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Edited Transcript of VOE.VA earnings conference call or presentation 7-Aug-19 8:00am GMT

Q1 2020 voestalpine AG Earnings Press Conference

Linz Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of voestalpine AG earnings conference call or presentation Wednesday, August 7, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Herbert Eibensteiner

Voestalpine AG - Chairman of Management Board & CEO

* Peter Fleischer

Voestalpine AG - Head of IR

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Conference Call Participants

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* Sigrid Brandstaetter

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Good morning, and welcome to our conference call for the Earnings Result Voestalpine AG First Quarter of Business Year 2019-'20. This conference call is being recorded. And I would now like to hand over to Peter (inaudible).

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Peter Fleischer, Voestalpine AG - Head of IR [2]

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[Interpreted] (inaudible) first quarter (inaudible) conference call. (inaudible) first, an overview of figures (inaudible). Now over to Mr. Eibensteiner.

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [3]

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[Interpreted] Thanks, and good morning to all also on my behalf. (inaudible) to this conference call

(technical difficulty)

Questions later. (inaudible) first quarter business year is perhaps very challenging. It had a cooling of the economy. During the first quarter, we have to accept this.

(technical difficulty) the market very much.

In particular, this led also to the automotive industry and in the weakening and declining profit in iron ore prices, raw materials prices recently also have declined quite pronouncedly, whereas the steel prices have gone down considerably. And this, of course, has exerted some pressure upon the margins. Furthermore, Voestalpine also suffered from increasing CO2 cost, that is for emission certificates we had to pay for. And in total, this translated into some negative impact upon our results.

So for this year only, we believe that certificate cost will amount of some EUR 100 million. However, in spite of this difficult environment, there have been some very favorable areas as well. For instance, due to our very broad product portfolio, particularly in the important customer segments like rail technology, aerospace, warehousing and welding technology, turn out rails and also in welding, as I've said, we have had a very positive and favorable demand situation.

In the rail technology, we have been booked, excellent in our book for the future as well. Then also on the intracorporate level, we have implemented some measures in order to react to the present boundary conditions we see in our economy in order also to tap all potentials in terms of efficiency increase and cost cutting. And this is very important for us also because this helps us adapt very swiftly to today's business and economic situation. In the past, we have always mastered this very well, and it's nothing new to us.

Now allow me maybe to cover some figures. The revenue at some EUR 3.3 billion is by 3.8% lower than in the previous year. All 4 divisions of the group have faced declining revenue, primarily caused by a reduced delivery volume.

In terms of the figures of our results, all these factors like trade conflicts, business situation, iron ore cost, CO2 emissions, certificate cost and also declining steel prices have been reflected most clearly. And internally, of course, furthermore, the start-up costs of the automotive plant in Cartersville, U.S. have also put downward pressure on earnings. As a result, this means, for the EBITDA reduction by 27.7%, that is from EUR 513 million first quarter of the previous year to now EUR 371 million this year. EBIT dropped from EUR 324 million to EUR 157 million, which means a reduction by 51.6%. Profit before tax declined from EUR 294 million to EUR 124 million, and the profit after tax from EUR 226 million to EUR 90 million. The gearing ratio rose from 49% to 58%.

And this, of course, also is due to the change from IFR -- or to IFRS 16, rather, where lease now is valued differently, which means that the net debt is increased by some EUR 440 million. Equity is stable at some EUR 6.7 billion, with the number of employees or headcount posts 51,670, which is more or less stable.

After the most important key figures, I should now like to cover some outlook. Let me repeat that all these uncertainties over the last few months, of course, have risen more and more. So what we do see is a repetition, so to speak, of the previous year EBITDA, which we had announced. And the most important insurance factors, cost-wise and market-wise, has been -- tried to be assessed properly. And then when we did so, that was a cooling of the economy, but no recessionary or crisis scenarios. So we assume that there will be some cooling of the momentum in the automotive industry of the preparation to the new emissions test in the automotive market, which will be introduced in Europe in September, will be mastered without pronounced problems. So we take it that, above and beyond, this cooling of the economy, there won't be any negative effects from trade conflicts or from Brexit.

