Good day and welcome to the Outokumpu full year results 2017 conference call. At this time, I would like to turn the conference.
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.
Thanks, Tommi. Good afternoon or good morning, depending on which time zone you're in. I would like to start with our normal slide, which is the Outokumpu vision for 2020. I will not go through it as I usually do, but just say this is an interesting point to reflect because we are now two-thirds into this process. Some of our friends would call it journey, which means that we have 40% behind us, 60% to go to become the best value creator in stainless steel by 2020. We go to the next slide. I just want to show you the progress we have made in getting to that target. So these, on the left-hand side you see, are the measures of success that we have been communicating.
Starting with safety, we came from a rate of about long term target of less than 3.5, which would be best in class. So we have made tremendous progress and more than hit our target and are clearly on our way to meet our 2020 target. If you look at the adjusted EBITDA from the EUR 309 million in 2016, which already was a doubling over 2015, we have more than doubled again into 2017. EUR 630 million versus our 2020 target of EUR 750 million, well on track. One of the highest profile initiatives in the company was a reduction of our SG&A by 25%. In other words, from the EUR 400 million in 2015 to EUR 300 million by the end of 2017 as a run rate. We made big progress in 2016. Had a run rate at the last quarter of EUR 80 million a quarter.
We're now down to EUR 67 million versus EUR 75 million target. Again, more than easily made our target there. Return on capital employed, we have a 12% target long term. The result of 2017 means that we have already reached the 11% + mark, which after nine years of losses, leading up to the first year of a positive ROCE in 2016, is great progress. Our gearing, long one of the main headaches of our company, weak balance sheet, is now down to 40% and very close to our longer-term target of less than 35%, thanks to a reduction in our net debt to now well below EUR 1.1 billion. As you might remember, when we set out on our vision in March 2016, we had a target for the end of this year of EUR 1.2 billion.
Due to the great results, we have adjusted the target downwards or upwards, depending on how you want to look at it, and made that as well. We do acknowledge that part of that was thanks to market conditions and specifically thanks to the increase in ferrochrome price. You can see that in this slide that our ferrochrome results went up from EUR 80 million in 2016 to EUR 217 million in 2017 due to an average ferrochrome price of over $1.40 in 2017. A very strong performance year-on-year driven by self-help, specifically in reductions in fixed costs. Variable costs are our already mentioned SG&A and our commercial excellence program that has itself. You can see that the improvement is across the board. In Europe, apart from the already mentioned million this year.
In the Americas, although maybe not yet at the level that we want to be, it is without doubt that we made a big swing from the EUR -27 million in year 2016 to the EUR +21 million this year. In the Q&A we can get into more detail there. For Long Products, clearly as well, driven by more healthy markets in especially oil and gas, but specifically by the cost initiatives that we took in Long Products, we are back into a solid profitable level. At the same time, we had a variable year in terms of pricing, and you can see that from this graph. We came into the year on rising prices. Midway of the year, they started dropping significantly from June, July onwards, reaching a bottom in October, and then have been increasing slightly again and now stabilizing at this moment.
All this in the face of imports that stay more or less close to the 30% penetration rate. Again, the largest part of these imports comes out of Asia, specifically Korea, Taiwan, and to a certain extent, Vietnam. In the U.S., a slightly different picture. Beginning of the year was the same. Slight increases quarter-on-quarter, and then as from Q3, a significant downturn in pricing. I think it was partially driven as well by the announcement of ATI on the joint venture with Tsingshan which puts some expectations into the market of lower prices, especially because this is what the joint venture was putting into the market as pricing. We see currently those prices reversing and improving again. Penetration, I would like to hand over to Chris. Chris?
Thank you, Roeland. Good morning, good afternoon, ladies and gentlemen. Let's move on to slide 10, the key financials. We're down significantly versus the same period last year. We saw an increase in the Americas in Long Products, but it was offset at an overall positive timing effect of only EUR 6 million in the fourth quarter, but also a decline versus the same period last year. In terms of the net result, a decline versus last year. But if you look at it year-on-year, a very significant increase. So EUR 392 million against EUR 144 million in 2016. This was driven as last year, again supported by deferred tax asset bookings in Germany this time. So take more of our tax losses back onto the balance sheet. Of course, if you recall, we did the same in Sweden and Finland last year.
We still have the U.S. predominantly left to go. However, that was EUR 125 million booking. If you take that off the year results, you can still see that the net income for the year was pretty solid even without that. The earnings per share in the year came out at EUR 0.95 per share, which was almost tripling versus last year. As a result of that, our Board of Directors decided earlier today that they will propose to the Annual General Meeting in March a EUR 0.25 per share dividend. Operating cash flow in the fourth quarter was strong. Again, this year, a very solid cash flow, EUR 328 million operating cash flow against EUR 389 million last year, and over EUR 100 million in the fourth quarter. That contributed, of course, to reaching the net debt target that we'd set ourselves of less than EUR 1.1 billion.
