Good morning, and welcome to SSAB's fourth quarter and year-end results presentation. My name is Maria Långberg. I am responsible for corporate communications in SSAB. Today, we will listen to a presentation by our CEO and President, Martin Lindqvist, and CFO, Håkan Folin. After the presentation, there will be time for questions and answers, and I will be back at that time. And now I would like to hand over to you, Martin.
Thank you, Maria. Good morning, and welcome. First, a short recap of the announcement we did two weeks ago, or a little bit more than two weeks ago. SSAB acquiring Rautaruukki and the reasons behind the combination. This is about, as we said at that time, value creation through hard cost synergies and increased flexibility and cost effectiveness. The synergies are expected to be up to SEK 1.4 billion, and I think or I might have been a bit unclear last time, because the synergies are SEK 1 billion in the base case, in every case. Then in periods of low market demand, there is another SEK 350 million.
I think most of you got it, but, I think I missed or was a bit unclear when I answered the question at the end of the Q&A session. So, but this is how it is. SEK 1.4 billion in a market demand like this, and in very good markets, the synergies are SEK 1 billion. The, offer is recommended by both board of directors and supported by the main shareholders. And to give you just, some kind of, time plan or, milestones before closing. For Rautaruukki shareholders, then the tender offer document will be presented at the end of Q1, and the acceptance period will start shortly thereafter. And for SSAB's shareholder, the approval of the rights issues, at the SSAB's AGM will be at the ninth of April.
Of course, the transaction is subject to regulatory competition approval in the European Union, in Ukraine, in Turkey, and maybe in Belarus. The pre-notification period with the European Union has started, and closing of the transaction is expected to take place before summer. With that short recap, I would like to come into our Q4 result and the result for 2013. 2013 was a challenging year for the steel industry and a challenging year for SSAB. It was characterized by weak demand and low prices, and I would say also weak demand, especially within the niche areas, the QNT areas, the areas where we are active, the areas where you move and lift material. The shipments compared to 2012 increased by 6%, however, with negative mix effects, lower content of QNT and higher content of standard products.
For the full year, we lost on EBIT level SEK 1.1 billion. We continued to generate positive cash flow, and the operating cash flow for the full year was SEK 2 billion. And when we look, when we leave 2013 and look into 2014, there are signs of improvement, and I will come back to that. Q4, a loss of SEK 282 million on EBIT, an improvement compared to Q3 and an improvement compared to Q4 last year. And the main reason for that was higher volumes. Q4 was also negatively affected by lower prices and negative mix effects. We continued to generate a positive cash flow, both operationally, but also net cash flow. And the, what we saw during Q4 was a positive outlook for, for the US steel market. We saw a beginning of a recovery.
We saw that in the order intake for during Q4, latter part of Q4. We saw some signs, positive signs of improvements from very low levels in Europe and some indications of a better steel market in Asia. We had an EBITDA per ton delivered steel in Q3 that was more or less zero, and now 250 SEK per ton in Q4. If you look at our key customer segments, and these are the important segments for us, and if we look at the trend in Q4 versus Q3, I would say fairly flat, with the exception of the U.S. energy segment, that started to pick up late Q3 and was picking up in Q4.
If we look at the sequential outlook, Q1 versus Q4, I would say that we see more or less the same trends in heavy transport, not getting worse. Automotive, picking up. Construction machinery on the same level. Mining, in our segments, bottomed out and somewhat stronger market compared to Q4 in energy. And we see also, for the first time in a long period, that service centers still are cautious, of course, but they are buying at slightly higher levels than we have seen during 2013, and the inventories in the service center system is not on the high side, and that goes for inventories in the full supply chain. They are normal or below normal. Market environment. World Steel Association expect the global steel production to have increased with 3% in 2013.
An increase of 8% in China, but a decrease in European Union and in North America with 2%. The European strip prices declined in the beginning of Q4, but strip prices strengthened slightly during the latter part or the end of the fourth quarter and into 2014. Spot plate prices started to move up in Q4 on the back of several price announcements, and I would say led by SSAB then, where the other plate producers followed. And as said, inventory levels on a normal or low level. And in China, many customers continue to have high inventory-
Impact our Q1 result. Okay.
