SSAB AB (publ)

Good morning and welcome to this presentation of the SSAB report for the second quarter. My name is Per Hilsum, I'm Head of Investor Relations and presenting today we have President and CEO Martin Lindqvist and our CFO Håkan Folin. If we take a look at the agenda, Matti will start to go through the record second quarter here for 2021. Håkan will go into the financial details, and then Matti at the end with the outlook and a summary. And after these presentations, we will open up for questions. But by that, please, Matti, start.

Thank you, Per, and good morning. The second quarter was a strong quarter in many aspects and the market was quite good. But the market is what the market is. And I think what I'm happy about on behalf of the organization is the solid internal performance that we show. And regardless of what the internal or operative KPI look at, we have seen a positive development, not only during the second quarter, but during the first half of 2021. We start with safety, and these are moving 12 figures, lost time injury frequency per million working hour. We're down at 2.3, and if we look at so far this year, we're at 1.6, which is starting to get really good. Efficiency has also improved over time. We have fixed cost per ton moving in the right direction. We had very stable and high production in not only in Q2, but also in Q1, so the first half of the year, very good. Of course, record earnings and a strong cash flow. So I would say that the internal performance in all divisions and all areas of the company has been improving and is going to continue to improve. Another important part of the second quarter was, of course, that we have now started to produce fossil free pellets or sponge iron. in our pilot plant up in Luleå. We have produced now way more than 100 tons and we will later this year start to roll fossil free steel and start the first deliveries to among others Volvo Group. We have also established strategic cooperation with both Volvo Cars and Volvo Group. We've also, during the quarter, issued sustainability-linked bonds with a huge interest from investors. We didn't really need the money, but we thought it was a good idea and we were happily, not surprised, but happy about the big interest from investors. If you look at the operating profit per division, I think they all did a good job. Special Steels, which is less volatile than the more standardized business in Special SSAB Americas, did 1.1 billion, 19% EBIT margin. Americas, we saw the effects of increasing prices, and I will come back to that. SSAB Europe also increased. on a good level profit-wise and then Tidnor I think has done an exceptional job and with a very strong performance in absolute terms of course lower than the steel divisions but very good achievement during the second quarter and then rookie construction continues to get better and better we have also seen over this period and this is an example from SSA Europe that the order intake continues at the high level we can see similar patterns in the other two steel divisions and in the other divisions. So the order intake has continued on a high and stable level. If we then look into the divisions and start with special steels, we saw high and stable production during the quarter. The shipments were almost 390,000 tons, the highest level ever, up 46% compared to the very tough second quarter last year, but up 3% compared to Q1 2021. And with an EBIT of 1.1 billion, we reached an EBIT margin of 19%, which is really good. Better prices, higher volumes and stable production. We will also, in order to the long-term increasing demand we see and the focus on specialties, we will from 1st of July move the Mobil plant from SSAB Americas into Special Steels in order to continue to develop that plant to a Special Steel mill with more and more QT production. That will have no major changes on divisional shipments or divisional profitability because Americas will still take care of the standard part in Mobil, but the ownership of the mill will move into Special Steels to increase focus and speed of transformation even more going forward. If we then look at, as I say, the Europe, strong market conditions, but I think what is good is that we have continued to move the product mix and high level of premium products and advanced high strength steels. And we actually saw, even though the problems automotive had with semiconductors, we saw a record level of automotive advanced high strength steel shipments. Even here, we had a high and stable production and we keep fixed costs at the low level. And the EBIT was 1.5 billion, summing up to 15%, which is really good for this division. 15% is a decent profitability. Moving over to America, we saw here as well high and stable production, good productivity, fixed cost kept at a low level, good demand with high shipments up 7% compared to Q2 last year and 3% compared to Q1 this year. An EBIT of 1.15 billion and an EBIT margin that increased to 24%, which is, of course, fairly good in the steel industry. Moving over to the other two divisions, Tidnor and Roke Construction. If you start with Tidnor, they have fulfilled now their cost efficiency program. They have taken down their fixed costs with more than 200 million per year, and that is fully done and fully visible. What I think is good also in Tidnor, they have managed to increase market shares in a strong market without losing profitability. Revenue up a lot compared to second quarter last year. And an EBIT of 449 million SEC gives an EBIT margin of 14%. Part of that, not the big part, but part of that is inventory gains, but it's about better cost efficiency, higher volumes, and better prices. So good performance from Tibnor during the second quarter. Looking at Tibnor, rookie construction, sorry, we saw... A solid internal performance with full focus nowadays on product business. As you might remember, we sold building systems last year, and we only now have the core part left, which is the product business. Revenue increased with 11% compared to the second quarter last year, and we ended up with an EBIT of 162 million, which is an EBIT margin of 10%. And we saw better volumes and better demand in both the roofing and the other part business unit called the envelopes and also a very good cost efficiency during the quarter. So with that, Håkan, I leave to you to go through the financials.

