Good afternoon. Thank you for standing by, and Welcome to Outokumpu's Q2 earnings presentation. At this time, all participants are on a listen-only mode. There will be a presentation followed by question and answer session. At which time, if you wish to ask your questions, you will need to press star one on your telephone. Alternatively, you can submit your questions via the web by clicking on the Q&A panel. I must advise you that the conference is being recorded today on Thursday, the 23rd of July, 2015. I would now like to hand the conference over to our first speaker today, Johanna Henttonen. Please go ahead.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Outokumpu's second quarter 2015 audiocast for our results. My name is Johanna Henttonen. I am Head of Investor Relations. Today, we will start with a presentation by our CEO, Mika Seitovirta. After that, our Chief Financial Officer, Reinhard Florey, will take a look at our Q2 numbers in more detail, and then at the end, Mika will do the closing remarks. After that, we will continue with a Q&A session. With this, Mika, please go ahead.
Thanks, Johanna. It is Mika Seitovirta here, CEO of Outokumpu. Thank you for joining. As anticipated, Q2 was a challenging quarter for us due to business conditions in the Americas. However, our message from Q2 is two-folded. Yes, Americas was disappointing, and it was as bad as we forecasted, but at the same time, EMEA continued to improve and was very much according to our plans and expectations from the side of the management. Let me just briefly go through a couple of highlights and a couple of positive things and a couple of challenges that we had during Q2. Of course, when it comes to EMEA, Q2 showed us further declining imports from Asia. At this point, especially, of course, from China, imports went down, and we also saw small base price increases in Europe at the same time. We could progress with the restructuring.
Bochum melt shop was closed according to our plans, and the last melt was at the end of June. Savings programs, all in all, the group reached EUR 433 million of savings, and we confirm our forecast for this year, which is EUR 470 million, which is also the target. It is still valid. Now into challenges we have in the U.S. We also got Mike Williams into the team now as from July 1st.
He is fully operative and as new head of Business Area Coil Americas, strengthening and most welcomed to continue to turn around in the U.S. On the challenges side, clearly, there were also uncertainties in the market. First of all, I would like to say that it is especially low level of nickel already for a long time, if we look at the historical values of the nickel. That is impacting our industry and the market behavior.
Maybe as the last thing, we could already see during Q2 that it is going to impact also scrap prices in the future. Also, the market conditions varied a lot. If we look at the Asian markets, and especially China, we all know that the economy was very uncertain there, impacting also the global economy. You could see the imports channeling from coming to Europe because of the temporary anti-dumping tariffs, so they went to U.S. instead. At the same time, the growth was much less in China than it has been previously. In these conditions, our EBIT was lost at EUR 25 million, and clearly unsatisfactory, but very much according to those expectations what we had when we gave our guidance.
As a result of this development during Q2, and especially, of course, the U.S. development, it was not only a deviation in our profitability, but it was also, of course, a deviation impacting our cash flow. All this together meant that our net debt rose to EUR 2.1 billion. It is still one of our key priorities for management to get this down. Let us have a look on EMEA. As I mentioned, it was very much as we expected. So there are already several consecutive quarters that we are able to improve our underlying EBIT. It is very much based on the restructuring. So first the Creusot melt shop, then the Bochum melt shop, higher utilization in our more efficient mills. That combination is now generating and giving us benefits on the cost side and giving us the opportunity to be much more effective than earlier.
This development is going to be continued on the restructuring side, but at the same time, we are going to put more and more focus that we are also commercially agile and putting the focus on the customer front. Looking forward now. So Q3, we are entering now, of course, the seasonally weakest quarter, and we are going to have our maintenance break there as planned. We feel that so far we are going to have very moderate impacts from the possible anti-dumping, and we wait until we have from the commission the official and final decision on the duties, what the levels will be, and how long possibly the anti-dumping is going to be, and whether it is positive or negative. So this we still do not know, and we expect to get it latest in September. Americas. Coil Americas, EUR -50 million underlying EBIT.
We believe this is the lowest point for Business Area Americas and Calvert. Few words about the market, because we know the backgrounds, how we ended up to this situation. Last year, long delivery times, we had our technical breakage in the cold rolling mill. Those problems were fixed. They are fixed, so our operations are running well. However, we had a very low order book when entering this year, and at the same time, imports were rapidly increasing, especially from China. So our challenge has been, and the lowest point has been really the Q2 here, which you can see in the very bad result. The challenge has been volume and the utilization of especially Calvert mill. How we react to this now? We think that first of all, the market development is in a way good because it is still clear that there is underlying demand.
The problem is that there is an inventory bubble, and most of the distributors are still having excess inventories. How long will it take to come to normal levels and the customers would then again place orders, remains to be seen. We feel that because of the underlying demand that is still there, the development will be better. I mentioned already Mike Williams as a new head. We have a lot of work. We have been doing it now since the beginning of second quarter, where we have sharpened our commercial strategy there. We have strengthened also our sales team to be more active in the market now. We are developing also our operations in Calvert. It is running well. I mentioned already that the utilization had been too low. It needs to be higher, and we have a large potential even to improve the operational efficiency.
All these programs are ongoing, also including cost streamlining to offset the lack of volumes for the time being. After Americas, let's look the global view of SMR latest forecast here. Maybe just to highlight the changes against the previous one. You can see we start from U.S.A. here. You can see that it was earlier zero end demand growth for this year. Now it is +2%, and this confirms only our own view here that the underlying demand is there. That's definitely good news. The U.S. economy overall, we feel is very strong. Of course, everything related to oil and gas is not that strong. That we know as well. Our exposure to oil and gas is not that big. Europe showing good numbers, +4% for this year.
