Good morning, everyone, and welcome to our third quarter results presentation. My name is Maria Långberg, and I took over as Head of Corporate Communication October first this year. Today, we will listen to our CEO, Martin Lindqvist, and CFO, Håkan Folin. And after the presentation, there will be a Q&A session, where you all will have the possibility to ask questions. And by that, I hand over to Martin Lindqvist.
Thank you very much, and good morning. I would like to start to say a few words about the very tragic accident we had in Luleå, at our site in Luleå last week. It was during an inspection of a tank at the coking plant in Luleå that a large volume of tar escaped from the tank. Two employees from IVAB, our subcontractor, lost their lives. Very tragic. I just also want to say that for us, that for us, safety is very important. We work hard with safety. We will continue to work hard with safety. We will continue to strive to be one of the most safest steel companies in the world. Going over to the third quarter, we had an operating cash flow of SEK 500 million.
We had an EBIT loss of SEK 598 million, which is SEK 70 million better compared to Q3 2012. Håkan will show you a bridge, but there were a lot of big movements between these two quarters: volumes, prices, and currency. But Håkan will come back to that. We had a normal summer outage in Sweden and a planned outage in North America. The total effect of that was during the quarter, -SEK 300 million. Shipments were stable compared to Q2 2013, with but with a thinner mix, more standardized material, and a lower share of quenched plate. Oh, that was mainly due to the continued weakness within global mining and yellow goods. In general, our contract prices continued down and were slightly lower in Q3 compared to Q2.
We continued to focus on cost efficiency in all business areas, not only EMEA. Sales were SEK 8.4 billion, with an EBIT of SEK -598 million, and a small, small, small positive EBITDA per ton. If we take a look at the segments, and this is sequential Q3 over Q2, I would say no big differences with a few exceptions. Heavy transport, heavy equipment demand has been weak due to uncertainty in the business climate. On the other hand, heavy equipment in U.S. booked at slightly improved levels in Q3 compared to Q2. Automotive continued to be fairly strong, not only in North America and Asia, but also for us in Europe. Construction equipment during Q3, still on a low level. Low construction activity in Europe, and the Chinese lifting segment continued during the quarter to be weak.
In mining, we saw a continued slowdown during Q3 compared to Q2. Energy, during Q3, a fairly okay segment with tank cars, pressure vessels, pipelines, and wind towers. Service centers continued to buy what they need, and only what they need during Q3, and inventory levels at service centers on low levels. During the sequential outlook for Q4, I would say that we see some bright spots in these, some of the segments, so, compared to Q3. If we take EMEA, shipments were higher than Q3 2012, but 14% lower versus Q2 2013. Local prices fell, both for niche steel and for standard steels. And the niche content of the shipments or the sales or the volumes were at 46% compared to 49%, one year ago.
Obviously, a thinner mix this year compared to last year. The quarter was affected by normal summer outages, and the demand was seasonally low during Q3. We have been delivering on our cost and flexibility program year to date, and that was finished, I would say, after the first quarter. Year to date, Q2 and Q3, the savings have been SEK 500 million, and the target is, as you know, to have a annual saving of SEK 800 million. SEK 500 in sustainable savings and SEK 300 increased flexibility. We have mainly seen these effects in sustainable savings, and there are things to do to increase our flexibility. But having said that, we have also suffered from the strong Swedish krona.
The effect for SSAB and SSAB EMEA so far this year compared to last year is -SEK 600 million. Americas, shipments higher than Q3 2012 and higher than Q2 2013. Unchanged price, local prices for niche steel, and volumes fairly stable. What we see here is a squeeze, continued squeeze in Q3 between selling prices and scrap. We had the planned outage in Mobile that affected our earnings negatively with slightly more than SEK 50 million. We have also done an extensive benchmark of our North American system, and we know that we continue to have the best cost position of all the North American plate producers. We see that less competitive plate mills are struggling, and we saw the announcement the other day about Claymont shutting down or idling their plate mill. There is currently a positive momentum in the market.
We expect the plate, or the steel consumption and the plate consumption to continue upwards, according to the market or the general development. We introduced a price increase last week of $30 per ton, and we have, effective from today, introduced another price increase for all new orders of $20 per ton, effective from today. The reason why we do that is that we have a strong order book and a good order intake. And we will continue to, as a market leader, increase the margin over scrap and help the market to do that. APAC, continued weak demand from the big OEMs, mainly within the lifting segments. Demand within automotive increased slightly, but other segments continue to be weak.
