Okay, ladies and gentlemen, good morning, and welcome to our Q3 result briefing. My name is Taina Kyllönen, and I'm the head of corporate communications. Today, before we start with the presentation, I have the pleasure of introducing to you our new head of IR, Per Hillström. Per will start working now in a week's time, on Monday, on the seventh of November.
Yes, and it feels good to be here and good to get to know the company and the industry. I'm really looking forward to it. Also connect with you here in the steels, all the steel specialists in the financial market, so looking forward to that. And, as you said, start here for first week in November. Seventh of November will be my first days.
Yeah. And I'm really pleased to have my IR team complete now with Per and Lisa Meyer, so they will be both at your, at your service. Okay, but then let's go to the agenda of today. So we will, Martin will start and go through with the market situation as usual, and talk about the Q3 result through the divisions. And then Håkan will run through the financials, and then Martin will conclude with the outlook, and then we are ready to take all the questions you have. So, Martin, please.
Thank you, and good morning, and thank you for joining us here today when we release the third quarter report. It has been an interesting quarter, and it is, it has been an interesting continuation on our journey. And I think, the completion of the synergy program and also the rights issue has put a fairly good foundation for SSAB on our journey towards industry-leading profitability. And speaking about journeys, I've been traveling quite a lot during the third quarter. I had the opportunity to visit all our mills, travel together with the sales organization, and I must say, I met a lot of senior managers and employees. And I'm very pleased with the energy level and the excitement that I meet in the organization. We also met a lot of customers.
I've been meeting customers in North America, in Europe, and, they are very pleased with the cooperation with SSAB, and they are also, they have a positive view on the market midterm. I think that is also a good foundation for our continued journey. If we start with the market, I think this picture showed what really happened in Q3. Quite a difference between our two whole markets. If we start with, North America, and this is plate North America, we saw weak demand, we saw continued high imports, pressure on prices. We saw spot prices moving down during the third quarter, and, we saw steel service centers destocking. At the end of the quarter, we saw fairly decent or low inventories at the steel service centers and in the supply chain, but still, definitely a challenging quarter.
As you see, at the end of the quarter, the spot prices were more or less back on the same level as the trough, beginning of this year. If you take Europe on the other end, it was a slightly different market during Q3. We saw stable demand, we saw low imports, inventories in balance, a dip in spot prices in the beginning, and then spot prices increasing. You see now that spot prices, compared to the beginning of this year, is 30%-40% up on the European market, and this is measured as hot rolled coil spot prices, northern Europe. If you look into Q3, then for SSAB, we had an EBIT of SEK 707 million, which is 115 million better compared to Q2 2016.
What we saw during the quarter was higher contract prices, continued cost reductions, lower shipments, and mainly due to seasonality, and then, of course, the maintenance outages. We had also a fairly good cash flow during the quarter. We had an operating cash flow of SEK 926 million, despite that we were building inventories in front of the outage in Oxelösund. So I must say that that was also quite okay. If you look at the KPIs, we had lower sales, so sales than Q2, and sales in line were slightly lower than Q3 last year. We managed to get an EBITDA margin on group level of 12%, and the EBITDA per ton delivered steel was north of 1,000 SEK per ton, which is couple of quarters ago, since we saw those kind of figures.
If you look at the different divisions and start with special steel, the EBIT was up SEK 177 million compared to the second quarter. We had higher prices and lower costs, and we had lower volumes due to seasonality. We had an EBIT margin in special steels during the second, third quarter of 15.2%, and an EBITDA margin of close to 20%. In Europe, we had lower shipments due to seasonality compared to Q2, and we also had lower capacity utilization. But we also here saw the effects of lower variable and fixed costs and the effect of higher prices. The EBITDA margin in Europe was 13% during the quarter, which is also quite good. Americas, as I said, demand for heavy plate was weak, spot prices declined, steel service centers were destocking during the quarter.
The low result compared to Q2 depends, of course, on lower volumes, costs of the maintenance outage, lower capacity utilization, but we had higher contract prices. As you saw in my first picture, spot prices went up in Q2 and then down in Q3. So when we were taking orders for Q3, we took it on a higher level than we're doing for Q4. If you look at Ruukki Construction, well, we see, of course, a seasonally better demand in Q3, so I think in all fairness, you should compare the operating profit Q3 2016 with Q3 2015. We had slightly higher volumes, but here we see the effects of the restructuring of Ruukki Construction. We managed to have an EBITDA margin for Ruukki Construction just north of 10% during the quarter. Tibnor is a reflection of the Nordic market.
We had a slightly better operating result than in Q2. We saw better margins, we saw lower fixed cost due to the synergy programs, but we also saw seasonally lower volumes. So I would say, all in all, decent quarter. Americas not performing, on the other hand, pretty strong in Special Steels, and I think this shows the potential in that business, division. When we run production in a stable way, we have okay prices, okay volumes for being Q3, the result, will always be pretty good. Håkan?
Thank you. Good morning, everyone, and thank you once again for taking the time and coming here, and also listening on the webcast. I will cover the changes in the results year-over-year, quarter-over-quarter. Some more data on the cash flow, spend some time on the balance sheet and the net debt, and then a little bit more time than usual on the raw material side, given there has been some quite big changes during the quarter. But starting then with the result development and looking at Q3 versus Q2, all in all, it's actually not a big difference. We had SEK 668 million in Q2, SEK 707 million now in Q3, so it's a SEK 40 million difference between the quarters. But on the other hand, the components are varying quite a lot.
