SSAB AB (publ)

presentation of the SSAB year-end report. My name is Per Hillström, I'm Head of Investor Relations, and with me today is our President and CEO, Martin Lindqvist, and also CFO, Lena Kraelius. And the agenda today, we will start with the summary of Fantastic Year 2021, and then the financials with Lena, a little bit more detailed look at the quarter as such. And then we're also very pleased today to present a plan for much faster transformation of our Nordic production system. So Martin will spend some time to explain what we are looking at there. And at the end, as usual, an outlook and summary. And we will also have a lot of time for questions here, so you will be able to ask your questions at the end. So by that, please, Martin, start with 2021.

Thank you, Per, and good morning, everyone. I will start with a brief comments and a summary of 2021. And it was and is or was a historical year for SSAB with, I would say, a solid performance in a very strong market. And I will give you a couple of examples of that. We had an operating profit of almost 19 billion or 18.8 billion in net operating profit. We had a very strong net cash flow, a net cash flow of 12.4 billion, and that meant that we could close the year in a debt-free position. And the board decided at the board meeting to propose the AGM to have a dividend of 5 kronor and 25 öre per share. Of course, A lot of this is due to a very strong market, but it's also structured. We have seen very strong demand for our niche products. We have seen good and solid internal performance. If we take safety as one example, we have improved the number of LTIs a lot during the year, and I would say that that is structured, and we still are not at zero, but we are approaching and doing a good job in the organization. I think also we had... stable and high production. We saw a successful ramp up during the autumn of 2020 after a very challenging 2020. We saw record output in several production lines. We have managed, I think, in a decent way to handle problems, even though they are not fully over with COVID-19 at the production sites in the organization. We have also had problems with the supply chain issues, shortage of rail cars, sea transports, trucks, and so on, both during the full year of 2021, during Q4, and also into Q1 2022. It was a remarkable year in many aspects, and I think the first volumes of fossil-free products that we delivered, the first commercial volumes to Volvo was landmark for SSAB. And we have during the year and are continuing with that to announce a number of strategic agreements with customers. And the board has taken a decision to speed up the transition and taken a directional decision for a faster transformation. I will come back to that in the end. But we have not also market-wise only surfed on a strong market. We have actually been able to continue to deliver on our strategic targets. If we look at special steels in 2021, they almost reached 1.5 million tonnes. And I would say that they would have reached it if we wouldn't have had the transport quality challenges. So they are going to reach the strategic target of 1.6 million tonnes at the latest 2023. Services is moving on. We haven't done any major acquisitions during the year, but we are on our way to reach the strategic targets. America's premium share improving over the year. And looking at SSAB Europe, we are fairly close to the strategic target we have for 2023. 43% being the outcome of premium share 2021 and still a lot of things to do. Automotive, of course, a segment affected by a shortage of semiconductors. but still a good growth. And if we look at the premium volumes in SSAB Europe, we already 21 reached the target for 23. So ahead of plan, still a lot to do and a lot of interesting prospects. And the Nordic market share in line with our long-term target of between 40 and 45 percent Nordic market share. As I said in the beginning, it was a marvelous year. We had record earnings in all divisions. We had Very good EBIT margins, good profitability, and altogether the EBIT summed up to almost 19 billion. But Lena will give you some more details on the financials. So, Lena, I hand over to you.

Thank you, Martin. Yes, it is really a privilege to start in my new role with these kind of figures, which I will go through briefly. In this slide, if we look at the graph on the right-hand side on the bottom, we can see the EBITDA improvement quarter by quarter during this year. And definitely, the market was favorable. Prices were increasing throughout the year. Volumes were on the lower side during the second half of the year, and the problems already Martin mentioned. But if we say that the market was favorable, I would also highlight the good performance of the whole organization. Already discussed about the premium mix improvement. Europe division, America's improving the premium portion of the sales. And also special steels delivered higher volumes this year. So good work in the sales in that aspect. Also the staple production improvement since last year. That is giving, of course, big benefit for the profitability. So we can say that good achievement also in that aspect. And also the cost efficiency. We were sustaining a good cost efficiency during the year. So all that shown in the figures related to EBITDA. And then quarterly figures isolated Q4 comparing to last year, telling exactly the same story. Prices on much higher level. They are compensating well. The higher raw material cost base volume slightly lower compared to last year's fourth quarter. Fixed cost on a higher level. And this is now mainly related to maintenance activities where we had the shift in timing. America's division did the big maintenance during Q3 last year. And this year we did it instead of during Q4. Also, mobile maintenance, which was done during Q4, is something we do only every second year. And then the other half is related to personal cost. With these high earnings, we are realizing profit sharing programs. And then if we compare Q4 with the Q3 outcome, Prices did continue to go upwards, compensating, again, higher raw material cost base, volumes slightly lower, partially seasonality of Q4 related, and also these transportation problems that Martin already mentioned. Fixed cost in this comparison, more related to seasonality, Q3 is a vacation period. And then, as you can see, the utilization of capacity was higher, thus the price Materials and services also higher in line with that. All this good performance led to a strong cash flow. Q4 net cash flow ended on the level of $5.4 billion and the full year $12.4 billion. Comparison high level with last year, definitely the earnings played an important role. They were much higher compared to last year. Some negative impact with working capital with higher inventories, but nothing to be alarmed about because the net operating working capital over net sales did develop really well during this year. Maintenance expenditures on a higher level, financial items slightly lower, taxes naturally higher with this level of earnings. Strategic investments were somewhat higher, and this is now mainly related to the Oxelosund conversion started, and we will continue during next year as well. As said already in the beginning, the target set for year-end to be net debt-free we reached and actually exceeded the gearing ratio at the end of the year being negative minus three, while last year it was 19. So the net debt cash position positive 2.3 billion. Then when we look at the next year forecast on high level, the CAPEX activities will increase during next year, and this is now mainly related to the oxalozoon conversion. We were indicating CAPEX need for this year 3.5, and we were slightly below 3. Net interest to be somewhat lower for next year, and then the taxes higher, and that's due to the incurred taxes this year, will be paid out next year. So on a total level, 8.5 is the total cash need estimate at this stage for next year. Very briefly about the raw material view going forward, or actually this is illustrating the history. The iron ore, peaked during 21, started to come down, luckily during Q4, but the latest development is again upwards. So the outlook for iron ore for Q1 is that it will be on a similar level than Q4 with an upward risk. And then the coal prices, they continued to increase second half of the year, peaking upwards, and they will continue to increase also during Q1 This is only few of the raw materials, the biggest raw materials. And we know that the alloys, for example, zinc and other materials will continue to go up. So overall, the cost base is expected to be somewhat higher for Q1. And very briefly, scrap prices. This is illustrating the U.S. spot prices. They were on a higher level for Q4, coming down mainly seasonality for January. And the outlook for February is that it's stable or might be going upwards. So that's still unknown. But then regarding outlook and other issues, Martin will continue.