Thank you, Martin. And good morning, everyone. And as usual, I will give some more details on the figures, including bridges, balance sheet, cash flow and raw material. If we start with an overview, and as Martin said, this was a very strong quarter from many different aspects. We had a sales of almost 24 billion in the quarter. We had shipments also at a very high level, at 1.8 million tons. And this means that we have been running production at a very high level in order to get this much shipments out. An EDTA margin for the group of 21%. And then finally, down to the right on this slide, EDTA per ton delivered steel of almost 3,000 Swedish kronor per ton. If we look at the bridges and comparing Q2 last year with Q2 this year, it's really comparing two extremes. Where in Q2 last year, that's basically where the world stopped after the outbreak of COVID-19, And now this quarter then being a very, very strong quarter. But anyway, the changes are coming from more than $4 billion in prices. This is mainly within Europe and America. That's where we saw the prices go down the most, and that's also where we've seen the prices go up the most. Also coming a lot from higher volumes, 1.6 billion, Europe and special steel. America has maintained quite high volumes throughout last year, but now we see a strong comeback for Europe and special steel. Then we have a negative of 1.6 billion in variable COGS, especially on the higher raw material cost, with iron ore being the dominating factor. Fixed cost higher than last year of around 500 million. Of course, we are running at a much, much higher activity level, but actually the fixed costs are still clearly lower than they were in Q2 2019, which is more relevant to compare with for this item. Some small change in FX, quite a big change in capacity utilization as we are running at a much higher activity level, and then something on other, small change on other. But all in all, then, more than $4 billion in positive impact coming from prices, volumes, and better capacity utilization. If we compare with Q1, then, instead, which is more reasonably quoted to compare with, we still have an improvement in EBIT of more than $2 billion. We see prices here improved by 2.9 billion, again, mainly Europe and Americas. We see slightly higher volumes, mainly from rookie construction, higher raw material costs, somewhat higher fixed costs, but again, still on a clearly lower level than two years ago. Small item on ethics, something on capacity utilization. We were running at the very full level in Q1 as well, but managed to increase production somewhat in Q2. and a small item other. But to simplify it, you can say that the difference between Q2 and Q1 is really that we have better margins now in Q2 than in Q1. We haven't come to that yet so far in this presentation, but we also had a very strong net cash flow in the second quarter. We had a net cash flow of more than 3 billion Swedish krona. And this is despite the working capital buildup of around 600 million. which I think, given the circumstances where the market is, is actually on a quite low level. But all in all, a net cash flow of more than 3 billion. And if we look at where we are year to date, then we have generated 4.2 billion in net cash flow. This has, of course, resulted then in a significant reduction of net debt. We have a net debt now at 6.5 billion Swedish kronor. It was almost double a year ago. And out of this 6.5 billion, around 2 billion is IFRS 16 related items. We've also reduced our net gearing, which is now down at 11%. For this slide, I think we have kept the headline for quite a few quarters now, which says that we have a well-balanced maturity profile. For the coming three years, we only have 4.7 billion in maturities. And if we look at 2021, isolated of 2 billion, most of these refer to commercial papers. We have liquid assets and committed credit lines right now at 16.6 billion, which is 22% of sales. This is more than we need at the moment, but it's a combination of two factors. One is that we took up extra facilities at the outbreak of COVID-19 to make sure that whatever happened, we would have enough liquidity, which we obviously have had. And the second factor is that we had an exceptionally strong net cash flow now in Q2 of 3 billion. So this is a bit more than we need, and we will adjust that going forward. Cash needs of the business, we say we need around 5 billion, and for cash needs we mean taxes, net interest, and capex. Capex is going to be higher than last year, or 3 to 3.5 billion. It's mainly then that we have restarted the capacity expansion of quenching temper material in Mobile, converting then Mobile more and more from a standard plate site into a specialty plate site. We've also started the oxyzone conversion for fossil-free steelmaking. If we turn them to raw material, we are seeing higher prices for both iron ore and coke and coal. So far, in our purchase prices, it's mainly being seen for iron ore. Our pellet prices were 18% higher compared to Q1. This will have an impact on the result in Q3. If we compare it to one year ago, it's actually up as much as 90% the iron ore cost. So far in July then, spot prices have stabilized for iron ore. For coke and coal, what you see in the graph then is not so big changes for our purchase prices. They were 8% higher in Q2 than in Q1. But what we saw in Q2 was that spot prices started to increase quite significantly in Q2. It's not yet seen then in our own purchase prices. We will see it in our purchase prices in Q3 and in the P&L Q4 and onwards. But there are no prices of plus 18% in Q2. Those will definitely have an impact in Q3 on the P&F. For our U.S. operations then, the scraps brought prices increased in Q2. They were up 7% compared to Q1. What we see so far for the third quarter, they have stabilized here at a fairly high level then. Finally from my side a few words about our planned maintenance outages. We will now in Q3 have maintenance outages in Special Steel in Oxelösund and we will also have it in some of the Nordic sites in SSAB Europe. The cost for this is 645 million but this only includes the direct maintenance cost and also the lower capacity utilization under absorption. But it does not include the lost margins we will have. And when we produce less, obviously, when we have the maintenance outages, we will produce less. And that means we will have lower shipments in Q3 for special steel in Europe, which will have an impact on profitability as well. Okay. Turning back to Martin and the outlook.

