Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to today's Q3 2021 Conference of Klockner & Co CE -- SE, I'm sorry. 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. So it's a Q3 call from Klockner & Co. And with me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; and our CEO Americas, John Ganem; and our CEO of EU Europe, Bernhard Weiß. They will guide you through our presentation. After the presentation, we are happy to answer your questions. With that, I'd like to turn over to Mr. Kerkhoff.

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

Yes. Thanks, Felix, and welcome also from my side to our Q3 call with record results. Let's directly jump into the highlights of this indeed very remarkable quarter. Demand in shipments are still impacted by the pandemic and are slightly down year on year. General seasonality supply and chip shortages are the main reasons. And clearly, our margin over volume strategy, and the result of this is literally visible in our profitability. Sales are strongly up and almost doubled due to the higher price levels and so is gross profit. After record Q2, we could even improve EBITDA further, marking the best quarter and 9-month results since our IPO in 2006. Positive pricing dynamics and strict net working capital management were helpful.Net working capital is up. It's largely price prudent. However, managing net working capital smartly mean inventories, but also booking in a very profitable back-to-back and contractual business we're driving it. If you take a look at our DIOs, you will clearly see, they are up, but I can clearly tell you just there where we did it, it was by intention. We had, in certain cases, very favorable 1-year contract supply in the longer run, where we clearly said we take all the volumes we can get because from '22 onwards compared to these contracts, it can just get more expensive. So we clearly intentionally driving that up. And you can see that we will see a downward trend towards year-end. But still, as we can sign good back-to-back agreements and what we can supply, which we can sell in '22 with higher margins, we will do and continue our smart net working capital management here.Net debt, therefore, is up quarter-on-quarter, largely price driven, however, strongly delivered year-on-year and still on low levels. The digital sales, another positive highlight were up again at 46%, still impacted by the special market environment but clearly gaining traction again due to strong Klockner system performance.Coming to the next slide. Green steel and sustainable businesses, solutions are clearly the opportunities and are becoming not relevant in 10 years from now, but already today. We will become one of the front runners and sustainability solutions to enable our more than 100,000 customers to establish sustainable businesses and projects. Therefore, we signed this quarter a partnership with H2 Green Steel, the venture that will produce real green steel that is virtually no emissions with reasonable quantities from early on, based on the very good energy production, green and relatively cheap they can do in Scandinavian steel. Through this, we will become one of the first distributors of real green steel. And we believe, clearly, in the advantages we see. It's going to be fast. There is a lot of know-how. Energy and energy costs there are clearly much better than others can have it.The partnership with H2 Green Steel is exactly paying, therefore, on our leveraging strength strategy. Annual volumes will be up to 250,000 tons from 25 onwards. We will be processed primarily through backer first and the extension of this collaboration is likely. We see ourselves here in a very good position directly linked to very interesting end markets for these products. Moreover, we are mill independent, which is a big advantage in this context. This is just the first step on our way to becoming the pioneer of sustainability in the steel sector and offering different sustainable solutions going forward.On the next slide, I would like to give you an overview on how we view sustainability overall. Sustainability for us is at the core of our new leveraging strength strategy, but this is more than just green. First and foremost, we take a look at it from the overarching ESG view. Besides environmental issues, social responsibility and governance reliability are in the growth parts of that. While many others only take a look at the inside, we take a more holistic and strategic approach. Of course, we take responsibility for our own action, and I will come to that in a minute, but we also view transformation as a unique opportunity where we believe that this will support our future development and offer opportunities for growth.And again, not just in 10 years from now, already today. The environmental part for us has 2 components. One is emission reductions, which we call our housekeeping and much more important is fostering sustainable business solutions, the business opportunity side of it. Let me start with a housekeeping part. You will not see green washing at Klockner. As one of the few in our sector, we don't talk about self-defined measures but if clearly committed to the