Good day, ladies and gentlemen, and welcome to the Outokumpu conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Johanna Henttonen, Head of Investor Relations. Please go ahead, madam.
Yes. Hello, good afternoon to everyone, and good morning. It's Johanna Henttonen, Head of Investor Relations at Outokumpu. Today, I have the pleasure to welcome you to this call discussing our plans to further improve the competitiveness and financial performance of Outokumpu. Today, we have Roeland Baan, our CEO, as well as Reinhard Florey, our CFO, with us. With this, I would hand it over to Roeland to go through a short presentation.
Thanks, Johanna. This morning, as you are fully aware, we announced the new vision and our key measures to drive competitiveness for the company, and we shared our long-term financial targets. What I would like to do is take you through a short presentation, and then open up the line for questions. I'll try to keep it as short as possible so that there's as much time as possible for questions. First of all, as a company, we have a very strong foundation. I would say we are the number two by volume, the clear number one by importance in this industry. We are leading the Western world, both in volume and in quality. We have world-class assets, and I have seen it with my own eyes. Compared to what is normal in our type of industry, we are way ahead.
We have a strong product portfolio, we have strong market positions with 30% in Europe and 21% in NAFTA, and we have extremely competent staff. We have some negatives as well, and one of those negatives clearly was our net debt and our gearing. We have made big strides since 2013 in reducing the debt and the gearing, now down to a very manageable 70%, below 70%, and EUR 1.6 billion. We have been improving our performance as well over the years from 2013 to 2015, as you can see from this. Very quickly say, though, that our real potential, of course, is far higher. As I said, we have great assets, we have a fantastic market position, but we are underperforming our competitors by a long way, and there is no conceivable reason for that other than ourselves.
If you look at the markets we're in, we are in resilient markets, in, as I said earlier, key regions, Europe and Americas. The growth rates have been slowing down slightly, driven by the general GDP slowdowns. But altogether, if you look at the future, there is clearly still an above-average growth expected in the stainless market. If you look at the supply and demand balance in those two markets as well, although there's always talk about overcapacity because of course, China, if you look at the fundamentals in these two markets, that overcapacity is, especially if you look at the coming growth, is not really a big driver. We're talking about very healthy, balanced markets. If we look at how we look going forward and our planning assumptions, we plan conservatively.
If we share the numbers that are later there, we are not giving these numbers from tremendous increases in nickel prices, nor favorable dollar exchange rates, or tremendous increases in demand. What we are announcing today is predominantly self-help, things we can control ourselves, initiatives we take onto our own company and into our own hands. To start with that, we said we need to align our company behind what we think is important. What we think is important is to be the best value creator in stainless steel. We clearly have not been, but we have the potential to be. If you see this vision, I'll read it out in total, to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. It has clear three elements. One is to be the best value creator. Two is it's time-bound.
We want to be there before, at the latest, 2020. It's not something that just can go on and on. Then the how, we want to get there through customer orientation and efficiency. Best value creator means a few things. It means the best value creator to our investors and shareholders. Clearly measurable in terms of EBIT, return on capital employed, and growth. We want to be the best value creator to our customers, easily measured by our customer satisfaction in comparison to our competitors. We want to be the best value creator to our employees, where we will indeed measure again our relative performance against competitors through something called the Organizational Health Index, where your own company is measured against a database of 1,300 others. Those are the three elements in there.
As I said, 2020 is the timeline, and customer orientation and efficiency are the two operative modus. It sounds maybe very simple. It is very simple, but it is a big change. Currently, we are more driven by our assets than we are driven by our markets. We want to really tilt that. We have great customer orientation today, but we want to make an extra step where we say that the market determines how we behave, how we perform, what our mills do, and what they produce. They have to do that in a highly efficient way. In order to get there, we defined six must-win battles, and I'll go through them. First is safety, and safety is your license to operate. We are currently not good. I wouldn't say we're bad, but we're not good.
