Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and our apologies for the delay of the starting of the call due to high volume of calls we are facing because of the coronavirus situation. Thank you for your patience. We want to welcome to the pre-silent call first quarter 2020 conference call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Reeta Kaukiainen. Please go ahead, ma'am.

Thank you, operator, and good afternoon, and welcome to Outokumpu's Q1 Pre-Silent Call also on my behalf. And as you've heard, my name is Reeta Kaukiainen, and I'm the Head of Outokumpu's Communications and Investor Relations. Apologies for starting so late, but it seems that there has been some difficulties in connecting the calls to this event. So there might be other people joining the call as we move on. So in today's call, our CFO, Pia Aaltonen-Forsell, will go through some of the main developments during the current quarter, and of course, the coronavirus situation and it's indications on Outokumpu and the stainless steel market are among the key topics here. But since we started so late, so let's move on, and I will hand over to Pia. And after Pia's few words, we will then have a Q&A session. So Pia, please go ahead.

Thank you, Reeta, and good afternoon, everybody. I wish you are all safe and well at this point. Obviously, we have stayed in contact quite a lot with also our virtual CMD happening only a while ago. So I think the purpose of the call today is really to update you on the most recent situation when it comes to both our preparedness to face this coronavirus situation, how we are doing operationally and from a revenue perspective as well as then try to answer any questions that you may have. So first, I want to say that being, I would say, reasonably detailed already as to how we have prepared for the coronavirus situation in our CMD, I think what I want to add at this point is that our operations have continued normally. We have also maybe, partially because of our geographic locations, been to the extent still protected and well that we haven't faced any sort of relevant business interruptions. I think we talked a little bit about the case in Italy where we've had some days of closure earlier. And now with the recent events in Italy, we are also from our service center perspective, having to stop operations for a while. However, from a group perspective, this remains maybe a smaller item. And otherwise, our operations are continuing as normal. And keeping our people safe and healthy is obviously a main priority at Outokumpu. Then for another, of course, extremely relevant question, which is then what do we see happening in the market and how does this continue? I think, obviously, if we start with BA Europe, we have constantly, in a lot of context, talked about the import penetration. And it's still maybe a valid point, based on the latest statistics. We obviously still see import penetration into Europe, although not on such high levels as we saw in Q4. However, at this point, there are both, let's say, demand implications obviously through, for example, automotive. You have all seen the news about them closing down production on a big scale. But at the same time, also supply implications based on information that is available out there in the market from, let's say, our competition and other sources. So I can only confirm what we already said during the CMD, that from our perspective, we have still seen a continued sort of normal or solid order intake. And obviously, and as we have also explained in the CMD, we remain very aware that the way how the COVID-19 impacts the global economy. It's clear that inevitably, this will also impact demand of stainless steel and impact Outokumpu. But for the time being, we have still continued to see, I would say, a rather solid or stable pattern here. Maybe then for some of the other really, really relevant areas as well when it comes to ferrochrome. Obviously, there has been news already earlier from the supply side from, for example, South Africa. And now at the moment, the situation in ferrochrome is obviously, from a global supply-and-demand balance, having a lot of impact from really lockdowns and total stops of production in several countries. And I can only reconfirm that we continue to operate normally out of Kemi, Tornio at this point in time. Then I think it's maybe good to just reiterate one more thing on really sort of scenario planning and a bit pressure testing our views about this year. I think Roeland talked a bit to this in the COVID-19 section of our CMD. And he talked to the fact that we have prepared also sort of a credit crunch or sort of -- really sort of low case scenario. Obviously, reading the news and various forecasts that are out there, some news point to sort of even sharper slowdown of the global economy during this year. And we remain, of course, vigilant in the sense that we keep an eye on this, and we will also adjust our scenarios if need be. But at the moment, how we see the situation through the scenarios is still -- that they give us some comfort as to the way of how we can manage and sort of steer and navigate through this storm, whether it comes to KPIs or whether it comes to liquidity. Then on the balance sheet, obviously, we talked earlier about the release of working capital of EUR 100 million this year. And the fact is that given the COVID-19 situation, cash preservation just comes even more important. So we are enforcing this message in the organization keeping, of course, cash as a priority. And in a time like this, obviously, we talk about inventory, but we also talk about tight management of receivables. So that -- and that definitely remains the priority. We are also looking into the CapEx plan that we have. And I can only confirm that we are working on this to sort of -- to reevaluate, but we don't have an updated CapEx estimate for the year at this point in time. But rest assured that we are working on the topic and also looking into perhaps delaying or otherwise being able to preserve cash also through the CapEx. And finally, maybe it's just good to give a bit of an update when it comes to the imports and the trade defense measures. So just looking at the quotas and how much they have been used, maybe one sort of data point that is interesting is that the residual quota for the sort of rollover from the first quarter, 82% of the previous residual quota had been utilized today. So there is a little bit of rollover there. And you know on the hot-rolled side, obviously, the earlier story already of China having used all of its quotas since January. And then you have, for sure, noted that we had to postpone the AGM. This is very much sort of the pattern right now in Finland where the government has put in place a lot of actions in that area to prevent big gatherings of people and really sort of recommending people to stay at home, as you are well aware of. So I think with that said, I would like to stop my presentation and really make sure that we have time for Q&A. So operator, please, can we move next to the Q&A section?