Thank you, Håkan. Take a look at the market, heavy transport, automotive, construction, machinery, material handling. We expect good demand in the third quarter. If we look at energy, we would expect a good activity within wind power and transmission, lower activity within oil and gas. Construction, high activity, and service centers, the big swing factors, I mean, where we typically look at the inventory levels, they are on the low side, both in Europe and into Europe. in U.S. And to be honest, in SSAB Europe and special deals, we are fully booked for Q3. We have some spare volumes in America, but the reason for that is that we didn't want to fill up when prices are moving in our favor. So we are pretty confident about the market demand or the expectations for Q3. And if we look at the next slide, I mean, we expect demand, as said, to be strong, driven both by underlying demand and at some time by customer restocking and steel service centers restocking. We see a structural good and high demand for high strength steels and quench and temper, and we expect that to be very strong. We will increase realized prices partly as Håkan was into, contracted by higher prices on raw material. When we look at the volume and price guidance, we say that prices for special steels, and they are much more stable over time, will be higher. In Europe and America, the realized prices in the P&L will be significantly higher. But as Håkan alluded to, we will have the planned maintenance stop during Q3 in Europe and special steels. We will have significantly lower volumes. In America, where we plan to run full in Q3, we will have stable volumes. So to sum it up, I think we have shown the solid internal performance in a strong market. We have a positive outlook. I expect the company to continue to generate strong cash flow over time. We saw during the quarter a significant reduction of net debt. I think what is also very important during the second quarter and so far this year, we continue to lead the development of fossil-free steel. came public with the strategic cooperation with Volvo and Volvo Cars. We will start shipments of fossil-free steel for concept vehicles already this year, and we have produced way over 100 tons of fossil-free sponge iron in our pilot plant up in Luleå, so all in all, a good quarter. With that said,

Yes, thank you, gentlemen. And now we can start the Q&A session. And as usual, you're welcome to ask more than one question, but please state them one at a time and not all questions at once to facilitate the process here. Then, operator, please present the instructions for the Q&A.

Thank you, ladies and gentlemen. If you have a question for the speakers, please press the 01 on your telephone keypad now. And our first question comes from Alan Gabriel from Morgan Stanley. Please go ahead. Your line is now open.

Good morning, gentlemen. I have two questions. The first one is around the pricing and the outlook statement that you've just communicated, Martin. I think your guidance comments on slide 26 would not come as a surprise to anyone. However, to what extent do you think the higher prices across your divisions will offset the lower shipments and the maintenance cost of $645 million that you've communicated? or in other words, given the visibility that you have on all these moving parts, would it be fair to assume that your absolute EBITDA would still rise Q2?

Well, that's for you to figure out, because we don't guide on that, but we will have, I mean, prices, we have a lag compared to spot prices, so we are fairly sure how the price development will be in Q3, and as I said, in Special Steels and SSAB Europe, we are booked we are sold out for q3 we still have some room in america's but that is by purpose so that is we call it tactically and managing the order book but but then how it plays down immediately we we don't guide on that but volumes will be significantly lower because we need to stand as you know we produce 24 7 and in order to keep a stable production level and good productivity we need to do maintenance and i think what we have done the last uh is that we have structurally changed the way we work with preventive maintenance and so on. And then you can always have bad luck, of course, and so on. But I think we are on a different level structurally compared to a couple of years ago.

Thank you.

And the EBTA figures, I will not give you.

Okay. Very good. Fair enough. The second question is on the capital allocation. So you're gearing standard 11% today. Possibly you'll be net cash at your end or very close to it. In your opinion, is it time for the board to reconsider the payout ratio of 30 to 50 percent?

We haven't started that discussion, but we, I mean, my job is to make sure that we have a strong, good cash flow generation and good cash conversion. And then I'm not worried about the balance sheet. So for us, I mean, it gives us opportunities to, I mean, I think also these good companies should pay dividends and then it's up to the owners. But we will be in a position where we can afford to pay dividends, do the investments we need, do smaller acquisitions. And we're looking also into, I mean, we have said that we will be fossil-free 2045. Is there a possibility to be that slightly earlier and so on? But, I mean, a strong balance sheet gives us freedom, including dividends.

The next question comes from the line of Tom Zhang from Berkeley. Go ahead. Your line is now open.

Yes, morning. Thank you very much for taking my question. So I've just got two, if that's okay. First of all, on free cash flow networking capital, clearly Q2, it's a positive surprise. Can you just talk a bit about whether or not that number includes required inventory build to cover the maintenance, and as such, whether or not requirements have been pushed into Q3, whether or not we can expect more build in Q3.

No, but I mean, the cash flow is what the cash flow is, and we have not in that way steered the cash flow. So we have done what we need to do, and it is a function of us being more and more efficient, and then, of course, the strong result. So it's nothing special with the cash flow.

but from working from inventory specifically, yes, we have whatever we could build up in terms of inventory ahead of the maintenance outages, we did that during the second quarter. So you should not expect that we need to build more for the maintenance outages in the third quarter, no.

Okay, very clear. And secondly, just on the auto, so you mentioned a record level of auto high-strength steel shipments. Could you give us a bit of color on what you're currently seeing at your auto market, whether or not the order cancellations, possibly from chip shortages, have gotten worse or gotten better, and whether or not there might be a mixed effect in Q3 that we should take into account if there is auto disruption?

We haven't seen any. I mean, we have a broad customer base, and we are in a very, very tiny part of the market with advanced high-strength, mainly martensitic, cold-rolling steels, and We haven't seen any big cancellations in Q2, and we don't expect to see that in Q3 either. So there's been a solid and strong market in our small segment of automotive.

Okay, very clear. Thank you. I'll turn it back.

I think the next question comes from Luke Nelson from J.P. Morgan. Please go ahead. Your line is now open.

Hi. Thanks for taking my questions. And two from me, just on special seals, maybe on your midterm guidance of volumes hitting 1.6 million tonnes, I think it was by 2023, it was pushed out by a year from the original expectations. I mean, you're almost there given shipments today. Can you maybe just give more colour around the sort of expectations around that volume guidance? now and whether we can expect this sort of run rate to be sustainably hit over 2022 rather than prior expectations of 2023. That's my first question.

