Thank you. Good afternoon, ladies and gentlemen, and welcome to Outokumpu's Third Quarter 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, thanks very much. Thanks for joining this call. I would like to start just to bring back into memory with our vision. Our vision is to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. Again, this is on three dimensions. It is towards the financial investors, the financial community, where we have set our targets as EUR 500 million EBIT by 2020, and a gearing of less than 35%, and return on capital employed, 12% minimum. The second dimension are our customers, where it says customer orientation. We want to be clearly ahead of our competition in the way in which we deal with our customers, and we want to be recognized that way as well. Thirdly, we want to be clearly the preferred employer within our space.
With that, go to the next page and get to the results of our Q3. I can say that we are pleased to announce these results. We have been continuing to make improvement and progress on the path that we have announced earlier this year, where we gave our 2016 targets in terms of our SG&A restructuring of EUR 100 million, our reduction of net working capital of EUR 200 million, and the restructuring, the reorganization on top of it. The results are noticeable. As you can see from this graph, we have continued the trend up and come to a EUR +32 million underlying EBIT for Q3. We have made fantastic progress in the Americas with another quarter of record shipments, and it is an extremely good result, getting close to break-even on the EBIT side. We are specifically pleased with Europe.
The cost savings initiatives over the past quarters are now clearly starting to get oomph and bite. That, combined with some improvement in pricing, has given a very strong quarter. On the net working capital initiative, we year-to-date are at EUR 149 million. In other words, well on our way to reach the EUR 200 million target by the end of the year. Then there is, of course, the net working capital release plus our strong result have led to positive cash flow and further net debt reduction, bringing it now down to just below EUR 1.4 billion. Setting us up extremely well for the target we have set for the end of 2017 of a maximum of EUR 1.2 billion.
As slight negatives on Long Products, we still are just below positive, so a very small negative result on Long Products, which is to a large extent due to still the derivatives of Forex. We took out a hedge on the British pound ahead of the Brexit vote to basically protect our business against any adverse reaction of the pound. That means that although operationally we are benefiting from the low pound, on the hedge, we actually have a negative offsetting that, and these hedges roll off by the end of this year. On ferrochrome, as you know, we already announced that we had major maintenance on the largest furnace there, which went to schedule and budget, but of course impacted our deliveries. Altogether, a very satisfying, strong quarter.
If you go to the next slide, just bring to attention again what is happening on the global market for stainless steel. 2016 shaping up to indeed have a slight growth over the weak 2015, about 2%. Mainly APAC, but some growth in Europe and the Americas saw a bit of a dip versus 2015. Again, looking to 2017, the growth is forecasted to continue with specifically strong results for Americas and APAC again. The positive environment has had a good effect on prices as well. If you look at the European situation, the right-hand side of the graph, you see import penetration. It ticked up slightly in Q3 to now 24% from 23% the quarter before. Still long way below its peak at 30%. Of course, what is more important is that the Chinese imports, which were basically the unfair competition part of our imports, have virtually disappeared.
What is now being imported is, I would say, generally speaking, at market prices. For us, as we always have said, we have no issue with imports. They have to be fair imports. In this environment, we have seen prices tick up a bit. If you take the published figures from CRU, it reflects a EUR 20 increase from Q2- Q3. Go to the same slides from the Americas. Similar slide again, first time on the right-hand side. Basically stable imports of about 23%, but with the announcement of initial anti-dumping duties on Chinese imports. Again, Chinese volumes have dried up, and been partially replaced by imports from specifically the rest of the world, and that's specifically Europe and the rest of the Americas. It had a significant impact positively on pricing.
Again, if you take the CRU pricing chart, there is about $120 on the base price of 304 that materialized over the last two quarters. We are still not at the level of, let's say, pre-Chinese imports that flowed the market in 2014 to 2015, but we have recovered quite a bit year to date.
Now coming to the key financials, I would like to hand over to Chris.
Okay. Thank you, Roeland. Good afternoon, good morning, ladies and gentlemen. We turn to slide number nine, the Q3 key financials. Generally, the picture is one of improvement across all dimensions versus 2015, but also to the last quarter. To pick out a few highlights here, the deliveries were slightly down versus Q2 in Q3, mainly because of the seasonality effect that we saw in Europe, and to some extent in Long Products. While in the Americas we saw an increase, Europe, you recall, has historically always suffered from a weakness during the summer break. We did take some actions to mitigate that, but nonetheless, deliveries in Europe were down, which led to an overall decline in deliveries. Sales, nonetheless, improved, and this was due mainly to higher base prices in both the Americas and in Europe, but also due to higher deliveries in the Americas.
Ferrochrome prices were also up, which contributed to the increased sales. If we look at the underlying EBIT, we can see that it improved significantly, predominantly because of the performance improvement in the Americas, but also because we saw ongoing steady progress in Europe, as already outlined by Roeland. On the cash flow side, we generated EUR +61 million of positive cash flow, a further improvement versus Q2, and significant improvement versus 2015. If I could turn to slide number 10 and look at the performance in Europe in a little bit more detail. If you look at the chart on the left-hand side, it shows the sequential quarters of the last five quarters of our deliveries in Europe.
