Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Hello all, and welcome to Outokumpu's Q1 2024 Pre-Silent Conference 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 give you a short update. 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 ladies and gentlemen, dear friends, I do hope you are all keeping well today. We sit with Linda here in Helsinki and it's another week of political strikes and even though those strikes are really some kind of protest against the government and again some changes in policies. They are impacting companies a lot. And particularly for Outokumpu, we have been out with several releases, just to really explain the situation. And as we speak now in the fourth week of the strike, we have estimated that the total negative impact for us is around EUR 80 million, of which we will see about EUR 30 million, that's an approximate number, but about EUR 30 million impacting the first quarter. And then, of course, with impact into the second quarter as well. And I guess everyone is now waiting for news. What will happen next, will further strikes be announced. But as we are speaking right now, we do not have other official information then that the fourth week of strike was announced last week. So that's really where we are in terms of the strikes. I will still make normal comments both about the markets and about our operations. Nonetheless, in Europe right now, these strikes are for sure, shadowing sort of any current improvements that we have seen in the market. But let me first just start from the market perspective, I think it's always good to reiterate also for those of you on the line who might have -- who we might not have been in contact with since our last release. So I'll start with Americas from the market perspective and just say, if you listen to us end of last year's development was a bit slowing down and the market was showing some signs of weakening. And certainly, when we look backwards, that also had an impact on price levels that were somewhat lower. And if we now think about the first quarter, we have seen a typical seasonal pickup for sure. I think there's a lot of market comments about some more optimistic outlook and a bit more positivity as well. But I'll just make the typical CFO's reminder here that any improvements that we see in the market right now, we will see in our invoicing more towards the later quarters of the year. And certainly, the first quarter in itself has still been impacted by the, let's say, slower market sentiment that was prevailing at the end of last year. So that's really where we are. I do think we are observing the seasonal pickup, and we are also observing somewhat gradually more positive market sentiment. And I also had a look at the distributor inventories and still, we haven't seen any, let's say, major restocking. So we are definitely still at low levels here in terms of the inventories. Then let me move to another, let's say, fairly positive area in Europe, and that's the more specialized grades within, for example, the pro grade family or also these select higher alloys that we are making. And here, I think as well really in the same fashion as we have been speaking earlier this year, we do see projects going forward. They could be in energy. They could still also be in green transition. And I think the sort of sentiment is improving. It's positive and it's improving, but definitely also there from a level that was slower end of last year. So somehow, we are gaining some momentum. And I think that certainly, at least for me, it's a positive sign given that interest rates are still high. But if we come to the commodity side, here, of course, our order intake sort of looking at the first quarter was following the pattern that we had initially forecasted, where we were also foreseeing the typical seasonal pickup. And I think that the markets were gradually improving aligned with that. However, now with the strike situation, of course, as per our separate announcement that has definitely had a negative impact on us both in the first quarter as the strike started in March and also then towards the second quarter. But market itself also on the more commodity or standard side, I think, has followed the pattern that we have talked about that there are some improvements. We see, let's say, step-by-step improvements and one statistic maybe still to share is that from a German distributor side, we actually did see a bit of restocking, actually some even increases in the inventory levels, but they are still on low levels. But let's say, some pickup was visible there. So I think all in all, if it wasn't for the strike, I guess our market comments would be exactly following what we have been talking about since the Q4 release. With the strike, of course, Outokumpu has some negative impacts there. And maybe there is then just one more perspective on stainless steel, and this is sort of a bit of a strike impact that probably will be more visible also in the second quarter. But we had some deliveries planned from our Tornio operations also into BA Americas. And of course, with the strikes, those will not materialize -- so some negative downstream impacts could also be in BA Americas. So not all negative impacts are in BA Europe. But let me then say just a few words on some other important aspects from Outokumpu perspective, ferrochrome production running -- was running at 80% before the strikes. The strikes are also impacting the ferrochrome production levels. But you may recall that we had somewhat higher inventories. And thanks to those we have still been able to serve the critical customers as well as any such internal demand where we are still producing stainless, for example, in Avesta or in the U.S. When we look at the maintenance costs, they will be a little bit lower in the first quarter compared with the fourth quarter. That's a typical seasonal impact, and I think we can reconfirm that. And then we also have the timing and hedging impacts where you might say, hey, there was actually a bit of a peak here in nickel prices, shouldn't that somehow be visible and have some different outcome in time and hedging. But I think we are, let's say, full circle back to those levels prevailing more or less at the start of the year. So I think we can just reconfirm what we said earlier about timing and hedging that there's probably going to be a small negative number. I mean, that's really going to be a small number. I doubt even double digit, but a smaller negative number nonetheless. And then finally, just looking at the ferrochrome market itself, I think here, again, the same pattern with some improvements, if we really look at the global market, if we look, for example, at China, we can just see some, let's say, small pickup in terms of demand that's also visible in those prices that are being quoted. But of course, as those of you who know Outokumpu well, you know that this market for us is not -- we are not delivering to Asia, but this is maybe more than sharing the global sentiment of the market. Also U.S. is somehow picking up, whereas Europe still remains fairly subdued. But I think with that said, I would complete, let's say, my opening here and would now be ready to move to the Q&A.

