Morning, everyone, and welcome to SSAB's First Quarter 2015 Results Presentation. My name is Andreas Koch, Head of Investor Relations, and today's presentation will be led by Martin Lindqvist, President and CEO, and Håkan Folin, our CFO. The agenda looks like this: Martin will start with the key numbers and followed by the divisional development. Håkan will then dig deeper into the P&L and cash flow statement. And last, we'll have the outlook, and afterwards, we will have the Q&A session. Martin?
Thank you, Andreas. Good morning. During the first quarter, we had sales of SEK 15.5 billion and an EBITDA of SEK 1.5 billion, and an EBIT of SEK 564 million, and a decent improvement compared to one year ago, Q1 2014, but also compared to Q4 2014. The profit improvement was driven by lower costs, and that we start to see now synergies in the P&L. The strongest improvement year-over-year was in SSAB Europe, and we also, during the quarter, had a fairly good cash flow, in spite of building up inventories of slabs in advance of the big relining in Luleå this summer. We have also, during the quarter, completed all the formal things regarding the Ruukki transaction.
As said, sales 15.5, EBITDA margin of 9.7% or close to 10%, and the EBITDA per ton now close to 900 SEK per ton. Shipments, volume-wise, slightly lower compared to Q1 last year. If you look at the segments, I would say pretty much as expected. Heavy transport developed during the quarter fairly okay in Europe and U.S. Automotive, overall good demand. Construction machinery, stable at low levels in Europe and the U.S. Mining, slow demand on low levels in all markets. Energy, wind towers, and transmission towers in North America, quite okay. Low activity in the pipeline sector. Construction material, seasonally slow. And then service centers, very slow during Q1.
If any surprise, may be a bit slower than expected, and the destocking phase will take slightly longer than we expected when we released the Q4 report. If we look into the divisions, special steels, heavy transport continued to be the segment showing the best development. Demand from most other segments were unchanged at low levels, and there were some geographical variations, but overall, fairly slow and fairly stable. Shipments decreased with 11% compared to Q1, and that was mainly non-branded QT in North America, but it increased compared to Q4 2014. And the profit improvement compared to Q1 was even though we had lower volumes due to lower costs. In Europe, we saw continued good demand from automotive and also stable demand from energy and heavy transport segment.
The shipments was up 2% compared to Q1 last year, and 7% up compared to Q4. Prices, including currency effects, were on average 2% higher compared to Q4. Synergies, lower costs, and higher volumes explain the difference in EBIT or the improvement in EBIT compared to one year ago. Americas, weak, or if not, non-existing demand from steel service centers due to destocking and high import in Q4, and we also saw in the beginning of Q1 compared to Q4 2014. Tibnor, fairly less losses this year, and that compared to Q1 last year, and that is due to the ongoing restructuring program. Russia and the Ukraine market remained weak during the quarter. Some updates from the synergies for the synergies. The synergies program is running well in line.
We will see the full P&L effect of SEK 1.4 billion during the second half of 2016, and we will see the full effect in the P&L 2017. So what have we done? Well, we have done the easy, part of the easy stuff. We have lower purchasing costs. We have renegotiated purchasing agreements. We are sourcing more internally to Tibnor than, than instead of doing it externally. We are shipping coking coal from Oxelösund to Raahe instead of buying it externally, and we have lower administrative costs. We have also announced a number of actions with later impact. We will close the galvanizing and color coating line in Borlänge during this year, and that will be affecting approximately 230 employees.
We have closed the former Ruukki head office and reduced staff functions. That will also be seen, the effects of that, during 2015. And we are going to consolidate service centers in Tibnor, and we have also initiated synergy programs in Luleå, Raahe, Hämeenlinna, and Oxelösund, and that will also be seen in the P&L before end of 2016. So, Håkan, some financials.
...Thank you, Martin. Good morning, everyone. I will go through some more on the key figures, also, on our balance sheet and our debt situation. And we will look at the changes in profitability between the quarters, and also some words on the raw material development. Starting then with some key figures. As Martin said, we had an increase in sales with approximately SEK 900 million compared to Q1 last year. This was to a very large extent, driven by the changes in FX, where especially the stronger US dollar and also somewhat euro has impacted sales. We had an EBITDA in the quarter of SEK 1.5 billion, which was an improvement of more than SEK 600 million compared to last year.
We had a positive operating cash flow of close to SEK 800 million, and I'll get back to some more details on where that is coming from. Looking then how we have an improvement of around SEK 450 million. We see a net in Europe and SSAB Special Steels. We also have positive impact of variable COGS. We actually have a negative impact on currency with SEK 70 million, given that we have higher cost of raw material in local currency, and also that we have seen some of the South American currencies, especially the Brazilian real, develop negatively for us. Then we have other, and in other, we have both Tibnor and Ruukki Construction are in other, impacting positively with SEK 40 million. So all in all, the change between the quarters, SEK 450 million.