We came in at EUR 1.09 billion, which is a significant decline from where we finished 2016. Again, 2017, we were restrained on capital expenditure. We only spent EUR 10 million more at the end of the year versus 2016, EUR 174 million against EUR 164 million. A slight uptick in the fourth quarter this year, but again, we continue to be very restrained on this to preserve cash and to improve our balance sheet. Staffing levels came down as a result of some disposals, but also as a result of our ongoing cost saving efforts, around 460 staff during the course of the year. Let's move on to slide number 11 and take a look at that because we're well aware that our results in the fourth quarter disappointed and fell way short of consensus and expectations.
I want to build a bit of a bridge for you in terms of how we got from the EUR 56 million adjusted EBIT in Q3 to the EUR 82 million EBIT in the fourth quarter. The blocks don't have exact numbers, but they're somewhat representative, the quantum of each of these pieces. We did see a small increase across the board if we add it up on base prices for the fourth quarter. Obviously, a significant impact from increased ferrochrome prices. Against a very large net timing loss in the third quarter, we saw small timing profits, so the bridge impact of that was quite significant. We also did not see the same negative effects in the Americas. Recall that in the third quarter, we had not just supplier delivery issues. Those continued, but to a much lesser extent into the fourth quarter.
There was also the hurricane in the third quarter, which we did not see, and the ferrochrome delivery issue that we did not see in the fourth quarter either. All of that improved the Americas result, and you see the impact here. We also clearly signaled in our last call and at the Capital Markets Day, saw a significant increase in maintenance costs. This was planned. This was scheduled maintenance and outages in Europe. Some of that had an impact, of course, on our deliveries in Europe. That was, I think, the big unexpected impact that we lost a significant amount of our deliveries in Europe. That was partly driven by the maintenance efforts and the low deliveries resulting from that.
We also had some commercial issues in an effort to drive through higher pricing, did not succeed and lost some market share as a result of that in the fourth quarter. We'll fight very hard in the first quarter to regain that. The other piece, which perhaps came as a bit of a surprise, was the somewhat higher cost levels that we're seeing in the fourth quarter and that we'll continue to see into 2018, driven predominantly by raw material input. I'll come to those in a minute, that we're seeing developing in the markets. There were smaller issues from the supplier carryovers in the U.S. and we have some small FX derivative losses as well.
I think one of the big pieces that perhaps we need to focus on are the cost drivers that we flagged, and I want to do that on slide number 12. I think we've had the discussions in the past. Most of you will be aware that we use, obviously, we have electric arc furnaces. They use graphite electrodes to heat the metal, and the price of graphite electrodes is increasing rapidly across the world. To give you some sense, we're seeing increases into the early part of 2018 of over 300%. That's very significant given that we use quite a lot of this in the four furnaces that we operate around the world. This is a significant amount of additional cost. I don't think that's a surprise, that is well known.
The other piece, which is probably a little less well known, is that we use a material called ferrosilicon, which is used to deoxidize the melt of the stainless steel, which again, we use in some significant quantities. The cost of this has gone up by over 45%, as you can see here. That again provides cost headway that'll also impact us into 2018. Finally, what we're also seeing is, and everybody will be aware of this, an increase in Brent and energy costs. Obviously, an increase in cost has ramifications not just in terms of the energy we use, but it also has ramifications on some of the input materials that are based on oil that will also ultimately go up. We've seen an increase from the sort of $50 a barrel levels to touching $70 a barrel in January.
This is a significant increase. This is on top, of course, of a weakening dollar and we sell our ferrochrome in U.S. dollars. That therefore is also a significant impact over and above this. These are headwinds that we started facing in the fourth quarter and that we will continue to face to a significant extent into 2018. Let's now move into each of the individual business area results, starting with Europe on slide 13. You can see here that the chart on the left shows the delivery volumes. You can see that it's clearly down sequentially, but also in the fourth quarter last year. The adjusted EBITDA as a result of that for the stainless business declined significantly from EUR 69 million to EUR 37 million. Although, of course, the ferrochrome business improved.
If we look at the business area Europe as a whole, and of course, we'll be separating this out into ferrochrome and stainless starting from Q1 of this year. We're already showing that here. You can see that overall, while the results stayed about at the same level, it was very much an increase in the ferrochrome results and decline in stainless steel. There was a small net of timing and then hedging impact, again, in the face of increasing chrome prices and slightly increasing hedging nickel prices. Question is why was it negative? The answer to this is that while we saw positive timing impact, we did at some stage during the quarter hedge some of that. As nickel continued to move up through the back end of the year, we had to take a mark-to-market impact on that. Not particularly big.