Thank you, Diana. So some words then about the accelerated Nordic transformation and to start to give you some background back in 2017, we formed the hybrid joint venture together with Vattenfall and LKAB. And we also inaugurated the world unique pilot plant for producing sponge iron, fossil free sponge iron in 2020. During last year, we delivered or produced the first sponge iron, fossil free sponge iron in that pilot plant. We also decided to, or we started a plan to reach commercial volumes of 1.3 million tons in this project of fossil-free sponge iron in 2026, in line with the need and the demand in Oxelösund. We then, in August, rolled and delivered the first fossil-free steel, and that was delivered to Volvo Group, to their new TARA machine. So in this partnership, we have... created the foundation for a fossil-free value chain, all the way from the iron ore being up in the mountain in the north of Sweden until finished products, in this example, a Tara machine from Volvo Construction Equipment. So this is what we have created since 2016. We have also seen a lot of interest from customers, existing customers in our important and focused segments these are examples of partnerships that we announced during last year we have also seen that the demand today and especially in the future exceeds the planned supply of 1.3 million tons in 2026 and the demand is not only bigger but also broader than we currently have the ability to produce And I would say a big part of it is within the mobility segment, advanced high-strength steels for automotive and for heavy transport. And we have had and continue to have, and that is only increasing, new customers in those segments approaching SSAB wanting to sign partnerships and take part of this development. So we have decided, or the board has decided, to start a feasibility study with the ambition or the to accelerate the Nordic strip production system. And the idea is to build a new mini mill in Luleå and one in Rohe and close existing blast furnaces and steel shops and so on. So build two new compact, high efficient mini mills with a scale of roughly 2.5 million ton each, which is in line with current capacity. We expect to complete this transformation during the coming 10 years. And that is the time is good because that is before the next scheduled blast furnace relining and the next scheduled invest big investments in cocoa and batteries and so on. So the timing is perfect around 2013. This will allow us to expand the product range in terms of grades, dimensions and quality. within current specialty and premium strategy. As one example, we will be able to produce Q&T two meter wide with thin gauges, which is asked for by the market. This will also give us capability to run a flexible load of HPI, sponge iron and recycled scrap. So part of the discussions and the partnerships we have with customers is to reuse the virgin scrap, so to say. We will leverage existing downstream assets for the new mills, including Borlänge, Hemmelina, Tubemills, Tibnor, Rokki Construction, Katoläng facilities. And we will build both mills fossil free from the start, including power supply. And I will come into some details. If we look at this graph showing the possibility to reduce with eight million tons of carbon dioxide per year, 15 years. earlier than planned. If we just put what the cost might be or where it is close today of 2030 without free allocations, because the free allocations in Europe will go away, that by itself is equivalent to seven billion per year in cost avoidance by doing this fossil free. But this, of course, overall strengthen our ESG position as a company. If you look into the benefits with these type of mills, I would claim that this will give us the possibility to have a structural and long-term profitability uplift. If we look and start with the commercial benefits, we will have a broader range of specialty and premium products. We will be able to increase sales to Nordic customers in areas where we don't have capacity today, and that is asked for. One example is galvanized material, we will have a much faster ramp up of fossil-free steel volumes in line with the market demand. If we look at the operational efficiencies, we will have a much better cost position. Lead times will be completely different. Today, we have lead times of six, eight, and sometimes 10 weeks. We will build mills with lead times below two weeks. We will, as said, avoid costs for CO2 emissions, and we will de-risk the carbon dioxide cost exposure. And we will also try to take away the small lost part of emissions by also looking into using biofuels in Oxelösund to become 100% fossil free. If we look at the increased operation of flexibility, and as you know, we are used to run mills like this. We have two of them in U.S. We will have lower fixed costs and a much better ability to adopt to swings in demand. It's much easier with a mini mill and an electric arc furnace. It's in practice, if you put it bluntly, red and a green bottom. When the business cycle is good, you push the green button, and when the business cycle is bad, you push the red button. So much more flexibility than running blast furnaces that are typically built for being run 24-7 in 15 years or 20 years and then you do a relining. Or coke oven batteries that you run 24-7 in 30 to 50 years without flexibility. We will also have a better raw material flexibility. We can use both fossil-free HBI from the partnership in hybrid, and we can also use recycled scrap from internal operations and customer scrap that we are typically today selling on the market. And then, of course, we will be able to reduce or avoid reinvestments in existing code-based operation. And as you might know, many of our operations were originally built during the 60s and the 70s. So we will have modern mills, state-of-the-art mills with much lower capex needs. We expect this, when we move now and start the feasibility study, to cost around 45 billion for the coming 8 to 10 years. And that includes Luleå, Rae, Borlänge and Hemelina, but it is excluding the conversion in Oxelösund that costs 5 billion on top of this. And if we look at the investment plan up until 2045, I would say that this is similar or even lower than the existing plan to keep maintenance of the assets we have today and moving into electric arc furnaces. So we will have a much more strategic and future-oriented investments in this case. And we When we look forward, we see that we have the ability to fund this transition with our own cash flow. And when we look at and we will come back with updates when we do the FIDs and so on. But when we look at the overall calculation, this is a very interesting investment case. But we can't do this only by ourselves. We need help with some things from the society. Of course, we need environmental permits and have an efficient environment. permit process. That is maybe a little bit less boring. What is important though is that we have fossil free electricity at the right time at the right place. So we need to work with electricity transmission and make sure together with society that we can deliver that together on time. But if we can do that we have a very good opportunity to be fossil free 2030 in line with the growing market demand. So the way forward, we have initiated the feasibility study for Luleå and Rohe. We will start immediately the permit process already now, and we will come back with information about sequencing and financial guidance when it is available. So we will keep you updated as we move on with this project. Then, outlook and summary for the year. When we look into Q1, we continue to see healthy demand in many sectors and many areas. And especially for QNT, an advanced high-strength steel, we foresee a solid demand in Q1. There is always, of course, in Q1, as it was in 2021 and Q4, questions regarding transport capacity and also the development of the COVID-19 situation. But right now it's not worse than it was in Q4, and hopefully this will ease up during 2022. So when we guide and look at shipments and prices, we expect higher shipments in special steels, Europe and America, in Q1 versus Q4, stable prices in special steels, somewhat lower prices in Europe and stable to somewhat higher prices in Americas. And as Lena said, generally higher raw material costs and fuels and bottlenecks within transportation will continue in Q1. So we sum it up before we open up for questions. Strong earnings, strong cash flow generation, high and stable production, good work with continuous improvement, what we internally call SSAB1, better safety performance, and a debt-free situation with a net cash position end of 2021. The board is proposing a dividend of 5 kroner and 25 öre per share, and we have a plan for an accelerated Nordic transformation that better will meet customer demand and for fossil-free products within our segments. We are doing a step change or planning for a step change when it comes to efficiency, flexibility, and cost position, and we will be able to eliminate carbon dioxide emissions 15 years earlier than the previous plan. So with that, Per, I think we open up for, and Lena, we open up for questions.

