Okay, good morning. Good morning, everyone, and welcome to SSAB's Q2 results presentation here in Stockholm. My name is Andreas Koch, Head of Investor Relations. The agenda for today looks like this: Martin Lindqvist, CEO, will start with a walkthrough of the main events for the group and also for the divisions. Håkan Folin, CFO, will then talk more about the cash flow statement, the P&L, and the balance sheet. After that, Martin will give the outlook and also give some information about our updated sustainability targets. Finally, we will have the Q&A. So Martin, please go ahead.
Good morning, and welcome to this Q2 presentation. To summarize, EBIT amounted to SEK 301 million in the second quarter. What was affecting us compared to the second quarter last year was, I would say, fairly big effects of lower prices, amounting to more than SEK 1 billion , and that was compensated by lower costs for raw material, but also synergies, and not higher volumes, but better volumes, more high-margin volumes overall. So what we lost a lot in volumes were in Americas and gained in some other places, but overall, the volumes were slightly lower than Q2 2014.
We also generated strong cash flow and operating cash flow, almost SEK 1.5 billion, and that is, of course, due to the result, but also due to lower inventories, despite that we have been building an inventories in front of the relining of the blast furnace in Luleå. That relining started also during the second quarter and will be finalized first of September or something, end of August, beginning of September, in Q3. Sales and shipments, fairly stable, both compared to Q1 and compared to Q2 last year. We had the same EBITDA margin as we had a year ago, but two percentage point lower than we had in Q1. And the EBITDA per ton delivered steel were also in line with last year.
Saying a few words about the key segment development during the second quarter. Heavy transport remained at high level, both in Europe and in U.S. In automotive, we saw also a continued healthy demand during the quarter. Construction machinery, fairly stable on very low levels, and we have not seen any improvement in the U.S. market yet for construction machinery, and the Chinese market remains depressed. Mining, no visible improvement during second quarter, and energy, continued good demand for wind towers, and the only change during the quarter was a slight pickup or slightly better demand for pipelines in North America. Construction material, we always see a seasonal uptick compared to Q1, so sequentially up, but the demand, and I will come back to that, in many regions, are clearly slower than one year ago.
Then U.S. service centers , we were, where I was when I released the last report or Q1 report, expecting that the destocking would come to an end during Q2. And now it will spill into Q3, and we have seen continued destocking during Q2, but we have not seen the end of it due to high imports in Q2, even though the import levels has come down. If we take it by division, Special Steels, sales increased. It was partly to a large extent slab sales internally. We are running two blast furnaces in Oxelösund now, when we are relining the big blast furnace or the blast furnace in Luleå, but also some currency effects year-over-year. Stable shipments, but they decreased 12% versus Q2 2014.
We had, compared to last year, also negative price effects, compensated by lower cost, but also, I said, lower volumes compared to last year. Europe shipments higher compared to Q2 last year, and slightly higher compared to Q1. We had lower costs for raw material, and we had synergies and other costs that were lower, but we also had the big effect of lower prices year-over-year. The lower profitability versus Q1 is also a big explanation of that: the blast furnace relining in Luleå, where we have one third of the costs in Q1. As we said last time, we will see negative effects of that in Europe, and we will see positive effects in Oxelösund due to higher capacity utilization and lower under- absorption.
Americas, I would say, substantially lower prices compared to one year ago, almost SEK 0.5 billion, or SEK 490 million. Shipments decreased. We had, due to market reasons, was standing still in production in Q2 as well. The profit was, even though, in line or slightly worse than Q2 2014, and that was the price drop was offset by lower costs. But we have not seen during Q2 the drop we expected or lower prices for scrap as we expected. That came beginning of July instead. Tibnor, the drop in sales is due to the divested remedy assets that was part of Tibnor pro forma last year, and shipments were up compared to Q1, and also slightly compared to Q2. The drop in profitability is a price mix effect.
Ruukki Construction, as said, we saw a seasonal stronger demand, but this year we see a weak demand in parts of Eastern Europe and in Finland, weaker than last year. Sweden and Poland, or the Swedish and Polish markets, are showing better development. But of course, the effects of the Russia and Ukraine situation is affecting not only Russia and Ukraine, but also other parts of Eastern Europe. We had a positive result, but lower result compared to last year, and that is due to volume and partly prices. And that is partly offset by lower costs as well, but the profit decreased. And we will now continue with the restructuring of Ruukki Construction and continue to implement further actions to lift the profitability in that division. Short update on the synergy projects.
It's progressing well in line with the plans to reach SEK 1.4 billion annually. The run rate ending of June is more than SEK 500 million, and the effect in the second quarter is SEK 125 million. During Q2, we have also announced further actions in that plan. We will close down a big part of the tube manufacturing in Virsbo and move that to Finland. We will also, during the second quarter, start to see the effects of or see the manning reduction when we specialize lines and move production lines between sites and specialize sites. So that will be according to plan and seen the actions during second half of this year. So Håkan, some words about financials.
