Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Outokumpu's Second Quarter 2022 Pre-Silent Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Linda Hakkila, Head of IR. Please go ahead, madam.

Thank you, operator. Hello all, and welcome to Outokumpu's Q2 '22 Pre-Silent Conference Call. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. Our main speaker today is our CFO, Pia Aaltonen-Forsell. We will first start with a short update from our CFO. And after that, we are happy to take your questions. So without any further comments, I will now hand over to our CFO.

Thank you, Linda, and good afternoon, good morning, everybody. This is Pia Aaltonen-Forsell. And let me just start with a few comments about demand situation and market and observing some of the recent situations here. So first, if I focus a few minutes on the European market situation. If we talk about the end user demand, it seems to be remaining solid at this point. And here, I also refer to our Capital Markets Day, we have hosted it rather recently about 2 weeks ago. And I think we have also there discussed some of these topics even more a bit, but still just confirming that, if I look at, for example, white goods in Europe, it's clear that there are still backlogs prevailing and listening to, for example, automotive, it even feels that due to improved supply chains and less problems even second half could be better than the first half. Then turning attention to distributors. From our perspective, this has been a weaker segment. We have talked about distributors more sort of sitting on the sidelines, waiting. I think what we can observe now is that import levels have been high, particularly in April, maybe then stabilizing a bit more to sort of more normal level, again, in May. And it seems obvious that there have been some imports into the distributor segment. And this certainly also is now visible in higher inventories. So it really seems that at least from what we can observe that distributors are really focused on sort of amping through those inventories at this point. And then finally, in Europe, we have talked about good demand in investment cycle related products. So from our perspective, for example, the pro grade and this indeed has continued, which obviously is also good for us as these are our more higher-margin products. Then [ please turn ] to Americas. So what we can see here, our demand from the distributors still remaining here confident in the market developments and remaining strong as well. Maybe there are some signs from the -- from our perspective, smaller segments in the U.S., for example, white goods as direct end-user sales of some weakening. So this is maybe something that we will be observing quite carefully. And then finally, just to say, I will come back to Ferrochrome even a bit more on the cost side. But just from a demand side perspective, I think you may have seen that the new benchmark price for Q3 is now out. It's at [ 1 80 ]. And clearly, there is a bit of pressure downwards right now on the pricing, maybe also the spot markets have been a little bit softer. So if those were my opening comments on the sales and demand side, maybe then turning the attention still to Q2 and maybe just more of a reminder that what we observed in our invoicing in the second quarter will really be a lot of deliveries of orders that we have actually received 5 to 6 months ago. And obviously, looking at the price development 5, 6 month ago, it was clearly on an upward trend. And with that said, I also wanted to confirm a few things that we have maybe debated also earlier. One of them being that from a margin perspective, it's not a squeeze. It is not a squeeze in the second quarter exactly because orders received by 5, 6 months ago now being invoiced. And indeed, there is cost inflation, but the balance is still favorable. So maybe out of the items around cost inflation, I would just sort of briefly comment around energy. I don't think it's huge for us. But with Ferrochrome, I would maybe still raise that there is some increase overall in the quarter, quarter-over-quarter on electricity. I mean it's not a huge figure, but the reason that I bring it up is still that Ferrochrome is such a big electricity consumer. So this is maybe that the business area where we can see some impact there in the end. Okay. And then maybe kind of final comment from P&L perspective. Indeed, nickel prices and changes in those are all ways of interest. Earlier when we gave our guidance and when we talked about what we expected for the second quarter, we also for maybe a bit sort of emphasized timing and hedging. So inventory related metal gains and losses and then also the hedging. So this is [ inventory ] related hedging gains and losses. And still on the balance of things and sort of looking at [ metal ] remaining high through most of the quarter, even though now we have definitely seen some downtick there. I said earlier that we are indeed expecting a positive impact, a net positive impact from the timing and hedging, and I can certainly confirm exactly what I have said before that this is even a significant positive figure in the quarter. And then I think I will sort of conclude here by still 2 remarks on working capital. One of them does relate to the situation in Ukraine and the war and that has indeed led to some increase in working capital for us because there are some supply chains that we have had to be arranged. And I have -- I would estimate at the moment that this could have a negative impact in the quarter of about EUR 100 million on the working capital. And on top of that, obviously, there is kind of normal seasonal pattern, usually working capital is fairly high in the second quarter. This is seasonally [ still a ] quarter with high activity inventories and also with the higher price levels, accounts receivable, for example, on a high level. So this is -- this should be nothing new compared to what I have said before, but maybe just to confirm that as well. But with that, operator, I would like to complete my short presentation and go to the Q&A part of the meeting.

