Hello all, and welcome to Outokumpu's Q3 2022 Results Webcast. My name is Linda Häkkilä, and I'm the Head of Investor Relations here at Outokumpu. With me today, we have our CEO, Heikki Malinen, and our CFO, Pia Aaltonen-Forsell. In the third quarter, our financial performance remained very solid, and we also announced our first share buyback program. Today, we will first start with the presentations, after that, we are happy to take your questions. Now, before we start with the presentations, I would like to remind you about the disclaimer, as we might be making forward-looking statements. Now, without any further comments, I would like to hand over to our CEO, Heikki.
Thank you, Linda. Good afternoon and good morning, everybody. Welcome to Outokumpu's webcast. Happy to present the results of the third quarter to you. We're obviously living turbulent times. We have just finished a major pandemic with COVID. We've had the ongoing Ukrainian war now, I guess, almost for eight to nine months and on top of that, we now have, at least in Europe, an energy crisis, which of course impacts this industry, which uses a lot of electricity and gas. When you add on top of that the overall inflation we see in the economy, which is starting to look like it may be even sticky, you have central banks raising rates, reducing their balance sheets, tighter monetary policy, maybe even eventually some tighter fiscal policy in some countries.
We see a market and a consumer who is going to be under a fair amount of pressure. Against that backdrop, I'm extremely pleased to present the results of the third quarter. With EUR 304 million of adjusted EBITDA, Outokumpu has delivered its best Q3 in history. Particularly, I'm pleased that we did it at a time when all of these challenges were starting to face us. Now, I wanna highlight a couple of things here with respect to what actually was accomplished during the third quarter, how we got to the 304. Well, we've obviously delivered. We had very strong, solid performance in our mills. They've been producing well. We've had maintenance, but within outside of that, mills have performed very well.
We have continued to work systematically on cost mitigation and have delivered, achieved the cost structure we needed to perform. On the ferrochrome side, and you'll hear more from Pia today, ferrochrome has been very successful in the hourly optimization of electricity usage. You know that ferrochrome business is a large user of electricity, so the hourly changes in electricity price can be used both to our advantage when we are agile in running our lines up and down. Now then, if we talk about energy, and that really is the topic of the day, we prepared this slide for you to really give you some context from the perspective of Outokumpu. So on the left-hand side of the slide, you see our total energy consumption in Europe in 2021. It was 4.6 TWh.
In the slide, you can see that roughly two-thirds of the electricity was consumed in Finland. Part of that was ferrochrome, and the other half was stainless. Then we of course have Avesta melt shop in Sweden, and then of course other countries, Germany in particular. That's our energy usage. On the right-hand side of the chart, you see the electricity price for Central Europe, which is the black line. You have Finland, Sweden, and Spain. While all of these curves are trending upward, you obviously can see from the chart that if we compare the electricity price here at the moment in megawatt hours, euro per megawatt hour, you can see that Central Europe compared to, let's say, the Finnish, Swedish average, it's about -53% cheaper here in the Nordics. Spain is about at the Swedish level.
Now, typically, Finnish and Swedish prices have been fairly close to each other. You can see that pickup in the Finnish price, the driver primarily is the result of two things. One is Finland has used to import about 1,300 MW from Russia. Due to the crisis, this importation has been discontinued. At the same time, we are awaiting the start of the Olkiluoto three nuclear power plant, which would bring, when it is in full use, full production, will bring 1,600 MW to the market. We have now that deficiency or gap in terms of supply-demand in place. However, it is our best understanding that by the end of the year, at least based on Olkiluoto's information, they should be up and running.
That would then bring some more balance to the Finnish market. That is sort of the overall picture here, and obviously, as we use a lot of energy, a lot of electricity in our melt shops and furnaces, so this number is, of course, very material. We're obviously not satisfied only looking just at the cost of the energy, but also very much about the consumption. For that reason, in our release, we have announced a decision we've taken to accelerate investments around energy efficiency. We will deploy approximately 10% of our CapEx for 2023 and 2024 at least into this area, with the objective of finding ways to reduce electricity usage, primarily now in Finland and Sweden, but also elsewhere where that's potentially possible.
I'll let Pia have a slide for you on that topic a bit later today to dive a bit even deeper into the subject. Anyway, a very important decision, 8% improvement in efficiency, that is a very ambitious target for the next two years. We think it's the right thing to do, and we're gonna go after it. A few words about markets. If we start from the lower left-hand side, you can see the transaction prices. Again, these are spot prices. They are coming from outside source.
On top of that, of course, we have our contract business, but I think this gives sort of a general indication of trends. Shouldn't be taken sort of as a point estimate, but more like a trend where things are gradually at the moment going towards. You can see on this chart, I think two key messages. If you look at the period leading up to, let's say, the second quarter of this year, you saw that there was a clear divergence in the prices in, let's say, United States and Europe vis-à-vis China. China being the green line, and then, of course, the U.S. and Europe being the black and blue. You remember the drivers, of course, that was. Europe demand was extremely strong.
We had, of course, super high freight rates from Asia, and also the demand in Asia was reasonably good. Now, coming into the second and third quarter, that gap became very wide, and that basically triggered our distributor customers to start importing products from Asia. That started to flow into the market end of first quarter, second quarter, and we also saw a significant amount of imports also coming into the third quarter. Also, countries like China, which had not been supplying stainless steel because of the tariffs for quite many years, they were also entering the market in Europe for the first time in quite a while. Now, spot prices are adjusting.
