Good afternoon, ladies and gentlemen, and thank you all for standing by. Welcome to today's Outokumpu full year result 2018. At this time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced. I must advise also that this call is being recorded today, Thursday, the 7th of February 2019. Without any further delay, I would now like to hand over the call to your first speaker today, Tommi Järvenpää. Thank you. Please go ahead.
Thank you. Good afternoon, and welcome to Outokumpu's full year 2018 earnings webcast. My name is Tommi Järvenpää. I am the Head of Outokumpu's Investor Relations. With me here today are also our CEO, Roeland Baan, and our CFO, Chris de la Camp. We will be referring to the presentation that can be found on our website. As always, please pay attention to the disclaimer in the presentation as we will be making forward-looking statements. With these remarks, I am pleased to hand over to our CEO, Roeland. Please go ahead.
Hi, Tommi. Thanks. Welcome to the call. As always, we start with the vision to be the best value creator in stainless steel by 2020. Just to reiterate, we do have a target of EUR 750 million in 2020. We reiterate that this is the target that we are confident we will achieve, and of course, as we said during the CMD, given the market circumstances as we are seeing on our baselining of 2015. Major deviations up or down will have deviations on that number. But if you look at the underlying business, there is nothing that makes us at this moment reconsider those targets. Go to the results for the year in 2018. Clearly, 2018 was an extraordinary year with the 232 tariffs implemented by the U.S.
We have seen a major disruption of trade flows resulting in a very large deflection of volumes from the U.S. into Europe, and on top of that, clear jockeying for position of Asian exporters into the European market. The temporary safeguard measures that were announced in July of last year have only partially helped due to a number of design flaws that we have talked about before. The main design flaw being that there was a so-called shipping clause that allowed material that was notionally already destined for Europe to come in without adding to the quota.
On top of that, you have seen very clearly as well that in the first half of the year, when the commission had already announced the investigation into safeguards, everyone and his dog tried to get as much volume into Europe, leading to import volumes of up to 110,000, 115,000 tonnes per month and a 33% share of consumption by imports, something that we haven't seen before. With that, of course, came significant erosion of prices in Europe. Conversely, in the U.S., we have seen prices strengthen, however, not as much as we had hoped for, because ultimately there is still the arbitration going on between the higher pricing in the U.S. and the low pricing in the U.S. and China versus 25%. The ability to price up has always been curtailed by that arbitration.
All in all, in absolute sense, we ended the year with EUR 485 million of EBITDA. If you look at the bridge to 2017, the main blocks there that influenced the difference was deliveries slightly lower. Overall pricing and mix slightly better, mainly because of the mix and higher prices in the U.S. We have been very successful in Europe to move a mix of high added-value products up by probably a solid 40% from about 8% of our portfolio volume to about 12%- 13% of our portfolio volume at significantly better prices and margins. Further hedging was slightly negative, basically zero. The big issue that we have always been talking about were the input costs. Costs of electrodes, cost of ferrosilicon, and specifically in the U.S., the cost of freight has been a very big negative impact on the results.
On ferrochrome, we had lower prices compared to 2017, partially compensated by higher volumes, but still a small negative. Altogether, that accounts to the EUR 485 million. So if you then have a look at how the different parts were influenced in the business. In Europe, where the biggest impact came from the pricing, we have seen a significant drop compared to 2017, to EUR 250 million. Still, given the fact that we reached base prices of as low as EUR 750, the mitigation effort that we have had in Europe has been extraordinary and shows how robust the business there is. In the Americas, and I come back into detail to it later on. The Americas, we have made a break even. Slightly disappointing. We had hoped to have a better year in 2017. But again, a number of elements that have pushed the performance down.
Mainly, again, input costs that have gone up and I'll get there in detail in another slide later on. Long Products had an excellent year, almost a EUR 10 million improvement over last year. Good volumes and good margins on both sides of the ocean. Then ferrochrome, as said, slightly lower prices, but extremely good operational performance leading to record productions. Already talked about the prices here, you see them a little bit better spelt out. In Europe, we have lost about EUR 200, EUR 220 per ton on the base price, on our volume of about 1.6 million tonnes, so you can do the math. You can see as well how much we have been able to mitigate. The U.S. price change, about $90 up.
By far, not enough to compensate what happened to Europe, of course, with the lower volume as well, comparatively, not a total hedge for the European business. Nickel prices have been trending up over the year reaching a peak about mid-year and then trailing off very significantly. So a bit of volatility as far as the metal effects are concerned, but throughout the year, pretty neutral. Ferrochrome price is EUR 0.11 lower on average. As you know, every EUR 0.10 is about EUR 10 million a quarter, so it is about EUR 40 million a year effect. Going back to the input pressures. Already said that the temporary measures were not effective. You can see this very clearly, where in 2017, on average, we had import penetration of about 27%, 26%.
That has gone up to peak in the second quarter of 2018 of 31%, and is still pretty high at about 30%. You see here, 28% for Q4, which is only up to November. We do not have the December numbers yet. We do have the feeling, though, that if you look into December and the month afterwards, January, that imports are trailing off into year. Into the U.S., you see the opposite, where we have gone from 22%, 23% import penetration, even 25% in 2015. But take 2017, 22%, 23%, we have come down to about 19% for the rest of the year. So there we have seen a significant tick down of imports. What we do see, however, is currently that the imports are on the rise again. This, of course, had significant effect on the pricing. Already discussed that. You see here the pricing in Europe, Germany.
