Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to today's Q2 2020 conference of Klöckner & 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, executive]

Yes. Thanks, and welcome everyone to our Q2 call. With me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; our CEO Europe, Bernhard Weiss; and our CEO America, John Ganem. They will guide you through the presentation. Thereafter, we are looking forward to answer your questions. With that, I hand over to you, Guido.

[Guido Kerkhoff, executive]

Yes. Thanks, and welcome also from my side to our Q2 call. Let's directly start with the highlights of this quarter in which we again achieved a set of strong results. Shipments were down year-on-year, but only slightly quarter-on-quarter. This is due to the macroeconomic environment and also due to falling steel prices, but also because of our consequently followed margin over volume strategy at the beginning of the quarter. Sales are strongly up year-on-year as a result of the higher price levels compared to previous year. Gross profit came in at EUR 508 million, a great level and only down year-on-year because of the unprecedented price dynamics in Q2 '21. The same applies for the EBITDA. We generated a strong operating income of EUR 222 million in Q2. Together with a set of results published for Q1, this marks our strongest first half of the year since our IPL in '06, even surpassing the first half of our record year '21.

As a result of our smart networking capital management, we generated a strong operating cash flow exactly as we anticipated and always guided. We continue our smart net working capital management with still lean inventory going forward, and we will see strong operating cash flows as a result of further net working capital release throughout the year. Accordingly, net debt came down quarter-on-quarter. Digital sales share remained flat at 45%, however, still on a very high level and the system performance was boosted in the quarter.

Let's go to the next slide. We're making strong progress and process of implementing of our Klöckner & Co '25 leveraging strength strategy. One important lever our strategy is leveraging assets and developing our partner network. What we announced today is exactly fitting into this level. We were chosen by Nucor, one of our strategic partners in the U.S., to partner with them at their new and state-of-the-art facility they create in Brandenburg, Kentucky. This is a very special business opportunity, also under the light of sustainable business models, and therefore, we decided to go on campus and strengthen our partnership. It is especially interesting in connection with our overall sustainability strategy and our Green Steel target since this new state-of-the-art EAF will produce low carbon steel only, and of the core market is renewable energy infrastructure.

But John, why don't you present a bit more insights to this opportunity?

[George Ganem, executive]

Yes. Sure, Guido. Klöckner Metals here in the U.S., we're one of the leading plate processors. And in line with that leveraging strength strategy that Guido referenced, we have a clear plan to expand capacity and enhance our portfolio of these specific type of higher value-added products and services. The scrap-based Nucor brand and build [indiscernible] will be one of the most advanced in the world and will have the widest range of capability in the United States with the ability to produce plates up to 14 inches thick and out 168 inches wide. The mill will have a capacity of approximately 1.2 million net tons per year. The Klöckner investment is aimed directly at expanding our offering of differentiated plate processing services. For Kloeckner Metals developing and managing both complex and sustainable supply chain solutions forms the backbone of our overarching higher value-add strategy is exactly what this investment will be focused on.

We also feel the timing of the investment is optimal with regards to the expected massive U.S. investment into renewable energy and other infrastructure-related projects. This really is a clear example of how we intend to partner with those suppliers and customers in pursuit of the truly sustainable tomorrow. We have enjoyed a long and strategic relationship with Nucor and look forward to strengthening this important and growing partnership even further with this on-campus investment. Thank you.

[Guido Kerkhoff, executive]

Thanks, John. I think it was an awesome team work from all parties that were involved. And our greetings indeed go out to Nucor, we're really looking forward to this great new partnership in Brandenburg. But now let's directly jump to the next news in terms of our business opportunities. 3 weeks ago, we launched Becker Stahl and published the acquisition of Hernandez Stainless and RSC Rostfrei. Let me shortly recap the rationale behind this transaction and why it creates value for our shareholders from day 1.

For this transaction, Becker's extending its strategic position as a multimodal supplier. And with this backup as the most modern service center in Europe, now enters the stainless steel market and thus continues to expand its product and service portfolio, which now consists of carbon, stainless and aluminum. 70% of our customers that we do have order at Becker order more than one material already today. Now with widening this offering, we are indeed in a better position to supply them. It is unique in the European service center market, and we already know from our existing customers that demand for [indiscernible] solution is very high since it is substantially improving the logistics for our costs. In line with our overall strategy, customers will get everything from one truck.