Thank you, Martin. Good morning, everyone. I will give some more details on the figures. I will also go through the changes in the operating profit between the quarters, some words on our financing situation, and finally, on the raw material development. Starting now with some key figures, and what we have chosen to highlight here is the EBITDA for Q2, which was more than SEK 1.2 billion. And as you can see, it was slightly higher than Q2 last year, and now after the first half of the year, we are over SEK 2.7 billion in EBITDA. We are also highlighting here the operating cash flow, which was close to SEK 1.5 billion during the quarter. Looking at the change in operating profit, and we start now with comparing this quarter, Q2, with Q1 earlier this year.
In Q1, we had a profit of SEK 564 million. We have seen a very big drop in price compared to Q1, which is, to a large extent, the development in Americas division. This has been compensated partly by higher volumes, especially in Europe, lower variable COGS, which is partly raw material, but also higher synergies now in Q2 than Q1. We have slightly higher under absorption, which is due to not running the blast furnace in Luleå for one month, and then we have no impact of FX and very limited on other. So all in all, between Q2 and Q1, it's very much about the lower prices, which are partly compensated then by higher volumes and lower variable COGS.
If we look then at Q2 last year compared to Q2 this year, we can see that the price element is even larger, and Q2 last year, we had SEK 389 million in EBIT, but since then, we have experienced a change in prices of over SEK 1 billion. This has been compensated for by higher volumes, or rather better volumes, significantly lower variable COGS, which is partly raw material, but here you have the full synergy effect. Well, not only variable COGS, but large portion in variable COGS, and also other efficiency improvements. The other part of. You also see lower cost here in other, where we have the fixed cost element. We also in other have the purchase price allocation for Ruukki, which were not included when we did the pro forma.
So those are SEK 50 million, roughly, in the other, impacting Q2 this year negatively. We also have a currency, a positive impact of SEK 70 million. So all in all, despite the big price drop in of over SEK 1 billion, this has basically been compensated for by better volumes and by lower cost. And some specific words on the currency, which is positive with SEK 70 million, but compared to other Swedish industrials, it is a fairly small amount. The reason for this is that we do benefit from a weaker Swedish krona. However, for our Swedish and Finnish operations, a large portion of our raw material is bought in U.S. dollar , the iron ore and the coking coal.
And what has happened since last year is, of course, that the currency that has strengthened the most is the U.S. dollar , which means that our cost of raw material has been negatively impacted by that strengthening, and that's why you only see a fairly small impact of the currency between the quarters. Looking at the cash flow more in detail, we had a change in working capital in the quarter of over SEK 600 million, where we saw, excuse me, reduced inventories in all three steel divisions. And Martin talked about the cost synergies before, but we have also said that we are aiming to reduce working capital and avoid capital expenditures in total of roughly SEK 2 billion. And we are seeing that the work we are doing on the working capital is showing some result.
We had a net cash flow then of over SEK 700 million in the quarter, and so far during this year, we have generated net cash flow of SEK 1,246 million. That leads us then into the financing situation, where the net cash flow in combination with changes in our dollar and euro-denominated loans have decreased in total our net debt with over SEK 600 million. So the net debt is now at SEK 24 billion. This is also generating the net cash flow has also meant that we have decreased our net debt from 56% to 53% at the end of the second quarter. Looking at our maturity profile, the average term is now 4.2 years, and we have an interest fixed rate of 1.1 years.
Out of the maturities now in 2015, of slightly over SEK 4 billion, more than SEK 3 billion of those are commercial paper, which we expect that we will be rolling. And for the other remaining maturities, we have options in place that in order to replace those. What did happen during the quarter, and very positive development, was that we were able to both lower our interest rate, but also at the same time, increase the duration. And we have since Q3 last year, we have steadily seen an increase in the average duration, and we are now then at 4.2 years, compared to 4.0 than in the end of Q1.
Before Q3 last year, you saw a declining trend, but that was also because during a long time, we were in discussions with Ruukki, and we could not basically do any refinancing. But since Q3 last year, then we see a positive development. During the quarter, we have also decreased our average interest rate from 2.8%, and it's now at 2.3%. There are basically three reasons, well, or three items that have impacted. The first is that we have refinanced loans that matured in Q2 with the other financing alternatives with a lower interest rate. The second one is that part of the Ruukki loans that we took over were at a higher interest rate, and those we are amortizing on, which means that in total, their average interest are impacting less.
Then the third item is then naturally that, the overall, the underlying interest rate, the STIBOR and LIBOR, are lower now, which, of course, impacts our average interest rate as well. Moving then to raw material. We have seen a decline in iron ore and in coking coal, and during Q2, we saw that this decline stabilized and was not changing so much. And then once we thought that iron ore stabilized, we saw a huge drop then in the beginning of Q3, and iron ore is now below $50 per ton. For SSAB, specifically, our average purchase price in Q2 was 8% lower than Q1 in U.S. dollars and 5% lower in Swedish kronor.
