Good afternoon, everybody, and welcome to Outokumpu's January, June 2020 result news conference. My name i s Marja Mäkinen, and I am from Investor Relations. Today, our results will be presented by our President and CEO, Heikki Malinen, and our CFO, Pia Aaltonen-Forsell. After the presentation, we have time to take your questions from the online audience, as well as from the telephone lines. For the online audience, please note that you can send your questions all the way during the presentation. We will then take those at the same time with the phone line questions. Before we start, I would like to remind you that we may be stating forward-looking statements, and we have a disclaimer for that on the presentation. Now, I think we are ready to start. Heikki, the floor is yours.
Thank you, Marja. Good afternoon. My name is Heikki Malinen, and it is a pleasure to go through the results of Outokumpu today with you. I hope you like the new format, this webcast that we will be using from now on. The last months, I guess we have all been struck by COVID-19. I hope all of you, your families, your friends, have stayed healthy, and you have been able to manage through these fairly challenging times. Let us stay vigilant and try and keep all of ourselves healthy going forward. As you know, I started in mid-May, on the 15th of May, in fact, and Roel Baan handed over the baton to me. Since starting, I have taken a deep dive into the operations of Outokumpu.
I visited a number of our sites in Europe, and I have had discussions with significant numbers, large numbers of employees, both here in Europe and North America and elsewhere, to get as good overview of the company situation as possible. My first impressions are positive. We have good assets. We have talented people, we have a good market position, and I feel that within Outokumpu, we have a get things done mentality. These are good foundations for the next part of the journey. But as we can see from the second quarter results, the trade issues, combined with the challenges that COVID-19 or corona poses to us, really, really make our environment fairly challenging. In the second quarter, in addition to that, the ferrochrome market was not as robust as typically we would have liked it to have been. Clearly, our results are not sufficient. I recognize this.
I also recognize that we have leverage. And in this circumstance, in today's market and in a possible post-COVID-19 environment, the leverage is more than should be. We have initiated a strategic review of the company here over the summer months, and as said, we are going through the whole business. I will talk about that a bit at the end of the presentation today. And our plan is then to communicate our way forward before releasing the Q3 results this autumn. Let me now start going through the presentation, and I will take us first to a slide that just briefly discusses the highlights for the first quarter. Sorry, for the second quarter. As said, the results have been impacted by a fairly weak global demand which is resulting from COVID-19. On the safety front, I am happy to say that we have made very good progress.
Over the last two years, safety has been our number one priority, and we have numbers to show that we are really having impact in this area. In Americas, we were able to improve our break-even level, and that is really a result of substantially really hard work. If you looked at the first quarter results in the Americas, I feel we were really on a good track before COVID hit. But the fact that we were able to still generate a small EBITDA number in Americas in the second quarter shows that a lot of good stuff has happened in our business over there. Import pressure combined with a weak market continued to damage the European steel market. Of course, it is a big theme for us in our industry, a topic worth discussing still more today.
Our order book started to improve towards the end of the last quarter, and obviously there are some green sprouts, but whether a bigger turnaround comes, we will then have to see. Long Products, we have initiated the strategic review earlier this year. As I joined Outokumpu, I decided to change management in the business and take a look at the business with a fresh pair of eyes. But we are still committed to come back to you with our point of view on how we go forward with this business, still before the end of the year. If we go to the next slide and just talk briefly about how we are responding to COVID-19. As said in the previous quarter result, we really have been awake and tried to address the situation very quickly.
On the safety front, we have taken strong measures, and I have to say that we have been able to keep our operations running fairly smoothly, and to a large extent, our employees have remained healthy. On the operations side, due to lower capacity utilization, we have taken necessary measures, whether they be some temporary shutdowns, co-determination negotiations, or other measures to manage with a lower utilization rate. Inventory management, supply chain management is key. We worked very hard to try and find the right balance in terms of inventory, given the lower demand available. On the balance sheet and on the financials, as you are aware, we were able to emit a EUR 125 million convertible bond issue in July. In terms of cost reduction, we have taken out about EUR 20 million of costs in the second quarter.
In terms of CapEx, last time we talked about the level of CapEx for this year, I can confirm to you that we will stick to the EUR 180 million guidance that we gave in the first quarter. As you know, we have a couple of major investments ongoing. We are doing a very sizable investment at our Kemi Mine, our Deep Mine project, and we are also doing an investment at Calvert in the area of critiques. In addition to that, we have certain IT related projects ongoing. In addition to that, we are continuing to reduce our networking capital in the amount of EUR 100 million. In terms of sales, as said, some signs of pickup, both in Europe and in the United States and Mexico, primarily in the areas of appliances, a bit in medical, some positive signs in automotive.
But on the project side and on the industrial client side, fairly weak. Looking at the results for the quarter, the EBITDA levels. Our EBITDA for the second quarter was burdened by weak global demand, which was caused by the pandemic. Our group adjusted EBITDA amounted to EUR 45 million in the second quarter. If you look at what are sort of the drivers of the change, looking at the right-hand graph here that is available to you. Obviously the biggest impact came from lower volumes. If we look at the amount of volume decline we saw, well, compared to the first quarter, our volumes declined in the amount of about 11%. If we compare to the second quarter of 2019, about 10%. No surprise in the sense that customers are buying less now.
