Good morning, ladies and gentlemen, and welcome to Salzgitter AG conference call nine months. The conference will be recorded. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Markus Heidler, Head of Investor Relations.
Good morning from my side as well. Another quarter is behind us, and a good one for Salzgitter, I dare to say. This is a call for investor and analysts only. The press is welcome to listen, but we will not answer a question from the press. Please refer to my colleagues from the communication department. With me today are our CEO, Gunnar Groebler, and our new CFO, Christoph Martin. Before we turn to business performance and result of the first nine months, I'd like to give Christoph the opportunity to briefly introduce himself. Christoph, over to you.
Yeah, thanks a lot, Markus, and also from my side, a warm welcome to our call. I would like to take this opportunity to introduce myself briefly. My name is Christoph Martin, and I'm 46 years old. I studied economics and business law, and since four months, I've been CFO and member of the executive board of Salzgitter AG. And I'm pleased that you are supporting us with your analysis. I joined the Salzgitter Group on January 2025 and have been responsible as CFO of our trading business since then. Over the past two years, we have sustainably restructured and transformed our warehousing business in Germany and Europe, as well as the administration of the trading business unit, so that we can now, once again, make a significant positive contribution to our group earnings.
For me, this is a good sign and a role model how restructuring, transformation, and sustainable performance enhancement in the Salzgitter Group can and will succeed in the future. Before joining the Salzgitter Group, I worked for thyssenkrupp Steel for more than 17 years in various controlling and finance functions. In the last years, I first headed the strategy department and then the entire finance function at thyssenkrupp Steel as Head of Controlling, Accounting and Risk. I have a clear focus on sustainable performance improvement, so I'm very familiar with programs such our P28 and the establishment of a lean and transparent performance, and that's important, cash culture. With almost 20 years of experience in the steel industry, I am pleased to be able to play an active role in shaping the socially and economically relevant transformation of this industry. This transformation goes far beyond decarbonization.
It is a fundamental change in our business model and offers significant opportunities for Salzgitter AG. As CFO, my clear focus will be on turning operational performance into cash, managing working capital consistently, and ensuring strict capital discipline. Sustainable value creation ultimately requires both operational improvement and financial strength. The first steps have been taken. We are on the right track, and with that, I hand over to Gunnar and the figures for the third quarter.
Thank you, Christoph, and a warm welcome from my end. Happy to have you all here on the call. Prior to moving to business performance, let me take the moment to perhaps also thank Birgit Potrafki for the good cooperation that we had, the trustful work over the last years, and her contribution to the Salzgitter, again, to the performance that Christoph already mentioned in terms of the progress that we have made. Also thank her for the very intense and constructive dialogue she also had with you guys on the analyst and capital side. Christoph, warm welcome to you. Happy to have you on board and looking forward to jointly now drive the company forward, as you already expressed that. With that, let me turn to the business update.
2026 has been and still is a year of transformation and change when it comes to Salzgitter as a group. I think one of the major milestones in terms of strategic development has been the acquisition of HKM. It is a very important step strategically for the steel operations, as it secures long-term steel production capacity and allows us to take full responsibility for the site, as well as for shaping the site's transformation plan into a low-carbon production based on electric arc furnace. We shouldn't forget, we also take our responsibility here in adjusting capacity in Europe by reducing the overall capacity of HKM from 5.2 million tons to 2 to 2.5 million tons. So, having the installed capacity at HKM and hence contributing to the overall capacity adjustments in Germany and in Europe.
After the successful acquisition, we're now in the implementation of the integration plan, so fully integrating HKM into the overall Salzgitter setup and, of course, also realizing the potential synergies that we have assigned to the transaction. Moving to the business environment, I think we have seen major changes and major positive developments from a steel perspective on the regulatory end with the Carbon Border Adjustment Mechanism that has been put into place beginning of this year and the TRQ, the trade defense instrument, starting July this year. Both measures are very important to us and also show the intended effects. In earlier days, and some of you might have followed the expert call that we had just prior to the summer break, where our expert team walked you through those measures and the effects that may have.
We talked about roughly a financial effect of EUR 100 per ton of steel. I think this is what we have seen. The team at that point in May forecasted a steel price end of year 2026 being around EUR 750. I think the team so far has been spot on, so quite some good outcome when it comes to the overall development. We shouldn't forget though, and we certainly will get to that also in the discussion, this is primarily induced by regulatory effects rather than market effects, right? But still, good development on that end as well. When we look at the numbers for nine months, it is also clear and underlines that we are on the right track. Sales rose by almost EUR 500 million to now EUR 7.3 billion.
I think it's fair to say this is primarily attributed to HKM and the full consolidation of HKM, the first time now in the Q3 numbers. But also, we see sales increased due to higher prices, as I just mentioned. Results have improved across all business segments. I think that is very important to mention. Each and every business segment has improved through the year, and we're now looking at EUR 660 million EBITDA VX, so without taking account the exchangeable on the Aurubis shares, as you know. We all are also very well aware of this is primarily driven by Aurubis and the development of Aurubis. However, we also saw particular pleasing developments and improvements in steel production and trading, as also Christoph mentioned. The restructuring is taking effect, so trading is developing nicely, as well as technology.
