Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Hello all, and welcome to Outokumpu's Q1 2025 Results Webcast. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. With me today as our main speakers, we have our CEO, Kati ter Horst; and our CFO, Marc-Simon Schaar. As per usual, we will first start with our presentations. And after that, we are happy to answer your questions. Before we start with the presentation, I would like to remind you about the disclaimer as we might be making forward-looking statements. But now without any further comments, I would like to hand over to our CEO.

Thank you, Linda, very much. And dear ladies and gentlemen, welcome to our first quarter 2025 results call. Let's get then going. So our Q1 adjusted EBITDA improved clearly to EUR 49 million in a very volatile market conditions. Our deliveries increased by 11% on Group level, 13% in the Americas and 11% in the business area Europe. The 1-week strike that we had in Finland had a EUR 50 million negative impact on our Group result, and this impact was then mainly in business area Europe. What I would like to especially highlight is the excellent result in business area Ferrochrome, and it was actually the best result since Q2 2022. We also had a good quarter regarding raw material costs and recycled material content, which actually increased to all-time high of 97%. This contributes positively to CO2 emissions. We are also targeting a EUR 50 million short-term cost savings, as communicated earlier, during 2025, and we are well on track to achieve that. If we then look at the market and especially talk a little bit about the Asian imports, both in Europe and in North America, I would like to state that we have kept our market positions in both continents, but Asian imports continue to be at a high level, and they are putting pressure on prices, especially in a still muted demand environment. So during Q1, the share of Asian imports stood at 23% in Europe and 32% or 33%, excuse me, in North America. So in the EU, we clearly need urgent measures to create a level playing field. And therefore, we are actively participating through Eurofer, but also as Outokumpu in the discussions with the commission regarding the steel and metals action plan. So in these difficult market conditions, we concentrate mainly on our own actions to improve the performance. Then shortly commenting on our EUR 350 million EBITDA run rate improvement program, so after Q1, we are standing at EUR 313 million of cumulative run rate improvements and will reach definitely the target of EUR 350 million by the end of 2025. Key contributor to the EUR 26 million improvement during Q1 was the closure of Dahlerbruck and transfer of the precision strip operations to Dillenburg. And we also benefited from scrap optimization and yield improvements in Calvert and Avesta. Let's then look at the Group result a bit more in detail. So operationally, we had a very good quarter despite the 1-week strike in Finland that impacted our supply chain and result. As commented earlier, stainless steel deliveries increased by 11% from the previous quarter, and our cost position improved due to lower maintenance costs, but also due to -- also because of the EUR 11 million short-term cost-saving measures that we delivered during Q1. Also, our active raw material cost management compensated quite nicely for the negative impact from the pricing. Further, I'd like to highlight that business area Ferrochrome did an excellent job in electricity and cost optimization, which you also see in this bridge. Then the sustainability highlight of the quarter is our record high recycled material content due to the high scrap share, and this contributes both to lower cost and lower CO2 emissions. If I then start to comment a bit the safety performance during Q1, we did not reach our total recordable incident frequency rate target of 1.5, but landed with a rate of 1.9. This is still a world-class level, but not a performance that we are satisfied with. And therefore, we have taken prompt corrective actions to get back on a targeted level. We made good progress towards our 2030 SBTi target and EcoVadis renewed our platinum rating. And our Kemi mine, as communicated earlier, will be carbon neutral by the end of 2025, and this mainly results from the additional measures we've taken in further electrification of the mine. Alfa Laval is one of our key Circle Green customers and our strategic partnership using Circle Green in innovative plate heat exchangers at Laakso Hospital results now in 60% lower product carbon footprint. And we've seen that Alfa Laval's competitors have also noticed what Alfa Laval is doing as a pioneer, and we have started also discussions with us on Circle Green. And then I'm handing over to Marc-Simon.

