Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Outokumpu interim report second quarter 2019 conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is recorded today, Thursday the 1st of August 2019. I would like now to hand the conference over to your speaker today, Tommi Järvenpää. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Outokumpu's second quarter 2019 earnings webcast. My name is Tommi Järvenpää. I'm the head of Outokumpu's investor relations. With me here today are also our CEO, Roeland Baan, and our CFO, Pia Aaltonen-Forsell. We will be referring to the presentation that can be found on our website. With these remarks, I'm pleased to hand over to Roeland. Please go ahead.
Thank you, Tommi. Good afternoon, everyone. I would like to start, as always, with reminding you of our vision: to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. As our results in Q2, and actually in the first half show, we are still making tremendous progress towards that goal, hitting our operational KPIs where we put them. If we go to the results. In a difficult market, we actually had a satisfactory performance in the second quarter, thanks to perfect execution from the operational and the commercial side. If you look at the EUR 91 million of EBITDA and look at the bridge, then it's clear that the market, as I already said, with its difficulties through the continuing imports of low price material from Asia, result in lower deliveries.
But at the same time, we have been able to increase the pricing and the mix both in actually all our BAs. Specifically though in Europe, where the specialty group has made tremendous progress as well. On the cost side, we have been able to continue our drive for higher productivity. As a group, we have overall achieved a higher than 3% productivity compared to last year. As I said before, we really are making still fantastic progress on these targets that we set out. Ferrochrome, as you can see, was flat. Then, as Pia will later explain, we had some small negative on the other operations resulting in the EUR 91 million I've said. If you look at the market environment, on the pricing side, prices in Europe, the base prices have really not moved. They're more or less flat, a little bit down.
Same goes for the U.S. Same goes actually for the average nickel price. The queues were pretty much comparable in that sense. Ferrochrome benchmark, of course, benefited us, was up 0.08 , with the known sensitivity of EUR 10 million per 0.10 . That shows you where the difference comes from, then mitigated by the maintenance cost that we had there. But the biggest issue, of course, that we are as an industry facing are the imports. Since the introduction of Section 232, if you look at the right-hand side of the graph, you can see that indeed, the imports into the U.S. have been deflected, have been taken out, and they have found their way into the only open market still around, which is Europe.
In spite of the safeguards, and in spite even of the latest permanent safeguards that were activated in February, that is still something that is coming into the market. The penetration went up to 30% for a quarter, and if you look at in the quarter itself, it was actually towards the end of the quarter, even slightly higher than that. The result of that on pricing has been clear in the past already. We dropped off a cliff in 2018, and we have more or less stabilized at this around EUR 800 a ton level. At this moment we might see a small increase, but it is very negligible. There's still enough pressure not to be able to raise prices too fast. In the U.S., the same thing happened in the reverse, pricing up and has been pretty stable ever since.
If we now look to what we are expecting going forward on volumes, this comes from SMR. In Europe, a deeper dip than usual in the third quarter. There are a few reasons to it. One, of course, is the much advertised slowdown in automotive, but the other thing is that the inventories in the distribution segment, due to the imports out of Asia, are still pretty high. So there's reduced demand in that segment. We expect as well that will reverse into Q4, where you see indeed a return to more normal volumes in the market. In the States, we see pretty much stable development, not too much differences Q o Q. With that, I hand over to Pia.
Thank you very much, Roeland. Good afternoon, and let me start by a few comments on the key figures. We have discussed the deliveries. You see the clear decrease. The stainless steel deliveries were down to a level of 584 kilotons in the quarter, and of course, in percentage terms compared with a year ago, significant step down 13% and also some 6% compared with the first quarter. So under those circumstances and in the market environment, reaching the EBITDA, the adjusted EBITDA of EUR 91 million, is still a satisfactory result. I think the highlight, from my perspective, on our report, is the strong operating cash flow, the improvement in working capital that we have been able to do during the quarter, and then the net debt reduction that followed that. So I will get back a bit more commenting on the working capital.