Enormous drop down, and when you thought that you were basically at the bottom in Q3, we had another push down in Q4 which has persisted into the first quarter as well. In the U.S., we have seen prices tick up, as you saw before. Currently we have seen a little bit of a tick down, but stabilizing at the current levels in U.S. as well. Transactions, and I think this is important to see as well. Transaction prices have come down significantly due to the drop in the second half of the year of, first of all, nickel. Then towards the end of the year as well, a stark drop in ferrochrome.
As a result, for instance, in the U.S., the alloy surcharge has been trending down for seven consecutive months, which had a big impact on the volumes that we sold as the distribution sector was restocking their high price inventory. I have been complaining sufficiently about the temporary safeguards. Thank God the commission has been very open to listen to our criticism or our proposals for improvement, let us put it that way. We have now, as from February, the permanent safeguards in place. There are a number of very good things there. One is that the period on which the import quota are being based is 2015 to 2017. Which if you look at it, were relatively 2015 and 2016, relatively benign import years. 2017 was getting already pretty high, but that average would take down the quota significantly.
The other thing which is good to mention is that the quotas are for the large exporters, representing 75%- 80% of the imports, are country specific. The issue that we had where countries are jockeying for position and just trying to beat the quota barrier, that has now been replaced by a more manageable country specific target. Then last, but probably the most important, is that it is now calendarized. It is being measured on a quarterly basis. Whereas in the temporary measures, it was a free-for-all for the whole quota for the whole period. Now the clock resets every quarter. Any residual will carry over to the next quarter, but still, it is a far more manageable position, and you will not have the whiplash that would come with the old system.
We expect, as you can see here from the left graph, that the imports that we are running at, let us say about 400,000 tonnes historically, should come down to about 330,000, which is at 20% down from the imports that we saw in 2018. So a very high level of imports will come down, and we said this before, if you do the math on this, you will probably get to an import penetration share of 23%, 24%, even if you include the 5% reset that has happened in February, when the new quota were announced.
Two more points. One is that there is potentially an increase of 5% again in June. However, after we have intervened with the commission, that is not necessarily automatic. We have argued that why would you have relaxation of quotas in line with market development if you do not know what the market development is?
It will be reviewed in the revision period in June. The same goes for Indonesia. Indonesia has been left out of the quota. The commission has put into a investigation period, the first half of 2018, which is the only thing they could do on the WTO, as the second half was not yet done. In the first half, Indonesia still was able to get under the radar screen and under the 3%. In June, they have already committed to looking at the full period of 2018 for Indonesia, and then review the developing country status. We know for a fact that for full 2018, both on hot rolled and on cold rolled, Indonesia is comfortably above the 3%, so we expect them to be included in the quota as from July this year. Chris, over to you.
Okay. Thank you, Roeland. Good morning. Good afternoon, ladies and gentlemen. Move to slide number 11, take a quick look at the group key financials. I think the first thing that stands out here on the first line is that our deliveries in the fourth quarter were very low. They were not only lower than in the previous three quarters, but also lower than the fourth quarter of last year. This was driven partly by seasonality, of course, that we would see in the fourth quarter, particularly in the Americas, but also because we found distributors having very high inventory levels going into Q4. With falling prices for nickel and ferrochrome, and therefore lower overall pricing, there was quite a significant destocking effect, that caused distributors to hold back and not buy as much as we were expecting and hoping.
Overall, a very low volume result in the fourth quarter, and that actually then also led to us not being able to get beyond the deliveries in 2017. We fell just short of that, if you like, in the fourth quarter because of that very weak quarter. We go further down, the EBITDA is EUR 89 million, higher than in the fourth quarter last year, but obviously somewhat lower than the three quarters we had seen prior to that in 2018, where we were around the EUR 130 million mark. I will come back to the key drivers behind that decline. Net income still positive in the fourth quarter, and positive for the year as a whole. But here in the fourth quarter, a further deferred tax asset booking of about EUR 20 million helped the results somewhat.
That was much lower than the previous years, but nonetheless, we were able to take an additional benefit there in the U.K. and in Italy. We then move down. We saw the CapEx, and this is accounting rather than cash CapEx. Cash CapEx was lower, came into EUR 104 million. So that is quite a high amount when seen against the accounting CapEx for the year as a whole. This is because a lot of the projects were completed at the end of the year, and hence quite a lot of backloading of that expenditure in 2018. ROCE is still a little short of where we wanted to be. We were obviously targeting at 12%. We were at 7%, so we have some way to go there. And overall, staff cost, headcount costs broadly flat.
The increase in 2018 caused by the acquisition of the Fagersta in Sweden that became part of Long Products in Q2. Moving on to slide number 12. You can see here on the left the development of our EBITDA in 2018. I think certainly during the first three quarters, we achieved much more stability in our results. But the fourth quarter was, in some ways, very difficult and somewhat unusual as well, due to some of the factors that we will go through. The broad bridge items to get from the Q3 results to the Q4 result were, first and foremost, I think deliveries, where we saw, as I said before, significant destocking by distributors, and therefore significantly lower volumes. And in Q3, in both main business areas, both Americas and Europe struggled severely here, and even Long Products also took a hit on deliveries here.
