Good day, and welcome to the Outokumpu interim report second quarter 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tommi Järvenpää. Please go ahead.
Thank you. Good afternoon, and welcome to Outokumpu's second quarter 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.
Tommi, thank you. Good afternoon. We will go through the Q2 results. I will start with some of the general issues, then Chris will take over. First of all, as always, our vision, best value created in stainless steel by 2020 through customer orientation and efficiency. Although you can all dream it by now, I keep on repeating it. It is what drives us. It is where we are at this stage, exactly at the midpoint. It is, as well, where we are very confident given the performance of the company, specifically in the last few quarters and what we see going forward, that we are confident of making our 2020 targets. Getting to the numbers, Q2 came in at EUR 136 million adjusted EBITDA. As we say here, a good performance in an adverse environment. This is really what it is.
Due to the trade disruptions out of Article 232 , we have seen a tremendous amount of imports landing into Europe at a rate far elevated compared to last year. We have seen pressure on European prices. In spite of that, we have turned a very solid performance. The EUR 136 million is actually our third highest quarter in the last 10, 11 years. We are extremely pleased with that, driven by higher deliveries across the board, both in Europe and Americas, as well as in LP . The pricing and mix has positive effect, not so much because of the pricing yet, but definitely because of a richer mix, specifically in the U.S. Then, on the negative side, you see there higher costs due to increase in transportation costs in the U.S. specifically.
The electrode pricing, which is still pretty much elevated and doesn't seem to be abating. Then you see a bridge effect is the emission allowance gain that we had in Q1. All in all, we have a very solid performance there. If you look at pricing, as said before, you can see that there has been a significant pressure on the base pricing in Europe. I will come back to that a bit more in the next two slides to put some color on it. Conversely, we have seen a rise in the U.S., and you might say, well, the $80 you see here looks not in line with the announcements that have been made, which has to do more with timing than anything else.
We have seen as well nickel price strong, and of course we had a ferrochrome price that went to $1.42 , which was a good support to our ferrochrome results. On the other hand, mitigated by, of course, the fact that we had the furnace down for the planned maintenance for four weeks, increased maintenance cost, plus a loss of production volume because of that. By the way, that maintenance has gone extremely well. The furnace came back on line as was planned and was within a week back into normal production. So extremely good job done. If you look at, as I said, the base prices, here you have an overview of what happened in Europe and in the U.S. I think the thing that is most conspicuous is the enormous drop that you see in the European base prices.
These are CRU numbers, and the base price here is a derived base price, because with all these imports coming in, more and more the pricing went to effective pricing, so base price plus alloy surcharge. As you then deduct the alloy surcharge from that effective pricing, this is the sort of resultant price you can see. It doesn't mean that the whole market is there, but this is the level where deals were being done, especially towards the end of the quarter, in specifically the southern part of Europe. Conversely, if you look at the U.S., since Q4 of 2017, you have seen a significant uptick. Again, you will not see that completely back into the numbers because there is a lag effect in our own numbers, because there's a lag effect due to the contracts that we have running.
The momentum in the U.S. is strong and expected to continue into 2018, into Q3, whereas for European base prices, we see them bottoming out and slowly recovering towards the end of Q3. Interesting to see as well is the transaction prices, the effective prices in the three main areas. There you see that China actually, especially in the last few weeks, last four weeks, the pricing in China has come up significantly from a pretty low price earlier on in the year. So underpinning some further pricing strength. As I said, this is all due to imports. If you look at this graph, where you see that in the second quarter of this year, imports now in Europe were 31% of consumption.
That is actually both in terms of percentage of consumption as well as absolute volume, is the highest point it has ever had in the European stainless steel history. In April and May, we had levels of 110,000 tons that came into the European market, versus a normalized 85,000, which we had during 2017. That clearly had a tremendous impact, which we saw in the pricing in Q2 and which still lingers into Q3. Most of these imports is not from China, but it is what we call rest of Asia and rest of world. Then specifically South Africa was a significant importer into Europe, and so was the U.S., actually. Those were two large parts of the imports. The rest of Asia, we saw a significant increase from Malaysia into Europe.
As I said, all in all, in a pretty unprecedented market with tremendous import pressure and tremendous price pressure, an extremely good result. Looking forward as well, we see that the thing is really turning the other way again. With that, I hand over to Chris.
