Thank you. Good afternoon, and welcome to Outokumpu's Q3 2018 earnings webcast. My name is Tommi Järvenpää. I am the Head of Outokumpu's Investor Relations. With me here today are also our CEO, Roeland Baan, and our CFO, Chris de la Camp. We will be referring to the presentation that can be found on our website. As always, please pay attention to the disclaimer in the presentation as we will be making forward-looking statements. With these remarks, I am pleased to hand over to our CEO, Roeland. Please go ahead.
Thanks, Tommi. Good afternoon, morning or evening, depending on which time zone you are in. I would like to indeed comment on our results. As always, start with the vision to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. Again, this is not just a cover page. This is what we will achieve and what we are achieving. I already will bring to your attention that during the upcoming CMD in about four weeks, we will clarify that further and put meat on the bone so you can actually see that this is not just a vision on paper, but a vision in reality. If we now turn to Q3, we had an extremely solid performance.
If you look at how the market had been developing, and I will get back to it, but what has been happening in terms of dropping alloy surcharges, increasing imports, dropping prices, we have turned a very, very good quarter. It is actually the best Q3 we have had in over a decade. So we are very pleased with the result. If you look at the moving parts within it, versus the second quarter of the year, we had significantly lower deliveries, which is partially normal seasonality, but part as well was a result of destocking because of the dropping alloy surcharges that has been dropping, and we can discuss it in detail later, but have been dropping four months in a row. So people have been clearly delaying their buy.
On the pricing and the mix, we had lower prices in Europe, higher prices in the U.S., and then we had definitely richer mix both in the U.S. and in Europe that helped mitigate the majority of it. On the costs, we had good cost control on both sides of the ocean, partly offset by input prices, ferrosilicon, and the famous graphite electrodes that we already discussed, but continuing strength as well in the prices of trucks in the U.S. So the freight costs were again higher in the third quarter than they were in the second quarter. Ferrochrome, a slight plus, and then for the first time, we have consolidated Fagersta in here, that added positively as well.
That, by the way, is proving to be an excellent acquisition of below 4 times EBITDA, the way it is shaping up without counting synergies, just on the asset itself. Moving to the next page. As I said, we have historically low base prices in Europe. Just to put it back into memory, I think the average in 2017 on base price was around EUR 1,100. We dropped in the second quarter to CRU price EUR 980 down to now EUR 800 in the third quarter.
Again, to our business, I have to say, thanks to our contract business, of course, we do not get the full brunt of that. Secondly, what we have been able to achieve on our raw material input side has, to a large extent, taken away that erosion of prices. So we have been aggressively attacking our raw material supplies, and virtually kept our margin stable.
In the U.S., you see that there was still a small increase quarter-on-quarter. For us as a company, that increase was bigger. If you remember, in the first half, we had realized pricing relatively low due to the contract positions we had out of 2017. So that has now kicked in positively in Q3. Nickel down and Ferrochrome down as well, and just on Ferrochrome, EUR 0.01 is about EUR 1 million a quarter as a sensitivity on our results. Next page. Talked about the input pressures, and here you see it very clearly. If you look at Europe, this graph, and you go back to 2015, where you had an average of about 60,000 tons a month coming in, peaking in the second quarter of this year to 100,000 tons coming in, and going from about a 22%, 23% share of consumption to now 31%.
Actually in April, sorry, in May, it went up to 33%. Unprecedented import numbers, clearly a result of volumes getting into Europe ahead of safeguards. Then if you now go into the third quarter, you see that although the volume has dropped significantly, the percentage of penetration stays the same, about 31%, reflecting the seasonal low volumes. Still the high volumes, a direct result of the fact that these safeguards had exempted material still on the water, which came in outside of the quota. Then, of course, the quota started filling up as well, bit by bit. So the import pressure stayed the same. As I said, in spite of that, in spite of lower volumes and in spite of lower pricing, we have been able to very robustly withstand that, which I think is a testimony to what the company is today.