Across the board, lower sales. As we said before, lower prices did happen the fourth quarter, but we managed to negotiate better raw material prices and costs. We also worked very hard on our product mix, particularly in Europe, and that substantially offset the further decline that we saw during the fourth quarter in pricing. There was a negative timing and hedging impact. Clearly, as you know, we saw nickel and ferrochrome prices fall into the fourth quarter, and that then led to this negative timing and hedging impact that we are seeing here. In the fourth quarter, again, we did a significant amount of maintenance work in Tornio at the end of the quarter. About EUR 20 million impact there. That is the big block predominantly that you see on the cost side here.
Ferrochrome, much stronger in the fourth quarter, substantially, of course, helped by the payment of an insurance claim, but also because of higher deliveries that we achieved. Those are the key items, how we move from the Q3 result to the Q4 result. Let's take a look at each business area that we have in turn. Starting with Europe. I think the chart on the left gives a very good pictorial sort of indication of what happened during the course of the year with the high level of imports coming to Europe that Roeland has already outlined. The results very much track that as we saw high levels of import coming in the second and third quarter, and having a very, very strong impact on pricing. Here, very clearly reflected in the quarterly results.
The bridge item from Q3, again, Europe heavily impacted by lower deliveries. That was one of the big pieces. We did manage to get an improvement overall in pricing and mix for the quarter in Europe. In Europe, we also saw a little bit of, compared to the previous period, a negative on their timing and hedging. The Tornio maintenance costs, I have already referred to. However, we also saw higher electrode costs and other higher input costs in Europe in the fourth quarter and the third quarter as electrode for silicon refractories fuels were all more expensive. In the other, what we had here was a benefit from a German pension plan adjustment. We spent significant amount of time during the course of the year working up on our pension obligations in Germany and rearranging some of the plans there.
That resulted in the fourth quarter in a small benefit that we're able to book to improve our result there. Overall, therefore, EUR 33 million for the quarter. If we look at the Americas, the result was not so good. As you can see here, deliveries made a very large negative impact. We do have the seasonality in the U.S. anyway, with two extended public holidays, with distributor destocking being a common feature, but this year it seemed to be unusually strong, so this had a significant impact through the fourth quarter. We also saw pricing mix and margin effects come down, bring the result down, and the timing and hedging results had a big impact versus the third quarter.
Although overall it was zero, actually, in the third quarter, we benefited from about a EUR 10 million positive timing and hedging impact, which didn't recur in the fourth quarter. Costs were slightly up. That led overall then to a result of minus EUR 22 million. If we look at the Long Products business on slide number 15, very good trend and development up to the end of the third quarter, with a significant decline then in the fourth quarter. Again, some destocking led to low deliveries. We were impacted more so in the fourth quarter than the third quarter by the effects of Section 232 in the U.S., particularly on the imports of slabs and billets, particularly that were moving from the U.K. into the U.S., which we had to absorb some of the tariffs.
There were relative to the previous quarter, some small and negative timing and hedging impacts, and costs also went up. The biggest item here is the other block, and this is related to medical plan charges in the U.S. where we had a benefit in the third quarter that did not recur in the fourth quarter. But also in the fourth quarter, we saw a change in pension legislation in the U.K. that forced us to take a EUR 3 million charge there. The combined effect, bridge effect, is represented here in this block and led to that significant decline, which is the biggest contributor in the decline of the Long Products business in Q4. Then we come on slide 16 to the ferrochrome production results. Ferrochrome had a very, very good production result. It was a record for the quarter. That is shown here.
As you can see, deliveries also went up, and that is mitigated together with a small cost improvement, the decline that we saw on ferrochrome pricing. Overall, despite lower prices, we actually managed to mitigate that through better deliveries and better cost management. The big story, of course, in the fourth quarter in ferrochrome was the reimbursement of an insurance claim. This referred back to the SAF 3 outage, which we reported on extensively in 2017. That caused us a lot of losses in 2017, and we successfully managed to get an insurance claim for that during the fourth quarter. So that was EUR 32 million that had a positive impact. But even if you take out that EUR 32 million insurance claim, we would still have ended up the fourth quarter with a record result for the year.
Overall then, a very stable underlying result for that business during 2018. Not just a stable, but also very good and strong result. Then move on to the next slide and to cash flow, which I think overall was a disappointment. You can see here the bridge of how we get from our EBITDA result, and this is reported rather than adjusted EBITDA, EUR 496 million, to a cash flow before financing activity. This is before we paid our dividends and bought back shares of - 14. I will start from the right here and talk briefly about the investing activities. This is our CapEx, but we also bought the remaining part of the Fagersta business in Sweden that we did not already own. So that was a EUR 14 million cash out.
If you deduct that, we actually ended up with cash CapEx out of EUR 215 million, which is well within the guidance that we had provided of EUR 220 million for the year. So no big surprises there. We will then look at the EUR 170 million. This was made up predominantly, of course, of interest costs, other financing costs associated with refinancing activities that we did during the course of the year, derivative and hedging costs. There were some smaller tax payments that we had to make, and we also had to make some payments to top up pension plans and had to pay out against accruals that were made against restructuring in the past. So that represents that EUR 170 million cash out, and then we had an increase in working capital of EUR 112 million.
