Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Outokumpu's Q1 2023 Pre-Silent Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Linda Hakkila, Head of IR. Please go ahead.

Hello all, and welcome to the Outokumpu's Q1 2023 Pre-Silent Conference Call. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. With me today, we have our main speaker, our CFO, Pia Aaltonen-Forsell. And as always, we will first start with a short update from our CFO. And after that, we are happy to take your questions. But now without any further comments, I would like to hand over to our CFO.

Thank you, Linda, and good afternoon, good morning, everybody. And I have to say it's been a great day today in Finland and here being in the office as well. I can see, as you know, see a lot of smiling faces and certainly, we have a little bit celebrated as well, Finland becoming a member of NATO yesterday. So a good move and a good step. But let's focus on the business here. So my intention today is really to give you a very brief business update to start with and then waiting for your questions, then we can dig a little bit deeper, I hope, into a number of topics. But at least what's been in my mind the last has been the market development and particularly what's going on with our distributors in U.S. and Europe. And if I start in Europe, if I would take my cautious hat on, I would say that we are sort of at the end of destocking. And if I would be a bit more optimistic, I would say that at least in Western part of Europe, we are already in restocking mode. So you recall us talking about this as well earlier that distributors are not all in the same position. We have some who have been more acting already for a while. But I would say the broad picture is definitely that destocking is ending in Europe, and we can even talk about restocking for some of our clients. U.S. is a little bit sort of still more, I would say, put more emphasis still on that some destocking can continue into Q2, especially for some customers. So here, again, our distributor customers are not the same. I mean also, if we look at the statistics, in Europe, actually in Germany, distributor inventory is below average, and this is cold rolled. And in the U.S., we still see distributor stocks being above average on cold rolled. However, also in the U.S., we can start to see, definitely, let's say, differences between distributors and some of them are already in a somewhat sort of more positive boost or mood. But I guess that's what sort of then also has impacted our situation a lot. I would say we still have a fairly short order book. It's more like roughly 2 months, maybe a bit over 2 months. But we have had sort of a good run in the first quarter. We are very much aligned with the guidance that we gave on the volume side where we said 10% to 20% growth quarter-on-quarter. And I think we are -- we can continue to say that now that the quarter is over both for Europe and for Americas. And I would say, particularly in Europe, I would still say, hey, for our main melt shop in Tornio, the winter was not particularly easy. I mean, especially on the Finnish labor side, there's been a number of strikes. Maybe the harbor strike was sort of the toughest one. But even though this was more than 2 weeks, that really didn't in the end impact the overall, let's say, quarterly volumes. So happy with us being there sort of well within that guidance. I really have nothing special to say on the mix. I have nothing special to say on the pricing. I mean no surprise there. And maybe I'll just sort of move over to have a few comments on the cost side first. So in Europe, energy has been sort of the topic on everyone's mind. And Q1 has actually been easier, as I'm sure you noted from the stats as well. And you know we are pretty well hedged. I mean we are, for this year, 60% hedged, and we are even pushing that a bit up now, but still around 60%. Still then looking at the sort of P&L impact quarter-on-quarter, I think in the end, probably energy cost will not increase as we thought for the first quarter, but rather actually decrease a bit. And this then in combination with some, let's say, broad inflationary pressure in consumables, et cetera, when I combine these 2, then I actually believe that sort of quarter-on-quarter there shouldn't really be any significant inflation impact. So there are no significant sort of overall cost pressure, which I think it's a good -- it's a good development, and I'm sure you already noted that based on sort of spot energy prices being lower. But certainly, we've also had some opportunity to enjoy that as we have hedged part of the portfolio. I think that's important. Then important point on net of timing and hedging is, again, no surprise. I think we said that in absolute terms, there's really no significant impact of this in the quarter. I mean, yes, indeed, I think what we will have is probably a bit of positive timing and a bit of negative hedging. The absolute impact should be fairly, fairly neutral. Obviously, still waiting for the real final figures to come in. But this is pretty much according to expectations. And maybe you still allow me to remind that we actually had a big negative absolute in -- like minus EUR 50 million in the fourth quarter. She's nodding. So obviously, if we now end up neutral, then this is a positive bridge impact obviously quarter-on-quarter. And I'll round up with a few words on Ferrochrome based on the earlier startup of furnace #2. And then we also restarted furnace #3 after some operational problems that we had after the sort of Christmas time. I think we are well aligned with what we said about how much we can run, but I mean it is still a low capacity utilization, like 50%, 60% in the first quarter. And somehow the Ferrochrome market is still fairly robust. And we have now been looking into the topics that we need to address in furnace #3 in Kemi-Tornio. And what we then agreed was that we will do the bigger maintenance in the third quarter. So that means we were getting a pretty good run in the second quarter actually. But I think I'll end my presentation here and take questions next. Thank you.

