Good afternoon, ladies and gentlemen. My name is Tommi Järvenpää. I am the Head of Outokumpu's Investor Relations. I have a pleasure to warmly welcoming you to Outokumpu 2016 Capital Markets Day in Helsinki. It has been now about seven months ago when we introduced our new vision and financial targets for the company. We are only in the beginning of our journey to sustainable profitability levels, but we can already see clear signs that things are improving. Today, our main focus will be on our target to achieve EUR 500 million underlying EBIT in 2020. I have been on the road myself quite a lot since last April, and I can tell that this target is the most widely discussed topic in our story at the moment. We are making solid progress, and today we are here to explain in more details how we will actually reach the target.
Before getting started, let's go through a few practicalities. First, safety. Safety is one of the top priorities at Outokumpu. There is no fire alarm practices scheduled for today, so in case there is a fire alarm, that is a real thing. In that case, you need to leave the building using marked exit doors and then follow Outokumpu hosts to the meeting point outside. Then also, please be careful using the stairs in the auditorium and hold the handrail to avoid any kind of falling incidents. Webcast. This event is being webcasted live. Also welcome to everyone who is listening and watching us online. The presentation materials are available on our website, and the recording of the webcast will be available on the website shortly after the event, too.
There will be a question and answer session after each presentation today, and then at the end of the day before concluding remarks, there will be a joint Q&A for all the presenters. Ladies and gentlemen, we will have a very exciting afternoon ahead of us. Once again, warmly welcome. It is my pleasure to introduce our CEO, Roeland Baan.
Thank you, Tommi. I would like to start with a very warm welcome to all of you here in Helsinki. Thank you for coming out. I see many well-known faces, by the way, so for quite a few of you, it was a short travel. But there are a number of you who came all the way, and I do recognize that Helsinki is not on your normal commute to work. So thank you for making the trip. We have done everything from our side to make this as pleasant as possible for you. We even arranged the weather. We do not do it very often. For this particular case, we did. I have heard, though, already some of you say or suggest that the next event should probably be Mallorca in spring. It will not be, I can tell you. But again, thanks very much for being here.
As well, thanks to the people who are joining us online. You will see quite a few presentations by me and my colleagues. However, the real value of this event is in the interaction, is in the engagement that you have with me and my team. So I really urge you, and normally I don't have to urge you at all because it comes automatically, but I really urge you to engage in discussion, questions. If there are any issues where there is unclarity, we will sometimes give an answer. We will give an answer, but you will realize that there are some things that we cannot, for commercial or competitive reasons, that we cannot be too specific about. With that, I would like to start with the overview of where we are currently and where we came from.
Our vision, the state of the company now, and a glimpse of the future. So you have seen many times now, I assume, our vision for 2020. To be the best value creator in stainless steel by 2020 through customer orientation and efficiency. There are three dimensions to being the best value creator. And it is, one, to our customers, two, to our shareholders, the financial community, and three, our employees. And I will address them all in due course. We have made this vision time-bound, 2020. Normally, a vision has no time. And in my opinion, if there is no time-bound limit to a vision, there will be no achievement.
It does mean as well that the way we look at it is that in 2020, we'll review where we are, and we will set a new vision for a new five-year or two-year or seven-year period, whatever it might be. What it means as well is, and this will come through in all the presentations, you see the words customer orientation and efficiency, and I can see you think, "So what?" I mean, customer orientation and efficiency, that's not very exciting. Now, let me tell you a secret. Doing business is not very exciting. It is not rocket science. It is not coming up with tremendous strategies and convoluted stuff. It is, especially in the base materials industry, it's about knowing your business and getting down to the basics and execute it flawlessly and perfectly. And that's exactly what we want to do.
We set our targets, and when we came out in March of this year, I still remember people looking at us and saying, "Hmm, that's a bit ambitious," and, "Okay, we believe it when we see it." Coming from where we came from, eight years of consistent losses, very consistent, to suddenly this jump to EUR 500 million of EBIT, a return on capital employed of minimum 12%, and a gearing of less than 35%.
However, we are making the progress. Tommi said it. We are at the start of the journey, but we have come a long way since last year and since the years before that. And we got there because ultimately we have a very strong foundation in this company. We have a fantastic market position. We are number one in Europe, and not just by a bit. We are the number one by a long way.
We are a strong number two in the Americas and growing. As Mike will tell you, the market share improvement we had just in this year is impressive, not to talk about the financial improvements. We have world-class assets. I said this when I came in. I did my first tour of the assets in January, February, and I can really say with all the years I have had in the metals industry, that I have seldomly seen so consistently assets so well invested and so well maintained. The capabilities that we have are unrivaled. We have great product portfolio. Again, we have a product portfolio that none of our competitors can match one for one. We have a research capability. We have technology department that outstrips anything that is there in our industry.
We are churning out, together with our customers, the solutions that are fit for their success. For the first time that I stand here, I can say, phew, and we have a solid balance sheet. We come from a position where we had over EUR 3 billion net debt, EUR 3.5 billion, EUR 3.6 billion, I think was at the height in 2013. We now are down to below EUR 1.4 billion. We have done that not by selling stuff. Of course, we sold SKS and that was a big help.
But since then, we have had significant improvement by just paying further down out of our own operations. We are, and I can say that, we are the leading company in stainless steel. We are the number 1 in stainless steel. I do know that there are two companies, two Chinese companies that have more volume. We have the portfolio.
We have the geographical footprint. So you can see that in what has happened in our financials. 2013, almost EUR 400 million negative. We have now, for the first nine months of this year, we are at a positive EBIT. With the guidance we have given you, that means that for the year, we are looking at a year with a positive EBIT. That's the first year in eight years. So it is a change to where we came from. It is not because of tailwinds, as someone was just telling me outside. Just take the facts. First nine months in 2015, the average sales price in Europe, EUR 1,056. First nine months now, EUR 3 less. So it's equal. Take the U.S., $100 less the average price in the first nine months of this year versus last year.
Then take the other things that are always put equal to profitability in the stainless steel industry. Nickel price, $2,500 less on average this year than last year. Then ferrochrome, $0.18 less on average this year than last year. Still, we went from minus a lot to plus. Right. With that, I would like to turn a little bit to the future and the general trends in our industry and in the world that support our industry. You have undoubtedly seen this from other presentations, but there are clearly three main mega trends going on in the world. Urbanization is one. I was surprised when I looked into this, but today, 50% of the world's population is living in cities. In 2050, this is going to be over 70%. It's over 70% of a vastly bigger population.
To illustrate that, between now and 2030, the world will grow 1.1 billion people. 95% of those will be absorbed by cities. Urbanization is not just a word, it is a reality, and it is something that drives a lot of things. It drives a different way of using resources. It drives a different way of taking care of waste, et cetera. The other thing is that if you have all these people so close by, cities cannot go wide. They have only one way to go, and it is up. Guess what? Up means elevators. We love elevators. This is where our material goes in. All these people have sinks, they have washing machines. Another thing, they have water pipes going up all the way to their apartments.
Water pipes, and this is one of my hobby horses, so I hope you have 30 seconds for me. The U.K. loses 3.3 billion liters of drinking water a day through leaking pipes. In the U.S., 2.1 trillion gallons a year, and I do not know how much that is per day. It is a lot. 2.1 trillion gallons a year are being lost through leaking pipes. You can say, well, not all is in the houses. Half of that, close to one trillion gallons, is attributed to leaking pipes in houses or the pipes that go from the mains to the houses. That is a lot. If you take that 2.1 trillion liters of water, it would put Manhattan 300 feet underwater. It is tremendous. Stainless steel as a product in water pipes lasts 120 years. It is not our research.
This is independent research done by the city of Tokyo that actually started a program to replace all the existing piping into stainless steel. Normal plastic or steel piping lasts 20- 30 years. There you see one of those clear things where sustainability and urbanization meets our product. Good. Mobility. All these people living in cities, their work, they have to cross to other places. They use mass transport because with the booming population, individual cars become less and less likely. You see, for instance, more self-driven cars, electrical, lightweighting. Stainless steel is there, a fantastic solution because we have stronger products, more formable, that can replace the existing carbon steel solutions at much lower weights. High-speed trains. Currently, most of the time done out of carbon steel, although aluminum is an alternative, but aluminum is too expensive.
We can lightweight high-speed trains or metros or name it, by putting stainless steel in there. We can downgrade and still maintain the same strength, lightweighting the solutions. This is happening, and I will have an example later. Then sustainability. Clear. Our product is recyclable over and over and over again without any loss of capabilities or functionality. 87% of our input. Other way around. If you look at our output, 87% of that comes from recycled material. That is huge. There is no other industry, there is no other product that can state that. In other words, stainless is continuing to grow. It has always grown ahead of GDP, and it is projected to grow at least for the next five years, again, ahead of GDP growth. 15% growth from 2015 to 2020. Most of the growth will come out of typically consumer-driven things.
The consumer goods, appliances, automotive side, but architecture and building construction as well. So typical segments where we as a company are very strong, where we have great focus, and where we have technological advantages. If you look at our portfolio, first of all, what you should look at is the distribution between distributors, how much we sell there, and end customers. And it is about 50/50. Why is it important? If you look at the market itself, you take the global market, then the distributors channel dominates. So we actually have disproportionately high amount of direct sales. And that is important because that means that we can achieve better results, better pricing on our products than when you go everything through distributors. Then if you look at the portfolio by segment, you see that we have a very well distributed portfolio.
We are strong, of course, in automotive and consumer, but we have no single dominating segment. We are well hedged within the segments we serve. One of the elements that we talked about in the vision is our customer. We said we want to be the number one value creator to our customers. And we used up to now something called the Net Promoter Score. And this is how we stack up against our competitors, how we have done for the last three years, and how we are still performing ahead of any of our competitors. And we do that because of better product quality, our people, the ease of dealing with us, and the expertise we bring. There are a few irritators as well, according to the same NPS as Net Promoter Score.
One is that people find us not as flexible as they would like us to be, and the second one is one that I really like, is they do not like our price. But they do buy from us because of the extra value we bring. Good. Back to our strategic plan. Our strategic plan is underpinned by six must-win battles, and I will go through them quickly. First of all, safety, and I will not go into details. Safety is the number one priority we have. It is our license to operate. We owe it to our people to get home the same way they got to work. We were not very good, and I will give you just a few statistics. We, in 2015, in total recordable incidents per million hours, had a frequency rate of 16. Forget about how you get there, just 16.
The global industry, the global steel industry, was at 11.7, so we were way behind. This year we are 10.7. We are ahead of the average of the global industry. Not enough yet. We have 5.0 as a target long term, and that will bring us into the absolute top performing group in the industry. How did we do it? By focusing on it, by training our people. Every single month, I have a call with close to 100 of our operational people on it, where we go through every single incident that was there, and we go through some of the developed areas. Not only is this important for safety, this is important for all the other things that require the same way of thinking and attention. So it improves your productivity, it improves your quality. So it is not totally altruistic to push this.
There is a big business benefit. High-performing organization. We had an organization that was complex, layered, difficult to oversee, with tremendous bureaucracy and very high SG&A costs. We have put into place a new organization, taking out the complexity, going into three simple functions: the sales on the front end, the factories, the mills at the back end, and in between as the glue and the lubricant, the supply chain. With that, we have been able to take out 600 jobs. We are still in that process. They are not done yet. But that will bring our SG&A down by EUR 100 million a quarter. It changed the way of working in interaction that has become much more cooperative. Internal friction, internal losses due to discussions have been taken out because we are simple and flat.
We are still trying to move that culture further. To do that, we have joined something called the OHI, the Organizational Health Index. An Organizational Health Index is something that was started by McKinsey & Company a few decades ago. It is a database with 1,300 companies in there. They all go through this same process where the temperature of, literally, the temperature of the organization is established through a questionnaire. The importance there is that the top quartile in this index has outperformed for the last nine years the stock indices by a factor of three. So a very strong correlation between performance and your organizational health. We did this, we came in at bottom quartile. Not unexpected. We have gone through closures, restructurings, bad financial results for the last six, seven, eight years.
What is good to see is that there are a number of leading indicators underlying this that we scored as well. Those leading indicators show that we are clearly on our way out. Our target of being part of that top quartile by 2020 is clearly within reach, and we have started a large number of initiatives to make that happen. Supply chain. I mentioned we have now clearly operations, supply chain, and the front end, the market. Having the supply chain being in charge of planning our mills, of buying our raw materials, and of making sure that it gets through the mills and then to the customer, has brought our net working capital, the largest part of net working capital, which is our inventory, into one hand. As a result, we have been able to squeeze out a tremendous amount of value.
We have said in the first nine months, we have EUR 149 million of net working capital reduction achieved mainly through inventory. EUR 200 million is a target. We have done this in the face of rising sales and rising nickel prices. So although the commodity value goes up, we still have been able to get the money out. The other thing that this brings is that we have all procurement in one hand. Procurement was in the past done by mill, and I come back to that later on. But we see clear opportunities to drive a 15% savings on what we call the addressable spend in procurement by 2020. Apart from the Americas, which is probably the biggest flip that we can achieve, manufacturing excellence. Manufacturing excellence is a philosophy. Where we are coming from is a series of mills that all did their own thing.