If we instead then compare Q1 to Q1, we had almost zero in Q1 last year +SEK 34 million. Here we have a drop in price of around SEK 400 million. This is excluding currency movements, and it's mainly coming from SSAB Europe. Volumes basically no impact, and then large impact on variable COGS. And it's the same factors as with Q1 to Q4, but here the raw material impacts are larger, where all three of them, if you say the big one, iron ore, coking coal, and scrap, were lower now in Q1 than Q1 last year. And absorption, fairly flat, and then currency impact of SEK 200 million positively, which is partly translation of the result of the American business, but it's also given that sales prices in other currencies than Swedish krona have impacted positively.
Then we have other with a negative of 170, and here is included the amortizations that we do on the purchase price from the Ruukki transaction, which we had now in Q1, which we did not have one year ago, of approximately SEK 50 million. So all in all, an impact between the quarters of more than SEK 500 million. Coming back then to the cash flow. As said, we have a positive operating cash flow of close to SEK 800 million. This was coming from the from the operating result of SEK 1.5 billion. Then we had the negative impact on working capital of SEK 436 million, and this is especially accounts receivable, which were all negative of a bit more than SEK 500 million. And as we have communicated before, we have a balance.
We had a decrease in our gearing from 56% down to 55%. We continue to have a fairly balanced debt maturity profile, where we have cash and backup facilities of over SEK 10 billion, and we have maturing, remaining to mature this year of around SEK 7 billion. Almost half of this, though, is commercial paper of around SEK 3 billion. And the remaining maturities, we have ideas on how we will, how we will refinance that. Looking forward, we have fairly small amounts maturing in 2016, a bigger chunk in 2017, and then fairly small again in 2018. And also here, we see, definitely that there are good opportunities for us to do this in a good way. We had the lower interest rate in the quarter.
They went down from 2.9 at the end of Q4 to 2.8 now in Q1, and we have also increased our duration from 3.9 years up to 4.0 years. So basically, since we completed the merger with Ruukki, we have quarter-on-quarter increased our duration, and at the same time, lower our interest rates. Moving on to the raw material side, starting with iron ore and coking coal. In U.S. dollars, we saw both iron ore and coking coal decrease during Q1, and we have on the graph here, it's from the beginning of 2014, where iron ore started on almost $140, and it's now down at, well, right now it's $58, but it was actually down even below $50 a few weeks ago.
But these are the spot prices for fines, and we buy pellets, and our pellet prices decreased with 12% in U.S. dollar, but actually increased with 1% in Swedish kronor compared to Q4. Coking coal has, during the same time period, also decreased, but not at all as much as iron ore. And for us, in Q1, our purchase prices were down 3% in U.S. dollar, but actually 13% higher in Swedish kronor. And for our raw material purchases, we're hedging the U.S. dollar the same length as the contracts. So usually, it's a quarter. And we have now seen the strengthening of the U.S. dollar, but we will continue to see that also going forward for our purchases.
For scrap, scrap prices in U.S. then, also fell quite sharply during Q1, and they were down 24% compared to the end of, Q4, and actually 35% compared to the end of the same period last year. And we saw, especially in February, there was a big drop, but since then they have been pretty stable.... It's important to remember, though, that despite this drop now in Q1, scrap prices has not at all dropped as much as we have seen iron ore prices drop, and historically, they have been very much correlated. But, so far, scrap prices have not followed the iron ore drop yet. Finally, then from my side, some words about the relining that we are doing now in Luleå during the summer. We will start in the beginning of June. It will continue for three months.
We will, and we are currently doing then, replacing these 500,000 tons of slabs. So we started up the small blast furnace in Oxelösund during Q1, and we will continue to run that until the big one in Luleå is up and running again. There will be some extra costs associated to this on top of the capital expenditures of between SEK 150 million and SEK 200 million. This will mainly impact Q3, but somewhat also now in Q2. And it will also differ a bit between the divisions, because for special steels, which are now running the small blast furnace again, they will actually benefit from this because they will have lower under absorption.
While Europe, which will be standing down with the big blast furnace for three months, will the cost will be burden on Europe. And after we have completed this relining, then at the end of August, we will have five blast furnaces, which will provide us the full flexibility that we talked about when we announced the merger with Ruukki. Okay.
So looking forward a bit then. We start with North America. We expect the market to continue to be negatively impacted by the high import we saw end of Q4 and beginning of Q1, and also higher inventory or high inventory levels at distributors or steel service centers. But the underlying demand or the real demand is expected to continue to be good in Q2. In Europe, no big changes. The underlying demand is expected to remain stable, and we don't see any inventory buildup or inventory reductions either to any large extent in Europe. China continued slow and weak during Q2, and the shipments in total, we expect to be in line with what we saw in Q1. And if we look at the segments, they are fairly flat, with some exceptions.