[Operator Instructions] We will now take the first question. It comes from the line of Ioannis Masvoulas from Morgan Stanley.

Pia, a couple of questions from my side. The first on the Ferrochrome commentary. What sort of capacity utilization shall we baking in for the second quarter, if you have any indication?

Right. Thanks for the question. So then we wouldn't expect any major stops at all during the quarter. So kind of back to normal capacity utilization then. Well, we are normally never 100%, but clearly above 90%.

Okay. Perfect. That's very clear. And just a second question on the buyback. You completed the previously announced plan. What's the capital allocation strategy here? Are you waiting for quarterly results to come up kind of view? Or do we need to see the cash from the longs business completing? Just interested to hear your thoughts on how we should think about capital allocation, specifically the buyback from here?

Well, obviously, the long products, the main portion of the money did flow in on January 3, and the overall impact of that on net debt. You remember the EBIT was EUR 228 million, but the overall impact on net debt is a little bit more than EUR 100 million, of course, sort of improving our position there. And that money we have received, so just to confirm that. Then we have now announced that we will sell the remaining kind of smaller Swedish part [indiscernible] of the long product operation, but that won't have any significant cash impact. That was a much smaller entity that we now announced. So I would say from that point of view, that was already completed. Now on capital allocation, so dividends will be paid here in a few days. I believe it's the 12th of April. We also will stick to this around EUR 200 million CapEx for this year. And certainly, as I have said, I think sometimes before, I'm quite comfortable with having a bit of a cash buffer just given still the uncertainty with the war in Ukraine and well, now most recently, obviously, the banking crisis. However, I mean, we are now in a situation where we have more tools than before, and we have shown that we have started sort of our dividend track with a good base dividend of EUR 0.25 with EUR 0.10 of additional dividend to be paid next week. We have already completed a first share buyback program. So I think we have shown that we have tools that we can use, and our cash balances remain strong. We also have an authorization from the AGM to continue. So I think this sort of gives us opportunities that we will consider. And then if we consider the [indiscernible], then we will inform.

That's very useful. And I guess if I can push a little bit. I think on the CMD last year, you talked about a cash buffer of as much as EUR 500 million. Is that still the view? Or could it be less than that given the progress you've made over the past 12 months?

Yes. I think we have also derisked more broadly. So I think we are kind of constantly building the strength of the company. So with that in mind, I think this cash buffer of EUR 500 million is necessary expensive cash buffer for sure. But I don't think we are in a hurry to change anything. But certainly, I'm just really happy that we have more tools. And I'll still say one thing that I think is important, I mean this promise that we made on the dividend, we need to stay on track with that. And I need to make sure that we have a cash buffer and that we are sort of ready to stay with that promise. And that's really my main and first priority.

We will now take the next question. It comes from the line of Tristan Gresser from BNP Paribas Exane.

I have 2. The first one, can you just talk a little bit about the working capital movements you're seeing into Q1? What should we expect there?

Right. Tristan, and I think I was maybe sort of fairly careful with this one earlier on, and I said that what we usually see in the first quarter is a buildup of working capital. And I think it's been -- it's been somewhat of a turbulent period for sure because we've had metal price movements, sales price movement. We've had a lot that has impacted. I'll still remind for everyone's benefit that last year, we also had some buildup of working capital because we had to readjust some supply chains predominantly on raw material following the war in Ukraine. So with that in mind, our working capital is somewhat higher than historically also because of that, at least EUR 100 million higher just because of that. So I think in the end, seasonally, we are still in a period with somewhat of a working capital build. But I don't see this as too dramatic because we haven't had any kind of compare with the quarter end to quarter end. I don't think there will be a sort of a significant movement. But seasonally, we should still expect a little bit of a buildup.

Okay. That's very clear. My second question is we've seen some weakness in Asian prices -- Asian stainless prices over a recent week. I mean the import situation in Europe has been pretty supportive over the past couple of months. Are you seeing with this price differential by region and probably also freight costs going down? The risk of seeing imports may be rebounding sequentially into maybe Q2 or Q3?