We're adjusting in the third quarter, and that gap, as you can see from the chart, particularly if you look at the light blue line and the green line, you can see that gap is clearly diminishing, making it less. Let's say there's less of a business case for a European distributor than to import from Asia. Looking then at the nickel chart on the upper right-hand corner, of course, nickel, it's been quite a wild year for nickel this year, particularly the second quarter. Looking at the last three months since the summer, and I have to say the chart doesn't really exactly show what I'm about to say, but if you just look at the average price here for the last three months, it's been surprisingly stable.
Therefore, we've seen sort of nickel trail between, let's say, $20,000-$22,000 per ton, even as the market has been, you know, weakening. Now, what sort of could be the drivers of that nickel price? At least sort of I have three hypotheses. One is, of course, energy costs have risen also in countries producing nickel, for example, Asia. That's sort of giving a bit of a lift in their cost structure. We have also seen quite a lot of interest from electric vehicle suppliers or electric vehicle producers for Class One nickel. Maybe that's also contributing to that.
Then there are certain large suppliers of nickel which reside in Russia, and maybe there's a bit of a question about how will the global crisis, the geopolitical crisis impact the availability of that nickel. Maybe they're contributing to where nickel is at the moment. Then on the lower right-hand side, you have ferrochrome price. I said we had quite a long multi-quarter period when ferrochrome was rising. We were above. We even got to a bit over $2 per pound. Now, since the summer, ferrochrome prices have been weakening. We've also seen the spot price in China be fairly weak, although in the last few weeks, there's been a bit of a pickup.
Obviously, very much waiting to see will China stimulate their own economy, and if that happens, of course, then one could assume that demand for ferrochrome also locally could pick up. Let's see what the Chinese government then ultimately decides to do. If we then look at our results, as said, quite an excellent quarter as far as we see it, EUR 304 million. You see the bridge on the right-hand side. If we first start with deliveries, let me just say that overall Q3 deliveries compared to the second quarter, -12%. Typically, we have third quarter being seasonality-wise, the weakest, specifically in Europe.
I would just say that if seasonality, let's say, could be like a -7% to -8% , maybe even 9%, then we have a bit more here than typical seasonality. We also took some maintenance in our plants during the third quarter. In the last year, in 2021, we were running pretty much flat out, so it was really necessary to maintain our lines. A bit more than seasonality. If we then compare the third quarter to, for example, the third quarter of 2020, when we were really at the bottom of COVID, so we're still better than in terms of volume than in that quarter. With respect to the bridge on the right-hand side, so you can see the timing losses, they were quite significant.
Pia will open that box or bar a little bit more for you. We saw lower prices in ferrochrome. I showed that in the previous chart. Iron costs went up and of course, nickel stayed fairly high. As said on the energy side, we saw that pressure from energy, electricity costs specifically, I would say in the Nordics following the midsummer in June when it became evident that Olkiluoto was not going to start as originally planned. Electricity prices in Finland and then of course Sweden started to move up as we got into the third quarter.
That really did not start until around midsummer, or let's say around July when then trending upward when the situation with Olkiluoto became a bit, let's say, clearer or less clear. If we move on and talk about sustainability. At Outokumpu safety is always the number one topic when we discuss sustainability. On the right-hand side, you can see the very, very positive curve in terms of our safety performance over the last years. However, I have to say that coming out of the summer, we've had a very challenging third quarter. We spent a lot of time talking and working on safety, but in spite of all of the efforts, the third quarter was not a good quarter for us on the safety front.
On the one hand, it is relating to the fact that we had a lot of maintenance, and in the last year we did have less maintenance, and maybe that sort of explains that when we have a lot of people on the sites, many activities, there is a risk that something happens. We've had a few nasty accidents happen for which we are of course very, very sorry and are doing our utmost to make sure they do not get repeated. As CEO of the company of course, it's my job to make sure everybody in the company stays safe. It's sort of an honor thing for me and my team. We have had last week in Outokumpu what we called a safety stand down.
Every single plant in Outokumpu, including also white-collar offices, have stood down. In other words, we've stopped activities, we've stopped production, we've gathered together as teams to discuss safety. You know, what are the issues we need to focus on? What are the priorities? How do we take care of each other? With these efforts of course, going into the fourth quarter and next year, I hope that we will be able to get back to the excellent curve we have been on over the last years. On recycling materials. On the lower right-hand side, you can see that we are still using and will use a lot of recycled scrap. We are the largest user of recycled materials in our industry, and that is one of our key strengths here in our business.
The third point I just wanna mention relates to CO2 emissions. In June, in our CMD, we told you that we have started, kicked off a feasibility study looking at a potential investment in Tornio to produce bio coke, and of course in ferrochrome we use a lot of coke, which creates CO2. The bio coke analysis is continuing. One thing I wanna just mention here, our engineers have concluded that there would be also, as a result of the process, an opportunity to produce biomethane, which would have a positive impact on our energy mix. The work continues, and I hope that we can report back before the summer of next year on an investment decision. Let's see, still a number of things to do. On strategy.
As said, we completed phase 1 in July, ahead of schedule, six months ahead of schedule, exceeding the targets. We are in phase 2. It's all about strengthening the core. It's very much about capital, continued capital discipline and strong shareholder returns, specifically giving that, you know, the last decade was not a time when we excelled in shareholder returns, but now that's really a very, very strong focus. I just want to say that our teams have worked through the summer. We have had a good start in the different business lines. You may recall that we have divided now BA Europe into stainless or standard grades, stainless Europe, and our advanced materials business lines.
