Ladies and gentlemen, thank you for standing by, and welcome to today's Outokumpu Pre-silent conference call, second quarter 2020. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Also, I must advise that the call is being recorded today, Thursday, July 2nd, 2020. I would now like to hand over the call to your first speaker today, Ms. Maria Mäkinen. Thank you. Please go ahead.
Thank you, operator, and good afternoon, everybody, and welcome to Outokumpu's second quarter pre-silent conference call. My name is Maria Mäkinen, and I'm heading Outokumpu's investor relations. With me here is also Outokumpu's CFO, Pia Aaltonen-Forsell, and to start with, Pia will go through some of the main highlights during this April-June period and also give an update on coronavirus situation and its implications on Outokumpu. After Pia's presentation, we will take your questions. But now I will hand over to Pia.
Great. Thank you, Maria, and hello, everybody. I hope you are all keeping well. I actually think, as we are still living the coronavirus period, even though definitely maybe in a different phase than when we have spoken last, maybe I start there and then just brief you a bit about the coronavirus impact right now. There is a little bit of background noise on my line. I don't know if there's anyone here who can mute or help me with that. Anyway, I'll keep talking here. First of all, just to say that in terms of real infections and real impact on our operations, this is extremely limited. I think in a series of earlier calls, we have talked about the minimal impact on operations that we had through some short closures in Italy and in Argentina in our distribution centers.
So directly, let's say based on infections, we can really say that the impact has been extremely minimal. This is due to, let's say, very early and very diligent measures to fight this back. Currently, all in all, out of the near 10,000 employees, we've had 44 cases, and that is, of course, unfortunate for these persons, but I think as a company and operations, we have been able to manage this extremely well. Then there is, of course, another perspective to this, which is how the demand has then impacted and also our absolute commitment to managing working capital. I think I've also mentioned before that we had already sort of early in the quarter taken some temporary shutdowns in order to save costs, but obviously also to adjust to the lower demand scenario.
We have continued with that throughout the quarters, but that has been clearly always based on demand and sort of optimization of working capital type of situations, not really, so to say, directly virus-based. Also, in terms of our supply chains, the weekly and daily indicators that I also look at, I can just confirm that even though there have been risks in some areas, if we think, for example, about scrap or scrap collection, I think we have also managed to deal with all of those in a very proper way. So that has definitely as well just not really caused any real issues into our operations. Overall, in terms of the coronavirus, we have also been through a long period with a lot of remote work when possible, a lot of travel and meeting restrictions, et cetera.
But gradually now, as restrictions are being eased up, we are also returning to more normal practices. But obviously, we are still far from fully being back to the earlier. So probably we will have a new normal that will also include more, for example, remote work than before. So I think that is really the, so to say, overall operational view from the coronavirus. Then obviously, what I think is really important is also to see how the coronavirus has impacted on our customers and on our demand. Obviously, as you know, we have a guidance out there for Q2 for the volumes. There is no change to that guidance. It was between 10% and 20% down. We are comfortable with that and remain with our earlier guidance.
I would also say if I see how this coronavirus cycle has, how things have moved and what has happened, I think as we also shared earlier, it was really somewhere from mid-April that we really started to see the impact on the order intake. Definitely by now, if I think of the period through Q2, we have seen some of those lowest individual days and weeks of the order intake then through April into May. I think that in terms of order load, we definitely saw sort of the bottom there in May. Now since June, we can see I do not know if it is too strong if I use the word improvement, but I think that we can see that we are turning a direction, but this is not a home run. It is not a consistent day-to-day basis.
Rather, there is still fluctuation, and I believe that we can maybe, at a later stage today, talk a little bit about the different customer segments, et cetera. But definitely, there are also some differences between those. But all in all, big picture, in the end, very much according to our expectations during the quarter. I think that is quite. At least I am reasonably satisfied with that because we have not really been hit by the global pandemic for a long time. So it is, I think, a good end result to be able to say that from a volume perspective, we are very much so to say, within our guidance there. I think from other perspectives, there has, of course, been some action, has been some steps from the European Commission. However, maybe not the positive ones, generally in terms of some big revisal of the safeguard programs.
However, what I would say is beneficial with the new safeguards now valid from July, obviously, is that we have this quarterly basis, and I think that was a clear improvement, if I should want to say something positive here as well about that development. I think that maybe still on the cash flow I have here, let's say, a few opening remarks, and then happy to discuss that in more detail later. As I have already communicated, and I think we have consistently communicated the cash flow and the working capital as one element there to be able to control it, remains really a priority for us. That is why also through the quarter, we have really been able to focus on turning the direction of the working capital move.