Yes. Precisely, as you said, I mean, we've also noted that this price differential has now a little bit increased. And that's something we keep sort of a very tight eye on just because historically, is the price difference -- we know that if the price differential goes too big, then we have always historically seen this sort of move with more imports into Europe. And I think sort of all that I can say without sort of -- I mean, obviously, I don't know exactly how all distributors are acting now, et cetera. But I think it was quite a hard situation in Europe and especially among distributors when sort of during this earlier big wave of imports, they had actually bought a lot of inventory at high prices and then had to get sort of -- I almost wanted to say, get rid of it, in a totally different market situation with lower metal prices. So I think that probably -- this was a hard lesson. Let's see how long that's fixed in the sort of community memory. And of course, we also keep on sort of keeping a really tight eye on this. So I cannot say for sure, but I would say the risk is maybe somewhat lower now because of the recent quite difficult experiences.

Okay. That's really helpful. And maybe just a quick one on the U.S. market. In your view, why the destocking there is taking so much time?

Tristan, it is a really good question, and it is taking more time than what we may be internally estimated first. I would say, my sort of -- my understanding at the moment is that we really see now a differentiation between different distributors. So it is clear that some had really overstocked on imports. And I think that this sort of -- this differentiation shows that there's certainly -- from a demand perspective, there must be some softness because this is then reflected in the speed of the destocking. But I also think that the fact that some distributors see it really on a lot of this inventory certainly has not sort of made their situation any easier. And what is then the sort of -- how does this then play out in the market? And how can you actually -- how can you speed up the destocking, we still haven't really seen. If I just refer now to official data, you have also seen the price graph. I mean prices have been fairly stable in the U.S. So maybe sort of all of these elements somehow play in as well. And as I said, I mean, we do have some distributor companies who I would say are going already kind of more back into the normal or maybe even restocking more. But market, in general, is still having a higher inventory level than normal.

We will now take the next question. It comes from the line of Krishan Agarwal from Citi.

Most of the questions you've addressed. Maybe a couple of questions on the pricing. So I mean, there's a lot of pushback when we talk to the different producers in this [indiscernible] are you saying 400 base price. And then -- so what is your assessment in that sense that -- are you correct to say that base prices have gone to the level of 400 or the transaction prices are much higher than what the CRU is reflecting the base pricing?

Right, right. Well, thank you for the question, first of all, and I think you are asking a really difficult question because we -- I mean, I think you all know how CRU work. They are collecting data from a number of market participants. And I've always sort of tried to be a little bit careful, not sort of -- I think the trick when I look -- the difficult thing when I look at this from inside the company's perspective, it's obviously that we, first of all, start with a fairly big share of contractual arrangements that are more long term. So I mean, if I look at sort of our moving price list, pricing data, of course, it's not the same because we have a lot that is priced with, let's say, different mechanisms and where things are being set on a more long-term basis. But then as well on the transactions, obviously, this data needs to come from somewhere, but I could not simply say it's right or it's wrong. I think it's an indication, and you need to also think of it as an indication rather than a sort of an absolute truth. That is the best I can say today.

Yes. Yes. Understood. So directionally, CRU does reflect how the markets are doing while every contract -- I understand that. And the second question on the U.S. I mean we are in the middle of the destocking from the distributors there. But then the pricing doesn't seem to have much of the impact from that. So does it give a signal to you that when the U.S. market is going into the destocking, there is probably a case for the higher pricing?

I'm always careful in giving any comments about the forward-looking pricing. So maybe I just sort of need to leave this a little bit open-ended and sort of not really reply directly to the question. But I would say just observing sort of the market during the spring, I think if we are now -- we've sort of seen probably sort of the most difficult part of the destocking already end of last year, sort of early this year because we now have some distributors who are returning to a more normal, normal situation. So probably, we've sort of been through those darkest hours and are going for something improved. How long it takes to kind of for everyone to be back to normal? Maybe that is something that still will take us kind of way into Q2. But at least, we are sort of heading for something more normal now, it seems.

Yes. And then one question on the volumes. So when we spoke last time, 3 months back, the guidance was for 10% to 20% of the volume increase. I think the expectation at that time was destocking probably is in the last phases and then it has lasted a little longer. So is it fair to assume that the volume uptick is more at the 10% range rather than the 20%?