Yes, we will do. Just a few words. We have good time now for questions, but I'm sure there is a lot of questions, so maybe in the first round keep it to a couple of questions. And as always, please state them one at a time to make the

process a bit easier here so by that then i would please ask the operator to present the instructions thank you if you wish to ask a question please dial zero one on your telephone keypads now to enter the queue once your name is announced you can ask your question if you find it's answered before it's your turn to speak you can dial zero two to cancel Our first question comes from the line of Alan Gabriel at Morgan Stanley. Please go ahead. Your line is open.

Yes, hi. Good morning, everyone. I have two questions. I'll start with them one at a time. Firstly, on the budget for your Green Steel transition, how much do you expect to obtain in funding from the Swedish or EU government, knowing that Oxeloson was the only site to have received the EU Innovation Fund backing back in November last year, given that your peers are also expecting almost 50% funding for their projects?

How much do you expect? In our calculations, we have done this with our own cash flow. And then if we would get some funding, we haven't calculated with that. So the 45 billion is what we believe it would cost maximum. And we see that we can do this with our own cash flow generation.

Okay, thank you. And the second question is, what would be the maximum capex that you're willing to tolerate in any given year from now on until the end of the project? And what does that mean for your capital returns strategy and your dividends, say, for example, in 2022?

We will not change the dividend policy. The proposal for 2021 is in line with the dividend policy. We will not change that. I think we are in a position with a net cash position. When I look forward and look at demand development, cost development and so on, you should expect us to continue to generate. I've been saying this for many years now, but you should expect us to continue to generate strong free cash flow. And then we will use that. And of course, this is money belonging to the shareholders. We will use that to invest and also to pay dividend.

Your maximum capex tolerance per annum?

No, but that will, of course, change over the years. And I mean, now we start the feasibility study and we are running the Oxelösund project. So I mean, it will be a bit, call it back-end loaded, the rest of it. And we will have possibilities to adjust that over time as well. We don't have one figure saying that this is the maximum investment level we will have. But what we know is that instead of investing in old equipment, we will invest in brand-new equipment.

Okay, thank you. Thank you. Our next question comes from the line of Tom Zhang of Barclays. Please go ahead.

Your line is open. Yes, morning. Thanks for taking our questions. Also to take them one by one. The first question, I was wondering if you could help us understand what sort of the net capex is, because clearly you're avoiding, as you mentioned, coking battery capex, some other capex that you would have needed if you kept the blast fences. I was wondering if you had a number on, effectively, what the net capex expenditure is over the next 10 years, if you deducted those costs.

As I tried to show out, I mean, what we see running the existing operations for the period I showed on the slide will cost slightly more. And to give you some examples, the relining of a blast furnace is roughly one to one and a half, or around one and a half billion. building a new or relining a coke oven battery is much more expensive than that and then we have steel shops and a lot of other things so i would say this is compared to the previous plan a bit more front loaded but but the absolute terms are actually slightly lower okay and second question just on

US plate pricing. I'm wondering if you're feeling any pressure there given plate looks to have overshot HRC quite materially now. Do you think there are any sort of risks that normalizes or do you think this kind of plate HRC spread could, an elevated spread could be maintained given sort of infrastructure demand?

Very good question, but I would say that what we saw regarding the spread of HRC and plate last year was abnormal with HRC being much higher than plate. What we see now is more historical pattern. Will that stabilize and be there forever? I don't really know. But we see a good underlying demand for plate in North America, and especially for infrastructure purposes and others. But where the spread will go, I was surprised to see the negative spread last year, to be honest.

Okay. Yes, I think the spread now, at least from the numbers that I see, are quite a bit above historic normalized. But it sort of feels like, yeah, and the market demand is there to certainly stop it going negative again. Okay, those are my questions. Thanks very much. Cheers.

Thank you. Our next question comes from the line of Seth Rosenfeld of XM B&P Paribas. Please go ahead.

Good morning. Thanks for taking our questions. I, too, I'll take one by one, first on decarbonisation and second on special steels. With regards to the decarbonization strategy, can you just give us a bit more color on the raw materials plan? You note flexibility between scrap and HBI, but on the HBI side, you're reliant on hybrids. Can you walk us through the plans for expansion of the hybrid green HBI capacity and what the additional CapEx implications would be for your contribution? I'll start there, please.