Another, I should say, another strong year for technology after record years in the past. We're targeting another record year for KHS also in 2026. As we have talked about P28 quite a few times, also here, I would say very strong and reliable developments. By now, we have already exceeded the full year target, which has been at EUR 122 million. We are now looking at EUR 146 million of cost savings. Also here, we are showing that the operational performance is clearly on our agenda, Christoph mentioned that, and remains on the agenda for the upcoming time. Our net financial position was boosted by the improvements on the operating performance, of course, but also supported by additional funding for SALCOS, some EUR 320 million, being subsequently confirmed already in first half of this year.
We should say by now also, most part has been received and will be received through 2026. So, we're looking at around minus EUR 700 million by end of September on the net financial position. We shouldn't forget that we also, of course, got some support through the proceeds from the sale of treasury shares through this year. So, this all will provide us with a strengthened position for starting into 2027. However, and I think that's also fair to say, and I would be surprised if our competitors see this differently on the calls that they are having, growth momentum is still lacking. We don't see a lot of growth in our markets. We see certain stabilization, yes, but still major challenges in most of our customer segments, partly supported by politically induced investments, the infrastructure package to be named here.
But again, sort of still the growth momentum is limited. Energy, I think worth to mention as well, given all the talk about energy prices. As we have said before, we have made for 2026, and a good part also for 2027, made extensive use of instruments such as PPAs on the electricity side, and also forwards to mitigate increasing energy prices, especially after the start of the war in Iran. But hedging was always part of our business strategy on that end. So, I would say we are most probably comparably comfortable in our position, both when it comes to the remainder of 2026, and as said, also the start into 2027.
But, and this is something I plea for both in Berlin but also in Brussels, policymakers have to address those structural problems that we have on the electricity side, where we're in an international business, global business, hence local electricity prices as they are here, as they are here in Europe these days, are long-term not sustainable for an energy industry like ours. So there's an urgent need to address those electricity price levels. And I think we have seen first movements on the German regulatory framework with the industrial electricity price now being able to be combined with the grid fee reduction that one gets as an energy-intensive industry as we are. So first steps, but certainly something that needs to further be worked on. Another element I just would like you to inform about is our update on the group strategy.
We are currently working on that, and we will provide an update on the group strategy end of first quarter next year. So, strategy Salzgitter AG 2030 has proven to be successful. From a long-term perspective, we have been, as we intended to, we are the leader in terms of transformation in Germany and amongst the fastest ones in Europe, which I believe, looking also at the regulatory discussions around ETS, is still the right and a very good position for us to be in. But it is also, after five, six years, it's also high time to review the strategy and to update it alongside current developments and things we have seen so far, and also review the bar that we have set ourselves on company performance, et cetera.
So, expect something by the end of Q1 next year, and then, of course, we will certainly also talk about key performance indicators for the group going forward. We will talk about the portfolio management and certainly also about SALCOS and HKM in terms of transformation, but also the already running transformational projects and CapEx projects. Yeah. With that said, looking at 2027, we remain cautiously optimistic about performance in 2027. Asset markets are still a bit blurry and not where we want them to be. However, first signs of improvements, but let's see how sort of this stabilizes. And clearly, we will continue to have the foot on the gas when it comes to the own performance, cost reduction, reducing complexity in the organization, and align our performance ambition to the overall financial ambition that we're going to set out.
With that, I give the floor back to you, Markus.
Thank you very much. With that, we like to open the Q&A. Please limit yourself initially to three questions so everybody has the opportunity to ask. Melanie, back to you.
Thank you. Ladies and gentlemen, if you have joined by telephone and like to ask a question, please press star nine and pound key on your telephone keypad. If you would like to withdraw your question, press star three and pound key. If you are connected online and listening via the web interface, please click the telephone handset button and then the raised hand icon. This will allow you to ask your question verbally as well. If you are experiencing any technical issues, you can also send written questions. Then please use the ask question button. We still have many questions. The first question comes from Tristan Gresser from BNP Paribas. The stage is yours, Tristan.
Yes. Hi. Thank you for taking my questions. The first one is on your steel production margin performance in Q3. It is kind of steady quarter-over-quarter. I would have expected some negative mix effect as you have integrated HKM slab sales. If you could discuss that and why we are seeing that steady margin development. That is my first question.
Tristan, sorry. There's some technical issues here. Thanks for your question. You're right if you look at it from a total perspective, integrating HKM, but I think what you see is the widening spread on the margin overall, right? In that sense, I think this reflects the improvements that we see ourselves and also see in the market. Does that answer your question?
Yes. Were there any positive gain on your raw material hedges maybe in Q3? Also, if I look at now, you counted three businesses, slab sales, strip sales and section, how they're ranking is, are you slab sale as profitable as strip, or, and how is section within that? Because I think you talked pretty positively about the demand. So I don't think it's profitability for section is above, but just wanted to confirm that as well.