They have their own teams, they are focusing on their own customers, and I can just say that the beginning has been good. Then my final slide, I want to just mention that Outokumpu's board of directors have made a decision today to launch a share buyback program of a maximum 20 million shares. This is our first share buyback program, as far as I know. It's really a first in our history. Our balance sheet with a net debt of EUR 90 million, our balance sheet is strong. It also allows us to reduce the dilution of the convertible bond, and I hope it also sends a good message to our investors about the confidence we as management have with respect to Outokumpu. With those words, let me hand it over to Pia.
I will then come back to talk about the outlook, and then we will be happy and pleased to answer your questions. Thank you very much.
Well, thank you, Heikki, and good morning, good afternoon, everyone. On that great proof point also of the focus in our second phase of the strategy, it's a pleasure for me to continue here. Clearly, on the back of the strength and balance sheet, we were able to get the approval here from our board to launch the first buyback program ever. This is up to 20 million shares. Let me talk through a few more points as well when it comes to our balance sheet. I mean, it's been a few turbulent years with COVID behind us, with a lot of turbulence in the market, a current energy crisis, a war in Europe.
through this period, we have continued in Outokumpu to work on our internal plan to strengthen the company, to strengthen the balance sheet, and we have truly repositioned our balance sheet. so much stronger now. Our net debt is down to EUR 90 million. We have a very strong liquidity. It actually increased to EUR 1.4 billion. we did a refinancing during the spring, as you may recall. we now have a committed credit facilities up to EUR 800 million that we are not having used at the moment. The share buyback program and maybe one thing I also wanna mention is something we work on a lot inside the company right now to complete the closing relating to the divestment of Long Products.
In July, we signed the contract for the divestment of most of the Long Products business with the exception of the Degerfors Long Products site, and now we are really working towards the closing. Let's see if every sort of procedure can be done by the end of the year or if it will be really early in next year. I think the progress that we are making there is according to plan. Let me then talk a few more words around energy. From the perspective of what we are doing, we are launching new extremely ambitious targets. To support that, we are also earmarking EUR 20 million of our CapEx, both for year 2023 and year 2024.
EUR 20 million more for energy than what we had intended before, but very much aligned with what we communicated in our CMD on the approximately EUR 200 million per year. You recall this, that we talked about a CapEx of EUR 600 million over a three-year period. This is very much in line with that. On one hand, of course, you could say, well, it's obvious, you know, it's from a financial perspective, of course, with these energy prices, it's easier to find the payback calculations being very attractive. Let me still say a few more words of background. Maybe first just starting with where we stand in the third quarter when it comes to energy price increases.
In the BA Europe business area, we did have an increase in costs of almost EUR 30 million because of higher energy prices in Q3 compared with Q2. That's of course a very significant increase. In ferrochrome, in the end, I think the final figure was an increase of EUR 13 million in the quarter. That's on the back of the very solid optimization program that we introduced. I really wanna thank our ferrochrome team, along with our energy sourcing team, for the ability to really start that in a period of an energy crisis and have even this hourly optimization working. However, it leads to lower production, and that of course then has kind of other consequences, as you have seen also in our production figures.
It's clear that we wanna look at other opportunities really for reducing the consumption and making our production more effective. I think I wanna share the next page here as well that is actually the 2021 figure here is from our sustainability report of last year, and this is describing our energy efficiency. You can see that this is the measurement that we will take. We will actually compare the year-to-date figure that we have this year and then reduce here by 8% by the end of 2024. That's gonna be an effort particularly in BA Europe, but also in BA Americas and as well in ferrochrome. Our ferrochrome production is energy intensive.
When you look at that energy that we use, so about 3.1 at this point in time, when you look at that, then one-third of that is actually the energy that we have used to produce the ferrochrome ourselves that then goes into the stainless production. I think, given our position in ferrochrome, we should not forget that there's also clear benefits for us. I mean, we are able to use some of the liquid ferrochrome going into the stainless process in Tornio. That's a benefit for us. Our ferrochrome production is a very low CO2 source into our stainless production, so there are clearly many benefits. When we look at the energy intensity, of course, this does increase our energy intensity. This is an area where we want to focus in the next two years.
I've put a few example here on what we are doing, but I think in the end, it is really about all of the heat, you know, all of the energy that we have in the process, that we in every step try to either reduce the consumption or be even better at the steering and how we are using it. Of course, improving yield always help. We already, as we speak, have laid out the plans, but there is of course now a high level of activity needed in the next year to carry this through. Maybe I have one final word on energy still in my presentation, and that is that in our communication throughout this period of energy crisis in Europe, we have also talked about our hedging, so how we are prepared.
I think that during this autumn, we've also really worked a lot with that inside the company. I think now if I look into the fourth quarter, obviously we have already said before we are pretty happy with the hedging levels we have, we have achieved. We are pretty well covered. I also can report that now when I look into 2023, we are at, I would say, fairly satisfactory hedging levels. As you may imagine, we have now been doing new hedges in an environment where forward prices have been more on a rising trend. However, I think all in all, it's a good balance and it's a good insurance for us going into next year.
With the current production forecast that we have for next year, we are just a little bit shy of 60% hedged in the main markets where we are using electricity. I think that has been a good achievement during the last few months here. Now I change a bit gears. Energy is very important, but there are a few other key messages as well. From all of the key figures that we are looking at here, I will return to a few important ones, both when it comes to the result as well as when it comes to the cash flow. I, you know, I still wanna point out here the operating cash flow in the quarter was strong. We had a EUR 238 million cash flow, and net debt did indeed decrease to EUR 90 million.