Not bad at all. They had their own processes, their own principles, their own approach to what they thought was lean manufacturing, but none of them did really lean manufacturing as a whole. Neither was there any real connection between the mills exchanging best practice. We have made it as one of the biggest priorities to have a single Outokumpu operating system in place. I always say my dream is that in five years' time, when you blindfold me and drop me in a plant somewhere, that the only thing I can see is that it's an Outokumpu plant because it has all the visual manifestation that you need, it has the same processes, it has the same information centrum. But I can see it's an Outokumpu plant, and that's the only thing I can see. Not where. That's where we have to go.
Today, you can put me anywhere and say, "Oh, it is Krefeld. it's Calvert." Because of the differences. We need to align that, and we have to take the advantages out that we can take. Both Mike and I will mention a number of advantages that we already have had and improvements we already have had with this approach. Generally, what we want to do is get the productivity improvement of 2% to 3% annually. That will not be totally linear. There will be probably better years and there will be lesser years, but that's where we want to go. Gives better competitiveness, which leads to better volumes in the market as well. Then Americas. Mike is going to say a lot about it. I'm super excited about what's happening there. It is an incredible asset.
We have incredible people there, and they all have, like good Americans, they have the will to win, and they battle it out, and they have made incredible progress. For the last 5 quarters, every single quarter, a new record on volume. 30% of variable cost out just this year alone. It's variable cost, so it's not driven by volume. We have moved from EUR 160 million loss into something much more palatable this year and with a very solid path to getting it to the profitability that it should have. We do believe that Americas will be the most profitable mill on a per tonne basis in the Americas, and we will get there. Then the last part of the building blocks, commercial excellence. The way we were organized was very much selling what the mill produced.
The way we are organized now is a commercial group reflects the reality of the market. The market has segments. You have automotive, you have oil and gas. So we have now a segment that addresses, for instance, automotive or appliances. They are exclusive for that segment. They have their own salespeople. They have their own technological resources. They have their own marketing, and as a result, we can get much closer to the customer. We can much better understand the value we bring, which means that we can much better develop products that they need and understand the value we bring, so we can price differently than we do today. Very big driver for both volume and profitability per tonne.
To put that into perspective, what we are expecting for the next five years, if you take 2015, the EUR -101 million EBIT loss to the EUR 500 million+ in 2020, we see that 55% of that comes from top-line growth. Increased volume because of our competitiveness that improves debottlenecking of some of our facilities where currently we cannot produce sufficiently to satisfy the market. Richer mix, both in terms of moving up the value chain as well as moving up the customer chain, and value-based selling. 55% top line, leaves 45% on the cost reduction. Our manufacturing excellence initiative, the procurement initiative, the further gains that we get from the SG&A, the further gains still be had from running programs that are not concluded yet. You might say, "Well, 45% with you were saying there was so much potential.
Why is it only 45%? Because unfortunately, on the other side of all the savings that you do, there is inflation. This is a net of inflation figure. If you add back inflation, you can see this is a huge part of the improvements that we see. Again, this is all what we have under control ourselves. This is not dependent on markets. This is not dependent on outside forces. This is something that we can do ourself. Before I hand over to Mike, we are solidly on track to achieve our vision. We have made tremendous progress this year. We made very, very big steps, and we were always aware that we would have to make big steps early on. We have improved through self-help. Again, you saw the numbers, has nothing to do with the market. Pricing is below, metal is below.
We are driving top-line growth with our efficiency, and you see the examples coming. We are firmly on track and believe we will get to our EUR 500 million target by 2020. With that, I would like to open for questions.
Ladies and gentlemen, we are now ready for questions. Just a reminder, please, when asking a question, wait for the microphone so that people listening us online can also hear the question, and then please state your name and company as well when asking a question. Who wants to go first? Bastian over there.
Thank you. My first question is just on your target to lower your procurement cost by 15%, which definitely seems a lot given that you have quite a few components which are not really in your control, and nickel is probably the largest among that. How do you plan to go there, or is there just a different definition to think about it? Secondly, my question would be on your plans for debottlenecking. Could you maybe just let us know where you currently see some needs to actually debottleneck wire products and maybe also by regions? Thank you.
Right. On procurement, we are talking about indirect procurement. We are talking about that part of procurement that is not metal. On the metal side, you are right, you can improve, and we are, but it is a different category. What we are talking about here is, for instance, things like transport or packaging or third-party services.
If you take Tornio, we have 700 contractors on site continuously that do service for us, divided over 40 different companies. There are tremendous opportunities to be had there. It is that chunk of our procurement where that savings will come out. On debottlenecking, look, there is always, if you look at the production system, there are always in a flow, there is equipment that could run more because the part upstream delivers more. You can think about our cold mills in Mexico. The Mexican market is growing fast. We are running flat out.
We have more capacity upstream than we have on the cold rolled. We have projects there to make sure that we can squeeze more out of these cold mills. When we talk debottlenecking, we are not talking about investments, at least not large investments. We are not talking about new investments in new capacity. It is really by being better with our existing. I will give you an example. In Krefeld, at one of the cold mills, we looked at unplanned outage, and said, "Okay, unplanned outage comes from either planned or unplanned maintenance. How can you cut that?" We cut the unplanned outage, or sorry, the unavailability from 65 hours a month to 40 hours a month. That is, what is that? A 35%+ improvement.
You say, "So what does that mean?" It means that you can actually put 5,000- 6,000 tonnes extra per year through that mill, which gives you a contribution of, I cannot tell you how much exactly, because that is what my competitors would like to know. But it is significant. That is just one mill. We have three of those there. We have another five in Tornio, and we have another three in Calvert, et cetera. If you add that all up, that effort is going to pay enormous dividends.
Artem over here.
What? Yeah.
Yes. Hi. Artem Belevskiy from Sberbank CIB. I would like to ask what comes to this top-line growth initiatives and especially improving mix and this value-based selling. How much of it actually relates to Americas? Because we have been hearing quite a lot about it and how much potential you see still in Europe.
A lot comes from Americas. There's still volume to be had there, but there is clearly in the mix quite some progress. If you go back to 2015, we were still selling quite a lot of what they call the black hot band and quite a lot of the white hot band, and undersold the cold roll. If you look now, we hardly sell, actually, we do not sell any black hot band anymore. So that has moved into the higher added value white hot band, and part of that has already shifted into the cold. So that's a big part, plus the volume, of course, that we are still gaining. However, we have the same in Europe. Not so much that we can shift to a higher end, but much more on the end customer side, where we get into the value-based selling.
An example there, we are developing with an automotive OEM, a specific product that can be used in either structural parts or in crash systems. That is tremendous upselling because it is the same product we sell to other places. But here, because of the application, you suddenly go into a different step change in value. So on both sides.
Okay. Thank you.
Peter.
Peter Edwards from JP Morgan. Is now a good time to talk about the chromium business? I have a couple of questions. First, operationally, am I right in thinking it has never really operated at its full rated capacity with the 550,000 tonnes since the expansion, and once it does get up to those levels, then the efficiencies will be improved? That is the first question. Then secondly, in terms of.
Can I do them one by one?
Yeah. Okay.
The ferrochrome ran absolutely at its full capacity in Q1 and Q2 without a hitch. 131,000 tonnes, I think, in Q1 and 135,000 tonnes in Q2. You can't get a lot better than that. Actually, Q3 was at the same run rate, but we took out one of the furnaces, pre-planned already a year ago, for maintenance. The only hitch we have had is in the restart. We had in October, when we restarted that furnace, we had issues. I won't bore you with details, but I can say that those issues have been addressed and that we are now running at normal rates.
Okay. In terms of then the market seems to be getting a bit tighter. The question I have is, I think it's the first time for a while we've seen the spot price higher than the contract price. Does that mean the discounts, which have always been a feature of ferrochrome, disappear, and the market is in better balance? It seems that way. Then secondly, in terms of how you get that through to the bottom line, I suppose it's to do with the alloy surcharge and how quickly does that come through, and is that based on the contract price, or could you change maybe to a spot structure?
Start with the second part of the question. If there is an improvement in pricing in ferrochrome, it comes to us through ferrochrome because we sell ferrochrome to the stainless unit at the normal market. Then the alloy surcharge does nothing other than put on the commodity cost to the consumer. That's flush on the stainless side, but the profit stays then with the chrome side. Does it answer your question because you-
In terms of if we see a headline number for the quarterly settlement, do we assume that that's the number you'll get, or do we sort of have to factor in some discounts? Is there a timing issue in terms of delays coming through to the bottom line?
There's no delay. It falls in the quarter where the pricing is. We follow market, so if there's a discount, there's a discount, and we'll discount as well. The headline price is basically what is the sort of contract price that is decided by Glencore with a number of customers. Then on the spot price, there is discounting. Our non-spot customers, of course, pay the contract price. The good thing is that we have very little spot.
Okay. Johannes.
Okay, thanks. It's Johannes Grunselius here, Handelsbanken. Could you touch a bit on the market situation in Europe here, talking a little bit perhaps on what's going on on import side inventories and what you see in terms of pricing at the moment, base prices?
Yeah. Probably, I am addressing this in the European part as well. Chinese imports after the anti-dumping measures have basically died. It is less than 1%. Imports themselves as a total have stayed at more or less 22%, 23%. It is lower than it was at the peak when we were up to 30% plus, but there is still a fair amount of imports coming in. However, those are imports at normal pricing. We do not mind imports. We do not mind competition. We just have to make sure that we are the more cost effective. So, on pricing, you have seen that in Q3, we were about EUR 20 up on the base price. We foresee a similar increase in Q4. Generally speaking, you could say that the inventories at distributors are below historical averages. So there might be still some room going into 2017.
Okay, and the last question from another Johannes.
Yes. It is Johannes Grasberger from Nordea Markets. I am kind of following on Peter's question there on price because the guidance of EUR 500 million EBIT 2020 that was given early part of this year, and since then, basically all the metal prices have gone up a lot. And I am just calculating the first nine months comparing the spot today, European base price 5% higher. Then we have the U.S. base price about 5% higher as well. And then ferrochrome is depending if you look at European price, which is 20%, and Chinese, that is 30% higher. I suppose, have you accounted in this guidance any kind of tailwind from metal prices?
All right. So two points. Number one is, there is less and less of a connection between nickel and our performance. And that is because of the fact that we have been more and more keen on putting hedges on our positions. If you go back, in general, you can see it, some of our competitors are fully unhedged, so their performance goes up and down with nickel. Some of them are 100% hedged, and you see a disconnect between nickel. We come from a hybrid where we had some impact, and we are on our way, and we have basically done that already to a large extent, to a fully hedged position because my philosophy is that I do not want to be a nickel trader. We have to earn our money on transforming raw materials into a useful product and getting paid for it.
If I want to be a nickel trader, we close the factories, go into London and sit on the LME. That is not our business. Second point on price increases. If you guarantee me that in 2020 we still have these prices, then I will give you some extra money.
Okay. That was the answer that I wanted to hear, to be honest.
Okay. Thank you, everyone, for the questions, and thank you, Roeland. There will be more Q&A session during the afternoon, so more chances to ask more questions during that time. Time to move on. Our next speaker will be Michael Williams, the head of our Americas Business Area. Before inviting Mike to the stage, let us take a look at a short video. This video will give you an overview how stainless steel is made in Calvert, Alabama.
[Presentation]
Good afternoon. My name's Mike Williams, and I'm the head of the Americas. I hope you enjoyed the video. I can tell you that my wife is extremely jealous of Calvert because she wished I got as excited when I go to work each and every day and respond the same way to her that way. But I hope you enjoyed the video. If you haven't been to Calvert, you have an open invitation to attend. Also, those of you that have, please feel free to return because I think you'd be very impressed with the progress that we've made over the last 17 months. In the Americas, the vision to be the best value creator in stainless steel through customer orientation and efficiency by 2020 is the focus of the Americas organization. I will discuss with you actions we are taking to reach this vision.
In the Americas, the stainless steel market continues to grow, the U.S., of course, being the biggest consumer of stainless steel in the region. The U.S. consumption is approximately 1.6 million tonnes a year and expected to grow at a rate of 2% annually. We will look at the U.S. market in more detail, but I would also like to highlight the Mexican market. While it is a smaller market, it is a very important market to us.
We have a strong reputation in the Mexican market, thanks to our Mexinox team. We have over 40% market share of the Mexican market. We are known for our high-end finishing and tailored solutions that support many of the high-margin businesses, for example, the home appliance manufacturers. We support a number of leading Mexican and U.S.-based appliance manufacturers. These are long-standing, valued partnerships and ones that continue to be a leading segment for us.
Taking a closer look at the Americas, we see a rebound in growth rates next year. As I said, demand growth is expected to be about 2% compared to zero this year. Distributor stock levels are currently slightly below historical averages. Some of this is the aftermath of last year, when we saw a massive invasion of Chinese imports. Distributors loaded their inventories with the cheap imports and then were stuck with extremely high levels of inventory when the nickel price plummeted. Since then, we definitely see some cautiousness among the distributors to fill their stock, especially since the nickel price has not shown much strength. As for the Chinese imports, the anti-dumping investigation that started a year ago has been pretty effective. The preliminary duties have been in place since February of this year, and we have seen a decline in the Chinese imports.
However, other companies have stepped in, specifically from Korea, which have increased significantly. With the Chinese imports declining, prices have increased, but overall, the pricing remains low. We are still well below the 2014-2015 pricing levels. In the Americas, the market structure is heavily dominated by the distributors and service centers. This is how the U.S. market is set up. Within this structure, we are working towards shifting this dynamic, working directly with end-use customers. This way, we increase our participation and influence the decision-making of the value chain, even if the end-use customer still wants to be served by a distributor. When we look at our end-use customer segments, consumer goods is the largest focus segment for us. This is well in line with our commercial strategy, and I will come back to this later in the presentation.