Thank you, Kati. Good -- next slide. Good morning, good afternoon, everyone, and thank you for joining us today. As mentioned earlier, in times of uncertainty, financial resilience remains our top priority. In this context, I am pleased to report that with the successful execution of a new EUR 200 million term loan, we have strengthened our total liquidity reserves to EUR 1.2 billion. Alongside this, we are making good progress on our short-term cost-saving initiatives, and we are firmly on track to limit our capital expenditures to EUR 160 million for this year, fully in line with our earlier communication guidance in that way. As expected, our net debt increased somewhat in the first quarter to a level of EUR 252 million, thanks to an only moderate seasonal increase in working capital, reflecting our ongoing commitment to capital discipline. This limited the increase in our leverage ratio to only 1.3. Now looking ahead, our convertible bond matures in July this year, and we have already received the second conversion notice at the end of March. As you can see from my earlier statements, we are prudent in how we manage our financials, and this enables us to take care of our shareholder returns. For the fiscal year 2024, we declared a dividend of EUR 0.26 per share with the first installment of EUR 0.13 per share paid out in April this year. With that, let's take a closer look at the performance of our business areas, beginning with business area Europe. Despite of the minus EUR 15 million EBITDA impact from the strike in the first quarter, business area Europe was able to improve its profitability significantly, albeit from low level. At the start of the quarter, we saw a slight uptick in order intake. However, the overall market sentiment remained cautious with customers continuing to adopt a wait-and-see approach. While March saw the first improvement in the manufacturing PMI in two years, the index remained below the 50-point threshold, indicating an ongoing contraction in the area. Even with modest gains in both the manufacturing and the service PMIs across the Eurozone, the overall growth in Europe continued to be restrained by the economic headwinds impacting the current sentiment. On a more positive note, BA Europe's profitability was supported not only by increased volumes, but also by lower raw material costs, less maintenance work and the successful implementation of our cost saving measures, consistent with our earlier guidance. With that, let's now turn to the performance of business area Americas. Also in the North American market, uncertainty prevailed. At the beginning of the first quarter, the U.S. manufacturing sector showed modest growth. However, as the quarter progressed and together with the new tariff measures, they began to weigh on the momentum in the market. In contrast, Mexico's manufacturing industry continued to contract, facing significant headwinds from external economic pressures and declining demand. At the same time, imports into the North American market declined slightly, but remained elevated by historical standards. Much like during the rollout of Section 232 in 2018, many importers accelerated their shipments in late of last year, beginning of this year to stay ahead of the newly announced tariffs. This front-loaded effect temporarily stabilized import volumes even as higher duties came into effect and put pressure on pricing in the North American stainless steel market. Now supported by seasonal factors, our business area Americas delivered a strong performance with increased deliveries. Distributor inventories remained on similar levels in Q1 compared to Q4 of last year and the energy as well as oil and gas sector continued to be stronger. Whereas on the other side, automotive and appliances see decreasing demand driven by the weak economic conditions and cost increases caused by the tariffs. Besides the increase in deliveries, the BA's profitability was further supported by a strong cost performance. Together, these factors effectively offset the impact of lower prices, which we have seen in the market. While recent U.S. economic data reflects a drop in consumer confidence and signs of renewed inflationary pressure driven partly by the new tariffs, we saw a positive shift in customer behavior, meaning the demand for domestically produced materials has increased and improved our order intake during the quarter. Now let's move on to business area Ferrochrome. The demand for our low-emission European ferrochrome remained strong with deliveries up by 24% quarter-on-quarter. We also benefited from a stronger U.S. dollar, which supported an increase in our average sales prices. In terms of the broader market environment for ferrochrome in both the Europe and the North American market remained subdued. Nevertheless, the demand for our sustainable and Western origin ferrochrome continued to hold up well. Meanwhile, chromite ore and ferrochrome prices in China showed some early signs of recovery and ferrochrome producers in Southern Africa announced further capacity reductions. Now on the cost side, costs were higher compared to the previous quarter, mainly driven or mainly due to lower fixed cost absorption, driven by lower production volumes in the first quarter and the absence of the electrification aid received in Q4 of last year. However, our team successfully mitigated part of this impact through optimized electricity usage, particularly important given the seasonal volatility in winter energy prices. Thanks to the strong operational performance, I am pleased, and Kati mentioned it already to report that this was our first or our most profitable quarter in business area Ferrochrome since the second quarter of 2022. And all of this, once again, demonstrates the strategic importance of our Ferrochrome business. In this context, I think it's also worth noting that ferrochrome remains excluded from the recent U.S. tariffs, reflecting its designation as a critical raw material by the U.S. administration. With that, let me now turn to a few final remarks on the Group's overall financial position. As I mentioned earlier, our net debt increased somewhat in the first quarter to a level of EUR 252 million, thanks to an only moderate seasonal increase in working capital. Now looking ahead, we assume that the upcoming maturity of our convertible bonds in July would support our net debt position in the second quarter. That said, please note that the first installment of our dividend paid in April resulted in a EUR 55 million cash outflow, which will have an opposite impact in our net debt in the second quarter. Now before handing it back to Kati, let me reiterate again that especially during these times of uncertainty and challenging market dynamics, we remain firmly focused on maintaining a strong and resilient financial foundation. With that, back to you, Kati.

