Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Outokumpu Q3 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.

Thank you, operator. Good afternoon all, and welcome to Outokumpu's Q3 2023 pre-silence call. My name is Linda Hakkila, 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 introduction. And after that, we are happy to answer your questions. But now without any further comments, I would like to hand over to our CFO.

Thank you, Linda. And indeed, a good afternoon or good morning to you all. It is indeed also autumn here in Helsinki, but what can we do? We will try to talk about some positive things and maybe also some things that are indeed still challenging in terms of the market today. But let me move quickly just first to the current market situation. And I wanted to start off with sort of what we see here and now in our order intake and sort of how we understand the market as we speak, And maybe I'll still start with just saying that when we had the Q2 release, we already talked about the fact that we saw, let's say, maybe a little bit green sprouts or kind of a little bit of an uptick in the order intake already in July. And I would say from really an order intake perspective, what we have seen during this quarter is maybe back to something a little bit more, let's say, reasonable or, let's say, a little bit more sort of normalizing. We are still definitely talking about a market that is on the weaker side. We are talking about the market where especially appliances segment certainly is very impacted by the overall macro environment and where distributors are still across the board being very cautious. But we do see sort of some return to normalcy. And I think we can all observe, if we look at CRU price growth, et cetera, that prices have been increasing from indeed very low levels in the order intake during this quarter. And maybe I'd still say that this sort of general comment about a bit reasonable but still a market on the weaker side goes across the Atlantic. So this is Europe, this is America. And then especially for our Advanced Materials business, what we have seen now is that a couple of those contracts were earlier during the summer either in a waiting mode, waiting to see if they would realize et cetera. We have actually seen them come through. But I mean, these are like individual examples, but still fairly important and big projects. So that's something that we see now in the order intake. And all in all, I mean, when I say reasonable, I try to somehow illustrate that you know that our lead times, our order books have been shrinking and lead times got shorter and shorter. I think that has stopped now, but we are still on fairly short lead times. I think from Tornio typically we would talk 6 to 7 weeks. So this is shorter than really in normal times. But at least we do not see a decline anymore. So some sort of reasonable levels there for sure. And I will take a step back and try to focus on what we really saw realizing in Q3 really in terms of realized volumes, realized invoicing. And here, first of all, I think the volumes followed really exactly what we also said in our guidance for the third quarter. So I mean, we were talking about a decrease of 5% to 15%, which is -- this is the seasonal pattern, and maybe it's a seasonal pattern a bit plus with the weak market. And I think we are really sort of firmly within that guidance comfortably the way at least I like it that we are pretty much there in the middle. So I think that's what according to our fairly low expectations. And then still how this normally goes is if we have a lead time of 6 to 7 weeks, you still have to count in that order intake during Q2 happened at lower and lower prices. And those lower prices that were in the spot market in, let's call it, May, June, those are now visible in our realized invoicing in the third quarter. So if we start to see some increases in prices in order intake in July, that could at a maximum be visible kind of in September in our invoicing. So with these sort of lead times, we will still see only in Q4 the benefits of now this initial price hikes, not really in Q3. So maybe that was sort of the market side, let's say, overall. I wanted to comment just one thing from operations. Q3 obviously is a quarter with some maintenance breaks so we will have some higher maintenance costs on the stainless steel side. On the