Outokumpu Oyj New

Hello all, and welcome to Outokumpu's Q3 2024 results webcast. My name is Linda Häkkilä. I'm the head of investor relations here at Outokumpu. Today, as our main speakers, we have our new CEO, Kati Terhorst, and our CFO, Mark Simon-Schar. As per usual, we will first start with our presentations, and after that, we are happy to take 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, very much. And good afternoon to everyone. I am Katitea Horst, and I studied at Outokumpu's president and CEO on the 1st of October. I'm honored to have this opportunity to lead Outokumpu to its next strategy phase. And having been part of Outokumpu's board for eight years has given me valuable insights from the board perspective. And then prior to joining Outokumpu, I have served as the divisional CEO for IMEA at the Belgian family-owned company Aliaxis. And Aliaxis is the global leader for advanced fluid management solutions, which enables access to water and energy. But then most of my career, I have spent and worked in different countries for Stora Enso, which is a leading provider of renewable materials. And my latest position at Stora Enso was as executive vice president of the paper division. Then turning to Outokumpu, one of my first priorities is to ensure smooth CEO transition and to build the future strategy of the company together with a leadership team. While doing this, we will ensure the delivery of our set targets in the strategy phase two by the end of 2025. I'm very proud of the fact that Outokumpu is the undisputed leader in sustainability in the stainless steel. And this is the position we definitely aim to keep. And last but not least, our focus will be on delivering total shareholder value. Let's now then move to discuss Autocompost's performance during the third quarter. We reported a solid adjusted EBITDA, and this was driven by good results, especially in business areas Europe and Fevercrow. Then, taking a little bit closer look at the result, our adjusted EBITDA increased to 86 million euros from 56 million euros in Q2 2020. I will come back a bit later in more detail on the drivers behind this improvement. Then on the group level, our stainless steel deliveries were 2% lower than in Q2, so basically stable and in line with our guidance. Our Business Area America's result reflects the deteriorated market conditions in North America. On the other hand, Business Area Europe's profitability clearly improved, supported by good margin management. I was also very happy to see that business area Ferrochrome delivered solid operational performance. Further, I can say that we are very well on track to deliver on our EBITDA improvement program. We are also making firm progress towards our 2030 SBDI target on carbon dioxide reductions. Then why don't we continue discussing the market situation a little bit. The graph on the left side shows the stainless steel transaction price development reported by CRU. We can see that stainless steel market prices have been under pressure during the quarter, especially in the US. And this is very much the result of a very low market demand, coupled with increasing imports from Asia. In Europe, the share of cultural stainless steel imports rose to 27% in Q3, while the share of imports in the U.S. was 28%, and in North America, including Mexico, even 37%. Then on the right side of the graph, nickel price has decreased during Q3, which is a reflection of the current weak global economic situation, resulting in oversupply of nickel. However, we observe nickel price resistance level somewhere between 15,000-16,000 U.S. dollars per tonne, before any adjustment or bigger changes on the supply chain. Let's now then come back in a bit more detail on the Q3 adjusted EBITDA development. As already stated earlier, the €30 million profitability improvement versus Q2 was very much thanks to the good performance in business areas Europe and Federal Chrome. Compared to Q2, our stainless steel deliveries were stable in business area Europe, while they decreased by 8% in business area Americas. Our overall deliveries were on historically low level due to the weak market environment, even lower than in the COVID year of 2020. At the same time, we have been able to maintain our market shares with a leading position in Europe and being clearly the strong number two in North America. The political strike in Finland earlier this year did not impact our result in Q3. Therefore, the production volumes both in business area Europe and Ferrochrome clearly increased during the quarter. Also during the quarter, our realized prices for stainless steel remained stable both in Europe and Americas, but the production mix in Europe was slightly weaker. Then good margin management, including positive raw material impacts in business area Europe, as well as good operational performance in business area Federal Chrome, really contributed to the quarter's profitability. And business area America suffered from lower volumes and a clear margin squeeze. Then net of timing and hedging gains for the third quarter were 10 million euros compared to losses of 8 million euros in the second quarter. Moving then to sustainability. I'm very honored to say that Outokumpu is the undisputed sustainability leader in stainless steel. And I'm especially happy with a good progress towards our emission reduction target and that our recycled material content has remained at 95%, which is the highest in the industry. We are also on track to make our chrome mine in Finland carbon neutral by 2025. In addition, our safety performance is at world-class level and we work very hard every day to make sure that everybody gets home safe. In September, Autokumpu also attended the United Nations General Assembly in New York and we partnered with Climate Week to advocate the role of stainless steel in green transition. We were pleased about the attention we got for our achievements and the white paper that we launched during that week. And Mark Simon will now then continue in more detail to discuss our financial position and the key developments in our three business areas. Please go ahead, Mark Simon.