Now, maybe just to go into that a little bit. If we look at it for the year as a whole, I think this is the area where we are most disappointed about because we were really aiming for a reduction. I will explain what happened here. The biggest thing is that the accounts receivable and the accounts payable actually generated cash. We saw lower AR at the end of 2018 versus 2017 and higher APs. What really increased during the course of the year was the overall value of our inventory. Here we saw a small build in the overall volumes of inventory that we keep, but a very significant increase in the value of that inventory. During the course of the year, we saw an increase in electrodes, ferrosilicon, refractories, fuels. We also saw like for like, an increase in nickel and in ferrochrome pricing.
All of that is reflected in the higher inventory value that we had. The specific value, each ton of inventory actually went up during the course of the year, which led to this increase in inventory and hence an increase in working capital overall. This is an area that we will focus on very strongly next year, as clearly we cannot do so much. This year, sorry, in 2019, this year. As clearly we need to try to get our inventory value down, and this is the biggest goal that we will be targeting 2019. You can see on slide number 18 the development of our net debt and predominantly, the working capital increase here led to an increase in the overall net debt, which ended the year at EUR 1.21 billion. The gearing as a result of that increased to 45%.
In both areas, the first increase in three years and also a pick up in the leverage on the right here of 2.6x. There are things we will be doing around inventory management, working capital management more generally, but we also have some non-business assets, land from previous mills in Germany that we will be looking to monetize during the course of the year to push that level down significantly. With that, I am going to hand back to Roeland to give a bit more color about the Americas result.
Thanks, Chris. Coming back to the Americas. Disappointing year for the Americas, but if you put it into perspective, then we have had operationally still a strong year, and we have had some headwinds that mitigated negatively those good performances from an operational point of view. If you look at that bridge, first of all, deliveries were slightly up year-on-year. That is a story of two different tales. The first half of the year was very strong in volumes, driven by, on the one hand, optimism around the Trump measures, both the Article 232, which led to lesser imports, but as well, the whole euphoria around the tax reduction, which was thought to boost the economy, led to increases as well in commodity prices and in a restocking cycle, which we drove in the first half of the year. Pricing and mix.
Sorry, and of course, the convert happened in the second half of the year, where as I said, seven months of continuous falling of the alloy surcharge, volumes came down significantly to a very low level of 155,000 tonnes in Q4. If you look at pricing and mix, pricing improved. You saw that, the $90 that I mentioned in one of the earlier pages year-on-year. But on the mix as well, we have been able to put a significantly larger portion of cold rolled into our mix. Where we have been saying for a while now that we want to get rid of the low add value products, especially in black hot band and to a certain extent, some of the white hot b and and put more cold rolled into the market.
We have really succeeded to do that this year, and have virtually eradicated any sales of the low-end hot like that. There was a slight positive on the timing and hedging, but then the very big negative comes from the freight cost, about EUR 30 million, and then other inputs, another EUR 10 million plus, that we have not been able to fully offset. Then as a bridge effect, we had last year a release of EUR 6 million accrual, which does not repeat. That brings us just below breakeven. So operationally, actually a stronger year than 2017. Result-wise, you can't see that because of the increases in the input costs. So a few points there that I do want to keep on hammering. Our operational performance there is excellent. We have clearly the lowest cash conversion cost per tonne in the group coming now out of the Americas.
We are still working on the last stages of the restructuring in Mexinox, and the reliability of the plant is really good. So, where it has been probably most disappointing is that we have not been able to commercially, fully take advantage of the opportunities that were in the market. Secondly, we have made a judgment error in the second half of the year where we were expecting higher volumes than actually materialized. By the way, you can see that as well. Our volumes dropped, but our market share stayed the same. But it has led to a lot of inventory bought to cater for a market that wasn't there. That is part of the story of the higher inventories that we had, with high inventories in the U.S. versus lower inventories in Europe. So in Q4, we said we'd do a deep dive.
We have put up a task force, combined of a European group and the Americas management team and the rest of the team. The deep dive come up with a number of improvement areas that we are going to tackle specifically around the supply chain area, and I come back to a few of the specifics. Then we have decided to strongly strengthen our commercial capabilities. We have taken a leave from the commercial leader that we had in the Americas, Steve Letnich. We have, as per the 1st of January, Olli-Matti Saksi, the Global Head of Commercial and the architect of our European commercial success. He has moved to the U.S., and he is now taking charge of both the sales side as well as the supply chain side in the Americas.
His mandate is clear, is fix a number of the issues that we found in the supply chain and supply chain interface with sales, with the so-called S&OP process. Fix those, reorganize the sales side as well, beef up the capabilities, and start avoiding the leakages that we have seen in 2018. Then the last point, in December, we brought an investment proposal to our board to do a significant investment in ferritic capability for about a EUR 40 million price tag. That has been approved. We already have placed our first POs. We are in vendor selection. We have reserved production capacity for some of the long lead term items, and we are going full steam ahead with that investment in order to unlock the 37% of the market that currently we cannot reach because we do not have the ferritic capabilities.
So those are the specific actions that we have for the Americas, and I am happy to answer more questions about that as we get into the Q&A. That leads me to the outlook. The stainless steel market is expected to remain challenging due to high distributor inventory levels, and especially if you look into Q1, that is still there. That destocking is still taking place. Stainless steel deliveries, of course, are expected to be higher than the fourth quarter of 2018. But Americas performance, we expect to remain weak. Firstly, because still volumes will not return to the same levels as we have seen in other Q1s. But as well because of, as I said earlier, the overhang of raw materials, of input materials that we have bought at relatively high prices will depress the result in Q1 as it works its way through the production cycle.