You can see while overall deliveries are significantly stronger than they were on a comparable basis in 2015, they were slightly off in Q3 versus Q2, driven by the summer weakness that I already outlined. We did mitigate the very severe impact that we seen in previous years here by pushing some maintenance work into Q4. While there was a dip, it was significantly less pronounced than it has been in the past. If we look at the chart on the right, you can see the corresponding underlying EBIT, and you can see that over the last few quarters, we achieved a very relative to the last few quarters, we achieved a very strong EBIT result of EUR 45 million in Europe.
This was driven partly by higher base prices, partly by higher ferrochrome prices, but also significantly by improved cost measures that we beginning to see coming through on the various initiatives such as SG&A improvements, but also some of the restructuring work that has been done in Germany in recent quarters. Overall, stainless steel demand in Europe remains healthy. Inventories have declined slightly, and this is keeping long-term inventory levels just slightly below averages. Base deliveries have increased by EUR 20 per ton. As you know, we did major maintenance work on our ferrochrome unit in Tornio, so the production was at 93,000 tons, which is a little lower than we would normally expect throughout a quarter. Made a number of adjustments to our reported EBITDA.
Most significantly for Europe, we reversed some redundancy provisions that we made for the restructuring in Germany back in 2015, that contributed EUR 4 million of additional EBIT that we prefer to have for the underlying EBIT, and smaller effects from hedging gains and losses, really some effects that have been made as well. Overall therefore, our underlying EBIT was lower than our reported EBIT. If we move to slide 11, we show the same information for the Americas here, and the good news here is, as Roeland has already indicated, that the Americas achieved yet another record high quarter. Looking at the chart on the left again, which shows deliveries for the last five quarters, you can see that with 185,000 tons for the quarter, it was a record and another 4.5% up on the previous quarter. We have now seen five consecutive quarters of improvements.
Looking at the chart on the right, you can see the EBIT, and the same story here. This is now the third quarter of significant EBIT improvement, and from levels of around EUR 40 million- EUR 45 million of EBIT loss towards the end of last year and the beginning of this year, we are now getting very close to a break-even EBIT for the Americas. This was partly driven by increased base prices, but also very significantly by higher deliveries, obviously, and by ongoing cost improvements and efficiencies that we continue to achieve in Calvert. Overall, the positive momentum in the America stainless steel market is intact and continues. On the market side, we have seen the U.S. Commerce Department set in September preliminary anti-dumping duties against Chinese imports.
As Roeland has already indicated, that has led to a significant decline in imports from unfairly priced material from China. Overall, inventories in the U.S. have remained pretty stable, and they now are still below the long-term average levels, but only slightly so. Base prices and deliveries have moved up about $80 a ton versus the levels that we saw in Q2. Again, we made some adjustments to our reported EBIT here, related mainly to the impact of derivative hedging and inventory gains. If we move on to slide number 12, to our Long Products division. Here, again, the business was impacted a little bit by seasonality, which you can see by looking at the chart on the left. We can see that the deliveries overall of 59,000 tons were below the levels that we saw in the second quarter.
On the right-hand side, however, you can see that despite this, the EBIT at a low level because it is a smaller business area is improving there and also moving towards the break-even point here. We did see some positive impact from the weaker pounds, which reduces our cost base unit in the U.K., but also some losses from the remnant effects of the Brexit hedge effect hedge that we took out. Overall, the market remains stable in this business, although obviously this is the segment that supplies the gas and oil industry, and that has remained somewhat subdued with the oil price not really recovering to previous highs. Base prices remain generally flat in both Europe and the U.S., and again, in our results here, we made minor adjustments to the reported EBIT due to hedging effects of metal.
If you look at slide number 13 now, the chart here shows our operating cash. The first line here I'd like to point out is that our cash from operating activities in the third quarter at EUR 61 million was up on the second quarter and was the third consecutive quarter of positive operating cash flow. We did generate cash from further proceeds that we received from the sale of the SKS business in China during the quarter. That was EUR 49 million. Against those proceeds, we've offset our cash CapEx outlays, which were EUR 23 million, so that the overall proceeds, i.e., receipts from the SKS sale minus the CapEx, summed to EUR 36 million and gives an overall cash flow for the quarter of EUR 87 million. That has contributed to improving our overall cash balance significantly to EUR 213 million.
There was also some reduction of debt as well. The net working capital contributed strongly to this result, as did the strong underlying EBITDA performance. We have generated so far a net working capital release of EUR 149 million during the first nine months. That number excludes provisions and some pension obligations. I'd like to then move on to slide number 14, which shows the impact of that cash flow on our net debt and on our gearing. The chart on the left here, the solid bars show our net debt position at the end of each quarter on a quarterly basis. You can see that we have reduced net debt by another nearly EUR 90 million here.
We're now just a whisker below EUR 1.4 billion and therefore well on target towards one of our key milestones, which is to reduce net debt to EUR 1.2 billion by the end of next year. Also, our gearing level continues to decline. It came down another 4% during the quarter and this now stands at 65%. On the right-hand side here, you can see the profile of our debt maturity from 2016 through for the next five years. Key message here is that the maturities in 2017 are substantially shorter term, and our cash position, our liquidity facilities now put us in a position not to have to do any refinancing activities next year. If there's an opportunity, we will exploit that.