It'll come back, but it moved a small timing impact into an added term, a small negative hedging impact. The overall impact is EUR -4 million. The ferrochrome results, of course, improved primarily because of better prices, but also because of better production volumes. We produced 121,000 tonnes in the quarter versus 109,000 tonnes in the previous quarter. The one negative, of course, is ferrochrome is traded in U.S. dollars, and the dollar started weakening and has continued weakening and obviously into Q1, but it weakened significantly in the fourth quarter. This was a negative as a result of that. I've already commented on the lower deliveries caused both by planned maintenance, but also because of the loss of market shares. We tried to push through higher electrode prices, and had some issues in achieving that. Let's move on into the Americas result then on slide 14.
Here we flagged clearly that there would be seasonality. It is typical for the Americas and the distributors there to destock in the fourth quarter, but also the Americas, of course, has an extra significant holiday in the fourth quarter with Thanksgiving, that we do not see so much in Europe. This impacted the deliveries. They were nonetheless higher than the fourth quarter of last year, but sequentially, obviously lower than the third quarter. Overall, the adjusted EBITDA improved significantly from a very poor result in the third quarter, but we'd explained clearly that the third quarter was impacted by a number of one-off negative timing and supply issues in particular. This did not occur, but we did also see somewhat lower base prices that impacted the result negatively.
Although the impact on timing was positive, overall, the results obviously improved significantly as many of those one-off effects disappeared. Moving on to the Long Products business on slide 15. Here there was a significant improvement both year-on-year and quarter-on-quarter in deliveries. This was driven by better demand in Europe. The Long Products business produces slabs in our Sheffield unit that are also used as raw material. The fourth quarter result recovered in the Long Products business. From the third quarter was a little bit up on the fourth quarter of last year. There was no timing impact here during the fourth quarter. Let's now move on to slide 16. Focus a little bit on the cash flow for the year as a whole.
If we look at the operating activities, 2017 was a bit weaker than 2016. This was driven predominantly by an increase in working capital. This was partly driven by overall general pricing levels moving up, so that drives up working capital. We invested EUR 63 million net of divestments. There were a number of divestments that we announced through the year in the U.S., for example. As I said before, we had relatively restrained capital expenditure of EUR 174 million. The net amount of that was EUR 63 million, which generated cash flow then before financing activities to EUR 264 million. We did significant refinancing that you'll be aware of. We repaid a partial repayment of the 2021 bonds and also repaid the 2019 bonds. So significant cash out from that. The overall cash balance at the end of the year was a little reduced.
Nonetheless, our liquidity remains very solid at around EUR 0.8 billion. The overall impact was a reduction in our net debt of EUR 150 million as a whole to get below that EUR 1.1 billion. In terms of the balance sheet metrics, of course, during the course of the year, they have again improved significantly. Net debt came down, the gearing came down. That was also driven partly by an improvement, of course, in the balance sheet through the deferred tax asset bookings, but also driven by our [audio distortion]. That effort continues, and we're well on track here. It will not always be a linear journey as we go from quarter-to-quarter. Q1 tends to be better for business, therefore there will be an uptick in working capital. So we're expecting a little bit of an increase in working capital, and that may have a negative impact on cash flow.
That is seasonality, and as last year, where we saw an uptick in working capital in the first quarter and a significant release into cash generations for the remaining three quarters, we're probably looking at a very similar profile in 2018 as well. Our debt maturity, which was an issue at the beginning of 2017, has effectively been resolved. We're now just looking at rolling commercial paper in 2018 as a direct maturity. We resolved the issue of the revolving credit facilities. We have removed a significant bond financing to very small unutilized facilities to be renewed in 2019, and the next big maturity will really not coming until 2020 with a convertible bond and then 2021 with the remaining bond that we have. I expanded a little bit on the aspiration to halve our interest expenses by 2020 to a level of roughly EUR 50 million.
We have made very good progress during 2017 on that. Not only did we recall the 2019 bond out of running cash flow, we also partially recalled the 2021 bond. Those carried coupons of 6.625 % and 7.25%, so significantly high cost debt removed. We restructured our pension loan portfolio and reduced several million euros of interest cost there. So we have a EUR 650 million standby facility unutilized at the moment that now runs into 2021. That also came with much better terms and conditions attached than the previous facilities to lower cost and significantly lower burden covenants attached to it. Overall, the run rate interest rate in 2017 was reduced by EUR 35 million, and we will see that coming through in the 2018 financials. Of course, that will not just be a net income, but also cash flow positive impact.