I think the reduction in net debt is particularly good news since we also paid the dividends of EUR 62 million during the quarter. I am very satisfied with that. Our gearing then ended at 49.8%. If we have a look a bit on the performance by each BA, we could start by BA Europe. I think we have seen several strong points in BA Europe's report. It is evident when you look at this waterfall here, that we have been able to achieve good steps when it comes to the pricing and mix. I would still reiterate there the importance of the product mix and the improvements that we have been able to make there.
Because when we look at the base price development as Roeland just commented upon, that remains stable on a very low level, by some statistics, even a little bit down from Q1 to Q2. Only a little bit, but still. With that in mind, I think this positive development is a good achievement. We also see good and positive steps when it comes to productivity development and other continuous improvement efforts. You do see here the 6% tick down in deliveries, very much caused by the increased imports. Then also with the endgame right now of the distributors having inventories on an average level. This was a clear downside in Q2 and continues to be challenging, throughout the next period. Net of timing and hedging, slightly negative. On the cost side, we have some improvements.
It is for example, the graphite electrodes and the electricity prices where we have a little bit of improvements. Then in others, I do think it is worth mentioning that there has been some reversal of the hedging losses that we could see in the first quarter report. In the end, we reached the same number as a year ago, EUR 73 million as adjusted EBITDA. Let us next have a look at Americas. I think when we look at Americas, the continued distributor de-stocking and the sentiment also, in the market has been causing lower deliveries and these were really somewhat also lower than we had expected. That caused, in the end, our net results to end slightly on the negative side at minus EUR 8 million adjusted EBITDA of the quarter. Compared with the first quarter, of course, we also had some positive movements.
A little bit of an improvement in pricing and mix, lower truck and freight costs in the U.S. Then the impact of the net of timing and hedging was positive during the quarter. Overall, again, the volumes really, at least from my perspective, being the main negative impact, compared with also what we had seen earlier. A few words then on long products. The market here, and demand in particularly in Europe, has been weakening. We still see a positive development on the result. Deliveries were a little bit down, but pricing and mix, and this is both customer and product mix improved, which was a good step. We had also small positive movements in all of the other main topics such as timing and hedging costs and also some reversal of FX losses that we had in the first quarter.
This is then taking us to a EUR 16 million adjusted EBITDA. Finally, on the BAs, let's have a look at ferrochrome. You might recall that Q1, the deliveries were record high, and we have continued on a very good level when it comes to production. We have also still had high deliveries in the second quarter, even though they were a little bit lower than in that record high first quarter. The benchmark price of 120, was a bit higher in the second quarter. Now we know that it's again down for the third quarter, as Roeland explained, but still here we enjoyed a somewhat higher price. Then we had the planned maintenance shutdown where the cost impact was about EUR 5 million. That really kept us then at the result level of about EUR 31 million for the ferrochrome business.
Then perhaps to my favorite slide, the cash flow generation. What you see here is a working capital release of EUR 96 million in the quarter. I think we have had a lot of focus on this internally. We have particularly looked at inventory levels in each part of the chain, but also focused on other areas such as accounts payable, the contract structures that we have, as well as particularly the overdue management. I think we have made good progress in all of them. We have hit all the internal milestones that we have set for ourselves, and it's also visible now in the end result, which is a positive of 96. Not to mention all of the details from last year, but I do think still it's worth mentioning that in the second quarter last year, this figure was -18.
The delta is quite significant. You might remember that it was very significantly positive also in the first quarter. We continue this positive momentum and development here. The CapEx during the quarter was at EUR 37 million. On the right-hand side, you see our estimate for the full year, where really the main efforts from our side have been in the Kemi Deep Mine project, which continues as planned. Then also on the digitalization and the ERP projects that have been important for us, and we continue working with those. Overall, we expect in terms of annual maintenance CapEx this year around EUR 100 million. I think all of those have been represented as well in the second quarter. Following the good cash flow, we have been able to reduce our net debt.
