SSAB AB (publ) (SSABA) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of the SSAB Q3 report. My name is Per Hillström. I'm Head of Investor Relations at SSAB. And presenting today, we have our President and CEO, Johnny Sjöström; and also our CFO, Leena Craelius. And the agenda, Johnny will start by going through the quarter in brief. Leena will present more details on the financials, and then Johnny will close up with the outlook and a summary. And after that, we will open up for questions. So by that, Johnny, please start.

Thank you very much, Per, and good morning to all of you. I'd like to summarize the Q3, and I will, as usual, start with health and safety. And as you can see on the graph to the left that we have a good trend where our lost time injury frequency is continuing to go down, a very remarkable work by the whole organization, changing the culture related to safety. I also want to point out the total recordable is at 4.8, which is a record low for SSAB, an area we will continue to work on and try to strengthen as we move forward. And then when we look at our financial performance, you can see that Q3 ended up on SEK 3.3 billion, which is better than Q3 last year, somewhat lower than Q2, but we have to remember that Q3 is a typical maintenance quarter and especially for Americas, the financial performance was held down because of the maintenance, but I will come back to that later on in this presentation. But I would also like to point out that we were able to grow our shipments even further within the advanced high-strength steel going into automotive, but as well as within Special Steels. So those are things that I want to highlight. And if you look at our net cash position, and I guess that Leena will comment on that later on in her part of the presentation, we still have a very good and stable balance sheet, a very strong net cash position. Now a few comments on our investment program. So the conversion or the transformation in Oxelösund, where we are replacing our blast furnace with an electric arc furnace is progressing really well. We are planning for production start-up in Q2 next year. So it's actually around the corner. And then we also have the work in Luleå with the mini-mill or what I would like to refer to as the mega-mill. It remains on time and budget. But I also want to highlight that with projects of this size, there are a lot of things that is challenging. And we have had some issues in the beginning of the project, things that we couldn't foresee. And with projects at this size, there are things that will always come up that we couldn't really prepare ourselves for. But I also want to point out that this investment is extremely important for the future of SSAB. It is in line with our strategy to accelerate our premium leadership. And it's product that goes directly into the automotive industry, especially for the electrical vehicles to help them to become lighter, which is a requirement from the market. And then, of course, we also had a groundbreaking ceremony a few weeks ago in Oxelösund. It was a new quenching line that we are planning to construct. That's going to give us more capacity to produce the most advanced quenched and tempered material within Special Steels. We have a very strong underlying demand from the defense industry and the mining industry. So it's important for us in order to grow with the customer demand. And also, we're expanding the capacity to be able to produce more powder for additive manufacturing. Now if we go into the divisions, we can see that the shipments within Special Steels were higher than they were Q3 last year. So that's a very good thing. We could also see that the prices were higher than they were Q2 this year. So both shipments and prices are good. But then if you look at the profitability, you might wonder why the profitability is lower than Q3 last year. That's mainly related to cost increases we have seen in alloys, transportation and to some extent, in natural gas, et cetera. So that has been sort of offsetting. We're not super concerned about this. We know that our prices are going to continue to go up. There is a delay and for Special Steels is an even longer delay than there is for other divisions. So we know that the price increases will offset sort of the cost increases going forward. I think it's still a very stable performance by Special Steels. There's a very strong underlying demand. So I'm very optimistic for the future. Now looking at SSAB Europe, the shipments came out on a higher level than they were Q3 last year. And especially very happy with the amount of premium steels that we're selling, which I commented on in the beginning, the advanced high-strength steels that goes into automotive industry, automotive industry that is shrinking on the European market, but still we're able to grow on a shrinking market. So it shows that we have a very good competitive advantage and that we create unique customer value. Prices have been increasing for SSAB Europe. We came out on a decent financial performance. We have to remember that in Q3, we also have maintenance that's affecting the cost but as well is affecting the deliveries. But I think still a decent performance. And then if you look at SSAB Americas, volumes came out pretty much in line with what it was Q3 last year, a stable performance. And for those of you who are following the CRU prices, you can see that the CRU prices have been moving up very rapidly. And having in mind that we are the second largest plate producer in the U.S. market, a market where the underlying demand is still very, very strong for heavy industrial applications, energy, oil and gas, et cetera. So we have a good combination of a lack of competition, but at the same time, a strong underlying demand. Our prices went up higher than we guided for. It was roughly 8%. We're not super surprised about that. But also I have to remind you, we have a delay because of the contract structure that we have. So even if the CRU prices are moving up, it's only 20% of what we sell in the United States, which are sold on spot. So there is a delay for us. And once again, if you compare our Q3 performance compared to Q3 last year, we have maintenance every other year. So that's the reason why we came out lower Q3 this year compared to Q3 last year. Just worth pointing out. And then we have the 2 subsidiaries. We have -- starting with Tibnor, where the shipments were somewhat lower or in line with Q3 last year. And then if you look at our financial performance, it was considerably stronger than it was last year. But then again, Tibnor is benefiting for prices going up, and that also has an impact on their inventory, so that's on the positive side. And if you look at Ruukki Construction, we haven't really seen an improvement in the Construction segment. They are still working on a low demand situation in the market. Still, the revenues are very much in line with what it has been in the past. And I think that they came out on a decent level when it comes to the financial performance higher than it was last year and also higher than Q2, but they are not having the same benefit from the inventory revaluation. So with that, Leena, I'll leave the word over to you.