Thank you. This is the operator. [Operator Instructions]. At this time, the first question is from Anssi Raussi of SEB.

It's Anssi Raussi from SEB. The first one would be a rather basic question about lead times. What kind of lead times you have at the moment? And I guess you're book in Q4, but is still early Q4? Or how is it?

Anssi, great question. So I think the change that we have seen in the recent months has been was somewhat shorter in time. So we are still finalizing bookings for Q3 and then into Q4 when it comes to more commodity grades. Obviously, on average, then when we look at the pro grades and the value-added rates, the lead times are fairly long at this point. So we are talking 5 months, 6 months there. So we start to maybe see a bit of a split here sort of by segment.

Okay. And the second one would be that if we think about Q4 this year, maybe a bit of ahead of time here, but how should we think about the mix between progress and basic stuff you have been saying that, for example, energy sector could be offsetting some of the consumer application, demand destruction, but how should we think about this at this point?

Yes. Thanks, Anssi. Obviously, sort of the [ full ] balance for Q4 is still to be seen. So this is probably a question we need to get back to. And particularly on the energy sector, I would say that I and we see this also as a longer-term development, not only over 1 or 2 quarters, but the energy transition in the Europe, in particular, I mean, I think it's an impact potentially for many years, even ahead with stronger demand into those sectors. But nevertheless, I would say, based on the order intake that we see right now, we definitely see still a strong investment cycle driven demand. And for us, usually, that the mix goes more in the direction of more pro grades. But as said in Q4, it may be still bit early to make the final conclusion for the quarter.

Yes, I understand. And maybe finally, I assume that you haven't seen any changes in industrial demand since Q1 call? Or how is it?

No, I don't think so. But what may be -- it becomes evident looking at the import statistics, et cetera, is really that there has been probably from the distributor segment, very strong imports into Europe, particularly in April and then sort of evening up a little bit in May. But as far as we understood, there would still be some sort of deliveries even on the way to Europe from a distributor sector perspective, imported goods. So it really seems that from our perspective, this segment has seen a demand from our perspective at the moment from Europe.

And maybe one more about nickel price as it has been coming down in recent days and weeks. How do you see the situation at the moment? Do you see that it could be positive, negative or how do you see the impact of nickel price coming down?

Yes. So what I would expect broadly is that when nickel price is increasing, usually, we have still seen fairly positive impact on really just the inventory-related gains and then somewhat offset by hedging. And now we should on the way down potentially see it in the other way. So of course, we will still come back with the Q3 guidance and clarity on this is it's relevant on a bigger scale in Q3. But similarly, as we saw the positive in Q2 based on the fact that timing was very positive and then we had some negatives in the hedging, obviously, with the lower nickel price level on the way down, I would just mathematically expect the opposite to occur. But of course, I don't know yet. I don't have yet sort of a view on exactly what that would be in Q3. And if it's a big number, we will come back to it. It obviously depends also on how much we see of this up and down of the price and what will happen. So certainly we will come back to that one as well later.

Yes. And to clarify myself, I think that I was talking more about like demand side. And do you see that lowering alloy surcharges could help the demand?

Yes. Well, I think it's also from a pricing perspective, certainly, we observe this a lot and certainly want to make sure that we stay competitive. So I think it certainly brings the best balance potentially being positive for the demand that we need to [indiscernible].

The next question is from Harri Taittonen of Nordea.

Yes. To follow up on these sort of earlier questions. You mentioned the import pressure from Asia being high and particularly in April. And I suppose, I mean, these volumes have been shipped very early in the year when the European prices were still very high, and...

You're right.

And now that the European prices have come down, so just wondering what's the latest on sort of view on like you see after the declines in Europe, what's -- you indicated that the May volumes could be normalizing already. But how does it look at kind of the likely import activity, let's say, towards the second half if prices are at these sort of levels where they are now?

Yes. Harri, thanks. I think it is a good question. Maybe to some extent, a really important question also to have the full transparency. Of course, I cannot have that. I mean we don't know about all the ships that are on the way or not, et cetera. But I think what we hear is that there might still be some distributors who have also ordered not only sort of make you for a very early in the year, but may still have ordered during the spring. Whereas others, for sure, have observed the price level. So I think there is a risk that there is still some material flowing in also in Q3. But obviously, none of this is kind of more anecdotal than really sort of numbers and [ tax base ]. But the dynamics in the end should be pretty clear that there was sort of a bigger price differential observed, and this has led to more orders in Asia and the price differential for sure at the moment is decreasing.