Starting on the price side, we had a positive impact in the result of high prices, SEK 460 million. The largest impact coming from SSAB Europe, but also Special Steels and Americas impacting positively. As Martin was mentioning, for Americas, spot prices are actually down in Q3, 25% almost. But for us, the realized prices are higher, given the contract structure we have. But when we go into Q4, we will see that negative impact hitting, our Americas business in Q4. Volumes, we have a negative impact of SEK 660 million. Within Europe and Special Steel, I would say that this is a seasonal effect. Within Americas, it's both partly seasonal, but it's also due to, steel service center destocking, and also a fairly weak end user demand during the quarter. No major change on variable COGS.
On fixed cost, we see Q3 versus Q2, a very positive development of SEK 380 million. Here, I think it's important to point out that around 300 of those 300 million is coming during Q3 because we are dissolving vacation reserves. So that's a typical Q3 effect, which we, we did not have in Q4, and we will not have in... Sorry, we did not have in Q2, and we will not have in Q4 either. No major change on FX, then other, minus SEK 126 million, very much driven by under absorption, which we have as part of other, where we had outage in Montpelier and also outage in the Swedish side of SSAB Europe. So all in all, no big change in the result, but positively impact by prices and cost, negatively by volume and under absorption.
If we look at Q3 versus Q3, it's a bit of a different picture. We had a result of close to -SEK 200 million last year, and now SEK 700 million. So all in all, a positive impact of SEK 900 million Swedish krona. On the price side, it's the only one that's red here, so -SEK 100 million. It's not a huge change, but one should remember, it's been a really rollercoaster. If we were here on Q3 last year, we had realized prices significantly down in Q4, significantly down again in Q1, and then climbing up in Q2 and Q3, and now we're back roughly at the same level as where we were one year ago. Volumes, it's no big change. Profit-wise, Q3 over Q3.
Here, Americas is the one that is dragging down the volumes, while actually Europe and Special Steel have clearly better volumes this quarter than one year ago. But then we see the big positive impact coming from the cost side, both variable cost and fixed cost. In total, SEK 520 million. It is partly raw material, between SEK 250 million and SEK 300 million, but it's also a big improvement coming from the synergy program, the Ruukki Construction saving program, and all other cost efficiency actions we are driving across the company. So it's clearly now visible in the result. We also have a big positive item on FX compared to last year. This quarter, we haven't had any dramatic change, but last year, we had a big negative hit in Brazil, a one-time hit, and when comparing quarters, we then get the positive impact.
Finally, on other here, it's also here, it's the under absorption that's playing a big role. Last year, we were not running the Luleå blast furnace during the whole third quarter when we had the relining, and this year we've been running it, and that's a large portion of these SEK 193 million. So all in all, a big improvement from minus 200 up to plus 700, and a large portion of that coming from improved cost position. Moving on to cash flow. Martin mentioned we had a decent operating cash flow at SEK 900 million plus, and also a net cash flow of over SEK 600 million. That was despite the negative working capital buildup of SEK 500 million, which we expect that we will reverse now during Q4.
The reason for the cash flow was, of course, the profit before depreciation amortization, and also that we've been keeping CapEx on fairly low level also in the third quarter. If we look at where we are year to date in terms of CapEx, we have spent a little bit more than SEK 900 million after three quarters, which means that we will stay below SEK 1.5 billion that we have set, that we have set as a highest possible frame for 2016. Moving into the debt situation, we decreased the net debt and also the gearing during the quarter.
Gearing is now at 35%, so we're getting close to the financial target of 30, down two percentage point from Q2, and down from 55% at the end of Q3 last year, which is, of course, to a large extent, driven by the rights issue we made. Net debt was down around SEK 250 million, and we're now at SEK 18.2 billion. If you look at net debt, you can see this is the lowest level we've been since 2013. The reason for the jump here is when we acquired Rautaruukki, although we did it with shares, we took over their net debt as well. We're the lowest level since then. If you take the gearing now at 35%, it's actually the lowest level where we've been since we acquired IPSCO in 2007.
We are on our way of reducing the net debt by SEK 10 billion. When we announced the refinancing package after Q1, we said we were gonna do three things. We were gonna do a rights issue of around SEK 5 billion, we were gonna move maturities out in time, that we have done, and we've done the rights issue. And thirdly, we said we were gonna reduce net debt by another SEK 5 billion, so in total, SEK 10 billion net debt reduction. And we're gonna do that before end of 2017. So far, we are at 6.2. The rights issue gave SEK 4.9 billion net. During Q2 and Q3, we have had a net positive net cash flow of SEK 1.3 billion.
So, so far at SEK 6.2 billion, which obviously means we have SEK 3.8 billion left during the coming five quarters to reach the SEK 10 billion target, and we will reach the SEK 10 billion target. One thing to point out here is that this we have calculated with the net cash flow we have generated so far. Then in the net debt itself, we have both in dollars and in euros, so it might go up and down, depending on how the currencies fluctuate. But we are committed, we will deliver this SEK 10 billion, and then if that becomes SEK 10.5 billion on the net debt or SEK 9.5 billion, depending on the currencies, well, that remains to be seen. We are focusing a lot on moving maturities out in time from 2016, 2017, 2018, out to 2019, 2020 and onwards.
