Good day, ladies and gentlemen, and welcome to the interim report second quarter 2016 conference call. For your information, today's conference is being recorded. At this time, I would like to turn 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 second 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, our new CFO, Chris de la Camp, who joined the company in the beginning of July. 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 CEO Roeland Baan. Roeland, please go ahead.
Thank you, Tommi. Thank you for joining us. I am pleased to start the presentation on our Q2 results. I will address some of the more general issues and at the end, our forecast for Q3. When we get to the more deeper financials, Chris will have his baptism by fire on the results. If we can, in the statement we talked about, just bring to mind again our vision, which is to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. I will come back to that, and talk a little bit about the progress we have made on the action points that we have underlying this vision. First, turn to the next page. I am pleased to say that we are clearly gaining momentum in Q2.
I said in the last webcast that if you look over the last few quarters, we have had operational improvements in both volumes and financial performance. That actually has accelerated into the second quarter. Just to mention a few of the highlights. First of all, of course, our EUR 5 million EBIT, underlying EBIT, which is a clear improvement over the first quarter of this year. This is mainly driven by, I would say, internal operational performance. Start with the record high deliveries in the Americas, which is a reflection of the increased trust that our customers have in our delivery performance and our quality. From a financial point of view as well, we had great strides in reducing costs. In Europe, as you know, we have the continued E100 cost savings program, which is still on track.
Another of our main drivers, net working capital, we have been able to further release working capital, resulting into further positive cash flow and reduction of net debt. On the flip side of the coin, as we already guided in Q1, the ferrochrome prices for Q2 were significantly lower, impacting the profitability in Europe. We had slightly lower, on a Q-on-Q basis, slightly lower deliveries in Europe. I will get to more detail. Get to the next slide. Just to set it into the more macro picture. The expected demand growth for 2016 in the stainless market, according to SMR, is estimated to be around 1%, so fairly flat with some fluctuations. The Americas are expected to contract by about 3%, Europe about flat, and the main growth will be in APAC. If you look at the apparent demand, though, these figures are slightly different.
We do see a reflection of the flat numbers in Europe. But in the U.S., we see on the apparent demand, a slight increase over last year. Moving to the next page, where we can see that the stability that came into the European market after the anti-dumping measures were announced in 2014. That stability in the market is continuing. Prices were very stable, and same level as in Q1, whereas imports have further reduced to a level of 21% now. As well, what you see is that the Chinese imports are still a very small part of the total import penetration. We see a reduction in import from what we call rest of the world, which is mainly South Africa and India. Go to the Americas.
You are all aware of the increase that we have announced, price increase we have announced in already January, followed by a few more. We always said this will take time to work its way through, and you can see that in the numbers. But the good news is that we see an increase of around $50 Q-on-Q. If you look at the import side, fairly unchanged Q-on-Q. The only change is slightly lower imports from China. The rest is basically stable. With the announcement of the preliminary duties, we expect that these Chinese imports will actually diminish going forward. Before we get to the financials, just the last one is on nickel price. It stays pretty volatile. However, I think that we see a bottoming out of that nickel price. We have been trading between the $8 ,000 And the 9,000 range for a while.
We are now breaking out of that on healthy demand for nickel and melt base in China. Currently, we are trading as high as about $10,500 on the basis of the noises from the Philippines. But for the quarter, we have been trading at around $9,5 00. Again, as I said, it looks like we have more or less bottomed out. You see that reflected in the transaction prices with the base price increases in the U.S., stability in Europe, and the improvement in nickel prices. The transaction prices have turned and are pointing upwards. So all in all, the environment is still not overly exciting in the sense of great activity. But relatively solid with some good pointers. With that, Chris, I would like to hand over to you.
Okay. Well, thank you, Roeland, and good afternoon and good morning, ladies and gentlemen. I am very happy to be here at a time of significant change to Outokumpu and giving my first investor presentation on our Q2 interim results. Please look at slide number 10. I point you to some of our key financials there. As Roeland has already mentioned, Q2 was a quarter where we had significant improvement in our deliveries, 19,000 tons more than in Q1. That was driven by a very strong performance out of the Americas and out of our long products business area, to some extent, set off a little bit by weaker delivery performance in Europe. If you then look at the sales, that also explains why we saw a very small drop of around 0.5% in our sales levels in the second quarter. But overall, the effects were very positive.
As you can see on this chart, our underlying EBIT improved from a result of EUR-20 million in the first quarter to a result of EUR-5 million in the second quarter of this year. Going down the chart a little further, you can see that operating cash was also positive for the second quarter in a row. After a negative result in 2015, we have now delivered nearly EUR 130 million in the first half of this year in operating cash. That is obviously good progress there. That has also led to us being able to reduce our net debt a little further. It has now come down EUR 66 million further between the two quarters. That is quite a bit more if you look at the progress since the beginning of this year.
