Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to today's pre silent call Q4 2019. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to pass the conference over to your first speaker today, Reeta Kaukiainen. Please go ahead.

Thank you, and good afternoon, and welcome to Outokumpu's Q4 pre silent call, as the operator said. And first of all, happy new year to all of you. So my name is Reeta Kaukiainen, and I'm the Head of the Outokumpu's Communications and Investor Relations. And today, with me here in the call will be our Investor Relations Manager, Linda Häkkilä, and of course, the host of the call, CFO, Pia Aaltonen-Forsell. So today's call marks the start of our new practice, and going forward, we will arrange these types of pre silent calls at the end of each quarter, and these calls are hosted by our CFO. And after each call, a replay of the call will be available also on our website for further reference, if needed. But let's get started. And I'd like to ask Pia now talk us through the main topics regarding Outokumpu's Q4 and maybe some market developments. So Pia, go ahead.

Good morning, everybody, and Happy New Year, and I've heard that there are some bad storms in Finland, but I had hoped the rest of you at least have had some good weather today. And this marks a start of a new year, and I think it's also a good time to just sort of briefly look back at what happened last year. And obviously, it was a year with very tough market conditions for Outokumpu. And at the same time, reading a lot of the reports on nickel and looking at some of the main inputs to our product. It's interesting, actually, to look at all the comments saying that it was a great year for nickel. Obviously, it was. With really the huge rally during Q3, you all know that we had a much calmer situation towards the end of the year. We had the prices returning to a more normal level. But still, when you look at the nickel development during the year, it is actually up from the start of the year to the end of the year quite significantly. I think it's even closer to 30%, when I'm looking at some of the reports here right now. So it's been quite a year. And obviously, one of the key messages that we want to share with you today is to give some update on how the market has developed. But obviously, we have a number of things that are interlinked. And what I thought I would try to do today is obviously to comment on those independent factors and, therefore, leave you with a bit more of a picture of where we are today. So I started with the nickel, and I think it's important also, obviously, for the dynamic of the European market situation generally and the import situation. From the statistics, you know and we all can see that imports have continued on a high level still during the fourth quarter. And I think that there are actually some peaks from the statistics that are worth noting. I think earlier, our key message has been, and we have clearly shared that, although there are some countries that have been filling their quotas a bit quicker than what would be sort of the average through the sort of full 12-month period, the average still has been just sort of pacing according to filling the quotas by the end of Q2 of this year. However, if you look at the hot-rolled imports, you can see that China has actually filled 87% of the quota, and that was already -- I have the stats from December, and it was about mid-December. So it's clear that here has been some rather rapid movement. Of course, this could be -- have a link to the ongoing actions by the European Commission looking into the antidumping and also looking into the countervailing duties when it comes to China and Indonesia and then the antidumping for hot-rolled for China and Indonesia and Taiwan. And just to be clear, all of this was for the hot rolled. But obviously, there has been also a link to the hot-rolled quotas filling up quite a lot or quite heavily for China already in 2019. So all of these are significant items. And I think our actions and our work through the full year actually and continuing into Q4 was to remain very active when it comes to lobbying, when it comes to informing commission and also individual countries and their representatives just about the situation that we have around the imports right now. And also, just -- even from December, we have several examples of people visiting our sites just to really learn more, people from the Commission, people -- very senior people from -- also representing Germany, et cetera. So I think that we have had many opportunities to share the information, to educate and to inform, and we have, of course, really tried to use that to give the sort of full picture of where we are. However, I do not have any update on when we would expect decisions other than what we have said before, and I think has been out there for a while to say that when it comes to these antidumping and countervailing duty measures or investigations by the Commission, they are ongoing, and probably, a decision would be expected at -- towards the summer of 2020. However, we do have information that we will start to record all of the imports. So that remains, of course, also an important item because it's -- our experience from the previous investigations has been that there has also been -- the measures have then also been, so to say, backdated or valid from the period of the investigation when the measures have -- when this recording of the volumes have started. Obviously, there's been some dynamic from the lowering of the nickel prices. When it comes to then price levels set for the imports, and that, of course, is only what we can sort of look from the market movements from the outside. However, I think that it's still valid, and we should still confirm that the movement that we have seen towards much more effective pricing, it is still there, and we really have this sort of split into the different types of businesses, the annual contract types of businesses and the other businesses where our customers are looking for longer-term contracts, be it, for example, automotive, where the quality, the certainty of supply also means a lot. And where we would still have the typical or the previous prevailing conditions of also, then the alloy surcharge and longer-term contracts to go with that. But especially when it comes to spot deals, it's clear that we are now typically being asked by customers to do effective pricing. And that's where we are in Europe. Generally, we've been through a cycle of a lot of conduct and a lot of negotiations with customers also about next year's annual contracts. And I think, generally, the messages there have been, should I call it stable or should I just say that without big surprises, despite the fact that the market conditions through the year have been quite challenging. And I think that's a good sign that we have this long-lasting customer relationships where there's a number of factors that are really important. And there it seems that we have continued on-site and almost back. Now I have focused pretty much on Europe, and I would still briefly like to go over to Americas and just to continue with a few sort of markets that we do see, at the moment, a very long period of destocking through 2019 resulting in lower-than-average distributor stock levels. And we have also seen a period of negotiations. And I think I said already in some meetings earlier during the autumn that anecdotally, there are some new customers. There are customers that are willing to do and make annual contracts through sort of the auto negotiation period. And I think it just -- now that we are through that period, I think that what we have just seen is that we still have the willingness by customers to really interact going to longer-term contracts as normally. And we are also getting some traction with new customers. So things are proceeding the way how we have expected them to proceed, and the very low inventories that we see at the moment are, of course, a sign that, at some point, restocking should occur. But of course, we don't know whether it will occur now or in half a year. We can only look at the moment at lower-than-average distributor stock levels. So I think, in very short, those were some of the remarks. I think we have also sent out a brief letter this morning reiterating and reconfirming our guidance for the fourth quarter. Obviously, we had expected the fourth quarter to be a slower quarter when it comes to demand, lower volumes and also expected the EBITDA -- the adjusted EBITDA to be on a similar level compared with Q3, and we remain with that same guidance at this point. And with that said, I think I would really like to open up for Q&A at this point.