science-based target initiative, SBTI, ambition for 1.5 degree, the most ambitious and most relevant frame work globally. Scope 1 and 2 emissions make up less than 1% of our overall scope 1 and 2, 3 emissions. That means the ballpark is coming from the purchase material.However, we have to address all scopes. Measures we are currently undertaken to reduce our Scope 1 and 2 are: one, as one of the first listed companies, we've generally taken our out domestic air travel in Europe. We have already centralized energy procurement and will soon switch fully to green energy. Some locations are already transferred. We will successfully transform our truck and car fleet and our newly launched hybrid working concept with a target of 30% home office for administrative functions is already rolled out. Measures for Scope 3, as a non-mill-owned company, we are best positioned for our customers to find access to carbon neutral or carbon reduced material. The aforementioned H2 Green Steel deal is one of the examples, more to come.Now I would like to touch on the business opportunities. Steel, stainless steel and aluminum are well positioned for a car neutral economy. Besides the current challenges of the mills to change to carbon neutral production, these material contained already today less carbon emissions than many alternatives, and they can be fully recycled. So they are well prepared for the circular economy. Therefore, we believe that our materials can rather play a more important role in the further circular economies. And this is more than just replacing steel by green or greener steel. This allows us to develop new products, replace other materials and find new supply chains. All in all, it's our clear ambition to be front-runner and sustainability solutions to enable our customers to establish and grow sustainable business and projects.Next slide. Apart from that, the consistent execution of our strategy continues. In Europe, we optimized procurement setup and harmonized the industry specifications and with that, our sales approach. Through that, we can achieve our goal of fostering cost country collaboration and enable usage of data-driven decision making, something that makes us stronger every day. Moreover, Finance and Administration Center of Excellence has been implemented. In the Americas, we're using the market momentum for strategic related measures. With a new facility in Mexico, right in the heart of the automotive industry, extend offering of complex supply chain solutions.We did great progress on the digitalization and automation side. New kloeckner.i setup was finalized, merging programming skills and IT know-how and bringing it closer to operations. The kloeckner.i hub in the U.S. is launched. Digital sales share increased to 46%, still held back to the special market conditions. However, positive trend is visible, again, due to strong Klockner systems performance. Kloeckner Assistant running better than ever and backbone of digital sales chain now and in the future. More than EUR 750 million sales volume processed in Q3. Meanwhile, already at EUR 850 million. We even plan to expand the 2 to other parts of the internal value chain.The best news is process analysis is underway, a starting point to extract random e-mail content or AI backed. With that, we enable to digitalize and automate 80% of all of our transactions. No questions anymore, no doubt is anymore. The digital business will be the major way how Kloeckner interacts business-wise.Next slide, we are on the way to gain a record full year result. This underlines that remuneration of our shareholders is high on our agenda and something that we discussed very early this year. Our remuneration measures have to be seen in the context and as a combined construction. Depending on the final outcome of the year, we plan to propose a dividend payment of EUR 0.90 to EUR 1.10. Moreover, we plan to take care of balance sheet structure and want to improve future cash flows and support, therefore, future dividend payments. We want to fund the so far unfunded pensions. This is a very German issue.As some of you might know, some might not, German pensions do not need to be funded. So they can sit just on the liability side, and you can manage them on your own. What we will now do is we want to fund the so far unfunded German engines that -- and usually, do that by transferring your assets towards CTA, which is contractual trust arrangement in Germany, and we want to transfer assets of more than EUR 200 million to a trustee to allow them to be off-balance later on and to have the payments than done off-balance from a fund to the pensioners. This will reduce our pension provisions considerably and improve our cash flow going forward by more than EUR 10 million every year.Hence, with this combined shareholder remuneration measures, we are paying a very good dividend in the light of a record year, improving our balance sheet structure substantially through the funding of our pensions and support future cash flows. We believe that this is a very attractive and especially well thought out combination of actions. With that, I'll come to the financials. Oliver, you might take over.