Well, look, the question of profitability is also a question of value chain, right? If you look at a slab, that's of course a much shorter value chain than looking at hot-dip galvanized flat product. In that sense, of course, a slab has a lower margin just because of the value creation that we do than any other project. So that's perhaps why sort of margins look alike, whereas, of course, the shift of product with different margins is there from Q2 to Q3. When it comes to raw material, we have not changed our hedging on raw material in the third quarter, but of course, we have been taking advantage from the possibility to hedge raw material in the current market, yes.
But there was no positive tailwind in Q3 in steel production from those hedges?
Nothing that I would say is particular positive in Q3 compared to other quarters, no.
Okay. My second question is on Aurubis. You made progress in simplifying Salzgitter's structure in recent years. Do you think Aurubis stake deserve to be looked at a bit more into next year? I would love to hear your thought on that.
Well, Tristan, you won't be surprised that the answer is the same that I gave you, I think, in the last call as well, or your colleague, I can't fully remember. But, look, we are happy with the development of Aurubis, and if you look at the numbers, I think Aurubis is an integral part of the good development that we're able to show. As I said, we're reviewing the strategy now, and we'll certainly also look at the overall portfolio and then come with an update end of Q1.
Okay, that's clear. Thank you.
Yeah. Thanks.
The next question comes from Zenande Meyiwa from UBS. Your line is open now.
Good morning, team. Can you hear me okay? Hello?
We can hear you perfectly.
Thank you. Just two quick questions on my side, just to follow up from the previous question on Aurubis, but then I'd like to shift briefly around KHS. I mean, the business is performing strongly, and it's looking to set another record year, but then it has somewhat limited synergies with the steel business. I'm guessing with the outlook of the European steel improving, would you consider maybe a sale of the business or a separate listing of KHS to crystallize value and also sort of simplify the group? I'm guessing it was partially answered with the Aurubis question, but keen to get your thoughts on that.
Yeah. As you rightly point out, you're going to get the same answer as for Aurubis. Also here, we are happy with the development of KHS. As I also said in calls before, the development of KHS over the last five years has been outstanding. I think they really inhale the concept of improving their own performance, which you also see in the constantly rising margin that we see in Aurubis with another record year now in 2026. That is all very positive, and we're happy with that. Again, as part of the strategy update, we certainly will review the portfolio, and of course, KHS is also, as it is part of the portfolio, we will also review our position on KHS. For now, as said, we're happy with KHS, and we will certainly not engage in anything on a short term.
Cool. That's very clear. Thank you for that. I've just got one more question, just on the treasury share sales. I mean, given that the improvement in the European steel fundamentals and higher steel prices are yet to fully translate into earnings, would you consider maybe slowing the remaining sale of treasury shares until the structural tailwinds in the European steel sector are fully reflected in the share price?
Listen, we're not in a hurry at all to sell our treasury shares, right? We are reviewing the market, we're looking at the market, and we will adjust and adapt our process to sell down our treasury shares according to market development. So far, we have achieved our initial target of selling roughly 5%, and as you might have followed, we have done this in a way that it doesn't harm the share price, and certainly will then look at it, and I think you should get the next update on the process with the full-year results or earlier if there's anything to announce. But no hurry, no intention to fire sale, and certainly we'll look at share price developments and will act accordingly.
Okay. Thank you very much. That is very clear. I will turn it over.
Thank you.
Our next question comes from Maxime Kogge from ODDO BHF. Your line is open now.
Yeah. Good morning, Gunnar. Christoph, first question on HKM. Can you perhaps about its contribution?
Maxime, I am very sorry, but you are breaking up. It is difficult, it is almost impossible to hear you, so if you could adjust the mic or something.
Yeah. Better now? No?
For now, it is better, yeah. Let us see.
Okay. Now, it was the first question, HKM, was it possible? To the latest country, Tony.
Maxime, we continue. Maybe you use the possibility to write your questions in the tool.
Okay.
You are breaking up, Maxime. Happy to answer your question, but you are breaking up.
Okay. I will jump back otherwise.
Okay.
Thanks.
Our next question comes from Bastian Synagowitz from Deutsche Bank. The stage is yours.
Yes. Good morning, and thanks for taking my question. My first one is on steel, actually. Just wanted to follow up on the HKM topic firstly. Can you maybe share with us what the contribution from HKM has been on a standalone basis, i.e., in terms of the step change you have now been taking in the steel production business in the course of the third quarter? Then secondly, and related to steel as well, I guess some of your peers have been emphasizing costs for energy and logistics in particular. I do not think you are totally isolated here, but what are you seeing? When you look at the margins, how do the exit margins in the third quarter compare to what you are now seeing in early the fourth quarter so far? Those are my first questions.
Yeah. Hi, Bastian. Good to have you on the call. Look, the HKM contribution now compared to before is pretty much in line. It is just that we have increased our share in there. As we have publicly stated, contribution will be mid-double-digit million EUR by year-end. This is, as I said, pretty much in line with what we have seen before. I think I am actually pretty happy with the development since we took over operationally, because despite the major transformation that we have done there, we should not forget we closed down one blast furnace. We have closed down half of the coking unit.
