Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Outokumpu Pre-Silent Conference Call Third Quarter 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 2nd of October 2020. I would now like to hand the conference over to your first speaker today, Linda Hakkila. Thank you. Please go ahead.

Hello, all, and welcome to Outokumpu's Q3 pre-silent call. My name is Linda Hakkila, and I'm the Investor Relations Manager here at Outokumpu. With me today is our CFO, Pia Aaltonen-Forsell. First, I'd like to say that we have received quite a lot of questions. But most of those were about our strategy, and that is something that we will get back to when we publish the new strategy on the 5th of November. Today, we will start with Pia's comments. And after that, we are happy to take your questions. But now please, Pia, the stage is yours.

Thank you, Linda, and good afternoon, good morning, dear participants. And I think I will just jump right into a few comments, and then we'll open up for the Q&A. So obviously, I would like to start with a few comments on the market. And I'm sure you all recall our guidance for this quarter where, first of all, in volume terms, we talked about 10% decline compared with the second quarter based on the seasonality but also the pandemic situation. And then on top of that, we described the European situation with import pressure and pressure on prices. And I think today, on the 2nd of October, obviously, having a lead through the third quarter by now, we are still having the same guidance vis-à-vis the quarter but obviously, would like to comment also a little bit about sort of how we see things at this point in time and what's happening in the market. I think we can maybe, on a question basis, come back to some of the details around various segments. But it may be good to still open this up by saying that the sort of speed of recovery from the pandemic lows in the summertime has certainly been faster in certain segments whereas others seem to be more slow in the response and particularly segments that are, I would say, more tied to typical investment cycles, there still seems to be more hesitation in the customer base. Other segments then closer to maybe customers, if we talk about the clients or automotive, are on a quicker rebound. All in all, at this point in time, we see typical lead times in Europe of 6 to 8 weeks and in Americas of 5 to 7 weeks, which are quite normal. So from that perspective, there has been an improvement from the summer period. There's also been a lot of news actually on trade, various trade measures only in the last few days or so. I would maybe, as the most important piece of news, highlight that the European Union is now looking into anti-dumping investigation when it comes to cold-rolled imports from Indonesia and India, and that seems like a very relevant investigation to have been started right now. We also have the news of the second step or the so-called anti-subsidy investigation and potential tariffs into hot-rolled imports now having been stopped or withdrawn. So a little bit of news there certainly coming out only this week. I think when we look into the raw material base and the cost base, overall nickel movements during the quarter have been there but then ending up at the 14,500. So I would say not -- certainly, not as dramatic as in Q3 of last year but still some upward movement early in the quarter and then kind of a little bit downwards during September. Maybe no more comments on that at this point. When it comes to other measures, vis-à-vis cost compression, I think we have kept up the pace. Just making sure that we are as diligent as we can when it comes to short-term cost compression and spend cuts wherever that is reasonable. You may recall that, in the second quarter, we had measures in place of around EUR 20 million, and we have continued with the same pace for sure to make sure that we are as diligent as we can there. On the working capital and on the cash flow, third quarter is seasonally the quarter, where if you look at the history of Outokumpu as well, it has been a good quarter vis-à-vis bringing home cash from the working capital. And when we look at the full year target that we have of at least EUR 100 million reduction of working capital, then we are very well on track. And I expect the third quarter also here to contribute in a good and meaningful way. On the CapEx, the full year budget or estimate there is still at EUR 180 million, as we have communicated before. So I think with that said, I tried to cover some of the main points and to make sure that I answer the questions that are relevant to the audience, I would actually propose that we continue with the Q&A session. So operator, we would be ready for questions now, please.

[Operator Instructions] Your first question comes from the line of Anssi Kiviniemi from SEB.

It's Anssi from SEB. A couple of them from my side. First of all, you highlighted that there has been a rebound in automotive and perhaps in appliances, but could you give us a little bit more flavor on what is happening on the other sectors in Europe and in U.S.? And also, as there has been a rebound in some segments, have you seen any signs of restocking in any of the markets?