During the quarter, we have decreased the loans maturity in the coming three years from SEK 8.7 billion down to SEK 6.8 billion, and we will continue work with this. If we look at commercial paper, we used to have more than SEK 3 billion in commercial paper at the end of Q1. We are now lower than SEK 1 billion. That's not because we're not able to access the market, but it's because after we did the rights issue, we had the large amount of cash on the balance sheet, and we've been mitigating that by lowering the amount of commercial papers. Finally, on the debt side, look at our duration of the portfolio and also our interest rate. We are now here at 5.2 years. It one year ago, it was 4.8 years.
But if you look over this five-year historic period, well, slightly above 5 is actually the highest level we've been. Then if you look at the interest rate, it's been going up a bit the last few quarters, and there are a number of factors impacting this. I'll point out two of them. One is that the underlying U.S. dollar LIBOR rate has been moving upwards, and as said, we have quite a lot of loans in dollars. And the other one is that we have decreased the commercial papers quite a lot, where we paid extremely low interest rate, and then that's taken out of the equation, the average will be slightly higher. But I would say still, we are at 3.3%, which I believe is fairly competitive. Moving then into the raw material, and of course, the big item is the coking coal development.
Coking coal prices during Q3 really spiked and took off in a way I don't believe anyone had foreseen. This one ends here at the end of Q3, but actually, even after Q3, we have seen additional increases on the coking coal side. For us, this is the purchase price for us, not the consumption price, but the purchase price for us during Q3 was 25% higher in U.S. dollar versus Q2, and 34% higher in SEK. The main impact of these coking coal increases will come from Q1 and onwards, but we will already in Q4 start seeing the impact of the higher coking coal in our P&L, especially for the specialty steel division. For Europe, we build up winter stocks up in Luleå and up in Raahe, because the big boats cannot go there when there is ice.
So there, it will come more in Q1, but for special steel, we'll start seeing it already in Q4. On iron ore, well, it hasn't been very dramatic. It's slightly up versus Q2, but not, not at all in the magnitude of how we see cooking coal develop. Then for scrap, which is obviously what we use in our U.S. operation, well, scrap price has been moving down. During the quarter, they're down 17% in the end of the quarter versus the beginning. They're still actually slightly higher than what they were one year ago. But I think this is quite interesting, because iron ore being flat, scrap slightly moving down, and cooking coal then going like this, it means for us, as a scrap-based plate producer in the U.S., we will definitely, compared to the integrated players, have a competitive advantage.
Finally, from my side, a look at the maintenance outage that we have had in 2016, and still plan to have. In Q3, we had a direct cost of SEK 280 million. Main one coming from SSAB Americas, where we had the outage, a big outage in Montpelier. We also had an outage on the Swedish side of SSAB Europe. During Q4 then, we will have, or are right now having an outage in Oxelösund for special steel, with an expected direct cost impact of SEK 130 million. And we will also have outages on the Finnish side of SSAB Europe, in Raahe and Hämeenlinna. So all in all, the direct cost will be lower in Q4 than Q3. But this is not including the under absorption cost, and especially not the lost margin on the volumes we will not ship.
During Q3, given how weak the market actually was in Americas, you know, we didn't lose very much volumes, and we didn't lose very much margin due to the outage. On the other hand, when we have an outage now in Q4, and especially for special steel, where we have the highest margin, when we lose some volume there, it will obviously also then impact the profitability of special steel. Back to you.
Thank you, Håkan. So zooming in then on Q4. When we look at this, we expect demand for heavy plate in North America to be relatively weak for Q4 as well. We see low stocks in the supply chains. We expect not further destocking. Realized prices are expected to be lower in Q4 compared to Q3, due to the lag effect, and I showed you the spot price movements. In Europe, we expect demand to be relatively unchanged. And, of course, with the seasonal slowdown at the end of the fourth quarter, which we typically see, second half of December. We expect also prices in Europe to be relatively stable. Demand for high-strength steels, also fairly unchanged, so stable underlying demand for special steels into Q4. And overall, we expect shipments to be in line with Q3.
But, also right in the report, this will of course be impacted about the price sentiment in the market. If customers expect prices to go down in Q1, apparent demand in December will be lower, and if they expect prices to go up in Q1, we will see the opposite effect. And that's important, to remember. So with that, dear friends, I think we open up for questions.
Yes, let's start from the audience here in Stockholm, and if you have many questions, please, let's take them one by one. So-
Exactly, so-
Ease enough Martin and Håkan's job. So, please.
Okay.
Mm.
Thank you very much for the presentation. Christian Kopfer from Nordea. Just a few questions from my side. Firstly, you touched upon the price outlook for Q4, seeing it stable. Still a bit surprised to see that outlook, considering the underlying trend of raw materials. Could you maybe touch a little bit more upon that, even though you said that it was dependent on the slow season going into the end of the year?
No, but when we look at it, and of course, you can read about prices moving and so on in Steel Business Briefing and other publications. But I mean, a rough estimate is what we see, fairly stable prices in Europe.
Right. And also, Håkan, you, you talked about the interest rate trend. Should, should we expect that trend to flatten out, next couple of quarters, or do you see it continuing up from here?
No, you should expect it to flatten out. That obviously depends on, especially on the U.S. dollar LIBOR rate. But, I think the reduction of the commercial paper, which we have done, which has impacted, will not be as large as it's been. So yes.
Right. Thanks. And finally for me, we have obviously seen the Swedish crown weakening quite a lot versus the euro. You didn't see much of that in Q3, right? That effect is still to be seen.
