Outokumpu Oyj New

Good afternoon and welcome to Otokumpu's second quarter results presentation. I'm Johann, responsible for investor relations. We will start with the presentation from our CEO, Kati ter Horst, and our CFO, Marc-Simon Schaar. And after the presentation, you have the opportunity to ask questions over the lines. And with that, Kati, I hand over to you.

Thank you so much, Johann. So welcome also from my side. And we will first, with Marc-Simon, cover the Q2 result. And then I will comment a little bit more in detail our very recent investment decision today. So if we start now with a result on Q2, profitability improved to 100 million euros from 65 million euros in Q1. And this improvement was mainly driven by the improvement in business area Europe. Business Area Americas continued its strong performance and we also saw Ferrochrome result further improve in the second quarter. Of course in Europe it's clearly that it's the regional measures in Europe, mainly CBAM and then also the steel safeguard measures that have supported the market. While we can say that in the US the market has been, and the demand on the market has been more robust, especially in the industrial segments, and for ferrochrome, especially our low-emission ferrochrome from Europe, in this geopolitical situation, the demand has been at a good level. We are today talking about our evolved strategy, two important steps as milestones to proceed and progress with our strategy. One is the investment in high-nickel alloys, and the second one is really the publication of our first patent applications, and I come back to that a little bit later. We usually always look at what do the imports look like. I think the main message here is that the imports in Europe have clearly stayed at the lower level. They were a bit higher in Q2, 17% compared to Q1, 15%. I think this is also a little bit being up front of the steel safeguards. Thank you very much. Thank you very much. Basically, the heating and ventilation, air conditioning segment has done well. And then we see energy area being one. So those are the highlights we would have. On consumer side, transportation side, automotive, both continents, the demand has been sluggish. On deliveries, I think it's really important to comment here now a little bit. Our deliveries in Europe in the quarter two, they were the highest in three years, which brings the group deliveries also to the highest in three years. But I also would like to highlight Ferrochrome. So also in Ferrochrome, we had a four-year high in the deliveries. You don't see maybe America's moving that much is maybe what we have to remember that we have 250,000 tons of our coal trolling capacity in Mexico, which we cannot currently use really to the full benefit of America's due to the 50% tariffs from Mexico to the US. But volumes played a big role in Q2. Then on sustainability, so I'm very happy to say that our safety promise further improved from Q1. So we arrived on the total recordable incident frequency rate at 1.4, which is kind of better than our target level 1.5. The four-hole half year was now 1.6. So this is a work that continues, but I would say that we are... Thank you very much. I think it's important to say that being recognized by both the Financial Times as one of the Europe's climate leaders for the third time now in a row and also by Time among the world's most sustainable companies, it really matters because it provides independent validation that the sustainability leadership is real, it's measurable and internationally recognized. and these rankings assess not only the climate commitments but also demonstrate progress, transparency and business performance. So such recognition reinforces our position as the sustainability leader in stainless steel and really supports our strategy of creating competitive advantage through decarbonization and circularity. With this I will hand over to Marc-Simon to go more in detail in the result.

