Good day, ladies and gentlemen, and welcome to the Outokumpu interim report first quarter 2017. Today's conference is being recorded. At this time, I would like to hand the conference over to Mr. Tommi Järvenpää, Head of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Outokumpu's first quarter 2017 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 on page three 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 very much, and welcome to everyone on the line. Good afternoon, good morning. As you are used for me, I will start with our Vision 2020. I do expect that in future meetings, I can ask you to repeat it to me, but until we are there, I will keep on telling the story. Our vision is to be best value creator in stainless steel by 2020 through customer orientation and efficiency. Again, the various angles to that are the customers, the shareholders, and the employees. We have to succeed to be the best value creator in all three areas. It is time-bound, so there is a sense of urgency, and it is all back to basics. The customer orientation efficiency is where the rubber hits the road.
With that, I am very pleased to say that the initiatives we have taken to fuel this vision are really taking hold and have led to a particularly strong Q1 performance. As you can see, our adjusted EBITDA was EUR 294 million for the quarter, which is a tenfold increase over the first quarter of last year, and a tripling of the fourth quarter of last year. In fact, the full adjusted EBITDA of the first quarter is more or less equal to the full EBITDA of the full year of 2016. Moreover, all our businesses delivered black numbers. We were positive not just in Europe, where you are probably used it. We were positive in Long Products, which had a difficult 2016. Most importantly, we have made extremely strong positive numbers in the Americas.
One of the questions you have been asking us all the time, when will Americas be positive? There you are. Americas are positive. This is all the result, of course, partially from a good market, and I will come back to that. But the productivity and efficiency improvements were very much visible in the results. Just a few examples. In the U.S., our variable cash conversion cost improved by 12% year-over-year. Sorry, quarter-over-quarter. In Europe, it was 4%. For such a mature environment, extremely strong performance. On top of that, we had significant reduction as well in the absolute fixed cost. When you look at SG&A, which is one of our other big initiatives, we again are well on track to make the targets that we had of the EUR 300 million run rate by the end of the year.
Actually, given the development, we think that we are on track to beat that target. Talked about the markets. Markets were strong with good base price increases. If you take year-over-year, we were up about EUR 100 in Europe and up about $170 in the U.S. Of course, ferrochrome, as you know, at $1.65 was a big tailwind. We had as well, as you could see, a substantial net working capital increase, which partially led to our negative cash flow. The investment in net working capital, however, is mainly due to volumes and pricing, and we expect the payback to be very strong in its cash flow for Q2. When we go to the next slide. Already talked about the base price is up EUR 100.
What is interesting to see is if you look at the imports, they stay more or less at the same level, 23%-24%. They were slightly down to 24.2% in Q1 over the Q before. As you can see, most of that reduction actually came from the Asian side, where we think that especially Korea was in its exports lower than before. Now, these are cold rolled numbers. If you look at hot rolled, which I do not have a slide here, there you can see that conversely, the imports were up mainly from China. First of all, hot rolled is only a small portion of the market. Secondly, although the hot rolled imports of China into Europe were up by almost 85% compared to the average of last year, it is still only 22% of the total hot rolled sales versus about 16% for the average of last year.
Yes, there is an increase, but there has been an increase in the market size as well. As a result, you see as well that, for instance, the domestic players went down from 70% to still 65%. So we should not overplay the role of the hot rolled imports into Europe, basically because much of the market is cold rolled and the re-roll capacity is not so large as to make a significant impact. When we go to the U.S., then we see that the prices have been increasing during 2016, and a slight tick up as well in the first quarter, about $170, as I said earlier. You see there that again, imports are coming down. The Chinese imports for cold rolled have basically disappeared from the market.
You see again that the rest of Asia, as well as the rest of the world is coming down. The two drivers there basically are, for Asia, Korea, and for the rest of the world, Europe, which shows is a clear sign of the very strong market that we are having currently in Europe. With that, we go to the financials. Chris, if I can ask you to take care of that.
Okay. Thank you, Roeland. Good morning, good afternoon, ladies and gentlemen. I will start on slide eight, to look at the summary of the key financials here that you can see. Let us start with our stainless steel deliveries in the first quarter. Here you can see that deliveries were up against the same period last year by 29,000 tons. This was driven most particularly by much stronger deliveries in the Americas versus the prior- year period, but also by higher deliveries in Long Products. European deliveries were down a little bit due to the closure of our Benrath site during the course of the year, and therefore reduction of our overall capacity from that. If we then move on to the sales, they were clearly higher.
