Good morning, ladies and gentlemen, both here in Stockholm and on the lines. Welcome to the result, Q2 result briefing. We'll run this through as we normally do. Our CEO, Martin Lindqvist, will start and go through the general market situation and the Q2, and then CFO, Håkan Folin, will go through the financials. Then we'll end with the outlook for the Q3, again, with Martin. Of course, after the presentation, we are happy to answer all the questions you might have. Let's get started. We are almost late to start. Martin, please.
Thank you. I need to try to find something to flip the slides with. So when I was standing here three months ago, we announced a financing package consisting of three parts: rights issue of SEK 5 billion, further net debt reduction of another SEK 5 billion until the end of 2017, consisting of sales of non-core assets and also generating free cash flow, and then, as the third part, a comprehensive refinancing package. It has been a very busy quarter. The rights issue was oversubscribed and successfully completed during the quarter. We have done the refinancing, and Håkan will come back to that, and that is, of course, something we always work with, trying to extend maturities and so on, and Håkan will spend some time on that during his part of the presentation.
We are also today feeling very confident that we will be able to, until the end of 2017, reduce the net debt with another SEK 5 billion. I would also like to take this opportunity to thank all people involved in this process: the banks, the capital markets, and of course, last but not least, the shareholders and the owners. They have shown a great confidence in SSAB's journey towards industry-leading profitability by participating in this rights issue.
A journey that takes time during interesting times and volatile times, and we see cycles, shorter cycles, and some would call it microcycles. I would like to spend a minute on that before I dive into the second quarter. This is a simple picture, but I think it shows what is affecting the steel industry, and of course, then SSAB: demand, capacity, and trade. There is, of course, expectations, short to mid-term, that demand globally for steel will decrease, and the reason for that is, of course, decreasing demand in China.
On the other hand, the expectations for demand on our home markets, Nordic, Europe, North America, we expect to see moderate growth going forward. For special steel, we expect to see further demand growth for our special steel products, and we see opportunities in some emerging markets for SSAB products. But overall, the expectation is decreasing demand. Capacity, another important factor. There is no doubt that there is a global overcapacity, and I would say a substantial global overcapacity, mainly centered in Asia and China, and less so, I would say, in Europe. And I think in Europe, the steel industry has partly dealt with it by idling capacity and closing capacity.
As you all know, there are ongoing discussions of further consolidation in Europe, and that could, of course, be helpful. The big part or one other important part is, of course, trade and trade flows. And as you know, when we talked about it, when we met six months ago, some countries have chosen to deal with their overcapacity by subsidized export. And that has led to trade barriers, discussions regarding trade barriers, implemented trade barriers, investigations regarding trade barriers, not only in Europe and U.S., but also in other places in the world. And that, of course, as we have talked about before, runs the risk of regionalizing steel markets. Trade barriers will not solve the problem.
It could give some short-term relief, but, It could also give some incentive for some countries to really start to deal with their overcapacity, but it will not solve the problem. Microcycles, I think we experience a microcycle both in Q4 and in Q2, and these are spot prices. After releasing Q1 report and meeting the capital market and the owners for a couple of days, I went out to visit customers. I went down to Italy in the beginning of May, and on the way down, I was re-reading reports about spot prices in Europe increasing. My plan was, later that afternoon, during the weekly meeting, talk to Peo, head of Special Steels, and Olavi Huhtala, head of SSAB Europe, once again reminding them of the importance of increasing prices. I met a couple of customers.
I had lunch and, and a meeting with one of the biggest customers we have down in Italy, that Monday, and he told me that last Friday, you, SSAB, announced a price increase of EUR 120 per ton for Q3. And I felt really happy, not only for the price increase, but also that we were so quick to do that. Two, three years ago, it would have taken probably a quarter to come through with the price increases, and, and this time we reacted in a matter of weeks or a couple of weeks. And, and my conclusion was, and still is, that with this microcycle, it's so important to be quick, flexible, and agile.
I think SSAB has a much better opportunity today with the production system, with the flexibility, with the lead times, delivery performance, market coverage, to be much quicker than we used to be as the old SSAB or the old Ruukki. And that, I think, leads me into the market situation in Q2 and what we saw, and this was what we were expecting to see for Q2. Apparent demand better than in Q1, lower imports into Europe versus Q1 and versus end of last year. Steel service centers starting to buy volumes in line with what they sold, so no destocking, but no restocking either. Steel prices increasing, spot prices in Europe and in North America, however, from very, very low levels.
That summed up to a result of almost SEK 670 million on EBIT level, SEK 850 million better than Q1, and that was, of course, because of higher shipments and prices, as we expected, positive synergy impacts, and better capacity utilization. We also managed to generate a fairly strong operating cash flow, and Håkan will come back to that, of SEK 1.2 billion, and we closed the synergy program. But we did not only close the synergy program, we actually finalized the integration of SSAB and Rautaruukki during the second quarter. It has been a tough and interesting journey, and as you know, we have been combining the two toughest competitors, at least on the Nordic market, but also globally when it comes to a lot of special steel products.
We generated synergies of SEK 475 million during the second quarter, and the run rate at the end of the period was actually SEK 2,043 million in hard cost synergies, and that should be compared to the original plan of SEK 1 billion within three years. We are also well on our way to deliver on the total cost-saving target of SEK 2.8 billion in full run rate at the end of 2016. And when it comes to the plan of reducing the manning in the company with 2,400 employees, we are currently running slightly ahead of plan. If you look into the divisions, Special Steels, decent growth in volumes compared to one year ago. One contributing factor is the business unit within Special Steels, Wear Services or services.