This is of course, very much welcome because we still remember the years 2012 and 2013, which were really low here. We would hope that despite of the uncertainties we have, this would really give us new opportunities in the European market. You can see the Chinese number now it is only 5% there. Of course, that's a heavy decline. Now those volumes are currently not coming to Europe. The big question is, of course, where will the volumes go because the local demand is that low. We don't have yet signs during Q2 that the imports from China to U.S. would be lower. This is, of course, something that we can see only later on. However, we are there back in game, and our delivery times are very slow, so we can serve customers there.
Globally, again, we still feel we are in the right industry. It is 4% growth globally that SMR is forecasting. We believe that that is very much the case. Let's look at the pricing. If you look at the European base price and the development, you can see that there's very little improvement. Actually, we are on a lower level than last year. If we look at U.S., it is more or less the same situation. In U.S., the pricing development, also the alloy surcharge development, has gone downwards. In practical terms, we are pretty much on a 2013 level currently. Last year's positive improvement is not there now. Let's take couple of comments about nickel. As you know, we are not giving any official disclosure where the nickel is heading. We can just conclude, all of us here, that it is on a very low level.
Of course, it's impacting the market. It's especially well to be seen in U.S., where distributors, wholesalers are digesting their inventories for the time being, and looking and following also where the nickel is going to go. Maybe it's worth mentioning that now, during the last four weeks, we can see that for the first time now, for a very long time, the LME stocks have been going slightly downwards. As I mentioned, this has an impact also to scrap prices. There is a high pressure that scrap prices are going to go up. A couple of slides still here. One slide actually about the European and then about the U.S. imports development.
What you can see here, if we start from Europe, is that 21.3% has been the current level now of imports. You remember that last year it was more than 30%, so it's clearly coming down. Out of that, you can also see the China share in the red box over there. So from almost 10% to almost zero, under 1% right now. A similar logic is there for the U.S. imports, but different numbers here. All in all, the imports are 32.2%, of course, including also the European imports. This has to be remembered. That was a clearly lower, which you can see below there in the same box, last year. Again, you can see that the Chinese share has been the one which has been increasing, so 13.3% against year before, 7.3%.
If you would go to 2013, the percentage would be around 4% only. That is the trend in U.S. and Europe when it comes to imports. Now it's time to go and have a look and drill down to our numbers. Reinhard, please.
Thank you, Mika. This is Reinhard Florey here of Outokumpu speaking. To start with the key financials overview, we can see that the underlying EBIT has reached a level of EUR -25 million. It certainly was driven by the weak performance we have seen in Coil Americas. Regarding the reported EBIT, which is at the same level as the EBIT excluding NRIs, we see just a small difference of EUR 1 million as a net effect from the raw materials related inventory and metal derivative gains and losses. Compared to last quarter, where this was EUR +7 million, a clear tribute to the falling nickel price. The operating cash flow in this quarter has been at EUR -41 million compared to EUR -62 million in last quarter.
The sales level has come down according to the slightly lower stainless steel deliveries, some 4,000 tons less than first quarter, but specifically lower nickel and other raw material prices, especially also molybdenum, to a level of close to EUR 1.7 billion. In this result of EUR -25 million, there is no effects from any non-recurring items in there. While in first quarter we have still EUR -19 million non-recurring items as a consequence from the cold rolling breakage in Americas, there is not such an effect in Q2 numbers enclosed. The personnel at the end of the period has been reduced by another 160 people to a level of a little bit above 11,600. So the overall reduction is following very closely at the path that we have anticipated in reduction of our headcount.
As a next step, we look at the progress in our cost savings programs. As Mika has already mentioned, we are making good progress here. According to our plans, we have reached a level of EUR 433 million by the end of the second quarter 2015, and are exactly on the trajectory as foreseen for delivering on the target of EUR 470 million for the full year. There are also no changes regarding the expectation of a one-time effect there. Maximum effect for the full effect of EUR 550 million would be EUR 220 million of that, of which provisions have been taken already at a magnitude of EUR 192 million, and only this increment of EUR 28 million to come in the next quarters.
Regarding the cash out from these provisions taken, after a sizable cash out in first quarter of EUR 56 million, we have seen now about half that value of EUR 27 million in Q2 2015, and we are expecting roughly about EUR 10 million for the rest of the year to come. If we go to the individual business areas and have a closer look there, starting with Business Area Coil EMEA. There we can see that the development of the underlying EBIT shows a clear positive trend. We have exceeded already after the first two quarters, the total underlying EBIT from last year and the EUR 42 million EBIT, and EBIT excluding NRI of EUR 56 million are continuing this positive development of Coil EMEA. Overall, we can see that the demand has been healthy.
The pressure from the imports from Asia, specifically where the provisional anti-dumping duties are effective regarding China and Taiwan have gone down. Overall, we have seen that the import pressure has gone down from some 30% - 20%, which means that some other Asian countries have increased their share of the imports. The deliveries in EMEA have stayed more or less at the same level, slightly up to 415,000 tons. Ferrochrome deliveries, in spite of the maintenance break that we had in this quarter, have been on a stable level, some 23,000 tons there. We can, on the other hand, see that the falling nickel prices has taken its toll on the sales, so we are a little bit above EUR 1 billion in terms of sales.
We are seeing that this also has an impact on the general way how we can proceed further, but it has not negatively affected our profitability. We can also see that we are on a stable level regarding the operating capital, more or less on the same level here. The ferrochrome maintenance break, as mentioned, has been completed. There has been an overall production level of some 90,000 tons in Q2, and the forecast for the production for the full year is now at 460,000 tons. Looking ahead, we will see that Q3 certainly will be seasonally slow as always in the third quarter. We are expecting in Europe some lower volumes. Also the pressure on the scrap prices, as Mika has already described, will certainly be visible in Business Area Europe.