Heavy transport, we expect that to continue to be a good segment and with... On a high level in both Europe and U.S. throughout the year. We expect automotive to continue to grow. Construction machinery, stable demand on low levels in Europe, if anything, some small positive signs in North America, and the Chinese market is expected to remain depressed. Mining, no short-term improvement expected, and energy, as it looked like in Q1, I would say. Construction material, we will see definitely seasonal uptick in Q2, which we typically see every year. Then service centers, we expect the apparent demand to improve towards the end of Q2. And if anything, this took a bit longer than we expected a quarter ago, and we still have higher inventories than normal in the beginning of Q2. Then over to something completely different.
A week ago, we launched our new brand name for structural steels, for steels above 600 MPa, and the name of that brand is Strenx performance steel, and that will be instead of Domex, Weldox, and Optim. But this is not just a change of a brand name. We also launched this together with much better guarantees when it comes to workshop properties and, like, weldability, bendability, surface, inner cleanliness, and so on. This has been received very positively on the market. We launched it 9:00 A.M. in Paris, me and Grégoire Parenty last Monday, and we got the first order already 20 minutes past 9:00 A.M. So I will bore you with a short, very short film, and before we take questions and answers.
Okay. You can see it on the web. It's a very nice short movie describing the new Strenx, brand name Strenx, and with better quality than we saw here today. Sorry for that.
Yeah, let's continue with the Q&A session, and we'll start with questions in the audience here in Stockholm. So Johannes, maybe start with your first question.
Okay, thanks. It's Johannes Grunselius with Handelsbanken. Could you give some color on the price environment, Martin, please, and tell us what you think about Q2 there, both in Europe and the U.S.?
I think what we say is that we. Given the inventories and everything in the U.S., we expect, and we see that on spot prices, continued price pressure in Europe. I don't really know, but fairly stable, I would say.
What, how would you describe the current price in the U.S. if you take the plate price minus scrap price? Because there was such a big fall in scrap in February. How's that price compared to sort of the Q1 average, for instance, now?
It depends. I mean, if you take, as Håkan showed, the scrap prices during March has been fairly stable. But if you look at the correlation, I mean, as Håkan also pointed out, the correlation between scrap and iron ore is always very, very high, and we haven't really seen that. So my expectation is that scrap prices will continue to move down, and especially now with the season as well, and also given the currency, there is no room for exporting scrap out of U.S. My guess would be, without knowing 100%, that the scrap export out of U.S. is fairly limited. So I think we should continue to see reduced scrap prices.
Thanks. Good morning, Christian Kopfer from Nordea. Firstly, on special steel volumes, you saw those 11% down year-over-year, I think, but it was up quarter-on-quarter. Can you elaborate a little bit on it? Is there any trend you see on the demand for special steels now, or is it more lumpy business quarter-on-quarter?
Say, if anything, I mean, all the segments where we sell special steel has been fairly stable on low levels. And as I said, if anything, we can see some small signs of improvement. What we saw compared to Q1 last year was, to a large extent, non-branded Q&T that goes via distributors, to some extent in North America. So a big part of the volume drop was in those products.
Okay, thanks. And, you mentioned that you had SEK 150 million in cost absorption quarter on quarter, right, for, from Q4. How much of that approximately was due to that you had higher crude production in the first quarter?
There was some associated to that. On the other hand, for special steels, we also had some extra costs associated with starting up the blast furnace. So all in all, in Q1, the impact wasn't, for special steel, net impact wasn't that positive.
Okay. Finally for me then, on the U.S., we have obviously seen import prices coming down a lot, and, what's your view on those prices? Would you say that those are fair from a market perspective, or would you say that it start to be, you know, unfair for, from... Is it more to say that it's more like dumping, or do you have any view on that?
I don't want to comment that, but we have seen prices and volumes coming down during import prices and import volumes coming down during Q1.
Okay. Thanks.
Are there any further questions from the audience? Okay, let's take some questions from the conference call.
A reminder to press zero one to ask a question. Our first question comes from Mr. Jean de Viviés from Exane. Please go ahead. Your line is open. Please go ahead. Jean de Viviés from Exane, please go ahead.
Can you hear me? Hello, Jean de Viviés speaking. Can you hear me?
Now we can hear you, yes.
Yeah, okay. Sorry for that. Technical issues, I guess. A quick question on your variable costs that were down in Q1. Can you explain a bit, a bit further, given that you explained that the raw materials, and notably the iron ore and the coal prices, were up in Swedish krona versus Q4? Is that the effect of hedging, notably, first question? And then, if we take the bridge on slide 17, I think, could you please give some color on the synergies impact in Q1 versus Q4 last year? I mean, the real net PNL impact on your earnings. Thanks.
