Outokumpu Oyj New

Hello all, and welcome to Outokumpu's Q2 2024 results webcast. My name is Linda Häkkilä. I'm the head of investor relations here at Outokumpu. Today, we have our CEO, Heikki Malinen, and our new CFO, Mark Simon-Schar, as our main speakers. As per usual, we will first start with our presentation, and after that, we are happy to answer your questions. Before we start with the presentation, I would like to remind you about the disclaimer, as we might be making forward-looking statements. But now, without any further comments, I would like to hand over to our CEO.

Thank you, Linda, and a very good summer morning or afternoon or evening, wherever you may be. Thank you and welcome to Autocompos Q2 results webcast. Today, as you may know, is going to be my 16th and final webcast representing Outokumpu as the company's CEO. And as you know, in someone's time, I will be transitioning then to a new job. The last 16 quarters have been quite eventful. And I can tell you, standing here 16 quarters ago, well, it was COVID times. But anyway, a long time ago, the company and the world looked very different. So it's been a real remarkable journey here over that time. past four-year time period. But anyway, let's now focus and take a look at the second quarter. And as it says here on the title, we actually feel that we had good progress in the second quarter, and I'm very happy that we were able to get our profitability back up after a fairly challenging Q1 and the first months of the quarter. If we look at the results for the quarter overall, 56 million was our adjusted EBITDA, And if you look at some of the drivers of that, well, positive was that the current market recovery, which started, I would say, last summer, which has been a bit slow and modest, but anyway, the trajectory has been upward, helped us to continue our business development and we were able to get our volumes up and therefore make fairly good improvements in the European business. The US market, however, I have to say, after a multi-quarter, multi-period of fairly robust and even stable time of development, seemed to soften a bit as we headed into the latter part of the second quarter. So that is sort of the overall market backdrop against which we have been selling and producing our products. A challenge we faced in the second quarter was clearly that we had operational challenges in the Americas and in Calvert in particular. These were operational challenges. I can tell you that we've taken strong and decisive measures to rectify them. We made decisions specifically to find ways to adjust for some of the deficiencies. And I feel that our management in Calvert have all the, are taking now the right steps to mitigate them. So we're moving forward rapidly to solve the issues. In the beginning of the year, we were facing a political strike. Personally, I feel the strike was quite unnecessary, and as I quoted before, it's quite unfortunate that Otokumpu was hit so severely. The total negative impact financially for us was 60 million, and 30 million of that approximately was divided over the first and second quarter. The scrap market continued to remain tight for a number of variety of reasons. The good news here for us was that we were able to get all the scrap we needed. And I think given our large scale as a company buyer, we have been able to procure scrap at competitive prices and also take advantage when necessary of pricing anomalies in the market if they have arisen. A few words about our strategy journey, and I specifically want to comment on Europe. As you know, Europe accounts for about two-thirds of Autokumpu's business. It's really strategically extremely important for us, Tornio being almost like the heart of the company with our two large mail shops and huge facility and operations, and also our Kemi mine, which is the only chromium mine within the European Union. We are now taking decisions to start processes within the company to find ways how we can further optimize our supply chain from Finland to Germany. we are going to start discussing with our employees in Germany, in the Krefeld facility, how we can further develop and flexibilize our operations. Objective here is also to take advantage of the fact that after the Ukraine war, the energy markets have changed quite dramatically in Europe. And if we look at electricity prices, for example, in Finland vis-a-vis Central Europe and Germany in particular, electricity prices in Finland are almost half of what they are in Germany at the moment. So with Tornio being a huge facility where when we get Tornio full, we can benefit from our local cost sort of benefits. In other words, for example, scale and electricity, and we can make a lot of money again when Tornio is full. So related to that, we will start various discussions with our employees and in the coming months and as we head into next year, we are going to communicate more about possible investments related to improving our cost competitiveness. As said, we are Europe's cost leader and we are determined to maintain a strong cost competitive position also going forward. A few words about pricing. Now, as you know, I'm always a bit cautious to talk about pricing, but I do want to share this slide because I think it at least gives us some directional view about where things are going. These are transactional price data curves, the sources