Net debt reduction, which is obviously one of our key priorities as well, is on the right track here. If we then look at the personnel, you can see that it has also reduced somewhat. It has come down a little bit further, and that is reflective of the ongoing efficiency and cost improvement measures that Roeland has already talked about. I would like to move on to slide number 11 and delve a little bit more closely into our European performance. Here you can see that our profitability in the second quarter was actually down on the profitability in the first quarter. We saw deliveries fall by 8,000 tons from 421,000 tons to 413,000 tons. That had an impact, amongst other things, on our quarterly EBIT, which fell by EUR 30 million to EUR 29 million.
That result was driven partly by lower deliveries, but also by lower ferrochrome prices and also somewhat higher raw material prices. However, offsetting some of that were ongoing cost measures that we continue to deliver, as outlined by Roeland earlier. Our restructuring program delivered for EUR 15 million quarter-on-quarter. The market remains relatively healthy in Europe, although we are seeing some uncertainties in the general investment climate impacting our plate products, which are now part of this business area. Base prices remained flat during the quarter, and ferrochrome production was solid at 135,000 tons during the quarter. We did make some adjustments to our reported results, most prominently EUR 29 million of redundancy costs resulting from the SG&A cost reduction measures that were announced previously. We also had a EUR 7 million positive impact from raw material-related inventory and net derivative gains and losses.
Moving on to the Americas. Here, the story is extremely positive for the second quarter. We achieved record high deliveries and further improved the efficiency. If you look at the chart on the left-hand side on slide number 12, you will see that we saw a jump in our deliveries from 161,000 tons to 177,000 tons. Nearly 10% improvement there. For the first time, a really significant improvement in our underlying EBIT, which historically has been bouncing around between EUR-40 million and EUR-50 million, actually improved to EUR-24 million during the quarter. This was due not just to the improved deliveries, but also to significant cost reductions, particularly in the variable area. We achieved a 14% improvement, but we also saw apparent consumption grow a little bit by 2.1%. We also have positive market effects beginning to come through from the anti-dumping investigation, which curbed dumping from particularly Chinese imports.
We are beginning to see an initial restocking by some of our distributors and announced further price increases during the quarter. The overall base price in deliveries was up by $70 a ton versus the first quarter, so that also contributed. In terms of the adjustments we made to underlying EBIT from our reported EBIT, these are somewhat smaller than in Europe, and there was a EUR 2 million provision for redundancy costs, again, related to SG&A, the SG&A reduction program. A small adjustment to insurance payments we were expecting. Timing issues or timing effect of EUR 8 million was the total impact of timing inventory-related valuation and derivatives. Finally moving to our third business area, the long products business. Again, this showed improvements, although the earnings were impacted by some derivative losses, which are included here.
You can see on the left-hand side that there was very strong improvement in deliveries of 40% from 50,000 tons- 70,000 tons. The financial results improved a little bit from EUR-4 million to EUR-2 million. We saw growing demand across all of our markets in Europe, although the activities in the oil and gas sector, into which some of these products go, remain somewhat subdued. Base prices remained at quarter one levels in both the Americas and in Europe. We sell these products in both regions. Overall order intake improved during the quarter. There were smaller adjustments of EUR 1 million to the reported EBITDA to provide for redundancy costs, again related to the SG&A cost reduction program, but no adjustments here to raw material timing effects or hedges. There is one item that did flow into these results, which pushed it below the waterline, if you like.
We did hedge in the U.K. as the impact of sterling and the decision for Brexit did impact sterling negatively, so we took a loss in our hedge there, EUR 2 million. But we are expecting to see that recover and come back to the results over the next two quarters. Without that, the results in long products would also have been positive. We then move to slide number 14, to the positive operating cash flow. You can see here on the left-hand side that the cash from operating activities, as I mentioned before, was again positive. A little bit lower than in Q1 where we had very strong positive impacts from working capital reductions. Those were smaller in the second quarter.
The cash impact of the investments was broadly on a little higher than in the first quarter, which led us to a cash flow of EUR 32 million before financing activities, but after investment activities. Cash in the bank and cash equivalents remains very robust at EUR 156 million, down slightly versus the first quarter, but we used the cash to further reduce our net debt, as I mentioned earlier. Net working capital efforts continue to be broadly on track. We have now released EUR 117 million during the first half of the year. Our liquidity reserves are also very adequate at just over EUR 800 million. Move to the next slide number 15. You can see here, on the left-hand side, the evolution of our net debt. It obviously has come down significantly over the last few years, and the improvements continue, albeit at a slower rate.
You can see that we are continuing to push the net debt levels down. However, this is not reflected in the gearing, which remained broadly the same at 69%, and that is as a result of a reduction in equity as well. The equity reduction came as we are still at a net income level, making losses. There were currency translation effects from the devaluation of sterling and some pension valuation effect as well. On the right-hand side, you can see our debt maturity profile over the next five years. I think the key point to note here is that during the second quarter, we issued a EUR 250 million senior secured bond with a coupon of 7.25%, which matures in 2021. We also extended a Finnish pension loan for around EUR 37 million during the quarter.
