Good morning, everyone, and welcome to SSAB's Q1 results presentation. My name is Andreas Koch, Head of IR. The presenters for today are, as usual, our CEO, Martin Lindqvist, and CFO, Håkan Folin. The structure of the presentation today is slightly different. We'll start with the Q1 results in the first section, and in the second part, we'll talk about the financial package pro that we announced today. Finally, we'll end with a Q&A and open up the floor for questions. With that, Martin, would you like to start?
Thank you, Andreas. So, many of us met here a quarter ago when we released the Q4 report. We had a lot of discussions regarding markets, costs, synergies, and also financial situation of SSAB. And it's... How should I express it? It's no secret that it has become slightly more challenging to finance a steel company nowadays. And we were also clear that we had the target of reducing net debt and reducing our net gearing.
A lot of the questions that were asked was about the balance sheet, and if it wasn't some of you said, "Wasn't it time to present the financial package to reduce net debt?" If you recall, and if I recall correctly, my answer to that was that SSAB is in a position where we will, regardless of market situation, continue to generate strong cash flows. But as we say in Swedish, I also put in a brasklapp. I said, "You can never say never, then." That is at least my memory. Since then, a lot of things has happened. We have done the Q1. It is more positive than Q4 was last year, and I will come back to that. We have seen quite an improvement sequentially in during the first quarter.
We have also, I would say, or we are, if not fully, but almost done with the integration of SSAB and Ruukki into one company. It has meant a lot of changes in ways of working. We have closed sites, we have reduced manning, and so on. But we have also been able to overachieve on the targets when it comes to synergies, but also been able to overachieve when it comes to time plan. And I think, today, SSAB is a much stronger company than we were before this combination, and all, a lot of the job is already done. We also felt that we could have moved on, as we did, but we also felt that proactively, this was a good timing to strengthen the balance sheet.
Strengthening the balance sheet will allow us to fully concentrate on one of the most important missions and targets we have, industry-leading profitability. Strengthening the balance sheet is a package, I would say, an attractive package consisting of three parts. It is a rights issue of SEK 5 billion, where the big shareholders will take their part, and the rest is underwritten by a number of banks. The second part of that package is, I would say, a comprehensive refinancing package, where we extend maturities, where we get backup, sufficient long-term backup facilities. And the third part... And that, those two first parts will take away any potential refinancing issues for the coming three to five years.
The third part is a very clear action plan to reduce net debt with another SEK 5 billion during the coming 1.5 year, up until end of 2017. And when we have done that, we will be well in line, or actually well below our balance sheet target of a net gearing of 30%. And then we are able to concentrate SSAB as a company and the full organization to deliver on strategic objectives and reach industry-leading profitability. With that, I think we jump into Q1. Demand picked up, it says here. Well, the truth is that during Q1, apparent demand and real demand was on the same level.
As you remember or might recall, we discussed last quarter about customers being unwilling to place orders because they knew that prices were going down, so whatever they bought that day would probably, or most probably, be slightly cheaper the next day. But in Q1, we clearly saw apparent and real demand being on the same level, so no further inventory reductions, but no further, but not any inventory buildup either. We saw prices start to move, spot prices, I would say mid-Q1, and that was, of course, fueled by also increased raw material prices. We saw during Q1, continued high export from China, and we saw also during Q1 and the beginning of Q2, anti-dumping measures coming into place.
These are examples, and I've chosen Europe and North America because they are our strong home markets, where we have a good position on the markets, and the ones in bold are the ones affecting, mainly affecting SSAB. And the most important one, or one of the most important ones, was the filing that was done a couple of weeks ago for heavy plate in North America. This will, everything else equal, regionalize steel markets... and that will be beneficial for SSAB, having strong positions on these home markets. If you look into the figures, as said, still a loss on EBIT level, but quite a clear improvement over Q4. It was higher volumes and lower costs, and we now clearly see in the P&L that the synergy costs are coming through. We achieved SEK 350 million during the first quarter.
We had a positive operating cash flow. It wasn't big, but what we said last time is that we will increase volumes, and by that, we will also increase accounts receivable. We increased accounts receivable with approximately SEK 900 million, but we could compensate for that with structurally lower inventories. So I would say it's not a big figure, but given the momentum in Q1 and given the build-up of accounts receivable, I think it's quite okay. Synergies, we are well on our way now. This is end of first quarter, and we are moving on. We will reach the target of SEK 1.8 billion mid-2016, and as said, all the actions are more or less done, so they are coming into place.
We have increased the target of the overall savings, structural savings in the group from 2.5, that we talked, 2.5 billion SEK, that we talked about last time, to 2.8 billion SEK, and that will be delivered, and I will come back to the split up of that later. If you look into the divisions, the big difference in special steel is volumes. They were up 27%. That means here we clearly see apparent and real demand on the same level, very low apparent demand in Q4. If you look at Europe, it is volumes there as well, but it's also the effects, and here we see the majority of the synergies coming through, so it's volumes and costs. In Europe, it is volumes. Overall, we had lower prices in Q1 compared to Q4, and that is visible definitely in SSAB Americas.
Since the beginning of Q2, we have increased plate prices in North America with $100 per ton, per short ton, so prices are moving up in North America. So but Q1, higher volumes, better costs, lower prices. Håkan, if you want to give some flesh to the bone.