This was driven on the one hand by higher deliveries, but also by higher prices that went up during the course of this year on a Q- by- Q comparative basis. If we then move down the chart, clearly Roeland has already outlined that the adjusted EBITDA multiplied by a factor of 10 on a comparable period. So a significant improvement. A lot of that is due to our self-help program and the delivery of our must-win battles, but also the market helped somewhat. Then resulting from that, a much stronger net result, and you can see that in the first quarter already, we have delivered more net result than the whole of 2016. Operating cash flow was EUR -53 million, and therefore somewhat worse than in the same period last year. That was driven, as Roeland has already outlined, by a significant increase in net working capital.
I will come back to explain that a bit more fully as to what actually drove that. As a result of that, net debt increased to EUR 1.376 billion, but it is still down significantly versus the same period last year. The capital expenditure number here of EUR 19 million was a little bit lower than last year. However, I would stress that this is an accounting number. The cash number was higher at around EUR 45 million. Therefore, this sets us on track on the ballpark EUR 150 million- EUR 200 million capital expenditure that we are trying to target on an annual basis. Our staff levels came down a little bit, and this was also driven by the ongoing efficiency programs that we have, but we also sold a smaller business in the U.S. early in the quarter.
Let's now move on to slide nine, which shows the European results in a little bit more detail. If you look at the left-hand chart, you can see that deliveries at 415,000 tons were actually the strongest since the first quarter of last year. If you look at why they were lower, this was, as I just said, due to the closure of the Benrath site in September of last year, which took out some capacity. The capacity which sits behind these numbers is not exactly comparable, and therefore we consider this to be an underlying very substantial improvement as well. You can see on the right-hand side the very, very significant improvement in EBITDA in Europe. It more than tripled. Again, a large driver here were cost reductions, both variable and fixed cost reductions.
Our SG&A program, of course, impacts Europe particularly because of its very large size within our company. These played major roles in the improvement. But also, of course, the market environment has improved and ferrochrome prices also supported that result. What we are seeing in Europe at the moment is ongoing strength in the market. We saw strong customer demand in all segments really, but especially in the consumer segments. We saw higher base prices Q-on-Q in the comparable period of EUR 100 a ton. But even if we look at the end of last year, during the course of this quarter, we saw EUR 40 price increase there as well. We have seen distributor inventories nudge up a little bit, so they have increased during the course of the last quarter. We obviously continue to see strong performance in our operational costs.
If we look at the ferrochrome operations, on the one hand, positive impact from the much increased ferrochrome price, which rose from Q4 by $0.55 per pound. We also had higher delivery volumes in the quarter versus the prior- year period. But on production, we did see some issues, where we had a technical issue in one of our furnaces, which broke down. While this did not lead to lower deliveries because we were able to draw on our inventory levels, this will have an impact and carry over into Q2. Let us move on to slide 10, and particularly on the chart on the left, where we can see the delivery volumes over the last five quarters. Q1 was a strong result for the Americas, 182 kilotons. That is a little lower than the third quarter result.
I think if we had not sold our plates business in North America during the course of the quarter, the result would have been marginally ahead of the Q3 2016 result like for like. Just about a new delivery record and a lot of production records also reached during the course of the quarter. Again, this was driven by a very solid demand in all customer segments and especially the end consumer segments. Then the chart on the right, the EBITDA chart. You can now see here very clearly that the improvement trend in the Americas continues. It has been a huge change when we compare the first quarter of last year to the first quarter of this year. But also you can see an ongoing trend quarter-on-quarter with a small blip in the fourth quarter, seasonal blip, where improvements continue to be made.
These as a result of the higher volumes after start lines, improved productivity, higher base prices, a better product mix, but particularly strong clearly also, the reduction in variable cost per ton and fixed costs in the operations and in the back office operations of the business. We did see the favorable market environment starting to attract some import bill volumes into the regions. Inventory levels, we are beginning to see nudge up a little bit in Americas as well, particularly in the U.S. The result was also improved by a small positive net impact of metal derivatives. I would like to stress here that this was small, and even without taking that into account, the Americas would have been solidly positive at an EBITDA and at an EBIT level.
We are finally positive here on a like-to-like basis on EBIT, EBITDA, underlying or adjusted, whichever way you look at it is now a positive result at that level. Let us move on to slide number 11, the Long Products business. Again, looking at the deliveries on the left, you can see that for some time, this was the best quarter. Here we have really seen demand improve significantly from the automotive, aerospace, and oil and gas sectors. We have also benefited here from the strong demand in our European business area, which needed additional slabs due to strong demand. The material which we could not produce in the other melt shops was made up in Sheffield, in our melt shop in Sheffield. That also contributed to the improvement in volumes to some extent there as well.