We had to let go roughly 500 people, which then causes quite some internal change of people in different positions. Still, we have been able to maintain a very stable operation, serve the customers. We should not forget, thyssenkrupp Steel is still a customer of ours. They are still in need of those slabs, and we have been able to really provide that at the quality that we agreed upon and that they are used to. So, I am very happy with the development. In terms of numbers, as said, midpoint double-digit million EUR.
Thank you. On the energy cost and logistics and the margin trajectory in steel?
Sorry. Logistics, you are referring to the River Rhine, I assume?
Yeah, I guess overall logistical cost, either whether it is, I guess, water logistics or just freight costs, how you have been impacted, and is this something which is weighing on your margins in the fourth quarter, or how do you see the trajectory going from Q3 into Q4 in steel?
I would not say there is a major impact comparing Q3 with Q4 in terms of logistics. Looking at HKM and the River Rhine, we have been able to shuffle around logistics, especially for coal and iron ore, in a way that we are sufficiently supplied through our participation in the Port of Rotterdam. So, on that end, yes, it is sort of additional work and additional cost, but it is not impacting the overall results dramatically. So, I do not foresee any major change in logistical costs. As it looks now, you never know, but as it looks now, no major change compared to Q3 to Q4.
Okay, thank you. Just maybe moving on to processing, and I guess here, when we look at the performance, I guess we have a deconsolidation effect as well, but it still clearly remains an underperforming unit despite the trade protection measures, and maybe they have not been seeing the full benefit yet. But can you please give us an update on the key dynamics here? Is there any hope you see currently or any tangible signs for a market improvement? And what are you doing incrementally to drive a turnaround in that business? And how far could that be another focus area as well in the strategic process you are currently undergoing?
Well, of course, the steel processing unit is a focus area for us. As you rightly said, it is not performing on a level that we want it to perform. I think what is visible, though, and we shouldn't forget that, is that they have, year on year, made significant improvement already. It is not enough, that is fair, but at least there is significant improvement there. And we have seen some restructuring measures already in that unit. Just as a reminder, we closed the MPT site in the Netherlands. We are in a restructuring process for MPT in Mexico. Things are ongoing. However, we are not where we want this unit to be, so there is full focus on operational performance. And this goes beyond P28. On top of that, looking from a market perspective, within steel processing, you have two key markets.
One is automotive, looking at MPT, which has, of course, been historically weak last year and this year, especially for the products MPT is providing. Secondly, on the large diameter pipes, pipeline business, this is project business, right? Either you have a project or you don't. There are a lot of projects in the market, but given also geopolitical uncertainty, some of these projects that have been announced even, and have announced us being a preferred partner, have been delayed, have not reached the financial close. So, in my book, this is just a delay on the market side when it comes to larger projects, right? You might recall we had a slightly different view on the hydrogen backbone in Europe. As it now turns out, it takes longer, and hence, of course, those projects are delayed that we have perhaps have seen slightly earlier on a timeline.
So that's sort of two things. Again, one is our own performance needs to improve, and we're working on that. P28 is one element of it, but certainly we will have to continue also restructuring work within those units in steel processing, and the market is, especially for the large projects, is delayed. Perhaps ending on a positive note, I think on the mid-size diameter, Mannesmann Line Pipe, we actually see a positive development through the year. You might recall, Bastian, that Line Pipe has a large customer base in the U.S., which was basically dead through the introduction of the tariffs. However, we're approached by U.S. customers as the production capacity in the U.S. for those diameters is limited, and they are in urgent need of those pipes. So we have increased our business with the U.S. for Mannesmann Line Pipe in the second half of this year.
So, at least ending on a positive note here.
Okay, great. Thank you. Last one, and quickly on balance sheet. I think the latest guidance for net debt for the end, I thought was around EUR 1 billion-EUR 1.1 billion. Could you just give us a quick refresher? I think the free cash flow and overall net debt development probably looks a little bit more favorable. If you could give us a quick update there, that would be great.
I will give you an update, Bastian. I think the net financial position of negative EUR 700 million remains stable compared to the nine months of 2025, and I think it has developed positively in recent three months. You can be sure our focus is clearly on liquidity and financial robustness. I expect the stable development of the net financial position to continue in the upcoming months until the end of the year. I think a net financial position of around about negative EUR 750 million is our target, and I think it is realistic.
Okay, very clear. Thank you.
Our next question comes from Benjamin Thielmann from Bernstein. Your line is open now.
Yeah, perfect. Thank you for taking my questions. I have two on KHS, if I may. First question is whether you could give some color from what region customers are, what regions are currently the weakest. We've seen the Q3 numbers from one of your German competitors. Any color on what region your customers are most reluctant to spend right now would be very helpful. Then the second question is on pricing. Orders in Q3 are down by 13% year-over-year. Also, Q2 was a bit softer on the order side, and I was wondering whether you see the risk that you would need to lower prices throughout 2027 to basically fight for the limited volumes that are currently in the market. Thank you very much.