Regarding Business Area Americas, we have already mentioned that this has been a disappointing development and certainly not a satisfactory profitability here. We see it as certainly the low point in the development with the expectation that this will clearly be better in the quarters to come. The deliveries have come to a low point of 111 million. However, we also see that in general, demand in U.S. is healthy, and as soon as the elevated levels of stocks at our customers will be eased out, which we expect to happen within the next month, we will see an upward trend of deliveries as well as order intake in our Americas operation.
The weak profitability clearly can be attributed to the low volumes, to declining prices that we are seeing regarding or as a consequence of the overall reduced demand and order intake, and then of course, some increased operating costs due to the low utilization levels. From the production side, the issues with the cold rolling mills have been overcome, and the cold rolling mills are working as planned. Regarding the second half deliveries, we are targeting to increase them. However, after this Q2, we expect the total deliveries to remain below the 540,000 tons of last year. Mika has already mentioned it, but I think it is important also from a financial point of view to point at the special programs and the special measures under the new leadership of Mike Williams, that we expect to take some effect in the second half of this year.
Coming to the business area APAC, we see that APAC at an EBIT level underlying of EUR -4 million has still a positive underlying EBITDA, which is not easy to achieve in the difficult market conditions we are seeing in Asia. We are seeing a rather weak market development in terms of the growth rates, and we are seeing capacities still coming on stream in this year. So there is quite some tension in the cold rolled and hot rolled market in APAC area. The higher volumes that we were successful to book have not been though enough to make up for the falling prices and for the decreased spreads that we are seeing. The underlying EBIT has declined, however, still EBITDA positive. The same is actually true for quarto plate, with a level of EUR -4 million EBIT.
We are still also there on a positive EBITDA level, and it is a clear difference to last year's performance. In order to follow the path of turnaround here, we have been able to debottleneck also the production side. It is expected that we will have the production up from some 75,000 tons in Degerfors to some 95,000 tons this year. Still, the EBIT was certainly impacted by low margin and product mix. We are seeing that there is some price pressure and in the U.S., the demand from oil and gas industry has been on the decline, which also had a negative impact on the quarto plate operation. The Long Products operations are in the positive range of EUR 4 million positive after EUR 3 million quarter one, now EUR 4 million in quarter two.
The sales have gone up slightly from EUR 150 million- EUR 160 million, and the deliveries have come up from 52,000 tons - 62,000 tons. The positive impact of the higher volumes regarding the profitability was limited, certainly, because there have been some lower margin volumes included in there. Also the impact from oil and gas business is certainly visible in the Long Products. But in general, we are very positive on this to be a profitable business area, further developing positively also in terms of profitability and cash flow. Regarding the operating cash flow for the group, as anticipated in our guidance, we have been at a negative operating cash flow, this time EUR 41 million after EUR 62 million last year. The cash flow from CapEx has been at a modest level of EUR 34 million, accounting CapEx at EUR 35 million.
The overall free cash flow of EUR 75 million has led on the one hand side to a higher net debt and on the other hand also to the decrease of our cash and cash equivalents, which though are still on a solid and stable level at above EUR 200 million here. Overall liquidity reserves remain very healthy at a level of above EUR 1.2 billion for the group. If we are looking at the development of our net debt and the gearing, as mentioned, we have seen a slight uptick of the net financial debt to EUR 2.1 billion. However, still the longer-term target of EUR 1.5 billion stays upright.
There is no change in our ambition to be at the end of 2017 at a level of below EUR 1.5 billion, specifically with the anticipation that the cash flows from our operative business, not only in the second half of this year, but in the coming two years, 2016 and 2017, will significantly contribute to this reduction. Regarding the gearing, it has gone up to 96%, but still stayed below the 100%, which for us certainly has a certain importance but is far away from the covenant. Regarding the debt maturity profile, no change to the situation in Q1. We have these first shifts from 2017 into 2019 and 2020. Maybe the only thing to mention is that the bond in 2016 has now become a current debt, so it is from non-current to current debt.
But no change there and no significance regarding our ability to refinance this as well. Last but not least, a look at our corporate program regarding net working capital optimization. We can see that even with a slightly negative impact of some EUR 28 million in second quarter, here we are at the level of our target for the full year. We are also confident that the EUR 400 million improvement level against beginning of 2013 will be achieved in 2015. We can also see that there is quite some room improvement regarding the inventory days and development that we foresee here from the end of quarter two to the year end. Mika, that brings me to the end of the financial performance. Back to you to outlook and guidance.
Thank you, Reinhard. To start with, let's look at the SMR forecast, just to give you an understanding of how they view the continents here when it comes to volumes and demand. You can see the very clear difference between second and third here in Europe, and that's the maintenance break and seasonality what we have in the market. Then, the positive thing in Americas is that SMR is forecasting, and we share the forecast that the demand would be on a similar health level as it has been during the beginning of the year. So no changes between the quarters here. Let's go through our guidance. Outokumpu estimates somewhat lower delivery volumes quarter-on-quarter, seasonal decline in Europe, and gradual increase in Americas. Underlying EBIT for Q3 to improve from Q2, but to remain negative, mostly due to seasonal impacts.
