Outokumpu Oyj (OUT1V) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Outokumpu's Q4 2022 pre-silent call. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over to your speaker, Linda Hakkila, Head of IR. Please go ahead.

Thank you, operator. Hello all, and Happy New Year. Welcome to Outokumpu's Q4 2022 pre-silent Conference Call. My name is Linda Hakkila, and I'm the Head of Investor Relations. With me today, we have our CFO, Pia Aaltonen-Forsell. We will first start with a short introduction. And after that, we are happy to take your questions. And now without any further comments, I would like to hand over to our CFO.

Thank you so much, Linda, and Happy New Year, everyone. I do hope this will be a year of some more positive external news. I do have to say that looking at sort of the news flow through 2022, there was almost an exhaustive list of continuing bad news whether it was the war, whether it was the energy crisis, whether it was inflation, whether it was higher interest rates. And obviously, this is sort of the environment that externally is there. If we take a broader brush, there was, of course, also a number of, I would say, very encouraging news. Most importantly, what I would like to highlight is the developing interest both for green steel, really sort of tangible cases that we could observe close to us and in our customer behavior that I can still return to. So these early steps, I think, are now sort of really starting. We can clearly visualize now the path here. And also on EU level, for example, the C-band decisions. So I think for longer-term development, actually, there has been some good news in this whole news flow. But of course, a lot has been dominated by more short-term sort of more negative news flow and -- without now even trying to predict everything for 2023, it's clear that we are ready and prepared with a strong balance sheet also for a more bumpy period, should that be necessary. Before I go into the details of some commentary on Q4 and the current situation that we should normally always do in this meeting, I would still like to take the opportunity to circle back to our CMD last summer and maybe sort of the highlight of my presentation and I received at least a lot of questions about was around the normalized EBITDA. And if you recall, at that point, we did share that, apart from the sort of particular and very strong market conditions that we have experienced post-COVID in '21 and into the early '22, we did expect a normalized EBITDA level of between EUR 500 million to EUR 600 million annually for Outokumpu. And I think that's a good reminder. I mean, both looking sort of historically at maybe challenging periods with lower results, I think it is still -- I mean, we stand behind this calculation and the expectation that we wanted to clarify at that point, where we think Outokumpu can be in a more normalized market condition and EUR 500 million to EUR 600 million annually was that level we were talking about. We did include in that, of course, some of the ongoing improvement projects. And in later quarters, we will share much more about the progress of our improvement project. That's not really the sort of the issue for today, but I can ensure you that I think we have a good start also with strategy execution of what we initiated last summer, in the CMD, our second phase. Okay. But with that background, maybe sort of a few more detailed comments on where we are right now. And maybe first to remind you that when we talked about the outlook for this quarter, we did start with the overall market view of somewhat declining volumes, expecting deliveries in the fourth quarter to decrease by 0% to 10%. I think we are still sort of firmly within those boundaries. I usually like to be sort of in the middle of all of those ranges, I think based on a somewhat I would say, demanding market conditions or market conditions that have been weakening, I would say we are within that range, maybe we are a bit more on that higher side of the negative. That's still to be confirmed, but anyway firmly within that range. And one more, of course, important observation on the market conditions is to say that we are -- we have been -- we spoke already, at the Q3 report, a lot about the destocking. And I think that's the character of the market that we are living in right now. This goes for both Europe -- even though in Europe, they started already during Q3, but we are still sort of at the tail end of that, clearly. And in Americas, I think this has sort of more clearly started during Q4, a clear destocking mentality. And as we said, when we have destocking in Americas, when the U.S. distributors are destocking, they are really destocking. So that means that the order intake and the deliveries are clearly weaker because of that. And when we look at the typical seasonality, again, obviously, in Europe, Q3 is typically the weakest one with the summer holidays, et cetera, and Q4 is already balancing out a little bit. Again, in Americas, the typical seasonal pattern is actually Q4 being the weakest one because of Thanksgiving, because of Christmas. And I do see that typical also seasonal pattern repeating. So in Americas, we have both the seasonal pattern plus the destocking, which really calls for a fairly challenging demand outlook or situation right now. I would still like to say just a few more words about sort of the specific market conditions. In Europe I think because of our focus on the 2 business lines, we