Outokumpu Oyj (OUT1V) Earnings Call Transcript

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

Thank you, Johan. All right. Let's then go forward and also very welcome to our webcast from my side. Our third quarter result solid, stood at EUR 101 million. and it was supported by very strong performance from business area, Americas and ferrochrome. Here, I would like to highlight regarding business area Americas. This was the best quarterly result in 3 years. However, then in Europe, the weak demand and high customer inventories weighted on the results. When we then come to our EVOLVE growth strategy, that is progressing well. So looking at the high nickel alloys, we are very well leveraging now on our current existing production capabilities to increase the business. And at the same time, we're working on the investment program that we have ongoing across mean,commercialization, product development and then as well operations. Also in the ferrochrome, we have now expanded our product folio and it also brings us to new customer segments. This is very important in the longer term because it increases our resilience and also then reduces over time or the of the charge come in our product portfolio. We have also launched the brand of EvoMaterials, which is our technology platform that we are developing in the U.S. and the building of our pilot plant is pressing on time, and it will be operational in the first half of next year. If we then look at the import statistics again, and I think the key focus here should be on Europe, which is the light blue line. So the EU post measures, CPAM and the new safeguards they are curbing imports. But as we all know, they have not basically fixed the underlying demand in Europe. And if you look at the chart, then you also noticed that the imports to Europe were on a higher level than compared to Q1 in Q2. This is also 1 of the explanation that there were more imports just before the new safeguards were valid as of first of July and this has also contributed to the higher inventories in a summer period next to the weak underlying demand. Then talking about the market sentiment and giving it a bit of flavor in different segments. So if we start with the consumer side, there, I think we could say that if we look at the household appliances, both in Europe and U.S., the undrawn demand is weak. And I think what makes the situation a bit worse even in Europe is that there's a lot of inflow of household appliances, and that has been increasing in Europe. Then if we look at construction, construction industry, if we look at building houses as such, it's also on a weak cycle, both in the U.S. and in Europe. But the 1 area in the construction that is doing really well is data centers as we all can read and see around us. And there, of course, that data center boom as to volumes and size is clearly bigger in the U.S. than it is in Europe. And this drives heating and cooling. This drives water management and everything related to that. So that's the plus point. That's a kind of positive thing what we see on the market. And then if I comment on the Industrial segment, then I would say Americas is much stronger currently with a robust demand compared to Europe. And automotive, I think, is not doing well in either continents. If we look at our deliveries then in the third quarter, we can see that we had lower deliveries clearly in Q3 in Europe than we had in Q2. So like I said, weak demand and then if we look at BA Americas, actually, we had a really good deliveries. And I think you need to see this also in the context of the 5% tariffs we still have from Mexico to U.S. which means that we cannot really use the Mexican capacity for demand in the U.S. So I think this is a good result and good deliveries in the Americas. And also, ferrochrome had good delivery volumes in the third quarter. Then on sustainability, we continue to be the sustainable leader in the industry. all our sustainability figures are as planned going in the right direction. The only thing what I'm unsatisfied is our safety result in Q3. So our total recordable incident rate year-to-date now stands at 2.1 million and as far away from our targeted result of 1.5. And obviously, we're taking all the actions here to improve the results going forward. What would be also important maybe to mention that we have also now started our bio coke production at the Tornio site and this is an important contribution then going forward also for our ferrochrome production and reducing the emissions in there. We were also present in New York Climate Week. And there, I think 1 of the topics that we discussed a lot it's how important is to have a predictable price for carbon going forward when we also continue to do our smart investments in decarbonization. What I wanted to highlight here also is our investment program then in high nickel alloys, giving a bit again the phases. So where we are now, it's the left basically box that you can see. So we have a position in alloy 825 and we are progressing well now developing the volumes in alloy and 625. And customers are especially interested in our white and heavy coils and the thick plates we are able to produce in the downstream assets. And then the next phase is now that we have already decided is implementing the Elexoslak remelting capability next to the current mill shop. And this, of course, then brings us to even more parameters and applications that require that. And then next year, in the beginning of the year, we will then be coming back with the engineering study for the Phase II within concerns the new melt shop and the new malls would be planned to be operational in the end of '29. With this, I hand to Marc-Simon.