Ferrochrome side, we had a slight move of the maintenance break. So it was supposed to start in September. Now it has started in October. And I mean, the reason for that was partly internal. We wanted to finish the inventory buildup; but it was also partly just in order to make this in a really smart way due to, let's say, a lot of projects also in Northern Finland. We found that it was much more reasonable to do this a bit later in the autumn. So for us, this was just all in all holistically in the best way. So that Ferrochrome maintenance break has moved a bit a few weeks further in time. So it happens now in the fourth quarter. And then nickel, I mean, you have all seen nickel price really coming down. And I think that this is maybe the one thing for the Q3 results that I really want to say, that what we see now in terms of what we call the raw material inventory-related gains and losses and then gains and losses from hedging or for short timing and hedging, what we see here now is more negative than we saw when we gave the Q2 guidance because nickel prices just continue down, down, down, down. And yes, down and a bit up but down again. And we are sort of now clearly below the 20,000 mark. We are at 18,500. And I think with where we saw sort of the month ending, this is not yet the closed books but this is sort of the calculation based on where the month ended, instead of being sort of just a little tiny bit negative as we were foreseeing, with those nickel prices that you have all been able to observe, the timing and hedging impact will be negative EUR 35 million to EUR 40 million in the quarter. And let me just try to then sort of summarize that from a European perspective, where the realized prices in the third quarter were really impacted by those price declines, you could see sort of in the spot market order intake during Q2; and then combine that with this week, nickel call timing losses that are quite substantial, and then, of course, weak volumes. This is a difficult environment to make any kind of profits for Europe. And I think this is quite time specific. I think the third quarter is typically a weak quarter and a more difficult quarter in Europe just profit-wise. So this is not at all a typical quarter. This is seasonally a very weak quarter. And then when you add there this big impact from the negative timing, it's sort of a lot of bad things happening all at once. But if I look forward, of course, I don't want to guess what the nickel price will be. But I think what we at least now see from sort of the already realized orders is that we are able to book reasonably also with the spot prices going up, which gives some, let's say, trust to the future. I think more or less that was what I wanted to say upfront really on the stainless side. I think the Ferrochrome side, I'm sure you have all observed some important market data that is out there. Even though demand in ferrochrome is, of course, muted along demand with stainless steel, there's been continued challenges on the supply side. So I think that has got somewhat of a balance in the market. Our own operations have been running during the third quarter. However, I would say we are yet, let's say, very far from those kind of tough quarters, as you may well understand. And then the final point, we have recently spoken already a lot about our strategy Phase 3, and we wanted to talk about also our preparations for that. We wanted particularly to highlight Americas as a market with a lot of opportunities going forward and how we are preparing for that, amongst other things, by evaluating and assessing our opportunities both when it comes -- and options, both when it comes to hot rolling as well as cold rolling. And I just wanted to say we hosted a webcast 2 weeks ago, where our President for BA Americas, Tamara Weinert, also gave a very detailed explanation, including our readiness to make a decision for the hot rolling. And I mean, we continue to work with that. So I mean, as we speak, we are waiting for the air permit, expecting that we could get that in November. We are also hiring really senior project management and resources into the project. So I mean, we are continuing to even increase our readiness, and we will, of course keep you posted on this matter as well if anything relevant comes up. So I think that summarizes my opening words, and I will now be happy to take questions.