One year ago, we had 164 Hardox Wearparts members globally. At the end of Q2, we had 220 Hardox Wearparts centers globally. That is an important part of our strategy, and we will continue to focus to grow that network. The plan is to double that network within the coming three years. Europe, we saw also result improvements, higher volumes and higher prices, and lower cost due to synergies. And the lion part of the synergies in this combination lies, of course, within SSAB Europe, as you all know. Americas, also result improvements, higher volumes, higher prices compared to Q1, but met by higher scrap costs as well, but higher margins. And at the end of Q2, the spot margins, spot prices over scrap was not normal, but more normalized than they were in the beginning of the quarter.
Ruukki Construction, where we typically always see a seasonal uptick, but what I think is strong in this report is that we have the same volumes compared to one year ago, but the profitability or the profit is more than EUR 60 million better than one year ago. And the reason for that is mainly, if not only, the ongoing restructuring program. And as you know, the target is to reduce the costs, and this is part of the EUR 2.8 billion, but not part of the synergies, to reduce the cost on a yearly basis with EUR 25 million. And all of those actions are taken, and we will see the effects of that in the coming quarters or continue to see effects of that in the coming quarters. With that, Håkan.
Thank you. Good morning, everyone. I will give some more details on the figures. We'll also show the change in operating profit between the quarters. Spend a little bit more time than usual on the debt situation, given there are quite big changes after the rights issue and the refinancing. And then finally, also a few words about the maintenance outage, which we have changed a little bit compared to previous plan. Starting with talking about sales, shipments, and profitability. We had in Q2 now, we had lower sales than we had Q2 one year ago. This was driven by lower prices. Prices impacted negatively with 6 percentage points. In total, sales were down five. On the other hand, we had higher shipments compared to Q2 last year, 5% higher shipments.
Actually, if you look at this time series from 2014 up until today, this quarter was the quarter where we had the highest combined shipments for the group. Looking at EBITDA and EBITDA margin on the down to the left here, we had an EBITDA in the quarter of SEK 1.6 billion, and we have an EBITDA margin of 11%. And actually, as with shipments, the 11% margin is also the highest we have had since the beginning of 2014. If you then finally here look at EBITDA per ton delivered steel, it was a little bit above 800 million, sorry, 800 SEK per ton.
Clearly up than compared to previous quarters, but actually slightly lower than we had in Q1, 2015, where we had a little bit lower profitability, but actually lower volumes, and then per ton, slightly better. But i will now move into and describe what happened with the profitability, from the different quarters. Starting then with the change between Q2 and Q1. In Q1, we had a loss of -SEK 190 million, compared then to the EBIT in this quarter of SEK 668 million. So an improvement of around SEK 850 million. Two main factor contributing, one being prices, SEK 480 million, and that's being seen in Europe and also in Americas, not in special steel.
As we have said before, both when prices go up and down, special steel prices are more flat, and we see the main impact therefore coming from Europe and Americas. Then we have volume also improving Q2 versus Q1, coming from all three steel divisions. We have slightly negative cost, both variable cost and fixed cost. Variable cost is driven by increased scrap cost in the U.S., slightly increased iron ore as well. And the fixed cost is to a large extent seasonal, where we are taking in more temporary workers during Q2, which will then work during the summertime. We also had somewhat higher maintenance costs in Q2 than in Q1. On the other hand, part of this cost, we actually had positive impacts from higher synergies in Q2 than Q1.
We had SEK 150 million more synergies in Q2 than in Q1. Then we had some positive effects from FX, with the weaker Swedish krona in the end of the quarter after the Brexit. And then in other here, of around SEK 100 million, we have under absorption impacting positively. We were running the mills at a higher rate in the second quarter than in the first quarter. So all in all, an improvement of SEK 850 million, where you can say SEK 1 billion is coming from price and volume, and volume then including better capacity utilization, slightly than negative impact from cost. If we instead compare Q2 this year with Q2 last year, it's actually quite a different picture you see here.
The improvement was a bit lower, from 301 to 668, so SEK 370 million something. But actually, we had a drop in prices impacting EBIT with almost SEK 1 billion, or SEK 950 million, comparing Q2 last year then to Q2 this year. And this was seen mainly in Americas and Europe, and to clearly a much, much less extent in special steels. We have volumes impacting positively, SEK 220 million, fairly evenly split between the three steel divisions. And then comes the big impact here. It's the cost side, both variable cost with SEK 900 million, but also fixed cost with SEK 230 million. And in the variable cost, we have the raw material definitely impacting positively.
But we also have that we are running the mills with a better yield, and we have the synergies and the savings program from Ruukki Construction impacting positively. And the synergies then being part of both the variable and fixed cost, comparing Q2 this year to last year, is SEK 350 million in positive EBIT impact. The other items here, FX and other, are fairly negligible in terms here. But all in all, an improvement of SEK 370 million, despite them losing SEK 1 billion on price, but taking that back with slightly better volume and especially much better cost situation. If we then move into the cash flow, we had an operating cash flow of SEK 1.2 billion. We had a net cash flow down here at the bottom of SEK 659 million.