If we would look at the second quarter of last year and actually taking into account the about EUR 130 million impact from IFRS 16, it's clear that we are now able really to reduce the real underlying net debt, both compared with the first quarter this year and with the figure a year ago. This is a good and positive development. On the leverage side, we are a bit up compared with the previous quarter. My final slide here is to highlight one of the achievements that we have in extending our maturity profile. During the quarter, we have signed a new term loan. This is a EUR 400 million term loan with a maturity in 2023. It's important, I think, both in terms of the maturity profile, but also because this is now a new type of loan linked to our sustainability targets.
So both in reduction of CO2 emissions as well as safety, which both remain key priorities for us in our sustainability work. It brings even more attention, both externally and also, of course, internally to these topics. In the graph that you can see in these pictures here, this is still the situation at the end of June. So although we have signed this agreement about the term loan, we expect to actually draw the loan during the second half of 2019. So it is not visible here yet. But you see that a EUR 400 million loan with a maturity in 2023 will, of course, significantly shift the maturity profile and also reduce the amount of maturities in the short term quite a lot. So it was a good step for us. And I think with that said, Roeland, it is over to you.
Thank you, Pia. So to the outlook for the third quarter. I said before, we expect the stainless steel market to remain challenging for the factors already mentioned, and we can dig into that more during the Q&A. We expect lower deliveries in Europe and a stable level of deliveries in the Americas. The ferrochrome result, of course, will be negatively impacted by lower benchmark price. And we have a planned maintenance shutdown of one of the ferrochrome furnaces, which is expected to have a total cost impact of about EUR 10 million during the second half of 2019. All together, we expect adjusted EBITDA to be lower than the one of the second quarter of 2019.
Thank you, Roeland. Operator, we are now ready for the questions.
Sure. And our first question comes from the line of Anssi Kiviniemi from SEB. Please ask your question.
Yeah. Hi, Anssi from SEB. Thanks for taking my questions. First of all, the deliveries Q2, they were lower than you guided and the underlying and apparent demand has been weak during the summertime. How is the seasonality when we go into Q3? You guide for lower volumes in Europe. That is traditionally the case, but should we estimate similar seasonality than in previous years? Could you, first of all, open a little bit on that?
Right. First off, the remark on the lower deliveries in Q2. Yes, they were lower, but do not forget that we gained market share in both Europe and the U.S. So relatively speaking, on the market position, we have done pretty well. It comes back to what I said earlier, the underlying markets are slower than they have been. Then coming into seasonality Q3, we do expect that the seasonality impact will be similar to previous quarters, but there is, as I showed, this projection from SMR, that the overall consumption for Q3 in the European market will be slightly lower than normal seasonality.
Okay.
Thank you. Our next question comes from the line of Luke Nelson from JP Morgan. Please ask your question.
Yeah. Afternoon. A couple of questions from me. Firstly, what, if anything, are you factoring in around inventory revaluation adjustments within the Q3 guidance? Secondly, just specifically in terms of Business Area Americas, can you give a bit more clarity around expectations and again, what you are factoring in in terms of Q3 guidance around hedging and timing movements? Then high level, longer term around your guidance at Business Area Americas and the annualized EBITDA run rate of EUR 200 million per annum by the end of 2020. Obviously, still at a loss, in this quarter. Can you just maybe paint a bit of a roadmap around how you plan on getting back towards that level of profitability, by the end of next year? Sorry, EUR 100 million run rate, if I said that correctly. Thanks.
The first two questions, I gladly hand over to Pia, and I will talk a bit about the longer-term activities in the Americas.
Thanks very much. It is Pia here. Hi. I think I can very shortly answer those. You asked particularly about the inventory valuation, but I think we tend to look at the net of timing and hedging as sort of one total bucket of events. I do not think that we foresee any major negative impact from those. I think maybe we could say that it is not a two-digit figure, but just to say that it is not a major impact, but it could be slightly negative.
The Business Area Americas, the longer-term targets a round the EUR 100 million run rate.