Thank you, Johnny. A bit more details and also Johnny mentioned a few things that I'm going to repeat here. But as the headline is saying, improved earnings versus Q3 last year, all the graphs are illustrating improvement in shipments, revenue and profitability. But let's begin with shipments. Q3 outcome, 1,530 kilotonnes, clear improvement compared to previous year by 64 kilotonnes and 4%. And the seasonality, as already mentioned, with the maintenance outages is showing that the reduction compared to Q2 was 230 kilotonnes and 13%. We were guiding significantly lower shipments in Special Steels and Europe as well as lower in Americas, and this was in line with the guidance. Then if we look at the revenue, SEK 25.6 billion reduction compared to Q2, SEK 1.9 billion and 7%. When shipments are going down 13% and revenue only 7%, it's indicating that the prices did develop upwards during Q3. EBITDA performance in relative terms, stable 13% year-on-year. But in absolute terms, we have seen -- or we can see the improvement, SEK 0.4 billion, as we can see improvement in the EBITDA per tonne performance. Then a bit more detailed analysis, bridge analysis comparing operating result Q3 versus previous quarter. Seasonality already mentioned, but good performance with prices. The biggest increase took place in Americas by 8% and then Special Steels and Europe division increasing prices by 3%. Both Ruukki Construction and Tibnor also increased their prices. Only minor impact here with the positive FX that was only impacting 2%. Volumes lower, already mentioned seasonality. Europe division, 160 kilotonnes lower; Special Steels, 44 and Americas, 27 kilotonnes lower. And as already mentioned, maintenance impacting this. Variable cost, here, we see an increase and here, a bit sort of a diverse development. In Europe division, we have seen that the pellet premium has started to climb up. We have higher logistics and zinc and paint cost. In Americas, majority of this negative impact is related to change in inventory. Inventories came down during the maintenance outage. And in Special Steels, already mentioned here, we had higher iron ore, coal, alloys and logistics cost, while the scrap cost was slightly lower in Alabama. Fixed cost positive impact seasonally, always Q3 tends to be such. We have lower personnel and external services cost. And then the capacity utilization, yes, related to maintenance outages, we didn't have any outages during Q2 as we did during Q3. So the crude steel and rolling production was around 10% lower quarter-on-quarter. And then a comparison against previous year. And here, we can see the improvement in the profitability performance. Prices have developed upwards. And here, the biggest increase took place in Americas by 12% year-on-year, contributing SEK 590 million to this positive EBIT impact, then followed by both Special Steels and Europe division, where prices went up 4% and impacting both divisions were contributing SEK 330 million here. Also, Ruukki Construction and Tibnor have succeeded to increase prices. Shipment volumes also positive impact by 64 kilotonnes. And here, Special Steel division has increased by 8%, followed by Europe division 4%, while as Johnny already referred to, Americas was rather stable year-on-year. Also to point out that Ruukki Construction and Tibnor, they were somewhat lower in their volumes year-on-year. Variable cost also negative impact in this comparison, especially with the Americas with higher maintenance-related costs and also higher scrap cost is contributing a big part of this. In Special Steels, we have seen higher alloys, CO2 emission allowance cost and logistic costs. And then in Europe, also higher CO2 cost, alloys, zinc and logistics. Fixed cost, minor negative impact here. We have some higher personnel-related costs and higher external services and also some higher rental cost. Capacity utilization with positive impact, and this is mainly seen in Europe division, where we have around 15% higher crude steel and rolling production. But to remind that last year, we had more extensive maintenance outage in Luleå compared to the maintenance outage this year. If we then continue with the cash flow, if we compare Q3 this year versus previous year, very similar trend when it comes to EBITDA performance, higher this year compared to last year. Similar trend in change in working capital, positive impact, even better than last year. Maintenance-related CapEx was fairly stable and similar compared to last year. And to remind that this other item or line here is related to CO2 emission spend that we are doing throughout the year. And then the strategic expenditures, slightly higher compared to last year, and I will get back to the guidance later on. But all in all, good operating cash performance. This led to strong net cash position, SEK 8.4 billion, which leads to the gearing minus 11%, which is still very well in line with our financial guidance, plus/minus 20%. And to remind that we did pay out the dividend during Q2 amounting to SEK 2 billion. Raw materials, as the graph is illustrating, let's start with the iron ore has been rather stable throughout the year. But to point out that the pellet premium has been going up quarter-by-quarter, and we see that it continues to go up also during Q4. Coking coal prices, as the graph is illustrating, have been developing upwards during the year, perhaps starting to move more sideways, but definitely, this is impacting the cost of all the Nordic mills. And then the scrap cost also illustrated in the graph has been higher this year compared to last year. And it tends to be that towards year-end, the trend as also last year shown, it tends to go upwards just before year-end. And perhaps to point out, which is not illustrated on this slide, we have seen rather significant increase in alloys cost during this year, zinc and paint cost and of course, the logistic cost has been going upwards. And also to summarize the cost impact of CO2 emission allowances. On group level, last year, the cost impact was around SEK 600 million, while this year, the cost impact will be close to SEK 2 billion. So there is a significant increase in CO2 emission allowance cost and mainly, of course, hitting the Europe division and to some extent, Special Steel division as well. Maintenance cost, this table, we have not updated since last time we were showing this. During Q3, the planned maintenance outages have been going according to plans. And to bear in mind that these will continue during Q4 in all steel divisions and thus impacting the volumes as well as the cost. And then the CapEx guidance. And this time, we actually updated the guidance for this year. Previously, we've been guiding for SEK 13.5 billion, and we have reduced it for this year by SEK 2 billion. And if we split this strategic CapEx, SEK 8.2 billion, biggest portion is then related to Luleå, SEK 4.2 billion and Oxelösund just below SEK 3 billion, Alabama Mill, SEK 0.3 billion, and then the rest is split to other smaller strategic investments. And to highlight that this update is related purely to the timing of the invoicing. And then also no change in the net cash impact when it comes to CO2 emission allowances. We continue to purchase the allowances. And the estimate is that it will be on a similar level as last year, around SEK 780 million to SEK 800 million. And no change in the digital road map plans that we have around IT projects. We continue to spend around SEK 200 million more or yes, more compared to '25. So that continues to be the same as previously communicated. But with this, I give it back to Johnny.