What we are planning for right now is what we call the demonstration plant, which is a full-scale production plant of 1.35 million tons. And we have announced that that will be built by the partners up in Vitofors in northern Sweden. And then, of course, we are discussing other plans also to step up these investments, and LKAB is doing that. So we are doing this in a joint venture and a partnership, so this fits – together with the plans for the value chain. So our ambition is to build a fossil-free value chain and have fossil-free steel available from that fossil-free value chain for our customers. And that will, of course, be dependent on the future demand. But what we see right now is that the demand is stronger than we thought. And in the partnerships we have signed, the ambitions are quite strong. So we have a good... call it the good prospects for the future in that aspect. Then, of course, we need, of course, power supply in order to do this transformation. The power generation is there and the power generation is being built out, but we also need power supply. So that, I would say, will be time-wise maybe a limiting factor.

Okay, just to follow up on that. If by 2030 you're using exclusively green inputs, how much HBI do you expect to be consuming compared to that 1.3 million tons currently under development?

Of course, much more, yes. We haven't said. I mean, we are moving now into the feasibility study, and we can flex between HBI scrap and recycled virgin scrap, so to say. So as I said, we are not using the scrap today. We can get scrap back from customers and use internal scrap. So the exact balance we need to come back to.

Okay, thank you. And I guess one last question, please, on special steels. Can you just talk us through the medium-term outlook for price realizations? This is a business that historically has been a lot less volatile than the Americas or Europe businesses. With some price pressure being realized today in the spot market, how do you think about special steels going forward?

If we take a step back and look at the EBIT margins that I showed on the first one of the first pictures, you saw that Europe and America's had better and higher EBIT margins than special steels, which is typically the case in a very strong market. So you're right. Special steels is they are much more stable margin wise and price wise, less fluctuations and less volatility. What we see and what we saw during 2021 is structurally increasing underlying demand, and we have seen that for quite some time, and that is the important part. So they will continue to grow, and I would bet you that we will meet the strategic target of 1.6 at the latest 2023. So we are following the plan, and we are actually a bit ahead of plan, but less volatility and more stable margins over time. But the underlying demand is structurally growing.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Alan Spence at Jefferies. Please go ahead to your line, is it?

Yeah, thanks, guys. Similarly, two questions, take one at a time. The first one on decomposition. How long do you anticipate the feasibility study to take, and what is your assumption around through-cycle profitability that allows you to finance it out of cash flow?

I must apologize. The first question was on how long before we can see the feasibility study.

We have started a feasibility study, and we will gradually get more and more educated, but I would say maybe... One and a half, two years maximum.

Okay, and the second part of that one was, what is your assumption around through-cycle profitability so that you can finance the CapEx out of cash flow?

When we look at the long-term profitability and cash flow generation, including these investments, we see that we can finance this over these periods. That's our base assumption. Then, of course, when you do projects like this, you in Swedish, we say Hengst and we leave them. You need to be really sure about that. And we are very confident that we can do that.

OK, the second one on Europe. In 2021, you achieved your tonnage target per premium volumes. What's kind of an upside target for 2023, and where do you see that going?

I see we have a lot to do on that target, and especially within automotive, where the demand has been affected by shortage of semiconductors. We have excellent products, and some products, they're high, The martensitic steels up to 2,000 megapascal, where we are world unique. We know the platforms we are into and so on. So I see a lot of growth prospects for the automotive part as one example. And we have also invested in Borläng in the continuous annealing line to take up the capacity. So we have plenty of opportunities to continue to grow that premium mix. above the target of 2023. Thank you.

And just if I have one last one, just quick confirmation. If the feasibility studies take one and a half to two years, can you just confirm that there'll be no capex spent on those projects until those studies are done?

No, but there will be some costs. I mean, with consultants, internal work and so on. But to be honest, I'm not sure it will take, I don't have the exact days and months it will take the feasibility study, but I a fair guess from the top of my head would be one and a half to two years. And then we know the cap, and then we will take the decisions mill by mill, so to say. Okay. Thank you.

Thank you. Our next question comes from the line of Luke Nelson at J.P. Morgan. Please go ahead. Your line is open.

Hi. Thanks for taking my question. Thanks. Two for me, one by one. Firstly, again, just on decarbonisation, maybe just more around the funding side of things and follow on from the prior question that sounds like CapEx is probably going to ramp up in a year or two's time. So 2022 will sort of still be a CapEx light year from that side of things. I suppose in that context, it's likely going to be a significant increase, again, in terms of balance sheet strength and the net cash position. How should we be thinking about that surplus capital over the very short term? Is it likely that it's sort of going to be kept more as a war chest in advance of that cap extent? Or is there still an ability to maybe return capital surplus capital back to shareholders in the new term. I'll start with that.

I think we have a clear dividend policy and we will follow that dividend policy. And we are obviously in a different position right now with the net cash position. And as I said, and I've said it many times and I have a tendency of repeating myself on that issue, but you should expect us to continue to generate from operations strong cash flow and have a good cash flow generation. And we are not done, even though I think Lena was rightly so impressed with the development of net operating working capital over sales. We actually had a lot of inventories at the end of the year due to transport product problems and so on. So I think we will have solid cash flow generation for the coming years and for the future. And then we will use that cash flow wisely. As I said, it belongs to the shareholders. We will live by the dividend policy and we will do investments that we believe is good investments for the future. So it will be a combination.

Thank you. Second question is, it's more just on the CapEx figure itself. Can you maybe, clearly the subject to a feasibility study and confirmation of that, But maybe can you just talk about to what extent there's contingencies built in within that figure from things like cost inflation and overruns? And then maybe just in terms of how much of that budget is fixed versus still subject to change and maybe assumptions around things like... Of course, yeah.

Of course, we have done our homework and done our calculations, and we are, of course, not willing to put ourselves in a situation where we would exceed that, call it, round and rough figure. So there are continuances built into that number, yes.

Okay, great. I'll leave it there, and I'll jump back in.

Let's come back to the issue when we have the FIDs and the investment cases ready, and then we can talk about profitability, internal rate of return, and so on.

Okay, great. Thank you. Our next question comes from the line of Christian Adewale of Citigroup. Please go ahead. Your line is open.

