Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to today's Q2 2021 conference of Klockner & Co SE. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Felix Schmitz. Please go ahead, sir.

[Felix Schmitz]

Yes. Thanks and welcome to our Q2 call. With me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; our CEO Americas, John Ganem; and for the first time, Bernhard Weiss, CEO for Europe. They will guide you through the presentation. Afterwards, we will be happy to answer your questions. With that, I'd like to hand over to Mr. Kerkhoff.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Thanks, Felix, and welcome also from my side to our Q2 call. The first one I do as the CEO here at Klockner. I'm really looking forward to our discussions in the future. First, before we start and jump into the figures, I'd like to thank all our employees for their great dedication in these unprecedented times. It's quite challenging currently in the steel environment. If we think of COVID, supply chain issues, we have everywhere, flooding in Germany, to balance our customer needs and to get the real good results that we developed and to address all the future-looking changes in the company. That's quite a challenge and I'd like to thank everyone who contributed to that. Now let's jump into the highlights of this pretty remarkable quarter. Demand in shipments are still impacted by the pandemic. However, as anticipated before, the gradual recovery is ongoing. Of course, year-on-year comparison saw a big jump of 21%. Higher volumes would have been certainly possible, but we're following a strict margin-over-volume strategy. The result is literally visible in our profitability. Sales up nearly 60% versus Q2 2020 due to higher prices. We more than doubled our gross profit to EUR 522 million, also due to positive pricing dynamics, but materially supported by our smart networking capital management approach. The precondition for our great Q2 performance was laid very early. Oliver will present this in a minute.The EBITDA was the strongest since our IPO. It amounts to EUR 271 million and was especially driven by prices, disciplined net working capital management, but also by substantial effects coming out of Surtsey. Q2 saw a very strong cash flow from operating activities of EUR 74 million and this is despite price-driven net working capital and also despite the negative cash effects from Surtsey. Net debt is down by almost 40% to EUR 303 million. We did not forget about our balance sheet and clearly used the momentum to deleverage.As presented in the last call, we saw a boost in digital sales during the pandemic. Year-on-year, the digital sales share is up by 7 percentage points. Interestingly, what we see is a flattish behavior since material is very scarce. This is directly linked to customers that now tend to order iPhone to receive direct supply confirmation. Of course, this is somewhat irrational and will dissolve in future again; and 2 relatively weaker EDI sales, which is especially important in service center business, both regarded as temporary effects. Most important is Kloeckner System sales volumes are significantly up, increasing and to compensate the weaker EDI and webshop numbers, and the rollout is continuing as planned.Now let's go to Slide #5. We introduced our new evolutionary strategy, leveraging strength on our virtual AGM in May. With leveraging strength, we're again ready to grow. The strategy builds on what we have achieved in the recent years, especially with regards to digitalization cost efficiency. It focuses on growing Kloeckner to an increased share of wallet at the customer side. To achieve this, we will much more take on the perspectives of our customers instead of concentrating only on the material. We will drive operational excellence initiatives in procurement, sales and [ L&O ] to increase efficiency and to accelerate our business transformation, focus on seamless end-to-end processes with a high degree of digitalization and automation. Zero-touch is the word here. With that, we're laying the foundation for more data-driven decision making and business rules. We leverage our own assets, strengthen our network and build co-operations with the external partners to develop profitable business cases, more downstream in the value chain.In analogy to recent initiatives such as Surtsey, we did not waste any time here. The execution has started immediately, frankly said, even before we launched it. First point of actions are our new organizational setup in EU Europe, changes in several European management teams as well as new cross-border projects, which directly support leveraging our own assets. Moreover, we are developing kloeckner.i even further and bring it to the next level. We'll have more details later on.On top, we're strengthening our partnership with Nucor in the U.S. This fits perfectly into our new strategic approach and comes at a time when U.S. infrastructure will find broad financial support. John, maybe you give us a bit of color on this.

[George John Ganem]