[Operator Instructions] Our first question on the line comes from Bastian Synagowitz.

Pia, I've got a couple of questions actually. And maybe starting with the current situation. I think when we last talked, and I think also at the Capital Markets Day, obviously, you said, I think the order book development was still very, very good. I think there were a couple of disruptions you have obviously had for the obvious reasons. I think automotive is one area you highlighted. Could you just give us any sense? I mean has the trend, I would expect, probably started to worsen a bit more steeply in the last few days? And I guess it's really more a question of days we're talking about here?

Yes. I feel pleased to know that my overall message is that it continues to be solid or stable sort of from that perspective. I mean obviously, there are some sectors, and I do think automotive is very notable there, where we know from the public news even that there are definitely sort of lower demand at this point. But if I would try to decide the overall situation sort of excluding that, it's difficult. Yet we really see a pattern whereby they would have less orders. Obviously, I think the key question is then, could we expect cancellations at a later point? And I think this is just a very valid question that could be triggered by the COVID-19 situation. However, that was something that we would see at this point either. Maybe sort of on a detailed level for loan products. Obviously, we have talked about weaker markets already earlier sort of based on the last year's annual reports, et cetera, et cetera. And I think that there is also some dependencies to some industries that are clearly suffering at the moment there. But maybe from a group perspective, that follows the overall pattern that we have the automotive being impacted, and generally, otherwise do not see yet any sort of disturbance. But we remain very careful.

Yes. Yes. Sure. I guess visibility as well. Look, just when you say things are very stable, when you say very stable, you refer or versus the first quarter base in the other sectors ex-automotive?

Yes. When I say stable, I say that they are according to our expectations. And obviously, when you look at sort of the seasonality, Q1 and Q2 tend to be good quarters from a volume perspective.

Okay. And just in terms of the first quarter, I mean obviously, like when we heard your business heads obviously talking in the first quarter, all of them were really, really positive on how the first quarter had actually gone. And is there any indication you could give us in terms of the magnitude of the volume increase in the first quarter, I mean versus -- are we, in fact, getting that close to last year's level? I don't if -- is there any color you could give us?

Yes. Yes. I think it's -- actually, remember in Q1 last year, that was still from a volume perspective even more than solid. That was, for sure, a good quarter. And it is actually sort of a good reminder to look there because when we compare with Q4, it's obvious that there's been an uptick. And you heard that also from the BA head sort of being very confident on our performance. And that's also very much aligned with our guidance. And I still think we need to say that we are not sort of at the top of the global economic development right now. So I don't really want to comment too detail because we haven't given any real guidance, vis-à-vis, last year. But I mean clearly, last year, Q1 was a very strong quarter.

Okay. Fair enough. Fair enough. Then maybe switching over more towards your raw material situation. One thing we've seen in China, obviously, when the whole thing started to develop was basically that there were massive disruptions, I think, particularly with regards to scrap collection. And so here, I was wondering, have you seen any impact on particularly your scrap supply where you've maybe been forced to actually rely more on like maybe primary raw materials with deep-sea supply rather than basically the scrap supply route, which is obviously much more based on like smaller truckload logistics and so on when it comes to collection?

Yes. Yes. But, yes, it's a really relevant question. And I still want to say that we would always keep really an eye also sort of on the cost levels. And in some sort of special or extreme situations, primary raw material might be a really good option, not only because of availability, but also sort of pending the price balance. But generally, what I can say is that scrap availability in a situation where a lot of countries are in lockdown and it obviously makes people move around less -- in many countries, there are recommendations that you shouldn't unnecessarily move around, et cetera. I mean this is all -- it's possible that all of these would have an impact on scrap availability. And then of course, some of the material also comes directly from industry. So then depending on how much the industry is stopping or not stopping, there could also be consequences. So I have to say that in this very unique lockdown situation, that is clearly a risk. It is not a risk that we would have, in any way, flagged in terms of our Q1 guidance or in terms of any of our talks or the CMD or anything. I don't recall any of the BA heads really sort of commenting in detail about that. So it's clear that we have been able to manage this risk very properly. But this is something that we just need to keep an eye on. And in the end, it's also the function of how much -- what is the situation amongst us and our competitors, how much we are producing and also the sort of demand and cost that in a sense, and the pattern therein. So this remains an area where we just have to keep a very close eye. And I wouldn't like to give sort of a very strong statement that this is, for sure, no problem in, for example, Q2. We just have to keep monitoring.