The EBITDA that we had on a group level as Heikki already shared to you, sort of the main features there. We did have a fairly significant negative impact from net of timing and hedging. I think I received so many questions of this, so I still wanna repeat that, you know, timing in our case is really, it is about the difference of pricing in and pricing out when it comes to the metal values in what we do. Nickel is a good example, usually having a big impact. With nickel we are able to do some hedging to mitigate that. There are also impacts from ferrochrome, there are impacts from iron, for example, or for example from moly. All of these kind of go into that bucket.
You know there is no way of kind of fully mitigating the impact, but of course a good working capital management along with some hedging can help to some extent here. We have some other metal impacts as well in our result, but maybe I'll come back to those later on. Let me move on to the European result. I mean, this is a good result despite a very challenging operating environment. With that, I mean the energy crisis, but I also mean the market environment where we are clearly moving into more of a destocking sentiment among distributors. I think that we have been talking about already for many months.
I think our decision during the summer to have a more focused approach within BA Europe on the two main customer segments, so looking separately at the commodity side and then on the other hand having really a focused team working on the more value added on the advanced materials side, has proven to be a very good decision also in this kind of a changing market environment. We still have the different market sentiment and also the different needs in the different segments here. I think it's probably one where it's fair to say that the commodity market has been impacted by the high import shares, by clear destocking around distributors, but also by this uncertainty that this operating environment in Europe has caused.
I still have to say, I think that we have done fairly well in this very uncertain environment, and we have been able to continue operating according to our plans. Realized prices indeed were somewhat lower during the quarter, and I think this reflects the big share of commodity that we have here. The mix was a little bit better, and the demand on the advanced materials side has continued to be on a very healthy basis, even strong in some sub-segments, whether that's oil and gas or maybe in some heavy industry, for example. Distributor inventories still remain on a fairly high level. I think it's fair to say that we are moving also into the fourth quarter in this sort of area of bigger uncertainty broadly in the market. Let me move quickly here to BA Americas.
This was a historic, really good result. I mean, actually, I think for the first time within Outokumpu, BA Americas was the business area to have the highest result. I'm sure that you have observed here that we still have had, you know, prices that have kept on a good level throughout the third quarter. What is now also clearly happening in Americas, in U.S. in particular, is that we see distributor inventories on a high level, and we see the destocking really happening among the distributor customers that of course are a really important part of our customers in this market. Destocking is heavy, and on top of the destocking, obviously there's inflation, there's higher interest rates.
This market is going through a lot of sort of hardship or tough times as we speak, and I'm sure that that's gonna be visible also going forward. I would also remind that the fourth quarter is typically seasonally a weakest quarter in the Americas business. I think if you look back many years, that's always been the case. 2021 was maybe a bit of an exception where also the fourth quarter was really strong. Finally, coming here to the ferrochrome, I think indeed we have talked about the energy optimization that helped to keep the costs on a better level, but at the same time it did reduce our production. We have seen here a market where obviously we have struggled with higher electricity prices.
If I look sort of broadly through this market, I mean, there has been some hardship and struggle also among other producers, and at the same time, the very harsh COVID policies and various sort of other maybe problems have been also visible, not only in the fact that the sort of spot prices were initially lower during the quarter, but also production has been reduced. Finally, I think we have now seen a bit of an uptick in the spot prices, and I think the market is here certainly still sort of looking for that balance. Maybe you have noted also that we have the Kemi Mine expansion finalization now timed to be early in the first quarter of next year. Well, cash flow.
As I said before, I'm certainly happy with the strong cash flow, taking our net debt to a really low level. What we have seen a bit apart from what we expected was a somewhat of a build-up in working capital in this quarter. When I look into the different components, I think accounts receivable have kept on a high level, still supported by what you have also seen being realized in terms of the stronger revenues in the third quarter. Accounts payable have already sort of clearly declined.
Accounts payable are of course impacted on one hand by the fact that we are now going into a sort of more weak market environment, and looking into the third quarter, we have also had maintenance, so overall our raw material purchases have been somewhat lower, and I think that's definitely also impacting then the AP balance that has been clearly lower. I think inventories were generally reducing according to what we expected. I think our inventories were like EUR 2.3 billion-EUR 2.4 billion in the second quarter. Now we were down to about EUR 1.8 billion, so clearly reducing there according to what we were foreseeing. CapEx this year is still gonna be EUR 180 million.
For my final slide for today, lowest net debt in the industry, clearly making our company more resilient. It's a turbulent time in the economy, but I think from inside Outokumpu we are well prepared. I think when you look at the gearing, when you look at the components here, when you look at the net debt, clearly this is a stellar performance, so maybe I actually need to think about changing this slide to something else in the future. I'll give that some thought and come back in the next report. Back to you, Heikki.
Thank you. That's a really nice slide to finish your financial section. If I just... Let's see. Get the slide moving. Before I just state the outlook for the fourth quarter, let me just make some general remarks still about the business from our standpoint. Obviously, we're in a situation here now in the global economy where we have supply bottlenecks, we have the war in Europe, in Ukraine, that is creating inflationary pressures. In the U.S. we have a strong economy still. There's also a lot of inflation. We see central banks raising interest rates starting from the U.S. pretty aggressively. Now, it's gonna be interesting to see will we have a hard or soft landing as we head into 2023 or 2024. That just shows that we are living in a time of a lot of market uncertainty.
What will China do here? Will they stimulate the economy? If, when, and how much that impacts Asian demand, it impacts the global supply-demand balance for stainless steel. Against that uncertainty, I still wanna underscore the fact that the demand for stainless long-term is growing. I mean, this is a growth market, and it just happens to have the seasonal and the cyclical seasonality built into it. With those words, let me just summarize our outlook for the fourth quarter. Our group stainless steel deliveries in the fourth quarter are expected to decrease by about 0% to -10% compared to the third quarter. The European ferrochrome benchmark price decreased to $1.49 per pound for the fourth quarter.
