Outokumpu Oyj (OUT1V) Earnings Call Transcript & Summary

Good afternoon, and welcome to Outokumpu's Second Quarter Results Presentation. I'm Johan responsible for Investor Relations. We will start with the presentation from our CEO, Kati ter Horst; and our CFO, Marc-Simon Schaar. And after the presentation, you have the opportunity to ask questions over the lines. And with that, Kati, I hand over to you.

Thank you so much, Johan. So welcome also from my side, and we will first with Marc-Simon cover the Q2 results, and then I will comment a little bit more in detail our very recent investment decision today. So if we start now with the result on Q2, profitability improved to EUR 100 million from EUR 65 million in Q1, and this improvement was mainly driven by the improvement in business area Europe. Americas business area Americas continued its strong performance, and we also saw ferrochrome result further improve in the second quarter. Of course, in Europe, it's clearly that it's the regional measures in Europe, mainly CBAM and then also the steel safeguard measures that have supported the market. While we can say that in the U.S., the market has been -- and the demand on the market has been more robust, especially in the Industrial segments. And for ferrochrome, especially our low-emission ferrochrome from Europe, in this geopolitical situation, the demand has been at a good level. We are today talking about our EVOLVE strategy, 2 important steps as milestones to proceed and progress with our strategy. One is the investment in high nickel alloys and the second one is really the publication of our first patent applications, and I come back to that a little bit later. We usually always look at what do the imports look like. I think the main message here is that the imports in Europe have clearly stayed at the lower level. They were a bit higher in Q2, 17% compared to Q1, the 15%. I think this is also a little bit being upfront of the steel safeguards that came in -- came actually in force in the 1st of July. Americas, if we look at U.S. only, the import level has stayed very stable at 20%, and there was a bit of increase in the whole Americas because of Mexico. Then if I would comment a little bit that did we see anything change in the underlying demand or the sentiment when we look at Q2 versus Q1, I would maybe highlight some of the positive things we've seen. So basically, data centers, both in Europe and Americas have driven some demand. And I think then in addition to that, basically the heating and ventilation, air conditioning segment has done well. And then we see energy area being one. So those are the highlights we would have. On consumer side, transportation side, automotive, both continents, the demand has been sluggish. On deliveries, I think it's really important to comment here now a little bit. Our deliveries in Europe in the quarter 2, they were the highest in 3 years, which brings the Group deliveries also to the highest in 3 years. But I also would like to highlight ferrochrome. So also in ferrochrome, we had a 4-year high in the deliveries. Where you don't see maybe Americas moving that much is maybe what we have to remember that we have 250,000 tons of our cold rolling capacity in Mexico, which we cannot currently use really to the full benefit of Americas due to the 50% tariffs from Mexico to U.S. But volumes played a big role in Q2. Then on sustainability. So I'm very happy to say that our safety performance further improved from Q1. So we arrived on total recordable incident frequency rate at 1.4, which is below -- which is kind of better than our target level of 1.5. The whole half year was now 1.6. So this is a work that continues, but I would say that we are very much on a leading level here, but work continues. Again, we also had a very high recycled content percentage. And then if we look at external recognition, I think it's important to say that being recognized by both the Financial Times as one of Europe's climate leaders for the third time now in a row and also by Time among the world's most sustainable companies, it really matters because it provides independent validation that the sustainability leadership is real, it's measurable and internationally recognized. And these rankings assess not only the climate commitments, but also demonstrate progress, transparency and business performance. So such recognition reinforces our position as the sustainability leader in stainless steel and really supports our strategy of creating competitive advantage through decarbonization and circularity. With this, I will hand over to Marc-Simon to go more in detail in the results.

