Good day, and welcome to the Outokumpu Q1 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call on.
Thank you so much. Good morning and good afternoon, everyone, and welcome to Outokumpu's Q1 earnings conference call. Today we have our CEO, Roeland Baan, and also our CFO, Reinhard Florey, to discuss the results. Roeland will talk about the overall topics, Reinhard go into financial details, and then Roeland will be doing the closing remarks. At the end, we'll be taking the questions from the participants. Before we start, I would like to remind you that certain information is forward-looking and therefore includes uncertainties that may cause our actual results to differ from our current expectations. With this, Roeland, please go ahead.
Thank you, Ana. Thank you for joining us in this call. As you have been able to already see from the release, the Q1 results were in line with our expectations at an underlying EBIT of minus EUR 20 million. If you then look into some of the drivers, on the positive side we had very healthy delivery volumes up equally in Europe as well as in Americas, where I do want to single out Americas for a moment because we actually show that we are very successful in the continuing commercial ramp-up leading to record output for this quarter. Highest deliveries in the history of our mill. Before you say, "But where is the results?" The results are there, but there is, of course, still a lag going on from the LME surcharge. The average nickel price in Q1 was over $500 down to Q4.
That put a drag on pricing. Operationally, however, the mill is developing very well. You can see it in the operational KPIs that are improving quarter-on-quarter. In fact, if you would look at the sequential results of Americas from Q2 of 2015 to this quarter, then you see a sequential improvement on the underlying EBIT in every single quarter. So we are very satisfied with what is happening in the Americas. On Europe, continuing momentum out of the restructuring programs still continuing in Q1 with a strong result, in spite again of the further trending down of nickel prices. Again, I think we can be very satisfied from the performance there. On Long Products we can be less satisfied. Long Products have been very much influenced by the turndown in oil and gas, and as a result lower volumes than expected.
But we have taken measures to counteract this move. If you look at the negative drivers, one is lower base prices, specifically in Europe. In Americas it was basically stable. But of course, strongly affected as well by the lower transaction prices due to the LME surcharges going down. Another clear issue happening in the markets is that with, generally speaking, lower economic activity, and with the specifically lower activity in oil and gas, we see that the arisings of scrap are coming down, and leading to significantly higher pricing and higher costs for us as a company. This is a situation that we do not see that will alleviate in the short term. So it's something that we will have to work with. Same goes for ferrochrome. Our results were impacted by lower ferrochrome prices Q1 over Q4 for the year before.
That trend has continued, so going forward, we will see a less than favorable pricing environment for ferrochrome. One that I want to specifically highlight is that we took a EUR 15 million write-down. Basically one trade receivable in Europe that we reevaluated and took the decision to get better transparency to take that write-down. In the Americas, we had still some high-priced aged inventory that we took the decision to write down. The impact of those two was very significant given the overall result to the tune of minus EUR 15 million. If we then look shortly at the overall picture for stainless steel for the year 2016, not a lot to add to what we have said before. We do not see an environment that is significantly improving. It is pretty stable.
If you look here at the data that are published by SMR, you'll see that there is a 1% demand growth expected for 2016. If you look at the underlying areas, so that Americas is expected to contract slightly at 1%, Europe to contract slightly at 2%, and then APAC to go up with 2%. All these, of course, are changes in the margin. So the most certain position you can take on this is that this is a flat market. Against the backdrop of this market, just a quick look at the prices.
If you look at Europe, and then specifically the German as a barometer of pricing, the German pricing for 304 as published by CRU, you will see that there is basically a stable pricing environment since the end of 2014, which by the way coincides as well with the becoming effective of the antidumping measures in Europe. If you look at Outokumpu's base prices in Q1, it actually declined slightly, which is the result of pricing that still lingers on from Q4 into Q1 on existing contracts. Then on imports, the import penetration decreased slightly to 24.4%, but still in a downtrend from 2013 when it hit its peak with the Chinese imports. If you move to the Americas, you see there an inverse when the antidumping measures were announced in Europe or became effective.
A whole lot of material was looking for a new home and found a willing one in the U.S., which led to a very steep drop throughout 2015 and actually into as well the first quarter of 2016. The turn-up you see there is basically the turn-up for Q2 in April. Again, on the basis of data from CRU, the base price in the Americas came down by about 2%. In spite of the announced price increases, we announced price increases in December 2015. In spite of that, the prices came down still on the market. The pricing for Outokumpu was stable on the base pricing. The explanation on why are these prices not going up given the increase is simply that when you announce a price increase, it takes time for old contracts to roll off.