And something that everyone, of course, has already seen is that the lower ferrochrome benchmark price will lead to lower ferrochrome price results. So we expect the adjusted EBITDA for the first quarter to be lower than the fourth quarter, so lower than EUR 89 million.
Thank you, Roeland. Operator, we are now ready for the questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be taken by an operator. If you wish to cancel your request, you may press the hash key. Once again, that is star one if you wish to ask a question. Our first question comes from the line of Seth Rosenfeld. Thank you. Please ask your question.
Good afternoon. Thank you for taking the questions today. Just a couple focused on the U.S. business. I recognize you have already spoken about this some, but I think that everyone on the call would appreciate a bit more color. Given what appears to be an inability to make attractive returns even during a time of unprecedented trade protection and with very high base prices, I think investors are very concerned about the ability of Outokumpu to make this asset work. Can you perhaps walk us through some of the past initiatives you have talked about on past conference calls? Is freight improving? How much has the mix enhancement actually improved your margins? Why was there such discrepancy in your cost base in the back half of the year, following up on the discrepancy in contract base in the first half of the year?
Ultimately, are you considering not retaining this asset and selling it to another operator who might have a better foothold in the U.S. business right now? I will start there. Thank you.
It was a good start, Seth. If you look at the broader question, will we be capable of making this asset a profitable one? I am sure we can. The first step we had to do was bring this asset operationally to maturity, and we have succeeded in that literally without fail. We now have an asset that is operating well, that is churning out quality product in time, and exactly what the customer wants. Customer response is very positive. We still see our share in the higher end of the market growing, especially if you look at appliances, where we have taken a major share of wallet. We are moving very well operationally. Where we have failed to really capture the value, as you said yourself, unprecedented protection. You have seen the results of other operators in the U.S. market.
The unprecedented protection has not really resulted in unprecedented returns. Not for us, not for others either. There are other elements that play a role there as well. But we have made mistakes. We have, in the first half of the year, not captured a lot of the price increases, as you know, because we eagerly contracted in December at extremely low prices and then missed actually the run-up of pricing after 232 went live. In the second half, I don't think we have missed that much commercially in terms of sales or capturing pricing. But what we had wrong there is our forecasts on the sales in the market. Again, we are not alone in that. But it does hurt, and it hurts because you have these high inventories at high prices that will have to work their way through the system.
I would say a lot of that is self-inflicted. If you look at some of the initiatives, freight, we are getting the freight costs down. We have moved into renting a warehouse in the Midwest. We are now bringing mother coils in there by barge and distributing from there. That will help. We're putting much more on rail and using less truck. We are renegotiating truck contracts. I expect that aspect to improve. I expect not that it will be a full mitigation because the truck market, the freight market remains tight. Again, it's a general issue. Let's see, what other I think all those points address the four points that you had. If there's anything else, Seth, go ahead.
I think just one last follow-up on the U.S. business. It seems like last year when some extreme weather impacted your ability to access raw materials, there was a bit of talk about whether or not the company in past years of very aggressive working capital management had perhaps cut working capital a bit too tight. Recognizing the challenge in late 2018 to manage working capital, is there any question of whether or not there's a structural challenge here where you have to rebuild inventory just to operate on a normal basis? Or do you really think this is a temporary Q4 phenomenon because of the parent customer demand?
Yeah. This has nothing to do with structural necessity. We are over-inventorized. We are sitting at inventories of over 100 days in the States, whereas in contrast to Europe, where we are below 80. If you take that, whereas Europe is a more complex business, more different products, more different inputs. Clearly we have a lot of leeway there. Ultimately, if you look at the disappointing cash return that we have had in 2018, that links very much into our performance in the Americas business, and specifically on how much working capital we have been building specifically in the Americas. The good news is that we can take it out again, but it's just disappointing that it happened.
Great. Thank you very much.
Okay, our next question is from the line of Luke Nelson. Thank you. Your line is open. Please ask your question.
Yeah, a couple from me. Firstly, just on Q1 deliveries, that you've guided to be higher than Q4. Can you just give a sense of what sort of delta that will be relative to normal seasonal patterns? Secondly, just the comment on hedging and timing effects, the sort of level of that that will continue to flow into Q2 and beyond. Then my final question, just on the balance sheet, given the guidance commentary around EBITDA, rough calculations get to over 3x net debt EBITDA as at the end of March on the last 12 months basis. So I'm just trying to build a bridge to your year-end 2020 target of less than 1 x. As things stand, absent a big material change in stainless steel pricing, I'm struggling to get there.
So maybe just to again, just highlight what of that are you assuming in terms of market versus internal measures and maybe some high level sensitivities around the balance sheet to change in top line pricing? Thank you.
All right, I'll take the deliveries. Chris will talk more about the hedging and the balance sheet questions. Deliveries, specifically in the U.S., where the drop of the surcharges went still on into the first quarter, we expect that there is, for Q1, relatively low deliveries. Definitely higher than Q4, but lower than what you would seasonally expect. Europe is more in line with what you would seasonally expect, slightly lower, but not that much. In general, and I think that is important, we do not see the underlying markets change. If we talk to our direct customers, we do have good direct demand. There are no big negatives on the horizon. We don't see any of our segments grinding to a halt. Automotive, as we have said before, has been slow. It's not slowing down further. We see some green shoots here and there.
I'm not that concerned on deliveries going forward into the year.