Our problem, if you call it a problem in special steels, is that we are a capacity constraint. The demand, the underlying demand and the structural demand is higher than we have the ability to produce And that's why we do this internal change as well, move over mobile to special steels. And as Håkan said, we are investing now in mobile for high capacity of quenching temperature. We will not, as a company, increase volumes overall, but we will continue to change the mix. And the most important part is within special steels where we need more production capacity. And that's why we are focusing on turning mobile into a special steel mill over time.

So I suppose maybe this could push a little bit harder. This sort of 1.6 million ton target, is that maybe really some upside relative to prior guidance of 2023 that was given?

I didn't fully hear you. Is that...

Is the upside there to, I think, 2023 was the time when you would expect to be guided to hit that, which is slightly delayed. Is it now, given you're almost there now, can we expect that more of a sort of back to 2022?

To give you an honest answer, I don't see a downside risk.

Okay, that's very clear. That's very clear. And then just on maintenance, can you maybe give... a bit more colour around what is driving that? Is that just given the market is strong, you're taking the opportunity to do more things, projects that you wouldn't have otherwise had in the budget? Or is there some underlying inflation that you're seeing in terms of the cost to do things? And to what extent is that a risk on maintenance going into 2022 and beyond?

I think with one exception, it's a fairly normal maintenance stop. And then, of course, I mean, the last years we have focused a lot on preventive maintenance and production stability. But what is a bit slightly different this year is that we also have a supplier, AGA, that has a stop up in Luleå. That will take some time. So we need, when we do that every third or fourth year, they do that. We also need to slow down and take down the blast furnace. So that is, in that way, the only difference.

Okay, very good. Thank you.

Thank you. The next question comes from Oster Lindström from Danske Bank. Please go ahead.

Thank you. Three questions from my side. I'll give them to you one by one. So the first one is, I mean, coming back to this question of the very strong cash flow that you've had so far this year, and also, I mean, the strong momentum around fossil-free steel. Given these two things, do you see any reason for or opportunity to use the strong cash flow to accelerate the conversion of the European operations to fossil-free steel production? And, you know, Lulio and Rahe, basically.

said Oscar we have said I mean Oxelösund is what it is and it will be up and running first of January 2026 fully fossil free with large volumes going out of that mill not only for Q&T but also slabs for the Borlänge site so to automotive and others so But then we have said externally 2045 we should be fossil free as a company. And we look into possibilities given the strong interest from the market to where we could speed up that. But that is unfortunately not fully in our control because we need a couple of things that we don't fully control or not control at all, you could say. We need electricity at the right place at the right time. And we also need environmental permits and that takes time. So, We are looking into possibilities and of course, strong balance heat gives us opportunities, but unfortunately it's not a quick fix. There are many external factors that affects us. I mean, right now we are, I wouldn't say struggling, but working hard to get electricity to Oxelösund in time to convert that mill. So the lead times are not short.

All right. Thank you. My second question is around cost inflation. I mean, other than the usual sort of iron ore and coke, what cost items should we keep an eye on in the present environment? I mean, input costs, but also employee costs. You know, are you going to be hit with big bonuses, et cetera, towards the end of the year here?

If you look at wage inflation, I mean, in Sweden, as you know, we have a three-year agreement with the unions on, I would say, a decent level, without saying too much. And the same, we have an agreement in Finland. It could be, I mean, in North America, in our U.S. operations, we pay per performance. We always do that. So we pay for – these are non-unionized plants where we pay for – time production or volumes, so to say. So their wages will go up. But overall, we did a lot of things also during 2020. We saved a lot of money and a lot of fixed costs, 1.6 billion. Part of that was actually the structure changes. And that's why, as Håkan alluded to, even though fixed costs go up when we run production at high capacity utilization, we are still lower than 2019 and we are running production at a higher level than 2019. So I wouldn't say that that is a huge swing factor.

All right. So we shouldn't expect sort of a lump sum towards the end of the year type of thing, really.

Well, and if you take, you know... bonuses or things like that I mean that we accrue for during the year so if we think that there will be such payouts we will accrue it when we believe there will be it so no that's not going to come like a one time surprise in December I think in the grand scheme of things Oscar I mean the big cost inflation is iron ore and will later on this year also be coking coal yeah

And just finally, on Tidnor and Rookie, with really good results here, how much of that is cyclical and how much of it is structural?

Part of it is cyclical. I mean, you shouldn't expect Tidnor to have an EBIT margin of 14% over time. That's impossible. But we work internally with, we call it a bit sloppy, but we call it freedom to operate and have thresholds for performance. where they should be profit margin-wise, so to say. And Tidnor has, I mean, with the cost program of 200 million, more than 200 million structurally lower fixed costs, that will continue. And they are continuing to work with what we call continuous improvements and the program we run group-wide with continuous improvement. So you should expect them to, over time, become more and more effective. And the same goes for rookie construction. I think the development for rookie construction when we sold the Russian business, when we sold the building systems, they are focusing now on the core business, which is not only profitable for rookie construction, but also a very important business for SSAB Europe. And they should also continue to improve over time. Then, of course, the market is very strong right now, and we don't expect that this is the new normal. In that sense.

All right. Thank you.

Thank you. Next question comes from Sebastian Snogovic from Leisure Bank. Please go ahead. Your line is open.

Good morning, gentlemen. Three quick questions from my side. Just firstly, on your special steel volumes and the inventory levels you've got here, The volumes obviously have been very impressive, but this is also a business with global distribution. So how are your inventory levels looking like here? Is there an element of destocking, which is also limiting your second half volumes? Or are you still well stocked in your satellite distribution centers? That is my first question.