Looking at the maturity profile going forward, you can see that in 2016 now, we still have just over EUR 250 million there, but that is actually all commercial paper, so it rolls. This will not be a cash out effect in this year, and does not need major addressing during 2016. Looking ahead into 2017, here we see approximately EUR 400 million, although some of that is unutilized facilities. In terms of the remainder, it is a combination of mainly bilateral loans, some leasing obligations, and a smaller amount of commercial paper that we need to address during the course of this year, early next year. Then we have a relatively low maturity profile for 2018, and then start addressing the bigger profile maturities in 2019. With that, I am going to hand back to Roeland to discuss some further market developments and progress on our vision.
Thank you, Chris. Go to page 16. Again, just to put things into perspective. Taking the cue from SMR, we see that as far as real demand is concerned, there is a typical Q3 dip, both in Europe as well as in the Americas. It is seen as about a 5% reduction in Europe and a 4% reduction in the Americas. However, if you then go to the next page, what we see is that the stock levels with distributors in Europe are about historical levels. In the Americas, they are still below historical levels. The underlying demand in the key sectors, and especially as well as for automotive, and industrial, and consumer goods, is expected to stay pretty healthy, as will distributors demand. In the Americas, we see that price increases are gaining traction. We already alluded to that.
We got the anti-dumping ruling, which is expected to curb unfair competition. We do expect that there will be less imports coming into that market. Putting all these things together, we guide for delivery volumes into Q3 to be sequentially flat, where meanwhile the pace of our efficiency improvements will continue, and the group's EBIT will turn positive. I think it is for the second time since the merger with Inoxum. So pretty big milestone, but as well, not something that is a one-off. It is clearly in the dynamics and the range of what we have been doing and where we are going. I know that there has been a lot to do about the ferrochrome prices that went down significantly in Q2 and now went back up significantly.
I do have to warn that we are undertaking some maintenance on our largest furnace in our ferrochrome operations, which will reduce the volume by about 30%, which will partially offset positive effect from the pricing. With that, to the next slide. Again, when we announced our new vision, we with that as well announced a number of must-win battles and long-term targets, as well as shorter term targets. If I just very shortly go past the must-win battles. Safety, we set ourselves for this year an improvement target measured in terms of Recordable incidents on an improvement target of 25%. We are running, at the moment, better than that. So we are making good progress on our safety promise. Although that is just the first step in getting where we ultimately want to go. The high-performing organization, we implemented the new organization as from the 1st of June.
We have concluded consultations in Finland and Sweden. We are still in consultations in Germany, expected to conclude that in August. In the meantime, the organization, as we said, where we went from the multitude of profit centers to basically a functional organization with three clear functions, has been implemented and is working well. Especially, and that is the third basement level, if you look at the world-class supply chain, where we have made great progress, which you can see back into specifically the progress we made on working capital improvement, which is now in the hands of our supply chain. Manufacturing excellence, already mentioned in the U.S., we have made an improvement of 14% in our variable conversion cost per ton. In Europe, although not as spectacular as in the U.S., we have achieved about 3.5% as well on the variable conversion cost. So making.
The turnaround of Americas, I think, the momentum over the last four or five quarters is very, very clear and continuing. On the portfolio side, Chris already alluded to it, we concluded the SKS divestment and got some of the cash in Q2 already, and more to come in Q3 and Q4. Then we sold off a service center in China towards the goal of getting our portfolio to where we want it. All this, of course, to support our financial targets. Just to put it back into the memory, for 2020, and we will not deviate from these targets, EBIT of EUR 500 million, return on capital employed of 12%, and gearing below 35%. If you look at the immediate actions, the next step, and I have basically talked about them to a large extent, the new organization set up is implemented and is functioning.
Our SG&A cost reduction of EUR 100 million is linked partially to the new organization, where we have the 600 reductions that we talked about, where we said we have concluded our negotiations in Finland and Sweden. We have implemented the reductions in the Americas, and basically, we will announce as well in August what is happening there. On top of that, if you look into the numbers that we have supplied, and you take the SG&A numbers for Q1 and Q2, corrected, for instance, the provision for redundancy, et cetera, we are currently running at a run rate that is below last year's run rate, even before the real SG&A program, the EUR 100 million, is in there. The non-staff related SG&A, we have already started to implement and see clear traction there as well.
Now last but not least, the net working capital reduction target of EUR 200 million, we realized EUR 170 million, so very well on track there, and well-positioned to get to our goal of EUR 1.2 billion by the end of 2017. With those remarks, I hand back to Tommi.
Thank you, Roeland. Operator, we are now ready for questions.
Thank you. Ladies and gentlemen, 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 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. Once again, please press star one to ask a question. Our first question today comes from Seth Rosenfeld of Jefferies. Please go ahead, Seth.