Yes. Thank you, Guido. We're pretty excited about this. Really 2 points to highlight. #1, we are currently expanding our existing on-campus facility located at Nucor's mill in Berkeley, South Carolina. This expansion will include the addition of a new stretcher leveler cut-to-length line, further enhancing our processing capabilities and allowing us to serve a wider range of customer segments. This will be operational in Q1 of 2022. Additionally, planning is now underway for a new state-of-the-art plate processing facility, leveraging our industry-leading position in complex multistep plate processing. While the final location is still under consideration, the processing and logistical capabilities of this new facility will be closely aligned with the Nucor plate mill currently under construction in Brandenburg, Kentucky, which will be capable of producing plates up to 14 inches thick with widths up to 168 inches wide. Both investments will strengthen our already strong partnership with Nucor and will allow us to further expand our offering of the type of innovative, complex and sustainable supply chain solutions our customers need and value. That's it.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Yes. Thanks, John. Indeed, I think it's very promising to grow in the U.S. right now, along with the successful Nucor partnership that we do have and the way they are doing their business in the U.S. So really excited about it and helps to support our strategy going forward and to grow again. With that, I'd come to our new EU structure on Slide 6. Bernhard Weiss has joined the group Board and he's now responsible for EU Europe and the whole region, being Austria, Belgium, France, Germany and the Netherlands. Bernhard served as CEO for France and led the remarkable turnaround of our French country organization. He not just imposed the clear separation of logistics and operations, he orientated strongly on the customer's way to look at the business. The results we have achieved are really visible now. Our French organization saw a shipment increase of 35% in Q2, very strong even against the base effect, but they managed to do this with 10 sites and 400 FTEs less compared to the previous year. Digital sales increased by 23 percentage points and is adding to this great team performance in France. Bernhard so again, welcome to our team. We also changed the management composition of certain countries with Francois-David Martino, we were able to win an international experienced manager, who knows the steel industry as well as our customer sector. In his last position, he was responsible for the Chinese business of Danieli Group. We also made changes to the management setup in Germany and the Netherlands and initiated a Europe-wide centralization of finance and administration functions to reduce costs further on top of the existing outsourcing. [Indiscernible] Kloeckner Germany and the Netherlands will therefore be managed under one joint CFO function. We are already in the process of leveraging our assets and driving cross-border collaboration. With that, we are sharing expert know-how and service portfolios to lift untapped -- so far untapped growth potential. Following this new European setup, we will report in a new and more streamlined segment structure from Q3 onwards. The then 3 segments being Kloeckner Metals EU, Kloeckner Metals non-EU and Kloeckner metals U.S. are perfectly mirroring our management approach and steering path. IR will provide you with additional information and data packages in a few weeks to make the adjustment as comfortable and easy to use.Coming now to Slide #7. On the leveraging strength, we are now taking the next step. We will extend the digitalization, but on top we will now increasingly push for the value chain automation. To achieve our ambition of zero-touch processes, we are thus expanding our efforts. The importance of kloeckner.i will be rising. It plays a key role in merging and extending the physical and digital businesses. We, therefore, gather capabilities under one roof and have launched a streamlined management responsibility for transformation, product and engineering and IT. Through this, we will be acting faster, more focused and bring digitalization and automation initiatives closer to our operation. As I already mentioned, we saw strong digital sales share of 42 -- 45% in Q2, up 7 percentage points and flattish quarter-over-quarter due to those unprecedented market conditions, which will only be temporary. Our Kloeckner Assistant is gaining more and more traction. It already processed more than EUR 500 million in sales year-to-date. Functionalities for processing orders are now live in the U.S., U.K. and Switzerland, and with the testing of a full automation service in the U.S., we saw a milestone on our way to zero-touch in sales processes. Meanwhile, the eProcurement tool by XOM is developing well. The gross market value is now above EUR 370 million year-to-date and this was achieved in this even very challenging environment.With that, I'd like to hand over to Oliver for the financials.

[Oliver Falk, CFO & Member of Management Board]

