Outokumpu Oyj (OUT1V) Earnings Call Transcript
January 4, 2024
Earnings Call Speaker Segments
Good day, and thank you for standing by. Welcome to the Outokumpu's Q4 2023 Pre-Silent Call. [Operator Instructions] Please be advised today conference is being recorded. I would now like to hand the conference over to your first speaker today, Linda Hakkila, Head of IR. Please go ahead.
Thank you, operator. Hello all, and welcome to Outokumpu's Q4 2023 Pre-Silent Conference Call. My name is Linda Hakkila, and I'm the Head of Investor Relations here at Outokumpu. With me today as our main speaker, we have our CFO, Pia Aaltonen-Forsell. As per usual, we will first start with a short update. And after that, we are happy to answer your questions. But now without any further comments, I would like to hand over to our CFO.
So hello, good and good afternoon, and I do wish you all our well and wish you also a happy new year 2024. So let me get down to a few comments relating to the current market and then current situation. And maybe let me just start first by a few comments on volumes and delivery volumes. Our guidance for the fourth quarter was to have an increase between zero and 10%. And I think sort of based on where we are about to end the year, of course, books are still being closed as we speak. I think we are more close to this lower boundary of this range. So we are within the range, but closer to the low end. And I think that is a bit reflective also of somehow the general sentiment, if I reflect a bit more on what we see in the current markets today, well, we actually don't see that much change. Not really. People, customers are still very much in that sort of waiting mode, a bit on dependencies, waiting for the trigger to the better. And we have, of course, discussed also earlier that we are not seeing the trigger yet, and I can confirm this is still at the moment of the situation. So somehow we are more in a kind of rollover mode almost when it comes to the market sentiment. There are a few changes that I think are worth commenting in the last couple of days and weeks, and 1 of them relates to imports to Europe. I mean, imports to Europe are at a very low level and have been sold for a period of time, naturally, as also demand is very low. So there is a linkage here. Now what we have then seen, of course, to the news is a lot of disturbances in the Red Sea, potentially in the future then causing more disturbances the logistic flow between Asia and Europe. And obviously, from history, we know that, that can get very congested and very troubled with all of the traffic now then being circumvented with a much longer route. So we will see -- I mean, this is nothing where we would have yet seen the impact. If there will be impact from that further, I guess, those we will see a little bit later during the first quarter. But that may be something to keep an eye on. So market environment in Europe has remained challenging. We still confirm what we said earlier that the past quarter -- I mean the third quarter was really the bottom. And that's where we also saw the lowest prices as what has been also reflected in our Q4 guidance. And market recovery in Europe is still expected to take some time. It won't happen overnight. We still have, as before, relatively short order books in -- into February at this point in time in Europe. So then maybe just a final comment on Europe. We've had a lot of actions when it comes to profitability improvements and making sure that we can come into black numbers for the fourth quarter. And I can confirm that those actions have proceeded as we planned and have been successful to the extent that they can then help to mitigate the difficult market conditions. Then let me comment Americas with a few words. And there, I have to say in Americas market sentiment has been weakening, at least to the extent that when we look at the CRU figures, I think you have all observed that prices have also been somewhat declined in the last weeks. I think we have seen indeed very high import levels, particularly from Europe into America and certainly that have an impact to some extent on the market balance right now. And I think Q4 per se, obviously, that's also seen a weaker quarter nothing sort of surprising there. But now just sort of observing the current market sentiment, we do see some signs of weakening as we speak and just kind of following what has happened in the last weeks here. So not very positive news even from that side of the Atlantic at this point in time. Then on Ferrochrome, we did release a few days ago, the information about the planned production curtailments there. And again, that is a reflection of the weaker market sentiment that we are observing. We are planning to curtail production permanently to about 80% of capacity until end of the summer or late summer of 2024. For Ferrochrome otherwise, we had a successful maintenance break as planned in the fourth quarter and the impact of that as per the planned earlier announcements. And then I think we talked a bit about the net of timing and hedging impact being slightly negative in our guidance. And as per all information I have today, I can confirm that nothing special new to say on that topic either. So I think that summarizes the more important sort of point of perspective that relates to Q4 and the current markets sentiment, obviously, maybe on an accounting detail just a reminder for the Q4 that as we were releasing the information about the continued hot rolling agreement -- tolling agreement for the U.S., we also informed about an impairment booking of about $280 million for the fourth quarter. So that's still valid as per earlier information. And then finally, the share buyback has continued as planned and -- the full impact of the share buyback commitment will be visible in net debt figure. Of course, a part of that has already been paid but then a part will still be seen as a debt at the year-end figures. And that's sort of a similar accounting procedure as we had with the previous this program as well. I think working capital has been as also planned. There's seasonally more inflows, so some positive impact from that. And in the cash flow, we also had some tens of millions of positive impact from some repayments of earlier paid cash taxes for the year. So there were some outflows in Q3 that we actually then lost back in Q4 for some tens of millions. So all of that has strengthened the cash flow in Q4, so that I'm sort of satisfied that we will show a strong balance sheet at the end of the at the end of the quarter. So I think with that said, I would like to complete my presentation and open up for Q&A.
