Outokumpu Oyj (OUT1V) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to today's Outokumpu Pre-Silent Conference Call Second Quarter 2020. [Operator Instructions] Also I must advise that the call is being recorded today, Thursday, the 2nd of July 2020. And without any further delay, I would now like to hand over the call to your first speaker today, Ms. Marja Mäkinen. Thank you. Please go ahead.

Thank you, operator, and good afternoon, everybody, and welcome to Outokumpu's Second Quarter Pre-Silent Conference Call. My name is Marja Mäkinen, and I'm heading Outokumpu's Investor Relations. With me here is also Outokumpu's CFO Pia Aaltonen-Forsell. And to start with, Pia will go through some of the main highlights during this April-June period and also give an update on coronavirus situation and its implications on Outokumpu. And then after Pia's presentation, we will take your questions. But now I will hand over to Pia.

Great. Thank you, Marja, and hello, everybody. I hope you are all keeping well. And I actually think as we are still living the coronavirus period even though definitely maybe in a different phase and when we have spoken last, maybe I start there and just brief you a bit sort of about the coronavirus impact right now. There is a little bit of background noise on my line. I don't know if there's anyone yet who can mute or help me with that. But anyway, I'll keep talking here. So first of all, just to say that in terms of real infections and real impact on our operations, this is extremely limited. So I think in a series of earlier calls, we have talked about the minimal impact on operations that we had through some short closures in Italy and in Argentina in our distribution centers. So directly, let's say, based on infections, we can really say that the impact has been extremely minimal. This is due to, let's say, very early and very diligent measures to fight this back. And currently, all in all, out of the near 10,000 employees, we've had 44 cases. And then that is, of course, unfortunate for these persons. But I think as a company in operations, we have been able to manage this extremely well. Then there is, of course, another perspective to this, which is how the demand has been impacted. And also our absolute commitment to managing working capital. So I think I've also mentioned before that we had already sort of early in the quarter, taken some temporary shutdowns in order to save costs, but obviously, also to adjust to the lower demand scenario. And we have continued with that throughout the quarter, but that has been clearly been always based on demand and sort of optimization of working capital type of situations and not really, so to say, directly virus based. Also in terms of our supply chains, the weekly and daily indicators that I also look at, I can just confirm that even though there have been risks in some areas, if we think, for example, about scrap collection, I think we have also managed to deal with all of those in a very, very proper way. So that has definitely as well just not really caused any real issues into our operations. So overall, in terms of the coronavirus, we've also been through a long period with a lot of remote work and possible a lot of travel and meeting restrictions, et cetera. But gradually now as those restrictions are being eased up, we are also returning to more normal practices, but obviously, we are still far from kind of fully being kind of back to the earlier. So probably we'll have like a new normal that will also include more, for example, remote work than before. So I think that's really the, sort to say, overall operational view from the coronavirus. And then obviously, what I think is really important is also to see how the coronavirus has impacted on our customers and on our demand. And obviously, as you know, we have a guidance out there for Q2 for the volumes. There's no change to that guidance. It was between 10% and 20% down. We are comfortable with that and remain with our earlier guidance. And I would also say kind of if I see how this coronavirus cycle has -- how things have moved and what has happened, I think as we also shared earlier, it was really somewhere from mid-April that we really started to see the impact on the order intake. And definitely, by now, I kind of think of the period through Q2, we've seen some of those lowest individuals days and weeks of the order intake than kind of through April into May. And I think that in terms of order load, we definitely saw sort of the bottom there in the May. And now since June, we can see I don't know if it's too strong if I use the word improvement, but I think that we can see that we are turning the direction, but this is not sort of a home run. It's not a consistent day-to-day basis, rather there is still fluctuation. And I believe that we can maybe at a later stage today talk a little bit about the different customer segments, et cetera, but definitely, there are also some differences between those. But I mean all in all, big picture, in the end, very much according to our expectations during the quarter. And I think that's quite -- at least I'm reasonably satisfied with that because we have not really been hit by the global pandemic for a long time. So it's, I think, a good end result to sort of be able to say that from a volume perspective, we are very much, so to say, within our guidance there. I think from other perspective, there's, of course, has been some action, has been some steps from the European Commission. However, maybe not a positive one generally in terms of some big sort of revisal of the safeguard program. However, what I would say is beneficial with the new safeguards now valid from July, obviously, is that we have this quarterly basis. And I think that, that was a clear improvement, if I should want to say something positive here as well about that development. And then then I think that maybe still on the cash flow, I have here, let's say, a few opening remarks. And then happy to discuss that in more detail later. But as I've already communicated, and I think we have consistently communicated, the cash flow and the working capital as one element there to sort of be able to control it remains really a priority for us. And that's why also through the quarter, we have really been able to focus on turning the direction of the working capital move. You remember that we had a bit of investment into working capital, with sort of clearly growing volumes in the first quarter. And now the direction has been clearly that with lower volumes, we are also able to squeeze out some more from the working capital. And I think this is our clear intention and the way we work, and I think that we are also successfully executing on that. Then final opening words still relating to sort of cost mitigations vis-à-vis the coronavirus situation. I think the strength of a process industry company like Outokumpu being very used to some volatility in demand is that we are good at mitigating this impact. We are good, as you know, taking what I would say, temporary measures whether it's furloughing where actually, we have also been able to give -- get some of the government support that has been available or whether it's other ways of quickly bringing down costs. I think we have really used this now to be able to also control our cost levels through the quarter. And that's definitely then something that we have to -- yes, maybe we can take that then with questions and possibly discuss a bit more in detail, but I think we have been able to use those tools in a good way also during the quarter. So I think I would actually stop there with my opening remarks and then remain open for questions.