Thank you, Benjamin, for your questions. When it comes to the regions, I would say that for now, Europe actually is the weakest region for what KHS has to offer. We have seen a very strong region, India/Asia, over the last 18 months or so. U.S. is a bit reluctant, but coming back. But Europe, and I think that's in line with the overall development in Europe, has been weakest in the regions. When it comes to order intake and pricing risk, I agree with you. The order intake has been more challenging this year than last year. We shouldn't forget last year was also boosted by a large order intake for Plasmax coming out of India, which we haven't seen this year in the same manner. That is, of course, why order intake has been different this year compared to last year.
But we're not in a position to desperately fight for prices in order to fill factories these days. I don't think we're there. Perhaps last thing, as I mentioned, Plasmax, what is actually positively recognizable is that Plasmax, which has been a product predominantly appreciated in the Indian market, this has now changed and moved. We see Plasmax orders coming in from South America and even from Africa. So we're increasing our Plasmax footprint globally, which certainly is a strong sign also for the time to come.
Perfect. That is super helpful. Thank you very much.
Thank you, Benjamin.
Then we have another question from Tristan Gresser from BNP Paribas. Your line is open.
Yes, hi. Thank you for taking the follow-up. I have a couple, but the first one is on the net debt guidance. Could you maybe discuss the elements of that? Maybe the gross CapEx expectation for the year, how much subsidies you expect to receive in Q4, working capital release, HKM payments, and treasury share sale. Is that included in net debt guidance? I start there.
Let's go.
Treasury share is included, but not with a high volume because we sell a lot until end of September, and you see our share price at the moment, so we are a little bit careful there. Working capital is a big part of the net debt. Working capital end of September is significantly, and you see it in our numbers, significantly higher than the end of December 2025. This is more important, it is also higher than we expect at the end of December 2026. There are two reasons for the high value. On the one hand, we have taken HKM completely into our books, and the second one is we have a higher receivable volume, especially at Salzgitter Flachstahl and KHS, than at the end of December 2025 due to better prices and volumes.
In the coming months, we will significantly reduce our working capital in all business units and bring it to the previous year's level. As I said before, our focus is in the entire group to constant management and optimization of our working capital. I see a big potential here for stabilizing our working capital and cash flow. Cash flow, and I think cash flow was a little bit disappointed on the end of September, but I think with our optimization of working capital and the limited CapEx in the next month, I see that we will get level like the level was in 2025 from around EUR 500 million for our operational cash flow by end of the year. The last question, I think, was CapEx.
CapEx, I think we guided this last time, and I expect cash flow from investing activities to be less than EUR 650 million for this year. Let us have a look in next year. The amount will certainly be higher, as we will continue our drive cycles forward, while also investing in the transformation of HKM. Nevertheless, cash outflow from investing activities in 2027 should be less than EUR 1 billion, maybe in a range between EUR 800 million and EUR 1 billion for next year.
Okay, that is clear. Do you expect some I think you received EUR 60 million from the seller of HKM in Q3. Is that the recurring amount you expect to receive in the coming quarters, or can you help us on the base of that and the scale of that?
We have not disclosed that, but it is not a recurring payment that you should expect. There is a payment schedule, but not disclosed.
Okay. My second question is on the steel production into Q4. Initially, I think you mentioned you wanted to restart the smaller blast furnace. Has this gone ahead, and how should we think of shipments into Q4? With the kind of steady outlook you provided for cost, with higher prices, does that mean that you expect steel production margins to go higher into Q4?
Yeah, look, on blast furnace C, you are right. We have announced that we are going to recommission blast furnace C. This has happened. It is successfully commissioned on schedule, so we are operational with blast furnace C. But we shouldn't forget this is primarily to increase production flexibility, right? So it is not about widening the output and increasing the output. It is really about being more flexible to play with the volumes among the three blast furnaces and create more technical stability around the production units. Also, and this is part of our plan, blast furnace C needs to be up and running when we shut down blast furnace B as part of the implementation of SALCOS, as soon as SALCOS phase 1 is operational.
So being able to have a reliable hot metal production through 2027 is where blast furnace C then will play an important role, and also helping in ramping up the EAF and including EAF in the whole production pattern. In terms of margin, I think expectation is that EBT Q4 will be above Q3 levels. So, I think that is a signal for margin development for you.
Okay. That is clear. The last question, it is more on the group guidance. If I take your full-year guidance, look what you have reported so far, the Q4 implied guide gives us kind of a wide range, when you should have decent visibility, I think, on KHS, which usually is stronger in Q4, and the steel production business. What is explaining such a wide range? Yeah, just trying to figure out a little bit the bridge into Q4.
Yeah, I can understand that question. However, I hope that you realize that we narrowed the window down to EUR 75 million. Anyways, now I think the major impact here is actually the situation around Aurubis. As you know, Aurubis is highly dependent, or the result of Aurubis that is flowing into our books is highly dependent on copper price and/or metal prices in general. We have seen them peaking, and it is sort of very, for us, very difficult to predict how that will actually end up in our books in Q4. Hence, a certain range actually around our guidance reflecting some uncertainty that is around Aurubis.
So, if I were to take out Aurubis and look at Q3 performance and look at Q4 expectation, there are no real reasons why it should not be up sequentially.
Now you are talking operational business within Salzgitter?