Okay, if we start with the first question, the FX part is removed from the variable COGS, the part of the FX bucket. So what you see on the variable COGS is not at all impacted by the FX. And even though, even though prices would have gone up in Swedish krona now during Q1, those are our purchase prices, and that's not... Normally we simplify it and say that we have a quarter of lag or something. So what you see that we buy in Q1, you normally will see hit the PNL in a subsequent quarter. On the synergy side, and if I got your question right, well, we said we have a net, we have an impact of SEK 100 million now in Q1, and you can find it a little bit everywhere.
You find it partly in fixed cost, and you find it to partly also in the variable COGS. So the positive impact you see on variable COGS contains the synergies as well.
Okay, so you said SEK 100 million net impact in Q1, that's right?
Yes.
And-
SEK impact, and then we had the restructuring cost of SEK 15 to achieve those as well.
85. And how much do you think would be in the, in the variable COGS part in the 275?
As Martin pointed out, some of the actions are, for example, renegotiated purchasing contracts, so those you will find in the variable part, but, definitely not all of the hundred, but, a fair amount of them.
... Okay, okay, thank you for that. And just coming back on the first question, so you said you were talking purchase prices. So should we expect the, I mean, could you please give an indication on how you see your raw materials PNL impact going into Q2?
If we take the iron ore, which is on the majority part, we say that if you simplify it, you can say what we buy in one quarter is hitting the PNL in the coming quarter.
So then the iron ore costs should be up in Q2 versus Q1?
We said there was 1% up in Swedish krona and 12% down in U.S. dollar. So, that's basically what you then would see in Q2, yes.
Same for, for coking coal?
Approximately.
Okay. Thank you for that.
Our next question comes from Mr. Carsten Riek from UBS. Please go ahead.
Thank you very much. My question circles around Europe. You have seen increased average pricing in Europe, which is a bit odd given the price duration we have seen since November in place, and which still continues. So I'm just wondering whether you have seen some structural changes in your product portfolio, which actually could explain it, or whether the time delays were a little longer? That's the first question. The second one-
One by one, then. I mean, the price difference is mix and currency.
Mix and currency. So then that was the second question I have. How much of the European division shipments went actually outside Europe?
That's mainly the automotive business. I don't know how many. That's roughly 300 or a bit more than 300,000 tons a year, so-
Ten percent.
Yeah.
10%. Okay. Thank you. The third question I have is Oxelösund. You, you said the small blast furnace is ramping up again, in order to replace, to some extent, Luleå. What happened to the small blast furnace once Luleå is actually up and running again?
If the market looks at it as it looks today, we will idle it.
Okay. Fair point. Thank you very much.
Our next question goes to Mr. Oskar Lindström from Danske Bank. Please go ahead.
Yes, good morning. Two questions remain. Number one, I mean, how is the slab inventory build up ahead of the Q3 Luleå relining impacted earnings already? I realize it's SEK 150 million-SEK 200 million, mainly in Q3, but have we had any other sort of additional costs or impact that we've seen already in Q1 or that we will see in Q2? That's my first question. And the second question is around, I mean, we see how your average realized prices have developed. Have there been any mix changes that are significant or that you can tell us about, in the first quarter, compared to, well, the fourth quarter and also the first quarter of last year, I guess? So those are my two questions.
The answer to the first question, I would say net, no, and not any impact during Q1. We will start to see costs in Q2 for the relining, but the majority, I said, will be in Q3. And then, when it comes to mix, we have developed a mix, especially in Europe, during the first quarter, and that has been by purpose. So we have a better mix.
If I may, a follow-up question on that. That improved product mix in your European operations in Q1. I mean, is that something that we should expect to continue going into the rest of the year? And what exactly has it been?
It has been a lot of different things, but, but, we have not overall. We have focused on improving the mix in Q1, and we will always focus on improving the mix. But how that will look in Q2 and Q3, we have not communicated, but we saw, we saw the effects of that in Q1, and as said, that was by purpose. We have worked hard to improve the mix in the European division.
So, sorry, just to keep up on that. I mean, in the past, you know, 2013 and so on, you sold a lot of slabs to sort of marginal markets in Europe. Is that part of the explanation that you're doing even less of that in Q1 now, or?
Yes.
Sorry, yes?
Yes.
Yeah. Okay. Very good. So how much of slabs have you sold externally in Q1?
That must be a very limited number, because as said, we are building up the slabs inventories now to meet the relining of the blast furnace in Luleå.
All right. Thank you very much.
Our next question goes to Mr. James Gurry from Credit Suisse. Please go ahead.