Hi. Thanks for taking my question. A couple of questions have already been asked. but a follow-up on CAPEX. So, I mean, with the Nordic system plan in place, we can see four large buckets of the CAPEX, which is sustaining CAPEX, contribution to the hybrid development, oscillation conversion CAPEX, and then on top of that Nordic system CAPEX. So, is that a fair way of looking at your CAPEX pipeline for the next 10 years, and then Can you help us estimate the capex for beyond 2022 in terms of all these four buckets? How should we think about incremental capex in 2023, 2024, 2025 in these four buckets?

What we are saying is that the transformation of the building of two modern, high-efficient mini-mills in the Nordic production system, including investments in Borlänge and Hemmelina and some other, that will cost roughly $45 billion. We have also said that the conversion of Oxelösund will cost roughly $5 billion. So these are the two main buckets. Oxelösund will, as communicated earlier, be up and running and ready 2026. But then also when you know that we are not going to run the existing facilities with the blast furnaces and cocoa and batteries and so on for the long-term future, there will also be a bucket of capex avoidance in existing facilities. I mean, right now, or up until now, we have been running them as going concerned, meaning that they would run forever. So we have a bucket of capex avoidance as well. And then how that plays out every year and so on is a bit too early to say. But in the $45 billion, we have contingencies, and we will come back to call it FIDs for each investment. This is a directional decision, and this is the starting point of a vision and an idea of speeding up the transformation of the Nordic Strip system, where we have done a lot of homework, of course.

Sure, sure. Thanks a lot. And then a quick shorter-term question on working capital. So you've already invested close to $6 billion in working capital in 2021. What should be kind of from a modeling perspective, what should we be thinking in terms of working capital in Q1, at least from a direction point of view?

You will, of course, be dependent on the market, but you should not expect us to massively invest in working capital. Quite the opposite.

Okay. Thanks a lot. Very clear.

Thank you. Our next question comes from the line of Carlos Enrique at Credit Suisse. Please go ahead. Your line is open.

Thank you very much. Two questions from my side. The first one is on the current order backlog in Europe and North America. Do you see any change in patterns currently, probably for the second quarter, given the high steep prices still in your order book? Means is there any standoff or do you think the good water intake will also continue into the second quarter? So the first half is pretty much done. That's the first one.

And typically we just guide for the coming quarter and the order book for Q1 gives us the courage to give the guidance we have. Then I said COVID is a question mark issue. The transportation system is a question mark, but the order book gives us clarity in Q1. Am I expecting the world to break down first of April? It doesn't look like that right now.

Martin, we believe that these shortages will probably ease during the first half. At least that's our base scenario. Then, as you said, we don't know what...

Okay, perfect. That helps already. The second question I have is also on the CapEx for 2022. You mentioned around $5 billion. At the same time, we see that your target for SSAD services, for example, to achieve $4.5 billion in sales and out of it $1.5 billion through acquisition is still on. So ideally, you need to actually execute on this within the next 24 months. Is this $5 billion CapEx number including any acquisition CapEx?

Yes.

Is it already included?

Yes. I was partly wrong during my presentation because we actually did some acquisition within SSAB services during 2021 as well. Okay, perfect.

Thank you. I just wanted to clarify that. Thank you very much.

Thank you. Our next question comes from the line of Markus Braunheiser of Kepler Schofarer. Please go ahead, your line is open.

Yes, good morning. Thanks for taking the question. Maybe let me get back to this decarbonisation plan, which I guess is pretty impressive for the rest of the industry. When you talk about the motives to advance that much, I take the point on the demand, but I guess with a longer-term perspective, this is probably what you expected anyway, that the green steel is becoming what the main product and market is demanding for. Are there any other points why this is being accelerated that much? Looking at Oxidazone, you have been discussing these issues with infrastructure and permitting and the power cables and so on for quite some time. So what is giving you the confidence from that background that you can move that much faster than previously anticipated?

I think it's a bit less complicated up in northern Sweden and northern Finland for one reason. We have learned a lot as well during this process, but the underlying factor is the increased demand. And when we started this project together with LKB and Vattenfall, we we're not really foreseeing how the demand would develop. And I think also we have a unique position here up in the Nordics because we have a surplus of fossil-free electricity. We have the right iron ore, we have the knowledge, and we have now also proven that we can produce this steel. And that is good, have been asked for by the market and has been creating a lot of interest in the market. I also think that... have with those prerequisites the possibility to to bring and start to bring mini meals to europe which has not been the case before and we have experience since 20 years of running mini meals and you see the development in north america now with quite i mean take steel dynamics and symptom as an example quite impressive meals being built with with capacity and cost position and capabilities that fits us very well. And we see the possibility to broaden our product offering. One example was two meter wide the Q and T with thin gauges that is asked for by the market. But we don't have the ability to produce today with good cost efficiency and productivity. So it's a lot of reasons, but it starts with the increasing demand from the market and the marketplace. And if you should do this anywhere in Europe, I think you should do it in northern Sweden and northern Finland.

Okay, I think there's a fair point. And Martin, maybe can we come back to the CapEx figure? Maybe I'm not 100% sure whether I got it right. Is the... Is the plan including any incremental DRI investments or would be the base case that this could be done by LKB? And are you having now a different stance on whether you want to be part of this Or do you want to have that outside of your core competencies? Is this acceleration now changing your stance on what is your core business and what is outside of your core?

No, it hasn't. And we haven't, to be honest, really decided. What is important for us is the partnership with LKB and Vattenfall and the ambition to create the fossil-free value chain and to optimize that value chain. And then how we will invest or not in that we need to figure out over time. But we have been investing in the pilot plant and we are now in the hybrid in the final stages of the FID with the demonstration plant.

So is the TRI included in the 45 billion?

The 45 billion is what is currently the Nordic strip system. So the answer is simple and the answer is no.

Okay. And finally, on the ramp-up of these green steel shipments, fossil steel shipments, you're saying that you want to have the commercial push already from the very start. So are you seeing a fair chance that the mill can deliver the full volumes from the very beginning, or shall we expect there's a multi-year ramp-up?

There is always on investment ramp-ups. The good thing with this is that we can build the mills in parallel with the existing mills. And then when the new mills are ramped up, we close the existing mills. And we can do that before the next blast furnace relining or before we need to spend a lot of money in coke oven batteries and others. So from a risk perspective, I think this is also a way of mitigating risks. We will not put any customers in jeopardy.