On the pricing and mix side, we had weaker raw material balance. When plants are running at much lower utilization level, of course, it impacts the ability to use scrap. It impacts yield and overall raw material efficiency. There was, in terms of product mix, no major changes. As you can see from the bar, some positive from net timing and cost of hedging. Net timing and hedging on the cost side, I already mentioned the EUR 20 million cost reduction. In terms of ferrochrome, it is worth saying that while we saw some improvement or pickup in benchmark prices for ferrochrome during the second quarter, we actually had a higher share of spot sales of ferrochrome products. A few words about pricing. I guess the key message here really is just the direction of the graphs on the left-hand side.
We had already, since we started to see these trade measures across the world in 2018, 2019, we started to see a downward trend in our average price levels. It is evident that now when you add COVID on top of that, we are seeing further decline in pricing. In Europe in particular, we have seen a further price pressure. In nickel, we saw a -4% change quarter-over-quarter. As I said, in ferrochrome, we saw a 13% pickup in benchmark prices. However, as mentioned, we did have more sales into the spot market during that time frame. A slide on import pressures. Of course, if you look at import pressures and you combine that with a weak demand, that is really a challenge for the European steel industry.
During the second quarter, the import levels from the third countries in cold rolled were about 23%, somewhat less than in the previous quarters, but one has to put it into the context of what is the overall demand situation. In the U.S., the amount of imports is clearly less than we see here on the European side. One final slide on the import quotas. As you know, during the first days of July, a new regime came into place. The current setup is still valid until the end of next year. In June of 2021, the current safeguards will expire. Anyway, on the 1st of July, we saw a new regime, which meant that the overall EU quotas were increased by 3%.
If on the left-hand side you can see for cold rolled, the bars, basically the number on the top of the bar gives you the quota amount in terms of kilotons for each of the respective importing countries. The blue color here tells you how much of that quota was actually used during the first 33 days. On the right-hand side, the most right bar, you can see that the residual quota was used up completely in the first days of the month. Clearly, there must have been a sizable amount of inventory waiting outside EU to be then imported into the market when the new month started. That's all I want to say at this stage. I'll come back then towards the end to answer questions and also talk a bit about the guidance and also the strategic process going forward. Now I hand it over to Pia. Welcome.
Thank you, Heikki, and dear friends, good afternoon or good morning, and I certainly hope you're all doing well. Let me see how I can use the clicker here now so we can move a bit towards the financial update. Let me start with just the key figures really in essence and in summary, a story of the top line of the deliveries. You can see here the Q2 volumes, a low level of 523 kt of stainless steel deliveries. That's 10% down year-on-year, 11% down compared with the first quarter. I think this is probably a lot in line with sort of also the general statistics that we see about the market.
I thought of maybe discussing a bit more the segments and how really this journey through the second quarter has developed in terms of different customer segments and also how we see the order intake right now. I'll get back to that a bit in the BA comments. If I think about the impact on our adjusted EBITDA, it's clear that particularly the lower utilization rates are a bit of a burden, and it's really the volume impact that has hit us compared with the first quarter. Also, as Heikki alluded to, definitely in ferrochrome, there's been a little bit more of the spot sales impacting the result. I think I want to get back to the cash flow figure. We'll go through that a bit more in detail, in one of the slides.
I think one of the good points of the report here is that you can see that our net debt level has remained stable compared with the previous quarter, and that's definitely on the back of quite a lot of actions relating to working capital as well as the CapEx scrutiny that has helped us through this period. Let us then talk just a little bit more about the BA specifics. What you see here is Business Area Europe. You can see the development of the EBITDA from a level of EUR 67 million in the first quarter into then EUR 30 for the second quarter. I think this is very much a story of successfully being able to counteract any impacts from COVID-19. Our operations have been running actually in a very smooth way.
But of course, with a lot of precautions, a lot of actions during this pandemic period. However, our utilization rates have definitely been lower. Even though we see a lot of measures in preserving costs, just really a tight cost squeeze during the quarter, very much also in Europe. I think here in Europe as well, you do see the impact from some more maintenance during the second quarter. Quite a typical, so the seasonal pattern that we would have some maintenance during the summer. We've had some maintenance in Tornio. We've had some maintenance in Avesta that is then pushing the cost up a bit quarter-on-quarter. If I think about, so to say, the journey through the quarter on deliveries, I think the first impact, who was first impacted by COVID-19? Clearly the end-use segments.
We've seen it all over the news with the automotive being down, also on the appliance side. Whereas through the quarter, we have seen the distribution being somewhat more stable. Clearly now with things developing, Heikki did mention that in terms of the order intake and how we see the situation right now, we see some of these end-use segments already.
Not maybe the green sprout is then, or green shoot is the right word, but we clearly see them returning now after being, so to say, on a lower level through the quarter. Obviously, you know that has some impact on the margins as well. I think we also can see the main impact that you see on the group of the weak raw material efficiency. It's visible here in Business Area Europe, and this is all related to the lower utilization rates, as Heikki has already mentioned.