So summing up, in Europe, the demand situation is expecting to improve slightly from low levels. The positive economic trend in North America is expected to continue to have a positive impact on demand. We have increased prices for standard plates. We have seen also higher scrap prices, partly offsetting that. We will have a maintenance stop, a planned ordinary maintenance stop at the end of Q1, beginning of Q2. The effect of that over the two quarters will be SEK 150 million negative. The inventory levels in Europe and have slightly moved up, or are fairly low. In the U.S., have slightly moved up, but they are still on decent levels, and we don't expect any major restocking or destocking during the quarter. The Asian market for our products continue to be challenging, but moving, if anything, in the right directions.
The shipments for Q1 will be in line or expected to be in line with what we saw in Q4. If that was the summary, then we open up, I guess, for questions and answers.
Yeah.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad now.
Okay, and I would like you all to state your name and company, as well as stating one question at a time. So let's start to see if there are some questions here in the room. Yes, please.
Thank you for taking my question. It's Julian Beer from SEB Equities. On the issue of input costs, a weak mix and price development, obviously leading to the Q4 profit miss compared to consensus. However, we were surprised to hear that your variable costs were also lower sequentially. For scrap, did you buy more scrap in the U.S. earlier than usual, anticipating the later in the quarter price rises? And, in Europe, in terms of the cost of iron ore and coke attaching to your steel sales in the quarter, how much lower was that sequentially?
I think on a P&L basis for Europe, that was... If you combine the two, iron ore and coke, there was no major difference between the quarters. And for scrap, a little bit that, but not much. I would say, what we, the reason why we saw lower variable COGS this quarter was that, we were actually running the mills, especially in the U.S., at the very good efficiency levels.
We have seen an improvement on yields and productivity in the mills even as part of the program. We were expecting, and the mills to come up at better yield levels, and we have seen that gradually during Q4.
The variable improvement wasn't really to do with raw materials, it was to do with-
No
... other parties?
Sequentially, it was, it was not raw material.
When we look at the Americas plate market, you're talking about $120 a short ton price hike since September 2013. You said they're going to be realized gradually. How much would you expect to see in Q1, and then Q2?
The first increase was active from first of December on new volumes, and then we typically have quarterly volumes, so a big part of it in Q1.
And if-
Yeah.
Okay, that's understood. So I think it was, if I remember correctly, it was a $50, sorry, a $70 per ton increase in the first round.
It was 7-
October, yeah.
Yeah.
Yeah.
In October, November, it was 70, and an additional 30-
And then we have a mix of, call it, contract prices or yeah, and quarterly prices, and then some half-year prices, so there will always be a mix.
Okay. And, you, you say that scrap prices rose during the winter, but I think we hear this morning that scrap prices maybe fell on the spot market $30 per short ton last week, and that lack of buying from Turkey in particular seems to be pressuring the scrap merchants. What's your outlook for scrap prices over the next three, six months?
It's a good question. We don't... Of course, we have an idea, but, but what we see typically is scrap prices moving up during the winter season because of, of, harder to collect it. With the weather, this year, with, with very cold weather in Midwest and also cold weather, as said, with even snow down in, in, in, in South, southern U.S., scrap prices have moved up a little bit more than normal. And that typically levels off when, when, when, when the bad weather goes away or when the, the weather normalizes, so to say. So what we are expecting is, scrap prices to come down from this seasonally higher levels in, in, during, I would say, year-end or beginning of January.
And then finally from me, how do you see plate price development for the rest of the year? Is there scope for even further increases, and how long are you booked out for?
We are booked out for a bit more than Q1, so.
Prospect to further price hikes?
We will come back to that if, if that's the case.
Okay. But, if you'd say up, sidewards, down, what would your best guess be?
I wouldn't say anything about that.
Thank you.
... Additional questions in the room? Okay, let's take some questions over the phones. Operator, please.
We have a first question from Mr. Alexander Haissl, Morgan Stanley.
Yes, good morning. It's Alexander Haissl, Morgan Stanley. My first question is on APAC, and the strategy outside Europe. I mean, clearly, performance continues to remain weak. Are you considering a change in strategy, meaning try to get joint ventures with local partners to bring more volumes into Asia, Africa, and Middle East? Is this an option for you, or you still try it on an organic basis?