As outlined before, our liquidity position continues to be in very good shape. We have over EUR 900 million of undrawn facilities in addition to the cash balance of EUR 213 million that I just outlined.
With that, I'd like to hand back to Roeland to give you a little bit of an outlook on the outlook for the fourth quarter.
Thanks, Chris. Looking forward, first a little bit about the market. We see still a healthy demand both in Europe and in the U.S. And actually, in Europe already booking into Q1. What you do see is a typical softening towards the end of the year, specifically in the services sector, not so much in the underlying demand with destocking to polish the balance sheet up for the 31st of December. That is specifically strong in the U.S., hence we see that our volumes in the U.S. will drop significantly compared to Q3. If you look at what it means for our estimates for Q4, there is some pluses and minuses. We still see some continuing strength in pricing, both in the U.S. and in Europe. We see some flat volumes in Europe, but on the negative side, we see dropping volumes in the U.S.
Then if you get to ferrochrome, which is of course always one of the drivers as well. Due to some issues that we had in the ramp up, the startup after maintenance of the ferrochrome operations in October, production suffered significantly. As a result, the volumes in Q4 of ferrochrome will be lower. However, they are going to be offset by an increase in price in Q4- Q3. As a result, the net-net is a flat ferrochrome result. All that together means that we are expecting a Q4 underlying EBIT to remain at a similar level to Q3. Consequently, for the full year 2016, we are looking at a positive EBIT. With that[crosstalk].
With that, thank you, Roeland. Operator, we are ready for the questions.
Thank you, sir. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digits one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause just for a moment to allow everyone to signal. Now the first question comes from Seth Rosenfeld from Jefferies. Please go ahead, your line is now open.
Good afternoon. Thanks for taking my questions. I have two sets of questions. First, looking at ferrochrome, then second, looking at the outlook for apparent demand. On the ferrochrome side, can you talk a little bit more about your confidence in the ferrochrome operational issues now being settled? Now that we are in November, are operations back to normal levels? Also, can you provide some sensitivity for your earnings to moves in the ferrochrome price? I think you tried to provide this in past quarters, but in a rising ferrochrome price environment, what sort of earnings upside is there for your business, and how would you respond to that? Is there opportunity to increase production or increase your external shipments?
Separately, I am just wondering, with higher nickel and also chrome prices, alloy surcharges are clearly strengthening. Wondering if you can comment if there has been any early signs of apparent demand improving, starts of perhaps customer restocking in response to higher alloy surcharges. Thank you.
Okay. Thanks for the questions. I will give you the long answer on ferrochrome, because I think there will be probably more questions coming. I will try to be as complete as possible. When we came out of the maintenance, as planned, at the end of September, what you do is you start up very carefully. You charge some of the ore in there. It is a closed system, so you cannot look inside what is happening. Then you carefully start the power up. It is an electric arc system, so you have the cathodes in there, and you try to not overheat it early, because the new lining can give away. You do that carefully. What we found during that process, as we were ramping up power from initially 10%- 15%, up to 25%, 30%, was that the current flow was not as it should be.
The arc was not formed the way it should be, which indicates that there is what they call frozen metal between the arc chunks. As a result, you have to go back and reduce power because you have the danger of damaging the inside of your furnace if you do not do that. Then again, you start the power up very carefully. That is a process that it took us a few weeks to clean out what needed to be cleaned out and to get an even melt. We reached about 50% power by the third week of October, and by the fourth week of October, we were at full 100%, and we have been at full 100% ever since. It does mean that we have lost production in October. But at the same time, we are running full tilt at the moment, and see no problems.
To your question, we feel that the issues are solved because it was not a design fault or a repair fault. It was just struggling to get a furnace going after having been down for a while. You are right that we gave some insights back in the second quarter on what is the effect. We then had a drop of, well, we went from EUR 0.96- EUR 0.82, and we said that the effect was somewhere between EUR 15 million and EUR 20 million. That is generally speaking, still true. The only thing that can still play a role in there is the exchange rate. As the dollar moves, that has an impact, of course, in the translation to euros as our functional currency is euros. But that guidance still stands.
Then on the alloy surcharge. The alloy surcharge actually have been up and down. In October, it went down compared to September. Generally speaking, you could say nickel has been trading between 9,500 and 10,500. There is no indication for it to be pushed either way, and as a result, we do not see a restocking at the distributors, nor do we see destocking. We are, as I said, in this sort of just below historical averages and no real impetus to move either way. You are right, if there will be a spike, then you might see something coming up. But we actually do not speculate on where the prices of nickel will go.
If I can ask one follow-up question, please. For, say, your austenitic or your ferritic grade production, can you please give us a sensitivity, not sensitivity, but some sense of what portion of the alloy surcharge is currently made up by chrome versus nickel? Most investors seem to equate that solely with nickel, but obviously chrome is a key contributor as well. In a flat nickel environment, I guess we are looking at chrome as the key driver, potentially.