This strategic repositioning is implemented via the acquisition of 2 stainless service centers being Hernandez Stainless and RSC. Both located in the German state of Baden-Württemberg. Together, they generated around EUR 160 million of sales and employ 70 people. Apart from the decision to step into stainless, this transaction for being limited in size, there's immediate synergies such as bundled procurement, leverage of Klockner's and Becker's logistics capabilities and optimizing capacity utilization to group demand. Capacity utilization will increase to 100% only through exploiting [indiscernible] Germany tonnages while decoiling at Becker. Moreover, we see the opportunity to consolidate on the level of commercial structures but also on the level of operating expenses. Through this, we will create value right from the spot. Thanks to Francois-David Martino and his team, and good luck in the stainless market.

Going forward, we will continue to follow our opportunistic M&A approach, and we'll do so in a highly selective manner. The decision to launch Becker Stainless along with the Nucor partnerships are milestones to be the leading digital one-stop shop platform to steel, other material, equipment and processing services in Europe and the Americas, Slide 25. Let's take a look at our further strategic initiatives. In terms of digitalization and specialty automation, we're able to post further progress on first half of '22. Though the digital sales share still flat, [indiscernible] performance was boosted in '22 close to EUR 800 million of sales were processed by our AI-backed tool in '22, a plus of 72% year-on-year. With this tool, we're able to digitalize more than 500 customers month by and month.

As we laid out in previous calls, we perceived the sustainability transformation of the steel industry as a unique opportunity to grow. Most and foremost, we want to enable our customers to build a carbon-reduced value chain with us. This purpose, which structurally upskilled our sales organization already today, we are therefore able to offer our customers high-quality sustainability advisory services in the field of carbon steel, stainless steel, aluminum, logistics and circularity, not just operationally, but also strategically on management level. More than 700 highly engaged and particularly trained salespeople are surrounding dedicated green steel experts to best-in-class knowledge offering sustainability advisory services from today onwards, just to recap, that's 10% almost of our workforce that we have trained and skilled to be there for our customers and invite them through this difficult challenge.

Our customers can, therefore, rely on the pioneering experience of the world's first [indiscernible] sales force. This very unique approach to structurally prepare the market as the fundamental to materialize opportunities of the decarbonization of multiple steel-consuming industries. With that, I'd like to hand over to Oliver for the financials.

[Oliver Falk, executive]

Yes. Thanks, Guido. And before we dive right in, I'd like to show you against the background of falling prices in quarter 2, how we manage the business cycle so far, the upward cycles and the more challenging downward cycles. Our management focus is the performance of the whole cycle, meaning we would like to achieve a strong performance through the cycle, which we clearly demonstrated throughout the last 30 months. The main enabler for the strong performance is our smart networking capital management. On one hand, we implemented countercyclical initiatives. For instance, in the second half of the year 2022 or at the end of the year 2021. Our decisions led to a much higher outcome of the upward side. Equipments made the positive price dynamics of 2021 and early 2022 immediately into record operating results. And as you have just heard that our disciplined margin and volume strategy contributed to those results as well.

Our smart net working capital management was also conducted in downward cycles, such as quarter 4, 2021 and now again at the end of quarter 2, 2022, with a strong focus on the mitigation of negative windfall effect. In all cases, we were able to mitigate big portions of the negative price effects and performed relatively strong. Overall, we manage our net working capital quarter after quarter and benefit on our ability to anticipate certain market developments. And this on the basis that more than 60% of our stocks are already sold. For the remainder of the year, we expect very strong cash flows and as a result of our net working capital management.

Let's have a look on the sales side. Next slide, shipments were 5.3% below the previous year's level. However, shipments were only slightly down quarter-on-quarter. Sales improved strongly year-on-year from EUR 1.8 billion in quarter 2 '21 to EUR 2.6 billion in quarter 2 '22 due to the considerably higher price level in all operating segments. Gross profit was at EUR 508 million after the record gross profit of EUR 524 million in quarter 2, 2021. Our gross profit margin went down year-on-year from 28.4% to 19.7%. However, it was flat quarter-on-quarter. We will now focus on the EBITDA for the group.

