Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2021-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to today's Q4 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, executive]

Yes. Thank you very much, and welcome to our Q4 Analyst and Investors Conference Call.

With me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk, our CEO for EU Europe, Bernhard Weiss, as well as our CEO, U.S., John Ganem. The gentlemen will guide you through the presentation. After the presentation, we will have a Q&A session.

With that, I'd like to hand over to you, Guido. Please go ahead.

[Guido Kerkhoff, executive]

Yes. Thanks, Felix, and welcome also from my side to our full year 2021 call.

Let's directly jump into the highlights of this very remarkable year with record results. Demand and shipments still impacted by the pandemic and therefore, stable year-on-year. Supply was still very tight, especially at the beginning of '21. Supply shortage and chip shortage were making the market, but very important from our side, we have continued with our margin-over-volume strategy throughout the year, and the result is literally visible in our profitability.

Sales strongly up due to higher prices and so is gross profit. '21 marked the best operating result since IPO 2006. EBITDA before material special effects of almost EUR 850 million and reported EBITDA around EUR 880 million due to positive pricing dynamics, strict net working capital management supported by project Surtsey, a great success. Thanks to all our employees who made this possible despite the challenging environment throughout the year.

Operating cash flow was negative at minus EUR 306 million, largely due to the funding of the so far unfunded pension provisions of EUR 240 million, which accounts for 80% and price-driven net working capital buildup. Always keep in mind around EUR 800 million buildup and just 60 negative operating cash flow coming out of that shows what the underlying cash performance in such a year was.

Net working capital, certainly up, price driven, however, we continue to manage it smartly, booking in very profitable back-to-back and contractual businesses. Generally, this net working capital buildup is rather temporary, as you all know, and will turn at a certain point to then support strong free cash generation. Subsequently, net debt was up. Digital sales share rather flat at 46%, still impacted by special market environment, so customers just call to receive confirmation. So classical digital tools like EDI and contracts were down. Kloeckner Assistant performance was strong and increased, and passed EUR 1 billion revenues last year. Due to this outstanding performance in '21, we are proposing to the AGM to pay a record high and certainly very extraordinary dividend of EUR 1 per share.

Let's come to our strategic update. I'd like to cover a core component of our 2025 strategy and would like to announce a major step for our company and our customers. The determining factors of our business environment are changing rapidly, and the steel industry is facing extensive transformation. However, let's stick to the facts. Steel can be recycled. Steel can be decarbonized and therefore, steel is not part of the problem. Steel is part of the solution and can even substitute more problematic materials going forward, a clear opportunity in our view.

Last week's United Nations' IPCC Report call for rapid progress. I strongly believe that mere restrictions and limitations will not be enough to successfully navigate this transformation. We must seize the opportunities and promote sustainable business solutions, and this will be our path. Therefore, as in the past, we want to lead the way in this transformation. It's only natural that our positioning in the value chain allows us to play an important role in this further development of the industry and, above all, in creating added value for our customers.

In the context of carbon emission reduced steel products, rational comparisons have hardly been possible so far. There is no standard. In countless conversations with various customers, however, we found out that this is exactly what they want. That's why we have developed a straightforward metric based on real product data and science-based frameworks. The metric, which we built in collaboration with the Boston Consulting Group is focusing on our customers' needs only.

As you can see, our classification begins at the start class at 1,750 kilos carbon per ton of steel. At first glance, the value may seem high to you because one or the other has already heard about the conventional figure of 2 tons carbon emissions per ton of steel. This is just one example of the enlightening value of this metric. The figure of 2 tons carbon emissions per ton of steel has so far ignored a significant part of the production emissions of steel, the input materials, as well as the upstream processes. It is the Scope 3 upstream emissions of the producers.

Our metric, on the other hand, captures everything our customers need to measure their emissions from raw material extraction to production. We will provide them with a categorization, a concrete footprint of the material and the addition of few other factors such as scrap share and energy sources. Only such a methodology allows them to calculate the carbon footprint of their own products, TUV-certified and in alignment with the greenhouse gas protocol.

We recognize that blast furnace players are very critical to this transformation and will need external support to drive change as quickly as possible. Not all can be produced via scrap. The transformation of the blast furnace players will take longer and is more expensive. Therefore, we explicitly support their intent to receive appropriate support for this challenging transformation at steel via the primary route will be needed in the future. However, we take a neutral stance regarding the technology of the production route, EAF or blast furnace, as they do not play a role in the eyes of the customers.

