Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Hello, all, and welcome to our audiocast where we will discuss about our recent announcements. My name is Linda Hakkila, I'm the Head of Investor Relations here at China Gas. Our main speakers today are our CEO, Heikki Malinen; and our CFO, Pia Aaltonen-Forsell. We will first present you a few slides. And after that, we are happy to answer your questions. But now without any further comments, I would like to hand over to our CEO.

Thank you Linda, and good morning and good afternoon to everybody. Hope you are doing well here in the midst of the last quarter of the year. The objective of today is to discuss our announcement from last night regarding the hot rolling agreement in the United States at Calvert and also a couple of other decisions we have taken. We have a few slides. I will not use a lot of time here. I'm sure you have a lot of questions. So this is more just to set the scene, so to speak. If we go to the first slide, just a reminder for those of you who don't follow Outokumpu that much in detail. We have 3 phases in our strategy. We are currently in Phase 2. And our current objective is to strengthen the core of the company, focusing really on our core assets in Europe and North America, and we are continuing to work and prepare for a Phase 3, which would then start in a few years' time. Now to the news of last night. As you know, we have a, in some ways, unique setup in Calvert, whereby the hot rolling which is a very, very critical part of the process was outsourced and it is being conducted in our adjacent site, which is owned by AM/NS company. And this setup was established a long, long time ago, prior to Outokumpu acquiring in Inoxum and that setup has been working in the recent years quite well. Now in the current setup that we have, there has been a question of how do we move forward for the future years? Should we hot roll ourselves? Or should we continue the partnership? Or should we look at other options? And basically, we have announced that we have been able to achieve what I consider a good agreement, a good arrangement with our partner, AM/NS. And the negotiations have been completed. And basically through that, we have been able to successfully extend the existing cold rolling agreement until 2051. And thereby, we will continue working include collaboration for many, many years. I do personally believe this is a win-win arrangement. Of course, both parties had their own needs. But I think in the end, we should -- I hope we are all satisfied. The agreement basically allows us then to have 900,000 tonnes of our hot rolling needs served by M&S. Our melt capacity is about 900,000 tonnes a bit more, and we have 600,000 tonnes of cold rolling. And as a result of the arrangement, there are certain financial implications of that coming from that. And thereby, we are communicating that we believe our annualized normalized EBITDA for the Americas business area will drop by about $30 million from $200 million to $170 million. And related to this agreement, and we are also -- we will be recording a noncash impairment for the end of this year. Now I would like to ask Pia say a few words about the impairment booking before I go forward. So Pia, please.

Yes. Thank you, Heikki, and hello, everybody. Well, it's rare that I got to discuss purely an accounting item, but really to clarify that this is a noncash accounting item, I would like to say a few words. You might be familiar with practices for impairments. But what it's really about is when something is changing in the business, such as now we are entering into this new contract, but also as an annual process, we would be comparing our assessment of the future cash flows of operating segments with the assets that we have there. And as a result of such a preliminary assessment, we now believe and communicate here that we would be booking into the Fourth Quarter into business area Americas, an item -- an impairment item of $280 million. It will be treated as an adjustment item and it's purely noncash. And then, of course, as a result of this the value of our assets in our balance sheet will be lower. And then it also means that in the future, depreciation will be approximately $30 million lower per year.