All in all, I think, going through a very strange quarter in many ways, very much a very special sort of pandemic quarter. I have to say that our actions to really fight this back have been very strong and now definitely helped us through the quarter. But the situation remains fragile, and as you have seen from our guidance as well, particularly in Europe, we obviously have the seasonality typically into the third quarter. Now the question is how to really then fight back and continue also, as we go forward. The lead times are on a normal level, and distributor inventories are a bit higher than normal, actually, in Europe at this point in time. Let me then talk a little bit about Business Area Americas.
Here, I think the real highlight is that you see that we have a positive EBITDA with a very low level of deliveries of 134 kt. I think this is really the journey and the development. I think I've talked about it before for Business Area Americas, but really getting to that lower breakeven point in terms of volumes, which is of course helping us through this difficult period. You see the negative impact really here from deliveries compared with the first quarter, and then you see also actions to fight back on the costs. I think we have been really taking significant actions in the quarter, and some of these actions can definitely also help us going forward as they then go through the cost of goods sold.
And one more point that I think is worth mentioning is that from a distributor perspective, we are actually at quite low inventory levels in Americas as we speak. All in all, good fighting back to the COVID-19 situation in our Business Area Americas. Business Area Long Products, a weak result very much driven by weak demand. If we consider the typical segments where it's automotive, maybe oil and gas, it's clear that here has been a lot of hard-hit segments also in our customer base that's very visible now in the lower results that we see in the quarter. Finally, Business Area Ferrochrome. If we compare with the first quarter, we see that deliveries have been just a little bit lower. We also have suffered from having more really of spot sales through the mix.
If you think about the ferrochrome market and the balance in the market, this quarter has also been a lot about the debate about what's going on really COVID-19 driven, very difficult situation in, for example, South Africa for some of relevant, let's say, market participants. This balance between the supply and on the other hand, the demand, where obviously the overall stainless demand is very much driving this, it has resulted in a somewhat higher benchmark pricing in Europe. But if you look at the spot prices, they remain on a low level. You can, I think, also see here some actions in terms of mitigating this through cost actions. Then, in our guidance, I would just remind that the maintenance efforts in ferrochrome in the third quarter will be quite significant.
That's really the period when we will have the major shutdowns this year. Here on the cash flow. I promise to say a few more words on that. We have been really actively both fighting back through the quarter. We have clearly been able to lower our inventory levels, kept very good control as well of accounts receivable, which from my perspective is important in this sort of pandemic time. I think we have been trying to look for the really optimal balance of how to be able to have the service to our customer, but still be at as low inventory levels as we can. I think we've been successful. It's visible here in a EUR 93 million positive quarterly impact.
I would still remind that as we are looking for the EUR 100 million impact for the full year, we now have a good starting point after the first two quarters. Then seasonally, typically, we have always been going towards lower inventory levels and working capital improvements towards the end of the year. Then the CapEx estimate remains at EUR 180 million. I think Heikki already discussed this earlier. I think this is my final slide. Just then a reminder of how we can see the debt development. Obviously now, COVID-19 related demand situation has impacted as well the cash flows. Clearly you can see this then in the debt level remaining at the same as before. I think that's a good achievement under the conditions and our focus on really cash preservation will remain very strong. At this point, thank you.
Pia, there was still one slide. Do you want to go through that? Why don't you come back so
Sure. Thank you, Heikki. Okay, well, this is the good news, actually. Not thank you too. However, that was in July. So we've had the convertible bond issue. I think if you've seen the market and then some of the issues sort of through the pandemic period, this is one of those instruments that has been used as a mean of really securing that maturity profile of the loans.
I think this is a very good addition, giving us a longer maturity and also obviously a good point in our liquidity through this kind of pandemic period. You can see here our full maturity profile and maybe even to say that in this picture it's not included yet because this was in July, so maybe that was the reason I sort of almost thought it was your slide. Maybe I should click now to make sure that I'm moving towards the right portion here.
Okay. Thank you very much. Looks good. A few words, thank you, Pia. A few words about the outlook. Here we go. The outlook for the third quarter, due to the global economic uncertainty caused by the COVID-19 pandemic, Outokumpu will not give quarterly guidance on adjusted EBITDA until further notice. The COVID-19 pandemic and related measures are expected to have a significant impact on the stainless steel industry throughout 2020. Due to seasonally low quarter, especially in Europe, combined with the continuing COVID-19 situation, Outokumpu expects its stainless steel deliveries to decrease in the third quarter for the whole group by approximately 10% compared to the second quarter. European stainless steel market remains challenging as a result of continuing import and price pressure.
The planned maintenance work at the ferrochrome mill in Tornio, Finland is expected to have approximately EUR 15 million negative impact on the third quarter result. That is the guidance outlook, sorry, not guidance, but the outlook for Q3 2020. A few words about the Outokumpu strategic review. I mentioned about this in my opening statement. Since I started, we started to work on the roadmap for the coming years. Our current vision that was defined in 2016 will anyway expire here at the end of this year.