Thank you, Kati. And good morning, good afternoon, dear ladies and gentlemen. Also welcome from my side to our Q3 webcast. Given the challenging market environment, our cash and liquidity position remained healthy in line with our financial target of net debt to EBITDA below one time during normal market conditions. The increase in net debt during the third quarter is driven by a temporary increase in working capital. I will come back to more details on the development at the end of my presentation. Our planned capex for this year is expected to be somewhat lower at 210 million compared to the early communicated level of 220 million euros. For strategy phase two, we remain committed to our capex frame of maximum 600 million euros. But of course, we continue to take future market developments into account when managing prudently our capital expenditures. Overall, total shareholder returns remain a high priority. Now looking at our phase two EBITDA run rate savings, we continued to make good progress during the third quarter in which we increased our run rate improvements by 24 million euros, predominantly in business area Europe. Year to date, approximately half of the impact comes from cost savings and half from commercial initiatives. Main contributors were improved raw material efficiency, the geographical expansion of our advanced materials business to the Asia-Pacific region, and the optimization of our product mix. With a cumulative gross annualized EBITDA run rate improvement of 265 million by the end of Q3, we are very well on track to achieve our overall target of 350 million euros by the end of 2025. But now let's have a look at the performance of our business areas and starting with business area Europe. Given the challenging market conditions and typical seasonality, the financial performance of the business area was very solid with a significant improvement in profitability after the recovery from the political strike earlier this year. Despite seasonally lower demands in Q3, our deliveries remained flat quarter on quarter. Stable prices and a somewhat weaker mix were offset by improved raw material cost performance. While the scrap market remained tight most of the quarter, we were able to offset the negative impact by our continued efficient raw material procurement initiatives. During Q3, the business area was benefiting from hedging gains related to the decrease in nickel price, quarter on quarter. And these positive impacts were partly offset by higher fixed costs due to the annual plant maintenance shutdown in Avesta in Sweden. Overall, the market environment started to deteriorate during the third quarter. And according to third-party data, industrial production is shrinking and the purchasing manager index continue to be below 50, indicating a market contraction. As such, order intake started slow after the end of the summer holiday period. Supported by low supply availability in Europe during the first half of this year, as well as a very weak demand situation in China, imports into Europe continued to increase. Distributor levels also slightly increased against a weak and historically low demand situation. From an industry perspective, the demand from appliances, construction, pulp and paper, heavy industries and automotive remained subdued, whereas a positive trend in the marine, aerospace, defense, and energy sector could be observed. Let's now move over to business area Americas, where the market continued softening. While the overall U.S. economy seems to be resilient and supported by the services industry, the manufacturing sector, relevant for our stainless steel demand, has weakened notably. On top, cold-rolled stainless steel imports into the US market increased to the highest level in the last four years, while at the same time, we were able to keep our market share stable. Nonetheless, continued focus on trade policy, especially on circumvention, is needed going forward. Out of the 13 kilotons reduction In volumes from quarter two to quarter three, four kilotons relate to the flooding in our mill in Mexico, which resulted in postponement of customer deliveries into Q4. The challenging market situation, driven by lower demand and increased import penetration, together with higher raw material costs, had a negative impact on our margins. From a segment perspective, only oil and gas is performing somewhat better, all else being weak. Looking at distributor inventory levels in the U.S., they remained below historical averages, and no restocking has taken place yet. One of the reasons could be the restraint and wait-and-see attitude regarding the outcome of the presidential elections in the U.S., Well, overall, a market recovery might depend on the completion of the US election in early November and for sure on further interest rate cuts as well as an improved economic situation in China. Now, looking at our Ferrochrome business, the business area delivered again a very solid result. While the overall ferrochrome market is weak with significant overcapacity in China, the demand for our low-emission ferrochrome with European origin remained resilient. The main drivers for the profitability improvement quarter on quarter are an improved fixed cost absorption after the recovery from the political strike and B, lower variable cost supported by lower electricity prices and improved mine efficiency. From an operational perspective and in line with our earlier communication, we ramped up our temporarily closed third furnace during October, not necessarily to produce more volumes, but to take advantage of optimizing our electricity usage given the price volatility in the market. Now, my final comments relate to our cash flow development in the third quarter. As you can see from the graph on the left, our cash flow and hence the increase in our net debt during the third quarter is driven by a temporary increase in working capital, which was driven by the recovery from the political strike. as well as the preparation for the annual planned maintenance shutdown in our Tornio operations during the fourth quarter. Given the weak market environment and our aim to maintain a healthy balance sheet, we will focus on reducing working capital during the fourth quarter to improve our net debt level accordingly. With this financial update, I would like to thank you for your attention and And over back to you, Kati.