Through this metric, we enable our customers to assess the quality of green steel product, allow comparability and enhance transparency. But we do not stop here. We want to enable our customers to establish with us sustainable value chains. We are, therefore, driving sustainable business opportunities and are securing green volumes already today. In October, we announced our partnership with H2 Green Steel to supply green steel from 2025 onwards.

In the meantime, we have entered into further green steel partnerships, which now already amount to 4 and will source various product groups in different green categories and across regions, Europe and the U.S. from a total of 6 suppliers. And this is already in 2022. These partnerships cover more than 450,000 tons of carbon reduced steel. And we aim for more. By 2025, we target to offer our customers more than 30% of our product in the 2 most sustainable categories.

By 2030, already more than 50%. This would then translate into huge annual savings of more than 4 million tons of carbon emissions. These components are of highest priority for us, for our business and for our society. Therefore, the concrete ESG-related targets are also part of the remuneration system for us as a Board and the Level 1, Level 2 and Level 3 management and cover carbon emission targets, safety measures and employee commitment.

Our digitalization and more and more automation initiatives advanced further. And by the way, the reporting targets are also reflected in our management remuneration system. Digital sales share is at 46%, still held back due to special market conditions. However, positive trend visible, again, due to strong Kloeckner Assistant performance. Our assistant surpassed the threshold of EUR 1 billion in sales processed and is further gaining speed.

Moreover, we started a new remarkable global transformation project. It aims to further enhance our internal level of standardization and harmonization. Through this project, we will drive our business automation under the zero-touch umbrella.

That's it on the strategy part. Oliver, please take over for the financials.

[Oliver Falk, executive]

Yes. Thanks, Guido.

So let's have a look on shipment, sales, gross profit and gross profit margin in the fourth quarter. Shipments were somewhat seasonally impacted, but especially by our very strict margin-over-volume strategy and the supply and chip shortage. Accordingly, shipments came in at 1,108,000 tons in quarter 4. Shipments for the full year '21 remained flattish despite the shutdown of locations under the Surtsey program.

Sales improved strongly year-on-year, up by 65% due to the considerably higher price levels in all segments. Gross profit before material special effects went up year-on-year from EUR 275 million to EUR 439 million. Gross profit margin went down quarter-on-quarter from 26.6% to 21.6%. For the full year, the gross profit margin improved by 4.9% to 25.4%. We have consistently managed our net working capital throughout the last year, and we will do so moving forward. We will act highly sensitive in this challenging market environment.

Let me share some details about our cycle management on the following slide. In the entire year 2021, we followed a strict margin-over-volume strategy. We earned gross profit per ton up to levels, which are double as high as in the average of 2019 and 2020. The gross profit per ton went certainly down towards year-end due to the falling prices. However, the gross profit per ton around EUR 400 per ton is still quite high and offers a substantial buffer moving forward. The net working capital increase in 2021 is predominantly driven by the sales prices and stock price increases. We will continue with our smart net working capital management in 2022.

Let's continue with the next slide. We'll now look on the EBITDA for quarter 4 and the full year 2021. In Q4, EBITDA before material special effects increased strongly from EUR 39 million last year to EUR 171 million in 2021. With a full year EBITDA before material special effects of EUR 848 million, we achieved the best operating full year result since our IPO in 2006.

EBITDA reported even came in at EUR 879 million, a great achievement, thanks to all our employees. The result was, of course, impacted by the positive price dynamics in light of the tight supply, however, also driven by our consistent margin-over-volume strategy and supported by the effects from the Surtsey program. The considerable price effect shows how actively we have managed our sales teams.

The year-on-year price effect was exceptionally strong, with EUR 30 million for the quarter and around EUR 269 million for the full year, excluding windfalls. OpEx is again complex to compare on a year-on-year basis in such a dynamic environment. OpEx was up. However, there are EUR 48 million directly linked to the extraordinary pricing and volume dynamics, for example, bonuses, shipment costs and logistics and packaging. Lastly, we had material special effects from disposal gains and provision true-ups concerning the Surtsey project of EUR 30 million.

We are now coming to cash flow and net debt. Net working capital increased by EUR 783 million in 2021, mainly due to the elevated price levels. In case of dropping prices, the net working capital release will generate strong cash flows. As a result of the funding of the pension obligations in Germany and the United Kingdom, at the end of the year 2021, we paid EUR 243 million into trust funds, which supports a significant improvement in the balance sheet structure.

