Good afternoon, ladies and gentlemen, and warmly welcome to Outokumpu's 2015 and fourth quarter results webcast. My name is Johanna Henttonen, and I am heading Investor Relations at Outokumpu. Today, I am very happy to welcome you to this event, and we also have our new CEO, Roeland Baan, as well as our CFO, Reinhard Florey, to give the presentation. Before we start, I would like to remind you that certain information we will be discussing is forward-looking and therefore includes uncertainties, and our actual results may differ from our current expectations. With this, I would warmly welcome Roeland to give the presentation. Please, Roeland, the floor is yours.
Thank you, Johanna. Good afternoon. Thank you for coming. My name is Roeland Baan. I am the CEO of Outokumpu since the 4th of January. I must say, I am glad I am standing here in that capacity, and I am glad to be able to lead a company with such a rich history and with such potential going forward into the future. I would like to give a general overview of the 2015 results and the Q4 2015 results in a general way, introducing it, and then handing over to Reinhard for more details. 2015, in brief, has been a difficult trading environment. Of course, dropping nickel prices throughout the year have influenced negatively a lot of elements, not the least, the underlying demand at the distributor segment, where, of course, the destocking has been going on, affecting volume specifically in North America.
In Europe, where we have less exposure to the distribution segment, this has been less of an issue. That brings me as well to the very positive side, which is on Q4, we had a stronger performance ending up into an underlying EBIT of EUR -11 million, to a large extent driven by the situation in Europe, where first of all, pricing has been rather resilient due to declining imports, but secondly, because of the cost measures that we have implemented in EMEA. The other thing to mention as one of the highlights is the deleveraging of our balance sheet. Due to the divestments in China, Shanghai Krupp Stainless, and Mexico, Oficina Mexicana, we have been able to significantly reduce our net debt situation to EUR 1.6 billion, and are now in a, I would say, more acceptable financial situation than before.
Not where we want to be, but I will come back to that in a moment. The saving programs, I alluded to it already, have improved our results in EMEA significantly, but we have, generally speaking, been very good in delivering on them. Again, I will come back to it in more detail, and Reinhard will have more of the numbers as well on that. If you have a short look at the outlook for 2016, taking the cue from SMR, the research firm, it still indicates that 2016 will not be a great year. As we sit here together, I think we just look at the financial markets and at the commodity markets, and we do not need SMR to tell us that. It is obvious that this is not the sort of ideal world that we are looking forward to.
Especially for us, we are seeing in Americas and Europe, if these projections come out, a reduction and negative growth, and for the world as a whole, a more or less flat market for stainless steel. That is the environment that we are looking at for next year. Shortly back to 2015, and to a point earlier made, look at the base prices for stainless steel. Europe has been very resilient in the last year, 2015, very much helped by the anti-dumping measures that were there in Europe, which probably is one of the reasons why we had a steep drop in the U.S. because these Chinese volumes looked for a new home, and unfortunately found them happily in the U.S. So the results in the U.S., in spite of the improvements we made ourselves operationally, have been under pressure because of those falling prices.
Further to falling prices, you know this graph, LME stocks have exploded in the last couple of years. There has been a small improvement recently, but it is a drop in an ocean. It really is still at incredible high levels, pushing nickel prices further down and keeping them down for the moment. It puts a lid on the nickel prices, especially if you then look as well at the general economic activity where especially Asia, China, growth rates have come down, affecting demand for the metal. I said earlier, the fall in nickel price specifically affects our demand from the distribution segment. That is a larger segment in the U.S., relatively speaking, than in Europe. As a result, in Europe, where you have good underlying demand still in the direct customers, that explains why we have resilient pricing in Europe versus the pressure in the U.S.
To the earlier point of imports. On the left hand, you see the imports into Europe, and they are both in absolute as well as in percentage terms. They have come significantly down from 2015 over 2014. Whereas if you go adversely to the U.S., you see conversely that they have come up significantly from an average of 25,000 tons a month to 34,000. That is a very significant jump. Without any changes in the environment, that pressure will remain. The deleveraging, already said, we got a good boost in the arm from the disposals, allowed us to significantly pay down our debt. Over the years, from 2013 to now, coming down from 190% to now under 70%, is one of the great positives in the story of Outokumpu over the last few years. With that, short visit to the synergy programs and the cost programs.
Reinhard will be more specific about it, but what you see is that on the synergies program and the P250 restructuring program, we have basically reached the targets. Those programs are at an end, so we put a line under it. The same goes for P400, which is our network and capital program. That program we achieved, we overachieved, and it is closed. The EMEA restructuring is ongoing, and you will see that in 2016, there will be a big part of the savings will start hitting. But still, we see a significant gap between our performance and some of our competitors, and that gap needs to be closed. So we are, at this moment, looking into further restructuring and cost measures as well as network and capital measures, which we will be, in the coming few months, will come out with more details.