Ferrochrome production continues at roughly 50%-60% of its full capacity due to the furnace shutdown and the optimization of the ferrochrome production, which is caused by the exceptionally high electricity costs. With current raw material prices, raw material related inventory and metal derivative losses, they are expected to be realized in the fourth quarter, leading to a guidance for Q4, which is that our adjusted EBITDA is expected to be lower in Q4 compared to Q3. That's the outlook, and we are now happy to take your questions.
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The next question comes from Anssi Raussi from SEB. Please go ahead.
Yes thank you and good afternoon everyone. I have a few questions, and I go one by one as usual. The first one is about Europe. Like, in which months your orders were booked, like which you delivered during Q3 thinking about the mix in terms of timing of orders received? Of course, how should we think about Q4 as your profits were at such a strong level in Q3?
Yeah hi Anssi t hanks for the question I think what we have seen now is sort of more a normalizing of the order stock that we have. Now I would say we are more in the typical sort of three to four months scheme. For example, right now in Europe, we are booking early into next year. With that in mind, kind of counting backwards, I think this sort of approximate three to four months is correct for the commodity. Then of course, for the advanced materials, it is indeed slightly longer than that.
Okay, great. The next one is about Business Area Americas. What was the main reason for such an improvement from Q2 if you think about your EBITDA excluding timing and hedging items? Of course, volumes will come down in Q4, but any other elements to take into account when thinking about the next quarter?
I would just say that, if I start here that we have had a very strong order book coming to that period, and we were able to produce that order book and basically sort of flush it out. As I said earlier, in the American market, customers react very quickly. They have typically a very, very short visibility with respect to their own demand. So when they make a decision to destock, it's almost like they cut it, you know, like you're going over a cliff. That's why I think the change can seem a bit abrupt.
Mm.
That's kind of just how the US market goes when it goes down, but also when it goes up.
I think what I would add there is, I mean, obviously I understand there's a lot of focus on timing and hedging because those have been really big amounts. On top of that, I mean, you have seen also that we have noted, you know, some positive benefits more broadly from the metal spectrum also, you know, into the quarter. I think that's on the back of, you know, the raw material related situation. That's what you see in the market, what you observe in the market and as Heikki just told, you know, when you have these really quick sort of changes in the market, it also, you know, there is also a strong impact on the raw material market.
If demand is low, there can be a situation where actually it is more favorable from a producer's perspective. I think, you know, we have been going through such a period. I don't know if that can really sustain. You know, that sort of a benefit only occurs in that kind of a momentum, you know, when demand is low and you really don't know where it's going. I think right now, I mean, typically what we would expect a seasonality, you know, kind of going later into the year is then that Q1 is seasonally stronger. I mean, that would be the normal pattern. That's why I wouldn't sort of bet on that sort of a situation just continuing into Q4.
Mm.
That's maybe one addition.
Okay. If we talk about the cheaper scrap prices in Q3, like, have you seen any changes in terms of pricing mechanisms between alloy surcharges and so-called all-in pricing?
I think this change very much also follows, you know, the sort of magnitude of imports there are into Europe. That's maybe also always sort of a good indicator or hint to follow.
Indeed, because the Asians have a tendency to, you know, use the fixed price model. When you have a lot of imports, the share of that type of business does increase in the market.
Okay that's clear t he last one from me is about Long Products. Are there any uncertainties related to this divestment, like competition authorities or any possibility that the buyer could actually withdraw from the deal at this point?
Anssi I have to say there's a lot of work relating to closing a deal like this. I think we have actually reached every milestone so far that we wanted to reach. From that perspective, I really couldn't report about any uncertainty. Certainly still some work remains. When it comes to this EU clearance, we are still in that pre-filing phase. Obviously, you know, not foreseeing anything in particular or any particular difficulty, but that's kind of still the phase we are in.
Okay. Thank you. That's all from me.
Thank you Anssi.
The next question comes from Rochus Brauneiser from Kepler Cheuvreux. Please go ahead.
Yes. Actually, it's Rochus Brauneiser from Kepler Cheuvreux. A few questions from my side. The one is on the inventory losses you recorded. I think it was a much bigger number in Europe, EUR 88 million versus the EUR 32 million in the U.S. Can you give us a bit of a guidance why that has differed so much between the two? Was that more pricing related or the level of stocks you have? Based on the dynamics you were flagging to for the Americas, shall we expect more inventory losses from that region in Q4.
Thank you. It's a good question.
That's the first question.
Yes thank you it's a good question to specify this further and I think I really wanna clarify that, you know, when I use sort of more our internal language, I talk about timing and hedging, and I think our official term is this, you know, raw material related, you know, inventory gains and losses there along with the hedging obviously. But what we really mean by that is not just sort of technically, you know, if we need to take provisions in our accounting. That is a small part of it, and I think there was, like, EUR 17 million in the quarter.
A bigger part of that is just really to say, you know, we have some stuff in our inventory, we bought it at a certain metal value, we are selling it at another metal value, and there's a, you know, there's a change in between. I think we are still sort of with where we see, you know, prices of nickel and ferrochrome and, for example, iron right now, we would still expect there to be some losses also in the fourth quarter. I think we wanted to you know, try to be a bit more specific about our view. We talked about them being significant in the third quarter and we only wanna talk about losses in the fourth quarter. Obviously, you know, smaller in nature.
