Good morning! Welcome to the presentation of the SSAB Q3 report. With us today here is our President and CEO, Martin Lindqvist, and also CFO, Håkan Folin. I am Per Hillström, head of IR at SSAB. The agenda is as follows: we start with Martin here commenting on Q3 in short, and performance by division. Håkan will cover financials, and then Martin comes back, a few words on the outlook, and then we close with questions, both here in Stockholm from the audience, and also from the phone lines. Instruction will be given later on. Okay, so by that, please, Martin, take the stage.
Thank you, Per. So good morning. The super summary of the quarter, I would say that demand in Europe, good, on good levels. In North America for heavy plate, very strong. Demand for special steels, also very strong. I think we saw the effects, the lag in the P&L in the U.S. We see now good volumes, good margins over scrap, strong market. And as you might know, we have also gone out earlier this week and introduced another price increase from first of January, with $40 per ton for standard plate in North America. I think we are on our way to strengthen the balance sheet, so we had a decent cash flow, a decent net cash flow. We ended the quarter with a 17% net gearing.
We will continue to generate decent cash flow and gradually continue to strengthen the balance sheet. We had some production problems during Q3. We had the fire in Hämeenlinna end of Q2 that affected Q3. We also had problems with the blast furnace down in Oxelösund, where the bricks were worn out much earlier than anyone could have guessed, which caused us production an outage of two weeks. We had some other production-related problems. We had problems with lightning in Borlänge and so on, but I will come back to that. Given what we see in the market and what we look and when it comes to Q4, we have a fairly good view, longer term than the next quarter or Q4.
We see very strong demand for Q2, and we have altogether in SSAB, nine quenching lines. We have four in Oxelösund, one in Borlänge, two in Raahe, and two in Mobile. And when we invested in Mobile, in the quenching, the second quenching line, what we internally call QL6, we decided to do it in phases. And what we are now doing is doing the second phase of that investment, and that is really taking away bottlenecks, so we can go from capacity in Mobile, 300,000 tons Q&T, up to 400,000 tons of Q&T. So it is volume related, not total volume, but we will continue to shift the mix. So less standard plate and more Q&T, and that is purely market driven.
We are today full in our quenching lines, and when we look forward, we will need this, and this will be up and running 2021. We will still meet the targets we have for 2020 when it comes to Q&T, and we are ahead of those targets, but after that, we need this as well. So 50%, roughly, is volume, and 50% is cost efficiency in this investment. And it is a strategic investment, but the payback time from decision, and the decision was taken late last night, is less than 4 years. So we will spend some money, and Håkan will come back to that, 2019, 2020, and beginning of 2021. And then after this line is commissioned, the payback time will be very short.
You see the graph, I mean, we are driving and leading the global Q&T market, so this is a next natural step. It has nothing to do with trade barriers or anything. This is long-term demand and long-term interest of our products. Moving into Q3, U.S., as said, strong demand from both end users and distributors. Low inventories, spot prices stabilizing at high levels, and then moving up into Q1. Northern Europe, I would say good demand continued, normal seasonality. July is always slower in the Nordic region, and August, as you know, in continental Europe. Inventories in balance, normal imports, spot prices rose somewhat during the quarter. So fairly good market picture, and that is what we expect also, a fairly okay market moving into Q4, but I will come back to that.
If you look at the segments, they are either strong or healthy at decent levels. Heavy transport, good demand in Europe, especially heavy truck. What we have seen in U.S., we have seen that rail cars and barges has started to move up again from very low levels. Automotive, of course, some hesitation in mature markets, but we also see the underlying growth in advanced high-strength steels. And as you know, we are only in that small segment, the high cold-rolled martensitic steels up to 200 megapascal, and that is a structural growth that we see. Construction machinery, at high levels, both in Europe and U.S. Material handling, also quite okay. Energy, solid demand from wind energy... and, higher activity or high activity in oil and gas in U.S. Construction, yes, the big infrastructure projects in Europe, positive.
We see somewhat uncertainty, you could say, in residentials in, in Scandinavia, but that is a segment where we are less exposed to. So housing is not big at all, even for Ruukki Construction. Then service centers, relatively low inventories, some hesitation as always, both in U.S. and Europe for, for year-end planning. But as said, underlying demand good, with maybe the exception of Turkey and Middle East for, for Q&T, where there is some hesitation, but underlying demand good. If you look at the key figures, we had an EBIT of SEK 1.6 billion. It's up SEK 511 million compared to Q3. We had higher prices, met by higher raw materials costs, of course, but better margins. And we also suffered from production disruptions, both in Europe and partly also in Oxelösund.
Decent operating cash flow and a net gearing of 17%, and compared to 27 a year ago and 20 at the end of Q2. So we are in that pace of strengthening the balance sheet. If you look at the divisions, Special Steels, as said, strong demand in all markets, with the exception of Turkey and Middle East. EBIT of SEK 536 million, higher prices or higher margins, and then the unplanned outage or the stoppage of the blast furnace in Oxelösund that costed us SEK 100 million during Q3. Shipments up compared to Q3, but seasonally, of course, lower, as we always see compared to Q2. Europe, good demand, underlying demand, EBIT down compared to Q3. We had higher prices and also higher raw materials, but we suffered from these production disruptions that led to lower shipments.
