Morning. Good morning, everyone, and very welcome to SSAB's webcast, where we're presenting our results for the fourth quarter and full year 2014. My name is Andreas Koch , Head of Investor Relations. I'm here with Martin Lindqvist, our CEO, and Håkan Folin, CFO. We'll start with a presentation, followed by a Q&A session, and you're able to raise questions on the web or on the phone conference. But now over to Martin.
Thank you, Andreas. I will start with some actual figures and then move over to pro forma figures, and Håkan will, during his presentation, also give you some explanations about the difference between actual and pro forma. But if we start with the actuals for Q4 2014, we had sales of SEK 15.2 billion, and EBITDA of just north of SEK 1 billion, and an EBIT of SEK 118 million, and we shipped, during the quarter, 1.6 million tons. The improvement compared to Q4 last year was mainly due to higher prices in Americas and lower costs in Europe. And the lower EBIT versus Q3 2014 was due to lower prices and seasonal slowdown.
If we take a look forward, we have a fairly good, fairly stable underlying demand and some mixed signals, of course, high import levels to U.S., but the underlying demand fairly okay and improving. Relatively stable demand in Europe, and if anything, moving in any direction, maybe some on the horizon, small positive signs. Of course, very dependent on what happens with the macro and the geopolitical situation, Russia, Ukraine, Greece, and so on. But underlying demand, stable, maybe some positive signs. If we then talk about the full year, and these are pro forma numbers, we had sales of SEK 60 billion, an EBITDA of SEK 4.4 billion, and an EBIT of just above SEK 1 billion.
We shipped 6.7 million tons, and the improvement compared to previous year was mainly due to higher prices and higher efficiency in SSAB Americas, and higher volumes and lower costs in SSAB Europe. We also had a board meeting yesterday, and the decision at the board was to propose no dividend payout for 2014, and the main reason for that being 2015 will be a year with fairly big restructuring, according to the industrial plan we developed before the acquisition of Ruukki, and I will come back to that, but we have announced the first step, and then closing the galvanizing, color coating, and coiling, and moving those volumes to Hämeenlinna. And this is a part of specializing the sites and specializing lines.
If we take a look at the KPIs, I would say a clear recovery in all aspects: sales, EBIT, EBITDA, and EBITDA per ton, if you compare 2014 to 2013, and if you compare Q4 this last year compared to Q4 2013. Some words about our key segments. Heavy transport remains strong in the U.S. Demand for rail cars expected to remain at a high level when we talk to the rail car builders, and they, we look into their order books. Good demand in Europe for trailers and fairly okay demand in Europe or slightly more positive demand for trucks. However, of course, a declining market in Russia. Automotive, strong demand, both in Europe and in U.S. or NAFTA, at a high level.
Construction machinery, stable demand on a very low level in Europe and in Asia, and the lifting segment remains depressed. Mining is a bit twofold. We see for new equipment, slow demand on all markets and slow demand on a very low level. On the other hand, higher activity in the aftermarket segment. 2014 was a year where we increased the number of Hardox wear part suppliers, and we also increased the volumes via the Hardox wear part supplier network. So the aftermarket or the service market is obviously performing better than the direct market. Construction material, Q4 is always a seasonal slowdown, and we saw that this year as well, and we are expecting a seasonally better demand in Q1.
That will, of course, be dependent on how much snow and how the winter develops, but typically, we see better demand in Q1 compared to Q4. Of course, the development in Eastern Europe, in Ukraine, in Russia, of course, continues to impact the construction material segment. The steel service center, I would say fair underlying demand, and the underlying demand is expected to continue to improve in line with the GDP growth in 2015 and Q1. But we had very high import levels of plates in North America during Q4 and so far in Q1, and also the inventories at the service center level were, at the end of last year, beginning of this year, higher than normal. Some words about the divisions. SSAB Special Steel, an EBIT of SEK 207 million, compared to SEK 225 million last year.
Lower volumes compensated, not fully, but compensated by lower costs. Shipments decreased compared to Q4 and Q3. Heavy transport, I said, the best segment or the best development of the segments, and demand from other segments during Q4, I would say, fairly unchanged. Market prices overall stable, but we had some positive currency effects in compared to Q3. Europe, an EBIT of -SEK 54 million compared to -SEK 402 million. The improvement is due to lower costs and better mix. Shipments on the same level as Q4 2013, and 10% higher versus Q3. Q3 in Europe is where we have the planned maintenance outages during the summer. Relatively stable demand, slightly improving in automotive and heavy transport during the fourth quarter.
We had 7% lower prices compared to Q3, but that was mainly due to mix effects. Americas, an EBIT of SEK 299 million, including a cost of an of the planned outage of between a bit more than SEK 175 million. So putting that back, we made roughly SEK 500 million in North America in Q4. Demand from heavy transport remained good, as said, in Q4, and the shipments decreased compared to Q3 and Q4 2014, and that was, of course, due to the outage we had during Q4. Prices down were 1% versus Q3, and as said, pressure from high imports. Some words about the U.S. plate market.
When we look forward, and when we talk to our customers, we expect that the plate market will grow with about 3% per year for the coming years. That is, of course, driven by the GDP growth, but also by improved construction market. The market for energy, transportation, and rail cars expects to be strong in 2015, and that is due to the order books for those customers. But we see some negative effects related to delayed investments in pipeline projects. And if you take SSAB's sales in North America, it is less than 10%, including what goes via service centers, that goes directly to the oil and gas sector. And we have currently a fairly limited exposure to big pipeline projects. Tibnor, a seasonally weak quarter in line with previous year, -16 compared to -17.