After a difficult 2016, you can see here that the EBITDA in the first quarter was very solid, EUR 9 million. Again, higher deliveries, better prices, but also cost efficiencies contributed to that. Again, here I would make the point that while inventory adjustments and metal derivatives had a small net impact, again, this business would have been very solidly positive as well, even without those. Now moving on to slide number 12. We did see a significant cash outflow during the first quarter of this year. Our net cash from operating activities was EUR -53 million. The biggest contributor to that was the increase of EUR 280 million in net working capital. It was caused by an increase in trade and other receivables.
This in turn, was caused by higher base prices, higher raw material prices, higher delivery volumes, and some of those deliveries were very much skewed towards the end of the quarter, so that it ended up increasing our receivables as well. We also saw the higher ferrochrome prices that we saw during the first quarter work their way into our receivables and also into our inventory values. That alone, the increase in ferrochrome accounted for over half of the overall increase in net working capital. There were further cash outflows of financing activities of EUR 91 million. You are all aware of the dividend we paid in the first quarter. We re-bought some treasury shares, particularly only solely for the purpose of hedging future performance share plan payouts that we expect. These were the biggest contributors to that item.
The financing costs in the first quarter were EUR 32 million, of which EUR 24 million were interest costs and the balance was derivatives. Overall liquidity reserves were very high again at EUR 0.8 billion, somewhat lower than in the past, but still very adequate for our business. As a result of the cash flow, our net debt increased a little bit and we stood at EUR 1.376 billion by the end of the first quarter. On the working capital side, I would just like to say that there were, apart from all the increases due to higher sales, higher prices, higher deliveries, we also did have the delayed sales towards the end of the quarter, which carried into the working capital. We also decided to reduce one of our factoring programs, higher cost factoring programs, to save interest costs there.
That also contributes approximately EUR 50 million to the increase in working capital. As Roeland has said, while obviously in the first quarter, in a very rapidly rising environment, this does inevitably lead to an increase in net working capital. This should be viewed as an investment. A lot of this will reverse in the second quarter, and we will see a much more positive cash flow during the second quarter than we saw in the first quarter. Moving on to slide number 13 now, and the impact on some of the key balance sheet metrics here. On the left-hand side, you can see our normal chart, and you can see that the net debt leverage has come down significantly yet again. We are now at 2.4x on an LTM EBITDA basis. A very strong improvement there from 2016.
Of course, the increase in net debt did lead to an uptick in gearing. That was one of the negative consequences of that. On the right-hand side, we are showing our debt maturity profile. I think the most noteworthy thing here is that in early 2016, we faced a massive maturity wall in 2017, in the first quarter of 2017, on a variety of different debt instruments. We have now moved through that wall to the end of Q1. We have essentially dealt with all of those maturities. The remaining debt here is normal commercial paper that revolves on an ongoing basis. We have no immediate maturities left to deal with in 2017. We have very little, as you can see here, in 2018. We now have a clear run in terms of the next maturity wall coming in 2019.
With that, I would like to hand back to Roeland to give you a brief summary of our outlook for Q2.
All right. Looking forward to Q2, what we already said is that the underlying stainless steel demand remains robust. We see that in most markets, specifically those segments that are consumption led, both in Europe and the U.S. We do see further improvement in base prices, both in Europe and in the U.S. And we expect the deliveries to remain more or less at the same level as during the first quarter. Of course, we have, as you know, a lower ferrochrome price. It went from $1.65 to $1.54. That combined with the issues we have had, which we can discuss further in the Q&A on our ferrochrome production, will give a slightly negative result on the combined results. Together, we expect the Q2 adjusted EBITDA to be somewhat lower than the Q1 EBITDA. With that, I think we are open for questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, that's star one to ask a question. We will take an opening question from Michael Shillaker of Credit Suisse. Please go ahead. Your line is open.
Yeah. Hi. Thanks for taking my questions. Three questions, if I may. Firstly, just on the guidance. We know that base prices are going to be higher in Q2, and you've guided to relatively stable volumes in the second quarter. We know the ferrochrome price down is going to be about EUR 20 million or so, EUR 15 million- EUR 20 million or so of EBITDA on your sensitivity. Assuming that those price versus ferrochrome more or less balances out, is the delta to the downside in Q2 primarily from the ferrochrome outage? Are you seeing any other factors at play which we should be more worried about? Because in Q1, you gave an open-ended upside guidance of more than EUR 250 million. This is an open-ended downside guidance.