Thanks, Kati. Good morning, good afternoon, also from my side. In the second quarter, stronger profitability combined with continued capital discipline enabled us to further strengthen our financial position. This gives us a solid foundation as we keep executing our Evolve growth strategy. In line with our guidance, group-adjusted EBITDA increased from 65 million euros in the first quarter to 100 million euros in quarter two. While the net of timing and hedging impact in the quarter was less favorable than we had expected, our underlying operating performance was actually even stronger, driven primarily by higher margins in business area Europe. And speaking of Europe, I am pleased to report that the business area has returned to positive EBITDA. Our operating cash flow remained solid at 85 million euros, allowing us to bring net debt down to 224 million while preserving our strong liquidity position. With that financial overview, let me turn to the performance of our business areas, starting with the business area Europe. The market environment in Europe was largely unchanged from the end of the first quarter. European producers continued to benefit from supportive regulatory measures, though end-use demand remained subdued. Anouk de Graaf, Paivi Allenius Beyond the volume growth, profitability in business area Europe was further supported by higher realized prices and lower fixed costs of sales in the second quarter, following the backlog-related pressure we felt in Q1 from the supply chain planning solution challenges we had. With that, let's move on to Business Area Americas. Business Area Americas continue to deliver a strong financial performance, underpinned by growth in some segments, showing improved demand, such as data centers and related investments into infrastructure, energy, as well as heating, ventilation, and air conditioning. The Mexican market also continued to show early signs of recovery with the manufacturing PMI moving above 50 in June for the first time in a year and its strongest reading since March 2024. In addition to the 4% higher volumes, profitability in Americas benefited from higher selling prices driven by an increase in the alloy surcharge supported by increase in commodity prices. These positive factors were partly offset by higher costs mainly related to freight and non-conforming material. Business Era Ferrochrome was able to increase its adjusted EBITDA in the second quarter versus the first quarter, supported by the solid demand for our low-emission European offering as well as higher selling prices. Overall, the demand remained healthy across all regions, with North America continuing to be the strongest market. On the supply side, production containments in South Africa remained in place for most of the quarter. Although electricity support measures have initiated production ramp-up, export volumes remained historically low, so the impact on the market prices during the quarter remained limited. We also continued with our expansion into higher margin ferrochrome products. and compared with the charged chrome market, the high carbon and high chromium ferrochrome as well as other special product segments are expected to be less exposed to the anticipated increase in South African production. Now combined with CBEM, we do see that this is reinforcing the strategic value of our portfolio expansion. Now with that, let me close with a few remarks on cash flow and leverage. Supported by the improvement in profitability, our operating cash flow remained solid in the second quarter. Together with some release in working capital and capital expenditures of 34 million euros, our free cash flow improved to 51 million euros compared to 34 in the first quarter. The working capital release came despite higher business activity and rising commodity prices during the quarter, once again demonstrating our continued focus on capital discipline. The stronger free cash flow enabled us to further reduce net debt to 224 million euros, as mentioned earlier, despite of the first dividend installment we paid in April this year. And finally, with both, Profitability up, net debt down, our leverage ratio declined from 1.3 to 1.1 in line with our financial policy. And with that, back to you, Kati.

Thank you, Marc-Simon. I think then we come to actually our outlook and guidance. So let's take that next. So for the outlook, we say that the group stainless steel delivers in the third quarter. I expect a decrease by zero to 10 percent compared to the second quarter. And this is due to the seasonality in business area Europe. And based on our current order book, the net impact of realized prices and raw material cost is expected to be positive. And with the current raw material prices, some raw material related inventory and metal derivative gains are forecast to be forecasted for the third quarter. So therefore, our guidance is that the EPITDA in the third quarter of 2026 is expected to be at the similar level compared to the second quarter of 2026. And then we can move to some more exciting topics here. So I'm personally very excited to announce that we are now starting the investment program into high nickel alloys. And it's important to understand that with this investment program being executed, we will really become one of the key global players in high nickel alloys for flat products. and during the past year we have run several trials at our arvester plant in Sweden to test the capabilities at our melt shop hot rolling and cold rolling assets and we have for instance been able to roll alloy 625 into a width of 1800 millimeters which nobody else is currently able to do in the market so we will be bringing actually a differentiated value proposition to our customers Based on this trial experience and to accelerate the time to market, we have now decided to do the investment in two phases. In the first phase, we will actually invest in electro-slag remelting at the current melt shop. We will also invest a bit in process optimization and we will complete the detailed engineering study Thank you very much. and once the first phase is then expected to be operational in Q1 2028. The second phase then is about the new melt shop. So that's about a vertical caster, it's about vacuum induction degassing, VDI, and potentially a second ESR. And this investment is planned to be operational in the end of 2029. Then moving a bit to the right side to talk about the property technology development in the US. So building of the pilot plant is proceeding on schedule and our first five patent applications covering the key process elements have now been published, which marks an important milestone in the technology development. It's also important to mention that this technology has wider application possibilities for metals. So we are really exploring here a number of options for future growth based on the technology development. So with that, I come to some of the key messages from today. So our EBITDA improved to 100 million euros, supported by market fundamentals across all the business areas. And our adjusted EBITDA in Q3 then is expected to be in the same level despite the seasonality that we have in Europe. Financial position remains strong and the net debt decreased and we are making really a progress in our Evolve growth strategy. With that, I will open for the Q&A.