Thank you, Roeland, and good morning, good afternoon, ladies and gentlemen. I would like to turn to slide number nine. Take a quick look at the group key financials there. You can see here the delivery performance in the second quarter of 2018, which was significantly better than in Q1 and also in the prior year period in 2017. It was a record delivery performance, as Roeland has already said, so I am very happy with that. That, of course, also drove substantially the higher revenues that we saw in the second quarter. Looking at the EBITDA, came in very much in line with the Q1 result as guided, albeit somewhat lower than the Q2 result last year. But you will recall that last year we saw very high ferrochrome prices. So the much lower ferrochrome pricing we saw this year contributed to that fall on a year-on-year basis.
Net income, somewhat lower than the first quarter of 2018, maybe justifies an explanation. On the one hand, of course, we adjusted out some of the one-off items in the first quarter result. So there was an adjustment in the EBITDA downwards. The other driver that pushed the second quarter net income lower was higher financing costs related to the refinancing of our 2021 notes. I will come back to that a bit later on. Operating cash flow more solid in the second quarter than in the first quarter, so it improved. I will come back to more details on that as well. But our net debt nonetheless increased, and that was mainly due to dividend payments and share buybacks. Capital expenditure, very much in line with the guidance we have given.
You will recall that we have guided to an annual CapEx spend of around EUR 220 million, and this number here represents about 1/4 of that, plus the acquisition of 50% of Fagersta that we did not already own. So those two items together make up that EUR 63 million of CapEx. Personnel numbers went up a little bit as well. Again, this was due to the acquisition of the 50% of Fagersta that we did not already own. We then move on to each of the individual business areas in a bit more detail, starting with Europe on slide number 10. Again, I think if you look at the result and historical performance, it was a good performance. It came down a little bit versus our first quarter results. But as Roeland has already mentioned, Europe going into a very challenging period.
The prices in Europe have fallen throughout the quarter to some very low levels as a result of diverted products from the U.S. into Europe. So this has been the biggest impact, as you can see here. So more than offset the higher deliveries. We had a little bit of headwind from timing and hedging effects, but they were small. In total also some negatives from higher input costs coming particularly from high electrode costs, high ferrosilicon costs. But good progress also in efficiencies that made up for at least substantially, if not fully, for the higher input costs. The other items are related to inventory gains from procurement benefits and one-offs that we saw in the first quarter, and adjustments between those on one-off effects. If we then move on to slide number 11, in the Americas, again, the business here, as Roeland has already mentioned, improved.
It made a profit. You can see that the key profit drivers were pricing and particularly mix on the one hand, of course, but also net timing and hedging contributed here quite significantly. Nonetheless, the Americas business did suffer significantly from higher freight costs. That was a very big driver in Q2, but also from higher input costs, as in Europe, electrodes, ferrosilicon, contributing quite substantially to more costs here. Overall, however, a profitable result, and it is good to see that after several quarters when we struggled to come to positive EBITDA in the Americas. So progress here. We then move on to the long products business, which showed very significant improvements. The key improvements came from somewhat higher deliveries, but significantly also from higher prices across both regions in which we operate, both in Europe and the Americas here.
The Americas, no doubt, supported by some of the impacts of Section 232 there already. Again, as in the other two businesses, high input costs offset some of those gains, but the overall result of EUR 9 million, a very good quarterly performance for this business. It is worth mentioning that the 50% acquisition of Fagersta that we made during the course of the quarter will in the future be attributed to this business and does not flow into these numbers. It will only become effective in Q3. So in Q3, we will see further benefits in the long products business accruing as a result of that acquisition. Last, but by no means least, on page number 13, the results of our ferrochrome business. Overall, a reasonably quarter-on-quarter flat development. The big story here is really higher prices.
We moved from Q1 prices of $1.18 per pound to $1.42 per pound from Q1 to Q2. That drove prices up, but it was offset substantially by the planned and advised maintenance outage of one of our furnaces there. That has an effect, not only the cost of the maintenance itself, but also the lost production that resulted from that. We also saw during the quarter an increase in coke prices that contributed to additional costs. Overall, when you look at the higher prices, they were essentially offset by the overall impact of that maintenance and higher coke prices. Moving on to slide number 14 about cash flow. We generated solid operating cash flow. The working capital only went up by EUR 18 million, and this was a result of very, very tight working capital management throughout the quarter.