We are well-positioned with our mills in Calvert, Alabama, and San Luis Potosi, Mexico, to serve the market. Our market share in the NAFTA region has grown to well above 20% and continues to rise. We have made significant progress over the last 17 months, but we are far from where we should be.
Last year, the Americas recorded an underlying EBIT loss of EUR 163 million. As you can see now, our direction has changed. The full commercial maturity in Calvert will be achieved by 2018, but we will get to positive numbers well before that. Solid profitability, that is our goal. I am not going to give you a date, but believe me, it will happen, and it will happen sooner than later. The good news is there is a lot of improvement potential still left on the table. In the Americas, cost improvement is clearly our biggest lever.
In our operations, we've improved our conversion cost by 30% this year alone. This is a very good achievement. With our company-wide manufacturing excellence initiative, we can and we will accomplish a lot more. We have also realized significant SG&A savings in the first half of this year. We've restructured and cut our SG&A cost by more than 10%, and we will continue to drive further efficiencies in this area. Sales volume growth also plays a key role as we continue to increase our order book and product capability. However, our growth and profitability is not based on hopes or expectations of higher demand. We are still making inroads into the market and earning our fair share. We are expecting significantly lower costs, better efficiencies, higher sales volumes, and profitable growth. The way we will achieve these improvements is through our must-win battles.
I'll walk you through the battles in some detail, but I'm gonna start with safety, very similar to Roeland's point on safety. To some, it's easy to dismiss safety as something soft, but I have over 30 years of experience in the metals industry, and for me, safety always comes first. It's not just because the safety of our employees is what's most important to us, but it's because it is a key indicator of the health and efficiency of your business. When I arrived in the Americas 17 months ago, what I witnessed was safety behavior and culture, a safety behavior and culture that lacked systematic approach and discipline. This is something that was evident in many other business areas in the Americas as well. What's transformed is a systematic approach, discipline, and relentless drive for improvement are what are now bringing forward our must-win battles.
In the Americas, we've already made good progress in shaping our team and ways of working towards a high-performing organization. A couple examples. We've implemented a new setup with new leaders in charge. That's new operational leaders, that's new commercial leaders, it's new supply chain leaders. We've upskilled our talent. I can tell you we've brought well over 40 to 50 people that came in from the outside that are now in the company. They're not new to the steel industry. They're new to Outokumpu, but they've brought their experience and their drive for success into the organization. That's to really drive a reflection that we're no longer ramping up, we're no longer turning things around, but we're a professionally run business that's very keen on execution each and every day and to be that fierce competitor in the market.
We've set up a business center in San Luis Potosí to centralize shared services in a lower-cost location. We're also investing in our people through increased training and also, as I had mentioned, updating our talent. That's not just updating the talent at the leadership level. That's throughout the organization, from the laboratory to the frontline manager, to a particular area manager and so on. It's just not in operations, it's in quality, it's in supply chain and so on. We're very enthusiastic about what's going on, and I can tell you the Americas team is enthusiastic as well. When Roeland mentioned the OHI survey, 96% of the employees in the Americas responded to that. 96%. In that response, over 70% responded that there's a clear and understood direction going forward.
I think that provides a pretty strong sense of direction to where the Americas is going. A high-performing organization contributes to cost efficiency in terms of SG&A, but it also improves our overall efficiency in how we manufacture, market, sell, and service our customers. Manufacturing excellence is extremely important. We have been at this for about 17 months, at particularly Calvert. It is our biggest lever of profitability of going forward. It improves our safety and our productivity, it reduces our cost, enables more capability, and enhances our ability to serve the markets. Just to give you an example of what we achieved so far in manufacturing excellence. in Calvert, we had a clear bottleneck in our cold annealing pickle line.
With a systematic approach on process improvements, equipment reliability, and boosting the competency of the team that we have focused in this area, we have gained a 22% increase in our throughput on our cold pickle annealing line, and we have also improved the yield by 8%. This means that we are able to produce over 22% more volume than before. In terms of cost, that is millions of dollars of takeout a year.
That is just one example. We have dozens. Not only have we executed, but we have dozens in the queue that will continue to be executed going forward. Several dozen, actually. Other actions that we have ongoing include our operational equipment effectiveness. It is really getting the maximum efficiency out of our machines. At the moment, we know what the nameplate capacity is, but the continued improvement in operational efficiency enable us to increase over that nameplate with that capacity.
If anyone asks me what the capacity of Calvert is or Outokumpu Mexinox is, I do not know yet. We know what was printed on the plates, but I do not know yet. Our single individual profitability lever in the Americas is our yield improvement. On average, every 1% in yield can net $5 million. So yield is a very big lever for us and we are extremely focused on now. Additionally, a couple of other methodologies and tools we have implemented. Visual shop floor management has been very effective.
It is a real-time feedback of performance problems and where the improvements need to come from, all in real time, and it definitely drives a higher focus from the organization, and accelerates progress. We have seen that this year. We have also implemented the 5S lean manufacturing principles along with reliability-centered maintenance. Now we are aligning our efforts with the global manufacturing excellence drive.
I believe this will yield even greater results across the company in the long term. In regards to supply chain in the Americas, we have already done a number of things that have yielded some very positive results. We have taken many actions to optimize our logistics and reduce spend. One key change we made was to fully integrate the supply chain organization and our approach to the Americas, so they take a holistic approach and perspective. This is the first time, actually, that we have started to look at Calvert and Mexico as a truly integrated supply chain because Outokumpu Mexinox is fed from Calvert. But now we are taking a holistic, integrated viewpoint and approach to it, with the new setup that provides those mechanisms and collaboration. This year, we have implemented a transportation management system that looks at our transportation patterns and costs.
Since the implementation of this TMS, we have realized over 7% reduction in our freight cost. That is predominantly just at Calvert, and we are implementing it at Outokumpu Mexinox right now. We have also put all of our transportation contracts out to bid, both new and incumbent, and are in the process of negotiating all new contracts, and the early results indicate that we would achieve somewhere between 12% and 18% cost reduction in our freight expenses going into next year.
We have also made much headway on our net working capital through predominantly a more integrated, disciplined system and approach to how we plan, how much inventory stock we need for each and every operation, as well as at the customer. Just to note that we are also going through a complete supplier rationalization, which is currently underway. We expect that to net even better cost reductions as well.
In addition to these step change measures, we are also looking at long-term operational improvements. On-time delivery in our business is a must-win to strengthen our reputation. In the past, we have not been that good in the Americas, both reliability and delivery issues. At the present time, our customers tell us that we are equal to, if not better than the competition. There is still an opportunity for us to improve and differentiate ourselves in the marketplace in this area, and it will be a keen focused metric for us. You all know that raw materials represents a large portion of our cost. We are optimizing our supply by taking advantage of not only our global purchasing power, but also tapping into local scrap supply, which is less expensive and faster to access. There is significant savings here.
We have only scratched the surface in this area, and I expect this to continue going forward. We have recently hired an expert who worked for a competitor that is now leading our raw materials procurement area in the Americas. This individual brings a vast network of connections to particularly the local or domestic scrap industry and supply chain. He has brought new insights, and I can tell you, has saved us millions of USD just in the last, say, five months that he has been a part of our company. I have great expectation for this going forward. However, we also have additional opportunities. Once we buy the raw materials, we have to be as efficient and optimized with consuming those raw materials as we can.
We are pursuing some process improvements, more in tools and intelligence on how to cost-effectively mix these raw materials to melt for the products we produce. You can use different forms of scrap, different contents of the scrap, different forms of nickel, ferrochrome, other alloys. How you impact the raw material cost is you have to have good tools and intelligence, as well as a good quality supply base to optimize and make sure that you are not overspending on the materials you charge in to make a particular grade.
So we are optimizing that right now. We are pursuing some additional techniques. These are not investments. These are not equipment. This is intelligence. This is how you think, how you operate, and the discipline to manage to those charge materials, to those recipes, to deliver that grade. We expect to get about a 2% improvement across our raw material costs.
Now, you may think 2% is small, but you are talking eight, nine-digit size numbers that we are starting with. So 2% across that is a big number. The next area is in the area of commercial excellence. We continue to make inroads into the market. Our strategy has been on earning our fair share in the market and evolving or transforming or transitioning to that preferred partner of choice. Our market share growth is just not based on our production capability, but it is also a process of improving our mix of profitable grades and sizes or dimensions. Our broader portfolio and increased production capabilities improve our selling opportunities. An example of this is our polishing capability in Calvert. This advancement is now making us an even stronger partner to the appliance industry, with higher margins and value-added product into Calvert.
Through the improvements we have made on on-time delivery, we are earning the trust and building our reputation in the market. We continue to be very strong in the Midwest region of the U.S. and are now working on extending our stronghold into other regions of the United States as well. Just to give you an example, this may surprise you, but in the Southeastern region of the U.S. where Calvert is located, 17% of all stainless steel is consumed in that region. What do you think our market share is, which basically is our backyard? We have less than 20% of that 17%. So the point here is there is huge opportunity, and we are going to have to go territory by territory, customer by customer across the U.S. and get our fair share.
One of the other target areas is we are broadening our customer base, really targeting more medium-sized distributors and service centers. As I mentioned earlier, working and developing a relationship directly with the OEM. So we are a part of the buy decision and not just a transaction to the OEM. We have had some early success in that arena, and it is an area that we are going to continue to focus on. We have really raised the bar with our sales organization. I can tell you right now, about 80% of the outside salespeople are new to Outokumpu. They are not new to the stainless industry, nor the steel industry. But over the last year, we have really brought in and brought on board a really, what I would consider, a high-performing team. So we have really raised the bar in that area.
With the people there, we have focused on technical training, we have focused on improving the culture, and we have definitely improved the expectation. When I first got there, I could tell you my viewpoint of it was that we had a lot of caretakers for customers and accounts, but really did not have the hunters to go out and get the business.
We have transformed that organization into some highly trained hunters, as well as some good experienced people that we have gotten from our competitors. Because our target is to be the partner of choice across Americas. The market has been, quite frankly, underserved in quality. This is another area of opportunity for us. Our customers recognize us as a global company in regards to the high-performing quality products we deliver. We are building upon that credibility, the global credibility, and landing more business. I will just give you an example.
Typically, across the industry, the claim rate, or really what is the reject rate at the customer level, it typically averages between 1.5%-2%. Calvert is well below that. It was a journey to get there, but we are well below that now. It has been a challenge with the new mill, but we are able to outperform the market at this point. It is not because I am telling you the statistic. This is because the customers tell us this. We do utilize our global footprint. We utilize a lot of experience within the company. That is something that we are bringing more to the market in the U.S. and the Americas. We are leveraging our European R&D capability and our 100 years of stainless steel manufacturing experience in the Americas, something that we really did not do before. With the new setup, that brings that collaboration much closer.
I can tell you, we take tremendous pride, I think Roeland said this earlier, we take tremendous pride in our fast response to our customers and the ease of doing business. Again, it is what our customers tell us is what is different for us, Outokumpu in the Americas, than the other competition. We are allowing our customers to leverage our customer expertise, not just in making stainless steel, but its use of stainless steel in either their manufacturing processes or their customers' manufacturing processes. We are bringing that, and that is pretty much unmatched in the industry today. I will bring you an example of that here shortly. In addition to our local talent in the Americas, we are able to draw, as I said, from the Outokumpu pool of expertise.
We are building our local presence in that regard with our new organizational setup, and we continue to leverage our technical capability with our customer base, and they really appreciate it. Again, it is not me telling you, it is them telling me, and I am conveying the message.
Finally, our customers, before, the commercial setup in Americas was, okay, Outokumpu Mexinox sells this and Calvert sells this, and we only sell what those two mills make. Sometimes Europe will call us up and say, "Hey, we got some stuff for you to move in the Americas because our regional market will not take it." Now it is all integrated, so there is one marketing and sales approach in the Americas, and our customers are really appreciating that. This is a very recent success. The Americas won a Supplier of the Year award by one of the largest appliance manufacturers in the world.
It was simple. The customer had an issue. Their incumbent supplier was not going to be able to supply them, which would put them in a three-month shutdown situation where they could not sell their units into the market to the consumers. They came to us. They were looking for, of course, the first thing was a reliable supplier, but more of a strategic partner as well, to support their growth in what they would call a hyper-competitive appliance market. Let us see what we did. We quickly set up a cross-functional team, both operationally, quality, and commercial. We looked at what they needed, what they wanted. Two weeks, we delivered the first order that would keep their plant running from the shutdown, and then we worked very hard over the next several weeks to fill their supply chain to ensure their plants did not shut down.
And we were successful in that regard, and they recognized us for that by awarding us the Supply Chain Excellence Award in April this year. A couple key takeaways, and then we'll get to the Q&A. We are well-positioned and much better established in the Americas than we were. We still have significant improvement opportunity, both in our cost structure and top-line development. Our progress, I would say, has been good compared to where we started to where we are. But I can tell you we're not done yet. We're far from done. We have a very clear focus, and we have a team that is extremely focused on execution with the aim of making solid profits sustainable consistently, and we'll do that as soon as possible. As I said earlier, it'll most likely come sooner than later.
That being said, thank you for your attention, and I'll be glad to take any questions.
Thanks, Mike. Let's take a couple of questions before the break, and then Antti here, I think, was the first one.