We had problems with the new crane in Luleå that was installed in the hot end. We were not able to get that up and running according to plans. We lost production up in Luleå. We had problem with the shear, a new shear, in the continuous annealing line, a very important bottleneck for us. We lost production there in Borlänge. We had problems with lightning strikes and so on, forest fires during Q3, and possibilities to shipment here. So we lost volumes, and I think the market is not worse than it were here, so we lost definitely some volumes in Europe, and that affected the result. Americas, strong demand continued. Spot plate prices at a very good level. Margins over scrap at good levels. EBIT up SEK 474 million compared to Q3, and that is due to higher margins.
Shipments up slightly compared to Q2 and Q3 last year. If you look at Tibnor, I would say stable demand in the Nordic region. Sales increased, but the volumes were fairly the same compared to Q3 last year. Lower than Q2, but that is seasonality. So I would say an okay quarter in Tibnor. If we take a look at Ruukki Construction, seasonally good demand, as always, in Q3, but in Russia, the demand weakened also in Q3. Sales were up, EBIT on the same level. The core parts of SSAB, or Ruukki Construction for SSAB, Residential, Roofing, and Components, did good. Less so in Russia and less so in Building Systems. Building Systems was a drop profit-wise in Q3. We knew that because we have the order book. Looking forward, we have a much stronger order book.
And as we wrote in the report, we have signed a contract to sell this during Q4, and Håkan will come back to these effects in his presentation. So I would say Roofing, Components, quite okay. Russia, not so good. Building Systems, a dip in Q3.
Thank you. Good morning, everyone. I will, as usual, go through some of the financials, and given what Martin presented earlier, I will spend a little bit more time talking about our investment levels, both historic and also what we plan for going forward. Starting with an overview and comparing especially Q3 this year with Q3 last year. We then see a sales improvement of 18% compared to Q3 last year, driven by clearly higher prices and also FX, given the weaker Swedish krona we have. On EBITDA level, we see an increase compared to last year with 27%, and we are now at an EBITDA margin of about 13%.
If we look down here on EBITDA per ton delivered steel, we were actually above SEK 1,500 per ton delivered steel, which is the highest level that we've been to, well, during the 3 years you see on the charts, but definitely since the merger between SSAB and Ruukki. The only area then where we actually did not perform better than in Q3 last year is in terms of shipments, where Americas was up slightly, Special Steel was up as much as 9%, but Europe clearly down. Given the size of the European division, on total level, we were slightly lower in terms of shipments.
If we go into the details then and zoom in on the EBIT between Q3 this year and last year, we see that we improved from slightly below 1,100, with SEK 500 million, up to 1,600. The main driver for this is the increased prices. Americas, of course, playing a big portion here, but also Special Steel, we have seen a definitely better pricing for us than we saw one year ago. Also, Europe had slightly higher prices. So SEK 1.5 billion in the EBIT improvement coming from prices. Slightly down on volumes, just like I explained last year, it varies between the divisions, but all in all, SEK 100 million negative impact for the group.
And then on cost side, on variable cost, almost SEK 1 billion negative impact, and here, basically all the main raw material, iron ore, coking coal, and scrap, are up compared to last year. And this impact is spread fairly evenly between the three steel divisions. Somewhat higher fixed cost year-over-year, driven by general cost increase. We have a very high activity level in the mill, and when we have, excuse me, when we have some of these production stabilities, as Martin, or instabilities, as Martin mentioned, that also tend to drive a little bit more fixed cost when we need to do a little bit more maintenance, and when we cannot run as efficient as we want. On the FX side, we have a tailwind here of SEK 250 million. That's coming basically from the weaker Swedish krona.
So when we sell in dollar and in euro, and we translate it back, we get this positive impact. On unabsorption, we were running basically at the same level Q3 this year as last year. We're running at lower level in Europe, but actually at a higher level in Special Steel, given that last year we had the yearly maintenance outage in Oxelösund in Q3. This year, we will have it in Q4 instead. All in all, then, an improvement of SEK 500 million. If we instead compare to previous quarter, we are roughly on the same level, 1,630 versus 1,600. Also here, we see an improvement on the price side, close to SEK 700 million, and when we only compare Q3 to Q2, this is very much extent driven by SSAB Americas.
Negative volume coming both from Europe, as we talked about before, but also, compared to last quarter, also Special Steels had somewhat lower volumes, also impacted by the European slowdown. Raw material side, or variable cost, not a huge difference compared to last quarter. Fixed cost, clearly positive, and this is the usual yearly lower fixed cost level we have, where we have the dissolvement of vacation reserves in Nordic countries, and overall in Q3, we tend to have a lower activity level in terms of spending fixed cost. FX, somewhat of a headwind, close to SEK 100 million, and then unabsorption, given the maintenance outage, in especially SSAB Europe, we were running at the lower level in Q3 versus Q2. Then, as Martin mentioned, and we have it down here in a small footnote, we are excluding items affecting comparability.
It's actually only one item, and it is this divestment of Ruukki Construction in Russia of SEK 213 million. The vast majority of this is FX impact. So every month, we revalue the shares in the different subsidiaries we have. That's not taking over the P&L. It's impacting the equity, but it's coming through the other comprehensive income. But when we divest the company, then we have to flush it through the P&L as well. So out of this SEK 230 million, the vast majority has already impacted equity, but now has to go through the P&L, and obviously, there's no cash flow impact. So we have classified this as an item affecting comparability. If we then move into the cash flow, operating cash flow is strong, SEK 1.9 billion.