[Operator Instructions] We will take our first question, and the question comes from the line of Patrick Mann from Bank of America.

Could you just talk a little bit about the Americas division? So I mean you spoke quite a bit about Europe and volumes down, pricing down, nickel down. Can you just give us a little bit more color on what's happening in the Americas division? And then maybe if you could just talk a little bit about working capital on the balance sheet as well.

Yes, indeed. Thank you, Patrick. So on the Americas side, I would, first of all, say we have been observing a lot the distributor data and the inventory data, and the reason obviously being that Americas is a very distributor-focused market. So this is super relevant. And we were past that sort of restocking point in terms of just tons already in May or in May, June. We haven't seen the sort of real pickup or kind of the real sort of boost to come. I think we are still observing our customers to be cautious. We have recently -- I think, only in the last few weeks, we had a lot of really high-level meetings with our key customers. And I think they are also talking about the higher interest rate environment being -- so it's certainly one thing that is putting a bit of a lid on also appetite to keep working capital. So there are certainly the same sort of more almost macro level uncertainties that are just simply sort of capping at the moment the appetite to really restock. But we see sort of this, what I would more call like replenishment like smaller orders, they are coming in. I mean business is continuing but our volumes continue to be -- there's not -- Q3 is not seasonally a weak quarter, but it's just that we haven't seen that pickup really happening. And you know our volumes in Q2 were not that strong. In Americas, just what we have seen in the order intake is that the price levels are obviously still -- they have been sort of more stable. They have been stronger if you compare with Europe. But definitely, as things don't start picking up, I think the bit of pressure there as well on the price side has been, let's say, at least sort of tentatively showing up. So the Americas business environment itself is still stronger compared with the European one. I think that's really fair to say. Now the nickel price decline impacts also in the Americas business. So this timing topic because we haven't closed the books, so I don't have the timing specs yet per business. But if I just think about the nickel risk that we have, then we certainly have sort of the long position that we have in the group, it's definitely also coming from BA Americas. So maybe it's fair to say that our nickel position, typically, we have been -- it its 1/3 in Americas and 2/3 in Europe. So with that said, I would expect some of that negative also to show up in BA Americas. So maybe that's sort of just sort of a rounded comment on what's going on there at the moment. And then balance sheet, working capital, from a cash flow perspective, obviously, as we have been buying less because of the lower volume environment and then it also starts with lowering the inventory starts from the early part of of the whole value chain. So I do think that what we will see particularly towards the end of the year is still a reduction of the working capital and a reduction of inventories. There is not a dramatic shift between Q2 and Q3. Rather, I would say that the sort of step down really, especially in terms of inventory, I would expect that to happen more in Q4 as we are now also seeing this some more reasonable, I would say, sort of order intake and pick up then also on deliveries into the fourth quarter. So what should I say, overall, from a balance sheet perspective, I am absolutely convinced that we will still have the strongest balance sheet in our industry at the end of the third quarter. We will probably have a little bit of net debt. So we have a negative net debt for a long time. I think there will be just sort of a pad of that, but nothing significant. That's what I would expect.

Your next question comes from the line of Ioannis Masvoulas from Morgan Stanley.

A couple of questions from my side. The first around the pricing you're seeing in Europe. So spot prices have started to move higher as you suggested in July, August, and I guess, into September. But if we take into account the typical lag that you see in Europe, is it fair to say that pricing could be a headwind in Q4 versus Q3? Or do you think that on a realized basis, that could be a problem for the European business?

Thank you, Ioannis. Based on everything I see right now, it's going to be positive quarter-on-quarter. So I think the real headwind is in Q3 because a lot of that decline in the prices happened during the second quarter and then that kind of realized in invoicing in the third quarter. And when I look at the realized invoicing figures, I can see sort of a small pickup already at the very end of September. So I think that's kind of the direction we are going in. But just to sort of keep the expectations under control. I think it is exactly like you say that there is always this delay. So in July, we saw an order intake a small improvement in the pricing. And then that translates into a small improvement maybe at the end of September in the realized invoicing, and that's kind of where we start from there.

Okay. Perfect. And the second question around the -- going back to the tolling contract with ArcelorMittal, as you suggested there is no update as of today, but is there any engagement between you and them in terms of potential expansion of the contract? Or would that not be your preferred way forward if you have that option?

Yes, it's a really good question. But I want to really start by saying that we have a really good relationship locally and we are talking continuously. So I think it's only natural that we would talk about operational things and contractual things, et cetera. So I mean, we have a good dialogue. And when we are assessing our own options, of course, it means that we need to assess available options from sort of all circumstances. And there is no riding as we have been pretty excited about the project. And I'm sure if you saw Tamara, you can confirm that and that we are really -- when we learn more and when we increase our readiness, I think that's also very healthy for them being able to make proper assessments.

Okay. Understood. And maybe related to that, is there any update on the potential EBITDA contribution if you were to go ahead with the project? Because you've given us enough information around the CapEx and even a potential working capital benefit. But is there any timeline where you could come out with an update on what sort of EBITDA question we should be expecting?

Yes, yes. Thanks. I don't have an update on that today. And from a CFO's perspective, that's typically a thing that I would also love to keep pressure on until we arrive at the time for the decision. So I think realistically, I would assume that this is something that we would then combine and have sort of concluded on internally also at the point if and when we arrive to an investment decision point. So I don't have an update on that now.

Okay, okay. That's very clear. And then just the last question on the U.S. -- the Americas business. If we look at base prices from CRU, they show that they've been extremely stable. It seems like on the volume side, there is potentially not a big change quarter-over-quarter. But if we were to think about your EBITDA in Q3 versus Q2 in Americas, how should we think about the different moving parts? I mean, is pricing really stable? Are you actually seeing some sort of pressure? I'm interested to hear your thoughts on that.