We do expect that gradually we will see these price increases starting to impact as from April of this month onwards. Important to mention as well that the LME surcharge, of course, was down significantly, whereas in Europe it was down by about 12%, in the Americas or in the U.S., it dropped by 19%. Again, lingering effects of what you will see on the next page, which is the development of the nickel price over time. Although we thought it couldn't go lower, we have seen that it did go lower in Q1 of 2016. Whereas the average in Q4 was still about 9,400, it went down to 8,500 in Q1 and hit a 13-year low. As a result, on the right-hand side of the graph, you can see that this was followed by transaction prices across the globe continuing to drop.
Against this backdrop, I would like to hand over to Reinhard to dig into the key financials.
Thank you very much, Roeland. This is Reinhard Florey, CFO of Outokumpu speaking. Going to the details of the numbers for quarter one. We can see that in terms of the stainless steel deliveries, and you have heard from Roeland what the drivers are behind, we have made progress compared to quarter four with a level of 574,000 tons. We came up to 600,000 tons in Q1. However, looking at the sales, we can see that the average transaction prices have come down, and overall the sales have come down by some 3.4%. Overall, this led to a situation where we ended up with an underlying EBIT of EUR 20 million for Q2, respectively, a reported EBIT of EUR 12 million. The operating cash flow, however, stayed positive, and it stayed significantly positive with a number of EUR 74 million.
And this also led to a situation that our net financial debt was reduced by some EUR 58 million to a level of EUR 1,551 million at the end of Q1 2016. So deleveraging of Outokumpu is continuing. CapEx has been lower than in Q4 and is around the run rate that we are foreseeing for 2016 to happen. And overall, we can see that the continuation also of cost savings through personnel reduction has continued from Q4 to Q1 and is bound to continue also in the next quarter. I would like to come back a little bit to a couple of updates and a couple of adjustments that we have taken in the understanding of our financial numbers. First of all, talking about reporting practices. There have been some new regulations, and due to these new regulations, we could have even gone from a quarterly reporting to a half-yearly reporting.
However, we decided to stay with the quarterly reporting. However, being a little bit lighter on Q1 and Q3 reporting, instead still staying in the full scope of IAS 34 in Q2 and Q4 format. Secondly, on the definition of our core parameter regarding profitability, we confirm underlying EBIT as main profitability measure, and we do that because we think that this is the adequate performance measure that shows the best contents to our operational performance. The adjustment that we are seeing to our reported EBIT to the IFRS EBIT are twofold. The first, it is the material income and expense items, which earlier labeled as non-recurring items. You probably have also seen that there have been some changes in the definition of non-recurring items by IFRS. So we are taking that, of course, into account in our definition here.
And the second is that, of course, we are also taking out the net effect of timing and hedging effects, so the raw material-related inventory gains or losses and the metal derivative gains and losses. Last but not least, we have introduced a new business area structure for the group, which you also have been provided the comparables for. So we have restated the quarterly data available for the past two years, and the reporting structure is now concentrating on three business areas, which is Europe, Americas, and Long Products. If we are looking into those new structure, starting with Europe, what we can see is that Europe's performance has been continuously strengthening, both in terms of the market presence, European deliveries, as well as the underlying EBIT.
Deliveries have grown from 380,000 tons to more than 420,000 tons, and the underlying EBIT has gone up from EUR 33 million to EUR 42 million in this current quarter. It is clearly a stronger performance due to stronger deliveries and also cost savings that have been applied over the past quarters, getting effective right now, as well as also effects from the EMEA restructuring program, which are effective with some EUR 15 million now already. However, we still see that there are some adjustments in there. So we have some EUR 8 million related to earlier site closure and some EUR 2 million net effects from the raw material-related inventory and metal derivative gains and losses. Included in the underlying EBIT is the effect of the write-down, as Roeland has mentioned, of a trade receivable here in the magnitude of EUR 12 million.
Looking into Americas, again, here you can see that on the market side, we have made further progress running into record production as well as record delivery now with a level of 160,000 tons as deliveries. We are seeing that this is also certainly driven by a pickup in the market. Apparent consumption was up by more than 4%, 4.8%, and we also attribute this to a certain degree to the announced antidumping and countervailing duties that have been filed in February. Price increases are sticking gradually. Roeland has explained why this has not been fully effective in Q1. We are expecting more of that impact in Q2. An impact in the underlying EBIT of EUR 3 million write-down for aged inventory at our mill in Calvert to make sure that we are on a level playing field going forward with our results.
