Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Outokumpu Pre-silent Conference Call Q4 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Linda Hakkila. Please go ahead.

Thank you, operator. Hello all, and welcome to follow Outokumpu's Q4 2021 pre-silent period conference call. My name is Linda Hakkila and I'm the Head of Investor Relations here at Outokumpu. With me today, we have our CFO, Pia Aaltonen-Forsell, and she will be the main speaker in today's call. We will today first start with a short update from our side, and then we are happy to take your questions. But now without any further comments, I would like to hand over to Pia.

Linda, thank you very much and happy new year to all of you on the line. I do hope you are all keeping safe and well. So let's have a few sort of over -- a bit of an overlook on the market and a bit also the main drivers for profitability and cash flow and then sort of clearly -- fairly quickly go over to Q&A. But I'll start with a few comments on the European market. And I mean, obviously, we are still here leading the positive sentiment the COVID rebound in the year '21 has been solid and strong. And also when we look into the year of '22, we hear a lot of still positive macro news despite Omicron and despite geopolitical tension, the overarching view still seems to be sort of -- so more on the positive side. And if we look into the development on Outokumpu side, of course, also, as earlier commented, our order book has really remained strong, and we are solidly booked for the first half in Europe also of next year and already booking some even into the third quarter. So the market sentiment remains on a positive note. Obviously, the sale definitely also goes for Americas. Maybe I'd like to spend a few more sort of detailed comments just on some of the key segments here. I mean I'll start with the distributors and more so from the really perspective of where we stand also in terms of stock levels. It does seem that stock levels have increased somewhat after the summer period, but we are still on very moderate levels in Europe. And in Americas, also looking here at some inventory increase through the autumn, but still, for example, based on our customer survey, 60% of customers still indicate that inventory levels are low. So this is sort of the current market sentiment there. When we look into some other segments, let's talk a little bit about automotive. Obviously, this has also been a strong year of rebound. Nevertheless, also a year with a lot of news of semiconductor shortages and various supply chain issues, I would say, not per se or in detail impacting Outokumpu so much, but still worth mentioning that also for the year '22, I mean, this is still a segment that looks to be, along with any other segments still on a positive and good, good demand situation. Appliance is also still asking for more volume looking really at a strong market also there. And then maybe my final comment more from a European perspective than as well on the heavy industry side, really see more activity also from bigger projects. And this goes along somewhat with then the comment relating to our pro grades and the pro segment, the value-added segment. There also, we do see increased activity, however, this has been -- this is along the lines of what we talked about earlier. I mean, there is a pickup. We started to see this already during the summer. So I mean, more inquiries, more orders. But in practical terms, we are only gradually seeing this in terms of higher volumes in pro. So this is still something that is kind of more ahead of us. And if we talk about, for example, scrubbers, that is definitely something where the timeline is still more ahead of us. Is it second half of next year? Or is it even further on than that? That I don't really -- I don't think we really sort of fully have that visibility yet, but clearly more ahead of us still to this regard. Overall, I mean, if we then turn the look just a little bit more into also the here and now when it comes to the realized prices, of course, based on what we have seen, based on the received orders. We have still seen -- continue to see an increase, also delivery levels, as we have guided for the fourth quarter here. They are on a good level, but on a similar level as in the third quarter, along with what we have said before. Maybe I'll round up with a few comments from the cost side. First of all, electricity costs certainly have made the headlines, along with other energy-related costs, whether it's natural gas or, for example, fuels in our case. And certainly, here also, I would reiterate that really in terms of the P&L impact or the impact in the fourth quarter compared with the third quarter. We do see an increase. We have a hedging policy that is protecting us particularly in the short term. So the increase, as we have communicated earlier, is sort of order of magnitude around EUR 10 million increase quarter-on-quarter from electricity. I would say that looking at natural gas, looking at out of fuels, et cetera, there certainly will be an increase from those as well. Is it up to EUR 10 million? Maybe that's sort of a good round number for that as well, but I would say these are sort of the limits where we are moving when it comes to the fourth quarter. Now for those of you who are watching the prices and -- the sort of future prices, forward prices on a daily basis. You know there's certainly been a lot of movement. So I mean, there really was -- really big peak -- really massive peak, then again, maybe some sort of calming down. So I think the direction, especially for the first quarter, is still clearly upwards. And maybe this is something that we will then come back to more when we give out Q4 figures. But as the prices look like right now, I would expect that this further continues into the first quarter with cost increase. Ferrosilicon, maybe one more sort of worth mentioning really with also increased cost effects in the fourth quarter. And then finally, all-time favorites, maybe not so much making the headlines this year, but the timing of hedging impact. Again, here, I would say probably a small positive figure in the fourth quarter. But then if I look at sort of a bridge impact versus the third quarter, it could actually sort of sequentially from Q3 to Q4 being just a little bit negative. But these are small figures overall compared with the current profitability level. And finally, a word then from the cash flow perspective. This has been a different year in many regards. One of them also being that what we communicated in front of Q4 in terms of working capital development was more of a stable development than maybe the typical seasonal pattern that we've seen before with somewhat of a dip. And I think that has two reasons: One of them, obviously, metal prices still being on a higher level, and this clearly impacts the valuations per tonne prices being higher. So we also have the receivables et cetera, on a higher level and also outlook into Q1, which clearly has also had a focus a lot on being able then to serve in a proper way. So we haven't had any specific, let's say, inventory reduction targets rather sort of optimization targets in terms of keeping a good service level to customers. So there, I can just reiterate that more sort of being stable on the working capital this year in the fourth quarter is what we are expecting right now. But with that said, I think that would round up my overall comment here, the -- let's say, further details, we can take on questions. So operator, I would be ready for the Q&A now, please.