You remember that we had a bit of investment into working capital with the clearly growing volumes in the first quarter, and now the direction is then clearly that with lower volumes, we are also able to squeeze out some more from the working capital. I think this is our clear intention and the way we work, and I think that we are also successfully executing on that. Then, final opening word still relating to cost mitigations vis-a-vis the coronavirus situation. I think the strength of a process in a company like Outokumpu being very used to some volatility in demand, is that we are good at mitigating these impacts.
We are good at taking what I would say temporary measures, whether it is furloughing, where actually we have also been able to give, again, some of the government support that has been available, or whether it is other ways of quickly bringing down costs. I think we have really used this now to be able to also control our cost levels through the quarter. That is definitely then something that we have to. Maybe we can take that then with questions and possibly discuss a bit more in detail, but I think we have been able to use those tools in a good way also during the quarter. So I think I would actually stop there with my opening remarks and then remain open for questions.
All right. Thank you, Pia Aaltonen-Forsell, for the presentation. Operator, we are now ready to take questions from the audience.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Again, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star one should you wish to ask a question. Our first question is from the line of Harri Autere from Nordea. Thank you. Please ask your question.
Yes. Hi, Pia. Good afternoon. All what you said, it seems to indicate that there were no material cancellations of orders that you were aware of at the end of the first quarter. Is that more or less the case?
Yeah, I think, Harri, what we discussed this in some earlier calls was to say that we typically have a pretty solid, let's say, protection, vis-a-vis cancellations in the way how we have the conditions around our orders. However, for, could I call it commercial reasons, we may still always contemplate to be supportive of our customers if need be. But I think I can confirm, definitely there have been customers discussing postponements and we have considered when applicable, but I couldn't talk about any material level of cancellations at all.
Right. Then as you promised that you will be elaborating a bit on these tentative signs of order inflow
Yes
kind of turning the corner and talking about the end use, maybe I should ask that.
Yeah. Harri, it's a good general question. Thank you very much for that. I am really sorry that I am in the home office mode and my dog now got crazy, but I hope my daughter will take care of her. So what we can see on the different end-use segments, first of all, I still think that there is a little bit two different areas here. You all know that distribution remains an important channel for us to the market, particularly so in Business Area Americas, but also in Business Area Europe. Last year, distribution was 46% of our revenue. I think that distribution is clearly still in this cautious with inventories, cash preservation mode. We've had, I would say, good dialogue. For example, Business Area Americas did call with all of our largest distributors during the last week, just in terms of updates and relationship.
Business Area Europe has done similar efforts to really sound where we are. I think that this sort of cautiousness or carefulness with cash is still the mode where we see distributors at this point in time. However, then if we talk about end-user segments, it's clear that there are differences between those. I think I talked about it earlier, that kind of automotive, for example, was pretty early in this crisis period. They were really, so to say, down with orders, reacting to the situation very quickly. Because they were early down, we've all read Financial Times and all the news about automotive starting up again. We do also see that but I still want to say, it's not like that we are back to any normal levels. It's just that we are seeing some, call it movement in the right direction.
I think the same goes, for example, for appliances. Well, there maybe partially because some of our customers were impacted also by closures in certain countries, et cetera. There was more of a step down already early in the crisis. So that is something where you can have some positive momentum and a little bit coming back. But again, here as well, I would say, this certainly doesn't indicate that now we are back to normal, but just that it seems that the direction has clearly changed. If we talk about many of the other groups that we have. Well, let's talk, for example, about oil and gas. It's clear that this is not a clear strong segment right now. However, it remains a very small portion of our business.
There are others, if we talk about construction, if we talk about industry, et cetera, where I would be very careful to say that we are at some sort of normal levels, but at least we can see some sort of light in those segments. So I definitely remain within, let's say, my overall frame about what we talk about where we are in terms of demand in Q2 and the volumes for Q2. But I do think it's interesting to see, what should I call it, these distinct differences still now between the different sectors and the clear cautiousness still of the distribution.
Okay. Maybe just a final question before leaving the floor to the others. But on this disappointing news from the EU, has the industry made quite vocal calls-
Yes
about the quotas? Have they been heard at all in the EC? Also, how do you see, how is the pricing risk for the stainless steel overall if we end up having a big sort of increase in the proportion of imports?