Thanks, Kati. Good morning, good afternoon also from my side. In the second quarter, stronger profitability, combined with continued capital discipline, enabled us to further strengthen our financial position. This gives us a solid foundation as we keep executing our EVOLVE growth strategy. In line with our guidance, Group adjusted EBITDA increased from EUR 65 million in the first quarter to EUR 100 million in quarter 2. While the net of timing and hedging impact in the quarter was less favorable than we had expected, our underlying operating performance was actually even stronger, driven primarily by higher margins in business area Europe. And speaking of Europe, I am pleased to report that the business area has returned to positive EBITDA. Our operating cash flow remained solid at EUR 85 million, allowing us to bring net debt down to EUR 224 million, while preserving our strong liquidity position. With that financial overview, let me turn to the performance of our business areas, starting with business area Europe. The market environment in Europe was largely unchanged from the end of the first quarter. European producers continued to benefit from supportive regulatory measures, though end-use demand remained subdued. A meaningful recovery in demand will require a clear improvement in business confidence, which continues to be weighed down by geopolitical uncertainty, particularly around the ongoing conflict in the Middle East. That said, volumes in business area Europe increased by 5% in the second quarter. Beyond the volume growth, profitability in business area Europe was further supported by higher realized prices and lower fixed cost of sales in the second quarter following the backlog-related pressure we felt in Q1 from the supply chain planning solution challenges we had. With that, let's move on to business area Americas. Business area Americas continued to deliver a strong financial performance, underpinned by growth in some segments showing improved demand such as data centers and related investments into infrastructure, energy as well as heating, ventilation and air conditioning. The Mexican market also continued to show early signs of recovery with the manufacturing PMI moving above 50% in June for the first time in a year and its strongest reading since March 2024. In addition to the 4% higher volumes, profitability in Americas benefited from higher selling prices, driven by an increase in the alloy surcharge, supported by increase in commodity prices. These positive factors were partly offset by higher costs, mainly related to freight and nonconforming material. Now with that, let's move on to business area Ferrochrome. Business area Ferrochrome was able to increase its adjusted EBITDA in the second quarter versus the first quarter, supported by the solid demand for our low-emission European offering as well as higher selling prices. Overall, the demand remained healthy across all regions with North America continuing to be the strongest market. On the supply side, production curtailments in South Africa remained in place for most of the quarter, although electricity support measures have initiated production ramp-up, export volumes remained historically low, so the impact on the market prices during the quarter remained limited. We also continued with our expansion into higher-margin ferrochrome products. And compared with the charge chrome market, the high carbon and high chromium ferrochrome as well as other special product segments are expected to be less exposed to the anticipated increase in South African production. Now combined with CBAM, we do see that this is reinforcing the strategic value of our portfolio expansion. Now with that, let me close with a few remarks on cash flow and leverage. Supported by the improvement in profitability, our operating cash flow remained solid in the second quarter. Together with some release in working capital and capital expenditures of EUR 34 million, our free cash flow improved to EUR 51 million compared to EUR 34 million in the first quarter. The working capital release came despite higher business activity and rising commodity prices during the quarter, once again demonstrating our continued focus on capital discipline. The stronger free cash flow enabled us to further reduce net debt to EUR 224 million, as mentioned earlier, despite of the first dividend installment we paid in April this year. And finally, with both profitability up, net debt down, our leverage ratio declined from 1.3 to 1.1, in line with our financial policy. And with that, back to you, Kati.

Thank you, Marc-Simon. I think then we come to actually our outlook and guidance. So let's take that next. So for the outlook, we say that the Group stainless steel deliveries in the third quarter are expected to decrease by 0% to 10% compared to the second quarter, and this is due to the seasonality in business area Europe. And based on our current order book, the net impact of realized prices and raw material cost is expected to be positive. And with the current raw material prices, some raw material-related inventory and metal derivative gains are forecast to be forecasted for the third quarter. So therefore, our guidance is that the EBITDA in the third quarter of 2026 is expected to be at the similar level compared to the second quarter of 2026. And then we can move to some more exciting topics here. So I'm personally very excited to announce that we are now starting the investment program into high nickel alloys. And it's important to understand that with this investment program being executed, we will really become one of the key global players in high nickel alloys for flat products. And during the past year, we have run several trials at our Avesta plant in Sweden to test the capabilities at our melt shop, hot rolling and cold rolling assets. And we have, for instance, been able to roll Alloy 625 into a width of 1,800 millimeters, which nobody else is currently able to do in the market. So we will be bringing actually a differentiated value proposition to our customers. Then based on this trial experience and to accelerate the time to market, we have now decided to do the investment in 2 phases. So in the first phase, we will actually invest in the electro slag remelting at the current melt shop. And we will also invest a bit in the process optimization, and we will complete the detailed engineering study for Phase 2 to confirm the total CapEx, which we still estimate to be about EUR 150 million. And the estimate and the CapEx for the first part of this investment in the current melt shop is estimated to be about EUR 30 million. And once the first phase is then -- it's expected to be operational in Q1 2028. The second phase then is about the new melt shop. So that's about a vertical caster. It's about vacuum induction degassing, VDI and potentially a second ESR. And this investment is planned to be operational in the end of 2029. Then moving a bit to the right side to talk about the property technology development in the U.S. So building of the pilot plant is proceeding on schedule and our first 5 patent applications covering the key process elements have now been published, which marks an important milestone in the technology development. It's also important to mention that this technology has wider application possibilities for metals. So we are really exploring here a number of options for future growth based on the technology development. So with that, I come to some of the key messages from today. So our EBITDA improved to EUR 100 million, supported by market fundamentals across all the business areas. And our adjusted EBITDA in Q3 then is expected to be in the same level despite the seasonality that we have in Europe. Financial position remains strong and the net debt decreased, and we are making really a progress in our EVOLVE growth strategy. With that, I will open for the Q&A.

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

I have 2 questions. The first one is on the metal spread guidance that is positive into Q3. Could you give us some indication how it's going to differ region by region? I guess we should expect a stable development in the U.S. and an improvement in Europe? I'll start there.