Regarding adjustments from the underlying EBIT, what we see is that we have received agreement with the insurance companies regarding our cold roll mill failures due to the motor failures in the second half of 2014. After already having received some insurance payments in the past quarters, there has been an agreement that an additional insurance payment of EUR 25 million will be paid to Outokumpu in our BA CA area. So we have booked the 25 million EUR in our profitability. However, we expect that to be then cash effective in Q2. So the cash of that has not yet been received in Q1. On the other hand, we have here EUR 8 million negative effect from the net of timing and hedging effect. Coming to Long Products, as already mentioned, sort of a disappointing performance regarding the underlying EBIT.
In spite of some increased deliveries due to the lower prices, high competition in the market, and a weak product mix in specifically this first quarter, we have seen a loss of EUR 4 million as an underlying EBIT. Under pressure, both in Europe and in the U.S., we are seeing this as a result from the low nickel prices and still the subdued demand from the oil and gas industry and related industries here. There is, of course, also some import pressure from Asia, and we are seeing now in Q1 a gradual pickup in order intake, where we would expect some positive effects on that in quarter two for our Long Products side as well. We are also applying cost savings measures according to the overall corporate program in this area. So, it is a clear target to bring this business area back to profitability in short time.
If we are looking at the cash flow side, we have come up with a performance of a free cash flow of some positive EUR 67 million in quarter one, mainly coming from an operating cash flow of EUR 74 million reduced by CapEx cash of EUR 17 million . This also leads to a situation where we have a total of EUR 166 million as cash and cash equivalents on our books. Overall liquidity reserves are EUR 900 million not counting liquidity that we have on top of this with EUR 130 million of facilities that will mature in February 2017. So for this year, it is still above EUR 1 billion of liquidity. The net debt has decreased by EUR 59 million to a level of EUR 1.55 billion , and we see that on the next slide.
The deleveraging has now continuously happened since 2013, where we had a record of EUR 3.56 billion as net debt to now EUR 1.55 billion. Gearing has stayed at the same level of Q4 at around 70%. If we are looking at the debt maturities and our debt profile, what we are seeing is that with the extension of our maturities of the main part to 2019, we have now in 2016, a couple of maturities among which effectively a EUR 150 million bonds to be repaid in June is the only real maturity. The other amounts are short-term facilities which we are revolving and which will not lead to a cash out.
In 2017, we have then around EUR 400 million of bilateral loans maturing, and many of the other maturities are, as you see, undrawn, and specifically the part of the facility of the syndicated credit loan that has been extended to 2017. In 2018, you see that there are hardly any maturities. This gives us a very good ability to use 2017, 2018, to refinance for our 2019 major maturities and prolong this further to the future. In order to facilitate further refinancing measures, we have taken a rating by the end of Q1. It came out with a B3 rating with a positive outlook at the rating agency, Moody's, which has also rated our outstanding bonds with a B2 rating with a positive outlook as well. This is the starting point for what we feel will be a positive experience as a rated company going forward.
With that, I will give back to Roeland for developing the industry as well as our outlook.
Yeah. If you look to our expectations for Q2, and again, no magic there. I said already for 2016, looking at a pretty flat year. You see that as well in the expectations for Q2 or Q1. A slight uptick expected in Europe, and a slight downtick in Americas. Basically, a flattened environment. If you then look at more specifically Outokumpu. In general, if you look at the market in Europe, we still see that the underlying demand in most of the key sectors outside of oil and gas is very healthy. This is where we have our main focus. Our exposure to oil and gas is limited in our European business. Stock levels amongst distributors are slightly above historical average. But not desperately so. We do not expect any downward pressure from that.
If you look at the Americas, there you have clearly seen that the stock levels among distributors were already low and have been pushed even lower. We see that there we are significantly below historical average. We do see as well that the delivery times are moving out slightly. You know that we have announced two price increases, already in December of last year and Q1. Another price increase was announced in April, bringing the total of increases now close to $240 a ton. Again, a word of caution, that doesn't translate immediately into oodles of cash coming in. We do have contracts that are quarterly, half-yearly and yearly. So the way it impacts depends from contract to contract and from customer to customer. But we do see the greater impact starting from this month and this quarter.