Thanks very much for my question. Can we talk about the synergies for a second? You're at about SEK 450 million a year now. Guidance was for SEK 1.4 billion, but I think that included lower losses. What's the scope or the potential to increase the synergy target, especially given the fact that, by this time next year or mid-next year, you're expected to have 530 fewer employees?
...But, we are, as said during the presentation, in line or well in line with the, with the plans we have, and we will be able to reach the 1.4 in hard cost synergies, mid-next year.
That's before 2017?
Sorry?
Full impact 2017.
Full year, full year impact, but we will have a full run rate second half. So all this will be realized mid-next year. And then to get the full 1.4 in the P&L, you need to see the full year, and that will be 2017. But the run rate will be there after June of next year, the full run rate.
Okay, okay, understood. Just one little follow-up question. Can you just talk through the debt maturity profile? You've got SEK 7 billion maturing this year. You've got about SEK 10 billion in liquidity. You know, we're a quarter of the way through the year. Are you confident of rolling that over successfully?
Yes.
As mentioned in the presentation, around SEK 3 billion of the SEK 7 billion is commercial paper. So in terms of long-term financing, it's, it's clearly less than the SEK 7 billion you mentioned. So the, the short answer is yes.
Okay, thanks.
Our next question comes from Isida Ikrami from Bank of America. Please go ahead.
Thanks very much. Two questions. Can you please comment on the trade cases in the U.S.? Do you have any perspective there? Will you say anything? And then secondly, Ruukki Construction, while obviously there's a bit of seasonality in Q1, which we can appreciate, and there are some turnaround initiatives at that business, it's still making losses at the EBITDA level. Could you talk about what kind of time frames you're looking at to stay committed to that asset? Or what you would need to see to potentially divest that asset or consider other options? Thank you.
Well, two simple answers then. On the first question, I don't have any comments. On the second questions, we have said before that, this is a part of the portfolio we have today. It's not the most core part. That is, our two home markets, the Nordic region and North America, for more standardized products, and then globally, advanced high-strength steels and Q&T, and that is what we always will stay committed to. And, but having said that, I mean, we own Ruukki Construction, and we will continue to do the turnaround and continue to develop that until we decide to do something else. So no real comments there either.
Okay, so you don't have any internal targets on how long you... I mean, it could be three years, it could be five years. I mean, is there a time frame on the turnaround story? Just to try and understand, you know, because obviously you guys have often said, "We're committed to the turnaround," and I get that, but I just want to maybe have a better understanding of, you know, what is a reasonable time frame to assume a turnaround?
Well, to be extremely boring, of course, we have internal ideas, but, but, what you got was the external answer.
Okay, thank you.
Our next question comes from Mr. Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes, good morning, gentlemen. I still have a couple of questions, and my first one is again on the U.S. business. I was quite amazed by your U.S. margin, which has been stable quarter-over-quarter on a kroner per ton basis, with a spread between spot prices and scrap has obviously been down about $100 over the past 5 months. So I guess one of the reasons besides the fix is that we had not even seen the actual peak in your margins in Q3 and Q4 last year, given that you have longer lead times.
Could you please clarify a little bit how much of the margin drop has been reflected in your P&L already, but then compensated by a fix, and how much incremental margin decline should we still expect in Q2, assuming stable U.S. prices from here? And then my second question is, whether there are any, say, effects from your product mix to the worse or to the better, which we should have in mind going into the next quarters. And then my last question is, on your synergies. I think on one of the slides, I've read that you had some synergies from shipping coal from Oxelösund and to Raahe, and I'm not quite sure why this would give you any benefit, so maybe you can explain that. Thank you.
On the first question on the U.S. prices, we have not seen in our P&L, you can say we have not seen the fall, as you can see on the spot market, given that, of course, that we have contracts with our customers that are not based on spot pricing. On the other hand, we have not seen the full impact of the decline of scrap in the P&L either.
And if you talk about the mix, I mean, what has not been, and we talked about that, the apparent demand from steel service centers. I mean, direct customers and the big OEMs, they have been very stable and ordering material in Q1. So you have, of course, a mix effect as well, because on average, I would say that there are slightly higher quality products to OEMs on average compared to steel service centers. So there is a positive mix effect in that sense as well.
Okay. Maybe just to follow up on that briefly. In the European business and in the specialty steel business, will the mix change at all going into Q2?
Yeah. I mean, I said we see some small positive signs in some segments in specialty, but I would say, no, not really, not going into Q2. What we—part of the volumes or volumes we lost in during Q1 was what we call non-branded Q&T. That typically goes to steel service centers in NAFTA. So of course, when the apparent demand comes back from steel service centers, that will have a slight impact on the mix.
