Hello all, and welcome to Outokumpu's Q4 and full year 2022 results webcast. My name is Linda Häkkilä, and I'm the Head of Investor Relations here at Outokumpu. With me today, we have our CEO, Heikki Malinen, and our CFO, Pia Aaltonen-Forsell. Today, we will first start with the management presentations, and after that, we're happy to open the lines and start taking your questions. Year 2022 was definitely a historic one for Outokumpu. Our earnings were in a record level, and Outokumpu was net debt-free at the end of the year. Before we start going through the presentations, I would like to remind you about the disclaimer as we might be making forward-looking statements. Now, without any further comments, I would like to hand over to our CEO.
Thank you, Linda. Good afternoon. Good morning, everybody. Welcome also on my behalf to Outokumpu's earnings webcast. It's really great to be here today. I feel extremely proud and happy to have the honor to go through the results of 2022. As you saw from, hopefully, then you noticed the first slide, you had that photo of our Outokumpu employees from Vilnius in Lithuania. That big smile that the team here had on the photo, I think that sort of portrays a bit the sentiment in the company at the moment. A lot of big smiles for the hard work of the last years then materializing in such a good financial performance.
If we now dive into the actual story here, so as Linda already said, EUR 1.3 billion EBITDA, it is by far the best financial result of this company, probably ever. Of course, there are many, many things that sort of drove that result. As we all know, last year was sort of a story of two parts. The first half of the year market situation was extremely strong, and of course, that further gave the company a lot of momentum. We were running pretty full all the way through summer. Our operations overall performed very well last year in spite of especially the very challenging energy crisis that hit us then as we went through the summer of 2022. Our ferrochrome operations, probably was the one that was hit most, or let's say clearly from energy.
Of course, it's a huge electricity user, and therefore, when electricity prices spiked up so highly in Q4, we of course, had to take rapid and decisive measures. Cost inflation, of course, has been a much broader topic, not only in energy, but also many of our consumables, other sources, factory inputs have also been rising. As we'll probably cover later on today, the enormously volatile nickel story of last year with some also historic phenomena in Q1. Finally, I wanna just mention that sustainability, of course, is an extremely important part of our strategy, both in terms of raw material content, recycled material content, we are really the leader, and also in terms of CO2 emissions, we are the leader in the industry globally. A few words first about the market.
If we kinda take a quick look at the upper right-hand corner where we have nickel price, this is an averaged-out picture, so you don't see the month and day-to-day volatility. As you recall, 2022 was a pretty weird year because we had already in March that huge short squeeze in nickel. I think that sort of in general just shows that 2022 has been quite a difficult year from the standpoint of how to manage nickel risk in our business. As you can see from the slide here, the picture that nickel price has been trending upward, we are actually still at a fairly highly elevated level. We're almost touching $30,000 per ton. Historically speaking, in an environment like we're facing today, nickel typically would have been at a lower level. It is high.
LME inventories are very low. Of course, one might ask or one has to ask, you know, "So what is driving that?" It's very difficult to get an exact answer. Is it the boom in electrical vehicles? Although even that has somewhat softened here recently. Is it energy costs? We just don't know for sure. Anyway, this is kind of the situation we're facing and that we have to manage. On the lower left-hand side, you can see transaction prices. Last year, of course, and the second half of 2021 really was a period of fairly high prices. In some way, we were back to record levels we had not seen, since, you know, 10, 15 years prior.
I guess what I can say about that is that you should think about the price level where we are today more as a normalization of prices. Yes, they have been coming down, percentage-wise quite a lot, as you can see in particular for Europe, but this is more a normalization of the level. That's how I would ask you to interpret that. You can also see that the gap between China, Chinese prices, which are shown here in green, and then Europe, which is the light blue one, that difference has also narrowed, which of course is critical because that delta between Asia and Europe does in many ways, when you factor in, of course, freight rates, it does drive sort of the level of imports into the European Union.
We have had COVID restrictions in China for three years. The Chinese market has been probably quite weak and of course that has sort of put increased pressure. Either Chinese producers don't produce stainless or they just have to export and of course Europe is a popular destination for a product originating from China or Indonesia. If we take a look at the results for 2022 for the whole year. While 2021 was a great year in itself, nearly EUR 1 billion in adjusted EBITDA, we ended up with EUR 1.256 billion for the fiscal year of 2022. Really as said, a record achievement. Our deliveries were down by 7%, very strong first half, second half clearly weaker.
Our prices were clearly higher, as you could see from the previous, price curve chart. It did of course, you know, drive our results upward as seen. Of course we had as a negative factor, cost inflation. I have to say in 2021 we were able to manage costs quite well. Inflation was sort of creeping in, but we were still able to sort of buffer that. In 2022, you know, the inflation just started to come through and even with our best efforts, you know, we just couldn't sort of, you know, stop it. It just came through various sources in the company. If we then look at the fourth quarter, and of course this is an interesting, situation because I have to say that the first half of the year we were very much capacity constrained.
Demand was very, very high. We're moving into a market where suddenly we're seeing the market demand drop. Especially as we got into Q4, demand really in some pockets of the market really started to almost like hit the brakes. We as a company, and we're a large company with thousands of people and many mill sites, we had to pivot the organization very quickly from a model of, you know, being a capacity constraint to then a demand constraint model where the focus is really extremely on cost mitigation and even a harder driving productivity.