Yes, if I take EBITDA, group EBITDA minus IP and consolidation, which includes Aurubis, and look at that, and look Q3, and I think about Q4, there's no reason why it shouldn't be up.
I tend to agree to you, but please keep in mind that, of course, Q4 is a shorter quarter. We are basically closing down vis-à-vis our customers mid-December already. And traditionally also in November, we have major overhauls in Salzgitter Flachstahl, which then also reduces production capacity there. Next to that, I agree to your statements.
Okay. Thank you. Appreciate the answers. Thank you.
Thank you, Tristan.
Our next question comes from Boris Bourdet from Kepler Cheuvreux. Your line is open.
Hi. Thank you. I have some remaining questions. The first is on HKM. You are guiding for mid-double-digit contribution at the EBITDA level this year. I was wondering whether there is a part which is non-recurring, or if we could basically double that number to guess what would be the contribution next year. More broadly speaking, on HKM, you previously shared an estimate of minus EUR 100 million free cash flow impact of the inclusion of HKM over 2026, 2027, 2028. Is it still the case, and can you share which are the building blocks of those estimates? That would be the first question.
Yeah. Happy to, Boris. Perhaps starting with the mid-double-digit result, I think you are jumping short if you just double that, because we are looking at a 30% participation first half of the year and 100% participation at the remainder of the year. Hence, the EUR 50 million is nothing you can just multiply by two. There is no major one-off effect included in those numbers, right? That is how I would look at that result and that information. When it comes to the cash outflow, the EUR 100 million over the next three years is roughly still in line. No changes there. The building blocks are, of course, the CapEx and the restructuring costs, then matched by funding through public funding and the purchase price contribution from the two owners. If you net that, you get to this roughly EUR 100 million over three years.
Okay. There is no specific net working capital contribution in this?
No.
Okay. Perfect. Thank you. Second question is on SALCOS. You are getting pretty close of starting the SALCOS projects next year.
Yeah, we are counting the months.
How do you look at the, in the current context for energy prices, is it economical to start things now, or is I am trying to guess whether there will be an incremental contribution or something that could dilute a bit the profitability there.
Well, we have no plans to postpone the ramp-up of SALCOS because of energy prices or any other input parameters. We are plowing ahead as planned. We do not see the need to adjust that. Of course, we are constantly reviewing the situation, but for now, there is no need to adjust the timing. Given that all the timelines are now lined up to meet the late summer target, it would also bring a destabilizing factor into the project we certainly do not want.
Okay. Thank you. The last question is on P28. You have now exceeded the target for this year. What is the new target now for 2026, and is there scope to looking more ambitiously to the 2028 target?
Well, that is of course a fair question, and rest assured that Birgit asked that question a couple of times talking to the team. It is also fair to acknowledge that the team has put a lot of effort in there, and they have come up with many good measures and ideas beyond the actual scope. I do not think we need another target to motivate them, but rather ensure that they get all the support that they need to exceed the existing target even further. I am very positive that we are going to exceed the overall target by end of 2027. Let us see how the outcome will be. Again, very positive on my end that we exceed that target and deliver on the 575 plus X.
Okay. Just to confirm, you said exceeding the overall target, which is 575, in 2027, as early as in 2027, right?
Yes, I can confirm that. The reason for end of 2027 is we want to have it fully in the P&L in 2028. Hence, the measures have to be implemented by end of 2027 in order to—
Okay
—to have the full year effect in 2028, right?
Okay. Thank you. Thank you very much.
Yeah. Thanks, Boris.
Then we have again Maxime Kogge from ODDO BHF. Your line is open, Maxime.
Hello. Can you hear me better now?
Much better, Maxime. Hi.
Okay, cool. Hi, Gunnar. Hi, Christoph. Most of my questions have been answered, but still on the SALCOS, I would like to know, I think there was a further delay announced today of a few months. What was the reason for that? Because previously you said summer, now it's middle of H2. Already summer, I think, was a bit late versus your initial plans, which were more H1 2027. I would like to know regarding SALCOS too, what share of energy costs are already hedged for SALCOS, either gas and the electricity, and if SALCOS can produce all the grades that you're doing right now with the blast furnace system, that is to say also, for example, the most advanced auto high-strength steel grades?
Yeah. Fair question, Maxime. When it comes to the inauguration or the ramp-up time, I'm a bit confused. I'm not aware that we have made any announcement today that we have a delay. We certainly don't have a delay. If there has been any announcement, I need to follow up on that. We have been very consistent in talking about late summer 2027. Hence, this is what counts, and this is what you should expect. So no further delay, and we're very well on track with the program right now. Actually, I'm very happy with the development that we have been able to take in 2026, and very confident also that we're going to deliver on that timeline and all the other parameters.
When it comes to energy, as you might recall, I think we talked about that earlier, we are obliged to use green electricity for the electric arc furnace. Hence, we have already, since the start of the implementation, built up a portfolio of green PPAs to support the electric arc furnace for SALCOS. On the DRI, you know that we are building the 100 MW electrolyzer, which will provide some hydrogen. The rest will then follow as soon as the pipeline is here, which will be most probably in 2030. We have now signed the first HPA to support the hydrogen delivery for the DRI. Up until then, we will run it predominantly on natural gas, which is part of our hedging strategy as elaborated on already earlier today.