Shipments lower, but compensated by lower costs. So I would say fairly in line profit-wise and sales-wise with 2013. Ruukki Construction, minus SEK 26 million compared to a profit of SEK 27 million last year, and that is, of course, negative effects from currencies and lower volumes, mainly in Russia, and the depreciation of the Russian ruble. Demand on most market was somewhat weaker versus one year ago, with Russia and Ukraine, in particular, experiencing a declining market for obvious reasons. Some words and some update regarding the synergies. We communicated mid-January or something, that the integration of the two companies is moving along ahead of plan, and we expect the synergies to be captured slightly earlier than we have communicated when we released this combination.
We are currently at a run rate of about SEK 300 million, and this is the P&L effect you should expect to see for the coming years, then SEK 500 million this year, SEK 1 billion next year, and then the full run rate in the P&L from the second half of 2016, corresponding then for the full year to SEK 1.4 billion. What have we done then? Well, what we have done so far, and what is in that SEK 300 million, is lower purchasing costs, new suppliers, new contracts, and combining best of both. We have insourced material to Tibnor that previously was bought externally that we can produce ourselves now. We are taking coking coal from Oxelösund to Raahe, instead of purchasing externally. We have also announced some actions with later impact.
As said, we will close the galvanizing line and the color coating line in Borlänge, and that will affect, to start with 210 employees. We have closed, or we will close, the Ruukki headquarters and reduce staff functions, not only in Finland, but in the full group. And we will consolidate service centers in Tibnor, and we will continue then to do things during this year according to the initial, industrial plan. Then, Håkan, some words about financials.
Thank you, Martin. I will, as usual, go through the key figures, also describe the balance sheet situation. Today, I will also spend some time on the Ruukki purchase price allocation, which we finalized now during Q4. Starting with some key figures. During the quarter, we had a strong operating cash flow of SEK 1.4 billion. The other figure I would like to highlight is the EBITDA for the full year of 2014, of SEK 3.7 billion, where Ruukki contribute with approximately SEK 600 million out of these three point seven. Moving then to the result development, starting with Q4 versus Q3. In Q3, we had an operating profit of SEK 483 million, and now when we look at Q4, it's SEK 118 million.
And the change is due to the—partly due to the contribution of Ruukki, which was slightly negative in Q4, but positive in Q3. When you add those together, the change is a bit more than SEK 200 million. We had slightly higher volumes, especially than in the European division, since we had the summer outage in Q3. Negative impact on price, partly in Americas, but actually mainly in Europe, given the mix effect. Then variable COGS, also slightly negative impact, where we had positive from the raw material, but on the other hand, we had the outage in Montpelier, which impacted negatively. In the other 50, it's, for example, foreign exchange, it's Tibnor, and fixed cost. Then talking about this is the actual result of SEK 118 million.
If you look in the report, you can see that pro forma, we say that the EBIT is SEK 173. The difference there is, first of all, in the actual result, we are including now the depreciations on the surplus values from the Ruukki acquisition. That's the major difference between the SEK 173 and the SEK 118. If you look on EBITDA level, you can see that the difference is much smaller. It's also in the pro forma, we have assumed that we have owned Ruukki already since end of 2012, which means that we are using average FX rate for the full year of 2014, while in actual, we are only using the five last months of the year.
So that's why you get a big difference between 118 and 173. If we then instead turn on and look at Q4 versus Q4, the picture looks fairly different. We had a negative result in Q4 in 2013 of close to SEK 300 million. Again, here is what Ruukki actually contributed with in Q4 2014, since Ruukki was not part of 2013, SEK -78 million, which is including then the, depreciations on the surplus values. A slightly negative volume impact, mainly due to Americas. Big positive price impact, which is then the plate prices in North America, which in Q4 last year, they were fairly depressed. They started to tick upwards, which they did continuously, basically up until October in 2014, when they, they started going down somewhat.
But all in all, that impact is close to SEK 400 million comparing year-over-year. The other big item then between the two quarters is variable COGS, and here it's both production efficiency that has been improved, but it's of course, also the lower raw material cost, mainly due to iron ore. And then once again, we have the same items in the other bucket. So all in all, it's an improvement of a bit more than SEK 400 million from Q4 2013 to 2014. The result that we have shown and talked about so far are excluding items affecting comparability. We had in Q4, quite a few of them. I'm not going to go through all of them here. This is a table from the report, but mention a few of them.
One is the write-down on the goodwill, which is close to SEK 300 million. This was goodwill that we had allocated to Ruukki Construction, and given the development in Eastern Europe, Ukraine, during the second half of this year, we wrote down that goodwill. We also due to the development within Ruukki Construction in Eastern Europe, wrote down certain assets there of SEK 130 million. Then the assets held for sale as a consequence of the decision from the European Commission, we signed sales agreement for all of these in December, and the sales agreement was somewhat below book value, so also there, we did a write-down now in Q4. And then the final item is related to Fortaco, where we wrote down shares in Fortaco and also shareholder loan to Fortaco.
Fortaco is a company that Ruukki owned partly, together with a Finnish company called CapMan, and the development during the second half of the year has not been as expected. Moving then to cash flow. As mentioned in Q4, we had SEK 1.4 billion in operating cash flow, and looking at net cash flow, we had more than SEK 700 million. The main driver of this was the earnings with EBITDA, but also a very positive development of working capital, which is to some extent or to a large extent due to lower accounts receivable, but actually also higher accounts payable and lower inventory. If you take the full year perspective, the operating cash flow is SEK 1.7 billion, and net cash flow close to SEK 100 million. Moving down to the balance sheet and the financing situation.
If we look year-over-year, our net debt have increased with close to SEK 10 billion, which is mainly due to that we have taken over the Ruukki debt. Now in Q4, we have also seen the development that part of our loans that are in U.S. dollar have become, in SEK, a higher value, and we have also moved, the amount we have to pay to the minority shareholders in Ruukki, we did not classify as debt before. We have done that now in Q4, so that has also increased the net debt. And out of the Ruukki debt that we took over, out of the total Ruukki debt, we took over everything except SEK 54 million, and we did that without any financial covenant. At the end of the year, we have a net gearing now of 56%.
