Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Hello, and welcome to follow Outokumpu's Q1 2022 Results Webcast. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. With me today, we have our CEO, Heikki Malinen; and our CFO, Pia Aaltonen-Forsell. We will first start with our presentations. And after that, we are happy to take questions from the line. And before we start with the presentations, I would like to remind you about disclaimer, as we might be making forward-looking statements. But now without any further comments, I would like to hand over to our CEO, Heikki.

Thank you, Linda. Good afternoon and good morning. Good evening. Also welcome to Outokumpu's Q1 release presentation on my behalf. As the title says, we had an excellent first quarter. The solid performance of the last 6 quarters continued in spite of the increased uncertainty. Overall, a very, very good start to 2022. Financially, we did very well. Our adjusted EBITDA increased to EUR 377 million, which is the highest we've had in any previous quarter. And this happened in spite of the dramatic escalation of the war in The Ukraine; and overall, the great uncertainty in the market. The team at Outokumpu worked very diligently to manage costs and to mitigate the COVID impacts. Remember earlier on, we had said that COVID was still around, and we indeed did have people -- quite a number of people, who were sick. But in spite of that, the operations performed very well. Our capacity utilization remained very high in all of our plants, of course then allowing us to produce the product that was expected by our customers. Realized stainless steel prices continue to strengthen, and energy costs were very competitive at Outokumpu. We saw a lot of energy cost pressure as we came into the quarter, and we'll talk about that today more. But overall, we felt that we did very well on that front. And then finally, safety, which of course is the most important thing at Outokumpu. We did very well on safety as well, and are on track with the targets we have set to further reduce our safety performance. Now going one step forward, looking at this slide. I just want to remind everybody, all of our listeners and watchers, about the strategy road map we have in place. We are still in Phase 1, which is intended to end at this -- in 2022. Remember that our objective for this Phase 1 was very straightforward: Improve margins and delever or derisk the company. And as the end of the first phase is really coming now and approaching us very quickly, I feel that we have actually achieved most of these targets already very well. And then in the not-too-distant future, we will then start communicating about Phase 2, but more on that later, then. Then if we look at the strategy implementation overall in terms of numbers. So we did set a target of EUR 250 million run rate improvement. And at the moment, after Q1, we are at EUR 237 million. So almost there in terms of achieving that target. And of the 3 major sort of [ muscling ] battles we have had costs, capital, commercial piece, we have made good progress. And as I said earlier, we are seeing significant inflation pressure across, I would say, the whole area of all of our factory inputs. But we have been able to, reasonably well, or even in some areas quite well, mitigate that inflation pressure during the first quarter. And on the commercial side, we have continued to improve our sales margins through effective selling and mix management. Then a few words about sustainability. Now this, of course, ESG is an important topic, and we will be communicating more and more about this as our strategy journey goes forward. As said, safety is our #1 sort of thing at Outokumpu. On the upper right-hand side, you can just see the figures. We are calculating our so-called total recordables. Injury frequency rate, where we compare the number of injuries against 1 million working hours. And you can see from this statistic that we did very well, 1.7 overall. The trend is very impressive, I would say, that even at this level, I feel that Outokumpu is approaching a world-class performance. On the lower right-hand side, recycling materials rates. Still hitting that 90% target. Our intention, of course, is to produce recycled stainless steel. And the use of scrap is, of course, very -- an integral part of that journey. We have continued to improve our energy mix. We are gradually trying to find ways to bring in low-carbon energy sources, wind power being one example. We did in fact sign 2 contracts to further increase the use of wind power in the company. And then finally, it is always nice to get external recognition. EcoVadis is one of these well-known international organizations that evaluate many, many different companies globally. I'm very proud that Outokumpu was awarded the Platinum rating for the work we've done in taking our ESG agenda forward. And I really feel good that Outokumpu, for whom sustainability is such a big thing, today, that we really did get this recognition. So very happy about that. Now we have not shown the sort of customer cases before, but we actually have one customer called Harvia which is, I would say, the world leader in the sauna business. So if any of you are into saunas, you probably may have heard of Harvia. But anyway, Harvia is our important customers. And they have been kind enough to prepare for as a video that talks about their plans and how they think about sustainable stainless steel and what role Outokumpu plays for them in their business. So let's take a few minutes, enjoy listening to the executive from Harvia. Thank you. [Presentation]