With that, I am going to hand back to Roeland to talk a little bit about the outlook for the first quarter of 2018.
Thanks, Chris. Indeed, looking forward to the first quarter, we are seeing continuing healthy markets both in the U.S. as well as in Europe, as well as, by the way, in Asia. So healthy underlying expect higher stainless steel deliveries in Q1 compared to Q4. On the other side, however, we have some clear cost pressures from graphite electrode, already mentioned by Chris, ferrosilicon, and energy cost, as well as a weakening of the U.S. dollar. The lower ferrochrome price already is known for Q1 at $1.18, and QoQ, that has an impact as well. Still, taking everything into account, we expect for Q1 a higher adjusted EBITDA [audio distortion].
If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Luc Pez from Exane BNP Paribas. Please go ahead.
Hi, gentlemen. A couple of questions for you. First of all, if you could comment a bit more on the underlying market trend, both Europe and the U.S. I understand the general comment about AC situation, but if you could give a bit more color as to how price is developing? Especially in the U.S. following the late Q4 pressure because of the ATI/ Tsingshan JV. A follow-up question on this would be related to what are your read with regards to the associated risk with the ramp-up? That would be my first questions. Thank you.
Luc, the associated risk of the ramp-up, I assume of the joint venture, is that what you mean?
Yes, sorry.
Okay. The ATI JV.
Let's start with the market trends. It's obvious that the world is entering a very healthy cycle of increasing demand in general. Not just for our products, but GDP growth numbers forecast are being adjusted upwards continuously. Markets are healthy. Commodities in general are on the way up. We are in a very healthy environment. Consumer spending is driving this, which is good for stainless steel. We see in that sense, both in Europe and in the U.S., very healthy markets which reflects itself into our order book. We see strong order booking into 2018. Really very positive. On price development, Q1 over Q4, as I said, you saw an uptick during Q4 of prices. We expect that uptick is now stabilizing in Europe. We see sort of average equal price into Q1 as with what we closed out on Q4.
In the Americas, as I said earlier, you saw a little bit of a downtick in Q4. Then, in January, a price increase that was announced stuck and is working. We actually think that there is further room on the upside in pricing in the Americas. If you then look to the JV, difficult to say, of course, and speak for another company. What we have seen is that the JV went into the market and offered product. At the same time, we have seen as well that the startup of the operation has been not without problems. The uptick of that is that we really haven't seen the material itself coming into the market yet. ATI, as you know as well, commented that they don't see any significant influence from that JV until the second half of the year.
Little impact in the first half. Then we have to see what the impact is, if at all, in the second half, given the strong markets, and as well, given the uncertainties that we have around what the real costing is of the joint venture and the product that they bring in.
Thank you. If I may ask a follow-up. You're pointing a lot to this cost pressure. If I may, you're the only one pointing so blatantly to these issues as a reason for the lower profitability. How do you explain that some of your competitors are able to improve earnings margins in spite of this cost pressure? Is it because of your mix issues you've been facing in Q4? Is it therefore temporary, or should it be more difficult also to pass through into Q1?
First of all, I don't think our competitors have been improving margins. That would be one step too far to say so. The cost pressures are there. You can go onto all the publications. Needle coke, which is the main ingredient into electrode material, is in short supply. There is clearly a shortage. Pricing, which was about $2,500 a tonne in early 2017 on the spot market, has gone up to $ 23,000, $26,000, which is where at the moment it's staying. We all have our contracts in place. We all have, as an industry, whether stainless or non-stainless, we have some buffer from contracts and past inventories. That doesn't mean that you should not try to pass on these increases in cost, because I learned at school that you should work at replacement cost. They are there. Our competitors clearly see them as well.
How they chose to treat them is up to them. I can't say anything about that.
Thank you.
We will now take our next question from Seth Rosenfeld from Jefferies. Please go ahead.
Good afternoon. I have a couple of questions, first on guidance, and then second kind of drilling into the European business, please. On guidance, I was wondering if you can please give us some sort of framework with which we can better understand the sequential EBITDA growth you believe is realistic? Obviously, returning to the first quarter 2017 level seems some way off, but how can we gauge the scale of uplift that is realistic on your own assumptions? Secondly, within Europe, I appreciate the new reporting clarity between stainless and ferrochrome businesses, so thank you. But when I look at just the profitability of European stainless, it appears as though EBITDA per tonne in the fourth quarter fell to the lowest level since early 2016, despite your commentary that base prices rose year-over-year.
Can you help us better understand what mix of cost pressures weighed on performance in Q4? Will those alleviate in the first quarter, or is this the new normal? With regards to the maintenance outage, lastly, I am surprised you say the maintenance outage led to lower shipments. I would have assumed that there was an inventory build in preparation.