Good afternoon. Seth Rosenfeld at Jefferies. A couple questions starting on the U.S. business. After hitting record volumes in Q3, can you please speak a bit more about the status of the ramp-up of Calvert? Perhaps you can talk about what's driving that volume gain, be it share gain versus imports or versus some of your domestic peers, and how competitive you need to be on price in order to grow those volumes. Are you able to achieve the entirety of the price hikes being announced, or are there discounts being applied as we've seen in years past? Last, can you just confirm what the current utilization rates are of the U.S., both in terms of melt shop and the rolling lines? Thank you.
Okay. We have said always that from a commercial point of view, it will take till about 2018 at latest to really get the full traction on Calvert. We are doing extremely well at the moment. No, we're not discounting. We actually were the first ones to announce price increases. We have been leading, in that sense, the pack in driving for better pricing. Our volume gain is really on the back of the extremely good performance of the mill. Good delivery performance, very good quality. We haven't had a single claim. We have great confidence from our customers in this case. We, of course, have done significant restructuring of our sales force and the way our sales strategy is being executed with new leadership. That helps as well and is reflected in ultimately an increase in our market share.
Thank you. Can you confirm the utilization rate right now of both the melt shop and the rolling lines at Calvert?
No. As you know, we don't comment on individual clients and utilization rates.
Okay. Thank you very much.
You are welcome.
Thank you. Our next question comes from Philip Ngotho of ABN AMRO. Please go ahead.
Yeah, good afternoon. Thanks for taking my questions. First of all, on the guidance and especially on the volume guidance. As you indicate yourself, there is always a seasonal effect in Q3. So the fact that you are still guiding for flat volumes, can you indicate where you expect the majority of the compensating volumes to come from, division-wise, but also what the split is between restocking and winning market share, for example, in the U.S., given the anti-subsidy rulings that were implemented? Then the second question that I have is on the nickel price. We have seen a recovery of the nickel price recently, and I was just wondering, maybe it is a bit early days, but have you seen already in this month, July, have you already seen some restocking impact or also from the raw material supply that the nickel scrap supply market? Those are the questions for now.
Okay. As we guide with flat volumes Q-on-Q, part reason is that we do see continued demand and we have taken actions in Europe specifically, where we have moved our traditional summer shutdown for maintenance. We have moved that towards the end of the year, when normally that is traditionally, anyway, a bigger downturn in the market. The net effect is that we have freed up extra capacity for a market that is existing and available, and that we will now supply from our mills where in the past that was to a large extent taken up by imports. That is one part of the answer. The other part is on what you say, the restocking. We do see apparent demand being very healthy in the U.S.
We do not see the sort of increase that we saw from Q1- Q2, but we see healthy volumes going forward as apparent demand is slightly more of what we think will be the underlying demand. If you talk about the recovery of the nickel price, it is a very difficult question to answer. As I said, what we do know is that we ended the quarter at clearly better levels than we had for a while. You now see that on the back of the discussion about the nickel pig iron supplies from the mines, the ore supplies from the mines in the Philippines, that there is another uptick. We will have to see how that works out. In principle, this has no effect on the scrap market.
Okay. Thank you.
Thank you. We now move to Artem Beletski of SEB. Please go ahead.
Yeah, good afternoon. This is Artem Beletski from SEB. Actually, two questions from my side relating to Americas. The first one is relating to price situation, and maybe you could provide us with some kind of guidelines relating to base price trajectory, what we should be expecting for Q3, in light of the fact that it's a lot driven by contract structure, what you are having, and should we basically assume similar trend quarter-on-quarter, what we have seen, for example, in Q2. The other one is really relating to Americas capacity situation and the very good progress in terms of volumes, also in Q2. Could you maybe talk how much you would be able to increase volumes from current levels, so from Q2 levels, in order to hit basically full utilization rate in America?
I can't go into specifics on pricing. We have all in all, over the last five months, announced increases in steps amounting to a total of $280 a ton. We have seen that $70 of those have come in Q2, which is indeed a result of the contract structure, where the role of quarterly contracts start working through. We will have new quarterly contracts coming on stream in Q3, and we will have a roll-off of the half yearly contracts. As I said before, I cannot disclose what proportion of our business is in what kind of contract. This is sensitive, competitive information that I would like to keep for ourselves. It is very conceivable that you will see a further move up on the pricing, but I can't guide you on exactly what it's going to be.
Regarding capacity, we have clearly said what is the nameplate capacity on our mill, both on the melting side as well as on the finishing side. It indicates that there is still enough room and leeway to still improve.
Okay, great. Thank you.
Thank you. Our next question comes from Michael Shillaker of Credit Suisse. Please go ahead.