Okay, maybe I was unclear. What I meant is on the demonstration plant, these first 1.3 million tons of fossil free steel, what kind of timeline do you think you need to fully push and establish that tons in the market? Is this just a

one-year process or is this rather a multi-year ramp-up phase no we are getting more and more sure that we will be able to deliver volumes from that plan to oxelosun 2026. okay okay that's clear thank you very much thank you and our next question comes from the line of patrick mann at bank of america please go ahead your line is open

Good day, guys. Thank you very much for the opportunity to answer the question. It's a bit of a follow-up question just on the possible funding for this, and apologies if I misunderstood the answer. But I understood that at the moment you're planning for the SEC45 to be funded internally from cash flows, and you're confident that you can generate that. Yes. I mean, is there not government funding or government support or European funds or even low-cost financing available that can help offset some of this CapEx bill? And will you be looking into that? Or is it the case that you've looked at it and decided to do it yourself?

No, but of course there could be possibilities like that. But we have not taken that into account when we have done our calculations. We see a lot of interest of funding these kind of projects. But as I said, when we look at the future, we see that we have the ability to fund this with our own cash flow. And then how we finally finance it, let's take that decision when we come to the investment decisions.

And as you saw last year, we already then had this sustainability linked bond where we had good conditions on the back of the earlier plan. Now, this is much more aggressive, so we will not be in a worse position on that as well.

But I think the starting position is decent with the net cash positions and good cash flow generation prospects. So I think, yeah.

Thanks. I think the reason there's so many questions on this is because your peers say they're expecting up to 50% of government support, right? Yes. I think that's where it's all coming from. Maybe just one follow-up.

Sorry. I was trying to think out loud and that is not always a good idea, so please continue.

The second question I just wanted to ask, you did speak a little bit about how this could be positive for margins in terms of you know, the different grades and qualities of steel that you're able to output. Can you maybe just help us think through the economics, the unit economics of this a little bit more? So should we be thinking about this as higher cost steel, although you avoid CO2, but at the end of the day, you're getting a premium or a higher price on average, a higher realized price? Is that the way to think about it?

The way we have looked at this is that we would have a much more cost efficient production with a broader product portfolio. And then, of course, as you mentioned, some future cost avoidance. That is how we have done the calculations. I think there will be most probably a premium to start with on fossil free. But I think and hope that fossil free will be the new normal. And because customers and consumers are demanding that. So so. Over time, I think this will be a very cost-efficient, effective way of producing fossil-free steel products within our niches and our segments.

Understood. Thank you very much.

Thank you. Our next question comes from the line of Victor Trollstein of Danske Bank. Please go ahead, your line is open.

Yes, thank you, operator, and good morning, Martin and Lena. Good morning. Just firstly, could you please remind us on maintenance capex needs for the coming, say, five, ten years? At what level is that?

But I think we have had fairly, the last couple of years, fairly normal maintenance capex levels, or if I remember it correctly, at or around a couple of billions.

1.8 to 2 billions it spends.

And that, of course, we see the possibility to gradually then decrease when we know that we will not run the existing system forever. So it will be gradually lower and lower.

Okay, that's brilliant. I just think you're sending quite a strong message in terms of cash flows, I suppose. We're talking about a strategic capex of, let's say, 5.5 billion per year in the coming 10 years. Let's say a maintenance capex of 1.6. You know, you have historically generated 3 billion in free cash flow over a cycle. That would imply 10 billion in operating costs. cash flows for the coming 10 years. What's behind that? Is that a more healthy steel market?

I think it's a combination. If you look right now and compared to a number of years ago, I think that the steel market is more in balance. I think also with this fit for 55 in Europe, there will be no possibilities for steel companies to hunt volumes because they will have to pay emission rights. I think Structurally, maybe healthier from an output point of view and demand and supply balance a healthier market. But we are also looking into our ability to continue to shift the mix to less volatile products, more profit-generating products. Then, of course, we will still have volatility, but the ambition is to reduce the volatility as much as possible. And that is done with a couple of things. Of course, the most important part, shifting the mix towards more stable price, stable and margin stable products continue to work with the continuous improvements in order to increase productivity, reduce cost and reduce lead times. And so we have a number of programs that we are running. And I think that when we look at that, we see that when do the calculations, including continuous and so on, we see that this is clearly a good opportunity and possibility for the future.

Yeah, no, brilliant. Yeah, it's, you know, strong, strong message. Obviously, I guess that, you know, implies normalized earnings of less than 12 billion.

So 2021 was obviously a very good year. You shouldn't expect us to generate more than 12 billion in free cash flow every year. But I've been like a fool repeating myself that we should be able to continue to generate strong cash flow. And we are not ready. I mean, Yes, we were investing a lot in working capital towards the end of the year. Yes, for sure. Will we continue to do that? No, we still see opportunities to become more capital efficient. And the example with the with the minimals, if you reduce lead times from just a simple calculation from eight weeks to less than two weeks, that is also a huge possibility of releasing working capital.

Then just a question in terms of your Q1 guidance, more short term. And just to be clear, what you're saying is that costs could come up a bit, prices basically flat, and then you have no maintenance in Q1. So I suppose, you know, mixing that together, Q1 earnings should be higher than Q4. Is that correct?

We don't give any figures or guidance. That's your job to figure out. No, but we are also saying that we see problems in the supply chain. We had the end of Q4 and we still have problems with getting trucks, getting containers, railway shipments, boats and so on. We don't know where the COVID situation is. will end up. And when it will end, we have had problems in Q4. We still have problems with a lot of people with a high short term leave, people being in quarantine, being sick or taking care of sick family members. So it's too early to say there are still some quality problems like we had in Q4 and they persist into Q1 so far.

Remember, Victor, also that prices in Europe will be lower also.

Yeah, yeah. No, that's clear. And just to find a very quick question, just in terms of returns on the CAPE program, you mentioned $7 billion in avoided CO2 costs. So I guess you don't know incremental.

