybe we've seen the worst and it's over.

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [5]

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Mr. Gabriel, let me try and answer your first question, iron ore, coking coal, risk provisioning.

The accounting has always been consistent ever since we've been doing this and it's done in such a way that the nonmaterialized transactions are evaluated and at market price. And once the contracts become due, the delta is then reflected positively or negatively in the results. Risk provisioning at the moment is not required because our contracts, in total, are substantially and clearly in the positive. So there's no need for this. And let me also say as far as it's foreseeable what's going to happen to the oil price, that is not likely to happen.

Now purchasing Aurubis shares. If you were to reach a majority, then yes, such a transaction would then mean that the market price valuation of the overall stocks package would have to be done, including those shares bought previously and the market value would then be matched against the pro rata Aurubis equity and treated accordingly. Effect on the results? Well, that would obviously depend on the situation at the time.

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Unidentified Analyst, [6]

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I'm [Novak Kalibura of Kalibura] Research. Two brief questions.

First, Brexit and what's your take on potential effects, and what are the versions or variations that you go through?

And secondly, it is my impression that industrial companies in the last year, Q3 and Q4, reported rather weekly. And now on a quarter-for-quarter comparison basis, on a like-for-like basis, they tend to come in with a few positive surprises. So might it happen that Q3 and Q4 for Salzgitter end up rather positive compared to the respective previous year's quarters? So which reasons might there be for you making investors happy?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [7]

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Well, the circumstances that would make investors happy during the second half year will be more modest than was the case last year. Let me state that right away. If we manage, and this is outside of any kind of accounting one-off effects imponderables, of which there are both positive and negative ones, so I'm leaving all that aside. And having said that, if we manage and succeed and on purely operative terms during Q3 and Q4 remain in the positive, then I'd say that would already be a situation that will make us happy. You've also got to see this in relation to you and your colleagues' view and take of our further future development. And that's also something which, over the last few quarters, has changed quite substantially.

Brexit is a topic that is not really all that relevant for us. In 2018, we had sales of about a EUR 150 million with U.K. customers and of those again, more than half was trading, and the remainder was mostly in the technology business unit. And to be honest, I can't see why a KHS filling plant, once Brexit is through, should not continue to operate and be sold and installed.

The cumbersome things about Brexit is more the short-term things: Just-in-time supplies, production sites where every truck, every shipment and every railroad wagon now has to be taken through customs separately. Free movement of people, of staff, of finances, that's a thing. But long-term business transactions should remain positive and relatively problem-free, although slightly more cumbersome.

I mean even if we travel into the other EU countries, you've got to take along your social security certificates, your colleagues who are aware of that and so are you, and Deutsche Bank's makes very sure, for example, that everybody traveling abroad in the EU has social insurance coverage and proof of social security coverage. Some of you have a slightly astounded look on your faces and I can all recommend you to check up on this. So even within the EU, we have such, say, cumbersome hindrances of daily lives. If you are really a stickler by the rules then Brexit shouldn't be something that makes you frightened all that much anymore.

The results of the 2 subsidiaries, Salzgitter management trading and technology, U.K., they were both low single-digit figures. And staff, one of them has 13; the other, 31. So it's very -- a really limited effect that we get to feel there.

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Unidentified Analyst, [8]

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My name is [Brauner]. Another word on Aurubis on the balance sheet. Now that your convertible bond expired and you repurchased the Aurubis shares and have clearly exceeded 25%, getting close to 30%, this means that there is a change in behavior versus the past. And at the same time, in this period now where you increased your shareholdings, your balance sheet has rather deteriorated and you've slipped out of the cash position here and is showing financial debt.

So what do you make of -- or how do you see your financial buffer? I remember in the past, whenever we asked you what would be your cash buffer of choice, it would be somewhere between EUR 300 million to EUR 600 million. That was also entirely different figures and now we are down to something which is almost approaching recession. So what's your level of comfort regarding balance sheet and buffers?

Second thing, market outlook or guidance. You said it earlier, supply balance. What do you make of it? How competitors are behaving in the market? Mittal announced a great many things. But then upon headquarters protest, quickly step back and did nothing in Poland. And also for Ireland, you've got one in SSPL. So they rather saw some upward change. What's your position on market balance? And do you believe that with a negative margin pressure now, discipline might actually improve?

You also said would be positive if you were still writing a profit for the second half of this year. Q3, I believe, is a difficult quarter, less volume because there's the peak and the margin squeeze. So how comfortable do you feel at present that in Q4, you'll be back in the black?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [9]

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Let me start by addressing the topics you mentioned, and my colleague will be kind enough to make sure I answer your questions completely, comprehensively.