Thank you very much, Leena. And I will give a short outlook and summary. So if we look at the global market for high-strength steel, this is mainly related to Special Steels, we can see that their strongest segments such as mining and protection is still very, very strong. And roughly, you can say that 50% of what Special Steels sells goes into rock moving or earth moving in one way or another. So mining is extremely important for Special Steels, and that segment is still very, very strong. And now protection is picking up, but it has a long lead time. And it's also an area or a segment which -- where we have lower volumes, but it's a big demand. And if we look at the geographies, I think if you talk about the overall plate market in Europe, it's very, very strong, and it's going to continue to be very, very strong. And of course, that has a positive impact as well on Special Steels. But the underlying demand for plate in Europe is not super strong, but the supply situation is very favorable. But for Special Steels, we believe that it's going to continue to be strong. Same thing with the U.S. plate market. We see we are the second largest plate supplier into the U.S. market. Here, we have a very strong underlying demand, segments such as energy, oil and gas, transmission towers, wind, heavy transport, all of those segments are going really well. We see a large demand. Customers are concerned that they are not going to be able to get the availability that they need. So here, we have a very strong position, very optimistic. I think that the Section 232 and the melted and poured works in our favor. We've now recently seen some imports starting to increase on plate, mainly from POSCO. But it shows that there's not enough availability on the American plate market and prices have been moving up. And then if you take a look at the European steel market, the tariffs are -- and the CBAM is working in our favor. But I also want to point out that recently, we've seen companies such as ArcelorMittal opening up -- reopening up idled capacity. I think there is an additional 10 million tonnes of capacity coming online. They have some production start-up issues. But once they're online, then that will have -- that will sort of close the supply and demand gap on strip. But if you look at the plate, there is no idle capacity to open up. So from that perspective, there's still a very strong demand and limited supply on the plate market in Europe. The Construction segment, we don't see any improvements yet, unfortunately. There are some infrastructure projects, but not to the extent that we were hoping for. I think the Nordic infrastructure market is quite strong, but for the rest of Europe, it's still very low activity. And the automotive industry, as you all know, has a challenging situation. And now we also can see a lot of Chinese car manufacturers settling down in Europe. That, of course, will increase the demand of steel because it most likely will be locally supplied steel. So that, of course, is beneficial for us. But that pretty much summarizes it. And now then if we go into the outlook and the guiding, if you look at Special Steels, we have guided for somewhat lower shipments, and that's mainly related to the maintenance that we are doing. So the Oxelösund mill has a sort of a longer maintenance period now, and that will have an impact on the shipments. And then prices, we guided for somewhat higher. The contract structure we have for Special Steels is normally a longer-term contract. There's a long lead time for when we had the order intake price until we have an invoiced price. If you look at SSAB Europe, we believe that the shipments will be higher. Now I think that their bigger maintenance is over. So they are -- they have the ability to increase the shipments compared to Q3. And here, we also guide for a somewhat higher price situation. And then we have SSAB Americas, where we believe we're going to be stable on the shipments, but we also guide for somewhat higher prices. I think that's for the summary of the outlook and the guidance. I think that we're getting closer to opening up for questions. Per, what do you think? We have a summary, but we can skip that. Actually, I pretty much covered everything in my presentation. So if there are any additional questions, we can take it during the call instead.

