Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Outokumpu Q2 2023 Pre-Silent 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. Please go ahead.

Thank you, operator. Hello all, and welcome to Outokumpu's Q2 '23 Pre-Silent Call. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. With me today as our main speaker, we have our CFO, Pia Aaltonen-Forsell. As per usual, we will first start with a short update from our CFO. And after that, we are happy to open the lines and 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, and welcome to the call also on my behalf. Well, it's the middle of the summer, but certainly, from a market perspective, it still seems rather cool. So it's been a period of uncertainty and somehow, we are still in the middle of that period. I mean -- I guess we are all looking for the macro signals that would be sort of the strong signal of a rebound, and I guess we still keep looking. But I will give some more detailed comments here during the call today. I think if I try to reflect first on the ongoing quarter as we are still sort of approaching end of June here. It's been a quarter with a weaker market, it's clear now that this downturn does take -- is still taking its time. I mean inflation for sure, has been decreasing and on the cost side, that is bringing some relief. And especially, I would mention energy costs there. But really, when it comes to the market, I mean, even during the quarter, I think we could experience some really weak weeks, and I would say this is especially true for Europe. If we look on the statistics, however, distributor inventories have indeed reached rather low points but they are still cautious buying smaller volumes, and there seems to be a bit of a wait-and-see attitude. I would say we are also in the summer holiday period, especially in the Nordics, maybe approaching that summer holiday period more in Europe. And that can bring some changes between weeks. And we have seen some weeks also with a bit of better order intake now. Let's then see if that is a sign that the bottom is here already or whether there is some movement due to the approaching summer holiday period, just trying to reach all relevant data points and see everything what's happening, I think, in that big flow of things, there might now be one or two positive points as well. At least one I picked up from U.S. where at least carbon steel prices have started to increase, but let's see, is Europe next or not. Maybe a few more points [ still ] before I let over to the Q&A. I'll comment on the volume. When we gave the outlook for the second quarter, we said volumes would be stable. And I still say, by and large, we are within that guidance. I would say in Europe, there's been a bit of pressure. So volume development was maybe a bit weaker here in the middle of the quarter. So there was a little bit of pressure down, but I would say in big picture, we are within the guidance that we have given. Lead times are quite short at the moment for sure. Ferrochrome has been rebounding exactly as we guided. So clearly there, the production has now been in line with our guidance. I think we've had a good production run in the second quarter. We are preparing there for a maintenance break in the third quarter. So it means that we are also putting some of the production into inventory just to be prepared for Q3. But overall, I would say, a good rebound for us compared with the lower first quarter. And then maybe a final point on nickel price and more broadly, the impact of the metals in our P&L. So we have clearly seen declining first price levels in nickel during the quarter. And you know that for our sort of impacts from a timing perspective or the inventory related changes in our P&L, usually this kind of a situation leads to some losses and then on the other hand, we have hedging in nickel that is somewhat compensating that. What I would say right now is that with the moves that we had also including what we saw in the last few weeks with a bit of a rebound from where I've seen the analysis right now, we are probably a bit negative impact in the quarter. I think when we gave the guidance at that point, the estimates were that we would basically be neutral from timing and hedging in the quarter. And from where I'm looking at it right now, we are not quite closing the month yet. So things would still change a little bit, but I would say it's probably a negative impact in the quarter of, let's call it, EUR 15 million, EUR 20 million, something like that. So not a big negative, but some negative there could be for sure. But overall, on costs, I would say, peak inflation is behind us. We are starting to see some easing up and especially on the energy side, also really some cost decreases. So in that sense, that is helping a bit the situation on the cost side. But I think those were my key messages in the opening, and now I would be happy to move over to the Q&A session.

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

I have 2. The first one, for Europe, we've seen some competitors cutting -- were planning to cut production recently. Is that also something you are contemplating? And then I appreciate the color you gave on the Q2. But usually in Q3, we could see a double-digit decline in volumes. Is that also something we should consider looking into, well -- those weak months into the summer?