It's SEK 300 million higher than what we had in Q3 last year, and we also have a net cash flow in the quarter of SEK 1.7 billion, helping us to continue to reduce our net gearing. If we look at some of the details where this cash flow is coming from, EBITDA of SEK 2,350 million, some build-up of working capital, although when we look at working capital over sales, and we look at it rolling twelve, we continue to reduce that, which has been, as we talked about before, one of our key priorities. We spent around SEK 500 million on maintenance CapEx. This other item here is what I just talked about, the Ruukki Construction, which is not cash flow impacting them. Operating cash flow, SEK 1.9 billion.
Then we have, in total, financial items, taxes, and strategic CapEx over around SEK 200 million, leading us - oh, sorry, SEK 250 million, leading us down to the net cash flow of SEK 1.7 billion. We, we continue a bit on the cash flow side, and we look at the trend, the rolling 12-month trend of operating cash flow. And we have, we have looked at this one a few times before, and we have, since a year back, we have basically established a new level of being at, at or above SEK 6 billion in operating cash flow. Now, we were actually even at seven billion when you look at the latest rolling 12 months. And our clear ambition and our clear belief is that we will continue to generate very solid cash flow going forward as well.
We talked about some issues we had in this quarter. We see a potential to further improve our profitability going forward. We are fairly well invested. I will come back to that shortly, because we will increase our investment level somewhat. We're working on reducing working capital over sale. That is developing according to plan. We think we still can do more. Given that we are lowering our net debt continuously, we will, and we see that already now, that we have lower interest cost. And then we will have a tax rate of around 20%. And adding all this up, we are confident that we will continue to generate very solid cash flows going forward as well....
If I then dive into a little bit more on the investment side, and what we have here is a chart from 2008 up until rolling twelve months now, the investment level in SSAB. Before 2014, we have also added back the Ruukki figures to make it comparable. What we see when we take a 10-year average is that we've been spending around SEK 2.7 billion in CapEx, which is very much in line with our depreciation level. In the early years here, you saw that we had a significantly higher CapEx, driven by that we were making relinings of the two blast furnaces in Raahe, Oxelösund as well.
And we also spent money on our strategic growth program here, the QL6 investment in Mobile, where we took the first big step, and now we're adding some smaller to debottleneck it a bit. So we were at even, you know, some years at close to SEK 5 billion in CapEx combined. A bit lower than for a few years, a little higher in 2015, when we did the Luleå relining, and then a little bit lower the last few years as well. But 2016-2018, we haven't done any relining, we haven't spent so much on strategic CapEx, but we have continued to do the normal maintenance CapEx required in order to give the right prerequisites for operations to run production.
Going forward then, what we have said before is that we will have a CapEx level of around SEK 2 billion, considering what we presented today in terms of the Mobile investment. We have also previously announced that we will, in order to increase efficiency in our tubular operations, we will spend around SEK 300 million on that. We will increase our investment level in the coming few years from the SEK 2 billion level to more somewhere around SEK 2.5 billion Swedish krona. However, given what I just showed before on the cash flow, even though we will increase investment somewhat, we will still continue to lower our net debt in the coming years as well. A few words then on the balance sheet side, looking at our maturity and our debt, net debt. We, as said, we decreased our net debt.
We are now down at SEK 10.2 billion. We also decreased the net gearing down to 17%. It's down 10 percentage points. If we look one year back, it's down 3 percentage points compared to the end of Q2. Maturity-wise, we have on average 6.1 years maturity profile. And if you look at what we have remaining in 2018, 2019, and 2020, that is less than SEK 7 billion then for the coming nine quarters, which means that we have a very, what's the word to use? A very comfortable maturity profile going forward. We have done that during Q3, we'll do it going forward as well, either repay or try to move the maturities out in time to clean, clean up as much as possible, basically. But this is very much under control right now.
So I will not spend more time on this, but I will move into raw material side instead. For iron ore and for coking coal in Q3, prices were very stable, I would say. Our purchase prices were slightly lower on iron ore side, 3%, 6% in dollars. They were basically stable on coking coal, slightly down in dollars, but really very much stable development in Q3. What we have seen now in the beginning of Q4 is that, especially on coking coal, but also in iron ore, spot prices have started moving upwards somewhat. On the coking coal side, we buy the majority in Q2 and in Q3, and then we have the winter stockage up in Luleå and in Raahe, so we don't buy that much in Q4.
So even if coking coal prices will increase somewhat, that will not have a big impact for us. In the U.S. then, where we buy spot, where we buy scrap, spot prices decreased in Q3. That's what you see on the chart. And our average purchase prices also decreased, and naturally, we're 8% lower in Q3 compared to Q4. Also here, and you see it on the chart, we have seen a little uptick now going into Q4, which is quite typically in the seasonal pattern in the U.S., where it gets harder to collect the scrap during the wintertime, and then we usually see somewhat higher prices. Martin?
So looking at the Q4 then. When we look at the steel divisions, we expect to continue to see strong demand for heavy plate in North America. We expect to see good demand in Europe, but as always, there will be a seasonal effect end of December. And the strength of that seasonal effect will, of course, partly depend on the price expectations going into Q1. So how much will steel service centers and distributors lower their inventories? That's still out for the jury to decide, but the inventory levels in the distribution or in the supply chains are not on a high level. If we look at high-strength steels, and especially Q&T, we expect the demand to continue to be strong.
If we look at prices, somewhat higher prices in Americas for Q4, somewhat higher prices in Special Steels, and I would say stable underlying prices in Europe. But you will also see that seasonal effect when we, prices will seasonally go down because we will sell less and less painted material, and, and so that will have an effect on the total prices. But the underlying prices, product to product, we expect to be stable during Q4. So to sum it up, I think Americas, good results, strong results, good volume growth, good prices for SSAB Special Steels.... positive outlook as well for Europe, but the normal seasonality, year-end seasonality. What we focus on right now is production stability, and production stability is very important also for safety. When we run a stable production, we also have much better safety figures.