Thank you, Marc-Simon. And I think then we can move directly to our outlook for Q2 2025. So outlook for Q2 2025. Group stainless steel deliveries in the second quarter of 2025 are expected to increase by 0% to 10% compared to the first quarter, which was impacted by the strike in Finland. Then maintenance break in business area Ferrochrome is expected to have up to minus EUR 10 million impact on adjusted EBITDA in the second quarter. And also the opportunities for electricity optimization are more limited during the summer months. And with the current material prices, some raw material-related inventory and metal derivative gains are forecasted to be realized in the second quarter. And geopolitics and significant uncertainty related to tariffs might impact the global economy and consequently, Outokumpu's operating environment, deliveries, metal prices and foreign exchange rates. And then the guidance for Q2 2025. Adjusted EBITDA is in the second quarter of 2025 is expected to be at a similar or higher level compared to the first quarter. Before I move to summarize, I still wanted to comment shortly on the -- on our geographical footprint in terms of the U.S. tariff situation. We've been getting some questions on this along the way, and I thought it might be good to try to clarify it even with one slide. So as you know, we have stainless steel production in Europe, in the U.S. and Mexico. And majority of our European stainless steel is sold in Europe. Advanced Materials has a more global reach and export some volumes to the U.S. But as these products are not manufactured in the U.S., the U.S. tariffs have not really impacted our business. And then in Americas, we melt and hot-rolled stainless steel in Calvert and cold-rolled either in Calvert or in Mexico. And then the hot-rolled material that is shipped from Calvert to Mexinox does not have tariffs. And then the material that we control in Mexico mainly serves the local market. And then finally, as already mentioned by Marc-Simon, ferrochrome is considered a critical raw material and therefore, bringing to U.S. does not have a tariff. So I hope this clarifies the setup that we have in Outokumpu. And then to summarize, we have strong market positions, and we have a geographically diversified footprint. We have the strongest balance sheet in the industry, and this really provides us with financial resilience in these kind of uncertain times. And we continue to do our own actions. We continue to improve our competitiveness with short- and long-term cost measures and have reduced our CapEx now to EUR 160 million for this year. And I'm very excited to present our new strategy during the Capital Market Day on June 11. So I welcome you all to join us then. And thank you for your attention today. I think we are now ready to start the Q&A.

[Operator Instructions] The next question comes from Tristan Gresser from BNP P Exane.

The first one is on the cost savings you had. I think it was EUR 11 million in Q1. I think in the past, you mentioned that the total cost saving would be around EUR 50 million, if I'm talking about the same thing. So when would you expect the remaining EUR 40 million to flow through?

The remainder EUR 50 million is expected to be split equally over the next quarters.

Okay. That's clear. So you have a bit more cost savings coming through than in Q2. You have the strike alleviation. You have higher volumes and you have those raw material kind of gains instead of being zero in Q1. So you have a bit of support there. So I'm trying to understand in which scenario would you see your kind of stable guidance materialize? I mean you're stable to higher, but trying to understand what could go wrong or on a sequential basis, how we should think about it?

Yes. I think when we think about the guidance, it's important what Kati said and the guidance itself said that we are in a time of uncertainty. And maybe the prudent is also being guided conservative -- prudent and conservative going forward. But given the uncertainty, this is why we are guiding for similar or higher, but we do see a positive development in our underlying business.

And maybe just one kind of final question on the guidance. If I look at stainless prices in Europe, kind of stable-ish, maybe a little bit down, but surcharges -- sorry, scrap prices have come down quite a bit. So in terms of spread or -- I know there's a lot of uncertainty in the market, but when you look at your business in Europe, you mentioned pricing pressure and spread contracting in Q1. Now in April, have you seen a stabilization or an improvement in the orders you're taking in?

Yeah. I think it's better to talk about the spread indeed than prices or raw material cost alone. I think we see a kind of positive -- stable or positive trend in that right now going forward.

The next question comes from Adahna Ekoku from Morgan Stanley.