[Operator Instructions] We'll now go ahead with the first question. First question is from the line of Anssi Raussi from SEB.
Thank you, and thanks for the presentation again. Actually, I have 3 questions, and I'll go 1 by 1, but I'll start with Ferrochrome. So how much of, let's say, accessories you have at this point? And what is the current capacity utilization rate if we compare to the coal production capacity? And is it so that you expect 80% of capacity to be enough for 2024? Or are you just pushing down your own Ferrochrome inventory levels? That's the first one.
Yes. Thanks, Anssi. And your questions are -- actually, it's a little bit complicated to answer to them in some sort of short and snappy way because I do feel that we have a bit of excess inventory. But that is not as significant. I mean, that is not the only driver for the changes that -- why we are also planning now to really curtailed production. But obviously, being able to lower inventory levels is also something we are targeting. When I think about Ferrochrome inventory levels, I think that it's important that we have, let's say, the needs, the commitments that we have, this is very typically annual contracts, by the way, that we have them secured and that we also have a bit of a safety buffer just in case of any disturbances in the chain. And when I combine those 2 then I think that the really excess inventory is not that significant. But [ admittingly ], there is something that we could drive down. I don't want to leave that kind of top of the list. I think more important is that we have a weak market sentiment and lower volumes and demand in stainless broadly, so kind of for the customers of Ferrochrome there is clearly lower demand, and we need to adjust to that. And as we have demonstrated during the electricity crisis, that obviously has nothing to do with the current situation directly, but we are able as well to adjust or optimize our production even on a daily basis, if necessary. But of course, the fact that we're taken -- planning to take 1 furnace out of production, we have 3 furnaces, and it's 1 of the smaller ones that we are taking -- planning to take out of production. It is more talking about this weaker market sentiment and adjusting to that. So we are already now at a lower capacity utilization. I'm sorry that I don't have a number to give you straight away right now. But we have -- we are also able to adapt even on a daily basis, if necessary. So this is reflective of a more sort of view into the summertime.
Okay. And now, as you mentioned, stainless capacity, how do you see your own stainless right now compared to the market demand. So do you have -- or are you able to limit your capacity right now? Or how do you see the situation?
I mean the most important is, of course, to optimize the systems that we have so that we kind of continue producing at high enough capacity utilization levels, particularly Tornio has remained at very good levels, which is important because that's where we also drive the appropriate cost structure. And then we will take necessary short-term work or other arrangements. They are unfortunately fairly broadly used sort of through our production system at this point in time. But we have still been able, I would say, to operate Tornio at an appropriate level. However in Q4, obviously, we have some maintenance breaks also in Tornio that we have planned also during November. So this is, I would say, broadly speaking, a very sort of low capacity utilization period. And then within our system, we try to optimize so that we use the capacity that then delivers the best efficiency.
Okay. And the last 1 from me is about the scrap prices. So what kind of realized prices you saw in Q4? And is there anything else on the maybe cost side in Q-on-Q basis to mention like energy, for example.
Yes. On energy, I would say the direction is sort of slowly but surely lower -- and why I'm saying slowly is that we have a hedging ratio that is above 80% was in Q4 and is also for Q1. So there's a number of contracts that were locked in already quite a long time ago. So with that said, the fact that the spot prices keeps on going very low, but also very high some days, it's not really impacting us that much. So sort of steadily downwards, but no like abrupt or quick or sudden changes there. I think on the raw material side, there has been some pressure in the market. And I don't really have, let's say, any sort of easy or quick explanation. So just say, this is exactly what has happened. But when I look at the scrap, I'm still broadly very satisfied that I think that we have had access to all of the scrap that we have needed at the point in time where we have needed it and still also to an appropriate pricing given that the market circumstances for us are challenging.
This is from the line of Ioannis Masvoulas from Morgan Stanley.
A couple of questions from my side. First of all, you previously indicated the modest rebound in European spot prices for stainless, which would benefit to some extent, Q4. Do you expect this to be a tailwind into Q1 '24? Or is fading now given that the spot prices haven't really maintained that positive momentum.