Okay. So thank you, Pia, for clarifying that. Now if we then take a little bit step forward and look at the future. So obviously, this partnership is very important for us, and we're excited about the arrangement, for a number of things. First of all, it does allow us the company to grow faster in North America, which is extremely important for us because we really like the North American market and U.S., in particular and it also allows us to secure strong shareholder returns, which is also something we have communicated as being really important for management. By doing this, by having this arrangement now, we basically are able to avoid nearly approximately $1 billion investment into hot rolling. And it also then allows us to do a number of things. One, of course, is that we will now be in a position to really accelerate and look at the potential expansion of our cold rolling capacity in the U.S.. Now recognizing again that we have 900,000 tonnes plus of melt. We have the 900,000 tonnes of hot rolling, but we only have 600,000 of cold rolling. So we are short on cold rolling. And to increase the revenue and margins of our business in North America, this is, of course, highly beneficial. It allows us to keep our balance sheet strong and also it then continues to support our policy of stable and growing dividends. Now in terms of financial targets, we have published them then when we started Phase 2, our net debt-to-EBITDA will stay below 1. Our CapEx for this part of the journey, 600 million is still the whole site. And we are working very hard to achieve the run rate improvement on EBITDA of 200 million. And there, we are also on course, and we continue to update you on every -- each of our quarterly meetings on how we're making progress. And you saw last time in Q3 that we were on track. And then finally, of course, we had the stable and growing dividends. Now in addition to this important arrangement, our Board of Directors have also approved a share buyback program up to EUR 50 million. And basically, we will now start very soon on December 1 with the program, and the objective here is to repurchase a maximum number of 11 million shares, and this relates to are primarily to our convertible. And then my basically final slide before we take questions is to say about Phase 3. When we met during our Q3 release, we spoke about the priority areas, and they were 4 basically, Americas expansion, which I've just confirmed is very, very important for us, but also European competitive. And this is important, 2/3 of our business still comes from Europe. Value chain integration, and here I specifically relate to -- when I talk about that, I talk about raw materials and energy. We made some announcements here recently with CRONIMET and others. And then sustainability leadership where we are the sustainability leader. We have the lowest CO2 emissions in the industry. We are the only 1 who has the approved SBTI 1.5 degrees commitment that we are working towards intensely. So the arrangement also allows us then to allocate capital into these other areas in the years to come. So with those words, Linda, I hand it over back to you. and take it from there. Thank you.

Thank you, Heikki. Operator, we are ready to take questions from the line.

[Operator Instructions] The next question comes from Anssi Raussi from SEB.

Thank you for the presentation. A couple of questions. And the first 1 is about your mix improvement, which was 1 of the main reasons behind this potential hot rolling investment and I have understood that even if you expanded your cold rolling capacity, it still wouldn't allow you to produce some of your higher grade products. So what has changed behind this? And do you think that you will be capable to produce these higher grade in the future?

Also, do you want to do both questions, simultaneously shall answer them 1 by one? Answer first your first question. So yes, mix improvement is important. We obviously have many different products we manufacture across the company. In the U.S., of course, it has been more the commodity grade the hot rolling investment itself would have given us certain flexibility. But I think ultimately, what at the end of the day, which is also very important is what can we melt and we, of course, can build very different types of alloys. And then when we look at the expansion of the cold rolling, that will also give us some opportunities then to roll different types of products. But I would say that the solution we now have in place does not, let's say, dramatically constrain us. So in that respect, I do feel that it is not like we have closed any material doors here for the company. Simultaneously, I would say that with the cold rolling investment, potentially, it does again give us more revenue and more margin and that in itself is already very, very important, which the hot rolling investment would not have given us in the same magnitude.

Okay. Thanks. And maybe the second 1 about this potential cold rolling investment. So talking about timing and maybe if you're planning to match your hot rolling capacity or what kind of initial plans you have at this point? Anything to comment here?

Right. So obviously, we have been applying for the air permit. That process is very far away. We hope to be able to get that soon. We need that for both. So that's 1 thing that hopefully will be resolved here in the not-too-distant future. And then secondly, with respect to cold rolling. So we have already started the work on the feasibility study there. And I hope that now with this hot rolling agreement, so to speak, settled, we will accelerate our work and really focus all of our energy on figuring out how to move forward with the cold rolling. So I cannot give you a definite date but I can confirm that we will definitely accelerate the work starting, so to speak, Monday morning.

The next question comes from Tristan Gresser from BNP Paribas Exane. Please go ahead.

The first 1 is really on the strategy and a little bit on the timing. I mean, we spoke maybe earlier in the month, you seem pretty sure that the final decision regarding this investment would not be in 2023. So I'm curious to understand what has changed since early November. Is it something new in the feasibility study that you saw really what has changed since 3 weeks ago?

Tristan maybe I can at least start here and perhaps Heikki still wants to fill something in. I think it's really -- I mean, there's a number of things coming together here. I mean, obviously, our own work on our feasibility study has continued full speed. But I think I can safely say that there was no like big surprise or a big event happening. As you know, on the feasibility, we still had a few really important things that we wanted to complete towards the end of the year or early next year. However, that's not really -- that's no negative surprises on that side. But if we look holistically at the situation and take in then the discussion and the dialogue that we have had on the tolling agreement I think we now arrive to a situation where the timing was right to take the decision. I don't know, Heikki, if you want to add something.