We do not go much more granular. But what we see is really healthy markets. So volumes will be significantly up. There is no doubt about that. At the same time, we see pricing holding at current levels. We do not see significant in Europe. We do not see significant opportunity for increased pricing due to import pressures. Do not forget, the falling dollar benefits Asian imports because that is quoted in dollars. That does not change. Dollar changes, in Europe it becomes cheaper. So you have limited chances to move up pricing. The volumes plus the activities that we undertake to continuously drive down our cost more than offset these other elements. As a result, we still see higher. Note that we do not say slightly higher, we see higher result in Q1.
In Europe, I fully agree with you that the fourth quarter was a disappointment, and I will get into that in more detail. I do want to point out something which maybe or maybe not has been missed, but we produced in Europe over 2017, a total of EUR 417 million EBITDA in stainless alone. So not the help by ferrochrome, just purely stainless profitability. You compare that to our peers, and the latest we have, of course, is Aperam's report. If you take their result, knock off Brazil, and then take the dollar-euro exchange rate, you will see that we are ahead in earnings in Europe on stainless of our main competitor. So I would say that our profitability in Europe is for Q4, there are several reasons.
One indeed is the maintenance outage. In the maintenance outage, unfortunately, when we came back on in Tornio, our biggest mill, we had a hiccup in December or November in the melt shop, which lost us significant volume further downstream. As you probably know, our bottleneck is not in casting and rolling, it is in cold rolling. So once you miss tonnes in your casting, you cannot make up in your cold rolling. You cannot bring that material to market. Secondly, and you can see that as well, we lost market share in October and November, which we regained partially in December, which was a direct result of our [audio distortion] budge from that strategy, because we felt it's necessary to recover the cost. Our competitors did not follow or put another way of recovering those extra costs, and we lost volume, specifically in distribution and in automotive.
We have adjusted our commercial practices to equalize with where our competitors are, and now we have regained again our normal position. But those two effects together led to a significant reduction in volume. As you can see, it was 26,000 tonnes versus Q3 that we were down. Whereas in Q4, normally we are up. So if you look at these things where you say, "Okay, theoretically we should have been up 40,000 tonnes from where we are," and we spent, rightly so by the way, EUR 30 million extra on maintenance in order to make up for lack of maintenance from the years 2013, 2014, 2015, then there is about EUR 60 million [audio distortion].
—the maintenance cost was EUR 30 million in Q4. That will not repeat. If I'm reading you right, the loss of 40,000 tonnes of shipments would equate to an additional EUR 30 million. Is that correct?
EUR 25 million -EUR 30 million, yeah. The full EUR 30 million or not, I'm not sure at this moment. I don't have the figures in front of me, but the bulk will not repeat. That's correct.
Very helpful. Thank you.
We will now take our next question from Michael Shillaker from Credit Suisse. Please go ahead.
Yeah. Hi, thanks for taking my questions. First, just trying to get my head still around the number versus where consensus was. Just on the conversation in the last quarter, because we're talking about the missed volume and higher costs as being the key variable between sort of guidance, effective guidance, and where consensus came out, or where the number came out, sorry, versus where consensus was. But wouldn't it by November time, we'd have known a lot about the increasing costs that were coming through from electrodes and similar on one hand. On the other hand, would we also not have known that because of the maintenance and similar, that the volume was actually going to be down in Q4? Because I think, last time we did all get together, it was the Capital Markets Day. But prior to that, it was November.
So that's question number one. Question number two, just on the electrode issue, because you are clearly making a lot more noise about electrodes than a lot of peers. Can you just talk about your electrode pricing when you renegotiated contracts? Are you fully on contract, and have you been forced into the spot market for electrodes at all, and is that part of the problem? And what is your contract spot exposure on electrodes? I'm assuming it's all contract, but if you could clear that up for Q4 and for next year. And the third question, I think everyone agrees, it is a healthy market, Roeland. You talk about a healthy market, but if you look at the carbon steel market, they're suffering from similar cost pressures. It's a healthy market. Steel prices are going up. People are making better margins.
What do you think the issue, the problem is in stainless steel at the moment, where we are in this reflationary environment? It is very normal when things get better that costs go up, et cetera. That is actually normally quite a healthy sign. But for some reason, stainless steel seems a little stuck, and it is not able to put base prices up sufficiently to pass on what is going on on the cost side. Thanks a lot.
Okay. Let me start with the last one, because that is the one where I have absolutely no answer. I do not know where carbon steel currently is trading at, and I do not know what, in the carbon industry, what the return on capital employed numbers are. I saw one of our return on capital employed is far superior to what happened there. I think generally speaking, if you would look at carbon steel 2017 return on capital employed, there are not that many that are over 10%, but I could be mistaken. I am not sure how true your assumption is. The only thing I can say is we are having healthy markets. We have healthy pricing as well. As an industry, we are making healthy profits.