During the quarter, we signed a new price agreement with LKAB for deliveries for the coming year, and we are also about to finalize a new delivery contract with Severstal. For coking coal, our average price during Q2 was 13% lower than Q1, both in U.S. dollar and also in SEK. If we move then to scrap, scrap prices are at the low level, but if we compare them with iron ore, they are still fairly expensive. In the U.S., we saw the spot market prices during Q2. They ended the quarter 8% higher than at the end of Q1. But then, as you can see, in the beginning of Q3, they have gone down, and the expectation is now that they will either stay on this level or might even decrease slightly further.
If we compare to Q2, end of Q2 this year to last year, we can see that there has been a significant drop of 24%. However, if we compare the scrap and the iron ore development over time, we can see we have chosen now to index this from the beginning of 2012. You can see that up until the start of 2014, basically here, there was a fairly strong correlation between iron ore and scrap. But since then, iron ore prices have continued to drop, but scrap has not dropped in the same way as the iron ore prices. This implies then that for scrap-based manufacturers, at the moment, they have a disadvantage compared to integrated players. Finally, for me, some words about the relining in Luleå, which is ongoing.
We closed the blast furnace last day of May, operations, and the relining is expected now to continue June and July and August. The total net cost for the group is SEK 150 million-SEK 200 million. What we see now is there might be around a week delay in the relining before we can start it again, which would mean that we would rather be towards the 200 mark than the 150 mark.... In Q2, the net impact was SEK 60 million-SEK 80 million, and in Q3, we expect it to be between SEK 100 million and SEK 120 million.
As Martin mentioned before, SSAB Europe is negatively impacted by this, both through the higher under absorption, by not running the blast furnace, which on the other hand, special steel in Oxelösund gets a positive development since they are now running two blast furnaces. But Europe is also impacted by more expensive slabs. The blast furnace in Luleå is the most efficient one we have, and when we now roll in Borlänge using more slabs from Oxelösund instead, they come at a higher cost than for Europe. You can say, negative impact for Europe, slightly compensated in special steel. Okay, back to you, Martin.
This relining is very important because this is the part that will give us flexibilities. We will have a redundant production system, and after the relining is done, then we have a much better flexibility in the production system, and can, in a much more cost-effective way, produce according to different demand scenarios. Some words about Q3 then. Well, in North America, destocking that we saw in H1 will spill over into third quarter. We know that because we are already in the third quarter, and it will end during the third quarter as well. But the underlying demand is expected to be relatively good, or in not being worse, rather improving during the third quarter. In Europe, demand is expected to, underlying demand is expected to remain stable.
We will see the seasonal slowdown that we always see in July and August. We will also have usual maintenance outages in Hämeenlinna, Raahe, and Borlänge, but we will not have a maintenance outage this summer in Oxelösund, so we will run Oxelösund, a special steel production there all summer. Overall, shipments during Q3 are expected to be slightly lower, as they always are in Q3 compared to Q2. If we look into the segments, we are not expecting any major changes. We expect heavy transport to be, continue to be good, and especially in North America, when new safety requirements for rail cars will support demand. Automotive is expected to stay on a continued good level, and construction machinery, fairly stable compared to Q2 and Q3 as well. Mining, we don't expect any improvement there either during Q3.
Energy, we expect continued solid demand from wind towers, and there is, of course, continued uncertainty when it comes to oil-related pipeline investments. Construction material, well, Q3 is the strongest, normal, the strongest quarter, due to seasonality, and we expect that to be the case this year as well. And we expect the destocking in service center to come to an end during Q3, and gradually see a stronger demand or a slow recovery when it comes to volumes from service centers in North America. We have also, during the second quarter, revisited our sustainability strategy and come up with new targets. We have said that by the end of 2019, we will achieve a lasting reduction when it comes to carbon dioxide emissions of 200,000 tons per year from a very good level.
As you know, we are the most CO2 efficient producer in Europe, and by that, probably also in the world. We will also have a lasting reduction of purchased energy with 300 gigawatt hours, and we will increase recycling from very good levels, so we will reduce the amount of landfill with 30,000 tons per year. And of course, we are in an industry that are emitting carbon dioxide, but I think even though we are the most carbon dioxide effective producer in Europe, at least, and probably I said in the world, our biggest contribution in that area is the products we produce and how they are used. And this is one example.
If you would replace 1 million tons of standard steel in a vehicle, we could actually, during that lifetime of the vehicle, reduce the carbon dioxide emissions with 8.4 million tons. And if we do that, 1 million ton per year, this is almost as much reduction of carbon dioxide as we emit ourselves, because we emit in our production system 9.5 million tons, roughly, every year. So this is apart from being or on top of being a very carbon dioxide effective producer, this is, as I see it, the biggest contribution to reduce emissions by using our products, our knowledge in applications on vehicles. So with that, dear friends, we open up for questions.
Sure, so now open up for questions, and let's start with audience. Ola, please go ahead. Let's wait until you get a microphone.
Ola Södermark. Do you hear me?
Yes.