So I think the market is definitely not a strong market. It's, yes, kind of borderline reasonable in the third quarter. And because the volumes remain pretty low, I mean, just even if volumes are stable compared with the second quarter, those are still kind of in a historical context, those are still low volume. I would say it always also leads to a situation where on the margin, you need to recognize some pressure on the pricing. So I don't think there is any drama around that. But I do think this is not a strong market environment, so just want to be open with that. And I think the real topic here is as well a bit of pressures from the metal side because we see this decline in nickel during the quarter. So that is definitely a pressure sort of a bit to the negative side.

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

A couple of questions and the first one about costs. So are there any major items, for example, energy costs if you think about Q3 compared to Q2. And also this maintenance costs, so just to make sure, is it so that the whole EUR 10 million ferrochrome maintenance impact will be seen in Q4? And is this other EUR 10 million maintenance cost still expected in Q3 numbers?

Yes, yes. So first, on that maintenance. That's other EUR 10 million, that's the stainless side and that is according to our earlier expectations. So that's a EUR 10 million addition quarter-on-quarter from Q2 to Q3, and that's on the stainless side. And then on the ferrochrome side, that extra maintenance cost is moving to the fourth quarter. And when we were earlier talking about this EUR 10 million negative impact in ferrochrome, that was a combination of additional maintenance costs and then kind of the lost contribution for some volume.

Okay. Clear. And no other major like cost...

Likely major -- I mean, I think on electricity, I mean, you may have observed that in Finland, for example, there was both a little bit of pressure on the prices in August and then there's been a really good sort of environment in September from a consumer perspective. So I think that, in the end, sort of kind of evens out a little bit. So we still have this fairly high hedging ratio, I would say globally -- or Europe has been more important here, 65% to 70%. So we still have some open as well in the quarter. And I think the way things turned out, it's really pretty even from Q2 to Q3. I saw nothing sort of extraordinary there. I think we said before that we are targeting now to really start to see deflation, for example, in consumables, et cetera. And I think a lot of the contracts are renegotiated, et cetera, but there are many that reset only from 1st of Jan. There are some contracts that could reset towards the end of the year. So kind of Q2 to Q3, I see that it eases up a little bit as we are talking on the cost side overall kind of single-digit millions. So then the maintenance cost kind of ease up the benefits that we have been potentially getting from some other sub-areas.

Okay. Great. And then about the scrap market, how does the market look there? And are the prices following nickel prices? Of course, maybe some lag, but how do you see that market?

The scrap market is a really interesting one. So I want to start by saying that we have been able to access all the scrap that we have needed in this market condition. And I think that particularly earlier, but this was maybe more Q2, there were also some what I would call opportunities that we were able to benefit from. I do see that the market has been somewhat tightening during the third quarter. However, still, from our perspective, not a problem of availability, not a problem of some sort of spike in prices or anything like that. But clearly kind of going a bit in the cycle direction. Your question about the linked to LME pricing is super interesting. Because I can say that there's clearly also a link to NPI-based raw material cost, for example, price in China. So there are like these kind of some floors that are sort of maybe dynamically developing in the market. But this is very dynamic. This is very dynamic. It's really a matter of demand and supply, and then it links to other sort of relevant key metrics. So what would I expect here now going forward? I think it's equally important how the demand on the stainless side develops as it is then what we can see happening on the LME nickel side. But I mean, on the LME side, the nickel price pressure has just been down. So that's certainly sort of -- maybe that should give some relief, let's say. Let's see.

Next question comes from the line of Krishan Agarwal from Citigroup.

Most of them have been asked. If I can ask on Europe, I mean, you mentioned that the multiple things going negative at the same time, lower volume pricing and inventory, and probably it was not a great time to make profit. So how do we think about the European profitability as we speak? I mean, for the month of October on the spot basis, excluding the inventory mark-to-market from the question, are you still making some money? Or it is at the very low level, if at all, you are making?