Thank you, Mark Simon. So let's continue then. Before we go to the guidance, I would very much like to highlight that we now have a strong foundation to create value over the cycle. And then about the outlook. So our outlook for Q4 2025 is... that the group stainless steel deliveries in the fourth quarter are expected to decrease 0-10% compared to the third quarter, driven by deteriorating markets for both business areas Europe and Americas. The planned maintenance break in Tornio, Finland, is expected to have approximately 10 million euro negative impact on business area Europe's adjusted EPTA. And energy costs for business area Europe are expected to increase by approximately 5 million euros. And then with the current raw material prices, some raw material related inventory and metal derivative losses are forecasted to be realized in the fourth quarter. And then the guidance for the Q4. So adjusted EBITDA in the fourth quarter of 2024 is expected to be lower compared to the third quarter. Let me now then recap some of the highlights of the third quarter and some of the short and long term priorities we are having. I'm currently ensuring a smooth CEO transition and having had the possibility to discuss with Heikki and the leadership team up front has really been valuable to me. We delivered a solid result in Q3. in difficult market conditions. As Mark Simon showed, we are on track to deliver the 350 million EBITDA run rate improvement by the end of 2025. I'm pleased that we have started these actions early and we are now more resilient to face the market headwinds. Then during the times like this, I think our full focus has to be on gas flow generation in order to be able to continue to invest in our future, preserve our healthy balance sheet, and create total shareholder value. I believe that our sustainability leadership and strong balance sheet provide a very good foundation for us to build on our future success in the next strategy phase. Then I would like to, in the end, add a bit more personal flavor. I would like to shortly comment on some of the key building blocks I see important for us going forward. First of all, in this kind of a business, in our type of a business, good operational performance and cost competence is a key. And personally, I am very committed to building a strong safety culture, and I expect the same from leaders and managers at different levels. In production, I promote lean principles, delivering good product quality in every step, and being a reliable supplier to our customers. Throughout my career, I have been in tough market environments, and learned the power of continuous improvement mentality. Then, because of my commercial background, I have worked a lot with commercial excellence, and I believe that in today's marketplace, one has to understand the evolving needs of customers even more profoundly. And let's not forget that Outokumpu is the pioneer in stainless steel, and it's time we use again our technical expertise and innovation capability to explore new growth opportunities for the future. Together with our customers, our suppliers, and our important stakeholders, we can make even a greater impact for a world that lasts forever. I thank you all for listening to our presentation today, and let's now open for the Q&A session. So, operator, we are ready to start.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Tristan Gresser from BNP Paribas Exane. Please go ahead.