Now as for Aurubis, there's no change in behavior. I want to be very clear on that. We held 25%. And I believe this proved to be absolutely right. We then did not enter into a bet against the cash compensation of the convertible bond but rather chose shares that we bought back. And in the share buyback, we didn't cut off at 25% by all means. But we'd rather said -- plus it seems that the share price in the medium- to long-term perspective and because we believe Aurubis to be a good company, we believe the price to be fair are attractive, rather. And so let's continue up to 30% minus 1 share. So it is no change in behavior. And you can accept it as an open question whether we would have done so had the share price been at EUR 64 or EUR 65 for those 5% delta. And my answer would be probably not. And with that, there really is no changed behavior. It is rather us reacting to a situation, an opportunity as I see it, a medium- to long-term opportunity, and we reacted accordingly.

Deteriorated balance sheet. The balance sheet didn't deteriorate to quite the extent it might seem at a first glance. We had a net financial position at the end of 2017 of EUR 381 million. And we all can handle figures. So we'll keep it in mind, EUR 381 million, net financial position end of 2017. That was good. At that time, we already had purchased quite a few CO2 certificates or allowances. And that is the main point because of which, if I adjust this EUR 381 million for what we acquired worth in CO2 allowances and some other things, too, some Aurubis shares were there as well. So if we adjust that figure for that, that takes us to about EUR 617 million adjusted net financial position. Because what we purchased in terms of CO2 allowances is not something we had to do, that was rather an investment into the future of the group. And in particular, of the Salzgitter location.

Now let me take a leap here to a situation as of 30th June 2019. The net financial position recognized is down to EUR 164 million-- minus EUR 164 million. So from EUR 381 million, we used to show to minus EUR 164 million, which is roughly minus EUR 550 million. Now if I were to take the adjusted figures and also take out the Aurubis purchases because I'd say it's like an active swap, the money is not gone. Then instead of minus EUR 164 million, I'd be at EUR 408 million. Meaning the adjusted net financial position has decreased by only EUR 200 million and these EUR 200 million, as was explained by my colleague earlier, have the main focus with Strip Steel and with Trading. For Strip Steel, the working capital, and we're getting bank to iron ore prices and the lot. So rather understandable reasons, I'd say and all of you know also the order of magnitude, which is quite understandable. And Trading, my colleague also explained, that's not so much raw material prices and the lot but rather the fact that international trading activities were handled, say, rather smartly by us. So that, in total, it did not lead to pressure on liquidity and rather contributed positively.

Now in that kind of business because of trading limitations internationally and so on, decreases, then that same effect decreases or ceases to contribute. So much maybe on the quality of the balance sheet.

Now if I were to say the allowances or certificates are worth a lot more than what we paid for them and Aurubis is worth at least what we paid for it, then the balance sheet quality has certainly not deteriorated. As a matter of fact, if we include all of the factors that we're not recognizing and showing, it has actually improved. Now obviously, we can't go about and blame us for that. There's something you can see and something you can't see, but only hold it against it but not in our favor because it will only materialize in 1.5 years' time. That, I believe, would be a very short-term view.

Balance sheet buffer. You remember it very precisely, Mr. [Braun], you're absolutely correct. And if I now were to take this adjusted group net financial position, adjusted for 2 things only, CO2 allowances, not their monetary value but what we've paid for it, I have to insist on this point. And if I add reserves onto that, that takes us far beyond such figures. But I'm not doing that for prudent reasons, only what we spent.

And then what we spent on Aurubis. If, for the time being, I consider this to be our value, which I believe is not flippant, then that takes us exact to this range of EUR 300 million to EUR 600 million, at EUR 408 million. So actually, I'm quite grateful to you for asking that question because I believe this really required some clarification to kind of come to terms with that and get to the grit of it.

Now your question about competitors in the market. The market's upgrade. Well, you know I would claim that. However, I do claim at the same time, and for very good reasons, I believe, that at year-end 2015, '16, it was considerably worse because back then, even a company as stable as we were had good reason to fear that given this situation of the Chinese import tsunami, if that were to continue for another half year, that we'd really be threatened in our existence. Are we threatened in our existence if the current situation continues for another 6 months? No. And that's the very decisive difference.