Indeed. Thank you, Johnny and Leena. And then we're ready to go into the Q&A. And may I just suggest before we start that in the first round, we limit to 2 questions each. So we'll let as many as possible get a chance to ask questions. And please state them one at a time to facilitate the process here. So please, operator, present the instructions.

[Operator Instructions] We will now take the first question from the line of Kaleb Solomon from SEB.

Maybe first on your Americas price guidance. I appreciate there's a lag and you explained that the sort of gap between market prices and your realized prices mainly due to the contract structure with, I think you said 20% being sold on spot. But for the remaining 80%, can you give us a rough split between the sort of quarterly and longer-term contracts? Just trying to understand how much pricing upside is still to come at the beginning of next year beyond what you guided for in Q4.

Well, in Americas, we also have so-called annual contracts, which are then index price. So there is sort of a delay also when we are updating the prices according to index. And then as you said, there is a combination of annual quarterly contracts and sort of a smaller part is something that is actually then reacting to prices more rapidly. So it is a mixture of all these different contract structures.

But I would also like to add that we are -- we have a tendency to be a little bit conservative. I rather be safe than sorry. So I think we had the same guidance in Q3, and you know where we ended up. So yes.

Yes, that's fair. And on Special Steels, you shipped 9% more than last year and achieved higher prices, but earnings were still a bit lower. And I know you've highlighted sort of freight and energy costs and alloys. But can you give a rough sense of how much of that cost pressure you're able to recover through pricing and what the sort of timing of that is?