On the next slide, our EBITDA before material special effects came in at EUR 222 million, a very strong result again. Reported EBITDA close to the same level at EUR 223 million. Year-on-year, we saw a negative volume effect of EUR 28 million due to the challenging macro environment in combination with our consistent margin over volume strategy, which was still in place at the beginning of the quarter. The negative price effect of EUR 17 million year-on-year resulted from the overly positive price development in the previous year's quarter, being less pronounced this year. OpEx was driven by higher expenses for shipments, operating supplies thereof about EUR 3 million from inflation in energy costs. Moreover, we have EUR 12 million of positive FX effects due to the appreciation of the U.S. dollar.

Coming now to the cash flow and the net debt. We had a net working capital release of EUR 85 million, fully aligned with our networking capital management initiatives. Taking into consideration interest and tax payments of a total EUR 27 million as a result and other taxes offset by pension, cash flow from operating activities came in at EUR 262 million in quarter 2, 2022. Including net CapEx of EUR 20 million, free cash flow now was EUR 242 million. Therefore, our net financial debt decreased from EUR 999 million at the end of quarter 1 '22 to EUR 903 million despite dividend payment of EUR 100 million. As already mentioned, we expect a very strong cash flow performance in the second half of the year.

Let's jump to the next slide. Our balance sheet remains very strong. Our equities are and the equity ratio remains solid at 45% as well as gearing with 44% and the leverage at a level of 1.0x. Overall, this very strong balance sheet enables us to manage our inventories smartly also going forward and will support us to further grow the business according to our Strategy 25. With this, I hand back to, Guido.

[Guido Kerkhoff, executive]

Thanks, Oliver. Before we dive into the regions, we guide you through an overview of strong fundamental builder [indiscernible] since 2019. After prices hiked again in Q1, we witnessed the correction in the second quarter. However, as stated before, this was not a surprise for us as Oliver laid out with [indiscernible]. Currently, we see prices also stabilize. Price discipline has been proven in 2020 and '21 and is intact also today, very good signals, but still against the background of the current macro environment with its multiple challenges, uncertainty remains elevated and react to a very accurate caution and sensibility.

Once again, our teams did a great job and managed again to participate strongly in this upward cycle. Due to their engagement and commitment, we were able to post the best first half results since our IPO in 2006. And the record result of '21, we will again achieve a great full year EBITDA, even if it doesn't come on as expected that the second half is more challenging than the first one. We not just managed the output cycles over the last 30 months pretty well with industry-leading quarter-over-quarter performances. So Oliver showed, we also mitigated downward impact, for instance, in H2 '21. We've clearly proven that Klöckner is able to strongly perform through the cycle with higher lows, especially higher highs.

Strong performance through the cycle is only possible due to very disciplined and smart net working capital management. As anticipated, this has already led to very strong cash flows in the second quarter. And due to our net working capital investments during the last quarters and may expect also strong cash flows for the second half of this year. Macroeconomic environment and falling prices certainly left its mark in steel consumption, and it remains to be seen by the end markets will finally develop. However, we remain constructive for the end market, especially, for auto in the second half. This is why we take a very differentiated approach when it comes to staff management.

Now that the chip shortage is fading further, we see gradual improvement here. June production, for example, in Germany was already up by 19% year-on-year. Against the back down of the trading of the share in Q2, also in the industry trading and frequent question, let me state one thing because there might have been a few topics [indiscernible]. We're not a producer, and therefore, a potential gas shortage has very limited direct impact on the group. Instead, we might see rising prices in such a scenario if production capacities will be short. [indiscernible] consumption is not material whatsoever. Moreover, by half, -- and this is another thing I think that should be highlighted, by half we're a U.S. company, where the overall impact of this is, of course, completely different.