Provisions for pensions were reduced significantly from EUR 288 million to EUR 50 million. Our future cash flow will consequently improve by around EUR 15 million per year. Taking into consideration interest and tax payments of, in total, EUR 117 million, cash flow from operating activities came in at minus EUR 306 million for 2021.

Gross CapEx to sustain our business assets in 2021 summed up to EUR 93 million, with investments in laser, press and cut-to-length machines, as well as investments in machines supporting higher automated processing. Disposal linked to Surtsey amounted to EUR 33 million. Thus, net cash flow from investment activities came in at minus EUR 60 million. Accordingly, free cash flow was minus EUR 366 million. As a consequence, our net financial debt increased from EUR 351 million at the end of 2020 to EUR 762 million in 2021.

Let's jump to Slide 14. As you can see, our balance sheet stays very solid, especially after financing our so far unfunded pension provisions and this despite record high net working capital levels. Cash is expected to come in throughout the course of the year. And for the pensions, there is no annual funding needed anymore.

Despite the increase of the total assets, we could further improve our equity ratio to 47%. The usage of our financing instruments and the maturity profile is shown in the appendix of this presentation. Overall, this very strong balance sheet enables us to manage our inventory smartly also going forward to follow our margin-over-volume strategy in the current market situation. And it will support us to further grow the business according to our strategy 2025.

I hand back to Guido now.

[Guido Kerkhoff, executive]

Thanks, Oliver.

Before we dive into the regions, I would like to give some information on the current environment, especially the war in Ukraine. The direct impact on Klockner is rather limited. We do not have our own business activities in the region, and our sales volume in Russia, Ukraine and Belarus is not material. While the indirect developments will look like remains to be seen, we expect prices to rise again further in what will then be a tighter market.

We're relatively flexible in our procurement and can source worldwide if necessary. Our inventories are in good condition, and we are ready to support our customers even if supply chains become very tight again. However, we remain generally optimistic about the expected development of our end markets. For sure, the situation is currently uncertain, but you could already see a shift towards more regional supply chains. The development that was already observed last year due to the pandemic, other recent supply chain issues such as chip shortage, the Omicron variant that slowed demand in the first quarter are still to be interpreted as a phase of transition and are generally expected to subside in the second half of '22.

All in all, this firm production has been creating decent space for pent-up demand in addition to inflationary trends. This is true for auto and mechanical engineering. GM, for instance, is expecting a volume plus 25% to 30%. Demand is there. It is strong and will then come through sooner or later, even if there seems to be a short-term impact on the auto sector due to the war in Ukraine.

In the long run, apart from strong backlog, we're confident that strong demand for sustainable products will seek for a new balance of energy supply. Defense investments and the U.S. infrastructure build, almost half of our business in the U.S., are shaping a new industry environment, which is fundamentally different from what we've seen throughout the last decade.

With that, I'd hand over to Bernhard for Europe.

[Bernhard Weiß, executive]

Yes. Thanks, Guido.

Let's come to the regional business outlook. As you stated, uncertainty remains. Main topic is still the shortage of material supply chain issues and, of course, the Ukraine crisis. The main market trends, I would say, changes versus the last call, the aftermath of the latest geopolitical developments in Eastern Europe are still unclear, but we can expect an impact on supply chains and disruption in transport capacity.

A range of factors tend to maintain prices at very high levels and even further increases in the mid- to long-term, energy costs, materials scarcity in aluminum, nickel, cost of stainless and the willingness from suppliers. So as everybody knows, there is still price pressure on carbon products in the short term until end of Q1, mainly due to distribution competitors that aggressively sold out high-cost imports to reposition their inventory costs.

We keep calm and are continuing our smart net working capital management to maximize profits. The higher net working capital is still driven by higher prices, but we have also been consciously building inventory to cover needs for mechanical engineering growth, but will also adjust to shorter-term developments as now in automotive. We have already seen effects on the smart management in January. Shipments for automotive were above 70,000 tons, had exceptional margins, similar performance we expect for February, also a reason why we remain optimistic for automotive in the long run despite all the uncertainties.

As mentioned, we are expecting a catch-up of automotive industry towards half 2 of the year that will create renewed material shortage, especially in carbon flat and drive again price increases. For other product families, prices have stabilized at very high level and even continue to increase for aluminum and special steel due to continuous tension on the supply side.

We, therefore, continue to apply a differentiated approach to protect our stock and maximize gross profit capture on these products. We expect real steel demand to be between 3% and 5% for Europe. So coming to our sectors. Construction is currently still low activity due to seasonality. Before Ukrainian crisis, activity was expected to grow again despite continuing tensions on raw material that maintain high prices not only for metals, but also for wood and other materials. And we expect that with 40% share, our strongest sector will develop robustly throughout the year.