So thank you, Harvia, for that message. I'm very happy to work with Harvia. And as said, great company, great products. Now then moving on back to our business and our industry, a few words about the market and prices. On the upper right-hand corner, you can see the nickel curve. As we have seen, we've seen the trend in nickel being upward. But what was of course very surprising, was that we saw this dramatic volatility take place in the month of March. I recall from statistics previously read that, in 2006, I think Nickel went to $54,000 per ton. And now we even touched $100,000. So tremendous volatility, which of course is never good for a business when things are so, so volatile. And now we've seen some stability recently. But any case, events like that are of course not positive for the business. On the lower right-hand corner, ferrochrome price development. The market has been very, very tight. Demand has been very strong. And also in some countries, Asia in particular, supply has been constrained. So therefore, we've seen ferrochrome prices move. And at $2.20 roughly per pound, I think we are approaching all-time high prices, not seen probably since about 2006, 2007 before the financial crisis. And then on the lower left-hand side, the price of stainless. And again, this is the spot price, based on external data. You can see the trend, still moving a bit upward as we got into the first quarter. And then you can see the commentary I made in the previous quarter, that the gap between the Chinese price and the European price has continued to widen, and that was also the case in the first quarter. Then a summary on our performance from the delivery standpoint. You recall that the first quarter is always seasonally strong. We had an increase of about 10% in volume terms. And you can see that in the first bar, comparing EUR 326 million EBITDA Q4, so increase from 10% volume, an increase in overall profitability. Then we also of course enjoyed the higher realized prices for stainless steel. And as said, they continue to strengthen in the first quarter. That is the second green bar on the right-hand side. And then we come to metal hedging and the volatility. So obviously, the events of March, in particular, did create a lot of volatility. And we have booked hedging losses, which are then shown in that negative red bar on the second -- on the right-hand side. And then finally, I talked about cost inflation. I do feel that we did -- as a team, we did excellent work in trying to mitigate those pressures through better efficiency. But in spite of that, the cost pressures are here, and that brought the results further down. Ending then at EUR 377 million of adjusted EBITDA. And on the lower left-hand corner, you can see the performance, since the bottom of COVID, summer of 2020, Q3 2020 -- million. We have now had 6 consecutive quarters where our results have improved. So obviously, a performance and a trend which is very helpful for Outokumpu. We had a very tough decade behind us. And through this performance improvement of course the company's financial position overall, our balance sheet, the health of the company are in much, much better shape. And of course that positions us much better as we think about the future years ahead of us. Now the last slide I want to show you before I give the remote to Pia, is a few words about the Russian Ukraine -- Russian war in Ukraine. And it goes without saying that Outokumpu strongly condemns the military actions Russia has taken in Ukraine. And we have therefore decided to stop all of our operations related to Russia as soon as possible. I would underscore that we actually do not have any facilities in Russia. But what we do, do is we have sold some products there and we also buy, procure raw materials. In terms of recycled raw materials, recycled steel or scrap, Outokumpu is currently not procuring any scrap from Russia. And the limited amount of other raw materials we procure from Russia, where we are trying to actively look for alternative sources globally. We do acquire energy gases from Russia indirectly. Russia is an indirect supplier. We are looking also actively for alternative sources. Together with our energy suppliers. We have asked those companies primarily who are providing us with gas, for example, to actively look for alternatives in case there might be disruption. Earlier this week, on Monday, the Board of Fennovoima, and this is the Board of Fennovoima. And Fennovoima being the nuclear power plant project in Northwest Finland. So the Board of Fennovoima made a decision to basically stop or terminate the EPC contract they have had with Rosatom subsidiary, RAOS project. We as a company feel that, that was the right decision. It was an obvious decision, especially now that the war has started, Outokumpu has basically written off the whole value of the project already in Q4 of last year. And therefore, we booked it down to 0. So therefore, the decision from Fennovoima has no impact on us otherwise. And finally, extending our sympathies to the Ukrainians, Ukrainian people. Outokumpu has donated EUR 1 million to support the relief efforts in both Ukraine and the neighboring countries, where many of the refugees are now moving to. So those will be my introductory remarks. And now Pia, I hand it over to you, please.