Yeah, thanks a lot. A number of questions, if I may. Firstly, just on the European market, it just seems flat as a pancake out there right now. The inventory is normal. Base prices have been stable for a long time. Imports are lower. All is positive, but none of this really seems to be indicative of driving any further momentum upwards in the European market. Very different to the U.S., which clearly went through a destocking, is now going through restocking. Can you sort of give us your vision for slightly longer than the next quarter in terms of how you think Europe pans out? Are we going to remain very flat, or do you think there is any impetus in there to get European volumes and also clearly base prices higher? Is question number one.
Question number two, very quick on admin, can you quantify the impact of the ferrochrome maintenance outage? 30% loss in volume is pretty significant in Q3, so could you quantify that? Then just on the Americas, looking at your numbers, you are doing around 700,000 tons now annualized out of 900,000 capacity. You are still losing an annualized around EUR 100 million of EBIT a year on that run rate. Can you ultimately get this asset up to, say, a NAS standard in terms of profitability? In doing so, can you help us at least build a bridge of how you get there in terms of how much of this should be price, how much of this should be volume, and how much of it is cost, so we can see in terms of your vision for what you really need to do on Calvert.
It is not obviously just volume, it is going to be a combination of things. So a little bit of help on that would be useful.
All right. A series of relevant but difficult questions. The European market. Yes, pretty flat. But at the same time, what we do see is that the lead time in our mills is increasing. We are now booking October, which is a big change from where we were earlier in the year or at the end of last year, when we were literally booking six weeks ahead. You see clearly in the underlying market you see improvement. At the same time, you have to realize as well that although we have some measures in place on the anti-dumping side there is as well, of course, a price in China local, and that will always work as a sort of virtual cap. Where it is and how to place is something that is part of speculation and individual calculation.
I would say we are happy with what is happening in Europe, and we think that in the current environment, we are capable of getting to a very decent profitability as we have shown. If you look at the impact of ferrochrome, we guided in Q1 what a EUR 0.10 change in pricing more or less would mean to the bottom line. We have guided that we will have a 30% drop in output for Q3. And I think you are probably capable of modeling that with those two pieces of input. Then, what do we have to do in the Americas to get to a NAS type of profitability?
It's interesting that you ask the question because I would answer that the other way around, which is, not our own analysis or research, but external analysis and research basically states that we have potentially the mill with the better cost position. The answer is we do not to get to the NAS position. We are basically in charge of our own destiny. Of course, it's nice to have extra price and extra volume, but we have shown the ability under the new management to significantly strip out cost. That will not stop. We see that continue, and that is what will basically close the gap and which ultimately, the way we are looking at it, will bring us to a more like for like profitability, which is ahead of NAS.
Okay. All right. Thank you.
Thank you. Our next question comes from Alessandro Abate of Berenberg Bank. Please go ahead.
Good afternoon, gentlemen. I just have two questions. The first one is related to your 2020 target of EUR 500 million EBIT. I would like to get more or less an indication of how much is it based on improvement of price and demand, and how much is really based on your internal efficiency. If you just can give us just rough percentage. Then, if you basically been able to set such an ambitious target that I really hope you are going to be able to achieve, would it be possible, also to offer some kind of nearer terms targets, for example, your guidance and all other things remaining the same, on a 12 months basis, for example, 2016 or 2017, just basically an indication because your performance can actually be monitored better. The second question is related to the long steel.
I have seen that the volume has been quite strong into Q2, and I was wondering what segment has so far driven this upside. Thank you.
First of all, on the 2020 target, when we launched it, we have said that that is basically based on internal improvements. Again, it is nice if we have some help from the market, but we have said we should be able, given our market position, given our footprint, and given our assets, to reach this by self-help. This is what we maintain. If you then say, do we have a near target. We have a near target, and we have clearly communicated as well as one of the most important things that we concentrate on and focus on, which is to bring down the net debt to a maximum of EUR 1.2 billion by the end of 2017. As we are ramping up volume and we are taking out already significant working capital, by inference, you could say then the rest has to come from improved performance.
On long products, strong volume. There are two parts. I would say about 40% of the strong volume comes from internal slab delivery. Our own growth on the flat products has driven 40% of the growth in LP because the slab comes from SMACC, which is part of the long products. The other part, too, is probably the strongest segment that we look at the moment, is automotive. There is a lot that goes into automotive. Our special bar is running pretty well as well in the U.S.
Roeland, thank you very much. Just really a follow-up. My question was related in terms of EBIT guidance. It is absolutely great that you are giving this kind of near-term targets related mostly to the reduction level of debt. Considering that 2020 is a bit far off at the moment and the EUR 500 million EBIT is really ambitious, and I really hope you are going to make it would be very helpful also for a proper assessment of what actually is going on in Outokumpu. If, for example, you can actually give us a next 24 months target, just an idea what the EBIT based on your self-help assumption can be. Would that be possible in the future? Thank you.
We haven't discussed this, Alessandro. Bear with us. We might somewhere in the future, but it has not been on the table up to now.
Thank you very much. I understand it. Thank you.