With that, I would like Reinhard to come and present the more detailed numbers on the financial performance for 2015.
Thank you very much, Roeland. Very warm welcome from my side as well. Very pleased to give you some more insights into the details and the colors of the numbers for Q4 and 2015. If we look at the overall performance, Q4 has, from the operative side as well as from our net result, clearly improved towards Q3. That is not only because of the quite significant impact from the transaction, but also the structural and operative measures that we have implemented clearly showed a positive impact there. While our underlying EBIT is still negative with EUR 11 million, it is an improvement.
A negative EBIT can never be the target and never be satisfactory, but it is an encouraging sign that we are making progress, and specifically also EMEA, where we have progressed with the structural changes, with the closures of the melt shops in Germany, have contributed now very positively, and this will continue to grow. If we are looking at the operational environment, we are seeing that deliveries have more or less stayed at the same level to Q3, while sales have gone down 4% from Q3. If we look at 2015 compared to 2014, this is an even more pronounced effect. We have seen that there is some 170,000 tons less deliveries in 2015 and quite a significant lower sales coming from that, some 6.7% decline. However, that did not materialize dramatically in the change of our profitability.
On the contrary, while underlying EBIT with EUR -101 million is more or less on the similar level, our net result has significantly improved and has reached a positive result with EUR 86 million in 2015. We can also see that the number of people employed with Outokumpu has been, as we had anticipated, reduced quite significantly, more than 1,000 people less on board compared to 2014. If we look at the non-recurring items, we can also see that there has been a quite significant positive effect there, EUR 409 million from the sale of SKS, but also the non-recurring items from the Coil Americas, where there was the cold rolling effects still visible in the first half, as well as the restructuring and redundancy topics have clearly gone down and be reduced compared to 2014 with a lesser negative effect.
If we are looking at the savings programs, Roeland has introduced already quite a lot about that to you. We have reached our target of EUR 470 million that we have been promising for 2015. The targets for the synergy programs as well as the P50 program have been done according to plan. No lapse of savings there. We have also, for the first time now, a positive contribution from the EMEA restructuring from the E100 program with some EUR 20 million of savings there. This program is going on and will yield another about EUR 60 million positive in addition to what we have reached. So at a level of EUR 80 million savings for 2016 and reaching the anticipated EUR 100 million in 2017.
We have also talked about, in the past, about the one-time cost for these restructuring programs of about EUR 220 million, and we can say that we have taken care of all these kinds of costs in our P&Ls already throughout the years 2013, 2014, and 2015, so that there is only a very small increment still to be expected in 2016. While on the cash out, you can see that we have seen a quite significant negative impact from that, specifically on restructuring and redundancy costs, some EUR 94 million in 2015. So also there, only a significantly smaller number at about EUR 50 million will incur in 2016. From the cost savings to the working capital savings to the cash relevant topics, we have overachieved on the P400 program quite significantly. That means that we have freed some cash of EUR 574 million compared to end of 2012.
There was also a significant increase between 2014 and 2015. However, that was certainly also helped by lower material prices, lower commodity prices, which had a positive impact as well. We are seeing that in total, our inventory days are still at a comparably high level. This is potential for the future. We are very much concentrating also in 2016 on this as a potential to further improve our net working capital and extract some cash from that. If we are going to some details to the business areas, starting with EMEA, we can say that there is a very positive development in EMEA.
While Q3 was quite disappointing in results due to seasonal situations and the overall difficult environment, we have been fighting back and Q4 clearly has been recovering and came out with an underlying EBIT of EUR 34 million positive, so that we are seeing a quite significant positive number for the year also in Coil EMEA. We have to see that deliveries overall have not been on the same level as 2014. They have declined by some 5%. Base prices also have gone down in average in 2015 by some EUR 20 per ton. But overall, we can say that the pricing environment has been more stable and resilient in Europe than in the U.S. Briefly coming to the U.S., there we are seeing that there's still a loss-making area.
This is certainly driven by an even more difficult environment regarding prices, regarding import levels, but also regarding the general consumption, specifically with some impact also from project industry and oil and gas industry there. We came out at an underlying EBIT of EUR - 41 million, only slightly more positive, but we are seeing a little bit of a positive trend there. On the deliveries, we are clearly seeing that Americas is picking up. They are gaining market share. While the first half of the year still has been marred by the difficulties we had with the cold rolling mills in 2014, and therefore our delivery reliability was not good enough for our customers. This has changed. We have gained ground there. We have now 138,000 tons. We are gaining speed again in the way how we are ramping up.
In principle, if you see that base prices have been down more than $200 per ton during 2015 compared to 2014, you can imagine that this has been not an easy environment, but this is still a very important leg for us, which we are striving to bring to profitability very soon. Looking into the three other business areas very briefly. Asia, of course, extremely difficult market, extreme overcapacities there, and we have decided to take out our engagement regarding operations in Asia while we are still staying in the business with our input volumes from Europe, specifically also on specialty grades, which give us good results. You can see that with this consolidation of SKS in December, also our fourth quarter result has clearly improved and is now at a EUR -3 million level of underlying EBIT.