Thank you, Kati, and welcome, everyone, also from my side. Building on the highlights Kati just shared, let me now talk you through our Q3 results in more detail, and let's begin here with the group highlights. In line with our guidance, adjusted EBITDA in the third quarter was at the same level as in the previous quarter. Given the typical seasonality, this is a solid third quarter result. Looking at the main components, deliveries and net of timing and hedging were slightly below our expectations. This was offset by better cost performance. Excluding now the net of timing and hedging, our underlying EBITDA improved compared with the second quarter which points to a higher quality of earnings. As in the second quarter, our result was supported by the strong profitability in BA Americas and ferrochrome. In Europe, the continued market weakness and seasonality led to slightly lower profitability in the business area in Europe in the third quarter, but it remained ahead of the third quarter of last year. Now on the cash side, operating cash flow turned negative due to higher working capital, but our financial position remains solid with a liquidity reserve of EUR 1.1 billion at the end of the first -- of the quarter. I will come back to cash flow and leverage then at the end. But let me now turn to the business areas, starting with the business area Europe. In Europe, the market environment has become increasingly difficult in the second half of the year. And this is visible in our Q3 deliveries, which were down 12% quarter-on-quarter. Three factors drove this: continued weak market environment, higher customer inventories and the usual seasonal slowdown. Inventories rose because customers imported more ahead of the new used steel safeguards that took effect first of July, as already pointed out by Kati. Demand remains under pressure in key end markets. construction, household goods and consumer durables, such as white goods and cars are struggling with cost inflation and higher interest rates. And also, as pointed further before data center-related infrastructure investments, on the other hand, remained robust. On the earnings side, profitability was slightly lower as the volume decline was partly offset by a positive net impact from realized prices and raw material costs. as well as seasonally lower fixed costs. Now looking ahead, we are confident that the new EU steel safeguards, together with CBAM, will create a level playing field. for Euro print producers. Once the elevated customer inventories have been worked off, which we expect in the first half of next year, European producers should clearly benefit and the market should become more stable. And so then the recovery will be delayed unless we see a clear upswing in end-use demand or in business and investment sentiment. With that, let's turn to Business Area Americas. Despite less tailwind from metals timing compared with the previous quarter, Business Area Americas delivered another strong financial performance. As pointed out its best adjusted EBITDA since the second quarter of 2023. This was mainly supported by 7% higher deliveries quarter-on-quarter, driven by solid demand, particularly in industrial segments and data center-driven infrastructure investments. higher selling prices related to both base price and alloy surcharge also contributed. Demand in the U.S. remains solid and the Mexican market continued on its recovery path. Looking ahead, negotiations on the USMCA review and the possible bilateral trade deal between Mexico and the U.S. are ongoing. A positive outcome could be another catalyst for BA Americas, and it would allow us to make full use of our Mexican production capacity. However, even if a deal is reached, Mexico will first need to demonstrate that its trade policy and enforcement protections are aligned with U.S. standards. With that, let's turn to business area. Ferrochrome. In quarter 3, ferrochrome demand remained seasonally low, but healthy across all regions. North American continued to be the strongest market in ferrochrome, supported by robust customer demand. Despite seasonally lower deliveries, BA Ferrochrome increased its profitability compared with the second quarter, but also compared to the third quarter of 2025 and '24. This was achieved despite headwinds from increased mining ag, the end of electrification aid and other inflationary pressures. The improvement was supported by higher sales prices energy optimization and better fixed cost absorption. Looking ahead, the ferrochrome market is expected to remain under pressure for the rest of the year. driven by production ramp-up in South Africa. Demand should stay relatively stable, although some weakening is anticipated towards the end of the year. So the pressure comes mainly from supply and not from the demand side. The expected higher South African production and the associated exports have on charge chrome is weighing on charge chrome. And charge come Scot prices and European index prices for the fourth quarter. This is exactly why we continue to focus on expanding our portfolio into higher-margin ferrochrome products such as high and medium carbon ferrochrome. With that, let me close with a few words on cash flow and leverage in more detail. As mentioned in our last webcast, working capital increased in quarter 3 as we prepared for the annual planned maintenance shutdowns in quarter 4, especially in Business Area Europe. Lower-than-expected deliveries and their timing in the third quarter caused net working capital to increase further. This is a temporary outflow, which we expect to reverse over the coming quarters. and it has our full focus. Now capital expenditures in Q3 was EUR 41 million. And based on our updated annual CapEx schedule, we now expect full year CapEx of approximately EUR 170 million compared with our initial plan of EUR 200 million. The difference is mainly a matter of timing in the execution schedule. Due to the negative free cash flow of EUR 124 million, mainly driven by working capital. Our net debt increased to EUR 348 million. And accordingly, our leverage ratio increased moderately from EUR 1.1 billion to EUR 1.3 billion with the improved rolling 12-month profitability, limiting the rise. Yes. And now with that, handing back over to you, Kati.