No, always, we have done -- I think we've done our homework really carefully. We've assessed all options. We've given a lot of consideration to different ways forward. And like always, a process like this, and I'm not referring to the negotiations with M&S, they take their own time. But personally, I feel that the outcome is good. We have a good partner and I'm very pleased with the outcome. And I hope that the other -- our partner is also satisfied, at least I hope so.

Okay. No, that's very clear. And talking a little bit about the normalized EBITDA First, what are the underlying assumptions there in terms of volumes and mix? And if it's possible to -- if this has changed versus prior the USD 200 million to USD 170 million.

Thanks, Tristan. The main change that has occurred is that now we have concluded on this tolling agreement. I mean obviously, the previous information that we gave about normalized EBITDA, we were still in the previous agreement period, and it was on that premise. And really, if we look further into the future, I don't think that our view, for example, about the market in Americas or about our other ability to produce or to make results has really changed. So what has changed now is that we have concluded on this agreement. And we wanted just to clearly communicate impacts.

Okay. And in terms of volumes there, is it 650,000, 700,000 tonne a year is kind of a good range?

I think it sounds like a feasible range per se, yes.

Okay. No, that's helpful. And maybe last question and jump back on the queue. When you talked about the hot rolling investment, you mentioned some -- the scale and the size of such type of investment. If we look at CRC in line and it feels like if you capacity at[ 600,000 tonnes ] you're adding 800,000 tonnes, you can do maybe [ 200,000 tonne in line]. For that type of typical line, is it fair to have in mind an investment of a range of $300 million. Is that the right way to think about it?

Yes, Tristan, I mean, obviously, our work has not progressed that far that I could really give an assessment of, let's say, our investment. But obviously, we've looked at sort of a range of investments that have been done. And I don't think -- I mean, usually, you are very savvy. So I think you are probably approaching kind of examples that we could find or other cases. But we do need to come back with more clarity once our own work has progressed more. So I expect that to take still a little bit of time before we can really talk more in details.

The next question comes from Ioannis Masvoulas from Morgan Stanley.

A couple of questions from my side. The first 1 is around capital deployment around Phase 3. Up until now, the focus has been on we have to do with a U.S. cold -- hot-rolling side of the business. we have the visibility on that prospect now. What does it mean in terms of capital deployment under Phase 3 in Europe? Are you looking to potentially accelerate investments towards European competitiveness or is the focus pretty much still on cold rolling in the U.S. and Europe is -- comes at a later stage, potentially?

I would say what I understand for your question. If you just look at the demand picture for the coming years and look at macro economy, you look at geopolitics, I mean from different -- if you look at the U.S. through different lenses, it is, as I said before, I think it's the go-to place at the moment. We're very fortunate that we have Calvert, that we have Mexico and it really puts us in an extremely good position from the standpoint of geographic positioning. So that is really our priority. But with respect to Europe, as when we talk about competitiveness, this is very much -- in Europe, at the moment, it's very much a cost game. As you know, the European market is -- it is a tough place to be at the moment. And so any investments if we were to make them, they really relate more to making us more cost competitive. And we now have the energy efficiency program underway we are allocating capital into that. That, of course, helps us to save money and cut costs. But then also on top of that, of course, we still have to solve how we're going to reduce CO2 emissions, specifically in our Finnish assets, which are the area where we have the biggest CO2 amount. So that's another area that will be high on our focus area for the next few years. And then going further into -- deeper into Phase 3, so we'll just have to come back when we have more clarity on that.

That's very clear. And the second question, again, with this decision yesterday, even if you go ahead with the cold rolling expansion, it's still going to cost maybe 1 what you were looking to spend on the hot rolling side. How should we think about net debt target going forward? In the past, you talked about potentially having a net cash buffer, how are you thinking about this sort of target in today's environment? And are you willing to get the balance sheet back to a much more conservative position? Or are you there today in terms of being close to a net neutral on a debt basis?