Yes, I think it's fair to assume that, absolutely. But I would say we are solidly still within that range.

Yes. Okay. And the last question is on the cost. So you said that energy is probably a tailwind and then some of the other cost pressures that there is not much of a movement. So should it be the case in the Ferrochrome as well where the operating rates will be higher significantly versus the Q4? Does that mean that the positive impact on the operating leverage is also offset?

Yes, yes. What I would say about Ferrochrome is that if we really only would look at energy costs, they get sort of more of a tailwind because the share of energy as part of the total cost is bigger in Ferrochrome than in stainless steel production. However, because of the really low capacity utilization rates, you get a lot of sort of other impacts kicking in. So I feel -- think it's sort of prudent to assume that those other impacts are somewhat negative. So you cannot sort of just give a huge boost because energy is lower because we were operating at only a little bit north of 50% capacity utilization. So that doesn't change so much in this quarter. Obviously, for Q2, if we are able to run more back to normal, and we will be running back to normal, and we have lower energy price on the spot right now, then that's going to be kind of the real benefit coming there.

We will now take the next question. It comes from the line of Moses Ola from JPMorgan.

So I had a question on the demand outlook. So if you're already seeing to enter destocking in Europe and restocking in some parts of Europe, how should we then start thinking about shipments into Q2? Is a similar range for what you guided for Q1 appropriate? That's my first question.

Yes. It's a good question. I will come back to the -- what really our guidance in the Q1 report for sure. But I think somehow the market is turning kind of one notch better. We're already enjoying this sort of end of destocking and gradual start of restocking a bit during Q1 in Europe. So with that now really coming to an end, the restocking really starting, I think this is like one notch more positive. Please remember that on a global level, we have 50% distribution, 50% end customers. And in the end customers, I haven't touched that so much here today. I would say we there also have a bit different situation in different segments. I mean we still have a fairly robust automotive for a number of reasons. You know all the supply chain issues earlier, et cetera. We still have a good sort of situation in some of the kind -- can we say, like heavy industries, anything around energy, I mean, all of those are still looking really good if they are maybe more sort of the specialized deals. Appliances is showing some weakness. So we have a bit of a mixed situation there for sure. But obviously, this is the kind of distributor development is moving the needle kind of short term between the quarters, and that seems to be more on the kind of positive piece now. I don't want to say it's strong, but it's kind of turning -- the dial is kind of to the stronger direction.

And then my second question was on Ferrochrome. So the Q2 benchmark accounts 15% premium versus Q1. You've historically guided for a EUR 0.10 a pound increase corresponding to EUR 7 million to EUR 10 million. But what is now, I guess, the updated sensitivity given lower capacity utilization that we could expect?

Yes. And I'm sorry, I don't have an updated sensitivity for the very low capacity utilization, but we will be back to normal capacity utilization in Q2. I know that's not making it kind of super easy. But I think energy is one notch cheaper than it was in Q4, already in Q1, just a little bit cheaper. And I think this positive development as based on forward prices today will continue into Q2. So we will see an easening of the energy situation, not a tightening and there is an upgrade then to the sales price. So I think if you sort of compare with some sort of historical data, then I just -- the sensitivity is still the same what we have said before.

Okay. And then finally, just on the raw material-related impact. So some of your peers have already indicated that they've seen negative inventory valuation this quarter. Could you just explain the moving parts of why you believe that there's been no real impacts in your business this quarter?

Yes. So one of the really tricky things actually to sort of measure in here has been the part of moly as our inventory. Because these dramatic movements in the moly price first up and then down, I think, certainly, depending on sort of how your stock and kind of what's your kind of price out mechanism and how you have sort of done that, I think that could have actually a much bigger impact than ever before. But we have looked through that, and I would say there shouldn't really be. Based on that, I don't really see any significant change for us in Q1. And I think this is certainly something that has moved much more than what I have seen before during my 4 years here at Outokumpu. And then just looking at sort of -- from our perspective, what I can say is that I see that quarter-on-quarter, certainly, we will have some positive timing impact. So it means that the timing for us is the difference between the pricing and the price out. And then again, from hedging, we will get some hits. But these amounts are now smaller than what we have seen in earlier. So the positive on the timing and the negative on the hedging, they won't be -- they are 2-digit figures, not 3 digits, and maybe quite low 2 digit. So that's what I can say, I...