Carsten Riek of UBS has our next question. Please go ahead.
Thank you. Most of my questions have been answered. Two left. The first one is on the U.S. business or the North American business. You showed the improvement in the base price, but if you look at the sales per ton, you showed in the second quarter, we have seen actually a decline, which makes me believe there was no kind of base price effect in the second quarter. Could you confirm that? If this statement is not correct, how much of the base price increase did you already capture in the second quarter? The second question is on your gearing target 2020. It seems quite punchy, and you have to pretty much halve your net debt by then. Do you intend to actually achieve that gearing target operationally only, or do you also have other measures in mind?
Can you be more specific about your sales per ton decrease? I am struggling at the moment.
Because at first quarter 2016, we had EUR 1,870 per ton in the Americas business, and we had EUR 1,757 in the second quarter, which is a decline of around, give or take, EUR 100. Which might be a function of when you book and when you sell, so it is predominantly a function of how you actually lock in the base price and how much negative nickel impact you still got into the second quarter numbers. But it pretty much looks like there was no kind of positive base price effect in there.
I'm just looking at the numbers. I see what you mean. Where this comes from is that the alloy surcharge in Q2 significantly dropped in U.S. So although you had a positive effect from the base price, you had a negative effect coming in from the alloy surcharge. That's a balancing thing, but as the alloy surcharge basically is a pass-through of the quality, that doesn't then really affect the profitability.
How much of the base price? Because if you captured the $70x the volumes we have seen, your improvement must have been stronger. It just doesn't add up. For me, I don't believe that you actually captured the whole $70. That's pretty much the question.
Yeah, well, it is there. It's very difficult because I don't have the numbers here in front of me to do the bridge for you.
Okay.
Let me come back to you separately on this and present you with the various moving parts.
Perfect. Thank you. On the gearing target?
The gearing, I assume that you are alluding to, are we planning to do any further disposals in order to get to the gearing, and the answer is no.
Okay. Thank you very much.
From Deutsche Bank, we have Bastian Synagowitz. Please go ahead.
Yes, good afternoon, gentlemen. I've got two questions left. Firstly, on your earnings outlook, that does not at all mention nickel. As we basically speak today, I think nickel prices are quoting more than 25% above the trust levels, which we've seen in the second quarter. Surely, this must have a positive impact in the third quarter, just besides the volumes and restocking. If prices remain where they are today, what would be the positive impact from nickel and also relatively cheaper scrap prices? It does seem to me like the scrap market has not yet fully reflected the full increase of the rising London Metal Exchange nickel prices. Secondly, on the European market and also on the dumping, you said that you are quite happy with the situation in the European market.
I guess in reality, in a market which went through a down cycle, of the type we've seen throughout the last couple of years, and also a capacity scale down to which you obviously contributed a major part. We should, at some point, see a base price increase coming through as well. I think we currently see a lot of momentum and also acceptance in the European Commission for anti-dumping cases in various steel products. Stainless has obviously been the first. If you feel that this is really as good as it gets in terms of pricing at the end of the day, because at the end of the day, imports from other countries are still blocking any price cycle on the upside. Shouldn't you be pushing the EC to broaden the anti-dumping case and also go against other countries like Korea, Vietnam, et cetera? Thank you.
Let me just start with the pricing question. We typically do not comment on pricing. I fully understand where you come from when you say, "Well, why is this happening?" We don't want to speculate on that. We know what we're booking. In some cases, we have achieved price increases that probably will filter through Q3. At the same time, as I said before, you have to be mindful of the fact that the anti-dumping duty is not that large that you can just price at will. So I would say there is still a natural cap, but I do not want to speculate on where the pricing actually is going.
When you talk about nickel, sure, if it stays here, then nickel, looking at all the moving parts. The higher nickel price would have an effect on both profitability and as well the cash move due to timing differences. We, for now, looking at what the various analysts are saying, see that there is a clear lack of consensus on where it's going. So we prefer to stick to what we know and where we were at the end of the last quarter.
Okay. Fair enough. Thank you.
Thank you. Johannes Grasberger of Nordea has our next question. Please go ahead.
Yes. Hi, gentlemen, it is Johannes from Nordea. A few questions still I have got left. First of all, on the European maintenance break that you said is pushed out until end of the year, I guess you wouldn't have done that unless you are seeing better demand in the market. My question is, have you seen improved activity in Europe through continuous declining import levels and as the nickel prices are spiking as well? That is the first question. Second question, in which grades and products in the U.S. are you actually gaining market share, and is it a more of a broad-based improvement where you are perhaps seeing that customers are entirely switching their core supplier to you, or is this kind of business that you have won from the import markets? Then a couple of admin questions.