We also have the assumption that so high iron ore prices will only be kept for a short time, so that during the business year, we believe there will be a normalization of the iron ore prices. And as a matter, of course, we have to do our homework as regards a swift implementation of efficiency increase and cost-cutting programs, and also, as regards the start-up phase in Cartersville.

Let me add to this that in the last week, you have also seen that there has been an exacerbation of the conflict between China and the U.S. So this negative or difficult phase will certainly not improve so fast. We furthermore see that the automotive industry have cooled off a bit, have lost some momentum, but the OEMs are positive that the new emissions test will be handled properly from September. So I believe I can say that these cost-cutting programs will be implemented in an excellent manner. And in the second half year or half of this business year, we will see the very first favorable effect of this.

So in a nutshell, we can say that the Voestalpine Management Board still are working intensively upon all of this also as regards the difficult environment, in general, the trade conflicts and the development of ore and steel prices. So we still believe that the EBITDA will parallel the one of the previous year.

As I said before, however, uncertainties have grown and not declined.

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Peter Fleischer, Voestalpine AG - Head of IR [4]

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[Interpreted] Thank you very much, Mr. Eibensteiner. Thanks indeed for his overview, which takes us to your questions already. And let me also tell you that, again, we have one channel in German and one in English, so you can ask questions in German or in English and you will also get Mr. Eibensteiner's reply in English or in German. So over to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) This takes us now to the first question by Sigrid Brandstaetter of the Oberoesterreichische Nachrichten.

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Sigrid Brandstaetter, [2]

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[Interpreted] Mr. Eibensteiner, you have addressed a cost-cutting and efficiency increase program, which we are -- you are rolling out. Could you maybe elaborate on this a bit? What is the extent, what measures are they? Can you tell us a bit more upon this? Over to you.

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [3]

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[Interpreted] We try, to the best of our knowledge, of course, to streamline all our processes on the purchase side, we want to -- and are improving our purchasing processes. We furthermore try to optimize our stock and our working capital. As regard to our employees, we are adapting as well. There are some measures as regards leased personnel, third-party staff where we want to cut a bit. And for our own employees, there will be a reduction of overtime, reduction of holiday accumulated and, of course, some vacant drops or posts will not be filled, not all of them. And this, we believe, will also certainly help us in order not to have to reduce staff in Austria. 150 have been reported to the public employment service for our Kindberg, Styria, Austria plant, some 80 posts within the Voestalpine Group have been offered to them already. And for some others, there are some jobs in our Stahlstiftung Steel Foundation, and also with some third-parties. And there will not be any reduction in staff in any other plant. All this will mean an annual saving of a bit more than EUR 100 million. And we believe that half of this will materialize this year.

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Sigrid Brandstaetter, [4]

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[Interpreted] A follow-up question, if I may. This saving potential, this means EUR 50 million for this business year and [EUR 110 million] for next year?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [5]

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[Interpreted] It is an annual saving program, and since it will be implemented in the second half year, we believe that some EUR 50 million will take effect this year.

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Sigrid Brandstaetter, [6]

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[Interpreted] Then you have mentioned third-party staff or leasing staff. Normally, you don't have so many temporary workers. How much leased staff can you reduce?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [7]

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[Interpreted] In Austria, we have 1,500 temporary workers on this, and this is also our leeway where we can maneuver.

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Sigrid Brandstaetter, [8]

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[Interpreted] 1,500, that's quite much. Can you give us an order of magnitude, meaning how many of them will be given back, so to speak? Are there any announcements to the contract partners today? Where are you at that?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [9]

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[Interpreted] No concrete figures yet.

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Operator [10]

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The next question, which will be asked by Alexandra (inaudible).