We will now take the next question. It comes from the line of Harri Taittonen from Nordea.

Just to double check on the Ferrochrome kind of operational that. I think you mentioned that you will take a more kind of fundamental maintenance at -- and service top at the Line 3 in Q2. Did I sort of get that right? And could you just kind of give a picture of that kind of the yearly profile of the maintenance impact this year with Ferrochrome, which probably you need to take some extra measures during this year to get the technical issues fixed. So maybe some sort of operative color on that side, please?

Yes. Thank you, Harri. So this really is the change that we shared now in this call. We will put it in the pre-silent newsletter as well. So due to the operational sort of problems that we encountered just after Christmas, and that continued into January on furnace #3, we are foreseeing a more sort of major maintenance break. And we initially thought that we would make or plan to make this maintenance break in -- basically in May, but -- and a little bit into June. But now based on our most recent planning and decisions, we will do this during Q3. And the sort of benefit of that is that then this other maintenance that we had planned for this furnace for the year will be combined. So then we sort of do everything in one, and then we don't have other significant maintenance breaks. So then there will be a significant maintenance break on furnace #3 in Q3, but this will be the only significant maintenance break in Ferrochrome during this year.

Okay. Okay. And if I remember right, it's been around EUR 20 million in sort of some years ago, I think in a normally...

Sometimes EUR 15 million, but if you're prudent, you will see EUR 20 million. We will tell about this then when we have the more detailed plan, but indeed, you are right.

Understand. Okay. So -- but basically, then if you are saying -- you were also saying that you will be getting to more normal capacity utilization. But that is then also we have to take into account that the Line 3 will not be fully -- until you take the maintenance. Is that the case?

Yes, they will -- so we are not getting up to 100%. I don't actually have an exact figure here. I don't have that yet. But I would say maybe we need to -- maybe we need to count in that it's not 100%, but we should be around 90%, at least because we are -- indeed, we will go back to running 24/7 and we have sort of -- we are back on track to be able to run close to normal operationally at this point. And I think that more detailed planning then has resulted in our decision to take the break only in Q3 and then be able to combine everything in one break.

Okay. No, that's great. I mean, no need for exact numbers, but just -- that's a good feel that you can add production quite a bit without or even before that maintenance. Okay. That's good to know. And then, I mean, presumably, you've been -- now that you have not been in the spot market at all because you've been obviously cutting the production. So I suppose, I mean, are you going to be able to benefit normally from the higher benchmark price when the volumes go up? I mean is that something...

Yes, it's a typical pricing mechanism in any case that the benchmark. That's one of the prevailing mechanisms for pricing. So obviously, the other one is the spot price if China -- but we are selling very, very little, if anything really to the Asian market. So..

[Operator Instructions] We will now take the next question. It comes from the line of Ioannis Masvoulas from Morgan Stanley.

Pia, sorry, just a quick follow-up, more of a housekeeping question. Now that you've sold the remaining of the longs business, what should we assume for the underlying EBITDA? Because in the past couple of quarters, that was sort of mid-single-digit million euros. Does it go back to negative?

Yes. You're right that we've had sort of a slight positive from this remaining long products entity, but we have a few other topics as well in this other. So I would say the impact of this one individual entity has not been more than EUR 1 million to EUR 2 million per month. If even that, it has been a very insignificant amount. So -- but that will, of course, now be gone then from the date of closing. So now we have signed, but we are still, of course, going into closing then as soon as possible, but we have not closed yet.

Okay. So the other line remains at close to breakeven or slight positive, it doesn't turn to negative going forward?

Not based on these, no. Not based on this, no.

There are no further questions at this time. I would like to hand back over to Pia Aaltonen for final remarks.

Thank you very much, and thank you for the good questions. And obviously, we are now at a point where there's a lot of macro uncertainty. And certainly this is a topic that we will come back to also commenting in our Q1 release. Nonetheless, the way how we see particularly the distributors and sort of that situation developing right now has still made it possible for us, I would say, to continue according to our guidance and with a good run in Q1 and into Q2. So I look forward to speaking to all of you soon in our Q1 release. Thank you, and have a good day.

Yes. Thank you for participating in our pre-silent conference call today. Before we close the call, I would like to remind you that we will start our silent period on April 9 and continue until our Q1 result is published on May 9. Thank you once again, and have a great day.

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