Important to note is that the Chinese imports are being addressed with antidumping investigation. In March, already injury was confirmed by the Department of Commerce. We are now in the process where over summer we expect that preliminary duties will be announced, and that then with further consultation, will then be effective as for the first quarter in 2017 as per our expectations. Against all these moving parts, we expect delivery volumes to be sequentially flat and as a result for underlying EBIT to remain at a similar level as in Q1. Again, there are some moving parts in there. We have positives, clearly, as I said, we have the pricing, we have still relatively good volumes. But it will be burdened by a weaker performance of ferrochrome because of continued downward pressure on pricing of ferrochrome and a weaker dollar.
With the current prices, and the development that we see going forward, the net impact of raw material related inventory and metal derivative gains and losses are expected to be marginal, if any, at all. I would like to go back a few weeks and just put back into memory the improvement program that we have announced, starting with our vision, which is to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. We will bore you by saying this every single time that we meet, because this is really what we believe in and what we're going for. To get there, we have defined six must-win battles. Again, I have explained them in our last call. Won't go through them. Will only say that they are all underway.
There is tremendous activity going on in the company to define, design, and implement all the different parts of all these must-win battles, leading to the financial targets in 2020 of an EBIT of EUR 500 million, a return on capital employed of 12% and a gearing below 35. However, as we have said as well, a number of these issues, specifically when you talk about culture in the high-performing organization or manufacturing excellence, these are initiatives that take time to really start giving full run rate results. In the meantime, we have to get some step changes in place. We have announced the new organizational setup. This is progressing as planned. We are still on track to flip the switch on the 1st of June and operate in the new format as from the 1st of June.
This is necessary because the new organization is the enabler for the second big point on the agenda, which is our SG&A cost reduction of EUR 100 million run rate by the end of 2017. The other one is we are still very actively pushing on the net working capital reduction of at least EUR 200 million this year. You have seen already the results in Q1, where we made a pretty big step forward in achieving that goal. All to get in the end, at the intermediate step by the end of 2017, of a net debt of EUR 1.2 billion. As far as we can see, we are well on track at this stage. We are very satisfied with the underlying performance of our businesses. With that, I hand over to the questions.
Very good. Thank you, Roeland, and thank you, Reinhard. Operator, we will be ready to take the questions.
Thank you. If you would like to ask a question at this time, please press the star or the asterisk key, followed by the digit 1 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 2. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to signal. We will take our first question from Michael Shillaker from Credit Suisse. Please go ahead. Your line is open.
Yeah, thanks very much. So three questions, if I may, Roeland. The first question just on ferrochrome. Given a 10 cent move down in the contract in the second quarter, is it reasonable to assume that is a headwind of about EUR 25 million into the second quarter? Given that the ferrochrome price has largely followed the rand down, but the rand has basically been strengthening in the first part of this year, is it reasonable to assume that we are going to get a stabilization in ferrochrome or maybe even something better than that into Q3? Second question on ferrochrome. Clearly, given the move down in the ZAR over the last few years and the tenge, I guess your position on the cost curve in ferrochrome has relatively weakened quite considerably. What are you doing to combat this? Is there any real focus on targeting the ferrochrome cost?
At what cost are you actually, or what price ferrochrome you actually break even at the moment? I guess if the price did continue to fall and you fell below that, what is the plan B on ferrochrome? Because integration is great in a rising market, but it can be a real negative in a falling commodity market. That's ferrochrome. The third question really on demand. I think it was figured on page 5, the SMR outlook is pretty grim if you look at it, negative Europe, negative the U.S. But I guess the question then is how does that actually square with the price hikes that have gone through in stainless steel on one hand?
How does that square with what's going on in carbon steel, where I guess four or five months ago, everyone would have said something similar on demand, and that market has turned around very quickly, and it looks like demand is going absolutely gangbusters out there. How ready are your commercial guys to accept that the market forecast may be completely wrong? Given we talked about inventories, we talked about imports lower, prices going up, that actually demand accelerates and you've got to be ready to take, especially you guys I think have got to be ready to take advantage of that. So how prepared are your commercial people that those forecasts they may be actually just plain wrong and too pessimistic? Thanks a lot.
All right. Thanks, Michael. If I can start with the last one. What if the market forecast is wrong? Look, we have given you the market forecast as given by third party, outside independent agencies. That's what for the communication outside world we'll stick to. By definition, our commercial people are very prepared for anything. We have an extremely competent and capable commercial outfit. These are people who are in the market all the time, who have their finger on the pulse and know exactly what to do where and how to react to what issues. At the same time, our assets are flexible enough to react in tandem with that. So I hope you're right and that the gangbusters come our way as well and we're ready to react. If I move to ferrochrome.