With regards to inflationary development, we're doing good in passing this through. In terms of wage inflation, we're on a level playing with our competition. However, due to [indiscernible] well and may be better prepared for this. Our general market perception for the midterm has not changed at all. Different market environment is emerging characterized by demand for sustainable products, new energy supply mix, investment in defense and especially infrastructure investments in the U.S., and do not forget we're almost half the U.S. company. All these factors are particularly positive for steel and our sector are expected to lead to a healthy demand and higher price levels than before COVID-19. With that, I'd like to hand over to Bernard for the current status in Europe.

[Bernhard Weiß, executive]

Yes. Thanks, Guido. Before we jump into the business outlook, a few sentences on the Klöckner Metals Europe. We again achieved a very strong quarterly earnings of EUR 90 million in the second quarter. Our networking management and the structural changes enable us to outperform already strong first half of 2021. Also strategically, we made great progress with technology investments in higher value-add businesses at our sites in [indiscernible]. These investments are not just fostering our strategy implementation, but also will differentiate us substantially from competition. In addition, we are more and more introducing automated machining processes, thus increasing value-added with relatively low FTE levels and reducing pure distribution exposure.

As Guido has pointed out, Becker Stainless has just been launched, this is more than just an acquisition of 2 smaller service centers. Becker will, therefore, not only be the most modern service center in Europe, but also the one that masters high complexity of offers in carbon, aluminum and stainless, making it a unique player in Europe. We are further strengthening our portfolio strategy and realizing cross-selling potential right from the start. I'm very much looking forward to see Becker entering that new market.

Coming to the sectors. Overall, no major changes compared to Q1, only gradual downgrades in certain industries after Q2 developments. In Construction, as I said last time, that sector is least impacted by the Ukrainian crises. Of course, increasing interest rates will affect the residential segment. However, infrastructure projects expected to overcompensate, especially, due to energy distribution work. Despite macro headwinds, very robust performance so far and nonresidential expected to be pretty resilient.

For machinery and mechanical engineering, we see no change compared to the last call. We see strong order books on our customer side and no negative trends. Customers have recovered from COVID crisis and activities are now growing above the 2019 levels. Automotive, we are pretty optimistic of the chip shortage is now fading out more and more. And Hiro said in June, we had 19% increase of production, so the recovery has begun and is expected to return to normal levels in the coming months. Shipbuilding, no major change compared to last report, it is still under pressure. And with that, I would hand over to John, please take over.

[George Ganem, executive]

Thank you, Brad. In the U.S., demand trends, I think, in the near term remain uncertain and somewhat difficult to predict. While we still see positive underlying fundamentals, it is clear real demand growth is entering the decelerating phase that the overall economy slows in the face of high inflation, rising interest rates and weak consumer confidence. From a clock perspective, over most of the first half of 2022, we have seen persistently negative market sentiment, feeding into lower year-over-year parent demand. This is also clearly reflected in the year-to-date NSCI shipment trends, which indicate negative year-over-year development across the entire service center segment.

With negative pricing trends continuing for most products in the second quarter, our transactional customers remain highly cautious in a destocking mode. We have also seen some of our large OEM contract customers begin to make inventory adjustments in anticipation of weaker demand conditions in the second half of 2022. We do expect pricing for those products to stabilize for the end of the third quarter, which should help bring transactional customers back into the market as supply chain inventories will likely reach critically low levels in coming months.

Turning to the specific segments. Construction spending is up year-over-year, but there is no question that residential is clearly decelerating as consumer confidence falls and mortgage rates rise. We still see solid quoting activity levels on nonresidential and expect this to continue, if not actually improve as we begin to see some of the initial impacts from increasing infrastructure investment later in 2022. Overall, demographics remain quite positive for homebuilding. So despite the current slowdown, it should remain on solid footing.

Turning to manufacturing and machinery, we're still generally positive, but growth rates in these segments are also decelerating. The ISM Manufacturing Index was stable in July and still indicates a modest expansionary environment. Second half forecast from our contract customer base are stable, although we do expect to see some level of destocking occurred over the second half of the year. Heavy equipment customers have strong backlogs and report no slowdown in demand on the horizon. Energy markets continued to improve gradually on higher oil prices. U.S. rig counts were at 767 last week and continue to expand on a weekly basis. This remains a key segment with clear upside potential.