Yeah.
I mean how-
First of all, the really, let's say, support from the national government has actually been overwhelming and really strong from so many of the countries where we operate also writing to EC and just saying that, sorry about this. You really have to stand up for the industry right now. But obviously the response from the EC has not been there yet. I think we have what we have right now. We know what the quota system is from July. I do not want to say that we are without hope. There is definitely all the time lobbying discussions ongoing and there might be even more focus from the Trade Commissioner now again on European matters. But clearly disappointing at this point. Let's not lose hope in that. Yep.
Yeah. And just finally on this pricing, what you are thinking or could there be significant, how do you see the pricing kind of outlook-
Yeah
in view of this?
Of course, I need to be a little bit careful because clearly we don't have a clear Q3 guidance.
Yeah.
But can I just say on a general level that yes, it's a disappointment that the import quotas are not reducing. Compared with the pressure last Q3 when we had the annual quota up against us, at least now it's clearly quarterly. So I think that's a good improvement and it balances, at least so that we don't have all of the pressure coming at once, which is a good move. Then in the end, it will depend a lot on the overall demand because if there is an absolute amount of volume allowed into Europe and how big a relative portion that is then has of course a huge meaning.
Yes, of course. Well, thank you very much. Thanks.
Thanks, Harri.
Next question is from the line of Luke Nelson from JPMorgan . Thank you. Please ask your question.
Hi. Thanks a lot for the call. Just a few follow-ups, if I may. Just on the volume guidance, is it possible to give a bit more of a breakdown on a regional point of view?
Then just following on to that as well, from a product mix point of view, just in the context
of how volumes have tracked.
Product mix in Americas was positive. It was negative in Europe in Q1. Just your thoughts
on how that's progressed in Q2.
Mm-hmm. Indeed. If I just start within, let's say, the distinction between Europe and Americas, I think this is, so to say, from our perspective, driven by also almost sort of the way of response to the coronavirus. Definitely, the direction is the same in all of our key regions. However, it seems that the steps down in Europe have been somewhat a little bit more smooth, simply because there's been a lot of government actions, support for furloughs, et cetera. For example, unemployment is then not impacting in the same way as in Americas, where in U.S. in particular, of course, jobless figures were so high up early during this crisis.
I think it's just fair to say that it seems that the dynamics of the markets are a little bit different and you're sort of seeing a harsher sort of curve down when it comes to Americas. I do want to take this opportunity at the same time to say, obviously, that gives sort of an opportunity for a quicker rebound, that we don't know, but it could indicate sort of the dynamics of the market. Then also in terms of, let's say, our performance in Business Area Americas, I do want to say, in terms of cost mitigation actions, that we have then also been able to make very rapid responses, exactly because of the sort of dynamics in the job market, et cetera. It also means that we can be quick in adjusting our fixed cost base.
And I think that we have, even during this quarter, further brought the break-even point clearly down. It used to be somewhere above 200. Then in the later quarters, we brought it down to 140 kilotons, 150 kilotons per quarter. I think now we are further down to the 125, 130 region, in kilotons for the break-even point. The dynamic is harsher, but it could also work in a company's favor when you need to quickly reduce costs. As to your question on mix, I think historically we talked a little bit more about mix, both in the context of U.S., where it was really a theme for us to improve the mix, then we had really taken some rather harsh changes in our portfolio.
I don't think that now in comparison, that we would really have been taking that sort of big step changes. I don't have anything specific to say around Americas. I think around Europe, in Q1, we said that the lower mix was predominantly due to the fact that we had a much higher volume compared with the previous quarter. Obviously, that drives the standards. The classic volumes are then getting a bigger portion. That's really where the growth was. We also had a bit of pushback in the scrubber business, which is part of the value-added mix, as we talked about then, because of the situation that started in Asia and was a little bit more visible through CPR, et cetera, already during Q1.
I don't really have, let's say, any big update or relevant update of that. I would assume that we are remaining with those same basic dynamics still as we speak.
Okay. That's clear. I'll jump back in the line. Thanks.
Thank you.
Thank you. Next question is from the line of Carsten Riek from Credit Suisse. Thank you. Please ask your question.
Thank you very much. Just couple of questions from my side. The first one is, Pia, you mentioned the net working capital movements.