Should we be worried that actually you're seeing the earnings taper away as we go into the second quarter, and that is why the guidance is open-ended downside is question number 1. Question number 2, just on the ferrochrome outage. Obviously, we had another one in Q3, I think late Q3, early Q4. Are you disappointed with the performance of the ferrochrome operations, or is this something we should accept as relatively normal? If it's abnormal, what steps are you doing to assure the smoother running of the facilities? Just on the working capital, I understand completely on the EUR 50 million of factoring reduction, but still sort of EUR 240 million of working capital build is pretty significantly higher than one of your peers, Acerinox, has just reported on their bases of sales this morning. Are you a little worried that working capital build got a little out of control?
We know it reverses out, but it's still better if you can generate free cash quicker. Are you worried that working capital build got a little out of control in the first quarter? Thanks.
All right. I'll start with the first one. Yes, base price up, ferrochrome price down. Is the difference when we say somewhat lower, is that then because of the operational issues? The answer is solely yes. By the way, when you say we have an unlimited upside and now we have an unlimited downside, if I'm somewhat cold, I'm still not freezing. I wouldn't call that unlimited down. Are we disappointed with the ferrochrome performance? Yes, we are. If I take you back to the discussion we had in Q4, when the start-up led us to a delay in getting to normal production volumes into the second and the third week of October, before we were back on track. We did then very well. November, December, and January actually were solid production months.
Somewhere during February, we started to experience some variability again, which we couldn't directly pinpoint what it was. That led to, in the first to second week of March, in an event that we had an overflow of this furnace where the whole material flowed out, and while doing this, damaged the cooling pipes and the roof of the furnace. The root cause analysis, in the end, showed that there was most likely an issue with one of the scales for the way we put coke into the furnace. As a result, we changed from one scale to another. This is how this happened. The analysis is that we were under- putting coke into the furnace, and we thought it was a chemical issue.
When it was from the chemical analysis came out that we needed more coke, we just charged more coke until the point where we actually over-coked the furnace and it started foaming. That is what caused the outburst of material and the damage. We had to stop it for three days. We didn't let it cool down completely, so that was a good thing. We still had liquid metal in there, which allowed us to then, after the repairs, slowly ramp up again. Why we're still not where we want to be is because we have to replace the refractory of the roof, and that meant that we had to order a refractory, which will be in the month of May, when we again put the furnace down for approximately three days to repair the roof.
In the meantime, until we get to that installation of the new roof refractory, we will probably be running at about 60%-70% of the capacity of that furnace to avoid any risk of further damage to the roof. Then on the working capital, Chris, if you could take that.
Yeah. Michael, to answer your question on the working capital, I'd say, did it get out of control? Only to a very limited extent that we could do anything about. As I said, I'll break it down into broad buckets of numbers for you. Roughly EUR 50 million reduction in factoring. That was a very conscious and deliberate choice. It didn't get out of control. It was deliberately done to save on high cost of one of our factoring programs.
Second piece, about EUR 150 million was due to the increase in ferrochrome that worked its way into our inventories, but also into our receivables through the alloy surcharge. Again, out of control? No. It's one of the results of just higher prices, and in due course, if and when ferrochrome prices fall, that will come back. The balance of that leaves about EUR 75 million, roughly, in terms of delayed deliveries.
What happened here was that we had some logistics issues, which meant that at the end of February, material did not get shipped and moved into March. Therefore, collections that should have happened in March did not happen and will be delayed into April. This is the element we'd say that could have gone better. It didn't. It's a timing issue. It'll come back in the second quarter. The balance then, we also saw an increase in receivables, but that was effectively offset by an increase in payables as well, just simply due to higher base prices, higher delivery volumes versus Q4. We sold 56,000 tons more, and I would say that's a side effect of a much stronger business environment in Q2 than Q4. Again, not out of control, but a result of stronger underlying business.
Okay. Thank you. Can I just very quick follow-up? Can we just get the volume of ferrochrome shipments that are likely to be lost in Q2? I hear you in terms of the smelter offering at 60%-70% utilization, but so we can try and run the maths on the actual volume lost.
We will be producing about 105,000 tons.
Okay. All right. Thank you.
We will take our next question from Johannes Grasberger of Nordea. Please go ahead. Your line is open.
Hello, gentlemen. It's Johannes from Nordea. First question is on the delivery mix. I'm just checking, it looks like the mix wasn't as good as last year, Q1. There seems to be a little bit of more semi-finished steel going out. Just wondering, has that been a dilutive factor in the Americas, or where has the mix been weaker compared to last year? That's the first question.
Can I just, for my own education, how do you deduct this high portion of semi-finished?
Oh, it's just checking from page number 11, where is 42,000 tons, and then 24,000 tons a year ago. More semi-finished products going out.