Tristan. Yes, indeed, I see no reason not to expect normal seasonality. So especially for Europe, I think you're right that historically, what we have seen is something north of 10% quarter-on-quarter decline just based on the seasonality. And I see no signs that, why that shouldn't occur this year. But of course, we will come back to the Q3 guidance and really in our Q2 report. And during the third quarter, we are planning some maintenance breaks actually at all of our main sites. But that was also scheduled for -- already earlier. But indeed, we will take maintenance breaks during the third quarter.

That's really helpful. And my second question is towards the U.S. market. I mean last time we left it and what we've seen in market conditions is that the U.S. is still relatively more resilient than what we're seeing in Europe. Is that still the case? Can you discuss a little bit what you're seeing in terms of demand? And also, I think there were expectations of potentially some base price decline in the region. Has it happened already, yes, that'll be it.

Thank you, Tristan. So if I look sort of backwards and that -- our order intake, I cannot see extraordinary strength, but also, I mean, the market is in a bit of a wait-and-see mode. But on the other hand, we also have seen, I would say, fairly stable price levels in the U.S. market, in particular. So I think the European market has been, let's say, under some more pressure. And clearly, the U.S. sort of holistically the situation seems somewhat more robust. However, it would be exaggeration to say the market is strong. The market is not strong, but just in [ comparison ] stronger than Europe.

We will take our next question. Your next question comes from the line of Bastian Synagowitz from Deutsche Bank.

Pia, my first question is just on the maintenance breaks, which you now have been flagging for Q3. Firstly, to check, will there be any further maintenance breaks in Q4 as well? And then when it comes to Q3, is there any way you could maybe quantify the cost impact as you've been doing in the past? So are you like taking these maintenance brakes both on the Ferrochrome and on the stainless steel side, what is the broad earnings impact, which we should be expecting from those?

Indeed. Thank you, Bastian. So with the planning we have right now, I would say this follows a fairly typical pattern of maintenance in the quarter. And that means that there will be a lot of European maintenance during the third quarter. And then we will, for sure, have some of the U.S. maintenance in the fourth quarter. And that's how usually also how things have played out. And in Ferrochrome, when we have the bigger maintenance break, I would say the EBITDA impact overall, given also that we will have lower deliveries or at least marginally lower deliveries, we will need to deliver from stock then during some weeks. I think historically, this has been EUR 10 million to EUR 15 million negative EBITDA impact. And probably that's not a bad guess for this time. But we will still reiterate those calculations, and we will give probably a more specific figure with the Q2 report. And then when I look holistically at the European stainless operations, again, there, I would say, if we go with all of the maintenance that we are planning right now, then probably quarter-on-quarter sequentially, that increases the maintenance spend with, let's say, EUR 13 million, EUR 14 million, maybe EUR 15 million. But -- and that would also follow a very sort of typical pattern. But some of the sort of final plans are still being completed. So there's always -- some adjustments could happen, but I think that's sort of the order of magnitude.

Okay. Great. That's very helpful. Then my next question would be, first of all, on costs and then also, I guess, what that means broadly for margins. So first of all, I guess you obviously had a fair amount of hedging in the first half still. Is there any further, I would say, more notable cost relief, which will benefit you in Q3 at all? Or is this something which we should be -- where we should be maybe taming our expectations a little bit?

Well, we are hedged about closer to 70%. And I think that means that should spot prices still be low then obviously, that 30% portion could come at a lower cost. But spot prices react extremely quickly to any changes. So in that sense, I agree with you, it's probably why it's sort of not to let expectations derail or sort of go too far, simply for the reason that the hit that we had during -- when prices were increasing, they were also just tamed or lower because of the hedging and now the same goes in the other direction.

Okay. Great. And then just on margins. So maybe, I guess, you will probably have to go a little bit region by region and maybe starting with Europe. So I guess we've seen pretty heavy pressure on European prices. Obviously, some of the [indiscernible] are reporting historically lows in base prices, even though they're probably distorted in terms of the way these prices are being reported. But I guess if we look at the spread of scrap versus transaction prices, there was actually a recent uptick in those spreads. And so I was wondering, first of all, is this something which you could mirror, i.e., do you see maybe expanding gross margins even? And if not, is there any logic for you to say, well, we're sort of somewhere near the bottom of the price cycle or are you still very much sort of unsure how far this is maybe panning out in the next couple of months with maybe seasonal softness potentially weighing further on the market here?