Yes. Thanks, Guido. We continue on the next page with a look into shipment sales, gross profit and gross profit margin for the second quarter. Shipments continued to recover from the COVID-19 pandemic and came in at 1,295,000 tons. The increase quarter-on-quarter by 0.7% is representing the result of our disciplined margin-over-volume sales strategy. Year-on-year, we saw an increase of 21% based on the drastic volume drop of quarter 2, 2020. Sales increased quarter-on-quarter by 21.1%, caused by the upwards market price trend and our consequent sales price management. Sales improved year-on-year even stronger by 57.8% due to a turnover plus of 225,000 tons and very favorable sales prices. Our gross profit has more than doubled year-on-year from EUR 229 million to EUR 524 million, an increase of 129%. The increase quarter-on-quarter is 35.2%. The inventory price change is still lagging behind our sales price development. Gross profit margin went up year-on-year from 19.5% to 28.4% and quarter-on-quarter by 3% points. The expansion of our margins worked perfectly well. This was only doable through our consistent net working capital management, which we will also pursue going forward. Moreover, our focus on forwarding sales and pushing contract business will be very helpful to manage the business in this highly challenging surrounding. We will focus now on the EBITDA for the group in quarter 2 in the next page. This quarter was the best since our IPO in 2006. EBITDA before material special effects strongly increased from EUR 11 million to EUR 271 million. The recovery of volumes continued and we experienced a positive volume effect of EUR 48 million. The price effect was exceptionally strong, including windfall gains of EUR 190 million beside EUR 82 million. OpEx is complex to compare on a year-on-year basis in such an environment. Excluding Surtsey, OpEx was up, especially driven by wage inflation in particular due to the labor shortage in the U.S. and U.K., and in addition operating costs. EUR 20 million of the higher OpEx are directly linked to the pricing and volume dynamics, for example bonuses, virtual stock options and shipping cost. Moreover, we had one-off OpEx of minus EUR 17 million related to severances and previous year income from public COVID programs. Our Surtsey measures contributed around EUR 20 million to the OpEx savings, a great achievement and a substantial contribution to our strong quarter 2 results. The overall result would have been even stronger if FX effects would have been more favorable against the minus EUR 14 million in the second quarter. Lastly, we had a minor material special effect true-up with regards to Surtsey of minus EUR 1 million.Overall, a great quarter thanks to sales pricing and how we manage our net working capital. So this is particularly something I'd like to show you in detail on the following page. We experienced now more than 2 years of crisis in which our net working capital management was a fundament to secure, on one hand, the delivery to our customers and on the other hand, to expand gross margins. This we call it smart net working capital management is one of the foundations for our high-performance through the entire cycle. Let's look on some historic figures. In 2020, when the pandemic took hold, we did not blindly sell off our stocks. Our relatively high stock level safeguarded our good service quality and supported increasing turnover volumes after the demand picked up again. Based on this strategy, we reached the lowest stock prices just at the beginning of the rising sales price trend. Our excellent supplier relationships supported us to keep stocks at an optimal level despite the continued shortage of material.As a kind of business principle, we are constantly striving to improve the quality of our stocks, which will help us to increase profitability going forward. As such, we reduced our Days Inventory Outstanding by a grate 4 days against quarter 2, 2019. The same is true for trade receivables for which we brought down overdues by 5% points and managed to bring down Days Sales Outstanding by 4 days against quarter 2, 2019. Overall, you can see that we reduced net working capital relative to sales by 4% points against quarter 2 2019, which is equivalent to EUR 265 million net working capital. Looking on sales, we almost doubled our share of sales contract business. This improves our options to control stocks going forward tremendously and of course, this is not easy doing. Our country organizations are doing a great job in optimizing the flow of material while the supply is extremely tight. Now let's look on cash flow and net debt for quarter 2. Our strong EBITDA of EUR 270 million resulted in a positive cash flow from operating activities of EUR 74 million. Our very tight net working capital management limited the cash out for net working capital to EUR 176 million, despite the continued price hike and the usual seasonal buildup in quarter 2. Interest payments were EUR 4 million and we had a cash out for taxes of EUR 15 million. The changes in other operating assets and liabilities amounted to minus EUR 1 million. Gross CapEx to sustain our business assets in quarter 2 was EUR 19 million, which were partly offset by a minor disposal proceeds of EUR 3 million. Thus, net cash flow from investing activities came in at minus EUR 16 million. Accordingly, we generated a positive free cash flow of EUR 58 million. So consequently, we achieved a reasonable deleveraging and our net financial debt decreased even further from already historically low level of EUR 363 million at the end of quarter 1, '21 to now EUR 303 million. So let's take a look at our funding portfolio and the maturity profile. As already said, net debt, including leases of EUR 303 million in quarter 2 is now even below the multiyear low of EUR 351 million, which you see in the table, and this is the year-end figure of 2020. In addition, we have utilized only EUR 439 million or 34% of our facilities including leases, again a strong demonstration of our excellent working capital management in the current steel price environment. As we have communicated in our last call, we extended our syndicated loan by one year until May 2024. In July, we renewed our Swiss bilaterals with 3 local banks until March 2025. The new volume is now CHF 160 million, an increase by CHF 30 million. We just received the investor's put result of our convertible. Not a single investor has exercised the right for early repayment in September 2021, which means that the bond will fully mature in September 2023. You can see in the maturity profile on the right-hand side on the bottom that we will have no major maturity until 2023. We improved our average debt maturity to approximately 2.7 years. So to sum it up, financing is very solid with a strong headroom under the committed debt facilities. We are well prepared for further rising prices and volumes, and we have a solid equity ratio and a low gearing. So that's it for the financials. I hand over now to Bernhard.

[Bernhard Weiß, CEO of Europe & Member of Management Board]