In addition to the ongoing savings programs, special measures are taken to improve profitability in Coil Americas. With current prices, net impact of raw material related inventory and metal derivative gains, such losses on profitability is expected to be EUR 10 million-EUR 15 million negative. Let me then summarize our priorities here. It's clear that to get Coil Americas back on track is the number one thing. We are very confident that we will get to the right track, and we can turn around the Americas operations. We can finalize, although delayed, the commercial ramp-up of the activities there. We have good team there. We have the most modern mill on the continent, and there is no doubt that we couldn't match with the efficiencies of our peers over there. The second thing is that we will further capitalize on the good progress of Coil EMEA. The restructuring continues.
We will also take new steps towards commercial excellence there. We believe that in the current market conditions, that's good development which we can see even in the future. Savings programs, we have gone through, but we also say that whenever we see the opportunities or identify further opportunities, then of course, we will use on them. Net working capital management. You saw that Q2 was not world class on that one, but I mentioned already that despite we are all in all in target, so of course, the challenges in Americas impacted as well the net working capital development. So now we are operating there as well, ourselves back on track. It's very high priority. Then of course, point number six here, debt reduction. We stick to our long-term target here concerning to 2017 and to be below 1.5.
In order to reach that, for us as management, nothing is off the table there. We look also operative development very carefully, but also possible divestments are not excluded from our toolbox here. I suppose you have now time to move to questions.
Very good. Thank you, Mika. Thank you, Reinhard. This would be the time when we are ready to start the Q&A session. Operator, please, I think you can go forward with the instructions.
Thanks, Johanna. As a reminder, if you would like to ask a question, you can press star one on your telephone, or you can submit your question via the webcast. That is star one on the telephone. Okay, we have had a few questions come through on the phone line. The first one comes from the line of Cedar Ekblom from Bank of America. Please go ahead.
Thanks very much. Hi, everyone. Two questions. Firstly, in the U.S. market, you have mentioned that you are taking some measures to try and address profitability and compete with imports. Can you just talk to what your strategy is at the moment on volume versus price? I am getting the sense that there is a push here to fill the mill and focusing on volumes, and I just wonder, to what extent that is helpful in a materially oversupplied market right now. In other words, are you perpetuating the cycle on prices moving lower? That is question one. Question two, there are a number of divisions within Outokumpu that are not making much money at the moment. Long Products, APAC in particular, while net debt is rising.
Obviously, there's little room for error, really, on the Outokumpu story right now, because with gearing so high, we really do need to see some real cash generation coming through in a pretty short period of time. Would you consider divesting entire divisions like APAC or Long Products, which could potentially be worth more if they were monetized, in terms of the balance sheet stress at the moment? Thank you.
Thanks for the questions. First of all, if we start from U.S., just to summarize again on a high level that we have several programs going on there now, which are partly related to our commercial strategy, partly related to our operational excellence programs that are going on there. That means that we develop our approach to different industries, to different customer segments. We are building up the partnership now because we know that we can deliver there. To your question, volume against price, that's an interesting question. We have always said, and we haven't changed our view on that we always go for profitability. We haven't changed our approach there. Then you need to remember as well that most of the production is commodities there. Of course, we have Mexinox then which is a separate story. And in commodities, there is always a market price.
We need to be efficient there. And of course, we need to meet as well the market price in a profitable way. When there are products which have special features like the 72-in wide or similar products where we can really give customers added value, we take always a premium on that. To your second questions about possible divestments. As you know, we haven't disclosed any specific units or assets or BAs or whatever that we would divest, and we are not going to do it today either. However, we have already a long time looked into the different opportunities that we have, knowing how important for us is to take the net debt downwards. It's really a high priority, and we have really looked into all.
When it comes to divestments, nothing is off the table from that respect either, but we are not going to disclose any specific unit or asset.
Perfect. Thank you.
You're welcome. Thanks.
Thank you. We have another question on the phone line from the line of Bastian Synagowitz from Deutsche Bank. Please go ahead.
Good afternoon. I've got a couple of questions, and my first one is again, on the U.S. So if I look at your shipments, which have been down 22%, even taking into account the import trends, I guess this is much more than the market. Post Q1, you explained that, I guess the pretty optimistic guidance at that point of 540 kilotons was basically based on customer discussions, and now you're missing this target as well, and you'll probably miss it by a margin. What exactly has happened here, and what were you missing in Q1? Have these customers you were talking to there really just walked away and said, "We go for imports rather than ordering domestic." Or why are you really losing completely ground on the market footprint?
Because if I look at your volumes, you are basically back to the time before the melt shop ramp-up and so is your operational performance, and it really should not be. Maybe you can give us a bit more color on what has happened, and maybe also tell us a little bit what your conclusions are after having been to the U.S. for the last couple of weeks. That would be my first question.
Thank you for the question. You are right about the volume levels that when you are saying that we are back to the levels actually which are actually history in our ramp-up as such. But that is true that the commercial ramp-up is delayed because of reasons we know. Why do we see it differently than at the end of Q1? I think that the biggest reason is really that when you buy imports as a customer, you have very long delivery times. It is four to six months. And depending on what you have bought, you might have been a little bit bullish as a customer as well when ordering at the end of last year when everything looked quite different.
I think that that created the higher inventory levels, and it wasn't to be seen that it might take the customer companies a little bit longer time to get rid of the over inventory and then to start place orders in the normal way. I have been really as from actually May, I have been having my office there. Now I am back to Europe, but I have been talking to customers, and there was not a single customer who would have said that we have changed you to imports. They are happy with our quality.
We have been able to improve the delivery performance a lot. The price gap against import pricing is much less than it was last year, and we have a delivery time currently, which is three to four weeks. So I am rather convinced that the customers are preferring made in U.S. delivery for many reasons against imports.