That's then before the proceeds from the rights issue, which is in line with Q2 last year, but clearly better than the Q1. And we had this positive cash flow despite having a small negative change in working capital, where we actually built accounts receivable during the quarter. Given the increased both volumes and prices, we built around SEK 750 million in accounts receivable. But despite that, we managed to keep the change in working capital almost on a zero level. If you look at the first half year, we have a net positive cash flow of around SEK 400 million, and we have. We talked a lot about CapEx before. We have maintenance CapEx and strategic CapEx.
Adding that up, it's around SEK 650 million after the first six months, which means we are well in line with what we said is the level for the full year of SEK 1.5 billion. CapEx will be higher in the second half, given that we have actually major maintenance outage in all of the three steel mills, but we will, we will keep to the SEK 1.5 billion that we have said. As Martin talked about, we have completed the rights issue. It was oversubscribed, and we received net proceeds of SEK 4.9 billion, increasing our equity. We have also done the comprehensive refinancing in terms of prolonging debt maturities, prolonging bank guarantees, and also we set a new large credit facility in place of EUR 495 million.
We also then have the target to, by the end of 2017, reduce net debt by another SEK 5 billion, and doing that then through selling non-core assets and our own cash flow generation. If we combine all this, all these actions we are taking, we will have a net gearing below the long-term target of 30%, and we have also moved the larger maturities out in times. We'll have removed the maturity risk basically for the coming three years. I will spend a little bit more time than usual in going through the different slides on the debt situation. Naturally, given the rights issue, our net debt decreased, and also our gearing went down.
Our gearing went from 53% at the end of Q1, down to 37%, and the net debt decreased by SEK 4.8 billion - SEK 18.4 billion. The reason why net debt does not increase more than SEK 4.8 billion when we had the rights issue proceeds for SEK 4.9 billion, and we had the positive net cash flow of around SEK 700 million, is because we have part of our net debt is in foreign currencies, especially US dollar and euro. And that means that the gearing is not impacted if the currency goes up and down, but both equity and also net debt might differ a bit, depending on the currency development.
Usually on these slides, when we show the maturities, we only show them for one quarter, but given that there's been so much change now between the quarters, I show it both at the end of Q1 and also at the end of Q2. And as you can see, there's quite a large differences. The thing that is not so different is the cash and backup facilities, which was around SEK 11 billion, SEK 11.5 billion, and now it's close to SEK 12 billion. So the total bar is the same, but it's quite a large difference because we have a lot more cash now following the rights issue, but we have less credit facilities. We put the new EUR 495 million facility in place, but we have closed two other ones, so the share of cash is larger than it's been previously.
But the total is slightly higher than close to SEK 12 billion. What's also changed a lot is the maturities in the coming three years, where we used to have close to SEK 16 billion, maturing 2016-2018, but now we actually have less than SEK 9 billion in the coming three years. We have also reduced the commercial papers with approximately SEK 1.5 billion during the quarter. So even though we see a significant improvement for the coming three years, we are constantly working on extending further the maturities, especially 2017 and 2018, and try to move them out in time to 2020 or beyond. Given the refinancing, we have a longer duration on our debt portfolio. You can see out here, we now are at 5.2 years.
We were at 4.4 after Q1, so we've increased almost one year during the quarter. And actually, if you look back in time, 5.2 is the highest we have been since the beginning of 2012. And given then the short-term volatility we are seeing, it's comfortable for us to have a duration that is as far out in terms as more than five years. The average interest rate, which is this line here, it has increased slightly. It's now at 2.8. It was at 2.7 before. And the reason for the increase is that when we are prolonging loans, then you usually get the slightly higher interest. And also, we have taken down the commercial papers, which are clearly below the average interest rate.
On the other hand, we are still below 3% in average interest rate. Coming down to the maintenance outage that we are planning for in 2016, the estimated cost for the coming two quarters is around SEK 500 million. That is in line with what we have said before. No major change there. But what we have done is we reshuffled the timing a little bit. So for SSAB Europe, given that we expect the apparent demand to continue to be fairly good during the third quarter and fourth quarter still being a bit more uncertain, we have moved part of the outages out in time. And in the U.S., the other way around, where we see that Q3 will be clearly seasonally weaker, we had planned to have the outage at the beginning of Q4.
We're moving it up in time a little bit to have it at the end of Q3 instead. And as Martin talked about in the beginning, with the micro cycles, it is extremely important for us to not be too fixed with our plans, but actually be able to adjust them according to how the apparent demand is moving. Even if underlying demand is not moving that much, we see clearly apparent demand moving much more quicker. And I think here we have shown that we are more agile and faster than we've been before by being able to change these outages in order to better match the overall demand situation.
Thank you. And that was, of course, one of the important parts of combining the two companies, to become much more flexible and use this, call it, redundant production system in a smarter way. Some words then, before we open up for questions, regarding the outlook. In North America, we expect plate demand to be somewhat lower, mainly due to seasonal slowdown. In Europe, we expect to see also a seasonally weaker Q3, which we always do, both in US and in Europe. High strength steels, demand being relatively unchanged compared to Q2, and overall then, lower shipments compared to Q2 in Q3, but at higher price levels. And if we look at this chart, I showed it last time, this is our journey that we have embarked.
I think that, the combination of Ruukki and SSAB, taken in the books, Rautaruukki merger, the total cost reduction of SEK 2.8 billion, well on its way. The manning reduction with 2,400 employees until the end of this year, currently ahead of plan. Cash flow generation and strengthening the balance sheet, one important part, done, the rights issue. Extension of debt maturities, even though that is always an ongoing work, a big part of it, as Håkan presented, done. Product mix improvement, ongoing. The development of the service and aftermarket business. The volumes and market shares we are taking within automotive, with our new products, the coil 1400 and the coil 1700, ongoing and partly done.