All right. Thank you, Pia, for the presentation. And operator, we are now ready to take questions from the audience.

[Operator Instructions] So our first question is from the line of Harri Taittonen from Nordea.

What you said, I mean, it seems to indicate that there were no material cancellations of orders that you were aware of at the end of the first quarter. Is that more or less the case?

Yes. I think, Harri, what we discussed this in some earlier calls was to say that we typically have a pretty solid, let's say, protection vis-à-vis cancellations in the way how we put -- have the conditions around our orders. However, for, could I call it commercial reasons, we may feel always contemplate to be supportive of our customers, if need be. But I think I can confirm, I mean, definitely, there have been customers discussing postponements, and we have considered when applicable, but I couldn't talk about any material level of cancellations at all.

Right. Right. And then as you promised that you will be elaborating a bit on these tentative signs of order inflow kind of turning the corner and talking about the hinges, maybe I should ask that.

Yes. Yes. Yes. Harri, it's a good general question. Thank you very much for that. I'm really sorry that I'm in the home office mode, and my dog now got crazy, but I hope my daughter will take care of her. So yes. So what we can see on the different end use segments, I mean first of all, I still think that there is like a little bit 2 different areas here. So you all know that distribution remains an important channel for us to the market, particularly so in Americas, but also in Europe. And you know last year, distribution was 46% of our revenue. And I think that distribution is clearly still in this kind of cautious with inventories kind of cash preservation mode. We've had, I would say, good dialogue. For example, BA Americas did call with all of our largest distributors during the last weeks just in terms of updates and relationship. BA Europe has done similar efforts to really kind of sound where we are. And I think that this sort of cautiousness or carefulness with cash is still the mode where we see distributors at this point in time. However, then if we talk about end use segments, it's clear that there are differences between those. And I think I talked about it earlier that kind of automotive, for example, was pretty early in this sort of crisis period they were really, so to say, down with orders reacting to the situation very quickly. And because they were early down, I mean, we've all read Financial Times and all the news about sort of automotive starting up again and so we do also see that. But I still want to say, I mean, it's not like that we are back to any normal levels. So it's just that we are sort of seeing some, call it, kind of movement in the right direction. And I think the same goes, for example, for appliances. Well, there may be partially because some of our kind of customers were impacted also by closures in certain countries, et cetera. There was sort of more of sort of step-down already early in the crisis. So there is kind of something where you can have some positive momentum and sort of a little bit sort of coming back. But again, here as well, I would say, this certainly doesn't indicate that now we are kind of back to normal, but just that it seems that the direction has clearly changed. And then if we talk about many of the other groups that we have, yes, well, let's talk, for example, about oil and gas. I mean it's clear that it is not a strong segment right now. However, it remains a very, very small portion of our business. And then there are others, if we talk about construction, if we talk about the industry, et cetera, where I would be very careful to say that we are at some sort of normal levels, but at least we can kind of see some sort of light in those segments. So I definitely remain within, let's say, my overall frame about what we talk about where we are in terms of demand in Q2 and the volumes for Q2. But I do think it's interesting to kind of see, what should I call it, this distinct difference is still now between the different sectors and sort of the clear cautiousness still of the distribution.