Okay. Got you. As you can see, there's a 40,000 tons increase in the overall and a 20,000 tons increase in the semi-finished. In percentage-wise, the mix actually is richer, although there's more semi-finished going out.
All right, exactly. Because the overall volumes are higher. That's part of it. This is coming through the semi-finished products because it's part of the overall mix in the demand.
If you take 610,000 tons against 640,000 tons with the stainless, then you see the 18,000 tons difference, then you see that the overall mix has become stronger.
Right. Makes sense. Okay. Thanks for that. Then in terms of the quite massive surge in the coke prices, just thinking, is that something that is also additional cost headwind going into second quarter? Of course, not something that is extremely consumed in ferrochrome, but I suppose still some small headwind, assuming that you were still able to consume a lower priced coke in the first quarter.
No, it is not really a factor. It is too limited. Although, as I said, we have been spending too much coke in Q1, unfortunately. But it will not be a determining factor.
Right. Okay. I have got a question on the working capital swing as well. If we now run the numbers and we go into the second quarter, assuming this EUR 80 million of delayed deliveries, that will come back and we already see that, okay, chrome prices are a little bit lower. I suppose we are talking something about easily EUR 100 million working capital reverse, which would be roughly one third of the first quarter tie- up.
Right. I do not want to comment on the exact numbers, but it is going to be a very substantial improvement in net working capital, Johannes, yeah.
Right. Then just curious still on the net working capital tie- up in this quarter. Was that a surprise after kind of closing the books? Or was that something that you were already seeing and expecting once you saw that the ferrochrome prices jumped into Q1, with the exception of these delayed deliveries, which was kind of exceptional?
No, I do not think it was a surprise. I think when we had discussions with various investors and analysts in the first quarter, I think we were always very clear that working capital was going to go up significantly, and it is going to have a negative impact on Q1 cash flow. So it was not a big surprise.
Right. Agree on that one, that it has been quite clearly communicated. The final question what I have is overall on the steel market. I know that the guidance is in general for the second quarter, but if you could just talk a little bit about the market dynamics when we head for the second half. Seems like there has been a little bit of restock happening in the first half of this year, and now metal prices going down a bit. Then we also have the Chinese inventories rising, for which we have heard some comments lately. So thinking whether there could be some slower demand patterns in the second half versus first half of this year. Or perhaps there are some other elements that we should be aware about that this should not be the case.
Look, seasonally Q3 is always weaker than Q1 and Q2 or Q4. I do not see any reason why that will change. Of course, there is a lot of speculation going on with what happens with now the alloy surcharge that is coming down because of lower nickel and lower ferrochrome. The only thing I can say is, well, we have extremely good order books going into Q2 and for Europe now starting into Q3. Very difficult to say whether these price movements will have an effect. If they would persist or go down further, of course, they will have an effect where especially distribution sector will postpone purchasing for as long as they can sit it out with their inventories.
Now, if you talk about inventories, in Europe, the distributed inventories are up a bit, but you talk about three or four days. So we are not talking about vast overstocking. For now, I would say, yep, Q3 will show its normal seasonal pattern, but it is too early to say anything into Q4.
Okay, and just a small follow-up. I suppose for the entire industry and the entire stainless steel value chain, the best outcome would be a situation where the metal prices, if they were to edge lower, they would basically edge lower as quickly as possible because that would make the de-stocking phase as short as possible. Would you agree on that?
Theoretically, yes. I think the best scenario always is everything is stable. So that is what we are going for.
Okay. Thanks for the answers on my questions. That is all.
Thanks, Johannes.
We will take our next question from Alexander Berglund of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Thank you very much. Two questions from me. First of all, on Europe, I wonder what your view is on the risk for imports into Europe now, especially, it seems like Brussels not being so supportive. There was not any revision on the anti-dumping against Taiwan. Secondly, on the U.S., a bit more longer term, what potential do you think you have to further increase the mix in the U.S. now that you are gaining market share and utilization is going up? Thank you.
Okay. Let's start with Europe, and I'll try to explain a little bit the Taiwan case, because it's not that Europe is changing its stance. As an industry, we thought there would be a case, and a case that can be proven on so-called absorption of duties. Given the numbers in the European market that looked reasonable, the EU investigated. The problem that occurred was that the Taiwanese market participants did not participate in the answering of the questions to a large extent. The full distribution sector did not cooperate, and it was only the two producers that cooperated in this investigation. As a result, on those numbers, there was no proof that, for these players, there was an absorption of duty. As a result, the Commission said, we will just keep the existing duties intact.