I think you mentioned there will be more cash coming in from the SKS deal in the second half. How much would that be, please, and will you be looking at more working capital release as well? Fourth question, the derivative losses in British pound of EUR 5 million negative. Can I get a clarification if these are included in the underlying EBIT as a negative effect? So taking this out, the underlying EBIT had been actually at zero. The last question is that, I think maybe it was already asked, but the ferrochrome maintenance break in third quarter, what will be the nominal impact of that in EBIT line? Thank you.
Okay. I will take the first two, and then Chris will take the others. The postponement of the maintenance break is not so much due to the stronger market we see, but it is due to an effect that we have seen repeating almost every year, which is that in the Nordic countries specifically, we tend to take advantage of the holiday period to do maintenance. That has every year actually resulted in a slight dip in our market share, which we then get back as soon as we are back up running. Rather than what we should be doing, which is keep on running as much as we can to mirror what the market does and have your maintenance shutdowns towards the end of the year when due to Europe, due to the Christmas period and the holiday period anyway, demand is lower.
It is just that we have modeled our own operations closer to where the market is running. We are trying to get the same profile. To the U.S., I can say that our gains are across the board. You saw that the imports in Q2 were actually, the import penetration was still pretty much the same as in Q1. It has definitely not been replacement of the import volumes. It is really, as I said before, it is the continuing confidence that we are getting from our customers, who basically see a very solid, major capable supplier next to us, and that is helping us. Chris, cash.
Cash. Okay. The answer to your question on how much we can expect to see coming in from the remaining payments of SKS is approximately EUR 60 million spread evenly across the next two quarters. On the Brexit hedge, if you like, what we did here is we anticipated, actually, I think as a lot of people did, that the U.K. would vote to remain within Europe and that sterling would appreciate. In the end, that did not happen, and sterling depreciated. That hedge we took to cover our cost base in the U.K. ended up turning into a loss, and the total impact of that was EUR 5 million. That is included in the underlying EBIT. If we had not done that hedge, then indeed the result in the long product business would have been positive to the tune of EUR 3 million.
Having said that, what we will also see going forward, and that is why we booked it into underlying EBIT, is a benefit of lower sterling because we obviously have manufacturing facilities there that have a cost base in sterling. A lot of the receipts are in non-sterling currencies. So we are expecting that loss to be offset over the next six months until that hedge expires by a better cost base and the benefits coming through from that.
I think you also asked a question on ferrochrome and the third quarter. I think without giving specific numbers, we have given in the past guidance on the impact of the decline in what the impact of price on ferrochrome is. I think you can do the maths on that. And the expectation is that the unit will be down for approximately 30% of the third quarter. Again, perhaps you could do some maths around what the impact of that would be in terms of the financials for the third quarter.
All right. Thanks for those. I guess kind of a follow-up question for Roeland. Just thinking, what would be Outokumpu's share of the global supply in ferrochrome right now? Because if the production is dropping 30% into Q3, could that have had an impact on the spike in ferrochrome prices into the same quarter? Just a short follow-up question. Thank you.
Yeah. The answer is no, because basically, the volume that we put onto the open market is about 20%-25% of our production. It is a fairly small amount that does not move the market, because 80% is going into our own system. It really does not have a significant impact on the market and is not driving the pricing.
Yeah. Okay. That is fair enough. Thank you. Those were my questions.
All right. Thank you, Johannes.
Thank you. We now move to Hjalmar Ahlberg of Kepler Cheuvreux. Please go ahead.
Thank you. Just one last try, maybe on the U.S. pricing pieces, you left $70 this quarter. Could you say how much we have gone through the full $280 per ton increase in terms of your, have we seen the major of it or will it be half of it left or less than half, or anything of help from that?
Again, I am actually looking here at our internal reporting, at the base price realized in North America, and we clearly realized the full $70 in Q2. It is here in front, I have it by month. We did. What we still have to go back to is indeed, why do you not see that in the raw numbers? Again, I assume this is part of the alloy switches, but the base price increase, I can be unequivocal, I am looking at it here, we realized that $70. There are no two ways about that.
Okay. Then just look at the remaining, if you have a $280 hike from the low point, how much do you think will filter through in the next two or three quarters? Will it be another $ 200 or will it be less than that in realized prices?
Again, that would mean that I would have to give you a breakdown of how our contract profile is and how much is in quarter, how much is in half yearly, and we don't want to do that.
Okay. Then just the last one on, you're saying that demand will be down a bit in both Europe and U.S. in Q3, but you will be able to have flat deliveries. So how confident are you in this? Do you have it in your order books or is generally stated it should be lower than this in Q3?
We have a high degree of confidence.
Okay. Thank you very much.
You are welcome.
Okay, we will now move to Johannes Grunselius of Handelsbanken. Please go ahead.
Yes. Hi, everyone. Two questions from my side. One is on the balance sheet and FX risks. Am I right that you have all your loans in EUR? In other words, you have equity value in USD in the U.S., but you have all loans in EUR?
No, there are some loans in other currencies as well, in dollars.
How much is that? Is that significant?