No, I would say that the demand is so strong and continues to be so strong. So we could use more stock volumes.

But it's not like we're going to see a drop with 20% of sales because we have sold everything from stock. But ideally, we would have reproduced as much as we can to replace the stocks. And if we could have wished, we would have had slightly higher stocks globally and even higher production. But I would say they are not lower now than they were a quarter ago.

Okay. Okay, thank you. And then maybe the second one related to that – What is the share of specialties at the moment in the mobile plant, and what would be the capex required if you would be upgrading the plant and converting it to 100% specialty plant, if this is what you're planning to do, if I understood correctly?

We will take it step by step, and we are right now in a process or in an investment program taking up volumes in Mobil. What is it, Håkan?

100,000 tons.

Yeah.

And right now the share is slightly below 30%. And as Martin said before, we're not adding more. We're not adding in total more capacity to the mobile mill. We are converting what's today's standard plate into more quench and temper business. And we take it, like Martin said, step by step.

Is there a time frame which is got in mind for the conversion here?

We have some internal hopes, but that will be dependent on the market. I think it's a good situation to have the bottleneck in our internal production, not having the bottleneck in the market. So we will take it step by step and depending on how the market develops, but we foresee a continued good market development for Q&T the coming years.

Okay, thank you. And then the last question on the conversion of the Lulia plant, which you talked about, which you may be speeding up on. Will this be exactly in the same setup as the structure for the Oxalosan plant and conversion here, i.e. he will build the electric arc furnace in the SSAB company and then the DRI plant and the electrolyzer and the hydrogen infrastructure will be in the hybrid joint venture? Or may you be possibly owning more of the entire infrastructure?

maybe also related to that are there already some some capex numbers which you could give to us no it's not and it's too early to say but what we are trying to say is that part of i mean a strong balance it is always important but that also gives us freedom to to at least look into it but as i said in the beginning the time horizon is quite long because it's not just start to build we need electricity we need environmental permits we need a lot of other things so I mean, it's too early to say, and it will not affect CapEx this year or next year or any time soon. Even if we would have wished that, and I'm not saying that we wish that, but it would practically be impossible.

And, I mean, given that you say that, obviously, at the moment, electricity and other things are actually a bottleneck, but you obviously have capital in place. Is there a chance that you may just go and basically take more ownership of that part, those parts of the infrastructure, i.e. own parts of the electricity and become more integrated on that front?

No. Our focus is making steel and developing steel in applications. So we will not be a power generator or anything like that. We will continue at the steel company.

Okay, very clear. Thanks, Martin.

Thank you. The next question comes from Tristan Gopfar from Nordea. Please go ahead. Your line is now open.

Thanks, Operator. Good morning, everyone. Firstly, a question on specialties. We have posted exceptionally strong margins here, around 18% on EBIT for the last couple of quarters. I just wonder on your guidance that you, for the group, expect prices in general to be partly contracted by higher input costs. Does that apply also for special steels, or how should we see that?

Yes, that applies for special steel. In terms of pricing, we guide for significantly higher prices for Europe and America, higher prices for special steel. But still, I think the price increases will more than compensate for the raw material increases. But then for special steel, as we talked about a few times, Christian, you know that we have the maintenance output in Q3 impacting as well.

Yeah, of course. Yeah, I'm just talking about underlying. What you see, kind of trends. Okay. Okay, cool. On hybrid, sorry if I missed it, but I don't know if you talked about it already. But on the results that you have been recording so far, with the sponge iron based on green hydrogen. Have you been given a quality care picture now about the cost base, how much it will cost in the industrial plant later on? Yes. Thanks. Can you say something there, Martin? You previously talked about 20%.

I mean, 20% higher cost per tonne compared to... I mean, of course, it depends on where the Coca-Cola is, but... Yeah, and we said that when we started to talk about that project. What has happened since then is that, I mean, cost for emission rights has gone from 5 euro per tonne to, I don't know the latest update, but above 50 euro per tonne. So... that gap is closing, but we have not communicated any figures. But what we have done, and this has not been an easy journey. I mean, we have been working with this internally and together with our partners and together with universities in Sweden for five years or so, and it's not an easy process. And we have experienced a lot of challenges that we have managed to overcome. So we are quite happy that we have... broken the code, so to say, and we are on our way. And when we came out with this project, we were hopeful, but doubtful as well. And now we are actually there. So I think that is extremely positive, but it wasn't an easy journey.

Yeah, sounds good. Don't think that I'm provocative here, but I'm just looking at your timeframe that you expect, still you expect... You know, the new electric arc furnace will be running in 2026 or so. And obviously one of your competitors is talking about, you know, ramping or not ramping up, but starting up at least full from, you know, A to Z equipment with everything in less time than that. So just wondering... What is here in terms of, I mean, have you been, is it much longer, does it take much, much longer time to get permissions and so on in the southern part?

No, no, no. Not at all. And the bottleneck is really electricity. So if you can help us with that, Chris, then I would be more than happy because then we can do it quicker. So it's about power supply.

Okay. So basically, it's fair to say that the power supply is much more challenging to get in this area than in the northern part.

there is a huge challenge to get it in the northern part as well. When we look at Luleå as an example. I don't have any clue about any potential competitors, but the bottleneck for us in Oxelösund is the environmental permit, but I would say especially power supply. And that goes for the whole of Sweden.

Okay. Thank you very much, guys. Thank you, Sam. Thank you. The next question comes from Rick Tronting from DAB. Please go ahead, Helan. It's now over there.