I'm really pleased with how well we were able in the summer months of the year heading into Q3 and then Q4, really do the pivot and get the organization to focus a little bit differently on how to run the business given the changing circumstances of the fourth quarter. Of course, if you look at this chart, it is interesting to note that Q4 deliveries at 450,000 tons were relatively speaking, absolutely low. If you even compare to the COVID lows of Q3 2022. It is my sense though that many of our customers, especially in the distributor segment, I mean they had bought a lot of product. I mean, we heard in Q4 that, you know, a lot of customer inventories were very full with product. Even some of the harbors were very full.
Many of the distributors just decided, you know, "Hey, the fiscal year is coming to an end. Probably we had a good year, let's hit the brakes." That of course then led to a pretty rapid deacceleration of demand for us, then of course bringing deliveries down quite substantially. Here on the lower left-hand side, you can see our EBITDA EUR 110 for Q4. We had, of course, Q3 was extremely strong, over EUR 300 million, the best quarter result we'd ever had, and then we dropped. You can say relatively speaking of course, quite a huge drop. If you look historically at Q4, I mean, Q4 isn't that terrible a quarter in many ways. I mean, it's a reasonable quarter given the acceleration of the market, given the energy crisis.
I personally feel 110 was a pretty okay result even when you compare it historically and given the tailwind. The headwinds and then overall the costs. Here we are at 110 and I said stainless deliveries decreased by 8%. Then the price decline, which accelerated as we headed into the end of the year, 60% impact on that red bar. The rest really came from the fact that we did not have these one-off positive metal impacts that we had in the third quarter, minimizing the price decline. That's the story for Q4, and we can answer your questions a bit later in more detail. I would like to say a few words about sustainability. This is of course a very important part of our strategy.
At Outokumpu, we start every meeting, every session in the company with safety. If you look at that upper right-hand corner, you can see our safety trajectory. We have been now for many years, year-over-year, able to reduce our total recordable injury frequency rate, TRIFR. With 1.8, I would claim that we are not only one of the best in the stainless steel industry, we're probably at the world-class level compared to many other industries. We have many sites in Outokumpu where actually we didn't have any major accidents during the whole year at all. Just looking at the site-by-site results, I mean, I'm really proud with the work we're doing.
Obviously, our target is to have no accidents, so the work is definitely not done. The trend is strong, and it does position us in this respect as a sustainability leader. On recycled materials, the level of 94 is probably, I believe very, very high, world-leading. As many of you probably are interested in how our company is positioned vis-à-vis the EU taxonomy, I wish to remind you that 91% of our sales in 2022 was both eligible and aligned with the EU taxonomy. Please factor that in in your analysis. We are on a ambitious journey to decarbonize Outokumpu. We're the only company that has committed to the SBTi 1.5%, and that has an approved SBTi target. This is the journey.
We will systematically reduce our emissions by 30% till the end of the decade, this is keeping us at the forefront of emission reduction and keep making us the sustainability leader. The last slide I would like to show you before I hand over to Pia is just say a few words about Long Products. I think over the past years you've asked me from time to time, "What is our plan on Long Products?" I've said it is non-core, we have had a strategic review. We kicked off a turnaround program with a whole new management team in July of 2020. Over the last 2-plus years, we really fundamentally improved the way the business was run. We improved the profitability of the business. We dramatically improved performance. Safety became better.
I mean, in many, many metrics, LP was a much better performing business. The reality is we have a strong focus on the core of the company. We want to allocate our capital into the core stainless business, stainless commodity side, and the advanced materials. Therefore, Long Products just did not fit into the portfolio. I have to say, I am very pleased with the outcome of the divestiture that we have now completed. We have the money in the bank. The total consideration on a debt and cash-free basis is EUR 228 million, and our net debt in Q1 will be impacted by having a reduction of EUR 100 million.
Overall, if I look at the earnings we generated between, I would say, the summer of 2020 until the end of Q4 2022, plus the residual in the incremental cash that we got from the divestiture, I mean, that amount of money, in my view is quite substantial. We have created a lot of shareholder, good shareholder returns through the way we managed both the turnaround and through the way we executed the divestiture. With those words, I think the LP story, as far as we're concerned, is done, and I wish the LP team good success with the new owner. Let me hand it over to Pia to go more deeper into the financials. I'll come back then with some more commentary about Q1 and the future.
Mm.
Please.
Thank you, Heikki. Dear audience, what an honor for me to be here as CFO of the company today, us being debt-free and resilient and the de-risking completed. We are financially stronger than ever before, and we deliver a record result for the year 2022. Let's first look at a few facts around the balance sheet. On a high level, liquidity as well increased, and I'll actually have a bit more detail of that still talking about the funding structure that we have right now, but it's now up to EUR 1.4 billion. We have an EUR 800 million committed credit facility that we haven't used. That's something that we did refinance during 2022, actually during the first half. We have also at this point, no commercial paper funding left at the year-end.