[Operator Instructions] We will now take our first question. Your first question today is from the line of Ioannis Masvoulas from Morgan Stanley.

A couple from my side. The first one, again, the strike in Finland. The extent of the profit downgrade seems quite sizable. Could you perhaps elaborate on the moving parts in terms of product flows that have been impacted across, for example, the U.S. and Germany. And related to that how long would the inventories last before you have to announce some profit or, let's say, Force Majeure across some of the specific product close that you may be running low on the material.

Ioannis, thanks very much. And first, I think it's maybe easier just to try to put things into perspective when it comes to kind of the importance of Tornio site in our operational system. It is our biggest melt shop. So under any circumstances, that is where, of course, we are producing all the way to cold rolled, also in Tornio so some direct customer deliveries are impacted, but we also typically have downstream deliveries, particularly to Germany, for example, to our sites of Krefeld and Dillenburg and also some select deliveries both into Mexico and U.S. And I think what we are seeing now is really the same pattern kind of being happening in front of our eyes. So the deliveries in the U.S. are what I would call select. So they refer always to some special grades or some specific cases that we would typically deliver that way. So they are a small part of this overall impact, but nonetheless, I mean, we are talking about millions, so we wanted to mention it in terms of financial impact. Then all of the other impacts are within business area Europe. And I think with a big emphasis on the more commoditized grades and with some impacts through the Dillenburg channel, then into the more special grades, but here, again, a bigger part of the impact going through the more commoditized grades, which is typical for the deliveries from, for example, then Tornio into Krefeld. And this is following kind of our normal pattern. And therefore, I think in terms of the financial impact, I mean, assessing what our results should be in these market conditions from Tornio and from our system in Europe, I think this is the result that we will see. And certainly, we had some inventories and we have some very low level of production that is done for safety reasons. So maybe some very critical deliveries can be taken care of. But it's really restricted at the moment. So definitely, this is the thing that kind of keeps our team, those who are working, they are really working day and night now to try to figure out how to solve for things. That's really all I can -- let's say, that's all the detail I would have at this point, Ioannis.

Understood, Pia. And one more follow-up from my side. On working capital, given that you have been destocking material throughout Q1, how should we think about working capital flows. Is there any release coming up for Q1 or not necessarily?

I think there will be a bit of a release into Q1 for sure because what is happening right now is that the inventories are running low. And this will probably continue also into Q2. We also have then, of course, both lower invoicing, but also lower sourcing volumes. So let's say, my assessment with what I know today is that we will go to a very low point in working capital here, maybe not only the week when the strike ends, but this will keep on impacting for a bit after that because we will really -- we will be at low levels. And then we will have to come back to normal levels again. So depending on the timing of the strikes, we can then expect the normalization once the strikes are over, and we've had some time to recover all the way from sort of sourcing, our typical DIO is 90 days. So we are, of course, still sort of having some of the earlier inventory in the pipeline to benefit from at this point in time.