In the light of significant increases in materials and metal prices, of course, we have seen nickel move up significantly during the second quarter, and of course, ferrochrome also moved up significantly. Despite that, we managed to keep the working capital increase to quite a low level. Then we had further offsets on cash as a result of financing costs and interest costs. We made some contributions to pensions, and this also includes minimum tax charges here. The positive operating cash of EUR 71 million was then invested, as I said before, predominantly in capital investments and capital expenditures, and the acquisition of the Fagersta joint venture that we did, the part that we did not already own. Overall, that led to just a little bit better than break-even cash flow as a whole.
As we see on the next slide then, slide number 15, nonetheless, our net debt increased by around EUR 125 million, and that was substantially driven because we also paid a dividend, the 2017 dividend in early April. That was just over EUR 100 million there. We also bought back some shares, predominantly fund performance share plans that were awarded to senior management in the company. As a hedge against future tax and increase in share prices, we decided to buy those shares ahead so that we have them available to be distributed as and when those share plans become due in the future. Overall, that led to an increase in net debt to about EUR 1.21 billion. Therefore, as a result of that, also it is an increase in our gearing to 45% and our leverage nudged up to 3.0.
Both as a result of higher debt, but also of course, we lost the higher quarter EBITDA from Q2 last year and was replaced by lower quarter EBITDA. Those two effects then led to higher leverage of 3.0, which you can see on the right. Nonetheless, the target remains here to get to a region below 1.0 by 2020. Then moving on to slide number 16. Worth a quick mention as well that during the course, we did some refinancing work. We had approximately EUR 200 million of notes outstanding during 2021. We are paying a coupon on those of 7.25%, and we replaced them with a new note of EUR 250 million. That is now due in 2024, has a coupon of 4.125%.
So the result of that, a significant reduction, again, in our total interest costs going forward, but also because the new notes mature three years later, an overall extension in our weighted average maturity of debt. So two key benefits that we achieved there. And of course, the reduction of interest costs moves us another significant step closer towards the EUR 50 million target of interest costs that we are aiming for by 2020. And with that, I would like to hand it back to Roeland to give you an outlook on Q3.
Thank you, Chris. Turning to page 17. Our outlook for Q3. In line with the market, stainless steel deliveries are expected to be seasonally lower in business area Europe and to remain stable in the Americas. The base price pressure that we are seeing continues in Europe, but the negative impact of this is partly offset by higher base prices in the U.S., supported by the steel import tariffs. Having completed the maintenance in a ferrochrome furnace, we are expecting normalized ferrochrome production at the normal rate. Altogether, that will lead to an adjusted EBITDA that is expected to be lower than the one that we had now in the second quarter, but significantly higher than in Q3 of 2017.
All right. Thank you, Roeland and operator. We are now ready for the questions.
Thank you. If you would like to ask a question, please press star one. We will now take our first question from Tom Zhang from Credit Suisse. Please go ahead.
Hi, gents. Thanks very much for taking my questions. I have got three, if that is okay. Firstly, you touched on the unreliability of some of the reference base pricing for Europe. Can you give your take on where base price trajectory is going from what you have seen into Q3, what levels you are actually transacting at, as clearly the referencing pricing on slide seven suggests something close to EUR 800 per ton. Any signs that those are stabilizing? Secondly, you have flagged cost inflation on slide five. Can you just give us your view on whether or not we should expect that to keep going, whether or not that is abating, particularly with respect to freight in the U.S. and ferrosilicon? Then very finally, from discussions before the results, you guys have been saying safeguards will likely be beneficial.
Can you just give us your view on the safeguards now that you have seen the detail, and whether or not you are worried that some exemptions, for example, Indonesia, might make those a bit less effective than you would have hoped for? Thanks.
Okay. It is difficult to say what are the base prices exactly at. For ourselves, we have, of course, a mix of long-term contracts with base prices, long-term contracts at fixed prices total, et cetera. We do not see clearly, and you can see it from the numbers if you just look at revenue and volumes, we don't see it as low as what you can see on the CRU. However, it has come down probably by, on average, blended with about EUR 100. I think that is as much as I can say about it. When you look at where is it going, is it stabilizing, definitely. I always said that you saw imports peaking at 34% of consumption in April and May, 110,000 tons import per month. We have seen that come down to 90,000 tons in June and further to 82,000 tons in July.
We see that that pressure abating, and of course gives opportunity for restabilizing and reversing the price fall. Of course, one of the things I go to the safeguards. One of the reasons why we think that that import number came down is that people, of course, knew that safeguards were coming on, and importers did not want to take the risk to actually have products coming into Europe, when it could actually land after the safeguards would take hold. Safeguards already seem to do their job. If you look at the specifics of safeguards, the cold rolled quota that is set, which was the average of three years, would equate to about 70,000 tons a month of imports.