On top of that, obviously, our balance sheet is already impacted by the full share buyback program that we are now in progress of doing. It will amount in total up to EUR 100 million, and at this point in time, we have already taken that as a liability so that in full is impacting our net debt now. The KPI table on the next page talks about the strong financial performance. I will come back with a few more comments on the BA specific figures and talk a bit more on the deliveries. As Heikki had pointed out, obviously, that is a figure that particularly for the fourth quarter is a weaker and a lower one due to the softer market and destocking.
If we look at the result of EUR 110 million for the quarter and the adjusted EBITDA of then almost EUR 1.3 billion for the year, this has also delivered us a really good net result of more than EUR 1 billion. What is, of course, a bit extraordinary in the year is that due to the improved performance in the U.S., we were also able to recognize in our balance sheet basically the right that we have in future years to use kind of old losses or recognize taxable losses, so that we don't have to pay cash out taxes in the future years. Let me just say that, you know, from a sort of accounting perspective, this is important. It adds something to our balance sheet. It actually adds profit to our P&L.
From a cash perspective, this doesn't make any difference. I actually wanted to point it out here. I mean, really from the underlying operations more, out of the record level earnings per share of EUR 2.40, we did have EUR 0.67 out of this deferred tax asset booking in the U.S. We also published a separate release of that in December, if you are interested in more detail. For me, that leaves EUR 1.74 as sort of a more regular EPS to be looked upon. Of course, other important KPIs from this page, I would highlight the return on capital employed now at 22.6% as well as then the net debt being negative.
I have one page here about strategy execution. You remember that we launched the phase two of our strategy execution last summer. Now we have started the journey of reaching the financial target of EUR 200 million EBITDA run rate improvement that we are targeting. I think what I wanna illustrate with this chart is that we have now come off to a good start. We have EUR 28 million run rate improvements that we have achieved during Q3 and Q4 of 2022. If you just look at it sort of linearly, you know, how much do we need to do by month to reach the EUR 200 million by 2025, we are actually in a really good pace there. The three areas that we are focusing on here are the growth from productivity, the customer-focused steering, and sustainability.
I think these are areas we will then return to also in our later reports. The start has been good and solid since last summer. On to my next section, where I have comments on our business area performance. I will start with Business Area Europe. I mean, obviously, looking from a profitability perspective, deliveries have been now, as you can see here, at a somewhat subdued level, however, with not much sort of change anymore from Q3 to Q4. Heikki already talked about some of these impacts. Obviously, the destocking and the distributors turning to a lot of imports, that happened in Europe earlier in the year of 2022, particularly during the summer. I would say towards the end of the year, we already saw imports declining.
We did also see sort of an end of this destocking cycle, and what we see now is somehow, you know, the light in the horizon, so to say, that we do see a return of the distributors, the distributor replenishment gradually starting. When we are now looking at the current market environment in Europe, I mean, obviously contract negotiations, annual contract negotiations are, you know, just in the completion phase. We have completed more contracts compared with the previous year. I get a lot of questions about, okay, what's the price level there? I always wanna refer back to something I think I also said a year ago, which is that through the years, we have observed that there is less variation year to year when we really talk about long-term annual contracts.
Without sort of saying, well, it's exactly EUR 100, or it's exactly EUR 150 or something, if you just look really longer term, it's clearly sort of a flatter curve with some variation. I would say, you know, in 2023, the contracted prices are a bit lower than they were in 2022, I certainly would only talk about a slight impact there. You may also ask that, you know, okay, it's growing. How big is it now? Well, the share of annual contract is still below 50%, that's for sure. We have been able to increase it from the previous year, which I think is a good sign in this market environment.
If we look at the market and what has impacted it, obviously the whole autumn was also all about electricity. You know, how expensive is it to run operations and you know, how does that impact the margins? Of course, higher electricity prices also impacted our BA Europe result. We have been able to continue operations throughout the autumn, and I would say the same goes now for the springtime. At the moment, we are fairly well booked for the first quarter. I think that also gives us the confidence for the guidance we have on the higher volumes. We have a little bit left to book for March, we are really focused now on booking the second quarter. Just a final word on BA Europe and the electricity in particular.
This also impacts ferrochrome, obviously even more so than the stainless steel operations. As those of us living in Europe have noticed, we have definitely been able to sort of regain, I would say, maybe even a little bit of optimism or at least a more neutral position when it comes to electricity and of course, in particular gas, where prices are down to the level before the whole Ukraine crisis started, the Ukraine war started. This also has an impact on electricity. Weather has been, let's say, much better or much warmer than could be expected. Q1 normally should be, at least in the Nordic, still a really cold period, but actually weather has been, to some extent, warmer. This has taken away some of the spikes.
In Finland, we are still due to wait for the new nuclear power reactor, Olkiluoto 3, to really get into commercial operations. We are still there in a sort of trial period at this point in time. That is still important for the future. We are hedged about 70% now on electricity for the first quarter. I think we are in a good position to continue operations here. On to BA Americas. Obviously here, the distributor destocking has been sort of almost more brutal, I would say, for the fourth quarter. You see a really low volume, 125 kilotons. This is really impacted by the typical seasonality where Q4 is the weakest in the U.S. in particular. At the same time, a real sort of soft underlying market because the destocking has impacted the fourth quarter.