Yes. Sure. I think it could change also anytime, I guess. So -- but so far, it seems like you haven't had like a major disruption or impact on. Okay. And then in chrome and ferrochrome -- okay. And then on chrome and ferrochrome, am I right that there hasn't been an actual settlement for the second quarter benchmark price so far?

No, I don't think there's been -- I don't think it's been announced yet. So that's at least how I understand it.

And in terms of the hedging, given the trend of the nickel price, I guess, we can, by now, expect a positive impact on your hedging?

I don't think there will be a big impact from hedging in Q1. Just sort of looking at where nickel was end of the year and where it ended up yesterday, so there could be some impacts. But typically, we should maybe also then expect with sort of lowering metal prices as they could as well be some timing losses and potentially some upside from the hedging. And in an ideal situation, of course, this would balance out. But yes, obviously, I haven't seen the final Q1 figures there yet so.

Okay. Okay. Then my last question, and sorry for asking so so many. Actually, my last questions is more on the liquidity side. But I mean if I look at your liquidity profile, obviously, it looks very, very, very solid. I mean you have actually a very large part of -- a very large pile of liquidity. Have you been on top of the end of the last quarter -- have you been securing any additional liquidity? And then also when it comes to particularly your dividend, you're obviously pushing out your AGM. And we've seen quite a few companies and management literally you turning on dividends. And now as announced one of your Nordic peers, I think last week had sort of like gone from like 100% to 50% to 0%. I mean what's your thinking on that side?

Yes. Yes. So if I just start with liquidity measures since year-end, obviously, there has been several quite important step. The pension loan, EUR 120 million. It was a refi that we did in March, but it was important because it pushed out EUR 80 million of maturities from the next 2 years. And at the same time, it's also sort of a 10-year instrument that we did. We have also been very active in the commercial paper markets, securing also some, what I would call, longer maturity from a commercial paper perspective. But it means that we have sort of evened out the profile that we don't have the typical 1 to 3 months. But we also have 4 months, 5 months, 6 months, 7 months, 8 months, et cetera, all until sort of the Q1 of the next year so that we have a more balanced maturity also of the commercial papers. And I think that's been good. The commercial paper market in Finland has been very, I don't want to use the word shutdown, but very sluggish with only few -- we've been only out a few times since March. So it's good that we have sort of the balanced profile there as well. So that's why I want to mention it. And obviously then, we did repaid convertible bond in February. So there's been a lot of movement. Also as a cautionary measure in this COVID-19 crisis, we have internally agreed that we want to see a bigger sort of, can I call it, sort of dry cash or dry powder available that we have more really secured as cash than we would sort of under normal business conditions. And this is the quality that we put in place during March.

Okay. And on the dividend side?

That dividend question is more difficult for me to answer. I exactly know what you refer to, and I think that there's been a lot of companies that have already been really directly impacted by the COVID-19. And we've seen a lot of the -- I saw one summary that was 9-page long around dividend cancellation. So I absolutely understand the question. But it's difficult for me to answer because it's only when the AGM has been summoned again when the Board will make that proposal. So this remains on -- something that will be confirmed once the new AGM summon is sent out.

I mean I also understand that like it's mostly like, obviously, not just a board decision, but also a board suggestion. But I would have thought that probably you as the CFO, that you're still going to have an important role in terms of like what is your advice. And so I just wanted to check, if like -- and is there any indication you could give us on this front on whether you're actually proactively suggesting to keep a very conservative proactive to start something, or?

I think I can only confirm that, I mean obviously, this is a topic that we are working on for obvious reasons. But I think that's about as much as I can say today.

Our next question comes from the line of Ola Soedermark.

If I can come back to ferrochrome topic. Given that not in a benchmark price is set for the second quarter and what's happening in the South Africa and ferrochrome industry, what are you seeing there? What should we expect? And what are your expectations? And how does it work without any benchmark price or your spot prices, or?