So again, you can see a reduction not just from the numbers I just gave, but you will see a reduction that is actually a reduction from 2017 monthly numbers as well. On the other hand, the safeguards themselves, as you probably have seen, do not specify country specific volumes on the quota, and they are not calendarized. It will be interesting to see how the market deals with this. Because on the one hand, I've read reports where analysts say, "Well, there's going to be a tsunami in the first three days of the period, and then it dries up, and the market is saturated in between." I think what the more rational behavior in the market will be, is that no one will know at the moment he, she, puts an order in for imported material that takes six to eight weeks to land.
No one will know whether they will be inside or outside the quota. So no one will know whether they will be at the import price that they thought or it's actually EUR 600 extra, because that's what we're talking about. And I think that you will see restraint, because no one wants to be in that position and be completely out of the market and lose their shirt. Cost inflation. We have seen strong cost inflation in ferrosilicon. It was already up significantly compared to last year. It went up another almost 20% Q2 over Q1. And again, we do not see that really abating. We know that several parties are looking at extra investment in the same space. Same goes for the electrodes. But that will take some time to turn that ship around. On freight, there's a temporary shortage in the U.S. of trucks.
That will definitely go away. In the meantime, we are taking a number of mitigating actions. And one of the simple ones is, make sure that we put more material on trains and barges into intermediate storage in the center of where the markets are. So we are in that process of securing intermediate storage where we then can ship in larger quantities by rail and barge.
That's great. Could I just ask two very quick follow-ups? Firstly, on the base prices, you said EUR 100 per ton. Was that Q2 to Q1, or was that what you're seeing now versus Q2?
That was Q2 to Q1.
Q2 to Q1. Okay. With the 70 kiloton per month on cold rolled, is there any risk given that Indonesia has been exempt from the quota tariffs? Is there not a risk that they could basically swamp the import market?
Yeah. That' s an interesting one. Indonesia is, for instance, contrary to Malaysia, which is included because their imports into Europe are above the 3% share of imports. Indonesia's are not. Theoretically, they can now ship for free up to 3% of imports. 3% of the 70,000, which is 2,000 tons, which doesn't really move the needle. As soon as they come above that, then automatically we can go to the commission, say, "This country is now having more than the 3% share," so they are not protected anymore by the developing country clause. Then they will be included in the safeguards. So there is little room to maneuver in that sense.
Okay. Very clear. Thanks very much.
Welcome.
We will now take our next question from Seth Rosenfeld from Jefferies. Please go ahead.
Good afternoon. Thanks for taking my questions. I would just like to understand a bit better how the impact of extended lead times in Europe is going to impact the expected P&L in the region, recognizing the weakness in spot prices during the second quarter. You obviously touched on the fact that you sell quite a lot on longer term contracts, but just concerning your spot sales, do you think that the third quarter will fully reflect the decrease you saw in spot prices during Q2, or should we expect another step down going into Q4, all else equal? Assuming spot price is flat line where they are today, is that baked in in Q3 or is there another leg down in the fourth quarter? I will start there, please.
That is a simple one. It will be fully reflected in Q3. We, in our models, see already a reversal in September, and we expect that to continue into the fourth quarter.
Great. Thank you. A separate question on Americas. Stripping out the raw materials inventory and derivative gain, that business appears just been barely break even EBITDA. Can you give us a bit more color on some of the steps you are taking to try to turn around this business? Obviously, the strong uptick in spot prices hasn't already hit your P&L. You already commented on that. From a self-help perspective, what is it going to take for the margins to actually start to perform closer to that of your peers? On the mix shift in the U.S., can you give us a little bit of a sense of is that shift already complete or will there be another step higher in your product qualities going into Q3?
Yeah. Although normally we do not comment on results in specific business areas, I can say on Americas that we will expect a sequential better EBITDA in the third quarter. That is with actually a reversal of the metal effects that you saw. That is really on its own steam, under its own steam. Why is that? A number of reasons. One is, as I said in the earlier call after the first quarter, we locked in a tremendous amount of business on contract in the fourth quarter for the first half. Literally, the majority of our sales in the first half were on contract. As that rolls off in the first half, now finally you will see the price increases fully reflected in the realized pricing in Q3 and onwards.