We are executing on the things that we have said we will execute on, which means that in short order, we are completing the restructuring in Mexico, getting to the end of that. We have put in place a full new team in the Business Area Americas management group, where we have very clearly set out the objectives in terms of cash conversion cost. The logistics issues that we have discussed, where we are opening in both the Midwest as well as on the West Coast. We will have logistic hubs to bring down the logistics costs further. The same goes for the route to Mexico and the route from Mexico to the West Coast, where we are now moving to containerized transport in order to bring down the cost.
Already this part of the second half, we see the graphite electrode costs coming down slightly, but we expect that to come down much stronger yet in 2020. We have a new head for commercial, where we are embarking on a much more granular approach to the market, more differentiation in our products, better mix, which you already saw in Q2, and that will continue. And then last but not least, we are in full flow with the ferritic investment. All in all, we are on the path to actually get to where we said we will go.
Thank you. Our next question comes from the line of Bastian Synagowitz from Deutsche Bank. Please ask your question.
Yes. Good afternoon. I just have a couple of questions. Firstly, could you please help us to understand the bridge into the third quarter? You just mentioned a single digit negative from inventories, potentially within maybe another EUR 15 million headwinds from the price drop and the maintenance in ferrochrome, and maybe another EUR 15 million- EUR 20 million from the seasonal weakness in Europe and maybe also the Americas. That would put us somewhere close to EUR 50 million- EUR 60 million EBITDA. I am not asking you for precise guidance here, but does that put us into the right ballpark, or is there anything I am missing? That would be my first question, and I will just take them one by one.
Pia.
Yeah, I think in terms of the main elements, I think you have mentioned all of the key elements. I think it is so easy to make disclaimers here. I wanted to give an answer on the inventory revaluation net of timing and hedging, but we all know it depends on the specific metal prices. Things could still happen in that area that we cannot simply disclose at this moment. Really, of course, a major element is the delivery figures. Here we have also seen the impact of the imports that have been quite significant, and this is a volatile environment as well.
These are the typical CFO disclaimers where I would say that you have the right elements, but there will of course be some sort of deviation in the exact outcome depending on how the market conditions will now continue during the quarter. We have seen continued high imports early in the quarter, of course.
Okay. Thank you. My second question is already thinking ahead about the fourth quarter. Is there any visibility you have got on market dynamics at this point? Are there any other one-off items or maintenance charges which we will see? I think Tornio used to have this EUR 15 million-EUR 20 million cost headwind from the annual maintenance shutdown. Maybe you can give us some early color there.
On winter maintenance, that has been always the case, and that will be the case as well this year. Because of the patterns, we will have more maintenance in Tornio in December than we have in the Q before that. Visibility on the markets, I will approach it a little bit differently, Bastian. What we have seen is that with the safeguards, and especially with the new period of the safeguards starting in July, that of course we had 2x 5% ease off, one in February and one in July, whereas the underlying stainless steel market has basically not developed. Net-net, there is more room for imports than there was actually under the old regime. Now, the other thing that we see is that because a number of these quota are still global quota, that early on in the period, there is an overfilling of these quota.
We are seeing some products that literally a year's quota was filled in two or three days. That is one thing that is distorting the market, and that indeed is one of the things why I said distributors have quite a bit of inventory because they are the buyers of this product. However, if you take a step back, the quota as they are, represents still ultimately about 25% of the amount. So what you see in maybe over imports early on in the period should balance itself, because at some stage the quotas are full and the domestic producers will be back in the thing.
All in all, long answer, we do see improved volumes in Q4, but ultimately it will be very important to see as well what comes out of the safeguard review that the commission will come up with in September, because that is when the new regime will come out, where, for instance, the question about Indonesia, will it be included, and if it is included, will it get its own country quota or will it be part of the global quota? All those answers will come in September.
Okay, perfect. Thanks for the color. Roeland, I've got one more question on cash flow and also the balance sheet, and I think you did actually a really good job on the cash flow side in the second quarter. Now if we think about the third quarter, I think you do have the EUR 90 million cash in from the property sale, and I think you also aim for further working capital reduction towards the end. But if we now look at the underlying cash flow before working capital and before the non-core sales, you're actually draining cash and you've been quite relaxed with regards to the balance sheet, obviously after the first quarter. Now, does that still hold true given that we are getting closer to a 4x net debt to EBITDA and the macro indicators are clearly not getting any better?