Thank you, Operator, and good morning, Martin, and welcome. Could you maybe talk a bit about CapEx outlook in the coming years and also about CapEx for the fossil free steel? I know on the capital markets they talked about 3 billion per year, not including hybrid capital injections. You have now announced a hybrid demo plant where I suppose your share could be around 800 million per year. Can you just talk about the capital outlook? How much has changed since the 2019 capital market?

For the Oxfam conversion, we talked about more than 4 billion Swedish kronor. And that I would say we're still in that neighborhood. No major change there. For hybrid, as such, we have the pilot plant ready. We talked about the big demonstration plant that might be 10 times the pilot plant, which would imply a bit more than 10 billion Swedish kronor. Then exactly how much of that, of course, it's maximum going to be a third that's going to be from us. But then we are also looking and talking to what type of support we can get from either Sweden or also from EU. So we'll see how much our contribution in the end will be to the demonstration plant. So I wouldn't say that so much has changed since the capital markets day. I would say we are still in roughly the same neighborhood.

Okay, brilliant. And the 10 billion for the demo plan, that's obviously for the total. Your share is 33%. You have talked previously about quite high degree of government grants. I'm just thinking about looking at the numbers here and that. obviously a numbers game, but, you know, the HEMO plant could maybe be around one billion for you guys per year. The twin plant you need to transform Luleå should be a bit, you know, less expensive and then transforming Luleå could be, you know, one billion per year maybe. That total is, you know, three billion per year for you and you generate the free cash flow is quarter of three billion. I'm just, you know, thinking about the strong balance sheet and maybe what you could do with the other billions of capacity you have in the balance sheet.

But we don't see a strong balance sheet as a big problem.

No, no. Me neither. But on that topic, given the efficiency improvements you talk about, is there any reason to change the capital structure target you have I'm not exceeding 35% over time. You're obviously well below that. And over the cycle, you should be able to cover most of the capital requirements.

It's an old target, and I can almost guarantee that we will not exceed 35%.

But once you remember, I mean, we are in a cyclical business, even though we are doing everything we can in terms of our specialty and premium ambitions to reduce our cyclicality. But still, it goes up and down. And this quarter was very strong, and we have a very strong outlook as well. Sooner or later, whenever that will be, it will be a slowdown as well. And we'd rather go into that just like we did a year ago with a very strong balance sheet and go in with a strong position to be able to have the freedom to operate that Martin talked about, to make the investments that we want to make or potential smaller acquisitions and not be constrained by the balance sheets.

Okay, now that's very clear. And just one final, maybe conceptually, how would you think we should prioritize ordinary dividends, special dividends and buybacks? Is it basically ordinary that you're looking for?

We haven't had that discussion, but we have a dividend policy and we plan to follow that.

Okay, that's clear. Thank you very much.

Thanks, Victor.

Thank you. The next question is from Patrick Mann from the Bank of America. Please go ahead. The line is now open.

Good morning. Thank you very much. I just wondered if you could comment... Well, my first question is, could you comment on the carbon border adjustment proposal and how you see it impacting the market and potentially your business? Thanks.

I think... the carbon tax border adjustment or what you call it is I don't have any big comments on it but I think what is important is that we have a level playing field in all aspects and I think it's right to put pressure on the European part of the steel industry because I'm a strong believer that it should I mean emitting carbon dioxide is not good and it should be costly to do that but on the other hand I mean having then free volumes of steel coming from other parts of the world without any, call it, cost of carbon dioxide or any restrictions would probably not be a level playing field. So what we are talking about when we meet the politicians and NGOs and other stakeholders is the importance of a level playing field. Then I think having ETS system or something similar on a global level would be the most brilliant solution, but unfortunately we are not there yet. So there needs to be some measures in place in order to create a level playing field. That's my view.

Thank you. And then on the second question, I think a follow on from the previous caller, previous questions. Around capital allocation, I mean, would you run a net cash balance sheet? So, you know, if prices remain high, and obviously the 35% target is an old target, I mean, would you be okay with running into a net cash position for a while?

Let's come back to that question when it materialized. I mean, my focus is to have the company continue to generate strong cash flows, and that gives us, as Håkan was into, freedom to operate. then, of course, we are not the bank. But I don't see us either having a very weak balance sheet. We have experienced that as well, and we prefer to have a decent and strong balance sheet, as Håkan said, over the cycle because this is still, even though we are getting less and less cyclical, this is still a cyclical business. So then for me it's pretty easy because it's up to the owners to decide what they want to do with that balance sheet.

Got it. Thank you. And then my last question is just around the financing of kind of this decarbonization. I see you've – in June, you've issued a sustainability-linked bond. I mean, how – is the financing – is the debt financing for green projects? Is it extremely low at the moment? I mean, is it – I'm just wondering if the market seems to have these concerns that everybody needs to, you know, has these high capital budgets to decarbonize. But if there's a lot of green finance available at low rates, you know, it doesn't seem to be – or that can mitigate a lot of that concern. So just how are you thinking about tapping that –

green bonds or the sustainability linked bonds I mean is it making a material difference to your cost of financing is it are you being given the money basically to decarbonize no we're not we're not given the money but but we are getting financing at attractive rates and it was for the sustainability linked bond it was a very big interest from the market in terms of investing in this with where we have had our science-based approved targets in terms of reducing our CO2 emissions. So there was a huge interest for this, and we don't foresee if and when we would need more financing to either for our injection into hybrid or to convert other sites. We believe that there's going to continue to be a very great interest for financing this type of activities.