You're a little bit out of the ballpark, but I can give you a ballpark. The movements in both the pricing of ferrochrome from Q4 to Q1 and the movement in the dollar will have an impact of about between EUR 15 million and EUR 20 million. More important to know is that, and this comes a little bit to your question about how cost competitive are you. We have always said that we are profitable. I can tell you we are still. So more than that, I do not want to share. What do we do to increase cost competitiveness? Look, we are still at the same place, in spite of the rand, the same place on the cost competitive curve. That doesn't mean that we sit back on our laurels. We are actually investing in expanding the lifetime of the mine and increasing continuously our operations to greater cost competitiveness.
Okay. Sorry, can I just ask one final question? Now you have done your deep dive and come up with a strategic plan. Are you still more or less every day looking at strategy, looking at strategic planning within, or is this now you have done it, and this is now purely about execution? What are we going to expect going forward?
You can expect a total focus on execution. The strategy is a simple bit. The execution is where the rubber hits the road.
Okay. Awesome. All right, thanks a lot.
Thanks, Michael.
We will take our next question from Seth Rosenfeld from Jefferies. Please go ahead. Your line is opened.
Good afternoon, Seth Rosenfeld from Jefferies. A couple of follow-up questions. First, on the outlook for European base prices. Given the Q1 dip in the reported base prices, how are you looking at that going into spring? As the market leader, do you think that there is room to regain some of that drop or push prices higher into H2 if nickel remains stable? Or are we looking at kind of spot stainless base prices at best for the remainder of this year? From an ASP perspective, hitting your P&L. Did your Q1 ASPs already reflect that drop in benchmark prices, or should we see incremental pressure into Q2? Trying to get an understand of your contract structure in the European region. Lastly, just one specific question on your guidance to be roughly flat underlying EBIT Q over Q.
Are you stripping out the EUR 15 million of inventory and receivables write down, so we are looking at kind of a EUR 5 million Q1 Q comp, or should we be looking at the negative 20 as a starting point? Thank you.
Okay. Starting with the last point. We are stripping out the EUR 15 million. In the first point, outlook base prices, we do not give any outlook. It is something that I cannot comment on.
I guess it's more specifically then, if you look at something like the inventory levels within the EU, where you've commented for a couple of quarters now that they've been slightly elevated and serving as a bit of pressure on your pricing power in the region. How do you see your distributor or customer inventories moving within Europe today versus maybe what you had guided to as of three months ago?
I think the same thing goes. Although it's slightly over historical averages, we do not see at this stage any move to destocking. Nor do we see a significant reduction on demand from the distributor segment. If you then look at the underlying end user demand that we see is still very healthy. I think that sums up more or less where we're coming from.
That's great. Thank you very much.
We'll take our next question from Johannes Grasberg from Nordea Markets. Please go ahead.
Hi, gentlemen. It's Johannes from Nordea. Can you hear me?
Yep.
Yeah. Cool. Okay. I've got a couple of questions. Well, I have to check on the second quarter guidance as well. So what Seth just asked. Are we talking about EUR 5 million underlying EBIT guidance then, plus any potential write downs that you could have in the second quarter, similar to Q1?
Go ahead, Seth.
We are guiding that underlying EBIT will be at about the same level than in Q1. I think this can be taken literally because, of course, there can be always one time effects. But if you have operative one time effects, they will not be eliminated from underlying EBIT anymore. This is the new rule. That is exactly the reason why we are putting that in our underlying and also the guidance has been quite clear that it will be similar to underlying.
Okay. Maybe just to follow up on that one. Do you expect any write downs of these trade receivables or age inventory values in the second quarter?
No, we are actually not having an indication that that would be necessary. We have been on a situation that we have continued doing a risk averse assessment. Of course, if you have major movements in the market, you can never exclude such a topic. But from that point of view, we are rather conservative in taking an approach to this.
Still have to ask about this guidance, because if I heard right, Roeland was saying that the Q2 guidance is stripping out write downs. Was this incorrectly heard or not?
Well, it's me being clumsy in expressing. Stripping out means that they are in there.
Okay, very good. Then a couple of other detailed questions. Can you say how much of the cash non-recurring items were paid out in Q1? What does the cash out plan look like, including the new savings program for this and next year?
What we have guided for is that the new program of SG&A reduction will result actually in some provisions of EUR 40 million that we will take in, where we are expecting that EUR 5 million will be cash effective in Q2.
Were there any non-recurring cash items in the first quarter?
There were non-recurring cash items, which means payout from provisions in first quarter, yes.
Can you say how much those were?
They were in a small double-digit magnitude, some EUR 15 million.