In Quarto Plate, Quarto Plate has been a difficult environment already in 2014, and we have been striving for a turnaround. Clearly there is a better result in 2015 than 2014, but it is still negative. Efforts still have to go on, and we are seeing quite significant potential that this will come to positive numbers soon. Deliveries have been growing, and this also shows the efforts that we are taking in Degerfors in Sweden, in our main European part. The underlying losses have been reduced to a level of EUR 23 million compared to EUR 30 million in last year. In long products, this is quite a resilient business. However, in fourth quarter, specifically the U.S. business also has been hit by lower prices, over capacities, and difficult market environment.
We ended up with a small negative number of EUR -3 million, but in total still a positive underlying EBIT for the year in long products. Of course, main focus was not only on the structural improvements and operational improvements, but also cash flow improvements. There you can see quarter four had a very strong impact on our cash flow for the year. While operating cash flow was positive, specifically the net cash from the investing activities, which is the delta between the divestments and the investments, came out with EUR 319 million positive and ended up at a free cash flow for the group of EUR 321 million. This also led to a free cash flow for the full-year of positive EUR 205 million, and that helped certainly to deleverage the company in the way that Roeland has explained.
Cash equivalents stayed more or less at the same level as did also the liquidity, where we have a very comfortable level of EUR 1.1 billion in the group at the end of this year. Financial stability has clearly improved, not only from the deleveraging and the improvement in gearing, but also from the maturity situation that we have taken care of in quarter four by refinancing efforts. We have renewed and extended a revolving credit facility to 2019 with a tranche of EUR 655 million and remaining additional EUR 145 million maturing in February 2017. Through the deleveraging, we had been able to prepay and take down our exposure in our loans by a significant value, and you can see that we now have maturities on a quite normal level for 2016 and 2017, whereas the bulk has been now shifted to time 2019 and 2020.
With that brief excursion into the financials, I would like to give back to you, Roeland, for the outlook and guidance.
Thanks, Reinhard. On outlook and guidance, first to level set. Again, looking at the projections via SMR, you will see that in Q1 2016, versus Q4 2015, what we see is an expected drop in real demand, both in EMEA and in the U.S. of about 2%. On top of that, and you have probably seen it today, nickel prices decisively dropped under 8,000 tons. There's little wind in the back to be expected from there either. However, in spite of these facts and in spite of the trading environment that we expect for 2016 as a whole to be still pretty tough, we estimate that the first quarter delivery volumes will remain at a similar level as the fourth quarter of 2015. At the same time, I've been talking about the restructuring cost efforts in EMEA that will continue to work its way into our results.
That results that although we see mitigating effects coming from there, that Q1 2016 will still be an underlying negative EBIT. Now onto a bit of a different subject, and it says here, the CEO's first 40 days at the office. There were weekends as well, so it's not that bad. The last five weeks, what I have been doing to familiarize myself with the company is I've been traveling around extensively. I have visited basically all our facilities, our major facilities, bar one, I haven't seen Sheffield. But for the rest, I've been to all of them. The one thing that I can say to my own comfort as well is that we as a company have absolutely excellent assets.
I have been totally impressed by what I've seen, to the point where with my 15 years in the industry comparing to what I've seen, which is common in our industry, we are ahead. We have better assets than the average. We have well invested assets. We have modern assets. We have assets that can compete with any other in the world. We have high levels of automation. There is a very clear signal for me that the bones of the company are extremely sound. The other thing that was very clear is our people. Walking around, talking to our operators, sitting at the pulpit, asking people about what they want, what they think. There is an absolute passion on what they're doing. There's an identification of the people with the company. They like the company. They want to succeed. They want to learn. They want to get better.
Clearly, we have the right elements to be competitive. The other thing that's very obvious is that we have come a long way with the acquisition and then the whole restructuring that has been done. Coming in from outside and seeing it for the first time, what I have seen, and then I talk especially about Europe, is that we now have an extremely well-balanced system. You can't talk anymore about a plant here and a plant there. It is a balanced system where we have a great balance between the downstream and the upstream, the hot end and the cold end, that is operating as one organism together, and that is very interdependent as well. Highly efficient, very, again, well-balanced as a system. That's good. Looking at the U.S., where you have a slightly different system, because it's Calvert there as the main driver.
Again, Calvert is a fantastic asset. It is an amazing asset with young, new people in there. People who do not come from our industry, who were in hotel management three years ago and learned the business. Again, you see that same drive of wanting to succeed and wanting to learn. We sent people from Tornio recently there to help, and people suck up the thing. There's a tremendous base. Still, we are underperforming our competition. That's obvious. There are a few things there that I want to comment on. One is, the focus of the company in the last three years has been very much how to digest an enormous acquisition. We bought a company the same size with its own very strong culture, with its own asset base that was optimized around what that company was.