This market situation, that's worse than 6 and 12 months ago, what led to it was something that indeed was not foreseeable to quite that extent. And you can't blame it on the EU Commission safeguards only. It's always multiple factors that come into it, it's also internal factors of the European market, of the European industry and economy and economic cycles and the political field having to react to this. Also, plans regarding Ilva, as far as I can assess it as a bystander, are dating back to the times when, yes, things were different. And how to handle that now in the short to medium-term for ArcelorMittal, it's something you shouldn't ask of me. I can only say it originates in different times. And we can all read that there's quite some active thinking going on about this. Other competitors did a similar thing. And investment and acquisition behavior in such volatile market is something that takes a while. There's the behavior more in keeping with the moderate and less panic-driven market behavior. They always have a lag of some 2 to 3 years because something that's once been triggered in terms of investments and acquisitions, you have to see through in one way or another usually.

Discipline. I mean that's not something that we talked about anymore, really. If I were to comment on discipline here, then I would tend to comment on market behavior of customers that I am not supposed to know about. So I, too, have to take it from the papers how things are developing. And other than that, I have to refrain from any kind of comment.

Right, third and fourth quarter, I refer that to my colleague, Burkhard Becker.

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [10]

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Yes, volume, you mentioned that earlier. This year, for Q3, during the regular summer maintenance periods and shutdowns with MBG and PCG, where it's for Q4 and then also, there's a weak December to be expected. But nevertheless, we expect there to be a reasonable chance of having both Q3 and Q4 as positive quarters. Let me -- with your permission, add one more remark regarding the balance sheet. And as a reference, we might want to do something that some people in the room here should be well familiar with, we bonded loan of the convertible bond to the tune of EUR 360 million -- EUR 64 million, we were able to see through in May with maturities which, on average, are longer than what we did in 2016. Back then, it was EUR 200 million and something like 3 years on average. So that should be an indicator that both investors and us, ourselves, have good reason to consider our balance sheet to be sound indeed and not quite so bad because else, they wouldn't have lent us the money for such a long period.

Are there any further questions? Mr. Schachel, the floor is yours.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [11]

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My name is Ingo Schachel from Commerzbank. I have a question on KHS. You mentioned that you had to follow the group. You described a negative tune, the decline of the service business and so on. This kind of market observations were not shared by you. You introduced your own measures and could you please elaborate a little bit more on the success of KHS? Do they come from the own measures you've taken?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [12]

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Look, we would answer this question together, my colleague, Burkhard Becker and me, I -- because he played a major role in the positive development of KHS. Let me put it like that.

After a few attempts which were partly successful, if I look back, have started again with a comprehensive concept and a new leadership. And this is how we gained more ground and we're quite successful at KHS. And we talked about that on several occasions, even here, even with you. To put it very simple, you need to fail with 2 or 3 major contracts in a year, and then all of a sudden, the 4% ROCE, which were theoretically possible for KHS, though not 7% as a possible [encodeness] due to some internal differences, which come from the spare part business and spare part deliveries and the business and due to the fact that we have a very aggregate intensive market. But a ROCE 4% for KHS is not a miracle, it's possible.

But apart from some internal organizational uncertainties, there were 2 or 3 contracts, which failed in a year than from the theoretical 4%, which are possible. This is not true today, but it was true some years ago. You have the 2% or 3% of internal performance when it comes to standardization, when it comes to improving operations. Then all of a sudden, you are approaching very quickly to 0, which means you have 2 or 3 major orders which failed. Then it has a dramatic impact on ROCE. But if you manage to conclude these 2 or 3 contracts successfully, if you're really focused, if you set defined priorities and do that in the long run, then let me knock on wood, then you will come to a situation we will probably see at the end of this year, which means a good result.

Apart from that, the trunk ins are coming and going. I mean that's life. And somebody from Bayern,Munich used to say, that it's also quite an effort to be always on top. And I mean every football match is a match you have to win. But there is, of course, somewhere you can see here and there. And I'm also convinced that this will be managed by the competitor you just mentioned to research to come back. I mean it is one of the most prominent mechanical engineering companies here in Germany. I wish them all the best. But of course, it's not always possible to win it, it's not always you who can be the best.

For quite a while, we used to be the #2, the #3 on the list. Now we are the #2 actually. But finally, we have gained more ground. And we have a stable position.

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [13]

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A few words about the market. I think we can see at the moment that the demand for filling machines in glass is rising, but this is something we have had some years ago already. Plastic bashing is playing a role in this respect, but this plastic bashing differs from region to region. We have to be very clear as well. There are markets, especially on the other side of the Atlantic, which don't care that much about plastic. Yes, we have some structural shifts. And KHS and Krones are the companies delivering products in this respect, having this kind of filling machine, refilling plants and so on, we are the ones who are compensating for that. We are the ones who see that glass and cans are very spare part intensive production areas. If you think of glass, for example, you need many more spare parts. And this is why you have to invest more. The service from KHS is very strong, very good. We do not see any negative developments there. And all the measures which were taken in 2016 will show a full effect in 2020. We're talking about EUR 60 million to EUR 70 million. This is according to plan, very well possible.

