Thank you for standing by, and welcome to the Outokumpu conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, on Monday, the 19th of October 2015. I would now like to hand the conference over to your first speaker today, Johanna Henttonen. Please go ahead.
Thank you very much. Good afternoon and good morning to everyone, and welcome to this Outokumpu conference call on our news this morning, as announced. We have today a short call, which will be hosted by our CFO, Reinhard Floray. Reinhard will give a short presentation and summary of the transaction, and after that, we will be ready to have your questions and answer those.
Before we start, I would like to make a short reminder that as we are in the closed period ahead of the Q3 reporting, we are only able to discuss today's news and not trading conditions or the Q3 numbers. For everyone to also know that there is a presentation available at our website regarding this conference call. With this, I would hand over to Reinhard, please.
Thank you, Johanna. This is Reinhard Floray, CFO of Outokumpu, speaking. A very good morning to everyone. Outokumpu is continuing its strategy to improve the operational performance and simultaneously support the deleveraging of the company by M&A transactions. In that context, we have announced today a share transaction in China that will significantly strengthen our balance sheet. Outokumpu sells 55% of the joint venture, SKS, in China. SKS is located in Shanghai and has been a joint venture with 60% Outokumpu shares and 40% Baosteel shares.
It is a company with a cold rolling capacity of 290,000 tons of commodity grades, mainly in the standard business, and it employs over 450 employees. Outokumpu continues to run the SKS mill after this transaction and will stay as a minority shareholder with 5% of shares in this company. As mentioned, the SKS mill has been focused on the most common stainless steel grades.
It is in a very highly competitive Chinese market, and it is not in our core focus. In APAC, what we focus on is specialty grades and tailored solutions for our customers in all countries, China, but as well as in regions from India to Australia to Japan. In this transaction, we think we are talking about a very attractive valuation with a transaction cash value of about EUR 370 million, which will significantly strengthen our balance sheet.
We will be expecting a closing of this transaction by the end of November 2015. It is fully negotiated and signed as of this morning and subject to customer regulatory approvals in China. This transaction is expected to reduce Outokumpu's net debt by approximately EUR 430 million and improve the gearing by approximately 30 percentage points on a pro forma basis.
As mentioned also in our last calls, Outokumpu's gearing was 96.4% at the end of the second quarter 2015. In addition, Outokumpu expects to record a non-recurring capital gain of about EUR 330 million in the fourth quarter results. This would be the positive effect on the equity, which then also adds to this 30 percentage point improvement in gearing. This is a short summary that we have also described in our stock exchange release today. With this information, I would open up for some question and answers from your side.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your first question comes on the line of Luc Pez of Exane BNP Paribas. Please ask your question. Mr. Pez, your line is now open.
Do you hear me? Hello?
Yes, we can hear you.
Okay. Sorry. Hi, everyone. Just one quick question because I think as anybody, I am very surprised by the amount of the proceeds you are gaining for these assets. As you described, we are talking standard grade stainless in a very competitive market, and looks to me that you are having it or selling it for more than one time EV sales, 55x EV, EBITDA, whatever, multiples, which looks a bit mad to me. Could you maybe share with us who is the buyer and what is the rationale for them to buy it, especially as they are not operating the assets? Thank you.
Yes. Thank you, Luc. Thanks for the question. First of all, the buyer is Lujiazui International Trust. This is an important company in China, which develops industry in the regional areas of the province of Shanghai. Regarding the valuation, we are very satisfied with this valuation. In the Chinese market, of course, the situation for a majority share that we are selling is something that is maybe a little bit exceptional. We have been one of the very few groups that had the chance to have a majority in an industrial company in the steel area as a foreign player. On the other hand, of course, this is a well-invested company. It is operational. To your question, why is it Outokumpu to continue the operation?
It is simply very convenient and very much experienced-based solution because Outokumpu and before SKS was part of this merger, it was also run by the ThyssenKrupp Stainless. It always has been in the hands of very experienced managers and very experienced operators, and it was the wish of the buyer that this should continue as the Lujiazui International Trust Group is a financial company.
If I may add two follow-ups. First of all, shall I understand that the transaction is binding? Second, does Baosteel have a preemptive right?
To your first question, yes, it is binding. It is a signed transaction, and we are expecting the closing of the transaction by end of November 2015, still in Q4 2015. Regarding preemptive right, could you specify what exactly your question about that is?
Does Baosteel have the right to claim back the 55% stake you are selling, being the partner of the SKS JV?
No. This is a transaction that is done with this buyer in very good cooperation and full transparency to our partner, Baosteel.
Okay. Thank you.
Your next question comes to the line of Michael Shillaker of Credit Suisse. Please ask your question.