Yes, that is the big question. I mean trying to integrate macro signals alone. I think if I just look at the macro, it seems that uncertainty is prevailing, not to mention what happened in Russia this week and I mean there's just a lot of events that sort of keep the uncertainty around. If I then look at kind of the smaller signals, the sort of weaker signals that we get, then I think it may be a little bit more like at least anecdotally, the one or the other sort of small positive sign. But it is always like this when we are at this kind of a weak situation in the market that there's almost an overwhelming number of various signals. And I'm sure that come the end of the summer, at least we will have more clarity then on when we come back from the holidays, what the autumn development will be. But right now, it's approaching summer holiday period and what I said before is we've had some weeks of better order intake. So we've seen that as well. But is that -- I just want to be really open, is that temporary because summer holidays are approaching or is that the sign of something, we will still have to wait and see to really be able to interpret that.

Okay. Okay. And then on the U.S. side. So here, I guess, if we look at spreads, there's still I mean, impressively at almost record levels, I guess. And we just go back and look at your numbers, I guess, and the margins you've been reporting if I just reconcile also, I guess, the performance you delivered in the third quarter last year, obviously, we had a metal loss within those numbers, still you were basically in the sort of -- in the [ EUR 100s ] in terms of EBITDA per tonne. And at the moment, you're basically running pretty much at half that run rate at least in the last quarter. Now I suspect you said, I guess, volumes are improving a little bit maybe in the U.S. But I guess the question is, if spreads are very similar, is there any scope for you to really go back to similar, I would say, 3-digit EBITDA contribution? Because I'm just reconciling this against, I guess, your midterm guidance of your target of EUR 200. I guess EUR 200 clearly cannot be built on basis of the current spreads. So really, I guess the market conditions from a profitability standpoint are clearly there, I guess, maybe not from the volume standpoint. But just wondering about your thoughts here.

I mean the operational leverage is big when we get into bigger volumes. And as you've seen from our Q1 volumes, we are still at fairly sort of subdued volume levels for the first half or for the first quarter. And if we are fairly similar in the second quarter, that's like okay, but that's not great. So here is the thing, of course, that we will also need a clear volume at peak to get to higher levels. So this is sort of the balancing act that we have here. Let's not forget that there's been a number of inflationary items that in the U.S. actually were hitting a bit earlier than what they did in Europe. And we have only now sort of seen that start to decrease. So I don't want to sort of comment the margin level per se in any more detail. We'll have to wait for the report. But I think for sure, we are historically still as you know, fairly sort of subdued volume levels compared with what we could deliver normally in a first and second quarter.

Okay. Great. And then maybe lastly, putting all of what you have said so far, obviously, together I guess you have a guidance out there for, I guess, flat to slightly better EBITDA and highlighting obviously these extra impact from -- this extra impact from, I guess, metal -- from metal prices, which I guess is fair. Despite that, would you still be comfortable with the guidance for flat to better?

Yes, I need to be because, otherwise, I would need to change it, isn't that -- so -- but I think the plants do better was -- the reason that we gave -- I mean, it's a very broad guidance. And usually, we try to be at least sort of clear on whether we think it's flat or whether we think it's better. But the reason for giving that at the point was of course the overall uncertainty and then also just the fact that we had pretty big moves in timing and hedging in the previous quarter. So now I can confirm that it's not a huge move, but it is indeed a negative one, and that's lower than what -- we anticipated that it would be flat at the time when we gave our guidance. So that's sort of clearly one negative that is hitting. And I'm not changing the guidance, but within that room of flat to higher at least the part of the kind of upside was not curbed, so to say, by these metal impacts being a bit more negative than we were foreseeing.

We will take our next question. Your next question comes from the line of Harri Taittonen from Nordea.