For machinery and mechanical engineering, customers have recovered from COVID crisis and are now growing above 2019 levels. The impact of the European geopolitical situation remains to be seen. However, we remain optimistic for the major subsectors. And for automotive, rebound of the volumes was expected end of Q1 of this year with the release of some supply chain constraints, as you know, chip and magnesium. However, Eastern European suppliers, sourcing from Russia and Ukraine will now struggle to maintain the supply chain and, therefore, disrupt the automotive production of our customers to a certain extent. But the demand is clearly there, and we will see when channels will be cleared again.

We have consciously built inventory levels to cover the rebound of the automotive industry in Q1 and Q2, and shipments in January and February with very high margins, proving it to be a very productive tactic. Contract agreements with all automotive producers and Tier 1 suppliers have been closed at very good levels, therefore, support strong margin generation in January and February. However, latest geopolitical developments must be taken into account. And coming weeks, we'll adjust inventory strategy to short notice developments, if necessary.

To sum it up, generally, we remain optimistic for the fiscal year development and short-term developments will be duly tracked. However, with 10% of the group sales in automotive, correlation is controllable. Shipbuilding, still under pressure, several major European shipyards closed in the last 12 months. There is a very muted demand for cruise ships, in particular, impact on tourism and ecological factors, as you know, if anything, in production, then rather the grey ships are good for us.

That's it for Europe. And with that, I would like to hand over to John.

[George Ganem, executive]

Thank you very much.

I'll start with the initial comment that, obviously, the baseline forecast that we have does not really take into account any of the recent developments in Ukraine as these really cannot be predicted with any level of confidence at this time. In general, we feel the potential impact on the U.S. may not be as direct or as immediate as we may see in other countries. But clearly, long-term risks related to increasing inflation and rising interest rates are something that we have to certainly be alive to because they can negatively impact overall economic growth prospects.

With that said, our macro baseline view has U.S. steel demand increasing between 4% to 6% in 2022, and this is after rising more than 15% in 2021. This would mean that real steel demand by the end of 2022 finally reached the pre-pandemic levels last achieved in 2019. As previously mentioned, early development in 2022 has been somewhat below expectation. This is for a multiple of reasons, and it's not really -- we don't feel indicative of underlying demand.

Clearly, in the US, we've had some negative price psychology developed within the flat-rolled segment, and this has caused transactional spot buyers to become highly risk averse. They've moved to the sidelines, opted to reduce their purchases and reduce inventories in expectation of lower pricing. Tight labor markets continue to be a major constraint on manufacturing and construction output in the US. And the ability to attract and more importantly, retain talent has never been more difficult, and I really cannot overstate the challenge that we're facing on the labor front.

Supply chains for all key inputs still not fully restored, and we continue to have logistical challenges that seem ever present. And of course, lastly, the Omicron variant certainly had a disruptive effect late in the year and early 2022, and seems to have resulted in more people unable to work than we've seen in previous surges. Despite that muted development, to start the year, we remain quite optimistic regarding underlying fundamentals.

As the effects of the above-mentioned constraints will be mitigated, we expect a strong seasonal demand lift in Q2 with year-over-year growth drivers shifting towards automotive, non-residential construction and energy. Underlying economic indicators remain positive, and there seems to be some modest and early signs of improvements in the labor market. And again, as Guido said, we feel this is going to finally turn pent-up demand into real demand as we head through the second and third quarter. So we're quite optimistic on the demand front.

Turning to the specific segments. Construction spending exceeded expectations in January and was up 8.2% year-over-year. Housing starts came in at over 1.6 million in January despite very difficult winter weather conditions and that continuing labor shortages. Overall, housing fundamentals remain strong, but growth rates while remaining positive will likely moderate in 2022. Inflation and rising interest rates remain an obvious and significant medium to long-term risk in the sector. Total construction, however, is expected to grow between 3% and 5%, with non-res leading the way at approximately 6%.

Turning to manufacturing and machinery. We expect to see continued and further solid growth in 2022 after a very significant expansion in 2021. Manufacturing indicators all remain positive with the ISM manufacturing index increasing to 58.6 in February from 57.6 in January. Kloeckner's core OEM contract base continue to provide strong 2022 forecast with some large HVAC appliance and electrical equipment companies, in fact, forecasting double-digit growth in some cases.