It was 55 at the year end of 2013, so it has increased with 1 percentage point. We have a liquidity preparedness of 20%, when you compare it to rolling 12-month sales. And it used to be clearly higher at the end of Q3, and we said it was a bit too high at that time, but now we have repaid one Swedish bond and one Euro bond, and now we're more at a more reasonable level. And when we look at the full loan portfolio, the average is 3.9 years, and we have an interest term of 1.2 years.
In total, now we have cash and backup facilities, the very left-hand graph of around SEK 11 billion, and we did, during Q4, now sign a new revolving credit facility of EUR 240 million. The bar that looks very big for 2015, close to SEK 8 billion, almost half of it is commercial paper. So, and those we expect to be able to roll. So if you look at the other loans that need to be refinanced, it's a bit more than SEK 4 billion. 2016 is clearly lower, 2017 a bit higher again. But all in all, when we look at this maturity profile, we believe that it's a fairly balanced and reasonable profile.
Development during Q4 was we decreased our interest rate, and we actually increased the average duration, and both of these are, to a large extent, related to the fact that we repaid, as I said before, the Swedish bond and also the Euro bond, which had a, then a short maturity time and also higher interest rate. This is pro forma figures for 2015 on the new SSAB currency flows. What we see in this picture is that we are short in US dollar. Maybe should explain. This is, this is outflow, and this is inflow. And if you look then at US dollar, you can see the outflow is, clearly larger than the inflow, so we are short in US dollar of around SEK 8 billion.
Then if you look on the euro bar, you can see that it's the other way around. There we are long in euro of around SEK 3 billion. The other big currencies for us is the Canadian dollar, Danish krona, Norwegian krona, and the British pound. All in all, we are long in other currencies than SEK, so if all other currencies go the same way, a weaker Swedish krona is positive for us. But it obviously depends which currency, if it's euro or if it's US dollar, that's moving. The way we work with hedging is that we hedge our purchases in US dollar, the ones that are three months or longer, then we hedge the purchase contract, and we also hedge the corresponding sales in euro. So that gives us a...
We basically can say we lock in the margin in terms of FX for this when we buy the raw material. Now I will spend some time on the Ruukki acquisition, starting discussing the purchase price allocation. The total purchase price at closing then on 29th of July was SEK 15 billion, and during Q3 and Q4, when we have done the purchase price allocation exercise, we have defined that the fair value of the assets is SEK 9.8 billion, and that gives us then the residual of the goodwill of SEK 5.2 billion. And when the fair value of the assets was SEK 9.8 billion, it implied that we have surplus values of SEK 1.4 billion.
And for the goodwill, we will do an annual impairment test, just like we have done previously and continue to do with the IPSCO goodwill, so we will do that every Q4. And for the surplus values, these will be depreciated over time. Some of them, shorter time, some of them we actually already, oops, sorry, have depreciated, like order booking inventory, while other ones then a longer time, 15 years, which is typically related to real estate. And the depreciation over time for both the Ruukki and the IPSCO amortizations will look like this. So the red bar on this page is the Ruukki amortization, and the blue bar is the IPSCO amortization.
What we can see here is that for the coming years, 2015 up until 2018, it will be fairly stable, starting at SEK 800 million, going up to SEK 900 million, and then from 2018 onwards, it will be a large decline in this amortization down to 2022, when we're down on only SEK 100 million for the whole year. Worth mentioning on this page also is that these assets are denominated in the local currency, so for Ruukki, mainly in euro, and for IPSCO, in US dollar. And this means that also the amortizations are set in the local currency, so the value in Swedish krona will vary depending on how the FX is moving then.
So for example, for IPSCO, 2015 is expected here that it will be higher than it was in 2014, given the strengthening of the U.S. dollar. Continuing then on the Ruukki acquisition theme, we are in progress of divesting the so-called remedy units, the six units that we were forced to divest as a consequence of the decision from the European Commission. As I mentioned before, in terms of the write-downs, we signed sales agreement for all six of them. And so far, we have received approval from the European Commission for three of them. That's Plannja Oy in Finland, Tibnor Oy, also in Finland, and then our shares in Norsk Stål Tynnplater, where we own 50% of the company in Norway. We are still waiting for approval for the remaining three assets.
We expect that we will get that during February, and these are Naantali Service Center in Finland, Halmstad Service Center in Sweden, and then 50% of the shares in Norsk Stål Tynnplater. In terms of impact, the sales of these assets in 2014 was SEK 2.1 billion, and as mentioned then before, we did the write-down of SEK 123 million in Q4. I would like to say some words about the relining of the blast furnace in Luleå. This is our largest blast furnace. It has a capacity of 2.3 million tons. It's now 15 years since it was built, so it's definitely time to do the relining. We will do it this summer, and we will have it closed from June until August. The capital expenditure for the relining itself is around SEK 700 million.
However, at the same time, when the blast furnace is closed, we will anyway do some other investments, which is good timing to do when you don't have production. So all in all, we will spend around SEK 800 million in Luleå this year. Within Raahe, they have two blast furnaces, and they were relined, one in 2010 and one in 2011, which means that within the group now we have very fresh experience of doing the relining, and that we will, of course, utilize. What we will also need to do is we need to replace approximately 500,000 tons of slabs, and we will do this by starting build up slab inventory in Luleå.
We have also started up the small blast furnace in Oxelösund, that has been idle for some time, and we will also build up slabs and ship them from Raahe. On top of the investment, we will have an extra cost for this. For example, transport of the slab, start up the blast furnace in Oxelösund, and we have estimated the extra cost will be between SEK 100 million and SEK 150 million. Some of them in Q1, but most of it in Q2 and Q3.