And they were, of course, I just want to remind you, partly also forced to go for the imports because we were off the game for a certain period. Hopefully this gives you some more background to that.
Thank you. Now just following up on that one, I think Mika Seitovirta already made the point. If I look at the U.S. business, basically currently an annualized EUR 130 million EBITDA loss-making business, which means cash drain is probably even higher than that, and your balance sheet cannot really afford it. You were already talking about a few measures, but are there any quick wins you could basically do and implement to basically get, I think the performance at least closer to EBITDA breakeven in the course of, say, the next two or three quarters?
Yeah. Of course, we are not giving any guidance for those quarters now or this year specifically. But I can say that yes, there are measures, and we have been preparing those measures in detail. And you have even quick wins. Of course, nothing can compensate volumes at the end of today. But when it comes to, for instance, yield improvements there. So we have been moving already in the beginning of the year, engineering skills to Calvert, from Tornio, from other units, from Outokumpu Avesta Works, in order to really take care that the best knowledge that we have within the group, and we have a lot of knowledge, is there to help. We start to see results there as well. So there are ways to turn around that profitability development. Again, it's two different cases.
When Europe is a solid restructuring and growth case, this has been a greenfield, and it takes time. But the good news are that the production is running. We don't have the cold rolling problems we had, and we are improving gradually there.
Okay then. Just moving over to the second point, which is EMEA. Again, I think here your operational performance is actually quite strong. Yet you mentioned you had some problems in the hot rolling mill. So how much was the impact in the second quarter and when fully fixed in Q3? Or will there still be some spillover?
First of all, yes, it is true that we had those challenges. I think this is really also a kind of a learning curve, because those assets have probably not so often been run at that high level. We can see we have been doing the stress tests already Q1. Those have gone well. Now, those challenges that we had in the hot rolling, those bottlenecks, we have solved, and we are pretty confident that we are able to deliver in the future much more reliably the higher volumes that we now have. I do not think we have disclosed and quantified any amount on that problem that we had. So there is no EUR amount for that.
Can you give us just a very rough sense? Is it rather single digit? Is it rather double digit million? I suspect it is less than that.
Well, I would say that it is single. That much I can say.
Yeah. Okay. Thank you. Then also on the plate business. I remember after Q1 in the conference call, you said that you would not really expect a fallback in earnings here, and it seems like the performance has worsened again a little versus the first quarter. What has happened here, and are the measures which you were mentioning in the Q1 call just taking a little bit longer? Or what can we expect sequentially in the next few quarters?
Yes. I am not happy with the Q2 quarto plate result. You are right, I was expecting more. I would say that the main impact has been still if we look at the ramp-up of our Degerfors unit. In that unit, we have had quite some complicated projects. That is first point. The second point is that although the deliveries went up, the price levels have not been as we have forecasted. Yes, we were deviating from our own expectations Q2 in quarter plates.
Think that you will kind of get back on track in the third quarter?
Well, we are sure we will get back on track. However, we need to get also the utilization levels right, and that is again dependent on the market development. Market is rather difficult for the time being. We are still aiming for the 95,000 tons, as we have said. That is what we are targeting. Of course, continuous improvement, and not only on the production side, operation side, but also we need to develop our commercial activities. But this has been the order that now when we can deliver more, produce more, the next thing is that we can sell more. It had to be this order so that we are not risking our customers.
Those were all my questions. Thanks for taking the time.
Thanks a lot.
Thank you. We have another question on the phone lines from Artem Beletski from SEB. Please go ahead.
Yes. Hi there, Artem Beletski from SEB. A couple of questions from my side, and the first one is really relating to inventory situation. How confident are you in reducing your inventories from slightly more than 100 days currently to the target at 86 days by the year-end? What are basically the elements contributing to this kind of inventory reduction?
Thank you for that question, and it is extremely good question. It is very clear now that it is a very challenging target, the 86, knowing what we had as development in Business Area Americas, and especially Calvert. Obviously that target was set before we had this situation. However, we have decided that we still try to get there with all the possible means, and I think we have learned a lot from last year as well that we have been faster this year to react to the situation that we are lacking volumes, and we couldn't make our volume forecast. It is of course also heavily dependent on how the market really H2 is going to look like. EMEA inventory development, I am very confident. I don't see any particular risks on that. They will keep up the good pace they have.
They had already good cash flows and development in Q2 as well. But the question is really how the H2 and how the very ambitious action plan that we have on that one is going to succeed. But really 86 I need to realistically say as well.
Okay. The other one is really relating to European situation and current trading. Could you maybe comment on lead times, what you are having right now and also new orders? Basically, are you taking orders beyond September when this final anti-dumping duties will be in place, presumably?
Currently, we are selling October in EMEA, which tells you that actually the order intake situation has been good.
Do we see some kind of impacts in terms of base prices due to potential decisions regarding anti-dumping in Europe?
Well, we are not guiding prices forward. We are only telling what happens behind. I think really we need to see the decision and the market needs to see that. That probably is going to take some time, even if you would get a positive decision, which we don't know today. You would probably have quite a long lead time before the market sort of demand and supply is in a new position, and you can say that whether that will then impact on prices and volumes and imports then from other places. So it's a complicated puzzle. So far I can say, and we have said it clearly that so far the impacts are very moderate.
All right. Thank you. That's all from my side.
Thank you.
Thank you. Another question on the phone lines from the line of Jean Devevey from Exane. Please go ahead.