Okay. And then just to clarify again on your U.S. margin, maybe you can remind us again, so what is your kind of precise lead time, how you realize your sales basically in the P&L? And then secondly, what's your basically hedging duration? Is it the same three months, which you would have for the raw material, for example, in Europe as well, or you don't hedge at all? So what's the mechanics we have to keep in mind here? Because it's obviously very difficult to work out your sequential margin progression, given all the moving parts.
In the U.S., we don't... I'm not sure really what you meant, if you meant hedging prices or hedging the scrap cost, but the answer would anyway be that we don't hedge either on the price side or on the scrap cost. And we turn around the scrap fairly fast, so if there's a quarter lag, usually on the iron ore, you see the scrap impact going in during a month or a month and a half, basically. And then on the contract side for prices, well, as Martin mentioned, we have changed. On the service center, we are selling more at the spot prices, while at the end user, we are selling more at the contract prices, which are done typically in the range of three months.
Now this quarter, we've been selling more to the end user side, and we've been selling to the steel service center.
So, what's your average sales duration in the U.S. business, roughly speaking? Is it three months, or?
I don't have that exact figure.
But then it sounds like it's pretty close to the three-month number, and that means that we actually have been seeing a large part of your margin, obviously, of the spot margin compression in your numbers already, effectively. Is that fair? Is that what you see in your controlling numbers?
I would say it's definitely not longer than three months. It's, it's rather shorter than three months.
Which means then we probably have seen pretty much all of that, which obviously means your margin will not actually decline that much from here, is what, what I guess the conclusion would be.
That can be your conclusion. On the other hand, you have to continuously see plate prices going down during Q1 as well on the spot market.
Yeah, no, that's true. But, yeah, okay, I guess not, not that, not that much. Okay, no, perfect. And then just on the last question on regarding the synergies, so why would the basically shipments of coal from Oxelösund to Raahe give you any benefit? I'm not quite clear about that.
Well, before, Ruukki used to buy coking coal on the external market, but now since we can do this internally instead, we save that extra cost.
Okay. And so Oxelösund, Oxelösund simply buys the coal cheaper, or?
No, Oxelösund produces the coking... They produces the coking coal, and then they can send that to Raahe, because Oxelösund has excess, coking capacity.
Oh, okay. Got it. Just producing probably the coke, I guess. Yeah. Okay, no, perfect. I'll follow up on that later on, maybe.
Okay.
Our next question comes from Mr. Ioannis, Ioannis Malovitich from RBC. Please go ahead.
Hi, guys. This is Ioannis Masvoulas from RBC. One question on your guidance. You guided the flat shipments in Q2, but special steel shipments are usually up in Q2. So should we expect some decline in Americas shipments due to high inventories? Or is the Q1 European shipment figure not sustainable in Q2? Thank you.
No, but we, the only thing we guide for is overall, for the full group, and then we expect shipments to be in line with Q1. And then, as you point out, there will be some divisions increasing volumes and some divisions decreasing volumes. But overall, we will have stable volumes compared to Q1.
Okay, thank you. Second question on Ruukki Construction. Definitely good EBITDA progress in the quarter, some SEK 20 million up year-on-year. Do you think you can accelerate the turnaround there in the coming quarters, in the seasonal, seasonally strong period? Or should we assume that the Q1 progress on a year-on-year basis will continue, for the rest of the year?
We are in the middle of that restructuring program, and it's of course a lot of internal measures and things we do, but we also see the effects of the Russian market and the Ukrainian market, and we see the effect of the Russian ruble and so on. So... No, I mean, the restructuring program runs according to plan, and it will continue to deliver positive effects.
Could you give any guidance whether you will have some acceleration in the gains versus Q1 or?
No. No.
Okay, fine. And just a last question on Americas. Assuming plate imports in the U.S. stay at current levels, and given that underlying demands continues to improve in the coming months, do you think that U.S. plate prices in the spot market could stabilize even if scrap continues to remain weak or decline further?
As you say, it will all depend on the import, but the import levels have come down, and they are still higher than normal, or it was at least during Q1, but they continue to come down. So that will be a combination of import levels, currency, and a lot of other things. So I think it's hard to have a very strong opinion about that. The important part is the margin over scrap, and if prices have a pressure downwards, selling prices, my expectation is that we will see lower scrap costs as well.
Okay. But in terms of then shipments, if exports do start to decline in what we've seen in recent days, you should start taking some market share back, which means Q2 difference in the Americas should actually be better quarter on quarter.
If that's the case, so yes.
Okay, thank you.
Our next question comes from Mr. Robert Rethy from ABG. Please go ahead.
Yeah, hi. I think most of my questions have been asked, but you did say then that the contract length was typically three months in the U.S. But you didn't. Did you have a split between contract and spot sales in the U.S.?
I mean-
For the lag effect from the... Because, I mean, the spot prices have fallen, what, 25% or so year to date, and your prices were now down 6%, so.