Which, by the way, gives us extremely good insight in how we are able to compete going forward. Then in the U.S., the opposite happened. In 2017, you saw that imports were peaking. Since the introduction of Section 232, bit by bit, the monthly import volumes have been dropping to now about 18% of consumption. Whereas it had been in the height of the Chinese imports, it had been up to about 27%, 28%. So for the U.S., Section 232 seems to be working. We talked of pricing. Here you see the reflection of what I said earlier, the drop from EUR 1,100 a ton in 2017 to, and here it is exaggeration into the EUR 750, it is low. I think what you can say, though, is that all the safeguards have not really turned the market.
They have at least stabilized the market now on a low level, but again, a very workable level as far as we are concerned in terms of profitability, given the activities and actions we have taken on the cost side. In the U.S., you see the ticking up of pricing. I think that is more or less where we are today. I do not see necessarily that there is a lot more pricing upside from here, but it is a very solid and healthy market in that sense. With that, I would like to hand over to Chris to go through the more detailed financial results.
Thank you, Roeland. Good morning and good afternoon, ladies and gentlemen. Move on to the group key financials. I think taking a broad view of this, the key message here is that the third quarter of this year was very much improved against the third quarter of 2017 on almost all metrics, but somewhat similar to the second quarter of this year. The one number, of course, that stands out as being weak is the deliveries. As you can see here, clearly impacted by seasonality when compared to the second quarter. The summer months, especially in Europe, are always weak. We also had somewhat weaker demands. The markets were slower this year than they were at the same time last year. Particularly towards the end of the quarter, where alloy surcharges were falling, we saw that some customers were pushing back on volumes.
Very much an effect we saw towards the end of the quarter that impacted our deliveries overall. The other point to maybe make is that the adjusted EBITDA was only to a very minor extent impacted by timing of impacts. Only EUR 3 million of that was positive timing effects. There was what one might call a one-off effect from a release of a pension accrual in the Long Products business of EUR 4 million. So overall, that is a pretty clean number without too many one-off impacts there. Apart from that, I think net income very much at the same level as Q2, and much improved against last year. Net debt a little bit better, but broadly the same as Q2. Gearing has come down a little bit, and as we will see shortly, leverage has also come down.
Capital expenditure in the third quarter, very much in line with what we have indicated and guided. We are aiming for a EUR 220 million spend this year, and we are right on track to achieve that. We then move on to the next slide and take a bit of a closer look at the European business. As Roeland has already said, here in an extremely difficult environment, a very solid performance. We are a little bit down against Q2, but given all the import levels we have seen, that is not surprising. Prices have obviously fallen significantly in the third quarter versus the second quarter. So this was a real headwind we were facing. Delivery is also much lower when compared quarter-on-quarter. This is partly seasonality, but also a little bit of a weaker market versus the previous year.
But quarter-on-quarter, certainly seasonality as a lot of Europe shuts down for the month of August. The pricing impacts here do not seem so big, and this is really because, as Roeland had said, we managed to move much more of our volume into specialty products. That meant that we had a higher contribution margin per ton. So that really supported the result overall. The timing and hedging gains were slightly positive, not a big impact there. Costs were improved. We had significant improvements from personnel costs during the summer. That is always a seasonal effect that supported the result a little bit. And generally, we are continuing, of course, on all areas to improve our productivity and cost base, and it is showing through here this quarter again as well. The other impacts were of a smaller nature various things to do with the small one-offs.
We then move to the Americas. Here, again, an improvement versus the second quarter from EUR 10 million to EUR 13 million. It has been two quarters now of profitable results after a period of losses. So that is encouraging. But of course, in the Americas, again, perhaps not as much as some people may have expected, partly because deliveries were down. The reason for that is that a lot of our distributors there pushed back on volumes at the end of the quarter, so we saw a significant drop in deliveries versus both expectations, but also versus previous quarters, as we clearly saw that alloy surcharges were going to come down on the back of falling nickel and chrome prices and didn't take volumes as the quarter drew to a close.