Thank you. And Hi Ioannis. So obviously, we are preparing for Phase 3 here also in terms of making sure that our balance sheet is strong. And I think we need to acknowledge that during a growth phase, there might be some periods where it can be beneficial to increase the debt to a maximum mobile leverage of one. But probably that is more sort of driven by timing issues, et cetera. So I do believe that having a very strong balance sheet, it's fundamentally important so that we also can maintain our ability to pay the dividend also when cyclically the business is slower because we know this is a cyclical industry. So I think we are leaning towards this very sort of conservative approach. Now really having a cash buffer or not. I mean, I think this position where we are right now, where we virtually have no net debt, it's really good. But a company always needs some gross debt and then some just really kind of cash available for not only everyday needs, but just with sort of a few -- a tactical time period in mind. So at this point in time, obviously, where we need to have our minds is that we have the convertible bond that is due in July 2025. And now with the share buyback program, we are making good progress towards already having those shares in our hands. This will not completely take us there. But then after this program, about 10 million more shares remain to be there. So that's just another perspective to also keep in mind that our gross debt will reduce then with that step as well.

The next question comes from [ Andrew Jones ] from UBS.

Just for a bit of background, can you give us an idea for what typical tolling costs are per tonne for in the U.S. [ broadly ]? Because I mean, it's all about the change of the contract that rolling cost seems to have gone up by my calculation, about $43 a tonne. It's a pretty big increase based on the sort of cost of the thought was [indiscernible] -- aside from building your own mill, I mean, realistically, were there any sites anywhere near your asset were -- could it be a viable alternative? Or like can you talk us through what sort of typical economics are of those sort of hot-rolling mills and what the potential centers might have been in that scenario?

Right. Andrew, thanks for the questions and the interest. And I think the difficulty in assessing what when you ask for what would typically be sort of a cost level for hot rolling, it is really that assets and come in different forms and shapes and some are really old and some are new, and there's kind of a range of alternatives available. And -- but if we look at some of our best assets, I do think it's -- if you have sort of depreciated everything already years back and you are sort of only running it, of course, then you might get into some sort of double-digit figure per tonne. But if you really count in capital costs and a whole lot, I mean you easily hike that figure from there. So I think there is a fairly broad range even when you do it in-house. And obviously, energy costs would also play in quite a lot. So at what energy costs will play in quite a lot so at what energy cost are you unable to perform. So I think holistically, if I try to make the assessment, I mean, when we were growing our investment plans preparing the business case was something that we were still kind of in the finalization phase off. So we have not published our own estimates, nor will we do it now because we are with this decision, of course, not continuing with the investment but I think just assessing the overall situation and also counting in the capital costs, I think that we have clearly arrived at a beneficial solution for us.

The next question comes from Tom Zhang from Barclays.

[indiscernible] Questions for me. The first one, with the new tolling intent kick in immediately, so we should expect sort of a low single-digit million impact really in Q3 -- and I believe the previous rolling concern. There was a fixed volume of [ 712,000 tonnes ] -- are those terms are still in effect with the new tolling arrangement?

Thanks, Tom. And yes, sorry, there was to be the background noise, but I think your first question was about when is this starting? And I think -- I mean, it's like starting immediately or like first of Jan. So I mean, we are really -- it will be active then and then when you ask that will this impact then be for our profitability, then it will also start from so from '24, like first of June '24. I hope that answered your question, please repeat if there was something else. I didn't hear anything else.

Yes, that's perfect. And sorry, the second part of the question, I believe in the previous arrangement, there was a step volume of 712,000 tonnes that you had to take every year. So is that still an effect of the new contract?

I think there's a number of sort of more detailed things that we have really chosen not to disclose but it is typical in contracts, of course, that you have sort of certain volume commitments or volume hurdles. But I think that's a detail that we will not disclose the exact nature of that.

The next question comes from Krishan Agarwal from Citigroup.

Most of them have been asked. I have 2. In terms of stressing the time line, I mean, is this 2051 kind of a firm year as you have the visibility for next 25 years or -- in other ways, what is the latest time either the party can bring back other party on the negotiation table in terms of giving the notice? So just trying to understand the time line a little better on this contract.