When the relining is completed, then we will have five blast furnaces, all in good shape, and we can then really fully start utilizing the new production system and go up and down in production in a way that neither former SSAB could do or neither former Ruukki could do, so we can really benefit of the combination then. Finally, from my part, some words on the raw material prices, where in general, we see clearly lower prices year-over-year. Our iron ore price was 7% lower in Q4 versus Q3 in Swedish kroner, but 29% lower when we compare with Q4 last year. We do have the dual sourcing, both LKAB and also Severstal from, Russia, and main part of our pricing is set on a quarterly basis.
For coking coal, we saw coking coal prices go down significantly already in 2013. What we see now is that in Swedish kronor, they were actually somewhat higher in Q4 than in Q3. In U.S. dollar, they were fairly even. But when we look one year back, we can see that the prices are still 13% lower. For scrap down, which used for our U.S. operation, spot prices did decrease during Q4. They increased somewhat toward the end of the quarter, but all in all, they were 6% lower at the end of Q4 compared to Q3. When we look one year back, they were actually 20% lower compared to the same period.
What we see on scrap prices is, as you know, iron ore prices have been going like this. Scrap has been fairly stable so far, but right now, we haven't seen the normal uptick that we see in the winter season, and for March buys, scrap prices are expected to decrease rather significantly. Okay, Martin, thank you.
I need to make sure that I don't slip on your water. Then we have LTI. So to sum it up, North America, underlying demand expected to be relatively good during Q1. As said, uncertainty due to import and high inventory levels or slightly higher or higher than normal in the distribution system. Europe, underlying demand expected to be stable, if moving in any direction, well, not negatively. In China, demand for steel is expected to stay weak during Q1, and shipments in Q1 will be slightly higher than Q4. Then I will show you something beautiful. This is the world's largest mining dump truck, also the winner of Swedish Steel Prize 2014. This is with a loading capacity of 450 tons, produced by BelAZ, developed by BelAZ with the help of SSAB.
Of course, there is Hardox in the dumper body. But what is interesting with this one as well, that axles and chassis and frame is also developed by SSAB Steel. I think it's a huge and fantastic machine. Requires a lot of steel as well. So to sum it up, when I look forward and see what we are into now with the integration, with the synergies and everything, my conclusion is fairly clear: We should be one of the most profitable steel companies in the world. We have a unique starting point. We are a unique start, steel company. We have strong market positions globally on quenched and tempered and advanced high-strength steel. We have strong market positions in the Nordic region and in North America.
We have, as said and discussed here today, a clear plan for the Nordic and Northern European strip business with the synergies, and they are moving according to plan or ahead of plan. We have a strong starting position in U.S., and U.S. continues to be an attractive market. So we have a strong starting point and a strong platform for further growth. And by that, my clear conviction is that we should be, if you measure it with margins, one of the most profitable steel companies in the world when all this is in place. So with that, Anders?
Mm-hmm.
Beware of Håkan's water.
Yes. We're now entering into the Q&A session, and we'll start with the audience, followed by the phone, and last, we'll take questions on the web. Maybe we have some questions in the audience. Oskar, please.
Thank you, Andreas. Oskar Lindström from Danske Bank. A couple of questions. The first one is, previously, you've been able to say a few words about the sort of outlook for pricing in the U.S. several quarters ahead. Can you give us any more details than what you gave in your presentation about the outlook for pricing in the U.S.?
Pricing has been. Spot prices in the U.S. have been trending down during Q4. And what we see now, as Håkan mentioned, is also raw material prices trending downwards. So it's more where the margin will go. Short term, on the spot market, I would say end of Q4, the margins were a bit smaller because of, of, spot prices for plate, due to high import, among other, and strong currency, were trending downwards. But what we see now when we look into Q1, we also see scrap prices moving in that direction. So my guess would be lower prices and lower raw material costs.
Sorry. Have you been able to lock in prices that for your deliveries in the first quarter?
We have contract prices, yes.
Any words about how those look compared to the fourth quarter?
No, but they, they are following the trend, of course, but, but, not to the same, with the same amplitude or what you call it.
All right. Thank you. One more question. You mentioned in your presentation that the heavy transport end-use segment is looking slightly better, both in Americas and also in Special Steels, if I recall correctly. What is this, and how much of that is related to tank cars in North America? Or are there other heavy transport segments which are pulling that demand?
Tank cars, rail cars, trucks, the full segment, I would say.
All right.
But as said, for tank cars and rail cars, 2015 looks quite okay.
Meaning stable or-
Yeah
... or improving? Okay. Wonderful.
The order books are still fairly long for those producers, and the contracts are... So they will deliver during 2015. How that will look in 2016 is, of course, too early. But for the start of the year, what we said, Q1 looks good, and what we can see for 2015 looks okay.
Have you had any cancellations so far on your contracts? None. All right. Thank you.
Any more questions from the audience? Christian, please.
Thank you very much. Christian Kopfer from Nordea. Firstly, on shipments, you expect shipments to be slightly up quarter and quarter in Q1. Looking at the business units, we typically see shipments in the European units up quarter on quarter. I guess you see that more flat now. Is it a typical reason for that, or is it... I mean, can you elaborate a little bit on that?
As you say, typically, we see a seasonal pattern with a slower Q4 and a slightly better Q1 in Europe, in construction, and so on. So overall, we expect shipments to be slightly better in Q1 compared to Q4. We haven't been more explicit than that.
So slightly up in the different units also, or...
But overall, up. I don't have every single unit on the... But, overall, up, yes.