And I will come back to that because that is also one of the reasons that our working capital was somewhat higher than one might have expected. However, we are seeing the impact in the Americas of higher price levels as a result of Section 232. We did say that in the second half, they would start coming through, and they have. And we have also obviously managed to improve our mix, which is in line with our commercial strategy that we have outlined in the past. Very little impact quarter-on-quarter on hedging and timing impacts, but here again, in the Americas, trucking rates continued to go up versus the previous quarter, and graphite electrode charges were also higher than in the past.
And then there were a number of smaller tax impacts where we had a rate refund in Mexico and smaller one-offs that supported the result to get to EUR 13 million. We then move on to the Long Products business. You can see here on page 12 that the Fagersta acquisition comes into the numbers now. It is about EUR 3 million of the results that is shown here. So as Roeland already said, it is making a positive contribution, and that is certainly also supporting the business and offsetting to a significant extent some of the difficulties that this business is facing as a direct result of Section 232. Of course, we are getting a lot of our raw materials from Europe coming into the U.S. that are subject to a 25% tariff, and not all of those tariffs can be passed on to our customers.
That is putting pressure on our U.S. business. Having the Fagersta business there is a very good offset against that. The other point to make here is that there is a very big other charge. This is as a result of an accrual for medical benefits where we offered some of our employees a lump sum cash payment in lieu of releasing us from the obligations for the future, and that had a EUR 4 million impact. That will not repeat in the future. It is a one-off, but it supported the business nonetheless. The other key items, deliveries were a bit lower. Also because some of this business was running into summer seasonality. Prices and mix, in particular, a little higher, mainly mix, actually. Then some positive net and timing impacts, slightly higher costs. Overall, though, a good result.
You can see on the left-hand side here that the profitability of this business has now improved for the fifth quarter in a row. So it is a very solid track record here. But I would warn that the EUR 4 million from the pension release was a one-off and will not repeat in the next quarters. Then moving on to our fourth business, which in profitability terms is actually our second biggest business, the Ferrochrome business. Again, very solid operations. We have had four quarters that have been reasonably stable here. So some of the volatility that we would have seen in the past has been taken out to some extent. A EUR 7 million improvement from Q2 to Q3. We produced and delivered more material, as we did not have a maintenance shutdown in the third quarter. Prices, of course, were down a little bit.
As you know, they came down 0.04 per pound from Q2 into Q3. We had an improvement in the cost base here. Coke and energy prices just eased off a little bit, which supported the business. Then there were other things that was mainly related to FX, which supported the business to the tune of a few million euros as well. So overall, an improved performance, but pretty stable. And in the underlying performance metrics, actually positive when you consider that the price actually moved the wrong way. Then move on to the next slide. We are showing the cash flow here. Cash flow at an operating level was positive again. The solid EBITDA we generated was partly offset by an increase in working capital.
You recall that I said we saw a lot of pushback on volumes at the end of the quarter that did lead to an increase in inventory levels. So that is partly reflected in this working capital number. That is something we are going to work on in the fourth quarter to get it down and improve the working capital position and therefore also the cash flow. But it then also has ramifications for the Americas business in the fourth quarter. Then we had a number of cash outs, the usual interest payments, smallish tax payments. Of course, we do not pay a lot, we do have to pay some minimum taxes that came out here, and a few other charges related to U.K. pensions. That was the EUR - 20 million in aggregate.
And then, of course, from the operating cash flow, we had EUR 52 million of cash CapEx out with a small amount of money coming in as well from activities related to investing, so that the cash that was left before any financing activities came in at EUR 9 million positive. Our net debt level was a little bit reduced as a result of that. You will see that on the next page. It is behind the decimal points, if you like, but net debt slightly smaller but rounded to about the same level. Meant that the gearing stayed very much at the same level of 45% as well. On the right-hand side, you can see that the net debt LTM leverage has improved again.
We obviously saw a bit of a spike in the second quarter there, but now with that very weak third quarter of 2017 out of the LTM numbers, we have seen an improvement in the leverage there through the third quarter. Clearly, as we get to the end of the year, we are expecting to further improve our working capital position. It is helped somewhat also by falling prices, so that we would expect a positive trend as we get to the end of the year here on that number as well. With that, I am going to hand back to Roeland to talk a little bit about what we are seeing for the fourth quarter.