We still see that it could impact into Q1, maybe even during full Q1. The destocking cycle is still definitely ongoing when it comes to the U.S. in particular. I think we need to mention one more thing that actually in the BA Americas context was quite big in the fourth quarter, and that is the negative impact of net of timing and hedging. That's really negative timing that is impacting here. It's a EUR 29 million figure in the fourth quarter. Comparing with the overall results that has, of course, some significance. If we look at the full year, obviously, Americas has delivered a remarkable result and really good operational performance. I don't wanna sort of leave the team without a thank you.
I think, given our overall performance here for the year, we should still be really, really proud. Finally, Business Area Ferrochrome. Here, the high electricity prices have really given us no choice but to really curtail production. You know, we have discussed this before, that one of the furnaces has been closed, and we have continued optimization. This is really electricity price driven. This continues now a bit into the first quarter, so we are still at this point now looking at 50%-60% capacity utilization. A few more words on the cash flow. I think we had a strong cash flow on the back of a good performance result-wise. In the fourth quarter, we already turned into actually getting some cash out of the working capital.
If I look a bit at the full year and focus on the buildup of working capital, I think there's a few words that are, sort of, worth mentioning. The first one, obviously, is that when it comes to inventory, this is really not about volume, this is about value, and the same goes for accounts receivable. There is one more important item that has contributed or resulted in this quite big working capital buildup during the year, and that is the accounts payable through redirecting of some supply chains where earlier, we were sourcing from Russia and now have been then looking for other sources. I think that's worth mentioning that the AP impact in this working capital is also fairly significant.
I will move on to my next slide, and this is just the final time I will show this slide, which shows our debt development, our leverage development, and you can see that we have now reached our target, actually no net debt. You know, we have promised as a target that the leverage would be below one times in normal market conditions. I think that's fulfilled, so this is now the grand finale for this page. I also wanted still to include one page on our funding profile. I think this shows a balanced funding profile. Obviously, our gross debt has decreased a lot, and also when you look at our debt maturity profile, it is balanced and sort of well-managed at this point in time. With that said, may I hand back over to you, Heikki.
Thank you, Pia. Let me say a few words about the coming quarter and a bit make some general observations about kind of the environment that we're living at the moment. We're going through obviously some dramatically changing times. It gives me a lot of comfort here as CEO that I can say that with that balance sheet and the financial situation that Pia just went through, we have a significantly improved resilience, and that really will allow us to create value in these changing circumstances. You've seen our strategy roadmap before. To just summarize where we are again, phase 1 was completed. The de-risking is done. We have the strong balance sheet, as Pia already mentioned. Now we're in phase two. It's about strengthening the core.
Olkiluoto has been sold. Now we're really trying to extract even more value from our existing assets by allocating smart capital. We will remain capital disciplined. The focus on shareholder returns is now higher than before. Sustainability, of course, is underlying everything we do. Now, in terms of shareholder returns, it does give me great pleasure to report that the board directors propose to the AGM that we will pay a base dividend in the amount of EUR 0.25 per share. That is the base dividend. On top of that, as a plus, we will pay an extra dividend of EUR 0.10 per share for a total of EUR 0.35. In addition to that sort of amounts to about EUR 150 million.
On top of that, as you know, we have the ongoing share buyback program in the amount of EUR 100 million. All those together amount to EUR 250 million. As I said before, our aspiration is that we are seen attractive, especially for longer term shareholders. We understand the volatility of the business, but we hope that this type of an approach gives our investors sort of comfort to stay with us through the longer term. Here's a new chart I wanna show, some observations about the market environment and really more a bit of a holistic view on what's kinda happening around us and what might be drivers of our business. I wanna underscore the fact that this should not be taken as guidance. I'm just trying to raise some of the key themes that we're also monitoring carefully.
On the left-hand side, more looking at sort of upside, positive upside impacts. I said the distributor replenishment should now begin in Europe. We have clearly signs it is starting. In the United States, it may be still going through the end of Q4 before we really start seeing that happen. Eventually, we're now coming closer and closer to the point of restocking. Of course, that should then give us upside trajectory in our order inflow. Also there are signs that ferrochrome demand is picking up. That's a very positive thing. The demand for advanced materials continues to be strong, and I would say that with the exception of the construction sector, which is probably at its weakest in, let's say, in a decade, all the other sectors where advanced materials products are sold seem to be doing reasonably or very well.
Finally, on the positives, I think we have a lot of positive momentum with our low carbon offering. Circle Green was launched last summer. Now, the volumes are still small, but I think it allows us to position Outokumpu really at the cutting edge of low carbon product supply, and then here we really are the leader. On the uncertainty side, we of course have the timing and impact of China reopening. I mean, three years of COVID lockdown, now when they open, I mean, things could get hot. We just don't know the timing. We don't know the impact for sure, but I would see this more as a positive upside. Will we see that in the second half of the year, or will that sort of impact 2023? It's still uncertain. If it...
If it reopens with a vengeance, it should also impact somewhat the demand for stainless in that Asian region, which of course maybe has some impact on exports out of Asia into other parts of the world. We've seen interest rates rise quite a lot in some countries. A lot of discussion about a soft or hard landing. As we all know, the data that we're getting every day is giving us somewhat different signals. On the one hand, it seems we're heading towards a soft landing, other data is indicating a harder landing. Cannot really say yet, but at least at the moment, things are a bit more heading towards a more positive direction. On the war in Ukraine, this terrible situation that we have here in Europe, usually when you have a war, it does create inflation.