Okay. On the raw materials, I mean, they have been quite heavily down. Could you say something about the, I mean, the realized price in Q4 and how-
As you know, we have a quarterly lag, and fines prices and iron ore prices have been going down during a big part of 2014. On the other hand, the US dollar has strengthened, so. But we have seen some effects of it during 2014, and then it all depends where the iron ore price will go. But currently, I think the fines price is around $60 or something per ton, which is obviously much lower compared to a year ago. And then scrap has been not developing at this. I mean, the correlation between scrap and iron ore is, over time, very stable, and we haven't seen that. We start to see that effect now of scrap prices coming down, but we haven't seen that correlation up till now.
For pellets, are those coming in down in line with the fines?
Well, pellets is priced from fines prices and then a defined pellets premium, and we have the same. The pellets premium we have for one year. From first of April to end of March, we have the same pellets premium.
Okay. And finally for me then, on the FX, I mean, the US dollar has strengthened quite dramatically versus Swedish krona. And is it possible just to give us a sense how your hedges have that impact? I mean, in terms of what was the realized US dollar to SEK ratio in Q4 so we can understand how far it is from the spot rate?
I would say the US dollar strengthened, especially in the end of Q4. So in that sense, when we did the hedging for the raw material buy, we did it in Q3. So then we, of course, had a clearly lower US dollar rate than what you see at the end of Q4, if that helps you.
Okay, fine. Thanks. Got a question at the front?
Thanks. Anders Gjemfors. I understand that special steel is defined as above 700 megapascal, but you have some high-strength steel for automotive-
Yes.
That is not included.
Yes.
That is included in Europe.
Europe, yes.
What about the percentage of high-strength steel for, in, Europe?
I don't know the percentage, but I think we sold to the automotive segment last year, approximately 700,000 tons. So it's a fairly decent chunk of business, and, and then we have some other volumes regarding being high-strength steel, but, but below 700 MPa. But in special steel, it's hot rolled volumes above 700 MPa and abrasion-resistant steel, Q&T.
Yeah, yeah. Okay, thank you.
Hello, it's Johannes Grunselius , Handelsbanken. First question is on investments. I know you talked about that in the CMD, for instance, on the third quarter. Can you just remind us about the CapEx level? Has this changed 2015, 2016, what you expect now?
We said in the Capital Markets Day that we believe R&C will be between SEK 1.6 billion and SEK 1.8 billion. Then, with the relining of the blast furnace in Luleå, which is obviously a significant investment for us, that doesn't happen that often, 2015 will be in the upper range of that or even slightly above that.
Okay. Then, I was thinking about if you could give us some color on how you expect the mix will progress here in Q1 and also perhaps in 2015. What... How do you view end clients or end demand for your real flagship products, in other words, quenched and tempered?
Well, as I said, what we see for Q1 is fairly stable markets with some, maybe some positive signs then, and within heavy transport, which typically takes the higher-end products, and then automotive also being strong, which takes, even though it's cold rolled, also the higher grades.
Obviously, the heavy trucks segment was very positive for you in the fourth quarter. Should we expect that to continue in Q1, or should even the momentum be even better quarter on quarter? Or how should we view it, or has it peaked?
I don't really know, to be honest, because I don't have that crystal ball. But what we see is a continued decent demand.
Julian?
Morning, it's Julian Beer from SEB. For the US business, we're reading that some commentators saying that mills' lead times has fallen below four weeks, compared to 12 weeks at the end of the summer. How much of that do you think is reflected to a cancellation of pipeline orders, and what do you think the triggers would be for a prolongation of the lead times from here?
I'm not sure because, as said during the presentation, we are not selling so much to pipeline orders. That is typically import going that way. So to be honest, I don't really know, but I realize that on the market, lead times are short enough, on average, compared to last summer. But I don't have a very clear insight in the pipeline projects.
So, that doesn't affect your volumes, but could affect the market pricing?
Well, I guess it has affected the market pricing, and it could, I mean, what do you call it? Secondary effects into our volumes, of course, if... But as I said, our direct business to that segment is approximately 8%.
Another reason I would add why why the lead times are going down is because we talked about scrap prices expecting to go down rather significantly. And Martin mentioned service centers sitting on high inventories. There is no point for them to buy today when they believe that scrap will go down, and then they think that the prices will go down. So I think we're seeing service centers sitting on the sideline, just waiting, in a wait and see mode. And then, of course, you get the lead time impact on the mills.
But we don't see any huge difference in our business.
No. Okay. One thing that we have seen, as you correctly predicted for us earlier in the year, was that Russian imports of plating coils fell dramatically in January. Unfortunately, imports from Korea picked up. But, if that Russian material isn't going to the States, is it coming into Europe? And how's that affecting the plate market in Europe?
We haven't seen that much of it yet. You never know in the future. We have seen some, call it re-rollers in Russian-owned re-rollers in Europe buying cheap Russian slabs, but not to a huge extent. We are not that active on the standard plate market in Europe. We are... I mean, due to our cost position and the closeness to the Nordic market, we are mainly in the Nordic market, so we don't compete on standard plate in Western Europe or Southern Europe.
And then, finally from me, again, on the theme of Russia. Just how much did your business fall in Ruukki Construction in Russia? And, what's the risk of further write-downs in that business unit?
Well, volume-wise, it didn't fall so much. It was more a currency effect, and then, of course, problems to get projects financed. But volume-wise, it didn't fall that much. But with the depreciation of the Russian ruble going down 50% or more, that, of course, affected the profitability when we calculate it into Swedish crowns. But volume-wise, not a huge drop. Of course, drops, but not a huge drop, not as you could expect. And this is a local business where we source, mainly source locally and produce locally and sell locally.
The risk of further write-down would be linked to any further depreciation of the ruble?
Well, and market, of course, but with this write-downs we did right now, the goodwill, we feel that, the book value are okay and not that high.
Thank you.