We've seen it partly on the prices. So, prices when we sell in euro and then translate back in SEK, we're seeing that partly, but it's not, as you saw on the bridge, compared to Q2, it's not a huge result impact.
Okay, thank you very much.
Let's move from this way, so, so for you, Hannes, please. Mm, great.
Okay, it's Johannes Grunselius, Handelsbanken here. Can you elaborate a bit on the mix? How was the mix in the third quarter? We have been hearing from you and other steel players that automotive is a very strong segment, and how do you see that going into fourth quarter and next year?
... I think, we had decent demand and fairly stable demand from automotive, underlying demand, I would say. And then, as we have talked about before, we are now introducing, and we are in the middle of, or have been introducing this year, a couple of new products for safety details in automotive, and that has helped us to grow our market share within automotive. So we have had a better growth in automotive than the underlying growth, to say, so to say, due to that. So that is extremely high strength martensitic steels that we have been pushing into the market or introducing to the market during this year. So we have had a good development within automotive.
If you can give some color on the strong results on specialty. I mean, is it anything to do with mix prices, or is it more efficiency, or what do you think?
I would say it's efficiency and production stability. And I say internally, I get surprised every time when I see the negative effects of, of production not running stable. And I get surprised every time when I see that we run it on stable levels. And I would not say that we have been running it on fantastic levels, but we have been running during the third quarter, the production, in a decent way and in, in, in a stable way, and then you see the effect. So it is cost efficiency, and it's stability. And that's something we are working with, with continuous improvement, to lift the levels day by day, week by week, year by year.
And then my final question here, and that's a follow-up on Christian's question on the relatively stable prices in Europe. At the same time, coal is moving up now, and you say that will be seen in the fourth quarter. But should we see that as there will be a slight sort of negative push on the conversion margin for you now in the fourth quarter? Or could you give some color on that?
Well, we are not setting the price in Europe. I mean, overall, for spot prices in Europe, we are setting prices on, on the most advanced steel products globally, and we are part of setting the prices or the leader when it comes to heavy plate in North America. But in Europe, we are one among many players, so we are not setting the price momentum. This is our outlook as we speak.
Olof Grenmark, ABG Sundal Collier. Three questions, if I may. First one on steel prices, the second on net debt, and the third on the outages, the maintenance stops. Regarding steel prices, you guide for flat or stable steel prices in Europe, at the same time as we should see a negative effect in America due to the lag effect. Isn't there a lag effect in Europe as well? Shouldn't we see a positive effect then?
What we guide for is roughly stable prices in Europe.
It's more on the positive side than, if you say roughly?
I say roughly, stable prices.
Fair enough. Then you, regarding the net debt, you said that there could be a dollar effect there, given the large change in the SEK US dollar ratio. Could you please elaborate on that one again?
Yeah, what I mean is that we're committed to this SEK 10 billion that we talked about when we released the financial refinancing package after Q1. But we have a portion of our debt in dollar, and we have a portion of it in euro. And what we want to do, we want to make sure that we focus on what we can impact, which is to deliver net cash flow, basically, in one way or another, by reducing working capital, generating profit, et cetera. And then if the, if the dollar or euro strengthens or weakens versus SEK, that does have an impact on, on the total size of the net debt.
It might mean that we are able to generate SEK 11 billion by ourselves, but the development of the SEK has made the loans become SEK 500 million higher, and then we will only, only then reach SEK 10.5 billion instead of the SEK 11 billion that we've actually generated.
So can you give us the dollar ratio in U.S. dollars of the net debt?
No, I don't have it from the top of my head. I can definitely get you that, but not from the top of my head. But what we're comparing with is when we released the Q1 result, when we said this was the target that we're going to achieve.
Just to be clear, I mean, there is no doubt that we will deliver the SEK 10 billion.
Okay, that's clear. Thanks.
Yeah.
Thirdly, regarding outages, is it correct that you didn't, did not have any effects at all last year in the fourth quarter?
No, we had the special steel also had the outage in fourth quarter last year.
How large was that one, roughly?
Approximately the same as we will see this year. It's the same type of outage.
Okay, thanks. That's all.
Ola Södermark, Swedbank. Just to go back to raw materials and coal prices that are spiking right now. You said you are building inventories to Raahe and Luleå. Are you done with it for winter, or are you still building inventories?
No, we have, we have bought everything we need for the winter.
So it could be a competitive advantage then?
Well, I would say maybe during Q4 for Europe, we might have a small advantage there. Not for special steel, because I said there, we don't build a winter inventory. But for Europe, it will come a little bit later, the increase.
Any more questions here? Okay, let's take the questions from the lines. Operator, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero, followed by the one on your telephone keypad. The first question comes from Alain Gabriel from Morgan Stanley. Please go ahead. Your line is now open.
Yes, good morning, ladies and gentlemen. Just two questions from my end. Firstly, do you mind commenting what you're seeing in the physical market in Europe, in terms of the strip demand? Some of your competitors have announced price hikes up to EUR 500 per ton. Is the physical market tight enough to justify those prices to stick beyond Q4? And the second question is on the CapEx. Have you underinvested in 2016, which means that your CapEx will go up in 2017? And would you be able to quantify? Thank you.
But, I'm not sure that I really understood the first question. I haven't seen price increases. What did you say? EUR 500 per ton?
Yes, that's the strip price.