[Oliver Falk, CFO & Member of Management Board]

Yes. Thanks, and good afternoon to everybody. So we continue on Page 10 and have a look into shipments, sales, gross profit, and gross profit margin for the third quarter. So first, shipments were seasonally impacted, but also by our very strict margin over volume sales strategy and finally, via the supply and chip shortage. Accordingly, shipments came in at 1,190 thousand tons. Our sales increased quarter-on-quarter by 10.3%, caused by the continuing upwards price trend and our consequence sales price management. Sales improved year-on-year even stronger by 59.3% due to very favorable selling prices. Gross profit before material special effects were more than doubled year-on-year from EUR 263 million to EUR 542 million.As our inventory prices are now catching up, we only saw a moderate price increase quarter-on-quarter by 3.1% despite soaring sales prices. Our gross profit margin went up year-on-year from 20.6% to 26.6%. Quarter-on-quarter margins came down 1.8% points due to the already mentioned pickup of the inventory prices. Overall, the management of our gross margin went exceptionally well due to the consistent and smart net working capital management, which we also will pursue going forward. Our focus on forwarding sales, sales contracts, and pushing contract business is very helpful to manage our business.On the next page, we focus on the EBITDA for the group in Q3. This quarter, as Guido already mentioned, marks a record and was the best since our IPO in 2006. EBITDA before material special effects increased strongly from EUR 40 million last year to EUR 277 million. The negative volume effect of EUR 11 million was driven, as already mentioned by our margin over volume strategy, but also by the tight supply and chip shortage. The price effect shows that we actively managed the price cycle. The year-on-year price effect was exceptionally strong with EUR 292 million, including with form gains of EUR 118 million. OpEx is up by, in total, EUR 42 million, mainly driven by shipping and operating costs and wage inflation. EUR 18 million of the higher OpEx are one-off and directly linked to the extraordinary pricing and volume dynamics of, for instance, bonuses.We will certainly not complain about that in such a record quarter. Lastly, we had a minor material special effect from this proposal gains and provision through acts of EUR 4 million. A great quarter, thanks to pricing and how we managed our networking capital to realize the maximum margins. We are now coming to cash flow and net debt. As you can see, our strong earnings of EUR 280 million were more than compensated more the effects from the networking capital buildup of EUR 258 million. That was driven by the uptake in prices. Taking into consideration the interest and tax payments of a total of EUR 33 million. Cash flow from operating activities came in at minus EUR 15 million in quarter 3.Gross CapEx to sustain our business assets in Q3 was EUR 22 million, which were partly offset by minor asset disposal proceeds of EUR 4 million. Thus, the net cash flow from investment activities came in at minus EUR 18 million. Accordingly, free cash flow was minus EUR 33 million. As a consequence, our net financial debt increased from a historical low of EUR 303 million at the end of quarter 2, 2021 to EUR 348 million, which still marks a very low level.Let's take a look on our funding portfolio and the maturity profile. So the net debt, including leases, came in at EUR 348 million, which is, as already mentioned, still at the level of the multiyear low and year-end 2020. Gross debts are at EUR 445 million in quarter 3, almost on the same level as in quarter 2 was EUR 440 million. A slight increase of the net debt in Q3 of EUR 45 million is caused by different cash amounts in those quarters.As mentioned in our last call, the convertible remains on the balance sheet until September 2023 as no investors decided for early repayment this year. Our maturity profile remains unchanged in comparison to quarter 2, our average debt maturity is approximately 2.5 years now. Gearing stays low at 22% in quarter 2. And as mentioned before, we intend to fund a large part of our pensions. This will be covered mostly by existing cash reserves and expected free cash flow. So with this, I would like to hand over to Bernhard.

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

Thanks, Oliver. Good afternoon to everybody on the call. Let's come to the regional business outlook. So uncertainty remains. Main topic is now more the shortage of material on the vaccination side, high vaccination rates have been achieved in Europe already more than 75%. Are there significant trend market changes versus the last call, actually not really in economic prospects compared to August, we do not see big changes. Several GDP estimates have seen downgrades, but we always were a bit more conservative here. General developments are positive, and growth rates are heading in the right direction.Demand is increasing and current limitations will be the driver for 2022 volumes and margin over volume strategy was a key for success in the last half-year, as Oliver said. We are managing our networking capital very smartly in this extremely challenging market environment and will do so going forward. Higher networking capital is driven rather by higher prices. We are taking additional tons for back-to-back business as well as for advantage contractual business only. Gradual sector recovery continues in mechanical engineering, but a shortage of chips and magnesium and meanwhile, more products prevents mainly automotive industry, but also machine builders to produce up to the market needs, therefore, impacting the recovery.In this context, we are now becoming more aggressive in order to grab and to gain market shares, and we have adapted our procurement quantities to optimally follow the market trend. The expected catch-up of automotive industry in the first half of 2022 will create renewed material shortage and drive, again, price increases. For the other product categories, prices have stabilized at a very high level and even continue to increase for aluminum and special steel due to continuous tension on the supply side. We have been applying a differentiated approach to protect our stock and maximize gross profit capture on these products. We expect real steel demand to be between 4% to 8% for Europe.All in all, we remain positive for the rest of the year and more bullish for 2022. Coming to our sectors. The construction business came steady through the pandemic, some lagging effects, of course. However, growth of 5% to 7% for 2021, still expected. Running projects continue, but new projects starts are being delayed sometimes due to the lack of visibility on financing and, of course, the strong price increase of raw materials. Residential and in civil engineering, stronger expected due to infrastructure stimulation programs, we remain positive for the sector also for the longer term.In machinery and mechanical engineering, we see an improved growth expectation of up to 10%. Machinery and plant engineering sectors anticipate to catch up coveted tax in the current year. Order books are full for next year. So opportunistic procurement approaches, as explained previously, are our intent here. Energy sector is expected to be flat in 2021, no positive impact sensible, low visibility regarding midterm views, future investment, restraints referring mechanical engineering.So automotive, most severely impacted by COVID pandemic, of course, up in 2021. The recovery of 2021 impacted by chip and magnesium shortage will not happen in full this year. We expect the sector to grow by more than 5% in 2021, but this does not change the overall very positive picture for the sector with consumer power gaining more and more traction, so setting up for a strong improvement in 2022, very bullish for the year to come. Shipbuilding, however, has no changes here, heavily under pressure, very muted demand for cruise ships, in particular, and merchant shipping also very weak. That's it for Europe, John, please take over.