Ioannis, thank you and happy new year. And I think we are -- I mean, what we previously said on Q4, I think is still relevant and correct because we still have somewhat of a delay between the order intake and the actual delivery. So I think it followed much the pattern that we had foreseen. And now if we sort of consider and just look at where spot prices have moved, then there's been more of a sort of stabilizing then continued upward curve. So I think in combination with the fact that we have a reset of annual contracts. And obviously, also for annual contracts, there has been some convergence towards the spot prices prevailing in Q4. So I think with that said, there's probably still -- there could be a little bit of momentum, but it's definitely not significant into Q1. I mean, just based on what we see historically now happening during Q4.
That's very clear. And second question, you mentioned a strong balance sheet at the end of the year. Do you expect to be on a net -- slight net cash position or maybe a small net debt position? If you can give us a bit of visibility on that, that would be very useful.
Yes, yes. Thanks. I think given the strong working capital performance, I mean, aligned with my sort of the initial view that we had -- and then as well, some of these positives, I really think that this strong balance sheet means that we could even have a [ viable ] cash position. But I mean this is still to be confirmed and when we have the accounts closed.
And last 1 for me, just going back to ferrochrome. Last time you had the curtailment, you took more, let's say, conservative approach and you waited to see how things will develop to decide how long the curtailment will last. This time, you're talking about the curtailment through to the end of summer. Is that because you need to work through the inventories? Or is it because you are a bit more pessimistic on the stainless demand outlook in Europe.
Well, it's a combination of both, I would say. I mean, the inventory plays in there, but it's not the main -- it's not the main driver. But of course, with some inventory that we could reduce in connection with what we currently see in the market. Those 2 led us to that conclusion.
And this is from the line of Krishan Agarwal from Citigroup.
Pia. Can you hear me?
Yes, I can hear you very well.
Yes. I have 2 questions. I mean following up on Ioannis' question on of the uptick for the Q4 pricing. How should we think about the price cost spread because earlier you alluded that there was a little bit of raw material cost pressure. So do we still -- is it fair to assume that the net negative EBITDA situation of the Q3 has sort of now been one-off in the Q3 and Q4 probably will feel better or positive EBITDA at least for Europe?
Yes. Thank you very much. And it's a really important question. And when I really -- when I now look more into like Q4, I think that the topics that we have described before as part of our EBITDA guidance are still relevant. And that leads me to the conclusion that the spread development has still been positive for Europe because we were unfortunately negative in the third quarter, and we were foreseeing black numbers in the fourth quarter. So obviously, that talks about a positive development. And I also opened this call by sharing some more negative sentiment about the market in Americas, but that is more what we see here and now -- so also relating there to Q4, I don't have any sort of additional information compared with what we said before.
I understand. And the second question on ferrochrome. So I mean, is it fair to say that the ramp-up after the previous slowdown in the ferrochrome has been fast -- faster than the market recovery into the European terrain, hence you are doing this curtailment? Or is it a -- the reflection of the significant sales slowdown on the stainless steel market itself in Europe?
I think it's -- we had a good ramp up after the maintenance if that is what you are referring to. So it was successful. However, I mean, this is a testimony of the market sentiment and also our willingness to cut cost as we can or at least plan to do that as quick as we can.
[Operator Instructions] I'll now take our next question -- this is from the line of Maxime Kogge from ODDO BHF.
So first, a general question on the market. On paper, you have -- I mean, a pretty nice situation because they have a much lower import pressure, at least in Europe for a few weeks. Nickel prices are stabilizing their prospects of freight cuts in both Europe and the U.S. and still the underlying volumes are -- seem to be quite weak. So what do you think the market needs to really be buying back again stainless steel. So that would be my first question.
Yes. If we talk about the European markets, you are absolutely right. I mean import pressure has been low for a period of time already. Now nickel prices have been stabilizing. So there are -- these are, of course, kind of -- these are good and sort of positive remarks. However, really, the underlying demand is suffering from, I would say, this overall macro negative sentiment disease, if I would call it that way. So I mean, it's really a matter of, yes, the interest rates could be going down, but they are still high. And this is putting a lead on companies on consumers and through that also, of course, on companies, on projects, et cetera. So I think that there are some signals that things in the future might be going to the better, but they are not realizing yet. And of course, even though interest rates would go down, the first step or the first steps we'll still only bring them down to a more reasonable level. I mean it's probably going to take a little bit of time is my assumption. And then obviously, you are right that this nickel price plays in a role a lot. And if there is an expectation over downward pressure that would still have people hold back and wait to see what happens. So maybe that is a stabilizing factor. But I do think that the underlying demand is weak and it's driven by macro circumstances. And we will have to see the whole kind of macro pickup in Europe and Germany being, for example, one very important market there.