... Okay, I haven't seen those figures. I can't comment on it. But as I said, we are not setting the prices on the European market. We are, in that aspect, fairly small and a follower. So if prices are moving up on the European market, you will see the same effects for SSAB. The second question, no, I don't think we have under-invested at all. I think we have, due to this combination with Ruukki, we said already from the start that we will see lower CapEx needs. We call it CapEx avoidance, and we gave a figure, and I think that figure is maybe slightly higher than we said from the beginning. So it's an effect of that as well.
We have said that this level is, of course, not sustainable, but for the coming years, I would say that we will be at or around SEK 2 billion in RNC or maintenance CapEx needs. This year is a bit lower, but I'm not feeling at all that we are under-investing.
Thank you.
Thank you. The next question comes from Jonas Mosvollas from RBC. Please go ahead. Your line is now open.
Hi, good morning, gentlemen, and thanks for taking my questions. Just the first question on coking coal. Could you possibly provide some indication on the realized cost increase during Q3 quarter-over-quarter? Because I think you only provided the average purchase price for the quarter, and maybe a split between quarterly and monthly price purchases for coking coal. That would be the first question.
Basically, in Q3, there was no impact of the rise in coking coal. As we showed on the purchase price, we had an impact, but on the P&L impact, this was virtually zero. So that is still to come. On the second question, on the contract structure, we have decided, actually, that for competitive reason, we don't want to give out a split of monthly and quarterly contract.
That makes sense. And then the second question, again, going back to the wording around divestments. It looks a bit more cautious than last quarter. What's the chance that you can actually deliver your deleveraging target without relying at all on divestments?
Good. A good chance, but we have not changed our mind. What we see is that, exactly as you point out, we have a very good chance to deliver that with or without investment. So that will be a strategic decision, and we have not changed our mind. We are a steel company, and our steel operation is the core business we run, and we will always have that as a core business. And then we have other parts of one big part and some other small parts that are not core, and they are always up for discussion. So no changes there. We are even more confident about the SEK 10 billion after another quarter, with or without any divestments.
Okay, thank you. And maybe just a last question on the U.S. business. Some of your peers have been cautious on scrap pricing in the short term. Could you elaborate whether you see a potential for further destocking in the next couple of months? And you know, as scrap prices start recovering, maybe from early Q1 2017, do you then see some positive trends in terms of restocking? Could that be a potential scenario that plays out?
What typically happens during the winter season in U.S. is that scrap, due to more expensive collection, goes up, and the supply of scrap goes down a bit. So typically, you see a seasonality in scrap costs, but apart from that, I don't foresee any big movements in scrap. But that is something you typically see over the winter season in U.S., and especially in Midwest, I would say. Not so much in the Mobile area, where we have one of the mills.
That's clear. Thank you very much.
Thank you. The next question comes from Carsten Riek from UBS. Please go ahead. Your line is now open.
Thank you very much. Four questions from my side. First one, when and to what extent will you actually see the positives from the recently announced European anti-dumping measures against China in HRC and plates? I'm rather interested in the magnitude, because they were quite steep, anti-dumping duties, especially on plates. That's the first one.
We will see that gradually then, if everything works as it usually does. As you know, the plate market has been the most depressed market in Europe, and the anti-dumping margins were between, if I recall correctly, 65%-73% or something like that. One fair guess would be that we will not see much Chinese plate on the European market during 2017.
Okay, good. But the second question is rather around special steel, which surprised quite a bit. Could you give a bit more color on why the cost improved in special steel that much on a per ton perspective, despite lower volumes quarter-on-quarter?
Quarter-on-quarter, it's important to remember the system we have, at least up here in the Nordic region, with release. What did you call it? The-
Dissolving vacation reserves.
The dissolving vacation reserve. That is one part, of course, when the cost. But, on top of the synergy program, which we have now finalized at SEK 2.43 billion, we have other cost programs running, and we have said that we will structurally reduce the cost base in total until the end of this year of SEK 2.8 billion. And that target will also be met. And one part of this is a program in special steel that we call 1,000 SEK per ton, and that program is also now giving effect. So and then the second and important part is that we have been running production, not in a perfect way, but in a better way than before, and we have focused a lot on that.
That has also been part of, of the restructuring of the company. We specialize in line and so on, and get up the productivity and yield. In this kind of industry, when you have decent yield levels and decent productivity levels, you see big effects or positive effects of that. It's a combination of a lot of things. I wouldn't say that the volumes were fantastic, or price is fantastic, or not even production fantastic, but I would say on decent levels, and then you see the potential in this business. I think the performance in Q3 was quite good in specialty.
Okay, thank you. The third question is on your EBIT bridge, page 12. Because you show us there 126 million in others, and part of it are the maintenance outages. But on another slide, there are SEK 280 million mentioned for the outages. How do I bridge the SEK 280 million to the SEK 126 million on page 12 or on slide 12? Because there must be quite a bit of offsetting factors.
Yeah, in the other, it's actually mainly the under absorption, while the cost for the outages are part of either variable cost or the fixed cost.
Okay. Because, okay, because you mentioned before that in the others, mainly the outages were in there, so I got a bit confused.
Yeah, maybe I was a bit unclear then. What I meant was that the under absorption effect we get from having the outages.
Okay. The last one is with regard to the FX effects on net debt. Is it actually fair to exclude them? Because you clearly see a positive impact on your operating cash flow from the FX rate, too, because of translation, et cetera, et cetera. Saying you wouldn't reach that because of the FX impact, because of the net debt, on the net debt, would be just one part of the equation. Should that not be rather neutral?