Because historically, we have seen that the second quarter sometimes can still see actually an increase in net working capital.
Yeah
predominantly because of the movements in AP, AR sometimes. We have a similar situation right now where demand actually dropped quite, probably sharply over the past
Yes
3, 4 months.
Could we expect that, instead of, I assume inventories might be actually a bit better off, but because of the receivables and payables movement, there might still be a little bit of a buildup rather than a release in the second quarter?
That's the first one.
Mm-hmm. It is a really good question, and I think the way we have been driving this now has been to be very careful on the inventory, particularly because of the lower demand situation. That has certainly been helping us, but it has also taken very diligent management to get that way. Listen, I think with the AR and AP, that dynamic, obviously, the AR will be very much impacted by invoicing, and I can only assume that with lower demand, you have lower invoicing. Looking at the AP side, there really, timing of when we start to build up inventory because of, for example, holiday season or other stuff, it does matter a lot. I do understand your comment and recognize that historically, there could have been this kind of movement. I think I can just remain really confident.
Obviously, I do not have really a figure that I can give for you here today, but I just remain really confident that as we have focused so much on driving down the overall working capital during the quarters to release cash, that this is really the direction that we have.
Perfect. The other question I have, it is a bit related to it. We have seen, was it yesterday, that 600 people in Krefeld were sent to short-term work.
What kind of impact do you see from these governmental programs to actually flexibilize your fixed cost? I found
Yes
actually with all the companies right now, that is the most opaque one for us at least.
Yeah
to forecast.
I do understand actually why it is opaque, because these rules vary also country by country. So, even when we work inside the company, we have to pay a lot of attention and work a lot to get sort of an overall correct view of this. So I would say, first of all, on average, for the group in total, our assumption or estimate is that, when we go for various terms of temporary measures to have people furloughed or maybe on short-term work, usually we can get about 50% back from the government. But of course, this varies country by country, like U.S. has nothing and some other countries may have a better situation.
Still, when I think at our overall cost base and then, of course, taking into account that typically if we go for short-term measures, it means maybe that we reduce production during, let's call it a two-week period. So, you still remain with many weeks with the normal salary. Then the absolute amount of government support, we are not talking about, in our case, any kind of big two-digit figures. So this remains a good tool and if we are still thinking a little bit country by country, you mentioned Germany, there are other countries, for example, U.K. or Sweden or Finland is a little bit different system that are really important countries of operation to us and where these sort of support does exist.
Perfect. That helps already. Thank you very much, Pia Aaltonen-Forsell.
Thank you.
For those participants who would like to ask questions, again, that is star and one. Okay, now our next question is from the line of Veikko Silvasti from Nordea. Thank you. Please ask your question.
Thank you. So it's Veikko Silvasti from Nordea. Just a quick question regarding the inventory levels in Europe and Americas.
How do you see it? Are they very slim at the moment as distributors are also in cash preservation mode, or how should we see it?
Mm-hmm. The latest stats that I have looked at really confirms this for Americas, where we are, let's say, below the distributor inventories are clearly below average historical levels. For Europe, I think there's been if I look at a little bit longer sequence like a year, there's always been some impact as well to distributor inventories from imports. It may be not as straightforward to just They are not so much lower than average, but clearly still in this careful mode. That's how I interpret it today.
Okay. Thank you.
Thanks.
Next question is from the line of Luke Nelson from JPMorgan . Thank you. Please ask your question.
Just a follow-up, just some modeling questions on CapEx. Anything out of the ordinary, obviously, you've given guidance for the full year, I think it's EUR 180 million.
Yeah.
Just if you can give any indications of the spend over the quarter or if it's been obstructed with COVID.
Yes.
Any other sort of cash flow impacts as well, like any of these furlough schemes, have you been able to disperse some tax or anything like that? Any guidance on that will be useful.
Yeah. No, really good questions. I think you know very well the tools that are available here. I start with CapEx, and obviously, we had a EUR 57 million CapEx cash out in the first quarter, and if you then look at our full-year guidance here, which we changed to EUR 180 million, it's clear that already during the second quarter, we went into a more conservative or preservation mode. I have to say, you know that these CapEx projects, they are usually You don't steer them day by day. Usually, you have ordered something and something is ongoing in the pipeline. So I reconfirmed EUR 180 million. I think, as I also said before, we are pretty much seeing Q2 in the way how we also saw it a couple of months ago. So it means that we have not had the reason to further change that.