We do not comment on how we calculate the alloy surcharge. That is something that we do internally on the basis of our processes and our consumption of various materials. And giving a lot of insight in that is something that competitively I would rather not do.
Okay. Thank you very much.
No problem.
Thank you. Now we take our next question from Michael Shillaker from Credit Suisse. Please go ahead, your line is now open.
Yeah, thanks very much for taking my questions. I've got three questions also, if I may. Just the first question, Roeland, if you could give us a sort of update on your view of where you are with the Calvert ramp up and the cost down that I think you've been talking about. Because the U.S. market is now, I think, in pretty good shape cyclically. Utilization rates in the Americas look relatively healthy. Yet, of course, I think the underlying EBIT is still pretty far away from where you would want it to be. If you could talk us through a little bit about ongoing plans to improve that profitability regardless of the cycle in the Americas.
Second question on Long Products. It just seems a persistent nothing business, really. It doesn't really help you, it doesn't really hurt you. I just wondered if there is a slightly longer-term strategic goal for this business, whether you could detach it comfortably from the rest of the group, whether there is actually any synergy having that business within the group, or whether you have got a slightly more aggressive restructuring plan, and whether it is even worth it given the size of the business and the management time that that would actually likely take.
Then the third question is just on the U.S. market. Obviously, we have heard from you and many of your peers about the weakness of the U.S. market in Q4. It does feel as though maybe it is a little bit more than seasonal weakness going on right now. Have you got a view on that? Is there some kind of buyer strike going on because it does not look like full-blown de-stock given that inventory is relatively low? Do you feel that the U.S. elections have come into play a little bit in terms of making people stand off until the result is known? Or do you see any signs of real underlying demand weakness?
I think Seth talked about apparent, but do you see any signs of real underlying demand weakness causing the weakness in volume in the U.S.? Given that you are actually, I think, bucking the trend and doing a stable Q4 versus Q3 versus most of your peers who are doing weaker, can you give us a sense, I know you talked about ferrochrome, why that is flat Q-on-Q, but can you give us a sense, in the stainless business, as to how much of your stability Q-on-Q is price versus bottom-up cost reductions and the restructuring measures that you have taken in the quarter? Thanks a lot.
Okay. Thanks for the question, Michael. On Calvert. We have, and I think this is important to note. In Q2, on variable costs, we had dropped 14% out of our conversion cost. If you look at the Q4 last year to now, we get close to about 30% we have taken out of the cost base. We are definitely not at the end of that process. If you look at how we operated that facility, we started it up, and then we had this major breakdown, and then we struggled to get volumes back during 2015. The facility has never been really tested and has never been run the way it can be run. What we see now with the group of new management and specialists we got in, plus the increased utilization of the plant, is we start to learn how to drive it.
It is almost like if for the first time you sit behind the wheel of a Formula One car, you go around the circuit extremely slowly because you have no clue what is happening. It is not that bad, I have to admit immediately, but we are learning. It is a fantastic machine, with tremendous capabilities. We are churning out more and more efficiencies as we go. There is a lot to go on the cost side. Commercially, prices have improved, but as we said, and as you see from the CRU numbers, of $240 of price increases, up to now recordable in CRU numbers, is about $120. Because we talked about this before, the role and the role of new contracts, and when were they adopted. Even on pricing, I would not be, at this moment, too concerned that this is it.
Apart from any other price increases that the market as a whole might have in it for itself. Then commercially, we have always said, given the fact that we are penetrating the market, and that we are still in this sort of newness with our customers, the full real commercial ramp-up, and it is not just volume, it is much more, in which segment you play, how much goes straight through distribution, or how much do you do direct with the end customers, how much bill of material do you have within your portfolio. All that we think we will not reach until 2018, when we can really say it is a mature mill. All in all, still tremendous upside on all the levers that we have. Long Products. It is a question I have had a lot, and I understand why.
Having said that, our Long Products division has a very strategic position within the group. First of all, it gives us broader portfolio that we can offer to our customers. There are quite a few customers that like the one-stop shop. It allows us to, when we get into the customer, to actually have more associated sales going with it. There is a clear spin-off. Profitability this year has not been brilliant, but then again, it is very much linked to oil and gas. If you go into the past, you will see that there have been much better numbers and numbers that are actually significant. There is no reason to believe that we will not get back there.
Last but not least, the facility at Sheffield as well costs slabs for the system, which especially in our quarto plate activities we are using. It is an integral part of our company and our strategy, and we are not thinking about divesting or anything else. Then the U.S. market, more than seasonal, I do not think so. What we hear from our customers going into 2017, clearly to me shows that there is no letup, there is no slowdown. It is literally seasonal end of year. I have no evidence whatsoever. On the contrary, I have more evidence that it is seasonal than anything else.
Okay. Very clear answers. Thanks a lot, and well done.
All right. Thanks, bye.
Thank you. Now we will take our next question from Bastian Synagowitz from Deutsche Bank. Please go ahead, your line is now open.
Yes, good afternoon, gentlemen. I have got three questions, please. Firstly, could you please give us just any guidance on how much the impact from the ferrochrome smelter maintenance has been in the third quarter? Is it fair to assume it has been somewhere between the EUR -10 million to EUR -15 million range? Also looking into the fourth quarter, why is the negative impact actually getting even larger? Because if prices are improving, and the contribution from the chrome remains just flat, it suggests that there must be another incremental EUR -15 million to EUR -20 million in the fourth quarter, which I do not really get my head around.