But we have invested in capabilities. We can produce both in Sweden and in U.S. to serve the high-end market. If you would decide to start to serve, call it lower segments or mid quality segments, that we can't do from Europe or U.S. due to the cost position. So we will continue to focus the high-end market. That's our strategy.
I mean, what is the problem in this? I mean, clearly, there is demand for your product in this market, and it, it seems... Is it more the market approach, that, that you're doing something wrong here, or what, what's the main reason for the rather disappointing performance here?
The reason for volumes going down, that these very high-end products are mainly consumed by the big producers that are exporting products out of China, the big OEMs with an international market presence, and to a lesser extent, for call it, internal consumption. We expect that to continue, or we expect that to gradually change, and big reduce their production of call it, the big mobile cranes. I mean, we have some other important markets like Russia and so on, but the biggest market in emerging markets for us is Brazil.
Mm.
That has been a, call it, a big burden during 2013.
Okay. And then I have a question for you, maybe more for you, Håkan. I think this was touched upon a little bit earlier, but you've now had sort of a working capital declines throughout 2013. If we have a sort of volume-driven recovery or increasing volumes 2014, should we expect that working capital to reverse?
What you would expect probably is that accounts receivable should go up if we start selling more. On the other hand, we should get more accounts payable then as well. We don't see that. For inventories, we have done a fairly decent job, but there's definitely more for us to do still. So I don't expect that if we see some improvement in volumes, we should not see a very big improvement in, sorry, big increase in inventory. We should be able to manage that reasonably well on current levels.
Okay, so a lot of the declines that we've seen, 2013, because I think it's accounted for something like 17%-70% of operating cash flow. A lot of that sort of decline is structural, I'd say.
I would say so, especially-
Yeah.
On the inventory side.
Okay. Well, thank you very much. Those were all my questions.
Thank you. Are there any questions here in the room? No. Yes, one question.
Thank you. It's Julian Beer here again. Your surprisingly weak steel price trend for ordinary steel in EMEA in Q4 seems to relate to mix within that broad grade categorization. Can you give us any tips at all as to how that mix could develop during 2014?
It's the mix within standard strip is mainly the volumes of pre-painted material that have a fairly big effect. And typically, end of Q4 and beginning of Q1 is the weakest part of the year for pre-painted material, and then it gradually improves, and the best part being Q2 and Q3. I would say especially Q3.
Okay, thanks for that. In terms of balance sheet, you mentioned that post Ruukki merger, assuming that goes through, there'll be need for further refinancing. Does Ruukki have refinancing needs this year? And if so, what is their strategy to deal with that? Will they wait to see what happens with the deal, or are they going to go ahead now as well?
I guess you need to ask them about that.
Okay, so you're not coordinating those issues at the moment?
No, we have to work as two separate companies until closing.
Okay, fine. And then finally, QNT demand. Your... There's been some suggestion by some of the heavy equipment manufacturers that their destocking has stopped, which should mean a sequential improvement in their own production rates. Are you seeing any evidence of that in terms of what they're asking you to deliver them?
No, but I mean, we live with that market, and you probably saw the CAT report and the destocking during 2013 in their inventories and in their dealers' inventories. That was quite massive. And if, when the destocking is over, and they start to produce and sell new equipment, that will be seen in our order books as well, for sure.
But you haven't seen it yet?
It will be seen when it happens.
Thank you.
... Okay, let's take some questions by phone.
The next question is from Mr. Seth Rosenfeld, Jefferies.
Morning, this is Seth Rosenfeld at Jefferies. Two questions kind of going back to the proposed merger with Ruukki. First, I was wondering if you can give a bit more color on potential for asset optimization following that merger, if you're looking at plans for potentially asset shutdowns, if you still have that sort of flexibility from a governmental perspective, or only idling some of those blast furnaces. If only idling, what do you expect to be the cost benefit given the continued fixed cost burden expected? And the second question, as part of the merger, you've announced a combination of your building and construction units. I was wondering what the timeline is for that combination and integration. And then thereafter, do you consider these businesses to be core to the long-term strategy of SSAB, or will they potentially be considered for disposal?