Thank you, Marc-Simon. Yes. And then I think we come to the outlook and guidance. So in outlook, we're trying to give you the elements to understand the guidance, and I then will also say a couple of words about the guidance. So our adjusted EBITDA in the fourth quarter of 6 is expected to be affected by lower delivery volumes across the businesses and also higher cost. And the impact is expected to be the largest in business area in Europe, where demand is anticipated to remain weak and customer inventory levels are still elevated. Stainless steel delivery volumes are forecasted, therefore, to decrease by 5% to 15% and from the third quarter of 2026. And with the current raw material prices, some raw material-related inventory and middle derivative losses are forecasted for the fourth quarter. Then your guidance reached that the adjusted EBITDA in the fourth quarter of 26% is expected to be at the similar level to the EUR 10 million in the fourth quarter of EUR 25 million. And look, what I want to say here is the reason that we decided to use the quarter 4 in '25 as a reference point is that our expectation for the adjusted EBITDA in 2026, fourth quarter is closer to the result in Q4, 25% than in the result now in Q3 '26. And with that, I go to the key messages from this call. So we had a solid quarter result, especially supported by strong performance in Business Area Americas and Ferrochrome, while Europe suffered from the weak market conditions. We have good momentum in our evolved strategy in Heineken alloys, expanding Ferrochrome's business and product portfolio, the new customer segments and then also advancing with our property technology and building our pilot line pilot plant now on time. And from my side, I would say that despite the weak market conditions we're experiencing in Europe, we absolutely remain confident in our future as the evolved growth strategy will strengthen our businesses, will bring more resilience and will create new platforms for growth. And with that, I open the Q&A session. So please go ahead.

[Operator Instructions] The next question comes from Adahna Ekoku from Morgan Stanley.

I've got a few questions that I can take in time. So maybe first on Europe. Could you just help us understand how the weakness in Q4 could potentially reverse into Q1, assuming no kind of proper demand recovery, should we still assume the typical seasonal uplift in volumes? Or Will the inventories continue to weigh on this? And is there any color you could give on costs or an extended maintenance that continues into Q1 as well?

So maybe if I start answering that, look, we guide per quarter, as you know. But like Marc-Simon said earlier, we do think that these inventories that are very elevated level, they will need to be kind of worked through. And once they are worked through, it should basically improve the deliveries. And then I think we should also remember that always in Europe, the first quarter and the second quarter, so the first half of the year is seasonally better. So maybe those are some of the elements that I could give.

Yes. And maybe then to continue on your question regarding the cost and particularly on the maintenance side.

The next question comes from Tristan Gresser from BNP Paribas.

Yes. The first 1 is on the Q4 guidance. I'm struggling a bit to see how you could be flat year-on-year despite what we've seen. I mean we've seen the CVA, the quotas U.S. EBITDA is doubled from HUGO in Q3. You have EUR 60 million of restructuring gains for the year. and you don't have the negative ERP impact that you had last year, so really struggling. So if you could help me and us understand a bit the building blocks by division, that would be helpful?

Maybe if I can start here, and Kati, you can, of course, chip in. So first of all, as Kati pointed out earlier, our guidance is here against the fourth quarter of last year in a sense that it's closer to the fourth quarter of last year and the third quarter of this year. This is important starting point here, which will give you an anchor point. So it's closer, okay? That number two, we said that volumes go down in the range of 5% to 15%, predominantly in terms of absolute numbers in business area in Europe, but also Americas is seasonally lower, as you know. Then -- and this is really the biggest building block here when we think about our quarter results here. against Q3. Then cost Alent is another driver in here. Three components to highlight seasonally higher costs eased and also a lower fixed cost absorption due to the reduction also in our work. On the demand side, what we do see is that our market share and order intake in Europe hasn't dropped. Then the third component is net of timing and hedging. You might recall that we had a positive timing impact net of timing and hedging of EUR 3 million in the third quarter. And now for the second quarter, we said somewhat it is higher single digit, lower double digits, around EUR 10 million negative impact, which we have here. And then maybe a third is ferrochrome as I already highlighted here. Also here, you see then lower deliveries as an impact from the stainless steel sector coming in. And I think I also mentioned already the pricing element. So these are the components which is driving then our Q4 results and hence, also our guidance.

And just -- that's helpful. But just to confirm, so the presentation, press release says adjusted EBITDA in Q4 is expected to be at similar level to EUR 10 million recorded in Q4. Now you're saying it's going to be closer to EUR 10 million than the EUR 100 million. So is that the range to EUR 10 million to EUR 100 million you had in Q3 this year and closer to EUR 10 million? Is that the right way to think about it?