Automotive sales remained depressed with preliminary July annualized units reported at 13 million, which is only slightly better than June. Historically, low dealer inventories and restricted production continued to hamper sales. Year-to-date June, North American auto production is actually up year-over-year by 8%, but remains some 15% below pre-pandemic levels. With strong pent-up demand, auto production should increase strongly once supply chain constraints are fully addressed. Shipbuilding activity remained stable and Klöckner Metals has a strong multiyear pipeline of projects in place.

So in summary, based on these segment views, underlying demand conditions are still decent, but with a clear decelerating growth trend in some key segments. As previously mentioned, we do expect market prices to stabilize as scrap finds a cyclical bottom in coming months. Additionally, falling second half import volumes and low supply chain inventories should help the market find a better supply-demand equilibrium. While currently weak market sentiment and destocking trends definitely creates some second half headwinds for prices and apparent demand, we continue to believe in very strong long-term demand fundamentals and remain highly optimistic as we look forward into 2023 and beyond. That's it.

[Guido Kerkhoff, executive]

Thanks, John. And with that, let's go through the outlook for Q3. As you all know, the outlook is currently, of course, still uncertain due to the rising inflation, supply chain issues and war in Ukraine. Due to recent negative price dynamics, we expect sales to go down quarter on quarter. However, [indiscernible] increase compared to Q2. EBITDA before material special effects is anticipated to come down as expected due to the price development we've seen and due to the overall market environment. We expect it, therefore, to be in the range of EUR 50 million to EUR 100 million in Q3.

Against the background of heavy price headwinds in Q2, the challenging macro environment, still muted demand, most and foremost compared with our performances a few years ago, this guidance is showing clearly underlying improvement in a down cycle. Again, we expect strong cash flow generation in Q3. For the full year '22, we expect sales to grow considerably year-on-year, shipments to be stable. Moreover, we expect EBITDA before material special effect to come in above EUR 500 million, and the emphasis is on the above. The rest has to be seen throughout the year and how further developments will occur in all the different factors I've mentioned. For the full year, operating cash flow is expected to be very strong and clearly positive. With that, we're now happy to answer your questions.

[Operator]

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

[Alan Spence, analyst]

I've got several questions and I'll take them one at a time. The first one is on this new on-campus facility with Nucor, and I appreciate you're not going to want to give specific numbers here. But can you talk a little bit about the economic benefits from the proximity in partnership as opposed to your more standard procurement of steel volumes.

[Guido Kerkhoff, executive]

John, do you take that?

[George Ganem, executive]

I can take that. Yes. Listen, I think the geographic footprint is optimal for Klöckner. We really have a gap in the center of the country. With Kentucky, it really fills in a geographic need for us. Additionally, the focus on heavy plate. Clearly, heavy plate doesn't travel as well and to process it, it's much better to do it locally, and that's where we see the very unique opportunity. In this mill, again, having the widest capabilities in the U.S. by far with 14-inch capability. I think that is the -- that's what we're really focused on, and that's where we think the differentiation truly come from.

[Alan Spence, analyst]

And then turning to green steel. You signed some deals of the company to start procuring that for 2 years. How are you seeing customer demand kind of volumes? And is it broad-based across the end markets? Or is it still certain end markets are driving it now?

[George Ganem, executive]

Well, Alan, what we saw in the beginning is that clearly the leading edge companies or premium home appliances and especially the automotive sector were leading the pack, and they seem to be more advanced that as I outlined with the training, the 700 people, we received many, many questions across all sectors right now. So we see that all sectors are indeed preparing and is going down. It is very much in the construction sector now if questions are coming up, shipbuilding. So it's across all and it has broadened.

[Alan Spence, analyst]

Great. And the last one is just a bit of housekeeping. In terms of the guidance, can you just say to you if and to what level you're assuming windfall losses in the Q3 guidance? And could you please just remind us on what for CapEx guidance?