We'll now take our next question. This is from the line of Tristan Gresser from BNP Paribas Exane.

I have 2. The first one is on the strike. What's your understanding of the situation in Finland? And any reason there to be optimistic at this stage? Or is there a good chance that this will continue for the full month of April? Just trying to get your sense of the situation there.

Thank you, Tristan. It is really for us right now, the sort of through not only thousand dollar but million-dollar question that what will happen next. And I can try to give some color to it for what it's worth. But I think taking a step back, when the question is about the labor unions being upset with the government about changes in policies, that's a very, let's say, difficult situation for companies to be in because we are not a negotiation party. So it also means that there's a number of nuances where our impact is not direct. And looking at the headlines in the Finnish newspapers, right now, I think the sentiment is still one where the labor unions get some understanding for why they are doing what they are doing. And there's also things also very easily get mixed up in such difficult situations. What are really the proposed changes versus what do people perceive to be the proposed changes right now. So I think that the sentiment is still one of pretty -- these topics seem to stand or these opinions seem to stand very far from each other as far as I can judge right now. But there are also some -- of course, there are some examples about the discussions. There are some examples about maybe the sort of general public being a little bit more hesitant to -- it's reasonable to have this level of strikes, this level of impact for what is sort of the cost that is being announced for these strikes. So I think there are a bit more that kind of headlines right now that maybe the support for the strike is somewhat reducing. But nonetheless, a political strike is maybe the most difficult one because if it was something that we could directly impact, we could weigh the pros and cons and make decisions.

Yes. It's a difficult question, so I appreciate the color there. And maybe my second question, on the U.S., I think your comments were fairly positive. And is it fair to say that on the pricing side, we've seen the worst behind us. And when you look at Q2, do you believe there could be some restocking?

So first, the question on pricing, I can only comment sort of backward looking and you know things that we have already observed. And I think that would indicate that a low point was reached. But then compared with what is, of course, the question, but if you just look, let's say, sequentially on the changes, I think that backward-looking data would point in that sort of conclusion or towards that conclusion. But we will see, of course, going forward. And when I think about stock levels, at least our understanding and thesis has been that the high interest level is still prohibitive for many participants in the market or many distributors to really consider restocking at some sort of big volumes or let's put it this way, it's a higher risk than it was a couple of years back to stock a lot because you will pay a lot of interest if for some reason, you cannot sort of turn it around quickly. So I think with the higher interest levels still prevailing probably that's putting a bit of a damper on sort of a big scale restocking. But other than that, there are some positive signs in the market.

We'll now take our next question. This is from the line of Bastian Synagowitz from Deutsche Bank.

I've got one question on shipments on the European side, actually. So I'm wondering basically how much of the effect you have basically already seen on the shipment side, maybe you can even give us a bit more color what was broad shipment trend you were expecting for Europe in Q1, where we will be broadly checking out now posted production cuts given that you're still able to compensate some of the trends obviously from inventory? And then basically, how many tonnes as of today do you basically expect to lose for the second quarter shipment run rate?

So we will lose definitely some volume also for first quarter because typically, we would also have direct deliveries from Tornio. And I think that's where we are already losing deliveries in the first quarter. So initially, we were expecting volumes to increase quarter-on-quarter 5% to 15% into Q1. And I think that was kind of fairly evenly distributed throughout the main markets, even though we didn't specify that, hey, exactly the same amount in BA Europe and in Americas. But we did see this seasonal uptick over both BAs. And now with the announcement of the strikes, we have also changed the guidance for the volumes to be even a tad lower compared with Q4. And we can really call that all the strike -- that's really the direct strike impact. So that's really direct impact for the BA Europe because those were those kind of lost deliveries to customers during the first quarter. And now the downstream impact will be sort of more visible during the second quarter, but we will also have some direct impact as we are still in strike. I mean, it's, of course, 2nd of April today. We, at the moment, only are aware that strikes would continue this week, but we await further announcements or clarifications. So depending a bit of also kind of how those continue. If it would only be this one week of strike in April, then I think that we could somehow rationally say that, yes, now it's going to be the downstream impact in this quarter. So that's -- I think it definitely has an impact on our volumes, both in Q1 and Q2.