I can't give you any numbers, but we're -- I mean, we're quite optimistic. And we're not losing market share. We're not losing momentum. The demand is there. Our prices are -- continue to go up for Special Steels. We were -- some of the cost increases that we could see in Q3 were slightly higher than we expected. We don't believe that they're going to continue to go up at that pace and our price increases are going to be higher than the cost increases. We're certain of that. But then again, I mean, we're living in a world now where things are changing so fast. The war in the Middle East, we couldn't foresee that. We couldn't foresee that all of a sudden, there was a freight limitation and the cost went up several hundred percent and just to be able to find a ship to ship it on. And this is more sensitive for Special Steels than it is for others. And that also have an impact on other costs like alloys, et cetera, because they need to be transported quite often as well. So this is a tricky part where in the world we're living in right now, the things are happening. It's very unstable in that sense.

We will now take the next question from the line of Adrian Gilani from ABG Sundal Collier.

I'll use my first question on Americas, where you seem to have taken the vast majority of your maintenance shutdown costs already in Q3. And you're saying you have strong end market demand, but still you're only guiding for stable deliveries into Q4. How come you don't expect deliveries to come up into Q4?

As I mentioned, the -- of course, a big portion of the Q3 deliveries were taken from inventory, and that also had the impact on the profitability on top of the maintenance cost. So thus, we think that the shipment volumes will be relatively stable also for Q4. And as you said, there will be still continuing the maintenance outage activities during Q4, even though the majority of the cost related to that was impacting Q3. So that is the reason for the stable.

Understood. And then we saw some speculation just the other day about the U.S. and Canada being in talks to ease these Section 232 tariffs. I guess what are you hearing on the ground regarding sort of the likelihood of this going through, what people are saying? And yes, what's the talk on the ground regarding these discussions?

So I think the market, everyone is convinced that the tariffs between Canada and the United States is not going to hold for a longer period of time. But we don't think that there's going to be any agreement within this year. If there's going to be an agreement, it's probably going to be next year. So that's the talk of the town. But then again, if you look at the plate market, the demand is so high now locally. And even if, let's say, Algoma would start shipping into the United States, it would not have a big impact on the pricing that's according to our estimates. They still need to import material from outside North America to fulfill the demand that we see right now.

We will now take the next question from the line of Alain Gabriel from Morgan Stanley.

A couple of questions as well. I'll ask them one at a time. The first one is on Oxelösund. So you're adding 100 kt of advanced high-strength steel capacity, which will come on stream at some point next year. Presumably, this capacity or these volumes are higher-margin products as compared to your current output. Can you help us think about the EBITDA bridge or upside to the earnings as your mix improves at Oxelösund? Maybe we can take the Q3 run rate as a baseline and if we hold everything on spot. Any guidance on that would be much appreciated. That's my first question.

Well, thank you for asking regarding our new quenching line in Oxelösund. And that investment will take more than 3 years to be up and running. So it's not going to be any additional capacity for next year.

No, Alain, I think you think about the Mobile investment we are running at the moment. That will start up Q2 next year. But that's not the same magnitude in terms of capacity. It's more maybe product mix.

Exactly. So we have been, first of all, extending the quenching line #6 that we have in Mobile, and that's going to be able to take more capacity. But also we're doing a tempering loop. That means we're doing a tempering furnace. And that tempering furnace, most of our advanced high-strength steel grades needs to be tempered as well. And we have been using the quenching line for tempering. And now with the new tempering furnace, we will relieve some of the quenching capacity. So that will happen in Mobile. And we have been able to increase the capacity in Mobile, can I say the exact numbers or -- so from 280,000 tonnes, now we're getting closer to 330,000, 340,000 tonnes. So that's an increase of 50,000, 60,000 tonnes, but that's what we have as an increase for next year. Now the quenching line in Oxelösund, that will take 3 years, but that investment also have the potential to reach another 300,000 tonnes. But the initial what we have communicated is the 100,000 tonnes because we will be using that furnace as well for tempering, but it's designed for being able to quench more than 300,000 tonnes, but that's more of a future project. Then to your question, what kind of financial impact this is going to have, I think it's a little bit too early to say because it's a few years away. But I also want to highlight that this investment is also approved to be able to supply and support the defense industry in Europe, where the demand is going to be significantly higher in 3 years' time than it is today. And there's a surprisingly long delay from when there's an order placed on, let's say, a military vehicle until we actually supply the steel. It takes several years, actually. So now we see an increased order intake, but it's not near as we believe it's going to be, let's say, in 3 years from now when we have that quenching line up and running. And those orders typically comes at good margins.