Yes. Thanks, Oliver. Happy to join the call for the first time today. I'm very much looking forward to lead the Klockner EU business towards this next decisive step. So far, it has been energizing to see the willingness of our employees to transform Klockner even further and faster. Therefore, I'm convinced that we will achieve our ambitious leveraging strength target and I think that our last year's and this year's determination in execution are great foundation to build upon. The most important projects we work on are already showing decent progress. For instance, we started to migrate some of the administrative functions of the Dutch operations into the German processes, and France works already much closer with Belgium than ever before in order to streamline costly redundancies, which we can process in one or the other countries, but not in both. This will generate further synergies and freeze us to grow our customer base even more determinately. We will particularly serve our customers better by smart logistics in various new service levels, which are more and more accepted in the market. We also extend our cross-border business being driven by customer coverage and not by location of product. For our customers, it's of utmost importance to be delivered on time, reliably and with an excellent service level. The customer couldn't care less which location the material comes from. We addressed that in our new sales tactics. We are becoming a real customer-centric organization. We also bundle our procurement activities within Europe much stronger to leverage our purchasing power better and drive strategic procurement for operational results. We are seeking partnerships with mills in various new areas, be it specific qualities, be it simply in volumes or which we have the optimal distribution quality in defined regions or countries or in new product characteristics like green steel. Our aim is to achieve a true cross-country collaboration to strengthen Klockner as one company. This is also core strategic intention and I'm really excited to merge this with our digital business model in future.So let's come to the regional business outlook. No changes in economic metrics compared to the April messages. Vaccination campaigns move forward, but COVID variant and pandemic restrictions continue to create uncertainty. However, general developments are positive and growth rates are heading in the right direction. Gradual sector recovery continues, while supply is still very tight, which is pretty in line with our earlier statements and estimates. We have managed our net working capital, as Oliver said, very smartly in this extremely challenging market environment and we will do so going forward. That was the precondition for our great performance in the last quarters, and we were very successful in expanding our margins. Despite our margin-over-volume strategy, we are maintaining our top market position with key customers, particularly due to our efficiency in operations and in fact, we are seeing a change in customer behavior. Security and reliability of supply in all its complexity is clearly moving into focus. This is benefiting our business also in the mid and long term, and we are supporting it by furthering contract business and forward sales. Positive pricing dynamic continues overall, supported by a disciplined supply side and associated with recovering demand. A general real steel demand estimation is still somewhat challenging to give even at this point of the year. We expect it to be between 5% to 10% for Europe. All in all, we are really positive for the rest of the year, especially for the demand side in the second half of 2021, under the condition that the fourth wave with delta variants remain limited in impact. So coming to our sectors. Construction industry, weaker start into the year due to the weather conditions, especially in Switzerland and Germany, but it caught up nicely to up to 7% for '21, what we expect. Economic uncertainty and muted office space demand is impacting our non-residential segment, therefore, expected to recover a bit slower. Residential and civil engineering is stronger expected due to infrastructure stimulation programs like Next Gen EU fund will certainly support further projects. The flooding has heavily hit infrastructure especially in Western Germany, and this will certainly result in an urgent demand for new investments in that region. We remain positive for the sector also for the longer term. Machinery and mechanical engineering, the outlook has really improved growth expectations of more than 10%. Complex value chains made it suffer heavily in 2020, and is now picking up and recovering its ongoing. So increasing trade and funding availability are driving it. Order situation has stabilized with agriculture being extremely positive. The energy sector is expected to be flat this year. No positive impact sensible, low visibility regarding midterm views, especially future investment restraints referring to mechanical engineering. Automotive different, strongly up in 2021. The recovery in auto is also ongoing. We expect it to grow by more than 5%. Two factors are slowing down the ramp-up. One is availability of material with even more scarcity in Western Europe after some suppliers declared force majeure after the devastating floodings, but the second problem is shortage of ships. These defer catch-up demand. However, shortage of chips is expected to relax towards the end of the year. This does not change the overall positive picture of the sector with consumer power gaining more and attraction for setting it up for an improvement in 2022. Shipbuilding, no changes here. It is heavily under pressure. So-so okay for military but, for example cruise ships in particular is very muted demand. That's it for Europe. And with that, I would like to hand over to U.S. John?

[George John Ganem]