Thank you. Thanks for answering my questions. That's all. Thank you.

Thank you. Next question comes from Christian Agarwal from Citigroup. Please go ahead. Your line is now open.

Hi. Hi. Thanks a lot for taking my question. Most of them have been answered, but a couple of remaining ones. Can you remind us your emission certificate position in the existing scheme of the things, and then how would your position change if the, you know,

I might not have heard exactly what you said, but I'll try to answer it, and then you have to repeat if I miss something. In terms of emissions for CO2, we have had allocations available so far. We have it also more or less for this year. We will have a small P&L cost this year. We have been buying CO2 emission rights for the last three or even four years in order to kind of hedge, so we won't... have to pay the current price when we need them. So we have some availability. It's going to be a small cost this year. It's going to be a slightly bigger but not very material cost in 2022. And then it will be somewhat increased in 2023 onwards.

Okay, I understand. And then, I mean, there's been a lot of questions on capital allocation and the expansion into the hybrid. Can you also talk about your interest in areas for the small transactions Martin has been talking about. I mean, is there any possibility for, you know, if you look at the system deal, or if you look at the Tata deal, if you were to have a stronger balance sheet or the market was to remain where they are, or the bolt-ons are going to be the only focus?

We will continue to focus on smaller and mid-sized acquisitions, no big acquisitions. And we did that during... We bought a company in the U.S. during the second quarter as well. So we will continue to do that. Smaller acquisitions. We bought some companies within Tidnor. We bought some companies within Special Steel. And we will continue to do that. But smaller and mid-sized companies that fits in in our strategy. And I would say mainly call it downstream related. I wouldn't say grip, but the better supply chain out to the end customers. That is what we will do.

I understand. Okay, thanks a lot.

Thank you. Next question comes from from Kepler Shepherd. Please go ahead. Your line is now up.

Yes, hi, morning all. Thanks for taking the question. Martin, can you maybe talk a bit about the restocking behavior in the market? You mentioned that in your output comment. What has literally changed to what you said a quarter ago Is there now more possibility to actually restock if you want? And in your perception, is the willingness to restock rather higher or lower compared to a quarter ago?

To be honest, I don't really know the interest. I just realized that the inventories are still on a low level and at some point of time there needs to be restocking. I wouldn't say that there is availability. Of course, there is always availability to restock, but the problem is the material availability. But at some point of time, there will be restocking. Will that be in Q3 or Q4? I don't know. But given the volumes at steel service centers and in the supply chain, there needs to be, at some point of time, restocking.

Okay, point taken. Maybe on your America's performance, which was pretty strong, when I look at the plate prices available by data provider, it appears to me that based on those, the performance could have been even better than what you reported. So can you help us to understand to what extent these usual price quotes you get and other data providers are representative for what you really see on the ground and what you're realizing in your order book?

The problem is the price, the time lag. I mean, we have mainly contract prices and mainly quarterly prices. And that's why we have a quarter of a time lag in the P&L. And that's why we guide for, we call it significantly higher prices in America in Q3. So we will gradually see that, but we have a lag of a quarter both up and down compared to spot prices. And that's what you see.

Okay. And then on special skills, I think you mentioned again that your capacity is the constraint at the moment and not the market in growing that business. Can you allude again why you're not deciding to restart a blast furnace in Axial Zone just for the sake of harvesting the market and increasing your market penetration in special steel product versus, you know, growing over capacity. So why not doing this at least temporarily to optimize your position?

The capacity constraint is not in the hot end. I mean, the small blast furnace is not a very cost-effective blast furnace. The capacity constraint is in rolling in oxylystone and after that. So that's, I mean, the We would get more slabs, yes, but we wouldn't be able to roll more QNT.

All right. And finally, on hybrid, I think you started now with the first tons of your fossil-free DRI. Can you share with us what the kind of learning or experience was over the last six months in terms of where the main obstacles was in running a DRI plant at 100% hydrogen?

a lot of learnings and a lot of obstacles. I'm not an expert. Martin Pei is the expert on that, but it has been, and I don't know the English word even, but there has been a lot of, call it challenges to overcome.

But would you say this is now a steady and stable process in terms of running this on hydrogen?

We know how to do it. We have obviously done it and we have produced, we said 100 tons. We have produced more than 100 tons Is it a stable process? What process is stable? But it is still a learning curve. But we have broken the code, so to say, and we know how to do it and we have done it. But it's not easy. But we have spent five, six years on this with a lot of research and development and process development. This is completely new techniques and nothing you can buy off the shelf.

Okay, interesting. Thank you very much.

Thank you. We have a question from Christian Greaser from BNP Paribas. Please go ahead. Your line is now open.

Yes, good morning. Most of my questions have been answered, but maybe one on the pricing outlook when you look at Europe and maybe also the U.S. Do you believe steel prices could sustain at this level until the end? Do you expect some normalization from this level? Maybe in other words... Where do you see any risk on the supply, demand, import side in H2, or maybe if you don't see any? Thank you.

As I said, the visibility we have is in Q3, and then a bit longer than that, especially in specialist deals, we see the demand. We don't see where prices are moving. We don't have that visibility. So we can see... the order books and the order intake, and that is for Q3. And then we have discussions, especially in special deals, about volume availability after Q3. But no signs yet, but that could change, of course. But we don't have visibility further than Q3 in pricing. We have, of course, some half-year contracts and some smaller parts of yearly contracts. And they will, of course, the half-year contracts, for second half of this year will move up quite a lot. But the major part of the volumes are quarterly contracts.