Yes. Thank you. Antti Koskivuori from Danske. Two questions on the volume side. You said that you don't know yet what is the kind of the maximum or the capacity at the moment or the future one. But if you could give us any indication whether that's 10% above the nameplate or 20% or any kind of indication would be helpful. Then secondly, on your market share, which is now 25% in NAFTA area. What is your ambition on that market share currently? It's been quite good development so far.
Yeah. To answer your first question, the capacity is probably in that range that you mentioned. Opportunity. I give you a classic example. Most high productive melt shops, they have two furnace shells. We have one, with the second one yet to be delivered. You have to do a major reline 15 to 16 times a year. That means you have that furnace down for 48 hours. When you have a second shell, you have that shell offline. You can brick it offline. Actually, it costs you less to brick it offline because you have heat exposures, you have things, difficulties doing a reline when it is in place. You actually get a lower cost.
But if you are down for 48 hours and if you have an offline one, which only takes you 12 hours to change, you pick up 20+ hours, that occur 16 times a year. That is a big increase in melt shop throughput. Those are the things that we have invested. These are modest investments. These are not double-digit million dollars. These are single minor investments that lead to huge productivity improvements, and we have a long list of those. Aspirationally, it is definitely north of 25%. I think what I look at is whatever the demand is, we should have our fair share. When you look at a maximum market, that fair share is probably going to be in that high 20%s, probably not. Could start with a 30%, I would say, but the market will tell us.
All right. Thank you very much.
Artem.
[Artem Belevskiy from SEB]. Mike, two questions. First one relating to your cooperation on hot rolling side. How happy you have been this year with your volumes basically growing quite significantly?
Well, I can tell you that our hot rolling partner is very happy about our development there because we're their largest customer. Specifically, we have really developed a much better collaboration with them this year. They're working better with us. We have our people embedded in the hot strip mill asset itself, where before that wasn't allowed. We see a lot better cooperation. As you should know, we have a 25-year agreement. We're in year 5 of it. I really don't see anything negative there at all. They've been very cooperative. They really like our business, particularly when the carbon hot rolled business has been as lousy as it has been. They like our business. They like that steady baseline. So they've been doing very well. Their quality is getting better. Their reliability is getting better. So they're making their customer happy from our end.
And we make our customers happy then.
Yeah. The other one relating to this, I would say, outlook for market share development. So one indicator of how to look at it is Net Promoter Scores, and Roeland presented this kind of development on the group level. How are you doing in Americas compared to your competitor?
We're doing very well. Actually, you would see that I think our Net Promoter Score is slightly higher than the 33, 36, I think, in that range. So we're doing very well. Again, as I referred to in the discussion, we still have a lot of upside on the top line, a lot of opportunity there because we were not viewed as a very reliable supplier. If you look from the first part of this year to where we are today, they'll tell you that we are building confidence in them. Not we, but the customers will tell you we are building their confidence in the market and we most likely will see the benefit of that next year.
Okay. Very clear. Thank you.
Up there, Kevin, in the middle.
Hi. Kevin Hellegård, Goldman Sachs. You talked about moving some of your sales from distributors directly to end customers. How do you think about doing this strategically without upsetting the distributors who are big customers of yours as well?
Yeah. Because I am not moving the sales from the distributors to me. What we are saying is we want to get to know the OEM customers much better so we can influence the decision-making. So we will either do that with partnered with an existing service center if the OEM desires a service center in the supply chain.
So the OEM can dictate who that service center is, or we can bring a service center partner with us. And we have had those discussions. We are not going to step over the service centers when they basically have 70% of the buy. We are not going to do that. But what we are trying to do is we are trying to influence the value that we bring as Outokumpu, the technical expertise, the growing and building reliability in our delivery. And we believe that we can differentiate that as well from our competition.
We know we are doing that today.
Peter, and then Bastian.
Yeah. Peter over at JP Morgan. Mike, when you look at the book of business that you have at the moment and compare it with the European book of business, the European business has been around a long time. I imagine there is lots of different products, different grades, different types of products. How different is your book of business, and is it automatic that if you have a more complicated or complex set of products, then it is good for profitability? Or will the U.S. business look similar to the European business in 5 or 10 years' time, and is that what is going to make it profitable, or do you think there is a sort of happy medium between the two?
Well, I think there is a happy medium between the two, and let me just explain that. We do not make the specialty grades there right now. We have melted and we have cast duplex grades, but we have not processed them. We basically brought them back to Europe, and they rolled them to do that. We have some limitations with our hot strip mill agreement. We have to get them to agree to be able to roll these higher grades. We have to go through that process. What we have been focused on, particularly since I have been there, is the grades we can make. Let us make sure we have the best quality and delivered on time and get it to the market. But we will pursue those opportunities. We have not even gone up the value chain yet. Roeland mentioned some of it.
We've gone from hot band to pretty much all white band. We do bring some hot band black. We do sell some of that to help our European friends out as well. But that's on a limited one-time basis. We're really focused on the products that we can make and we're good at making. We're making sure we have the market penetration to serve us well.
Just as a follow-up. You've got a wider product than I think anyone else in the market. Is that a sort of competitive advantage at the moment, or is that something you've still to leverage?
No, that's one of the value chain opportunities, the top-line development. Because I'll tell you right now, of all our shipments, only 17% of our shipments are 72 inches wide. That is a huge opportunity for us. However, you have to remember, 60 inches, I talk in inches, so I'm talking imperial here. So 60 inches is the dominant width in the North American market because nobody else has 72 inches wide except for us. And so the OEMs, all their processing equipment, their equipment to consume that product is all 60 inches wide. The ones that are making the investments, particularly the tank manufacturers, both the transportation tank manufacturers as well as the vertical tank manufacturers, are now starting to make those investments because they're seeing the productivity enhancement, the risk reduction in reducing the number of welds in those products.
You're going to see that grow as we go on. And again, that's one of the top-line development opportunities that we have.
Thank you.
Then Bastian, last question from there.
Thanks, Michael. I have been highly impressed by what you delivered or achieved since you took over, and I think this is not just with regards to profitability, but also volumes, which were really strong in the last quarter. Now, the fourth quarter we know is going to be a little bit weaker, and it is a bit of destocking and uncertainty, I think, as been pointed out in the outlook. Can you give us some early sense how your first quarter order books are shaping up here? Is the third quarter performance, from a volume level, a run rate which you think is normal, or has there been any extra, any positive microcycle baked into it?
What is the last part?
Sorry. Is the third quarter volume performance, is this really the normal level which you think is sustainable, or has there been any basically extra positive in there from a microcycle or import displacements, whatever it may be? I just take my second and third one.
Okay. As I said in my presentation, I have expectation, or we have expectation that our sales volume will continue to grow. The first quarter, we are just starting to see that come in now, and I am not disappointed. We will give you better guidance when we do our fourth quarter, or when Roeland does it and Chris do the fourth quarter. Did I miss one?
Yeah, no, I just wanted to get some sense whether the third quarter performance was really the actual run rate. I understand you actually see even some upside from that level. My next question would be on profitability. You pointed out that operational excellence and improvement is basically your largest leverage, but you also still have a very large share of black coils versus white coils. I was wondering how far the upgrade of products will be a profitability driver going forward. Maybe lastly, just on trade, I would be very keen to get your view as to whether you see that these inputs which are coming in are actually coming in at a fair price.
Because if you look at the trade balance, it really seems like China has been almost completely displaced by countries like Korea and probably Thailand and other countries. Do these really come in at a fair price, or do you see a possible further anti-dumping case coming up? Because clearly the approach in the U.S. is a different one versus the one in Europe at this point.
Yeah. Just to your last question, I can tell you that we monitor that very closely. If we see that they are dumping below market, we will take action with that. The industry will take action. The industry has a trade group that monitors that very closely in the U.S.
Do you think they are coming in below fair price at the moment?
Not seeing that now. Because one of the things you have to understand is, particularly if you see, whether it is South Korea or Vietnam, that is the Koreans, right? So there is already tariffs on Korean stainless. So they behave accordingly based on those tariffs. I am not seeing anything at this point in time. But again, the trade organization monitors that very closely. If there is dumping going on, I can tell you there is going to be action taken. The U.S. has proven that they do that consistently.
I have got no doubt on that. The last one was basically on the upgrade from black coils to white coils and how far they would be a profitability driver.
Well, I would say Roeland showed you a chart about where we are saying the improvements are coming from, both top line as well as costs. Americas is pretty well in alignment with that. We still see a lot of top-line development, and that is really selling the mix up, okay. Selling the mix up. But you have to understand, though, Calvert is long on hot band compared to the Calvert melt shop, and the hot mill is long on hot band black compared to the processing plants at Calvert and Outokumpu Mexinox. So we are always going to be in the market for a certain amount of hot band black to make sure that the melt shop is fully booked.
Okay. Thank you.
Thank you. Thanks, Mike, and thank you for the questions. Next, we will have a short break. There will be coffee and some refreshments served outside the auditorium, and then let us please make sure that everyone is back at their seats by 3:15 PM. as we will then continue with the presentations. Thank you.
[Break]
Okay, so time to move on with the program. Welcome back. Our next presentation will be about Europe and how Europe is turning from restructuring to profitable growth. And let us welcome Roeland back, our CEO, back to the stage.
Thanks, Tommi. So, this is my second hat, as the Head of Europe. Before I start, just one thing I have to say. A lot of the attention of the community, the financial community, has been on the story in the Americas. And of course, it is incredibly important. But what is happening and what has happened in Europe is of, I would say, an epic scale as well. And you can see that very clearly in the numbers and the actions.
So, as Tommi said, from restructuring to sustainable profitability. We have gone through some tremendous restructuring steps. The acquisition of Inoxum was a big bite to swallow. It has taken quite some time to digest as well, I have to say. It is almost like the snake eating the deer, and you see that the deer slowly going through. And we are now back to a really lean snake.
I will come back to that. The focus now, after having had these big steps, is on improving efficiency. Because that is where, like in the Americas, like in the whole group, that is where the really big prize is. This is where there is so much that we can achieve. We do this, of course, while building on our very strong number one market position in Europe. If you look at Europe, short term, very healthy. We see very steady demand. We have seen it throughout the year and actually the second half even more so. The interesting thing is that has not led to increased inventories with the industry. So what we see, the demand we are seeing is really the real demand. This is the underlying demand of what is being consumed. Of course, what has helped is stabilizing imports because of the anti-dumping.
Chinese part of the European market was at some stage over 10% of consumption. It is now virtually zero. Still imports coming in, I said it earlier, but they are at pricing that we can manage. You can see that in the base price. Base prices are recovering very clearly, EUR 20 up in Q3, another EUR 20 in Q4. I said, if the sort of demand continues, and if you see a bit of the restocking coming in from the distributors sector, then we see more potential there to come as well. What we are seeing in 2015, 2016 seems to be as well what is going on for 2017, 2018, 2019, 2020, because the outlook is pretty much muted. It is muted not just for our sector, it is muted for Europe as a whole.
You know this, GDP growth has been anemic and is expected to continue anemic. The Brexit event, when it will happen is still an issue, but clearly there the consensus is that it will take out quite some of the future growth of GDP in Europe. So you see a very flat market projection. This is SMR, by the way, that comes out with this projection. Very flat market projection for the midterm. Some changes in between. You see that the consumer goods is down a little bit. Very strong growth in building and construction and infrastructure, and still good growth in automotive. So a few of the areas that we are strong in. But as I showed earlier, we are actually very well over the whole segment. The only segment where we are a little bit less exposed to is petrochemicals and energy. So back to the restructuring.
The restructuring led to a decrease of melting capacity in Europe of 1.4 million tonnes. We closed 1.4 million tonnes of melting capacity. That is huge. On top of that, we closed 250,000 tonnes of cold roll capacity and taking the pain on our own to basically bring the European market into balance, which to a certain extent it is now. If you take into account what we export, it is a very balanced market. At the same time, we have been balancing our own assets in that way, and where we had very discreet, distinct assets that were on their own, we now have a system of plants that is completely interdependent on one another. The result is that we can drive tremendous synergies and efficiencies.
A bit to what Mike said, if you suddenly treat all these plants as one system and you go one step higher and you say, "How can I optimize?" Just as if they were on one site, all these pieces of equipment. How can I optimize it? Suddenly becomes a lot easier and a lot more obvious what has to happen. That is exactly what is happening. We have increased our market share. We were at the end of 2015 at 30%. We have now for the first 10 months, we are running at 31%. That is the biggest market outside of China that we are talking about, and a 1% market share there is significant, especially if you do it at better pricing.
We have streamlined our assets, and we have a fantastic network, not just from sales offices that we have in Europe and across the world, but as well from our service centers, where we have 10 coil service centers in Europe. We have four plate service centers in Europe. We have a very strong service center in Australia where we have a large market share, about 20%. Then we have a specialties service center in China, where a big part of the very high end of our exports is going.
Then you see what it actually did to us, and this is why I said it is not just about Americas and the change there, it is as well watch what we are doing here in Europe, where we are coming from EUR 33 million full year 2014 to EUR 85 million full years 2015, and now in the first nine months, $116 million. This is a tremendous improvement in results that comes from efficiency, from better market realization, et cetera.
Of course, Europe has its own contribution to the Must Win Battles, and I will skip safety because that has been clear enough. Although we do add to the Must Win Battle of Americas because we take supplies from them to supply some of the stuff that we cannot do ourselves, I will leave that to Mike as his story. If you go one by one of the others, high performing organization.