Yes. Well, I think the sort of -- what I find strange, but what's really the fact is that we haven't really seen, or at least yesterday when I checked, we haven't really seen any movement in the sort of Chinese or Shanghai price for ferrochrome. So this is the fact that the market there has not reacted to the fact that there is really a big supply disturbance given all of the kind of COVID-19 lockdowns and really production shutdowns that we know for a fact are there as well. Obviously, what sort of remains unknown is really what -- are there some inventories out there? It seems there are some, for sure, based on at least my information. And then to what price would those inventories be sold-out potentially. And then obviously, also sort of how quickly China is turning back into normal production. So even though I think there are, from a pricing perspective, some good indications that could sort of drive the price upwards, there are also unknowns. And I guess that's also why we don't see sort of the -- yet the reaction really in the markets on the price. So I think it's always -- my sort of economic background tells me that the market is always right. So we don't really see that movement in the price in the market, yes. But there are, for sure, some sort of sale signs that could indicate a better price level. But that remains to be seen.

And how, look, does it work for you now you're entering the second quarter? Are you charging first quarter prices, or?

Yes. So how it works for us, obviously, is that in -- yes, we have some contract structures obviously where the benchmark price is important. And as you know, we are not really sort of mixed up in setting that. So to some extent, we have to wait and see what that information is. And then obviously, there will be something done on spot prices, et cetera. So there could be kind of a number of options depending on then the specific customer and the relationship there.

Okay. And when it comes to your restructuring or your overview of long products, you didn't talk about it at the CMD and I know that is ongoing. What happens there now that it is just a challenge, it's running around these challenging markets?

Yes. No, I think that's a very, very fair question. And I think, first, as a starting point of sort of a reminder that we talked about a strategic review that could end up with a lot of different end results. And we talked about the time schedule for -- during 2020. And obviously, now a lot of the work that one would typically do under such circumstances is more difficult because we can't travel, we can't meet people, we can't look at the sides. We can't -- there's a lot of things that are, at the moment, more tricky. And of that sense, we have to take that into account in not being too bold on the time schedule. But at this point, I don't see any reason to sort of change the year-end schedule that we have given from the start. But we may have to come back to that once we really see how long this situation continues.

Our next question comes from the line of Veikko Silvasti.

It's Veikko Silvasti from Nordea Markets. My first question would be regarding the European market and your possible increase in the market share. Earlier in the week, we saw some price increases in the European market because of shutdown of Italian mills. And now we can most likely expect the Spanish mills also will be shut down. So do you see scope for further price hikes in Q2? And what's your kind of ability to take some market share in Europe at the moment?

Well, our ability to take market share, I would say, at the moment, our operations are running normally, so sort of compared with others who are more unfortunate. And I really want to say that this is an unfortunate situation, of course, that we have countries that are so badly affected. And that's just a very tough situation for sure. But in the end, we don't know for how long period. So just sort of with general economic theory, I would say, if there's really disturbances in supply and that there is less supply than demand, that could, of course, help on the pricing side. So definitely, that is sort of a positive background indicator. But again, we face the unknowns. We don't know for how long, and if these are prolonged shutdowns or if they are very temporary. And we also don't know, really, the demand situation. As I said before, even though we have sort of a solid order intake situation, obviously this could change very rapidly. And this COVID situation is just putting a lot of unknowns there. So I -- that was a very cautious CFO answer. I have to admit that, Veikko. But I really think there is -- there are some positive signs, but let's not -- let's just take that for given yet because there are too many things that we simply don't have information about.

Yes. That's true. And then maybe second question regarding the net working capital release that you mentioned earlier. Is the target of about EUR 100 million release in net working capital still intact? Or are you aiming for more?

It impacts for the full year at this point in time. But as I said, we have put a lot of focus on the cash preservation at this point. And following that, we are obviously looking into whether it would be possible even to reach sort of higher levels in some areas. So we are working on that. But I think sort of, at the moment, the full year EUR 100 million target is kind of the official one. Then I still want to add that you know we have seasonality in working capital. Like typically Q1, we are building up working capital receivables, et cetera, when sort of the volume seasonality typically is ticking upwards during Q1. And obviously, now given the situation, we need to be extremely, extremely conservative also when it comes to inventories sort of through the full year. And I don't say that we would not normally be careful, but now we even need to be conservative.

Thank you. We have no further question at this time. Please continue, ma'am.

Thank you, operator. And if there are no further questions at this point of time, I think we are then ready to conclude the call. And once again, apologies for the slow start, but there seems to be quite a bit of activity on lines going on during these days. A recording or replay of this call will be available on our website later today, latest by tomorrow morning. And I would also like to remind everybody that our silent period will start on Monday, next Monday, April 6 and continue as usual until the quarterly results are published, which will take place on the 6th of May. So until then, thank you again. Have a great rest of the day and stay safe. Goodbye.

That does conclude your conference for today. Thank you for participating. You may now all disconnect.