We work a lot with preventive maintenance actions. We work a lot more focused on preventive maintenance. We do better risk analysis when it comes to RNC, CapEx, and so on. So there is a lot of things going on to improve this production stability. We also focus a lot short term, midterm, long term on our program for continuous improvements, SSAB One. So I think this will help us to come back to a better level when it comes to production stability, and right now, we are at that level. We will continue, even though we will increase investments a bit with this investment in Mobile over the coming years, we will continue to focus on debt reduction. And I think we should, regardless of business cycle, have a very strong balance sheet.
And that will also give us flexibility to invest or look at, look at opportunities without having any restrictions in the balance sheet. So we can take decisions like the investment in Mobile when we feel that the market is there and will be there long term, then we can afford it without thinking so much about it. So the strong balance sheet will give us opportunity to continue to develop this company. With that, Per, should we open up for questions?
Yes. Yes, please. And then we can start here from the floor in Stockholm, and please present you by name and company here. So we have a couple of questions already here, I think. So please, can we have a microphone?
Yes, Ola Södermark, Kepler Cheuvreux. Europe was a little bit weaker than the market had expected, and you explained it by the volumes were lower. Assuming that everything have been running as planned, and you indicated that could have seen volumes in the same range as last year, is that this also mean that the profitability had been roughly at the same level as last year, around SEK 1 billion on EBITDA?
Well, you know, higher volumes would give a higher profitability. Yes, I don't really see any market-related things that would have prevented us from having a good volume development. So it was... I mean, to put it bluntly, it was internally, production problems. I mean, the fire in Hämeenlinna and Oxelösund, of course, I mean, you can never foresee that. Lightning strikes, you can't do much about it, but also ramping up those two investments. The crane in Luleå, we could have done it better. The continuous annealing line, the flying shear, we could have been a bit smarter. So, so yes, we could have volume-wise in Europe, done better. We were not restricted by customers or markets. We were restricted by internal issues, so, and external issues not related to the market.
Giving what you're saying now, that means that the markets are highlighting that the markets are quite good in Europe, and when you are looking into Q1, I know that it's a little bit early, but what's your feeling about European markets?
The only feeling I have longer than Q4 is for special steel, and there we see the underlying drivers, and we have talked about them before, lightweighting, reducing weight, increasing payload, reducing life length, and so on. So there we see, I mean, and we look at different penetration grades, as we have discussed, QT contra or versus a standard plate. So there we see a long-term growth. Where the European market will end in Q1, that's too early to say.
Thank you.
But Q4, looking okay.
Yes, hello, Johannes Grunchenus here, Handelsbanken. So just want to hear your thoughts about, yeah, your exposure to automotive at the moment. I mean, we've seen a lot of evidence that is the market outlook for automotive in general is deteriorating, and the market is really, really concerned about this theme. So could you help us, again, remind us about the total exposure and how you see your niches in automotives, please?
To start with, we are focusing on a tiny part of the automotive steel market. I would say somewhere around or below, just below 5%. So we are only in these advanced cold-rolled martensitic steel grades for safety details. And in that market globally, I don't know, but I would guess that we have a market share of maybe 5% or something. So, I mean, we are. It is important for SSAB Europe, it is important for us, but we have very good products, these martensitic steels that are excellent for cold rolling. I mean, you have. We have talked about it before. You have the same weight as press hardness, an example, the same energy absorption, but at a different cost.
So we see structurally that the interest for these kind of advanced steel grades, due to lightweighting and safety and fuel efficiency and so on, is increasing. And also, when it comes to new types of cars, they are excellent for battery protection, as one example. So structurally, we see an increasing interest for these kind of advanced cold-rolled products. Then where the total automotive market will go, going forward, I don't have a clear, very clear view on that.
Sure, but it sounds that even if this market will be very bad in 2019, you will hold up quite well or shows stability in these niches.
Well, I think, I mean, automotive is obviously a huge market, but, but we are also there focusing like we do. I mean, plate is a huge market globally as well, but we are only in a small, small part of plate. So you can say there are some similarities in that aspect, if you compare advanced high-strength martensitic steels to Q&Ts. So, so there is underlying, there are underlying drivers for these type of, of products that, that doesn't necessarily have a very strong correlation to the total market, if you understand what I mean?
Sure. And then, I have a couple of questions on your new CapEx guidance. You're indicating now, rather SEK 2.5 billion compared to SEK 2 billion. Am I right that the change is all due to growth CapEx? And you also mentioned the U.S. investment gave us some help, how we should be thinking about the value creation. But, can you remind us about the investments in the tube business? How you look upon that one?
First of all, we are not at all expanding total volumes. What we are doing is continuously shifting the mix. So in Mobile, as an example, there will be no more volumes coming out, but it will be less standard plate and more Q&T. The investment in the tube factories is not about increasing volumes; it's about changing the supply setups. We are closing one factory, and we are consolidating factories. So we are closing the factory in, what's the name?
Lappoja.
Lappeenranta, and moving that production to Hämeenlinna, where we already have a tube factory, and that will save a lot of money for us in transport and so on. So we will have a bigger tube factory, or we will build out the tube factory in Hämeenlinna and close the one in Lappeenranta. So that is about cost efficiency, mainly about cost efficiency, partly about volumes.
Could you just remind us about the, that investment? I know there's been a separate press release, but remind us, and, and also how we should think about payback on that investment?