Maybe you remember that while Roeland was still the CEO, he also said that, if need be, we can further squeeze it. I think that at the moment we have, so to say, reiterated EUR 180 million and remain very observant of this topic, but that's where we are. But then what you need to calculate from there is that if it was 57 in the first quarter, and there's only so much that you can do on very short notice, then it means a decreasing amount towards the end of the year. I think that was the first portion of your question. Then I think the other portion was, yes, indeed, there is support also in other ways from governments than kind of direct subsidies in terms of furlough support, et cetera. And I think actually that those are on a temporary basis, those can actually be quite important.
I just give a couple of examples. You know that our sort of monthly pension fees definitely can be many millions, if not even 10 in some individual countries. And in various countries, for example, in Finland, the pension institutes have, for example, said that you can defer your pension payments by, let's call it a two-month period. Or in some countries, again, I take Finland as an example. There is a possibility to defer VAT payments if you pay, let's call it a reasonable interest of magnitude 2.5%. I think we have looked into all of those and particularly those that come at favorable conditions we have used, but it's not very typical that they would be kind of super long term. It has more been immediate sort of crisis response.
And that's why I would say that it doesn't make a big enough headline that it's something that we would describe separately. But there are some positive moves from those on a kind of a very short-term basis.
Okay. That's very helpful. Thanks a lot.
Thanks.
Thank you. Next question is from the line of Alan Spence from Jefferies. Thank you. Please ask your question.
Hi, good afternoon. Pia. One for me, just if we're trying to get a sense on potentially where volumes for Q3 would be using the exit rate from the quarter, if the activity levels you saw in the last few weeks were just a flat line and not improved further, and that continued in Q3, do you have a sense of how much stronger that might potentially make Q3 than Q2 for volumes?
Alan, you are putting me in a very difficult space because you know we don't have Q3 guidance out, and I was instructed to be very careful about not saying things about Q3 yet. I think that's just something that is a little bit difficult for me to comment directly like that. Maybe I can just say that someone asked me, "Do you believe there is still seasonality in the European market?" I think that that's kind of a pattern that has been there for, I don't know if forever, but at least sort of during the industrial period. So I think that we shouldn't exclude normal patterns. But that's about as much as I want to say today.
Okay, that's fine. Just a housekeeping one. Could you remind me if there's any planned maintenance in your ferrochrome operations planned, whether that was Q2 or Q3, Q4, please?
Yeah, maybe Maria or Linda, if you want to confirm this, but I think it's planned for September in this year. Last year it was like September and October, and this year I believe it's September.
No, there shouldn't be any major maintenance.
There is none in Q2, but I just wanted to confirm for you the plans going forward. But it's not relevant for Q2.
Nothing major planned.
Okay. That's great. Thank you.
Yeah.
Next question is from the line of Ioannis Masouras from Morgan Stanley. Thank you. Please ask your question.
Good afternoon. Thanks for taking my questions. I've only got one left regarding inventories. You already spoke about distributor inventories in both Europe and the U.S. Do you have any visibility on inventories at the end users, automotive, appliances? Are we at sort of average levels there? Or is there a risk that real demand will be decent possibly in the second half, but apparent demand is going to lag due to inventory build?
I think obviously that question is much more difficult to answer than the distributor one because, yes, there are individual accounts where we have this sort of joint forecasting and we actually have that visibility. If I would comment kind of based on the information that we have, then I would not say that there is an inventory buildup. But I think I risk being a little bit anecdotal because I couldn't claim that we have sort of a broad enough visibility into those segments. I have to leave it at that kind of anecdotal level that I think that's kind of the cases that I know. It's not on a particularly high level.
Is that both for Europe and the U.S.?
Well, in the U.S.
From that anecdotal evidence.
Yeah. I would say that this is Europe-based, what I have in mind. Because also in U.S., we are sort of even in a bigger sense, going through the distributor segment.
Understood. Thank you.
No further questions, please continue.
No further questions. Thank you for all the participants for your questions, and thank you, Pia Aaltonen-Forsell. A recording of this call will be available on our Outokumpu Investor website later today. Just to remind you that we will be stepping into silent period on next Wednesday, the July 8th, until our first half financial report will be published on Friday, August 7th. Until then, I would like to wish you all a warm and sunny summer. Thank you again.
Thank you. Bye.
That does conclude our conference for today. Thank you all for participating. You may all-