It's not that they are lower or, they just keep it intact, the current 6.7%. It's not a case of a change of heart. They just followed the procedure, and the procedure didn't give them the tool to actually do anything about increasing it. As far as the U.S. is concerned, yes, of course, we are looking to improve our mix. I think you will see that from those numbers, as Johannes pointed out, the mix has improved, and the main volume growth has been in the U.S. So you can already see that there is a shift in the mix to richer mixes. This is our stated objective as well, that we will continue that path. This is one of the main commercial drivers between now and 2018 for our returns in the U.S.
Thank you very much. Very clear.
We will take our next question from Luc Pez of Exane. Please go ahead. Your line is open.
Hi, gentlemen. A couple of questions as follow-up. First of all, with regards to the windfall gain, would it be possible to at least indicatively break it down, as far as the contribution to the U.S. turnaround is concerned, in particular in the Long Products as well? That would be my first question. Secondly—
Before you—
Sorry.
Luc, before you go on, can you explain what windfall gain is and how that plays?
The inventory, raw material inventory revaluation item. You were talking the EUR 33 million boost to the quarter, which was reported as non-nickel- related inventory gains so far.
Yeah. Specifically for U.S. and LP. Okay.
Okay.
Should I take that?
Yeah.
The number overall was small. In the interim statement, we talk about a number of EUR 33 million, which also includes some derivative gains. If we take that out, then the number was overall about EUR 25 million. In round numbers, about EUR 8 million of that can be attributed to the U.S., about EUR 2 million or EUR 3 million to Long Products and the rest to Europe. In the overall context, it was a very small gain.
Okay, very clear. Thank you. Then, sticking to the overall market comments, as we had a couple of hours ago, I am feeling that your competitor are maybe a bit more concerned about the rising spreads with Chinese market and the ongoing weakness maybe in Chinese markets and excess inventories that can be seen here. Is this something which is a source of concern to you as well, or you are feeling pretty relaxed with regards to that? Thank you.
It's always a bad idea to be relaxed in this market. But if I break it down to pure numbers, we have seen since the high end of pricing in China, we have seen the prices come down with about $120- $140. If you look at cold rolled between EU and China for local markets, we are now at approximately a $500 a ton differential on a base of, let's call it $ 2,100, $2,200 in China. So if you take the 25% duty, that is already more than the current gap. Then on top of that, you have, of course, the freight plus the supply line, plus the fact that you still get a premium for European material or Chinese material. I'm not concerned at this stage. The gap is just not big enough for Chinese cold rolled material to find a way into Europe.
But you have to monitor it. You have to look at it. In that sense, I don't know what my colleagues have said, but in that sense, of course, we all keep an eye on it. You do not want to shoot yourself in the leg.
Okay. So the way I should understand it is that it's more to be seen as a cap for you to raise prices rather than any actual downside risk emerging as of today, I mean.
That's not quite what I said. I said that the gap currently is about $ 500. If you take the 25% import duty plus the freight plus the premium of Europe, there is still some way to go before you actually open the floodgates.
Okay. Thank you.
We will take our next question from Seth Rosenfeld of Jefferies. Please go ahead. Your line is open.
Good afternoon. I have a couple of questions on the outlook for Q2 guidance and then a few fundamental issues with regard to trade policy as well. I guess, just going back to the very first question on the outlook for Q2, I am going to try to push you here to give us a bit more color, net- net of the various factors you discussed earlier. Can you put the guidance in any quantitative context of what scale of downside we could see? You were generous to provide Q1 guidance north of EUR 250 million. Do you think that cold but not freezing would be north or south of EUR 250 million? Second question. With regards to the outlook for volumes in Q2 being flat quarter-over-quarter, that seems to be somewhat counter normal seasonality.
Have you seen a shift in buyer appetite in the last couple of months, given the volatility in raw materials prices perhaps that led to less buying appetite for this period? It seems like normally you would expect a tick up in the course of Q2. So if you can talk on buyer appetite and how your lead times have also moved over that time period. Thank you.
Okay. On the first one, we were very clear in Q1's outlook where we said we give a one-off numerical guidance, and it is a one-off numerical guidance. We have had many questions on somewhat. We just refer to the Oxford English Dictionary, where there is a reasonable explanation of how to take that. Definitely not a lot. That is one of the things that is clear. On the volumes, no, we have not seen a change of buying appetite. In fact, if you look, we did not say it, but actually the sales are slightly up, going into Q2. But, as there is not material enough for us to say it is up, we said it is in line. We have not seen a difference in buying appetite. It is still underlying strong, and our order books are pretty full.
Can you give a sense on the lead time for new orders today versus where that would have been, say, two months ago?