[Operator Instructions] Your first question today comes from the line of Ioannis Masvoulas from Morgan Stanley.

Two questions from my side. The first one on energy. You provided some useful color for Q4 around the energy and natural gas costs. But can you perhaps give us some indication on how we should be thinking about Q1? There is a lot of volatility, but there is also the hedge book in play. So some indication on how you're thinking about the development here would be very useful. And the second question relates more to the stainless side of things. If we are to look at pricing in Asia. We've seen some weakness over the past month or two. And same goes with spot ferrochrome prices in China. Is that impacting the purchasing behavior of some of your customers, either in Europe or the U.S.? Because you mentioned that inventories are at more comfortable levels now. So has there been any potential destocking trend that you're seeing into Q1?

And first, on the electricity, I would say, yes, indeed. I mean this is really super, super sort of choppy and volatile from day to day even. But based on what I know right now, I think my best estimate is that the impact -- the negative impact quarter-on-quarter could maybe be the double in Q1 versus Q4 as what it was in Q4 versus Q3. And I'll give, let's say, one more thing to consider, which is, of course, also the inventory cycle that we had. So I also need to take into account when I'm saying is that there is a hedging that is, of course, important. But there's also the fact that we do use most of the energy here and the electricity sort of early on in the process. So once something is then inventory work in progress already, we probably already have a lot of the electricity and energy costs there in the inventory. And then it takes some cycle before that's out of inventory and then actually the margin is realized. So with that said as well, I mean, some of these impacts are pushed to the next quarter. So that would be, let's say, my take on it today. But I do have to say, I mean, this varies day by day a lot so. Maybe that's on the energy side. And then I think, indeed, I mean, looking at sort of development in China, certainly indicates that there has certainly been some level of change. How is that then impacting into Europe and Americas? I really cannot claim that I would see any direct impact right now nor from the fact that as you also said, I mean, we do see somewhat more normalized in inventory levels at the moment. So -- but we are still not quite there where we were before all of this hassle and these situations with COVID started. So there's still some way to go there. Certainly also, just looking at external statistics on prices, et cetera, I think we can see that this rate of change that was really quite big and the more sort of rapid increases early year in the year now seems to be more sort of moderate, but still on a positive trend from our perspective. So something to watch for. I think that's related to my earlier comment as well that we are seeing a very solid order book in Europe into the first half of next year with booking into the second half, but of course, still sort of early days to really make conclusions about that. And then final comment from my side with the order book, the sort of sequence of things or the pace of things is a bit different in the U.S. So there, we are clearly typically booking the one quarter ahead where we also are following there that normal pattern as we speak.

Your next question comes from the line of Krishan Agarwal from Citigroup.