So the time line is fairly straightforward. It is 20 years. So from where we are today, 20 years from now, either party could discontinue the termination period would start 4 years prior. So in 16 years' time, at the earliest, can you terminate, then you have 4-year termination period and then 20 years from now, it would discontinue. That's the shortest or, let's say, least that's the shortest time. But I said, we have developed a partnership with intent. This is a longer-term partnership and we did extend or even deepening the collaboration on site so that both parties feel that it's going seamlessly and smoothly as possible.

Yes, I understand. And then more a little bit push on the dividend policy. So stable and the growing dividend kind of a very generous policy. So most of the analysts are forecasting a net cash position, slightly bigger than what you had in the Q3. So what additional requirements should be met for you to go with the special dividend you had last year? Or should we be in the expectation that '25 is the bare minimum and then probably there will be some kind of a consideration given depending on the other situation. So how do you think about the additional [ equity ]?

Krishan, thanks for that question. I think given the that we just launched now a share buyback and also with a clear message that we have the convertible maturing in July of I think the share buyback as, let's say, an additional instrument is sort of well called for However, when it comes to the dividend, what we have committed to is the stable and growing dividend out of this starting point of the base dividend of EUR 0.25. And that's really where I would position my answer now.

Okay. Okay. I understand. And then a first clarification, I mean, the strengthening the core sales. CapEx was 600 million, but I guess you're running slightly behind that CapEx target. Can you confirm that the Kenimine CapEx is finished? And then remaining of the CapEx you are free to allocate to some other businesses?

I can confirm that Kemi Mine has been we had a nice inauguration event as well, and operations are running successfully there. So -- so we are all set and that's not impacting the future CapEx cash flow. Of course, we have some kind of regular CapEx into Kemi Mine, but not the deep mine, not the strategic project. So we are free to allocate cash and normally I give a round figure of 100 million for maintenance type of CapEx, of course, in a very tight situation that might still shift a little bit downwards. But it means that we also have money in this Phase 2 towards our strategic priorities in this strengthening the core phase.

The next question comes from Anssi Raussi from SEB.

I have a couple of quick ones, actually. So first of all, you mentioned this USD 30 million normalized EBITDA run rate, a decline of $30 million. So can you remind us what kind of capacity or production numbers you're estimating here when you talk about normalized EBITDA. So is it based on the lower end of this capacity range? Or is it average or this 900 kilotons or what kind of production numbers we are talking about here?

Thank you. And I think this is back to the CMD that we had back in '22 even. And at that time, we didn't make kind of specific numbers available but we said that it was kind of coming back to more historical averages when it comes to pricing, costs as well as then the production and then we counted in that we have made some strategic improvements such as cost reductions in our Phase 1 strategy. So that was sort of the setup. So that's why I think this is now a bit top of my head, but this volume 650, 700, it's more in that range because we need to look at a bit sort of backwards that what have we typically been able to do.

Okay, clear. And then the second 1 about your negotiations with AM/NS. So how long you've been actually negotiating with them? And -- or was it like quicker process or have you had 2 tracks to say here?

Well, of course, we have a continued dialogue with our partner on location. I would just say that we have been working on the feasibility of the hot rolling first in quite some time, as we mentioned in the Q3. And yes, this took some time. It was -- as always, I said in the beginning, both parties, of course, have their own needs, and it takes some time to achieve a good solution, and I'm very happy with the outcome, and I hope that the other party. Our partner, I hope, is also pleased. We look forward to a very good long-term collaboration in Calvert.

There are no more questions at this time. So I hand the conference back to the speakers.

So thank you. I just wanted to briefly finish off by saying that I said, I think we're making good progress on our journey on Phase 2, and we've now laid out already some initial ideas on Phase 3. As I said, I'm very happy with the outcome of the withdrawing hot rolling agreement, and it sets us up for faster growth in North America. And we will then come back at the appropriate time when we have our plans ready on what we do. And as I said, it also gives us some financial flexibility to look at the other areas European growth, value chain and sustainability topics, which, of course, are for us very, very important. So with those words, unless Pia has anything to add? No, so I thank all of you who wish you a very happy holiday season, and we look forward to seeing you again in early February. Thank you very much.