Ola Södermark, Swedbank. Give a question on your volume guidance for group. You are saying that the volumes are going down seasonally, as we have seen normally over the years, but can you give some more color on the different business area? Europe is obviously down, but how is it in Special Steels in Americas?
Special steel, I would say, fairly stable, and compared to a normal year, higher volumes, because we are not taking any outage in Oxelösund. Americas remains to be seen, but it all depends on import levels and so on, but I'm not expecting lower volumes in Americas.
... And, given that you're not going to have a maintenance stop in Oxelösund, is it, does that mean that this SEK 200 million is lower maintenance cost than a normal Q3?
Yes, in Europe.
One more question on the production issues you had in Sweden. You wrote about it in the report, and I assume that have to be material because you wrote about them, but you haven't mentioned.
No, we had production issues in Borlänge and in Oxelösund, but in Borlänge, we were standing still in the pickling line and the after following for eight days. And that, of course, gives extra costs, extra complexity, and also delays, delivery delays. So, so we wrote about it because it was, it was material or not material, but it was affecting the profitability, and we came out worse than we would have done if we wouldn't have had those extraordinary production problems. You always, in this type of industry, have production problems, but they were bigger than normal, if you put it like that, in Q2.
You know, we usually want to have a number to quantify.
Well, I thought about it, and I mean, you always have pluses and minuses, but we would have done a better result without it.
Okay. Thank you.
Let's go to Julian Beer .
Just if I can carry straight on with all this questioning on this amount. You said that you have problems in Borlänge. Were there also some issues in Oxelösund on the upstream side? Could you just detail those?
Yeah, we had production problems and some breakdowns in Oxelösund as well. So, Q2 was production-wise not and delivery-wise not a good quarter.
Okay. So if I was to estimate around SEK 100 million as the quarterly unexpected impact, would you hang your head or would you brighten your eyes?
You're not completely off.
Can I just ask a broader question, around mix development? Håkan showed the chart, indicating that year-on-year, earnings impact from price falls were just over SEK 1 billion. Would you be able to give a rough estimate of how much of that was mix versus price, and where has mix deteriorated most, and what are the prospects for a mix recovery in the next year?
I'd say most of that was actually price. Given that, well, a majority of it was in the U.S, and there, the mix changes are not that huge. There was also price. Part of the SEK 1 billion was in Europe, and part was in special steel, but to a majority, I would say it was mix. What Håkan, what Martin was talking about, that construction didn't develop as we had expected, really, now in Q2. So, part of the mix—what was mix, I would say, was mainly in Europe, where we saw less color-coated material than we normally do during a second quarter.
And that, that's the organic coated material?
Mm-hmm.
I think, I seem to recollect from previous years, that impact has been, you know, maybe up to SEK 100 million also. What's the reason for the poor development this year? Is it just lack of summer houses being built or?
It's slow demand in Finland and slow demand in parts of Eastern Europe, of course, affected by the situation in Russia and Ukraine. Slow demand in Russia.
Okay.
These are fairly profitable, as you know, products.
I guess that's an issue for Q3, but then Q4, we're back to the low mix anyway. My last question, with regard to advanced high-strength steel versus standard steels in Europe, what was the sequential development there, and how do you see that going forward?
I think the sequential, as I mentioned during the. When we looked at the segment, it was fairly stable in some areas or on very low levels. So I would say in some areas, slight improvement, but in other areas, very flat on low levels. And we are not expecting due to raw material prices, we are not expecting or planning for any major uptick within mining as either, and that is an important segment for these kind of products. On the other hand, heavy transport, quite good, and the expectation for U.S. with the new regulation for rail cars, will help it. Automotive, we expect to continue to stay on a good level and on a high level.
If you take construction machinery and mining-related equipment, we are not seeing or expecting any uptick during Q3, so stable on load levels.
So with the rail cars, you're expecting any sort of downturn in absolute demand, maybe because of a flattening off of shell production to be offset by a requirement to upgrade?
No, we are not expecting any lower demand.
Thank you.
Okay, let us take a question from Johannes Graselius .
Yes. Hi, everyone. I have a question on the net working capital development, SEK +632, and you heavily indicated that might be more to come, and it's relating to the merger. Could you help us to understand what happened here in Q2 and how to look at these things in Q3?
Well, I would say it's not, it's part of it is related to the merger, but definitely not all of it, because part of the inventory reduction was also seen in Americas, which is, of course, not impacted by the merger. But, well, we expect that we have a lot of actions in place to look at the working capital. Martin mentioned that we also continue to build slab stock for the relining, which we will then flush through now in Q3.
...So in that sense, Q2 was a good quarter, no doubt. But, yes, we are still expecting to be able to do more on, especially on the inventory side. And it will differ between quarter, but, as Håkan said, part of it is related to the combination with better logistics, fewer hubs, and so on. And part of it is on the ongoing work we have been doing for, for a couple of years now, when we follow this weekly with, turnover at stock points and so on, and, and are getting better and better all the time. So Q2 was good, but it was part of the long-term trend.