We have to hope that that crisis and war will cease soon. In the interim, we will probably facing different waves of inflation or different policies of inflation in the future. Finally, energy markets in Europe, as Pia mentioned, it's been unseasonably warm here. The German natural gas inventory levels are very high, so I think it's clear the winter of 2022, 2023 should be pretty much, you know, handled. We look at next year, and I think what will happen in 2023, 2024, we will then have to come back to that after this summer and see what type of actions are needed to prepare for a potential next wave of challenges. We still have six months to go before that is again a topic.
Let's hope we can find new ideas on how to mitigate that potential risk. That's sort of a big picture of the themes we're monitoring. I said should not be taken as guidance, but more a general overview of the types of topics which can impact our business. Finally, I wanna just go through the outlook for the first quarter. As is stated here in the slide, our group stainless deliveries in the first quarter are expected to increase by 10%-20% compared to the fourth quarter. Ferrochrome production continues at 50%-60% of full capacity as a result of the planned optimization we're doing because of the higher energy electricity costs, and also we have had a disruption in one of our three furnaces in Tornio.
Inflation, energy, and consumable price is expected to continue in the first quarter. With current raw material prices, no significant raw material related inventory and metal derivative impacts are expected to be realized in the first quarter. Guidance for Q1 2023, adjusted EBITDA in the first quarter of 2023 is expected to be higher compared to the fourth quarter. With that outlook, we head forward, and Pia and I are happy to answer your questions. Thank you very much.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue.
If you wish to withdraw your question, please dial star five again on your telephone keypad. If you are using speakerphone, please make sure your mute function is turned off. Voice prompt on phone line will indicate when your line is open. Please state your name before your question. The next question comes from Harri Taittonen from Nordea. Please go ahead.
Yes, thank you and good afternoon. The on the end of the cost side, I mean, a couple of things. It looks like both in the Americas and Europe, it looks like the at least a calculated cost per ton seems to have declined from the third quarter level, even if you, if you sort of saw this decline in volumes. Just wonder, what was the sort of the where were the key inputs, or was it sort of energy or scrap or other factors explaining that in that division? Maybe another one related to ferrochrome now that coming into the first quarter, is there a sort of difference in the maintenance cost?
Also is there an increase in cost in Q1 because you are opening that sort of third furnace but still keeping the volumes down? Thank you.
Right.
Thank you. These two.
Thank you, Harri, and hi. I think on the cost side, first of all, you know, when we look at realized energy prices, we of course have a mix of, you know, a small share of spot prices than the earlier agreed sort of contractual or hedge prices. Then on top of that, specific results of the optimization from ferrochrome. If I just sort of try to look at this rather holistically, I think we were able, even in a difficult environment, to keep the energy costs rather in, if I could call it more sort of in balance, even though the pressure was really, really high. On a global level also, you know, we have more maintenance in the third quarter compared with the fourth quarter. That also eases a little bit on the cost side.
Those are, to me, sort of two most significant, sort of underlying contributing factors. We've had a lot of focus on the improvement actions. On the scrap side, you may recall that, particularly for BA Americas, we said during Q3 that there had been some, you know, more advantageous circumstances that we perceived as fairly one-off. That's actually getting a bit worse in the fourth quarter. I cannot really say that that would have helped. If you look at our bridges, then, this impact, of that, sort of various metal impacts go into this pricing and mix part of the explanatory bridge.
Maybe if I could just say on the ferrochrome, so I said we have had a disruption there. We are now working to repair that this spring. Because of the technical problems we had in one of the furnaces, we have to run with a bit of a lower energy load. Of course, that then means also that the output is going to be less.
Mm.
We are going to have to have a maintenance here further this year, but until then, on the larger furnace, the energy load has to be lower.
Mm.
Lowered.
Heikki, if I would still continue specifically on the maintenance costs, I think in ferrochrome, I mean, we are still talking about, you know, a very low, you know, EUR single digit millions additional maintenance cost during the first quarter. This is because we have made some, let's say, interim improvements. If we take the bigger maintenance stop in Q2, we will talk separately about that in the Q, you know, when we have our Q1 report to be a bit more specific. That will be more like kind of the normal bigger maintenance breaks that we have had in ferrochrome historically.
Great. Thank you. Thanks for that. Maybe just sort of slot in one third kind of broad question. I mean, after this, sort of strengthening in balance sheet, how do you use sort of continued share buybacks as a sort of a complementing measure once the current program is completed? I mean, is there something you could say about that?
First, we will need the AGM to accept the proposals that are out there, that there is an authorization. I think it's probably something that we need to then consider once we have that authorization in place.
Okay. Thank you.
The next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good afternoon, all. I've got one question, please. On your guidance for better EBITDA, there are obviously a lot of moving parts, but you give us the ones on volume and the metal charges, which is very helpful. The only missing part are probably your gross margins. Wondering whether you could help us out to understand whether you continue to see the benefits from better mix and whether we have seen the trough in realized margins in the fourth quarter, at least when you adjust for the negative impact from metal effects. In other words, will your realized gross margins be stabilizing in Q1?