Okay, thanks. Regarding your ability to produce—
The grades. Yeah, sorry.
The grades, yeah.
Yeah. Look, I think we have said initially we are able to produce roughly 90% of the grades that we are producing today. By now, we have been able to further narrow that window through intensive work with our R&D team and also the scrap team. You shouldn't forget that we are building the shredder alongside Xylos, which will help us to customize the scrap input to some of the higher grades. That's one thing. Secondly, we have very intense discussions with some of our auto customers that want to increase the recycled content in the steel grades, which will then also increase the scrap content to those grades. This is still sort of in discussion, and some areas also need further R&D.
But I'm very confident that ultimately we're going to get there with the grades, and should be able and will be able to deliver all the grades that we're delivering today. Are we able to do this here and now? No, we are not, but very close to it.
Okay. Perhaps just the last one. Yes, this is on the whole supply environment in Europe, because EUROFER has been coming up with a figure saying that actually 10 million tons of capacity has been restarted in Europe recently to cope with this drop in imports that we should be witnessing gradually over the next few months. But it's difficult to reconcile this amount because except for ArcelorMittal, perhaps U.S. Steel, that have been restarting a bit of capacity, yeah, not so much has actually happened in terms of reopening. So yeah, what would be your view on that?
Perhaps, sorry, perhaps it's a question I should have already asked last time around, but I'm a bit struggling to understand why you closed down one blast furnace at the HKM, because probably the market would have been in need of this additional capacity too, because while the others are reopening, you're actually shrinking your footprint on your own.
Actually, we are not shrinking our footprint, Maxime, because you shouldn't forget, we had a 30% share of HKM, which basically led to some one million ton delivery out of HKM into the Salzgitter sphere. We are now increasing that to two to two-and-a-half, depends a bit on how you calculate, one electric arc furnace. So we are not shrinking in terms of steel production footprint, on the contrary. We have made sort of the analysis around HKM, and we see a good chance for HKM to contribute to the slab market in Europe, given the sanctions vis-à-vis Russia. Just as a reminder, Russia is still importing roughly three million tons of slabs into the European Union. By end of September 2027, that will be reduced to zero.
Here we see a good opportunity for all those slabs that we will not use internally to be sold to the slab market in Europe, and then being a green slab produced at the very center of Europe. This should be sort of a sweet spot for HKM, also with the steelworks that is very flexible and very performant there. So, that's the way we look at HKM.
Can you specify what share of HKM shipments still go to thyssenkrupp, and when the underlying contract expires? What would be the impact when this contract comes to an end?
Well, the impact is obvious. If and when the contract comes to an end, we'll have to sell those slabs elsewhere, and this is exactly the market that I just described. So basically—
Okay
with the contract that will run up into 2028, we have the time also to sell the slabs as of then on a structured basis into the market. That is, I think, a very comfortable situation. We know the amounts that we have available there, and we are approached actually by quite a few customers that are interested to buy slabs from HKM. So, I'm very comfortable and positive that we're going to be able to sell those on a structured mid to long-term structure into the market.
All right. Perhaps to finish with, can you perhaps provide an update on the ETS discussion? Because I think that the industry is very split on the topic. On the one hand, you and perhaps SSAB are lobbying for very strict measures, and on the other hand, you have ArcelorMittal and other players which are campaigning for softer trajectory in terms of phase-out. There was a proposal made by the Commission in July. Where do we stand in terms of dialogue between the EU entities, and what is, according to you, the most obvious, the most likely outcome?
Yeah, I think that we have seen quite a few discussions and opinions and statements around ETS since the EU came out with their proposal. The proposal is, I think, twofold. One, it clearly underlines the Commission's view that ETS should structurally remain as is, with a clear price signal on CO2. market-based system. So, I think that's a very important message given by the Commission and supported also by member states. I don't know whether you have seen the letter that Friedrich Merz wrote to von der Leyen beginning of this week, where he explicitly said and strengthened or supported von der Leyen in sort of keeping her line when it comes to ETS reform. So, I think that's a very strong and good message.
Yes, we see some movements when it comes to the CBAM factor, that this might be reduced, and hence companies that are not that far advanced with the transformation could buy some time, but not too much. There's a clear understanding by now that first movers should not be disadvantaged by the reform. Third element, perhaps, because that also has been heavily debated in the steel industry, connecting further free allocation to investments is something, of course, that needs to be considered very, very carefully, because what you don't want to have is a stop of any investment project in the steel industry, because everybody's waiting for 2031 for this measure to come into place, and then do the investment in order to secure further free allocation. That's one element.
And second element, for those who already have moved, like, well, you mentioned SSAB, Saarstahl Dillinger, ourselves, those investments, of course, has to be attributed to the free allocation if this conditionality actually comes into place. For us as a steel industry, it is not desirable, because it is just adding complexity and has a risk that investments come to a halt. Specifically for Salzgitter, I am a bit more relaxed as we have done the investments and should be able to prove that those investments are eligible for further free allocation. Does that answer your question?