The point is more that if you want to go even higher, then there are, specifically in Europe I would say, there are some effects where the reality of increasing costing is not yet reflected in pricing. I do believe that at some stage it will happen. But at this moment, as you saw with our EUR 30 increase, only EUR 30 for a surcharge on electrodes, basically, we got punished. We lost volume very quickly. When that reality will come through, I do not know. It will at some stage. Because I agree with you, that an inflationary environment or reflation as is taking place at the moment, ultimately will affect the full supply chain including us. Contract position on electrodes, I am not going to share that. That is part of each individual company's secrecy, how you do it.
Again, you say we are the only ones making noise, but it is not true. If you look at the Long Products markets in the U.S. and in Europe, they have all put on electrode surcharges. It is a fact. If you read Metal Bulletin, you have seen that electric arc furnace carbon operators are very worried and see the same cost pressures. I do not know why our competitors in Europe choose not to talk about it. That you have to ask them. I cannot answer that. The last question, did we know about the volume miss and the miss in guidance? We did not miss our guidance at EUR 170 million for Q4.
That is, we have given enough guidance as well on where the things were, including what we saw on maintenance, including what we saw on pricing, where we said it will be about equal to Q3. We have no reason to change anything in our guidance. Our guidance was correct. On the volumes, that was a surprise that we got ourselves only later in the quarter because of the breakdown or the poor comeback of a melt shop in Tornio. Still, it did not materially impact our guidance or our internal targets for Q4.
Okay. Yeah, sorry, Roeland. I was not saying that you missed guidance. I was saying the difference between what you reported versus consensus. The question, I guess, was really one of the reasons that has been put over this morning today has been the higher cost as well as the lower deliveries. The lower deliveries, I understand that maybe that surprised you at the end of the quarter. My question was, were you as a company aware of the higher cost when you came to market? Because if you were, obviously it is not reasonable to say that is part of a bridge between the miss versus consensus, but I am guessing you were probably surprised negatively during the quarter by the extent of the cost increases.
No, because the cost increases were, I think, about EUR 8 million that it hit the quarter. Again, we knew that. That was in our own internal forecast. It is relatively small compared to, for instance, the EUR 30 million difference in maintenance. Hence, we mentioned in the guidance the maintenance rather than the cost increases.
Okay. So when I look at the bridge on page 11, the red with higher costs. The maintenance is EUR 30 million, but we are saying the higher cost is only EUR 8 million? Or that includes derivatives as well?
Michael, that's just for the input costs. There are other things as well.
Okay.
The higher costs also include spillover issues in the U.S. and some FX derivative losses.
Okay. All right. Thanks a lot. That's clear. Thank you.
All right.
We will now take our next question from Bastian from Deutsche Bank. Please go ahead.
Yes. Good afternoon, gentlemen. I've got two questions. Firstly, on Europe. Just getting back on this market share loss, it seems like a reasonably drastic reaction, obviously from your clients to the electrode surcharge, which you introduced. You mentioned that you gained part of the market share loss back already. How long do you expect it should take to gain the full market share back? That would be my first question. Then secondly, on ferrochrome, where you point out some fixed headwinds. But at the same time, if we look at the South African rand, it's obviously strengthening quite a bit against the other currencies. I think to some extent the low Q1 settlement was clearly a negative surprise. It seems like there is a bit of bottoming in the ferrochrome market.
Just would be curious to get your view on whether you think that likely there's a little bit uptrend on the way and whether you think that possibly the next settlement could edge higher from here? Thank you.
Yeah. The market share already started recovering in December. We expect to be at our normal market share in Q1. So, that effect is gone in Q1. On ferrochrome, you are actually right. The increase of the value of the rand definitely helps us. If you look at China at the moment, there is clear upward pressure on ore and as a result as well on ferrochrome prices. So if you would look at it today, if we would have to say, okay, at today's market indications, you would probably be EUR 0.15 - EUR 0.20 higher than where we are today. Whether it is still the same when we are at the end of March when the negotiations for the contract takes place, that we have to see. But yes, there is clearly upside at this moment.
Okay. Thank you. Then, I have got one more follow-up, just more on your competitiveness versus some of the Asian players and thinking particularly of the essentially, new mills, which have been evolving around Tsingshan. Now, obviously, we are seeing a lot of inflation. You pointed that out as well in your charts. Do you think that that is essentially, to some extent, impairing the cost base for some of your competition in Asia, which, obviously is still a reasonably aggressive competitor also here on the European market after the Chinese essentially dropped out?