We have a very strong belief and are convinced that this will lead us to industry-leading profitability, with an EBITDA margin above industry peers and a net gearing below the long-term target of 30%. That will also give us the opportunity to resume dividend, dividend payout, of 50% of the net profit. That, my friends, was our short presentation, and now we open up for questions and good advice, as always.
Let's start with the questions from the audience here in Stockholm. So Julian, please.
Thank you very much. Good morning, everyone. Very much congratulations on your early delivery of synergies and, top up on the targets. Can I just start by focusing on your Q3 guidance, that pricing will be up? Could you first give us some details on how you see bookings in the different regions? What sort of lead time do you have for your orders now?
It differs between regions, it differs between divisions. We have not been explicit about exactly how the order book looks and the order intake. But as we said, we expect stable underlying demand, and we also expect to see, and we will see, seasonality as we always do in both Europe and in North America. We will, on the other hand, see also seasonality in Ruukki Construction in Q3.
So, but altogether, I would say that fairly stable underlying demand. And then when it comes to plate consumption, it will be dependent on the preliminary ruling, end of September or beginning of October, of the plate case in U.S., which is obviously pretty important for us and some other measurements in Europe. But as said, in U.S., imports are still on a high level. In Europe, they have come down compared to end of last year and beginning of this year.
I was thinking more about the guidance that pricing will be up for Q3 versus Q2. The reason I asked about orders was to understand how sure you are that pricing will be up.
Well, the price has gone up during Q2. And the structure we have, I would guess that we have something like 35% or between 30% and 40% being more spot contracts, and the rest being on contracts. And the majority of the rest, call it 65% or so, is quarterly contracts. So there is definitely a lag effect.
Okay,
We have a little bit more spot,
Thanks.
Order books longer-term contract in Europe versus America, where America is a bit more on the spot side than Europe.
Very good. Would you be able to arm wave to say whether Q3 to Q2 price momentum would be, say, similar to from Q2 to Q1? Your price increase sequentially, would it be similar for next quarter to this quarter?
I would say it won't be less, no.
Great. Lastly from me on the trade cases, and thank you for summarizing those on slide 29 of the presentation. I understand from trade press that Arcelor asked the U.S. authorities to delay a preliminary assessment of the multi-country plate trade case from July to September. Do you have any information on that? What's your view on how that very important case will pan out?
What we know right now, or what we, what we expect, is to have a preliminary ruling end of Q3, beginning of Q4, and, and that's what we know. I mean, it's a process, I would say, outside our control.
Okay, and in Europe, something which isn't on your slide, I think in February, there was a multi-product case taken out against China, which included heavy plate. Is that an investigation which could end up affecting SSAB, SSAB's plate market in any way? Or is heavy plates not something you're involved with in Europe to the same extent as in the States?
Of course, we are not involved in this to the same extent, but we have a market for ordinary heavy plate in the Nordic region. But outside the Nordic region and outside NAFTA, I would say it's not any big volumes at all. So it's mainly for the European production system, it is on the Nordic market, and it's heavy plate, mainly produced in Raahe.
Okay. Do you get any feeling as to whether the European Commission is going to be more sturdy in its activities than it has been in the past?
If you ask about the feeling, I would say probably slash hopefully, but, but, as always, with politicians, you never know.
And then finally, do you have any feeling for when that particular trade case will be given a preliminary assessment by the European Commission?
No.
Thank you very much.
Okay, and the next question. Yes, please.
Yeah, hi. So it's Robert from Carnegie. A question on that guidance of your Q3, so seasonally weaker volumes overall. But in Special Steels, you guide for unchanged demand, and I think historically, there's been sort of the same type of seasonality Q on Q in Special Steels. So I'm wondering, are there any sort of end segments re-accelerating or recovering, or is it the phasing of the maintenance stops, or if you could elaborate on that?
But we have, as we did last year, we are planning to take the maintenance stop in Oxelösund during Q4, and this year as well. I would say that there are some ups and downs in segments. Some segments are moving slightly better, and some segments are going down. But overall, we expect the demand to be in Q3 fairly unchanged.
All right, so, so that sounds very bullish. And on, on Julian's question, just, a follow-up on, on the pricing. You talked about it not being less Q on Q in Q3. Was that a comment for Europe or for the group overall, Håkan?
I would say, especially for Europe, where you have, as we said before, you have a larger share of contracts where you get the delay effect than you have for Americas.
Of course. All right, thanks.
Okay. Then Johan, please.
Yes, it's Johannes Grunselius, Handelsbanken. Could you give us some comments on your thoughts on the plate prices here in the US going into the third quarter? Because it's obvious that there is a positive lagging effect coming, but if you look at the spot prices, there is a little bit of a downtick over the last few weeks. What do you see there, please?
Oh, that's exactly what we see on the spot prices. And as I said, it will be the preliminary ruling of the plate case will be important for that market. And today, plate prices, spot prices for plate, are in line with strip prices, which is very seldom the case. So structurally, they are too low.
Then a question on scrap prices in the U.S. What was in your books in the second quarter? Did you take the full negative effect of higher scrap prices there, or were there also lagging effects, which was then positive on the cost side there, or?