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Unidentified Analyst, [11]

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[Interpreted] My question relates to the CO2 emission certificates. You had said that you expect a plus of EUR 100 million in cost. Can you explain why that is and how much you have paid for that last year?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [12]

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[Interpreted] Last year, we paid for that some EUR 69 million in terms of CO2 certificates. On the one hand, because the certificate price was lower then. On the other hand, because we had a major relining of the blast furnace, and so we emitted less CO2. This year, we expect the certificate cost amounting to some EUR 100 million. That's correct. And unfortunately, this money is not earmarked and is not only used for sustainable CO2 reduction technologies. And that would be a positive steering effect.

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Operator [13]

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(Operator Instructions) Our next question comes from (inaudible) of (inaudible).

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Unidentified Analyst, [14]

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I would like to know how much is [steel] production, the crude steel production in (inaudible)? And looking at your outlook on the next call, I believe you're planning some cuts.

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [15]

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[Interpreted] Sorry, can you say it again?

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Unidentified Analyst, [16]

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Yes. If I can ask how much was your steel -- crude steel production? And if you're planning some cost reduction for the next call?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [17]

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[Interpreted] Our production ratio was around 5% below maximum capacity. And the crude steel production was around 6.8 million tonnes.

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Operator [18]

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This takes us to our next question. This comes from (inaudible).

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Unidentified Analyst, [19]

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[Interpreted] I should like to ask you what you can tell us about the Cartersville start-up. What is the state of play? When will it be concluded? And what has been cost so far, and what do we expect in terms of cost for this year?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [20]

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[Interpreted] Well, as I said, Cartersville still is in its start-up phase, which means that we accompany our OEM customers. Also as to their start-up phases in their factories, so the volumes are gradually going up more and more. In total, we are improving there more and more. First half year, of course, we still have some negative effects, and we expect that at the end of this business year or early next business year, we will have the first positive monthly result already.

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Unidentified Analyst, [21]

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[Interpreted] Can you maybe elaborate on this, what orders of magnitude and what problems you still have for other problems, evaporating, so to speak?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [22]

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[Interpreted] No, they are not evaporating automatically. It's about quality improvement measures; it's about reduction of scrap; it's about optimizing quality; it's about reducing useless double work and double control; it's about delivery to the customer, which costs a lot when it has to be done too fast; it's about the reduction of backup for plants where some aspects still have to be improved underlying. So it's a bundle of measures, which of course, costs us still a lot of money. But we believe that before the end of the year, we will have some positive results there. And we believe that the Cartersville plant, then, next year will certainly have positive results.

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Unidentified Analyst, [23]

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[Interpreted] Next year or next business year?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [24]

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[Interpreted] Next business year, that is.

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Unidentified Analyst, [25]

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[Interpreted] And what about the order of magnitude in terms of cost? You have evaded this question, I'm trying again.

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [26]

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[Interpreted] Yes, of course, we are only in the first quarter of this year, so far. But it's very difficult, of course, to assess and anticipate all of this. And when, of course, I give you a figure, then you would multiply it by 4, and this would give all of us a very high figure. But towards the end of the year, it will turn positive. And I said before, it's a bit difficult for us to now quote a figure because many things, of course, depend on how much the automotive customers will cost, so please don't -- understand this, it's the same thing for us. There is a plan, of course, and we are perfectly on-track. But you have seen it and heard it yourself that uncertainties in this very area are quite high.

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Unidentified Analyst, [27]

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[Interpreted] I'm surprised by your optimism because when having a look to German machinery sector, it's very grim. So backlog is good, but order intake shows some gaps. So why are you so optimistic?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [28]

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[Interpreted] Well, the machinery sector and mechanical engineering is, of course, not a dominating sector for us, but it is important. We depend very much on the automotive industry and also many others. But you are right. Two stages, for instance, and this will hit your vantage. Yes, of course. And even now, we see a reduction in volumes, particularly as regards lower qualities of grades because a lot comes into Europe from outside of Europe. Last but not least, due to the trade measures and the markets in China and in U.S., of course, are now closed down because of the duties. So Europe is the only one still open, and this makes it difficult for us.