Thank you, Martin. Good morning, everyone. I will go through some of the key figures. I will also show the result development from Q4 into Q1, and some more details on the cash flow. I will, however, not now go through the debt situation and the maturities, which I usually do, because we'll come back to that when we talk about the financing package a little bit later. Starting then with some key figures, and if we start with sales, we had a sales of around SEK 13 billion now in Q1. It's an increase compared to Q4, with SEK 500 million due to the higher volumes. It's, however, a decrease compared to Q1 last year with SEK 2.5 billion. And this decrease is mainly coming from lower price.
It's 11 percentage points due to lower price, a few due to volumes, and a few due to mix, but it's overall the price level in the market that's so much lower, that gives us SEK 2.5 billion lower sales. If we look on the EBITDA, we had an improvement compared to Q4 with SEK 600 million, and in Q1 now, we had 744 million in EBITDA, which corresponds to six percentage points. Final point on this page is the operating cash flow, which Martin mentioned. Not hugely positive, but actually slightly positive, at least of around 80 million SEK. If you go into some more details then on what happened actually between Q4 and what happened now in Q1.
We had an operating profit or loss rather, of SEK -800 million in Q4, and now SEK -190 million in Q1. So it's a difference of a little bit more than SEK 600 million. And this is actually despite that we had, on average, lower prices impacting the result with almost SEK 400 million. And this is because, you know, the prices dropped in Q4. They actually stabilized both in North America and in Europe, fairly similarly in December, and the spot prices have been trending upwards during the whole of Q1.
However, we entered Q4 on a clearly higher price level than we entered Q1, and we also have, in all our three steel divisions, a contract structure, with, some, some things on spot, some on three year contract, three months, some on six months, which means that on average, we got the negative impact from lower prices in Q1 versus Q4. But this was compensated by an increase in volume, impacting with SEK 450 million. We actually had 15% higher volumes now in Q1 than in Q4. And also here, within other, we have the unabsorption effect, so the impact that we were producing at the higher utilization rate in the mills, is a large portion of these SEK 212 million. So all in all, volumes and better utilization was around SEK 650 million.
The other point impacting positively is the variable and the fixed cost. This is partly because we had a maintenance outage in Oxelösund during Q4, which we did not have now in Q1, but it's especially driven by the lower cost coming from the synergy program, from the Ruukki Construction savings program, and from other cost-saving initiatives. And the synergies alone, comparing what we got in synergies in Q4 with Q1, impacted positively with SEK 125 million. And we will continue to see this during the coming quarters as well, that we will get more and more impact in the P&L out of the synergies. But all in all, volumes, lower cost, helped us improve the result with SEK 600 million.
On the cash flow side, and we mentioned the positive operative cash flow, but then we had a negative net cash flow of SEK -244 million. In this cash flow, I think there are two things worth pointing out. First one is working capital, second one is the cash flow. If we start with working capital, we had a build-up during the quarter of around SEK 500 million. That is because we had clearly higher sales, so we built account receivables of SEK 900 million, and we lowered inventories, and then the net then was around SEK 500 million. I think this should be compared with what we did in Q4, because in Q4, we released SEK 2.1 billion in working capital.
So we were expecting that we would bounce back a little bit and need to build some working capital in Q1, but that was compared to what we did in Q4, I would say fairly minor, actually. The second point then to point out is on the CapEx side. After Q4, we guided and said that CapEx during 2016 will be between SEK 1.5 billion-SEK 2 billion. Total CapEx, both maintenance and strategic. We are now saying that when we are releasing the Q1 report, that we will keep CapEx level during 2016 on SEK 1.5 billion. And in total now in Q1, we have the maintenance CapEx here of a little bit more than SEK 200 million. We have strategic CapEx of around SEK 90 million.
So we are a bit over SEK 300 million in the first quarter, which means we are well in line towards the SEK 1.5 billion in CapEx for the full year. This can be compared then with the total depreciation and amortization level of SEK 3.8 billion on a yearly level. I will also move in now and talk a little bit about how we foresee Q2. Starting with North America. I can say North America, the real demand, we expect to be fairly stable during Q2. The steel service centers, which were replenishing basically the whole of 2015, they are, oh, sorry, they were destocking the whole of 2015. They are now replenishing, and basically what they sell out to their customers, they are buying from us to make sure that they are stable on their inventory levels.
They are on a fairly low inventory level, but we don't expect that they will restock, but we don't see that they will destock further either. Another segment in the U.S. that has been developing in Q1 fairly well and looks to be developing well going forward as well, is the wind tower segment. In Europe, we also expect demand to be fairly stable. Don't see any huge changes going into Q2. We saw in Q1 that probably the end of Q1 was slightly more positive than the beginning, but no major changes expected for Q2. Segments in Europe that are doing fairly well is the automotive segment and also the heavy transport segment. As Martin pointed out, there has been trade barriers, both being decided upon, but also being filed or being considered.