[George Ganem, executive]

Well, I can't give you detailed numbers on the windfalls that we have. We have to see what's coming, but it's going to be impacted by windfall losses, that's clear. And steel, but keep in mind that the EUR 50 million to EUR 100 million, if you multiply that by 4 and compared to what we have achieved as results, if you go back to the past, I think it's [indiscernible] because it will include in our windfalls. But the levels we need to see will finally turn out as one of the reasons for the range. On the CapEx guidance, Oliver?

[Oliver Falk, executive]

Yes, the CapEx for the full year, we expect the net CapEx figure of EUR 100 million. And you should not forget about, let's say, the income from the sale of real estate, which we have already realized. So that's included in net figure.

[Operator]

And your next question comes from the line of Seth Rosenfeld from BNP Paribas.

[Seth Rosenfeld, analyst]

Can I follow up on Alan to start out, if I can push a little bit harder. I think we all need to better understand the impact of inventory holding, windfall gains or losses, both in Q2 and in the forward guidance. Feedback for investors is, obviously, a continued uncertainty over the underlying earnings power of Klöckner. There's a certain benefit, but we've also had really huge windfall gains over the last 1.5 years. So is there any sense as to better understand what the underlying level of profitability is Q3 guidance implies earnings down almost 80% Q-over-Q at the lower end? So where do you view kind of medium-term earnings power in a more stable price environment u.

[Oliver Falk, executive]

Maybe let's start first with the quarter 2 on a more specific part of the answer. So what is happening right now is that we see also in the first weeks of July, quite stable sales prices. So the pressure on the gross margin is coming from the steel increasing stock prices. And you might remember that our -- the falling prices, which we see in the market, they have occurred around May. So the incoming material is now -- by the end of July, having lower prices and that will have then an impact on the overall stock prices. So the gross margin pressure is coming from the stock price change. And as I just tried to explain is that our stock prices will drop then from August then onwards. However, there is a strong pressure in the second quarter [indiscernible].

[George Ganem, executive]

However, what we can add on to that one, we have seen a strong decline over a short time period. And now the stabilization continues and is valid then you should have a short time where it will hit and affect us. And from then on, it will continue and we see the underlying performance. And again, EUR 50 million to EUR 100 million, including windfall losses as compared to the historic performance, a good guidance. Don't underestimate that.

[Seth Rosenfeld, analyst]

Just to clarify, is the view that Q4 could intend to see a better alignment of inventory costs and sales prices? Or would we be expecting in that plus EUR 500 million full year guidance into another quarter of inventory losses?

[Oliver Falk, executive]

Yes. It's not so much the inventory losses for quarter 4. Quarter 4 is really hard to predict what -- regarding the turnover. We see reduced with for losses for the first quarter, that's clear, but volumes are really hard to predict. So therefore, we were quite cautious on the first quarter. And that's resulted in the guidance for the full year where we save a minimum than the EUR 500 million EBITDA.

[George Ganem, executive]

Yes, that was for the fourth quarter to I think that's fair.

[Seth Rosenfeld, analyst]

Okay, understood. And the last one, please, with regards to working capital. Obviously, over the last 1.5 years, you've been a quite significant investment in working capital. Given your pricing outlook, what portion of that working capital build do you think can begin to unwind in the second half of the year? If you think the prices are actually stabilizing, what's still quite elevated levels is it fair to think that only a modest portion of recent working capital investment could be unbound? Or are you hopeful you could see more release in coming quarters?

[George Ganem, executive]

No, there will be quite some relief. I mean the prices have come down from May onwards quite significantly, and that will be reflected in the incoming material that will be there in the upcoming months. So therefore, you will see a release even the volumes were to stay the same.

[Seth Rosenfeld, analyst]

Are you able to classify what portion of this investment could come back to them?

[George Ganem, executive]

Not at this point, no, we wouldn't. But you can see the prices have come down significantly.

[Operator]

Your next question comes from the line of Rochus Brauneiser from Kepler Cheuvreux.

[Rochus Brauneiser, analyst]

I have a follow-up on previous question on the normalized earnings side. When I look at historical performance like in the years after 2014, 2015, I think you had cost per ton in the range of EUR 200, EUR 215. Would that be the right number directionally to where we are going to end up in the coming quarters without any reoccurring windfall effects?