Yes, hi. Thank you for the presentation and the questions. I have two. I start with the U.S. Could you quantify the flooding impact in Mexico on a million-euro basis, and could you give us an update on the situation there, if it has improved, any cost impact in Q4 as well, everything has been solved? And just excluding maybe this one-off, the level you're having in the U.S. in terms of margins, is that a margin level you feel comfortable defending into Q4 despite lower volumes?

Tristan, thank you very much. On the US flooding, maybe to start with how we have done operationally, I think the team in Mexico did a fantastic job and the mill was up and running back again after two weeks. When it comes to the impact in Q3, we had no significant impact here, some marginal costs in the third quarter. However, at the same time, we had to, as I mentioned in my part of the presentation, also postponing some of the customer deliveries, four kilotons from Q3 to Q4. But at the same time, of course, in the fourth quarter, we also face some costs in relation to the flooding. But overall, the impact when I take the postponement of the deliveries is and the costs which have been occurred into consideration, it's not a significant impact on our Q4 result.

Sorry, that's helpful. But on Q3, how much is that?

Very immaterial, below €1 million. Okay.

So if the impact was negligible, it's just market-driven, let's push EBITDA to €5 million, million, but the U.S. stainless prices are still above Europe. You see they have a premium. So I'm just wondering what has been driving the underperformance. It looks like you're doing better margin in Europe than in the U.S. on an underlying basis. So why is that? And if you can touch on a little bit on the market environment, you talked about the U.S. election uncertainty. How much of... of a driver do you think that is and how optimistic you are that once you, we get past the election, you, you, you'll get some type of recovery.

Coming back to your margin question. So if, if I look a bit back into, into the history and compare price levels last year to price levels this year, then we certainly have seen during the time a decrease on the, on the, on the price level. At the same time, I also mentioned that we have been also facing vis-à-vis the sales price and particularly the drop on the nickel side, relatively speaking, higher raw material costs, which then at the end led to a margin squeeze over here. That is all I can say at the moment, explaining the margin and then also vis-à-vis Europe. On the election side, do you want to take it?

Yeah, maybe a couple of words. So I think our, first of all, I think what we see a bit in the U.S. market, that there is a bit of this wait and see environment currently, which means that actually our customers or let's say the distribution has not really started buying and the delivery times are quite short. So that stocking still needs to happen. And the hope is a bit that when the election is over, who then wins, that maybe doesn't matter so much to our industry. That's our analysis. But it's more about that we get going again. And then hopefully there is also some good news on the interest rate side, which might give a bit of a boost to the economy.

Okay, that's very clear. And maybe one last quick follow-up. If there is a change of ownership at Calvert, I mean, we've seen reports that Nippon Steel may solid stake. Does it have any implication for your supply agreement, or is there nothing really there?

No, it does not have an impact on the agreement, long-term agreement we have. And I think it's also fair to mention that our business partner with the daily or weekly discussions has really been Arsene Mittal, and that would stay the same. So I don't see any impact on that.

Okay. Perfect, thank you very much.

The next question comes from Ansi Rousey from SEB. Please go ahead.

Yes, hi all, and thank you for the presentation. I have a couple of questions, and I start with cash flow. So how much you could reduce working capital in Q4? And how should we think about H1 next year seasonality? Because the dynamics were a bit changed this year. And also your capex was around 130 million euros year to date. So I guess this means that Q4 capex will be close to 80 million euros.