Thank you, Chris. For the fourth quarter, we see basically typical fourth quarter pattern. Seasonal market slowdown, on the one hand, extra maintenance work in Europe. If you then dig a bit deeper, we expect the deliveries in Europe to remain flat quarter-on-quarter, whereas in the U.S. we see them decline. You have seen that the contract price for Ferrochrome is $0.14 cents lower than it was in the third quarter. Again, if you take the $0.01 per pound is EUR 1 million per quarter, then you know what the impact is there. With the drop in both Ferrochrome and nickel prices, we see substantial raw material related inventory and metal derivative losses in Q4. Altogether, we expect the adjusted EBITDA to be at a similar level of Q4 2017.
Thank you, Roeland. Operator, we are now ready for the questions.
Ladies and gentlemen, if you would like to ask a question, you can signal by pressing star one on your telephone keypad. Keep in mind, if you're using your speakerphone, make sure the mute function is released to allow the signal to reach the equipment. Once again, for questions today, star one. We will hear first from Seth Rosenfeld with Jefferies.
Good afternoon. Thank you for taking the questions today. I have three questions focused on the European business, please. I think you mentioned earlier on the call that you were able to retain roughly stable margins in Q3 in Europe, despite the big fall in base prices by attacking raw material supplies. Can you give us a bit more color on that with regards to the timing of alloys procurement or specifically with pushing down stainless scrap prices? Secondly, with regards to the European product mix improvement, obviously a big step change supplying more specialty products. How sustainable is that going into Q4 in 2019? Lastly, given your heavily weighted exposure to annual contracts, can you please give us a sense on your expectations for those base prices into 2019? Has the recent volatility in the spot market impacted a negotiating power going into 2019? Thank you.
All right. Thanks, Seth. On raw material prices, it's a mix of several things. Indeed, of course, the biggest lever is scrap prices, and we have been able to work significant progress on that, but on other procurement issues as well. All in all, as I said, we have been able to offset most of the price pressure by improved input costs. We do think, by the way, that that is completely sustainable. This is not just a one-off. This is not just separate deals to try to polish the results. This is a sustainable thing where we are still working into getting more advantages that we see. On the specialty products, that's a great story. Not only do we see it as sustainable, we see still that the trend is continuing into higher end products.
There are, for instance, just one market to mention, you know about the ocean-going vessels that have to go back from the 3.5% sulfur to 0.5%. Generally speaking, you can't do that other than either have total refits of the engines or new engines. There's one other way, which is you put scrubbers in, and that is the solution that most people choose. Scrubbers for sulfur are, of course, in a very corrosive environment and need extremely high demanding stainless steel products. That's one market that we see booming, and there are many others. That's something that is a trend and not just something that happened. On annual contracts, it's too early to say. The contract negotiations normally start a bit later. I fully expect the normal dance around it. Ultimately, again, I don't expect that this will be a negative pressure on 2019 results.
Great. Thank you very much.
We'll now move to the next question, and that will come from Carsten Riek with UBS.
Thank you very much. Three questions pretty much from my side. The first one, again, on the base price levels in Europe. CRU states EUR 799, as you mentioned. But how serious do we have to take that price? I'm long enough in covering stainless steel to say at EUR 799, the whole industry would be EBIT negative. You should see the real base prices. What do you see in your operations, or did you actually move over to a transaction price? That's the first one. The second one is on the low water levels in the River Rhine. Do you have any issues here with your Krefeld operations because you ship the hot roll material over from Tornio? Is it hampering you? Is it pushing up the cost? If so, by how much? Third question on the Ferrochrome bridge you show in the presentation.
I don't really recall which page it was. I think it is page 13. Could you just guide me through the bridge? Because what I notice is a very strong increase in deliveries in Ferrochrome of more than 10% quarter-on-quarter, but that doesn't seem to show really in the deliveries impact. How do you calculate the deliveries impact? Those are the three questions I have for now. Thank you.
All right. On the base price, look, EUR 799, CRU even went down to EUR 749, I think, somewhere in one of the months. It is a derived number, and it is taking the quoted transactional price from Asia minus the current alloy surcharge. That, of course, as you say it correctly, is not what happens in the market. So our realized price is different, and you can see that as well if you just take our European revenues and divide it by the tons, you see that we are not that close to EUR 799.