[George Ganem, executive]

Well, that's a bit difficult to predict. I mean, what we've clearly seen structurally we move upwards. So therefore, and we've seen that in the investments that we're currently undertaking as well that we out value chain a bit. And there, the gross profit per ton is always higher. So we want to continue on that route and continue to get out of this just cyclical distribution business. So we want to move that. On the other hand, what you see and you require higher gross profits at the end of the day because the cost below the gross profit, there you see the inflationary effects, and they will not disappear in the short term. You see it on the wages, you see it on transportation cost and energy cost. And this is a level playing field. That's not just us.

So therefore, the way how we look at it is indeed from a completely integrated view. You can't just say you want to go back to old gross profit levels. That will not be good enough to cover your cost and to end up in the same bottom line as we did in the past. So therefore, the requirement, and it's not just us, it's for everyone in the sector and will be different. And the whole setup and the paradigm that we used to have has shifted.

[Rochus Brauneiser, analyst]

Right. And another question associated to that is when you look in the last 5, 7 years, I think you have been selling at least 1 million, maybe 1.5 million more tons of steel. Now when we are entering into a period of locals, no growth or negative growth. How you're planning to make up for that lack of volumes to maintain your margins? Would that mean that you have to take out a new restructuring program? Or what were the moving parts or what is helping you to maintain superior performance compared to average in the last decade maybe?

[George Ganem, executive]

Yes. I know your question. Look, reviewing our portfolio is something we do on a constant basis and how to upgrade and how to ship and how to be more profitable and have a better offering for the customer out there. That's the integral part of our strategy as now we want to offer more to the customer and want to widen our network internally and with partners. And that -- you've seen the 2 investments we did one, partly inorganically, the other one, organic on-site with Nucor. So how we want to grow around our capabilities and use our capacities more efficiently.

If you take a look at the backup sameness, the one thing is to go out to the customer and have more backstage. But on the other hand to say, look, if we get all the calls now and then can do the decon sustainable even for the German business, we have a lot of synergies and we take out margins, others would have taken before because we had to acquire already equal product or our distribution business. And that's the way how we look and how can we optimize our sites that we have. We rather want to look into the market, we can make out of that.

And how can we shift in this portfolio, all of our site up that even if we are at lower volumes, we earn more money with it. And not just to push on volumes might be, so in some cases, in some situations, the right thing. But overall, we're looking at how can we optimize our return we get out of that and how can we structurally have a better value-creating offering for our customers of this. The lower our own added value is the more we are bound to cyclicality and just the price cycle. The higher we are in the value chain and the more we move that we should even have lower volumes, then be better through the cycle with less volatility. And that's how we're trying to drive and optimize our output [indiscernible].

[Rochus Brauneiser, analyst]

All right. And then final question is on Oliver's comments on the working capital management. So you were saying that 60% of inventory was sold. Is that kind of recurring level that you try to sell a large chunk of your inventory well in advance. What kind of time frames are we talking here? And is the price already set at the moment, it is still in your books? And obviously, it's a longer forward in terms of your sales process, but maybe you can put a bit more color on that.

[George Ganem, executive]

[indiscernible] especially on the contract business, the more and more we enter in the service center business in the contract business, the more is upfront sold at prices and you always try to be back-to-back covered with the incoming prices connected to what we sell either on 3, 6 months or full year contracts. And that's where the 60% are largely referred to and that is well through in the U.S. as well as for especially Becker business that we're always trying to have back to back. And in that aspect we have longer-term business, which is largely for our industry. Now if you leave out the last 1.5 years, that was very helpful where you could generate short-term more margin out of it. But in the longer term, you've just exactly trying to get there. We have this stability in this underlying content volume or contract volume to drive it and then you have a guarantee margin. But Bernard, you might jump on to that.