No, that absolutely makes sense. And there is no change in the sort of -- for the near term in any of the EU kind of import control mechanisms, as I remember...

No, no. There is no -- as far as I know, no, no.

Yes, yes. Okay. And then on Ferrochrome, of course, I mean, the price level for Q3, the benchmark is still fairly high, but of course, a fairly substantial drop from Q2. And given that the spot prices have been -- I mean, staying fairly high levels. So I don't know if you can give any color on what you saw there in the market in driving the benchmark price, given that the spot prices -- they have come down, but not a lot as...

I agree. They have not come back. They have not come down that much, and there has also been quite significant challenges still on the supply side as well. So I guess this is sort of -- this is maybe then to some extent, sort of keeping still the pricing momentum, even though, of course, China has been through the cycle of sort of clearly lower stainless steel demand. I think we have observed that sort of until now. Now obviously, maybe China is at a turning point. It remains to be seen, but at least some economic indicators seem to be kind of, again, going in a stronger direction. But however, China is a big producer here in stainless and then the demand has now been lower. Maybe that is just a balance -- one of the kind of key balance impacts here. So I would say [ 1 80 ] is from a historical perspective, a fairly high sort of -- maybe not elevated level, but still, we can go sort of -- we can do pretty long statistics and still say okay, kind of reasonable, reasonable levels, yes.

Absolutely. And if I -- I mean do you already know the kind of the maintenance schedule and the impact, I mean, now for the Ferrochrome side for Q3, there was some just to refresh the memory there, I think you have talked about it, but...

Yes, indeed. So we will have the second biggest furnace on maintenance in August, September. So sort of typical historical impact have been maybe sort of EUR 10 million to EUR 15 million, and we will come back to that later. That's what it is exactly this time around. But we are indeed scheduling maintenance in Ferrochrome in the third quarter and actually the third quarter will for us be an important maintenance period also on the stainless side. So we are trying to be aligned here the schedules, for example, in Tornio, so that we can have optimal use of CO gas, et cetera. So trying to sort of schedule in a fairly similar time frame also the stainless maintenance this time.

Exactly. And last year, there was not really major maintenance affecting Ferrochrome. Is that...

No. No. It was so, yes.

The next question is from Ioannis Masvoulas of Morgan Stanley.

Thanks very much for the presentation. A few questions left from my side. The first one on U.S. demand. You suggested it is stronger than Europe. But just to get an idea, are there any customer industries where you're seeing some indications of softness as compared to 3 or 6 months ago?

Yes. And indeed, if I look at the distributor segment, we really see [indiscernible] very confident signals. I would say that white goods is an area where some softening can be observed. I don't know if I should really call it. Maybe I would call it sort of early signs of softening. But white goods is the one that I would mention, really nothing else.

Okay. Very clear. Second question on the import situation. You mentioned the elevated levels in Europe during April. Did you see a similar trend playing out in the U.S.?

No, not similar. I think in the U.S., the market dynamics are somewhat different. The constraint there obviously has been that domestic production has been running on such high capacity utilization that import has then been used to balance overall demand and supply. So I do think there has been a bit higher import levels, but not of the significance as in Europe.

I see. Very clear. And on the same topic on turning to Europe, yes, we have seen European base prices coming down. But at the same time, as nickel prices come down, I guess, Asian material will start to become again more competitive. So how do you feel about the export arbitrage from Asia to Europe? And is there an indication that this is closing in a way that we should confident -- be confident about normalization in imports into the second half?

I think it depends really a lot also on the nickel price development going forward? So how big is a potential advantage of NPI-based raw material and with the lower levels that we have right now, I think... [Technical Difficulty]

Hello.

Just a moment, I think the line dropped. Just a moment, I'll call her back. [indiscernible] line. The conference will resume shortly. Thank you. She is back in.

Hello. I'm sorry, Ioannis, I was dropped off the line. I'm not going to be dropped. Now I don't know maybe I was speaking for myself for several minutes. I don't know. So can you help me by [indiscernible]. So maybe you can repeat the question. Yes.

Yes. So the question was around the fact that nickel prices are now coming down, and I'm wondering whether that's going to keep Asian material competitive in the European space into the second half?