Thank you very much. In the U.S., we're expecting steel demand to increase between 7% to 12% in 2021. This is supported by forecasted GDP growth of close to 7% and accelerating recovery in labor markets and the continued tailwinds from fiscal stimulus driving strong consumer spending. I would note that forecasted steel consumption is likely running below actual potential due to the continuing supply chain issues across a wide spectrum of inputs as well as an ongoing labor shortage. There were a record 10 million job openings at the end of June with both construction and manufacturing sectors particularly struggling to meet the rising labor requirements. It should be noted that even at the upper limits of this current forecast, overall steel consumption would end 2021 some 10% below 2019 levels, and we believe this supports growing expectations for another sizable rebound in demand in 2022. With this strong base case for overall consumption trends, recent mill consolidation expected to result in better supply discipline and the looming passage of a long-awaited infrastructure spending bill, given a further boost to steel demand, we remain solidly optimistic on prospects for the balance of 2021 and through 2022. Turning to the specific segments. Construction spending in June was up 8.5% versus the same period in the prior year, driven mainly by residential. Long-term fundamentals for housing remain very attractive due to positive demographic trends, but recent activity has been slowing modestly as evidenced by lower permit issuance. This is likely due to higher input cost and a persistent shortage of labor, as previously mentioned. Housing stats came in at a very strong EUR 1.643 million on an annual basis in June, surpassing consensus forecast. Private nonresidential and public spending continue to struggle from their post-pandemic declines, but there are signs of improvement coming from recent leading indicators. The Architectural Billings Index was reported at 57.1 in June, with the inquiries component at an all-time high. Additionally, the Dodge Momentum Index came in at 155.8 in July, which remains at levels last seen in 2018. It should be noted that non-residential recoveries typically lag the overall economy by about one year, supporting forecasts for slowly improving conditions over the second half before stronger growth returns in 2022. And of course, prospects for an even more robust recovery in non-res would be further improved by the passage of the $1.2 trillion bipartisan infrastructure bill working its way through the U.S. Senate, hopefully, very, very shortly.Turning to manufacturing, heavy equipment and mechanical engineering. These segments remain our strongest by far and are expected to continue to outperform through the balance of the year. Industrial production in the U.S. has already returned to pre-pandemic levels with current activity approaching or even exceeding capacity in some industry segments. In the U.S. and Mexico, we are experiencing strong demand from appliance, HVAC, water heater and electrical equipment customers. In line with IP, many of our large OEM contract customers have returned or even exceeded pre-pandemic business levels. Second half forecasts have come in unusually strong as supply chain issues and labor constraints continue to hamper OEM's efforts to rebuild inventories while keeping pace with surging demand. Additionally, initial forecast for 2022 indicate continued demand growth well into next year. The heavy equipment segments are projected up to be up 10% to 15% year-over-year and are also forecasting additional strong gains in 2022. This sector obviously would benefit directly from the hopefully soon-to-be passed infrastructure bill. And finally, machinery and industrial equipment are recovering nicely with steadily increasing backlogs and strong demand from warehouse construction.Turning to energy. Those markets are recovering slowly, but remain weak overall by historical standards and that recovery could be slowed temporarily by the recent delta variant surge. Energy continues to be the one key steel consuming segment where demand remains far behind pre-pandemic levels. Although drilling activity continues to slowly recover with recent rotary rig counts up to 491 versus 247 in the same period a year ago. They are still 50% below the averages achieved in 2019. Oil prices have stalled recently with demand concerns arising related to COVID and the announced ramp-up of output by OPEC. However, it is still expected that any increase in output will be tightly controlled based on demand trends. Longer term, we expect demand and drilling activity to climb over the next few years as the economy expands and consumer demand returns to pre-pandemic levels.Turning to automotive. As Bernhard has mentioned, this sector continues to battle supply chain issues related to the ongoing semiconductor chip shortage. While North American production is up strongly year-over-year through June, it remains far below potential. With automakers unable to match production with underlying demand, dealer inventories have been decimated and now sit at less than 30 days. The lack of available inventory is forcing buyers to delay purchases, which is now being reflected in weaker monthly sales levels, which fell below actually 15 million units in July. This is creating a significant level of pent-up demand, which should result in an extremely strong increase in production once supply chain issues are ultimately resolved. As such, we currently are expecting a robust recovery in auto production to occur in 2022, keeping supply and demand in tight balance for metal products, especially coated and aluminum.Finally, in shipbuilding, we remain on an improving trend, but only with modest growth expected in 2021. This is because this segment was the least affected by the COVID pandemic in 2020. Our naval business is on an upward trend with new programs in the queue, while our barge segment has a decent backlog through the end of 2021. Overall, we're extremely optimistic as to the outlook, both for 2021 and 2022. And I think the infrastructure bill would be an added accelerator and further improve our optimistic outlook. And of course, COVID remains the wild card. We have not yet built any negative impact from the current surge in the delta variant here in the U.S. as we don't believe that this will result in any significant lockdowns or more substantial restrictions that would hurt the overall economy in a significant way at this point but again, remains uncertain. That's it for the U.S.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Yes. Thanks, John. Indeed, a positive development in the U.S. and going forward looks even stronger. Now let's come to the outlook overall. Q3 first, we expect shipments to go down slightly quarter-on-quarter due to seasonal patterns that we have in the summertime and due to our strict margin-over-volume strategy. However, sales will go up significantly in the light of the current pricing development. As already announced in our half release 2 weeks ago, we expect an EBITDA before material special effects of EUR 200 million to EUR 230 million. For the full year, we expect a considerable increase in sales and slight increase in shipments, also due to our margin-over-volume strategy in light of the extremely tight supply. Nevertheless, as my colleagues already laid out, demand is developing well with vaccination programs progressing and stimulatingly supporting our core markets were very positive for the months ahead. After this record first half results, we're expecting the best full year income before material special effects since our IPO in 2006 at EUR 650 million to EUR 700 million. Moreover, though last year's cash flow from operations was already strong. We expect it to increase again this year. So all in all, a very positive outlook towards year-end. And looking at the share price, it has developed quite well over the course of the year. However, we are still trading below book value, even without goodwill, close to a somewhat implied floor, so to say. This is certainly not our ambition going forward, and we aim clearly with our growth strategy for more.Before you raise the questions in our Q&A session now, it is too early to discuss dividend payments at this time of the year, but it should be clear that if things turn out in '21 as we expected right now, we will see a solid and good dividend payment after 2 years of crisis without any dividend payment. And now we're happy to take your questions.

[Operator]

[Operator Instructions] Your first question from comes from the line of Owen Spence from Jefferies.

[Alan Henri Spence, Equity Analyst]

It's Alan Spence from Jefferies. And Guido, you managed to already preempt my first question, so I'll skip that one. But moving on to working capital, I was hoping you could give us a bit of a sense of expectations for Q3 and Q4.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Yes, maybe Oliver goes into it. Yes.