And a few questions, if I may. First of all, if you could help me better understand what you are talking in terms of cost improvement when it comes to your U.S. operations, because I understand you are saying your Q2 is going to be the lowest point, but at the same time you are saying volume are going to improve in H2, and I understand not so materially given the full-year guidance you are now talking. In a context where prices are still dropping and maybe are further to go, that would still suggest to me that there is maybe downside to this assumption. So maybe if you could quantify a bit more what you are doing there and how much cost improvement you would gain. That would be my first question. Second question would be related to your EMEA business.
If I look at the transaction price from CRU Q2 versus Q1, I end up with a drop of something like EUR 30 per ton. When I look at your realized sales price in EUR per ton, I end up with EUR 110 or so drop Q2 versus Q1, which suggests to me that either you are dumping or the mix is deteriorating. So if you could elaborate a bit more and to what extent this is offsetting some of your cost improvement there. Thank you.
Thanks. We start from the U.S. So indeed we have a special cost improvement program there, and it is on top of the programs that we have had so far. So we have during Q2 really looked all the possible measures how we can improve our position because we are suffering so much from the lack of the volumes. Your comments about declining prices are okay. However, the underlying demand is there.
And then if you say, yes, we have a cost improvement program, we have not disclosed any number for that program, and I am sorry that I cannot give you this number now, but we are ambitious on that one. And I think it is very credible actions that the new management is doing there right now. So maybe just those comments briefly on the cost improvement in U.S. Reinhard, maybe you can comment the pricing and the comments.
Yeah. I understood your question in that way that you say the transaction prices that you see on the official statistics versus our transaction prices, there is a difference. Please do not miss the point that, of course, there are always mixed effects regarding austenitics and ferritics. And that, of course, is in the transaction price per ton, a big difference. And you not lost on profitability. Rather, we have gained on profitability. So we think that the suggestion of us dumping in the market is very far-fetched and certainly not appropriate.
Hello?
Thank you. We do have another question on the phone lines from the line of Cedar Ekblom from Bank of America. Please go ahead.
Thanks. Sorry, one follow-up question from me. No one seems to have asked it yet. Obviously, the topic du jour, U.S. trade cases. There are a number of steel companies in the U.S. in stainless steel that have seen their profits decimated by very high levels of imports. Yet, when you ask companies what they are doing on the import side of things, they all seem to be pretty sanguine on the issue. Now, I understand that this is a legal problem, and you guys don't have clarity on when we might or might not get a trade case launched. But could you talk a little bit more about this in detail, what your perception is of the problem, how aggressively you are pursuing it? I understand you can't say whether you think you will get a decision or not in favor. That's a separate issue.
But I feel like investors are a bit concerned by what appears to be apathy from steel companies on the level of imports into the U.S. and what it's done to profitability. I just thought I'd ask the question straight out. What is happening there? Thank you.
Yeah. This apathy you don't find in this company. The case, of course, depends a lot, but can you file it with appropriate data, and do you see the injury happening or threat of the injury coming? We are working on that, as we have disclosed earlier. We are, of course, taking always fair trade issues in a very serious way. Until we have, however, enough data to make the right conclusions that whether we can file something or not, there is not much more that we can comment on that. But I promise you that as soon as we have those conclusions available, we will immediately tell what is our position towards that.
Okay. Then just a further question. Is there any way you can give time frames on that? How long you need to get this additional information? Is it all in your hands, or are you required to get responses from other parties?
Let's put it this way. It's not all in our hands, and therefore we are unable to give you a timeline. It's also depending on the authorities and so forth. It's a legal thing as well. I think the best thing would be that you would look at some of the carbon steel cases earlier. Maybe you'll get an understanding how soon that kind of a process could come if there is a case.
Okay. That's very helpful. Thank you.
You're welcome. Thanks.
Thank you. We have another question from the line of Jean Devevey from Exane. Please go ahead.
Gentlemen, if I may add a follow-up. Just to be sure I properly understood some of Reinhard's comments on EMEA profitability going in Q3. You were talking Q3 underlying profitability to be down versus Q2 level on lower volumes and negative scrap price pressure. I would just like to clarify whether we are talking EBITDA ex non-recurring or ex NRI effect, which was quite positive in the Q2. Thank you.
Thanks for the question. We are not expecting NRI effect in Q3. What we are seeing is that there is, as always the case, a seasonal impact in Q3. The seasonal impact is certainly more pronounced in Europe than it is in Americas, where there is no such a thing as summer break in the narrow sense. I think what we are saying is that we are expecting the volumes in Europe to be lower in terms of the deliveries and also in terms of the production, as we have these maintenance breaks in order to be there with the full strength of production capabilities back after summer. Those are the reasons, and that is not different from the years before. In that sense, there is nothing to worry about. There is no operational topic, there is no negative look on the market.
We still think that the market is strong, but we have this seasonal effect.
Thank you. Our next question comes from the line of Antti Koskivuori from Danske Bank. Please go ahead.
Yes, thank you. Most of my questions have already been answered. Maybe one on your other operations in Q2, minus EUR 14 million on EBIT, pretty high number or low, how you put it. Could you specify what is actually in that number, and then what we should expect going into Q3, Q4? I know it is difficult to predict, but any kind of help would be appreciated. Thanks.
Yeah, thanks for the question. Of course, in other operations, what you see is all the impacts from derivatives. These are derivatives on the metal side, on the currency side. In that sense, specifically the currency derivatives that we see from the U.S. dollar and other currency effects are included in there. Then there are topics of special initiatives that we take in other operations. If there are any minor costs, that is added in there as well. But clearly the main reason here is the currency derivatives, and if you take it from the EBIT excluding NRI, it is also the metal derivatives there.
All right. For Q3, do you have any estimate for that?