We have initiated a company-wide assessment of our current strategy, our performance and structures, and that's been going on now for a few months. Our intent is to communicate before the announcement of the third quarter results, our new vision, our strategy, and our financial targets. We will have a webcast to present these plans to you in the coming period. With those comments, I think we have covered the presentations. If I click that, thank you. I guess it's now time for Q and A, and Pia will join me here at the podium. Thank you for your interest.
Yes, thank you, Pia, Heikki, and operator. We are now ready to take the questions for the phone line audience.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone. The first question comes from the line of Alan Spence from Jefferies. Please go ahead.
Hi, Heikki. Hi, Pia. I've got three questions, so I'll take them one at a time. The first one is regarding ferrochrome. You mentioned the higher mix going to spot sales in the second quarter. How big of an impact was that, and do you think that trend will continue in the third quarter?
Yeah. Hi, Alan. This is Pia. I think you've seen the bridge and part of the negative impact that you see there from deliveries is also coming from this mix. That's clearly, it's only a fraction of that. I just want to say that what we see obviously here is, as well, lower deliveries from our own mills. That means that the impact is also partially dependent on then how our own volumes continue forward. As you can see in our guidance, we still expect Q3 to be approximately 10% down.
Thank you. The next question comes from the line of Anssi Kiviniemi from SEB. Please go ahead.
Hi, Anssi from SEB. Thanks for taking my questions. I have a couple of them. First of all, kicking off with the Q2 outlook. Stainless deliveries declined by some 10%. Should we expect the typical seasonality in Europe, meaning basically European deliveries coming down and perhaps U.S. being more flat or even up, or how should we read the situation, and what do you see in your order books?
Yeah. Thanks, Anssi. Maybe I can at least start the answer by saying that we've even highlighted Europe a bit here in our guidance, just to say it's typical. Actually, I looked through a really long time series of the impact from Q2- Q3 and what the seasonality has been, and typically has varied 7%-9%, these kind of step downs between the quarters. We know that historically that has typically been driven by Europe.
I think that's obviously the general answer. Then, as you even asked about how we see the order intake and our order books developing right now, this has been the journey where in April they were definitely down based on the COVID situation, and there's been a gradual uptick in that. Since June, we have seen some improvements, and I think that's the reason and the rationale as well for us to give this guidance that we are having now.
Okay. Thanks. Second one on steel deliveries. We saw a pretty big impact on result in Q2 from lower deliveries. Should we expect similar magnitude in Q3, or is there something else we should notice on mix or from other part of the business that impacts the earnings impact from the lower deliveries?
Yeah. Obviously, that's a really wide question. Maybe, Heikki, if I start
Sure
if you feel you want to add something, then please feel free. I think there's a number of things that we would like to highlight. Certainly, you've seen the ferrochrome one, the maintenance one. It is significant. It is EUR 50 million in a quarter impact. That's definitely a topic to pick up. The other issue is that with the import pressure, obviously this is true particularly for Europe, and the lower demand combined, naturally that puts some pressure on the prices as well. I think, just looking historically at the step down in volumes that there has been between Q2 and Q3, it is clear that that has some negative impact on the result as well.
Maybe I would just add that obviously in terms of trying to improve the result for the third quarter, we're of course looking at all possible actions that we can control ourselves. One area, of course, is maintenance expenditure. These plants, of course, have to be maintained, otherwise at some stage there would be the production problems. But where possible, we will postpone maintenance if needed in order to help improve the financial result for the third quarter. But there are limits how far you can go with that.
Okay. Thanks. Then just a housekeeping question on raw material related inventory and metal derivative losses, EUR 16 million. What was the key driver for that, and should we expect a smaller negative in Q3, or what do you see currently?
Well, I think the typical pattern would be, if you look at nickel prices right now, you see them being a bit on the rise, and that could give some positive impact into this bucket. But I don't want to speculate on what the nickel price will be at the end of the quarter, but with the current pattern, then there should be a little bit of positive boost there.
Okay, and what was the key driver for the negative impact in Q2?
There were no big. We have a couple of items here. We have, so to say, the price in/price out difference. We also have really sort of accounting related NRVs, and then hedges. And I don't think that any sort of category really stood out or was a big topic. There were not big hedging impacts. Also not big accounting impacts. So it's really more the typical, what I would call, timing kind of areas, but not that significant.
Okay, thanks. Then the last question, a quick one. You have indicated that you have these different scenarios and will be just fine even in the most adverse scenario. Now you highlight that there's a task force around these different scenarios and financial arrangements. Has the situation changed in any way, or are you just kind of indicating anything or kind of what's the situation there?
Yeah, Anssi. It is a good question. Maybe just to clarify, the scenario modeling was something we really started based on the COVID-19 situation. We have continued that. We follow this sort of, may I call it, kind of McKinsey logic with the different recovery paths. What we are seeing right now is maybe turning more into kind of the, it is leaning a bit more towards the U at least, not sort of the really fast V.