I cannot see that I would kind of see them suddenly sort of moving more, you know, away from Europe and into Americas. I think it's more having to do with, you know, what we actually have at hand in inventory, where I think we are sort of normal in both BAs, and then also kind of what our order stock is. One thing to mention then maybe is that U.S. is seasonally weaker in the fourth quarter, so would expect there for that reason, obviously, the volume to be a bit lower.
Right. The second question refers to your Americas performance. I guess, as you said before, that was quite terrific and your underlying margin doubled quarter-on-quarter, which is quite exceptional. Maybe can you help a little bit on your bridge? I think you were flagging some other gains in that bridge, so the last column in the bridge, which could be something like EUR 40 million. Can you talk about the nature of that effect? Maybe I got you wrong on your comments on price and mix. I know what the market has been doing. I know you had booked inventory losses. Why could the price mix be so exceptional on a quarter-to-quarter basis? Maybe I missed that point in your remarks.
I think hey to be fair, I think that's half to do with sort of how we group-
Mm
Certain items here. You know, some of those sort of metal-related benefits go into that sort of pricing impact bucket there in our reporting. You shouldn't read it just as sort of change in base prices.
Mm.
I think that's the reason for the potential confusion here. As to that other, I think our IR actually did an update of that graph a few hours ago, I think that's the reason why you have been sort of early adopter looking at the slide, and we have made a short update there. It positions a part of this change more into the cost bucket. But the nature of that was that there were some sort of more once again, you know, in the big picture relating to how we value inventory, some items that were, you know, very positive in the second quarter. Sorry, the other way around. Very negative in the second quarter, and then they were positive in the third.
You know, the bridge happened to be then 40 +, but it was on the back of having these kind of opposite numbers almost in the quarters. There is an updated version on that, and I hope that makes it a bit easier to understand if you look at that updated bridge. Sorry about that. Apologies.
No, no worries on the margins, sorry that I'm asking again. I see. I understand that this is not obviously purely related to the base prices. Shall I expect that some of the effects or cost pressure you see on the energy prices is also going as a positive into your price mix figure? Because there is some kind of pass-through in one way or the other. Is that also a factor contributing here?
Basically we don't, you know, comment on the details and guidance on our pricing. Obviously there are different elements and energy may or may not be a part of that, depending on the business. But we will not open that in detail.
All right. Got it. Maybe on your Long Products division, I think in the P&L you were recording a loss. When I look at your cash flow statement, it appears there might have been an impairment in this business. Can you comment on that?
Yeah. The reason for that is that we have now classified the Long Products business as available for sale. Then based on accounting rules, you know, when it's not more sort of a normal part of the kind of continuing operations, but it's rather something that is held for sale, then we had to go through this whole exercise, you know, line by line of trying to estimate, you know, the final impacts of the deal. That led to an estimated impairment of about EUR 30 million, and I think that's what you see there. The operating result was strong for Long Products in the third quarter.
Mm
As well.
Okay. No that clarifies. Okay. Many thanks.
Thank you.
The next question comes from Krishan Agarwal from Citi. Please go ahead.
Hi Pia and Heikki thanks a lot for the presentation. My question on Americas has broadly been answered, so I'll probably ask a question on net debt, which has gone significantly lower. Then you've come up with the new share buyback as well. Would you be able to give us an update, as in is there any kind of a threshold you have for the net debt or net debt to EBITDA, updated in the current context of a stronger balance sheet? How long can you continue this, you know, shareholder returns in the next six to 12 months?
Yeah
point of view?
Yeah. It's an important question, and I think as far as our financial targets go, what we published during last summer was a really important statement with the combination of a continued strong balance sheet. Leverage clearly, you know, we wanna keep it below one, under all sort of normal market circumstances. Then we also wanna, you know, be steady and, you know, have a steady and growing dividend. The focus on the shareholder returns needs to equally be there. That's what we have commented in the summer and clearly that is still valid. Those are our financial targets. We stick to both.
Yeah. I get that. Does it mean that, till the time you reach 1x net debt to EBITDA, you probably can let the balance sheet gear up a little bit, to maintain these buybacks?
Yeah. I think this gives us, you know, some flexibility, but I just wanna assure you it's our clear intention to really keep a very strong balance sheet. You know, in a period of uncertainty like we have right now, I think it's really good also to have some buffers. We clearly have high liquidity, a lot of, you know, unused committed credit lines, and still expectations of course also towards the end of the year to be able to continue to deliver a good cash flow also.
As I said, I mean, we don't know whether we're gonna have a soft landing and then a sort of a COVID type of a rebound, or whether this is going to be a hard landing, which takes longer time. I said we wanna be prudent here and make sure that we will remain competitive, but also balance sheet-wise strong throughout the period of weakness in the markets, however long it takes.
Understand. Quickly, final question on ferrochrome. I remember last time we had a discussion that the electricity cost in ferrochrome net of the production adjustment is not going up that significantly. How should we think about the electricity cost in ferrochrome in Q4, given that you're saying ferrochrome is operating only at, like, half the capacity-
Yeah
Currently?
I mean, the reason for operating at half the capacity is really that balance of, you know, what we know what we can sell at and then on, you know, on the balance of that, the much higher electricity costs. With this optimization, we are able to keep the electricity cost under control. We had an increase indeed, Q3 compared with Q2. It was EUR 13 million, so it was much smaller than what we feared sort of at the peak of the sort of electricity spike there. With the optimization, really the target is then that we don't have this escalating electricity cost, but it comes at the expense of lower production.
Okay. Understood that. Okay. Thanks a lot.