Yeah. Very difficult to say. Indeed, these competitors are mainly coal-fueled and coal pricing is going up significantly. Still, they have a cost advantage. I do think by the way, that a lot of the volume that comes out of these new mills, take Tsingshan, is mainly going to go into Asia, and not that much into Europe or U.S. Predominantly hot-rolled black goes into re-rolling. Re-rolling is not that big in Europe and U.S., but is big in India and China.
Okay. Thank you.
We will take our next question from Ola Södermark from Kepler. Please go ahead.
Yes, hello. Just a follow-up on Europe [audio distortion] that you lost that volume zone after a slower ramp-up and after a maintenance stop and the electrode surcharges?
In Europe we are predominantly cold rolled sellers. We sell very little hot rolled. Most of what we have in Europe in the market is higher added value. That's correct.
When it comes to maintenance stops in 2018, you said that it's not today or maybe going to be some maintenance stops in the first quarter. Can you clarify it a little bit? Also—
Oh, no.
—are we going to have a normal maintenance stop in the fourth quarter in Europe—
So—
—or in third quarter?
Sorry, that was my fault, Ola. We will not have a maintenance stop in Q1.
Okay.
But we will have ongoing normal maintenance. So there will be a sum which I don't have here at hand. If it's similar to Q3, for instance, then the delta of EUR 30 million will exist if it's a bit more, so I don't know. We will have, like every year, we will have two maintenance periods. One in July, August, mainly in the Nordics and then one in December. Both, by the way, should be of lesser extent than they were in this year, where both last year in, sorry, 2016 and 2017. We spent more and especially in 2017, we took the decision and actually we communicated that early in the year as well, took the decision to significantly spend more in maintenance to improve reliability of our assets.
Okay. Thank you.
We will now take our next question from Johannes Grasberger [audio distortion].
It is. We can hear you.
Perfect. I have some questions here. I will start with Americas first. How much of the mix improvement now is true, actually? I am thinking here also from timing perspective, is there a certain timing or a month or a quarter when these long-term contracts usually get negotiated? Because I remember from the Capital Markets Day, the message, at least to me, was that the strategy for this year or the outlook for this year is to improve the mix. I suppose looking at the fourth quarter earnings, there has not been much of a mix improvement yet effectively. Are we still seeing that improvement kicking in during this year at some point?
Yeah. It is an excellent question. Our mix development in the U.S., in the Americas, was disappointing. We clearly did not get the traction in the local market, domestic market with our cold rolled product that we were aiming for. As a result, in order to keep our assets efficiently running, we resorted to export of hot band to Asia and Europe. The mix was poor in two ways, less cold rolled and more exports than expected. That was a clear disappointment. To your point, when does the mating season start? That is normally October, November. The good news is that we have had tremendously good bookings. Actually for the first quarter, on cold rolled, record bookings into the domestic market. It looks a lot better. It should, because this is what we have been working on all the time.
What went wrong, if you want to say so in 2017, is our contract business was just a smaller portion. As a result, we thought that on the spot market, we could sell the difference, and we couldn't. Now we have far stronger contract business, so we have a far better basis for our cold rolled domestically.
In terms of the wider gauge products, is that also selling well? Because I remember that there is a cold rolling line for the, what the width gauge ever was. Was it 60 in or something like that? Is that also selling well now that the oil and gas [audio distortion].
No, actually it's two ways. It goes into oil and gas. If you have wider and you have to create vessels, you need less welds and have a stronger structure. So that is one of the places where it goes into. The other one is, strange enough, into industries where they need not as wide like appliances. Because there, by taking the large coils and slitting, they can use double width more efficiently in their thing. So yes, it is going up, the sales in our wider material, but it will never be 50% of the market. It is a higher priced niche that we are developing. So it is developing, but it's not significant yet.
The last question on the Americas business then is that, in terms of the mix improvement, where are we now in the fourth quarter? If you could give any kind of wording, are we 10% through, 20% through, and then by 2020, we will be then 100% through? Just to give some kind of color on the trajectory, how quickly the mix is expected to improve?
I revert to our earlier statement, which is we expect the Americas to reach its commercial maturity in 2018. And given the way we see our order book develop, plus the strategies we have in place, we do believe that indeed 2018 [audio distortion].
—movement. So is it just a translational impact and is there a delay to it or is it kind of immediate direct effect? The final one would be on the bridge going into Q1 2018 from Q1 2017. Just looking at the profits that you made a year ago, as opposed to or what has changed since then, and please correct me if I'm wrong here, but it's lower ferrochrome price. We will have a better mix in the U.S., stable market and prices in Europe, better oil and gas market, which should be, I suppose, good for Long Products. The only negative effect in addition to ferrochrome is actually the cost effect on graphite electrodes. That is the question.