Hi, Anssi. On the cash flow side... While we're not forecasting the cash flow for the next quarter, I think I mentioned that we're aiming and looking into networking capital reductions over here, and as such also to reduce our net debt level accordingly. I think what you should, given the current market environment, price levels we see, and the business situation, I would expect... a mid-double-digit number in terms of working capital reduction. You talked about then quarter one, and certainly also here we're not giving yet a guidance on our Q1, but typically then quarter one is seasonally somewhat stronger than the fourth quarter. However, at the very same time, I would like to remind us that we're still working in a weak market environment, also to take that into consideration when thinking into Q1 of next year. Then on CapEx, yes, you're absolutely right. It is close to 80 million, which is currently being forecasted.

Thanks. That's clear. And then about Ferrochrome. Your Ferrochrome production was above deliveries in Q3. So do you think that you will continue to build up Ferrochrome inventories in Q4? And is it so that we should expect stable production in Q4, Q on Q basis?

Yeah, on Ferrochrome. So we obviously increased production quite a lot in Q3 coming from the strike impact, the political strike impact situation in Finland. And we now have, of course, the opportunity to even produce more if we need to. But like Mark Simon said earlier in the presentation, the main reason that we ramped up the third furnace was to be able to optimize with energy cost. And currently, we think that our production levels would be about the same as in Q3. But should we have more demand, we can produce more.

But we're not expecting to build up extra working capital here on the Ferrochrome side.

No, indeed. Good addition.

Okay, got it. And lastly, about your lead times in stainless steel, are we looking at two months or how is it in Europe and America?

Well, reflecting the market environment which we described, Ansi, I think what we can say at the moment is that we are booking Q4 more towards the end of Q4 basically in here. What we have seen is basically after the summer holiday period season that the order intake has only slowly recovered and this is as much as we can say at the moment.

Okay, thank you so much. That's all from me.

Thank you.

The next question comes from Bastian Sinagowitz from Deutsche Bank. Please go ahead.

Yeah, hi. Good afternoon, all. I've got a couple of questions as well. Now, I'm going to start with Europe. And I think your performance here was pretty good, particularly also even when we consider that even when X-ing out the metal and hatching effect, I think your underlying margin was relatively decent in the given environment. So I'm wondering, can you maybe give us a bit of a split between how that performance actually separates between your standard business and your advanced materials, just to get an idea? And maybe can you also give us some color on the underlying gross margin trends into the fourth quarter? From what I understand, you're talking about falling scrap prices, and the market is easing here a little bit, but then I think transaction prices are more or less stable. So are you seeing expanding margins there? and then possibly lower volumes against that as an offset. Obviously, I'm ignoring hatching effects and the maintenance break here as well, but I'm really just curious about the underlying margin trends into the fourth quarter. That's my first question.

Okay. Bastian, on the first question relating to Europe and then basically stainless Europe and advanced materials, We are not reporting and not guiding on the split of BA Europe in here and the advanced materials business and the commodity business. But I think what should give you an idea is when we think about the volumes, then around 15% is on the advanced materials side, around 15% to 20%, and the remainder being on the commodity business over here. Then your second question was on... Cross margins into the fourth quarter. Into the fourth quarter. And I think you referred to the scrap situation. Yes, absolutely right. As we were reporting, we see that the scrap market has eased somewhat to the end of the third quarter. And... The real impact of that one is not yet fully visible in Q4. First of all, it takes time to go through the machinery. We have and we will reduce our working capital, our inventories, as I mentioned before. So that takes a bit of time.

Okay, got it. But you basically see expanding gross margins into the fourth quarter?

I wouldn't say that.