There shouldn't be any reversal in the third quarter, so we should see a bounce back in net working capital, do you think, or?
Yeah, we will, as Håkan said, we will flush through the call it extraordinary high slab inventory in Q3. Due to standing still in Luleå, of course.
There was also some accounting effects that took off some of the net interest bearing debt. What's that, and should we see that as extraordinary, but there won't be any reversal going forward?
Not really certain. What are you reflecting to the... I mean, the net interest bearing debt usually changes due to the net cash flow, and then also the FX, since we have loans in both U.S. dollar and EURO.
Okay, true. So it was hedging, I think, that had a positive impact, so that offset the negative effects on-
Yes.
On the net interest bearing debt. All right, then I understand. Okay.
Let us take some questions over the phone.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, zero one. The first question comes from Mr. Carsten Riek at UBS. Please go ahead.
Thank you very much. First question is on specialty steel. This division performed very well. If I look at the sales per ton, it was up quarter-on-quarter. Is there a significant mix effect here, or is there a risk to pricing? Because we have clearly seen that plate prices are heading down. What's your take here? That's the first question. I have two more.
Well, you could say it is a mix effect, because where we have lost volumes are not on call it the branded products to the Hardox and Strenx volumes. So there is a positive effect in that aspect. So we have lost volumes, but that is more for non-branded products.
Okay. The second question I have is on Europe.
Yeah.
If I look at the sales per ton, they actually increased, which clearly indicates you had a cost push. Part of it is explained by the Luleå relining, and you also hinted on the higher production costs from Oxelösund. But apart from it, is there anything else which actually caused these kind of higher costs? Because that was quite significant, and I'm just worried that it's structural rather than a one-off. What's your take here?
It's not structural. Of course, when you have production problems and are standing still and repairing equipment, that will also, what do you call it, contributes to higher costs.
So it's entirely based on the relining of Luleå and the deterioration in the costs, because you get slabs from Oxelösund?
Yes.
Okay.
Some other extra costs due to production problems.
Oh, okay. So it has nothing to do with higher iron ore costs from, let's say, Russia or switching over to LKAB again? I just want to make sure that I covered this area, too.
No.
Good. The last and the third question is: How does your statement of spillover effects and destocking in Americas aligns with the rather stable volumes in the Americas business, especially in the trading business? Because I would have thought we'd see a bit more pressure on those volumes because of this.
What do you mean with the pressure on those volumes?
'Cause you said we have still destocking in the, in the Americas.
Yeah.
Which, of course, should actually negatively impact your production numbers in the U.S., because if this continues, then you will rather see downside and not stable volumes, I would guess.
But the underlying demand is not going down. It's stable or, or it's going up slightly, and import is coming down. So, so my conclusion is... And, and we have also seen during Q2, call it, very, very limited order intake from steel service centers. And, as I said, I was expecting that to come to an end during Q2. Unfortunately, it didn't, and, and that's why we talk about spillover effects into Q3.
Okay.
Then, as you know, there are other, call it, actions ongoing in U.S., discussions regarding trade barriers for Korean material and so on. So we will see where this end, but the underlying demand, and that is important, is not deteriorating.
On this note of the-
It's a balance issue, I would say.
Yes, thank you very much. On this note of the anti-dumping, did you get already any indications whether the anti-dumping measures in the U.S. could be widened to plate material, too, or is it currently not under discussion?
Well, it is under discussion among our colleagues.
Oh, okay.
Where that will go, I don't know.
Fair point. Thank you very much.
The next question comes from Miss Ida Ekblom at Bank of America Merrill Lynch. Please go ahead.
... Thanks very much. A follow-up question on the U.S. I want to try and get an understanding of what your visibility is. Maybe you can give us some clarity on what lead times have done over the last month or so. Because when we came into Q2, the expectation was that the destocking would be over, and it sounds like you're guiding for Q3 for there to be spillover effects, but potentially for destocking to come to an end during the quarter. Import prices in the U.S. are still well below domestic prices. I understand underlying demand is recovering, but inventory levels are still above normal.
Just want to get a sense of what your visibility is on the destocking actually coming to an end in Q3, or if we might be sitting in the same position two to three months from now, where the destocking has simply continued because this price advantage continuing to motivate imports. Thank you.
I think that question is not possible to answer a hundred percent. But when we look at, I mean, lead times are, as you say, fairly short, but when we look, we follow inventories, we follow import statistics and so on, and our view is that we will see the end of the destocking during Q3. Having said that, I was wrong the last time, so maybe I'm wrong this time as well, but we expect the destocking to come to an end during Q3. And the visibility, well, we have seen. We have the order book, we have the order intake, so to say. So the visibility is not, of course, 100%, but we have some visibility.
Okay. Just on that point, what is the order book? Are, are we looking at 2 weeks, 4 weeks, 6 weeks? Just, just out of interest.
It depends a lot. We have short orders, but we also have long orders. So, it differs a lot between customers, between segments, and between products.