Yeah. Good morning, and thanks for doing the call. Just a follow-up, I guess, to Luc's question, because I think it is a pretty exceptional value that you got relative to, I guess, what people expected. Can you confirm there are no derivatives such as put call options or similar, which would allow the buyer to sell this back to you at any point in time?
This is a terminal one-off transaction. You are getting the asset off your books for good, and there is no risk that this asset comes back to you at any stage at the request of the buyer, point number one. Point number two, I think that is obviously now a couple of asset sales you have put through in the last few weeks. M&A has clearly picked up in terms of your focus. Do you think you are done, or are there any more potential assets that you are looking at selling? Obviously, we do not want detail. You cannot give us detail. But in terms of the bigger picture, is M&A still likely to be something or disposals of assets still likely to be something you are very focused on? Thanks a lot.
Thank you, Michael. To your first point, I can confirm that. There is no clauses that this would come to us back, or this is just a temporary situation. This is a signed share deal where there is no clause that would be anything coming back. To your second question, M&A, I think we have demonstrated that in the past, I would say 12 months, where we have been working on several projects, and you will appreciate that M&A projects always take some time to materialize.
But we have announced that there will be this transaction in Mexico. Now we have announced that there will be this transaction in China. Both areas where we see that this is not necessarily the core businesses of what we want to do and where we want to be. So this, I think, would be the main steps in the M&A area. But of course, we will continue with some smaller topics wherever we see non-core business or non-core assets in the context of our company.
Okay. Very clear and well done on the sale. It is a very good price, it looks.
Thanks.
Your next question comes to the line of Seth Rosenfeld of Jefferies. Please ask your question.
Morning. Seth Rosenfeld at Jefferies. Just one follow-up question. If you could walk us through what you expect to be your remaining business within the APAC region. Are you considering more fully pulling out of the entire region, or will you continue to invest in your existing distribution and stainless steel service center network there? Also, how do you expect it to shift, I guess, if you can give us any guidance in terms of margins? Obviously, the business you are selling was more on the commodity grade end of things. You are perhaps focusing more on specialty looking forward. How effective do you think it will be in really turning around the profitability of that APAC business? Thank you.
Thanks, Seth. First of all, Outokumpu will continue to operate in Asia. This is a business where we had in our strategy already anticipated that we will focus much more on specialty business, on business of higher grades and direct customers that we can provide with these kind of materials from the European mills. We will be less dependent on the local production of standards grades based on local hot band, where there is, of course, a quite high volatility of both availability and price level. Therefore, we have decided to exit this kind of business. But we still operate service centers in Kunshan and in Guangzhou, and in Australia. We have an extensive sales company network, and we have stock points in the APAC region between India, Australia, Japan, in Korea, and Singapore.
This is an extensive sales network that we are leveraging to stay in this market, because it's a growing market, but it is very difficult to operate in the standard grade market, and that's the reason for this move. In regards to your questions, what impact does that have in terms of margins? As Johanna had said, we are not going into detail of operational questions this time. But of course, the direction indicates that a shift from commodities to special grades will rather be positive than negative.
Great. Thank you very much. Next question.
Your next question comes from the line of Peter Edward of JP Morgan. Please go ahead.
Morning, Reinhard and Johanna. First of all, congratulations. Secondly, I just wondered if you could talk us through a little bit what you can tell us on the debt side. Because I think you have some maturities that you would probably like to refinance. And obviously this transaction would help Outokumpu quite a lot. And maybe also a little bit about the covenant side. The main covenant, I think, was on gearing, and this obviously makes a massive impact on that covenant. Anything you can tell us on the debt side would be helpful. Thanks.
Thanks for the question, Peter. Of course, there is nothing that we can disclose or have here to disclose in terms of refinancing. But, we trust that this is a situation where the overall financial data, the quality of the balance sheet, and also the quality of the appreciation of the financial stability of the company will be certainly positively impacted by these magnitudes.
So we will reduce the net debt level by EUR 430 million, and we will strengthen our equity side by EUR 330 million. So, from that side, there is deleveraging going on that certainly enables a stable basis for refinancing, for also addressing the maturities in 2017, but specifically also demonstrating that the promises that we have given regarding the target deleveraging level of below EUR 1.5 billion is clearly at reach from what we can do. We have clearly decided that with such a transaction, we want to also give this kind of signal of the way our management addresses these challenges.
Could you just tell us the facts in terms of the maturities outstanding, and the total level of gross debt, including undrawn lines, by any chance?
We will have more information on that on our Q3 information that we have. Other than that, we have disclosed in Q2 where we are with these kind of maturities that are now mainly in 2017, 2019, and 2020, some even beyond that ahead. There are some maturities in 2016 from the bond that is maturing in there with a magnitude of EUR 150 million. Nothing has changed in that respect from what we have disclosed in Q2.