What would be the catalyst for you to tackle the CapEx budget or raise cash in any different way? Thank you.
Just a few general remarks. We are not relaxed on the balance sheet, which is why you see that we actually are still reducing debt. We are completely focused on cash, and I think it is an amazing achievement that we have been able to have a tremendous cash flow in Q1 and Q2 and bring down our debt. If you correct for IFRS 16, which of course is just a bookkeeping thing, then we are actually now at our lowest debt level since Q4 2017. I think this is testimony to our focus and that we are not relaxed. This will continue in Q3 and in Q4. Again, we are fully aware of what's happening, and we are bolstering our balance sheet where we can. What we cannot, of course, influence is the market. We can do everything we can on what is under our control.
The market is the market, and ultimately, if you look at the multiple is going up, yes, it is because actually, of course, we have lower EBITDA rather than we have higher debt. Pia, anything you would like to add?
I think in terms of, let's say, alternative ways of thinking of the capital structure and as well the funding portfolio that we have, you have seen that we have taken significant steps in changing our maturity profile, and I think we continue to be very focused on that and analyzing various alternatives. This is not the end of the game. This was actually just a first significant step in ensuring that we have the structure that is beneficial for us and also then the maturity profile.
Okay. Thanks for clarifying. Maybe just again, to follow up on this, what would be the catalyst for you to basically tackle the CapEx budget or essentially think about any other alternatives? Because, clearly even, I guess with all of these measures, given the earnings trend, I think the net debt to EBITDA multiple obviously is still very high and it may not be so much an issue when it comes to the equity ratio. But just in terms of ongoing cash generation at this point of the cycle versus where the absolute balance sheet number is possibly not the right size.
Mm-hmm. If you look at CapEx, we said about EUR 240 million for this year. EUR 80 million of that is the investment in the deep mine. If you look at the base CapEx, EUR 100 million of maintenance and safety plus another EUR 60 million of the normal development and expansion, that actually is a very manageable level. It is the level that we have always said that we have a sort of a base level of EUR 160 million. The deep mine is an exceptional thing. Just to bring it back into memory, we are mining down to about 500 m currently. We are running towards the end of the seam at that depth. In order to secure sufficient supply of ore until the end of the 2030s, we are now investing a total of EUR 250 million. That, of course, comes in one block.
It is in three years that you have to put it in, and that buys you then almost 20 years of supply security. A low price to pay for that this product gives. If you say, let us stop that because we want to squeeze cash out, then basically it will mean that you will suddenly find yourself without ore supply somewhere in 2023, 2024. We will not do that. However, if push comes to shove and really things go pear shape, then of course we will be able to squeeze, there is no doubt. At this moment, the operational imperative is still bigger than the worry about our leverage.
Okay. Basically that means that there is no sort of time buffer you have got in the CapEx project plan here, in case you would shift it, that essentially, you would still have a buffer of like a year or two before essentially you would get the impact from the ore supply.
No, that is not how it works, Bastian. As the old seam phases out, you have to start phasing in the new seam. This is binary. What it needs is, because now you are down in 1,000 m, you need a hoisting shaft that goes down to 1,000 m, otherwise you cannot get your ore out. It is literally the hoisting shaft has to be in place before you run out of the seam that you have now. That starts becoming critical in 2022. That means that we have 2019, 2020, and 2021 to actually have that investment done in order to make absolutely certain that you have no shortage. There is no possible shift. When I say we can squeeze, the squeeze will be more on other stuff that we are doing than on this project.
Again, this has a tremendous return, and the alternative of not having your own ore supply for us would be much more damaging.
Okay. Very clear. Thanks so much for clarifying.
Thank you. Our next question comes from the line of Tony Lebon from ODDO. Please ask your question.