Okay, let us take some questions over the phone. Operator, please.
I remind you to press zero one to ask a question. Our first question comes from Mr. Carsten Riek from UBS. Please go ahead.
Thank you very much. Two questions from myself, actually three. The first one is on the closure of the galvanizing and color coating lines in Borlänge. In my opinion, a good first step, but the question around this is what happens to your cold rolling and hot rolling capacity in Borlänge then? Because it looks like you have to actually substitute those volumes. Is there enough demand, or do you expect that you also, at some point, have to cut capacities here? Second-
Yeah, if we take them one by one. What we are aiming to do and what we have started to do is to specialize sites, to get longer sequence length, to get up the utilization rate, to get better yield and better productivity. And that this is the first step, then moving color-coated and galvanizing volumes from Borlänge to get up the run rates in Hämeenlinna, and to become more cost effective. And this is the first step, and then further actions will follow.
Okay, perfect. Thank you. The second one is on the outlook statement for 2015. You gave some outlook statement for the first quarter, but I haven't really heard that much about 2015 as a whole. Any kind of EBIT target for 2015, and if it's just on a qualitative side, better or worse than 2014? And also, on the cash flow for 2015, is it fair to assume, given that 2015 will be the year of restructuring, that your 2015 free cash flow is likely to be worse than 2014?
So first of all, we never give any. We don't give that kind of guidance. We try to describe the market as we see it for the coming quarter. And then when it comes to cash flow, you should not expect it to be materially worse than 2014.
Okay, perfect. Last question is on the goodwill. I believe you added another SEK 5.2 billion in goodwill to the balance sheet. We have now 29% of your balance sheet is goodwill or about 60% of the equity. Given the market conditions right now, if it doesn't really improve, what, how, well, how long can you resist any write-downs?
But we check that every year, so. And we did some write-downs of goodwill in Ruukki Construction this year, so last year, so we check that every year.
Okay. So 12 months, we won't see massive ones, at least?
Well, if nothing extremely special happens.
Okay. No, that's fair. Thank you very much.
Our next question comes from Mr. Jean-Deveve from Exane. Please go ahead.
Deveve from Exane BNP Paribas. I had a question on the US and the impact from the lower oil and gas prices. Would you expect any negative impact on the mix, side? I appreciate that, oil and gas-related end markets are not a huge share of your sales. I think you said a bit less than 10%. But are there some margin impact, that should lead to, some margin compression in the US, given what we see in, oil prices right now?
Well, I think you can look at it in two ways. Of course, lower energy prices will also be positive for the North American economy and drive, call it, reindustrialization and higher production rates and so on in U.S. So midterm, I would say, it's probably also very positive. But short term, of course, it affects the steel demand. And as said, for us, it's somewhere between just above 8% or 8% directly to that sector. But the secondary effects could, of course, be plate producers being more exposed to it or trying to find business somewhere else. So I think it's hard to predict exactly what, where this will end up.
I would say over time, I guess for the U.S. economy and the steel consumption, this is fairly positive.
Okay, understood. Thanks. And then a second question on Luleå, the SEK 100 million-SEK 150 million additional cost impact that you mentioned, is that a net impact? Or, I mean, is that the full cost impact? I mean, taking also into account the fact that you will have, I assume, lower costs at Luleå, given the demand, I mean, the investment operations there.
It's, it's the actual cost we will have associated with the impact, sorry, with the relining. If we then, after the relining is done, we might have lower production cost, that's not included in the SEK 100-SEK 150.
Okay, understood. Thank you.
Our next question comes from Mr. Bastian Synagowitz from Deutsche Bank. Please go ahead.
I had three questions. So my first question is on the U.S. business. Could you clarify once again how the actual costs related to the maintenance have been? And also let us know whether this number is just the direct cost or whether this does include any impact from the loss in shipment volumes related to the maintenance work in the fourth quarter. That's my first one. Maybe I stop here.
The cost that we said was SEK 175 million, and those are the actual cost for the outage. So if you would take the total P&L impact, which you are alluding to, then due to lost shipments, yes, then it would be a bit higher.
Could you give us just a rough picture of how that would have looked like? Just considering the volume loss and lack of fixed cost dilution would not have happened.
Fixed cost dilution is not that big because we have very, very low fixed cost base in the U.S. It's more in terms of the potential lost volumes than you would look into.
Yeah. And how much has that been, roughly, could you say?
We haven't really quantified that exactly.
Okay. Okay, good. But then my second question is following up again on the FX, and I guess that clearly turned into a big tailwind for you after having been a headwind in the last few years. Håkan, I guess what you told us was that you hedged on a three-month forward basis, which means that in the fourth quarter, we've really only seen the 5%-6% of the FX movements in your numbers so far. But then, since then, obviously, the krona has depreciated another 20% against the dollar. So that means that we are still yet to see the major benefit of the weaker krona in your numbers. Is that correct? So just in rough proportions, is the 20% depreciation number also what you see in the hedging duration?
You're right about, as I said before, that we hedged Q4 before Q4 started, and that's really when you saw the big swing in the SEK and the US dollar development. So, your assumption is right, that going forward, you will see a, a different rate, a higher rate than between Swedish krona and US dollar.
Okay. So basically, I look at your margin, it's roughly SEK 1,000 in the fourth quarter, stripping out obviously the maintenance work. Now, if I go, basically, FX adjusted, we get just roughly SEK 200 only from the FX side, and then whatever the spot market and price cost spreads will do from there.
If you're talking about the translation of the result in the U.S., if I understood the question correctly, then yes, that assumption would be right.