Very good. Thank you, Anssi, and good afternoon. So yes, indeed, I mean, when we look at appliances, I can only comment that there are some good governmental actions in, for example, Germany when it comes to VAT reduction, but more generally, maybe this is a question of sort of people spending time at home and then realizing that there is really a need for new appliances in the household. This could potentially be an explanation, of course. Of course, this rebound kind of back to the level of pre the COVID crisis is visible at the moment. Then when we talk about automotive, I need to be a little bit more careful because, for those of you who follow this closely, you obviously know that automotive was not even kind of towards end of 2019 on any kind of strong sentiment. So I think what I just want to communicate clearly is that we see automotive volumes coming more to, so to say, levels that we had pre the COVID, but that doesn't mean that they are on high levels compared with, so to say, historical highs. But somewhat of a normalization there. Obviously, we have seen more premium segments bounce back first, and now we start to see kind of more positive moments as well than in the more standards there. So I certainly don't want to kind of make too big of a story of that. There is still way to go to the really kind of historical normals, but at least rebound is visible. Then I think I would focus on a few other segments in Europe. I think I already shortly commented that if we then look at more, what I would call, so to say, heavy industrial uses or whether it's maybe oil and gas related, et cetera, so sectors where our products would typically are maybe used for certain more sort of CapEx-type investments and maybe then the good example as well that relates to oil and gas industry is the scrubbers. I think these sectors are still -- I guess there are both very strong linkages to what makes sense as what oil price is and then obviously, a cautionary approach by companies into CapEx spend. So here in these sectors, we still have a slower market. And that has some impact on our mix as well. Obviously, these are typically products from the, so to say, better end of the margin range. And then maybe a final comment in Europe on distribution. Here, the inventory levels have been average or even slightly above for a period of time. So I cannot really talk about restocking right now. I think what we really see with distributors is that this segment is, in Europe, very much impacted by imports as well. And I think it's fair to say a few words about imports because now we have the new safeguard system with the quarterly quota. And it literally means that the first month of the quarter is under a lot of pressure from imports. I mean, in July, what we saw was the -- about 45% import share, which is enormously high. I have [ then ] that these figures clearly below 30% from August and would assume that then September is lower again, but it seems that we will have more of a sort of quarterly tempo now in the import pressure based on the new quarterly quota system. And particularly with distribution, of course, also with other segments, but particularly with distribution, we are competing here as well with the import volumes. So I would say that's sort of the European picture. So that's why I said also early on that the seasonality certainly has been there as it has been in historical years as well. And we certainly still see the pandemic impact with different emphasis in different segments, but it's still there. And that also causes some lack of visibility going forward if we think about what will happen. For example, next year, it's clear that we are not yet out of the woods in full when it comes to the pandemic. There is -- maybe then a few additional comments about Americas. So in Americas, of course, first of all, the seasonal pattern is not the same as in Europe between Q2 and Q3, so I wouldn't highlight that as any sort of important factor there. Also, distributor inventories have been on a low level for a period of time. And that restocking cycle has maybe been kind of expected. But what we do see right now is that distributors are still clearly giving the message that they are very cautious building up higher inventories. And maybe in Americas, we see a little bit more of this typical -- what used to be maybe the pattern that if nickel price goes up, then kind of on the way up, there is more willingness to stock. But obviously now in September, the nickel price has been more stable or even a little bit down through the end here. So I would say that in the Americas market, we are still very much in a situation with rather low inventory levels at the moment.

Okay. Then perhaps another question or theme is the nickel. So basically, have you been able to push the higher nickel price to your customers as we have seen a big rally in the spot market there? Or have the margins been under pressure in Europe? Also, kind of what has been your exposure to nickel from hedging perspective when we have entered into this peak nickel price?