[Oliver Falk, CFO & Member of Management Board]

As you know, the price to us will increase moving forward. So that is especially true for the incoming material. They have higher prices and our stock prices will increase even if we would keep volumes -- stock volumes at the same level, which we are planning to do. So there will be a slight net working capital increase. But you know at the end, for quarter 4, we are again reducing seasonally net working capital. So we would not see tremendous increases of net working capital against the levels which we have seen in quarter 2.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

What I would like to emphasize here is what Oliver mentioned is that we doubled the volume and the percentage of our inventory that is already sold going forward. So what we manage and what we do in the current time is where our customers are looking for more certainty and safety of being delivered in the future, so that we move more and more to contract business where we had spot business before. And I think that is given the time where we are in an upward cycle, the right way to do because it secures earnings going forward.

[Alan Henri Spence, Equity Analyst]

Interesting. And then one probably for John. U.S. infrastructure bill, you obviously had given some pretty optimistic statements around dividend. Are those benefits factoring into your comments you had about 2022? Or when do you think steel demand will be boosted by that?

[George John Ganem]

Yes. I would say 2022, our base case does not include the infrastructure bill at this point. We're looking purely at the current trends in 2021 compared to where we saw consumption in 2019 before COVID and we would assume that there's probably still some significant growth in 2022 just to rebuild back to our pre-pandemic levels. And then we would see the infrastructure again as a further accelerator to demand growth as it flows through clearly not until 2022 and likely the years after.

[Operator]

And your next question comes from the line of Carsten Riek from Credit Suisse.

[Carsten Riek, Director and Co]

It's Carsten Riek from Credit Suisse. The first one I have is on the implied guidance for the fourth quarter. Your implied guidance pretty much calls for EUR 40 million to EUR 90 million in EBITDA. What are the assumptions behind this? Do you expect that the inventory gains completely disappear, means price momentum is stalling or what is behind this? And is there an upside to this full year guidance?

[Oliver Falk, CFO & Member of Management Board]

Well, that remains to be seen whether there is an upside. But as you clearly outlined, I mean volumes are always weaker in Q4. Incoming prices come up, so the margin will shrink and that's the basic assumption. Again, EUR 40 million to EUR 90 million, as you rightly did the math on this one, in there, taking out all kinds of windfalls compared to, say, normal through the cycle performance is not bad. But again, if it continues like we see it right now, I wouldn't exclude upside potential.

[Carsten Riek, Director and Co]

Okay. Perfect. The second question I have is pretty much related to it. What is your view on the inventories because you hinted already in your presentation on this, the sustainability of steel prices in North America and in Europe in the third quarter? And do you expect some restocking over summer in the system, means from your customers?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Maybe Bernhard's thoughts on the European market.

[Bernhard Weiß, CEO of Europe & Member of Management Board]

Not different from what we saw in the normal cycles as well. What we see, what Guido already said is that we mitigate our spot business risk significantly now because customers ask really for a reliable delivery rather than for the best price at the moment. So what we are doing is we are exchanging probably a little bit net working capital against business risk.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Maybe, John, something from the U.S., I think a similar picture?

[George John Ganem]

Yes. I think it's a very similar picture. I would say as far as pricing, we see no weakness. In fact, prices continue to move up even as early as yesterday with the new price increase on tubular products. The inventory side, I think MSCI inventories, the Metals Service Center Institute inventories, through June are up only 1.6% since December. So clearly, there's been very limited inventory build. And I would tell you that at the customer level, as I mentioned earlier, our customers have not been able to significantly increase inventories as well, primarily because they're dealing with a slew of different supply chain constraints and these labor shortages, which have impeded production with many customers. So I would say that while many expected the inventory replenishment to drive the current cycle, I believe it has further to go based on our market intelligence.

[Carsten Riek, Director and Co]

My last question before I go back to the queue is probably for Bernhard. What cost savings do you expect out of the EU business restructuring because you mentioned procurement, et cetera, et cetera. There were quite a bit of a change, which you currently implement here. But what do you believe comes in bottom line from this exercise?

[Bernhard Weiß, CEO of Europe & Member of Management Board]

Well, actually, most of the effects we drove out of Surtsey, but now it's the time for the remaining year for some additional structural changes, be it organizational but also be it on the footprint we have today. To put that in, let's say, millions is very difficult because we for sure have also some FTE effects out of these, let's say, efficiency measures we take, but they will probably more realize – will be materialized in the first quarter and second quarter next year. All over, we will see of course, a much more streamlined organizational and administrational cost base.

[Operator]

And your next question comes from the line of Tristan Gresser from Exane.

[Tristan Gresser, Research Analyst]

It's Tristan Gresser from Exane BNP Paribas. Two please. If I start with capital expenditure, with the new investment you just mentioned in the U.S. and if you can talk a little bit about the reach and profile. How should we think about CapEx for this year, but also for the next?

[George John Ganem]

Look, CapEx might be slightly increasing with some of these initiatives but overall, stays in line with what you've seen so far. So, no huge expansion. Last year was clearly down, but this year will be on normalized levels and might be slightly increasing, but not huge with the effects we've seen so far.