Yeah. We are currently for Europe, we are booking into July. In the U.S., we are booking into June. We are about —no, we are actually towards the end. We have about six, seven weeks in the U.S., which is what we were before as well. We are 10 weeks in Europe, which is exactly where we were before.
That is great. Thank you very much.
We will take our next question from Bastian Synagowitz of Deutsche Bank. Please go ahead. Your line is open.
Yes. Good afternoon, gentlemen. I have got just a few questions left. I was just going to take them one by one as well. Firstly, following up on the ferrochrome issue in Q1, you mentioned that shipments were stable, obviously, but production was down. Has there been just any financial impact in Q1 already? If so, could you please help us to quantify it, i.e., what would have been Q1 EBITDA without the volume loss on the production side, or has there been any kind of effect from fixed cost capitalization? Thank you.
A lthough indeed we did deliver out of inventory, mitigating some of the production losses, there has been a small effect on volume as well in Q1. We do not quantify that specifically.
Okay. Thank you. Well, then just onto my next question, which is on the U.S., and I have been quite impressed by your performance here. Obviously, now prices are picking up further, volumes are maybe up or flat. I was wondering basically, if we exile the EUR 8 million inventory gain, which you mentioned, is there just any reason why Q2 should be getting any weaker than, the say lower twenties, which would be implied by that?
I assume you are referring to Americas.
EBITDA. Yeah, exactly. That is Americas. Yeah.
We clearly guided that we see an improvement in stainless for Q2, and we stick to that.
Okay. Thanks so much.
We will take our next question from Carsten Riek of UBS. Please go ahead. Your line is open.
Thank you very much. Most of my questions have been answered. One just on the more global stainless environment. What we have seen over the past few months, I would say over the last six months, is quite a bit of supply response. At least globally, we are about 14% up over that six months. Each and every month, 14%, which I haven't really seen that much of an increase for a while. I think the last time I remember was somewhere in the range of 2003, 2004, 2005, 2006. Do we enter actually a new period where we see a similar growth in stainless as we have seen back that time?
Hence the steel price differences or stainless price differences which we see, and which actually in March are $700 and April even higher after nickel came down, might be sustainable, or do we hit a wall here? What's your kind of demand forecast for the current fiscal year? Thank you.
A lot of the growth that you mentioned is the melt rates in China that have gone up significantly because literally the stimulus programs there have led to a boom in housing and infrastructure building. If you look at the data, globally, we are looking at 4%-5% year-on-year growth for the next few years, let's say 2017, 2018, 2019. Of which again, a large part is China. But altogether, these are very decent numbers, very strong numbers. And as you know, it is normal that over the cycles, stainless is growing at a faster clip than the global GDP is, and that seems to be continuing if you believe the forecast from the pundits.
You think it's still sustainable and the price differences right now are manageable?
What price difference are you looking at?
I have currently more than $700, and that's the March number. April is not yet out, but I would guess it's at least $750-$800 after China's stainless steel prices already reacted quite heavily.
It's higher than what we have. As I said, if I look at and we tracked 304 cold rolled, and we are tracking this currently March at $532 exactly.
Okay. It is different from CRU then. Okay. No, that is fine.
We will take our next question from Shyam Kumar of Kuvari Partners. Please go ahead. Your line is open.
Hi. I guess my first point on that somewhat lower thing, you have responded twice. Once we are talking about the temperature from cold to hot. Second time referring to the Oxford English Dictionary. Can we not get a slightly more informed response? Somewhat lower means many different things. Can you not give us a sense of how much is the lost volume on ferrochrome, how much would be the cost to repair, and what kind of margin you would be making on that kind of lost volume at $1.55, so we can figure out the range, please?
I gave you a production number. We gave you as well what $ 0.10 does on EBITDA per quarter. I think with those two you can work your magic.
Okay, fair enough. In terms of working capital for the full year, have you got any expectations as to how that will move on an annual basis? Is it going to be flat, or do you expect to build or release over the course of the year, please?
Yes. If I knew exactly how the prices for nickel and ferrochrome develop for the rest of the year, I could give you a number. If the prices stay exactly where they are today for the rest of the year, then I would expect the further development of net working capital to decline, because some of those increases in the first quarter come back for the rest of the year. But it is very dependent on what raw material prices do for the rest of the year.
Okay. Thank you. Sorry, Roeland. Carry on.
No, just at stable pricing, looking forward, there will be a small impact still there.
Okay, fine. Small impact. Okay.
Yep.
Okay. Thank you.
We will take our next question from Johannes Grunselius of Handelsbanken. Please go ahead. Your line is open.