[George John Ganem]

Thank you, and good afternoon to everybody. From a U.S. perspective, overall, U.S. steel demand, we expect it to increase between 8% and 12% in 2021. And this is a pretty impressive result considering there has been virtually no growth in some very large consuming said segments such as automotive and commercial construction and only a slow and subdued recovery in energy. Additionally, real underlying demand in the second half of 2021 is definitely running below potential due to continuing supply chain issues across a wide spectrum of inputs, logistical constraints as well as an ongoing shortage of labor. There remained over 10 million job openings at the end of August in the U.S. with both construction and manufacturing continuing to bear the brunt of an unprecedented and very challenging labor market.Looking at the specific segments. We see construction demand up between 5% and 7% in 2021. This is driven mainly by residential. Overall spending slowed in September, was down about 0.5% from August, but was still higher by 7.8% versus same period in 2020. Housing starts have slowed somewhat, came in at 1.5 million on a seasonally adjusted basis, annualized in September. However, home builder sentiment has improved recently despite still high input cost and this continued shortage of labor, fundamentals for housing still remain very positive due to favorable demographic trends.Nonresidential spending has continued to trend below pre-pandemic levels of square footage put in place is up solidly year-over-year. Nonres typically lags any economic recovery by 12 months, and expectations are for very strong growth in 2022 and 2023. This is supported by the recent architectural billings index, which came in at a very robust 56.6 in September, and the scores for the past 8 months have been among the highest ever seen in a post-recessionary period. And then adding further to the already positive outlook, the base case excludes the added demand that would be potentially generated by the long-awaited infrastructure spending bill that will hopefully make its way through Congress here in coming weeks.Turning to manufacturing, machinery, and mechanical engineering, we have seen these sectors outperform all other sectors so far in 2021 with growth rates above 10%. Our contract OEM business continues to remain strong, and we'll do so through the end of the year, and we forecast very strong growth trends again in 2022. Manufacturing indicators all remain positive. The ISM manufacturing index was above 65 over the last 6 months. OEMS, from our perspective, have been so far limited in their ability to fully rebuild inventories to support potential demand. And as I mentioned, many of our larger OEM customers are forecasting double-digit gains again in 2022.Looking at energy, we expect a continued but modest recovery trend here. OCTG demand only up a modest 2% in 2021, while renewable power generation growth is likely in the double digits. Drilling activity is steadily improving, but still very low by historical standards. Rig counts are now in the mid-500s, which are up from the prepandemic lows of mid-200s, but still well below prepandemic levels, which averaged over 900 in 2019. Oil prices have rebounded recently and the supply-demand balance may tighten further as the negative effects of the recent Delta variant begin to recede as OPEC seems content to maintain restricted output levels, for the time being, prices should remain elevated and may trend higher as demand improves.Again, on renewable, we see this as a top priority with future investments heavily supported by both the bipartisan infrastructure bill and the Democrats separate $1.75 trillion Build Back Better spending plan.Looking at automotive. This has really been a tough segment this year. Sales have been reduced dramatically due to historically low dealer inventories as production levels remain severely constrained. Year-to-date September production is only slightly above 2020 levels and continues to be hampered by supply chain issues, most specifically the semiconductor chip shortage. Full resolution may not be realized until later in 2022. September sales came in a very low 12.2 million on a seasonally annualized basis, which was down from 3 million in August. Low sales is directly the result of virtually nonexistent dealer inventories, which stood at only 27 days on October 1. Once the semi-chip conductor shortage, semiconductor chip shortage abates, we expect a significant surge in production in order to meet pent-up demand and with the need to rebuild dealer and fleet inventories.The shift towards electric vehicles, production is continuing to accelerate, and we think this is going to take center stage with aluminum demand rising significantly. We see really double-digit increases in automotive in 2022.And then lastly, on shipbuilding. I think shipbuilding for us remains very consistent. We see modest growth again in 2022. Our defense business remains a bright spot with -- and will be a solid growth contributor in '22 and 23 based on the programs already under contract as well as a number of new and exciting programs that are now in the queue. Our barge business is showing signs of life after a pretty slow third quarter. Quoting activity has increased recently as many projects that were delayed or on whole are now becoming active again. We expect this trend to continue to improve further in 2022.In summary, I would say that even at the higher end of our current 2021 forecast of 12%, overall, steel consumption in the U.S. would end the year approximately 8% to 10% below the 2019 pre-pandemic levels, with demand not yet fully recovered in the IMS predicting greater than 5% GDP growth in 2022. We feel there's a clear and compelling case for another very strong year of demand growth as we head into 2022. And finally, when you couple a positive underlying base case for overall consumption with consolidated and more disciplined domestic producers and then throw on top the inevitable passage of the infrastructure spending bill, we really find it hard not to be optimistic on the prospects for 2022 and beyond. From a pricing perspective, prices have clearly peaked in the U.S. temporarily, mainly the flat roll prices on hot roll are under modest pressure. This is mainly due to mills having more availability and as buyers become more cautious in their outlook and look to reduce stocks for year-end.Plate prices are actually stable to moving higher and are well below the historical spread versus hot roll. Long products are stable and will likely go higher as scrap is expected to increase pretty significantly through year-end and into early 2022. And similar to Europe, stainless and aluminum prices continue to trend higher on continued tight supply. Overall, we feel pretty optimistic on the pricing outlook for 2022 based on a very positive outlook for demand, while capacity certainly will be added. Supply will increase. We feel it will be absorbed by stronger demand. And I think the disciplined approach that we're seeing from the domestic mills lead us to lean strongly to the camp of higher highs and higher lows as we look forward into 2022. That's it for the U.S.

