Outokumpu Oyj New

Hello all and welcome to Outokumpu's Q1 2024 results webcast. My name is Linda Häkkilä, I'm the head of investor relations here at Outokumpu. With me today as our main speakers we have our CEO Heikki Malinen and our CFO Pio Aaltonen-Forsell. As per usual, we will first start with our presentations, and after that, we are happy to take your questions. But before we start with the presentation, I would like to remind you about the disclaimer, as we might be making forward-looking statements. But without any further comments, I would like to hand over to our CEO.

Thank you, Linda. Good afternoon and good morning to everybody. Welcome also to Outokumpu's webcast here to discuss our Q1 results. And it's nice to see you again after a couple of months. So today we have a lot to discuss again. Let me start with this slide here first of all and tell you that, as you've probably seen, if you followed our announcements, Q1 was a pretty eventful quarter for Outokumpu. Looking at how the year started, the first four, six weeks of the year were actually pretty good. Our order inflow in Europe was actually pretty nice. And I really felt after the first month that this is going to be quite a nice quarter. But then, unfortunately, events changed. Political strikes began at Outokumpu, and basically, our three smelters in the ferrochrome plants and our two huge smelters in the steel plant were closed for four weeks. Also, our port was shut. And, of course, as you know, within the otokumpu system, when torneo is shot, of course, it does have material implications. We had to make two profit warnings, and ultimately, we've had to guide down the results. So, what started off as a really nice, good start ended up in what was, of course, not a satisfactory outcome. Political strikes per se have been a bit of a phenomenon in Finland. The government is moving towards adjusting the legislation, and let's see what Parliament decides, but at least the proposal will be to to sort of modify the legislation when it comes to political strikes, that the duration would not be that long if they take place. But anyway, for Otokumpu, this was of course a big and unfortunate start to the year. And we have worked very hard to try to mitigate the impact. We indicated initially that the first half year would probably take a hit of about 80 million euros. At the moment, we think it's probably going to be about 60. It's still a big number, and as I said, we're very sorry for the negative impacts for our customers, obviously not something that we wanted to be happening here. But beyond that, if we look at the implementation of the strategy, our phase two is going according to plan. Actually, we're a little bit ahead of plan. And today we have announced that we are going to raise our performance improvement target for phase two from 200 million euros to 350 million euros. Obviously, we have cost inflation. raw material costs rising, we see wage inflation, and also we have now the impact of the strikes, which we have to also financially recover. So that is why we then decided that it was necessary to raise the performance target. So that is kind of where we ended up, you know, Q1. And if we then look at the markets, What obviously is interesting is to see what happens with prices. I mentioned after the presentation in Q2 and then also in Q3 that I felt that as we headed up, we came out of the summer of 2023, that we felt that that was the trough in commodity prices in Europe. And since then, we've seen gradual improvement in pricing that continued also in the first quarter. Nothing major, but we can see gradual movement month over month on the price levels. And you can also see that with that fine light blue line on the curve on the left-hand side. So European prices have risen somewhat. We're obviously not where we used to be, but anyway, the direction of movement has been positive from the standpoint of the producer. And in the United States, we've had some continued moderation of prices. If you look at the curve on the bottom, you can see the situation in China. The Chinese situation is, of course, complicated in the sense that China is such a huge player and Asia in general is such a huge player in the global stainless industry. I had already expected last summer that the Chinese government would have stimulated their economy and really gotten the, let's say, consumer activated to buy, but that has not happened. And subsequently, we can see that the oversupply globally stemming initially from Asia just continues to burden the whole markets. And we see that, for example, in our case in Mexico, there is increased imports from Asia. We know we've seen that be the case also in Latin America and some markets and so forth. In Europe, we haven't really seen that much massive import pressure in spite of the very weak situation in Asia and in China. On the right-hand side, we can see nickel. We have been trading somewhere between 16,000, 18,000. We've had a couple of months even at 19,000. That seems to be momentarily roughly the LME nickel price range where it is trading, although many other commodities have actually moved up very robustly, like copper, but nickel is now moving sideways in that position. Then if we look at our deliveries, well, here it's again a tough, tough story, because if you look at the last three quarters, our deliveries have been somewhat about 400,000 tons, which of course is clearly lower than we've seen in some of the past years. I want to make the comment here as we look at our results that if we had, first of all, I want to make the comment that the