[Tristan Gresser, Research Analyst]

All right. Second question, maybe on growth. So, you're executing Surtsey and you're now starting to implement the 2025 strategy. You're ready to grow. How do you plan exactly to achieve that growth? Could you please maybe tell us a bit more about detail, timelines and maybe some of your targets, how we should think about it?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Well, the way we want to grow, as Bernhard already said, we're focusing a lot more. And as I expressed with the example of France on the real customer demand that we do have, we split logistics and operations from sales and look clearly what do our customers ask for, what additional product they want. For example, when we develop this new strategy, we did some customer survey, especially in Germany and found out that more than 50%, so it was more than 60%, even of our customers clearly said, we'd like to buy more material from you, different materials that you're currently not offering in services. So we're really looking into what can we do on top of what we're currently delivering, services, high value-add. We do either on our own and can shift better from our network. So we have some capabilities in France. In the Netherlands, we don't have in Germany. We have some in Germany. We don't have in the other countries. So we will drive that. For all of that, what we need is to be highly automized and more digitalized that we can cope with it. But we want to expand our offerings to our customers to serve more of their needs, and therefore have a deeper share of wallet with them. And we think there is still additional potential as we found out, and we will address that. And the better we are in digitalization and automation, the more we can serve it currently. Us and competitors as well are very often restricted by their own capabilities of getting all these services then aligned. Always keep in mind, we have more than 200,000 different products on our catalog. So managing complexity is indeed key for us to do our business.

[Tristan Gresser, Research Analyst]

All right. That's very helpful. And maybe one last one regarding the windfall gains. Given the size of it, can you maybe please give us a sense of the split by division, especially between Europe distribution in the U.S. and also how much gains are you incorporating in the Q3 and Q4 guidance?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Well, incorporated. And so we don't go down with these detailed numbers, but you can have between the regions a rather equal split that we do see in the effect, a bit stronger in the U.S. clearly as price hikes were a bit stronger. But we're giving overall -- we're applying the same mathematics every quarter, and we give you the numbers for overall the group. We don't do that much more for Q3 and Q4. Clearly, for Q3, within the EUR 200 million to EUR 230 million, we expect significant windfalls there in that as well. In Q4, it's going to be significantly lower, as Carsten already asked. So the implied 40 million to 90 million is not that strong on windfalls.

[Operator]

And your next question comes from the line of Lars Vom-Cleff from Chase Bank.

[Lars Vom-Cleff]

It's Lars Vom-Cleff from Deutsche Bank. Two smaller P&L questions or observations, if I may, for Dr. Falk. Firstly, flipping through your quarterly report, I assume that the positive developments of both the investment as well as the finance income were rather one-off tailwinds. Am I correct with this observation? And then secondly, the tax rate, H1 definitely benefited from the recognition of the deferred tax asset. So I assume your guidance for the full year '21 stays at around 27% as the tax rate we should expect. Shall we then expect the tax rate to increase afterwards again to a level of around 32%, which you mentioned in one of our earlier calls?

[Oliver Falk, CFO & Member of Management Board]

Let's start with the tax. In quarter 2, you see the reported tax of EUR 31 million. What you need to know is that we have a deferred tax benefit included of EUR 15 million, which will not happen in the third and the fourth quarter. So, doing that percentage calculation, which you want to do for quarter 3 and 4, then the income of EUR 15 million have be extracted. All other parts of the current income tax expenses will stay systematically the same. The other question regarding financing. We have, in the financial result, we have positive effects from the -- so to say, the extension of the convertible bond, we have additional 2 years in the maturity. So -- and we have to recalculate the cost, which are associated with that bond. So we have an income, interest income of EUR 8 million, which will be then become interest expense over the 2 coming years. And the second topic, which is included is a true-up of one of our venture capital firm based on a capital increase, which the firm has conducted. It's another EUR 4 million.

[Operator]

And your next question comes from the line of Rochus Brauneiser from Kepler.

[Rochus Brauneiser, Head of Steel Research]

Yes. It's Rochus Brauneiser from Kepler Cheuvreux. I have a couple of questions regarding your volume performance. Can you give us some sense how you think about volume seasonality in the third quarter and the fourth quarter? Shall we assume it's the usual pattern we have observed in previous years or would you consider given the catch-up effects which are still there, it will be less pronounced in the second half?

[Oliver Falk, CFO & Member of Management Board]

Rochus, it's going to be a bit less pronounced because there's so much tightening of the value chains that nobody really stopped producing. So we'll see the same pattern, but less than in the past. July came in already pretty okay. August, we expect some bigger ones.