Okay, very helpful. Now, my last question is on the cash flow and balance sheet, and here I didn't really get my head around it. So you had a really strong free cash flow in the fourth quarter. I think that was roughly SEK 700 million, yet your net debt went up by SEK 1.8 billion. Part of that was obviously the inclusion of the Ruukki minorities, but then there was probably some further effect from the SEK conversion. I saw there were two items in the financing cash flow totaling up to SEK 2 billion, and that seems to explain a large part of the difference. Can you give us a bit more color on these two items, please? I didn't really understand what was in there.
Not sure exactly which two items you're referring to, but what did happen during Q4 is that we did move then, as I said, the minority from, we moved it into the net debt, so that was one item. Another item that happened was when we did a write-down of the shareholder loan to Fortaco, that was a loan we had to Fortaco, and that impacted net debt positively. When we took away that from the balance sheet, it also had a negative impact on net debt, so therefore, net debt increased.
Okay, but then the write-down probably would not be a net, would obviously not be a change in your cash flow. So the cash flow items I was referring to was basically the change in financial investments of SEK 1.7 billion, and then other financing activities of roughly -SEK 400 million, which you booked in the fourth quarter, and those were much higher than in any of the quarters before, and hence I wanted to know what that is.
Let me look into it specifically, but I think that's actually a reclassification between lines, if I'm not mistaken.
Okay. All right. Thank you. Any follow-up on that would be great. Thanks so much.
Sure.
Our next question comes from Mr. Jeff Large from Macquarie. Please go ahead.
Yeah, hi, good morning. A couple questions from my side. The first is, I just wanted to clarify on some of your comments towards the U.S. business. Are you saying that your order books for the first quarter are essentially filled, and so, you know, the potential risk to pricing that we see from, say, the sharp fall in scrap prices here in February, that's more a risk to pricing in Q2, or is it something that could even kind of start to impact the back half of the first quarter, or could accelerate the sort of pressure on pricing in the back half of the first quarter?
We actually didn't say anything about the order books in U.S.
Okay, but then maybe can I ask, are you saying that your order books are full, or are they? Can you give a sense of, you know, how the order books look for the first quarter?
They look as expected, and this time they are not really full with the lead times we have, but they look more or less as we expect them to look.
Okay. Just a second question, in terms of looking out or, excuse me, looking at the dividend, I mean, can you give us some framework as to—as you look out over the course of this next year? Like, are there certain metrics that you feel need to be met to, to propose a dividend? I mean, is it, is it not only, you know, what you see on the P&L, but certain levels in the balance sheet, for example?
No, but we have a dividend policy. We will come out with new financial targets in the annual report, as we talked about during the Capital Markets Day. But, but we have a dividend policy that we follow. But 2015 will be a year with restructuring, and we have, as said, announced the first restructuring, and it will be also a lot of redundancies and so on. And then the board decided to propose a zero dividend for 2014, due to that.
Okay, great. Well, then we'll, I guess we'll look forward to more color over the course of the year.
Yeah. So, it doesn't say anything about our belief of the future or the free cash flow expectations we have for 2015.
Okay. Thank you.
Our next question comes from Mr. Cedar Ekblom from Bank of America. Please go ahead.
Thanks very much. Two quick follow-up questions. On the U.S., you mentioned that your direct exposure to energy is only about 10%, but can you talk more about how you could see plate prices across the board being depressed, even in non-energy markets, as volumes that were previously directed to energy now find their way into the spot market? Just trying to understand that or understand the extent to which you might not have a direct exposure to energy, but which small falling energy CapEx in the U.S. can actually impact other markets there, and-
If we start with that one, I would say that the most important metric in that aspect is plate import to U.S. and to North America. It has been on a high level during Q4, and it has continued during January on a high level. Even though we saw Russian volumes going away, they were met by Korean volumes. How that will look for 2015 will be very dependent on the import volumes of not only plate, but for strip as well, but the import volumes to U.S., and what measures, if any, the U.S. government or someone else will take against that.
In terms of domestic production, have you seen any tons yet that were being sold on a contract basis by domestic producers into the energy end markets being displaced into the distributor markets? I understand that imports go into the distributor market, but what I'm trying to understand is, is there actually risk that domestic tons, which no longer are not demanded by energy end users, get into the distribution markets as well? Because if we're seeing that in strip products, I understand. I wonder if we're seeing it in plate yet.
Typically, plate import goes to, as you say, distribution or service center markets and also to pipeline projects. That is the typical pattern for plate import into NAFTA or to US.
Oh, okay. Okay, I'll leave that one. And then the other question, can you just explain from an accounting process, for my knowledge, why have you recorded a surplus value on the Ruukki acquisition rather than that number going into goodwill? Or, you know, why was there a surplus value recorded? Has it got to do with the timing between, you know, coming up with a fair value assessment and then a later value assessment of these assets? Just to understand why that value is there.
What you do when you have done a purchase of a company, you look into what you actually paid, and in this case, then it was SEK 15 billion. And you look into what is the asset value on the balance sheet of that company. And then you say, "Okay, we paid now, in the sense, in this case, more than what the book value was." Then you go through asset class by asset class to see, is there, for this type of machine or for this real estate, actually a different value, either higher or lower, than what it says in the books.
For example, take a real estate and say, "Well, in the books, it's worth SEK 100, but if we ask for a market value, it's SEK 150." Then you record that 50 difference as a surplus value, and you do that for all the asset classes you have, and then in the end, you come up with the fair value of the assets, and the goodwill is then the remaining, the residual between the fair value of the assets up to your purchase price.
Okay, so when you add up those numbers in that chart that you've given, you get a SEK 15 billion purchase price, and then you add up the goodwill, the fair value of assets of SEK 9.8 billion. Does that SEK 9.8 billion include SEK 1.4 billion of surplus values, or is that on top of one point-
No, that includes.
Okay, that makes sense.
The fair value is SEK 9.8, and the surplus value is how much higher the fair value is than the book value.