Maybe even, in some categories, it could be more of a V, but maybe we are kind of leaning a little bit more in the U direction. I think there is not a direct link with that. Heikki, maybe I will just hand over to you because the review that we are doing right now is more profoundly on the strategy, and that entails a lot of elements. It is not particularly only a financial review.
Right. I guess the big question is, what is the letter? Is it the W or is it the V or something else? I guess what we are sort of starting to see signs of is that when there is a recovery, that we might see some more robustness here on the European side. Some sectors in the U.S. actually might take a longer period to recover. Of course, that very much depends on how the COVID-19 pandemic continues to go its ways in the U.S. But at least that is sort of the, there may be a difference in terms of how it impacts the markets, with Europe hopefully a bit better.
But we will see. In terms of the strategic analysis we are now doing, of course, we are trying to create as realistic view on what will be the world like in the coming years. We are doing a lot of analysis based on end user markets to see sector by sector, how we believe that these would recover, and therefore from there, work backward on what type of financial setup we need in the company to make sure we manage the coming years. But we will come back to that later this fall.
Thank you, and have a great weekend.
Thank you.
Thanks.
Thank you. The next question comes from Seth Rosenfeld from BNP Paribas Exane.
Good afternoon. Thank you for taking my questions today. If I may, I have two questions, please. First, a simple one with regards to the one-off gains you reported in Q2 of at least EUR 8 million. Can you just clarify what was included in that? Were any of those part of your COVID-19 response, and will they continue into Q3? My second question please is when we think about some of the internal efforts to offset, or because of, let's say, the lower volume environment, obviously Q2 shipments seem to come at the better end of your guidance range.
We did still see results burdened by a number of unique operating challenges. You flagged raw materials efficiency being weaker, maintenance costs actually going up in Europe, and also the weaker product mix. Just to understand, do you expect any of those three factors to reverse going into the third quarter, or on lower volumes, we actually see each of those exacerbated and get worse? Thank you.
Great. Hey, I need to check. Sorry, Seth, you talk about the one-off gains, but our adjusted EBITDA and EBITDA were on the same level, so I need to clarify that. We did have actions of about EUR 20 million in the quarter. But maybe could you ask that again, please?
Yeah, sorry. In the bridge year-over-year, you reference an EUR 8 million improvement in one-offs, if I read that correctly.
Those could also be just some sort of bridge impacts not repeating vis-à-vis the previous quarter. We had in that sort of other bucket, some FX related gains, et cetera. There is no telling exactly where the Mexican peso, for example, is moving. So I don't think that there is kind of a repeat pattern in those, if that was your question. Yeah.
That is very clear. Yeah.
I think-
It is referenced in the bridge regarding Q2 year-over-year performance, saying there are one-off items of EUR 8 million. Perhaps there is some alleviation of prior one-off losses. That is fine.
Yeah.
Sorry, my other question, please.
Then as your other questions, I think you highlighted a number of other topics that we have described for the second quarter. For example, the raw material efficiency and the maintenance, et cetera. I think, maybe to repeat a few of the key messages there on maintenance, obviously ferrochrome, a big add, EUR 50 million in the quarter for Q3. For all other maintenance, we are being extremely restrictive in evaluating that. But I think it is like Heikki already said, that there is no situation where we could do absolutely no maintenance. So there will definitely be some work carried out as well in the third quarter. And you know that in the second quarter we had specific actions of EUR 20 million, but they were pretty much mitigated, not fully, but pretty much mitigated by more maintenance.
You know that in Europe, the summer period is typically a period for some breaks and holidays. So obviously that has also played into the timing here. I think that in terms of raw material efficiency and your other questions, we are working hard to mitigate those. But looking at the volume guidance, it also means that the level of lower utilization seems to continue in this period.
Okay. Thank you very much.
Thank you. The next question comes from Yannis Masvoulas from Morgan Stanley. Please go ahead.
Yes. Good afternoon, and thanks for taking my questions. I have two left. The first on the Long Products business review. You suggested that you are still planning to come up with an announcement by the end of the year. Do you see any risks to that timeline given the COVID-19 situation and how that may delay part of the review and potential strategic solutions? Secondly, with regards to the Americas business, you indicated the weaker product mix in Q2. Can I just ask, is that mostly seasonal or is it due to COVID-19? In the latter case, would you expect any improvement in the third quarter? Thank you.
First comment on the first one. I think the only thing that, let me put it this way. We basically have put in on a team, and hardwired a process to come up with a clear roadmap and answer on the strategic review. I am confident that we will be able to meet the timeline, and hopefully we will be able to come back to you clearly earlier than the end of the year. We are working very hard, so I am not concerned on the LP review.
Good. In terms of the Americas product mix, yes, it was a little bit weaker in Q2, but this was not a significant impact. I would say, some of this is really the sort of small shifts that we would have in this sort of pandemic period. There is nothing structural going on there. To answer your question on Q3, I think I need to leave it a little bit open-ended. Small shifts could occur, but there is nothing structural going on.
Okay, great. Thanks very much.
Thanks.
Thank you. The next question comes from Carsten Riek from Credit Suisse. Please go ahead.