On hedging and timing in Q1, we still have quite a bit of inventory that was produced on the higher nickel and ferrochrome prices last year. So we will see negative timing effects in the Americas as a result of that working its way through the system. In Europe, we have rather less inventory left at higher inventory costs, so we expect the results from hedging and timing to be not particularly negative at this stage. On the hedging, it all depends a little bit because obviously hedging is very sensitive to the movement of prices. Generally, you have certain hedging positions which you can offset to your underlying positions to a large extent, but generally hedges tend to, if you just do straightforward, tend to be mark-to-market. So in a rising environment, you tend to have a negative hedging effect offsetting your underlying gains.
In a falling nickel environment, you tend to get a gain. At the moment, we're seeing nickel prices go up. They've gone up quite significantly since the beginning of the year. So generally, we'd expect a little bit of a negative hedging result for the quarter if prices remain at their current levels or continue to go up. Moving on to the leverage question. I think very clearly the answer to your question is yes, leverage will move up in the first quarter. There'll be two key drivers behind this. The first is that there's been an introduction of a new accounting standard, IFRS 16, which requires leases to be put on the balance sheet as pure debt. That has an impact on our overall net debt position of EUR 130 million. It's not a cash debt, if you like.
It will have an accounting impact, and we count it as part of our net debt going forward. So that will drive up the overall net debt position, just as a result of that change or the implementation of that new IFRS 16 standard. Also we typically see an increase in working capital in the first quarter. So fortunately, we're seeing a pickup in deliveries from the fourth quarter, so that'll pick up AR. We should be able to see an increase in payables. That'll help. But at the moment, we're also seeing our inventory value increase a little bit as nickel and ferrochrome, nickel prices in particular, going up. That'll be reflected. So overall, we expect as a result of better business, we like higher volume of business and higher nickel prices, potentially the net working capital to go up.
Those two will be drivers for a higher net debt position at the end of Q1, and therefore a higher leverage as well. The last question, I guess is, how do we then push it down to get to a lower leverage and the target that we set ourselves for the following 21 months or so? Clearly, structurally, we need to work on, and we're putting in place a program to work on structurally getting our overall working capital levels down. That addresses, in particular, our inventory levels. It will address some aspects of our payment terms as well. As I said earlier in the call, we have in the past had assets in Germany that have been sitting on land that we'll close the assets.
That land has been refurbished to some extent it can be sold, and it's not an insignificant amount of potential cash in. So we're expecting significant boost to reducing our net debt from some of that. The rest will have to come from better EBITDA through 2019 and 2020, which we're expecting, as mentioned by Roeland before.
Yeah. Maybe just one actual remark. As you know, the way we work our strategic cycles in the company, we have a vision, five years, and then every year we have a specific mission. We've shared these missions in the past with you, what they are, and every year's mission puts a platform in to jump on for the next year. For this year, and this was set already back in December, the mission is concentrating on just one single item, and it is to bring down net debt. So the focus of the company for 2019 is to aggressively work on a reduction of net debt. There are a number of levers that we can talk about, but that is what the whole company is geared to doing.
Okay, great. Thank you.
For those participants who want to ask questions, again, that is star one if you wish to ask a question, and hash key if you wish to cancel the request. Our next question is from the line of [Sandeep Pidi]. Thank you. Please ask your question.
Good afternoon. I have a couple of questions. One on maintenance CapEx. Sorry, maintenance cost that was in Q4. Do you expect the same going into 2019? The second question is, what are your expectations on working capital for the full year 2019?
They were here, I will put to Chris. CapEx, that is just seasonal, [Sandeep]. In Q4, in the Nordics, we just closed down and do the bulk of our maintenance. Our typical maintenance budget CapEx per year is EUR 60 million- EUR 80 million, and that was the case in 2018, and it will be the case in 2019. Chris.
Yeah. On the working capital, there are things that you can influence in terms of reducing your inventory levels, the quantity of those, and on your payment terms, both with your customers and your suppliers. On that basis, we are targeting to get the working capital down, underlying working capital down by 10%-20%. However, let me qualify that. If nickel or ferrochrome shoot up and move to much, much higher levels, that would be an offsetting effect. There comes a point where you can no longer reduce your working capital levels without significantly impacting your operations. This is on the assumption that raw material prices stay, broadly speaking, the levels that we've seen recently. If there's a significant jump, then that would have an impact.
I cannot tell you where those are going to end up, but on the assumption that we're going to see a broadly similar level for raw materials, we should see a 10%-20% reduction overall working capital.
Thank you. Just one follow-up question. We saw Tornio maintenance shutdown during Q4. Is this a regular occurring event or how should we think about it?
That's yearly event, happens every year. Last year it was there. It's actually slightly more cost, about EUR 30 million. This year it was EUR 20 million. So it is a yearly event.
Okay. Thank you.
Our next question is from the line of Cedar Ekblom. Thank you. Please ask your question.
Thanks. Just some follow-up questions on the U.S., please. So first of all, in the release, you say that there's been a misalignment between the production and the sales function. Can we interpret that as your sales team is battling to get the right orders in order to run the mill efficiently?
No.
A follow-up question. Yeah.