Our review is that for our two home markets, North America and Europe, we will start to see the impact of these trade barriers in Q2 onwards. That should be, mean that we, with the local production, will be better positioned to get offset for our production volumes. Moving into high-strength steel and the special steel segments, we don't foresee there either any major change in the second quarter. In the first quarter, we saw heavy transport, construction, machinery developing fairly well, and we foresee that will happen in Q2 as well. While the mining segment, which has been on a low level for a long time, we expect to be stable, but still on a low level. So all in all, adding this together, our view is that in Q2, we will see slightly higher shipments, across the board, basically.
Also, given the price increase announcements we have made in North America, and given the price development in Europe, we will also see slightly higher prices in Q2 than in Q1. Martin?
Thank you. So I think I covered most of this in the beginning, but it is so that these financing or refinancing package included, including the rights issue and also the bank package and other things, will clearly strengthen SSAB and clearly strengthen our balance sheet. And as said, we will take away any potential, and I use the word potential, refinancing issues for the coming years, from the company. And we will now fully focus on delivering on our strategic roadmap and make sure that we end up as the most profitable steel company on having industry-leading profitability. As said, the package is structured in this way: 5 billion SEK in rights issue, supported by main owners, underwritten by banks.
Additional SEK 5 billion in clear actions to reduce net debt up until end of 2017, divestment on non-core assets, free cash flow, and I will come back to that, and also a comprehensive refinancing package. When we look at this and look into the coming one and a half year, we are certain that we will reach our, at least reach our, net debt target of 30% up until end of 2017.
Okay. Looking then at the debt maturity profile, and as you see, we have two here on the slide. One is how it actually looks like after we finalize Q1, and one is how it will look pro forma after these refinancing activities have been completed. And if I start here with the Q1, we have cash and backup facilities of around SEK 11 billion. We have an average duration of 4.3 years, and we have a net gearing of 53%. It was 52% at the end of the year. It's fairly unchanged now at 53%. We also have what we call a buffer ratio, and this means how much cash and backup facilities do we have divided by rolling 12 month sales, and it is now at 20%.
It's a fairly high level, and if you would exclude the commercial paper, it's at 14%. If we then look at after we have completed this refinance package, both then, getting the rights issue completed and also moving the maturities out in time, that we have agreed upon with our lenders, we will have a fairly different structure here. We will have a similar size, actually, of the cash and backup facilities, although more cash. We will have a duration of more than five years instead of 4.3. We will have reduced our net gearing already by completing this down to 38%. And the buffer ratio I talked about before, if we exclude the CPs, it will be increased up to 70%, 'cause in this plan, we are lowering the level of CPs that we have.
We got a lot of questions on the CPs after the Q4 result, and actually now, after Q1, we are almost at the same level as Q4, with similar interest rate, basically. But in this plan, we are reducing slightly on the CP side. What we are also doing, we are moving the, we are repaying some of the loans maturing in 2016, but we're especially moving maturities from 2016, 2017, and 2018 to 2019, 2020, and onwards. And if we look at what we have maturing then the coming three years, after this refinancing is done, we will have SEK 9 billion maturing the coming three years. And if we compare that with how it actually looks today, we have SEK 16 billion. So it's a significant reduction of what we would need to refinance in the coming three years.
And if we add together, the lower amount of maturities in the coming three years, we add together that we will also have clearly more cash on the balance sheet and the additional SEK 5 billion in debt re-reduction that we are targeting, that Martin just talked about, we will have no major refinancing needs in the coming three years. Coming then to the terms of the rights issue, it will be with preferential subscription right for existing shareholders. It will be Class B shares only, and the amount is approximately SEK 5 billion. The issue price and the subscription ratio will be determined at the EGM in May. And in terms of subscription and underwriting, as Martin said, Solidium and Industrivärden have committed to take their pro rata share.
On top of that, we have also talked to some other owners, where Robur and LKAB have said that they support this transaction, and they will vote in favor at EGM. The remaining amount not taken then by Industrivärden and Solidium, for that, we have an underwriting commitment from four global coordinators. In terms of timetable, we will announce the terms just before the EGM on May 24. The EGM will be planned for May 27. The subscription period for the shareholders will be from the beginning to the mid of June, and then the plan is that right after midsummer and before people go on summer holiday, we will announce the result of this transaction.
Thank you, Håkan. So what are we then going to do? This is an updated picture with the target of cost savings, and as said, synergy program will be finalized during this quarter and will be met. When it comes to the Ruukki Construction restructuring, all the actions are taken, and that will now onwards be seen in the P&L. What we call selected efficiency investments, the PCI and the water treatment plant in Alabama, done, up and running. Other cost measures, lowering cost position in special steel products and so on, under implementation. We all have finalized, I think it was last Friday, all the last negotiations, so now people are start to leave.
At the end of Q1, I think the reduction of manning was 1,500 or 1,600 people, so we will definitely not come under the target of 2,400 people. When we look into this, we see the possibility to raise the target from SEK 2.5 billion to SEK 2.8 billion in structural cost savings, and we know that we will be at this full run rate end of this year. If we talk about opportunities to free up cash flow, I mean, the synergies and the structural cost savings will, of course, help us to improve EBITDA, and that will be, of course, helpful, very helpful in cash flow generation. As Håkan said, we will have a CapEx this year of SEK 1.5 billion.