have Stainless Europe with more commodity-driven business, and then we have Advanced Materials, I think we can distinctively see that within the progress within the value-adding portfolio of advanced materials there's still a number of subsegments that continue on a strong note, whether it's heavy industry, whether it's oil and gas. We do have a lot of projects there going on in the pipeline, and the order book is also somewhat longer. When we come to the commodity side, obviously, we are very much impacted by distributor behavior. So there I would clearly call the market weaker, and we are also up for fairly short order books. And I think this is a sort of phenomena of the market conditions that we can observe of order books also clearly short and lean. On the markets, then I think on the crisis, usually, I don't even give that much indication. I mean, you follow the CRU statistics, I'm sure all of you on this call. The one thing I did want to say, still, is that at our sort of typical order book length is the 1 quarter. That's what we talked about in the Q3 release. Then just mathematically, that means that in Europe, when you saw the price curves going down during the third quarter, that's actually what we will realize in the invoicing in the fourth quarter. And what is happening now as we speak is also that the order books are even shortening. So it means that we get sort of a quicker circulation of the realized prices then into our really sort of P&L. But I think that's sort of enough said briefly about the market situation right now. Instead of chrome, we've had a bit of a special situation due to the energy prices. I think we have been indeed proceeding as we said in the Q3 release, our capacity utilization has been somewhere between 50%, 60%. The second furnace is down. We have been optimizing furnace #1 and 3, and that has allowed us to sort of keep in the black -- keep producing some important volumes, keep energy costs, I would say -- when I use the word under control, I don't mean that they stay on the same level, but they stay balanced enough that what we produce, we can still do that in a profitable way. So I think all in all, that is very much, as we said. Some other big cost items we typically talk about, for example, maintenance, there's really no significant change between the quarters, Q3 and Q4 will be pretty much alike. Otherwise, of course, there's some inflationary pressure, but there's nothing I would highlight in particular. I think the only other thing I would still add here, more from the P&L perspective, is the net of timing and hedging impact that we typically describe and we talked about them being negative in the quarter. And I would say, based on the very late nickel price increases in the quarter, we get a little bit of that special results that we already get some of the negatives from hedging losses but we actually don't realize the upside on the higher nickel price in the pricing out. So you know that when we talk about timing, we talk about the difference between the price in and the price out of predominantly nickel, but nickel, ferrochrome, of course, a few other smaller items as well. And usually, when the prices go up, that's good news for us because we can realize higher prices then also in the invoicing in the price out, but when it occurs very late in the quarter, then there's not enough time to really do that -- already benefit from that. So that means that with this sort of late nickel increase, I would say, like order of magnitude, it may be like EUR 20 million more negative from timing and hedging than what I assumed or what we guided for before. So that's one element to take into consideration. Maybe then before I complete my presentation, just 2 more sort of details to describe. One of them, we were out with a release a couple of weeks ago relating to a deferred tax asset. Of course, for me, as a CFO, I don't want to make this too small by saying it's just an accounting item. That would maybe be counterproductive. But it is truly an accounting item. It's the result of the improvements in Americas that have occurred over the last couple of years. And simply by IFRS rules, now we have reached a point where we need to recognize that, hey, we actually have historical losses that we will benefit from in future payments of taxes. So now it's time to recognize them on the balance sheet. But this does not impact the cash payments per se, it's just an accounting treatment. So that's why maybe still just really confirming that we gave a release because it was an important amount. It was EUR 350 million more on the balance sheet. Obviously, it also has a onetime positive impact in P&L that is significant but it does not impact the cash payment of tax. And obviously, with this now being on the balance sheet, it will actually raise our effective tax rate going forward in the P&L, not so to say, in the real world, if I may use that language. And finally, yesterday, we completed the divestment of long products to Marcegaglia and you remember the EV was EUR 228 million. And then also, all in all, we reached almost EUR 228 million in terms of cash. Three quarters of that was with equity, and 1 quarter was a debt item. So I think, all in all, that was now sort of brought to a completion according to our earlier plans and information. But with that said, I would like to stop and move over to the Q&A session, please.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Krishan Agarwal from Citi.