My first question is on Ferrochrome. I mean, over the last 3, 4 quarters, we've seen some sort of mix change in the ferrochrome where the spot delivery that the lower price was sort of impacting the realization. So how should we think about the ferrochrome price realization and the third-party deliveries for the fourth quarter, are they sort of normalizing and hence, quarter-on-quarter, solid increase in ferrochrome profitability?

Yes. I think I was a little bit careful in some of my earlier statements, particularly when asked around the sensitivity of how does price changes impact ferrochrome profitability. And I said maybe the increase is a little bit lower than what it has been historically. There has been a number of reasons for that -- one of them was more on the cost side, really that the electricity hikes are also impacting ferrochrome, which we need to remember. That's a cost element that's really quite significant there. But really on the market side as well that we've had some pricing that has led to a situation that you cannot just look at the benchmark price. So I would say I would earn a little bit on the cautious side there to say it's -- we still need to count on some part of the pricing being more sort of impacted by the spot. But this is -- by no means, this is only a share or a fraction. This is, by no mean, sort of the majority or the big part of the ferrochrome pricing. So a little bit of cautiousness may be there. I don't really want to send the too strong message of that, but rather just repeat what I've said before.

Okay. Second question is more on the U.S. side of the business where your European competitors are announcing indicative price increase, like 4 or 5 price increases, and then you have sort of volume opportunity in U.S. from the withdrawal of one of their local competitor. So how should we think about the U.S. business as in you are competing on the pricing to gain further market share? Or your price increases has been sort of competitive to your peers?

Yes, yes. So I mean, looking at, for example, capacity utilization in the U.S., I mean, clearly, we have been operating at really high rates. I guess, this is sort of throughout the market. And even when I was looking at some import statistics. Now I haven't looked -- I actually didn't have the latest numbers here available. But when I looked just around Christmas, I mean, the imports have also been a little bit up because there's really been a lot of demand. And simply, I would assume based on the imports being a bit up that there's really not been enough capacity at the moment to fulfill all the demand domestically. So I think clearly, we have done our best to serve customers and to keep on delivering. I really can't kind of comment the pricing more than that.

Okay. Okay. Understood. And the final question is, I mean, obviously, the price realization across U.S. and Europe are going to be strong in the quarter, but the nickel pricing and the scrap pricing are pointing towards stronger input cost increase, not to mention the electricity cost increase. So overall, I mean, should we increase the pricing offsetting in the cost increase? Or you are expecting a net margin increase into the quarter on a stainless side?

Yes, yes. Well, I would say, based on our guidance, of course, we are guiding for higher. And the components, while deliveries are really stable quarter-on-quarter, it's really the balance then of the net of the cost increases that certainly are there. But at the same time also, we do see realized prices increase now based on the order intake that we had earlier at the point in time when prices were really increasing. So I would say our guidance gives a good hint there.

Okay. That's clear. A final, a quick clarification. When you said about stable working capital in the Q4, do you mean a similar sort of a working capital build quarter-on-quarter or no build at all?

Yes, yes. I would say, target more to sort of keep on the same level, not to have a build. Certainly, there could be -- I'm not saying this is not sort of a round 0, absolutely stable. But usually, we've had somewhat of a decrease in the fourth quarter. And I don't foresee that happening right now with sort of the current market environment that we have.

Your next question comes from the line of Tristan Gresser from BNP Paribas.

The first one, we've seen a bit of industry press about a potential labor dispute in Finland. Has it impacted at all your operations? Or moving forward, should we expect some kind of disruption? If you can comment a bit on that, that would be great.

Yes. Thanks. A really, really relevant question, of course, during these days. I mean, if I look the Finish news, it seems that this is sort of all over, all over the news line right now. So I mean, we haven't had a disruption until now. This hasn't -- until now, there's not been an impact on our operations in such a way that we would be talking more about it. But of course, there's been now more threats in the air. I would say yesterday, there was some good news about sort of the tentative solution that could sort of pave the way here, but there are still some decision-makers out there sort of pondering, whether they are to accept the proposal, et cetera. So we are still living now in the period where we are expecting things to clarify, but they are not sort of fully clarified yet. And certain importantly things are happening more towards the end of the week. And depending then on the resolution from those meetings, we would, of course, be providing more information if that's needed. But at least there was, let's say, some level of resolution proposal that was put on the table yesterday that now seems to be then further debated by the parties.