Yeah.
We do not do transaction prices. We still have the normal stuff. Admittedly, there are distributors who say, "Look, we get stuff from Asia at transaction prices. Are you interested?" And the answer is no. We are not interested. We still stick to the normal pricing. River Rhine, no impact. We do not see any impact going forward either. Then the Ferrochrome bridge, Chris, I do not know whether you want to comment on that.
Yeah. On the Ferrochrome, you always have to remember, Carsten, that we have internal and external deliveries of Ferrochrome. Of course, with a much weaker European stainless deliveries that we outlined earlier, you have also got less Ferrochrome going into that business. So maybe the impact from that is obviously negative and had to be made up to some extent from external deliveries.
Yeah. Although, Chris, the larger impact on the internal deliveries was actually the fact that we have cranked up our scrap usage.
Yeah.
In the U.S., by close to 20% more, 20 percentage points, not percent. In Europe probably about 7 or 8 percentage points. That suddenly requires a lot less Ferrochrome, and that is the biggest impact. On the other hand, on the profitability, that has a very large positive lever as well.
You just clubbed together several positions in deliveries in order to come up with this number?
Yeah.
Okay.
The deliveries. No. The deliveries in our report are the external deliveries.
Mm-hmm. Yeah, but they. Yeah. Okay. No, I'll do it offline. Don't worry. Thank you.
Okay.
Now we will hear from Luc Pez with Exane.
Hi, gentlemen. Two questions, if I may. First of all, we have just closed the Acerinox conference call, and the guys there were very negative about your prospects, talking October order vacancy on the back of destocking, et cetera. You look a lot more relaxed on these issues. Maybe if you could give us a bit more color, and maybe talk a bit more by end markets. That is my first question.
I do not know. Maybe we have reason to be more relaxed. Of course, what we have seen is decreasing volumes. As I said earlier, there was an onslaught pre-safeguards, and then there was still the stuff on the water coming in. So inventories were getting pretty high. Then if you look at the way the alloy surcharges has been developing, July to August, minus EUR 60, August to September, minus EUR 60, September to October, minus EUR 80. So there has been a continuous drop in alloy surcharges. As always, you can see that coming. You can see what the nickel market does. The contract price for Ferrochrome was announced. So people have clearly suspended their buying and driven down their inventory for two reasons.
One, because they can buy cheaper tomorrow, but as well, they better get rid of the inventories now because tomorrow their inventories will be worth less. So that has an impact. That impact is fully taken into our guidance for the fourth quarter. So, yeah, in that sense, we are relaxed in the sense that we know that the volumes are not as great as they could have been. As we say, it is flat quarter-on-quarter, so they are not as bad either, as far as we are concerned. On the margin and pricing side, we remain very competitive.
Okay, so maybe a follow-up. Could you maybe elaborate on the cost of the maintenance you are planning for Q4? I am assuming it is a steady number relative to last year, which, if I remember correctly, is EUR 30 million quarter-on-quarter negative impact.
It is a bit less this year. Last year, as we said, there was extraordinary maintenance in there because of the reliability issues that we wanted to address specifically on the hot mill. A normal steady rate is about EUR 20 million over your Q3. So that is for this quarter as well, it is about EUR 20 million that you have to count as a negative impact versus Q3.
Okay. Very clear. Thank you.
Now we will hear from Bastian Synagowitz with Deutsche Bank.
Yes. Good afternoon, gentlemen. I have two questions. What you just said on Ferrochrome means that there is simply not as much benefit in using own Ferrochrome versus scrap, I guess, if I understood this correctly. Have you been selling all of the Ferrochrome into the market, or have you been effectively stockpiling? If so, is there enough market to sell down the inventory? That would be my first question. My second question is just to follow up on contract prices. Did I understand your comments correctly in the sense that you don't see a risk of a price decline here? Thank you.