Yes. I think the -- with the lower nickel prices, clearly, it should be closing the gap then other important factors remain, whether there's any problem with transport, with logistics and then obviously also how strong is local demand in Asia and particularly in China. So all of those would have an impact. And certainly, if I just look at the second quarter, we had a lot of kind of pressure here because logistics were working, Chinese demand was weak locally and then at the same time, obviously nickel prices were high. So I think it was a bit of a perfect storm in that sense. So maybe at least on what we observe right now, clearly, that advantage is decreasing. But it has gone, I don't know.

I see. Okay. And maybe just a last question for me, if I may, on the energy side. You mentioned about a modest increase in electricity costs quarter-over-quarter. But what about the gas supply risks that have been focused over the past few days and thinking more about second half of the year. And not just, I guess, Tornio, you have the, I guess, LNG capacity there, but more thinking about your operations in Sweden or even Germany? I'd be interested to hearing any feedback there.

And yes, indeed, as you said, when it comes to Tornio, we have our LNG terminals plus we have also now set up a backup with propane. So we are ordering and sort of stocking up propane as a backup to really make sure that we are at all conditions able to run Tornio. The gas dependency in Avesta is less, and we also have some backup opportunities. So I would [ not flag really ] risk for Avesta. As for Germany, I think I need to flag the risk that we are dependent as the German sort of typical industrial picture is, we are dependent on pipe gas. And certainly, this is something that we are making appropriate backup plans for. Let's see how the situation develops. Obviously, what we have is cold-rolling and finishing capacity. And to some extent, we have the opportunity always to have internal backups from other facilities. But clearly, I would say Germany is for us the bigger country of risk. Obviously, you can also have a look at our capacities, et cetera. So this is a smaller part of our overall footprint, but still relevant.

The next question is from Luke Nelson of JPMorgan.

A follow-up just on the cost question, just more broadly, power, natural gas and ferrosilicon in the past, you've talked about the sequential impact. Can you maybe just talk through what the sequential hit will be from those Q2 on Q1?

Yes. I would say on gas, thanks to our hedging and contractual situation, I really wouldn't flag any significant increase from Q2 -- from Q1 to Q2.

And ferrosilicon, I think in the past, that was sort of 10 million to 20 million or it was -- is that fully in built now in the Q1 bank?

I think it's fully in built. Last time I was looking, we had maybe a couple of single millions, what -- hardly worth mentioning, of course, as an increase. However, still the higher price level has prevailed in the second quarter.

Okay. That's clear. And then just on the Tornio maintenance that you mentioned. You talked about the Ferrochrome cost in Q3. Can you maybe just talk through what the sort of the planned maintenance is the furnace there and potentially what the cost is? And is there any maintenance at all in Q2? Just to get a sense of what the sort of Q3 relative to Q2 maintenance costs all there?

Yes. I think our most significant maintenance will be in Q3. There's been a little in Q2, but it's been more at the kind of odd line here and there, not at the sort of main -- not at the main lines or all the main facilities. So there will be an increase into Q3. We probably still need to come back with a bit more detailed thinking on that, but sort of from an operational perspective, the most important ones will be the maintenance that we do on the second biggest furnace in Ferrochrome. And the reason that we do it now is that the furnaces are up for maintenance every fourth year. So there is just this reason where you need to do a bit more work and 2021 was that because we had 3 furnaces, so every fourth year, you have the year where you don't have big maintenance, it's only sort of smaller scale. And that is the reason why comparing with '21, there will indeed be an increase. And I don't have yet know the exact magnitude, but I would say order of magnitude EBITDA impact, for example, in 2020 was somewhere between EUR 10 million and EUR 15 million. And that was, by the way, our biggest furnace at that point. So probably it's not the upper end of that, but we will come back to this when we have the more exact data [indiscernible] Q3 balance.

And sorry, just to confirm, that is that EUR 10 million to EUR 15 million just for Tornio and then the Ferrochrome furnace, what was that for Ferrochrome...

Yes, that is the Ferrochrome -- that is Ferrochrome maintenance EBITDA impact in total, how it was in 2020. So it was more to sort of bring the scale. And then I guess Tornio stainless will also be in maintenance in Q3, and we will also have Avesta in maintainance in Q3.

And so just to point that will be -- that's included in that EUR 10 million to EUR 15 million number that you talked about or some additional...

No, it is not. That is additional.

Okay. Is it possible sort of order of magnitude of that? Is it sort of a similar amount on top or...

It is probably a similar amount when we talk both about Tornio and Avesta. I would assume it's a similar amount or if you look back at historical period, it could be a similar amount.