Thank you very much. A few questions from my side. The first one is, you say actually in your quarterly results that you deferred VAT and Social Security payments. Could you quantify the amount and whether that deferrals will continue into the third quarter? On the back of it, when you expect those deferred payments to reverse? That's the first one.
Indeed. Carsten, if okay, I'll just take that question. It's pretty specific. These are a number of different schemes that governments in different countries have put into place. If I would mention maybe the most significant ones, they do, so to say, move VAT payments over a period of several years. It means that it is a beneficial program from the perspective of the company.
I think we are talking about an amount north of EUR 70 million, where, for example, for VAT, we have applied and we have been sort of, say, awarded this right. But it's really going to impact us from Q3 in a positive way. This is just information about how we have tried to navigate the situation of COVID-19. How some of these schemes work is that you have kind of an amortization scheme, and they could actually go over a period of several years.
Okay, perfect. The second question from my side is, it looks like that your fixed cost base was less flexible compared to peers. Will that actually be more flexible in the third quarter, as you pointed out to the 10% lower volumes?
Structurally, we are currently reviewing our own cost structures and looking for ways how to also increase the variability. But at this stage, I think we cannot sort of confirm or guarantee anything that would be different from the previous quarter.
Okay.
Thanks. Maybe I can add a really technicality, which is that you would have holidays, typically in Europe, quite a lot falling into the period of Q3. And with that, usually companies do accrue that sort of through the period of the full year. So that gives a little bit of relief then in the period when you actually are out. So, typically if you look at the pattern, that means some relief in the third quarter. But, I mean, it's not that you can look at the historical facts. It's positive, but it's not huge.
Okay. And the last one I have is on the European ones and on the outlook guidance. It's a mix. We have seen in Europe shipments only down 7%. You clearly outperformed here your peers. But looking into the third quarter, this effect seem to actually reverse and you play catch up with the volume downside your peers showed in the second quarter, at least. Is that you actually, the market share you gained in the second quarter, you will probably have to actually give it away again after the lockdowns in some other areas in Europe were eased. Is that the right interpretation or am I wrong here?
Well, I would just say that there is a typical seasonal pattern as well that we have seen through the years, where Q3 has been always lower than Q2. I would say in our own view, that seasonal pattern still exists there, but you are absolutely right on shifts in a very strange quarter with a lot of production curtailments and COVID forces stops in the whole industry. So a strange quarter and our view is that seasonality will still be there.
That's great.
Okay. Perfect. Thanks for the explanation. Thank you very much and have a nice weekend.
Thank you. Same to you.
Thank you.
The next question comes from Luke Nelson from JP Morgan. Please go ahead.
Hi, Heikki. Thanks for taking my question. First one, just to follow up from an earlier question just on ferrochrome, and the greatest share of spot sales in Q2. I didn't quite catch, what are your expectations on how that progresses into Q3 and specifically your prior guidances for roughly a EUR 10 million EBITDA impact for a EUR 0.10 move to pricing? Is that a sensitivity that we should be thinking should normalize or use for our quarter-on-quarter bridge?
I think it's been, Luke, hi, that's been a very sensible and a very reasonable rule of thumb, with sort of the normal split and share of sales. Obviously, the difference is that, with pricing benchmarks or others, this is more clear that this is the impact that we would expect. Then, if you have sudden shifts in the mix, that could be caused, for example, by just lower internal deliveries as well. If our stainless deliveries are down, it's clear that has that kind of impact in that very quarter that could as well be negative, if the share of spot sales is higher. So, I think it's too early to say that here would be a pattern for the future. I think this is very much pandemic-driven. That's at least my view. I don't know, Heikki, if you want to add.
No, I would agree. Obviously in the third quarter we have the maintenance, so please make a note of that.
Okay. Sure. That makes sense. Second final question from me, just on the U.S. import penetration rate. I know clearly it's a better position than where it is in Europe, but it does look like it ticked up slightly. Again, is that just a sort of a COVID Q2 issue that's muddied that a little bit, or is there anything specific you're seeing in that market, that maybe caused that import penetration to tick up? Thank you.
I am not aware of anything specific that would have changed anything material that would have changed quarter-over-quarter. I think the key point is that, the level is clearly lower than it is in Europe. Obviously the recovery will very much depend on how these end-use markets evolve and how the different end-use markets actually buy imported materials. So in some segments they probably buy more imported product, in other applications they buy less imported products. But then we come into the very much detail here, if we start discussing that.
Sure. Okay. Thanks a lot. Have a good weekend.
Thank you.
Thanks.
The next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good afternoon and thanks for taking my questions. I have a couple of questions left. Firstly, on the raw material efficiency in the European business, which you said has actually gone worse in the second quarter. I think that's actually been one point where it seems like you did actually fairly well in the first quarter as well as in the fourth quarter of the last fiscal year. So could you let us know, is it basically your scrap rate or ratio which has come down? Or has it been also worse in terms of scrap purchasing costs? So what has happened there? Will part of that potentially reverse and resort in the third quarter?