The investment was around SEK 300 million. If I recall correctly, I don't think we stated a payback on that one. It's a, it's a very good investment as well, so in line with what we presented earlier today.
That's helpful. Thank you.
Thank you very much. It's Christian Kopfer from Nordea. On Americas, firstly, you said that you saw lower scrap prices sequentially in the quarter, right? And I just made a very quick calculation, correct me if I'm wrong, but it seemed like operational cost came up somewhat, rather than came down. So did you see a full effect from scrap, lower scrap prices already, or should those be seen in Q4?
That goes fairly quickly, the scrap prices. It takes roughly one month, so I would say you have seen, you have seen most of it in Q3, yes. If prices continue now to go up, yes, beginning of October, or maybe October, we will still have the lower scrap prices. But if, as we saw on the chart, if, if the increase continues, then from November, December, we will have higher scrap prices.
But was it something else, then, that kept operational costs pretty much stable in Q3 versus Q2 in Americas, per ton?
No, nothing. I would say we have to look into that. I can look into that and come back to you, but nothing I can think of-
Okay, fine.
-immediately.
And then you mentioned some SEK 280 million in underabsorption costs. So was that more or less only Europe, or?
Yes, more or less. Partly special steel as well, given that we had this blast furnace we had to stop for two weeks. But, mostly Europe. And Europe, it was both. We had planned maintenance outage in Europe as well in Q3, which we guided for, of course. So it was both the planned one, and then also what Martin mentioned before, that we were not running production as we wanted to.
All right. So, so how much would you say was unexpected, under absorption cost? Approximately, was it 50% of this, or?
Something like that.
Okay, fine. Yeah, on the special steel, I mean, you are delivering very good on the volume side here, and are you close to being or taking into under consideration to open up the smallest blast furnaces, or?
That is not the matter of producing Q&T. We have—I mean, the bottlenecks in Q&T production is the QT lines, and that's why we took this decision. We will still, without this decision, we will still, because this will come on stream in 2021, we will still meet the 2020 targets, and we have also the possibility, production-wise, to overachieve the 2020 targets. But when we look ahead and see the possibilities in different markets, different segments, better penetration, discuss with customers, we think it is a very good idea to do this investment of SEK 1 billion in Oxelösund, in Mobile. And as said, it's not only. It is increasing volumes with 100,000 tons by opening up bottlenecks.
So 50% of the return is from increased volumes, but roughly 50% is also by decreased costs. So,
But then about the smaller blast furnace in Oxelösund, we will actually start that now during Q4. It's not because we're going to increase QT capacity or we want to increase total output, but during the summer of 2019, we will have a so-called midterm repair in the one of the blast furnaces in Raahe. Summer 2020, we will have a midterm repair on the other blast furnace in Raahe. And then, of course, we have to close them down for roughly two months, and we obviously lose a lot of slab production capacity during those months, so in June and July 2019 and 2020. And therefore, we will now, actually already in Q4, we will start the smaller blast furnace in Oxelösund, not to increase the total output, but in order to support when we are doing this midterm repair.
Keep the slab balance.
Then close it down again in Q1?
No, we will actually run it all the way until we have this, up until after 2020.
As you know, the two blast furnaces in Raahe are much bigger than the small one in Oxelösund.
Right.
So we will do this to keep the slab balance in and be able to continue to deliver, even though we have big outages. And I mean, in the old SSAB or in the old Ruukki, typically during a period like this, bought slabs externally.
... But now we can manage it-
Yeah.
Internally.
Just to clarify, on the vacation reserve, was that around SEK 300 million in the quarter?
Yes.
Okay. And then finally for me then, I mean, your financials looks better and better, and but share price has come down a lot. Are you considering to invest in your own company via share buybacks?
This is not an AGM, so
But would you con- I mean, if you just talk in a broader basis, not on AGM.
No, but I think what we are focusing on is running the company and strengthening the balance sheet. Then, the owners decide what we do with that balance sheet. But our focus is to continue to strengthen the balance sheet, and I think we should do regardless of business cycle, we should have a strong balance sheet, and we should be able to do things that we believe will develop this company long term, without any... I mean, we sat here a couple of years ago and had a completely different discussion, and I don't want to have that discussion with you guys again, even though it was a nice discussion. But,
Right.
So, yeah.
Thank you very much.
Okay. Then, thank you for that. Then we can move to the phone lines, so I will ask the operator now to please present the instructions.
Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. We have a first question from the line of Alain Gabriel of Morgan Stanley. Please go ahead. Your line is open.
Yes. Good morning, gentlemen. Two questions from my side. First one is a follow-up on the previous questions on the, the stoppages in, SSAB Europe, the unplanned stoppages. Can we put a dollar amount or a SEK amount on the, the foregone earnings in Q3? The foregone profits, not just the cost underabsorption, but the, the foregone earnings as a result of the one-off unplanned stoppages there. That will be very helpful in looking at the bridges Q3 versus Q4. And the second question is on the raw material prices. I believe you do typically negotiations in November, December to lock in some, some pellet prices and, coking coal, for the winter period. How are those negotiations looking directionally, at least, versus what you have locked in for this year? Thank you.
To start with the first question, I won't give you an exact number, but, I mean, Håkan mentioned the under absorption and the portion of it being due to production instability. And then you can also see, I mean, there is no real reason, market-related reason, why the volumes should be 8%-9% lower than Q3 last year. So you get some kind of feeling, at least, for the effect in Europe.
Okay. Thank you.