We are probably a factor four off of what best in class would be. We have to get that, not just because of our safety performance, but as well because a great safety performance always goes hand-in-hand with great operational performance. Secondly, we want to implement a high-performing organization. We need to have a far leaner, simpler organization, much more nimble, an organization that is more transparent, that we can actually put clear accountabilities to individuals and manage performance much better than we do today. We want to have this whole system led or managed through a world-class supply chain. Whereas today, our plants are profit and loss centers, leading to sub-optimization, internal competition, and I have to say, not always constructive discussions on how we interact between plants.
We want to, given the interdependence of our assets, streamline this through a world-class supply chain process, where the supply chain marries the requirements of the market with the capacities and the capabilities of our plants. Programs, plans, and schedules the individual plants in the most efficient way. Controls the resources, procures the resources, controls the inventories in the plants, and makes sure that we evacuate the finished product out of the plant. That leaves the plant then free to concentrate 100% on what they should be concentrating on, which is safety, of course, but productivity, efficiency, quality, and delivery performance. In order to support that, we get to the fourth must-win battle, which is establishing an operating model that ensures manufacturing excellence in our system. Again, I think this is not where we have been at our best in the past few years.
We have been concentrating on the integration of Inoxum. A lot of fantastic work has gone in there, but we now have to get back to the basics and make sure that we get that 2%-3% of productivity improvement every single year, every year. The fifth is an open door. It is actually a bit different in character because the first ones are more processes and journeys. Americas is a single big lever that you could argue is our biggest lever to profitability. If we can change the performance of Americas, we have changed the performance of Outokumpu. So that in itself is a must-win battle where we have total focus on. Then the last one is our portfolio, which is a mixture of product portfolio, where we have a broad portfolio, but not necessarily the most profitable.
We have a number of great products that have a small market reach and add complexity, and probably do not pay their full way. So we need to make sure that we cull that. Then we have still some minor assets that we feel can be disposed of without changing anything in our core business. So those are the six battles leading to then our long-term financial targets. There are a few more around customer satisfaction and employee satisfaction and delivery performance. But these are the core ones for this call. One is we have an EBIT target for 2020 of EUR 500 million, resulting in a return on capital employed of 12% and a gearing below 35%. We want to get there, of course, through the improvement programs and the must-win battles that I described before.
But as you will see, a number of these will only have full traction over some years. If you talk about a culture change, or you talk about the implementation of a manufacturing excellence program, that will take three, four years to reach full runway. It will, of course, already show up earlier. But in order to get a bigger step early on, we need to have a few big steps done. Those big steps, as we announced, are our SG&A initiative of EUR 100 million run rate by the end of 2017, our reduction of net working capital in 2016 of EUR 200 million, and then we have a number of other ongoing initiatives that support these big first steps, leading to an end of 2017 net debt of maximum of EUR 1.2 billion. Again, we very clearly have that as one of our most important targets.
I see that I was running ahead of myself because this is all on the next slide. Indeed, for 2016, a new organizational set up, where we have three business areas simplified from the past, Europe, Americas, and Long Products. This will be effective for the 1st of June 2016. We can't go faster because of the consultation period that we have with the workers' representatives in the various countries. This is a timeline that's bound by that process. We will have the SG&A cost reduction, which will lead to a reduction in headcount of about 600 people. Then we have the net working capital reduction all ending up in the EUR 1.2 billion net debt by the end of 2017.
The basic, again, is a simpler organization, a clearer focus on what we're doing on the things that really count, on our customer, on our operating efficiency, and more accountability and performance management potential within the company. Not to flog a dead horse, but in the last slide, reiteration, we have immediate actions for a step change in our cost and competitive position. Then we have very ambitious but realistic targets set for 2020. Then we are confident that with what we have announced today, that we can reach these targets. With that, I open up the floor for questions.
Thank you, Roeland. Operator, please with this, we'll be ready to take the questions from the audience.