Okay. You don't have an average on how that has changed. I'm just trying to get a better sense, right? So just, you know, have lead times stretched out in the last four weeks, or have lead times stayed the same in the last four weeks?
I can only answer for SSAB, and I would say that our lead times are slightly longer-
Okay.
compared to four weeks ago.
Perfect. Thank you very much.
The next question comes from Mr. Seth Rosenfeld at Exane. Please go ahead.
Yeah. Hi, Seth Rosenfeld from Exane. Another follow-up question on the U.S. outlook. So you said basically you're expecting the destocking to continue into Q3, the raw material prices, be it iron ore or scrap, are coming down. And it seems now that the price levels in the U.S. have stabilized. Do you think this is sustainable? I'm talking about the prices there. Or would you expect further pressure on the back of raw materials and continuous destocking going into Q3?
It's a good question, but hard to answer. I mean, when we look at margins, if you measure that as spot prices over scrap, they are at very low levels in Q2 and end of Q2, and historically low levels. And I have no clue where scrap prices will go. I would expect scrap prices to follow or to have a strong correlation between scrap and iron ore, because that has been the history, and that is fairly natural. And as Håkan showed, we have not seen that since 2004. We have seen the same pattern, but the correlation is not there, and over time, because I think the correlation will be there. Will that happen during Q3 or not? Well, I'm not expecting, to be honest, the scrap prices to go up.
Will they fall, so we see that full correlation again? I don't really know, but I'm not expecting them to go up. And the logic would be for scrap prices to come down further.
Okay, understood. Thank you. And another question on the production issues at the Swedish mill, as you mentioned. So you said this impacted the deliveries with some delays there. It does not seem quite obvious when we look at the shipments for Europe that are slightly up Q2 versus Q1. Still, would you expect a catch-up in the deliveries in Q3 on the back of the volumes that were not delivered in Q2?
Uh, yes.
Do you have any indication there in terms of thousand tons, what was approximately the amount?
No.
You can give there?
No.
Okay, thank you.
Next question comes from Mr. Bastian Synagowitz at Deutsche Bank. Please go ahead.
Yes. Good morning, gentlemen. I've got three questions. So firstly, I wanted to follow up on your European margins. Even when backing out the maintenance cost for the second quarter, your, the margin of European business dropped by roughly EUR 20, while I guess most of the European peers will likely report a margin increase or at least stable margins. So I'm really wondering why the margins have been so weak. You mentioned product mix, but, but how far is this also an effect of the lagging impact of falling raw material prices?
Maybe you can just give us any hint on whether you expect the margins in the European business and also US and specialty steel to deteriorate further in the third quarter, particularly having a fixed in mind, or will raw material costs compensate for the residual price drop, which we are seeing in the spot market? I'll stop here before continuing with my last two questions.
As I mentioned before, Q2 margins in the European division was impacted negatively by the relining that we started now in Luleå, and both then from the extra cost up in Luleå, but also from higher slab cost than usual in the European operations. That we will see also in the third quarter as we continue with the relining, you will have the same impact in the third quarter, and then on top of that, we have the normal summer outages in Borlänge, Raahe, and Hämeenlinna. If we take the other part you mentioned on the raw material and the prices. Well, prices have been slightly down in Europe, in general, spot prices during the second quarter, but not significantly.
And, where those are heading into the third quarter, well, we don't see a trend that they would come down significantly in the third quarter either. And then, as you were alluding to, yes, we have lower raw material costs, which will partly compensate for that. But I would say that the margins in the European division is more impacted by the specific of the Luleå relining rather than by, what you call it, deteriorating margin. That's not, that's not how we see it.
Okay. Just to follow up on that, I mean, it really seems like, as I said, the relining and the basically step supply out of the Special Steels operations are basically continuing, and that's one of the reasons. But it sounds like you're not expecting any further underlying deterioration of gross margins coming from-
We-
versus raw material cost in SEK?
No. I mean, excuse me, we have the lower raw material costs as we presented. Iron ore down in, excuse me, Swedish krona with 5%. So no, we don't expect underlying materials to deteriorate, no.
I should also just add on that, that the synergy program also mainly relates to SSAB Europe. Of course, when that comes through also in towards the latter of the year and especially 2016, that will, of course, improve the margins, you know, for SSAB Europe.
Okay. And then just squaring that over to the U.S., where, as you already said, we obviously had the fall in iron ore prices. So scrap prices have fallen, but not so much. So where do we stand here on basically gross margin progression? Have we seen the trough of margins here, or do you expect, again, a further incremental margin squeeze in the U.S. business?
No, not on the spot market, no.
But effective, affected in your PNL, where obviously you have deferring or lagging trends coming into your PNL, and obviously, as the exception is running against it.
Yeah, we have a lag when it comes to contract prices, yes, but the raw material prices are seen fairly quick in the PNL in Americas.
Okay. So effectively, you're, you're telling us, basically Q2 was the trough on underlying U.S. margins as well?
All depends where scrap will go in Q3.