Absolutely. On the net of timing and hedging, what we say is that we expect some gains in this area. And I would quantify this as a higher single-digit number compared to the EUR 11 million. And I think in terms of business areas, why we don't give guidance over here, certainly, the Americas business is still on base plus alloy surcharge, and we see a bit of lower nickel price environment here in the U.S. So that's impacting then on the U.S. side and mostly then of the other result is being related to business area Europe.

Okay. Just a quick follow-up on Americas, given you have base plus surcharges, if surcharges are going down, that should impact your spreads, right? And the second question is also a follow-up. When I look at Slide 22, which is the bridge Q1 to Q2 EBITDA Europe, the red column, that is pricing mix, raw material costs. If I understand correctly, the guidance, this should turn into a big green column into for Q3, right?

Well, what -- yes, I think we guided for on the one hand side, lower volumes and those being offset by than the net impact of realized prices and raw material costs, and you're referring to this item. So yes, this is a positive element and being offset by the volumes. And therefore, we guide on a similar level. And what we're referring to mostly is in relation to business area Europe.

Yes. And I guess it's correct to mention as well that we could have had better mix in Q2. So we do expect the mix in Europe, especially to improve in Q3.

And last question, just does this guidance of better spread, stainless metal spreads include the recent drop in stainless scrap prices or is that going to be more of an impact for your Q4 results?

I think this is more going out further into the later part of this year.

The next question comes from Bastian Synagowitz from Deutsche Bank.

My first one is just a quick follow-up on the Americas and the moving parts there into the next quarter. I guess the impact here from the metal and hedging gain in the second quarter was only quite meaningful. I guess usually in the U.S., you still see probably further positive tailwind from seasonality in the, I guess, in the third quarter. So just wanted to check whether you would expect an all-in performance run rate, which remains pretty similar also here to the second quarter or will this be in the mix a slightly larger deviation here between Europe and Americas? That's my first question.

Yes. I think as I mentioned earlier that we have had expected a higher impact -- a positive impact from net of timing and hedging in the first quarter. So a reason why that has not been materialized is basically the increase in commodity prices, which we have seen in the second quarter and then together with a different melting pattern, which we delivered to the market, a younger [ melted ] pattern, which we delivered to the market with higher raw material costs. That was the reason here. Fortunately, we could offset this and stay fully within our guidance, which we gave for the second quarter. Now as this is a shift from the second to the third quarter on the [indiscernible] European side. On the other side, if we think about Americas, then here, what I also mentioned earlier before is that given current raw material prices, they are expected to be some -- or commodity prices somewhat lower than in the second quarter. And that Americas is on an alloy surcharge basis. So that is having a certain impact here. But from the volume side, we should further consider a robust market in the Americas for the third quarter.

Okay. Okay. Understood. And then second, maybe zooming in quickly on the ferrochrome business, which did very well. You indicated here the potential effect from, I guess, the electricity regulation in South Africa. Is this something you see impacting the market already, i.e., what are the current pricing dynamics you're perceiving pricing pretty stable? You see it coming under pressure already?

Well, as I mentioned in my part of the presentation on the ferrochrome side, we haven't seen any impact on the pricing and as well as driven by the fact that we haven't seen export volumes to pick up here. I think we mentioned that ramp-up in operations production has started. We are not in a position and cannot guide on prices going forward and therefore, would rather leave it here with the important notion that we're going to develop our product portfolio into higher-margin business and which should give us then an opportunity to decouple to a certain degree from the pure charge chrome market.

Okay. Okay. Understood. And then last one quick question also on, I guess, your maintenance schedule. Usually, there are always some bigger maintenance breaks in either ferrochrome or the European operations. There isn't any in the third quarter. Is there anything we should have on the radar with regards to this for the fourth quarter? I guess it would be quite helpful to have a bit of [ tee ] on that just ahead of time to avoid any negative surprises.

Well, indeed, we do have our annual planned maintenance shutdown in -- both in Europe and in the Americas towards the end of Q3 and beginning of Q4 over here. We do some small increase in maintenance costs in the third quarter, but I don't see any significant deviation from that third quarter level going into the fourth quarter.

And ferrochrome, actually, the biggest maintenance shutdown for SAF 2 actually took place already in Q2. So that's done.

Is there any cost impact still to come through from these in the fourth quarter, any major items at least -- just a ballpark at this point?

Not -- Bastian, not major items. There is a small increase in here, as I mentioned. But important is really to look at our guidance, what we have been saying that most important to understand the volume impact then also the net impact from the realized prices and the raw material costs and we do guide for similar. That, I think, is the most important key part. And then you have different items, different dynamics. I mentioned on the maintenance break, nothing major. But in order to understand the guidance for the second quarter, I think we gave the elements in our guidance.

The next question comes from Joni Sandvall from Nordea.