Thank you, Heikki. And dear ladies and gentlemen, I do hope you are all keeping safe and doing well. And I wanted to start a bit by talking about the health -- as Heikki talked about, the health of our balance sheet, our financial resilience. And let me make a few remarks of that to start my presentations. So we are a company that operates in a cyclical business. So the whole emphasis on this first phase of our strategy during '21 and '22 has been to increase the strength of the balance sheet, and that way, to derisk the company. There have of course been circumstances, now the war in Ukraine, but let's not forget that we also had the COVID crisis. It's maybe a bit still among us, hopefully soon to be something of the history. But to mitigate the risks relating to that, I think the importance of risk management has kind of really surfaced. And I do feel that in Outokumpu, we have a good way of working with that, together as a team. And that has now also helped us in the risk mitigation relating to the war in Ukraine. Our financial resilience has increased. So our net debt has clearly reduced. It's now at EUR 294 million and obviously supported by the good momentum also when it comes to the profits. Our gearing is very healthy, down to 9%. And also in this time period again of uncertainty, we felt that having a lot of liquidity available is of utmost importance, so we have increased a bit our liquidity reserves. They are now up to EUR 1.3 billion. We will pay a dividend in -- or we have paid a dividend in April which we are of course very happy about. And then finally, net working capital. I think I will come back to that a bit later in my presentation, but it is a really high importance also, given now these high metal prices and prices generally that we are experiencing. So I do want to show at least briefly a few important KPIs. Just looking at the net result of the quarter at EUR 251 million, delivering an earnings per share of EUR 0.55. And I think those are good figures to start the year with. You can see our operating cash flow here, EUR 147 million. Our net debt, below EUR 300 million. So I will come back to those facts still a little bit later in my presentation. And then finally, return on capital employed now at almost 24%. Whereas in the first quarter a year ago, we were sort of barely on the positive side there. So it's been a year of good development. As Heikki said, 6 consecutive quarters now of really good profit development and profit figures as well. So one part of the success, on top of the market rebounding after COVID, it's clearly our strategy execution. And we have talked about this before, we have an approach that really runs through the company in a very diligent but also transparent way. And we have a lot of people engaging in the projects to improve. And the pie chart to the right shows that we still have a very strong implementation pipeline. Even though we have implemented more than 1,200 initiatives, we still have many hundreds in progress. And what you can see here is that, all in all, we have already been able to reach EUR 237 million of run rate improvements through these own actions. And I think that's pretty significant because we also upped our targets, so we increased our target late last year, and we increased it to EUR 250 million EBITDA run rate improvement. So we are pretty close to reaching that target by now. Let me next talk through the main point per each BA. And I will start with showing here the development in the business area Europe. There are of course some general remarks that do relate to all of the businesses. And maybe I would just sort of briefly relate back to Heikki already talking about the nickel price development and how that really was quite disruptive in the month of March. So we -- I'm sure we all remember this debacle in the LME nickel trading. Obviously, still at this point, we are waiting for the independent review of what really happened and what can be improved going forward. And we have still seen sort of fairly elevated LME nickel prices, although with very small trading volumes at this point in time. So overall, there's been an impact of that. And maybe it's enough to say first that you have seen some in the first quarter. You have seen actually a very big negative figure. The net of timing and hedging was a negative for the group of EUR 42 million. And that was actually more than EUR 60 million negative of hedging and about EUR 20 million then of positive from the other elements. So that EUR 42 million is the net figure. I think it's also then important to see that there are also clearly benefits for us when the nickel price goes higher. I think we do hold some inventory and the timing gains will be significant in the second quarter, even though presumably with these nickel prices, we would have some hedging losses overall in the second quarter as well. So that, I think, is something that is, if not fully unprecedented. Maybe something has happened in some historic years at some point, at least in the recent years, this has been quite an extraordinary development for sure. But then let me quickly say a few more things, really, particularly for BA Europe. I think the COVID mitigation was a really big topic for BA Europe. I think in U.S., in Calvert and in Mexico, we saw the peak in apps and season because of COVID already sort of during Christmas time, like very early in the quarter. But in BA Europe, this really came sort of during the quarter, the wave was heavy. And I really want to say thanks to the team for extremely good mitigation. In the end, we really managed to grow our volume, which was good because the market demand was strong. It was a good quarter to perform operationally in a strong way. And obviously, this really also helped us to boost our EBITDA. I think Heikki has talked a little bit about where we are right now also in terms of the market situation. But I still think a few sort of typical remarks that I would like to make. We have seen, in the order intake right now, much more sort of the waiting attitude from the distributors. Obviously, that's one important market channel. We have other important market channels, for example end users, where we still have a more positive sentiment overall. And what we can see from the statistics, obviously, apart from the higher imports in the first quarter is also that distributor inventories are now a little bit above the historical averages. So that is sort of the environment where we are operating right now, obviously, still at really good capacity utilization levels. And overall, sort of -- typically, of course, Q2 is still seasonally also a strong quarter. Then let me move to BA Americas. It is a pleasure, again, to show these figures. We've had a very strong situation during the first quarter in the market. And obviously, this sort of positive sentiment overall from a macro perspective also continues in the Americas. So it's a strong market environment, including distributors, including end users as well. I do think that if you look at distributor inventories, they are maybe a little bit up compared with sort of end of Q4, but we saw somewhat of a peak during Jan-Feb that has now a bit declined. And that was probably caused by almost sort of congestion in the ports and a little bit this sort of peak in imports over a short period of time. So we are certainly running our operations very strong right now and also then enjoying this good operational performance, along with a lot of mitigation on the cost side because, obviously, inflationary pressure is there. So you see here also in euro terms, a very strong result, EUR 90 million in the quarter. I would like to move over to ferrochrome. You have seen the price, the European benchmark price being high in the quarter and kind of continuing to rise throughout the second quarter. So it has been really important to keep the operations running. You can see that we are a little bit up on volume here. So we have been sort of in a stable and sort of robust performance mode during the quarter, enjoyed the tightness of the market, has led to the price levels being very good. And maybe I would still comment, even though I didn't do that for BA Europe in particular. But we have also been able to benefit from the Nordic electricity markets. And obviously in the ferrochrome case in particular, from an electricity price level that is still, in comparison with many other European countries, clearly more favorable. Our hedging efforts were also successful. So in the end, overall, we actually did not see an increase in electricity from Q4 to Q1, even though overall in energy, maybe there was a little bit of pressure. And finally, let's look at a record result also from Long Products, you can see EUR 24 million here in the quarter. So we've been really successful in getting -- pushing out more volume also from our downstream operations here and enjoying the efforts of the turnaround program now really proving also in the result. So I think those were, overall, some positive news from a profitability perspective. If I now still use just a few more words on the balance sheet. I would like to start with the cash flow -- the operating cash flow impacts of the first quarter. So you obviously see a good result, supporting it strongly. And then you see working capital at a negative of EUR 252 million. Obviously, it is very much the higher metal prices driving this. So if I would like to simplify, I could of course say that yes, indeed, we did have in euro terms about EUR 200 million increase of inventory in the quarter. Half of that was clearly only kind of price-driven. But then in the end, it is still worth mentioning that there's been really big changes as well. AR increasing more than EUR 300 million, but on the other hand, also AP increasing almost EUR 300 million. So those more or less offset each other in the impact. And then you can see here that there's really nothing significant going on, on the provision front, et cetera. Those restructuring programs are now kind of a matter mainly of the past. So the payouts of those have really been done. And from a CapEx perspective, we remain at the CapEx of EUR 180 million for this year. And that would take me to the final slide of my presentation, still showing here the development of our net debt and leverage. Obviously, our net debt now below EUR 300 million, bringing also the leverage to 0.2x. So clearly better than our set target at being below 3. And we believe that the strong balance sheet is an asset, especially in uncertain times. And we are also comfortable at the moment with the thought to building here really the resilience and the strength under these circumstances. So with those words, Heikki, back to you.