deliveries, of course, impacted now by the strike were 10% less than in Q3 of 2020. So the volumes were really low, even lower than we saw in the midst of COVID in Q3 of that year. But if you then look at the results of the company, so even though the results are modest, Pia and I were just doing some modeling that if you look at the volume level today and compare that to the past, in the past, at this level of volume, we would have been clearly in negative EBITDA. So our performance improvement measures, our cost reduction measures have brought, improved our break-even point quite clearly. And even with this low level of volume, we're still able to maintain, you know, positive EBITDA. Again, not at all happy with the absolute level. But I do want to make the point here that our performance improvement measures have had teeth, and they really have had an impact. On the right-hand side, you can then see the red bars. They just pretty much signify or show what the impact of the strike and declining volumes were. One thing I want to mention is still I want to come back to this scrap question because we have seen the scrap market tighten actually now for two, three quarters. This is not a phenomenon also in Europe, but it's also the same situation in the United States, so intrinsics are moving upward. And so one could ask, so if the market isn't that strong, so why is the scrap market tight? Well, at least a couple of reasons. One is in Europe, there used to be some volume coming from Russia. That volume is not coming anymore. Secondly, industrial activity in Europe and also in the United States on the manufacturing side is surprisingly low. And when it's slow and consumers are not buying new washing machines, you don't have this normal turnover from the residential side, well, then the scrap volumes are not also circulating. And so simply, there is not the amount of robust supply coming, and that starts to tighten the market. I do, however, at the same time want to make a comment here and say that we as a company have been able to get all the scrap we need. We have a good relationship with our suppliers, ChroniMed being one of them. We do not have to import any scrap from other regions, from other continents, so we get everything we need from Europe. We don't need to buy any extra primaries. And also, if you look at our working capital, given the structure of the supply with our scrap dealers, we don't need to carry any huge burden of working capital. And I think the way we've organized our supply chain is good in the sense that we don't have that working capital burden. Actually, our system is pretty efficient. Then a few words about sustainability. Well, I always want to make the comment about safety. And you can see the long-term trend of the company. We've been working on this for decades. And today, if I look at that 1.2 TRI number and compare that, for example, to the chemical industry, we're starting to be here at chemical industry levels, which, of course, is a much more closed process than what we do in the steel side. So the direction of movement is right and good. And, of course, we have many plants where the TRI number for last year and this quarter was zero. So we're making good progress here. And in terms of recycled material rate, we are at very, very high levels, 95%, 96%, and our mission levels are going down. Then a comment about shareholder returns. Well, very happy that our AGM approved the $0.26 dividend for each share. That has been paid in April. We have renewed our dividend policy two years ago in the summer at the CMD. We have completed the second share buyback, which is related to our convertible. We have returned 144 million euros to our shareholders. So we have a strong commitment and dividends remain a very essential and key part of our equity story. Then before I hand over to the... presentation to Pia, let me just comment briefly on some of the recent announced changes. So first of all, Pia, After working for about five years for Otto Kumpu, has been announced that she's moving on to a new challenge. And I'm very, very happy that we were immediately able to appoint Mark Simon Schaar, who you will then see in Q2 live here next to me. Mark Simon Schaar has been working for the company for over a decade. He has a very strong financial background. He's worked in many different roles. Last role now, he's in charge of all of our procurement, raw material procurement general procurement and has been leading that very successfully and i was very pleased that mark simon is excited and willing to take on this very very important role So you will then see Mark Simon briefly, or not briefly, but from August onward when he then shares the podium with me. The other major news, of course, was my announcement that I have submitted my resignation and have decided to take on a new opportunity working for another company, another industry. I have worked for Otokunbu in different roles, first as a board member since 2012 after the merger for eight years, And then, of course, four years in the role of CEO. We may come back to this topic in the Q&A, but as I said, I do feel that I'm leaving the company in very strong hands and in many ways in a very good shape, not only looking at it from the standpoint of where we lie in terms of the balance sheet. But maybe we come back to this question if you want to delve on to that a bit more. But with those sort of comments from me, let me hand it over to Pia and she will dive into the numbers and then I'll come back and make some general comments about how I see the coming near term future. Thank you very much.