Okay. Excellent. And sorry, just a final question for me, again, just back to the natural gas and German exposure. I mean can you maybe just talk through exactly what the plans are, if it does go to Level 3 restrictions. Just maybe talk about how you're thinking about the direct impact on production, whether you have sort of stockpiles or additional sources to maintain production? And then are you having any conversations with end customers? And to what extent do you see that as a risk on your customers? And then I suppose maybe if you could frame that in terms of the shipment risk as well.

Yes. And indeed, I absolutely -- we absolutely do have discussions with our customers. But I think the difficulty in assessing the situation from anyone's perspective right now is that both timing, magnitude who would be impacted, how would the political decisions be drawn, all of that remains under a lot of uncertainty. So I don't think we have like a clear message that we could share, but obviously, we are gathering information also when it comes to the customer end here. If I then come back to our situation. Obviously, we have focused a lot to have the certainty that we can run operations in Tornio and Avesta, and that also gives us some flexibility in [ resetting ], for example, cold-rolling or finishing between countries. And I think that's one important part of the backup plan. And then obviously, we are also looking into other opportunities there. Some of them will take more time to implement. And that's why I would say it also depends here on the timing of any potential sort of [indiscernible] status, how sort of -- what the impact would be. So I think there are simply too many unknowns in this, which is volume estimate or a volume impact. More broadly, I can just say that we do have opportunities then to also leverage our other production sites.

Okay. That's useful. I suppose, maybe just a different way. I think last year, there was around 4 billion of sales within Europe to other Europe, just from the annual report. Can you give sort of very high level what proportion of that would be Germany?

I think it's easier to look at one of our capacity slides and then look at the balance there. And now I don't have that in front of my eyes here. But I would sort of think of it that way, kind of look at the share of capacity that we have out of Germany. So maybe if I have done during this call, I could come back or then that's part of our typical backup slides in our investor presentations.

The next question is from Carsten Riek of Credit Suisse.

Just 1 question left from my side. It's on the demand side as well. Can you remind us how much you're exposed to the chemical sector. I think it's mainly through the duplex grades. And do you see any reservations here from the chemical customer side placing new orders because they are the ones which actually are screaming loudest with regard to natural gas or potential natural gas shortages. Just trying to guesstimate whether it's already coming along to you or not.

Yes, I really couldn't say or tell. So maybe they have raised something at some point, but it has not been -- at least it does not become visible would say to me at this point. That -- maybe it's also a result of a lot of what we would do for chemical industry would perhaps be tied to projects with a little bit sort of more longer-term pipeline. And maybe that's also a reason then that it has not surfaced to me. But chemical and energy in Europe in 2021 was like, more like 1% or 2%. It's also a fairly small kind of the industry segments that we are selling to in Europe.

Got it. And then maybe one on the net working capital because I read that you divested a plate service center in Aalten, 1 in Castelleone and so on and so forth. Is that another that in order to streamline your net working capital further? What is exactly behind those kind of steps saying goodbye to the service center, some of the service centers in your portfolio?

Yes. So these service centers have been plate service centers, so they have maybe been one of the more specialized segments that we have. And I think that's the reason to say with slightly smaller volumes, they are probably better owned by -- now the new owners who are more active than broadly in those areas and have there some maybe sort of more specialization into that. So from an overall perspective, these are fairly small part of our footprint or actually a very small part of our sort of global footprint or even European footprint.

Okay. That's absolutely fair.

The next question is a follow-up from Anssi Raussi of SEB.

It's Anssi from SEB again. Just 1 more question from me about Q3. Could you maybe describe like expected mix in terms of timing of orders being delivered and the order book, like are you delivering orders mainly from April and May and the demand was still probably a bit higher or how is it?

Anssi, I think based on the order intake, I would say this pretty much as you described that even though lead times on the commodity side is getting shorter, it is still clear that what we will deliver during Q3 is probably a lot of orders received during the second quarter and then also or perhaps even a little bit earlier. But then as it comes to the mix, I think we have now been reporting over a longer period of time that we have constantly seen this share of the pro grade getting stronger. So I think with that in mind, we certainly -- I would expect that this is visible also in the invoicing.

[Operator Instructions] At the moment, we don't have any other questions registered.

Thank you, operator. Thank you all for participating in our call today, and thank you for your questions. Before we close the call, I would like to remind you that we will be starting our silent period on July 6, and we'll then publish our January-June results on August 4. Thank you from my side, once again, and maybe Pia you still want to add a few words from your side before we close the call.

Thank you, Linda. At this point, I would just like to wish everybody a great summer. I hope you do get a little bit of summer relaxation, and I wish you a great time. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.