Okay, clear. Second question is on -- we've seen actually quite extreme weather conditions in Scandinavia over the past days with, I think, temperature at the lowest for 25 years. Does it -- I mean, I guess you are quite used to low temperature in Finland and Sweden, but do you still see an impact on non-cost logistics, et cetera, in Q1?
Yes. So far, I have nothing to report, but I can absolutely testify to just making everyday life a bit more difficult for sure. I have to take care. I mean, not to freeze yourself. But 1 thing, of course, is that spot prices of energy, for example, are certainly climbing in such a situation, but our hedging ratio is high. it's well above 80% for the first quarter. And in Finland, I think it's even higher than that. So not quite 90%, but still clearly above 80%. So we are well covered and also have practices to optimize, so to cut energy consumption, if we really would have some real peak prices, which absolutely could happen in this kind of weather conditions. So that's 1 thing. There, I think we are better prepared after this energy crisis. And then, yes, eventually, we could have impact on deliveries, et cetera, but I'm not aware of anything of that kind at this point in time. So traffic is still running.
And we'll now take our next question. And this is from the line of Anssi Raussi from SEB.
Just 1 follow-up. Could you maybe comment your mix in your order intake during Q4? And also, if we think about Q1 cost, I guess, Europe should be stronger in terms of seasonality when we compare to Q4 and also Q4 should be quite weak in Americas due to seasonality. So is there something we should be extremely worried about going into Q1?
Well, Anssi, thank you. And first to ask a question really about projects, et cetera. And particularly relating to mix. Then I think there is quite -- there are quite big differences between different market segments. So we do see some market segments that continue even strong or at least robust in terms of continued business, hence, also order intake for us for projects or for more value-added projects. And those include, in particular, I would say, still some oil and gas, still some retransition and still also maybe some sort of general industrial type of project. So those are maybe a little bit I don't want to call them anomalies, but just to say that sort of weak market sentiment where especially consumer-driven demand is low, then I think that some of these [indiscernible] branded products sort of are showing still some robustness, but not all. And these higher interest rates are for sure, also causing some, let's say, concern and some projects are being delayed. So I would say like the holistic picture is that as we see right now in the order intake, I mean, I am at least still setting also this sort of value-added order intake is pretty much according to plan. I mean is -- this is what we would expect and would also expect that this picks up a little bit into the first quarter. But I have to say that at your other question of what should we expect from Q4 to Q1, I don't have yet the final answer to that. I think we are still in this period right now where usually sort of in the second part of January when people really come back from holidays, that's probably the time to really observe really logistical challenges in Suez Canal, Will they have an impact somehow to behavior of customers in Europe, will they feel an urge or a need for example, to stock up. We don't know that yet. We won't -- that remains to be seen. But in the market right now, we are not observing these kind of signals of strength and of a sort of pickup. So I would kind of -- at the moment, I have to speak more of sort of a rollover mentality where things just kind of continue on this fairly low and modest level in terms of what we see in market activity. So we'll probably know better in a few weeks. And then when we give our Q1 guidance, we will talk more about this.
And there are no further questions at this time. So I will now hand back to the speakers for any closing comments. Thank you. We have a question come through if you would like to take it?
Yes.
Now we have a question from the line of Bastian Synagowitz from Deutsche Bank.
So thanks for squeezing in at the end here. I just had 1 quick follow-up on the last question, actually, Pia. Just in terms of the volume trend, I guess, usually, the trend we see both -- on both sides [indiscernible] U.S. and also Europe it's probably a trend of up -- being up like broadly 15% to 20% of the fourth quarter level. But I guess, from what you're saying, we should be expecting at a minimum, probably a much more flattish trend, i.e., [indiscernible] likely a double-digit grow much more flattish versus Q4, would we be comfortable to say that, do you actually still see the like high-teens and I would say within reach from, I guess, the comments you're trying to caution us a little bit on the volume and demand side, at least that's what I've been reading out of it. But maybe you can just help us on that on.
Yes. Thanks, Bastian and Happy new year. And I would say having the kind of normal pattern which sums up with the volume of the product -- that's not -- I mean, the market [indiscernible] more subdued than that. I will, however, need to come back to this when we give our Q1 guidance because the first weeks of January are usually -- they will show some direction once we get sort of past the sort of holiday period. So we will need to come back to that. But I just wanted to share that the current market sentiment is not sort of -- it's not supportive of a strong pickup, at least from what we can see right now.
Speakers, just checking, did you have any closing remarks before we close the call.
Thank you, operator. Well, before we close the call, I would like to remind you all that we will start our silent period on Tuesday, January 9, and will continue until our Q4 results are published on February 8. Thank you, once again, for joining our call today, and have a great day.
Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect. Thank you.
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