Thank you, Pia. So let me then finish with the outlook before we take your questions. So the outlook for the second quarter is as follows. Group stainless steel deliveries in the second quarter are expected to remain at similar level compared to the first quarter. The European benchmark for ferrochrome price will further increase to $2.16 per pound for the second quarter. With current raw material prices, significant raw material-related inventory and metal derivative gains are expected to be realized in the second quarter. Supply chain uncertainties resulting from the war in Ukraine and associated Russian sanctions remain a risk in the second quarter. And adjusted EBITDA in the second quarter of 2022 is expected to be higher compared to the first quarter. So that is the outlook for the second quarter of 2022. And with those words, I would like to hand it to the operator for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Tristan Gresser of BNP Paribas.

The first one, can you discuss a little bit the moving pieces for the Q2 outlook in Europe? Would you expect margins, excluding the losses in Q1 and the gains in Q2, to be stable quarter-on-quarter? Will the price increase be able to offset the increase in costs?

Yes. Thank you for the question. And well, I'm sure you asked this on the back of us also really pointing to the significant impact of the net of timing and hedging being positive in the quarter. However, when we look at the other elements. Obviously, volumes are pretty much stable. And I would say apart from that, we are really doing our best with the mitigation of kind of the inflationary pressure that we can see on cost right now. So maybe there is sort of some opportunity still also on the operative side to sort of really continue on a good path. But overall, of course, the net of timing and hedging impacts should not be sort of discounted. Those are important.

All right. Understood. And could you maybe give us some sense of the scale of the expected inventory gains for Q2? Is -- are we talking about something similar to the Q1 losses, but being positive? Or something even larger?

Yes. I mean, obviously, that will still depend on where we actually -- sort of towards the end of the quarter, we'll see the metal price developing. So this is still somewhat of a moving target. But based on what we can see right now, I mean, it's early May, it's clear that the reason we say significant is that we really had also a significant negative in the first quarter. And now we will also have a significant positive in the second quarter. So indeed, it could be sort of a similar size or even bigger than what we have seen negative in the first quarter.

Okay. That's very helpful. And my second question is a bit more on demand. How has been the reception of the latest increase in the alloy surcharges from both distributors and customers in Europe? Have you been able to pass on the raw material cost increase to your customer? Where has there been some pushback? And also, have you been able to use the alloy surcharge mechanism to all of your sales in Europe recently?

So I think I will not go into the details of the alloy surcharge, let's say, response to the degree you are looking for. I mean, what I can say is that, as said, the alloy surcharge was put in place at the end of April and is in effect now for the month of May. And we're now in the process of considering what we were -- what we are going to do with respect to the alloy surcharge then for the month of June. But the calculations and the thinking is still underway, and we have not made any decisions at this point in time.

Our next question comes from the line of Carsten Riek at Credit Suisse.

The first one is actually on the long division, which did extremely well, a result which we haven't seen for at least the last 7 to 8 years. You mentioned what changed already a little bit. But Pia, you mentioned that actually you did more downstream -- or debottlenecking in downstream facilities. What exactly did you do? And how sustainable is the very good result? That's my first question.

Yes. Thank you, Carsten. I think it's actually a pleasure to talk also about the success of the turnaround program. And obviously, from a group overall perspective, we already start to speak about smaller volumes. But I still want to mention, I mean, I think we have downstream operations in the Long Products division are, for example, our Fagersta operations, our OS -- bar operations in the U.S. And I think we have just been really good at sort of getting a bit more volume out and really being able to fulfill sort of the kind of promise or the capacity that we have seen also being there in those units. So also getting kind of the logistics to work and sort of the full scope of that. So I do think that is important. And maybe I should mention one other topic, which is that sort of during -- already during 2021, when you can see from the sort of price development on the flat side, that prices started increasing, there was actually, I would say, somewhat of a delay before any price increases started to go through in the long products sort of product categories. So maybe that's also contributing now, that we start to see some of those positive developments.

Okay. That helps. The second question is more on the broader market, especially I know that you usually don't talk about second half, but I'll try it in any event. Will the COVID-related lockdowns in China post a risk to the stainless steel demand in the second half in your opinion? Could it actually disrupt the value chains? And could it impact the European/North American business as well, in your opinion?