For the coming years, we will be around SEK 2 billion, and that should be compared to the total amount of depreciation and amortization of SEK 3.8 billion. The reason for this being possible is that we have done all the big strategic investments. But also as a part of this combination, we are actually closing down production lines that will require no further maintenance, of course. We are specializing lines, we are increasing sequence lengths and getting up yield, running the machines in a better way. So that's why we can have CapEx level of around SEK 2 billion for the coming years, compared to then depreciation and amortization of almost SEK 4 billion. We see potential to continue to reduce use working capital structurally, work in progress, finished goods, and so on.
I would say mainly within inventories, and then, of course, a lower net debt will also help us to get down financial costs. So when we look at this, we see a clear possibility with clear actions to get another SEK 5 billion out of the balance sheet up until the end of 2017. And as said, then clearly meet the target of a net gearing of 30%. This is what we are going to focus on. This is what we always have focused on, but this is what we are going to continue to focus on. The global market for advanced high-strength steels and Q&T, where we, especially within Q&T, are the global leader.
Our two important home markets, flat carbon steel and tubes in the Nordic region, where we today have a market share between 45% and 50%, so higher than before the combination with the two companies separate. And then in North America, where we today have a market share within heavy plate of 25%. So we have been able to increase that market share as well. When we look at the divisions in special steel, it's very much about accelerating growth through innovation, product, and application development. One very important part will be the after market, what the, the new business unit, SSAB Services. We have currently 200 Hardox Wearparts globally. The target is to, within the coming years, double that amount of Hardox Wearparts, and that will drive growth of Hardox steels through, through that network.
When we look at SSAB Europe, well, here we will see a big part of the structural, structurally lower costs. So at full run rate, end of this year, will be more than SEK 1.5 billion structurally lower costs in SSAB Europe. That will be beneficial. We have, as said, since the combination, not only maintained market share, but actually been able to take market shares in the Nordic region. We see good possibilities with better delivery performance and shorter lead time, which is also a consequence of this combination to take further market shares. We have a number of very interesting steel products on the way to the market Toolox 1,700 and some other products within automotive. And last week at the BAUMA fair, we launched also a new product family for SSAB Europe, which was very well received among customers.
If you take the U.S., and we have talked about this before, we benchmark the cost position. We are clearly not only the quality leader, but also the cost leader. I think. With the flexible production system, we should be that, and we have, we are very well positioned to take part of the growth or the rebound of the North American market, and especially if we see positive effects from trade barriers or dumping measures, we will be very well situated to take part of that market. Sustainability is an important part of SSAB, and it's actually our business model, because what we do is actually helping end users to reduce weight, increase payload, increase life length, and reduce fuel consumption, and that's how we sell our steel and our steel products. So that is the sustainable offering.
This is one good example of many, and I've said it many times before, but we typically, when we look into an application, we can typically double the life length. We can typically reduce the weight between 30%-50%, and by that then increase payload, reduce fuel consumption, or a combination of that. We are today the most carbon dioxide steel producer, carbon dioxide-effective steel producer in the world in our mill in Luleå. After the PCI investment in Raahe, we are on par with Luleå, so we have, in that aspect, very good measures. In U.S., we are 100% scrap-based, we only use recycled materials, so that is important.
But a couple of weeks ago, we launched a new project together with LKAB and Vattenfall, where we are determined to look into the possibilities of produce iron without any carbon dioxide as a waste product. Today, when you produce iron, you use iron ore and coal, and you get iron and carbon dioxide. We are looking into a new process, and it's not only theoretically possible, it's also possible in small-scale development tests, to use hydrogen, and then you would produce iron sponge, and the residual would not be carbon dioxide, it would be water. So we are now determined to look into this and try to make it in a full-scale, cost-competitive industrial project, and that project has been started a couple of weeks ago. So summing this up, integration almost done.
All the cost measures, to a large extent done, will be seen. We are in a position now with this strengthening of the balance sheet, with a combination of the rights issue and the refinancing package, and the actions we have and will take to strengthen the balance sheet with another SEK 5 billion. We are in a very good position to 100% concentrate the organization towards the strategic goals and to reach industry-leading profitability. With that, Andreas, I guess there will be a lot of questions.
We hope so.
Yeah.
Let's start with the Q&A session, and why not starting with the audience here in Stockholm? I think, Olof, you're the first one. Let's give Olof a microphone.
Olof Grenmark, ABG Sundal Collier. Coming back to this debt reduction program then, of course, and you're talking about a second step to reduce the debt by SEK 5 billion. Just to clarify, is that based on the market conditions now in the first quarter of 2016, or do you build in any kind of scenario into that debt reduction?
I mean, it's a couple of action. It's also divestments on non-core assets. So we feel, with what we see, pretty confident or very confident that this is doable. But it's a combination of free cash flow from the operations, and that is due to synergies and cost efficiency measures coming through. And then it's also divestments of non-core assets.
Fair enough. And you're talking about slight price increases and volumes now, going into the next quarters. I've learned that slight, that's somewhere in between 0%-5%. Is that correct?
Maybe we have a slightly broader definition of that.
Thank you.
Okay, Oscar from Danske.
Oskar Lindström from Danske Bank. I'd like to follow up on Olof's question there regarding the SEK 5 billion in debt reduction from cash flow and your own measures. Maybe phrasing the question a little bit different. What's sort of the base year there? Is that cash flow level that you had in 2015 or?