[Operator Instructions] Your first question comes from the line of Harri Taittonen of Nordea.

Maybe could I clarify a couple of sort of one-off type items. And first of all, the strike impact in Finland, was it any sort of material impact that you could see now because SSAB, at least, they sort of indicated that the impact for them at a fairly material number? And also, is it too early to ask about that kind of indication for the timing and hedging item, how it's sort of -- how it could pan out in Q4? I believe it was about EUR 30 million, negative in Q3? So those 2 questions.

It was. Yes, it was. And Harri, maybe I start with timing and hedging because, obviously, it was a big negative in Q3. And I think also in our guidance, which I didn't repeat that detail, but we were quite clear to say that we didn't expect that same negative. And if you just think about sort of the movements in the nickel that we had during the third quarter, it was from $12,000 up to $18,000, and then it came a little bit down by the end of the third quarter. And now again, then during the fourth quarter, the movement has been down with a slight uptick at the end of the year, but not at all, so dramatic, let's say, part. So my assumption just kind of looking at those movements, would that -- would be that when we say that we did not expect a similar negative, we were still looking at nickel prices that had been declining. And for me, just the math of what we have seen is that there is some opportunity for a positive movement, but we didn't see nearly as volatile movements during the fourth quarter as there was during the third. So I hope that is enough sort of indication of where we are. You know that we haven't really shared the exact volumes that we have in the hedging, and they also vary a little bit because -- just to repeat what we are hedging, we are hedging sort of the trading when we know that we have something in the inventory ready to be sold, when we know that we have a fixed-price sales contract, then we are hedging the other end of both of those contracts. And at the same time, we have been hedging a part of our base stock in Europe, so a part of the sort of nickel throughout our process. And all of those elements, obviously, are contributing in this case.

Sure. So it is kind of not impossible that the sort of the item will be positive, so the delta would be more than plus EUR 30 million theoretically without giving guidance?