Mm-hmm. Again, if I may at least, have some perspectives on this. Hi, Bastian.
Mm-hmm.
I think first of all, indeed, you know, if you just look from a sort of bridge perspective, then obviously, you know, in Q4, we had on a bridge level the negative impact that we had a positive one of on the metals in the third quarter. If I try to more think sort of on an absolute level, that what are the various things impacting us, then I think obviously, you know, price development is an area where I have some difficulty kind of commenting prices going forward. If I just look at sort of one of the bases, which for us is the annual contracts that we have concluded, then I think that the sort of the decline is very modest that we can see in those.
Those are still an important part of our base. Of course, you can follow the sort of, the pricing, the CRU pricing, and that's one indication of the spot deals that we are seeing right now. However, we are already fairly good booked through the first quarter, so there is not sort of much new orders anymore taken for the first quarter. Those prices have already realized just a little bit earlier because we are definitely in shorter order books right now. Then if we look at sort of various components of the markets, indeed, as Heikki said, actually the advanced materials business, that part, the more value-added grades is still, you know, that is showing strength.
I think, you know, overall with higher volumes and so with the strength from that market, those for me are like positive signs.
Thanks, Pia. Thanks for walking us through that. If I can maybe even follow up a little bit more on that. I mean, again, if we look at the volume increase, whether it is 10% or even 20%, obviously, those are very large increases. With the contribution margins in your business, obviously that will give you a very positive effect on operational leverage. As you've been hinting, it seems like you're still probably taking a little bit on pain on average pricing because, net-net, probably still realized prices may come off a little. Maybe costs are not fully compensating for that.
If we take those two effects together, so volume's up and price may be slightly down, do you think that that part will already be sufficient to stabilize your profit and then the metal effects basically do what they do? Maybe they are flattening out, maybe they are still gonna be a negative, but net-net volumes and prices will still keep your numbers more or less stable?
Yeah, I think there is a good boost from the, from the higher volumes. I agree with that. Even though I don't have sort of an exact figure to give you, I do think that those two elements are, you know, sort of important, sort of, as you mentioned. I cannot really say if they exactly compensate each other. I think overall, when you add up all of the elements, we are indeed looking of course at a higher EBITDA in the first quarter.
Maybe if I can.
Okay, mm-hmm.
I mean, if you A little bit trying to answer your question from a little bit different direction. If you look at our sales, One way to dissect it is we have the advanced materials value-added business, and then on this commodity stainless we have the end user business and the distributor business. So far the advanced materials is, it's quite stable.
Mm-hmm.
The contractual business, long-term contracts also fairly stable. The volatility really is the distributor business and at the margin, certain distributors who are very actively buying and selling, you know, product from Asia. We really are seeing the incremental orders coming at the sort of margin from those customers who, you know, a bit have been buying less when they took advantage of the Asian, you know, influx of volume. I do believe that. As you know, with these large mills like Tornio, the higher the operating rate, of course, the operating leverage really starts to kick in. That's why it is important to, you know, get those large assets like Tornio, you know, running reasonably well. I think that's kind of what we are aiming to do here.
Okay, great. Thanks for that. One more question on Americas, if that's okay. Clearly as I said, it's been a very challenging quarter. If I look at the volume numbers, I have to go as far back as 2015 to really see a number which has been similarly weak on a volume level. On the other side, if we look at prices, maybe they're softened a little, but they're still very high and it seems like you're able to keep up a decent level of market discipline there. Now, what do you see in terms of the stocking? Do you think it's gonna last just until Q1? Are you already seeing any signs of improvement?
Clearly, whenever those are coming through, it will give you at these margin levels, like a very strong operational leverage.
I mean, now I have to... I'm a little bit speculating about Q4 behavior, but I think for many customers, 2022 was a really good year, and probably many of them had achieved their financial targets. When they ended up buying a huge amount of, you know, excess volume, of course they're sitting on that inventory. I think we have seen some decline in end user demand because I think initially we internally thought that the destocking would end a bit earlier. At the moment we're, as we said, I think we think that the destocking or the stock replenishment should start, you know, kicking in as we head towards the end of the first quarter, possibly even the second. We just don't know for sure. We are starting to see now customers order.
I mean, it's more than green sprouts. It's still not, you know, like kicking in, you know, full throttle. I think the next four to eight weeks will probably give us better sense on what's happening. Clearly there's been some end user softening. I mean, if you look at, for example, the US housing market, I mean, you know, people are not changing houses because of the high, you know, mortgage rates. Home appliance sales is weak. I mean, you know, of course you can see the end user demand has softened here. That is probably flowing a bit into our customers and then to us. Let's see. We are still reasonably optimistic that replenishment is approaching in the coming weeks.
Mm.
Again, cannot promise anything yet.
Okay, thanks. No that is, very helpful color. Thanks Heikki, and, thanks for taking my questions.
The next question comes from Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Hello. Good afternoon. Thanks for taking my questions. The first question is around your ability to fully pass through the raw material costs. As you mentioned, nickel remains elevated, molybdenum has also surged. How is that ability to pass that through to your customers is playing out into the quarter, especially based on your current order book in Europe and the U.S.? Within that, are you seeing any signs of demand destruction for grades that are high in molybdenum content? Thank you.