Okay, thank you.
Yeah?
Yeah, yeah.
Yeah.
Thanks.
Thanks.
Our next and at the moment last question comes from Bastian Synagowitz again from Deutsche Bank. The stage is yours.
Yeah, thanks for taking my follow-up. Just a very quick one also on HKM and actually how that fits into the European blast furnace landscape. From my understanding, I think the output last year was somewhere between 4.2 to 4.4 million tons, and now you obviously cut away 2.5 million tons of capacity, which means you could technically run not higher, and you cut roughly 1.7 million tons on a net basis. 0.7 million tons of that you pick up with the restart of blast furnace C, so about one million tons compared to the 2025 output is basically what would need to be picked up elsewhere by higher European production in other assets or, I guess, from slab sourcing outside Europe. Is that correct, or is there anything I'm missing here?
No, I think the math that you did is correct, but just bear in mind, and I said that earlier, ramping up blast furnace C is not to increase production output. It is to increase flexibility amongst the three blast furnaces that we have here in Salzgitter. So, don't expect Salzgitter to increase the output by 0.7 million tons on an annual basis. What we want to do is to reduce the output of A and B, as they have been running now on full steam for quite some time, and to relax a bit on technical stress on those two blast furnaces. That's the reason for blast furnace C kicking in now. Then again, as I said, it will help us to smoothen the ramp-up of the electric arc furnace prior to shutting down blast furnace B.
As soon as blast furnace B is out, we will sort of need C to also then help us with leveling the production capacity. Blast furnace C is not an increase of capacity. Rest of your statement is correct, yes.
Okay. Okay, very clear. Thanks for clarifying. Just on the policy side, can you maybe get us briefly up to speed on the overall, on the lead market discussion? I guess there has been some decision by the European Commission last week, from what I understand, but maybe can help us to understand how exactly that looks like for you, and is the outcome which we've seen there so far, is that basically, are you happy with what you're seeing there, i.e., other companies, the outcome is now entitled to offset CO2 as well via using steel? Is that ring-fenced to steel? Can they use other materials as well? Yeah, if you could maybe just talk us through that briefly, that'll be great.
Yeah, at least I try. It's a blurry picture still, and notice has been made, right? I think we're preparing for the trial that needs, that should start just after New Year. My view on that, talking lead markets, I would like to distinguish two things. One is the public procurement, which is more the Industrial Accelerator Act. I think it is very good that the concept of lead market is picked up there. Question will be how to ramp up. The CO2-reduced products in the public procurement conceptually is in there, and I'm also now talking to administration in Brussels, but also in Berlin and other European countries. I'm optimistic that it will remain in the IAA, which also needs to be decided then beginning of this year in the trilogue. That's one element.
Second element is the private procurement sector, and you mentioned automotive. The automotive package includes an option for automakers to offset CO2 in their fleet target through especially green steel. I think it says now 7.5% can be offset by 2035, and I think it's three. Now, I'm not 100% sure with the current numbers. It's floating a bit, but starting with a lower number, I think it is three in the discussion right now, as soon as the automotive package would be operational, which then would be 2027. The opportunity for car manufacturers to offset CO2 for their fleet target explicitly through green steel, which is a major step forward, because for a lead market, you need volume. You need volume, and the automotive market, of course, provides volume.
Even if you have a lower percentage, it translates into significant volume compared to the overall steel volume in the automotive sector and helps us to underpin the business case for green and helps us to ramp up and run down the cost curve for the green steel market. What still needs to be finalized is the definition of green steel, though, Bastian, and I think we talked about that earlier. We as industry, together with policymakers in Germany, have provided the definition, the low-emission steel standard, which is now a European-based standard. However, it has not been fully picked up by the Commission. Commission is discussing whether to provide an own definition of green steel.
We are trying to convince the Commission that building on something that is already there and that is largely also approved by the steel industry and other policymakers makes sense, but let's see where we land that one.
Thanks. That is great, Gunnar. Just a quick follow-up. The offset with green steel, is this now ring-fenced to green steel only, or can the auto players also go and just buy other decarbonized materials such as aluminum or whatever it may be?
No.
The latest one.
Yeah, there was a discussion whether those 7% or 7.5% should be only targeting steel or whether it should be open also for green aluminum. But as I understand the discussion right now, but again, this is a bit of a floating discussion, it is solely reserved for steel.
Understood. Okay. Thanks, Gunnar.
This was the last oral question, so I would hand over back to Markus Heidler.
Okay, then we have a couple of questions in the chat, and we start with the question of the impact of the closure of Ilva in Taranto. Can you share some insight, Gunnar?
Well, of course, it is good that there is clarity by now, what happens with the liquid phase of Ilva Taranto. Now it is to be seen whether the rolling remains and what happens there. But at least clarity on the front end. I think that again helps our view on the slab market in Europe, right? Because there is another slab producer that basically left the market.
Right. From my point of view, the remaining questions in the chat have been already answered. Thank you for your questions, for joining us today. If you have any further questions, please feel free to contact Jan or myself, and we will give our best. See you next time. Thank you.
Thank you very much. You all have a great day.
Thanks a lot.