The raw material side, I'm not 100% sure if I understood your question, but basically for iron ore, we have two supply contracts, one with LKAB and one with Severstal . They are both valid up until the end of March 2019, but the prices are over time, following the market index. On the coking coal side, there we also have typically either quarterly or monthly pricing agreements. What I said, or what I tried to explain for our purchases in Q4 is that we buy the majority of our coking coal in Q2 and Q3, and then we have winter stockages up in Luleå and Raahe, because the big ships, they cannot go there in the wintertime due to the ice situation.
So it's not, it's not tactical planning or trying to get the best, or lowest coking price. It's just a matter of the physical situation up north in Sweden and Finland. So what I said was that even if coking coal prices go up, it's not that we have locked in prices, but it's a matter of that we have already done the majority of the purchases to get the volumes delivered before the ice settles up north.
I see. Okay. That's very clear. Thank you.
Thank you. Our next question comes from the line of Seth Rosenfeld of Jefferies. Please go ahead. Your line is now open.
Good morning. Thank you for taking the questions today. Just a couple of points on the Americas operations, please. When you think about volumes for the fourth quarter, clearly seasonally see some weakness in demand in the U.S. in Q4. How should we expect the maintenance outage to impact that? Would we expect normal seasonality, where you've been able to build some inventories preemptively, or would you expect a greater than normal decline Q over Q? And then secondly, can you speak a little bit about your metal spread expectations going into Q4? Clearly, scrap has ticked up modestly in October, expectation for another increase in November. Is there a bit of a lag in your price realizations as well that could lead to stable margins, or should we expect some pressure due to the raw materials? Thank you.
For shipments in...
No, but I mean, we don't expect to see anything else than normal seasonality anywhere. But what we have had in the beginning of Q4, this semiannual maintenance outage in Montpelier. So we were down, I can't remember if it was a couple of weeks in beginning of October, and that mill is now up and running and slightly, I must say, ahead of plan. So we don't... That will, of course, to some extent, impact, of course, as it always do when you have an outage. But anything else than normal seasonality in North America, we don't expect. We see a continued strong demand, and we have a very healthy order book, and long lead times.
Thank you. And with regards to price realizations and impact on metal spread with rising scrap costs?
Yeah, on our own prices, we said we will have slightly higher realized price in Q4 than in Q3. I mean, the majority, if you compare to Q2 and Q3, you saw a very big uptick in prices in North America. You will not have the same uptick, but you will have a slight uptick on price levels in Q4.
...And then where scrap ends up, yes, it's up slightly now in October. Where it will go November, December, I think that remains to be seen. So in terms of how that will impact our spread, I think it's too early to say.
Okay, thank you very much.
Thank you. Our next question comes from the line of Ioannis Masvoulas of Macquarie. Please go ahead. Your line is now open.
Good morning, gentlemen. A few questions from my side. First, on capital allocation. Are you considering any other investments beyond the Q&T and tubes investment plans you have announced over the next, let's say, couple of years? And are you also considering M&A opportunities, or the focus is now clearly on the organic CapEx potential? And within that, just in terms of the 4-year payback in Q&T, what's your assumption on the startup? Are you looking for early 2021, which gives you about 2 years of production to achieve the payback? And maybe a second question in terms of the-
Take them once at a time, please.
Sure.
Capital investments, I mean, Håkan said that we expect to be around SEK 2.5 billion. I mean, we have, we keep the R&C investments, we will probably have some, we will have, as we talked about, the midterm repair in Raahe in 2019 and 2020. We will do this investment in Mobile. I mean, that's what we foresee, and then continue with the R&C investments and maintaining CapEx. When it comes to M&A, opportunistic view, if something would come up, a small part that would fit our strategy, we would definitely take a look. Will we do any major, huge acquisitions? I can't really see that because there are no other steel companies that would suit us.
But if something came up that would strengthen us in global Q&T or on our home markets, we would definitely take a look, that's for sure. But in order to be able to do that, we are not planning anything like that, but in order to be able to do that, that requires a strong balance sheet.
Okay, thank you. Maybe a second question on the blast furnace repairs that you mentioned over the next couple of years. What sort of P&L and CapEx impact should we be factoring in?
I don't have the exact figures, but I mean, what you do, as you know, I mean, you build a blast furnace, and then you run it for 15 years, or you run it for close to 20 years, and then you do a midterm repair. I mean, a big relining that we just did in Luleå, and that we have done, that Håkan showed in RAW, and the two blast furnaces in RAW is maybe, I don't know, SEK 800 million-SEK 1 billion. A midterm repair is much lower than that.
Okay, thank you.
The big relining in Luleå was in total close to SEK 1 billion. And when we take this midterm repair, they are not even a third of that, maybe a third to a fourth of that.
That's very helpful. Maybe just a last question on the restart of the smaller blast furnace. What, what sort of impact are you expecting on the unit costs, once this is up and running?
The unit cost? I mean, I mean, in, in total, it is a bit more expensive to run a small blast furnace than a big blast furnace. Of course, the cost, unit cost in Oxelösund will go down, but overall, I would say a slight increase because of productivity. A small blast furnace, I said, is less efficient than a bigger one. So, I mean, as you know, blast furnaces, I mean, the scale, the correlation between scale and cost is quite strong.
Okay, thank you.
The smaller, the more, the less cost effective.
Sure. Thank you.
Not huge differences, but on the margin differences.
Thank you.
It is at least, as we think about it, much better to do this than to buy slabs externally or to cut sales.
Thank you.
Thank you. Our next question comes from the line of Carsten Riek of UBS. Please go ahead. Your line is now open.