Maybe I can start with a few reflections on the high nickel price. I mean, obviously, this is one where then the transaction price gets higher and that fine balance between, you know, what is the price level where, for example, distributors will find it attractive to start importing from Asia. I think that is the fine line and the balance that we need to strike all the time. Now with the current price level, what we experience is that, you know, import levels have clearly come down. It seems that there is now a better balance and not this sort of need for distributors to play this import game as we speak.
Maybe that is at least to part answering the question, with sort of the combination of the current high nickel price, still kind of, at least in the U.S., clearly lower import level and in Europe, maybe somewhat stabilizing import levels. Maybe there is a kind of balance at the moment, of course it's always a fine balance. I think the question of molybdenum is very recent. It's a very recent issue that has surfaced and probably there is both issues on the supply side of molybdenum, at as well, on the demand side, demand being strong. I mean, this is something that you need to produce very strong products and including even needs for military equipment, etc.
I think sort of just broadly, if I think of the first quarter, then maybe Heikki I can hand over to you for any further comments. If I to look at the first quarter, you know, we are pretty much booked. We still have some room towards really the end of the first quarter, but that means that this is not really such an kind of Q1 topic, but obviously it could have impacts then going forward, possibly.
I think this moly challenge really originates from both Chile and Peru, where the miners have had labor disruptions, and that basically is constraining the supply of the ore. We don't see really the demand problem. It's purely a supply issue. We hope that those issues in Peru and Chile will be resolved soon. Of course, we will see more volume coming to the market. As said, it is a very recent phenomena from the last two weeks almost.
Great. Thank you very much for that. Second question on the Q1 guidance. Is it fair to assume that the improvement in volumes is mainly driven by Europe, given the destocking pressure in the U.S.? Do you think the U.S. could also contribute, sequentially, on the volume front?
I think under these circumstances, it's still fair to assume that both will contribute somewhat. I think the Q4 figure for U.S. was really historically a very low figure. It's a low level to start from, obviously. Both BAs will contribute.
Very clear. Just the last question from me on the energy costs. If I'm not mistaken, at the Q3 results, you said that you've hedged 60% of your energy costs for 2023. I'm just wondering on those hedges, are you in the money now given the pullback in energy prices? Or have you hedged at the high levels relative to what you can secure now in the spot market?
Yeah. I think it's an excellent question, obviously we have even increased the hedge level a little bit early in the year. We are actually now at 70%. I think the nature of this is that we have now built up the hedge portfolio, in a sort of increasing price environment. Some of them were still made at, you know, some kind of pre-crisis, really low levels, but obviously then we also have an increase there. I would say we are starting to have more of a, you know, so-so situation there. I don't think we have really published exactly where we are.
In the nature of things, I think right now is that, you know, if we get, really a drop in energy prices, then obviously we have locked in at higher values. Do we really get a drop? I don't know yet. In gas prices, indeed, we have already got that. In electricity prices, you typically always have also some seasonal variation.
Mm-hmm.
That is obviously sort of counted in when you make these longer term contracts.
That's very helpful. Thank you very much, both. Thank you.
The next question comes from Rochus Brauneiser from Kepler Cheuvreux. Please go ahead.
Yeah. It's Rochus Brauneiser from Kepler. Most questions are answered already. Maybe again, on the volumes, when you're guiding the 10%-20%, if I remember correctly, the midpoint is about what you typically record in an average Q1. In that sense, the range is pretty much built around the usual seasonality. You know, you said the U.S. comes from a lower starting point, and there's still a bit of a lag, whereas the EU is now showing some clear improvement. Is it fair to assume that you would expect the Q1 rather on the higher end of that range you're given? Is that a fair assumption?
Yeah. Rochus, thanks very much for the question. I think sort of the usual starting point for us is if we give a range, we try to be somewhere comfortably in the middle when we start. Obviously we give a range because there is some variation during the quarter. You know, it's a range for a purpose and I mean, we will get improvements both from Americas and from Business Area Europe.
Okay. Another question is, I think one of the big, variations and big, surprises, positive and negative, in 2022 was that metal effects, which had boosted your business in Q3 and then reversed in Q4. Is this something which could happen in 2023 again, or was that pretty much of a story of last year?
I wouldn't rule it out. I think in a volatile market environment, you know, situations can vary and market situations can vary. I would say that, you know, if it's something that we can foresee, then there is no reason sort of not to mention it. You know, at the moment, I cannot foresee anything like that. Of course, I cannot rule it out because I think it more comes from what the market dynamic is.
Okay. Okay. Finally on the working capital, can you get a bit more specific about your direction and magnitude in the Q1, and what is your current thinking around magnitude of working capital release maybe in the whole year?
First of all, I mean, if I look at the buildup during 2022, it was almost EUR 600 million during the year, and some of that was due to the higher price level, and then some of that was due to the redirection of the supply chains. I think in an earlier call, you know, I said the fact that we cannot buy from Russia but are buying elsewhere is adding at least EUR 100 million to the working capital. Maybe I would even hike that figure up a little bit now that I sort of see the outcome of, you know, where we have landed in terms of new contracts and new setups, new supply chains. Maybe it's even north of EUR 200 million.