Bastian, hi. I mean, obviously, you are spot on in your historical analysis here. If we look at this through Q4 and through Q1, we were able to get some improvements. Obviously, Q1 was a good volume quarter if we compare with Q2. So I don't think that there is, let's say, a fundamental shift or any sort of structural change in terms of going to lower levels here, whether it's scrap ratio or whether it's other factors, whether it's yield or something like this. But now clearly, we have been, so to say, battling a pandemic situation. So this remains our top KPIs, the things that we are really pushing for all the time for improved performance.
Would you be confident enough to say that that will improve again in the third quarter?
If you talk about the long term, I think we have all of the right things on our agenda. If you talk about a particular quarter, I think it is also sensitive to the very mix, the very customers, the very type of product, everything. So I think it is just a little bit, there is too many factors to take in to give you a clear answer on that.
I would say that obviously the lower the utilization rates are and the shorter the batches of production are, that is not a positive factor for raw material efficiency. So, like in the first quarter when we were running more full, able to run longer batches, longer customer runs, that gives you a much better opportunity to optimize your raw material flow, your yield, and your scrap rate. So with a declining or lower demand expected, that is not helping the situation in the third quarter.
Okay. Thanks, Heikki. That is very clear. My next question is a quick follow-up on ferrochrome. I guess if I look at the slide deck here, you only show a small improvement in price realizations. If I hold this against the volume performance, and your top line, it does suggest that you probably have been building some inventory, I guess, for your maintenance break in the third quarter. Unless I am missing something. Could you please let us know whether that is what has happened and whether that also means that your shipment volumes in the third quarter in ferrochrome will actually be largely stable despite the maintenance break?
There's a number of customers that we do need to serve, despite the maintenance break. So, there needs to be some preparation. But it's been a tough game finding that optimal balance, as I described earlier. So, we are preparing in an appropriate way but probably trying still to keep it at the minimum we can.
Okay. But does that mean that shipments will be more flattish rather than heavily impacted by maintenance?
Yeah, I think we are not giving really that detailed sort of forecast information, so I think I just need to leave it there.
Okay. Fair enough. My last question, Pia, is probably one for you as well, just on balance sheet. If we go back, obviously, you always expressed a lot of comfort around balance sheet and your covenants related to the gearing or equity ratio. But then obviously the window of strength in the first quarter has not been used to roll over the convertible back then, and obviously the timing of the recent convertible suggests that the conviction on the balance sheet has probably dropped a little bit. Are you generally still happy with the current balance sheet, and to run with it? Maybe one for Heikki. Heikki, when you think about the strategic journey you're basically embarking on, I guess you probably have a good idea already. Do you feel at this point that you are appropriately capitalized for the strategy you plan to embark on?
Yeah. If I just first answer to your question, yes, obviously you are right. We paid back the previous convertible in February, and now this new issuance was in July. There are certainly a lot of things that have happened between those two dates, for example, the pandemic. I think given the pandemic situation, at least I am really happy with the convertible bond issuance. I think we need to pay a lot of focus to our maturity profile, of course, for maintaining liquidity, which of course, as you see from our figures is really good at this point in time. But just keeping that up in a pandemic is a key priority. A higher debt level is something that needs even more focus during this kind of time period. I think I now leave it there.
Right. Obviously we will come back with a lot of detail, when we then present the results of the analysis to you. But I think generally speaking to your question, obviously every company, every business has a lot of ideas on where to invest and how to grow. To your question, it depends then, the balance sheet, of course, will impact what type of investments we can make in the future and in what sort of time sequence. But we will come back with that also. But at least for this year, we are confirming the EUR 180 million, and that is the amount of money we will spend on CapEx.
Thanks, Heikki. But at this point, if you look at your balance sheet structure, you do feel that you are appropriately capitalized for essentially what you plan to do?
The actions we are going to make, we will present them later, and some of them may have, some of them may not have impact on the balance sheet. I will have to come back to that later.
Okay. Perfect. Thanks so much, and thanks for taking my questions.
Thanks, Bastian.
The next question comes from Ola Södermark from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon. Sorry to have to come back to the bridge and the impact of the 10%-11% drop in volumes quarter-over-quarter and year-over-year there. Can you talk a little bit about the dynamics going forward, and should we expect the same magnitude of EBITDA drop when you are guiding for 10% lower volumes in the third quarter?
Ola, it's Pia here. Hi. Obviously it's a really valid question and I think the dynamic of the pressure that you get just through the lost margin, when you have a lower volume. That's a pattern that definitely then provided what the margins were in the previous period. That's really the impact that you will see in a bridge like this. What's really the topic is, what are the other measures that can be taken in order to fight that back? They can be cost measures. They can always as well be improvements in raw material efficiency or other similar. I would say that our efforts are obviously in those buckets that we can touch and that can be helpful. As mentioned, typically in Europe you would have summer holidays, that would bring some ease on the personal costs.
Also being as restrictive as is reasonable on the maintenance front. However, it's clear that there is one more, so to say, potential negative, which is the price pressure that we have described here. Somehow, you need to combine all of those and our efforts need to be in those areas where we can have an impact and that is not only dependent then on the market.