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Unidentified Company Representative, [14]

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Now I'd say, with these positive messages, we will leave the room here. Let's go to our telephone participants. Mrs. Sanders, could you please open up the Q&A round?

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Operator [15]

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(Operator Instructions) The first question comes from Bastian Synagowitz from DB.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [16]

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Prof. Fuhrmann, my first question refers to the steel market. What about the stocks? What about the stock situation? And what about demand situation after the summer breakeven even it was described earlier to ask a question like that?

And then I have a question on the cost measures, which have to be taken. Are there any restructuring measures which might come in the second half of the year?

And then I have a third question on cash flow and the balance sheet. Working capital went up, and you already mentioned some of the reasons for the increase of the working capital. Maybe you could elaborate a little bit on the development of the net financial position, respectively, the net financial debts until the end of this year.

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [17]

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Nothing easier than that. I will take over the easier part, the more difficult part will be taken over by my colleague.

Let me talk about the stocks. The stocks are mainly normal, but there are product groups where the stockholding is quite high. You might wonder where. Well, in Plate Steel, the stocks compared to the consumption are relatively high. Even if just recently, the stocks have declined basically. Well, there are no signs for any kind of paralysis or slowing down, we can't see anything like that after the summer break. I mentioned in my presentation the problems in the automotive industry. And I think we have overcome the worst. We can see, for example, trends which became visible in the last months of 2018 and the first months of 2019. We can see that some positive trends being more ground and continue.

It is our plan to start an earnings position improvement program, which will have a full year effect and will accompany these measures taken within FitStructure, but these are not the strategy measures we also have. And I'm not talking about that many measures, as you could see. We forecast a full year effect of EUR 2 million but I'm not going to elaborate on any other details.

As far as the one-off effects are concerned, we have to see how they are composed. And we're not talking about a staff reduction program. Productivity, however, will be in our focus. And as we have to analyze individual aspects of the programs, we will have to communicate that internally. And I think it would be far too early to elaborate on that in greater detail right now. And Burkhard Becker is ready to talk about the working capital until the end of the year. I hope that you can determine that in the range of plus/minus EUR 10 million. Otherwise, I would be disappointed.

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [18]

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Well, what will be one of the main driving aspects for the year, and I think whatever I'm going to describe now needs to be tried and tested. Let's assume that the price for iron ore will end up at $130. To date, it was rather $93, $94 per ton. And if we assume that the price for coking coal is at the level we could witness 2, 3 weeks ago, $160, 162 and no longer $200 per ton. If we assume these kind of factors for the future, and of course, we have some deliveries in the pipeline, but we have to use something as a calculation basis. So if we take these figures, and if I assume that HKM, and HKM is also included in a certain range in our balance sheet with the net debt position, you should not forget that either, then we're talking about a volume increase of 2.5 or 3 million tons of iron ore. Then I multiply that by $20 to $30, then you will have the first amount for the reduction cash out by the end of the year. And if you assume in addition to that, including HKM, that the coke input is 100 million to 200 million ton, multiply that by another $25 to $30, then you will get the next amount. Always under the prerequisite that things will stabilize along these lines, and then you will have a good chance that you will profit from that situation by about EUR 100 million.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [19]

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Maybe one more question on the cost program. Can we expect an update by the end of the year? Or is that rather something which will come into play for next year?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [20]

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No. I think that by the end of the year, we will be able to announce and to discuss many more details in this respect.

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Operator [21]

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At the moment, we do not have any further questions from the German channel. (Operator Instructions)

There are no further questions from the German channel. Now let's switch to the English channel. The next question is from Alain Gabriel, Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [22]

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Just 2 questions from my side. Firstly, can I clarify your comments on the previous question because it wasn't very clear. On working capital. So if prices stay where they are today, do you expect to release another EUR 100 million of working capital? That's one. And then two, on your CapEx budget for the year, some of your competitors have been proactive in reducing their CapEx needs for 2019 in light of the current market conditions. How much flexibility do you have to cut down your CapEx spending for H2 and then into 2020?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [23]

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Yes. Concerning the first question, I think we can say, yes, absolutely properly understood. Concerning the second question, it goes without saying that people revise the CapEx plan for the next few years, it goes without saying that we will probably finish what we have begun. We already did so. That means that the 2 large CapEx projects in Salzgitter and in Ilsenburg will be finished. Beyond that, we will take, say, a little bit more cautious stance on the one or the other item, which belongs, say, more to the comfort zone in investments than into the category urgently needed.