Okay. And my second question on contracts. We discussed the kind of Q3 results, yes, we are in early January, our most of the contracts, I understand a lot of them are resetting in January being concluded and past those negotiations being sort of very successful. And when we take into account some energy inflation, should we still look at the net impact in a positive manner?

Yes. I do -- I would say, first of all, yes, they have been concluded. The sort of whole dynamic was for -- more towards sort of earlier conclusion in '21, maybe compared with some earlier years. We have seen the new price levels reflected in the new annual contracts, so meaning that we have received increases and also the volumes that we were looking for. So clearly, we have secured here the portion that we want it, which is a little bit higher than it was the year before. So overall, I would say we are happy. And on the balance of things, still provided also the cost inflation that we can see. Currently, I would say that we have been managing this in a way that is satisfactory.

Understood. And my last question, please, on the U.S. market, you touched on the fact that imports are rising, demand is really strong and operating at high capacity utilization. We see some news that [ ADI ] could be filing for an exemption to get back the Indonesian slab that were previously blocked. Is that something you would oppose? Or put a request for this not to happen? Or do you think there is space in the U.S. market to have a bit more supply?

Actually, on that question, I need to say that I haven't yet formed a view whether we would be opposing that individual exemption request. I do want to say earlier that there has been, I would say, a good mechanism for keeping or somehow sort of keeping the checks and balances in the markets. And also that extension was not received before. I would say, on good reasons. So I really cannot provide sort of a full answer to your current question, but let's see.

Your next question comes from the line of Bastian Synagowitz from Deutsche Bank.

Pia, you already gave a lot of good color on the order book, so I can scrap my question here, but I still want to follow up briefly. So just looking at all of the positivity, which you're reflecting in your comments, I guess it's -- I think it's fair to assume that the usual volume seasonality, which we see in the first quarter, i.e., volumes up probably in Americas and also Europe, that's something we can probably also expect this year, right? So is that a fair statement? Or?

Well, I would say the market, overall, sort of sentiment is positive and that has been the typical seasonal pattern. So at least it's difficult to see right now what would be talking again that if I kind of turn it a little bit. But of course, we will only provide a guidance then when we give our Q4 report.

Yes. Got it. Okay. Okay. Understood. And then just looking at the very significant order book links and then the price dynamic, which we basically had pretty much every month. I suppose we also -- from the spot side, we also see a further increase in a realized margins, i.e. it's not just the annual contract, where you're going to see the big reset in pricing, probably quite significantly above what costs are doing. But then I guess you still see obviously a further price and margin improvement on the spot business as well. Is that also a fair assumption? Or?

Yes. Well, I think you are capturing a lot of the elements here and the dynamic sort of environment we've been in. So obviously, with the long order book, it's just -- the fact of the matter that is that whatever orders we receive now and in the realized order intake, we have still seen the increased price levels. Then, of course, it means that we are sort of pushing that to deliveries and realized prices in the future. So to that extent, I think it's true. And obviously, the spot business, yes, indeed, we do have the service centers. But overall, with the order book in place for such a long period of time, obviously, it means that the share of spot business there is lower. So the impact will come a lot from the orders that have been received.

Okay. Okay. And then lastly, on capital returns. I remember when you and Heikki last spoke on the call, you sort of managed expectations more towards an update on shareholder returns may in the second quarter. Is that still your latest thinking? Or have you sharpened your idea around how you want to do it when you want to communicate?

Yes. Thanks, Bastian. It's an excellent question, and I think I need to return to this in our next call then sort of about the more sort of steps to come there.

Okay. Okay. And so and very last one, EUR 180 million CapEx guidance, I think you will remain firm about that. So I guess, again, no change on that number also for 2022 as it stands today?

You are right.

[Operator Instructions] Your next question comes from the line of Luke Nelson from JPMorgan.