We are not saying that we will not reach it. What we are saying is that we will reach it, period, and then we are trying to explain what has happened so far.
But you would agree, I believe you can't only look at the net debt and the FX impact, but you also need to actually look at the positive impact from FX, which it has on the operating effect.
I agree. Net debt is net debt, regardless of FX, and this was a way of trying to show how it has looked so far.
Okay. Good, then I understood it. Thank you very much.
Thank you. The next question comes from Seth Rosenfeld, from Jefferies. Please go ahead. Your line is now open.
Good morning. Thanks for taking my question. I'd like to dig in a bit on your performance in the Americas. On the margin outlook, if I look at metal spread for U.S. plate versus the scrap inputs, it looks like spot spreads have fallen by nearly $90 per ton at present in October versus the Q3 average. In your Q3, it looks like EBIT per ton in dollar terms is only about $20 per ton. Can you walk us through what the impact you expect to see on your profitability going into Q4 and into Q1 as your quarterly contracts start to roll over? Because on a spot basis, it looks perhaps very challenged. And on volumes on the U.S., I believe you had a 20% drop in shipments in Q3, Q over Q.
It seems to be roughly in line with what some of your peers have seen, like Nucor and Evraz, but the market-wide, like, MSCI data was much better than this. Can you walk us through what the key deltas are in terms of shipments, and again, perhaps where you see the demand outlook in U.S. plate? And a third question on the pricing outlook for U.S. plate. Your peer, Nucor, announced a $30 price hike several weeks ago. From what I've seen, none of the other peers, yourselves included, have followed with that, another price hike, and there hasn't been any follow-through in spot prices. Can you talk to the pricing dynamic in the U.S.? Thank you.
No, I'm not sure I even remember the first question, but I mean, if you talk... I mean, no.
As regarding prices, spot prices grow margin compression versus what we have seen on margin compression.
No, but we have, to a large extent, quarterly prices in U.S., and as I tried to show at the one of the first slides, I mean, spot prices went up in Q2, and we took gradually Q3 prices, or contracts during Q2, and then, in Q3, spot prices started to decline, and gradually during Q3, we have taken, orders for, for Q3, four. So, so you clearly have a lag effect in our realized prices compared to, to spot prices. That was, yeah, that's the reason why you, you see that.
Can you? My question was more looking forward to Q4. The October prices of October spreads versus scrap have contracted considerably versus the Q3 average. So can you quantify what scale of impact you would expect in your Q4 realizations?
No, we don't do that. I mean, the outlook we give for Q4 is the outlook I presented, and we expect that contract prices in Q4, due to that volatile spot pricing of heavy plate, will be lower than in Q3. That's the outlook we give for Q4. For Q1, we are not giving any outlook yet.
On the MSCI data you mentioned, you say you compare us with Nucor, and we came out roughly the same or slightly better on volumes. But if you compare with them, MSCI data, you must remember, that is what steel service centers are shipping out. But what we've seen in this quarter is that steel service centers have, when prices were going down, they have been buying less than what-
They've been, yes.
... than what they normally do. They've been destocking. So therefore... In total then, since steel service centers represent 40%-60% of our U.S. business, if they are retracting and buying, you will of course see that in our shipments compared to the MSCI data.
Thank you very much. Just a follow-up question on pricing. I know there was one price in the US from Nucor. I don't think it was followed by yourselves. Do you have any confidence in US prices finding a floor in the near term for plate?
We don't comment on that.
Okay, thank you very much.
Thank you. The next question comes from Roger Bell, from JP Morgan. Please go ahead, your line is now open.
Good morning, gents. I've got sort of two broad questions. First of all, could you just provide within the SEK 380 million reduction in fixed costs that's in your bridge on page 12, could you break that down by division? And then also, it seems that the fixed cost reduction year-on-year is actually less than the fixed cost reduction that you're quoting quarter-on-quarter. Could you just, you know, explain why that is? I would have expected the year-on-year fixed cost reduction to be bigger. And then just touching back on the disposals or divestment processes, is it still the case that you are just thinking of selling Ruukki Construction in different parts?
I.e., you know, some bits in one country, some bits in another country, or, you know, could you look to sell it in one chunk? And, you know, perhaps, you know, in light of this improved performance, so, you know, is there scope to just sell it in one go?
Well, if I start with the second question, I'll let Håkan take the first one then. As said, we have not changed our mind at all when it comes to what we are going to do with non-core assets. And I will come back and when we have done something to speculate and discuss externally, what we are planning and what we haven't done yet is not meaningful. So we have not changed our mind, but what we clearly see and what I said from the beginning, I think, there was a possibility to improve performance in Ruukki Construction, and that's why we launched this, call it, restructuring program.
When I look at the figures of Ruukki Construction, they are gradually getting better and better due to that, and they are approaching the level where they should be, profit and operational wise. That's my conclusion. Then I think it's, we're in a better position to do whatever we want to do with that business when it's a well-run business compared to when it wasn't.
And if I take the fixed cost question, if we start with a year-over-year versus quarter-over-quarter, what I tried to explain when you compare Q3 to Q2, is that a large portion of this SEK 380 million is coming from a temporary effect in Q3, which is due to dissolving of vacation reserves. That's almost SEK 300 million. So if you want to, a more clean comparison, Q3 versus Q2, is to take out those SEK 300 million, and then you will be left with around 80. And then if you compare year-over-year, instead, you would see that the difference is, as you were expecting, larger year-over-year than quarter-over-quarter.