Very good. Thank you, Heikki. And I have to say this feels quite special and a bit emotional as well. My last and final presentation here as CFO for Outokumpu. It's been a true pleasure and privilege, of course, to be in this role and also to serve all of you to the best of my ability. And I also want to say something about Mark Simon. I'm not going to make a bad joke. I'm really going to say we worked side by side in some really tough spots. And I think the professionalism that Mark Simon showed also for example during some refinancing events and during some other important events in Outokumpu history, I think really shows me that he has what it takes to become here a really successful CFO of Outokumpu. But now let me go to my presentation today. So first of all, repeating the strength of the balance sheet. We have the strongest balance sheet in the industry. That's the result of a lot of hard work and also a very consistent policy, the way how we have worked together with Heikki and also with the whole management team. So obviously that's visible now with still a negative net debt figure at the end of Q1. And also through the fact that our position in terms of cash, in terms of liquidity remains strong. And that has enabled us to fully remain committed to our policy when it comes to shareholder returns. We have paid dividends of 110 million this year. We have also completed the second share buyback program. So I think all of those are really, really good and strong points. Let's then look a little bit at the announcement that we made today about hiking the target. And Heikki already mentioned this, but let me take you through a few more details on that. So we announced that we will hike our strategy execution target when it comes to the EBITDA run rate from 200 million euros to 350 million euros. And first of all, if we think about what's the nature of these improvements, I would say it's about 50-50. into more like operational efficiency, raw material efficiency, also costs, and about half is more on the commercial side. And you may remember that when we launched this strategy phase two, we also talked about the fact that we wanted to be able to release some more capacity in Americas with very modest investment. So we talked about some $20 million investment and 80 kilotons of more capacity being released from our current platform. And I think we are very well on our way in terms of enabling that. So the investments have proceeded well. However, the market has not quite been there to absorb it. So that's something that we still have, let's say, ahead of us to benefit from. We also talked quite a lot about the throughput efficiency, especially in the commodity business in Europe. I think that has been really well projected as well. So we can see that already in reduced working capital, in reduced inventory needs. But as well, they're sort of placing that in the market still lies ahead of us. But we have also added here a number of cost measures. And I think the harshness of the market situation The fact that we can see both sort of the price level under pressure now already for a longer period of time. We can also see actually that our volumes are quite low. So all of these measures have really been necessary already from that perspective. And then adding the strike and of course the inflation that we have been going through in the last years all add up to the necessity of doing this. And on the inflation, I still want to say that even though inflation now is clearly slowing down more back to sort of historical levels in Europe, we have not had a deflation. So the cost levels remain elevated compared with a few years ago. So that's really the rationale. And someone asked me that you just keep doing these improvement programs that, you know, why is the result then not every year, you know, up to several hundred millions more? And I would just say that, you know, we constantly live, you know, in a very dynamic market with a lot of changes. And I think that the fact... that under this market pressure we are able to do still a positive result in our EBITDA level in Europe despite a very difficult situation. I think that's a proof point of the success of these programs. But now let's then look a little bit into the results. So I'll start with BA Europe. And I think we already commented quite many things here on the harshness of the market. And Heikki also gave a good overarching view of the scrap situation, both in Europe and in the US. So that's really valid for both. And that's clearly adding as well to a squeeze on the margins that we can feel right now. Are there some good elements? Yes, there are definitely some good elements. We can see that inventories are now really low when we talk about distributor inventories that we can measure. And it also means that some sort of replenishment has started. Heikki talked about the activity that we could see on the order intake early in the year. Obviously, the strike situation was hurting us. We were not able to take as many orders, but we can see again sort of a healthy order intake now that we are back after this strike event. And also, Avesta and our more specialized grades, I think we have continued to enjoy a sort of reasonable or even good market situation in some subsegments where it's energy, maybe it's green transition related, where projects are clearly still carried out. despite