Okay. The main covenant is on gearing. Is there another covenant as well?
Yes, we have a covenant on gearing and liquidity, and also nothing has changed there.
Okay, thank you very much.
Your next question comes from the line of Johannes Grasberger of Nordea. Please ask your question.
Hi, Reinhard. It's Johannes from Nordea. I've got a couple of questions. First of all, just really quickly, can you give us some kind of idea of the complexity of today's transaction, whether you could kind of talk us through how long the negotiation took place, and was the divestment initiated by Outokumpu, or were you actually approached by the buyer? That's the first question.
The second question, can you describe how well the SKS assets are invested relative to the other plants in Europe and the U.S.? What I'm trying to get here at is to understand whether the plants elsewhere are actually as well-invested, which should obviously have a positive impact on your asset valuations. The third and final question is that, can you say basically if you have been approached by other potential buyers for the steel plants in Europe and Americas as well? Thank you.
Thanks for the question, Johannes. First of all, about the complexity of the transaction. The complexity of the transaction is coming both from the magnitude as well as from the location. This has been, of course, going on for a couple of months prior to today's signing. Other than that, of course, we cannot disclose any more details to this. It is a very solid transaction with a full legal documentation that has been signed on this contract.
Nothing very special or nothing that would make this transaction more complex just because it's in China or something like that. Of course, there is still the regulatory approvals with the normal process between signing and closing that it has to run through. As said, complexity is to be expected in this kind of magnitude.
Regarding your question on the investment status of SKS, we can say that SKS is in a good shape. It was established in 1997, and there have always been the appropriate measures regarding CapEx. However, on a relatively low level in that sense, because it's only a cold rolling mill and it doesn't ever get this kind of magnitude, like an integrated mill where you have to care for a hot mill or the melting phase.
As such, this was a rather uncomplicated and a very well-running facility. I think we can say that in general, this is a very good operation, very competitive as well. But the overall market, of course, is in a difficult situation. Therefore, we will from our side not miss this plant a lot. Your third question was whether we have been approached for selling any other assets in Europe or in the U.S., and I can tell you that is not the case.
Okay, thanks very much.
Your next question comes from the line of Johannes Granselius of Handelsbanken. Please ask your question.
Yes. Hi, everyone. Most of my questions have been answered, but could you help us with some numbers on the SKS business, like the annual sales and annual EBITDA? That would be very helpful, for the last 12 months or the full year 2014, please.
Thanks for the question. We have not disclosed in the past, and will also not disclose in the context of this transaction the financials of SKS in specific. It has been a part of our APAC business, and as you have been following over the past couple of quarters, our APAC business has been more or less on a break-even profitability. This is also a situation that you can derive the overall context of SKS from. We will not miss a major part of profitability contribution for the future.
Right. But if I look at sales for APAC, for instance, SKS makes up the lion's share of the sales in APAC, right?
This is naturally so. I wouldn't say the lion's share, but the clear majority.
Okay.
Because with a capacity of 290,000 tons, it has been both on the toll rolling as well as on the direct businesses and the traders business, a significant volume player.
Okay. Thank you for that.
Welcome.
Your next question comes line of Steven Benson of Goldman Sachs. Please ask your question.
Hi. Just a quick one coming back to the selling price. From what I recall, this plant was very central in Shanghai. How much of a factor was the land value in the overall transaction price? Then I had one follow-up just on the debt level or the covenants. Have you actually ever disclosed what the debt-to-equity covenant actually is? Those are the two questions. Thanks.
Yeah. Thanks, Steve. To the first question, we have sold 55% of the shares of this company, and we are retaining 5%, and we have been asked from the buyer and entrusted with the operational responsibility. This is not in the context of anything else. So there's also, from our side, no further comments on possible future scenarios at this point.
Regarding your second question, there is no covenant on net debt to EBITDA or anything like that. As said, we have covenants for the company on liquidity as well as gearing. We have not disclosed any kind of values, but I have mentioned already in the past that we have ample headroom in both of that, so no need to worry.
Okay, thanks.
Your next question comes line of Cedar Ekblom of Bank of America. Please ask your question.
Thanks very much. One follow-up question on the balance sheet. The deal obviously does have a very positive effect on the gearing position, but ultimately, your net debt to EBITDA, if we look at the run rate year to date, is still 6x-7x net debt to EBITDA. I just wonder if you are considering doing anything else which would be positive for the balance sheet, considering we've had shares rally 70% over the last three weeks with little change in the macro continued risk in terms of Chinese exports reemerging into Europe, with Chinese prices continuing to trade far lower than European stainless prices. Basically, is this enough, is the question on the balance sheet?