Good afternoon. I have a few questions. The first one is on your 2020 EBITDA target of EUR 750 million. I see one slide in the presentation recalling this target and the bridge in order to get to that figure. The equity consensus currently has an estimate of about EUR 500 million, and it is about the same at Moody's rating agency. I talked to the Moody's analyst recently. I would like to understand if there is any specific reason why you do not adjust the target. Is it because you still believe in the EUR 750 million? I guess this is my first question.
That is a very good question, and it is one that I am very happy to answer. When we set the EUR 750 million, we did that on the basis of the market that we were in early 2016. It is a 2015 market that you have to take into account, which means the 2015 base prices, 2015 ferrochrome prices, nickel prices, et cetera. That is the environment, we call that a mid-cycle environment that we set the EUR 750 million on. That makes sense when you do that in 2016 because you have a baseline that is meditated on those numbers. If those numbers are there in 2020, yes, we will make the EUR 750 million. Now, the question is, are those numbers there?
If you have a different market, for instance, like we have today, where base prices are not $1,100, but they are EUR 800, yes, you have a correction for that, and you will not make the absolute number of EUR 750 million, but something less than that, in spite of the fact that we, as a company, will have hit all our internal targets and all our improvements. The issue is why do you not change it, or why do you keep it on? We had the opposite question in 2017 when our EBITDA was racing away, and the same question came all the time, "Why are you not putting your target up?" And we had the same answer then, which is, we do not know what the market circumstance is going to be in 2020.
As we said at the CMD as well, we keep EUR 750 million, but we will have to correct that for the real market circumstances, up or down, and that will give you the final number.
Okay. Thank you very much. My second question is on the convertible bonds maturing next year. Moody's mentioned in the latest report that it was the refinancing, the measures to take in order to refinance this convertible bond would be something they would consider in order to assess what they will do with the negative outlook that they put on the rating. Could you please give us a color on the way you intend to refinance the bond?
Yes. Hello, it's Pia here. We have very recently signed the agreement about the EUR 400 million term loan, and I mentioned this earlier in the presentation. Of course, that gives a huge improvement to our maturity profile. It also gives us a lot more flexibility and room to consider a range of options when it comes to the refinancing also of the convertible bond, because very much, at least statistically right now, it seems that we will have a maturity in February 2020 of EUR 250 million. I think, following also discussions with Moody's, that one of the really key elements that they also alluded to was our plan with the term loan that we have now already delivered upon, and we will draw on this loan during the second half of this year.
We have room to maneuver, and we may also consider other options still in order just to have the loan and debt portfolio that suits our needs and the maturity profile that we want to achieve.
Thank you. My third question is on off-balance sheet receivables. Could you please give us an update on the amount?
That's a very good question. I think I would even need to I can give you some light first just on the overview of our actions in that area, and I think there are two things to consider. One is, of course, the development of the sales, and the other one is the development of our ability to manage overdues. I think we have been making a lot of progress and hit all our targets when it comes to the overdue management. When it comes to trade and other receivables, at the end of the second quarter, the figure was EUR 739 million, and this is the level where we disclose it. There are also some other receivables included in that figure.
Okay. Thank you. My last question is on the ramp-up of the margins in the Americas division. In order to get more confidence in the way you would be able to increase the profitability, do you benchmark yourself? I am sure you do, but we lack some data in order to benchmark your division versus that of competitors. Could you please give us a little bit of color on where you are going to sit in terms of, for example, EBITDA margin versus your competitors in order to have more comfort on the ramp-up of your margins in this geography?
Yeah. Naturally, we do benchmark for what we know. As you know, our competitors do not detail their operations in the Americas.
Yes.
We have probably just as much from public sources, as much information as you have. If you can actually get our competitors to divulge more, that would be very much appreciated. Having said that, we have a pretty good idea of where the gaps are, and those are the things that we are addressing. Of course, there are structural differences, as we have discussed before. For instance, the nearness to the market, where our Midwestern competitors are better positioned than we are. Having said that, we have an advantage with our Mexican operation. Yes, we do very detailed benchmarking, and part of our projections of where we are going to get in 2020 are coming from bridging these gaps that we see.