We needed to integrate that, and that has been where the focus has been. It took efforts, resources, a focus away from maybe what our core base business is. Still, the result is great. What we have here is fantastic. But now we need to bring this to the next level by refocusing on the base business. Refocusing on the core. I can guarantee you that what I've seen and what I've heard and what I know is that we can clearly see these areas of improvement. It's not something where you scratch yourself and say, "What's wrong with us?" There's nothing wrong with us. It is basically you can see the areas of improvement, you can see the opportunities everywhere. That brings me to basically sort of broad outline what we need to do.
I start on the right side of this slide, the building of long-term competitiveness. If you go and look at the internal side of our plants, you see pockets of excellence everywhere. You see methods of working that are different but are good. What we do not have is a real manufacturing excellence system that brings up best practice, that drives performance, efficiency, et cetera. What we do not have is a very strong supply chain management that brings it all together and makes sure that we bring down our inventories, that we up our delivery performance, that we bring down our cash conversion cost. There are enormous improvements there in the old-fashioned way.
Rather than selling assets as we have done in the past to make our money, we go back to the old-fashioned way of making money, which is concentrate on where the rubber hits the road in our business. Same with our customer side. We have tremendous opportunity with our customers. We have great products. We have a fantastic product portfolio. But we are not optimizing it. We have to streamline that. We have to have the company led from the front, from the customer end, in order to leverage on that part. These issues are not quick fixes. There is not a silver bullet. There is no flip a switch and we are there. This is a pathway to success. It will take years, three years, four years before you are really there at your excellence point.
In order to get there and to deserve the time to get there, we need to do a few quick fixes, and they are there as well. One of them, very clearly, is further bringing down our net debt. For me, that is a primary objective, is to deleverage the company further. We have the opportunities. As Reinhard said and showed, we are still very heavy in our working capital. We have a very large chunk of money locked into our working capital that we can get out without- I would not say without too much trouble. Again, it is down to hard work, but we can get it out. We have defined it. We are working into details, and there is significant improvement there. The other one is SG&A.
We are complex due to how we got together, how the company was formed, and we have to get the complexity out. We have tremendous opportunity in bringing down our SG&A costs. Not only does it take out cost, it brings efficiency that in itself is a flywheel to improve performance. That is another thing that we are working on at this moment with my whole team and with the other teams as well to bring that to a very quick, short program to take those costs out. Obviously, Coil Americas. You saw already we have a gradual improvement. We have a fantastic improvement in our volumes. In spite of the difficulty in the market, we see our market share growing. We are pretty successful there. We have a new team on board there. We have a new leader, Michael Williams, who has an incredible pedigree, fantastic leader.
He brought in October, a new operations leader, world-class, and early January, we got a new commercial leader in as well, in whom I put enormous faith. We have a new team there. They are already moving fast ahead, and things are happening. The costs per ton are coming down due to the focus on our manufacture. I can see as well there the dynamics and the progress going to happen. Obviously, there are many more things, but those are the things where we, on the short term, can make a difference, bring that down, get our initial results up, and deserve with that the longer-term journey to sustainable excellence. Although we are a long way already in defining these plans, I unfortunately cannot yet share the details with you, but we will do so in the coming months.
I would like to hand over to the floor.
Thank you, Roeland, very much. Thank you. Also, I would like to welcome Reinhard here. Operator, we are soon ready to start the Q&A session with both Reinhard and Roeland. Okay. As usual, we will start the Q&A from the Helsinki audience. I believe that we have Baby here with a mic. If you do have a question, kindly raise your hand so we will get a microphone to you. After Helsinki, we will continue with the conference call participants. I believe that in here we have one question. The first one.
Hi, it's Johannes Grasberger from Nordea Markets. My first question is related to the U.S. operations and the fact that one of your competitors has recently shut down their operations, ATI Allegheny, which I assume is releasing some 100,000 tons-150,000 tons of market share. Any comments on that, whether you've already seen some effects on your operations for Calvert, maybe on increasing order intake or capacity utilization since the plan to shut down?
The only thing I can say is that our order intake progress in North America is in line with our expectations.
Those expectations are for, I suppose, improved order intake?
They are for the expectations for improvement, yes.
Okay. My second question is on the volume guidance. For the first quarter, stable volumes, but I suppose after the sale of SKS, is that comparable volumes between Q4 and Q1? Q4 volumes are looked at without the volumes that SKS produced, or is that not comparable, which means that there is more volumes coming out from another plant?
Well, first of all, SKS has already been deconsolidated in December from the numbers. You would not meet a huge difference there. What we mean is that it will be on the levels that are in the papers that you can see.