Yes, thanks for the question. I think no doubt this will give a very positive effect on the balance sheet and also from the net debt to EBITDA point of view. However, as mentioned in my very first opening, Outokumpu is very much doing two things simultaneous at the same time, increasing the operational performance, improving it by a ramp-up in the U.S. by a turnaround in Europe as well as in quarter play. In parallel to that, also working on the debt level with restructuring supported by some M&A measures.
So this means we are, of course, not only working on the net debt side, but also on the EBITDA side. But this is a process over the next quarters and years, and therefore it is important if we have the chance to have a major improvement of the balance sheet through this transaction that we of course did, and we are very happy about it.
Your next question comes from the line of Bastian Synagowitz with Deutsche Bank. Please ask your question.
Yes, good morning, gentlemen. I got three brief questions. Firstly, could you remind us whether there has been any semi supply from Europe into Shanghai Krupp Stainless? I understand it was fairly minimal, if not zero. Secondly, following up on the terms from your earlier comments, it seems like it is a pretty clean deal structure, but are there any relevant clauses in the contract framework with Lujiazui we should be aware of, or do we have any financial obligation to possibly inject capital above the proportion of your ownership if the company may need it?
Lastly, as Luc and Michael said, I think you got a fairly decent price taking into account the current environment. I suspect it is pretty difficult, obviously, how most of the other sellers in the market here, which probably struggled to get even close to 50% of replacement value. Could you let us know how large the replacement value of the Shanghai Krupp Stainless rolling mill would be? Thank you.
Yes. Thank you for the question. Your first question regarding supply from Europe or U.S. into SKS, that is virtually zero. As said, we are bringing material from Europe into our Calvert organization, but this is on the specialty side. This is both in sheets and coils, but also in plates and long products. But this does not go to SKS. We have discontinued supply from our European mills to SKS already some years ago.
With the disposal of Terni, that was the last where there have been some smaller volumes. So everything was sourced domestically in China for SKS. So no impact from that on our current operations. Secondly, regarding the deal structure, no, there are no unusual clauses. Of course, I cannot give you any kind of details, but there is also no obligation to inject a higher than proportional capital or something like that.
No unusual clauses. Regarding replacement value of SKS, as said, is a well-invested operation with cold rolling operations, with finishing operations. So in that sense, it's not different to any other major cold rolling capacity of this kind. So, as we would see that as a well-invested company, that would be then comparable, but there are of course, no specific values that we could give to a replacement value because we have not been seeking this.
Sure. But say a level around EUR 600 million, EUR 700 million, is it basically roughly a level which would be fair to assume for an asset like this?
If you take the full investment of cold rolling mills, you could easily come to this, of course, yeah. So there's nothing very special on that.
Okay. Thank you.
As said, we certainly are also talking about the situation that we have been owning a majority share here.
Sure. Okay, thank you.
Your next question comes the line of Carl Frejborg of Carnegie. Please go ahead.
Yes, hello, Carl Frejborg, Carnegie. Thank you, but my questions have been answered.
Okay. Thank you.
As another reminder, if you wish to ask a question or make a comment, please press star one on your telephone and wait for your name to be announced. Your next question comes from the line of Maxime Kogge of Oddo. Please go ahead.
Yes. Hello. Maxime Kogge at Oddo Asset Management speaking. Thank you for your call. Very quick follow-up question on the fact that the transaction is pending. Do you see any risk on regulatory approvals in China? My second question is about financing. I see there is a step-up on the 2019 straight bond if the company doesn't get a credit rating by the end of March 2016, so you have a strong incentive to be rated. Have you begun your discussions with rating agencies? Do you see that today's transaction could help your rating, or it won't be sufficient to avoid, I would say, a B-minus rating? Thank you.
Okay, thank you for the questions. Regarding the regulatory approvals, we do not see any unusual risks. This is a normal process which goes through these kind of approval processes. There is nothing different from other transactions that we would see. We are talking about China, and this is something where we have some experience, where we have been over the years. We think that we have a quite good assessment as far as we can regarding these processes.
Okay.
To your second question regarding the credit rating, what you say is true. Yes, there is this small step-up in case we would not have a credit rating by end of Q1 2016. Now, again, I will go in more detail than in our Q3 announcement. Of course, this transaction and the ability then to incorporate the positive effect in Q4, when it has closed end of November, will help the assessment also from a rating agency. No doubt this is positive, but this does not now lead to any kind of conclusions whether we will have a rating or not by the end of Q1.
Okay. Very helpful. Thank you.
We have no further questions at the moment. Once again, that is star one if you wish to ask a question or make a comment. It appears we have no further questions coming through on the telephone lines. Please continue.
Thank you very much for everyone participating today. I think this concludes our call of today. I would kindly remind you that our Q3 report will be issued on November the 5th. Thank you for participating.
Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.