Okay. Thank you very much for all of your questions.
Thank you. The next question comes on the line of Sandeep Peety from Morgan Stanley. Please ask your question.
Hello. Hi. I have three questions. Firstly, on Business Area Europe division, I see that improvement from pricing and mix is close to EUR 42 million. This is the same level of EBITDA that you generated in Q1. Can you let us know how sustainable this is and why was the improvement not seen before? Secondly, I see the effective tax rate for this quarter is close to 70%. Maybe if you can explain what is leading to it and what are your expectations for the full year. The final question, we have seen EUR 100 million of working capital release during the first half of the year. Should we expect similar levels going into the second half of the year? Thank you.
All right. Let me start with Europe. Actually, you have seen this before, this margin improvement, because we have over the last, I would say six quarters probably, shown a mix improvement. To put some numbers, again, since we came from what we call our Pro grade in volume was about 6% a quarter six ago. It's now over 12%. You see a clear improvement in that share of the mix of Pro grades. The Pro grade margin is a multiple of our normal standards. Whether we can improve even further. Currently, we are flat out on these specialty products, on these Pro grades. We are looking to debottleneck and move certain parts of production to other places in order to further free up capacity. Whether you see this mix improvement continue in Europe depends on how successful we are on that.
On the other hand, in the Americas, as I alluded earlier, we do have still a lot of runway where we have been very much a single product producer, and getting now much more into diversifying in other dimensions, gauges, grades, et cetera. There is still movement ahead as well. On the tax rates, Pia.
Yes. Hello. Hi, it's Pia here. I think on the effective tax rate, there are two main topics to be mentioned. First of all, I really want to say that this is a P&L tax rate. This is not equivalent to anything having to do with cash taxes. Nevertheless, it's a relevant question. There are two elements. One of them is that we had one item, more as a one-off, if you look at the cumulative figures, where we do not expect full tax deductibility. There is this item of about EUR 80 million, which is not then giving the tax deductibility.
The other one is that when you look at the structure of where we are generating profits and also some jurisdictions where we are generating losses from a taxable profit or taxable loss perspective, we have, for example, a longer history of losses in the U.S. That means that we cannot book deferred tax assets vis-à-vis those losses. I think those are the two main items that then lead to a higher effective tax rate in the P&L. When you asked about what will it look like going forward, of course, this one-off item will not repeat. But the fact that we are not able to book deferred tax assets on the losses in the U.S. and other such structural changes, they are, of course, depending on our profitability development.
But I would assume that on a taxable profit level, we remain in this situation also during the rest of the year. That means that this effective tax rate will remain high. Has nothing to do with cash taxes.
Thank you. Our next question comes from-
There was one additional question, was on working capital release. Sandeep was saying we have released significant working capital already in the first half. We do expect that we have further release in the second half as well.
Thank you. Our next question comes from the line of Anssi Kiviniemi from SEB. Please ask your question.
Yeah. Hi, it's Anssi again. Still a couple of questions left. On slide five, this has been addressed in previous questions also, but I just want to make sure. Some EUR 60 million boost, as I look at the picture, comes from mix and price and customers. How much of this will continue in Q3, Q4? Is there something else in Q2 results that kind of boosted the profitability? Meaning, for example, scrap utilization, scrap discounts, et cetera, that kind of won't repeat themselves in Q3? That's my first question. The second question is on E.U. safeguards. Do you think that it's fair to think so that if Indonesia will be added to the other countries, let's say residual quota, that Indonesian volumes into Europe will slow down?
Is it fair to assume that, as a matter of fact, those volumes will exhaust the other countries quota, and thus the price pressure remains intact? What are your thoughts on that? That would be helpful. Thanks.
Very good. It's Pia here. Maybe I can start just maybe by, let's say, qualifying the answer a bit to say that the impact that you see here, which is very significantly positive on the pricing and mix, I think we have discussed the underlying reasons, the really improved product mix, et cetera. This is a bridge impact. So this was the improvement from the first quarter to the second quarter. So in a way, when you ask that will they last, it's a different question than will they continue to improve. I don't think we have been specific in giving guidance on our pricing or the mix or so on. Of course, I think that we can say that we have achieved a good level with the product mix, and obviously we have taken a really good step in the second quarter.