Yes, yes, yes. Of course, it's possible. And obviously, the delta -- positive delta is already big, just if the negative EUR 30 million is not repeating, and I think with the nickel movements, there is even a possibility for some positive impact there. But as said, it also depends on exactly what the volumes have been in the nickel hedging, and they tend also to vary a little bit.

Sure. Okay. How about the strike impact, I mean, the sort of ballpark feel of that, I mean, in comparison to the Nordic peer of yours?

Yes. Yes, indeed, I have to say that a strike is always serious. And I think from an operations perspective, we had to put in a lot of actions, a lot of mitigating actions. And we've had a very good cooperation, I would say, also locally, just to try to make things work, regardless. And I think that's why also, I mean, we haven't sent out any message about some major negative impact. So I cannot really see that we should give such statements as SSAB has to answer then why it was so negative for them. Of course, this is a serious situation. I'm not saying that. But I think that with -- with sort of our situation and our mitigating actions, we do not see any major impact from the strike as it was during the fourth quarter. And I think there has also been some good news now about -- at least sort of the [indiscernible] and agreements now about not continuing the strikes in that area. However, the electricians might still be continuing their efforts.

Your next question comes from the line of Alan Spence of Jefferies.

Just got a couple ones. First one, just about your comments around the decline in nickel pricing. I think kind of through the summary, you guys mentioned that it didn't really incentivize any restocking as a lot of customers had expected to either fall back or that the view that it wasn't sustainable. Now that it's come back some, have you seen any improvement in buying appetite from those customers now that the nickel prices have subsided?

I think there is a link both -- at least for me, I think the link between, okay, what we have in the inventories and then always the sort of the balance -- especially now if we talk about Europe, then the balance of the import with the nickel price. And I think we probably saw a combination of all of these playing out. And therefore, I mean, we haven't seen the restocking, that obviously in Europe occurred somewhere more towards the end of the summer or early in the autumn. It was not really something that we would have noticed. As you have seen, I mean the European producers' volumes overall were very low in the third quarter. So there was really a sort of import pressure, probably in Europe, to some extent, impacted then also on the stock levels. So I cannot really say that, I mean, we have seen the low levels in Europe throughout the second half of the year. In Americas, I think, by now, I mean, the destocking just continued through 2019, and it's now on low levels, the inventory. So perhaps that gives some opportunities for the future. But also, there, I mean, trying to say that what would be the date when the restocking would continue, I don't want to speculate about that. It could be later in the year as well. It could happen quicker. That is not something we could comment on right now.

Okay. And I've just got 2 kind of more housekeeping questions. The real estate sale, could you tell us what the approximate book value was of that, so we can judge to the P&L impact?

I think there was a rather low book value, which you can also see from the fact that the P&L impact, which we have adjusted for. So it's not visible in the adjusted EBITDA. But Linda or Reeta, maybe you can still confirm? I think we have published the P&L impact. And yes.

Yes, I think -- Reeta here. I think we said, it was EUR 50-plus-something million, we can check it for you. [indiscernible]

Yes, if need be, we can come back to this, but I just want to put it in the context that this is a piece of real estate that we had used for a production site that we had closed down. And I think under those conditions, typically, you will end up with rather low book values, which then also calls for quite significant P&L impact when a sale under the condition that we managed to do right now is realized.

Okay. And the last one, your comments about the annual contracts in Europe being maybe positively surprising to us but stable. I just want to confirm that comment was more about volumes as opposed to pricing or margin?

I think you hit a good point here. I don't think that we have been too vocal about where the pricing levels have ended. I mean there is obviously a link between the general price level and the price level of the annual contracts. But also the fact that we are not commenting it, I think you should read it as that, that there is no major change. However, my comment was more about sort of the volume, the way of conducting the negotiations and everything. Obviously, with a lot of uncertainty in the market through the year, I think it's important to have that dynamic of the longer-term contracts and of -- the kind of slightly different nature of that business, giving some stability also going forward.

Just adding the number that we were checking about the transaction, it was EUR 68 million.

EUR 68 million is the P&L impact?

Yes. It was in the release, actually, that we put out in there, yes.

Yes. Okay. All right.

And that's the P&L impact, yes.

And your next question comes from the line of Constant Riek (sic) [ Carsten Riek ], Crédit Suisse.