That was one example. But when we look at the calculation, and we need to come back to that when we come with the FIDs, but We see this as a very interesting investment opportunity when we look at the calculations so far. Otherwise, we wouldn't propose it. But let's come back to that with more detail.

Okay. Okay. Okay. Yeah, thank you very much, guys.

Thank you. Our next question comes from the line of Johannes Kononcilius of CNB Markets. Please go ahead. Your line is open.

Yes. Hi, everyone. It's Johannes Kononcilius here. Yes, I have a question on, well, what you showed on basically slide 18 in your slide package about premiums on the first green steel that you're aiming for, I think, 2026 or so. Could you elaborate a bit on how you see the price premiums there? Is it sort of one premium from everyone buying fossil steel, or is it sort of different case by case? And I would so much appreciate if you could give us any sort of help in the magnitude of future price premiums that you're projecting?

That's my question. No, not really. I mean, we think the market is very interested. The market is willing from start to pay a premium. I honestly believe that, well, there might be a price difference between companies. carbon-free, fossil-free steel and usual steel or a margin difference or however you put it. But I think and hope that this will be the new normal. So I think it's very hard to say what will the premium be over time and how do you calculate the premium. So let's come back to that. I don't have a good answer, but we see that the current demand is exceeding the planned capacity. And our base case guess, and I would say that this is a fairly educated guess, is that that demand will not lower over time. And you have seen announcements from companies like Daimler, what kind of pressure they put on their sub-suppliers when it comes to scope 3 emissions. And my guess would be, and I would claim that this is an educated guess as well, is that that pressure will not decrease. I would say quite the opposite.

Mm-hmm. But that's helpful anyway.

What I see and what I'm trying to say, Johannes, is that I see an opportunity because the location and the knowledge and the partnership we have within hybrid and with customers makes this, I mean, if you should do this, you should do it in northern Sweden and northern Finland.

Yeah, yeah, got you. I mean, everybody assumes, I suppose, that the premium will be highest in the first years when this is a revolutionary product. Let's see if it becomes a new normal or not. Then I have a question also you mentioned a few times in the presentation, Martin, about that scrap availability seems to be pretty good for you in the Nordics. I mean, would it be possible to run the new SSAB setup with the sort of scrap in the Nordics and Is it enough scrap, basically, that you can be using locally?

Or how do you see that? We could potentially do that, yes, run it on scrap as we do in the U.S. And there is scrap availability in the Nordics, and we are one big producer of scrap and our customers using our material. And we could also use it with scrap from the market. Today we are selling scrap to the market. So there is... and that's what we try to call flexibility then between HBI and scrap. So we will in practice have higher flexibility than raw material flexibility today than today.

Okay, got you. Thank you.

Thank you. This question comes from the line of Bastian Sinow-Bivitz of Deutsche Bank. Please go ahead. Your line is open.

Good morning, and also thanks for taking my questions. I've got only two quick ones left. I'll also take them one at a time. Martin, could you briefly talk about the new product segment which you aim to enter, please?

We have a fairly good idea about that, and it is within the mobility sector. And one good example, and I won't bore you with too many examples, but one good example is two-meter-wide Q&T, which is – and thin gauges, which is asked for by the market, and we are not in a cost-efficient way able to produce that today. I mean, the quarter mill in Oxelösund is not an optimal setup to produce, I would say, thinner gauges than four millimetres, and with these mills we can produce one, two, three, up to four millimetres. So we will have a broader product offering. We will also with this mean what we are lacking today and what is asked for is and where we have a fairly low market share is galvanized products, especially within advanced high strength steels. We don't have the capacity today. That will be another example.

So with that, I guess you're really entering a new product spectrum in that sense that you're basically entering the surface market in automotive, right?

Not necessarily, no. But we are focused to stay within our niches with advanced high-strength steels and QNT. And there we see possibilities both for, as said with the example of QNT, new grades and new gauges and widths, but also other parts where we are either Lego producing today, like galvanized advanced high-strength steels, or not being able to produce at all.

Okay. And then just to briefly explore a little bit further on that.

Just to be clear, I mean, we're not changing the strategy or the focus on niche products. That's still the foundation and will continue to be the foundation of SSAB.

I think that's very clear that you're pursuing that. But just to explore briefly further, you mentioned strong demand, and I guess we all were able to see a very strong demand from automotive. I guess this is the segment that which you are emphasizing at the same time only at the moment automotive, I would say relative to other C-companies, is underrepresented in your end market. Are you seeing that pull for fossil-free steel from other market segments as well, such as white goods or whatever?

Yes, we see that from a lot of segments and segments that we are not active in today and segments where we will not be active, but we see it from heavy transport. We see it from other segments where we are active today. So I would say To be honest, we see it from most of the segments want to have fossil-free steel in the future, with very few exceptions.

Okay, perfect. Thanks, Martin. And then I have one follow-up question on capex. And sorry to come back on that. Obviously, there have been a lot of questions around that already. Lena, you were showing some charts on capex, I think on slide 22. And I guess before, you've always been talking about three, three and a half billion capex over the cycle. as a rough guide to keep things simple and instead of talking about, say, peak capex or nailing things down to one specific year, which I appreciate is very difficult to do, what would be the new normal effective over-the-cycle capex for the rest of the decade, which we should be factoring in? And again, I'm conscious that may be subject to change because if electricity isn't there, the $45 billion will obviously be split maybe over a longer time span, and maybe there will be some funding, but What is the broad number we can work with versus the three to three and a half before?

It's a very good question. And let's come back to that, because as we said, I mean, we have the maintenance capex level today that will over time then in existing facilities go down. We have the Oxelosun conversion, which we have said will cost until 2026, roughly five billion. And then we have this new program. So it will be a combination of that. And it will be dependent on when we start. But for the coming years, you should expect us to move on with Oxelösund and then gradually then start to invest in our Nordic mails. But at the same time, we will start to reduce maintenance capex and call it other strategic capex in those facilities. So let's come back to that when we move on with this feasibility study and have more clarity. But we have said a round figure of 45, including contingencies, and in order not to disappoint anyone with that figure.

Okay. Okay. Sounds good. Okay. At least I tried my best. Okay. Thanks so much.