We have restructured here in Europe, and the restructuring was group wide, but the biggest impact was here in Europe. There we did the taking out of all the various P&L centers. We had five business areas, four of which were basically in Europe, and three of those we actually put into one, which is now the business area Europe. It sounds simple, but it changes the way you operate, it changes the way you think. It allowed us to take out literally two layers of management, take out 400 white collar positions, all directors and higher, leading to tremendous cost. But as well, efficiency improvement because suddenly you do a lot less business with yourself, and it is much more outward-looking. We have done the Organizational Health Index. So where are we now? We are driving better performing teams.
We are in the rollout of what we call high-performing team workshops. We have gone as the old team, we have gone through it ourselves just to experience whether it helps, and we actually started into it with great skepticism because we are a great team, and we came out of it and said, "Jesus, we are a much better team now than we were before." It really works, and we have decided to roll this out and get this as the core of our performance drive. We are all about accelerating execution speed. As a company, we have been slow. We have been very thorough. We have been typical engineers, and apologies for the engineers amongst us. We have had a culture where we look at things over and over again. We put a steering committee in place, and it takes months.
We have said this has to be gone. It has to be over. It has to be much faster, much less getting into four digits behind the comma. I will give you an example. Just within our own team, we have decided that, and my apologies for being on slide 48 here, because within our own team, there are no presentations allowed that have more than six slides. That is it. Because if you cannot say what you need to say in six slides, then you do not know your business. So I do not know what it says about the slide 48. So that is just the acceleration of things. We have pushed down as well responsibility and authority so that people can actually take decisions on the floor, and it does not have to go up.
We have a drive for continuous improvement, where the main element to do that is to use performance evaluation processes. We had one very, I would say, incomplete. We have reinvigorated it, and it really is something where we will be able to give clarity of role and what is expected for delivery, give coaching, and have consequences, both in terms of rewards, but in terms of a good talk down as well when it is necessary. Again, I cannot stress enough how important the high-performing organization is. Research has shown that 50% of a company's success comes from the right strategy. 50% comes from the organizational strength. It is very, very important. So you cannot get the strategy right no matter how good it is if you do not get your organizational strength right. Manufacturing excellence has been mentioned a number of times, comes back again.
We have recruited in Europe, a new head of operations. There was none. We have made it a clear role. This is the gentleman who basically controls all the plants. He has, in his organization, built an experts cell for manufacturing excellence, which is where we do the development of both the philosophy and the toolkit that we will roll out to the plants. The responsibility for executing, though, lies with the plants. This is not a centralized organization and will never be a centralized organization. We tell centralized what we do, where we want to go, but we leave the execution then to the people who are actually on the floor. We have done plant assessments. Every single plant has been assessed on where they stack in terms of lean manufacturing, and we have identified the gaps. We have set the KPIs, and we have mapped the material flows.
From there on, you can start working. Just again, to show the strength of proper manufacturing excellence, you see a few examples here. Tornio melting capacity. Tornio has a nameplate capacity in melting of just over 1.4 million tonnes. We put a group of people in charge, and they came from several parts of the organization, not just from Tornio. They came from outside as well, from Avesta. They have been looking at the processes. They have been looking at the changeover times, the sequences, et cetera. We have been able to run Tornio at almost 1.6 million tonnes of melt capacity for the last three months. It is a 15% improvement. That is all product that suddenly can go to market that you did not have, and that market is there. It gives you a tremendous improvement in your cost as well.
We had the same thing in Avesta in the AOD converter. We looked at, again, the time it takes for changeovers, and we have been able to improve that by 55%. As a result, which is much more important if you then look at the product that comes out, we saved 20% on cost per tonne. So every tonne is 20% cheaper.
This is not about more tonnes only. This is as well about your cost down. These are big numbers, and I know that when you look at, okay, you guys, you are looking at having the 45% of the EUR 600 million coming out of your productivity. These are the things that drive it. These are big steps, and these are single elements, and every single piece of equipment you look at, you find these. I talked about Krefeld, for instance, already, the 38% improvement on the cold mill.
I have another one in Tornio, the hot mill. You can say that a hot mill in a factory is the heart of the factory. If that thing does not work, you have a problem because nothing goes. With the melting capacity up, we started hitting a bottleneck in the hot mill. We had a group doing a seven-step maintenance reliability centered approach, and we have been able to get the availability of the mill up 10%. Again, these are big numbers, and it is every single stone you turn, you get into these numbers. People in our own organization are first skeptical, then they are amazed, and then they say, "Okay, what is next?" That is really what is happening. It feeds on itself. It is fantastic. All that with the backbone of our supply chain.
Supply chain, having it set up the way it is, makes life a lot easier because our sales group can look at the only thing they need to do, which is the market. Our operating group is going to concentrate on where the big money is, the manufacturing excellence. In between sits the keeper of the money, I would say. The guys who control inventories, who control planning, who make sure that we get the right products to the right places, the right production to the right capacities and capabilities. Just a few things, if you talk about end-to-end planning, just to give a flavor of why this is important.
In the past, when you had all your single mills having their own sales and their own planning, because of many uncertainties, either market or from the buying end, there were always mismatches between planning and execution, and then what basically was the scheduling. As a result, we would hit either shortage of product, not servicing the market, or we would have a hiccup somewhere, the market would not materialize, and we had buildup of inventories in the system. Very inefficient. I would say that our planning in those days, on average, was off 20%-30% on any period. In the new situation where we have not just the system itself working, but we are backing it up with a sort of macroeconomic statistical forecast system, we have been out of our planning versus reality by not more than 3% or 4% consistently.
Again, tremendous efficiencies that you put into your pocket. Procurement efficiency. I think it was Peter that asked the question whether 15% is a lot. 15% is a lot. Mike already said transport in the U.S., 12%-18%. Here in Europe, we had a drive on our pallets. A very big cost factor is the pallets on which we transport most of our products. We have achieved by not only looking at the cost of the pallets, but by having one of the pallet manufacturer come up with a very novel idea. We saved 35% on our pallets. We are looking currently at our bill on transport in Europe, and we will probably exceed the numbers that they have in the U.S. Again, these are huge veins that we are opening up of efficiencies and basically money.
We have achieved in all this an inventory reduction of 8%, which again, you see in our financials. Then last but not least, commercial excellence. A lot of questions have been asked because this is the one where I have to admit we have to be most vague, because I can't tell you which customer we did what and how much the margin improved, because that's the sort of information that I just cannot give. But what I can say is that we have, for instance, with the new approach, we have been able to much better look at the real profitability, not only by customer or by product, but in all combinations, by customer, by product, by region. We have been able to weed out the lowest profitability segments or its micro segments and redirect that product into higher-end value customers.
It has given us a 10% increase in the value chain versus what we had at the end of last year. Then on value selling, we have added a full 1% to our margin by that approach. These are hard numbers. These are very hard numbers. Unfortunately, again, I can't give you very specific examples. But you can imagine that if you have a product like, and this is again, one of my favorites, where we have been working with a tier 1 automotive supplier to develop a new fuel tank. Fuel tanks in cars are made of plastic, have always been.
This customer said for one of his customers, "I need a lighter tank, and it has to have more capacity." We came up with a product that basically makes the tank 50% lighter. So half the weight, and it gave on average four liters more of capacity. It has much more formability, it is recyclable, and it has better crash properties. So a win on every single point. That is where we are making our money. Ending up with an example as well, where we think we show the power of both our technology and our product. The Swedish rail company took a decision some time ago to use our product into their high-speed railway. Normally, if you go to the TGV or you go to most of the stuff that is being built by Alstom, these are made out of aluminum.
Of course, what you have to do with aluminum, you have to go much bigger gauges. But still it is a weight gain over carbon steel. With stainless steel, they were able to lightweight versus any other option, maintain a clear advantage over strength versus either carbon steel or aluminum, and have much more longevity because even aluminum corrodes. So when they had to refurbish, normally you have then to change the structures as well. In this case, with stainless steel, they could just leave the same structures in place and do the outside. So there is a sustainability advantage as well. Now you can say, "Well, but it is not good because you guys cannot sell it twice." We do not want to sell it twice. We just want to sell it to all the other train makers as well. That is where the difference comes from.
In summary, we are leading. We have been leading for a while. We are now getting to the point where we are leading financially as well. We have completed our restructuring steps. There is still some little stuff to come, and we will get there during the rest of the questions, I am sure. We are focusing on our efficiency, and we not only want to maintain a number one position, we are going to build it out. Thank you.
Thank you, Roeland. Now time for the questions again. Here, Johannes.
Okay, thanks. Johannes here, Handelsbanken. Just another question on slide 47 there, when you talk about 1% additional margin through focus on value-added products, should we be thinking this is the percentage or the margin on reported sales or is it on a sales on the base price level? Basically, are we talking plus EUR 10 a tonne or are we talking EUR 20 a tonne?
That I'm not going to tell you, but it's 1% on our contribution margin, which is one of the leading drivers that we have. That takes into account the cost of making the product versus the sales price. That's why I can't be more specific. I can only say this gives you, on the total portfolio, gives us a 1% extra margin.
Just to understand the dynamics on higher margin products. Are there additional costs in that higher SG&A cost, or is this roughly the same cost per tonne?
No. SG&A cost, no. I have to qualify. You know what? I can use this example because that's non-competitive. If I go back to my days in aluminum, we had one certain product, a certain plate product in a certain grade that would go into general industrial users. That would sell at about $3,000- $3,200. That same product would go in a plane and would sell at about $4,500. The difference was that to get in a plane, you had to do ultrasonic testing for every plate. So the cost was slightly higher, but still your margin upgrade is even higher. That same product would go to an aerospace project in India, where the same plate was $32,000. We had to, however, give more support on the technical side. So your cost on the SG&A went up. That's how you have to look at that.
Ultimately, yes, in order to get to the higher added value, you have to do a bit more, but you have to make sure that the value you bring gives you more return than your extra cost.
Next one, Peter.
Yeah. Following on from Johannes' question. Whenever we've looked at Outokumpu's product range in Europe, it's very wide, extensive, and you have all the sort of the sexy grades, and yet sort of all the competitors were making all the profits. We could either conclude that you weren't making any money from duplex and all these other things you'd invented, or that the other products weren't making any money, or that if you'd run the plants flat out, making standard grades, you'd make more money. How quickly can you optimize the mix? Can you give us a clue as to will there be some range rationalization or will you just charge more to the customers?
There's a fourth possibility as well, which is your cost is just too high, which was the case. I have to say, I think that we can do rationalization in our portfolio. There are certain products that we just do not sell enough of to make it interesting, and we will have to have these discussions with the customer and say, "Okay, what alternative can we offer you that is good for you and at the same time good for us?" Yes, that will be part of the discussion.
So the fact that you have got this very complicated or very sophisticated portfolio, how will that come through in the numbers in the future? Does it mean you will probably get better growth than the peers or theoretically you will have a better margin than the peers in the future?
Yes.
Both. And I suppose, and how long does it take to come through? Is this a very difficult process?
Peter, the one thing, of course, that never goes away is that you always have this base load of 304 grade , which is basically not a lot of differentiation other than in the service you deliver and the quality you deliver. But yet you do not have that much room. So you have to look at what is that volume beyond the bulk standard stuff. That is where you make extra money. And yes, that will drive us to better returns than our competitors.
Thank you.
Then Johannes over there.
Yes, it is Johannes Grasberger from Nordea Markets. It is a question on the Sheffield SMACC, of course, that is utilized by Long Products as well, but are you starting to think about maybe using that also on the European business side because of the weaker pound and I guess, easier cost base compared to your other competitors in Europe?
We have always used Sheffield for slab deliveries into Europe. Sheffield has a swing capacity function within the group. One of the reasons why Long Products is very important for us. Of course, the lower GBP helps. It makes it more competitive both for Long Products itself, but as well as a supply base for the rest of our system.
But in terms of the capacity in the European segment, do you have enough hot rolling capacity or cold rolling capacity to utilize that smelter asset?
Yes.
Is there also a swing factor that you can. Is it kind of related to that you can push over the nameplate capacity that you have, and that way you are able to use the Sheffield asset in a better way?
The best way is to maximize, of course, the melt shops where you have your hot rolling. So you would maximize Tornio, and that is one of the reasons why we have pushed it beyond its nameplate. The next one is, of course, Avesta. Avesta has an interesting issue, which is their melting is nameplate 450,000 tonnes, but the hot rolling is 900,000 tonnes. So we have a vast amount of hot roll capacity there.
Would an option be in selling hot band into the market?
No, not really. That is not our business.
Okay. All right. Thank you.
Any more questions?
All right.
Thank you, Roeland. Thank you for the questions. Our next presenter will be Kari Tuutti, the Head of Long Products, and Kari will explain us how Long Products is creating value to Outokumpu through efficiency and specialization.
Thank you, Tommi. Can I first ask, a show of hands, how many of you have an iPad? One or more iPads. Great to see many hands. Thank you. All of you are supporting the Long Products sales as there is a small slice of Outokumpu bar in each of the iPads. Just one example of the very specialized offerings that we are developing and delivering to our Long Products customers. My name is Kari Tuutti, and very happy to have this opportunity to share with you the Long Product story and strategy. How do we create value through efficiency and specialization? The role of Long Products is a very clear one in the group structure.