On top of that, there are a number of things I can point to in spite of the increase in input cost that we have seen and the freight cost. We have seen as well further significant improvement in the SG&A controls in the Americas. We are in the middle, as you know, of restructuring in Mexinox, that already has led to a big drop in our cash conversion cost per ton. We see as well that our ongoing manufacturing excellence activities in Calvert have led to, if you split out melt shop from the rest of the plant, with a clear drop in our cash conversion cost per ton in the, let's say, downstream activities and with, in spite of the higher outflow of costs, a stabilization of the cash conversion cost per ton in the melt shop.
A lot has been done there to further improve the cost side. As I said, the pricing will now come through in Q3.
Great. Thank you very much.
Welcome.
We will now take our next question from Anssi Kiviniemi from SEB. Please go ahead.
Yeah, thank you. It's Anssi from SEB. Couple of questions from my side left. First, looking at the cash flow and looking at the working capital, you highlighted there that there has been a good working capital management and thus, the negative figure there wasn't as big as, for example, I expected. Could you guide a little bit more on Q3 dynamics, how we should think about the working capital and what you can still do on that side?
Yeah, sure. The absolute number of working capital is always very dependent on the movement of metal prices, of course. I'll sort of put that out there as a proviso and as a caveat, if you like, on what's going to happen. But generally, what we have been doing is we've been focusing, particularly in Europe, on managing our neutral inventory levels down. We have much more potential to do that in the U.S., and we're currently working on that there as well. We are working at the moment extremely hard on restructuring some of the payment terms for contracts, where there are long payment terms. In the U.S., you may recall from previous conversations, we used to export quite a lot of our products that was not only lower margin products, but also on long payment terms.
As that is coming back into the U.S. now, clearly we're replacing those longer payment terms with payment terms that are much shorter, and that will also continue to have a positive cash flow impact. There are ongoing discussions, and this is an ongoing exercise all the time with our suppliers to try to improve not only the actual terms of the contracts in which we buy various raw materials and metals, but also the terms around which we pay for those. These are just some of the ongoing opportunities that we continue to see.
Okay. Should we expect a positive number going into Q3 or will there be still a small negative one on working capital?
Well, generally, the dynamics in this business are that you see a significant increase in working capital through the first half of the year, often because in the second half of the year, particularly as you get towards the end of the year, business tends to slow down a little bit, and that releases working capital. That then picks up as you go into the first part of the next year. Again, it picks up and increases working capital. So it's somewhat cyclical that you tend to see a buildup of working capital in the first half and a reduction in the second half, prices being somewhat equal. If prices stay at a constant level, we would expect to see a reduction in working capital through Q3 and Q4.
Okay, great. Thank you. Another question on Americas. The profitability level there has been impacted by the kind of contracts you have made for the first half of the year. Just looking at, for example, Q1 2017, Q2 2017, with lower deliveries, lower base prices, you were able to deliver EUR 30 million EBITDA roughly in Americas. Kind of big question is that is the main factor of the current result level. Is it cost? Is it something else? Or what is cooking there? A follow up to that question is then, now that we have seen Section 232 tariffs, how's the dynamics working with you having a hot-rolling mill in U.S. and cold rolling in Mexinox? That's not optimal for the cooperation, right?
All right. Let me first correct your statement. Base prices in Q1 and Q2 of 2017 were actually higher than in Q1 of 2018, realized base prices. And similar, maybe at best, to base prices in Q2. Again, you can get an approximation if you take the revenues over the volumes in the Americas.
We are actually now in Q2 with the increase that we have seen, we are now slowly getting back to the same realized base prices as we had in Q1, Q2 last year. That shows as well the impact of what I said, the delay in the contracts, but as well as the market had gone very low. If you look at Q4 2017 versus Q1 2017, there had been a very steep drop of over EUR 100. I do not know the number already, but it was a pretty steep drop during the year. You see that going forward, as I said, this will now work its way into our realized numbers.
The flip side, of course, as said as well, there are some cost increases, which we have been flagging. Ferrosilicon, the electrodes, and then the freight, which we have to a large extent mitigated, but probably not fully. However, with all things equal, it still will be a very positive mix between the elements. On the Section 232 dynamics, there is a number of things here. First of all, it is interesting if you look at the price development in stainless steel base prices, and you would compare that to the price development in carbon steel. Then you see that stainless steel has been lagging significantly in that price development. Which is interesting, moreover, because if you think about it, the 232 import, 25% is on the full price. It is not just on the base price, it is effectively as well on the nickel content, et cetera.