Yes, I was referring to Oxelösund, apologies. It's not 1, but 3 years ramp-up. And my second question is on the CapEx. So you have deferred quite a big chunk of CapEx out of '26 into '27. Does this mean your budget for '27 will go up? Or is it fair to assume a similar deferral of magnitude out of '27 into '28? I'm trying to get a sense if this is going to be additive to your '27 or we will have the same mechanism in '27 as well.

Yes. Thank you. This is purely a timing issue. And at this stage, you can move this SEK 2 billion to next year. But of course, we will get back to more detailed guidance during Q4 when it concerns next year. So at this stage, it moves between years.

We will now take the next question from the line of Tristan Gresser from BNP Paribas.

First one is on the Q4 guidance. So you guide for somewhat higher prices across all divisions and also higher cost. Can you tell us if you expect actually margins to improve in Europe, Special Steels, Americas? And would you expect Q4 to mark the peak of operational quarterly performance for the year? That's my first question.

Well, we don't guide the margins, first of all. And of course, the uncertainty -- the Q4 is always a bit difficult to predict because it is the year-end quarter. We continue to have the maintenance outages. Of course, the production performance is in focus that we succeed in that. We have sold a majority of the order book in Q4. So we are quite certain about the price development during that quarter. And then the cost, like Johnny said, some of that cost we know and foresee that will remain stable or slightly increase. So it is a combination of all these. And as I said, we don't guide for the margins as such.

And the cost outlook across division, if raw material is somewhat higher, that's the same kind of magnitude that for price, so that's 0.5%. And then you flag additional costs to that. Is that correct?

Well, I don't sort of flag for more additional costs as such for Q3, but somewhat higher as...

No. And Tristan, as you can see in the outlook statement, we expect freight and those costs to remain on a high level. So we are not speaking about any significant delta on that account. But raw material, as Leena showed, is moving up.

And the pellet premium is included in the raw material?

Yes, premium goes up quarter-on-quarter.

Yes. Okay. That's clear. And just on the European supply and demand outlook, I think you mentioned inventory is normal. So do you think that overhang is behind us? And why would you explain steel prices not moving higher, faster given the plunge in imports? And you mentioned 10 million tonnes of capacity restarts. I mean, I'm struggling a bit to see that. I'm seeing the 3 blast furnace from ArcelorMittal, but HKM has lost 1 furnace. Ilva is about to shut down. So can you help me understand a bit why do you think that we'll have enough capacity restart to fulfill the plunge in imports? That would be great.

I think you're right that there are start-up problems and Ilva is another question mark what's going to happen to that and so on. But there are idle capacity coming back online that's going to give additional capacity. But then you're absolutely right. The question mark is kind of startup problem issues do they have and what kind of capacity will be closed down and not be utilized. And we've also seen political influence on production -- steel production where governments have taken a bigger initiative to support the steel industry. You know Ilva, since the past, that the Italian government has stepped in and supported it. So what's going to happen to Ilva, it's not a simple answer to give if they're going to close down or not. My guesses are maybe that they're not going to close down, but it's remaining to be seen. And then we have also the Eastern Europe countries where also the governments are stepping in and supporting. And here, we see some other smaller mills with idle capacity starting up again. We know that they have starting up problems. It's not easy. I think that my number was more theoretical, but it's a fact that we have some idle capacity coming back online, mitigating some of the supply and demand gap, but that's primarily on the strip side. Hence, I'm not as maybe so optimistic when it comes to price increases on the strip as I used to be because of this additional capacity. But then again, as I've been saying on the plate market, we believe that there is a shortage already. We see it already when it comes to steel structure that goes into data centers and also piles, steel piles that goes into a lot of construction work that there's a lack of capacity forcing companies to look outside Europe to get the availability that they need, and that will, for sure, drive up the prices. So a little bit hard to predict. I'm a little bit more cautious when it comes to price increases on strip than I am on plate.

We will now take the next question from the line of Boris Bourdet from Kepler Cheuvreux.

2 questions. The first, maybe with the other segment. I remember that you guide for something around SEK 1.4 billion negative contribution for the year at the EBITDA level. The run rate is well above that level. So do you stick to that guidance of SEK 1.4 billion per year, including '26? Or should we shoot at a lower level? That's the first question.

I think we will stick to the guidance that we have given.