While the BA Europe and BA Americas are driving results participating in the flat products market, my unit really is completing the Outokumpu product offering by focusing on the Long Products part of the market. Let me first start with key priorities for us for 2017 in order to contribute to the overall group vision and ambitions. First of all, we have made significant improvements in our cost competitiveness in 2016, and this will enable us to go after new and increased volumes in standard products, supported by the improved cost competitiveness. Secondly, in U.S., where we have a very strong quality reputation in the marketplace, we have opportunities to go after multiple growth opportunities supported by some focused investments that we have done this year.
In Europe, we will be growing our special products sales as we continue to strengthen our product offering with heavy focus on special products. Let's then have a quick look at the product offering that we have in Long Product. On a high level, you can look at four different product categories. First, bar and rebar, where we offer a broad range of dimensions and shapes, really serving a very broad range of customer segments, be it energy sector, be it automotive, consumer applications. Then wire rod. Key applications including springs, wire producers, welding companies, and electronics. Then semis products. There we are looking both cast and rolled semis, for example, seamless tube, flange producers, big customers for our semis products serving energy sector, for example.
Then fourth, our welded pipe business, where we are very much focusing on high demanding applications, serving U.S. customers from our Florida plant, focused again on oil and gas, on chemical industries. From the grade point of view, we cover the full Outokumpu range, but very much our focus is on the special grades, the Pro ranges, which account for more than 40% of our sales. Like already discussed, our melt shop, the SMACC melt shop in Sheffield, has an important role in supplying slabs to our cold rolling mills in Germany and elsewhere in Europe. Indeed, there is spare capacity. We are not even close to our nameplate capacity in SMACC. So in case there would be any operational issues, SMACC has an important role as a safety cushion in case of needed support from other melt shops.
Let me then say a few words on our customer base and geographical exposure. On the left-hand side, you can see the end-use segments that we are serving. Oil and gas still remains our biggest segment with roughly 20% of the overall demand, even despite the significant decline in oil related investments. Chemical, industrial components, automotive, aerospace, very important segments for us to serve. Regionally, U.S. is our biggest market with 40% of our overall sales, Europe covering 50%, and then the balance 10% is APAC. I see great opportunities for us to grow our business in APAC with our special products offering in markets like China, Japan, and Korea. Let me then say a few high-level comments on the overall Long Products market. The market size, 5.5 million tonnes, representing 15% of the overall stainless market.
2015, we saw a significant decline in the market, again, very much driven by the oil and gas investment slowdown. However, SMR sees a positive development in the next years with an average 2.5% growth rate annually in the Long Products market. I have to say I do agree with this view. I recently met some of our oil-related customers, and they are now cautiously optimistic that we have seen the bottom in the oil-related investments. This is one signal that supports the view that we will be seeing a moderate growth rate in the market going forward. Looking at pricing in U.S., we expect flat base price development. In U.S., there's a very significant share of imports. 50% of the demand is covered by imports. It's important to note that in the Long Products side, there are no import duties in place, unlike on the Flat Rolled side.
Certainly we will be following the development of the imports and taking action if validated. In Europe, we have seen and we are implementing price increases. This is supported by healthy growth in the market and as well, the level of imports has remained rather low and stable in Europe, and this is providing opportunities for some modest price increases. Let me then look at the past performance of the Long Products unit. 2014 was a very strong year for Long Products. We delivered more than EUR 30 million EBIT, which resulted in more than 20% return on capital. The return on capital really illustrates the asset light structure that we have in Long Products, both when it comes to fixed assets and working capital. 2015 and 2016 have been far from satisfactory developments. But looking forward, looking at the fourth quarter this year, we are seeing positive development.
Particularly looking at 2017, we are seeing significant improvement in volume environment, in pricing, and very importantly, as I mentioned earlier, driven by our improved cost position. Let's have a closer look at our cost position. 25% reduction in our conversion cost from last year to this year. A massive improvement, and this will be a key lever for us to benefit next year. Three areas that are delivering this. First, our operational improvements are improving our cost competitiveness. For example, in our melt shop in Sheffield, we have reduced the number of aborts by more than 40% in the past 18 months. A very significant improvement and one example of the continuous improvement activities that we are implementing across our mills. Secondly, more than 10% reduction in our SG&A costs this year alone, again, improving our cost competitiveness.
And thirdly and importantly, the normalization of the British pound. As you can see from the chart, the pound strengthened significantly in 2015. And in the past nine months, we have seen the pound retreat back to a more normalized 1.15 Level against the euro. Looking at the uncertainties related to Brexit and the implications to the U.K. economy, I believe that this is a good assumption for where we will see the pound going forward. Our improved cost competitiveness, positive outlook both in terms of volume and pricing, are really promising a solid outlook for 2017. On the must-win battles, we have specific actions and targets on all of the six must-win areas. I will now touch only on two of them, namely the Americas and commercial excellence. Let's start with the Americas. We have a very strong quality reputation in the U.S. Long Products market.
During this year, we have made some focused investments to improve our special product capabilities and capacity that will give us multiple growth opportunities to go after. First, when we look at the important segment of fittings and valves, we are able to in-source some key products that were previously partially outsourced to third parties. Having the full control and quality in-house will enable us to grow our business both with existing and new customers in this segment. Then automotive and aerospace, both positive growth areas where the market is growing and Outokumpu has a strong position. We continue to expand our approvals and products that we can offer to this segment. For example, in automotive, there's a big move towards GDI, gasoline direct injection, and stainless steel bar is a key element of these new engine solutions, and Outokumpu has a very strong position in this space.
Thirdly, service centers. We have a select group of partner service centers where we are very closely working with them, developing new end customer contracts. We will continue to do that. We will expand our product offering to them, and also we will look at expanding our geographical coverage with them. And then lastly, construction, and namely stainless reinforcement bar or rebar. There's a significant growth towards stainless steel rebar. Different infrastructure owners, bridge projects, other infrastructure project, the owners are seeing the significant life cycle cost savings that they can get by implementing selectively stainless instead of carbon steel, reducing the maintenance costs and expanding the lifetime of those projects. This year, we have built full stainless rebar capabilities to our South Carolina facilities, and we will go after this growing market.
Let's have a look at one reference case from Europe or specifically Middle East, where we are delivering more than 1,500 metric tonnes of stainless rebar from our U.K. facilities to Kuwait to a landmark bridge project where the designers are using selectively stainless to bring the cost savings in the maintenance area. Outokumpu won this project not only due to the strong reputation we have in development of stainless rebar solutions, but very much due to our high quality and high reliability, delivery reliability, reputation, and capabilities. So then let's look at commercial excellence. In Europe, we have multiple growth opportunities, both in standard and special products, and I have given very challenging growth targets to my commercial team to go after this.
First one, hexagon and square bar or special shapes bar, where we have great capabilities in our Sheffield units. Earlier this year we made an important strategic partnership with Böllinghaus Steel, where we are co-marketing our joint offering of shapes bar, and we are seeing tremendous momentum for this partnership. Secondly, special grades. Leveraging the Outokumpu metallurgy expertise, expanding our product offering. One example of this, we have shipped our first nickel alloy 825 wire rod to customers in Europe. A big opportunity potentially. Thirdly, looking at new strategic semis customers supported by the improved cost competitiveness, big opportunities not only in Europe but also in Asia Pacific.
Lastly, we are developing our service concepts related to supply chain, how can we offer even shorter lead times and delivery reliability close to 100%, which is the performance at the moment from our SMACC melt shop, 98% delivery reliability. So focus on special products is a big strategic priority for us. Here you see a simple schematic of our product strategy. Starting from the bottom of the table, round bar 30 4 grade. Margins aren't massive, but obviously also we need the loading and the efficiencies from the standard products. Selling value through product superior machinability already gives us a nice premium as the product users get significant cost savings, be it increased tool life or faster tooling speeds as they are machining our bar. Very important part of our product offering.
Then going to hexagon and square bars, again significant price increase compared to a round bar, and even more so when we look at then special grades and special customer specified tailored solutions offering significant margin premium. So very simply, we want to offer the best quality, best delivery reliability, and very importantly, the technical knowhow in combination of special products. This is the combination that our commodity competitors are not able to copy. Ladies and gentlemen, let me summarize. I see there's a lot of opportunities for the Long Products unit to create value through efficiency and through specialization. Our role in the group is simple. We complete the product offering of stainless steel with our bar, wire rod, semis, and pipe offerings. Our improved cost competitiveness will open up new growth opportunities in standard products.
In U.S., we have multiple growth opportunities towards segments such as automotive, aerospace, fittings, and construction. In Europe, we have an improved and continuously enhancing specialty product offering that we are focusing on to drive for improved margins and higher valued products. Ladies and gentlemen, my ambition is to make Long Products the best performing unit in the group, be it safety, be it growth, or be it return on capital. Thank you. Now happy to take questions.
Thank you, Kari. So now ready for the question. I think Bastian over there was the first one.
Thank you. My first question is just on your expansion into stainless rebar, which I understand has been probably one of the most profitable product groups in stainless Long Products in the U.S. Given that you just ramped up the plant, I suspect you probably will not have been profitable this year. So maybe could you just give us some color on that side, maybe even on the magnitude of the losses. Can we expect this business to be already contributing a positive EBIT next year? Any quantification on that side also would be great. Then just following up on your comments on energy, where you said that some of your clients seen some recovery, I think also some of your competitors turned notably more positive on this side. So could you maybe give us here some color on how you see your orders here?
What has been the recent utilization rates and maybe the number of shifts you have been running at over the past couple of months, and where do you expect to be, say, in the course of the first quarter next year? Thank you.
Yeah. Thank you. When it comes to rebar, we are participating to the rebar market through our European production system. The rebar market is healthy profitability, but as you saw from my product schematic, it is by far not the most profitable segment. So it is better profitability than your standard round bar, but still more in the mid-range. When it comes to the North American market, we see that the price levels in North America, if anything, are slightly better than when it comes to Europe. So our profitability for rebar in North America will be at least on the same level as in Europe.
Has it been loss-making in the U.S. this year?
We are only starting first quarter next year, so the volumes will start ramping up only next year. We do not see any negative business there. The production system we have developed during this year. Again, it is a growing market with healthy price levels. So I do not expect any loss-making business there.
Could you maybe give us the capacity number which you have put in place in the U.S.?
When we look at the Long Products production setup, and the annual volume of roughly 250,000 tonnes this year, I don't see any significant bottlenecks that would prevent us from growing our volumes significantly over the next few years. The rebar capacity as well, I don't see any limitations from capacity point of view. It's more that what is the margin expectation we have and how quickly will the stainless rebar be adopted in the different regions. I really don't see a capacity as an issue when it comes to rebar.
Sorry, I was just referring the new rebar equipment which you've been installing in the U.S. What is the capacity of that?
We are talking about at least 10,000 tonnes capacity. It will take a while for us to fill that capacity for sure, with the margin expectations we have.
And then just on the demand in the energy segment and utilization rate?
When we look at fourth quarter, we are seeing increasing volumes. How much of that is coming from the energy sector? I would say that the energy sector still is not significantly growing. It is more that people are seeing more activity that will result in increased volumes next year. But I wouldn't say that yet this year in the fourth quarter, we are getting significant benefit from the energy side.
Could you maybe give us some color on the utilization rates? At which rate are you running, and where do you expect to be in the first quarter?
Again, the capacity utilization is a very dynamic area. When it comes to our melt shop in Sheffield, the nameplate capacity is 450,000 tonnes. We have manned the capacity to do 300,000 tonnes, and we are pretty close to full capacity when it comes to the manning. Again, if we see more demand, we can then increase shifts and increase capacity. So the situation is something where we can easily flex up and down.
Thank you.
Sure. Thank you.
Then Peter, next to Bastian actually.
Thank you. Just a simple question. If we are building our models and we are thinking about the Long Products business and in longer term, should we just think that it will have similar margins to the flat products and grow at a similar level to the flat products? In terms of the volatility of the returns, historically, it seems to me, but I may be wrong, that it has been a bit more volatile. Is that something that is endemic in the business or is it something you can moderate going forward?
I think it's fair to assume similar margins and growth rates as rest of the group. If we look at the past few years, there has been a bit more volatility. We definitely are looking at ways to stabilize this. I believe that the new organizational setup will bring some stability. I wouldn't expect that type of volatility going forward.
Thank you.
Kevin here in the middle.
Kevin Hellegård, Goldman Sachs. How much of the improvement you expect to come is going to come from a recovery of the oil and gas market? Do you expect to be able to return to recent 2014 profitability level without any recovery of oil and gas?
Looking at our plans for next year, we have not baked in any significant expectation on oil and gas recovery. We are very much building our plans on expanding beyond oil and gas.
Then Johannes.
Yes, it's Johannes from Nordea. I'm just wondering, you're saying that your direct kind of exposure to oil and gas is limited, so to speak. I suppose there are other players that are supplying this segment and when that industry and demand has declined, have you seen that these players have been selling into your market areas? Now coming back to kind of a recovery scenario where oil and gas is perhaps picking up, could we see them sort of drying out these volumes from your core markets, which will be in a way additional plus?
Yeah, good question. First of all, I would say that we have, and especially we had, when we look at 2014 and 2015, we had a very significant exposure to oil and gas. That has reduced due to the fact that that segment has declined in terms of demand. Certainly also our competition who saw that same decline have directed their efforts to other segments. This really did result in an overall decline in the price levels and had a negative impact across the segments. Should there be a recovery in oil and gas, it would be positive for the industry. But again, we are not basing our positive outlook on next year on that event.
Okay. Thank you.
Thank you. Thank you, Kari. Thank you for the questions. Now it is time for the last presentation of the day, and it will be given by our CFO, Chris de la Camp. Chris will talk about our improving profitability and declining debt.