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

Yes, hi. Thank you for the to-the-point presentation. That's really appreciated. I have two questions. The first one is on the metal spread guidance that is positive in 2Q3. Could you give us some indication how It's going to differ region by region. I guess we should expect a stable development in the US and an improvement in Europe. I'll start there.

Absolutely. On the net of timing and hedging, what we say is that we expect some gains in this area. And I would quantify this as a higher single-digit number compared to the 11 million and I think in terms of business areas why we don't give guidance over here certainly the America's business is still on base plus alloy surcharge and we see a bit of lower nickel price environment here in the US so that's impacting then on the US side and mostly then of the other result is Being related to Business Area Europe.

Okay. Just a quick follow-up on America, given you have base plus surcharges. If surcharges are going down, that should impact your spreads, right? And the second question is also a follow-up. When I look at slide 22, which is the bridge Q1 to Q2 EBITDA Europe, The red column that is pricing mixed raw material costs, if I understand correctly the guidance, this should turn into a big green column for Q3, right?

Well, yes, I think we guided for, on the one hand side, lower volumes and those being offset by then the net impact of realized prices and raw material costs, and you're referring to this item. So, yes, this is a positive element and being offset by the volumes, and therefore we guide on similar levels. and what we're referring to mostly is in relation to business area Europe.

Yeah and I guess it's correct to mention as well that we could have had better mix in Q2 so we do expect a mix in Europe especially to improve in Q3. Yes.

Thank you. And last question, just does this guidance of better spread, stainless metal spreads, include the recent drop in stainless scrap prices, or is that going to be more of an impact for your Q4 results?

I think this is more going out further into the later part of this year.

All right.

Thank you. You're welcome.

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

Yes, good afternoon. Thanks for taking my questions. My first one is just a quick follow-up on the Americas and the moving parts there into the next quarter. I guess the impact here from the metal and hatching gain in the second quarter was only quite meaningful. I guess usually in the US you still see probably further positive tailwind from seasonality in the third quarter. So just wanted to check whether you would expect an all-in performance run rate, which remains pretty similar also here to the second quarter or will this be in the next slightly larger deviation here between Europe and America? That's my first question.

I think, as I mentioned earlier, that we had expected a higher positive impact from that of timing and hedging in the first quarter. So the reason why that has not been materialized is basically the increase in commodity prices, which we have seen in the second quarter. and then together with a different melting pattern which we delivered to the market, a younger melting pattern which we delivered to the market with higher raw material costs. That was the reason here. Fortunately we could offset this and stay fully within our guidance which we gave for the second quarter. Now as this is a shift from the second to the third quarter, On the beer European side, on the other side, if we think about Americas, then here, what I also mentioned earlier before is that given current raw material prices, they're expected to be some or commodity prices somewhat lower than in the second quarter. And you know that Americas is on a alloy surcharge basis. So that is having a certain impact here, but from the volume side we should further consider a robust market in the Americas for the third quarter.

Okay, okay, understood. And then I was thinking maybe zooming in quickly on the Ferrochrome business, which did very well. You indicated here the potential effect from, I guess, the electricity regulation in South Africa. Is this something you see impacting the market already, i.e., what are the current pricing dynamics you're perceiving? Is pricing pretty stable? Do you see it coming under pressure already?