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

Thanks, John. I just want to continue and wrap up with our outlook for the full year then in 2021. We expect sales to be significantly and shipments slightly by prior-year level, and EBITDA confirmed as in our guidance of around EUR 800 million. The current still muted demand is more than welcome, but it certainly means a stronger recovery for next year as you could clearly hear from John as well. And in Europe, we see basically the same picture. We plan to propose a dividend of EUR 0.9 to EUR 1.10 per share. This comes in combination with the funding of the so far unfunded pension provisions. With that, we're now happy to answer your questions.

[Operator]

[Operator Instructions] And so your first question comes from the line of Alan Spence from Jefferies.

[Alan Henri Spence, Equity Analyst]

Actually, just starting off the pension, a EUR 200 million transfer of assets for what looks like about kind of EUR 10 million of annual savings. If I think about that as a normal investment, that's not a great payback. Is there a different way you're thinking about that? Or are there not other opportunities with potentially higher returns?

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

As we said, it's above 10%. And you always have to see that you get in some returns. So the cash return over all of that investment, putting it into a fund is clearly above our hurdle rates. Otherwise, we wouldn't have done it.

[Alan Henri Spence, Equity Analyst]

Okay. Just to clarify, you said the hurdle rate was 10%, was it?

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

A bit below.

[Alan Henri Spence, Equity Analyst]

That’s helpful. H2 Green Steel and that allocation of volumes in 2025, just interested if you could share maybe some feedback you've had with customers about their level of demand, be it by geography or end market for that product?

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

You see more and more of our customers asking for when can we supply and what qualities and what -- how really green is it because more and more competitors are coming up and showing, look, their steel is green, very open, self-defined, how they get there? But you see more and more demand from the custom side coming, that their end custom products they want to sell, they want to have carbon reduced or carbon neutral. And therefore, it's growing. It's across different sectors. You clearly always have the big companies, but they don't want to pay that much. If you come to the smaller and the medium-sized ones, on higher premium products they have, they are more interested and less price-sensitive on the issue.