So maybe if I try and answer that. Obviously, the -- as far as we can see, the lockdowns in China have been quite considerable. And indeed, they have caused logistical issues in the various ports and in the supply chain. We have actually -- if you look at the publicly available, Eurofer -- I guess, Eurofer statistics on imports into Europe, you actually can see that there was increase in imports into Europe from Asia in the first quarter. And interestingly, what actually also happened was that we saw China import volume in the first quarter into Europe for the first time. I tried to look at statistics. We went actually many years back to a point when we actually saw China bringing in that amount of volume. So probably, there is something going on in China that then led them to move that volume into Europe. The volume that arrives now -- or arrived in Q1 probably was ordered like 5 months earlier. So there is -- as far as we understand, sort of a 5-month lead time lag between the point of production and then when it actually arrives here. So trying to think of what the events were in China at the end of Q4, it was before the Olympics. I don't know if the lockdowns were that severe at that stage. But anyway, China volume has now arrived here. And let's see what -- whether that was temporary or whether that is more of a permanent phenomena. China, of course, does have the tariffs in place, as we know. On the North American side, I would say that we saw earlier, in the beginning of this year, we saw quite a big bump in imports into North America. But our understanding was that, that was more a result of just simply bottlenecks in the supply chain, which then ultimately opened. And you saw this sort of big swoosh of volume coming in. At the moment, we have not seen the same amount of activity, volume coming into the United States as we see here in Europe. So that would be a bit of a difference. And in terms of the second half, it's very difficult to predict what exactly we're going to see from Asia into these markets. So just have to wait and see here some months.

That helps already. And the last one is more broadly. After fixing the balance sheet, what's pretty much next? I assume that the appetite for bolt-on acquisitions is rather low after the last kind of experiences. But what are the areas you would like to strengthen your position?

So Carsten, that is a good question, and that is a very important question. Maybe is the proverbial $6 million or $60 million question. We're obviously thinking about this deeply. I just asked you for your patience. During the course of this year, we will come to you with a good plan. But today, unfortunately, it's not the moment where I want to share what we're going to do next. But trust me, we will be back in the not-too-distant future. Please be patient.

Then I keep my patience.

And our next question comes from the line of Patrick Mann of Bank of America.

I wanted to ask -- and Pia, you alluded to your relative cost position in energy and electricity. Can you give us an idea, how much is your relative cost position improved to your European peers? And then does that impact your strategy going forward? I mean, is there the opportunity here to -- if this is a structural cost advantage now being in the Nordics, to aim to take market share? Or possibly, does it just encourage more imports from Asia, as Heikki was just saying?

Patrick, thanks very much. And I think I base my answer more on sort of general information about electricity price development, et cetera. Obviously, I don't have sort of any specific contractual data for anyone else than ourselves. And when I just look first at that sort of difference between the price levels that we have seen in Finland or in Sweden compared with other European countries, I mean, obviously, in the peaks, we have talked about hundreds of euros per megawatt hour. So I mean, these have been very significant differences. And I think we do see that in our cost development now as well, that our long-term hedging strategy has been good. It has protected us in this kind of extremely volatile environment. That is not to say -- I think we can discuss the details of our hedging program. That's of course something that is rolling. And if market prices go up at some point, we will be impacted as well. There have really been some, I would say, if not anomalies, then at least sort of really sort of moments of very low prices, for example in Finland, during the month of March. So obviously, there were also some really sort of beneficial momentary sort of events here. So I would say overall that I do think we have a very electrified production. So this is important for us. And I do believe it's a very sort of positive advantage for us at this point in time.

Can I, Pia, just add a few comments on electricity because obviously it is a very important part of our cost structure. Three points. Obviously, the Nordics, of course, benefit from a substantial amount of hydro power originating from Northern Scandinavia at low cost, sustainable. And of course, that will be around. We in Finland have now Olkiluoto, number three, the nuclear power plant is about to start or has already started and is gearing up. So we understand that overall, the Finnish market should be in fairly good balance with Olkiluoto going forward. And I think furthermore, it is quite interesting, that if you look at the Finnish Coast, for example, there is still a sizable amount of wind power capacity or potential. And our understanding is that wind power, from an investment cost per megawatt, is reasonably competitive nowadays, probably more competitive than ever. And therefore, we believe that there will be investors, energy companies, who will be investing in that type of energy source in the future as well. So I think it does maybe give us some relative advantage.

I mean, are you factoring it into your strategy though? Are you saying, well, look, if we compare even a year ago and our outlook and our relative cost position to European peers, it's structurally different, and we should be more ambitious about maybe European market share. I agree with everything you're saying, right? So shouldn't we see the Nordic countries, in terms of energy-intensive production and manufacturing, including stainless steel, shouldn't you become a much bigger proportion of Europe output?

Well I think, Patrick, important question. I think short term, of course, we have been running full. So with the capacity utilization we have, we just don't have more capacity. So it would obviously require from us investments or other ways to further generate more volume in the coming years. And that of course would not happen overnight.

Our next question comes from the line of Luke Nelson at JPMorgan.

Firstly, just a couple of follow-ups on the cost side, which you sort of give some detail to. And obviously strong performance, particularly in ferrochrome. But at the pre-close call, you gave some numbers around the quarter-on-quarter impact from natural gas power and ferrosilica. Can you maybe just talk through what the sequential impact is going to be for those elements within your Q2 outlook, guidance? That's my force question.