The lagging effect for scrap are fairly short, so there is some, definitely, but it's usually around one month lagging effect. So, yes, you can say there was a little bit of the lagging effect, which you'll also see a little bit in Q3, but fairly limited.
Then I was also wondering about how you viewed CapEx. I think you had a guidance in Q1 of SEK 1.5 this year. Is that still valid, and what you see beyond that? And if you can help us with how we should see tax costs in the coming quarters, please.
I mean, if we take start with, with CapEx, we will be in line with the guided SEK 1.5 billion, as Håkan pointed out, and we are at roughly SEK 600 million so far. It will be a bit more during the second quarter, but definitely when we sum up the second half, but definitely when we sum up the full year, we will be in line with the guidance. We have said that over time, for the coming years, we are approximately at the level of SEK 2 billion. That is what we need, plus, minus something. Then I think the tax, it's better that you answer.
In terms of tax, we have in Sweden and also in Finland, tax rate is around 20%. Then it matters a lot where we are earning or losing money, and that's why we get quite big hits between quarters. But on average, I would calculate on around 20%.
I was thinking that there might be some, you know, tax shield or something like that because of the weak historical quarterly losses, right? So but we shouldn't see any sort of benefits from that going forward.
We have that to some extent, yes. So, you know, 20 or slightly below then.
Okay.
The next question. Okay, let's take questions from the audience online. Operator, please.
Thank you. If I may remind all participants first, that if you wish to ask a question, please press zero and one on your telephone keypad. The first question is coming from the line of Olof Grenmark from ABG. Please go ahead.
Yes, good morning. Just coming back to the stoppages and the outages, to clarify, should we expect the same figure, SEK 500 million, for the full year? If you could, somehow clarify what the difference will be between the quarter now and the third quarter compared to your previous guidance, that would be helpful. Thanks.
SEK 500 is for the coming two quarters, Olof. The difference, actually, it's not that big difference because we, in terms of what we said before, since we moved Europe from Q3 to Q1 2014, and Americas the other way, there's actually not that huge change in terms of the difference between the quarters. It's more actually change between divisions. But SEK 500 is for the coming two quarters.
Okay, thanks. That's all from me.
Thank you very much. Next question is from Carsten Riek from UBS. Please go ahead.
Thank you very much. two to three questions from my side. First one, Martin, you brushed over Europe quite quickly, even though that was your major swing factor. Could we dive a little bit into the cost savings? Because, that was the position which surprised me most. How much of the cost savings were actually out of the synergy program, and how much due to lower raw materials? The second question on the same subject, Europe, is the cash flow generation. I was quite surprised about the good operating cash flow, despite
I mean, my memory is not that good. Could we take them one by one?
We stop at the first one.
Okay, thank you very much for that. No, but as Håkan pointed out, I mean, the synergies in total for the second quarter was SEK 475 million, compared to when we combined the two companies, and the majority of that is, of course, within SSAB Europe, where we see most of the effects. And then compared to second quarter last year, I think it was, what did you say? SEK 300-
SEK 350 million.
350 more in synergies. So that is, I mean, if you compare it sequentially, Q2 over Q2, and the rest is other costs, like variable costs and better yield and so on. So that is the answer to that question.
Okay.
The reason for maybe not spending too much time on Europe and the market in Europe is that it developed pretty much or fully in line with our expectations.
Okay. On the European business, again, on the free cash flow, well, let's say, let's step back on the operating cash flow. It was very, very strong, despite having an increase in steel prices, higher shipments, et cetera, et cetera. So for, for me, naturally, I would have expected a cash outflow here because of higher working capital needs, especially in the inventories, but inventories remained stable. How did you manage that?
This is also due to the combination, and maybe we were underestimating when we presented this combination, the positive effects of doing that. But it's also a complex system, and when you combine these systems and you specialize sites, you get up the sequence length, you get up the yield performance in the mills, that gives that kind of effects. And I think also, given that we were building so much accounts receivable, I think it was very positive that we managed to keep the total working capital unchanged.
We have said before that we have had that before, and we still think there is more possibilities, and that is also partly why we are confident that we will, in the combination of selling non-core assets and generating free cash flow, be able to reduce the net debt with another SEK 5 billion in the coming one and a half year.
Okay, thank you. The last question is on Americas. Håkan mentioned a less certain outlook in the third quarter and seasonality in the US business. I'm a bit puzzled here, because in the last three years, three times we have seen actually an increase in shipment and production from the second to the third quarter. So I'm not really sure what he mentioned here by seasonality. It should be actually stronger, not weaker, or at least stable. Thank you.
No, but we typically see seasonality, underlying seasonality in the third quarter as well in the U.S. And this now, spot prices, if you look at spot prices for plate in North America, they are, I mean, not pointing straight down, but flattening out and pointing downwards. So I said, I think we will see seasonality this time, and we will see it maybe slightly increased by uncertainty in prices. But that also will be very dependent at the end of the preliminary ruling in the plate case, how it will play out.
Okay, so the seasonality is more related to pricing rather than volumes?
No, I would say both, and we typically see that seasonality in the third quarter in North America as well.
Maybe I have the wrong numbers, but I would like to see that, because I don't have it in my database.
Okay. We'll come back to you with that.
Yeah. Thank you.