Off-highway equipment should see another strong year, with year-over-year growth estimated between 5% and 7%. And machinery and industrial equipment expected to grow even further between 8% and 10% on the back of very strong demand coming from the warehouse sector. Overall growth rates in manufacturing and machinery are projected to be somewhere between 4% and 6%, but varying by segment, as noted.

Energy markets are now expected to continue on a modest to strong recovery trend. Drilling activity is steadily improving, with rig counts now at 650, which is up from the pandemic low of 244 but still well below pre-pandemic levels that averaged greater than 900 in 2019. Obviously, this is the sector most immediately affected by the Russia-Ukraine situation. With oil now reaching record highs, it seems reasonable to expect a stronger recovery than what we had in our baseline forecast.

The utility pole market is expected to see accelerating growth in 2022 as renewable energy tie-in projects and the replacement of aged lines become critical. Focus on renewables continue to be a top priority of the Biden administration and will be a significant driver of steel demand growth in the future.

Turning to automotive. Sales and production should see steady improvement as supply chain constraints are resolved and dealer inventories can be expanded. January production only up slightly year-over-year, indicating that supply chain issues remain. The situation should, however, steadily improve as the year progresses. February sales came in at EUR 14.1 million on a seasonally adjusted basis, annualized basis, which was down from EUR 15 million in January. While there remains tremendous pent-up demand, it's clear production and low inventories are limiting sales growth potential.

Obviously, supply chain issues will be resolved and when they are, the expectation is for a significant surge in production in order to meet that pent-up demand and the need to build new car inventories. The shift towards EV production is happening much faster than anybody expected, with massive investments being announced almost on a weekly basis. And the 2022 production for heavy trucks and trailer are expected to increase by strong double digits as well.

Finally, on shipbuilding, this remains a very consistent market for Kloeckner, and we see modest growth in 2022 again. We have long multi-year naval contracts, which remain steady with multiple new programs under development and barge activity also remain steady and should see positive year-over-year growth.

I think as the last comments I would like to make is really on pricing. The demand fundamentals clearly are quite positive from our perspective, clearly, risks related to inflation. As we look forward longer term, pricing in the US, obviously a little different than in Europe. Flat-rolled prices after reaching unsustainable and historic highs late in 2021, began to correct in the middle of the fourth quarter and really have been on a rapid and pretty dramatic descent ever since. This resulted from a shift in the supply-demand balance.

As second half imports surged, domestic supply began to increase and demand weakened more than expected due to the factors that I mentioned earlier. Surprisingly, all other product lines have actually remained stable with stainless and aluminum continuing to move higher. The domestic mills have actually begun to announce capacity reductions and have planned significant second quarter outages in a sign that the consolidated producer base seems committed to matching supply and demand much more dynamically than they have in the past.

As such and up until a week ago, we expected flat-rolled prices to continue to fall but at a much slower rate before stabilizing in mid- to late second quarter. The basis for this forecast was controlled domestic supply, lower import volumes and improved seasonal demand. The Russia-Ukraine situation, however, has quickly changed the pricing dynamics in the U.S. market as input costs, as previously mentioned, are now rising dramatically.

Flat-rolled mills have quickly announced $150 per net ton of increases and market prices have already begun to move back up. It seems now likely that flat-rolled, stainless aluminum will move higher in Q2, while other products should either be stable or will move higher depending on the actual scrap price trends in coming months. We continue to believe that strong underlying demand fundamentals, coupled with a more consolidated and disciplined producer base will result in structurally higher and hopefully less volatile steel prices in the future.

That's it for the U.S.

[Guido Kerkhoff, executive]

Thanks, John.

With that, let's come to the outlook. There are no big surprises anymore for Q1, following our ad-hoc announcement in February. Sales and shipments are expected to go up versus Q4. Relatively spoken shipments tend to be weak in Q1 through Omicron effects and should take up speed in the second half. We expect EBITDA before material special effects to come in between EUR 130 million and EUR 180 million, and this despite lower volumes year-on-year.

This, of course, also means that net working capital will still be elevated in Q1. However, as Oliver explained earlier, our balance sheet is extraordinarily solid and therefore, we are fine even with current levels, but we will not complain about that. Cash will, depending on the development of the price side, come in afterwards throughout the course of the year. And we can deliver if needed and be there for our customers if market tightens.