No, but what we say from now up until end of 2017, we will see additional SEK 5 billion debt reduction due to cash flow and divestment on non-core assets.
Any sort of indication of how much in terms of non-core asset divestment would contribute to that?
We have clear plans and clear actions for that, but as said, in total, and, and we communicate the total sum is SEK 5 billion.
All right. All right, thank you.
See Hjalmar back in there.
Just another one on non-core divestments. Ruukki Construction is obviously one of the potential divestments. Is Tibnor also a potential divestment at some point?
I think, as said, the core business of SSAB is to produce and sell or sell and produce steel, and that's what we do. And Tibnor is an important part of the European setup. So that is our way of call it keep a grip on, maybe that's the wrong wording, but to service is a better word, the Nordic market for small and mid-sized customers. With short delivery times, some extra services like it could be bending or bundles or whatever, servicing customers that are not able to take deliveries directly from the mill, so they need smaller packages or whatsoever. So I would say that Tibnor is more an integrated part of SSAB Europe, and by that, also part of the core business.
Okay. And then a question on the results on Americas, which was quite good in my view. Was there some kind of lag effect or timing effect, where you have more benefit from low scrap prices and price increases, or is this some kind of sustainable level or even better level going into Q2?
Well, as Martin said, for Q2, we have done a number of price increases, which we believe will go through. On the other hand, what you have also probably seen is in the last month, scrap prices have gone up into Q2. So if I would compare how we see Europe compared to Americas, in Europe, we see prices moving up, and yes, iron ore has moved some, but not to the same extent. If we see Americas, prices are also moving up. However, at the same time, we see scrap also moving up, so there will still be pressure on the margin there. But we have increased prices more than what we have seen scrap move.
Okay, and then just the last one on the new SEK 300 million savings, which business segment will that be in mostly, or is it overall?
I would say it's on top of the synergies, and as we are running a program, and I think I said it last time as well, when you run a program, you have internal ambitions, internal targets, and then you have a level where you are certain that you will reach, and, and that level, or more than certain that you will reach, and that level you communicate. When we are into these programs, you always find more things to do, and, and that's the case. So I would say it is within specialty to a large extent, but it's also, I would say, in other divisions. But, but that is part of a process when you run it. You, you lose some, but you win a lot, and you find new ideas, new ways of working, and then you see, well, it's actually possible. Let's...
It's possible to reach the target, and that is what we have done.
Okay, thanks.
Johannes from Handelsbanken had a question.
Yes, Johannes Grunselius here, Handelsbanken. A question there on Americas. I mean, there is new trade cases now being, well, considered.
Mm-hmm.
When do you expect those to be fully implemented, and do you expect those, like, this debate or this investigation to have an impact already, well, in coming weeks and in the short term?
It will take a while before they decide, and then it will be, I think it's retroactive for 45 or 60 days.
160 days.
160 days, sorry. So, and it typically takes a number of months, but what you see typically... You see that people start to be a bit reluctant to import, because they know if they import and continue to import, they will be sitting there with the risk of those 160 days paying up, penalties. So you typically see, call it a short-term effect, and then when it is decided, you see a bigger effect. That has been, at least been the case during the previous actions like this.
It's pretty obvious this will be a positive direct impact, but a few of the countries involved in this investigation that they are exporting to countries in Europe. Do you expect to see any kind of indirect effects here, for your plate market in Europe?
Well, for standard plate, maybe, and we are not really in the standard plate market in Europe, so we have not thought so much about those effects.
Jordan Bjerling from SEB, any question?
Thank you very much. Good morning. With regard to the anti-dumping cases, European lawmakers have been much more timid than their U.S. counterparts in setting punitive tariffs to dumping entities. Do you see any risk that that could mean volumes that have previously been directed at the U.S. market will actually start flowing into Europe?
That will, of course, depend what the tariffs will be in the U.S. and the transport costs and so on, but, of course, it could be a risk like that, yes, for, in this case, standard plate.
There's been a lot of focus in the U.K. on this specific issue and the timid nature of the European tariff. Do you see or hear from your contacts with Eurofer and others whether there could be a shift to a more aggressive move by European lawmakers?
Well, I know for sure that Eurofer is in favor of that. I've not talked to the European lawmakers, and so I can't really give you a good answer on that. I know that Eurofer is still working with a question, and they think it could be more to be done.
Okay. Last question on scrap. We've seen what we saw last year, scrap really taking quite a long time to correct down-
Mm.
in line with iron ore. This, we've seen, particularly the last two months, a very aggressive move up in scrap prices.
Mm.
In fact, a larger per ton contained steel-
Mm.
- more than iron ore.
Mm.
Has something fundamental happened to the supply of scrap, and how do you see the outlook for scrap pricing for the next couple of quarters?
I wouldn't say that something fundamentally has changed, and if we look at scrap collection and look at inventories before scrap collectors, I mean, cars and whatever it is, I mean, those inventories are actually on a high level. So I wouldn't say that something fundamentally has changed. And my belief is still that the correlation between scrap and iron ore over time will be there, and we will see shorts, ups, and downs compared to that normal curve, so to say. So no. Then, of course, it depends on with the strong U.S. dollar, the export of scrap has not been that high the last 1.5 years.