Yeah. Right. Good. Then actually one more question on Americas. It looks like the average selling price in that segment is quite low compared to the market prices, whereas you are actually achieving, say, a premium price in the European operations, which to me means that the mix in Americas is quite weak still compared to what the stable operations in Europe are doing. Should we assume that if the ramp-up goes ahead at Calvert, the actual average selling price will improve from the current level, which has also a positive impact on the bottom line?
It is true that currently our volumes in the U.S. have been mainly going through the distribution segment. We clearly have plans to migrate part of our sales more into the so-called bill of materials and into direct customer sales. However, it is effect of the market that in the U.S., just in general, the distributor segment is much more significant than it is in Europe. But yes, we are moving up the mix.
Okay, and then the final question is on the SMR forecast for -2% demand in Europe and the U.S. during this year. Maybe a couple of words on that, because the EUR is still weak, and exports from Europe are increasing. Which segments do you see that are actually coming down? Because construction looks like that is bottoming out, automotives are doing fine. Just a couple of words on that, what is taking down the demand?
Although indeed automotive is running fine, you have other sectors where it is pretty poor. Oil and gas is obviously down significantly. Heavy industry is expected to be down significantly. Then again, the famous distributors, that is still a factor in the market that you have to count on. You saw the graph, over 50% is distributor volume for the market as a whole. As long as nickel prices remain depressed with a tendency down, that volume will be low.
Okay. Thank you.
Hi, it is Erkki Vesola from Swedbank. Couple of questions from me as well. Coming back to Coil Americas or the market, is there any prospect after the heavy drop that the base prices would improve in the Americas market in the course of 2016?
I would assume that the prospect is always there. I think the issue is that there are many unknowns and uncertainties. The volatility is there. Obviously, if volatility abates and stabilization comes into the market, you would see potentially an improvement. But to speculate on that is wrong.
And linked to that, how much should the base price improve in order for you guys to reach breakeven level at Coil Americas?
I would like to not comment on that.
Okay. Then more housekeeping question regarding 2016 CapEx. Is there any guidance by you?
Our 2016 CapEx will be around EUR 140 million.
Okay. Thank you.
Do we have more questions from Helsinki at this point? If not, operator, I think we are then ready to move to the conference call participants. I would also ask, of course, conference call participants identify themselves before the question. Thank you.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero followed by the one on your telephone keypad. The first question comes from Seth Rosenfeld from Jefferies. Please go ahead. Your line is now open.
Good afternoon. This is Seth Rosenfeld at Jefferies. It is a couple of different questions. First, starting out on the balance sheet. Obviously, you have had some success deleveraging significantly in the past quarter, driven by asset sales. You noted earlier on the call their goal of further reducing net debt in the near term.
I recognize you cannot say a lot, I suppose, but could you just give us some targets for medium term, what sort of level you would like to be at, either in terms of absolute net debt or perhaps gearing, given that is where your covenants are? Also, you have made some progress recently refinancing your debt in order to reduce your annual cash outflows. Do you see further opportunity for that in the medium term, or is that going to be something that you have kind of hit the nail on the head thus far?
And then separately, a question on the outlook for the EU. Clearly, last year's anti-dumping measures helped block import from China and Taiwan, but we have seen growth in volumes from other countries in recent months. How is that affecting your business? Are these new volumes as damaging to price as China was? Are you ultimately seeing a bit more downward pressure looking out into the spring of 2016? Thank you.
Reinhard, if you can take the first part.
Yes, sure. Thanks, Seth, for the questions. Regarding in general the asset sales, of course, that had a significant positive contribution. We see that also as part of active management of the company, that we optimize the balance sheet by non-negative measures. Please keep in mind that with the assets that we have taken out, we have not reduced our EBITDA potential that we have in the company. These were not heavy EBITDA contributors. On the contrary, there were negative results coming from that. In that sense, of course, this is some extraordinary topics that we had, but the overall deleveraging was also
Coming from some operative topics around the networking capital. If it comes to medium-term targets, please bear with us that this is not the time yet, before, specifically Roeland has taken up the full view and his program to talk about medium targets. But one thing is for sure, deleveraging will go on. If it comes to refinancing, yes, the refinancing efforts have been taken from our point of view, also at the right time and the right scope. Regarding further refinancing, there are always opportunities for us. We have access to several pockets of money in the market, be it daily money in terms of local markets or be it bonds. There is one pocket that we are not planning to look into that is any kind of rights issue or something like that. That is not on the agenda, but other possibilities we have.
We will calibrate that very much with the opportunities regarding cost and the possibility to have further improvement of our interest cost there. We will not have to take any steps which will deteriorate this. On the contrary, our target clearly is also to take our interest costs down.
As far as the question around the EU anti-dumping and the effects that we see for 2016. As you saw, there was a significant impact in 2015 on imports. However, there will still be, of course, import pressure coming from countries like India, South Africa with a low rand, et cetera, which will put a natural cap on what you can and cannot charge. However, as I said before, prices have been very resilient, and we expect that to continue.