Yes, indeed. Hey, maybe I can take the hedging question just upfront as it is an easy one to answer. I don't expect any material impact from hedges during the third quarter. So that's maybe just a short answer there. And then I need to give a more longer answer to the question of -- because you both ask that have we been able to put -- transfer the higher nickel prices to customers. And then you also asked is this putting margins under pressure. And I think already starting from our guidance, we have talked about pricing pressure in Europe, obviously, linked to the higher import levels and also more generally, so there has been a pressure on the prices. Now then to your particular question about how we've been able to transfer the higher nickel prices to customers. I think this is now -- this comment focus is only on BA Europe because in the other BAs, obviously, we still have the alloy surcharge type of pricing. And in BA Europe, as we know now, this new typical method of pricing, with the affected prices has been there for quite some period of time. So I think we have at least very good processes in place. We have a very good understanding how to steer this, and we have the mechanism, so to say, to run this. But obviously, always on the run up, it's a lot of hard work to make this happen. But I'm not particularly worried about do we have kind of the tools and the processes to manage this. I think what I'm seeing more generally is exactly what we already brought in our guidance that there is import pressure, and we are obviously still in a pandemic period. So there has been price pressure during the quarter.

Okay. Then the last one from my side on production. Has it gone according to plans in Q3? Have there been any other issues than the previously highlighted Ferrochrome maintenance break?

Yes. Yes. No, the Ferrochrome maintenance one, obviously, that's a really big one. And I think maintenance was carried out during September. It has been going according to plan, and we are actually now in the sort of start-up phase after the investment. And so far, everything runs exactly according to plan. So that looks kind of good and normal at this point in time. And then if we talk about other production steering and production performance during the third quarter, I think there's a number of things that we have been running with a lot of attention and care. So first of all, still being obviously in a pandemic situation. So if we think about our operations, for example, in the U.S., the COVID-19 situation is still -- definitely has been very much a question still during the quarter. But we have been able to operate normally despite the pandemic still being definitely an issue. So no kind of concerns or anything to report from that side. Then furthermore, during the quarter, we have been very diligently evaluating how we do maintenance, where we do maintenance and what is the appropriate level of maintenance at these demand levels. So there's been a lot of focus into that area with also some maintenance being postponed to later quarter, but nothing really so material that I would mention it here. And then apart from that, we have been partially furloughing people as well as having, for example, short-term work and always kind of controlling this and then bringing people back at the right moment, et cetera, a lot of attention and focus there as well. So Anssi, I guess what I want to say is that this has certainly not been kind of your normal quarter, I mean, we are still -- from the volume basis, these are also low volumes. And there are these challenges that it kind of entails because we bring shifts down and then we bring shifts up, so a lot of attention and care. But there have been no so kind of material issues or problems that I would like to describe here or that would have been so important that I should mention them here.

Your next question comes from the line of Seth Rosenfeld, Exane BNP.

If I may, I have 2 questions. First, following up on maintenance expense. Thank you for confirming Ferrochrome outage has proceeded according to plan. If possible, can you confirm any expectation for unique maintenance outage costs in Q4? Should we expect that EUR 15 million cost in Q3 to be stripped out going into Q4 or replaced with something different? On a go-forward basis, you commented on some maintenance being deferred due to the COVID conditions. What scale has been deferred? Just so we understand what cost overhang might be going forward. I'll start there, please.

Yes, exactly. Very good question. So first of all, I can only confirm that the -- it is unique to have this kind of EUR 15 million cost and profit impact from the maintenance at one go in one furnace, so that is the reason also that we have described it. So we don't have any single case that would be as significant in Q4. That is already evident right now. And just to sort of give you some comparison because we have not given the Q3 figures yet, but during Q2, for example, we have some of the cases on some of the lines, for example, in Avesta and Tornio, and there was maybe order of magnitude some, let me call it, EUR 10 million to EUR 12 million that was deferred as well. So I think this is the order of magnitude that can be handled and where it can make sense if the volumes are lower in some particular quarter or in some particular period to do. And then obviously, vis-a-vis if there is any single really big case in Q4, then we will give it in our guidance as well. But my expectation is more that we'll go more into a pattern where there's a number of maintenance cases happening across all sites. So the cumulative definitely can still be closer to kind of normal levels in Q4, but we will get back to that. I don't want to go too deep into Q4 because there are still some topics that are in the making there.