In addition to that, there will be an additional positive impact due to the sale of properties in Switzerland and France. This material special effect amounts to EUR 54 million. For the full year '22, I would like to highlight again that the impact of the current geopolitical crisis is still uncertain, having said what -- or just relating to what Bernhard and John were mentioning. However, we keep very calm and follow our smart net working capital approach. That means not selling off, expanding margin. Cash is going to come in anyways. And we expect that our overall sales and shipments will increase considerably. Moreover, we anticipate considerable increase, then strong operating cash flow and net working capital dynamics turn.

We're now happy to answer your questions.

[Operator]

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

[Alan Spence, analyst]

2 for me. I'll take one at a time. And the first on capital allocation. You paid down the pension last quarter. Your medium-term CapEx outlook doesn't have the big decarbonization cycle that the steelmaking peers are going to have. I know buybacks aren't necessarily a priority. So how are you kind of balancing your thoughts on future dividends, deleveraging and M&A?

[Guido Kerkhoff, executive]

Well, thanks, Alan, for the question. As you've seen this year, with the pensions and with the dividend, we are already trying to cover as much as we can an improved situation and return to our shareholders to such a degree. Because even the pensions and the cash out we paid there will increase the operating cash flow going forward and therefore, strengthen our position to pay out and be stronger on dividend payments.

We have a -- we have a policy in place how we consider dividends based on the net income. We stick to that. M&A is an opportunistic approach, as we've always clearly laid out. What we want to do is improve, like we started on Surtsey, our footprint organically shift towards the green steel, for example, to open opportunities in the market to better leverage and use our assets once we find opportunistically M&A targets that can support us on that, help us to grow more into fabrication, for example, where we see we can eat more into the value chain of our customers. Or where we find an improved regional footprint or widening of our capacities that we need, we might take a look into that one and then opportunistically deploy that. We continue to work strongly as first priority to further improve and leverage what we have.

[Alan Spence, analyst]

And the second one is on demand. Just anything you can elaborate on what you've seen from customers over the last 2 weeks? Are people holding off until they get a bit of a better sense of how things are going, particularly in Europe? Or are they actually maybe pulling forward orders a little bit, trying to get ahead of these price hikes that the market is expecting?

[Guido Kerkhoff, executive]

Yes. To sum it, what we see is in the beginning, and this is what you see in the -- saw on the price hikes, customers were a bit concerned, might supply chains and steel get very tight, and they wanted to have supply. And we had some competitors. Look, in our case, we don't import a lot from Russia or Ukraine. Some of our competitors do. So customers got nervous and placed orders with us that were usually with other suppliers. So there was -- people were nervous. And that's what drove prices up and we could leverage then and see how much we can do and make longer-term contracts with them if they join us.

So uncertainty was then -- was driving the first [ change ]. Now I think, going forward, what we have to see is how tight will the market finally really be. And how much will we, for example, see in the auto sector, as you see larger in Europe. We're 50% in the US, so not that much affected, as John was talking about a bit in Europe. In automotive, we see some that have to stop production, and therefore, they will ask for less supply, but we're not that much affected by it. It's just 10% in automotive in our case.

And in some others, what we now see after 2 weeks where customers do have, for example, supply to Russia and Ukraine, as they had such a big backlog, they do not have to reduce production, but really shift and supply their customers in the Western Hemisphere a bit more and sooner than they could have done before. So for example, on agricultural products and machinery and equipment there. So they just shift. So therefore, I think the price reaction on the market was exactly in line with that.

[Operator]

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

[Carsten Riek, analyst]

My first question comes on your strategy shift. Maybe can you give us an idea what is the current volume you could offer in the category, pro and prime? The reason why I asked was the carbon footprint of the EAF is, of course, way smaller than the blast furnace operations already today, and some of the volumes would already fall within that category even from today's perspective. And will you shift your portfolio closer to electric arc furnace in the next 3 years in case there are delays of ramp-up of carbon-reduced steels with the blast furnace operations? That's the first one.

[Guido Kerkhoff, executive]

Yes. Current supply, we have is low, 6-digit numbers on -- for '22 for the top 2 categories that we have. Clearly, EAF producers will be faster than -- you've seen our commitment of 30% and 50% for '25 and '30 are big commitments. And we're agnostic about technology. So we take whatever we can get. If it's more DRI, we can do it. If it's more EAF, we will take it as well. And you see on the number of partnerships that we have announced, 4, and we have more than 7 companies now supplying us already throughout this year with the -- with green steel in these categories that we are indeed reaching out to the whole market and see what we can supply. Because our clear expectation is 60% of the market overall worldwide is blast furnace related and the change for them will take longer.