Could you say something about the Ferrochrome market and how it looks like, I mean, from a supply-demand point of view and the supply-restrictions point of view, just to give color to get a feel what the sort of the market side of the outlook is for -- the sort of for the coming quarter, please?

Yes. Harri, so Ferrochrome market has clearly also had its -- from demand side, I mean, I think it has been weak or based on the fact that stainless steel demand has been on a lower level. So I would not sort of -- I think the demand side is on the weaker side, but we've also then had a lot of restrictions on the supply side. So this seems to be kind of for a pretty long time now, the continued story that some constant struggles in South Africa has certainly kept them, I would say, it's ore exports to China have continued but there does seem to be just continued problems and also problems with the electricity prices right now and a lot of restrictions on those. So with that all in mind, we still seem to be at a low level, but somehow balanced, at least that's my interpretation at the moment.

Okay. No, that's great. Perhaps another question just on the stainless side and kind of the import signals from Asia with the current price developments and sort of the difference? I mean -- and also like can you remind if there are any kind of -- so in fourth quarter that coming up in the next months or quarters or so or other sort of points, just a reminder on that.

Yes. Sorry, Harri, I think your line broke a bit, but I think your one question was whether there is a lot of -- if there's any signals about the import from Asia right now. And if I answer that question, I -- we really don't see any strong flows. Just simply there is not much of an economic incentive, given the kind of prevailing low price levels in Europe compared with even the price level in Asia at the moment. So they're really -- I mean economically, it doesn't make that much of a sense. So no big inflows at the moment. But then when it comes to the various trade protection measures, I would say, really importantly, obviously, there's the anti-dumping and anti-subsidy measures that are still in force, if we talk about Indonesia, we talk about China. And then the safeguards, the mechanism, the quarter mechanism was extended for one more year, and then it will be up for a bigger review in June 2024. So I think that sort of division process that went through this stream went as expected. So there was a bit of relaxation of the quotas according to the WTO rules, but other than that, they continue. And then there has been some quite important and anti-circumvention cases, for example, vis-a-vis Turkish rolling. And I know that there's a lot of activity exactly on this sort of anti-circumvention space. And then, of course, 2026 CBAM is kind of the next big...

We will take our next question. Your next question comes from the line of Moses Ola from JPMorgan.

Just one from me. I just wanted to ask what you're seeing currently on imports and how your order book is currently competing with imports into Q3? And also beyond that if you have any visibility thus far?

So I think we do not see any sort of big import activity. And I think that's simply based on the price levels for spot being low in Europe in particular. We also don't see import activity of any magnitude, of course, in the U.S., but that's kind of as per normal since some time. But I think how this is then reflected in our order intake. I think, of course, sort of local producers have taken market share from imports. But at the same time, demand is also lower. So I don't -- this alone has not sort of triggered any huge increase, rather, I think that the low imports are also reflecting the kind of weaker market situation that there is. So low prices, low imports and bigger market share for local or regional producers.

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

I just wanted to ask maybe just around balance sheet development. I know you said you're building up some stocks in Ferrochrome and ahead of the third quarter maintenance shutdowns. Just how should we think about working capital on the balance sheet into the end of this quarter?

Yes. So what I would expect is a bit of a buildup of working capital, but not huge. So from a cash-flow perspective, well, we also paid the dividend in the second quarter but given our result guidance and then the working capital building up a bit, but not by a huge amount. I still look. I think it's a comfortable sort of position still with the balance sheet as in previous quarters.

[Operator Instructions] There seems to be no further questions at this time. Please continue.

Thank you, operator. And then I think I said earlier during the call that we see a lot of sort of wait and see from our distributor customers. Then I would say that's probably what we are -- now all also need to do. There's a bit of wait and see now until we are ready -- closing our accounts and then coming out with the Q2 report and Q3 guidance. But with that Linda, maybe you can remind us of the practicalities, please.

Thank you, Pia. So before we close the call, I would like to remind you that we will start our silent period on Tuesday, July 4 and will continue until our Q2 '23 results are published on August 3. Thank you once again, and have a great summer.

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