from CRU. When we at Otocompo report our pricing information, we always talk about BA Americas, and you need to remember that in BA Americas, we have Mexico, and the pricing level and the dynamics of the Mexican market are different. somewhat different than they are in the United States. So this chart only looks at the US, Europe in aggregate, and then China. Couple of points at the bottom, of course, what is somewhat worrisome is that the Chinese market remains fairly weak. You can see it from this price curve. There isn't any material improvement in pricing in China. In fact, the difference to other markets is again growing a bit. That would need to change. But of course, as we know, at the moment, the real estate, for example, market is very weak. And China's very weak. The Chinese really need to stimulate local demand in significant ways to get things going again and for us to start seeing some more robust pricing improvements in China. In Europe, as I said, the trough in terms of pricing was last year in the summer, probably about July of last year. And now gradually we have been moving upward Now, no dramatic movement, but anyway, the trend is clearly upward up until the end of the second quarter. And in the Americas, after coming down somewhat, we've had fairly stable pricing in the U.S. during the second quarter. On nickel on the right-hand side, this chart is a sort of a rolling chart which averages over a longer time period the price of nickel. On a day-to-day basis, of course, we can see significant volatility on the price of nickel on the LME. I just want to make one comment that If we look at prices today in nickel, about over 15,000, maybe 15,500. So even in this quite significant turmoil we've seen in financial markets and in the stock market, and also some commodity prices have swung up and down, nickel has held above 15,000, 15,500. And I think it's a good sign that nickel is holding up. I think it gives an indication that underneath there is fundamental demand. for the raw material and for base metals in general, which of course are a major cost component and also give an indication on the health and direction of the sector. Then looking at our deliveries on the upper left-hand side, looking at, of course, comparing to the COVID years, significantly lower levels, positive again that after a strike effect in Q1, We were up about 20,000 plus tons in the second quarter, about 5%. And now, of course, looking then for a Q3, which is probably about the same levels. And then let's see where next year takes us. At the bottom left, you can see our results on a quarterly basis. I asked you to add the 30 million, which was the impact of the strike on the Q1 and Q2 numbers to get a better sense for where the profitability was. So obviously far too low compared to where we want to be. And Mark Simon in his chart will talk a bit about how you see the longer term, our midterm and our thinking about profitability. And he will explain a bit more where we are and what have been the drivers behind the change. from where we want to be and where we are at the moment. And then on the right-hand side, you see the bridge. No major, really, topics other than what I said earlier. Compared to Q1, deliveries were up 5%. We had some realized pricing declines. And then, of course, we made some improvements on the cost side, giving then us the $56 million. I want to keep my opening comments here fairly short because I said Mark Simon is now going to start and he's a good start as a new CFO and I want to give some more time for Mark Simon for you also to familiarize yourself with him and he will talk a bit more today and I will keep my remarks more brief. But this last slide here in the opening section from my side really relates to sustainability. As I really said many times, Otokumpu, in our view, is the clear sustainability leader. Just look at this, for example, the safety performance. Our safety level and the trend is really remarkable. At 1.3 so far year-to-date, it's a really strong number. We know at Otokumpu we can do even better, much better, but the trend is very strong, and I challenge anyone to compare that to other companies. You know, Otokumpu is a very strong performer comparatively to many other companies on safety. On the recycled materials side, our recycled materials content has risen over the last year significantly, and even our LTM number this year, I mean, it's an impressive 95 all-time high. I know I'm very proud about that achievement. And then on the left-hand side, you have a couple of other points regarding the recognition we have seen, been receiving from outside rating companies that look at sustainability leadership. We're on many lists nowadays. So I think the fact that we are now being recognized for our performance is also positive. And then finally, I just want to say that When the energy crisis started in Europe, we set some very ambitious targets on energy efficiency savings. We are about halfway through that project. It will take us a bit longer to achieve the targets we set, but by the end of probably next year, we will be where we wanted to be. And again, we've saved significant amounts of energy on our course, improving our carbon footprint and doing good things for the planet. So with those words, let me hand it over to Mark Simon, and he will take you over to the next section. So please, Mark Simon.