On Ferrochrome, it's more complex than that, Bastian. When you are talking about austenitic material, then it is more beneficial to use as much scrap as possible. We always have. I think if you look in our sustainability report, we have been always at an over 80% recycled material rate. If you can drive it up further for the austenitic materials, that is great. We have done that. We have done that specifically in the Americas, where we had been running at a pretty low rate. You're absolutely right. In austenitic, it is more beneficial to use scrap than use chrome, especially if you have been able, like we have been, to drive down the cost of the scrap significantly. However, in your ferritic business, you have to use chrome. That is the biggest use of our own chrome, not just now, has always been.
Most of our own chrome use goes into ferritics, and that doesn't change because you can't put nickel in ferritics. Does it explain well?
Thank you. Yeah, actually, I have two more follow-ups on that one. Does that mean that you also have been selling more austenitic versus ferritic in terms of product mix, which you were referring to earlier?
The mix is anyway about 70/30. Ferritic is a smaller product in the overall market. Austenitic is clearly the dominant product.
Okay. What have you done differently on the scrap market? Because obviously it is a market. Markets used to be fairly efficient. So basically, what have you done to bring down the price?
Well, I assume that there's someone from Aperam and someone from Acerinox listening as well, so I'd rather not answer.
Okay. No disclosure of the secret recipe then. Okay, then on my last question, just on contract prices, if you could just clarify that.
Yeah. Two things there. First is, we know that we are competitive with the import prices that are being quoted. So that's one element. The second element, the more important, is that there's a big difference between imported spot pricing versus guaranteeing the delivery and on-time delivery, specifically in sectors like automotive and appliances, where you need to have the service. You need to have not just the service in terms of delivering within a four hours time window every time that you deliver, but as well how you prepare the material, the quality of the material, et cetera. So these customers do understand that there are two different markets. That's why we do not see too much of an impact on the contract pricing.
Okay. Understood. Thank you.
Welcome.
Now we will hear from Ola Söderholm with Kepler.
Yes, hello. Good afternoon. Ola Söderholm, Kepler Cheuvreux. A question on Americas and the price mix or the product mix there. Earlier, we were talking about improving the product mix over the years. How is it going?
Yeah, that is going very well. One of the drivers in the last few quarters, actually, not just in the third quarter, the second quarter as well, has been the fact that we have virtually ceased all sales of black hot band, which is the lowest added value product in the portfolio, and that we have significantly increased our sales of cold rolled in the portfolio. It is still not at where it can be, but it is getting better and better and making a distinct difference in the contribution to our profitability.
A follow-up on the maintenance cost. When we are looking forward into Q1 and Q2 next year, when do you have your next major maintenance quarter?
Maintenance always runs the same pattern. In Europe, you have the market slow down around Christmas. People basically stop working in the second week of December and do not come back until the first week in January. That is the ideal moment because our customers do not produce as much. That is the ideal moment for us to shut down and do maintenance. That is the highest maintenance season. Then we do in the summertime, for the same reason, we do lighter maintenance, but that as well, there you are a bit more maintenance heavy. I can guarantee you that going forward, the pattern will always be the same. Lighter extra maintenance in the summer and then the big annual maintenance sessions in the fourth quarter.
Okay. Thank you.
Welcome.
Then Sander Hehn with Morgan Stanley will have the next question.
Yes, afternoon. Just on the bridge on page 12 for the North Americas. Could you just remind us where you are on the self-help program? Because if I look at that bridge, ex the medical and ex the acquisition, profits went backward a little bit. You do mention that you have made some progress on certain elements such as the mix. So I just want to understand where the self-help programs are in terms of completion and what we can still expect.
Yeah. A lot of the self-help has been in the cost side, and unfortunately, you do not see that because of the increased freight cost. I do not have the figure here, but it is by now over EUR 30 million extra, for year to date that we have spent on transport. So, if actually we, and I am not even then talking about the extra cost you have for ferrosilicon and electrodes, which especially on the electrode side is hitting the Americas more than Europe because of the different contracts that we have there.
So, there it has been very significant. If you look at our operational, our yields are improving steadily. We measure something which we call the triple R, which is rejects, reworks, and reallocations. We want that as low as possible because every time you do something extra on your material, that costs money. That has been dropping significantly.