The book value. Okay, fine. That, that makes sense. I understand that. And then just the one final question. In the synergies slide, you mentioned that one of the synergies or savings you were able to capture was selling or transporting coal from Oxelösund to Raahe. I mean, that's a one-off, I assume, right?
No, it's we produce coking coal that was previously bought on the open market.
You produce it yourself?
I know coke, coke oven batteries.
Oh, okay, the coke battery is fine. Okay, that's fine. Okay.
It's not a one-off.
Yeah. Okay, I understand. Perfect. That makes sense. Thanks very much for the color.
Our next question comes from Mr. James Gurry from Credit Suisse. Please go ahead. Mr. James Gurry , your line is open. Please go ahead.
Yeah. Can you hear me?
Yeah.
Yes.
Yeah, just two quick questions. Just on the earnings reconciliations, you can see the negative contribution from Ruukki. Shouldn't we see some sort of synergy benefit there, given that you've already booked, perhaps it's an annualized figure of SEK 300 million? Shouldn't we already see perhaps SEK 75 million of the synergy benefiting into the earnings at this stage? And also, can you explain your expected net debt progression during the year? Do we expect it to go up significantly in the first half of the year, then fall down in the second half of the year?
First of all, we have seen very limited effects of the synergies in 2014, including Q4. Then, when it comes to net debt, we are not giving any cash flow prognosis, but we are not expecting the net gearing to increase over time.
Well, just a little follow-up then. You—I, I perhaps missed what you said about the refinancings that are due this year and next year, but you're quite confident that you can traverse that hurdle easily?
We are convinced that we can fix that. Yes.
Okay, thanks.
Our next question comes from Mr. Ioannis Masvoulas from RBC. Please go ahead.
Good morning. This is Giannis Masvoulas from RBC. Two questions, if I may. First, on the working capital, you had a strong working capital release of SEK 800 million in Q4. Should we expect additional working capital release in 2015, in line with previous guidance? That's the first question.
Yeah, for working capital, in line with previous guidance, I assume you mean that what we said at the Capital Markets Day, where we said we aim to release around SEK 500 million, and yes, we still expect to be able to do that. In, if we take the whole year, 2015, what we do see in the first quarter and the second quarter is that given the relining of the blast furnace in Luleå, we will have an inventory buildup of slab. But obviously, when the relining is done, going into Q3, Q4, that working capital will be released again.
Okay, thank you. Second question on the restructuring costs of SEK 550 million. Given that you have accelerated your cost savings program, should we expect that to mostly take place in 2015?
I think it's fair to assume that, yes, in the same way as we have accelerated the impact of the synergies, we will also see the cost come a little bit sooner, so more in 2015 than we previously expected.
Thank you.
Okay. Our last question comes from Mr. Robert Redin from ABG. Please go again.
Hi, hi. I was wondering about those imports into the U.S., pressuring your margins there. Is there any? Do you have any sort of outlook for that? Will that problem just continue? Because, I mean, plate prices in the U.S., although they've fallen a lot, they're still way higher than they are in the rest of the world in U.S. dollars. So, are there any sort of pending trade cases being talked about in the industry, or, what's your outlook for that import pressure?
It's, I think it's very hard to give a clear answer on that. Of course, there is discussions of trade cases in North America, where the Asian import, how that will continue, I can't give you a clear answer on that. I mean, we were in Q4 on very high levels, and then there were trade cases against Russian coils and coiled plate, and what will happen in... We are not very active in those discussions.
Okay. And I was also thinking about FX. So we have this 2014 update, but and then after, basically after that, then the US dollar has strengthened versus SEK by a lot, but also in year-on-year terms, you have iron ore prices and coal, which is a lot of the US dollar outflow being down a lot. So would you venture to sort of help us out with maybe some type of net FX impact in 2015 given current FX rates?
Now-
On EBIT?
No, we don't give that guidance either, but we have in the report, we have a sensitivity analysis, depending on how the Swedish krona develops against a basket of currencies, basically our currencies that we showed here today. But, you know, as I said before, it obviously depends which currency is becoming stronger and weaker.
Okay, but the net outflow, you said, was SEK 8 billion in 2014, then the US dollar strengthened by 20%-25%. So that net outflow of all three equals to 10-something or 10-ish.
You could argue that way. You can also argue that part of it, we still have hedged for the next year, and we also, it also depends on the profitability we have in the U.S. business. So, it's not that, and at the same time, the raw material prices have come down, which means we will buy them for less U.S. dollars. So it's a bit too easy to only add a 20%. There's a lot of other variables in that equation.
Okay. I was just thinking if, if you could have helped us out something, because it's a big, big mover, but okay, cool. Just a final question. Tax rate, do you have any guidance for that for 2015?
In general, no. We have the 22% tax in Sweden, it's 20% in Finland, and, our tax, actual tax rate depends a lot on where we actually earn money. So, I would say it's, we try to say, well, around 20%, but, depending on where we earn the money.
Okay, cool. Thanks. That was my question.
Okay, I think we have one additional question here in the audience.
Anders Gjemfors again. Coming back to the galvanizing line that you are going to close in Borlänge. From the top of my head, I think there are... You produce some 300,000 tons of galvanized, and that is about half the volume from the cold rolling line, roughly. Does that mean that you are moving the cold rolling as such from Borlänge to Raahe as well, or you will stay with the cold rolling in Borlänge-
Yes.
and only transfer the galvanizing?
Color coating.
Ah, of course. Yeah. Okay. Then the question is, what about the capacity for galvanizing in Raahe? Do you have to invest a lot of money or-
No.
You have that surplus of capacity already?
Yes.
No, no major investments. Okay, thank you.
Okay. I don't think we have any questions online now. So then, I think we're quitting for today. Thank you all for participating.
Thank you.
See you next quarter.