Great. Thank you very much.
Thank you. The next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is now open.
Performance. Firstly, can you please give us a little bit of color on whether you think that we have reached the trough in Q4, and whether we will already see at least a little bit improvement in the first quarter? Secondly, given that fourth quarter volumes were not actually that bad, actually, they were quite good. How much of any future improvement to get to EBITDA breakeven is really in your hands, or is this maybe more a function of what the market and maybe base prices are doing? The last question is for Roeland. You already gave us quite a bit of color and detail on what you think needs to change, which is great.
You also said that you are not planning to divest any asset near term, which I guess is very understandable, and I guess certainly the good price you got for the SKS asset has basically given you a lot of time on the balance sheet now. However, we are obviously still having U.S. asset, which is probably state-of-the-art in theory, but at current EBITDA run rates, and I am referring to Q4, it is basically burning at least 14% of your market capitalization in cash per annum. Clearly, this needs to be fixed very quickly, one way or the other. I appreciate that intuitively it makes a lot of sense to try to solve the situation on a standalone basis, but would you categorically rule out any strategic partnership or even putting the asset up for sale should you not be able to fix the cash burn quickly? Thank you.
Bastian, it is Johanna here. Could you please repeat the early part of your first question? Because we did not actually hear if you meant group as a whole or specifically some of the business areas.
All right. Sure. Sorry for that. I was referring to the S, whether you could give us any color on whether you think that we have reached the trough in Q4 and whether we will already see a little bit of improvement in Q1. Basically, the second part of this question was whether you think that getting to EBITDA breakeven is really more in your hands or whether this is more a function of what the base prices in the U.S. do from here onwards.
Thank you. So Coil Americas related question.
I would take the question one and two as one, if you do not mind. I feel that we always have to do what we can to make sure that we are as resilient as possible and as robust as possible in whatever environment we are operating in. Our own efforts to reduce cost, to improve our mix in the market, and to increase our share are, to me, the most important moves. Ultimately, of course, there are always things in the market that you cannot control. We need to make sure that we suffer from those less than the others. Whether the Q4 is the trough, it is a matter of can you look into the crystal ball and tell me what happens to nickel prices, Chinese imports, et cetera? It is not something that you can answer.
Again, the thing that I can answer is that we will improve our own controllable game, and bring it to best in class. Would we contemplate divestment of our asset or partnerships, I would say at this moment very clearly that the U.S. operations are a key cornerstone of our strategy. Even if you have a short-term outlook that does not look great given what we see and what happens in the markets and nickel prices, that does not take away the long-term strategic importance of that asset.
Very clear. Thank you. Maybe one brief follow-up on the debt situation, if I may. If I remember correctly, there was a step-up clause in one of your bonds if you are not getting a rating by 2016. Could you give us any update on the situation and maybe share with us the impact if you should not get any rating by the end of the deadline?
Sure. That is correct. There is a step-up clause in one of our bonds. It is about a EUR 250 million bond, so not a very large part. The topic of rating is, for us, always in the agenda. The topic of timing is to be assessed when it is appropriate for the company to take that. That is not something that would be appropriate to comment at that moment. But as said, it is on the agenda, and timing will be more or less communicated when we are at the moment where this is beneficial for the company. You will have certainly a good understanding that current situation in the market is difficult. But on the other hand, Outokumpu is improving. We have our hands in that.
Okay, perfect. Thank you, and thanks for taking my questions.
The next question comes from Nick Pez from BNP Paribas. Please go ahead, your line is now open. Nick Pez from BNP Paribas, please go ahead, your line is open.
Hi, gentlemen. Sorry, I did not recognize my name. Couple of questions, if I may. As a follow-up on your first thinking, Roeland, with regards to need for more cost cuttings. Could you maybe share with us if you have in mind, I know it is a bit early stage, the need for more closures? Or would you have more in mind the idea of better clustering some of the sites as some of your competitors do? That would be my first question. Second question related to anti-dumping would be the following. Do you see room for more anti-dumping measures in Europe targeting India or other countries? Where do you stand with regards to anti-dumping in the U.S.? Thank you.
Okay. Thanks, Nick. It's actually Luc. Luc. Yes. Luc. Nick. Luc. Okay, sorry, Luc. On further closures or clustering, as I said, in U.S. there is nothing to cluster because basically that is Calvert, which is then forming a tandem specifically with Mexinox. In Europe, we have reached a very balanced state of affairs. If you take what we have on the upstream side, in our hot rolling, in our cold rolling, combine that as a system, it is very balanced. If you would take out any more capacity, de-cluster or close, you would upset that balance, and you would actually do yourself a disservice. I don't foresee that at this moment. As to anti-dumping measures, whenever there is unfair competition, we will actually, of course, actively try to have that investigated, wherever it comes from, whatever product it is.
That goes for Europe, but it goes for the U.S. as well.