I think it's Carsten Riek from Crédit Suisse. Just 2 questions from my side. The first one is on the restructuring efforts because I read in the newspaper, in a German newspaper, that there will be 224 -- sorry, 252 jobs cut in presales by the end of 2021. When do you expect the cash out for that? Is it already a 2020 kind of issue? Or do you drag it out until 2021? And the second question I have is on the Chinese stainless steel consumption. It looks like China is currently very weak. We have seen in November, the import numbers are almost approaching 0 while the export numbers keep going. Does it have a negative read across to the margin level in 2020, in your opinion?

Yes. So I'm sorry, there's a little bit of a noise on the line, but I hope you all can hear me. So first of all, about the cash out impact on the German restructuring, so I think still at this point, I can just comment sort of the principal of it. So I think it's important to see that you would typically -- the cash out would occur at the point where the person would actually be leaving the company. So there is a link with that. So if we conclude somebody that they leave during 2020, then very likely, the cash out would occur then. And as you have read in the newspapers, there are a range of agreements probably going to happen. And of course, this is true for presales, but we also have other sites in Germany. So it's very likely there will be cash out in 2020, but some could even be in 2021.

Okay. And the comments on the Chinese?

Yes. I think that's a really interesting sort of area to be looking into. I mean as I said before, when we look at the import situation for the hot-rolled in Europe at the moment, so we have -- we have Chinese quotas filling up very much. It was 87% when I checked last time. So that's a lot because kind of half of the period is still remaining. We also have the European Commission investigation. So it seems that there is not much room for Chinese imports into Europe during 2020 or the first half of 2020 in the current quarter period. So the dynamics within China is obviously really interesting and really important -- it impacts, of course, anything from the set of strong pricing to a lot of other factors. But whether China would have then to push a lot of products into Europe, there simply is not much room in the quota. So that's why I would just say that there has to be some limit to the impact of this because there are limits to the imports as we see it right now.

Okay. Could it be actually diverted so that instead of sending quotas directly from China, you currently hedge it and out of sudden, it doesn't come out of China, it comes out of a different country, which still has a quota?

Yes. That is such a good question. If you really look at what countries do not really use their quota, I mean U.S. is like really, really low utilization. Well, that doesn't seem likely. There are other countries in Asia where the quotas of utilization also on hot rolled is still pacing on the average or even slightly below that. So yes, in those quotas, there would be room, but could they really do that? I cannot answer that. And then Indonesia has pretty much used all of this residual quota. So sort of, theoretically, in some of the quotas, there are some room, but could they really do that, that I cannot really answer.

And your next question comes from the line of Andy Mohinta of Moore Capital.

Andy from Moore Capital. Just a clarification, please. So if I understood your first comment correctly, any nickel hedging gains are not included in the adjusted EBITDA guidance that you've given? Is that right?

Yes. I think -- and I'm sorry, again, I hear some noise all the time in the background, but I hope you can hear me well. So in the guidance, what we have said is that we do not expect the big negative that we had, so it was minus EUR 30 million in the third quarter, to repeat in the fourth quarter. So you -- of course, if you then think of sort of a delta, of course, that's a positive delta because the negative doesn't repeat. So that's how far the guidance goes.

Okay. And then the building blocks that you have given for Q1 2020, you've talked about seasonality. Is 2019, when we look at Q1 2019, is that a good proxy to get a sense of what sort of shipment uplift we should expect in EMEA for shipments?

Yes. Generally, when I think about seasonality, I think it's something that we have received over the years, potentially even in -- repeating over many years. And I still think -- I don't think Q1 '19 was bad, but there is always, of course, point, maybe looking a bit longer back in history. Generally, 2019 was the year with really tough trading conditions for Outokumpu.

There are no further questions at this time.

Okay. Thank you. Thank you, operator. If that's all, then there is no point in continuing the call. So this was our first pre silent call, and I've said, we will continue this going forward, and you will get the invitations through e-mail as this one. And of course, always, the information will be available on our website as well. Our silent period will start next Monday and continue until the Q4 and full year results have been announced on the 5th of February. So until then, thank you all for your participation in today's call, and have a great weekend. Thank you, and goodbye.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating, and you may now disconnect.