Shipments of niche products were 6% lower compared to a year ago, and also lower compared to or 8% compared to a year ago, and also lower compared to Q2. Local prices were more or less unchanged. Tibnor, unchanged shipments, but lower, seasonally lower compared to Q2. We saw, compared to Q3 last year, higher volumes of strip and rebar, but lower volumes on some other products. The market environment, World Steel Association released their external report for short-term outlook 1.5-2 weeks ago in conjunction with a meeting in São Paulo. They expect the global steel consumption this year to increase with 3.1%.
Of course, China being one of the main drivers with an increase of 6%, flat consumption in North America this year, and a downturn this year in the European Union of 4%. During the third quarter, we have seen strip and plate spot prices increasing somewhat during the quarter, so trending upwards. We have seen spot plate prices in the U.S. recover during the summer, fell off slightly during the latter part of the quarter, and now start to move up again. Inventories all across the supply chain in Europe and North America are on low levels. We don't expect any destocking in the magnitude we saw last year. But in China, many steel users still have higher than normal inventories, and they need to reduce stocks of steel and, to some extent, finished goods. Håkan?
Good morning. I will go into some more details of our financial figures for the third quarter. Our sales was SEK 8.4 billion . This was 4% lower than the third quarter last year, and they were impacted negatively by prices, 10 percentage points, mix, four percentage point, and also FX, two percentage point. However, then this was offset by an increase in volume with 12 percentage point compared to the same quarter. The loss was SEK 598 million , an improvement with slightly less than SEK 70 million compared to the third quarter last year. And we saw better volumes, lower cost, better utilization rate, however, significantly lower prices and negative FX. And I'll get back to some more details on the bridge. We had a positive operating cash flow of SEK 500 million.
On this page, you have a lot of figures. You also have them in your reports. I'm just gonna point out two here, which is our net gearing, where we have a net gearing now of 55%. One year ago, we had 56%, and since then, we have had negative profit levels during the quarters, but we have anyway been able to reduce the net gearing during the last twelve months. On this page, you have the details on the development in profit from last year's third quarter to this year's third quarter. In this, Martin mentioned we had SEK 600 million in FX year to date, and in this quarter, we had SEK 70 million. The big change between the two quarters negatively is on prices.
This is both, on the specific different product groups, but it's also a mix effect, that we have a higher share of standard steel this quarter compared to the third quarter last year. But all in all, it's almost SEK 800 million when you compare the quarters. We offset this by, higher volumes, better utilization rate in the mill, which means lower under absorption cost, better variable COGS, which is both due to raw material prices, but also due to the efficiencies we have done, in terms of production. And then we have the other, part, which is a little bit more than SEK 200 million. It consists of, for example, Tibnor, and our, fixed cost improvement. And all in all, the change between the quarters is approximately SEK 70 million.
Coming back to the cash flow then, we had, as mentioned, the operating cash flow of SEK 500 million. This was to a very large extent driven by the Americas operations, which alone almost accounted for the SEK 500 million. Partly due to the profit, but also due to good release of working capital. And all in all, on the net cash flow, we were also positive this quarter by a little bit more than SEK 300 million. I will now spend some time more details on our financing and liquidity situation. At the end of September, we had the net gearing of 55%, one percentage improvement compared to one year ago. Our net debt decreased with slightly more than SEK 600 million during the quarter.
But actually, our net gearing went from 54% by the end of Q2 to 55% now. Despite net debt decrease, then we also had a decrease in equity, which made this change. Our liquidity preparedness is approximately the same as for last quarter's. It's on 28% of rolling twelve-month sales, and we have commercial paper of around SEK 300 million. Finally, on this page, our average term on the loan portfolio is at 4.2 years, and we have an interest term of one year. This is how the debt maturity looks, and you see the cash and back-up facilities of approximately SEK 10 billion. We have some maturing in 2013. That's the commercial papers. In 2014, we have a need to refinance approximately SEK 2 billion, which is mainly capital market debt.
Then it increases slightly in 2015 and 2016, and then we have a larger bump in 2017. But overall, we feel that we have a fairly good spread on the maturity of our debt portfolio. On this page, you can see how the duration has developed and also the interest rate. We are now at 4.2. This is lower than where we were in the end of 2011, where we were a bit above five. On the other hand, if we go back and compare to 2009 and 2010, and most part of 2011, we are still on a fairly good historical level. Our interest rate in this quarter has remained fairly unchanged compared to the last few quarters, slightly below 3%.