Can you hear me?

Yes.

Happy New Year to all of you. A quick question on the inventory destocking situation which you mentioned about both Europe and the U.S. So if I'm correct, I mean Europe is much more advanced in terms of destocking. And the last time when we spoke after the Q3 results, you were saying that, okay, we are into that last lever of the destocking in Europe. And so is it okay to assume that okay, U.S. or the Americas business will continue to see the destocking in Q1 of this year, while Europe is mostly behind in terms of that destocking impact on volume?

Yes. I think there's a couple of things always that impact that. The one is obviously from how high is the level where you start. The second is how much imports are there. And then, of course, the demand. There are -- of course, also the supply itself from the sort of supplying region. And -- but what we can see right now and what we can see, I also just looked at the latest stats from what we know. There's less stats available on the European distributor inventories. But from what we can see, inventories are really more sort of -- they are declining and approaching a more normal level. So that's why I think it's fair to say that we are sort of at the tail end of that change. Now when it comes to -- do we then observe, do we get a lot of -- is the order intake now then higher from distributors? I would say that's still more sort of sporadic that we have indeed some distributors who are returning more back to some sort of placing orders, et cetera, and while we have others that are not. So that's not yet a uniform picture. But I think based on the sort of indicator here of the -- starting to normalize, not yet normalized, but approaching, then I think we are probably sort of getting there. For the Americas, and this is now U.S. in particular, I think we have good statistics and we have seen sort of a very, I would say, a fairly sluggish reduction of the inventory levels. And I think that's also on the back of imports still being higher than normal in the U.S. as well. And I think that's probably 1 of the reasons there. And probably it also talks about underlying demand being weaker because that's resulting then in, I would say, a slower sort of step down in the inventories. And for me, that clearly talks about this kind of continuing into Q1. Does it continue the full Q1? Or is it just January, February? That, I don't know yet. I think when I see the January statistics, I will know more.

Understand. And then quickly on ferrochrome. I mean, energy prices have been one of the big headwinds [ and your operating electricity ]. We get it. But can you help us in terms of quantifying that how much of the energy cost in ferrochrome is on a hedging basis, meaning that even though the spot prices have come down, the actual P&L cost of energy for the ferrochrome will take longer to reflect that lower cost. Or it is more of a spot that, okay, the spot price has come down and energy costs will come down proportionately of ferrochrome?

Listen, I think the sort of -- the rule of thumb that I would take now going forward is that for the year '23, we are hedged at about 60%. And I think that exactly gives us the sort of the belief that having this operational or operating model now where we run like 50%, 60%, that's the one that will occur if the spot prices are really high. And then when the spot prices go down, then we can sort of profitably run a bigger part of the volume.

Yes, yes. And these are like 12-month hedges, if I assume?

Yes. Some of them are also built on a quarterly basis, but a lot of the contracts that we do are for 12 months.

Yes. So practically, you would be seeing Q2 of last year as the energy cost for ferrochrome in this year?

Well, to be a bit more specific, even, I would rather say that when we looked at energy cost in Q2 of last year, we were still at a very low point because we had some annual contracts for '22 that were done on a lower level. And there are some quarterly contracts that were still at that point on a low level. And now when we enter into '23, we have a lot of new annual contracts for '23 that are on a higher level. I don't mean that they rise now from what we see realized late in '22 into '23. On the contrary, we have seen some forward prices actually go down now, but they go down from a high level. And a lot of the annual contracts now have actually started from first of Jan if we talk about '23.

Got it. Got it. Quickly a clarification on this metal pricing hedging gains. So you're saying that the negative impact is going to be EUR 20 million more than the earlier guidance. Did I hear it correctly?

Indeed.

Can you remind us of the earlier guidance because in the Q3 you had close to no more than EUR 100 million of negative impact. So how should we think about Q4?

Yes. I think when -- we had a fairly sort of -- how should I say, neutrally negative -- I mean, we didn't say it's really negative or a big negative or anything. What we said -- actually, I'm just reading directly now from the guidance -- we said, with current raw material prices, raw material-related inventory and metal derivative losses, are expected to be realized in the fourth quarter. And I think we said that because when we had the EUR 100 million, we have said that, hey, this is a lot, it's a big number. And now we just wanted to emphasize that there was going to be a negative number. So we don't really have -- we haven't really given like euros, but for me, that means that, hey, we were somewhere like -- more like half of what was there before, and that was the reason not to say that it's high or it's a lot or something like that.

Yes. And now probably EUR 20 million higher than the earlier expected?

Now about EUR 20 million higher than what we expected then. And that's really sort of -- the negative turbulence really towards the end of the quarter is the reason because we don't have the time to realize through higher alloy surcharge any higher price out, but we already get some hits on the hedges. And that's really the simple reason. I mean, usually, it should always be good for us when nickel price goes up. But I mean, that's kind of the rule of thumb. But in this special context, it can occur the other way.

Understand. And a question, I mean, not specifically for the Q4. I mean, LME nickel prices have gone up a lot, and a couple of the arguments which we hear from our internal guys is that the liquidity in LME is very low, and hence, the price volatility is higher. And then low liquidity is attributed to stainless guys like you are not being that active into the LME because of the volatility, which we saw 200,000 price. So how should we think about your position as you continue to use LME the way you were using before? Or you guys are sort of now trying to evolve some kind of alternative mechanism for the nickel price issue?