Secondly, I noted that your EUR 110 million underlying EBITDA included a positive one-off item of EUR 22 million. Could you please give us some more color on the nature of this effect? Have you had any cash out related to this as well? I think that has been related to the acquisition of one service center. Lastly, I am curious on whether you see just any risk to the guidance for flat European shipments in the fourth quarter, given that there is obviously plenty of economic uncertainty around. Thank you.
Okay. I'll take question one, two, and four, and let Chris do number three. We do not guide on individual parts of the business. The exact impact, I'm not going to spell out. We have said we have a 30% drop in production in Q3. Again, we have already said some time ago what price differences mean. You should be able to calculate back more or less accurately what that would mean on a volume drop. On the fourth quarter, to try to help you get your head around, there's generally speaking, a difference between production and deliverance. We knew we were going into maintenance in Q3, so we have been building up the inventory to handle that. As a result, even when we were in September out and had no production, partially we could offset that with deliveries out of inventory.
Now, the whole thinking was then, of course, in October, you are full back up, and then you get enough new supply into inventory to actually ramp up your deliveries. What happened is that we were at best at about 50% of capacity in October. We had depleted the inventory buildup for the maintenance, and as a result, we are now just short material for shipment. That is why you actually get lower shipments in Q4 than in Q3. Those are then mitigated by the increase in price. It's actually flat. It's not lower. Then, the last one, risk to the guidance. No. Don't see it. As I said, we are booking already into Q1, so we know our volumes in Q4. We know the prices in Q4. Chris?
Yeah, let me give you the story on the Hernandez acquisition. What happened here was that we had roughly a 33% stake in Hernandez, and in 2015, we had severe doubts around the receivable that we had against them and took a provision of EUR 10 million against that. There were further receivables that were due in 2016, and we took another EUR 12 million of a bad debt risk provision in March. In total, by the end of March, we'd taken EUR 22 million of bad debt provisions against receivables from Hernandez. We felt it was in our interest to acquire Hernandez during the quarter. The result of that acquisition was that the bad debt provision, EUR 22 million, could be reversed. That was a EUR 22 million reversal, which you see coming through as a benefit to SG&A costs.
Consequently, it moves up our underlying EBITDA by EUR 22 million. Now that, of course, on a year-to-date basis, because of the EUR 12 million that we took in March, it flatters our year-to-date result only by EUR 10 million, but the quarterly result is indeed EUR 22 million better than it should have been. Now, when you go to the next line down to EBIT, the result of this acquisition was that we also took the goodwill against that and had to impair it, and that impairment charge was also about EUR 22 million. If you net off the two, the impact on the EBIT was actually zero.
There's a EUR 22 million one-off benefit in the EBITDA, which would have been EUR 88 million otherwise. There is a zero impact on our EBIT as a result of that. Year-to-date, the positive impact comes out at only EUR +10 million.
Understood.
At the EBITDA level.
But then just to follow up briefly here, has there been any cash out for the acquisition? I would presume that no. Then just coming briefly back on ferrochrome as well, could you just share with us whether we can expect that the full situation around ferrochrome will have reversed in the first quarter? I would presume so, but just confirm that the first quarter will be clean, and we will also obviously get the full price benefit, depending obviously on how chrome prices will move for the first quarter settlement. Thank you.
I think we are[crosstalk].
Nothing operational. Operationally, as I said earlier, we are at full 100%, and we will be in Q4, and we should be as well in Q1 if nothing unforeseen happens. But everything is running fine.
In response to your first question, was there any cash out? There was a very small amount for the purposes of our accounts, de minimis, that we paid for it.
Okay, very clear. Thank you.
Thank you. Now we will take our next question from Carsten Riek from UBS. Please go ahead, your line is now open.
Thank you very much. Most of my questions have been answered. One left on your short-term actions. You had on your agenda to free cash of around EUR 200 million from net working capital. It looks like you have achieved this target already in the first nine months. Is there anything left which you could still further push down net working capital, or do you think is as good as it is right now? Thank you.
If you separate out from the financials, the true working capital release, and we consider for this purpose only trade receivables, trade payables, and inventory. The actual release year-to-date has been EUR 149 million. It is almost exactly pro rata on track for the EUR 200 million that we set ourselves. We still have a way to go during the last part of the year, working very hard on achieving that. Clearly, we always said it was on the assumption that ceteris paribus, so that pricing and so on would remain at approximately the level of the year beginning.
We have had a little bit of headwind on this because prices have moved up a bit since the beginning of the year, but we are still working very hard on achieving that EUR 200 million. I would say we cannot declare victory on it yet. We still have a way to go, and we are very clear on what we need to do in all areas of our working capital to achieve that target. But we are not there yet.
Okay. Thank you. Maybe one other question on the base price levels, because you mentioned the market is currently quite good with regard to demand. Is there enough strength in the market to push through further base price increases in the fourth quarter? Or would you wait and see until the first quarter?