That is something where I think we cannot expect sort of a quick release. I think it's good to keep that in mind. Otherwise I would of course expect that when we built a lot of working capital, you know, because of higher prices, you know, this will fluctuate then according to, you know, where the market is developing. Obviously already when you look at Q4 and the direction, the direction has been for lower prices indeed. I would indeed during the full year definitely expect the release. If I talk about the first quarter, this is seasonally typically for us, a quarter where we still build, you know, both AR and inventory. Usually we have built maybe a couple of EUR 100 million. If, you know...
I would here more look into history and just say, you know, right now I would definitely expect typical normal seasonality and a build of working capital in the first quarter.
Okay. When I take the average of the last couple of Q1s, that would be probably the best guess as at the moment.
Yeah. I would say. I mean, I think we will follow typical seasonality. That's why I think looking at history is, you know, it's a good guideline. But, sort of if I look, you know, Q1 build working capital, Q2 maybe stabilize, Q3 - Q4, release working capital. That would be the typical annual pattern, and I expect that to repeat this year.
Okay. That's very helpful. Thanks, Pia.
Thank you.
The next question comes from Tristan Gresser from BNP Paribas Exane. Please go ahead.
Yes. Hi. Thank you for taking my questions. The first one maybe on Europe and the market conditions you're seeing there. We've seen import falling quite a bit, and you talk about some restocking even, but it does not look like the market has really reverted back to the base price mechanism. Do you still expect the market to return to this old model? Would you believe this change will now be permanent? The base price system used to be one of the key advantage of the stainless sector, and it provides some key visibility, I think on quarterly pricing and cost development, and now it's pretty much gone. I would like to hear your view on that. Thank you.
Maybe if I answer that. I think we have sort of seen some fluctuation if we look at the order book over the past two years, what % is effective pricing or fixed pricing, and then what is sort of base and alloy. I have to say there's probably some correlation between the amount of imports from Asia and how that share of fixed pricing or effective pricing increases. Obviously from we view and from our side in the past, it's been always the view that the base plus alloy is sort of a effective, transparent, you know, good mechanism. It is pretty much a function of competition, you know, which way the wind goes here.
At the moment, I think, in the fourth quarter, the share of, or more the Asian price model was becoming more prevalent in Q4.
Mm-hmm.
Okay. I mean, you mentioned the three kind of area of your order book between advanced materials, end user, and I think distributors. It would be helpful if you could give us a rough sense of the split between the three.
The advanced materials, we have had about 15%-ish, roughly. With respect to the contract business in the remaining part of the company, probably about 45 contract, 55 distributor. Again, this fluctuates year-over-year, you know, ±5%. Roughly speaking, would you agree, Pia?
Mm-hmm.
Do you feel comfortable with those numbers?
I think with the advanced materials, we don't really refer to those highest, you know, like the pro grades et cetera, like really these specialized grades.
Right.
With that sort of narrow definition of the portfolio there.
Okay. That's, that's helpful. Maybe a question on the CBAM. I mean, you made some helpful comment in the release. What's your understanding of the policy right now? I mean, Scope 1 direct emissions were always kind of part of the debate and should be in the policy. What, what's your view then on Scope 3, Scope 2, sorry, and also you mentioned Scope 3 there. A little bit of clarity there. Thank you.
Obviously, you know, political winds come and go, but I personally do believe there's a lot of momentum for the European Union to take a holistic and comprehensive view on this and gradually factor everything in. Obviously, the implementation of this still remains to be done. I mean, there's an agreement or a commitment to implement this, but until we see in concrete terms, you know, what the officials really put on paper and how they really make this happen, you know, I would be a bit cautious to make any strong statements.
Mm-hmm.
Um-
Indeed, Heikki, I mean, the design that was now agreed on European level just before Christmas does include for stainless-
It does include.
... the most important sort of Scope 3 input factors. I think from a design perspective, it is sort of a very... It's a good achievement. It's a good design. As you said, I mean, implementation rules and, you know, how to implement remain really important part of the how this will actually pan out.
All right. Very, very interesting. Thank Thank you very much.
Thank you, Tristan.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you. Maybe I'll just summarize the presentation today and the discussion with a couple of observations or a couple of key messages. As said, Outokumpu is now net debt-free. We're in a whole different situation. Financially, the company has never been this strong before. In some ways, I can say that destiny is now much more in our own hands. I look very optimistically towards the future. Secondly, as you've seen, we are guiding in Q1 for a positive outlook. We have increasing volumes 10%-20%, and we're also guiding upward trajectory in EBITDA. Finally, as we said with respect to our strategy, we are going to raise total shareholder returns really much higher in the agenda of the company.
I'm extremely pleased that the board is committed and has decided to propose to the AGM the dividend of EUR 0.35, which includes both the base dividend and plus the extra dividend. We have the ongoing share buyback program of EUR 100 million, totaling EUR 250 million. I hope this is something that will make Outokumpu seem much more attractive for longer-term investors. With those words, once again, thank you very much for your interest and your good questions. I think Pia and I and Linda, we wish you a very good continuation of the week. Thank you.