Thank you, sir. Next question is from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good morning, all, and thanks for taking my questions. My first question is on your margins and also on the third quarter outlook. You say that almost half of your margin improvement in the second over the first quarter has been driven by volumes. Possibly a bit color on that at the point. I mean, you just mentioned you have not been priced by your strong euro number at all, it seems. So, a little bit more color really would be quite helpful. Then maybe over to my second question is on the maintenance in Oxelösund. You just said that there are no costs, but there will be a volume loss.
So, [audio distortion] , and let's see, really, the question color, and you said very clearly that you are involved in further consolidation. Since you know the whole situation, Europe has a good dynamic, and some articles or mentioned companies to just confirm that you have [audio distortion] or maybe extracting synergies this way, rather than actually putting money on the table and actively consolidating.
Yeah. I don't know what to answer to that, but as said, we have just finalized the combination with Ruukki and taking our part of the work, so to say. So that is what we are doing now. We are focusing on our journey towards industry-leading profitability and run this new company as good as possible. That's my and our 100% focus.
Okay. Okay, that's clear. Thanks so much for taking my questions.
Thank you.
Thank you, sir. Next question is from Oscar Lindström, from Danske Bank. Please go ahead.
Hi, good morning. I have three questions for you. Maybe we can take them, but we'll take the first one, and then, and then I can... It's regarding H2 2016 now, year-over-year. I mean, you give us the maintenance profile for H2, but how does that look year-over-year? Flat, up, you know, what's the deviation? And likewise, in terms of non-recurring items and the impact of the Luleå relining last year. Maybe if Håkan could sort of summarize that.
In terms of the maintenance outage, if we take the Nordic operations, if we take the full half year, it's basically the same as last year. The difference this year is that in Americas, we have a large maintenance outage in Montpelier now during the second half of the year. We did not have a similar large outage last year. So that's the difference for the Americas division.
And then, of course, with the big difference of not relining a blast furnace up in Luleå
Yeah.
-this year.
And in terms of EBIT impact of the not relining the blast furnace, it will obviously be positive if you compare for SSAB Europe, which was negatively impacted by the relining. They will have a positive impact in the third quarter, especially compared to last year. You have a slightly opposite effect in Special Steels, where we last year were running both blast furnaces up until beginning of October, and this year, we are only running with one blast furnace in Oxelösund, so you get a little bit more under absorption within Special Steel.
Could you perhaps give some indication of the size of the positive impact on Europe and the size of the positive year-on-year impact on Special Steels?
If I have the figure correctly in my head, I think we said in total, the relining costed us SEK 225 million-SEK 250 million last year, and then the negative impact is a bit higher than that for Europe, and then you're compensating a bit for Special Steel.
All of this in Q3, or how much was?
No, that was spread out, actually, for Special Steel. They were running both blast furnaces from the beginning of the year, last year, up until October, while for Europe, then we stopped the blast furnace on first of June, and we got it up in operation again in the beginning of, it was in the middle of September.
Okay, so maybe 50/50 between those two quarters, roughly?
Or even more, I would say. The main part of the negative impact in Q3.
Okay. Thank you. My second question, you also had the Brazil non-recurring item last year, right, in Q3? Is that correct?
Yes.
Yeah.
My second question is around, kind of now that you have better volumes, and we've talked a little bit about the prices, is there also going to be a mix change during H2 compared to H1 or year-on-year, actually, due to the stronger volumes, or for any other reason for that matter?
I would say, we, Martin talked about it on this last page in terms of the roadmap, where we are constantly working on improving our mix. And if you take SSAB Europe, where we have the automotive business, and that has developed quite well over the last year. So I would say, yes, you would have a somewhat better mix, second half of last, oh, sorry, of this year compared to last year, but I wouldn't say it's dramatic, no.
Yeah. And similar in terms of you being able to plan production better when volumes are higher or when you have more sort of able to plan your order book better?
Yes, correct.
Yeah. And sorry, my final question, there was some questions about you participating in M&A before, and but you do have some non-core assets, which you've talked about earlier. But you've, in my opinion, or my understanding, signaled that you're not, you know, you're in no hurry to divest those, and perhaps you felt that they were, you know, not in good enough shape or at their normal sort of good enough performance level to be candidates to divest. Do you feel that the construction business is now running better or, you know, is at its full potential or ready to be divested?
We feel that it is running better, and you clearly can see that in the figures. As said during the presentation, we have the target to reduce the cost base in Ruukki Construction with EUR 25 million on a yearly basis. And we have done the majority of all the actions, so we will see that. We saw that in the second quarter, and we will see that in the coming quarter as well. So yes, the business is clearly running better, and you're completely right. We felt that this is not the core of SSAB, but we felt that we could run this business in a better way than it has previously been done, and we see some effects of that already in Q2.
So, I mean, it's beyond the sort of year-on-year impact of these cost savings, or for the remaining quarters, we shouldn't sort of, you know, you've done what you plan to do with it in terms of improving earnings?
To a large extent, yes.
All right. Well, thank you. Those were my questions.
Thank you, sir. Next question is from James Gurry from Credit Suisse. Please go ahead.
All right, thanks for taking my question. Just in relation to the European market, how much the volume improvement has been to overall improvement in demand, rather than taking away from less imports, or, do you think one of your competitors in Europe has actually missed out on some volumes during that quarter? And just in relation to that last topic, just then about Ruukki Construction, the possible sale of that. With the debt program that you announced earlier in the year, you sort of gave yourself a timeline of the end of next year, right? To achieve, it was 30% gearing levels. Does that include the sale of Ruukki Construction, and the finalization of that sale by that time?