Indeed. And I think ferrosilica especially was one of those cost elements where we definitely saw an increase quarter-on-quarter, from Q4 to Q1. Could have been sort of north of EUR 20 million impact on the group level. And obviously, that sort of really kind of jump or peak seems to have been, from our perspective, happening quite a lot there, Q4, Q1. So I think there is still inflationary perhaps as it was from the Q4 to the Q1. Then I want to say that for electricity, if I just take that part, I did initially expect that we would still have maybe some tens of millions of increase from Q4 to Q1. And in the end, we did not because the kind of end of March was then so sort of beneficial from an electricity cost perspective for us. So we were more or less stable. And I would say maybe there is a bit of pressure up for the second quarter, but it's not that significant. And then the gas situation that you remain sort of a really sort of big, open topic. I mean, obviously, sort of my natural answer should have been we are sort of contractually protected. And I could give you sort of more clarity on, maybe it is around EUR 10 million increase or something like that. Now of course, we all know that gas is under pressure, and there are really significant movements in the price sort of from day to day. So I think that brings potentially a little bit more pressure into that sort of area. But without any major disruption, I would say also here, we are still talking about sort of a pressure upwards. But we are not talking many tens of millions on group level. Maybe it is more like EUR 10 million, EUR 15 million. But there is more uncertainty around the gas as we speak.

Okay. That's very clear. And then I suppose just more broadly, again, with group guidance for EBITDA higher relative to Q1. Can you maybe just give us a sense of how that guidance would fare if we adjust for ferrochrome? Which obviously, we've got roughly $30 million improvement in EBITDA with the new ferrochrome settlement. And then adjust for the gains in inventory and hedging, which sounds like it's potentially sort of a $30 million positive. So I'm assuming that's potentially sort of $60 million or $70 million sequentially tailwind coming through. Can you just sort of, adjusting for those, how would the stainless steel business' margins proceed? Would they still see EBITDA improvement? Just sort of on a stand-alone basis?

Yes, indeed, I think it's a good question. It already starts to be really specific, but I do try to at least sort of give some information on some of the elements that are most important here. So you touched on ferrochrome, you also touched on the net of timing and hedging. And I just want to see, I mean, with the metal price -- with the nickel price that we see right now, I mean, it would be a hedging loss and a timing gain. Just to sort of be clear on that, that there is a net effect then that will be clearly positive. That is what it looks like right now. And then you talked about sort of what are the elements sort of on the flat stainless side? Obviously, again there, not really a big change, volumes more or less remaining the same. And then I would still repeat that, I mean, there is -- indeed, there is inflationary pressure, but our cost mitigation efforts have been really successful. And as I just described, some of those details that we typically talk about, I mean, there are not that significant step changes in those, even though we clearly see sort of a pressure. So I would still say that there is sort of a fair and sort of good performance also from the stainless side. So we are for sure sort of observing still a kind of a good development here possible.

Our next question comes from the line of Anssi Raussi of SEB.

First one is a simple one. So for which month or quarter you are currently booking your orders?

Okay. So if I answer that question. So we are currently booking orders for the end of Q3. So that would be August, September.

Yes. And that -- Anssi, that's -- I mean, it's usually Europe that we are talking about. You know that U.S. is sort of operating a little bit on a different cycle. There, we are, I think, booking July, August, which is really typical for kind of how we would operate.

Indeed, yes. Of course, I'm talking about Europe here. And you also mentioned that you see improving demand in food grades. Is this due to energy investments? Or what's behind of this? And do you see that this would have a significant impact on Q2 results already? Or later this year?

Well, I'll let Pia comment on the implications. I would just say that in terms of demand, the demand for food grades is looking good. As I said, there are some major bigger trends. I mean, you talked about energy. I think the reality is that now with this Russia-Ukraine crisis and the risk associated with supply disruptions from that market, could ultimately lead to quite substantial investments in energy in Europe. And I think that will be an interesting area for us to focus on in terms of our sales. Of course, as commodity energy prices go up, oil included, globally, that will also further increase the demand for the types of metals we produce. So I think there's a lot of positive tailwind in that sector as well.

And Anssi, maybe just to add, that typically, the sort of order book is here for a bit of a longer period of time. So indeed, there could be some positives in Q2, but it could also come a bit later in the year. So this is not kind of uniquely for Q2.

Okay. That's clear. And then maybe the last one from me is just to clarify and to continue on ferrochrome division. So basically, should we still use the old rule of roughly EUR 10 million EBITDA per EUR 0.10 price? Or when thinking about the price delta quarter-over-quarter, is there something specific to take into account in Q2?

Well, it -- Anssi, we had the challenge with all these other sort of inflationary pressure and kind of other things happening around that. But I mean, as we speak and as per right now, that's kind of the best advice I can give for these circumstances. And we'll certainly come back if that changes.

And the next question comes from the line of Rochus Brauneiser of Kepler Chevreux.

Most have been answered already. Maybe on your EUR 250 million program, you were mentioning early on that this was also quite helpful in mitigating the cost inflation you're observing. How do you think about stepping this program up again? As we might be prepared that inflation is not moving away too quickly. So are there any thoughts already at this stage for the Phase 2, that you keep going and keep pushing on this side? That's the first question.

Yes. Thanks very much. And indeed, I think we have more than 700 initiatives that are still sort of extremely early phase or under evaluation. So it is absolutely possible that a part of this could be sort of a source also for our second phase sort of improvements. And overall, it's just important as well that this way of looking at improvements, really driving them as projects is also sort of the security that we need in our type of industry, in just constantly fighting this battle on cost and on inflation. So I think both sort of as a kind of long term, like way of working, it's valuable. But certainly, we probably have there, ideas in the pipeline that we can use also going forward.