Do you have any finding in mind, timing, whatever?
We have nothing in mind. We are looking into it, of course, actively. Again, as I said, if we have the feeling that there is unfair trade, then we will push for investigation.
Thank you.
The next question comes from Johannes Grunselius from Handelsbanken. Please go ahead.
Yes, hello, everyone. It is Johannes Grunselius, Handelsbanken Stockholm here. Just a few questions. I am curious to hear a little bit about your initial thoughts here on new cost savings, Jan. I realize this is very early stage, but could you give us some kind of hint what kind of magnitude scale we are talking about here? Thanks.
I could, but I won't. Again, we have clearly identified a number of areas. I have mobilized a large part of the senior management in the company. We actually had a meeting with the 50 most senior leaders early last week to go through the potential programs to do more defining. We are back working to put meat on the bone, and as said earlier, watch this space. In the next couple of months, we will come with details.
But it clearly sounds that there is something. Am I right?
Yes.
Yes, thanks. I will wait for the details. When are you presenting those? Will that be in conjunction with the Q2 report, or will it come in between quarterly reports, or do you know that at this stage?
We do not know at this stage, but I like your persistence.
Okay. Then I have also a question on the markets. Could you give us a little bit of an update? What are your insights into the inventories in Europe, among your, in the systems, among distributors? If you also could give us an update on where we are in terms of inventories in the U.S., please.
In both regions, destocking has been going on. We are basically at either average or below average levels, in both regions. That does not, however, automatically translate into increased demand. The only thing you can say is that there is less room for destocking than there might have been in the past. But what we see currently is that the distributor sector lives hand to mouth as long as the nickel prices stay depressed.
Then I have a final question, and that is your thoughts on the base prices in Europe. You said it several times here in the presentation. Those are pretty stable, although the market situation is so tough. What are your thoughts on that? How come that the base prices have held up that well in this weak market?
I think it is because of the underlying demand that we have still experienced in Europe. We are talking about the automotive sector, which, of course, is a big driver in Europe. Very healthy. The white goods is still very healthy. So I think that, plus the fact that there is automatically a higher end market where it makes a difference where the material comes from, and imports have less effect, will stabilize pricing.
I see. Thank you very much for your answers. Thank you.
The next question comes from Kevin Hellegard from Goldman Sachs. Please go ahead. Your line is now open.
Hi there. Good afternoon. I just wanted to hear, given what you have done on your net debt and your interest cost, can you give any sort of flavor of around which level of EBITDA you will be free cash flow breakeven at this stage?
All right. Just to get your question right. The free cash flow has been at EUR 205 positive for this year. So, in that sense, we are clearly more than breakeven for this year.
Just like what level do you need to be breakeven? I guess there was a lot of divestments in here as well. What level of EBITDA will you roughly need to be at to be breakeven?
Well, maybe just to give you the building blocks there. What we are having in addition to our EBITDA cash flow, we are having some depreciation, which is not cash relevant, in the magnitude of some EUR 230 million. If we are taking the investment cost, we said that the total interest cost that we have here is about EUR 160 million in 2015, which will go down in 2016. If you take the CapEx, Roeland has already given the number. If you add that up, there is not a lot of tax payments that we would have on the cash side. So that gives you roughly the number of EBITDA.
Okay. Thank you.
The next question comes from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead. Your line is now open.
Hello. Thank you. Just on U.S. and the base prices. You announced a base price increase in January of 160, but you are not saying how much that actually will be effective in 2016. Can you elaborate a bit on that? Can you also say if the higher prices will mean a potentially negative impact on volume, thus you have been able to compete with low prices in Q3 and Q4?
Yeah. Start with the second part. We don't expect an influence on volumes from this. We have to see for the full Q to what extent this price rise sticks. We don't have the full visibility on that yet.
Okay. A question on the scrap market. Can you quantify the effect that increased scrap prices had in Q4 and what you see for Q1? Will you see increased pricing Q1 as well, or have you seen it stabilizing?
Well, on the scrap prices, we do not give any kind of details. This is a very strategic way of how our procurement works, how our use of that works. There has been some negative developments. That is very clear because the availability of scrap with such poor nickel prices is subdued, but that has nothing to do that we would not have enough scrap. There is some negative impact there. But we will not quantify that.
All right. On base pricing in Europe, you were able to increase prices of around EUR 15 in Europe. Do you see this holding up in Q1, or do you see it reversing as prices has been not increasing in general?
Again, we do not comment on pricing, but I think the guidance was clear enough.
Okay. And just last one on Degerfors, you said you were aiming to increase standard products in that business area. How do you think that will affect profitability and so on? Are you increasing your volumes by taking market share, or do you see the market growing?
Due to increased efficiency, we have been able to lower overall costs on the products. As a result, we have now access to parts of the commodity market we would maybe have shunned in the past.
Okay, I see. Thank you.