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Operator [24]

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The next question is from Ioannis Masvoulas, Macquarie.

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Ioannis Masvoulas, Macquarie Research - Analyst [25]

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Three questions from my side. The first on Strip Steel. Performance was relatively good in the quarter relative to expectations and some of your peers. Could you perhaps quantify the benefit of the iron ore hedge in Q2? And can you talk about the EBIT bridge from Q2 to Q3? And then the second question on the Aurubis position. If I look at your -- the market value versus the book value of that position, the difference is fairly substantial. But I believe that the impairment test at the end of the year is based on the value-in-use model. Can you provide some color on what's driving that model and whether we should expect a significant impairment at the end of the year?

And then lastly, you talked about the cost optimization program and potential for CapEx containment beyond this year. But would you consider more proactive measures? For example, heavy plate has been under a lot of pressure, could you potentially restructure that further with potential to reduce capacity? And beyond that, how should we think about asset sales?

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [26]

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Yes. Asset sale is always a good idea, especially in the bad situation. So it goes without saying that the sale of distressed assets, many people here come from banks, they know what I'm talking about, yes, that this is really the land of last resort. So a restructuring of something that seems to be somewhat problematic for the next future, we think would make more sense. And we have a very -- say, a very focused view on our heavy plate activities in the context of the profitability improvement program I have indicated. Then the benefit of the hedges for iron ore in the second quarter in the result of Strip Steel was, say, more or less EUR 20 million -- was around EUR 12 million. EBIT bridge is -- I'm not in a position to make this from quarter-to-quarter. And yes, the difference with market value and book value and so on in Aurubis, can you say something about that?

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [27]

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So yes, it is right that as for all other assets on our balance sheet, also for the Aurubis assets, so the equity value, we have to make an exercise for the impairment. This impairment is based on DCF procedure. We calculate the value in use. We do it -- or we observe and look on it permanently. So far, we do not have the necessity to impair the assets we have on our balance sheet. And as you know, the stock exchange pricing for the Aurubis shares is only one reference, and that is not what we do here for the impairment. For the impairment, we base on DCF and value in use.

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Ioannis Masvoulas, Macquarie Research - Analyst [28]

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So just to clarify here, that DCF model, is it based on consensus expectations or your own forecasts about Aurubis?

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Burkhard Becker, Salzgitter AG - CFO & Member of the Group Management Board [29]

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No, on our own forecast with the look on the budget the management of Aurubis makes every year for 3 years onwards.

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Operator [30]

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At the moment, there are no further questions in the English channel. (Operator Instructions) We have no further questions.

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Unidentified Company Representative, [31]

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[Interpreted] If there are no further questions right now, then all I can say here in the room is thank you very much.

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Heinz Jörg Fuhrmann, Salzgitter AG - Chairman of the Group Management Board & CEO [32]

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[Interpreted] Let me say something before we conclude. And let me be very clear and frank. The situation is worse than it was a year ago. And it's not just a little worse, it is substantially worse. Because a year ago, it was really good.

But ladies and gentlemen, we mustn't always think in terms of black and white either. I mean life usually happens in shades of gray. Sometimes a bit lighter, sometimes a bit darker. It's like in our personal lives as well. It's not always either euphoric or totally depressed. And what you measure a company against which main business is steel, I can't set the standards in August 2018 here because that was an exceptionally good situation. And if we take out any exceptional influences or one-off influences, then last year, we had an EBT of more than EUR 400 million. And that's not something that I could or should take for granted as the normal situation.

On the other hand, I was afraid that we'd be entering crunch time at year-end 2015, '16. And you can trust me on that. If that situation had persisted for just a little bit longer, this may well have left very severe traces within our company, down to really putting our existence at risk also for Salzgitter AG. We certainly would have been amongst the last to go under, but we would have gone under eventually. And that's an entirely different situation, ladies and gentlemen, than what we're seeing right now.

And I'm not trying to gloss things over here, but it's an entirely different situation. And this economic-cultural pessimism is something I can only demonstrate. If I were to say no, the Americans and the Chinese will never agree on anything. No, there will be import tariffs on European cars into the U.S. and so on and so forth. If that kind of across-the-board pessimism is something that I buy into, then some of the negative scenarios that are being painted would have a certain degree of justification.

But as I said, you've got to see things that way. We can't keep anybody from seeing things that way, quite obviously, because the future does not always tend to stick to forecast to a 100%, both in the positive and negative sense, but it's very important to me to have this out clearly. We shouldn't get carried away here and shouldn't always be flattering between the 2 extremes of euphoric down to deeply depressed. That is really something that we should all hold ourselves against.

Thank you very much.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]