Thank you, madam. Ladies and gentlemen, if you would like to ask a question at this time, please do so by pressing the star or the asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask your question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Lucas from Exane BNP Paribas . Please go ahead.
Hi, gentlemen. Thank you for taking my questions. I have a couple, if I may. First of all, if you could maybe quantify the associated restructuring charge accompanying the extra cost savings you are targeting first. Secondly, when I read your press release, I do understand that you are willing to target 9,300 employees, which would suggest far greater layoffs than the ones that are talked today. If you could elaborate a bit on that one. My final question would be regarding the cultural change you are trying to implement and to what extent you are, let's say, believing this is achievable given the fact that so far the track record of the company has been pretty bad at restructuring, I would generally say. Thank you.
Thank you very much for those questions. Restructuring charge is difficult to pinpoint exactly, but we reckon it is about EUR 40 million-EUR 60 million. This will not all be in 2016, although a large part will hit 2016. The 9,300, we do have ongoing initiatives. For instance, in Germany, we still have the closure of Benrath, that will be effectuated this year, and there are a few other things as well. If you add everything up, on ongoing initiatives, plus this, the SG&A initiative and the restructuring, that is what takes us to a total of 1,700 reductions from its current 11,000. Is a cultural change achievable? Yes. I am not saying it is easy.
But with the right tools, and the right tools for me is the correct organizational format, the clarity of vision, the clarity of targets, and then the accountability and the management of the performance, you have everything in place to force a culture into a different gear. Yes, I think it is absolutely possible. The fact that it has not worked in the past is, as you investors will always remind us, is not a guarantee for the future.
Thank you.
Our next question comes from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead.
Thank you. Just firstly, on the ongoing EMEA restructuring program that you are aiming to save around EUR 80 million. Is that still unchanged, or does this impact the new savings program?
Okay. That is still unchanged.
Okay. Perfect. On this EUR 500 million target, could you say how the split will be, or do you have any idea of the split between Americas and Europe? Should we view it as on the volume base that should be related to volumes, or will Europe be more profitable than U.S. or vice versa?
Good questions. What I can tell you is that, for the Americas, the turnaround, of course, has a volume element in there. We are still not at our market capability. We are still growing our sales. We are still growing our market share. We have shared in the past as well that we want to get to around 700,000 tons. We are just over 500,000 tons end of 2015. So there's some run there. On top of that, we have, under the current new management there, we have extremely good programs on the cost side running. I am talking specifically operational cost. We have a world-class operational leader there, who already is making, he joined in October, in the five months he's there, he's making great inroads on improving our cash conversion cost, getting more efficiency out.
You see the enthusiasm in the plant growing as well as these results are measurable and obvious. So, that will drive, to a large extent, the turnaround in the Americas, those two factors. In Europe, you will see the EUR 80 million that was mentioned by you earlier. On top of that, a large part of the SG&A initiative will reflect on the European side. We do believe that there we have, especially in upselling, we still have, on the commercial side, quite significant opportunity as well.
Okay. Thanks. Just lastly, could you say anything about on how the latest price hikes in America has been accepted now that you have gone a few months into the first quarter?
Yeah. You have to look, of course, you will not see that directly back in the numbers, because you have, of course, a mix of spot sales, monthly contract, quarterly contracts, yearly contracts. What we see is on the spot market, these price increases are sticking. And we have great confidence as well that the announcement that we had for Q2, the $80, is sticking as well. So it looks pretty robust in that sense. Again, how that works its way through in our numbers, is a function of the makeup of our portfolio between spot and non-spot business.
Okay. Thank you very much.
Again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one. If you wish to remove yourself from the queue, please press star two. Our next question comes from Johannes Grunselius from Handelsbanken. Please go ahead.