Okay. Maybe just a final question before leaving the floor to the others. But on this kind of a disappointing news from the EU and -- I mean has -- the industry made quite sort of vocal calls about the quarters. I mean have they been heard at all in the EC? And also like how do you see -- how is the kind of the pricing risk for the stainless steel overall if you end up having a big sort of increase in the proportion of imports?

Yes. Yes. So I think first of all, I mean the really, let's say, support from the national governments has actually been overwhelming and really strong from so many of the countries where we operate also writing to EC and you just saying that -- sorry about this, that you really have to stand up for the industry right now. But obviously, the response from the EC has not been there yet. So I think we have what we have right now. We know what the quota system is from July. And I don't want to say that we are without hope. There is definitely all the time lobbying discussions ongoing. And there might be even more focus from the trade commission now again on sort of European matters. But clearly, disappointing at this point. Let's not lose hope in that.

Yes. Yes. Yes. And just finally, on the sort of pricing, what you're thinking? Or is it sort of -- could there be significant -- I mean how do you see the pricing kind of outlook in view of this?

Yes. Yes. And of course, I need to be a little bit careful because clearly, we don't have a Q3 guidance, but can I just say on a general level that's, yes, there is -- it's a disappointment that the import quotas are not reducing. But compared with the pressure sort of last Q3 when we kind of had the annual quotas up against us at least now it's clearly quarterly, so I think it's kind of -- that's a good improvement, and it balances at least so that we don't have all of the pressure sort of coming at once, which is a good move. And then in the end, it will depend a lot on the overall demand because if there is an absolute amount of volume allowed into Europe and how big relative portion that is then has, of course, a huge meaning.

Next question is from the line of Luke Nelson from JPMorgan.

Just a few follow-ups, if I may. Just on the volume guidance, is it possible to give a bit more of breakdown on a regional point of view? And then just following on to that as well from a mix -- and product mix point of view, just in the context of how volumes have tracked. Product mix in Americas was positive. It was negative in Europe in Q1. Just give your thoughts on how that's progressed in Q2?