Thank you.
The next question comes from Patrick Mann from Bank of America. Please go ahead.
Good day Heikki and Pia. Thank you very much for the opportunity. I really like the chart of the electricity prices in Finland and Sweden relative to the rest of Europe, and it's kind of giving me two follow-up questions. One is how do you think about Outokumpu's relative cost position now in Europe, given these changes in energy prices in the different markets? And then the second question is you know, it seems like the high energy prices are spurring you to invest in energy efficiencies and trying to manage that. At what power price would it just become you know, impossible to produce ferrochrome in Finland? At what point would you say, "Okay, there's only so much we can optimize, and at this point we don't have the power to do this"? Thanks.
Of course, if I just start Patrick I guess obviously we're not privy to the detailed figures of our competitors' cost structures. Just looking at the shape of the curve, you saw the -53% on that chart. You know, and energy being a big component. There has to be some level of gain or advantage we have at least momentarily based on that curve. Again, I mean, this is sort of outside-in analysis that we can only perform. We do assume there is something there. In terms of ferrochrome, I don't think we can really give you a number per se regarding what is sort of the cut-off price.
I have to say, though, that I've been really pleased with the success of the energy optimization we've been able to do on an hourly basis, seven days a week, 24 hours a day. That basically has allowed us to really you know, run the facilities in a way where we actually have to take, you know, bring down the production very rapidly and then ramp it up. That actually allows us to bring the average price down. I don't know if there's really.
Mm
One set of a number per se, because if the price goes high and we're able to benefit from that, you know, you still kind of can bring down the average.
Mm.
Anything you wanna add?
Heikki, I would add that the optimization capability is really important going forward, because what we will observe is much more volatility in the spot pricing in the electricity market also in Finland going forward. The higher and higher share of wind power and renewables lead to a situation where, you know, on a windy day, we really see extremely low electricity prices. Then again, that situation can change rather quickly. It seems that this capability to optimize in this type of a production like ferrochrome is, where electricity is really a very big share of the costs, is just really vital. That is why now with keeping this at, you know, between 50%-60% of the production, we are able to both.
sort of use any sort of hedging position that we may have to our benefit, and then also to use all of the opportunities with kind of a normal or low electricity price, and then cut the production at those peaks. I think it's more about that than saying that, you know, I don't expect a stable electricity price going forward. This volatility will continue based on the type, how the production sort of structure or how the supply structure has changed.
I mean, as we head into the winter, Finland's energy or electricity demand is about 15,000 MW, and about 4,500 MW of that will come from wind. We will have about 1,000 MW of new wind capacity coming per year. So obviously within a couple of years' time, with Olkiluoto, you know, we will be more than well, you know, satisfied as far as electricity supply. I think, you know, with wind being, you know, one day you have a lot of wind and then you have nothing, the part of the success is to be a really good weather forecaster.
Mm.
The better we are at forecasting, you know, what hour of the week, of a day.
Mm
you know, whether there's no wind.
Mm
You know, then we can optimize. I guess we're really reading those weather charts.
Yeah
now, you know, every day.
Sounds like you need a big battery. Thank you.
The next question comes from Moses Ola from J.P. Morgan. Please go ahead.
Hi Heikki. Hi Pia. I just wanted to ask a question on the sequential price mix effect. Specifically, what would you say is the contribution from pricing the mix itself and then the positive metal impact? Is there a way you could break that detail down segmentally, so different between Europe and Americas? I'll pause there for my next question.
Moses thank you I do think that these positive metal impacts have been a very significant part of the positive change that you see there. Because if we look into sort of the pricing structures, I mean, they have held fairly well in Americas through the third quarter. If we look into Europe, we have already seen this pressure down on the commodity side. More there sort of positive from the metals. Then I would also say that the mix has had a positive impact in Europe, but it has not been that big.
What are your expectations then for that metals impact, positive metals impact into Q4? Is that something that's sustainable?
I think just sort of more kind of thinking about the market sentiment, I think those are more like things that occur in certain market sentiments, and it wouldn't be typical to see that continuing the way you know the world is right now. This is not something. I mean, it's still early November. It's maybe a bit early to say for the full quarter.
Okay, thanks. I also wanted to ask, just following on with Patrick's question on the energy savings. Could you quantify perhaps the cost savings after the efficiency program is done? I'm just doing, you know, quick back-of-the-envelope calculations on, you know, 2,300-
I mean, it's such a.
kilowatt hours of expenses.
Yeah.
Sorry?
Excuse me.
Yeah
Sorry Moses it is such a good question, but it really depends on what assumption you make, you know, vis-à-vis the electricity price or the gas price. I mean, that amount could, you know, really vary. It's clear that, you know, we are looking at benefits of, you know, euro several tens of millions, regardless if we would take a fairly sort of modest assumption on further electricity and gas price increases. I think that's why we just sort of need to start from, you know, we are fairly transparent on, for example, how much electricity we use. We are fairly transparent on our energy efficiency, and we will report very transparently on how our energy efficiency is improving.
The exact cost impact will naturally depend on the price development.
Okay thanks for that. Just finally from me, some of your peers have guided to a working capital release in Q4. What are your expectations on working capital? Are you expecting a release? And if so, what are the building blocks? Do you expect to undergo some maintenance to limit production of finished good inventories as well into Q4?
Yeah. Just sort of looking at the patterns and where we are right now, I would expect a modest working capital release into the fourth quarter. I mean, it still depends on our final view on the first quarter. I think there's a bit of observation time left here right now. As said, we are selling sort of the early part of Q1 right now, and at the point where we sort of see the full pattern, then we will also decide on, you know, where we finally leave the inventory level at the end of the year. Typically, we would not anymore reduce inventory in a significant way from Q3 to Q4. Rather there could even be kind of a slight uptick on the inventory side.