So look, you have to remember our guiding practice now, which has not changed. So we say higher, lower and similar, and that's what we have used here. What I'm trying to give it the color by saying closer to Q4 last year than the Q3 this year. So -- and I think Marc-Simon, if you calculate from the Q3 result, I think Marc-Simon has quite well given you the elements to think about what we expect. So I hope that helps.

Okay. And just on the guide, could you quantify the impact of energy costs so far in Q3 and what you expect in Q4? And I think last year, you had this EUR 20 million headwind in Q4 ERP and maintenance. What would be, I think, flat for maintenance in Q4 in Europe. What would be the euro impact Impact of maintenance as well. Any quantitative color you can provide, that would be helpful.

So maintenance in itself is direct costs. There are -- there is no real impact really here quarter-on-quarter as we're accruing our maintenance costs over the year, number one. Number two, what maintenance drives, of course, is a lower production to fixed cost absorption impact what you then see here as well. In terms of energy, higher energy costs, and particularly, I now refer to the impact from the Middle East, we see in Q4 an impact of around EUR 15 million compared to prior crisis levels. And that is around a EUR 5 million increase from the third quarter to the fourth quarter. And then you were mentioning also the impact in terms of volumes in the fourth quarter of last year, absolutely right valid. But there are a couple of other components we need to take into consideration. So first of all, with the rollout of the ERP system, yes, we weren't able to deliver as much as we could have to the market. But at the same time, we had a stronger production than what we see right now in the fourth quarter and then impacting the cost level. And then the second point here is that we do have -- we don't have any electrification aid anymore here in Finland that -- which was supporting our fourth quarter last year. And also on the ferrochrome side, we have a higher mining tax. So these are building blocks, which help to understand here also the development.

The next question comes from Bastian Synagowitz from Deutsche Bank.

My first 1 is ferrochrome, which I think has done very well this year, I guess, also really benefited from Saban and a good performance overall. So I guess you've got a few moving parts. You mentioned shipments, which are down in Q4 and then there's pricing, I guess, now with Saban particularly the pricing side, just maybe a little bit more opaque than usual in terms of what is sticking for you relative how far you're being impacted by global spot prices. Now I guess when we look at the comp you're referring to in the fourth quarter. Ferrochrome has actually done very well last year was around EUR 40 million, very similar to what you just did in Q3. So could you please maybe help us to size the magnitude of the decline, particularly which comes from ferrochrome, that would be great. And then maybe a second question, following up on the cost side, where, I guess, you've managing things overall quite well, actually, just given your hedges on energy. Is there any sense you could give us how the EUR 10 million you've been facing in the last couple of quarters would look like if you would mark that line to market. Those are my questions.

Maybe if I start with Ferrochrome, you can come back to the energy then. So our Ferrochrome deliveries go mainly to our got half to our own production and then half basically to other steel producers. So basically, when -- in U.S. as well, there's the seasonality in the fourth quarter and then Europe now is weak. So there is just less demand for ferrochrome. So that's why the volumes are lower in Q4. And then you have seen the -- what happens on the market. So the ramp-up of the South African volumes and production that has not had an impact yet in but it does impact the ferrochrome price index already in Q4. So there's more competition and pressure on the market. So it's both volume and pulp price. It doesn't say that our ferrochrome business would not be solid but it's slower than in Q3. SP1 And then if I can add to that, Bastian. And important also to remember you heard my comment on the electrification at and the Ferrochrome business is with the smelters, very high consumer of energy and electricity and a lot of that comment what I mentioned earlier in terms of electrification that was impacting positively Q4 last year and we don't have that tailwind this year. And we have a higher mining tax also this year.

And that 1 as well.

Okay. But then to your second point on the energy side. So my comment in terms of the increase in the energy cost quarter-on-quarter EUR 5 million or in quarter 4 against quarter 1 prior to the Middle East conflict of EUR 15 million here. That is basically in relation to that one. We do hedge our electricity and our gas consumption for the fourth quarter, it's around 80%, 80% being hedged. And on the electricity side, almost a similar amount on the gas side. The Middle East impact is not only about the consumption in terms of gas where we need to buy spot here, et cetera, on the market, but also related to freight costs impacting that in a meaningful amount.

And also fuel in the U.S. for the trucking, especially -- so it's basically everything that's all related indirectly as well.

And if you mark that to market, would that mean that the EUR 10 million you talked about earlier with the double or would it go up even more? How should we think about that?

No, I don't think that -- I'm not saying -- I didn't say that anything goes up even more. I mean we have the typical seasonality in energy costs and prices. And typically, costs go up in the fourth quarter against the third quarter by around -- of course, it's pretty volatile. But also, as mentioned before, we are hedged to 80%. So from a market-to-market perspective, we are in the money.