Indeed. So if I just start within, let's say, the distinction between Europe and Americas I think this is, so to say, from our perspective, driven by also almost sort of the way of response to the coronavirus. So definitely, directionally -- the direction is the same in all of our key regions. However, it seems that sort of the step down in Europe has been somewhat a little bit more smooth, simply because there's been a lot of government actions support for furloughs, et cetera. So for example, unemployment is then not impacting in the same way sort of as in Americas where in U.S., in particular, of course, jobless figures were so high up early during this crisis. So I think it's just fair to say that it seems that the dynamics of the market are a little bit different, and you've sort of seen a harsher sort of curve down when it comes to Americas. I do want to take this opportunity at the same time to say, obviously, that gives sort of an opportunity for a quicker rebound that we don't know, but it could indicate sort of the dynamics of the market. But then also in terms of, let's say, our performance in BA Americas, I do want to say, in terms of cost mitigation actions that we have and also being able to make very rapid responses exactly because of the sort of dynamics in the job market, et cetera. So it also means that we can be quick in adjusting our cost base -- our fixed cost base, and I think that we have even during this quarter, kind of further brought the breakeven point clearly down. It used to be somewhere above 200 then in the later quarters, we brought it down to 140, 150 kilotons per quarter. And I think now we are sort of further down to the 125, 130 region in kilotons for the breakeven point. So the dynamic is harsher, but it could also work in a company save when you need to quickly reduce costs. And then as to your question on mix, I think, historically, we talked a little bit more about mix both in the context of U.S. where it was really sort of a theme for us to improve the mix. And then we have really taken some rather harsh changes in our portfolio. I don't think that now in comparison that we would really have been taking that sort of big step changes. So I don't have anything kind of specific to say around Americas. And then I think kind of around Europe, in Q1, we said that the lower mix was predominantly due to the fact that we had a much higher volume compared with the previous quarter. Obviously, that sort of drives the standard. The classic volumes are then getting a bigger portion. That's really where the growth was. And then we also had a bit of pushback in the scrubber business, which is sort of part of the value-added mix as we talked about then because of the situation that started in Asia and was a little bit more visible in shipyards, et cetera, already during Q1. And I don't really have, let's say, any big update or relevant update of that. I would assume that we are sort of remaining with those same basic dynamics still, as we speak.

Okay. That's clear.

Next question is from the line of Carsten Riek from Crédit Suisse.

Just a couple of questions from my side. The first one is, Pia, you mentioned the net working capital movements. Historically, we have seen that the second quarter sometimes can still see actually an increase in net working capital, predominantly because of the movements in payables receivable at sometimes. We have a similar situation right now where demand actually dropped quite probably sharply over the past 3, 4 months. Could we expect that instead of -- I assume inventories might be actually built better off? But because of the receivables and payables movement, there might still be a little bit of a buildup rather than a release in the second quarter? That's the first one.

No. It's a really, really good question. And I think the way how we have been driving this now has been to be very, very careful on the inventory particularly because of the lower demand situation. So that has certainly been helping us, but it has also taken very diligent management to get that way. And listen, I think with the AR and AP, that dynamic, obviously, the AR will be very much impacted by invoicing. And I can only assume that with lower demand, you have lower invoicing. And then looking at the AP side, there really timing of when we start to build up inventory because of, for example, holiday season or other stuff, it does matter a lot. So I do understand your comment and kind of recognize that historically there could have been this kind of movement. But I think I can just remain really confident. I mean obviously, I don't have really sort of a figure that I can give for you here today. But I just remain really confident that as we have focused so much on driving down the overall working capital during the quarter to release cash, that this is really the direction that we have.

Perfect. The other question I have is it's a bit related to it. We have seen, was it yesterday that 600 people in Krefeld were sent to short-term work. What is it actually -- what kind of impact do you see from these governmental programs to actually flexibilize your fixed cost? Because I found actually with all the companies right now, that is the most opaque one for us at least forecast.

I do understand actually why it's opaque because these rules vary also country by country. So even when we kind of work inside the company, we have to pay a lot of attention and work a lot to get sort of an overall correct view of this. So I would say, first of all, on average, for the group in total, our assumption or sort of estimate is that when we go for various terms of temporary measures to have people furloughed or maybe on short-term work, usually, we can get about 50% back from the government. But of course, it varies country-by-country like U.S. U.S. has nothing and some other countries may have, so to say, a better situation. But still when I think kind of at overall cost base and then, of course, taking into account that typically if we go for short-term measures, it means maybe that we reduced production during, let's call it, a 2-week period. So you still remain with many weeks with kind of the normal salary. So then the absolute amount of kind of government support, I mean, we are not talking about, in our case, any kind of big 2-digit figures. So this remains a good tool. And if we are still thinking a little bit country by country, you mentioned Germany, there are other countries, for example, U.K. or Sweden or Finland is a little bit different system that are really important countries of operation to us and where the sort of support does exist.

[Operator Instructions] Our next question is from the line of Veikko Silvasti from Nordea.