Thank you.
I think I still remember the first question, and we need to take the second one again. But I mean, we will. We haven't been very vocal about exactly how to run the combined company. We have said that we will specialize lines. We will also. We are seeing redundancies, and we will come back to that after closing. We will have a capital markets day and discuss more in depth exactly what to do and how to do it. We are still two separate company, so we have started the process. So I mean, we can't do anything until closing. So that's the simple answer. But of course we have plans and ideas how to do it.
And then the second question, I'm not sure that I understood it and remember it.
Sorry, just to confirm, can you confirm if you have flexibility to shut down any of those blast furnaces, or in order to get governmental approval for this merger, have you had to essentially give up that flexibility moving forward?
Uh, no.
Okay. And the second question was, with regards to the merger, you've announced a combination of the building and construction units. I was wondering what the timeline you think after a merger would be for an integration of those businesses? And then in the longer term, looking at your mix between niche steels and some of these lower quality construction steels, do you think that the construction units remain core to the long-term strategy for SSAB, or are they potential disposal targets?
There are some integration within, if this merger goes through, within the construction business, and that, in that case, that will be done. What will be core and non-core going forward, we need to come back to, and we will do that after closing.
Okay. Thank you.
Okay, next, question, please.
Thank you. The next question is from Jeff Large, Macquarie.
Yeah. Hi, good morning. It's Jeff Large from Macquarie. My first question is just going back to U.S. plate pricing and your confidence about achieving those price hikes. I mean, obviously, we're into 1Q, and it sounds like your book is, I guess, you're booked out, you know, into early 2Q, I think you said. But you know, given your guidance that you expect those price hikes to be implemented, you know, in affecting 1Q and 2Q, I mean, what degree of confidence can you have on those 2Q implementations or realizations if you do have scrap pricing, you know, coming under pressure? And, you know, probably on top of that, I'm sure we're bound to see a pickup in import volume.
Just kind of, yeah, if you could talk a little bit more about your confidence on that 2Q price realization?
Well, first of all, with this, price increases, for plate, they are from very low levels, and we typically measure margins over scrap, and they are still on low levels. They are, far from normal. So, that would, in any case, speak for, that it will stick. And, then, I mean, we have introduced the, price increases, and the others have followed, and, we have an order book. So, we are, with the visibility, we have, confident. Then what will happen with imports and, depends on a lot of things. It depends on, currencies and so on. So I mean, to speculate, late into Q2, regarding imports and so on, it's, for me, impossible.
But as things stand, it sounds like you have a high degree of confidence that the price hikes will stick. And then, I mean, given that you guys churn scrap pretty quickly at your U.S. operations, that, I mean, theoretically could set up a pretty good margin picture for 2Q at your U.S. business.
As said, I mean, the margins are still below normal, and we have said, and I'm very confident that margins will normalize. I mean, the margins we saw in Q3 and Q4 over scrap was, I mean. And I would say for the full 2013 were extremely low.
Okay. Just a second question-
We are not-
Oh, go ahead.
... right now at what we expect, what we consider normalized margins.
Right. Right. Just a second question on raw materials, and specifically the iron ore contract with LKAB. You know, we have seen—Obviously, we've seen, like, benchmark prices moving down for iron ore, but we've also seen, you know, pellet premiums moving higher. And this maybe is more just a question of, you know, understanding how the contract works. Is there a risk that, say, your iron ore price contract doesn't fall as much as, you know, maybe potentially we could see with the benchmark price, given that, you know, pellet premiums have been driven up by stronger demand out of China?
I mean, I guess the question is really, does that contract, are you negotiating not only like a reference price with LKAB for iron ore, but also, you know, a separate pellet premium?
We have a separate pellet premium in the contract with LKAB, yes.
... Okay, so there are, there are several different moving parts, I suppose, with that contract?
Or at least two then.
Yeah, at least two. Okay. All right, thanks.
Okay. Next question by phone.
The next question is from Mr. Johan Sjöberg, Carnegie.
Yes, hello. Okay, just coming back to the synergies, and just talking about the SEK 1.4 billion, and, if I understand it, I mean, the weaker demand we have, the higher synergies we will see. Is that fair, too?