Okay, okay. That's interesting. Then secondly, sorry that I come back to the guidance and to the previous question. I'm not sure whether I got you wrong when you talked about this inventory metal derivative effects, which were negative EUR 42 million last quarter. And you were just saying it could be positive with the same amount or even higher than that. So we're talking about EUR 100 million -- or let's say, it could be up to a 3-digit figure in terms of swing impacting the EBITDA? And if we adjust for that, how shall we think about the realized prices? I'm not sure whether you commented on that previously. I think volumes are flattish, you hope energy prices to mitigate. I just don't -- I'm not just sure whether your comments mean that your underlying earnings are flat or eventually down, yes.

Yes. I mean, I don't see any reason to interpret it like that the underlying earnings would be down. But I want to emphasize that the sort of -- exactly as you said, the swing to the positive in this net of timing and hedging will be a big number.

Okay. Okay. That's helpful. And then maybe more like a general question. You are saying, over the last couple of quarters, you are running at very high capacity utilization. What kind of quarterly numbers shall I think about what you would consider as an effective [ group ] capacity across the whole plant network?

Well, I would say I don't think we have published that sort of a nameplate capacity figure. It's kind of a constant subject for also kind of further work at our end, just looking at also the right number of shifts, how we are running the various operations. But it is true. And seasonally also, I mean, I would expect the first quarter and the second quarter to be kind of in a normal sort of annual cycle, those where we would see those really high capacity utilization. So maybe that's kind of the best answer I can give right now. I mean, I was just looking at some sort of historical stats looking at the development of our delivery volumes sort of from '17, '18, '19, 2021. And obviously, there's been sort of the COVID lows. '20 was a low figure, '19 wasn't that high of a figure. But overall, if you look, of course, we've had kind of a good rebound back to those kind of times before all of these crises started to hit the -- generally the industry as well. So I would say we have taken sort of very many steps on that journey on that rebound. And now of course the question going forward is, what can we do more? And certainly, we are working with those questions every day now.

Maybe I can just add to that. But obviously, with the level of capacity utilization we have, and even though our melt is based on batch processing, we do see that with the high utilization, we are getting also efficiencies. Because we can run longer, we can use -- we have bigger melts. We can use the same recipe in a multiple times consecutively. And that basically gives us efficiencies. So I think that is also sort of generating to the not only high utilization, but also then just generating more volume. Vis-a-vis when times were tough, we were kind of selling what was demanded. So it was much difficult, more difficult to run. So this is -- there's a big positive delta for us also from there.

Our next question comes from the line of Krishan Agarwal at Citigroup.

Most of them have already been taken. If I can ask a question on the hedging policy. I mean, you mentioned a couple of times that the hedging policy has been successful, it has protected you in the high pricing environment. My question is how adaptive the policy has been in the current pricing environment? As in have you reduced the hedging so that the current hedges in the high pricing environment doesn't get to burden later on when the prices come down? How that evolution has been?

Indeed. Thank you very much. May I still ask, that do you mean particularly nickel hedging here? Or do you refer to something else?

No. I mean electricity price, sorry. In my mind is electric price.

Yes. Okay. So on the electricity price, so what our hedging policy is, that we are gradually building up sort of our position. We typically actually -- with really sort of delivery contracts. So we don't want to sort of be exposed to pricing only in a certain moment of time. So kind of when the moment is right, we actually build sort of a rolling position over a period of 2 to 3 years. So we have some really long-term contracts. Like you have seen us recently launched, for example, wind power contracts for 10 years, et cetera. But then we also build a more sort of tactical position with contracts running over sort of this rolling few years period. And that means that we take positions gradually. So that when we, in the end, kind of reach that quarter, we have reached a very high percentage. We never hedge 100% of electricity simply because there could be variation in production volumes, et cetera. So we do need to leave sort of a top layer there for spot market. But under the circumstances, for example in the first quarter, we wanted to leave an extremely thin top layer. And that is what our policy allows us. So we have, let's say, some ability to adjust, whether we really take the hedging up to, let me say, 90%, 95% of the expected consumption, or if it's just slightly lower than that. But I mean, that variation is not huge. But that's kind of where we can, according to our policy, take the decisions then based on our best understanding of the overall situation.

So if I understood it correctly, you had decent flexibility not to take high pricing hedging so that your cost base is permanently increased for the next -- end of this year or for next year.

Yes. So I mean, there is some impact. But we have like funnels, I guess, is the sort of right term to use there. So we have some funnels inside which we can move. So we have some flexibility, but we don't want to sort of kind of totally sort of step out and not do any contracting at all. But obviously, we would always assess the situation and then choose in which funnel we are. So if prices are high, we would go for the lowest funnel. Let me maybe sort of try to explain it that way.

Sure. My second question is more on the Capital Markets Day or the site visit you are holding in June. I mean, what should be the expectation in terms of key messaging? I mean, if I were to use the example of Kemi mine. I mean, you've been doing this mine life extension program for long. The CapEx has gone into that. Should we expect some kind of a messaging that, okay, CapEx has been -- and then the CapEx will come down there? Or any other potential key messaging?