As Roeland explained, actually when you look in the history, we have been able to build this during a longer period of time. Maybe not with so significant steps in a quarter, but still, it has been a continued development. I don't think I can. Sorry, I cannot be more specific than that. I think on some of the input costs, we have a little bit more information. So we have been discussing, for example, the electrodes, and those gave a positive from Q1 to Q2, and where the prices are right now, most likely there will be a small positive again to see if the prices remain where we see them at the moment.
As to the safeguards, it's a lot of speculation. But we assume that Indonesia will be included. We assume as well that that will have an effect on the volumes. Whether it will be a part of the global quota or not, doesn't really matter a lot, because it's not the Indonesian volumes as such that are pushing down the pricing. Don't forget, we report cold rolled prices. And when we talk base prices for three or four cold rolls. Although indeed the cold rolled imports of Indonesia into the European market have gone up, they're over the 3%, they're about 9% or 10% now. But they are not big enough to really move the market. So the price pressure comes from the overall import pressure because the prices in China are low as well and Korea as well. So it's not just Indonesia.
Okay, thanks.
Thank you. Our next question comes from the line of Krishan Agarwal from Citigroup. Please ask your question.
Hi. Thanks a lot. This is Krishan from Citigroup. Just to follow up on the guidance, and you said that the guidance was set in 2015 and then afterwards things have changed, particularly on the European base price. Considering the European base price of 800, at that time $1,100, $300 per ton of delta, then you have 1.5 million in terms of delivery, works out to close to EUR 450 million. So my question is that, is it a better way that you adjust for that, adjust the guidance of 750 by this EUR 450 million and then work back for this EUR 270 million target. Is it a fair way, you think, to look at the next 18 months of business year?
I like your thinking, Krishan. We refrained from doing that because the markets are so volatile that then you will be changing, potentially every quarter, you would be changing your outlook or your target. We prefer to keep on sitting on these targets and if you want, we will not publish them so often anymore. But for internal purposes, this is how we actually work. We work on the drivers of our business and we make the bridges to that 750 with that. So that for us internally, works extremely well to see whether we are still on track or not.
Okay. Thanks a lot. Then one question for Pia, I think. You guided for EUR 150 million of working capital reduction, EUR 100 million already delivered in Q2. So do we assume that EUR 150 million coming from working capital and then EUR 90 million coming from the land sale probably would be the net reduction in the net debt for this year? Assuming that the operating cash flow will be able to fund the CapEx.
Yeah. I think you have captured really some of the very key points and of course then with some impact as well from what our profitability will actually be and maybe it is better that I just do not comment that further. I want to add a few things on the working capital. I think it is important to note that if we think about the milestones that we have set, we have hit all of those and we have even been a little bit over-performing on some of them. You see already a strong performance in the second quarter as well. That gives, of course, some confidence that we are well on track to meet our targets and maybe even with some potential of exceeding them. However, what we have to remember is also the dynamics.
For example, inventory levels are really important, but if you really want them to impact your cash flow, then the inventories need to be on the level where we want them to be several months before the actual year end, for example, because then we have the time to actually invoice and even receive the cash. The Q3 figure is important in that sense because what we reach there at inventories will tell us a lot about the overall level that we are able to receive throughout the year. I think we are well on our track to real estate sales of course obviously as well being a key element because it is EUR 90 million, so it is a significant step in our cash flow.
Yeah. Then just to cross-check. So EUR 90 million, you are not paying any taxes on that, it is straightforward cash receipt?
That is straightforward cash receipt, yes. That is the cash impact.
Okay. Thanks a lot. That is all from me.
Thank you.
Thank you. We have no further questions at the moment. You can continue.
Thank you very much and thanks for attending our earnings call. Our third quarter results will be published on the 31st of October . Until then, thank you and goodbye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.