As I said, the fourth quarter basically is booked. We will have, in Europe, a price increase, which is comparable to what you saw in Q3. In the U.S., you will see as well that there is an increase, not in the same level as Q3 or Q2, but there is a continuation. Going forward, yes, we see strength. We see possibilities to further recover the lost territory that we have suffered during the import booms from China, both in Europe and in the U.S. I will not comment on what we see as possible, just out of commercial reasons.
Okay, perfect. Thank you very much.
Thank you. As a reminder, star two to remove yourself from the queue. We take our next question from Johannes Grasberger from Nordea. Please go ahead, your line is now open.
Hi, gentlemen, it is Johannes from Nordea. My questions are as follows. First of all, on Americas, I honestly think the cost base still looks pretty stretched. Can you talk anything more on that front? What is or what are the cost lines in America?
Johannes, before you go on, what do you mean the cost lines look pretty stretched?
I just kind of seen that the base prices are going up. You have very high volumes, and still, I would have expected a stronger result from Americas. I am just thinking here that, are there specific cost lines that are still too high for the operations, and what is being done to change it? Maybe if you take that on the first one, yeah.
I can. As I said, we took 14% out in Q2. Compared to Q4 last year, we are close to 30% that we took out on a converted cost per ton basis. There is more to go. As I am sure you know that. It is the dynamics that are important more than the momentum. If you look at dynamics, you see the improvement from Q1 results to now, and there you can see that, yes, the volume had an impact, and price had some of an impact. But if you take those out, you see that there is a very large cost element in there that carries probably the biggest part of the improvement. That is what is still progressing and where we still see upside potential.
If you would, I am just continuing on that one. If we take price and volumes at lower variable costs and compare third quarter EBITDA to first quarter, what would you say has had the biggest leverage on the profitability year to date?
I do not have that at hand. But again, as I said, 30% of cost, I would definitely go at the biggest impact, especially because there was no impact of price in Q1. There was a limited impact in Q2. I would still say that the biggest impact is the cost side, by far.
Okay. All right. On ferrochrome, I am just curious if there is somehow a double negative hit in Q4, so to speak, because I am trying to understand here that, okay, you have this kind of slowdown in the ramp-up of ferrochrome capacity. Are you forced to buy some ferrochrome from the market at the steel mills, and at the same time losing some production? Or it is just a shortfall of deliveries?
We are not forced to buy from the market. As it happens, we do buy some. This is a logistics play, where we sell some to the third-party market because of the logistics being positive. Then in another location in the world, we buy the chrome locally, so we save the freight. But we are not short chrome for our system.
Okay. In the earlier part of this call, did you mention or, if not, could you mention us the sensitivity of the ferrochrome operations for a $0.05 or $0.10 move in the ferrochrome price? At least if we look at the annual report from 2007, for example, we had the sensitivity of EUR 10 million on EBIT from a $0.05 move, and now the capacity is obviously double. Are we talking about a $0.05 move in the ferrochrome price, EUR 20 million on EBIT sensitivity?
Per year or per quarter?
Annualized.
What we said in Q2, and I am sticking to it, is we had a drop then from $0.96 a pound to $0.82 a pound, and we said it has an impact of, depending on the dollar move, between EUR 15 million and EUR 20 million for the quarter. That is still that.
That matches. Yeah, that matches pretty much the $0.05 to EUR 20 million annualized then. All right. I have got one more question to go before I have got a couple of cash flow related questions. Just the utilization rate at Long Products mills. Okay, you mentioned the oil market, and is that the only driver for improved demand, or can you ramp up volumes in the current market environment, or do you really need just higher oil prices to see stronger demand there?
I do not think we need higher oil prices. We have already seen that even at-- It is the stability that you need. With the oil prices stabilizing around $50 a barrel, we have already seen that the rig count in the U.S. is starting to go up significantly. It is the shock of the drop that had many operators stop drilling and actually not invest in further capacity because it was ugly where it was going. As we are now back at $50, you see that rig count is coming up because people can make it work financially and economically at this level. We see a rebound in our customer base that will have a positive effect over time on our deliveries.
Okay, and then my final questions on cash flow. Just the third quarter, other non-cash adjustments were EUR -20 million, which has been normally a positive figure. Any comments on that? Then the second question on Shanghai. Have we now seen all of the proceeds by the third quarter? Is there still something coming in in the fourth quarter? And the final question on cash flow is on working capital and the EUR 50 million cash flow boost from that the guidance implies for the fourth quarter. Where is that really coming from? Is it just selling down the inventory at the same time when the European steel mills are going under maintenance? And how does that play with the increase in ferrochrome price and the ramp-up in that segment? Does it make this working capital guidance more difficult to achieve?
On the cash flow, the non-cash items adjustment I think you are referring to is that clearly the one-off impact of the Hernandez acquisition, as I mentioned earlier on, you have to back up was an item in EBITDA which was non-cash relevant. That is something that accounts for most of the adjustment there. The second piece is we are substantially done with the receipts from Shanghai. There is a small amount left to go, but we do not expect it to be that much more. But there is a little bit more to come. It is going to be a smaller amount in the fourth quarter.