No, I have to say it is always very difficult to anticipate the movement of derivatives. Of course, there are some macroeconomic views that we have on currencies developing, but we have seen that the devaluation of the EUR has come to a certain stall now. If you take all the uncertainties about Greece, about Ukraine, it is not easy to predict, therefore, we are not giving a guidance on that.
All right. Maybe one question still on the base price levels and the potential increase in Europe. If you could share us your view about the timing and the potential price increases in Europe. Assuming that the decision on September would be positive from your perspective, would the timing of the price increases be then in September, or do we need to wait out a bit longer than? What is your view there?
First of all, just to repeat that we will only know when the commission comes out, what the final levels of tariffs, if the positive decision comes, and what is the length and everything. This is a market which takes a long time to change, to start. Everything that you are asking is actually basically a result in the future of supply and demand balance in this market. So we are not giving any guidance on pricing. We are not giving any estimate. We wait for the decisions to come, and then we will be part of the market and see how it looks like. The only thing I can say, whatever happens, I think they are longer term changes.
Okay. How would you describe the market balance today? You have been talking about the demand going or improving as well as import levels coming off. How is the market balance today? How do you see that?
Of course, we don't know the capacity utilizations of our competition, and we don't comment those numbers. We should do that in order to be able to answer in a proper way to your question. But what we can say is that, again, from more than 30% imports, we have come down to a level of 20 something. We have seen some imports from other countries increasing, so it's a net impact here. Actually, we are back to the levels where we were before 2014 because the imports have always been around 20. Whatever happens with the commission decisions, it's clear that the imports will not disappear. There is capacity in our mills and as I said, I don't know what is the situation of the competition, but I believe that we are able to serve whatever decisions come and whatever implications it will then have.
The market currently, as we said, is rather healthy. There is demand. So that is slightly improving now in Europe.
All right, thank you.
You're welcome. Thank you.
Thank you. Next question comes from the line of Michael Shillaker from Credit Suisse. Please go ahead.
Yeah, I guess a lot of my questions have been answered, but just a couple if I may. First of all, on Q3, given obviously Europe is generally very seasonally weak and the U.S. looks like it is still in destock, and therefore probably worse, not better. How much comfort do you actually have over your guidance for the third quarter? I know that you have got a tailwind from the lack of the ferrochrome outage, and I know that you have got, obviously the Bochum closures should start to feed through, but it does feel as though normally in this kind of cycle, Q3 would, if anything, probably be worse than the second quarter. That was my first question. Second question on the net debt target for 2017, which currently, given you are still bleeding cash, does look like quite a tall order.
Can you give us a little bit more clarity on, you must have a budget somewhere for this, on how much is market, how much is pure cycle, how much is bottom-up, from what you expect out of Calvert and restructuring and how much is coming from asset sales? You are not going to give me every single number, I understand that, but at least give us a feeling how you get to that target in what is still a very tricky market. My third question is, look, I guess you are about 80% of the way through the cost reductions. Right now, your 500 odd plan for cost reductions and synergies and obviously the group is still a bit loss-making.
I know you are working around the edges to try and get improvements in the U.S., but at what stage do you actually say, look, we actually need to go for something a little more major here, and we actually need another major overhaul of the group, because frankly, just tweaking around the edges in the U.S. won't get us in the position we need to be in. Those are my questions. Thank you.
Thanks, Michael. Very good question. First on the Q3 results. I think it is fair to say that, of course, in the guidance, there is a confidence of the management. You have already triggered the right point there, which I would like to confirm. First of all, yes, we expect a positive impact from the Bochum closure. Yes, there will be a better profitability clearly visible also from the ferrochrome within the EMEA results. We have another topic. We have been pointing last year also to the burden from the propane topics that now in third quarter, we will also have specifically in Tornio some positive effect that will help us also to reach our targets there. If it comes to the U.S., yes, you are pointing to a market which still has to digest the full stocks there.
But also there, we are confident that during Q3, we are seeing an improvement of the situation there. Our order intake and deliveries would improve. In that sense, while we are still, I would say, realistic enough to say there is a chance that it is still negative, we think that Q2 should have been the low point here. To your second question regarding the cash, I think it is very clear that always the majority of the deleveraging effect will come from operational improvements. If we are confirming our EUR 1.5 billion target, then it is also very clear that we trust also in our ability to create cash and extract cash from our operative business. Then there is, as Mika has mentioned, also the optionality to look into some M&A activities, not to be specified at the moment.
But it is clearly to be emphasized, we are not shifting all the effects for deleverage on M&A side. This is clearly our ambition in the improvement of the operational side to deliver on that. To your third question about cost reductions, I think I can only very much agree with what you said. Of course, the programs that we have now in place are not the limit and are not the end. We have already now taken the programs in the U.S., which clearly come on top of the improvement programs that we have under the P250 and the EMEA restructuring. I think we have demonstrated the synergies. We have kept our promises. We have even anticipated the point of time when we would be ready.
I think on the P250, we are absolutely confident that we will deliver on time there. The same is true for the EMEA 100. So it is the next, starting with Americas programs coming up, and there will be certainly some more details in the quarters to come.
That's great. And just on the cash flow over the next two years. Are you using current market conditions, or are you actually assuming an improvement in the underlying market conditions in terms of your effective budget?
No, we are not really speculative in that. We have always emphasized that our ability to improve our profitability mainly comes from inside, and that we still have, I think, many opportunities to improve there. So it is not, if you imply that any speculation that nickel would go up significantly or something like that's not the basis of our calculations.
Okay. I know you're reticent so far to give a target for the U.S. cost reductions, but is that something you feel free to do in a quarter or so time?