[Rochus Brauneiser, Head of Steel Research]

Okay. Makes sense, yes. So looking at this, I would consider that overall, probably you're going to ship some 5 million tons or a bit more in this year, which means that you haven't really generated a lot of growth. So what I want to understand is how I shall think about the catch-up effects for next year based on the supply constraints you have suffered? And what will be the effect in 2022 coming from your margin volume strategy because in the end, you are going to go for more growth going forward. So how do these moving parts play out in terms of volume growth capability in the years ahead as far as you can see now?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Well, look, I think if we could supply the demand as it is on the market, we could significantly increase volumes but given the supply side that we currently do have, we can't and we don't want to because we have to balance out supply and demand to the benefit of our results and to stay capable of delivering reliably, as Bernhard mentioned. So we're not selling everything off we can sell at good volumes and good prices. We try to keep our product range as broad as we can, that we can balance out for our customers and key customers, indeed that we can reliably deliver through the cycle. So that's why, given the growth that we want to achieve, we could do more. Currently, we try to balance it out to the benefit of all our shareholders. If there was more material, we could do more. And this is what you will see somewhere in '22 kicking in, but it depends a bit on how will the supply side develop over time.

[Rochus Brauneiser, Head of Steel Research]

Another question is on the personnel costs. I think personnel costs have gone up pretty strongly over the last 2 quarters on a per employee basis by 30%. Can you single out the effects, which are temporary in terms of labor inflation and which might be more sustainable?

[Oliver Falk, CFO & Member of Management Board]

Yes. Regarding the cost, there are temporary effects or, I would say, effects, which are related to the current favorable development of the results. So, first thing and the most important one is the bonus accruals, which we have put in place and the second one, virtual stock options in favor of our employees. Both are accounting tremendously for the cost and will be a one-time effect of this year. We secondly have included in the personnel expenses, severance and retention payments. You know that we have had management board changes, not only on the Board itself, but also in the management of the services segment and the distribution segment, meaning Netherlands and Becker Stahl service. So those EUR 4 million would also not happen again. And furthermore, we have to consider that last year, we have had -- have seen income -- income from public programs, which account for roughly EUR 5 million, which we do not have right now, and also [ pension ] related income from across service cost – income cost reduction, which accounts for nearly EUR 7 million. So all this together and the bonus – the figure for bonus for the quarter is EUR 11 million and for the stock option EUR 1.4 billion. So this is the total of the cost for quarter 2, which we will not see moving forward. So if you deduct all this, the expense might be much lower.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

And even on the other personnel cost parts, what you see is that temp labor is a bit more expensive, where we have to fill in right now on the other hand, what we try to do. I mentioned it in the beginning of my speech. We see that there is an extra burden for all our employees, and we try to cover that with one-time payments because people are really diligently working, and their support is strong. So, we have to recognize that but we're trying to do that everywhere where we can just with one-time payments and not to increase going forward salaries.

[Rochus Brauneiser, Head of Steel Research]

Is it possible to give us a sense to what extent or how much has temporary labor utilization increased since the beginning of the year?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

I think these numbers would not be that much useful going forward because it's a temporary effect that we see right now. So going forward, let's see how it develops and then we see.

[Rochus Brauneiser, Head of Steel Research]

I think you mentioned in previous comments in the call about the changes in your business structure from spot more towards contract. Can you give us a bit of a sense how much you're shifting the contract structure in Europe and U.S. compared to last year?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

So maybe, Bernhard, you give some insights on Europe and then, John?

[Bernhard Weiß, CEO of Europe & Member of Management Board]

Yes. For Europe, at least significantly, when we saw last year, probably 35% to 40% contract structure. We see now over 50%, or over 50% stocks, which we have, which are already contracted, either price fixed or volume fixed. And I think in U.S., John, for you. It's even a little bit higher.

[George John Ganem]

It's a little bit higher. Typically, we are structurally more contract oriented on a long-term basis. And then we have certainly shifted on our transactional business to be more in a forward selling mode, and I would suggest our current inventories that are committed to customer orders are in excess of 60%.

[Rochus Brauneiser, Head of Steel Research]

And can you finally comment on the reasons behind the management changes at Becker Stahl and -- or the other way around, what shall we expect from these changes in terms of how you approach the business going forward?

[Guido Kerkhoff, Chairman of the Management Board & CEO]

The intention around that was in Europe, first of all, to bring the businesses closer together and get the borders down, so have more operating focus in the business. It was no additional layer. Bernhard is on our Board, but he is not located in the holding. He's in the German business and on the Dutch business and it together. And for Becker, what we see is to drive more engineering and customer orientation. They wanted to have more engineering expertise, and Francois is coming rather from the customer side. So he did buy steel, but he built -- as an engineer who build up big plants. So he knows exactly what our customers need and how we can get deeper into the value chain of our customers and have broader offerings out there. And this is what we wanted to strengthen. And maybe, Bernhard is expanding a bit on this one.

[Bernhard Weiß, CEO of Europe & Member of Management Board]

Yes, especially on Becker, that's a volume business, and it's all about utilization of our assets there, of our machinery and tentatively, orders become smaller and more orders. That means the intelligence on how to utilize our assets is more of importance than the market size this is what drove, let's say, the decision to have a more technical-oriented leadership in Becker Stahl.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue.

[Guido Kerkhoff, Chairman of the Management Board & CEO]

Okay, then thanks a lot for this call. And if you have any further questions, don't hesitate to contact Felix and his team. And thanks, and looking forward to the next call. Bye for now.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.