Well, as I mentioned in my part of the presentation on the Ferrochrome site, we haven't seen any impact on the pricing and on As well as driven by the fact that we haven't seen export volumes to pick up here. I think we mentioned that ramp up in operations production has started. We are not in a position and cannot guide on prices going forward and therefore would rather leave it here with the important notion that we're going to develop our product portfolio into higher margin business. and which should give us then an opportunity to decouple to a certain degree from the pure charge chrome market.

Okay, understood. And then last one, quick question also on, I guess, your maintenance schedule. Usually there are always some bigger maintenance breaks in either ferrochrome or the European operations. There isn't any in the third quarter. Is there anything we should have on the radar now With regards to this for the fourth quarter, I guess it would be quite helpful to have a bit of speed on that just ahead of time to avoid any negative surprises.

Well, indeed, we do have our annual planned maintenance shutdown in March. Both in Europe and in the Americas towards the end of Q3 and beginning of Q4 over here. We do some small increase in maintenance costs in the third quarter, but I don't see any significant deviation from that third quarter level going into the fourth quarter.

And Ferrochrome, actually the biggest maintenance shutdown for SAF2 actually took place already in Q2. So that's done.

Is there any cost impact still to come though from these in the fourth quarter? Any major items at least, even if it's just a ballpark at this point?

Not major items. There is a small increase in here, as I mentioned. But important is really to look at our guidance, what we have been saying, that most important to understand the volume impact. Thank you very much.

Okay, thank you.

Thank you.

The next question comes from Joni Sandvall from Nordia. Please go ahead.

Yeah, thanks for the presentation. It's Joni from Nordia. Maybe starting off with the variable cost outlook, I think you mentioned the freight costs have increased, but could you give any indication of H2 outlook regarding freight costs and also energy?

Yes, well, on the freight costs, transportation costs, fuel costs and related to the Middle East, we have seen an increase in our variable costs in the second quarter. Given of what we see right now and the situation, which can evolve, as we know, and change every minute, we do not expect a significant deviation from what we have seen in the second quarter.

Okay, that's clear. Then maybe on the Ferrochrome follow-up, does this development of your portfolio require some investments, and if so, when are you expecting to be ready with this?

Well, actually, this part of the portfolio development doesn't require such big investments. We also use the ferrochrome converter that we already have at the plant. Then, of course, when we want to use the technology we are developing to further go to 90% chromium metal, then we talk about an investment. But we are not in that stage yet that we can discuss that.

Okay, that's clear. And then lastly on the pilot plant startup and timetable here, when should we expect more information around the patents and maybe the startup timetable for the pilot factory?

Well, look, we today said that our first five patents are public. So the patent applications are public. So you can see what the base technology is and what is the process technology we have made the applications for. We have other patents in this journey that will be public then later. and the timeline is today what we have said from the beginning that the furnaces at the pilot plant should be operational in the first half of next year meaning that by summer 27 we can then confirm that the technology would be scalable. So we are on schedule in budget and on time schedule with the pilot plant.

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

Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments. The next question comes from Tristan Gresser from BNP Paribas. Please go ahead.

Did you, Christian, still have a question?

Yes, sorry, I was on mute. Thank you for taking the follow-up. Just on Avesta, the Phase 2 wire, there's a bit of a delay on the decision for this, and now given you have more visibility on Thank you.

So if I take Avesta and CapEx, and Marc-Simon can comment then on the working capital. So remind me still, the Avesta question was exactly about...

Yeah, I think initially you were thinking... Ah, why we are doing it like that, yeah, yeah. Yes, yes. And now it's in a year.