Yes. Hi, everyone. It is Johannes Grunselius from Handelsbanken. I have a question here on the net debt reduction. Because you are giving us the explicit target to reduce the net debt now to 1.2. I think, you had 1.6 at the end of 2015. You are also saying you will release EUR 200 million in net working capital. And I know you are paying very low tax, CapEx discipline. So, it seems to be a rather small reduction in net debt. Could you give some color on what kind of things you are seeing in the cash flow for the next two years so I can understand those numbers, please?
Okay. I beg to differ on the small change, but I will give the word to Reinhard.
Yes, hello, Johannes. Just to put that in the right perspective, it is a EUR 400 million de-leveraging in two years, EUR 200 million from net working capital, mainly driven by inventory reductions that we plan to have, and EUR 200 million coming from cash from operations. That is on the one hand side, really coming from our profitability improvement. That is the big part. There is certainly also a smaller part, and we have always been indicating that there is a smaller part from some M&A activities as well, which will be cash relevant. However, we rather tend to be on the conservative side. However, the 1.2 is the realistic target that we feel to have. Just to give you an idea, CapEx will be this year in the range of slightly above EUR 140 million.
Next year in the same range, maybe a little bit higher, because there will be some investment also in expanding our ferrochrome mine. Then we have the cash from the financing costs, which will be about EUR 120 million per year. If you see that would give you then the perspective for the EBITDA respectively, if it is somewhere then.
Yes. I guess you will pay out also from the booked provisions, right, relating to the ongoing restructuring. Am I right? Is there something like more than EUR 50 million out?
Absolutely. That is correct. That is the number that we have planned in 2016.
Okay. My second question is on the U.S. business. You sound very positive now given the most recent price hikes you have seems to be accepted. What kind of operating rate are required in this market to reach an EBITDA break even? Could you elaborate on that?
No.
At least I tried.
No, this is the sort of information that becomes competitor sensitive, and we do not give that.
Fair enough. The final question, the new EUR 100 million lower SG&A cost, you said already it is mainly targeting in Europe, but could you get some more details on that? Is it like an 80/20 split or something, Europe versus U.S., or how should we view it?
Fair enough. The only split that I can give you is that between headcount reduction and other SG&A costs, it is about a 50/50.
Okay.
How it is divided regionally is very difficult to separate.
Okay. Thank you very much for taking my questions.
Our next question comes from Johannes Grasberger from Nordea. Please go ahead.
Yes. Hi, gentlemen. I have got a few questions as well. First one regarding ferrochrome. How do you see actually the importance of that business in the current/new state of Outokumpu now that the steel mills are starting to produce cash flows? How I see it is that ferrochrome has been quite a vital asset until now due to the cash flow side, but can we say that ferrochrome is not as such a non-core asset anymore to Outokumpu?
The only thing I can tell you is that the ferrochrome operation significantly helps in the efficiency of our manufacturing process because you basically get liquid ferrochrome straight into your smelting process. So you save significant cost on the energy use. So it is a very useful asset to have.
Okay, fair enough. Another question which is directed to you, Roeland. Now that you are taking over the European steel business, I suppose you will be sitting down with the customers even more than you have done so far. My question to this is that what do you think about the European base prices today? Do you think the fair price level should be higher? Continuing on that one, why do you think actually base prices have not yet increased even though there are less imports entering the European market today than a year ago?
No, what I think personally is a lot better than that. The base prices in Europe have been extremely resilient. In that sense, you see as well that they are at a level that is sort of adequate, and we are planning forward on the basis that today's market is, at least for 2016, is the market that exists.
All right. Fair enough. While I heard the question regarding the U.S. base price hikes, maybe if you can repeat that once more. You had this $160 base price increase at start of January, and then the second one, $80 from Q2. If I heard right, the comment was that these price increase have been actually passed through in the spot market. Is this correct?
They are sticking, and it's very difficult to say how much exactly, but clearly the market is accepting the higher price levels.