Just to follow up on Bastian's question before, just to maybe hit it another angle on pricing. Can you just -- a bit unclear around heading into Q1 and maybe Q2 just with the annual contracts resetting on the 1st of Jan, you talked to energy cost Q1 versus Q4 probably being double digit again. So maybe if we take a step forward into sort of Q2 then can you sort of start to paint the picture on how the margins might proceed given AST sounds like it can continue to grow in H1 and maybe even into the summer. So how should we be thinking about the margins then? Is it possible to preserve that margin as we step into Q2 and some are just given with the annual contract resets seems like it's a bit of solid level.

And let me just -- let me just comment on some of the elements because I think that's what I would be happy to do at this point in time. And yes, indeed, as discussed earlier, with the long order book, particularly in Europe, it, of course, implies mathematically that we need to look at order solubility and the price level there and then consider that, that means that, that kind of translates into realized prices in then the [indiscernible] half of next year -- or this year, of course. I mean, we are already in Jan, here right now. So with that said, that sort of gives a certain curve of expectation, I would say, on the positive side. And then on the cost side, it is actually a little bit more tricky to even foresee even saying something about Q1, I need to be careful and say it's sort of on my best information right now. And what do I base it on? So first of all, I base it on the fact that we do have in terms of electricity and also sort of energy more broadly. We do have a hedging policy, as we have discussed before. So it means that we are packing the majority of the following quarters on a basis of being sort of sure of what the cost level will be, but we also always have the spot level. And in the other element that I need to take into account there is that how the mechanism also works is that we are sort of gradually increasing the hedging levels. So it does mean that we have also concluded some contracts into, for example, '22, also at the somewhat higher levels that we experienced late in 2021. So with that said, I have some sort of, I would say, educated view about what could come, but we still have this certain traction that also moves with the spot and the spot has really been moving so much almost on a daily basis. I mean I get a report every day of how much the estimate for Q1 would change with sort of the current forward prices. And this is just a figure that is still moving a lot. So that's why I think that it seems that there is pressure into the pricing of, for example, electricity into Q1 and also Q2. But there really a lot still needs to happen before that's being completed and really realized. So that's why I would be more hesitant to answer that question and really sort of give a figure for the longer term there. So just sort of -- I was just looking into the overall figure, the spend if we calculate all electricity and what we calculate as energy together, I mean everything with natural gas, LNG, what we have in various fuels and the whole sort of bucket of everything there. I would say the overall level is order of magnitude like EUR 350 million for the year 2021. And I think that just sort of gives you a little bit of a grip of then the kind of overall situation, what certain changes could mean and how much it could change, et cetera. But I guess you following the market, I mean, you hopefully can sort of subscribe to that it's difficult to really give a sort of sound solid answer.

Yes. No, that -- that's great color. Maybe more of a straightforward one just on maintenance in Q4. I think Q3 was around EUR 20 million roughly, and the guidance was for 0 or very low levels in Q4. Can you maybe just confirm that is still the case; and then anything into 2022, Q1, Q2, specifically to sort of if you have an indication of the maintenance profile?

Yes, indeed. So what I can say, first of all, about the maintenance profile, I don't think Q1 is typically a very low maintenance quarter. So there is not sort of any significant planned maintenance there. We need to come back with the sort of bigger schedule of maintenance for the rest of '22 than in our February call. Is there something that could happen already sort of in June or are we pushing a lot into Q3 next year as well. I think there's still some sort of fine-tuning ongoing to that respect. So we'll need to come back, but not Q1. And then when it comes to the cost level, the EUR 20 million or the sort of EUR 10 million, those are the changes that we usually like to talk about if we have something more significant going on in a quarter. And there wasn't anything like really no big stoppages in, for example, ferrochrome or so in the fourth quarter. We did have some planned maintenance in Calvert. But then overall, the amounts were not that significant. So we did not say anything specific. So I really don't have any sort of number to add here to say there would be an addition also.

[Operator Instructions] There are currently no further questions. I will hand the call back for any closing remarks.

Thank you, operator. Thanks all on the line. Again, thanks for the active participation. And we will be back with more information and details then in our Q4 report early February. But best that I hand over to Linda for the concluding remarks.

Thank you, Pia, and thank you all for joining our call today. Before we close the call, I would like to remind you that we will start our silent period on January 9, and we'll continue until we publish our full year results on February 8. But now thank you once again, and happy new year.

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