The cash flow guidance that we see is going to be driven by, on the one hand, the improved EBITDA that we see coming through, and on the other hand, also obviously, the working capital. It is a combination of the two. You have also got to bear in mind that we have some CapEx outflows as well in the quarter.
Okay. Thank you. That is all for me.
Thank you. Now we take our next question from Johannes Grunselius from Handelsbanken. Please go ahead. Your line is now open.
Yes. Hello, everyone. This is Johannes from Handelsbanken. My first question is on your own cost actions and short-term actions. You have the guidance, obviously, or target to reduce SG&A of EUR 100 million. I think the target is that you will achieve this by the end of 2017. Have you started to see any impact of this so far? If so, could you give us a ballpark number of what you have achieved so far on this one, please?
Yeah. The answer is yes, we have seen significant impact already. Recall that we said on a run rate basis of EUR 100 million end of 2017. We do not at this stage expect to see the full EUR 100 million out for the year 2017, but for the run rate to be EUR 100 million. If you look at our 2015 financial statements, and subsequent reclassifications that we have made, then the starting point for SG&A costs is around EUR 400 million a year. If you look at our SG&A costs in the year to date in the third quarter, we are currently running at 270-ish.
The third quarter did have the positive impact of the Hernandez acquisition. Even if you extrapolate going forward, the activities that we have already implemented, adjust for some one-off items such as the restructuring charges, which are in Q2, it is clear that the SG&A costs are already going to be significantly lower in 2016 than they were in 2015.
Yeah. How should we be thinking of this in the next few quarters? Will it be a linear trend here where you will achieve lower SG&A, or is it any big changes in the coming quarters, if you can say anything about that?
Yeah. It is never precisely linear. That would unfortunately be a bit too easy because you have always got certain cost items that are lumpy, that are not. Your SG&A cost is not exactly the same every month and every quarter. There are one-off charges that fall into it, and the cost savings, you stop certain costs at certain times, and you do not release, for example, one person per day, but all groups of people at certain periods of time. It will be a little bit lumpy, but the trend you will see will be down to the cost at that level by the end of 2017.
Okay. Then I have also a question on your new long-term financial targets that you set in April. The market conditions were different with lower base prices in Europe, lower ferrochrome prices and so forth. Are you looking into maybe revising up the targets because of better markets now than half a year ago?
I had expected that question at some stage. The answer is no, because if we want to know one thing for certain is that prices can go up as well as down.
Yep.
Then to sit in 2016 and say, "Well, what we see now happening in 2016, 2017, let us take that and extrapolate that to 2020," goes too far for my taste. More importantly, Johannes, we have always said we do not want to get distracted by moves in pricing.
Yep.
This is a self-help story. If you get some help, fine. If you get some headwind, that is fine. We have to make this without any of these issues. We concentrate just on our initiatives and make sure that we deliver them, and that is where our head is at.
Yes. What you are basically saying then is that those target relies on market assumptions which are far more negative than what we currently see?
Well, yeah, if you go back, we have said that we do not take into account any significant improvement in market circumstances. Although we take some inflationary price increases, as well as a slight uptick in nickel, which is basically where we are today.
Okay, fair enough. Yeah, thanks. I have also a final question, and maybe you touched upon this already, but I was off the call for a few minutes, but I was thinking about your thoughts on prices in Europe for next year. Have you any idea? Your competitor were out a few days ago and talked about EUR 50 in the markets where they have a very strong market share. In other words, it was Acerinox, obviously. They talked about EUR 50 in Spain, Portugal by the beginning of next year to implement that price hike. What is your thinking about price hikes for next year for continental Europe?
Those markets are typically not markets that we are active in. As I said earlier, we do see a healthy market. Of course, if we see an opportunity to move pricing, we will. We will not take our foot off the accelerator in that sense.
Okay. Thank you very much for answering my question. Thanks.
Thank you.
Thank you.
And now we will take our next question from Luc Pez from Exane BNP Paribas. Please go ahead. Your line is now open.
Hi, gentlemen. I have two follow-ups, even though most of my question have been answered already. Could you allow me to understand better the dynamics behind the lack of restatement to the Europe underlying EBITDA and EBIT, where you are mentioning the impacts, be it the write-downs. I understand that this is fully being offset at the EBIT level, but wouldn't it be clearer to put one-offs as one-offs and clean as clean? That would be my first question.
The second one is a follow-up on the U.S. pricing. As I understand, you are pointing to healthy demand conditions, steady import pressure, but price are not moving. What is the reason for that? Despite everybody seemingly pushing on the prices, and Acerinox also pointing to the fact that prices are not moving, is it because you are afraid of facing more import pressure if you raise too hard the prices? Is it because you are pushing too hard on the volumes, or others do? Thank you. If you can clarify.
Chris, you are covering the first part.
I do have to ask, I am sorry, I did not quite understand the question on the first piece. When you say the adjustments in Europe, are you talking about the EUR 6 million adjustments, or which adjustments are you talking about here?
No, I am talking to the adjustments which are not done on the underlying numbers, which are the EUR +22 million on the underlying EBITDA and the EUR -21 million on the write-downs. Why are these not restated properly in your underlying figures? Because these are one-offs and accounting effects, which everybody can understand, of course, but which are not stated as one-offs properly.