Green steel will be as cost resource going forward. And therefore, the pricing should be somewhat different and decoupled from the rest. And we see positive underlying possibilities for us to develop end customers there because some of the products of our customers will not stay and will get labels like lower carbon footprint or carbon reduction. And they want to have it according to greenhouse gas protocol. So some of the more advanced customers we're talking to, rather bigger companies that have a very, very clear focus and they're completely agnostic where it comes from.

They want to optimize the mix of product they use in that. They can move to electric arc, they will do. If they still need sort of quality grades, they can only get from the blast furnace operations, they will optimize their mix. And we want to be there ready for our customers to supply them with as much volume as we can get in the categories. And we're strong in the US. You know that. We are closer to electric arc furnace producers than some of our competitors.

[Carsten Riek, analyst]

Perfect. Very helpful. The second question I have is pretty much on the guidance. First quarter guidance, of course, very wide range, EUR 130 million to EUR 180 million in EBITDA. That was given mid-February, if I remember correctly. Since then, we have still seen U.S. prices in a freefall pretty much. When you look at the kind of wide guidance, is there any chance to narrow it down? Because you have, of course, in the fourth quarter, you had still very good U.S. steel prices in your P&L. I believe it was up 13% quarter-over-quarter. So there were some kind of windfall gains, I would guess, in the U.S. operations still in the fourth quarter. Could that already go into windfall losses into the first? Or are you confident that you could avoid the windfall losses?

[Guido Kerkhoff, executive]

Look, Carsten, you correctly outlined upsides in the US, but we have to see how the Ukraine and Russia situation works out and that doesn't lead to a change as well. So I think, overall, we can confirm this pretty wider range. But even the lower end of that range was clearly above what the market and the consensus was expecting and that we don't change it, given all the changes we've seen since we did it, I think, is already a strong statement.

[Carsten Riek, analyst]

That's true.

[Operator]

[Operator Instructions] Your next question comes from the line of Rochus Brauneiser from Kepler.

[Rochus Brauneiser, analyst]

Yes. Few questions from my side. Maybe on the cash flow guidance. So you're talking about a considerable increase in OCF. To what extent is that already building in the latest moves we have seen in steel pricing in Europe and elsewhere? And as you previously mentioned, you expect further price hikes from here. So how does this square together with the latest evolution on the pricing front? That's the first question.

[Guido Kerkhoff, executive]

Oliver is going to take it.

[Oliver Falk, executive]

Yes. Okay. So the price tendencies we see right now forces us, let's say, to maintain the inventories on appropriate levels. Cash flow is very much also impacted by EBITDA and not only net working capital. So really, it's hard to bring that down right now. And we are confident that we are going to stick to our guidance what we have made so far.

[Guido Kerkhoff, executive]

So even taking into account last year as a reference, I mean, prices have come down in Q4 and early Q1. Now they're recovering. But in the US, not going back to the levels in hot rolled that we've seen before. And if you take last year's cash flow without the pensions that has been strong. So even if we stay on higher levels, the EBITDA should turn into cash flow. So therefore, it has to be stronger. I mean, as long as we don't see prices going far beyond what we've seen last year, which is, even in today's situation, not that likely.

[Rochus Brauneiser, analyst]

All right. Okay. That makes sense. Maybe a follow-up on a previous question on the demand destruction you're going to expect or not. I think, on the order side, I think you said nobody really knows and there might be some fall-off. According to your conversation with the clients, where do you think the biggest concern is? Is it the wiring harness in Ukraine, Russia? Or is it more the kind of the palladium stuff or neon gas staff? So what do you think is the bottleneck? And what do you think about the Q2 call-off rates versus Q1?

[Guido Kerkhoff, executive]

Yes. Again, first of all, the strongest consequences we currently see in the automotive sector here, which, again, it's 10% of our customer portfolio. That's the one thing. Secondly -- but what we see there is, indeed, supply chain, Tier 2, Tier 3 suppliers are down there like in wires we saw. We, on the other hand, see where the customers is. They have learned, especially German auto, they have clearly learned throughout the pandemic that they have to shift if supply chain issues are there. So they're much faster in finding alternatives. So if we see how busy they are already in working around this, I think it's going to be temporary. Yes, on some raw materials, I mean, and you saw on the other hand, that nickel was going up that sharply in the last 2 days. But on the other hand, I don't think that by the end of the day, it will stay with that distraction. There are some where Russia plays a very important role, but I think it's going to be overcome and it's going to be temporary.