I mean, given how the market development has been, how the volume development has been, I would look at sort of accounts receivable coming somewhat down, and maybe we get a bit of a rebound in accounts payable that were really very low at the end of the third quarter. So those are the elements, but at this point I wouldn't expect any sort of significant downtick here, but a bit of a release.
Thank you.
Please state your name and company. Please go ahead.
Hello, this is Ioannis Masvoulas from Morgan Stanley. Can you hear me?
Hello.
Yes yes.
Yes. Please Ioannis go ahead.
Hi Heikki, Pia. Thanks very much for the presentation. Just a few questions left from our side. The first on ferrochrome. Utilization rates remain low in Q4. Ferrochrome pricing is coming down, and you have some energy hedges in place. Do you still expect to be positive EBITDA in Q4 and I guess Q1, based on what we know today in terms of the inputs?
Yeah, I would say the sort of driving force for us also to put in place this program with the energy optimization has been to ensure that we can, you know, run in black figures. That has then led us to decisions at points to stop production. That is really sort of the philosophy that we have here. Based on that philosophy, I would say yes, but without sort of judging now every individual element. I mean, especially going into Q1, there's a lot of things we don't know.
We know the price for Q4, you know, we know how we are able to optimize energy, so I think we have a very fair or decent chance indeed, even in these very difficult market conditions to end up with sort of a, some sort of a reasonable, EBITDA figure.
Great thanks for that second question on Americas, you talked about clear signs of weakening in Q3, which I guess that extends into the rest of the year and into next year. Is it more driven by distributors, or are you seeing some of the key end customers coming under some pressure? Is there any specific industry that you would highlight here?
Well, as you know, the bulk of our sales in the United States goes to distributors. If you look at our customers' business, typically, if we can kinda compare, like, the average order size, I mean, it's like, you know, in the $1,000s when our orders could be, you know, in the $100,000s or even millions. It's a very fragmented business, very short visibility, you know, like hours or day or days. Therefore, you know, the product just gets spread over so many end users that I would say it's almost impossible to say, you know, this sector is weaker than that.
As I said, our customers are having fairly limited visibility at the moment in the U.S., and what they're telling us is that they intend to basically destock here before the end of the year, before the financial year is over. I think that is kind of the American way and that's kinda explaining how we also see the fourth quarter will probably go through.
Okay understood thank you last question, if we can go back to slide seven around the EBITDA bridge, Q3 versus Q2. I think you mentioned that part of the positive or a large part of the positive you've seen pricing and mix relates to metal effects, and my understanding is raw material pricing effects, which was a positive. Then there's a negative, again, on raw materials driven by timing in the other bucket, the net of timing and hedging. Is that right? Then what would be the net effect across raw materials across the two buckets for the quarter?
Well it still seems that the negative timing impacts are bigger. We don't, you know-
Sure in terms
Yeah.
In terms of the—what you're classifying under the two different buckets, if you could just maybe elaborate a bit on that, on what you include in one bucket and what you include in the other bucket in terms of raw material price changes, that'd be very useful.
Yeah. In terms of what we include in the net of timing and hedging, what we include there about change in the value of nickel, ferrochrome, iron, moly, I think those are the most important components there. Really, the sort of difference between the price in and the price out. That's sort of the margin change that we see there in that bucket, and we try to mitigate that by, you know, hedging a part of the nickel that we have, but we are not able to hedge the others.
In terms of the pricing and mix, I think that from the kind of big green bucket that you see here, you know, in other quarters, the sort of construction could be different because there could be other impacts from base price or from mix, you know, bigger impacts, et cetera. This time and in this quarter, I think it's really predominantly the positive metal impacts that are coming through there. That's more maybe driven by the sort of actual situation in the raw material market that is at hand, in the period.
Is that more scrap or?
For example, yes.
...
I see.
Okay. Thank you very much Pia.
Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you to all of our listeners and analysts for joining us on this call. A couple of summary remarks. First of all, I said EUR 304 million of EBITDA Q3, the best Q3 in our history. A big thanks to the whole Outokumpu team for delivering that great performance. Looking forward, phase number two, we have had a good start. Our teams are really working diligently to start executing on our targets. On the commercial side in particular, we're making good progress talking with our customers, trying to solve their problems, and delivering value to them. Energy, as we said, it's very important for us. The chart on energy costs, Finland, Sweden, Benelux, other markets, there seems to be an interesting story developing there. We are not just sitting here and waiting to see what happens to electricity prices.
We've announced an ambitious target to raise our efficiency by 8% by the end of 2024, and we're putting capital at play to deliver also that performance. I wanna say the balance sheet at EUR 90 million, this is the strongest balance sheet in the industry. It puts us in a good position, gives us a good resilience as we potentially move into a softer or a hard landing, whatever there is to be coming down the road. The share buyback today, the first in Outokumpu's history as a company, very happy to see that take place. One more very important thing, sustainability. In our Capital Markets Day in June, we launched a new product, Circle Green. This is a product with the lowest carbon footprint in the industry
I'm happy to tell you that we have spoken with a lot of our customers here in Europe and United States, not only end users, but also some distributors have shown real interest in this product. It's early days with Circle Green, but it's a good start. It gives me a lot of confidence that we're doing the right thing for our customers here, and I look forward to telling you more about that in the future quarters. Take care and look forward to seeing you then at the end of Q1. Thank you.