Yeah. Okay, good. Then my second question is on the additional cost measures, initiated, in Ruukki Construction. I mean, those are largely a reaction to the trends which evolved after the EUR 1.4 billion synergy, synergy targets has been announced. So could you please quantify those? And, is it fair to assume that they are obviously not included in the EUR 1.4 billion number?
No, due to the market situation, we need to continue on top of the synergy project, so to say, and that's what we are doing.
Okay, but could you quantify those?
No, not at this stage.
Okay. All right, then. And then lastly, on your cost of debt, which obviously saw a large step change in the course of the quarter, I think they dropped by roughly 50 basis points. Is it fair to assume that this will feed through to an annualized SEK 100 million interest cost relief, or is there anything else we should keep in mind, which would possibly drop part of the benefits?
I think it's fair to say that this is the change that we saw during Q2 is what we are, roughly what we would be expecting going forward as well.
Okay, perfect. Thanks. Thanks so much for taking my questions.
Next question comes from Mr. James Gurry at Credit Suisse. Please go ahead.
Thanks very much. I think most of my questions have been answered. Just one quick one. You've got, I think is it SEK 5 billion for refinancing this year, of the, of the net debt. Are you confident of refinancing that this year and, in the refinancing due over the next three years?
The short answer is yes. A bit longer answer would be that out of the... It's not really five, it's between four and five, that needs to be refinanced. A large portion, the majority of this, more than SEK 3 billion, is commercial paper, which we expect to be rolling. And then for the rest, this year, we already have options that we are evaluating and, that we will move forward with. So yes, we don't see any issues with that.
Once again, you've got no covenants, do you? Even though your net debt is quite elevated in general.
No, we have no financial covenants.
Great, thanks.
Next question comes from Mr. Oskar Lindström at Danske Bank. Please go ahead.
Yes, hi. Really three questions. I'll start with the first one. You had a year-on-year negative price mix effect of just over SEK 1 billion. Could you break that out between the three main divisions?
I would say roughly SEK 500 million in Americas, SEK 400 million in Europe, and the rest in specialty.
All right, super. Moving on in the same sort of type of question, variable cost came down SEK 610 million year-on-year. Could you maybe break that up between the three main raw materials, iron ore, coal, and scrap? And-
... the new contracts that you've signed and current spot prices for scrap, should that year-on-year figure rise next in Q3? And then could you give sort of an indication of how we should think around that?
I would say two things: I don't have the breakdown on top of my head, and also, it's not only the raw material, it's also how we run the production and including then parts of the synergies that we have achieved so far, you will find in the variable costs. Looking at the next quarter, yes, there will be lower raw material costs, given what we saw in purchase price in this quarter.
But on the other hand, if you want to compare Q2 to Q2 this year and then go Q3 to Q3, you should keep in mind that already in Q3 last year, there had been quite a significant drop in, especially iron ore, compared to the beginning of 2014.
Okay. My last question then, earlier here now, in the Q&A session, Gillian Beer mentioned or speculated around unexpected impact on earnings of unexpected production problems of around SEK 100 million Swedish krona, and you seem to have nodded or said, you know, not completely off. Now, that's not including the direct costs for the Luleå relining, which were, you said, between SEK 60 million and SEK 80 million Swedish krona during the quarter. Am I understanding that correctly?
Yes.
We should then expect between SEK 120 and SEK 140 in direct costs in Q3 due to the Luleå relining?
Yes.
But at the same time, also lower maintenance costs than normal due to not doing the-
The same maintenance cost in the European division, but in the Special Steels division, we will not have the normal summer outage in Oxelösund, we have moved that into Q4 instead. So in Special Steels, lower, yes, but in European division, approximately similar as last year.
The Special Steels, Oxelösund, maintenance cost, how much is that, which you've now moved to Q4?
I think we'll come back and quantify that more in detail when we release the Q3 report.
Okay. Thank you.
Next question comes from Mr. Ioannis Masvoulas at RBC. Please go ahead.
Hi. Most of my questions have been answered, but I just wanted to clarify a few things. In terms of the slab volumes you got that SSAB Europe got from Oxelösund in Q2, could you quantify the volumes there?
Oh, I don't have that in, from top of my mind, actually.
Neither do I. I don't know the exact volumes, or I don't remember them.
I think you've guided to 500,000 tons during the blast furnace reline. Is it gonna be one-third, two-thirds in Q3, Q3, roughly?
Approximately, yes.
But I want to remember that we also take slabs from Raahe as well, so it's not only from Oxelösund, and we also had the slabs inventories from high production Luleå before, so it's not that is. But we will come back to that to you and with some more details.
Okay. And also, I think, as part of the production disruptions you had, I think you mentioned some upstream production issues at Oxelösund. Was that costs that were actually reflected in SSAB Europe or Special Steels?
Special Steels.
Okay, but the majority-
Some part in Special Steel and the Borlänge part in Europe.
Okay, but the majority, was it in Europe, or was it, roughly split half and half?