Okay, thank you. The third question regarding the Tornio steel mill strike. Any verbal cost estimate what the impact would be on the second quarter of that?
No, we have refrained from giving direct impact of that directly. It is a fact that this was an annoying incident, and such a thing doesn't go immediately without an impact. However, we are trying in the context of the total EMEA structure to have remedies against that.
Okay. Thanks for that. Then three sort of larger questions. First of all, on the U.S. market, I am just thinking here that, what is the main reason for a higher output at the U.S. operations? Have you seen new customers choosing to place orders at Calvert instead of competitors? Or is the volume ramp up kind of a result of less imports into market and a kind of a consequence of more demand being channeled to the domestic mills in the U.S. market?
There has been a drop in imports slightly. So that, of course, helps the local producers. We also are clearly regaining the trust from the market after the problem of 2014, where we unfortunately did not fulfill our contracts and our deliveries with our customers, and these customers were becoming a little bit shy. We have now enough history behind us of significant improvement and very reliable, both quality and delivery performance. So we do see an increasing penetration into the market.
I must say, I am a little bit puzzled about the weak Q1 for Americas, given the big upticks in the base price and the high steel output. As you mentioned, I guess it is then correct to assume that the profits are still weighed down by certain fixed price contracts, which are kind of underneath and that are diluting the spot price effects for you, and those will presumably fade out in the coming months given the expectation of increasing prices, or is this the case?
No, that is correct. Again, if you look at the portfolio, you have a mix of spot contracts, quarterly contracts, half-year contracts, yearly contracts. So the way the price increases affect the average price at which we actually ship out is highly dependent on the profile of our customers. So that is one on the base price. As I said, of course, on top of that, you had in Q1 a 19% drop in the LME surcharge.
My final question as a follow-up on that one is that, correct me if I am wrong, but I have kind of understood that the U.S. steel market is closer to the spot market than the European steel market. At least last year you had around 25% of direct mill delivery contracts. Is the share of those contracts going up? Or after the kind of the correction in the prices that you are seeing, are we still at, say, closer to the spot market in the U.S. business than in the European business?
Direct mill is not the same as spot. The non-direct mill is not the same as spot. You have non-direct mill, i.e. distributors where you deliver on contract. So spot could be direct mill, it could be distributor, it can be any segment. However, our share of bill of material and direct mill is improving compared to what it was in the past.
Okay, thanks. Those were my questions.
We will take our next question from Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open.
Yes, good afternoon, gentlemen. I have three questions. My first one is following up on ferrochrome. If the European benchmark price would be stable around the current 82 cent level, would we then still see a negative impact spilling over into the third quarter, given how your pricing works and also the lack from the alloy surcharge? If so, how much of that will possibly impact, having in mind the EUR 15 million to EUR 20 million negative you mentioned previously? Secondly, could you give us a bit of clarity on your CapEx? I understand that your normalized maintenance CapEx will be closer to EUR 170 million to EUR 180 million, at least that is what you mentioned in the last call. You also mentioned some extra for your ferrochrome mine.
Could you please give us any color as to how much this may be, and will there be any other, say, CapEx extra in the next two to three years? Lastly, could you please explain why a weaker dollar in the U.S. is a negative? I would have thought that as long as you are in a loss-making scenario in Americas, any weakening in the domestic currency should actually be good for your group accounts. Thank you.
Reinhard, if you take the Q3 thing.
On the ferrochrome side, the 82 cents is referring to a contract price, and the contract price is applied for a quarter. This means the spillover effect is minimal. There might be some smaller, but in comparison to the total impact, clearly a very small impact from that. It is more or less applied for a full quarter. If it stays at the same, then spillover is minimal. Regarding the CapEx question, just to clarify that, we said that our mandatory maintenance CapEx is actually at a level between EUR 70 million and EUR 80 million, and all on top there is relating either to development CapEx for cost improvements for a specific project or specific investment projects. For instance, the MEFO project in Neosta in order to close the Benrath facility.
But then on top, we have investment into our strategic part, which is on the one hand side, the ferrochrome side, where we are extending the mine in order to keep also for the coming years and decades, the same level of accessibility, as well as some investment into our energy projects, which are also there to provide a longer-term supply security from the energy side. We have anticipated that the CapEx cash out for 2016 will be only slightly north of EUR 140 million in this year. Going to the USD question, the impact of the USD is definitely a negative one when we have a weaker USD on the ferrochrome because we are producing in a Eurozone, and that means that, of course, in the competitive comparison, there is a difference then that comes directly to our profitability.