So on the alloy surcharge. In other words, 25% increase or tariff on stainless steel is a virtual 50% on the base price. The dynamics are, I think, far from over, is my point. Coming back to Mexinox in the U.S. Yes, there is notionally a 15% duty from the U.S. into Mexico. However, we are exempt from that, so we do not pay that. Yes, there is then the 25% coming back from Mexinox into the U.S. Currently, our customers are accepting that and absorbing it. We don't, because it is a port which is just in short supply in the U.S. itself. Secondly, we have asked for exemption through our customers, for those products. This has just been posted, I understand, this week. So we would know in the next four weeks, five weeks, whether we get the exemption or not.
Then I go back to the overall dynamics. As I expected, there is still more price movement to come. Of course, the potential absorption for our customers will become less and less as the whole level of market rises.
Okay, great. Thank you.
We will now take our next question from Carsten Riek from UBS. Please go ahead.
Thank you very much. Most of my questions have been answered. Just two left, one more general. We talk a lot about base prices, transaction prices, surcharges and all of that . The interesting part is we can't track it anymore, and so can a lot of the customers not track it anymore in Europe or in the U.S. Is that the first move going back finally to transaction prices again, in your opinion? Or, will this system continue to be base price plus surcharge in North America as well as in Europe? That's the first, more general question.
Because it apparently works very well on the way up, but it just doesn't work on the way down.
Well, we have had the discussion in the past as well, when I got questions on something that opens up a perceived gap in the base prices with imports from Asia. No one ever asked me the question, it goes the other way around. When, for instance, the alloy surcharge suddenly go— When input prices, nickel, ferrochrome suddenly go up and the alloy surcharge has not yet gone up. You see the converse. You see then that suddenly the derived base price from the imports shoots up by EUR 200, EUR 300. I don't think this is the end of the system as we have it. And one very important reason is that our customers who ultimately sell to OEMs, et cetera, need the system to make it transparent for their customers, because they can pass on another surcharge. It's much more difficult to pass on an effective price.
I don't think that given the fact that volatility in nickel and ferrochrome, et cetera, will remain forever, our customer base would not want to shed the surcharge system. Why did it happen this time? Very simple. Because there was a whole lot of distressed volume on the water, in some cases diverted from their original destination, U.S. back into Europe, that were desperate to get prices and of course you will find people who work that. Ultimately what you see is that the portion of the market that worked on this effective transaction price is not that large. And again, it will disappear as soon as these desperate distressed cargos disappear.
Okay. Thank you. The second question I have is on the North American operations. I believe we have seen a bit of an improvement, but similar to Seth, we're still at a very low level. I was just wondering, and you mentioned it, Roeland, given the very good pricing we have currently in the U.S. on the carbon steel market. Is there actually pressure on Outokumpu to renegotiate the higher rolling fee with ArcelorMittal or does the company currently stick to the contract despite the very good profitability levels in the U.S.?
Well, Carsten, we are partners. We have a partnership in good times and bad times. It is funny that you mention it. I was there a few weeks ago. I paid a courtesy visit to our colleagues. It was very clear, they said, "Look, there were times that basically your volumes were the core from which we were floating. You stuck to the contract, although maybe you could have done better by reducing volumes. Now it is the other way around. We know that it happens." This is a partnership. It works well. We are not there to try to go for short-term gain and lose the long-term benefits.
Okay. That's good to hear. Thank you very much.
Welcome.
Again, as a reminder to ask a question today, please press star one, and if you find your question has already been answered, you can remove yourself from the queue by pressing star two. We will now take our next question from Johannes Grasberger from Nordea. Please go ahead.
Hi, gentlemen, it is Johannes here from Nordea. I have got two questions left here. The first one would be on the recent Chinese anti-dumping investigation. If you could talk about that a little bit, how you feel that impacts you or if it even does not impact you at all. The second question then on Americas, just wondering the Section 232, how that would be impacting the mix. Do you think you will get a tailwind on the mix as the imports leave the market? Those are the two questions. Thank you.
Yeah. The China anti-dumping investigation is an interesting one. First of all, if you look at the product categories, we are only impacted on hot rolled that we would be exporting and on quarto plate. Both are very small volumes. We are talking about 10,000 tons. So it is for us pretty irrelevant. However, as a matter of principle, we will fight this because, of course, we are not dumping. It is the strangest thing you can bring up. The reason I think why the net was cast wide is that China is targeting very clearly, and this is TISCO specifically and Baowu, very clearly they are targeting Indonesia. 80% of the Tsingshan plant productions are going into China, and that has had a major disruptive influence.