Yes. Hi, everyone here. Most of my questions have been answered now, but just a question on the outlook here also from my side. In the adjusted EBITDA definition, you book inventory gains and so forth, metal derivative gains, which happen in Q1 here. Are you expecting any of those to come as well in the second quarter?
At this stage, actually, we're expecting the impact of those to be very small in the second quarter.
Very small. Yeah, okay. Just to be clear here, I think I figure it out and understand your communication, but when you're talking about a somewhat lower adjusted EBITDA, you make the reference to the EUR 294 million figure, right? That's how we should be thinking.
Correct.
Yeah. Good. Just want to clarify that. Then on the ferrochrome smelters, you gave us the numbers here, lost production, so we can work with those numbers. But how should we then see the third and the fourth quarter? Is that back to 100% capacity utilization again in your expectations? In other words, about 130,000 tons in quarterly ferrochrome production?
We have always said that the ferrochrome production, because it's never a straight line, is between a yearly production between 480,000 tons and 520,000 tons.
Okay. 480,000 tons. Yeah.
The 130,000 tons is assuming that you crank it out at full tilt the whole time.
Okay. Over time it's more. Sorry.
Yeah. Over time, it's more like between 120,000 tons and 125,000 tons.
Okay. Yeah.
To your question, if the ramp up after repairs is as expected, we should be able to be at a sufficient clip to be at normal volumes for Q3.
When do you think you will be up and running again at 100%? Will that be here in the middle of May or later on, or how should we be thinking about that?
Currently, the shutdown is planned for the second week of May, and it's all depending, of course, on whether we have the refractory in-house in time. If we get the refractory earlier, we'll shut down earlier. We are putting as much pressure behind it as possible.
Okay. Thank you.
You are welcome.
We will take a follow-on question from Luc Pez of Exane. Please go ahead. Your line is open.
Yes, sorry. One last question left. I did not see any reference to the guidance you made when you reported your Q4 about net debt coming down below EUR 1.1 billion by year-end. Is something that is still firm, or because of the jump in working capital requirement over Q1, you are not committing any more on this?
Oh, no. The EUR 1.1 billion is absolutely firm for the end of the year. Yep. Absolutely.
Thank you.
Yep.
We will take our next question, Alessandro Abate of Berenberg. Please go ahead. Your line is open.
Hi, good afternoon, gentlemen. Most of my question have been already answered. I just have one left. You spoke about price differential, my colleagues and yourself, but the decline of cold rolled export from China towards Europe has been completely replaced by hot rolled. How does it play into the game of sustainability of stainless steel price? Because most of the rolls, I think, is going to be clearly very cheap quality and is rerolled, most delivered also by distributors and processors. Do you see any kind of risk that even though the cold rolled is not really appealing in terms of price differential, as you were saying, Roeland, the potential threat and pressure from China can actually come from the significant increase in hot rolled export? Thank you.
I understand the concern. The total hot rolled market is about 20% of the complete market. Of the 20%, as I said, currently about 22% is Chinese imports. You get to extremely small numbers of real impact onto the cold rolled market. As a result, it will not put a cap on pricing. Secondly, it is interesting to see that although the Chinese imports have increased, the local mills, the European mills, as I said, still provide 65% of the hot rolled into the market. It is clearly less compelling on the hot rolled than it is on the cold rolled in terms of price differential.
Yes. Okay, thanks. Do you have any kind of visibility in the price? If you think that the risk of dumping material related to hot rolled, even though it is small in terms of volume.
As with all imports, we are monitoring continuously. If we think it gets to a point where it is unfair competition, we will immediately ring the bell. But at this moment, we do not see a reason for that.
Okay. Thank you, Roeland.
As we appear to have no further questions in the queue, I would like to turn the call back to the speakers for any additional or closing remarks.
All right. Thanks very much. If I can just recap, we have had a very strong first quarter, and a clear evidence of the improvements we have started last year, and that is continuing quarter-over-quarter for every quarter in the last five. Big driver behind this is our operational progress. The manufacturing excellence initiatives are really paying off. Of course, we have as well in Q1, we had a robust market, but we see this market environment to continue into Q2 as well, which means that there is still positive momentum in base price appreciation in all regions. On the flip side, we have been talking extensively on ferrochrome, and indeed this is a disappointment, and it will affect our Q2, and will offset the positive side of stainless. But altogether, Q2 again will be a strong performance with strong cash flow resuming as well in Q2.
Thank you, Roeland. And thank you for all the listeners for your attention and active participation. Outokumpu second quarter results will be published on July 25th. Until then, thank you and goodbye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.