Thank you, Heike. Good morning and good afternoon, dear ladies and gentlemen. And also from my side, welcome to our Q2 webcast. My name is Mark Simon Schaar, and since the beginning of June, I'm the new CFO of Autocompo. Before I start with the update on our financials, I would like to continue on Pia's words from her last webcast and to thank her for the great leadership she provided and the strong balance sheet she left behind. Personally, the continuous and sustainable improvement of the total return for our shareholders through smart capital allocation, dividends according to our dividend policy, as well as maintaining a healthy balance sheet aligned with our strategy is at the top of my CFO agenda. As such, I'm happy to report that we maintained our strong liquidity position during the second quarter. Despite the dividend payment of 110 million euros to our shareholders and new leasing liabilities for two new liner vessels, our net debt level remained low and our balance sheet continued to be the strongest in the industry. Our cash and overall strong liquidity position, together with our capital discipline, provide us with a solid foundation to successfully navigate through times of uncertainties prepare for potential economic upturns, and invest for growth as part of our Phase 3 strategy. And all of this with a clear focus on continuously improving total shareholder returns with a clear commitment to our dividend policy. Before going into the financial performance of our business areas, let me remind you about the way we are ensuring our profit generation. namely our Phase 2 EBITDA run rate improvement targets, where the improvements are coming from, how the program developed during the second quarter, and the overall importance of the program, given the weak market environment we are currently operating in. When we launched Phase 2 of our strategy, our goal was to achieve an EBITDA run rate improvement target of 200 million euros by the end of Phase 2. Thanks to the dedication and hard work of our team, we have met this target more than one and a half years ahead of schedule in quarter one this year. When entering phase two, we initially focused on commercializing our new portfolio additions in the high margin advanced materials business with grades such as LO825 and Circle Green. In addition, we geographically expanded our established advanced material products as well as the new high-margin portfolio additions to the US and APEC by further strengthening our sales organization in the respective regions. On the cost-saving side, one of the key achievements relates to the improvement in our raw material and alloy efficiency in the commodity business. This includes an all-time high recycled content of 95%, the improvement in alloying efficiency, as well as alternative raw material sourcing. Building on this success and to combat the current weak market environment, we raised our EBITDA improvement target by an additional €150 million to €350 million in May this year. This new target will be reached through further improvements in operational performance and efficiency, along with further strengthening the commercial aspects of our business. On the commercial side, we look into further geographical expansion of our advanced material product portfolio into the growth markets Asia Pacific and the Americas. exploring new applications for established grades, and commercializing our new products in any markets, such as Sinecro 35 and Aloy 800. Given the expansion of our webshop and customer portals, we aim to capture additional multi-channel sales opportunities and will continue to release new features quarterly. On the cost savings, we are planning to achieve similar raw material improvements in our specialty grades production as we did in our commodity business. Furthermore, our restructuring plants in Germany, which we have announced in autumn last year, play another pivotal role. And finally, as part of our energy efficiency program, we have made great progress in the area of waste heat recovery, and we aim to further expand in this area. Overall, we have made really good progress and are well on track to achieve our increased target. Around 850 projects have been completed and over 250 projects are currently in implementation. I would like to emphasize that the program also enables us to improve our processes and build capabilities as a foundation for our phase three strategy. In the second quarter, our run rate improvements increased by 8 million euros. The somewhat slower pace is seasonally driven and also impacted by the strike and other temporary operational challenges we faced during the second quarter and mentioned by Heikki. Here on the slide, we give you some examples of our successfully implemented projects during the second quarter, mainly related to the introduction of new advanced material products as well as yield, quality and logistics improvements. Now, given the total run rate improvements of 500 million euros from phase one and the current status of phase two, the question is, where are those savings visible in our profitability? The answer is that the successful EBITDA run rate improvements enabled us to partially offset the significant market headwinds resulting from the weak market environment and the significant inflation we are faced with compared to the year 2019, meaning prior to the pandemic, the war in the Ukraine and other geopolitical tensions. And despite the exceptional weak market environment and the significant headwinds, we in Otokumpu remain fully committed to our early communicated normalized adjusted EBITDA run rate of 500 to 600 million euros, based and supported by our own profit improvement actions. As you can see on the slide, without our improvement measures compared to the EBITDA baseline of 2019 and prior to the pandemic, Otokumpu would have been clearly EBITDA negative today instead of the 217 million adjusted EBITDA generated in the last 12 months. Also be in mind that the market has been exceptionally weak during the past year, especially in Europe. Therefore, the additional 150 million euro increase in our EBITDA run rate improvements is of a fundamental importance as we are currently EBIT break-even and we must further improve from here. The gross impact from inflation and other headwinds, mostly one-off in nature such as the political strike in Finland, are among others driven by salary inflation, fuels, electricity, maintenance services, just to mention a few. As you can see, the stainless steel deliveries in the last 12 months are well below the level of 2019, which in itself was already