To start with your first question, if I remember it correctly, then I would say that the underlying demand in Europe has been fairly stable, and it has been swings in apparent demand. And then as said during the presentation as well, we have seen less import into Europe compared to end of last year and beginning of this year, and that, of course, has an effect. When it comes to... And the second question was regarding Ruukki Construction. We said that we will reduce the net debt with another SEK 5 billion up until end of next year, and we still stick to that plan and feel confident that we will deliver on that plan. And that includes also some potential sales of non-core assets.
As said before, we are a steel company that sell, ship, and produce steel products, and that is the core of SSAB, and that means that things that are slightly outside that focus are regarded as, in that aspect, non-core assets. We stick to the time plan, and we stick to the plan to do the restructuring of Ruukki Construction, see that restructuring visible in the P&L and then deliver on the SEK 5 billion in additional net debt reduction.
Okay. Have you had any incoming queries about that business from interested parties?
That's a good question.
That's all I've got. Yeah, thanks.
Thank you. Next question is from Alessandro Abate, from [audio distortion]. Please go ahead.
Martin, congratulations on the great set of results, especially for the European side. I have three questions, if I may. The first one is related to the maintenance outage cost. Is it possible to have a kind of a sense of where this cost we're gonna head to in the coming years? The second one, if you can give a bit more about the structural differences of the EU plate markets, mostly in Europe, excluding the Nordic, where you really have a significant different position versus the US one. The third one is related to consolidation.
I mean, taking a look at your company and the assets where you operate in, the segment where you're operating in, do you think that consolidation in the U.S. for your company profile can actually be stronger in terms of potential, possibilities than actually it is in the European space? Thank you.
Do it first.
Sorry, the first question was on maintenance outage. Was it you wanted guidance for the coming years? Is that correct?
Exactly. Yes. Thank you.
I think, in general, you can say that for the Nordic business, we typically run the maintenance outage, one per year. Then the timing is a little bit different. We have had them for special seasons in Q3, now we have them in Q4. For Europe, typically, they are in Q3, now we move part of them to Q4. So I would say for the special steel in Europe, you can calculate with roughly the same cost going forward as you have this year, and that we have in the table on the, in the presentation. If you take Americas, then the two big sites, we have the outages, either with 18 or 24 months in between by each site.
So to make it simple, you can say on average, we have one large maintenance outage in U.S. every year, and that's also what we have this year down in Montpelier. We will have a large one the next year in Mobile. So, to make it fairly simple, then you can say that you can use roughly the same maintenance outage cost that we have this year also for the coming years.
If we take your question, Alessandro, about the European plate market, I'm not an expert on that one, because we are mainly for standard plates active in the Nordic region, and that is, of course, a bit slightly different compared to the rest of Europe. And it's a bit smaller and in some ways, not protected, but not influenced as much as on import and so on, on, as the other markets. So we are I would just guess if I gave you a breakdown of the European plate market, so I think I skip that. And then when it comes to your questions or your comments about further consolidation in U.S., I know that you have, and we have discussed that, some ideas about that.
I mean, North America is a home market for us, and we are the biggest plate producer there. So, I mean, if someone wanted to do something there, I guess they would talk to us in some way.
Martin, thank you very much. Have a great day.
Thank you.
Thank you, sir. Next question is from Luc Pez from Exane BNP. Please go ahead.
Hi, gentlemen. A couple of follow-up questions. First of all, on the working capital requirement, could you, let's say, guide us as to what you expect in terms of structural improvement as part of your synergies? And, more specifically, looking at the coming quarter, whether we should expect some increase, which is what I would expect as part of seasonality. That would be my first question. Thank you.
If I take it overall, I would say that we still see possibilities when it comes to working capital efficiency, when it comes to work in progress, finished stocks, and so on. That is due to a strong focus and the effects of combining these two companies. I mean, we had practically, Ruukki had one stock in one place, and we had another stock in the same place. So we are constantly working with that. On the other hand, I mean, we are increasing stock sales, which is an important part of our global Special Steels business. But overall, I would say that we expect to continue to become more effective when it comes to working capital efficiency.
That, of course, will be affected also about the sales volumes and prices that will build or reduce accounts receivable. But overall, I think we are expecting to see positive over time development when it comes to working capital efficiency, and we haven't done everything that is possible to do. That is my answer to that question.
Okay. With regards to, yes, coming quarter, working capital requirement, please?
Yeah, for the coming fourth quarter, as we guided for shipments, even prices will be down, but shipments will also be down, both seasonal from a seasonal point of view, because, but also because we are doing the outages. So, in that sense, you know, we don't see that. I think you have said that you were expecting that we need to build working capital, and I think that in terms of accounts receivable, we should rather be able to free up some cash during the coming quarter.
Okay, thank you. Second question is related to comments you made. I would like to be sure I properly understood this. When you are talking about prices being up, I understood that you were expecting Q3 versus Q2 prices to be less up than Q2 versus Q1. Is this correct?
No, actually, we said for Europe, given that the spot prices we saw on the market were higher during Q3 than they were in Q1, and we usually lag there given the contractual structure. So for Europe, you would rather see a higher increase during Q3 compared to Q2. On the other hand, what we said that for Americas, we have seen spot prices starting to trend downwards. We don't have as large share of contractual business in Americas, and there, as Martin said a few times now, how the pricing situation develops during Q3 is very much dependent on the expected ruling of the import trade case.