The average contract length would overall in Americas is less than a quarter. But if you take the direct business and the business to the big OEMs, it's typically a quarter. If you take the steel service center business, that is more typically, call it, spot prices then. So there is something between short, on average, shorter than three months.
Okay, cool. And you wouldn't want to say, right, what your contract price change was, Q2 versus Q1?
I don't have that on top of my head.
All right. Second question would be on the capacity utilization. I presume it was high now in Q1 because you're overproducing to get the slab inventory to have something when Luleå closes down. But the SEK 150 million-SEK 200 million in cost that you've guided to, is that sort of a net figure for the positives of overproduction in Q1, Q2, and then the negative in Q3, or is it just the negative in Q3?
No, that's the net impact. And as I said before, the impact in Q1 was fairly limited. But the SEK 150-200 million is the net impact of the positives, so the overproduction, as you call it, and also then the negative that we will be standing in Luleå for three months' time.
Okay, great. Okay, thanks so much. That's my questions.
Our next question comes from Mr. Oskar Lindström, Danske Bank. Please go ahead.
Yes. Hi, thanks for taking another question from me. I was thinking a little bit around the U.S. railcar market, which there was a lot of focus on at the end of last year due to the oil price decline. I see in your report you say it's fairly stable, but could you provide a little bit more color on that? I mean, what do you see for that market in for the rest of the year? You know, to what extent has the railcar market been impacted by imports, or are these very sort of loyal types of customers? Yeah, so in general, do you have any more comments on that market and its outlook?
We expect that market to stay fairly stable during this year. And it's not about maybe loyal customers, but it's about quality of the steel that goes to that those to railcars and tank cars and pressure vessels. So you need a certain quality, and that is typically not the qualities we see for imported material.
Okay. So, I mean, this is not an area where you're feeling... You're actually feeling perhaps less price pressure here than you are in other markets or the service center market.
Of course, the prices are. We feel the prices; they are moving as well. But as I said, these are not typically standard qualities or qualities that are exported from Asia or elsewhere. These are other qualities. These are normalized plates. These are other types of plates and other types of qualities.
All right. Thank you very much.
A reminder to press zero one if you'd like to ask a question. We have no further questions on the telephone.
Yeah, some last questions are in the audience. Julian Beer, please go ahead.
Thank you very much. It's Julian Beer from SEB. On Americas, ship volumes were very poor in the first quarter, and they were as bad as the dark days of Q2 2013. And you're telling us that the drop-off was due principally to very weak demand from the service center, and what demand there was seems to have been supplied by the import market. You're saying that you expect destocking to come to an end, which may lead to recovery in domestic prices. Why shouldn't we expect a re-acceleration of imports if those domestic prices recover?
I think, first of all, when we entered into Q1, we saw high inventories at steel service centers. Then after prices coming gradually down, they have not been buying. They are sweating out the inventory, so to say. And maybe it will take a bit longer than we expected when we released the Q4 report. So that's one reason. And we have, due to that, been standing still during Q1 due to low order intake from steel service center. It has been low or, in some areas, from time to time, non-existing. And the capacity utilization, as you know, in the North American steel industry, has been extremely low in Q1.
Now, if you look at the external figures, you see that the capacity utilization is gradually ramping up, not with any massive steps, but it's gradually ramping up. And you also see the import coming down and prices being adjusted. So we expect that the destocking will be over sometime during Q2, and then we will see normalized volumes. And then what happened with prices? Well, that's a balance. And what happens with trade actions, that's also something that will affect this, and currencies.
Okay. But it seems on plate to me that most of the imports are coming from private companies in countries like Korea and what have you, which couldn't really be accused of being nationally supported in terms of the focus of most of the American targets. What I guess I'm concerned about is that we've seen a big pickup in imports supply to the service centers, and the service centers may have got used to having 30% of their supplies from the importers, and it could have been a structural change in the market. How can you respond to that?
Well, by being the most cost-effective producer and having the best landed cost in North America, which we have. So, that is our way of responding to it. And over time, there is no possibility to compete landed cost over time. A quarter or two, you can do that if you have a different calculation. But, over time, being the most cost-effective producer, landed cost, is the target. And we are there, and we will continue to be there.
And a little bit of dollar weakness would help as well, I guess. Just finally from me on the underabsorption side. So to fully understand, you're saying that the benefits of underabsorption in Q1 and Q2 will be fully taken back in Q3, and on top of that, there will be SEK 150 million-SEK 200 million of cash costs?
Well, the underabsorption that was shown in the bridge was not... You're relating to the slab buildup ahead of Luleå relining. The underabsorption, which we saw in the bridge before, was not only because of that, it was also because, in general, we were running production at the higher level in Q1 compared to Q4. So, what I'm saying, and net in Q1, it was basically a close to zero-sum game because you had some additional startup costs in Oxelösund when bringing that blast furnace online.