Just first on the shipments outlook for Q2. Can you help us understand if you expect this increase at a similar level across the U.S. and Europe? And maybe if you could just touch on how the different end markets are performing across the two regions.

Yes. So the guidance of 0 to 10%, the range that is -- applies to both Europe and the Americas, Adahna. And then on the end user side, I think as I commented before, on the European side, we don't really see an uptick given the current economic environment and also the uncertainty driven by the tariffs is definitely still subdued. And in the U.S., also here, we don't really see a real and clear improvement in the underlying demand.

So of course, there have been -- just to add a little bit, maybe there's been a lot of communication about investments coming to Europe on infrastructure, on defense. And -- but the timing of that is still uncertain. So that still needs to be seen what the impact of that is. If there would be an end of the war in Ukraine, of course, that would support European economy as well. And Americas, it's a better situation for local producers for sure. But really seeing the market picking up, projects picking up, investments picking up is not something we have seen yet, so.

Okay. And just a quick one on working capital. If you could clarify your expectations for Q2 and the rest of the year?

We don't give guidance for the rest of the year. But in terms of Q2, I think it's best to think about stable or somewhat reducing net working capital.

[Operator Instructions] The next question comes from Tristan Gresser from BNP P Exane.

Can you hear me?

Now we can hear you, yes.

Sorry, it's me again. No, I was asking about the Ferrochrome division. I mean you had strong performance in Q1. I know you mentioned that you're going to have some maintenance in Q2, but what's the outlook for the division in terms of volumes, maybe prices or costs or any kind of color you can give? And I know you mentioned some different dynamics between the spot market and your contracts. Could you say how much -- what's the split currently? And how has it evolved over the past year or so?

Yes. And if we think about the second quarter and in terms of volumes, I think as I mentioned before, the overall market is somewhat subdued definitely. But at the same time, we also see capacity reductions within the industry. Our -- the demand for our ferrochrome still is holding fairly well. We don't see any significant change here in the second quarter.

And I would maybe say on a longer-term look that with the CBAM coming in, let's say, now exactly in what form in '26 has also had probably the impact that we have more longer-term contracts now in ferrochrome and there's more interest from the market to have more of those. So it looks quite solid going forward, the demand for ferrochrome.

Okay. So there's no reason really to see this Q1 performance as an outlier. And could you share how much of your shipments or volumes of ferrochrome is actually getting the premium?

All volumes. All volumes.

All volumes. Okay, all right. And maybe just another question on the European trade policy outlook. I mean, we've seen the layout of the C Action Plan and the timing spread out between Q2 to Q4 this year. What will you be most looking at in terms of announcement in the coming months? What is the most important thing in your opinion? And also, if you can spend a little bit of time discussing the potential melt and pour rule that could have an impact on stainless would be keen to have your view there.

Yeah. So if I start with that. So we've been in several discussions with the commission and I think the good thing is to mention is that they understand what the situation is and they see the importance of steel in Europe. Then and how quickly we would get new measures that will really have an impact is, of course, always the question. But why the melted and poured has also been brought in these discussions is that the key issue here currently is that the stainless steel is melted either in Indonesia or China. And then it travels to Europe through several different countries being cold-rolled or hot-rolled here and there. And this actually creates a problem of circumvention, which has been very difficult for the commission to stay behind. And melted and poured rule would mean in stainless steel at least that you would really kind of look at and follow the steel way it has been melted, which would give some more tools to avoid the loop holes of circumvention. So I think in that sense, it's -- it could be a one way. Other way could be, of course, different kind of measures and tariffs looking at them in a different way. So there are different discussions ongoing, and I'm sure commission at least understands the urgency that the industry is putting there now in this current market environment. But it's difficult to say when, but work is ongoing.

All right. That's very clear. So there is a probability of that still happening in 2025.

I think the probability of something happening now and then I think there's a bigger probability for different measures in the summer of '26. So two moments probably.

[Operator Instructions] The next question comes from Dominic O'Kane from JPMorgan.

I just wanted to ask a quick question on the convertible bond. Could you just maybe give us a little bit more details on how you intend to redeem the convertible bond?

Yes. Well, at the moment, as I mentioned, we expect that the convertible bond will convert in July this year. And that is our base case scenario. That is what we're thinking about the convertible bond.

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

Thank you very much. So thank you everyone for joining us today, listening to us. Thank you for your questions and then looking forward to seeing many of you during our Capital Markets Day on June 11. Bye now.

Thank you. Bye-bye.