Okay, clear. Thank you. And my final question, therefore, would be related to the US market. I do understand that everybody has large hopes on the ruling by DOC in the coming September. What I am surprised about, however, is that when you look at imports coming into the US, they are now at near historical lows, so one could argue that it has already at least a volume impact in the US market. But inventories have been building up to quite high levels over the past two months, and prices are starting to fall off. Is there something happening on the demand side, even just talking, or?
I would say we see, we definitely see the seasonal slowdown, and we see some segments are a little bit weaker than they were before. Like, we have the heavy transport, for example, in U.S., is slowing down slightly. Construction machinery also slowing down slightly, with some of the large producers, like, John Deere and Caterpillar, laying off people in North America. So I would say it's a bit uncertain where the U.S. market is heading at the moment. Yes.
We see some other segments, like wind towers, continue to perform and perform in a good way and increasing. So it's a mixed picture now, as Håkan says, a bit uncertain.
Thank you. Have a good day. Thank you. Next question is from Christian Kopfer from Nordea. Please go ahead.
Yes, it's Christian Kopfer from Nordea. Just a few follow-ups from me. First, just to clarify on the cost savings. I mean, everything else remains equal, you expect to realize some SEK 800 million further in costs, call it cost savings from current levels, right?
Yes.
Well, actually, no, not 800 further. We are expecting that we will reach the SEK 2.8 billion target by year end. SEK 2 billion of those are synergies, but part of the other ones we have already realized, like we have realized part of Ruukki Construction savings programs. We have realized, which we talked about a few quarters ago, this so-called PCI investment in Raahe, around SEK 200 million, cost improvement. So, it's not additional 800 from where we stand today, but, but we're saying that by the end of the year, we will have realized the SEK 2.8.
Okay. But could you just give me an indication, how much it is still to be realized?
I think it's a few SEK 100 million still to be realized.
All right. Okay, perfect. Thanks. And then finally, for me, I was offline for a while, so sorry if you already have discussed it. But, if I look at the plate prices in Europe and in the US, they have come up, at least on my screen, in the region of 5%-10% there from mid-June. Would you say that, is that more of a, you know, seasonal slowdown kind of pattern, or is it other factors than that?
I think it's a combination, the majority of it being a seasonal slowdown. But I said many times now, it will be very dependent on import volumes and the expectations of the plate ruling in... or the outcome of the plate ruling in U.S.
Yeah. Yeah, but you haven't seen import volumes coming up again in the U.S., I guess?
N o.
All right. Okay. All right, thank you very much.
Thank you, sir. Next question is from Roger Bell, from JP Morgan. Please go ahead.
Hi. Good morning, gentlemen. Thanks very much for taking my question. Just one question. Could you just go through the moving parts in the net debt movement in Q2 versus the end of Q1 figure? Because you say your net debt is reduced by SEK 4.8 billion, but just look at gross cash and gross debt, the overall movement there should have been more like SEK 5.4 billion. And then, obviously, if you take the rights issue proceeds on the operating cash flow, it would suggest that you should be getting something like a sort of SEK 5.5 billion net debt reduction. So, could you just explain what other sort of moving parts there are in that net debt reduction and maybe how they might look going forwards as well?
Yeah. Then we had SEK 4.9 billion coming in from the rights issue, and then we had a net cash flow of SEK 650 million or around SEK 700 million then. So in that sense, if you would add the rights issue proceeds and the net cash flow, yes, you would get to that. It should rather be, you know, SEK 5.5 billion, SEK 5.6 billion. The difference is that we have a lot of our foreign or our net debt in foreign currencies, in U.S. dollars and in euro. The reason for this is that we have it as an equity hedge, so since we have a large portion of equity in U.S. dollar from the IPSCO acquisition and in euro from the Ruukki acquisition.
So we don't want the net gearing to fluctuate between quarters, depending on how the FX develops. But what does fluctuate between the quarter is the net debt. So we actually, this quarter, when the Swedish krona is getting weaker, the debt in foreign currencies is getting higher when translated back to Swedish krona, and that impact is around SEK 700 million, and that is what's making the movement in net debt be only then SEK 4.8 billion versus what it could have been with a flat currency of around SEK 5.5 billion. I hope that clarifies.
Okay. So going forward, we should just look out for movements in the krona and essentially sort of buy in for, you know, for future periods?
Yeah, I would say net, I mean, net cash flow should and will be the main driver of how the net debt develops. And then, of course, yes, if the krona is becoming weaker or stronger, that will have an impact on net debt as well. Correct.
Thanks.
Thank you very much. We have no further question for the moment.
Okay, thank you. Then there's one more question at least here. Julian, please.
Thank you for taking my follow-up question. I just wanted to focus on your last slide, roadmap towards industry-leading profitability, where for the industry-leading profitability, you say that, when you get to net gearing below 30%, dividend payment of 50% resumed. And you're saying that you will reduce net debt by SEK 5 billion by the end of 2017, which, on my numbers anyway, would get your net gearing below 30% by the end of 2017.
Yes.
which is encouraging for the yield outlook for 2018. What about between now and then?
That's a decision for the AGM.
Okay, but does it also mean that you're expecting to have your industry-leading profitability by 2018?
Yes.
Thank you.
Any further questions in Stockholm? Okay, then we thank you and wish you to have a very nice day. Thanks.
Thank you very much.