But what I am saying in total is that, yes, the positive underabsorption you get in Oxelösund and potentially a little bit in Roa by running those blast furnaces at a slightly higher level, that will be taken out by that we are standing in Luleå for three months, and the net impact is this SEK 150-200. It's not only underabsorption, actually, it's some extra cost as well, associated with.
But given that you're saying that underlying markets are flat in Europe overall, your seasonal ramp up in Q1 and Q2, unless there's some great improvement as you're going into Q3, you'd normally be underproducing in Q3 as well seasonally, would you not?
Yes. Seasonally, yes. What we said about the underlying market in Q1 in Europe was that it was stable, yes, but we also said that it normalized after a very slow year-end. The last December was very slow, so in that sense, we were running production, not because the market improved greatly, but because it came back to, I would say, a normal, stable, although fairly low level now in Q1.
There is difference, of course, between within Europe. Slightly better the further north up you go.
And then finally, Q2, would you expect underabsorption gains to, to be up versus Q1?
Well, if you take the if you isolate the blast furnace part, well, you will have the small blast furnace in Oxelösund running the whole quarter. On the other hand, you will be standing, we will be standing with the big blast furnace in Luleå for one full month. So maybe up slightly, but not a huge impact.
And seasonally?
As we said, you know, shipments fairly flat in Q2, which will then reflect in the production level as well.
Thank you very much.
Okay, so to see, we have some questions on the web.
Yes, we actually have quite a many questions from the web, but actually some of these have already been answered, so I won't repeat those. But the first one comes from Ritesh Shah, India, Investec. "Can you please divide the size of all the grade steels for Americas, Europe by 2020, 2025? And how do you see the demand, supply situation, and competitiveness of your product basket versus alloyed, aluminum alloys?
No, I can't divide it from by 2020 to 2025. And compared to, what's the question? Compare, competitive-
Aluminum.
Aluminum. Well, we have some steel grades, especially within automotive, where we can compete and outperform aluminum. We can be on par when it comes to energy absorption and weight, and we can produce and sell it much more cost-effective compared to aluminum. So we have examples where we have been able to take market share for safety details from aluminum with Docol 1700 and Docol 1800 martensitic steel cold formed.
Basically, we're not supplying any standard material to the automotive makers.
... Okay, and then the next question comes from Frederick Werner, Jarsira, Sweden. How do you see the Swedish and Finland market for the rest of 2015? And what new competition can you see regarding heavy plates in Sweden and Finland, in the markets after the merging?
Well, as said, we expect the overall stable volumes in Q2, and that is the guidance we give. And then, of course, if you divide the Nordic region, Sweden is slightly stronger than Finland and Norway right now, and for Q2 as well. Then when it comes to new competition on plate, there has always been competition on standard plates in Europe and in the Nordic region. And we are, in the European perspective, a fairly small producer of standard plates, and we see plates, standard plates in the Nordic region, which is not a big market, but from other suppliers as well, and that has not changed.
Okay, and then the last question is from Gustav Hanson, Pareto Securities. How are you expecting price levels to develop for Q2? And could you please elaborate a little bit on the price increases in Europe you saw for Q1? And you said that we should see 150 or 200 million SEK in increased costs for the relining. Just to clarify, so that's on top of capital expenditure?
I take the same last question first. The answer is yes, it's on top of the CapEx. It's costs that will impact the PNL, Q2, Q3. On the first question, on the price levels, I think we commented that already, actually.
Okay, that was all. Thank you.
Okay, if there are no further questions, we'd like to then... Okay, well, one last question here from Johannes.
Yes, it's Johannes Koncilius again, Handelsbanken. Just a question on CapEx. Can you give us any sort of guidance here for the current year, Luleå is impacting it, and also what you look for 2016, please?
We said the, excuse me, at the Capital Markets Day, that we believe, as a combined company, we will have a maintenance CapEx of SEK 1.6 billion-SEK 1.8 billion yearly basis. But then at the same time, we said that this year, given that we have the big Luleå relining, which is of course a major investment for us, we will be in the higher range or even slightly above that range. But going forward, on an average, we will be within SEK 1.6 billion-SEK 1.8 billion in replacement and compliance CapEx. And then on top of that, we will then have strategic CapEx, but that's very much depending on interesting projects we will find.
But, if you add the strategic CapEx on top of those numbers, what do you arrive with, you think, for this year and next year?
For this year, we have the PCI coal injection in Roa, which is also, when you look in the report, that's the main part of the strategic CapEx. And that's a fairly big investment, but that's so far the only big one that we have decided and communicated on.
Well, thank you for your participation, and please feel free to pass us any further questions to the IR team. Thank you. Take care.
Thank you.