Okay. If we take the Q4, Q1 question first, Johannes, you are right. There will be better volumes. The biggest impact will indeed be from the ferrochrome. Correct. That is where we see the negative. There are no other significantly sized. We believe that those will actually get worse into 2018. The second question then, or your first question was around the hedging. We do hedge some of the FX exposure that we have between the U.S. dollar and the euro. Predominantly we do it to ensure that when we buy nickel in and we price it out, there is an exposure there on the nickel. We hedge that, and then we do a corresponding hedge on the FX underneath it as well.
We do not hedge, at this stage, the exposure of the U.S. dollar cash stream that comes from our ferrochrome business and the results that the U.S. result translates into euros. The U.S. result translates into euros, of course, is a relatively small impact because the result is not that big yet. The biggest impact is from the ferrochrome income stream.
Right. If I go back to the bridge, of course, I did not mention the effects now. The negative drivers would be lower ferrochrome FX than the graphite electrode cost inflation. On the positive side, we will have better mix in the U.S. and better volumes for Long Products in terms of the oil and gas demand.
Yeah, and better volumes in Europe, of course. Yeah.
Yeah. Right.
So it is better volume all around.
Okay, perfect. Thank you.
We will now take our next question from Carsten Riek from UBS. Please go ahead.
Thank you very much. Two questions left from my side. The first one is, again, on the profitability. As you correctly say, you strive for being the most profitable stainless company. I am just trying to estimate how you want to get there, because if I deduct ferrochrome and nickel impact in Q4, the stainless steel operations made mere EUR 20 million in EBITDA or EUR 36 per tonne. That is quite low. We learned that there was about a EUR 30 million impact on the maintenance. Is there any other adjustments which I have to take into account? What actually would bring you to the next level? That is the first one. Second one, on the net working capital, we have seen quite a bit of net working capital swings, especially in the receivables which went down to EUR 160 million. How much of these EUR 160 million will reverse in the first quarter? Thank you.
Do you take the second one?
I will take the second one. Yeah, clearly, in terms of if we sell less material in the fourth quarter, the receivables of course decline, and we will swing back up from that for sure. That is normal seasonality. That is the same effect we had last year. There should be a little bit of mitigation, of course, from ferrochrome prices being lower. That lowers the value of our working capital. At the moment, we are also seeing high nickel prices. Again, that has a negative impact in terms of increasing the value of working capital. We will have to see. In terms of the profitability, you—
Let me do that.
Okay. Roeland will take them.
On profitability, I just repeat what I said earlier. If you take our full year results on stainless only, just strip out ferrochrome. Just look at stainless, and just look at Europe and compare it to what we know now from Aperam in Europe, which is the full result minus the $ 123 million [audio distortion] on stainless in Europe versus about EUR 395 million Aperam on stainless in Europe. I think that we are from where we came from, which was the poor man at the bottom of the pile. We have come a long way, and we are clearly on our way to be that best in value creation. We have a volume advantage, so we probably need to go take up to get there. But we have, as you know, clear plans on how to do that.
We are currently, as I said already, only two years into our five-year plan [audio distortion]. We have talked about those levers and shown what we think are they worth going forward. If you concentrate on Q4, the only thing I can say is, given the volatility that we have seen in the year, you have to take out that volatility. Q4 clearly is an anomaly, where we had low volumes that are not normal for a quarter, and we had already communicated and very intentionally increased very significantly our maintenance. I think we are still very solidly on our way. And the results going forward will show that.
Okay. I'll take it like that. Yeah. Thank you.
We will now take our next question from Ephram Ravi from Citibank. Please go ahead.
Yeah, this is Krishan from Ephram's team. All my questions are answered. Thanks.
As a reminder to ask a question, please press star one . We will now take our next question from Kevin Hellegård from Goldman Sachs.
Good afternoon. Just one question left. The import penetration looked quite high in Q4 in Europe, and you mentioned yourself that the weak dollar is an advantage for the Asian producers. Do you see a higher pressure in the market in your Q1 order book?
No. Again, our order book is pretty strong. Having said that—
You don't see any pressure on base prices at the moment in Europe?
We don't see any pressure is wrong. We will see a slight decline in pricing in Q1 over Q4, but not significant at all. We don't see further push down on it. But I wanted to say, it takes time for the supply chain to establish. We don't have visibility on what is happening in Q2 or Q3. Can't really say that there will be no further pressure.
Okay. Thank you.
As there are no further questions in the queue at this time, I would like to turn the call back for any additional or closing remarks.
Thank you. Thank you very much for attending our earnings call. Outokumpu's first quarter results will be published on April 26. Until then, thank you and goodbye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.