Thank you. As another reminder to register for a question, please press zero followed by the one on your telephone keypad. The next question comes from Mike Shillaker from Credit Suisse. Please go ahead.
Yeah, thanks a lot. Mike Shillaker of Credit Suisse. So three or four questions, if I may. One question briefly, which may have been answered, and if it has, I apologize, just on Q1, the implied guidance. That is weaker than Q4, I think, given the comment that costs will only sort of partially mitigate the current downward pressure on base prices as well as the increase in scrap costs. So is that correct? Is there any form of quantification you can give for how much weaker you think Q1 would be? The second question, more sort of strategic for Roeland. How are you looking at the cycle? How do you build a long-term cycle into what you think you need to do at Outokumpu?
Because I think if we look at the last seven or eight years since the crisis, a lot of CEOs have come up with cost reduction plans that have consistently been eaten away by a weaker cycle. How do you sort of build that into your thinking so that you actually get ahead, and we actually start keeping cost reductions as opposed to just treading water? Because I think that is going to really sort out the men from the boys going forward. Another question for Roeland as well. Look, your times at Aleris and Mittal, and I guess especially Aleris, which I think was quite a turnaround story. Can you give us some sort of feel in terms of what you did there? What was similar between what you see there and what you achieved there relative to what you think you can achieve at Outokumpu?
Because obviously, I totally appreciate you are not going to give targets, but it would be quite interesting to see what you think you did in Aleris, especially, that you could compare with Outokumpu. How do you see the challenge at Outokumpu relative to the challenges you have had at Aleris and Mittal? Thank you.
All right. If I can start with the Q1, what you say there is the implied guidance. I would say that is your interpretation rather than what I said. I will leave it at that. When we get to the long-term cycle versus the cost reductions, are they sufficient? I think what I said before, we have done a lot of cost reductions that come out of the restructuring, where you have a lot of assets in one heap that you have to then streamline and get into something that has industrial logic. That has been done. That has led to a lot of cost reductions, not necessarily to your sustainable competitiveness yet. The next level that we are looking at is addressing that sustainable competitiveness.
As I said before, there is absolutely no reason in what I see and in what I have identified as opportunities that we cannot be one of the most, if not the most competitive player in this field. That, by definition, makes you not impervious, but much less vulnerable to any of the cycles. I hope that answers your question. It is not just, in other words, pure cost-cutting. It is as well to get into your operational excellence to be more competitive than the next guy. That brings me a little bit to your last question on Aleris. The program we set up there was very much around indeed optimizing the portfolio, and optimizing the portfolio was on the assets, on the products, and on the customers.
So we went through a similar exercise there where we closed some of the facilities in order to get better utilization in what was left, in the better facilities. We sold some of the non-core businesses that we had, which you could liken to what we have done with SKS. We very much focused on the market side. So we tilted the company from an asset-led organization to a sales-led and customer-led organization, which brought us very clear advantages in especially, again, the higher added value segments that we targeted. We also, and I think this is the one thing that is very similar, we also in Aleris did not have a clear manufacturing excellence operation system. Which we introduced, and which over the period of 5 years we got operating, and which basically almost guaranteed productivity gains of, in the first instance, 4% or 5% per year.
Then as you get the low-hanging fruit out, we still gain 2%, 3% a year on productivity based on the program of excellence and the sharing of best practice. So a lot of the issues there are the same as we have here in Outokumpu, which brings me to the point where I said, I think we know what to do.
Okay. So a follow-up question on that. So five years with a plan, but you said that actually tangible results started coming through relatively quickly after maybe one year?
The tangible results start filtering through early on. The size of it is something else. But yes, within the early days, so the 18 months of the program, you will already see it significantly.
Okay. And just on Coil Americas, how much do you think so far, given what you've looked at, has been just mismanagement or bad management of the asset? And how much do you think has just been bad luck, bad cycle? Because again, I don't know where we'd be if we didn't have the USD stock last year. But when you look at it, how much do you think effectively the performance has just been impacted by the fact we've just been in a massive destock? And where do you think we would be without that?
Well, Mike, I find it very difficult to answer the question. I wasn't there in the years when this facility was built and started up. I don't know the circumstances under which it was done. I don't know what the market did in those days. So it's very hard to comment. What I do know is what I see today, which is a plan that has a fantastic flow going through, that has great assets, that has people that, and maybe that's the only thing where I see the great advantage, that have been trained over the last few years to get up to a level where they understand the business and the equipment they're using, and where there is this enormous wish for improvement. And that is where I bank on.
Okay. Roeland, thanks for the answer and good luck.
Thank you. There appear to be no further questions. I will return the conference back to you.
Excellent. Many thanks. Any more questions here in Helsinki? All right. Looks that everything is clear. So with that, I would like to thank you for participating in today's conference call and webcast. Thank you, Roeland. Thank you, Reinhard. Also a reminder that our Q1 report will be out on April 27. Thank you so much.