Thank you very much. Two questions from my side, both on the U.S. business. The first one is on the sustainability of the plate prices in the U.S. What we have seen in the numbers is that the HRC, or the spread between HRC and plates, are now the highest since 2015. We all know that usually HRC and plates are running in tandem. So, how sustainable, in your opinion, are the current prices, especially against the background that the operational issues that Nucor and ArcelorMittal's plate facilities seem to be fixed? That's the first one.
First of all, what we have seen the last couple of years is hot-rolled coil prices, even from time to time, being higher than plate prices, and that's not the normal. So, when we look into Q4 and look into Q1, I mean, we said we will see slightly higher plate prices in our P&L, and then we were out this Monday, I think, or Tuesday, and increased the prices in Q1 with $40 a ton, followed by Nucor, and I read this morning as well, by ArcelorMittal. How will that play out during the first half of next year? To be honest, I don't really know. I don't have that in my order book. I don't have that visibility. But the underlying demand, if you look at the segments consuming plate, is looking good.
If you look at import volumes, there are still imports, but they are much lower levels than when they peaked, and we saw a lot of Asian material and other material coming in. So I would say the balance looks quite okay going forward as well, but what will that mean for prices? I don't have that visibility longer than Q4 and the start of Q1 with the price increases.
Okay, that's, yeah.
There has also been some changes on the hot-rolled coil versus the plate market. On hot-rolled coil, you have actually seen some new investment and new capacity in North America or in US coming online-
Ramp up.
-with Big River Steel. But on the plate side, it's actually the other way around, where ArcelorMittal have closed the line that was actually roughly 5% of the total market. So the supply side has developed a bit differently for hot-rolled coil versus plate the last few years as well.
Okay, that helps. But the other question I have is on the CapEx plan you announced for Mobile. And of course, capital allocation is key for the sector, especially nowadays. I'm a bit puzzled about the payback, and maybe you can help me on that. Because if I look at the SEK 1 billion investment, and I look at the shift in volumes from 0.3-0.4 million tons, we are talking about 100,000 tons more in Q&T. That would imply, at least on the back of the envelope, an EBITDA per ton on those volumes of about more than 2,500 Swedish krona per ton.
That seems to me quite ambitious, to be fair, especially when we look at the Americas business in total and see that over the past, at least pretty much 2 to 3.5 years, you returned an EBIT until the end of the second quarter 2018 of SEK 1.2 billion EBIT only, and you've spent now SEK 1 billion, potentially for the Mobile expansion.
To answer your question, the SEK 1 billion, which is a lot of money, is 50%, roughly 50% calculated on better margins for Q&T or the margin difference for Q&T and standard plate. And for Q&T, we have used figures that we are very comfortable with. And roughly the other 50% is reduced costs.
Okay.
And that-
I think, Carsten, you were talking about the result that you have seen in Americas division, but, the special steel products, even if they are produced in Mobile, they are actually sold, and you get the result in the special steel division. So, it's not really relevant to look at the Americas division, because that's the standard plate. But the Q&T products, the increase will actually be happening in the special steel division, not in Americas.
Oh, okay. Understood. It would be helpful for us if we could get a split, because it's far extremely difficult to have a look at these businesses, not having the split between America and the specialty steel and the rest, because I mean, you fly blind, let's face it.
Mm-hmm. But, I mean, as said, 50% roughly cost decreases or efficiencies, lower cost, and 50% roughly volumes. And I feel very confident when I say that this has a payback time of slightly less than four years from yesterday evening.
Okay. Perfect. Thank you very much.
Thank you. Our next question comes from the line of Cedar Ekblom of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much, guys. My questions have all been answered. Thank you.
Thank you. Our next question comes from the line of Bastian Synagowitz of Deutsche Bank. Please go ahead. Your line is now open.
Hi. Yeah, good morning, gentlemen. I have three quick ones left. Just firstly, you talked about iron ore cost being down, but it seems to me that pellet premium are due to increase again, further. Is this something which we would start to see in the fourth quarter, or will we rather see the effects in your pellet P&L in the first quarter, given the time lag until you realize these costs? And secondly, obviously, you announced the plans on the Q&T expansion. Can you just give us any understanding on whether the SEK 1 billion will be evenly split over the years 2019-2021? Then are there also any other potential strategic projects you're still basically looking into and which you may have in the pipeline?
Could you then lastly, briefly, just confirm as well whether of the two repairs you've got upcoming in Raahe in the next two years are fully baked into the SEK 2.5 billion CapEx guidance? Then my very last question, just on the Ruukki business-
Bastian, hold on a bit here. You're-
We, we-
We are not so intelligent. We cannot remember all of this.
I remember the second question. I guess that's for me. But I would say roughly, that investment, roughly, very rough figures, 50% 2019, 30% 2020, 20% 2021. Very rough figures.
Okay, perfect.
Then I leave the rest of it.
Got it.
He has a better memory than me.
On the iron ore pellets, no, that premium has gone up during the years, I would say the last year and a half or so, and we have already seen an increase in our iron ore cost based on that before. If the pellet premium continue to go up, sure, then we will see further increase. But what I showed on the slide was that was our purchase cost, and those were actually basically neutral in Q3 versus Q2. And as you know, there is approximately one quarter of delay for the iron ore from when we purchase it until it hits the P&L. So, it's not--you're not going to see a huge difference in Q4, no.