What it is here, it's easier to do one question at a time. What it is that, as I explained, our sales forecasts were far higher than what came out ultimately, because of the significant drop suddenly in the alloy surcharge . As you know, 80% of the market is distributors, and distributors speculate. If they see prices go up, they restock. If the alloy surcharge comes down, they get the hell out of dodge and they de-stock. So there was significantly lower than forecasted sales volume, but we have meanwhile bought in the raw materials for the forecasted sales volume. That's the disconnect that was there. There was no process to timely have the feedback loop to stop the buying process, and as a result, we have built too much, too high priced inventory in raw materials in the U.S.
Okay, that makes sense. Then just to follow up on that question, is there any read across in terms of ATI ramping up into the stainless market in the U.S., that we should infer that that's also part of the reason why potentially you're moving volumes not as quickly as you would think, or is it just a destocking issue at distributors?
As our market share has actually increased, that cannot be the issue.
Okay. Then the last question. You're talking that you're quite hopeful that the safeguards in Europe will have a meaningful impact on improving the supply-demand balance. Just in terms of what has happened in the U.S., we've obviously had trade protection in place in the U.S. for nearly a year, and we've had steel prices go up and then go down, essentially round tripping. When we look at the European example, is it the fact that you're confident because the mechanism is different in Europe in terms of a quota rather than the tariff as it is in the U.S.? Or why, having looked at the U.S. not being that effective on the safeguards or on an import barriers basis, actually resulting in price increases, why do we have the view that in Europe it's going to be a significantly different outcome?
I think there are a few differences. First of all, the U.S., as I said, is a very high priced market, so it is open to arbitration, whereby if you look at the Chinese market and the European market, which at the moment, by the way, are almost at similar levels, there is much less arbitration possibility. So you virtually would not be capable of absorbing, as an exporter, absorbing the 25% tariff beyond the quota. So it is much more likely that the imports into Europe will be limited to the quota. Do not forget, the flip side of the low pricing in Europe is that suddenly the European producers are becoming much more competitive with the Asian imports. In other words, the door is relatively closed to Asian imports on a net back basis.
Whereas to U.S., you have the arbitrage, where you could, in some cases, even pay the 25% and still net back more than when you would probably put it into Europe.
Perfect. Thanks very much.
Our next question is from the line of Bastian Synagowitz. Thank you. Please ask your question.
Yes, good afternoon. I have firstly one question on the inventory situation, which you outlined on the U.S. I guess what you say is you are running at too much high cost inventory here. That means that there should be a lot of scope to release inventory from this effect alone, but then you are telling us that working capital is going up from an already high level in the first quarter. Could you please quantify this extra effect of inventory? And then also how long do you expect for this inventory drag on your cost structure to unwind? Is this something which actually is dragging into the second quarter as well, or is it something which will be fully absorbed in the first quarter? That is my first question, and I have one more, but I will stop here.
All right. I would say that the bulk, 90%, will be absorbed in the first quarter. There is still a small bit that goes into the second quarter, but the bulk is gone. The other end where you say, "Okay, but how do you then explain it to the increasing working capital?" That has a lot to do with, as well, how the inventory in Europe is. The European inventory, as Chris said, has got rid of the more expensive stuff. If now the nickel prices go up, and with that, potentially our input prices, then you would see a rise there.
Okay. But could you quantify the effect from essentially this additional inventory load in the U.S., or is it actually not that meaningful in terms of actual value? It is more meaningful in terms of cost.
It is not that meaningful in that sense. No.
Yeah. Okay. Could you quantify the impact on your Americas numbers in the first quarter? Is it like a EUR 10 million or EUR 20 million number, or is it actually less than that?
It's, let's say EUR 10 million -EUR 15 million.
Yeah. Okay, clear. Then just again on the balance sheet and also on your cash flow. Chris, this is probably one for you. Could you please quantify the amount of non-cash assets or the amount of assets which you aim to monetize in the course of the year? I think you mentioned that earlier. Secondly, I think you have been guiding for cash requirements of around EUR 320 million- EUR 330 million in the last calls, and I think you confirmed that at some point.
Now, if I look at the waterfall bridge, you've been spending around EUR 220 million on CapEx and then another EUR 170 million for taxes, which means we would actually be much closer to EUR 400 million. You mentioned there were some one-off items in there. Could you please quantify those and maybe also just update us again on what the actual cash needs are? Thank you.
Yeah. We would stick to about the EUR 330 million, EUR 340 million I've talked about in the past. Let me just come back to your first point on disposals. The assets that we have on our balance sheet are a very significant double-digit amount. High double-digit million. Just to give a sort of indication of where we are, that's what we're targeting for disposals. In terms of the other items, our interest costs this year will be lower because we obviously did some refinancing activity during 2018, and that only had a half year impact and will have a fuller impact in 2019. So that's going to be lower interest costs. The guidance for EUR 220 million of CapEx stands, so that's the same. We did have some one-off costs in financing during 2018.
For example, the refinancing of the bond was one that came into there, and we also did some work around CO2 emissions. What happened here was that we had derivatives in place for the requirements, actually excess requirements on CO2. Those we exercised and then converted them into physicals during the course of the year. We sold the excess at significant profit, and that is reflected in the EBITDA, and we discussed that in previous quarters. But we still retained some of them. So we have, if you like, pre-bought our CO2 requirements for the next three years that are now sitting on the balance sheet, and that should also help. And that is also in the one-off costs that will not repeat in 2019 and beyond. There were also, in addition to that, I should add, we do have small tax payments.
We have always said they are low, but they are there in some countries. We have minimum taxes, and we are in a tax-paying position in countries such as Mexico. We have minimum taxes in Germany and the U.S. Then the other item is that we had to fund, in particular in the U.K., a pension deficit as well, which was in aggregate about EUR 20 million.