No, it's a relatively small part, but some of them are in other currencies.
Okay. But rather insignificant. Basically, what I'm after is the FX impact here on the equity side and the net interest-bearing debt side. If we should see another, for instance, 10% uplift on the dollar versus the EUR, just because it's easier to relate to, then obviously you will book higher equity value because of the U.S. operations. But how should I see the net interest-bearing debt developing by that?
Yeah, but I think in a net position, we still have a positive equity position in USD, take the assets minus the loans. If you see an appreciation of the US dollar, you will also see an appreciation at equity base.
Okay. Then I just want to check with you if I understood it correctly. You have the new explicit target for reducing SG&A with EUR 100 million on the 12-month rolling basis. Am I right that this has not yet started to be seen in your books? The lowering SG&A was due to other stuff, or can you help me with that?
Yeah. So there are two parts to it. We are releasing 600 people, white-collar people, as part of the SG&A program. That represents probably around 55%-60% of that EUR 100 million. That is phasing out. So you don't have everyone out at the same time. We have people who actually will not leave until next year. We have people who have left immediately. We have people who will leave during this year. So again, that's why we say the run rate is not achieved until the end of next year, then we have the full run rate basically down. What I said is, on the other hand, on the non-headcount part. On the headcount part, you have a small, negligible impact, basically, only because of June, because we effectuated the new organization for the 1st of June.
So you'll have a very small effect of a few of those people that are leaving already in June, but most of it is coming later.
Okay.
On top of that, what you have is the non-headcount related, and there we are making progress, and we actually, as a result, have a run rate now for the first half below the run rate of last year for total SG&A.
Okay. Then I know you have the program that was launched long time ago, the MEA restructuring program. Is it possible to give some numbers on how much that is still left there to be realized for the coming quarters or, let us say, for the next six months or, and then for 2017? Is that possible to help us with those numbers?
Yeah. This is something that we have, I think in a previous presentation as well shown. We realized about EUR 20 million of that in 2015. There is about EUR 60 million in total to hit 2016. And of course, when ultimately, the Benrath facility closes down, that is when a big chunk is going to be realized again. It will take time because not everyone is leaving at the same time. And then we have another EUR 20 million left into 2017.
Okay. That is very helpful. Thank you very much.
Thank you. We now move to Luc Pez of Exane.
Hi, gentlemen. Two follow-up questions, if I may. One related to Carsten's question with regards to your sales -per -tonne figure. I was checking at the same time with the CRU numbers on alloys, and actually the alloy surcharge has been increasing Q2 versus Q1 based on number. Like Carsten, I am a bit puzzled by the fact that your final price, if you do a simple arithmetic of sales divided by shipments, is going down. If you could maybe elaborate as to whether you are forced into discount pricing to push up volumes or mix deterioration. I do not know.
No, absolutely not.
Okay.
I can say absolutely not. Again, Luc, we have to come back onto that question because, again, I am looking here at the real data, and I can confirm that the price increase is there. We need to come back on that.
Okay, perfect. Second, maybe partly related, when I was looking at the monthly imports coming from China, these have already dropped to more or less zero if you take the last month of May, which would suggest that whatever the outcome on the anti-dumping, there is already not so much coming into the U.S. I am quite surprised to see you push so hard on the volume. I am wondering to what extent this is partly explaining why the price traction so far in the U.S. has been so slow. Are you aggressive? Too aggressive, maybe?
Sorry. Come again, Luc. I did not understand that acoustically.
Meaning that as you are forcing so many volumes into the U.S., at the same time, I think lots of people were surprised by the slow traction into U.S. pricing. Recent data were already showing that Chinese imports were nearly zero, if you take the month of May in particular. I am wondering to what extent you are too aggressive on volumes and therefore that this has a negative influence on your ability to raise prices.
No, because again, we have raised prices as the first in the market. We have clearly communicated every single price increase. The reason that you do not see it filter through, again, is because of the contract makeup. If all were spot, you would get all in one go. If all were one-year contract, you will not see any improvement until next year. If you have a mix, then you see it filter in. It has nothing to do with the sales volumes.
Okay. Looking at your target to beat NAS profitability per ton, would you agree that you probably need to increase your EBITDA per ton at America's business by a range of close to $200 to get there?
I will not comment on that. I will go back to my earlier remark. We have the potentially most competitive mill in the Americas, and we just need to bring it, and we will bring it to that state. Again, if you look at that long-term target and our must-win battles, the turnaround in the Americas is a clear story there. It is one of the six must-win battles, and the progress we are making show that we are actually getting there.
Okay, thank you.
Thanks, Luc.
We have no further questions at this time.
Okay. Thank you very much for your attention and active participation. I would like to remind everyone that we will host a capital markets day in Helsinki on November 29th, so please pencil this into your calendars. We will be sending formal invitations within few weeks. Outokumpu's third quarter results will be published on November 3rd. Until then, thank you and goodbye.
Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.