And Pia, are you currently bringing over volumes from the U.S., i.e., like do you -- like is this the situation on Europe, but then you can actually compensate maybe most of it with what you're bringing over from the U.S.

From -- to my knowledge, we are not currently delivering from U.S. into Europe, but that's maybe something I still need to check. But to my knowledge, we are really feeding the European system from within Europe.

Okay. And even though you're obviously currently not producing given that you're on strike, but what is your latest view on the scrap market? Has the situation with, say, 2 out of 4 big players being on strike, now? Has this started to ease the tensions and the tight situation on the scrap market? Or hasn't really the situations have been changing so far?

Well, obviously, with lower volumes, we are also less active, but I would be surprised if there was no impact on that in the market, at least over time.

Okay. And then maybe moving over to ferrochrome obviously where your operations are affected as well, but then also, you obviously had cut part of the capacity utilization earlier because of the depressed situation with chrome prices being on the way back up. Now in a normal scenario where demand is basically coming back to maybe where we expected -- where you were expecting it to at that price level, would you basically be inclined to bring back the chrome capacity already? Or is that price increase not yet enough for that?

I think we would first -- I mean, we had the main sort of driver for the curtailment was also the very low demand on stainless side. And you know that we have 75% on average over the years of the ferrochrome capacity used for internal deliveries. So of course, we have some flex in our typical external deliveries. But the more important question for this is really that what are the production levels on our own stainless sites and what's been the reasonable, let's say, response also to that. So I think we need a combination of several things. So obviously, the price level could impact, let's say, where it makes sense to turn something on even though demand internally wouldn't yet have fully recovered. But I certainly don't think kind of given the big weight of the internal deliveries that we would yet have been reaching such a point.

We'll now take our next question. This is from the line of Moses Ola from JPMorgan.

So a couple of questions from my end. Firstly, just on the ongoing guidance for the strike. Just wanted to clarify. So of the EUR 80 million, it's EUR 30 million in Q1 and then the ongoing run rate should we assume is EUR 15 million as per the last -- EUR 50 million per week as per the last guidance.

Thank you, Moses. Yes. So looking at the impact in Q1, that will be around EUR 30 million. That's as per our announcement. And then now our sort of weekly estimates have varied between EUR 15 million and EUR 25 million. So of course, that gives an average of EUR 20 million. But I don't want to give, let's say, forward-looking announcements. I think if there are more strike announcement, we will try to make as good -- as accurate estimates as we have information and then also openly shares. But the weekly amounts have varied between EUR 15 million and EUR 25 million.

And can you confirm if there's any impact to CapEx from the strikes as well? Is the EUR 200 million run rate for this year, still valid?

I think it's a very reasonable question. And given how disciplined we have been with capital so far, given now that our cash flows are lower in this situation. It's definitely something that we will need to consider. But so far, we have not taken decisions to cut back, anyhow, given the list of projects within this EUR 200 million is fairly sizable because there is not, let's say, 1 or 2 really big projects, there is rather a longer list of medium-sized or small projects, I think it gives us the flexibility. So should we decide to do so, we would definitely still have the, let's say, reasonable ways to do that towards the end of the year. So definitely something we would consider, but have to come back to when we have really formally decided on that.

Okay. And then finally from my end, just on inventory revaluation impact, we've seen higher raw material prices recently, especially on the nickel side, guidance you can give versus what you previously expected in Q4 for Q1 and then also into Q2 current expectations on raw material revaluation impact.