So it will also, of course, depend on the strength of the U.S. dollar, because when you see a weak U.S. dollar, you typically see a lot of scrap export, especially from southern U.S. out to Turkey and other parts of the world, but that has not been visible, the last, I would say, one and a half year. And I wouldn't. I don't know, but I wouldn't think that we have seen a sharp increase in scrap export. I haven't heard that, at least.
Your main peer in the U.S., selling plates, said last night they expect scrap prices in the U.S. to level off sometime during Q2. Would you agree with such a
I don't have a clear view on that, but, hopefully they are right.
Thank you.
Any more questions here in Stockholm? Oscar, had a question and a follow-up.
Yes, a follow-up question. There's been quite a lot of talk about consolidation or structural changes, especially in the European steel-
Mm.
- industry, and then, do you have any comment to that? What's your feeling about sort of the true interest in actually doing something from the different parties in the steel market?
I can't really answer that question, but I... My answer would be, in the same way I've answered before: I think it's needed, I think it's positive, and I think hopefully, or I hope that something will happen. And something will most probably, I guess, happen with Riva, because that is due for, during May here. I can't see too many possibilities, with Riva, but there are a couple of natural possibilities that may or may not occur. Then, of course, I read the same trade press as you probably do and hear all the rumors, but I can assure you that we are not bidding for Riva or trying to be a consolidator in the European steel market.
Thank you. That's reassuring. Yeah.
Okay, let's see if I have any questions over the phone. And, just remember to please state one question at a time. So operator, please.
Thank you. Ladies and gentlemen, if you haven't already and you want to ask a question, please could you press zero and then one? So that's zero and then one on your phone keypad to enter the queue, and we will take the questions one by one. As was mentioned, can you please limit it to one question only?
...Per turn. We first go over to Alain Gabriel at Morgan Stanley. Please do go ahead. Your line is open.
Yes, good morning, ladies and gentlemen. If I may go back to the Steel Americas, part of the discussion. And, do you mind giving us more color on what has driven this big uplift in EBITDA in Q1, given that prices have been down? It doesn't really benefit from the synergies with Ruukki. So what has really driven this big uplift versus Q4 and versus what the market has been expecting? Thank you.
I think there are two changes compared to Q4. You're right about prices that are still continuing down. On the other hand, we had a big decrease in scrap during the fourth quarter, which was impacting us in the first quarter. And then the second one, which is actually the larger one I would say, is that we have clearly higher volumes in Americas than in Q4.
Okay.
Also, I mean, even though Americas is not part of the Synergy program as such, we are, of course, driving other cost measures. We work a lot with these, what we call internally, Six Sigma projects, and so we are also reducing the cost base in North America.
All right. Very clear. Thanks.
We are now over to Robert Löfberg at Carnegie. Please go ahead, Robert. Your line is open.
Yeah, hi. So this sort of a follow-up on that, on Americas, on the result and volumes there. You said the wind was looking good, but what are you hearing from other key end segments like yellow goods or construction equipment or heavy transport?
I would say-
When you have discussions with them?
The biggest difference in Q1 compared to Q4 is that the destocking that we talked about, and I gave prognosis on many quarters, ended during Q4, and steel service centers started to replenish. We're not building up stocks, but they were starting to buy again, and I would say apparent and real demand from them were on the same level. That was one of the bigger changes. So lower apparent demand and destocking amongst these service centers, and that changed into Q1.
Oh, okay. So they-
But apart from that, we, when we look at it overall, with some ups and downs, I would say we are seeing fairly stable underlying demand, with some pluses and some minuses, depending on segment.
All right. Yeah, 'cause I saw the distributors, they were selling 23% less plate in Q1, year-on-year. But okay, then at least they were at a super low level in Q4 then.
Especially, they were not replenishing any stocks, so the stocks going into Q1 were very low.
All right. And would you say you took market share in Q1 in terms of production in the U.S., or?
We haven't seen the statistics yet, but during 2015, we took market share, yes.
All right. Thanks.
We're now over to the line of Cedar Ekblom of Bank of America Merrill Lynch. Please go ahead, Cede. Your line is open.
Thanks very much. Thanks for the call, gentlemen. I've got one question just in terms of the size of the planned rights issue. If I look at net debt to EBITDA at the end of last year, which is about 7 times, with the rights issue, you're only gonna get your net debt to EBITDA being dropped down to about 5.5x . I appreciate you have further debt reduction plans, but ultimately, those will take some time to play out. So I just wonder, in terms of the size of the rights issue that you decided on, was the decision to do not a larger rights issue, a function of support from your major shareholders?
I mean, net debt to EBITDA, of course, depends on the EBITDA. But with SEK 5 billion in rights issue and then actions to get another SEK 5 billion within 1.5 years, we felt that we will be in line or below our net gearing target. So that was the main reason for doing SEK 5 billion. I think, this will take away, as I said, the potential financing issue for the coming three to five years. So we felt that this was the way we wanted to do it.
I think to add upon that, it's not, it's not only the debt reduction in itself, it's also the way we have moved the maturities out in time from 2016, 2017, 2018 to 2019 and onwards, which, which gives us basically very limited refinancing needs the coming three years.
Okay.
It's a combination of those three factors.