Okay. Okay, all right. And then, secondly, just coming back to America, and sorry to let you not get away on that business as easily, but I still find the performance hard to reconcile. I guess I understand that volumes, obviously, low demand is very weak, but then still, obviously, it's one of the most protected markets. You're basically almost in a duopoly. Yes, imports have been going up, but When we look at your margins, you're basically making 30 to 40 U.S. dollars EBITDA per ton, despite like standard or benchmark transaction prices obviously being higher. The scratch here is I'm following. They're not really explaining the delta. So can you help us to get to the bottom of the issues here? Is there a structural problem, a structural productivity or cost problem? What are you doing to tackle the issue? And other than a market recovery, is there anything which will help you in Q4 or in 2025?

So to answer your question, there is no structural topic issue, underlying issue or whatsoever in the business. I mentioned the main drivers, which you correctly reflected as well. And particularly when we look into the U.S. market and as I mentioned before, into the manufacturing industry and the production performance basically and the demand situation over there um then i think that is pretty much explaining here um also given given the production volumes we are having uh where the where the margin squeeze is is really really coming from maybe after also a little bit to to what mark or simon said is that of course the if you look at also the

CRU data, you can see that the difference between European pricing, real estate prices, and America's real estate prices has gotten much smaller. So the U.S. prices have come down more in that sense in the past. And then I think that we have been able to get better scrap prices actually in Europe overall and managing that than in the U.S. So I think that has helped the margin more in Europe than in the U.S., And then, of course, that volume drop that we are now having and the weak market. Yes, it's a better protected market, but 28% share of Asian imports currently, it's the highest number in four years. So it does impact the pricing in the market.

I very much appreciate you clarifying. Then my last question is on the strategy and your role as a new team. And obviously both of you are very familiar with the company, have literally been with it for years. before taking over, but what are your initial thoughts in terms of what has to change in terms of strategy and what are the obvious tweaks here? You talked about what you like about the company and the strength, some priorities, but are there any obvious tweaks and changes to strategy? I'm thinking particularly about growth, which I guess has been emphasized quite a bit in the last couple of quarters.

Yeah, I would first say that in the short term and in this kind of market environment, the full focus is now delivering on the phase two targets that we have set for ourselves. So ensuring that we really get the 350 million run rate impact on EBITDA by end of next year. We're continuing our decarbonization agenda, fully committed to that. and ensuring now, at least shorter term, that we really keep a strong cash position, have a healthy balance sheet, and are able to ensure our shareholder return. So I think that's the priority. And then, of course, when we start working on the next phase of strategy, together with the management team, we will be also looking where our best growth opportunities could be. And maybe I'm talking here more about EBIT growth than growth of the top line, as it varies quite a lot from cycle to another.

Okay, great. That's very helpful. Thanks so much.

The next question comes from Tomaso from Jefferies. Please go ahead.

Katia and Mark Simon, and thanks for the presentation and thank you for my question. So my question is on Americas, and sorry to insist on that, but I was wondering, given the current softness in the market and the deteriorating environment that you forecast into Q4, which is likely to have an impact also in Q1, do you still retain your 170 million euros by 2025?

Yes, on a normalized level, absolutely, yes. We're still committed to that number.

And I would like to also add from my perspective now as a new CEO that longer term we see the Americas market very interesting for us. So nothing changed in that area.

Okay, thanks. And maybe thanks for that. And just to follow up on Europe. Q3 is usually the seasonal trough and we see some slow there, some slows there and the holiday season as well impacting. So where is the deteriorating condition coming from into Q4? Is it like more pricing? Is it more volumes?

Well, on the one hand side, we have seen and we talked about imports, also talking about the distributor levels, which have increased on a higher level, above historical average, I would say. The very weak market sentiment in the various segments, as mentioned already before, we do see from public available data that the manufacturing companies industry is shrinking and, as I said, also the sentiment looking at the PMI at the moment. Those are these factors which I would take into consideration and then driving.

That's very clear. Thank you very much.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

So thank you, everyone, for your active participation. My message for the future is one of continuity and confidence. We have a strong foundation and we have a lot of good potential ahead. So I would like to thank you for today once more. Wish you a nice day and a successful end of the year.