the fact that we haven't seen the interest rate cuts yet. So the market is gradually improving. It's clearly not improving in any sort of rapid speed, but there is indeed a gradual improvement that we can see right now. The volumes, however, remain on a very low level, and I think if we would paint an even longer time series here, you would really see sort of the low market volumes that are prevailing currently. I will move to BA Americas, and here I would also start by pointing out the volume. I mean, we had 150 kilotons quarter, and you could say that it's still a testimony to the U.S. market being in reasonable shape. What we can see, however, is that the market in Mexico has really been under a lot of pressure from imports. And there is a link here to the situation in Europe. I mean, the European demand has been weaker, price levels have been lower, and there's been some measures to curb some of the imports. So, holistically, this overcapacity that somehow originate in China but finds its way globally through maybe also third countries, has also been flowing into Mexico. I assume not only Mexico, I'm sure also to other countries, for example in Latin America. But all of this is adding to the pressure in Mexico, and clearly Mexico is a market with less trade protection, or clearly less trade protection than, for example, the U.S. And why is that important for Outokumpu? Well, if we look at our balance of capacity, if we look at our cold rolling capacity, you know, out of the 600 kilotons cold rolling, we have 350 kilotons in the US in Calvert and we have 250 kilotons in Mexico. That is really the majority of that really stays in Mexico. So, you know, that market dynamic also is meaningful and important for us. So, I don't think that this impacts at all our long-term view of the market, but short-term, clearly, some of the turbulence globally now has somehow also been finding its way into the Mexican situation. Not so much the American situation, even though there are imports, they have been on a fairly stable level. What else is there to say? There's still one important topic, I think, relating to this quarter and also impacting the second quarter. And that's some issues that we've had on the operational side. We are just now out of a big maintenance break where we were repairing some of, for example, these exhaust ducts, and we have had some issues there already during the first quarter. We were now able to repair and fix all of that, but I think that has to some extent kept us from doing really sort of those top volumes in the quarter as well. And just to remind you, okay, so there was this Mexican situation But the 150 kilotons, I think you should compare with sort of other top quarters where maybe we have done like 180 kilotons. So, you know, there was clearly some volume also missing on our side. And then we could see the same issues on scrap as in Europe. So I hope that clarifies a little bit about our performance and clearly these operational issues are now should be something that we have in the past, but they are still impacting also the second quarter. Maybe I'll take Ferrochrome a little bit more briefly. I think we were able to mitigate some of the strike impacts. However, we did also feel the strike during the first quarter here. So with that in mind, I think there was a very reasonable result of 22 million euros in the quarter. And when we think about the capacity utilization, we still have one of the smaller furnaces shut down temporarily until August of this year. So it still talks about the market that is only maybe starting to recover. And of course, a big part of our ferrochrome demand goes also internally to our stainless. And when those volumes have not been at the strongest level, that also impacts then ferrochrome. My final slide on CapEx guidance for this year and also on the cash flow. So I think on the cash flow, I think it's enough to say that having this sort of big effect like a strike certainly put a really big impact. pressure on our supply chain. So we did continue to buy raw materials. Obviously, we continue to operate in Americas, despite the fact that we had some operational challenges. We continued also, of course, buying also in Europe. Avesta was operating as normal and we also bought something for Tornio. But we had a lot of disruption in our production and the flow was not sort of as smooth as it usually is. So with all of that in mind, I'm happy with the end result where working capital was really in the end balanced and kept under control also in this quarter. And now just looking into where we are sort of headed for, obviously we were still negative net debt at the end of Q1. Q2 sees a similar or slightly better sort of market environment or results, but we are paying the dividend So clearly that puts some pressure now on the debt in this second quarter. And then finally on CapEx, recall that we said 600 million euros for the strategy phase two execution and we are now really you know really all in for delivering improvements and that means that we will also stay consistently within the 600 million capex limit for these three years we were 170 last year so we will hike this up a little bit this year to make sure that we can deliver all those improvements so about 220 And I think that leaves a little bit north of 200 then for the year 2025. But with that said, back to you, Heikki.