Other than that, we of course also have some translation effects, but they are more on the balance sheet than in the profitability.
Thank you. Now, briefly following up on the CapEx part. Now, considering these strategic components which you mentioned, is this what brings us closer to the previously mentioned EUR 170 or EUR 180 million CapEx for maybe 2017 and 2018 or the years after? Would that be a good number to be working with, or will we just remain around the EUR 140, EUR 130 level, which you have been guiding for 2016 as well?
I think for the way forward, a level of EUR 170 and EUR 180 would be too high for us. I would rather say it is between the current number and the EUR 160 number, depending on the individual years. That is not coming in a very equal stream, of course, but that would rather be the at-risk CapEx range that we are seeing adequate for Outokumpu, as we are in a very well-invested state.
Okay, perfect. Thank you. Now, just one follow-up on the trade receivable, which you have been writing down. What has happened here? Did your counterparty default, or what has gone wrong?
No one has defaulted. We have done a risk assessment and decided to be on the careful side and take this write-down.
Okay, but is it essentially the liquidity situation of your customer which has triggered this event, or what is the reason behind it?
We are not commenting on any details regarding our customers.
Okay, fair enough. Thank you.
As a reminder, ladies and gentlemen, to ask a question, please press one, and if a question has already been answered, you may remove yourself from the queue by pressing star two. We will take our next question from Luc Pez from Exane BNP Paribas. Please go ahead. Your line is opened.
Hi, gentlemen. Most of my questions have been answered, but I would have one remaining. Could you be maybe a bit more specific to help us modelize the Americas business as to what is the exact structure of your contract there? What is the share of quarterly lag contract, quarterly spot, half-year or whatever, ballpark, at least, so that we may better understand how the price filters through your P&L in the coming quarters? Thank you.
Luc, it is a question that I get regularly from our competitors and do not answer. So I am afraid I cannot answer to the structure of our contract business in the U.S.
If I may add a follow-up. Therefore, I must say, like one of my colleague, I am quite surprised to see you ramping so fast the volumes, especially at a time when imports are coming off. That can easily explain why prices are not moving up, and therefore that could be detrimental to your case into the U.S. What would be the comment you would make to that? Are you so confident that the U.S. trade case is going to move in your direction?
The evidence is very clear. We have announced an increase of $160 a ton in December. We have announced another $80 a ton in February, and there was another announcement of 80 in April. The move is clearly up. You can see that as well in the market. It is just a matter of when does it start filtering through into your average pricing.
Yeah, but what I mean is that even when you look at the CRU numbers, you can see that only $40 of what has been announced here to date has been sticking, which leads me to think that maybe having a more pricing over volume strategy would help you capture more prices rather than volumes.
Again, for the CRU just records transaction prices, and that includes as well what has gone to the contracted business. Just watch this space, is the only thing I can say.
Okay. Thank you.
We will take our next question from Johannes Grunselius from Handelsbanken. Please go ahead. Your line is opened.
Yes, this is Johannes from Handelsbanken. Hope you can hear me, gentlemen.
Yep.
Yeah. Good. Most of my questions have been answered, but I would like to ask you about the Q2 guidance here. Because, Roeland, you are very clear that you will have headwind from ferrochrome prices, lower ferrochrome prices. You gave a ballpark number how that impacted your fourth quarter. So maybe this impact is like EUR 15 million, EUR 20 million now in Q1. But on the other hand, you have tailwind, I suppose, from better prices. I also see that in the report that there was an unusual high negative impact from others and eliminations. You should also have a more positive tailwind from cost cutting. So I am surprised you are not guiding up the second quarter. What am I missing here in the moving parts? Thanks.
Well, you are not missing a lot, Johannes. There is one element that I mentioned, and we have not quantified, but that has a significant impact, and that is the rise in scrap prices. The input cost is going up due to, as I said, reduction in the risings and upward pressure on pricing and intrinsic nickel. So that has an influence. And the other thing that you did not mention in your balance is the alloy surcharge, which had a significant impact, and that still streams through into Q2 as well. For the rest, I think you are spot on.
Okay, that is helpful. It is pretty big impact then from scrap prices. I just want to come back to your also explicit guidance for Q2. Sorry, this has already been discussed a few times here in the call, but just to be certain. So the underlying EBIT was -20, and if we would adjust for the inventory write-offs and the receivable write-offs, this number would have been -5. Am I correct that we should use -5 as a reference for the guidance for underlying EBIT for Q2?
Use the -20.