Thank you, Tommi. Good afternoon, ladies and gentlemen. Looking around the room, it's surprising how many people actually look familiar, and it's probably a testimony to the very significant number of investor meetings, analyst meetings, and bank meetings I've had the opportunity to join since becoming CFO of Outokumpu in July of this year. To those of you who've not met me before, I'm Chris de la Camp, and I've been here since July. I'm going to spend the next 20 minutes or so trying to pull together the exciting stories that you've heard about from my colleagues, and talk a little bit about how that relates to our financials and what it means for us financially going forward. There are three key messages that I want to leave you with at the end of today.
The first is to reiterate that the short-term initiatives that we have started here in Outokumpu are yielding results, real tangible results. You've seen those in our financial statements on a quarterly basis. They're evident, and we're making very good progress. The second message I want to leave you with is that the initiation of our Must Win Battles has started to put us on a solid track to achieve our 2020 target of EUR 500 million of EBIT. This is not going to be a straightforward linear journey. There will be some ups and some downs. Market changes will happen, but we're firmly on track to get there. The third point I want to make is that while profitability increases continue to be extremely important, we will also be putting a lot of priority and focus on continuing to strengthen our balance sheet.
It will remain a key priority on our way forward. Our short-term initiatives are yielding results. It's a very clear message. You've heard it time and again this afternoon from my colleagues. We have spoken about the streamlined organization, particularly in Europe, but it has also been implemented elsewhere in the company. We have moved from five business areas to three. We have moved from a very business line-driven organization to a much more streamlined functional organization, where we're looking at one P&L for Europe, for example. These changes have made a significant impact in our overall costs in the background. It reduces the complexity of running the company. It has reduced significantly the layers of management in our company, but it also has significantly facilitated making changes in the background to functional responsibilities and managing those.
We've seen better coordination across various plants in solving problems, which is yielding real results. We've seen efficiencies in the way we report and in the way we manage our back office functions. We have been able to start standardizing processes, therefore reap efficiencies from that. Clearly, the complexity has reduced significantly. All of these factors have played into the initial reduction in our SG&A costs. We want to reduce by EUR 100 million by the end of 2017 on a run rate, and we're making good progress towards that. 600 white collar staff reduction. It's a structural change that is ongoing, but there are many things that actually sit behind these reductions. Let me give you a few examples. The first is a clear simplification the way we do business, and this is the number of meetings we have, reducing those.
The number of reports we produce. I could jokingly say we produce only marginally fewer slides than we produce stainless steel. It sometimes feels like that. Reducing all of that leads to significant benefits on the SG&A side. It's also giving us the opportunity to centralize a lot of back office functionalities that have been located on our various sites in the past. For example, if you look at things like HR functions, finance functions, accounting functions, procurement functions, they've been very fragmented in the past. As a result, we've never been able to reap the organizational benefits of being a very large company. Centralization is driving efficiencies. We have put in place a new service center in Vilnius, in Lithuania, that is now being ramped up. I was there on Thursday.
There are now over 60 people who are working there, and a lot of the back office functions are coming together. Apart from the fact that there is clear wage advantages of being in Lithuania, it's also leading to standardization of process, best practice interchanging, and further efficiencies. We've also got a plethora of IT systems. Somebody once said, if there's an IT system that's ever been invented, we've probably got it somewhere. We have hundreds of them. We've started making significant changes to that. We're in the process of building a single ERP system across the company, eliminating duplicates of various applications, which will ultimately standardize processes, drive further efficiencies, and actually lead to significant lowering of IT costs as well. The first rollout will be in Germany next year. We're also reducing our discretionary spending.
The third area, net working capital reductions, they're well underway. We've reported EUR 149 million reductions. They've come predominantly from inventory reductions, but we've also worked very hard on other areas. We've reduced our overdues by standardizing collection processes. We've renegotiated customer processes. We've come through the mating season. As part of our procurement initiative that has already been talked about, we've also renegotiated payment terms to extend those. The net working capital is well on track to be delivered by the end of this year. This is in the face of very difficult headwinds because, as Roeland mentioned earlier, contrary to the pricing, we've actually, since setting this target, seen higher nickel prices and higher sales volumes. Let me give you some proof points of the improvements we've achieved. Profitability has clearly improved.
After eight years of losses, in the third quarter of this year, we had achieved not only a quarterly profit, but a year-to-date EBIT profit, which puts us EUR 7 million in the black for the first time in a long time. We have also guided the fourth quarter to be a similar level, therefore, we expect to be solidly positive for the rest of the year. That is a significant step, you can do the maths from EUR 101 million lost last year to something significantly in excess of zero, puts us on track for a very solid first step towards that EUR 500 million EBIT target. That is the first step. We still have a long way to go, but we are certainly making progress. A second proof point is our cash flow. Clearly, it has gone up significantly. In the previous years, we were at break even.
If you look at 2013, just a little bit higher. We lost a lot of cash if you discard the disposal of the assets in China last year. The improvement in operating cash has come from operating EBIT improvement on the one hand, but also our net working capital release during the first nine months has contributed, these have been the key drivers of improving our cash flow. Clearly, we have generated some cash flow of around EUR 66 million from the disposal of our SKS assets in China. This was the remaining part of those assets. The bulk was in 2015. That is on top of the EUR 190 million that we have generated so far. Let us take a look at the must-win battles again and the various exciting opportunities and initiatives you have heard about this afternoon. There are clearly very large numbers involved.
55% of a EUR 600 million improvement is around EUR 330 million, that is going to be delivered through top line growth. You will see going forward an increase in the volumes. It will come from improved efficiency on the one hand because of the manufacturing excellence program. It will come from debottlenecking. It will come also from the commercial initiatives that you have heard so much about this afternoon. We will improve our margin per tonne going forward simply through upselling the products, through putting more intermediate products through the end processes, through value-based pricing, all of this will positively impact our gross margin in the future. But we are also doing a lot on the cost side. EUR 270 million, if you look at the maths. That will come from the productivity improvements that we have talked about, predominantly manufacturing excellence.
It will come from savings in the substantial procurement base we have, it will obviously come from the remnant benefits that we will have from the programs that were started in the past. Most particularly, the 100 program in Germany. On top of that, obviously the EUR 100 million of SG&A cost savings. If we look at the results of that so far, you can see them already. The reduction in our SG&A costs is evident. If you look at our Q3 financial statements, you will see that the run rate to that stage or the number for the first nine months was EUR 271 million. That included certain restructuring costs that we outlined in our Q2 results. That sits against a EUR 400 million cost base in 2015. So we are on track to deliver a significant benefit there already.
We're about halfway into the program, both from a time and from a cost reduction point of view. You've also heard from Mike the significant improvements we're achieving in the Americas. This is a quantum leap, and it really tackles all of the must-win battles. It's a huge improvement. You've seen the quarterly results, EUR 41 million EBIT loss, fairly continuously through 2015 in the first quarter of this year, and in the last quarter, we were at minus 7. If you do the maths on an annualized basis, it is huge. Let's take a look now at the balance sheet. Oops. Apologies. At the balance sheet, the third key message and the key financial activities we're going to do to continue strengthening our balance sheet. Clearly, if we go back in 2013, our net debt was enormous.
Our gearing was astronomical, and our leverage was actually negative because we didn't even generate a positive EBITDA. You can see, in credit to some of our predecessors, that we made some significant improvements through 2014 and 2015, but those came predominantly from asset disposals, predominantly and most particularly in China. That's given us a solid basis, but this year we've continued to improve through the first nine months, mainly because of the operational improvements that are now driving the deleveraging and the improvement in gearing and the continuing reduction in net debt. As we go forward, we will continue to do that. We'll have less help from disposals. We still had the SKS assets in 2016, but going forward, the key driver will be improvements in EBITDA.
We have very clear targets, and we feel they're good and realistic to give us the resilience that we need in a somewhat cyclical industry. We will be targeting, and this target stands, EUR 1.2 billion by the end of 2017, a gearing of less than 35% by 2020, and a net debt to underlying EBITDA or leverage of less than 2 by 2020. At this stage, we're not going to change those targets because they are always subject a little bit to market changes, and we want to achieve these in the environment that we determined them at in April of this year. We're very confident that we will achieve that. But there are a number of other things that we will do to continue to support and strengthen our balance sheet. The primary one is obviously our CapEx spend. We've been very conservative in our CapEx spend.
In recent years, we've spent an average of around EUR 150 million per year, and this is considerably less than the depreciation and amortization charge that we take on an annual basis, which is around EUR 230 million- EUR 240 million. So spending below our D&A rate. But this is a rate, and Roeland mentioned at the beginning of the afternoon, we have a very well invested asset base. So this is a spending rate that allows us to maintain our assets in very good condition and to keep them safe. For this, we need about EUR 70 million- EUR 80 million, so roughly 50% of our annual CapEx to achieve that. But then we also want to spend money on sustaining the long-term viability of our business to make it better and to improve, and further drive efficiency, some of which need investments.
Let me outline for you the three key projects that we have. Probably the most important in terms of size is the investment in our new ERP system. I have already mentioned that. Until 2020, that will consume between EUR 20 million and EUR 30 million annually. We will get the payback from that through lower IT costs, improved processes, and greater efficiency. We have also got two other big projects, the first of which is the debottlenecking of our Kemi mine. Recall at the moment, we are down to about 500 meters. We need to dig deeper by 2024 to be able to continue accessing the chromite that we need to keep our ferrochrome business going.
We will be investing there to ensure that there is a seamless transition from the current findings to the next findings, and this will consume somewhere in the region of EUR 10 million to EUR 20 million annually over the next eight years or so. The third large project is the Fennovoima energy project, which is the construction of a power station here in Finland. Finland is structurally short of energy. It is very dependent on Russia. As the largest energy and electricity consumer in Finland, we feel it is in our best interest to ensure that we have long-term access to affordable power that is secure, and that is why we are investing in that project. Going forward, we will also be looking at opportunities as and when they arise, very small scale projects in the plants, because we do not want to shut our eyes to those.
For example, we have gone through, as part of the manufacturing excellence program, identified smaller projects. These are EUR 1 million or EUR 2 million that would give us significant benefits with very short payback periods. We would not want to not do those. It would make economic sense to pursue them. They will not substantially impact our EUR 150 million. They will be a small percentage of that, but we will not close our eyes to such opportunities as and when they arise. The other piece that we are going to be focusing on is our cost of financing. Today, we have a well-diversified debt portfolio. As you can see in the left-hand chart, it is well-diversified in terms of long-term debt, short-term debt, fixed debt, and variable debt, and we are quite happy with that distribution.
It is also a fairly well-diversified maturity of debt, ranging now from fairly little debt that becomes due in 2017, and some of it goes out through to 2021 and beyond. We have a very high level of liquidity, over EUR 200 million in the bank at the end of Q3, and EUR 900 million of additional liquidity. That is a very good base on which to build our business. It buffers us against any foreseeable cash shocks that could come from working capital requirements or other eventualities. Going forward, we will also be looking to reduce the cost of our debt. Financing costs this year will be approximately EUR 120 million. EUR 20 million of those will relate to hedging, but the actual interest costs of EUR 100 million are still too high, and we want to get them down over the next few years.
We are looking at a number of initiatives to do that. We will clearly be looking to reduce our overall gross debt, and there will be opportunities for that as we generate more cash. We will be looking to refinance some of our more expensive debt and replace it with lower cost debt as and when the opportunity arises and when that makes economic sense. We are also going to be taking a very careful look at our shorter term liquidity facilities, optimizing our cash balances, our undrawn liquidity to make sure that this does not become too expensive in a time of negative interest rates. To summarize, the financial recovery for Outokumpu is on its way. We have made a lot of progress in the short term this year through the immediate actions we have already taken, and those are clearly yielding results.
We have a solid plan to continue the financial improvement going forward. It is not going to be a straight line journey. Some quarters will be better, some quarters we may not be doing quite as well, but we are very, very confident that the trajectory will clearly point towards our 2020 target. As the point was made earlier today, give us assurance that prices will be higher in 2020 than they are today, we might look at a change in that target. Today, that is certainly on the basis of the assumptions that we have made. The strengthening of our balance sheet remains a key priority, and we are very confident that we can also deliver what we have promised there. I think in wrapping up, I would say that we as a management team feel extremely excited about the opportunities that we have discussed with you this afternoon.
They are deliverable, they are there, they are very tangible, and we are extremely confident that by 2020 we will be able to deliver what we have promised. Thank you. I will take some questions now.
Thank you, Chris. The first question up there, Peter.
Hi, Chris. Now you have the ability to generate some profit. Can you talk about the tax loss carry-forwards, and how big they are and which geographies and what that means for the cash taxes going forward?
I will talk about them generically rather than specifically. We have very large tax loss carry-forwards in most of the jurisdictions in which we work, most particularly in the U.S., Germany, and Finland. Some of them are evergreen, some of them are not. And they are, to put a sort of order of magnitude to them, several billion euro. This has two impacts. Firstly is subject to some minimum taxes, that we will be paying very little cash taxes in the future because we can offset future profits against those losses. But the other impact will also be that, as you generate profits, you have the ability to bring back some of those tax loss carry-forwards in the form of deferred tax assets onto your balance sheet.
As we become more profitable at a pre-tax income level, you will also see some of those DTAs reappear on the balance sheet going forward.