We will comment certainly in more detail in the coming quarters.
Okay, very good. Thanks a lot.
Thank you.
Thank you. Our next question comes from the line of Seth Rosenfeld from Jefferies. Please go ahead.
Good afternoon. This is Seth Rosenfeld at Jefferies. The majority of questions were already asked, but I guess there are two areas to follow up. First, with outlook for stainless scrap prices, can you just give a bit more color on how obviously weak nickel has impacted scrap supply, and just how significant the squeeze upwards in scrap prices that you are seeing? I do not think it is trying to quantify what the impact could be on the coming quarters of earnings. Then secondly, within EMEA, obviously with Bochum recently closed, and you commented that your capacity utilization rates at Tornio and Avesta are upwards 90%. Can you just try to give us a bit more color on how it is impacting your cost base, primarily on the variable cost side?
I know the EUR 20 million target you gave from the Bochum closure, I imagine principally on the fixed cost side, but how is that impacting your operations and variable costs at those two remaining plants? Thank you.
Yeah, thanks for the question, Seth. Regarding the scrap prices, you will understand that, of course, regarding our procurement conditions, we are not giving any kind of concrete numbers. But it is true that, of course, the ability, even for the big scrap suppliers, is being made much more difficult to source according to the demand if the individual collection gets more difficult because there is an expectation that the current level is lower than what we could see in the future. This is the main driver from this situation that currently, although the nickel price is low, the scrap prices or the cost of scrap currently is getting more of a burden for us. I think that is something that everybody feels in the market.
However, this is not influencing negatively the availability of scrap for us as such, so there is not a shortage that we would see at the moment. Regarding your question of EMEA, I think we have summarized overall the impact regarding fixed and variable costs in our EMEA restructuring improvements that we have said would be at a level of EUR 100 million when fully implemented. This comprises Bochum, this comprises the Penrith closure and the transfer of the cold rolling assets and production into Krefeld and optimizations in our sales structure and distribution structure that we have in Europe. All of that is certainly something in which we have seen fixed and variable costs included in there.
But to confirm what you are saying, besides the fixed cost, there is a variable improvement because on the one hand side, production moves from an energy expensive to a much more reasonable energy price market in the Nordics. Secondly, if you increase the utilization rate on your lines, this also has a positive effect on the variable cost due to the ability to have optimized runs in your production program. But that is more or less all I can say to this topic.
Great. Thank you very much.
Thank you. Our next question comes from the line of Luc Pez from Exane. Please go ahead.
Hi, guys. Sorry, most of my question have been answered. Thank you. Cheers.
Thank you.
Thank you. The next question comes from the line of Johannes Grasberger from Nordea. Please go ahead.
Hi, gentlemen. Likewise, most of the questions were asked, but regarding Americas, it seems like you are quite clearly signaling that Q2 will be the low point. Would this be true even assuming volumes would remain at Q2's level for the remainder of the year, or do you need higher output to improve from here?
First of all, we have indicated that we expect volumes to go up in Q3 versus Q2. It is also clear that the implementation of the improvement measures, of the operational improvement measures that we have there would nourish our expectation that even then Q2 would be the low point.
Okay, thanks for that. My second question is on EMEA. When are you starting your annual price discussions in the European market? I suppose you cannot give any indications on the price levels where they are heading at the moment, or?
Thanks for the question. It is Mika here. Concerning the price negotiations for the part, which is mainly then the yearly contracts with the end customers. That is about one-third of the volumes. They start late August, September. They are valid for next year. Of course, it is extremely sensitive area, so we cannot give you any details what we are expecting from that. That is a separate process. It starts pretty soon, and of course, we will take them extremely serious.
Continuing on the EMEA side, I think Reinhard just shortly touched on the electricity price, which has in the Nordic market has been falling quite heavily. Any indications on what your hedging policy is right now on electricity?
No, actually, we are not publicly commenting on the energy hedging policies that we have.
Can you say whether you will benefit at all on the lower electricity prices this year? Or would the benefit rather come next year regardless of how big that benefit is, but just if you could give us any kind of feeling on that one?
Yeah. It's a very specific question regarding our purchasing condition, which I would not like to go into detail here.
Okay. Very good. Then the final EUR 40 million cost savings for this year, is it going to be a year-end weighted effect or evenly split between third quarter and fourth quarter?
We are expecting that rather to be on an evenly distributed effect. This is a constant process of improvement measures going into effectiveness, and there is not a timed effect in there. This is rather a steady flow of improvement.
Okay. Thanks for that. My last question is on the debt reduction. I see that you are highlighting as one of the second-half priorities to reduce debt. Does this now mean that you are implicitly guiding for positive free cash flow for the second half of this year? I think I heard Reinhard also commenting the same thing in his presentation. Please correct me if I am wrong here. Thanks.
If we take it for the second half, I would tend to be in agreement.
Okay. Those were all my questions. Thanks.
Thank you.
Thank you. Our next question comes from the line of Alan Spence from Jefferies. Please go ahead.
Thank you, but all my questions have already been answered.
Thank you.
Thank you. We have no further questions on the phone lines. Please continue.
Thank you. I believe this concludes our session of today. We do have still some questions which came through online. We will be answering those individually by email from the IR team, so thanks for those questions. Thank you for your participation today. Thank you, Mika. Thank you, Reinhard. May I use this opportunity to tell you that our next field trip is on October 7th to Tornio, so there is still available seats for that trip. The third quarter report will be out on November 5th. Thank you.
Thank you. Bye.
Thank you. That does conclude.
Thank you.
the conference for today. Thank you all for participating. You may now disconnect.