I can say 2 things. I can say, 1 that as a CFO, I have been putting so much pressure on the organization to figure out alternative ways of managing the nickel risk. And of course, the key way always is to have very low inventory. That's sort of the -- so the operative tools are really highly emphasized internally right now because that gives us then sort of less need to go, sort of financially risk-managing nickel exposure. And the other thing is that we have policies, and we are still always following our policies and our policies call for hedging under certain conditions. And basically, we have some room to maneuver when it comes to our base book hedging, and we basically always are hedging when it comes to inventory that we hold available for sale and also any sort of price out that we would have already done on a firm basis. So that, of course, again, reduces the position. So we have a bit of a natural hedge in that if we hold inventory, but then on the other hand, already have agreed a fixed price out, then, of course, we take both into account [Technical Difficulty] in our positions. So I would say, if I then just translate this all to what is our position in nickel trading right now, I think it's somewhat lower exposure to LME than before.

Bad news for LME. Anyway, that makes so much clear. I'll go back in the queue.

Thank you.

We are now going to proceed with our next question. The next question comes from the line of Anssi Raussi from SEB.

Guys, can you hear me?

Yes.

Great. Great. I have a couple of questions, and I actually continue a bit on the previous ones about nickel price and actually pricing mechanisms. So I've been asking this earlier as well, but are your customers still accepting alloy surcharge pricing? And what kind of impacts you have if they don't accept it and they go for this so-called all-in pricing?

Yes. I think the prevailing pricing mechanism in the Americas is still alloy surcharge-based pricing, typically monthly. And the market in Europe is much more dependent on basically the -- somehow the balance, how much imports are actively in the market because imports are typically priced on effective or all-in price, as you said. And then we also have to remember that when we deal with big projects, when we do projects in Advanced Materials business, there's a lot of project-based work. Typically, those could also be using a pricing mechanism, all-in price or agreed price in advance. So I would say with the current market sentiment that we have, we have an increase in so-called fixed price -- effective price, all-in price in BA Europe. And it's actually -- by now, I would say, clearly, more than half our order intake go that direction. And that just brings an interesting element then when you ask us what are the impacts. I think that what the impact is and why I always say that as a CFO, I prefer the alloy surcharge, it's that that provides a better risk management for us. When we talk about effective pricing, then the challenge that we have to overcome is that when we price out, it's just the price that we agreed when we took the order. And if the nickel price went up meanwhile, well, bad for us. If the nickel price went down, good for us. So there is not one answer, hey, these are the euros. It's more that there is one risk management tool that we then miss at that point. So in an environment like right now -- sorry, Anssi, sorry to interrupt. I just still want it to be really clear on this one. So in an environment like right now where we see this increases on LME nickel price, but at the same time, in a market environment where we have more deals done on effective prices, then it means that with some -- of course, with some variation here because Americas is pricing out alloy surcharge, part of Europe is pricing out our surcharge. But a big part of Europe is pricing out fixed price. So the recent changes in nickel price then don't impact that price out at all. So we don't get the benefit in this case. Now when we have had a higher nickel price, we don't get the benefit of that.

Okay. That's clear. And the second one is about your ferrochrome furnace. So any estimate or changes in your plans? So you're still planning to relaunch at the end of this quarter? Or how do you see the situation at the moment?

That is the current estimate. And obviously, I mean, we are in readiness to change that. There's been a lot of downward movement in the forward electricity prices, but it's not been sort of significant enough yet for us to really be able to reassess our Q1. But we keep a very close eye on this. So I will come back to this again in early February when we have our Q4 results. But at the moment, the plan is still that we stand for Q1, as we have informed before.

And you still think that you're able to make positive profits in ferrochrome division, even with this capacity utilization rates?

You asked a really good question. And with ferrochrome production, yes, because the share of fixed cost is so low of the overall cost burden. So we have 3 furnaces, so we can keep 1 furnace down. And we have various arrangements, furloughs, et cetera, for personnel. So we keep our costs down. So it's not that we have a low capacity utilization per asset, but we have a total closure of 1 of the assets. So then the economics work. But it's a really good question because, of course, the sort of base of how to make money in our industry is you need to have a high enough capacity utilization.

Yes. Good point. And actually, the last 1 for me is regarding your cash flows in Q4. So what kind of elements we should think? And of course, you will receive some cash from these long products divestment later but not yet...