Okay. Then, final question on merging the quarto plate business into Europe and America's divisions. Just the rationale behind this. Does it actually allow a more flexible hot melt flow into either strip or plate products, which I guess you would need right now as the cold rolled demand looks fairly strong. I guess you would like to boost the utilization rates at Sheffield, better than you can today. Is this the reason just to put out the hot melt flow into these other divisions and other products and not only into plate products, or is there another rationale behind that merge?
The main reason is that, if you look at quarto plate, there is a great synergy and overlap with the efforts, the sales efforts, for instance, on coil. A lot of the plate goes into projects and some of the coil goes into projects as well, same customers. If you look at the operating model where we said, "Okay, we steer now through a supply chain central, centrally led supply chain, and we work on the assets as basically cost centers, driven by productivity." It makes sense to see quarto plate as a market rather than as a business and see the main production unit, which is Degerfors, as an asset that needs to work along the manufacturing excellence principles.
All right. Actually, I promised this was the final question, but I make now the final one. I guess this is a bit on Reinhard's side, but, assuming, in the U.S., the volumes wouldn't increase a single ton this year, so we would have the around Q4 annualized 550,000 tons of deliveries and base prices would increase by $240 per ton. That I suppose has approximately EUR 130 million, EUR 140 million positive impact on your EBITDA, and you would have basically break even, EBIT at Americas with these price increases for this year without any volume increase. Is this correct?
No, not in that sense, because I think you misinterpreted a little bit the words from Roeland in terms of the price increases. What he said is that the price increase stick up to a certain degree. I think you cannot add up fully what you are seeing as the maximum amount of the two price increases. That is not the impact that we are seeing in the Americas market. On the other hand, you have to see that of course there are some other areas that we have to cope with as challenges, be it from the scrap markets as well as from the domestic mix situation that we have. I think, let's not be over-optimistic, but the direction that at least over the next years, there is a EBIT break-even stays absolutely in our range.
Okay, thanks. Those were my questions.
There are no further questions in the queue at this time. However, ladies and gentlemen, if you would like to ask your question, please press star one on your telephone keypad. We now have a follow-up question from Johannes Grunselius from Handelsbanken.
Yes, hello again, Johannes Grunselius. Just wondering if you can help me to convert the EBIT into EBITDA instead. Also, I mean for the long-term target, am I right that what you anticipate long-term in depreciation cost, is that about EUR 240 million? The question linked to that, is that how we should see the investment requirements in the company going forward?
Yeah. The depreciation that we are calculating is rather EUR 230 million. This depends very much also on the way our depreciation is handled in small M&A activities. This is the range that we should take into account there. Regarding the investment levels, we do not think that the level that I had indicated for the year after this one, which is a little bit higher than the EUR 140 million this year, would be significantly changing over the next year.
What you are indicating is, CapEx perhaps EUR 160 million-EUR 180 million. If I am using those numbers, those are conservative numbers, long-term investments and-
Yeah, I think that is a fair assumption. Yes.
Okay. Thank you.
Our next question comes from Alan Spence from Jefferies. Please go ahead.
Hi. Thanks for taking my question. Just one quick one. Under those six battles you mentioned in portfolio, you touched on some minor assets that are non-core. Is there anything else you can tell us further about that?
Yeah. There is nothing further than that. There is no plan at this stage to divest any of the other businesses, because basically they are all part of our way forward.
Okay. Thank you.
As a final reminder, ladies and gentlemen, if you would like to ask your question, please press the star followed by the one on your telephone keypad. We will pause for just a moment to allow for any final questions. As there are no further questions at this time, I would like to turn the call back to our host for any additional or closing remarks.
Many thanks for your participation today. Appreciate that. As you know, we will be coming out before the Q1 with the historical comparison figures, well in advance to ensure that you have opportunity to plug those into your models. The Q1 report will be coming out on 27th of April . Thanks for participation.
Ladies and gentlemen, this concludes the Outokumpu conference call. Thank you all for your participation. You may now disconnect.