Okay. The reason that we did not take them on the EBITDA was that the provisions that we booked in the past were actually taken against regular income as well. By releasing those provisions, we felt that we should take them against ongoing EBITDA, so regular business rather than a one-off, because otherwise we would have a mismatch year to date. Not having classified them as NRIs in the past, we felt we should not classify the benefits either. That is the one piece.
Then on the impairment charges, pretty much the same thing. It is an impairment charge below the line. It is an impairment, and impairments are, by nature, one-offs. We did not adjust that on the EBIT.
Okay. Do you know if there is any one-offs we could expect on the Q4, maybe before you move to the U.S. pricing question?
We are not expecting anything very significant at this stage, no.
Thank you.
Right. The pricing, again, it all depends on from which vantage point you look at it. Just to give you an example, you see that CRU is reporting a $120 increase in base prices in the course of this year. It is information they are getting by basically calling distributors and similar customers, and trying to get a feel of what is the transaction price. If you look at our books, we are closer to $150, so we are already off remark of what CRU says. Then you look at the headline numbers, where there has been a total of $240 a ton of increase announcements, and you have a third number. I assume that Acerinox will have a fourth number to that.
Contracts are constituted. When did you actually cut into? I will give you a little bit of insight in how we got to our number. Already when we talked in Q2, we said, "Well, we don't have the full impact in there because we have annual contracts that are not reacting to any price changes." You have semi-annual contracts that are not yet in your Q2. The only thing that cuts in there are basically your Q1 roll-offs and your spot. If you then go to Q3, again, still your annual contracts are not moved by the pricing. We actually had in June, so before the effective date of some of the increases, we had a number of new semi-annual contracts. They are not impacted.
You have to look at the mix of your contracts and when they were entered into, at what price level, in order to get an idea of what actually the effective base price is.
Thank you.
Welcome.
Thank you. Now we'll take our next question from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead. Your line is now open.
Thank you. Just wanted to hear if you get any comment on the potential shipment volumes in the U.S. in Q4. You're up at 180,000 tons now. You were at 160,000 in the beginning of the year. Will you fall back to that level in Q4? Looking into 2017, will you then get back to 180,000 per ton and above? Can you give any comment on that?
You are referring it to the U.S.?
Yeah, U.S.[crosstalk].
Again, we do not give exact numbers in our guidance. We give company overall numbers. But it is the December effect. You have in the U.S., basically, from the moment of Thanksgiving all the way up to New Year, activity goes down. Quite a few of the business actually closed down for the last two weeks of the year. But the most important thing is the polishing up of the balance sheet of specifically the distribution sector. I would say if you look at the past five years, and you look at December versus October, November, you will see that there is a significant drop-off in volumes in the U.S., and this year will not be different.
Okay. It is no percentage number. Significant, is that above 10% or is it below 10%?
Again, I am not going to comment on our numbers because that is competitive information. To get a feel, do a regression analysis on the last five years, and I think you get very close.
Okay. Thank you. On E.U. shipments, they were quite strong this year. You did mention that you did not do any maintenance, but on the demand side, what were you seeing especially good that was able to achieve this higher than usual shipment in Q3?
I think the big success that we are having is that after having proven to be an unreliable partner in 2014 and 2015, we, as from the middle of 2015, have regained the confidence of the market. We have been exemplary in our delivery performance. We have been exemplary in our quality. Feedback, and I was there not so long ago, and did a two-week trip past all the customers. The feedback from the customers was agile, nimble, good to deal with. We really have put ourselves on the map, and you see that back in the volumes. It is nothing other than that.
Okay, thanks. You mentioned that you are pretty much fully booked, I think you said, for Q4. Can you say what are the lead times in E.U. orders today?
In Europe, we are booking currently into February. Not for all territories. There are some niches of smaller markets where we are still in January, but for the large markets, we are all into February. Then in the U.S., we are starting to book into January.
Okay. On imports in U.S., they seem to have picked up a bit, as you indicated in your presentation, and even more maybe after that. Do you see any impact of this? You still seem quite positive on the U.S. market. So you do not think that imports will come back to above normal level again?
If you look at it, actually the import share is still pretty decent at 23% of the month. I think that will probably remain. It is a good market. It is a healthy market. Do not forget that as local producers, we do not only ship to local market, we export as well quite a bit. You will always have that sort of trade-off between imports and exports. More important is these are imports at market prices. These are sensible market players that are importing their materials into the market.
Okay. You do not see any risk of these new imports pushing down prices. They are rather being done at the same prices as are in the U.S.
Don't forget, if you export from Europe to U.S., your cost base is not very different, and you have logistics parts as well. There's not a lot of chance you have to start pushing prices.
Okay. Great. Thank you very much.
You're welcome. Thanks.
Thank you. As a reminder, star one to ask a question. There are no further questions over the phone at this time, so I would like to turn the call back to Tommi Järvenpää for any additional or closing remarks.
Thank you very much for your attention and active participation. Outokumpu's fourth quarter and full year 2016 results will be published on February 2nd. Until then, thank you and goodbye.