It is one of the reasons why prices in China at the end of last year and beginning of this year dropped so much before recovering again. Obviously, this is targeted at that plant, at those imports, but if you package it in a larger anti-dumping case, it is easier to actually get it through. On the Americas, absolutely, we have already seen our mix improve, whereas we had last year, as you know, quite significant exports from America into the rest of the world. That has now dwindled to about 3% of our volume is export. We have seen our cold rolled mix significantly improve as well. Yes, this gives a very strong tailwind to us.
And just on that note, you mentioned that they will be targeting Indonesia with this anti-dumping investigation. I am wondering here, did you mention on the call that Indonesians are allowed to bring in about 3% of demand as imports?
No, not of demand.
Of imports.
Of imports. The quota, as I said, if you take the quota and you make that into a monthly, it is about 70,000 tons, and they would be allowed to get up to 3% of those 70,000 tons into the market without triggering the safeguard. Once they get past the 3%, they lose their developing country status, and then we will bring them into the safeguards.
Right. So 3% out of 70,000 tons, which is the quota.
Correct.
Thank you.
Welcome.
We will now take our next question from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes. Good afternoon, gentlemen. I have got three quick questions left in mind. Just firstly, on Europe, you mentioned obviously that the very severe part of the price pressure in Europe only started towards the end of the second quarter, and we have all seen the CRU numbers. If we put through this EUR 200 drop, which CRU is suggesting, it obviously put Europe into a loss-making EBITDA territory next quarter. But that obviously does not appreciate your contract business and also the fact that, as what I understand, purchasing conditions for stainless steel scrap in particular seem to have improved a lot, which could help you on the margin. How much of the price pressure have we seen already? And can you give us any sort of color as to how much worse the third quarter in Europe can really get?
And then secondly, just on the other slide, this more technical question. You said you have been benefiting from hedges. Will this normalize in the third quarter, or will these hedges run for longer? Then just lastly, can you please give us a quick update on your cash requirements bridging from EBITDA? You will be spending EUR 220 million in CapEx. At the current earnings run rate, how much do we have to budget for cash interest, pensions, and then also cash taxes all combined? Thank you.
All right. I will take the first question and then the timing effect plus the cash requirement, Chris, I will pass to you. As I said before, the price pressure that you are referring to probably got to its worst in June, July, stabilized in what we see from our order books, and is then reversing into September. It' s definitely not as if we would go into negative territory. That is absolutely not happening. As I said, one of the things which strangely enough we enjoy in this environment is that we have now proven to ourselves that with all the initiatives that we have deployed and all the muscle and battles that we have been working on, that we have reduced our break-even pricing level by literally hundreds of euros. So even in this environment, we are still capable of returning good results due to all this work.
It' s absolutely not black at all. Chris.
Yeah. Hedges and timing. So Bastian, actually in the second quarter for the group as a whole, our net of timing and hedging impact was de minimis. It was a EUR 1 million impact. So we are obviously trying to maintain that as small a level as possible, but we didn't get a big impact from the nickel hedging and timing in the second quarter. Now we do hedge other things as well. Of course, we hedge FX to some extent. We hedge energy, we hedge interest costs, even. There is a lot of other things that we, even in the first quarter, CO2 credits. So there is a lot of other things that move up and down. In some quarters, we may get a positive impact from the net impacts of all of those, and some quarters, not so much.
From those, we did get some positive impact in the second quarter. I would not expect that to continue. You can see in the others of the financial results, there was a EUR 5 million corporate benefit, a lot of which came from the impact of those other hedges. Going forward, I would not plan on it. I would expect that to disappear, because normally at the corporate level, we also have some central costs. They are not big, but there are some central costs. A more normalized level would be a small charge rather than a small benefit that we have seen there. I think that would be a more realistic assumption going forward. Then moving on to cash impacts.
As we said in the past, our cash taxes at the moment are relatively low because we have tax loss carry-forwards in most of the legal entities in which we operate. I would underline the word most, because we do have one or two legal entities in which we operate where we do not have tax loss carry-forwards, and there we do have to pay tax. Even in them where we do have tax loss carry-forwards, some countries such as the U.S. and Germany have minimum taxation as well. We do have to pay some taxes. We are not totally cash tax exempt. I think overall, this will be at a relatively small level for the foreseeable future, say EUR 10 million- EUR 20 million in cash terms overall, on normalized profitability.