Okay. So it would be Q1 in that case. Okay, very clear. Thank you. Then just following up on CapEx again, the two repairs you have, and you mentioned for Raahe in 2019, 2020, are those fully baked into the SEK 2 billion-SEK 2.5 billion CapEx guidance? I would think probably yes, for 2019, but also for 2020?
Yes, they are baked into that rough level of around 2.5.
Got it. Okay. Then just my very last question, was just briefly on Ruukki. Could you remind us of the residual book value, of Ruukki, of the Ruukki business in your accounts,
... Just given the impairment you've made, and it, it was only a relatively small portion of the business?
You mean the Russian business?
Exactly. So, Russian, the Russian business, obviously, there was an impairment related to, as what I understood, just the Russian component of Ruukki, but obviously, that was only a smaller share. So, what is the residual book value of, of Ruukki, which you still have?
Of the whole Ruukki Construction?
Correct. Just roughly.
I don't have that on the top of my head, actually.
Okay, no problems at all. Then-
We can follow up.
Sounds good. Okay, thank you.
Thank you. Our next question comes from the line of Oscar Lindström of Danske Bank. Please go ahead. Your line is open.
All right. Good morning, gentlemen. Four questions from me, and I'll take them one at a time-
Thank you.
-to give you time to answer. The first one is on Europe. I mean, the production issues that you listed affected the third quarter. I mean, is that production running well now?
Um, yes.
We're back to normal, sort of, i.e.?
Yes.
Okay, good. Second question is on the Mobile investment. Is that gonna have any negative impact on volumes during the time of the investment, i.e., longer maintenance stops or such things?
No.
The third question is on the special steel volume development, which has been going very well. You have a strategic target to hit 1.35 million tons by 2020. You're getting pretty close to that already.
Yes.
Does that mean you should be sort of plateauing at SEK 1,350 up to 2020, or?
No, but I mean, the target as such will not hinder us from continuing to develop this business. And we said that we had the capacity to reach that target and also overachieve that target. Now we take the next step with the investment in Mobile. So, Håkan show the figures from 2008, and I've said that before. I mean, we probably over-invested at that time, but now we have hopefully learned something from that as well, so we take it step wise. When we need the capacity, and today we are running, we are running fully Mobile for Q&T, and we need more capacity. And then we let the market become the, I mean, decide when to do these investments. But there are other possibilities to debottleneck.
So what it's all about is, I said many times now, it's not about increasing the total volume out of SSAB, but continue to shift the mix towards special steels and Q&T and reduce the mix or the part that is more standardized steel.
Just going back to special steels volume in, let's say, 2019, I mean, do you have capacity to produce more than 1,350 already in 2019, for example?
Yes.
Yeah. Okay, great. Well, just one more question then is on imports into Europe. I mean, I think it was the European Steel Association requested tariffs against Turkish or quotas, I believe, against Turkish imports. And then there's the whole question of sort of making the temporary tariffs into sort of long-term. You know, what's happening with the European trade policy on steel?
I'm not 100% updated. I should probably be, being on the board of Eurofer, but I'm not. But what I see, and what we see is that, we don't see much of that into our home market, the Nordic region, and we don't meet that either with our more advanced products on continental Europe. So I'm not up to speed when it comes to import from Turkey into Southern Europe and the effects of that.
You're not feeling any pressure from non-European imports, you know, competing against your products in Europe?
Uh, no.
Okay, great.
Well, there is always competition, of course, but, but I wouldn't say that anything abnormal, no.
No, so it's not-
But there is always competition.
Yeah, but there's no change so that more volumes have started to find their way into the European market, I mean, in any way? Okay.
Not what we have seen so far. How will it look in the future? Impossible to answer, I think. But no big shifts in any direction, so far at least.
All right. Super. Thank you. Those were my questions.
Thank you.
Thank you. Our last question comes from the line of Luc Pez of Exane. Please go ahead. Your line is now open.
Hi, gentlemen. Would it be possible to have a bit of clarification as to what you would target as a working capital to sales, over time? Given the fact that, obviously, you've been outperforming, with regards to your ability to better control working capital requirement in this quarter, once again. Should we think, 22%, such as the figure we can see on the 12-month rolling basis is, let's say, the new normal, or do you see room to further improve when I look at inventory as a percentage of sales?
No, but you should not see this as the new normal. I think this is a every day... I mean, this is continuous improvements. Of course, there was a lot of things, as we have said before. I mean, after the acquisition of Ruukki, we focused on synergies, manning, flexibility, and those issues. I mean, and not so much, to be honest, on working capital. Working capital efficiency is always important, and as Håkan pointed out, there is more to do, but more, call it, continuous improvements all of the time. So you should not expect us to stay on this level. You should expect us to continue to become better and better.
If we have seen the last, since we really started with this during 2016 Q3, Q4, we have seen a very good development, I would argue. Unfortunately, I would like to, but I wouldn't dare drawing the trend line continuing in that pace. But still, as Martin said, small improvements quarter-over-quarter, year-over-year, that's really what we are aiming for.
So you don't want to commit on a, let's say, medium-term target, here?
No, the only thing we commit to is become better day by day. So, I mean, I think it's impossible to give a target, because we have internal targets, of course, but not in absolute terms, but rather in net working capital over sales. And I mean, we have targets for every year, every quarter, where we should be. So... But I mean, the day we say that now we are perfect, and here we will stay, then I think we are making a big mistake.
Okay. Thank you.
Thank you. As we have no further questions, I'll return the call to our speakers. Please go ahead.
Okay, thank you. Do we have any final question from the audience here? Okay, by that, we thank you for the attention, and wish you a nice Friday. Thank you.
Thank you very much.
Thank you.