Yeah. So in a demand like today, then the synergies would be SEK 1.4. But when we are running the production full speed, which we don't do today, the synergies will be SEK 1 billion.
Okay. Also looking just coming back to the heavy plate price increases in North America, I mean, I would... Yes, I agree that they come from very low levels. So on the other hand, you're seeing quite a short pickup in scrap prices during the fourth quarter, and now as we enter a more seasonal calmer period where you see scrap prices falling back, how worried are you about seeing heavy plate prices also coming down here?
It will depend on underlying demand. And when I look at the underlying demand, the quality recovery, especially in some segments that are very important for us within standard plates, it looks promising. But then you never know. I mean, if we all of a sudden would see a stop of consumption of standard plates or a much lower consumption of standard plates in other parts of the world, you will see secondary effects, as we saw a year ago with high import levels of standard plates from Korea. And then if that happens, it could happen a quarter or two, but over time, it's impossible for them to compete with standard material produced in Asia and shipped to U.S. And then you will see some other effects.
Then you will see discussions, as we have seen in Canada, about anti-dumping things and so on. So, I mean, to think about-
The regulators will be looking into the local market area. As I estimate that your market share in the Nordic region is 40%-60% in most of the kind of bulk material, standard grades, and also, what is the kind of market share of you and Ruukki combined in the special grades in Europe?
I mean, we look up on this. First of all, we have now started the process with the pre-notification process, and that will take some time. And secondly, we regard this as a global, highly competitive market. So I think that the question is, as we see it, irrelevant.
Also in the bulk rates, it's a global market?
Not really. I mean, maybe not a global market, but definitely a regional market. Definitely.
Okay. Thank you very much.
Okay, now we have one final question by phone, so please take that question.
The last question is from Mr. Alexander Haissl, Morgan Stanley.
Yeah, hello. Sorry, one last question on, on working capital, and, what is really the potential after the combination, looking on your working capital, the sales and rotation days for the combined entity, it still seems quite high compared to best in class. Are we talking about SEK 2 billion-SEK 3 billion that you can structurally take out of the company?
I mean, we. There is, we haven't been specific about the potential, but, I mean, we have due to inventories in the same areas and due to supply chain and things, we see, call it a substantial potential.
Okay. Thank you.
Okay. We have also received a few questions over the web that we will take now. Please state the first question.
Okay, the first question is from Mr. Wojciech Głazkowski from the U.K., and he has actually stated two questions, so I'll just take them one by one. The first one is on the finished steel price development. Have you seen any signs of recovery in Q1, and what is your expectation looking into Q2, particularly for commodity plate?
I mean, what, Europe? Which area was it? Was it Europe or-
He doesn't say. He's from the U.K., but he doesn't say anything else.
I mean, but as said many times, in U.S., we have seen a clear improvement in standard steel prices. In Europe, we saw during Q4 prices going down, and the momentum into Q1 is, I mean, at least for spot prices, positive.
His second question is, you mentioned heavy plate price recovery in the U.S. What about Europe? What outlook do you have for Q1 and Q2?
As I said, we haven't been specific, and we don't sell standard heavy plate in Europe. That is a pure for us North American market.
And then we have two questions from Mr. Hiten Davda, also from the U.K. I'll take them one by one. First one, a long question: Can you provide some more information regarding the EU approval process for the transaction, specifically in relation to distribution of carbon steels? The EC has historically viewed the market as regional, in which case, Ruukki and SSAB would be dominant. How do you expect to overcome this?
With all respect, but, both Ruukki and SSAB are very small, companies, and even if it would be viewed as a European market, our combined market share would be extremely low, much lower than 5%. So, that is not, at least what I think, dominant.
Then the final question: Likewise, in niche, specialty steels, how comfortable are you that the EC will view the market as EU-wide or regional? Are there any areas of focus for your pre-notification discussions with the regulators?
When I said the regional, I meant the EU market. I think that is, I mean, the smallest market you can look at, but, I mean, for niche products, it's truly a global market. We are competing and selling on a global market, and, yeah, together with all the other producers.
Okay, thank you. That was the last, both written and phone question.
Okay, thank you. Any final questions from the audience here in the room? No? Okay. By that, we would like to thank you for coming.