On that specific question, I think it's fair to expect that we can show that the project is about to come to an end. It has been successfully managed. And also from a CapEx perspective, obviously, that means that it's kind of tailing off. We still have like EUR 60 million, EUR 70 million this year, and we will have some tens of millions next year. But physically speaking, I mean, we are sort of moving really towards the completion of the project. So I think that's one good example. I mean, we certainly want to show, both the mine and our stainless operations, we want to show what benefits we have from the integration. But as for the really sort of detailed messaging and agenda, we will come back to that shortly. That's still, at the moment, under preparation.

What I would say from my side is I would expect it to be a great event, and I will definitely recommend you to arrive and book those airline tickets.

Sure.

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

Heikki, can I just follow up briefly on Carsten's earlier question on balance sheet and strategy? And sorry to come back to that, but that is obviously still a key point for investors. The magnitude of your cash generation obviously does allow you to look at capital allocation in a very different way versus what it would have been the case even a year ago. And without going into detail, I'm just wondering whether you plan to update on strategy or capital allocation from a holistic point of view. And maybe also whether you could us -- could give us at least the broad timing which you're envisaging here? That is my first question.

Right. So to answer that in a way to be informative, but not sort of say what we ultimately are going to say. So I think that, first of all, what I would look carefully at is the journey we outlined when I joined. The first step was that we would derisk the company and the second step is investing in the core. So what I can say is investing in the core is still kind of what's on my mind. And I think you should read into that, well, I think the words in itself tell already something. I think otherwise, indeed, I'm very happy where we are as a company. We are 6 months ahead in terms of the, let's say, the targets we set. We have -- we made extremely good progress. Of course, we have had a lot of tailwind from demand, and that basically does put Outokumpu in a unique position. I don't know if Outokumpu has been this strong financially, balance sheet-wise, ever. At least, have to go up very, very far into the past. So it does give us optionality. And what we, of course -- many things we can do. And when trying to figure out is how do we prioritize the different things? And how do we make sure that -- I think what's really important for me at this stage, at this juncture, is that we have been able to institutionalize a way of working here over the last 2 years. And I want to make sure that this way of working continues, and we start creating a very, let's say, predictive track record in terms of our performance. So I think that is sort of what I would say at this stage. And we will come back, as I said, with the -- during the course of this year with much more detail and a very holistic and comprehensive strategy then for you to react to.

And in terms of the timing, is this something you plan to do for the third quarter or fourth quarter? Or are you still keeping still all options here in terms of the timing?

We are working very hard. I don't want to commit to a date. But I what can tell you, we're working very hard on this.

Understood. Then just maybe to get back then on the points you made. And I think you made a couple of very valid points. If we look at Outokumpu, obviously, as an equity, sorry, it's probably fair to say it has not worked over the past decade. So I think it did very well in the recent past. But if you look back, obviously, it did create quite a bit of pain for investors which have been in there for long. I think, in fact, the current market capitalization is not far from the amount of equity which has been raised over the past 10 years or so. Is this something which is on your mind and which you aim to repair? In other words, do you see share buyback as generally something which is part of your toolbox as well?

I'm not going to comment on individual actions the company may or may not do in the future. But I would also say that I understand that the concerns from the past. The last decade was very tough for the company. And as CEO of this company now for 2 years, of course, my objective is to try and create a sustainable, consistent, predictable track record so that investors and stakeholders could sort of see that, okay, this is kind of where they're going and the plans make sense. And when they say something, they will deliver. And at least Pia and I and my colleagues in the executive committee of the company, that is kind of the mantra we are repeating among ourselves. So far, the last 2 years have gone better than we predicted. And of course, we are -- that is kind of the mindset we have. Is that not the case, Pia?

Absolutely. And making sure that we have a very sort of consistent delivery also of what we have promised to do. And I think the financial resilience, the strong balance sheet, will also help us with that also going forward.

And we have one further question. That's from the line of Patrick Mann of Bank of America.

Just in terms of switching raw materials away from Russia. Is that expected to have any kind of impact on cost? Or is it just about sourcing supply?

Patrick, in the short term, what I would highlight is that there could be working capital impacts. Because obviously, there are some supply chains that needs to change, there are payment terms, there are sort of delivery times, and all related items that are certainly going to impact. So I do see this as a pressure on the working capital in the short term. And then obviously, for the longer-term perspective, it's more sort of the holistic development of, for example, the nickel pricing and what happens there that will really have an impact. So obviously, there could be different scenarios into that. So I don't think that is kind of Outokumpu-specific, but definitely something we are watching. But if I think about Q2, for example, I really also think about still some pressure on the working capital. Maybe it leads to, for example, AP development being somewhat worse.

I just want to comment to add one thing, if I may. We haven't really touched on ESG at all. And I just want to briefly say, regarding raw materials that we as a company are putting a lot of effort and resources into what we call responsible sourcing. Obviously, as you know, many of the metals we procure come from, what we call, I guess, high-risk countries. And so we have a team of professionals which are doing really deep dives on location in these countries to understand and make sure that the way they mine, the way they conduct, that they don't break any human rights guidelines and so forth. This is an important part of our ESG road map. And I just want to make sure that you are aware of that, that we take this seriously, and we're putting more resources behind it. Thank you very much.

Thank you. And as there are currently no further questions in the queue, I'll hand the floor back to the speakers for the closing comments.

Thank you very much for following our webcast today, and thank you very much for very good questions. Before we close the call, I would like to remind you that we will publish our half year report on August 4. But now thank you once again, and have a good day.

Thank you.