a challenging year from a volume and a pricing perspective. However, through our improved margin and metal risk management, we were able to offset these negative impacts. Our own profit improvement actions from strategy phase one and two are crucial to navigate through these exceptional times, paving the platform for our phase three strategy. And let's be clear, the concept of continuous improvement measures, given the nature of our industry, will remain a constant theme going forward. So to summarize, the analysis confirms our normalized EBITDA run rate of 500 to 600 million euros, despite the exceptional weak market environment and the significant inflationary price pressure in the global market, of which part is more permanent and the other part is expected to ease somewhat over time. But now let's have a look at the results of our business areas, starting with business area Europe. We started off this year quite nicely in our business area, Europe, with a strong order inflow in the first couple of weeks. But with the long political strike in Finland, the situation changed significantly with a very unfortunate negative 40 million EBITDA impact during the first six months in Europe alone. After the strike ended on April the 7th, Business Area Europe's financial performance improved by higher volumes and cost efficiency. However, the political strike still had a 20 million negative impact on our Q2 results in Business Area Europe. Overall, the market environment in Europe remained challenging with only a gradual market recovery, as said by Heike already, despite the low distributor inventory levels and low supply availability due to industry strikes. Asian imports into Europe increased during the second quarter after the relatively low levels we saw in quarter four of last year and quarter one of this year. However, the significant increase in shipping costs from Asia to Europe is expected to put some cap on this trend. From a sector perspective, a subdued real demand continued for construction, automotive and white goods. The positive trend in energy and renewables, especially in hydrogen, continued. So overall, in order to see an inflection in real demand, macroeconomic stimulus such as interest rate cuts are required. While the scrap market remained tight, we were able to offset the negative impact by our efficient raw material procurement initiatives during the second quarter. As the operating environment in Europe remains challenging, accelerated efforts to strengthen our cost competitiveness are required, as mentioned by Heike before. I will now move on to Business Area Americas, where we are able to increase our deliveries by 7% from the previous quarter. Although our volumes increased, the market environment softened in the U.S. towards the end of the second quarter somewhat, and imports into Mexico still disrupting the regional demand supply balance. The somewhat weaker profitability in business area Americas quarter on quarter was driven by lower overall realized prices, despite a stable base price environment, the tightness in the scrap market, the downstream impact of the political strike in Finland, and some temporary operational challenges in Calvert, which resulted in a higher cost base temporarily. While the new hot rolling agreement with AM&S carries higher tolling fees from the beginning of this year onwards, I have to say that the cooperation with our partner on-site was running well in the first half of this year. Despite the current softening in the market environment, I would like to emphasize that our long-term view on the U.S. market remains highly positive. Moving on to business era ferrochrome, where we had again a solid result in the second quarter given the negative impacts from the strike and lower production volumes in relation to the temporary closure of one of our smaller furnaces and hence a lower fixed cost absorption. The market has somewhat improved in the second quarter with higher deliveries as well as higher ferrochrome sales prices. In this context, let me please repeat our early announcement that one of our smaller furnaces, ferrochrome furnaces, will remain closed until fall this year or remain closed until fall this year. Taking now a longer-term perspective, I would like to show you an interesting graph from an external source indicating how Autocompo's position within the ferrochrome market is expected to strengthen in the long run. As you can see from the graph, the high carbon ferrochrome imports from South Africa into the European Union are expected to decrease. On the one hand side, this is due to the expected reduced capacity of ferrochrome production in South Africa, given the energy supply and other infrastructure challenges in the country. And on the other side, due to higher sustainability requirements in relation to the cross-border adjustment mechanism introduced by the European Union. Here I would like to remind us that our ferrochrome is globally the most sustainable ferrochrome with the lowest carbon footprint, 67% lower compared to the industry average. And as communicated earlier, we have plans to further reduce our ferrochrome emissions, for example, by using biocoque instead of fossil coke in our production. Looking at the current market environment, we also see that ferrochrome market seems to become more and more aware of sustainable topics. More and more customers are interested in low CO2 ferrochrome and are prepared to pay a premium, a green premium. Some customers even asked to confirm supplies for the year 2026. All of this supports the importance of our Ferrochrome business and how our position within the Ferrochrome market is expected to strengthen in the long run. Now my final comments relate to our cash flow in the second quarter and our capex frame until the end of 2025. The challenge in market conditions make active working capital management even more important, and I'm happy to report that we were successful here during the second quarter. Despite the weak market environment, we were able to report a positive cash flow before financing activities. However, and equally important, given our strong balance sheet, we have the flexibility to prepare for the next market upturn in line with any market needs. When it comes to CapEx, we repeat our target frame of €600 million for our Strategy Phase 2 until the end of 2025. And given our expected cash out of 390 million euros from 2023 and 2024, this provide us with the remaining capex frame of a bit north of 200 million euros for the year 2025. And now I will hand over back to you, Heike, to give us an update on the outlook.