It's a reasonably good question. But let's say, given that we had some movements in nickel price, but it went up, and then it came down again. We see the way sort of the main mechanism still work, how the contracts work, the periodization, the inventory valuation. We still stick to our earlier assessment that in Q1, there will be a very slight negative impact from raw material-related inventory valuations and hedging. So I think definitely, minus 10 would already be a big figure. So we are not talking about a big figure here. And that's also really in line with what we said before the spike in price because it came back down again. And then going into Q2, with the information that I have right now, I wouldn't expect anything major, but that's something where we will kind of rerun all our calculations and then come back when we give Q2 guidance.

Okay. So just when you say anything major, do you mean a major loss or a major gain on either...

I mean both -- I mean it's a figure of fairly close to 0 probably. I think a bit on the negative side, but not a big one.

[Operator Instructions] And we will now take our next question. This is from the line of Maxime Kogge from ODDO BHF.

First question, could you talk us a little bit about the import pressure, especially in Europe, where it had become very, very low in Q4, just around 10%. Do you see a pickup there? And in the U.S., it seems on the contrary to have slightly strengthened in Q4 and where do things stand there in at least for Q1?

Right. Thank you, Maxime. So the import pressure in Europe remains low. What we have just seen from realized imports and all of the statistics show that we are still on low figures. I think the Q4 figure was probably 10%. I think now we are at 10%, 11%, 12%. These are the levels that we have been seeing reported right now. So still, as we speak, from what has arrived in Europe, levels have stayed low. And then what we can expect going forward, I would expect that normal market dynamics will play a role here. And certainly, there have been some improvements in the price levels in Europe. So of course, this could trigger higher import levels in the future or more maybe sort of typical import levels. But from what we have seen realized have remained low, and I would just maybe really shortly comment on Americas. I think it's -- there seems to be, let's say, a certain level of imports also all through last year, also during the weaker sort of market periods there and that seems to continue. So no major change in the U.S. either.

Okay. And the second question about the demand in Europe, you seem to be quite constructive in your previous comments on the upturn in Europe. But yet, I mean, if we look at prices, they remain very much depressed. So do you -- I mean, you seem to point to slightly higher restocking activity, but do you also see a better activity on the end demand. Yes, that is my second question.

Yes. I think it's always -- what -- I think what is clear that there are signs of better sentiment. There are some areas that are stronger, I mean, aligned also with our previous comments on some projects, on energy, on some green transition projects, et cetera, where the more specialized demand is it really seems that those projects continue to realize and we can also see them in our order intake I think on the commodity side, it's just that demand has been low, and we see some improvements, but that doesn't mean that demand has risen to, let's say, a strong level. I think it just means that the direction, again, is towards stronger. And I think that's been visible in this slight uptick in German distributor inventories, some slight restocking probably took place. But again, the scale probably doesn't yet bring kind of big, big increases in any direction. These are rather like small movements still as we speak.

Okay. And just the last one, perhaps a bit theoretical. But if the strike went on again, would you consider sourcing slabs on the open market? I would assume that a lot is available from Asia or doesn't make sense given that transformation margins are too low to make it really interesting from a financial point of view?

Yes. I think it's a really tricky question. I mean, to really factor in costs, delivery times. Delivery time is also always a super important aspect. Could we really have goods when we need them, would it really make sense from a CO2 perspective. I think there are, let's say, so many dimensions of such a dilemma that is just -- I simply cannot answer it with sort of one easy answer. This is what we would do. But obviously, the longer the strike goes, the more we look need to sort of consider every alternative. And I do think our team is being extremely active in trying to make things work also from the perspective of our customers. So I certainly don't want to rule anything out, but I don't think that there are like easy solutions that can be implemented off the shelf.

Thank you. And there are no further questions at this time. So I will now hand back to the speakers. Thank you.

Thank you, operator, and thank you all for participating in our call today. Before we close the call, I would like to remind you that we will start our silent period on April 7 and continue until our Q1 results are published on May 7. Thank you once again, and have a great week.