Just in terms of guidance for taxes going forward, cash taxes going forward, would you put a number to it, or is it going to be a fixed number or will it depend? Is it going to be just a slightly lower tax rate? How would it look?
It's always very difficult to put a number to it because, as you know, tax is not a global number where you can just put a percentage on the overall profit, because it depends very much on the different countries in which those profits are generated. So it's difficult to put a precise number. It'll be a few million, but not many millions in terms of cash taxes. Small number. Yes. Thanks.
Hi. This is Debdeep Chakraborty joining from Nordea Markets Credit Research. Just if you could provide some color on the refinancing of the expensive debt as you mentioned. The second question is, any color on the credit ratings? Anything you can provide? Thank you.
Yeah. Clearly, in the past, we've been a company that has suffered from some financial difficulties. During those periods of financial difficulties, when you take loans, they're based on your risk profile, on your credit rating, or shadow credit rating. That would not have been very supportive in the past. So some of the loans that we took would've been more expensive than if we took them today or were to take them in the future when our credit profile will be bigger. So we'll certainly be taking a look as to whether we can improve on the terms and conditions as our credit profile improves going forward. In terms of our credit rating, we currently have a B3 corporate rating from Moody's with a positive outlook, an issuer rating for two of our bonds of B2.
Obviously, as time goes forward, we'd like to improve on that as our financial performance improves, and our view will then ultimately justify an improvement in those ratings.
Just to follow up on that. On the 2019 bond, do you see any possibility of calling it back and issuing a new bond?
We will look at market conditions as and when the time is appropriate and see whether it makes economic sense to do that. So at this stage, it is too early to do that, but as and when it makes economic sense to look at more expensive debt, we will do that.
Thank you very much.
Bastian.
With all of these big step changes which you delivered on your balance sheet in the last year and also probably the year before, I guess it's probably been time for you to sit down with your lenders and banks as well and just discuss your terms. What is the run rate in terms of the financial line we can expect going into the next years? Is there going to be a big reduction? Because clearly there must be a big benefit from all of the progress which you delivered.
Yeah. It will be significant. Obviously, today we are at EUR 100 million. We are expecting a very significant reduction over the next two or three years. Some of these will obviously take a bit of time, but it's a significant item in terms of cash out and also in terms of impact to our net income. We will be taking a very hard look at that. I do not want to name any particular numbers at this stage, but I think if you start doing the maths in terms of the additional cash that we will generate going forward, based on a EUR 500 million EBIT target, and utilizing that cash to perhaps repay debt, then you can start getting to numbers as to what we are sort of targeting for that.
Thank you.
Okay.
Then Johannes.
Johannes Grasberger from Nordea Markets. I'm going to ask another question on the tax assets or the kind of the deductible losses. How many years do you still have time to deduct those? I suppose that's shorter in Europe and especially in Finland, but in the U.S. that's much longer, isn't it?
Yes. It varies very much by jurisdiction. So it's from two. To name a couple of points in Finland, typically, tax losses last seven years. In the U.S., they last forever. So there's a sort of two points in that spectrum.
The follow-up question is that, have you been allowed to transfer the entire construction cost of Calvert when that was constructed by Inoxum? Has that tax asset been transferred to you?
Well, I don't want to specifically comment on the details of the agreement between us and Inoxum, but generally, the tax arrangements were such, they call it your watch, my watch. So any tax benefits and liabilities that would have occurred under the Inoxum ownership would have remained with ThyssenKrupp, and anything that happened after that would have gone to us. So that actually sometimes works for you and sometimes works against you.
Okay. In a sense then, we're talking about, at least in the U.S., we're talking about several years of zero tax payments?
Yes. Subject to minimum tax payments, it's going to be a while before we have to start paying substantial amounts of cash back.
Okay. Thank you.
Yeah.
Any more questions? Peter.
Christopher, I do not know if you are the man to talk to this or whether Roeland is, but we have not really talked about the contracts in the business and whether the longer-term contracts mean there is delays in pricing coming through and whether you do more of that because it means the business is more stable, how we should think about that.
Yeah, the longer term contracts, it will take time for the pricing to come through. Obviously, different contracts have different periods to run. In terms of, they are probably a bit different in the U.S. from Europe. But we should expect as we go through the contract renegotiation period, some of those benefits of recent price increases to be reflected in the renegotiated contracts.
Could you just remind us roughly how much of the business is based on longer term contracts? In that case, are they annual or semiannual?
We've never commented on it, so there's nothing really to remind you about. We don't really like commenting on the structure of our contracts.
Typically, for the industry, is it a contract based industry or?
It's a combination of everything. It's contracts. It's spot. Different run rates. There's something of everything in there.
Thank you. I think it is time now to move to the final Q&A session, and may I invite all the presenters now to join us to the stage. Then we will have final opportunity to ask questions from any of the speakers of today. Of course, then we will continue discussions later on over the drinks. All right, so who wants to go first? Anyone? Kevin?
Yes. That is Serge Kessel from Swedbank. Coming back to energy and your If electricity prices should go wild either in the U.S. or here in Finland or in Germany, what is your hedging strategy for the coming two, three years? Could you give us an update on that?
Again, it is one of these very difficult questions to answer because our existing coverage on electricity is a layered structure of hedges. You do not want to go fully hedged because that basically is not in line with your sales. You do not want to go unhedged. So there is a layer. If something happens, you will see that a big part will not be affected because we have fixed price in place, and that other part, it will be affected. We will have to take trading decisions as and when it happens. Ultimately, if you look at our hedging strategy, in principle, you only hedge that which is known price and known volume, so you have a known cost against it. Otherwise, you start speculating on future moves.
Sounds pretty complicated to model in. Thank you very much.
Kevin, from the back.
Yeah. Hi. Mike, I went to see the Calvert plant, I guess it was approximately a year ago, and at that point in time, you talked a bit about not really having the right team in place yet. There was a bit of difficulties getting the right people. Do you have the team around you that you think you need to drive Calvert forward, or is there still a bit of shortage in the region in terms of the right people?
No, absolutely. I have the right team in place. As I had said earlier, the total leadership team has been replaced there, both operationally and commercially. 80% of the outside salespeople are new to the company, not necessarily new to stainless steel or the steel industry. We've brought in somewhere between 40 and 50 people from the laboratory, lab technician, that have experience and also understand how a high-performing organization operates, an integrated steel plant. So the team's in place. Actually, most of those people have been there less than a year. So what you've seen in the last two quarters or three quarters are just a fraction of their time there. So I have high expectations going forward.
In terms of improving the product mix in the U.S., is that going to predominantly from capturing market shares from your key domestic competitors, or is it going to be replacing imports?
It's a combination of both. We had mentioned that if you look at our product mix optimization still yet to be done. In other words, ensuring that cold roll is a very large percentage of our sales volume versus where we're more, in the U.S. they call it CMP, but it's hot band white. Then we still have a fair amount of hot band black. As I said, we're always going to have some hot band black because we're melt shop long in that regard. So there are tremendous opportunity on the top line in regards to optimizing the mix to the market.
Maybe one extra. Generally speaking, something that we haven't touched really, but comes back to the high performing organization. We have made a lot of changes. We had a top 50 meeting in June, and only 22 people of that 50 were the same when we had that meeting in January. Just to give you an example of how much we have been working on renewing the leadership teams.
Johannes was the next one. Over there.
Yeah. Hi again. Actually, I have one more question for Mike. I did not have the time to ask you before, but when you entered this year, and now that you see the U.S. market, are you surprised how tight it is? Was the expectation that the market balance
would be, say, less tight in January? Because we know that base prices have gone up a lot, and the capacity utilization has improved a lot. One of the competitors have closed one of their plants. I am just thinking, has the whole year gone just as expected on your side?
Yeah, pretty much. There is no doubt, going into 2016, one of the competitors was in a work stoppage tied to a labor dispute. They came back from that and started up earlier this year. They have decided to close some capacity. Yes, we have benefited from that. The market, it is a global market. If you look at the domestic producers, all the domestic producers have had a pretty good year from a utilization rate standpoint because the market did tighten in the second and third quarter, particularly with the impending or the preliminary duties that were applied against the Chinese. But then it gave time to others to come in, like the Koreans, as I had mentioned earlier. It is always going to be that domestic versus import scenario. Now, we think we have a competitive advantage because we are domestic. We can provide better on-time delivery.
We definitely can provide better quality, and we can definitely provide a lower cost because the logistics costs are going to be lower.
Okay. And then one more question is regarding to Mexico and the U.S. politics game that in terms of a potential trade barrier between Mexico and the U.S. Any comments on that? What do you think will happen with the prices in the U.S., and are you worried about that situation?
Well, I couldn't predict accurately who was going to win the election. Even though I'm a Republican and voted Republican, I couldn't predict it. That's a very complex topic, and it's very difficult to forecast. The agreement is very complex. It would be pure speculation if I gave you an answer to that. I will just only make one comment in that regard. The supply to Outokumpu Mexinox is made in Americas. That's all I can tell you.
Okay, thank you.
Then we have a next question from Johannes.
Thank you. I have two questions on your mining operations. Ferrochrome is a rather small commodity versus copper or oil, et cetera, so it is difficult to assess the fundamentals. What is your own thinking? It has been a big price movement now. I guess the price will be higher in beginning of 2017 versus Q4 pricing. Do you think that reflects fundamentals, or do you have any thoughts on that? What would you advise us to use as a long-term assumption?
Yes, please.
Yeah.
You are right. The number of producers is relatively small. It is a relatively small market, and as a result, is more volatile because small moves on the end consumer side can have big moves on the supply side. You can go back in history and look at the historical pricing, and if you go back five years, then you see that historical pricing was definitely above what we have had during this year. Now, if that is an indication, then I think that would probably a reasonable sort of assumption to take ahead.
The reason, I mean, the dollar is so much stronger now than the EUR. I guess you are the only producer in the Euro land, or am I right?
Well, you have, of course, Kazakhstan and South Africa, which again, are not dollar denominated.
My second question also relates then to your own mining operations. Given the importance of these assets, and I think all of us have a pretty positive view on it, are you thinking of highlighting that more? For instance, putting the asset into an explicit business area or something like that to increase visibility? I know this question has been discussed over the years, but what you're thinking about that?
We will not do that. We see it clearly as part of our stainless business. 70%-80% of the production goes into our stainless business. So we see it as an integral part of our stainless business.
Clear. Thanks.
Then last question from Peter.
Roeland, you talked about the chrome price, the best way of forecasting it is looking back in history, and could we do the same for base prices? Because base prices are very low by historic standards.
I do hope so, Peter.
But seriously, in terms of thinking about the base price, is there any reason why now we should have a lower base price than the past? It always occurs to me that when you have a higher alloy surcharge, the customers seem to be willing to pay a higher base price as well. And when the alloy surcharge goes down, the base price goes down. There is no reason why that should be the case necessarily, but what do you think determines the base price apart from the market? Is it the fact that Chinese are bigger players in the market now than they were, and therefore we cannot go back to the period in history, or is it a bit higher?
Very difficult to answer. First of all, the base price is set by the market, and the market is generally set by cost. You can look at some of the cost elements, and one of them, a rather large one, energy, is clearly below historical average as well. How big is the impact? I don't know. Ultimately, look at the market. Within the current market, we are clearly profitable. We are looking to become more efficient, and we really want to become the cost leader as well in the Western world. So we play the market as is and make sure that we can hold up through our own actions.
Thank you.
Thank you, Peter. Thank you for the questions, and thank you, gentlemen. Now we will hear final words from Roeland before the closing remarks.
Thank you, Tommi. So again, thanks for your attention through a long day and your very valuable questions. It gives ourselves some insight as well in what we are doing. The message is a simple one. We have come a really long way. When I joined this company, when I discussed joining this company, the general feeling was it is a basket case. I think from a basket case, we have become an exciting, viable, strong future leader financially as well as our market position. What excites me, and I am living this every day, is that we started this early this year. We sat with my team in Lapland, literally, on the, I think it was the 7th of January for three days, minus 30 degrees Celsius. There was no excuse for anyone to go out. We hammered out what we were going to do just as an idea.
We launched it as an idea. We gave it feet and hands and legs, and we put meat on the bone. What I see is it is really getting traction. This company has transformed itself. You look at the people, the people themselves have more swagger. They go out again, and when they talk to their neighbors and the neighbor asks, "So what do you do?" They come back again and say, "I work with Outokumpu," rather than, "Well, I do something in stainless steel," which was literally the sort of mentality that was there, having been beaten to death for 8 years on restructurings, on cost drives, on lack of profitability. You see an enthusiasm coming back that comes through everywhere. Then you have seen the examples we have been given. There are so many initiatives that we are taking with tremendous focus.
We are not all over the place. That is a big difference. We have tremendous focus. Ultimately, it is efficiency, and it is customers. That is where it all boils down to back to basics. But within those simple elements, we find so many things where we can make so much progress. The examples you have seen are not chosen just for you.
They are chosen basically because those are the ones that we have, as we are still at the start of our journey. There is a lot more to come, and that is why, as Chris said, we are extremely confident that we will achieve our target, that we will achieve our goals, and that we will get where we want to be, which is in every single aspect, be the number one in this industry in the world. So those are my last words. I am sticking to it.
Thank you very much.
Thank you, Roeland. Now the official part of the event is nearing to an end. We will now continue next with the cocktails right outside the auditorium, and then in approximately half an hour, we will have a bus transportation to the city center for those who will join us for the evening together. At this point, thank you very much for everyone. This concludes Outokumpu 2016 Capital Markets Day.