[Rochus Brauneiser, analyst]

Okay. So on the guidance for the full year, you talked about volumes in particular, but directionally, you haven't talked much about EBITDA. What are the key reasons for not getting a bit more precise about the EBITDA outlook for the current year?

[Guido Kerkhoff, executive]

I think it would just not be reasonable. What have we learned over the last quarters and years that markets change that rapidly that whatever we tell you today would have so many disclaimers. The value is rather ridiculous. That's why we say we take it quarter-to-quarter. And what we want to tell you is what measurements do we have in place, how do we react and how do we deal with it. And I think if you take a look at how we covered the whole crisis and the pandemic, you see that we have the appropriate measurements in place, and we're up to speed how to make the best out of it.

So -- but still having said that, currently, for the full year, we're rather confident. And for Q2, with the current hikes and what we see and the rather shorter demand and prices increasing, again, there is more confidence than we might have had a couple of weeks ago. And then we have to take it from there, how the second half looks. That's why we've given the clear outlook. We expect there is so much pent-up demand. If that kicks in and if that can be fulfilled, it should be positive. But you don't know how Ukraine finally continues, although there are better signals now. And that's why once we have a clearer picture, we will be more clear on our guidance. [ It's all on the ] same confidence.

[Rochus Brauneiser, analyst]

Right. That makes sense. Yes. Okay. And Guido, maybe finally on the green steel. Any way that these 3 other partners can be disclosed? And seriously, when do you expect the real fossil fuel-free steel to be available for you guys?

[Guido Kerkhoff, executive]

Look, we currently have said we only name. It's 4. We don't want to go out that much. We're in talks with more partners. And look, I think we're well positioned and we started very, very early. They are -- the current partners, we have one in the US. We have in Southern Europe and even in Germany, another one, that supplies us where we have signed agreements. Now, I think we're in a good position as we have -- we've worked on what we've announced now for more than half a year to develop not only the metric, but to discuss it through with all suppliers and get to these agreements and see who can supply us and how can we develop it.

So behind our targets of the 30% and 50%, there is a detailed planning from what supply and which if -- we will see going forward because we want to grab that opportunities. And I hope that the rest of the steel producers, especially the blast furnace operations need to start the transformation pretty soon that they find agreements that their overall cost base can be solved so that they get enough confidence to start that journey. Because for them, it's -- especially in Europe, it's a big journey and very costly.

[Operator]

Your next question comes from the line of Lars Vom-Cleff from Deutsche Bank.

[Lars Vom Cleff, analyst]

Just a quick one on the outsourcing of your pension obligations. You said that you already outsourced the ones in Germany, the CTA, as well as the UK. And we can still see roundabout EUR 50 million of pension provisions on your balance sheet. Is there any intention to also outsource those? Or shall we calculate with EUR 50 million as a basis for our models for the upcoming years?

[Guido Kerkhoff, executive]

In general, there is a possibility to do it. We couldn't do it in that timeframe because it takes a bit longer with France and the U.S. So it could be done, but remains to be seen. I think it's a low number, yes. Whether you eliminate it or not, shouldn't change your model.

[Operator]

Thank you. There are no further questions at this time. I will hand the call back to you.

[Felix Schmitz, executive]

There's another question?

[Operator]

Sorry, sir. One more question just came in. And the question comes from Xin Wang from BNP Paribas.

[Xin Wang, analyst]

So I just wondered, because you hike your dividend to EUR 1, should we view this as a new base dividend moving forward? Or is this a one-off?

[Guido Kerkhoff, executive]

Look, it's an extraordinary high dividend. We've never paid a dividend like that. We've never had results like that. We have a clear dividend policy in place, which is already aimed towards 30% of our net income, and we stick to that. And then we see where the results will be going.

[Xin Wang, analyst]

Great. And then can you also provide an update on the -- on your cost saving measures and how they're going to contribute to your 2022 earnings, please?

[Guido Kerkhoff, executive]

We have achieved overall the EUR 100 million run rate of our cost savings from the Surtsey program, and we have initiated some other cost cuts of a low 2-digit number overall, on top of that Surtsey program. But I think we're taking out 15% of our employees within one year and cutting down 17 sites. We've done a strong development there. And our intention, if you take a look at our strategies rather now to leverage our assets more and to grow with our customers and again be more aggressive on the market to grow there.

[Operator]

Thank you. There are no further questions at this time. I will now hand the call back.

[Guido Kerkhoff, executive]

Well, thanks all for the call today and for your questions and looking forward to talk to you pretty soon again. Thanks a lot. Bye.

[Operator]

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