[Bernhard Weiß, executive]

Yes. If you look on the distribution business, we significantly increased our contract business, but the price is set, of course, also the take of volume is set. However, not all the material is ordered, but it's also part of the normal commodity distribution in many cases. So what we say and also with respect to the question before, what we are trying to achieve is to change our customer portfolio coming from pure transactional customers who buy spot every time to more partner customers, which buy from us continuously based on, let's say, certain indices or certain prices throughout the year, which we set, and that will also take out a lot of cyclicality in our business.

[Operator]

[Operator Instructions] Your next question comes from the line of Carsten Riek from Credit Suisse.

[Carsten Riek, analyst]

I have a few questions on the strategy. The first one is, again, on the new partnership with Nucor. John, I think you mentioned there are 1.2 million net tons per year capacity involved. My question is, will all those volumes run through your process or only a proportion of this? If so, what is your estimate? How much of the volume could go actually through your lines? And attached to that kind of strategic theme, I guess you still need to invest to offer those services to Nucor. What magnitude do we talk? And would you expect that we could see that cash out already by year-end? That's the first kind of lock of questions.

[George Ganem, executive]

Yes, I mean, our facility is not going to absorb all of the Nucor capacity, just a small fraction of it. What we're focused on are the complex multistep plate processing type of supply chains. The overall potential volumes really predicated on the type of mix that you get. This is not going to be a massive overall volume type of business. This is going to be a margin type of business with a highly differentiated process and services tailored to more complex type of supply chain solutions. So overall, through the entire network, we certainly see growth potential over and above what we're investing in Brandenburg, but this is a small part of the overall 1.2 million tons. But again, very value-added in nature and focus. Does that answer the question?

[Carsten Riek, analyst]

Yes. With regard to investments, even though it's only a small portion, I think you need to put those kind of processing lines in place?

[George Ganem, executive]

Yes. I mean we're really -- we're focused on, obviously, multiple pieces of equipment. I think we're -- you're talking multiple burning tables, doubling capability, machining, drilling, really a lot of different types of equipment involved, but we're also looking at managing supply chains to a wider partner network where we need certain capabilities that we're not going to have internally, will offer those services on a managed service basis, managing a network partners to bring a full fabricated type of solution to bear.

[Carsten Riek, analyst]

Do we talk about CapEx-wise, I don't know, EUR 5 million, EUR 10 million, EUR 15 million. Can you give a magnitude?

[George Ganem, executive]

[indiscernible].

[Carsten Riek, analyst]

Sorry, I couldn't hear it. Sorry, what was the answer because you...

[Guido Kerkhoff, executive]

It's a low double-digit number that we will invest...

[Carsten Riek, analyst]

Okay. Cool.

[Guido Kerkhoff, executive]

That is a low double. It's going to start throughout this year, but the major part of next year.

[Carsten Riek, analyst]

Okay. Perfect. The second question I have is a Hernandez and RSC, the Stainless Service Center acquisition. Can you give us an idea what the underlying EBITDA margin in that business on a steady state? What is your assumptions here?

[Guido Kerkhoff, executive]

We could do so, but we'd like to keep it with us. Please understand it. We see a lot of synergies and it's going to be accretive to our margin overall.

[Carsten Riek, analyst]

Okay. That's fair. On the Kloeckner Assistant, I'm just interested what is needed in order to boost those digital sales or digital share further? You mentioned the 72% growth on the EUR 780 million sales. But if I look through and look at the steel price increase at the same period, it looks like the volume was maybe marginally better but not hell of a lot.

[Guido Kerkhoff, executive]

So the functionality like having e-mail and coating and this stuff included, and these technical features will come, and that will boost it that.

[Carsten Riek, analyst]

Okay. Cool. And the last one which I have is on the FX effect, of course, the U.S. dollar appreciated quite significantly versus the Euro. What was the positive contribution to EBITDA in the second quarter? Because your U.S. business has performed quite strongly, and I guess some of this was probably FX related.

[Oliver Falk, executive]

Yes, it was less than EUR 10 million, about EUR 10 million.

[Operator]

There are currently no further questions. I will hand the call back to you.

[Guido Kerkhoff, executive]

Thank you very much for your questions. If there are any questions on top, don't hesitate to call Felix and his team, we are available for you. Thank you very much.

[Operator]

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