The cost of the production problem was. The majority was in Borlänge, in Europe.
Okay, that's great. Thank you very much.
Next question comes from Mr. Nitish Agarwal at Citigroup. Please go ahead.
Hi, thanks very much. Most of my questions have been answered. Just one more question on pricing. There was a negative impact of more than SEK 600 million in second quarter versus the first. What sort of a trend are you witnessing in third quarter in terms of prices? And what do you... And do you expect this trend to continue going forward? I mean, although I understand that you expect destocking to end in third quarter, so some of that impact probably will be minimized. Thanks.
I think it's a question that is impossible to answer because it will all. A big part of that price decrease, sequentially, was, of course, in North America or in U.S. or in North America. And it all depends on currency, import, and when the destocking is over.
Okay. And so far, what sort of a trend have you seen so far in the third quarter since the first of July?
Well, the North American plate industry introduced price increases from beginning of the third quarter. So, I would say one would expect then to see stable prices or prices bottoming out or stabilizing.
Okay, perfect. Thanks.
Next question comes from Mr. Seth Rosenfeld at Jefferies. Please go ahead.
Good morning. Just a couple of quick questions on the outlook for the Special Steel business. You mentioned the release and deterioration in pricing in this area. Can you just give us some sense, is this coming in line or more aggressive with pricing pressure you're seeing in other markets?
... and on the demand side, can you give us a sense of which end markets for special steel are currently strongest? Where you're seeing a bit of deterioration.
With the price deterioration within special steel is lower than in other than for standard steels or in Americas or Europe. The prices are, over time, much more stable. Then it, of course, differs. If you take the branded products, they are much more stable than non-branded, but as an average, they are more stable than for standard products. And I said we went through the segments, and I would say that we are not seeing any deterioration in demand. We see in heavy transport, good demand, and so on. But construction, machinery, and mining-related, which are important segments, I would say we unfortunately, we see stable demand. And why I say unfortunately, is because they are on very low levels.
Okay, thank you. Just one follow-up question. Obviously, the special steel business benefited a lot in the last quarter from the jump in utilization rates, as you kind of repositioned some of your production to Oxelösund. How do you expect this to progress looking forward, after the relining of Luleå is completed? Should we predict a big fall in utilization rates at Oxelösund, I guess, going into Q4 and beyond?
When the relining in Luleå is over, and we are back at normal production, so to say, then we will, as it looks now, definitely close the small blast furnace in Oxelösund again. We started that one to compensate for the relining in Luleå.
Which is purely on a temporary basis. Okay, thank you very much.
We have a question from Mr. Robert Redin at ABG. Please go ahead.
Yeah. Hi, thanks for taking my questions. I'm thinking about the lag effects in your U.S. business. If you could say something about your mix of contract versus spots business in the second quarter or even potentially in Q3.
We have approximately 50% of the business being, call it, contract business, and 50% being shorter term. But the shorter term business is typically one big part of that is the distribution business, and that has been, call it, smaller than normal in Q2. So I would say in Q2, we had more than... The percentage of contract business was a bit higher than normal due to slow demand or slow purchase from steel service centers.
Okay, so a bit more than 50 on contract.
Yeah.
All right. And also thinking of these imports, I mean, that they've been coming down. You said that this talking will come to an end in Q3. But, I mean, what are the drivers of the imports? Are they still there? Is the import versus domestic price differential still attractive enough? Because I'm assuming now that prices are sort of stabilizing, that buying an import material is more attractive than before, when prices were falling, given the long lead times on imports.
As you said, import typically have long lead times, but it's all a matter, as you say, of prices, and that is, of course, heavily affected by currency. So if it is more beneficial to export to U.S. than to sell it somewhere else, that will be seen. Over time, there are... The North American steel industry has mitigated that with trade barriers and so on. Now prices has come down, so the benefits of exporting into U.S. are not that big. Then, of course, you have also the balance between scrap and iron ore. So it's a bit complicated, but we follow inventories, we follow import statistics, and we see that import comes down, and we see that the underlying demand is not going down.
It's quite good and continues to be good, and it's expected to continue to be good. So I think it's very, very hard to say where import will go, but the conclusion would be that import will continue to come down. But if the U.S. dollar strengthen a lot against other currencies, we could see import increasing again. But against that then is what we now see when it comes to talks of trade barriers and so on. So to give you a clear and 100% true answer is not that easy.
Okay. I'm just worrying that if prices stabilize or go up, then the import domestic discount is sort of more attractive than when prices were falling, even.
Yes.
But that's the typical pattern, would you say?
Yes.
Yeah.
You need to remember, we will always see import into the U.S. and North America, because the market is structurally undersupplied with plate.
Mm-hmm. All right, cool. Those are my questions. Thank you.
There's no other questions at this time. Please go ahead, speakers.
Okay, thank you. Do we have any final questions here in the audience? Okay, if not, thank you for participating at this call, and please feel free to contact our IR team for additional follow-up questions. Thank you.
Thank you very much.
Thank you very much.