And you tried on Lena's first meeting to see if you could convince her to answer something that you knew that you wouldn't get an answer from Håkan or me. So good try.

Okay. Thanks so much.

All the best. Thank you. Our next question comes from the line of Andy Jones at UBS. Please go ahead. Your line is open.

Hi, thanks for the opportunity. My question is regarding priorities, because I guess the very low power costs in northern Sweden provide a huge advantage for making low-cost sponge iron, and clearly you're dedicating a huge amount of capital to EFs and basically sorting out the steel facilities, but it doesn't leave a huge amount to potentially invest in hybrid going forward. Can you just talk a bit more about how you see the returns on producing spongion, given the power costs and so forth that you see now, compared to the investments that you're making here? Because obviously the majority of the CO2 reduction comes from the spongion part, and that seems to be where the value is. So I'm quite surprised that the magnitude of the spending here compared to the focus on hybrid? And are you giving up an opportunity potentially to LKAB who might wish to, who seem to want to accelerate this? Are you essentially losing some of the value of your location? That's quite a broad question.

What I'm trying to explain is that we will do this in a partnership in the hybrid partnership together with LKAB and And I think it will be dependent on electricity prices. I think the good thing with this project is that we will also have hydrogen storage so we can use wind power as an example and then store energy in the hydrogen storage and then produce sponge iron 24-7 regardless of peaks or troughs in electricity prices. So what I'm trying to say, and let's come back to that, but We are trying together to optimize then a value chain and then exactly who will do what and who will own what. We haven't really decided that. We have the partnership. We are now investing or planning to start to invest in the demonstration plant, and then we'll take it from there. So we're talking about the full value chain together with LKAB, SSAB, Vattenfall, and then customers. So what we are trying to achieve is fossil-free products out at end users in a cost-efficient way.

Yeah, that makes sense. I guess I'm kind of asking, can you really afford to commit much more in terms of capital to hybrid given these huge capex investments that you're planning here?

That will, of course, depend on cash regeneration and so on. But now we are taking this decision, a directional decision, and we'll take the decisions... one by one, but it goes together because we are now investing in a fossil free value chain. And I think that is what is appreciated by the market and what the market wants to see. And I think that the feasibility of doing that is better in the region than in other regions. And with the knowledge and experience we have, we are very well suited for this. And we have a strong belief that this is the future. Not maybe the full future, but this is what the market is asking for.

No, I completely agree. And just to clarify something on the 45 billion, obviously the capital intensity is a lot higher than the Oxelos one, clearly because the scope is larger. Aside from just building EAFs, could you just give us an idea for what other facilities are included in that 45?

For example, you are... It is... No, it's complete minimals, like... I think Sinton in Texas is a good example. Completely integrated mills, starting with electric arc furnaces, out comes finished products after rolling. So this is a complete minimum. In Oxelösund, we are closing the coke oven battery and the blast furnaces and moving over to electric arc furnaces. But we keep the steel shop, the rolling mill, because they are state of the art and very well fitted for those kind of products. This I mean, you should compare it with Mobil or Synton.

Okay. Okay. Okay. That's great. Thank you.

Thank you. Our next question comes from the line of Seth Rosenfeld at Exxon BNP Paribas. Please go ahead. Your line is open.

Morning. Just one follow-up question, please. I appreciate your comment earlier on the improved efficiency of the new capacity, better product mix, lower fixed costs, et cetera. But in the past, you've given an explicit figure for the higher operating costs of green steel. I believe there was 30 to 40% above traditional technologies. As you go forward and kind of dive into this at a broader scale, what's your confidence in the like-for-like operating cost component? I recognize there might be some other mitigating positives, but how do you think about the cost of production? What's your assumption around, for example, cost of that DRI substrate? Thank you.

No, but... we have become more and more sure about the cost and efficiency and so on. And that has not increased over time when we have become more and more sure.

I'm sorry, the cost inflation you're more sure of?

No, but the cost of producing steel like this has not increased when we have gotten more and more educated. I would say the opposite.

Can you confirm an updated expectation for how much your operating costs will increase, like for like, with any technology?

They would not increase.

Okay. So compared to prior guidance of an over 30% increase, the new guidance is no increase?

Let's come back to that, but it is not a 30% increase for sure.

Okay, I think this is something that the market definitely wants more color on, recognizing how much capital is being allocated to the shift in technology.

And we need to come back to that when we come up with the FIDs and so on and take it meal by meal. But the operating costs will be, we will be much more cost efficient.

Okay, thank you very much. Thank you. And we have one further person in the queue. That's Alan Stentz of Jefferies, who's going to help you online as well.

Thanks. Appreciate the opportunity to ask a couple of follow-up questions. For the 5 billion Oxelison conversion capex, can you just confirm how much of that will be done by the end of 2022, and then how the remaining will be split 23 to 25?

I think for 22, it's around a billion.

A billion in 2022.

That's the total amount spent so far?

For Oxelison conversion. No, that's for the 22 year. For 22.

And how much was spent in 21?

I don't have the exact figure, but part of the cost is already occurred during 21. Yeah.

Okay. And the second one is just on... The blast furnace relines and new coke ovens for Luleå and Rohe, were those scheduled to be done before 2030 or after 2030?

I would say around 2030. Then you can always flex. Sometimes you can prolong it a year, and sometimes you need to do it a year earlier. So I would say around 2030, the two blast furnaces in Rohe, one of them slightly later, and also Luleå in that region as well. So I would say around 2030, all the three of them.

Okay, but effectively within the timeline of the $45 billion, not afterwards. Is that the correct way to think about it?

Around that timeline. I say that around 2030 because it's not an exact science. Sometimes you're lucky and you can run a blast furnace one more year than planned. Sometimes you're unlucky and you need to do it one year earlier. It depends so much on the wear and tear in the blast furnaces. Also, if you have... had to stop them or not. So it is not an exact science, but around 2030, all three of them. Okay, thank you. So the idea is to avoid that, of course.

Thank you. And so no further questions on the line at this time. I'll hand back to our speakers for the closing comments.

Okay, thank you. Thank you for all the interest. And by that, we close today's conference call and we wish you a pleasant day. Thank you very much.

Thank you.