Yeah, look, we have learned a lot, let's put it like that. So we have done a lot of trials in Avesta, both using basically... Thank you very much. and the only thing we would need to add there is an ESR which increases the purity of the metal what you need for this kind of metals for quite a few customers so in that sense we actually when we first invest in a current melt shop we are not delaying the whole project but we are coming faster to the market with these three alloys and we probably are a year and a half faster than we would have been otherwise. So through the learning we had in Arvesta, we have found capabilities in a current mail shop that we were not sure about before. And therefore, this investment case has improved with a phased approach. and we still think the total investment is about 150 million but to be exactly sure of the second phase investment we still want to complete our detailed engineering study and that is exactly what we are doing. and then on the capex then you know we have set on maintenance capex that it's about 100 million a year that's where we are about this year as well we have room for of course strategic investments we will start this Avesta investment cycle now so some small capex probably spent this year continues the next year but we have also other strategic initiatives on the table so I think more in the end of the year beginning of next year is the right moment then to comment When eventual other decisions come, what does the strategic capex start looking like going forward?

I can then answer your question, Tristan, on working capital. So for the third quarter, and based on or due to the planned maintenance, which we... Thank you very much. Such as related to our restructuring programs for which we provided the provisions already last year beginning of this year. Having said that, as a result thereof we expect our net debt to increase in the third quarter. And then you mentioned maybe also a bit outlook into Q4. I think now if I look at the market and the dynamics, we need to see how the market is coming back from basically the vacation summer period, our customers being back and how then the market develops and picks up here. So it's a bit too premature yet to give a reliable outlook over here.

All right. Thank you.

The next question comes from Maxime Kogi from AutoBHF. Please go ahead.

Good afternoon. I have a few questions on the nickel alloy project. It's quite an exciting one. Actually, the market is rather two-sided between, on the one hand, oil and gas and chemical processing, which are relatively weak, and on the other hand, aerospace or electronics that are currently booming. So do you have a view already of the markets you would like to address? And plus, related to that, do you think you can Really pretend to become a relevant U.S. player given that the footprint will be in Europe. Your peers have actually had to make some acquisitions there in the U.S. to really position themselves as the U.S. players. And if you want the homologation timeline to be validated by clients, it would be helpful as well.

Maybe starting on the segments, I think you mentioned some of the important ones. So even maybe the oil production is not increasing in barrels, we see increase in exploration. And the oil exploration is going deeper, more difficult places. It requires more pressure resistance and all that. We see that market. Of course, Middle East now is a bit different, but, for instance, in Latin America, proceeding quite well, if you look at the plans. Power generation is one area. Electronics is one area. Specialty chemicals is one area, for sure. And these are global businesses. When it then comes to U.S., well, I think our biggest volumes, what we plan here to have, are probably not for U.S., they're probably more for Europe and Europe. and Asia, but they are also partly for US and for Latin America. And maybe one thing to remember that when steel products now have a 50% tariff being exported from Europe to US, high nickel alloys or nickel alloys have 15% tariff, the normal 15% tariff. So it is product that travels.

Interesting. And the second one, this is on commodity prices. So nickel is now taking a bit of a hit, but molybdenum remains very strong. And I was wondering whether that was more of a challenge or an opportunity for you, and maybe if you could shed light on the development of the Greenland Resources Project, which will allow you in the end to have your own capacity there.

Well, first on the molybdenum price itself, yes, you're absolutely right. I think the market is, since a couple of years, in a structural deficit here. We have seen molybdenum prices going up, which then also puts a certain pressure on the margin of these products here. That's so much from the commodity pricing side. But what was the second part of your question? I didn't get it totally.

I think it's on the Greenland Resources project. Any color you could give on the development, on the timeline and when it could be operational.

Yes, I think from what we understand also in the discussions here with our partner, I think the project is well on its way and the exact date and time of when going Operationally, that is still something which needs to be explored, but we are very positive and looking forward for the mining project to become online. Yet I'm not in a position to give any further details, unfortunately, but I'm pretty sure that soon we will be in a position here during the second half of the year and then give also a bit more color on that.

Okay, thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

If there are no more questions, then I thank you all very much for your participation and good questions and see you next time then when we talk about the Q3. Thank you.

Thank you.