Just to clarify on your comment. Did you say that for Tornio in Q2, you deferred EUR 10 million to EUR 12 million?

It was predominantly Tornio and Avesta. And then there have been some smaller sites as well but just to give the view.

Okay. So that's the scale of catch-up in the future. And then a separate question. On the U.S. market, I think we've seen some of the benchmark base prices decline in the last 2 months. Meanwhile, the largest player in the U.S. has confirmed that their base price realizations have been stable. Can you give us some sense on your own price realizations and whether or not you've felt that base price pressure in your sales?

Yes. Well, obviously, right now, it's also an important point, just initiating discussions also about annual contracts, 2021, et cetera. So there's a lot of noise, I would say, around this out there. But can I comment this in a way that, first of all, for Europe, we have really described the price pressure, but I have no such description to give for Americas. I really want to say the situation is kind of more neutral there. And there's also very normal lead times at this point. So I think that there are not really kind of clear ingredients for price pressure at the moment. I do recognize kind of the data that you talk about. But I really shouldn't, so to say, make a big deal out of that.

Your next question comes from the line of Luke Nelson from JPMorgan.

Two questions. Firstly, just on Ferrochrome. In Q2, you sold a high proportion on spot versus contract. Can you give any indication around how that is trending in Q3? And my second question is just on mix, clearly, a negative effect in Q2 -- in the Q2 waterfall. Can you just give a sense on how we should quantify the improvement quarter-on-quarter, Q3 versus Q2 given obviously greater market share with orders and higher end users but also your comments around oil and gas and that market being a bit more slow?

Yes, exactly. Yes. So if I just start with the Ferrochrome. I mean the reliance on the spot market in Q2 was driven, to a large extent, by the fact that we had lower internal volumes but also by the fact that we had a very quick drop in the internal volumes following the COVID situation. So I mean, April was -- April and kind of Q2, we had a big drop compared with the original plans because, as you have seen, obviously, even when compared with Q1, we dropped about 10% in volume. So there was an element of lower internal volumes, and then a need, of course, to place volumes because some of this was unplanned. Now I think this is only then to indicate that the visibility, though still not -- nowhere near kind of normal time periods, as I alluded to earlier, but it's still clear that there was a little bit more, so to say, ability to have the view of the coming months as we learn more of the dynamics of how this period works. So I think that has, to a certain extent, helped here. So the kind of element of very rapid change is not there. But I would still assume that under the context of lowish internal volumes, we will need to place some as well on the spot markets. So maybe that was a round answer, but I think the direction is towards still some spot volumes as well in Q3. Then if I speak to really the mix component of the variance bridge and kind of what we see from Q1 to Q2 and then Q2 to Q3, when I spoke to the different segments and the development that we see there, then I think it's fair to say that some of the higher-margin segments are now not rebounding with, so to say, quick speed. And I think that's definitely something that is on the negative side thinking about our mix. That has to be spelled out. So I think without giving you an exact figure, I would say that there was still kind of pressure in some of those better grades from -- even from Q2 into Q3. But obviously, there are also other elements playing in here. So I think giving you a magnitude would kind of be quite cumbersome at this point in time. We obviously don't have all the analytics even completed yet. But I would assume that there is some pressure in the mix also from Q2 to Q3.

Our next question comes from the line of Harri Taittonen from Nordea.

So I think most of the questions have been answered, but maybe one question on the -- kind of based on the statistics. It seems that the hot-rolled restrictions have worked to some extent based on the sort of a lower input. Have you sort of benefited from that at all? What are you seeing directly from where you are?

Yes, yes, yes. Harri, I think that's a fair question. And as seen in the statistics, there have been less import pressure. And I think as there's been both the opportunity for the volume and as well the price is always set as well in the balance between the demand and the supply. So it's a positive impact. Of course, the cold-rolled share is much bigger and has much more weight. But this has been a positive contributor.