Let me repeat. We have guided on underlying EBIT, and there is only one number for underlying EBIT in Q1, and this is -20.
Okay.
We have just explained that within this underlying, there are some special effects that we are seeing that we have referred in our guidance clearly to the underlying EBIT number.
Okay. Thank you very much.
We will take our next question from Hjalmar Kihlberg from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you. Just one more question on U.S. and the pricing there. You do not say how much is contract, but could you say that, will eventually all your products be impacted by prices, or is some not impacted at all of this recent price hikes?
If you say eventually, with a timeline to 2017, you would be right. Look, a part is yearly contracts. That will basically continue at the fixed pricing.
Okay. Could you say something on the price, what you are currently booking your standard 304 grades U.S., at which base price level it is now?
No, I cannot help you there, sorry.
Okay. On shipment for Calvert, do you have any full year indication for that in volumes terms for 2016?
I cannot give you any full year indication other than saying that the commercial ramp-up is continuing. Again, I want to stress we are extremely happy on the progress that we are making in Calvert, both operationally and commercially. So very satisfied with what is happening there.
Okay, then looking on imports, it has been discussed a bit, but the level in Europe, do you see it stabilizing at this level or do you see it moving in any direction in the rest of the year going forward?
I can really not answer that.
Okay.
To make it a bit of a less flippant answer. What is important is that we do not mind imports as long as they are at a level playing field. We can compete with any serious competitor in this market from wherever the product comes.
Okay, thanks. You just mentioned the impact from scrap prices in Q1. How much bigger is the impact going into Q2 compared to Q4 versus Q1? Is it a similar effect going into Q2 versus Q1?
You are talking from a financial point of view. The impact that we are feeling in Q2 has very much to do with the Q1 price development because you are purchasing the material, of course, six to eight weeks before your final deliveries. So there is a little bit of a spillover effect. It is not that we are indicating a negative development in Q2 to happen regarding scrap pricing. This would be completely irrelevant for us to point to any kind of direction here. But what we are saying is that what we have seen in Q1 happening and what is impacting us will have a negative impact in Q2, which also explains why the progress that we are making in terms of both pricing, volume, and our efficiency is not fully visible in what we are guiding for in Q2.
Okay. Just one on the writedowns again. Historically, what is a typical level of writedowns for a quarter compared to the EUR 50 million this quarter? If you look back at the historical underlying EBIT, have you included writedowns in those or have you then have it excluded?
Writedowns are topics that are only happening according to the prudence of how we are seeing the commercial situation and the economic situation. They have no pattern. A normal quarter goes without writedowns. If there are writedowns, then they have a certain reason why they are being applied. But this is not something that we are guiding for, or this is not something that has also a history that always repeats in that sense. So those are, in the sense, one time effect. However, in this case, they are included in underlying EBIT because they are operationally related, and according to the new rules, that is not an adjustment in the sense of a non-recurring item that you would give.
Okay, thanks. Just a last one on your balance sheet. You have been working a lot to get your net debt down, and it is going the right direction. I am just looking at some of your peers. As I say, ArcelorMittal raising equity, being pressured by creditors. How are you seeing your pressure from creditors developing in the last few quarters?
Well, first of all, I think we have again strengthened our ability to have access to the capital markets with being a rated company now, and clearly having access also to rating bond markets and other financial instruments. We have also a good liquidity at hand. So in that sense, I think from the financial stability, this is clearly an improvement of the company. We do not compare with companies like ArcelorMittal that has a complete other dimension of debt level, and we are also not having any kind of equity raise on our agenda.
Okay. Thank you a lot.
We will take our next question from Artem Zolkin from SEB. Please go ahead. Your line is opened.
Yes. Hi, this is Artem from SEB. Still two quick ones from my side. First relating to ferrochrome. Should we expect normal seasonal pattern in terms of production for Q2, so volume should be down maybe 20% quarter-on-quarter in Q2? The other one really relates to European base prices. So your prices were down some EUR 50 per ton in first quarter. Does it relate to, say, weaker mix what you have seen compared to fourth quarter, or is market pressure a bit more substantial compared to what CRU is projecting?
On ferrochrome seasonality, we see stable development Q over Q. I am not aware of the seasonality you are referring to. As far as European base prices are concerned, our dip is more due to mix than anything else.
Okay. Thank you. That is all from my side.
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Excellent. Many thanks for participating in the call today. Thank you, Roeland. Thank you, Reinhard. Our next report will be for the second quarter, and the date is July 26th. Thank you for your participation. Bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.