In the future, that could rise obviously, as we start soaking up those tax losses and Finland will be first in line, then we start having to actually pay cash taxes, not something for this year or potentially even next year. On the CapEx front, the CapEx guidance has been for this year EUR 220 million, and that is the sort of framework that we are looking at going forward as well, and we will be there. The Fagersta acquisition was an opportunity that we used that is open above that. Say it is going to be EUR 235 million for that this year. That was not a CapEx as such. That was an acquisition. But EUR 220 million is the cash CapEx out.
On the interest costs in terms of cash impact, it was rather large in the second quarter because we redeemed the old more expensive notes, and there was early redemption fee associated with that, about EUR 11 million. Also some fees to our arranging banks and legal advisors and so on. There was a cash out associated with that. Obviously the ongoing normal interest costs that we have as a cash out. Our interest costs are now running on the sort of low to mid-60s after this refinancing. I think if you work on the assumption that it will be. It will not be the same every quarter because bond interest, of course, is only paid biannually.
But I think if you work on the assumption of EUR 15 million-EUR 20 million of cash [inaudible] quarter or about EUR 65 million for the nearer future, that would give you a reasonable cash out on interest. Does that sort of fully answer your question?
Yeah. Maybe just one missing part. You also pay something for pensions. And actually, if we kind of relate the EUR 60 million you pay out for pensions, it is actually a high number relative to your pension provision. Now, I don't want to get overly into the detail here, but that, I mean, EUR 60 million relative to EUR 300 million of pension provisions is typically a relatively high paid on ratio. So I think the EUR 60 million, according to your cash flow statement, we have to reflect as well. Is there any additional offset via deferred taxes? I mean, some of your lines are not fully split up, and that is why I am asking.
Did you say EUR 16 million or EUR 60 million?
I think six zero, so EUR 15 million per quarter, EUR 60 million, I think per annum. But I think it seems like there is some additional offset potentially against that.
No, we don't pay EUR 60 million of pensions a year. It's much, much less than that. What we did
That's what I would have thought.
No. That would be huge indeed, against the provisions. No, what we did is we made. But it was lower single million. To put it in perspective, so lower single million contribution to one of our pension plans in the U.K. in the second quarter. But we did not pay more than that. So the cash out, apart from normal contributions into pension plans that you make on an ongoing basis, they are relatively small. They're certainly only single- digit millions, not double- digit millions a year.
Okay, understood. So basically EUR 220 million CapEx this year, roughly whatever you paid for Fagersta. That's been a kind of an acquisition one-off, and then basically EUR 80 million for taxes and interest cost roughly combined. All in basically puts you comfortably at or below EUR 300 million cash requirements.
Yes. Plus swings in working capital, of course.
Yeah, of course. Working capital. Yeah, whatever nickel price. Okay, very clear. Thanks so much.
We will now take our next question from Luc Pez from Exane. Please go ahead.
Hi, gentlemen. Thanks for taking my question. I have one last remaining, which is connected somehow to the reply you made on Indonesia. I do find interesting as well that China is targeting Tsingshan. Part of my questioning is twofold. First of all, do you have any comments, update on the exemption process that ATI Tsingshan is seeking in the U.S.? I understand that the conclusion is not yet out, but they are trying to get it, first of all. Secondly, don't you fear, are you concerned, I don't know, that the Chinese restriction onto Indonesia import would likely lead to some increased pressure in the U.S., particularly so I suppose if they get an exemption here?
Okay. No update on ATI and Tsingshan. That process is running. It's taking very long. Don't know why. We'll watch that. Again, I would be highly surprised if this exemption would come out because it flies straight in the face of the reason why 232 is put into place, which is to make sure that domestic mills produce domestically and not shut down their operations in order to import, which basically this is. Do we feel that the China action against Indonesia would result in more pressure on the market in the U.S.? No, I don't think so. Don't forget, there is a 25% tariff on it, and that's a 25% tariff, I repeat it, on the full price, so including the metal. As the metal is 50%, it basically puts a $ 500-$ 600 penalty on these imports.
Unless Tsingshan is prepared to run this at a loss, which doesn't make a lot of sense, I don't see that there will be any pressure from there.
As there are no further questions in the queue, that will conclude today's question- and- answer session. I will now turn the call back to your host for any additional or closing remarks.
Thank you, and thanks everyone for attending our earnings call. Our third quarter results will be published on October 26. Until then, thank you and goodbye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.