[Alan Henri Spence, Equity Analyst]

And just the last one for me around working capital, and I appreciate we're not even halfway through the quarter since I gave a talk. But do you think we'll be looking at another investment in Q4 or potentially a release?

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

Let's wait and see how it finally turns out and where the pricing is going to go. Usually, you would see a soft release. But let's see where it goes. Again, what we clearly said is whatever we can get, especially on the favorable contract we will take.

[Operator]

So our next question comes from the line of Rochus Brauneiser from Kepler.

[Rochus Brauneiser, Head of Steel Research]

[Technical Difficulty]

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

Rochus, we cannot understand you.

[Rochus Brauneiser, Head of Steel Research]

[Technical Difficulty]

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

No, it’s not better.

[Operator]

So your next question comes from the line of Tristan Gresser from BNP Paribas.

[Tristan Gresser, Research Analyst]

Yes, just a follow-up on the green steel comments you just made. So from your perspective and the perspective of the customer, you're talking to -- you're seeing maybe less interest on, let's say, low carbon steel or net 0 steel made via balance sheet approach versus the kind of green steel you mentioned from H2 Green Steel, is that correct?

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

Yes. We see that our customers -- they are currently really looking into what qualities is it and what definition is it, and they definitely want to go towards the net 0 that is really at 0 or really net lower to have clearly defined standards.

[Tristan Gresser, Research Analyst]

All right. That's clear. And do you see any difficulty to get supplies from the mills that produce this material? What would be the advantage to sell it to you? And what is your vision, maybe longer term? Is that more helping you on the volume side or maybe on the margin side, if you can give us some color on maybe the premium you're seeing to this market and these kinds of products?

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

I think it's going to be a scarce product on the market, especially as for the blast furnace-related producers, it's going to be more difficult to change because -- so then it takes more investment and the longer time to build and to shift to DRI. If you’re EAF based, it might go a bit sooner and a bit easier. So for us, as we’re mill independent, we can look for the sources. And that's what we like so much about H2 Green Steel, they will be on the replacing blast furnace sites. So coming from iron ore, be one of the first with cheaper energy and with a clear real green steel product on the market, but we see other products coming on there as well. It will help us on volume, certainly. But I think in the beginning, as I said, it's rather scarce, and therefore, you can -- you have to find the right channels. And we're the best partner because we know the market better than anyone else to find out where can you get the best margin out of that product, which will, from my point of view, be clearly scarce in the beginning.

[Tristan Gresser, Research Analyst]

All right. That's helpful. And maybe last question on margins and the sustainability of margin, you achieved 4.56% EBITDA margin year-to-date, excluding windfall gains. Is that a sustainable level moving forward? And if you can give us an update on the third say cost savings that you realized in Q3? And if there is some upside left there as well?

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

Well, we have achieved, and we've realized 95% of all the measures of our Surtsey program. And as you rightly said, this is supporting in the price effect and the windfalls are clearly overshadowing our results. But underlying with clearly improved performance and certainly is completely on track. That's what we haven't mentioned in that or that's gone for us we're in the next step.

[Operator]

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

[Carsten Riek, Director and Co]

A few questions from my side. The first one on the dividend announcement, which surprises and hints on an excellent free cash flow generation in the fourth quarter. How sustainable will be such a dividend going forward? And why have you decided to propose the level of dividend as you did?Second question, more operational related. No matter, non-EU didn't actually have the same kind of operational excellence than the other business. At least it looks like that -- is it mainly a function of the Swiss business? Maybe you can shed a little bit of light on the change here. And the -- I believe last question is, will the removal of the Section 232 tariffs have any impact on your U.S. business, in your opinion? And could you consider actually shipping volumes over to the U.S. from Europe?