Right. Right. Is there anything you can say about the sort of the possible timing of the, say, for example, provisional measures? Now the investigation was started just a few days ago. But based on the experience from 1 year ago, then it took a few months before the provisional.

Indeed, indeed. Yes, yes. So I think, yes, exactly. I mean we almost kind of have the -- we could almost follow this sort of month by month at what happened and how it played out. I mean what we have seen historically is, of course, that it's not only the -- even really imposing the decision about the provision on tariffs that is important. But it's even the momentum is created at the point in time where, for example, some sort of ledgering or, what is the correct term, that all import volumes start to be noted or starts to be documented or measured. And usually, already, that can have some level of impact into the, so to say, balance and the thinking in the market. That's what we have seen historically. But I mean I think formally, there is 8 months' time. So I think that's kind of the only kind of official information that we have at the point in time that this could take up to 8 months.

Your next question comes from the line of Ioannis from Masvoulas (sic) [ Ioannis Masvoulas from Morgan Stanley ].

A few left from my side. The first one, just along the Long Products business. You announced a restructuring plan. Could you give us some indication around restructuring costs and what sort of sustainable savings you're expecting to achieve? Then second question in terms of the quotas. So we have the reset going into October but at the same time, we're seeing the difference in pricing. Europe versus Asia, it's not as big as it was a few months ago. Could we see a situation where the spike in October is not as bad as it was in July? And then very last question on the volume progression, how should we think about Q4 relative to Q3 in Europe and the Americas?

Indeed. I mean very good questions. So first of all, on the Long Products, I try to give you some order of magnitude from our earlier announcements. But I still think this is something that we will come back to because together with the announcement that we concluded the strategic review into a turnaround plan, we did also give the information about the planned reduction of 100 headcount. However, as this was sort of planned and the initial announcement, we did not yet give precise information about what sort of impact this could have savings nor onetime costs. So at the moment, I just need to say that last year, we announced this 350 headcount reduction in Germany. And there, the onetime costs were about EUR 50 million. And typically, what I have seen in payback times sort of through the years of this kind of initiatives is somewhere between 1 and 2 years. So that is kind of how it normally or typically works out. But we will come back to this question for sure. So now that the plan is initiated and the more detailed plans and negotiations are being carried out, we will assess this, and as soon as we have information available, we will publish it. So that was your question on LP. And then obviously, I completely agree with you that it's a new situation right now when the delta between the pricing really is nonexistent between Asia and Europe. And I think that this certainly can have an impact. I mean, still in June and kind of prior to the 1st July to September period, there was still some delta to be actually -- that was probably interesting as well. So I agree that this could take some of the pressure out, but I think it's difficult to quantify it at this point in time. And certainly, also the general market momentum plays in here. So we still know that there is capacity in Asia. That situation has not changed, but probably, there is also an improved demand situation locally. So if the pricing level here is not interesting and buyers here can buy local at the same price, maybe the dynamic will slightly shift. But I think that remains to be seen. We have seen so many, many quick movements that it's -- I think quantifying this is difficult at this point in time. And then your question about the volume progression into Q4. I think the market sentiment that I tried to describe earlier as well, of course, is what we can see right now. And certainly then, as this particular guidance for Q4 or really volumes into Q4, we will probably come back then with our Q3 report.

Your next question comes from the line of Jason Fairclough from Bank of America.

The -- just 2 quick ones from me on -- one on sort of balance sheet and cash flow and then the other one on sort of how we should think about the trends in profitability. So just in terms of cash flow, I mean, Outokumpu was already quite highly levered coming into this crisis. So you've talked about working capital inflow. And I guess the question is, is there a potential that as you ramp the business back up that you actually face some more balance sheet pressure as you need to rebuild working capital. So that's the first question. Second question, just in terms of profitability. There seems to be sort of 2 different, if you like, models of profitability for steel companies showing up. With some of the steel companies, it looks like we're going to see trough profitability in Q2, whereas for some of the other companies, it looks like actually Q3 could even be worse than Q2 through some combination of volumes and pricing pressure. I don't know if there's any color you can share on that.