Yes, but if we are talking about volumes isolated, then this is the impact we can look forward from
Yeah
the third quarter.
Partially we are maybe talking sort of bridge technique here, but the bridge technique is really you look at the lost volume and you look at the lost margin and that's what
Yeah. Okay. Thank you. Wish you a good weekend.
Thanks. Thanks a lot.
Thank you. The next question comes from Alan Spence from Jefferies. Please go ahead.
Sure. Thank you. Just one follow-up question from me. Regarding CapEx and the $180 million budget, it looks like the annual maintenance is decently lower than what it would previously have been. The things that you have deferred there, are those items that you are comfortable getting through this period having not spent on, or should we assume that there needs to be a catch-up spend in 2021 for these?
Yeah, Alan, it is a tough job cutting CapEx in an industry like this. We have had to take several and very deep and thorough discussions with all other members of the management team, as well as a big number of people in the organization to find that right balance. Obviously you are right that in some cases it is more a question of timing, when should you do something. Then for me, that does not automatically mean that we just sort of move things into 2021. But there might be a later point in time when some things will have to be carried out.
There are safety-related CapEx. There is also legislative environmental compliance-related CapEx that we will have to spend no matter what.
The rest is something that we are working on. But obviously, if the utilization rates are lower, then of course it gives you some sort of flexibility on postponing CapEx. But if and when the market, of course, at some stage clearly picks up, then that maintenance will be, of course, going up as well.
All right. Makes sense. Thank you very much.
Thanks, Alan.
The next question comes from Harri Taittonen from Nordea Bank. Please go ahead.
Thank you. Heikki , maybe time for two questions here still. Looking at the import restrictions or safeguard measures, one question is about the older anti-dumping duty regarding the cold rolled against China, which has been in force since 2015. Is there any sort of news or do you see what's going to be the outcome or the potential continuation to that? Because it started five years ago, and it was for five years. The other question is related to the Carbon Border Adjustment Mechanism. You mentioned that it will take a few years, but are there any kind of, in that process, decisions that we could be expecting during this year or earlier that we should be looking at in order to get a feel of where that process is going?
So in terms of the import restrictions, I have no new information on the first question.
Right
At this stage. On the second one, the thing here is, of course, EU and combined with the WTO, it is a complex organization.
Sure.
I think it is almost impossible to project when decisions will be made and also in what magnitude. It seems that also on many topics, there seem to be different points of view among the EU member states. Then it, of course, depends on what is the consensus view. So I am very hesitant to make any projections on what the outcome would be. On a high level, as I said earlier, for us, of course, the safeguards expire next summer. We have to find urgently a solution well before that.
Sure. Okay. Thank you very much.
Thank you. The next question comes from Seth Rosenfeld from BNP Paribas Exane. Please go ahead.
Thank you for taking the follow-up question. If I may, just with regard to the strategic review, you mentioned this is going to be announced later this quarter before Q3 results. Can you, at this stage, just give us some framework for exactly what's included in that scope? Is this essentially going to be an updated version of Vision 2020 with EBITDA and returns targets, or are you considering more structural changes, such as whether all of your operating units are still core to the asset portfolio? Just how broad should we consider the work being done?
I don't want to preempt the decisions we're going to take, simply because at this stage we're doing a fairly comprehensive top-down and bottom-up review. We're doing a lot of benchmarking and also a lot of calibrating in terms of the outlook. We have to obviously have a point of view on what's the outlook for the market in the coming years. Based on that, we're working backward to determine what type of targets, and in particular, what type of actions are needed in order to keep us on the right path going forward. Sorry I cannot go into more detail at this stage. But we'll try and get back to you. Obviously, we need to make decisions as quickly as we can. But as I said, before the end of the third quarter, before we come up with the results, you'll hear more.
Okay. Thank you very much.
Okay.
Thank you. We have no further questions.
Thank you, operator. We have a couple of questions from the online audience. One, if the current market conditions remain until year-end, is it possible you will have to take impairment by year-end? If so, in what approximate magnitude could those be?
Yeah. I think it's one of those things where, from just an audit perspective and running a good diligence on our balance sheet, we would be testing even more frequently than at the year-end. We have already tested a lot of assets in Q1 due to the pandemic starting up. We have also tested assets in Q2. We have reflected the current situation and our current view of how things are developing in those tests. As you've seen in our results, there has been no report. Obviously, we'll continue to do it. So it's a process that is now much more frequent because of the pandemic.
Thank you. The next one. How do you see inflation coming into the metals? When do you see stainless steel prices going up in a meaningful way?
Cannot forecast on that. Obviously, metal prices are a function of demand, supply, and also to some degree on how the exchange rate vary. Those are the primary drivers, but I cannot forecast on what happens to exchange rates and supply demand at this stage. Those are the primary drivers for metal prices.
Good. Thank you, Heikki, for the answers. Now, I think we have time to conclude our news conference. Thank you for all the participants for their good questions. Outokumpu will publish January, September results on November 5th. Thank you once again, and have a nice weekend.
Thank you. Have a nice weekend.
That does conclude our conference for today. Thank you for participating. You may all disconnect.