All right, thank you.

And I said you could have a good proxy for it is to look at the quarterly prices Or the spot prices and then have a quarter of a lag approximately.

Thank you. Our next question comes from Ansi Kivianemi from SCB. Please go ahead. Your line is open.

Hi, and thanks for taking my questions. A couple of still left. I will take them one by one if that's okay. First of all, on guidance Q3 prices, I mean, prices in Europe and U.S. are expected to grow significantly. In Q2, those were 16% and 29%. So in the context of your commentaries on one fighter lag, is this a good starting point when we start to think about Q3 in terms of price momentum or should it decelerate a bit?

I think you can expect, honestly, that they will. I mean, we said significantly higher, which means more than 10%. And I would say that it's definitely more than 10%, to put it that way. But like Martin said, I think the best way is to look at what has the quarterly price increases been on the spot market and then kind of roughly, roughly apply the same percentage for our prices for the coming quarter.

Okay, thanks. That's clear. Then on lead times, you highlighted that you have visibility into Q3 and currently selling Q4. What are the lead times in Europe and U.S.? And have you heard anyone asking already for 2022 contract volumes? I have heard that there are some customers doing that currently in the market.

Yes.

And then lead times. I don't know the exact lead times. For special sales, the lead times are quite long. And Håkan?

Like Martin said before, I mean, for special sales in Europe, we are more or less sold out for Q3. And for Americas, we have tactically not sold everything because we want to not have customers speculating in putting orders. And also, we want to make sure that we get the best price possible. but you can say shipments for Q3 are more or less secured.

Okay, and in the contract negotiation, what are the dynamics currently? I mean, it's elevated price levels in historical terms in steel. Are you saying to customers that, okay, if you pay the current price, you will get the volume? So what are the dynamics in the negotiations?

As Håkan said, we are in special steels in Europe sold out for Q3, so We are now discussing the period after that.

Yeah, and the dynamics when you are discussing volumes after that.

Availability.

Okay. Thanks for that. And the last one is basically fit for 65% I mean, Sibam was already addressed, but on the changes in the emission trading system, do you think that these changes kind of makes it more rational for you guys to speed up the fossil free steel development a lot? Or is this something that, of course, is supporting it, but doesn't make it or break it?

I think it is partly supporting it, but that's not the big deal. I mean, the big deal is the interest from the customers. And then, as I said, speed up is not fully in our hands either. We look into possibilities, but there are some quality external bottlenecks, and we have talked about them. Electricity supply at the right time, at the right place, and then environmental permits. But I think everything else is equal. the policy making in Europe drives this change. But for us, it's not an environmental project. For us, it's business development and customer demand driving this.

Okay, that's clear. That's all from me. Thank you very much.

Thank you. The next question comes from Nelson from JP Morgan. Please go ahead. Your line is now open.

Hey, thanks a lot for taking my follow-up. Quickly, just on Section 232, obviously the US and the EU committed to resolve the dispute by year. Can you just talk through what the potential financial impact could be if there is an agreement around Section 232?

If it's Europe and the U.S. making an agreement, I think net-net that will actually be positive for us. I mean, before Section 232 was introduced, it was not Europe being the big importer into U.S. and being the one destroying the price situation there. And we were, ahead of Section 232, we were exporting up to 250,000 tons from our mills here in Europe into the U.S. Some of that we've been getting exception for, some of that we are still exporting, but some of those volumes we have lost. So if there would be an agreement with Europe and the US in terms of removing the Section 232 and potentially instead having quotas like they have for some other countries, I think that would actually help us in terms of exporting more from the Nordic into the US.

Okay, that's very clear. Final question for me, just on the prior question around the sort of order book outlook, maybe more of a midterm question around discussions with uh with the sort of auto customers and and maybe even your your renewable customers who anecdotally looking to to get much longer duration contracts in place multi-year is that is that something that you're you're increasingly considering or having incoming um And is that something we can expect maybe in the sort of specialty steel sides that the duration of some of these contracts might move from annual to sort of 18, 24 months plus?

We have not entertained any such discussions.

Very, very clear. Thanks a lot.

Thank you. The final question comes from Andy Jones from UBS. Please go ahead.

Hi, James. Just a question on your process. On their last conference call, they started being acclaimed that they had a patent for hydrogen DLI production. I'm just wondering how you see that, and does it cover your process, and do you see it as any sort of risk to your plant? Thanks.

Sorry, which patent? Were you talking about the first patent?

Yeah, they claim to have some sort of patent. I'm not quite sure whether it covers your process. And if so, does it represent any sort of risk to your progress?

We don't. We don't see that it would be a risk to our process. We have looked at that and we think it's a very generic and not so specific patent. So we have actually, what do you call it, overruled or put in an objection to this patent because we think it's too wide. But we don't foresee that it would stop our process at all, no.

In a worst case scenario, if the court rules that their patent is valid and they're allowed that sort of definition, what would you see as the consequences? I mean, would you have to pay for some sort of royalty in it? What sort of magnitude is typical for that sort of thing?

As I said, we don't see it as a problem. So that's a very, very hypothetical question. But we have looked into it and we don't see it as a problem.

Okay, thanks. Okay, there could be no further questions. We'll turn the conference to the speakers for any closing remarks.

Okay, so that concludes today's conference. And we want to thank you for all the good questions and also like to take the opportunity to wish you a nice summer. Thank you.

Thank you very much.

Thank you.