Yes, that's a good question. I'll start with the balance sheet first. I would maybe just first comment on the working capital reduction sort of journey that Outokumpu has taken and clearly already starting back in 2019, where we were running quite significant programs. For example, Americas contributed a lot into the EUR 200 million reduction in working capital that we could see in 2019. I think actually like 2/3 of that reduction was from Americas. And it's clear that we have seen still a fairly healthy Q1 of this year. And to a large extent, we have been able to maintain those inventory levels that we set as targets at the point in time when we initiated the 2019 program for reduction. So obviously, that's sort of a first step that I feel is pretty well, could I say, anchored or built in now into our system and how we operate. Now we are targeting a further EUR 100 million reduction during this year. And now we are talking about reductions predominantly through Europe because we took such a substantial step in Americas already last year. And then obviously, now when we have been walking through this -- or going through these reductions, the demand situation has been lower. And I think you are absolutely right that then in a higher demand situation, there might be pressure on the whole system in the terms of, okay, probably, we want to increase inventory levels at certain points, et cetera. I can only say that we have now built a granular control of particularly kind of thinking through the flow, how the inventory moves to our system, thinking through the points where we want to carry inventory and the points where we really just want to have a flow-through, thinking about the tonnes that we carry in all of these various points. So I think we have a very well-elaborated system that we have been steering. But we still have improvement opportunities there. So I would say that we have also developed as a company. We have developed our practices. And I think this will help us also on the rebound. And I would also say that the earlier EUR 200 million reduction is pretty well built into the system right now. But for the additional EUR 100 million of this year, do I see more opportunities in 2021? I think I would be careful to promise that at this point. Do I think we are able to keep it at the level where we will take it at the end of the year? That is at least our very clear ambition right now. So we are building all of our plans so that we can keep it then at that level. So that was a long answer, but your question was really good and really relevant. And still, just to give some sort of order of magnitude, I mean it is also that where we had the really big shifts in nickel price in Q3 of last year, we added, in 1 quarter, EUR 70 million to inventory just through the nickel price. But you may remember that those were pretty extreme moments that we saw at that point in time. Then to your -- yes. Then into your other question, which was around the profitability and kind of whether the trough is Q2 or Q3, I think from Outokumpu's part, in a sense, I can be pretty clear because at least when it comes to volumes, we have confirmed that we have a guidance where Q3 is lower than Q2. It is seasonality, but it is also seasonality in combination with the COVID-19. And we have pricing pressure in Europe. So I think it's anyway clear that there are factors that are putting pressure on the profits in the third quarter. Plus we also, by coincidence, have the maintenance in Ferrochrome, where we have been pretty clear that, that is a EUR 15 million hit on EBITDA. However, I want to say that we have still been as diligent as in the second quarter to really find all of the opportunities for cost compression and for cutting all spends that is reasonable to cut in the quarter. So we are fighting back, and we are taking the measures that are appropriate and that are in our hands.

There are no further questions at this time. Please continue.

Thank you, operator.

Okay. Thank you...

So go on, Pia.

Thank you, Linda. Thank you, operator. Thank you all for very good questions. And I certainly wish that you always stay very healthy and stay very safe until we speak next time. And I am very excited then to talk to you again on the 5th of November when we have our release but also then our strategy presentation. So looking forward to that. Thank you very much. And with that said, over to you, Linda.

Yes, before we close the call, I would just like to remind you that we will be stepping into a silent period on next Tuesday, October 6. And then as Pia already commented, we will announce our Q3 results and the new strategy on November 5. So I also want to thank you all for participating in this call, and have a good weekend. Thank you.

That does conclude our conference today. Thank you all for participating. You may all disconnect. Speaker, please stand by.