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Operator [29]

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And this next question comes from Christian (inaudible), (inaudible) Steel.

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Unidentified Analyst, [30]

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[Interpreted] Mr. Eibensteiner, I'd just like to repeat the question, which has been asked in English before, where the connection was a bit bad. You mentioned a figure of 6.8 million tonnes of crude steel. Is this the first quarter?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [31]

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[Interpreted] Certainly not. It's an annual figure of last year, okay? And that was 5% below maximum capacity. This year, it will be some 5% below our maximum capacity. This is today's plan.

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Unidentified Analyst, [32]

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[Interpreted] You mean now, presently?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [33]

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[Interpreted] Yes.

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Unidentified Analyst, [34]

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[Interpreted] And last year, how close to maximum were you?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [35]

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[Interpreted] Well, last year, of course, can't be taken as a basis because we had the major relining of the blast furnace, meaning that 1 million tonnes of capacity have been taken out, and we had to buy the blooms.

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Unidentified Analyst, [36]

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[Interpreted] Then a question as regards to (inaudible) play now, 5% below max, it is quite generous, I would say. So do you expect that the capacity utilization would have to go down even further?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [37]

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[Interpreted] We will see how volumes develop.

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Operator [38]

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(Operator Instructions) And now the next question will be asked again by Ms. Sigrid Brandstaetter of Oberoesterreichische Nachrichten.

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Sigrid Brandstaetter, [39]

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[Interpreted] I'd also like to ask a question linking up with the previous speaker's question. Mr. Eibensteiner, it seems to be highly ambitious, indeed if you say the EBITDA of last year, you want to reach it again because now you are a quarter below that. And the outlook, as you have said yourself, is quite, let's say, uncertain. So I believe that this optimism is maybe not so easily justified. Can you maybe elaborate on this? And then I would have a second question.

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [40]

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[Interpreted] Well, I think I've hinted at it already. This guidance, of course, holds true if we see an improvement of the raw materials prices, meaning that, plus no further deterioration in the automotive sector, no additional impact resulting from the trade conflicts. And as a matter, of course, we do not expect any recessionary scenario. Yes, and no one expects that relevantly today. Well, this is why we also share this view.

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Sigrid Brandstaetter, [41]

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[Interpreted] And one additional question. I don't understand one figure in the quarterly comparison. Because there is a cash flow from operations of minus EUR 86 million and compared to that minus EUR 3 million last year, I don't understand this figure. And investments, I believe, have been reduced. So could you please explain this?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [42]

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[Interpreted] That's the building up of working capital. Raw materials have become more expensive, and this means that also raw materials will have a higher value even with constant volumes.

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Sigrid Brandstaetter, [43]

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[Interpreted] Yes, and you've also been mentioning the reduction of working capital. What about the warehousing capacity. Is there a reduction battle, so to speak, already or how much ore and coal is hit by that?

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Herbert Eibensteiner, Voestalpine AG - Chairman of Management Board & CEO [44]

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[Interpreted] It's not only about iron ore and coal, it's also about some other alloying elements. And it's also about semi-finished and finished goods, which are on-stock, which are in the warehouses and have a high impact as well. And if the business situation decelerates, and of course, we are also preparing to some standstill in the automotive factories during summer time, there are some orders, of course, and we take it that in September, they will be delivered again. So of course, we have a lot on stock. And all of that means that as of the end of the quarter, when compared to last year, we have a working capital of some EUR 400 million more. So warehousing, semi-finished products, higher cost in raw materials are the factors

Okay, Thank you very much. There are no further questions. So let me also tell you that on the 6th of November, 10 a.m., the half year results will be presented in the Erste Campus in Vienna. And now thank you very much for your time and your questions. We wish to all of you a very nice day from Linz, and excellent holidays, so we hope. thank you very much. Good bye also from my end. Thank you.

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Operator [45]

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Ladies and gentlemen, this is the official end of today's conference call. Thank you very much for participating. We wish you a lovely day. Thank you very much.

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