Okay. Thank you. Just on the CO2 component, which you mentioned, could you just let us know roughly how much that was? I would have thought, and sorry for my lack of knowledge here, but I would have thought that if you buy CO2 credit for a future period, you would basically capitalize those, i.e., it is basically an asset swap, but you would not expense those. But it is basically been just—
No.
Or you do not carry them in cash equivalents is basically the answer.
No, you don't have them in cash equivalents. To buy them, you have to Sorry, I thought you meant the cash out. You have to finance them.
Yeah.
You have to pay cash to buy them.
Yeah.
That's in the other block that you see there of the EUR 170 million. Because we had a surplus and the price went up, we sold them, and the cash in from those sales is reflected in the EBITDA number.
Got it.
You are purely talking cash here, not accounting.
Yeah. Okay, thank you.
Our next question is from the line of [Charles Lorkir] . Thank you. Please ask your question.
Good afternoon. Thank you very much. My question is a point of clarification regarding the outlook for Q1 and the guidance. Obviously in Q4 2018, the EBITDA excluding the insurance claim is about EUR 57 million. With the commentary that you provided to us, it sounds like Q1 is going to be relatively soft. Should we understand the guidance for EBITDA in Q1 to be lower than EUR 57 million or lower than EUR 89 million?
We guide for Q1 lower than Q4 and Q4 was EUR 89 million.
Okay. Right. Okay, thank you very much.
You are welcome.
Okay. Our next question is from the line of Luc Pez . Thank you. Please ask your question.
Hi, gentlemen. Two remaining questions, if I may. I hope you can hear me well. I am losing my voice. First one on the ferrochrome. With prices now near the $1 per pound and maybe some risk into the Q2 benchmarks, aren't you afraid that this may be a headwind into your results and ability to reach the 2020 target? The second question related to that, is there any room for you to rethink the timetable for the investment at Kemi expansion or not? The last question with regards to the CapEx guidance for 2019, I'm not sure I got the answer right if it was asked before. Thank you.
All right. The ferrochrome benchmark was set at EUR 1.12 when the prices in China were around EUR 0.80 . They're still around EUR 0.80 , EUR 0.81, EUR 0.82 . There is absolutely no reason to think that we will go lower. In the end, Luc, I think the most important thing here is we are in the top 10% of most efficient ferrochrome operations. At the sort of EUR 0.80 that you see in China, over 50% of the market is losing money, cash. The likelihood that it goes lower is extremely low. Everything can happen, but it is very unlikely. Hold Kemi investment, that would be shooting ourselves in the foot because it's not to expand the mine, it is to make sure that we are into the next layer of the seam so that we can maintain production beyond 2023.
If we do not do that, you will see the ore production taper off, and then by the time you are then ready to restart your mine production or your mine expansion, you would run the risk that you do not have enough ore available anymore to feed the smelters. As you can see from the results, the return that we have on ferrochrome is extremely attractive, and although EUR 250 million is a high investment, the payback time of it is about a year and a half.
Okay.
CapEx 2019, EUR 220 million is our guidance there.
Thank you.
Okay, our next question is from the line of Harri Taittonen. Thank you. Please ask your question.
Yes, hello. Harri Taittonen , Nordea. Good afternoon, and a couple of quick questions. It has been a long call already, but, on the impact from the European safeguarding measures, I was wondering, is this the sort of the final decision, or is the industry possibly still kind of working to amend the continuation and the implementation of the measure? That is one thing. And then the other question is about the sort of the volume outlook. Now that destocking has been a key driver for deliveries to go down, but as you say, nickel prices have been moving up. Can you see a scenario in which sort of higher nickel prices would start to trigger opposite direction in the inventory cycle? Those two questions, please.
Yeah. Safeguards, and don't get me wrong if I gave the wrong impression. We are actually very satisfied with the safeguards. We do think that they will make-
Sure.
—a substantial difference in the market. We have put all our thoughts into the commission, and the commission has taken 90% of them into the design of the new safeguards. The only thing left—
Okay.
—as far as I'm concerned, is Indonesia. Do not forget, Indonesia is relatively unimportant at the moment, even though they are very high in their imports into Europe. It is Black Hot Rolled Band, and there's only one customer for it, and no one else re-rolls. It does not change the market. There's the one re-roller that suddenly has access to more material from Indonesia. cold rolled is still negligible in terms of the import into Europe, and as well in terms of capability of Indonesia. Then, the second, I cannot even read my own handwriting here.
Scenario in which the sort of nickel prices which have been moving up, and is that sort of in any way?
We can clearly see volumes improving. If we look at the order book, we see our order book is currently full until April. So we see a stronger order book. We see as well stronger pricing coming in already. So that bodes well for the future. As I said, if you just take the mathematical numbers, imports would drop to about 23% of consumptions versus the 29% that they were. So yes, I think this will be very supportive.
Okay. All right. Very helpful. Appreciate it. Thanks.
There are no further questions at this moment, sir. Please continue.
Thank you very much for attending our earnings call. As a reminder, we will host a site visit to Calvert on April 2nd. More details can be found from our website. Hope to see many of you there. Our first quarter 2019 results will be published on May 7th. Until then, thank you and goodbye.
That does conclude our conference for today. Thank you all for participating. You may all disconnect.