If you look at what we have done in Mexico, the restructuring program where we have taken out or are taking out close to 400 heads, we are about halfway there. Realized already in our cash conversion cost. That is the self-help part on the cost side and the self-help part on the market side we just discussed, where we have now reached the position where we can basically allocate the majority of our capacity into the cold rolled market domestically, rather than in slabs and hot band that we export to the outside.
Okay. So underlying the business is better, but you have to wait until transport costs come down for us to see it, basically.
That's, or-.
Is that fair?
That is fair, or we can find other ways to offset those costs.
Yeah. Is that possible? I assume you were going to work on your transport network. Is that still something that gives you-.
Yes.
Gains? Yeah.
It is one of the biggest levers into 2019, actually.
Okay. Are you going to talk about it at the Capital Markets Day, or are you willing to give us an insight already now?
No, no, we will. We need something for the Capital Markets Day.
Yeah. Okay, fair. Last question. On destocking, clearly it happened at the end of the quarter. Can you point us to sort of history to help us think about how long this takes, two months, three months? Assuming obviously that raw material prices don't drop further from now. What is a normal destocking cycle? two months, three months?
It's very depending. First of all, what stock level do you come from? If you look at the U.S. now, for instance, you see that in the U.S. we are now at stock levels, inventory levels in distribution at normal levels, maybe a little bit below. So there's not that much room anymore to do further destocking in the U.S. In Europe, we are still on the high side. So we still have potential for further destocking. Again, you see that in our guidance for the fourth quarter, where we say we are flat quarter-on-quarter in Europe on the volumes. Normally, you would expect with strong October, November to higher volumes than in Q3. But because of this destocking, we don't see that.
Noted. Thank you very much.
As a reminder, everyone, star one if you have a question. We'll now hear from Anssi Kiviniemi with SEB. Go ahead, please.
Thank you. It's Anssi Kiviniemi from SEB. Couple of questions left on my side. First of all, apparently there has been a radioactive material in your Tornio furnace. Could you talk a little bit about the background? What happened and has this had any impacts to your operations or how you approach these kind of situations?
Start at the end, it had no impact on the operations. Just to put it into perspective, this happens all the time at any steel mill that melts scrap. These are not nuclear bombs that are suddenly found in the melt. This is literally, if for instance, old factories have their control valves and control instruments very often based on radioactive metals inside. Don't ask me why, but typically in the 1950s, that was the sort of material that was used. You're talking about a piece of metal, an instrument basically, that is not bigger than a 0.3 liter water bottle. The amount of radioactivity is extremely small. However, we have very sensitive and sophisticated systems to actually detect radiation. As soon as you actually have this measurement device going into your melt and the protective lead cover melts away, then the radiation comes free.
It's absolutely insufficient to be harmful, and we probably have incidents like that four or five times a year.
Okay, that was pretty clear. Second question is related to automotive sector. Could you remind us what is your exposure and currently how are you seeing that market developing? Thanks.
I think we shared in our pie chart that we have about 20% of our business going into automotive, in various levels, from OEM to tier 2, tier 3. We have seen some slowdown in demand. We have been digging into it, of course, deeply by talking to the OEMs and to the tier 1. The answers we are getting back is, guys, this has to do, in Europe, with the switchover of the environmental norms and, specifically in Germany, a tremendous backlog at the TÜV in getting the certificates out for the vehicles. In the U.S., the slowdown, if at all, has more to do with people waiting for the new model years, which is now coming out or has come out. We don't think at this stage that there is a structural, fundamental slowdown taking place.
Of course, there has been a slowdown in China, which affects some of the exporting manufacturers, and I think the German manufacturers have gone public on it as well. But at this moment, we don't see a real big impact.
Great. Thank you. That's all for me.
Okay.
At this time, there is no additional questions in the queue. I will turn the call back to your host for any additional or closing remarks.
Thank you, and thank you very much everyone for attending our earnings call. Please also note, as mentioned earlier, that we will host our Capital Markets Day on November 20th in London, and more details are available on our website. See you at the CMD.