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

Yes. Carsten, let me start on the dividend. I mean, it's a record year. And therefore, it's a record dividend. We're a business, and you have to see how we can go through the cycles and what our sustainable results will be, and they will always be like in our usual dividend policy related to our results that we achieved. So going forward, these record years cannot be standard or expected as a sustainable dividend. And in for that dividend, I think it is needed to clearly demonstrate that in such a year which -- such a strong resolve that shareholder remuneration has to be considered in the same way as the results are.And if you apply that and take a look at what we did, on one hand, to pay out a dividend of that level, a record year needs a record dividend. But on the other hand, to finance out pensions and therefore, reduce the cash flow burden going forward from the pensions, I think this mixture of dividends and getting rid of former and older liabilities and reduce the risk there is a very good solid set of shareholder remuneration in a situation we're in now.Coming to the non-EU. Yes, and you're absolutely right. The reason is Switzerland. Switzerland does a very good performance, but the Swiss business and the underlying market is not as cyclical as the rest. We're very strong in the rebar business there, which is a longer cyclical business. In the beginning of the year, that was even a slight burden because you signed the contracts much sooner and earlier, a year in advance when you deliver. Some of that, you can physically hedge. Some, therefore, comes later with a bit of different seasonality. But the overall Swiss business is developing nicely in the right direction, but that's why you cannot expect such volatility as we see in the other businesses.In 2020, for example, it was stabilizing, therefore, you don't see the big uptake this year there. On the U.K., you see very strong performance. I'm very happy with the performance we see in the U.K. but Swiss is much bigger than U.K. So therefore, that's why the non-EU is not picking up like EU or U.S. On the Section 232, the impact, I think shipping from here from us to the U.S. We won't see that. I think it has been a very good solution to enable, again, to come back to older levels of shipping from Europe and Europe originated products in. So overall, I think, and you see it reflected in the U.S. results as well and the stock price development there. I think it was a very good and wise way of going forward and allowing again international trade. But maybe, John, you can add to that, how is it perceived in your side.

[George John Ganem]

Now, I think, [indiscernible] very, very positive from all sectors of -- certainly, the steel producer side of the equation. Look, we look at the Europeans, historically, as not being disruptors to this market. They take a very structured approach, a very strategic approach. They deal directly with customers, not through third-party traders. They're not opportunistic. So while volumes may increase, I think it's only positive for the steel consumer. And frankly, I look at it from a Klockner perspective, another avenue where we can differentiate ourselves because of our global footprint and the relationships we have on both sides of the Atlantic. So we look at it as a general positive for Klockner, and I don't think it has a significant impact on the market, certainly in the short to near term.

[Carsten Riek, Director and Co]

Perfect. Very quickly on the external funding of the pensions. Because at your former company, there was a discussion back and forth, but of course, they lack cash and doing. So now you can do it here. But is it also a signal that you're more prudent on external growth going forward as you fund your pensions first?

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

No. No, it is not. I think it is cleaning up of the liability side. And if you take a look at the pensions that we still have here, I mean, a lot of the pensions of Klockner are already funded, but the German ones here, most of the people are retired. They have a high cash out ratio, and therefore, to settle this and now have it off-balance and have it used and funds provided for that because it's not belonging to people that are still in the business. Our current pension models work in a different way. I think it makes sense to clean up in such a situation, the liability side that you just have a bank liability spend then can continue to grow. It was just cleaning up in a situation where you can.

[Operator]

[Operator Instructions] And so your next question comes from the line of Lars Vom-Cleff from Deutsche Bank.

[Lars Vom-Cleff]

I got disconnected in the meantime. So apologies, should I ask a question that was already raised. 2 quick questions, if I may. The easier one, I guess, is looking at the dividend announcement you just made, are share buybacks an idea for you as well in order to hand some excess cash back to shareholders? And the second one, rather, for my model. Can you give me any feeling about the effective tax rate either for the fourth quarter or for the full fiscal year? Because it seems to move a lot during financial year '21 so far?

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

Well, I think with our model of having dividends and funding the pensions, we have found a good way of addressing all the issues around shareholder remuneration. Share buybacks in the German content have to be seen in the light of the German context and other things. So, therefore, we think we found a very attractive way of having a good shareholder remuneration included in our model. So I think that's a good one. On the tax rate, Oliver?

[Oliver Falk, CFO & Member of Management Board]

Yes. You can calculate with 18%.

[Lars Vom-Cleff]

For the full year or for the fourth quarter?

[Oliver Falk, CFO & Member of Management Board]

For the fourth quarter.

[Operator]

[Operator Instructions] Sir, no more questions at this time. Please continue.

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

Well, then thank you very much for the call, and looking forward to our next call with the full year. Have a good day. Thanks. Bye.

[Operator]

This concludes our conference for today. Thank you for participating. You may now all disconnect. Speakers, please stand by.