Okay. And then if I could just have one follow-up question. In terms of the incremental SEK 5 billion, you've obviously said divestments of non-core assets and other cash flow generation. Could you give us a split in terms of what you expect to generate out of, each one of those potential cash generators?
I think-
When you say other cash flow generation, is that simply a working capital move? And what potential working capital unlock do you think you can deliver?
I would actually not give you any clear split up of that, but it is a combination of the those things you are mentioning, and that's also why we are so clear about the investment level this year and the investment or the CapEx level the coming years. And that would not have been possible without the combination then. And it is mainly an effect of the combination of specializing lines and closing production lines and so on. So when we look into this, we are confident that we will be able to get those SEK 5 billion, including then sales of non-core assets. But to give you an exact split, how much is working capital, how much is divestments and so on, I would prefer not to do that.
Okay, thank you.
We're now over to the line of Carsten Riek at UBS. Please go ahead with your question. Your line is now open.
Thank you very much. The first question I have is on specialty steel, because you also, you've shown a very strong performance in the first quarter. My question is entirely volume driven, or were there other components in there, which I missed? That's the first question. The second follows soon.
I would say it was mainly volume driven, then we see some effects on cost as well. So but, but as we said of the Q4, in Q4, the apparent demand also in special steel was very, very low. And now in Q1, we have seen apparent demand being in line with the underlying demand. So it was, I would say, mainly volume or to a very large extent, volumes up 27% compared to Q4, but also some elements of cost measures.
Okay.
Nothing on price.
Okay, thank you.
And maybe just to add on that-
Yeah.
that we had an outage also in Q4, and obviously that we guided for SEK 113 direct cost, and then you also have under absorption and so on. So
Volumes also gives the effects, positive effects on under absorption of fixed costs.
Okay, that's helpful. The second question I have is on the rights issue and the net debt target. I was actually a bit disappointed that the net debt to equity target wasn't put lower than the 30%, because effectively, you haven't reached the target by the underlying operations, but you ask shareholders to step up here. So, is the free cash flow target going forward, did it come down, or what changed? Because you clearly got a help now from shareholders in driving down the net debt.
If I'm not sure if I understand the question correctly, but I'll try to answer that, and then you have to add if I was wrong.
Uh, okay.
But, as you saw pro forma, we will be down to 38% in net gearing-
Mm.
And we have the financial target of being around 30%. But this was pro forma at the end of Q1, and this was not including then the additional SEK 5 billion in net debt reduction that we also talked about. So, when we have done that, by the end of 2017, we will be lower than the 30%, which we have as our financial target.
Yeah, yeah. No, that's, that's, that's understood, but you had it before, even without the rights issue.
Yes.
So your, your original target was below 30% without getting extra equity from shareholders. So now you're getting extra equity, extra, let's say, cash from shareholders, and you're now moving. You're not moving your net debt to equity target down.
And, uh-
So operationally-
Uh-huh, okay.
Something must have changed. What actually has caused not to change this target further down?
We have not said that we will not change the target. We have not changed the target yet, and we are just using that as a comparison where we will end up, and we will end up below 30%. If we change the net gearing target, that is another decision.
Mm-hmm. Okay.
So nothing has really changed. We have not, the only thing that happened, we have not changed the net gearing target, no.
Oh, okay. Understood. The other thing I had is on the disposals, because SEK 5 billion looks quite substantial. We know some of the assets, which might be involved. Some others, of course, we don't know. But is there a risk that some of the assets you might put on the disposal list could also lower your intangibles?
Not materially, no, I wouldn't say that.
Okay, perfect. Thank you very much.
We're now over to the line of James Gurry at Credit Suisse. Please go ahead. Your line is open.
Thanks for taking my call. Just a couple of questions on the outlook. It's one question in two parts, I suppose. Yeah, related to the non-core assets. The construction division had lower results in this quarter. It might be one of the ones that I suspect that you'll look to sell. In terms of the non-core assets, what do you think the outlook is for that, for that business over the coming months? And in terms of maintenance, it has impacted your steel results quite significantly in past years. Can you just outline maintenance plans for the rest of the year? Are they quite low, given that you've lowered the CapEx forecast for this year? But just maintenance for the rest of the year and what is planned.
Let's say that steel prices do actually go significantly higher and profitability is very high, would you consider postponing the usual maintenance period that you have over the summer?
To start with the first question, what we see, if you compare Q1 this year, because there is, in the construction business, a strong seasonality. If you compare Q1 this year with Q1 last year, you see better performance in the Ruukki Construction, even though volumes are much lower. So you start to see positive effects of the restructuring program, and that will be seen now onwards. What we are aiming for there is to take structurally down the costs of at least SEK 200 million per year. I mean, yes, there is a seasonality between Q4 and Q1, and Q1 is, in this business, always the weakest quarter.
If you compare Q1 to Q1, you see a better, or call it lower losses, this year compared to last year.
In terms of the maintenance outages, we have a table in the, in the report where you can see for the coming three quarters what the plan is. So it's on page four or five, or fairly upfront in the report. In short, we have, in Americas division, we will have a mini outage in Mobile now in Q2, and we will have a larger one in Montpelier in Q4. In Europe, we will have the normal summer outages planned for, second, third quarter, second quarter. Then in, Special Steels , we will have the outage planned for the fourth quarter.