But then you also have the effects of the outages and the fixed cost during Q3, so it's a bit more complicated.
If you then ask about fixed cost by division,
Yeah.
Exactly, then we don't break that down exactly, but given that a large portion of the synergy program was within SSAB Europe, you see a large impact there. The turnaround program in Ruukki Construction, you also see a large impact in Ruukki Construction. But actually, when we look at all five divisions, we see a positive development when we compare Q3 this year compared to Q3 last year.
Okay, thanks very much.
Thank you. The next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead, your line is now open.
Yes. Good morning, gentlemen. I've got three questions left, and my first one is, again, following up on coal. You said already that you bought your winter needs for Europe, and cost would therefore be stable in the fourth quarter. But I remember that you used to buy physical coal even until the end of the first quarter, to be really hedged throughout the entire winter in the past. Has this changed, or does this mean that we will only see the 35% increase in coal cost until the end of Q1? And, maybe you could also let us know whether you are hedged against the appreciating US dollar for the raw materials.
Yeah. We have finalized the contracts, but I don't believe that we have received all the coke and coal coming into the mills yet. But as I said before, you know, you will see, in Europe, you will see a small impact during Q4. You will see more impact in special steel, and then going into Q1, you will see even further impact in both special steel and within Europe. And it has not changed. I mean, what we do, both in Raahe and in Luleå, we need to bring in the coal before the ice comes, because then it's not possible to bring in those big ships because they are not ice class. So we need to do that before the winter. So there is no change in the pattern.
The price, basically, the basis for the prices which you get on exactly those volumes which you bring in right now to be hedged for the ice period, is this the 35% you mentioned?
That was what we bought, and then what was shipped during Q3. Then we have also signed deals for Q4, which might not be shipped yet, or not shipped at least until the end of Q3.
And those will be higher than the 35%?
Yes. Given how spot prices have developed, yes.
... Can you just give us a rough indication how much more? Is it, is it like another 30, is it another 40%?
I actually don't have that, I don't know the details of that, actually.
Okay. And the FX component for the appreciating US dollar, is that hedged or?
Yeah, we are hedging both coke and coal and iron ore. So we hedge it basically in line with the contract structure we have. So for iron ore, we typically hedge it a quarter at a time, the US dollar, and for coke and coal, since we have a mix of our quarterly and monthly, we hedge it a little bit shorter. And then we hedge the corresponding sales in euros, so we kind of try to lock in the margin there in between. So yes, it is, you can say it is hedged, but it's on a short-term basis. So, if you look at it, you know, one, two quarters ahead, it will basically even out.
Got it. Okay. Very clear. And then my second question is again, on fixed costs. You mentioned the SEK 380 million temporary fixed cost reduction in the third quarter, which will reverse in the fourth. Does this mean that on top of the SEK 200 million maintenance charges, we will get a sequential headwind from fixed costs of SEK 380? So we will really see the full SEK 380 million of fixed cost reversal?
We also will have maintenance outage in Q4 as well as you saw.
No, not exactly. So basically, understand, you have SEK 200 million of maintenance charges. But then on top of that, will we see an additional cost push of SEK 380, i.e., will the entire SEK 380 reverse in Q4?
No. I mean, 300 or up to 300 is the resolving of the vacation booking. So not the full 380, no.
So, how much, roughly?
I think,
Because I think the vacation point sounds to me like it is like almost like a one-off, if I'm not-
That you can say, yes. You can say that is almost a one-off for Q3, and we typically have that every third quarter. We have the same situation with this. But yes, you can see that as a one-off for Q3.
That means then fixed costs were reversed by at least like SEK 300 million, possibly a little bit more?
Yeah, around SEK 300 million, yes, in Q4. Yes.
Got it. Okay. And then just lastly, on your tax line, which was positive again, could you please give us some guidance here as to how this will develop going forward in the fourth quarter, maybe also in the next year?
I would say we had a positive tax this quarter, and it always depends on in which countries we are earning the money or not. But over time, of course, if we are actually and it usually when we are close to the zero level, that's when we kind of get the big swings in tax. But over time, if we earn more money, our tax rate should be more in line with, you know, what it is overall in Sweden and Finland, where we have the biggest operations in U.S. So around 20% or so is more of a long-term guidance.
Okay. But then that, that sounds like Q4 again will be rather positive than negative on the tax line.
Could be, yes. Yes.
Okay. Okay, very clear. Thanks so much.
Thank you.
Thank you. The next question comes from Oscar Lindström, from Danske Bank. Please go ahead, your line is now open.
Super, thank you. Three questions. First one is, I mean, you completed the synergy program back in at the end of Q2, but I seem to remember that you said you would be continuing with cost savings or personnel reductions until the end of this year. Does that mean that we should expect a somewhat sort of increased rate of fixed cost reduction due to or variable, you know, cost reduction going forward as well?
Yes. What we have said is that all the actions are done in the synergy program, and then on top of that, and that amounted to, as I said, SEK 2.043 billion or so. And then the total structure cost program is to reach, at the end of this year, in full run rate, SEK 2.8 billion. And then we have also said that we will take down manning with a bit more than 15%, I think it is, with 2,400 people or so, until the end of this year. And that will also. That target will also be met end of this year.
So we will see effects in Q4, and you will see additional effects in the P&L, so to say, compared to the previous quarters or previous year, also into 2017.