We have we changed that actually in 2015, where we had always had in Oxelösund, the outage planned for or performed in during the summer period, but we moved it to Q4 in order to make sure that we could actually continue deliver during what's normally a better period than the somewhat slower period towards year-end.
Then on the margin, of course, it's possible to change that a bit on the margin, depending on market situation. That will, of course, be taken into account.
Maybe finally, on the maintenance side, of course, last year is a bit different as we had the relining of Luleå. That's the big difference.
That will not be done in the coming 15 years.
So, of course, that added to the maintenance CapEx last year.
Mm-hmm.
Oh, okay. Can I just follow up with one question then? In relation to the rights issue, just explain the dependence of the new bank facilities and the equity raise, and, just clarify with... You know, you've got your 30% gearing target-
Mm.
-are there any, covenants being introduced into your financing package going forward?
There is one covenant on the RCF facility, yes.
Are you able to tell us what it is?
It's net debt over equity of 60%.
Okay.
As you can see, pro forma, now, after doing this, we are, we are right now at 53. Pro forma, after doing this, we will be at 38% on the same metric.
Okay.
Okay, we now go to the line of Kevin Nielsen of Goldman Sachs. Please do go ahead.
Hi, there. I just wanted to check in a bit on pricing. If I currently see plate prices in the U.S. around $645 per ton and in Europe, around $635 per ton, how much of, like, announced price increases would be in that, in your view, and, and how much could yet be to come, just from the currently announced, increases?
To be honest, I can't really answer that question on the spot prices. I mean, there was a price increase announced earlier this week, and that is obviously probably not part of that. So I don't have that compared to spot prices. I only know it for SSAB, and I said, we have been announcing $100 per short ton since beginning of Q2.
Okay, so that is, I guess, all still out there?
Also, just remember, of course, they come gradually, and so, so more into May rather than April.
Yeah.
From May and June, you should-
Yeah
Definitely see the new level.
Thank you.
Okay, we're now over to Bastian Synagowitz at Deutsche Bank. Please go ahead. Your line is open.
Hi. Yes, good morning, gentlemen. I've got three questions. Firstly, if we are looking into the European landscape, there seems to be clearly a lot of momentum for possible consolidation step, and you already said that you're not planning to be consolidator, but how far would you be willing to get involved in the consolidation in a passive way? In other words, are there any assets among your European plants which you would be willing to sell? I'll stop here before taking my next one.
No, but we, we are in the middle of finalizing the consolidation move we did when we acquired Ruukki. So, so we have, we have our plate more than full in that aspect, and so, so yeah, that's what we are doing.
Okay. Okay, very clear. Now, my second question is on CapEx, which will be obviously significantly below depreciation. In a very extreme scenario, how long could you run with a SEK 2 billion CapEx level without getting any negative impact on your equipment or product qualities?
No, but, I mean, this you need to remember, this is due to the combination and the structure we have now in the production setup. So we have been, first of all, closing a number of lines, the lowest performing lines and the older lines. We are specializing lines as well, so you get up sequence length, and that, I mean, makes it possible to reduce CapEx because you will have less starts and stops. So I would say that these are things that structurally have changed because of the combination.
Got it. So basically, this is the sustainable CapEx run rate level going forward, and there are no further strategic CapEx steps which you plan for the next, say, three to five years, or is there anything down the road?
It's impossible to answer that question, of course, but what we know when it comes to CapEx, we know that around SEK 2 billion is okay. Then, of course, if we would do something else, something strategically, that would change it. But what I'm saying is that, I mean, to fulfill the strategy, we have sufficient capacity when it comes to special steels and so on. So we have done, over the last couple of years, fairly big strategic investments into our plants. I mean, we have built QL6 in Mobile and so on, QL7 in Borlänge, and so we have done all the big-ticket items. So I don't see big need for strategic CapEx going forward.
Okay, thank you. Now, my first question is on your financials line. Could you give us a bit of guidance how your net financials line would look like before and after the rights issue, also considering the other refinancing measures which you've done? So in other words, with the SEK 150 million which we have seen in the first quarter be a good assumption as a quarterly run rate for the rest of the year, and how will this move once the rights issue and the other refinancing measures have been finalized?
The 150 for Q1 was positively impacted by this Eurobond transaction that we did. So, excluding that, it would rather be in line of around SEK 200 million. And I would say that, for the coming, we will have with the new refinancings we are doing, they are at market level, obviously, which is slightly higher than what we had previously. But at the same time, since we are reducing the overall net debt, that will enable us to lower the total financial costs anyway.
Okay. Could you give us a rough guidance on what, how this would look like?
I would say, you know, you should view Q1, if we clean it from that transaction of around SEK 200 million then, and then adding slightly higher on the margin cost for the new facilities. On the other hand, lower overall net debt, so financing costs for the net debt.
So, net-net basically stable around 200?
Yeah, or slightly below.
Okay, perfect. Thank you.
That was the final question on the phones. Gentlemen, can I please pass it back to you for any closing comments?
Okay. Any last questions from the audience in Stockholm? If not, we'll conclude this presentation and Q&A session. Thank you for participating.
Thank you very much.
Thank you very much.