All right. And then the second question, I know you've touched on this already a little bit, is the Ruukki Construction and how we've really seen some improving results there. I mean, have you done all that you can do on your own to improve earnings there? You know, are you at the end of restructuring there, or are there more measures you're planning to take?
You're never done with improvements to start with, but I think we have taken all, most of the actions, yes, in that EUR 25 million structural cost program. We haven't seen it all in the P&L, but all the actions are more or less taken, yes. That's also why we now have appointed a new head of Ruukki Construction since beginning of Q4, Sami. And so he is, and the person that has been running Ruukki Construction the last one and a half year is, he is ready to get with the team, with the all the actions to take down costs.
All right. Thank you. The third question is around your order book, or order books for Q4 in 2017. You know, how, how, until how far in the, in the future are they full? And then, yeah, that's my third question.
We typically, at this point of time, have very limited visibility into Q1. So we have a decent feeling of how the order book looks for Q4. But then as said, I mean, there is always also, I mean, customers need to take out volumes at the end of Q4 as well, during Christmas and New Year. So there is always, of course, that was what I tried to explain, always an uncertainty. But we have a fairly good grip on Q4. Q1 is still, we haven't finalized negotiation on prices for Q1. We have yearly contracts, half-year contracts, and then quarterly contracts, and they are not completely ready yet. So we, the visibility into Q1 is, at this point of time, fairly limited.
All right. And then, sorry, just finally, the weaker demand in the U.S., is that something where we should expect that to impact your... I realize there's a price component to it, of course, but is there also a mix component for you, that your mix changes as demand weakens in the U.S.?
Not really in the U.S., because they are mainly, or if not only, selling standard plate. I mean, the niche material we produce in the U.S. is sold by special steel, so you shouldn't expect much of a mix change in, let's say, the Americas.
There were, you know, there's a similar question for your European business. You mentioned earlier here, having launched new products for the automotive sector and so on.
Yeah.
Is there some sort of underlying mix change going on in your European business?
There is always a seasonal mix effect for us. I mean, during fourth quarter and first quarter, we typically sell less of color-coated materials, so that mix effect. In that way, you can say we have a thinner mix when it comes to price. And that is always the case, and if the mild winter in the Nordics, it can last for a longer time in Q4. And if we get a tough winter, there will be seasonally no consumption of, or lower consumption of color-coated material.
All right. Thank you.
But that's a yearly effect that we see every year, and it could be stronger in a tough winter and less strong in a mild winter.
All right, but no sort of underlying structural changes in your, in your product mix?
If anything, over time, we will have a better and better mix due to automotive and due to other products. So the underlying, over time, mix effect will be positive. But then we have seasonal patterns, like, for color-coated material.
All right. Thank you.
Thank you. As another reminder, to register for a question, please press zero followed by the one on your telephone keypad. The next question comes from Luc Pez from Exane. Please begin your question.
Hi, gentlemen. Two follow-ups, if I may. First of all, with regards to your guidance on the working capital requirement, could you explain how you managed to reduce it in Q4, while the raw material cost charge will rise, talking coking coal in particular, but maybe iron ore as well? That would be my first question.
Okay.
If you can hear me?
No, but yeah, but to answer that one then, what we did during Q3, we were building up slab inventories in front of the outage in Oxelösund. So we will have the blast furnaces standing still for a slightly longer time than the rolling mill. So we will eat up that slab inventory during Q4, and that's the reason for us being sure of working capital reduction.
Okay, very clear. Thank you for the answer. And second question is with regards to European prices. As my feeling, I think, shared with some of my colleagues, is that you have a more cautious tone than some of your peers. Could you maybe be a bit more specific as to what is driving these rather cautious tone for steady prices? Is it because of your larger exposure to plates, meaning that plates are more under pressure at this stage until the anti-dumping measures do benefit the market in Europe?
First of all, we are not so exposed to standard plate in Europe. We are exposed to some extent to standard plate in the Nordic region. The big exposure on standard plate we have is in North America. No, but, as said, we are not setting the prices on European level. If prices move up in Europe, you should expect to see the same pattern in SSAB and, cautious or not, but, I like to see it also in the order book and in the P&L, and before I have a clear view.
And therefore, so far, you're not seeing any pickup in order book that could justify any more optimism, I would say?
Yeah, well, this is the view we have right now.
Okay, understood. Thank you.
Thank you. The next question is a follow-up question from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yeah, thanks for taking my follow-up. I just actually wanted to follow up, in fact, briefly on the outlook. So if we now take the effects of the maintenance charges and fixed costs as well, and net them off, it will be a SEK 200 million sequential headwind in the fourth quarter as a starting point. You basically say shipments will be stable, but prices will be down, while costs will be up, and at the same time, Ruukki Construction and Tibnor will probably lose a little bit on seasonality and maybe also on prices. So to sum all of this up, it looks like Q4 will be pretty tough, although I think a lot of these challenges are admittedly probably just more temporary. Would you rule out that you will drop to a loss on EBIT level again in the fourth quarter?
Because it does sound like a fair amount of headwinds. Thank you.
We are not giving any result guidance, but we are pretty sure that we will see a better result in Q4 this year than last year.
But would you rule out that you'll be loss-making?
As said, we are not giving any guidance on profit. We are trying to give guidance on volumes and prices.
Okay. Thank you.
Thank you. There appear to be no further questions. I return the conference back to you.
Mm-hmm. Thank you. Any additional questions from the room? Okay, then I thank you for joining us today and wish you to have a nice Friday.