This page shows how our net debt and our net gearing has developed during the last three to four years. We started 2010 with a net debt of approximately SEK 15 billion, and during this period, we had our large capital investment program of approximately SEK 5 billion. We saw an increase in the net debt going from SEK 15 billion up to almost SEK 20 billion. At the same time, we also saw the gearing increase, and it topped there in the third, fourth quarter of 2011 on 65%. The net debt has since then decreased at a fairly decent speed, down to 55%.
But what we have especially seen during this, last years is a really good increase on our net debt, on the actual size of it, where we have gone from, almost SEK 20 billion, and now we're down slightly below SEK 15 billion, which is actually down to the same point where we were, when we started this major CapEx, payments. Finally, I will mention some about the trend in our raw material prices. We mentioned in our report last, quarter that we had signed a new agreement with LKAB, ranging from first of April this year to end of March last year, and where the prices are set on a quarterly basis. For Q3, our iron ore prices increased with, 6% versus Q2.
As we have said before, there's roughly one quarter lag from when we buy the iron ore until we see it in our P&L, so this will be seen then in the fourth quarter. On the other hand, our price for coking coal decreased with approximately 11% during this quarter compared to last quarter. And then finally, our U.S. scrap buys. The scrap has been fairly volatile during the quarter, but ended up in the third quarter 2% higher than it was in the beginning of the quarter. And now, Martin, back to you on some comment on the outlook.
Okay, thank you, Håkan . So what do we see then? We expect steel demand in Europe to be fairly stable in Q4. Of course, as always, if the momentum trends upwards into Q1, we will see better apparent consumption at the end of the quarter, and if the trend is downwards, we will, of course, see lower apparent consumption. But the underlying demand is expected, or we expect to be fairly stable. We expect Asian steel consumption to continue to grow, and in North America, steel demand will increase in line with the economic recovery. As said, we have, together with other producers, recently announced price increases, and as said, we have, as from today, re-announced another price increase for the North American plate market. Inventory levels in Europe and North America.
on fairly low levels, and we expect no major restocking or destocking during the quarter. The shipments, total shipments for SSAB is expected to be higher in Q4 compared to Q3. With that, I think we open up for questions and comments.
Yes, and, we will start with questions in the room here. And please state your name and organization that you work for before you ask the question. So just raise your hands if you have any questions. No questions in the room? Okay, then we go over to the phone conference. And operator, please state the first question.
We have a question from Mr. Neil Sampat at Nomura. Please go ahead.
Hi, good morning. I have three questions. Firstly, in terms of the planned outage at Mobile, which was taken forward by a quarter, or some of it was brought forward. I guess, looking back to the full year results, you guided to two outages this year of roughly similar size, which kind of implied that there'd be about SEK 150 million or so to SEK 200 million of cost associated with each. So with the second one, I think in one of the slides, you mentioned that there was only SEK 50 million of costs related to this planned outage. Could you explain the discrepancy between that SEK 50 million and the kind of fuller a SEK 150 million-SEK 200 million impact for the first outage? Secondly,
Maybe we can take them one at a time.
Mm-hmm. Please.
Yes, you're correct. We talked about two outages, and then we decided to take part of the second outage for market reasons in Q3, and that part of the second outage costed us a bit more than SEK 50 million. The second part of that outage will be taken somewhere in the beginning of 2014, as we plan now. So no planned outages in the U.S. in Q4. But we can, of course, decide when we take that outage and also, I mean, taking that decision depending on market outlook and so on. So this was just one part of that planned outage that we took in Q3.
Okay, thanks. That's, that's very clear. Secondly, on EMEA, I guess when you launched your cost saving program last year, the SEK 800 million program, I guess you mentioned that the target was to get back to breakeven at EMEA, at the very least. And with most of that cost saving now done, I guess EMEA is still in the red. So strategically, what's, what's next for EMEA?
Continue to work with that in EMEA. One of the problems we have seen so far is the strengthening of the Swedish krona. And as I said during the presentation, so far, we have experienced headwind of SEK 600 milion compared to last year. And of course, we need to deal with that as well and become even more effective. But that is a bit, call it, problematic to do in a very short term. But we continue our efforts in EMEA when it comes to cost efficiency, but also when it comes to flexibility, and we have, as said, increased our efforts. But we are not only doing that in EMEA, we are also running a program in North America to make sure that we really stay the most cost effective producers of plate.
So we have a program running there as well, taking down costs during the second half of this year.
Okay. So, can we expect some sort of update on EMEA and what else you can do there in terms of the new program? Is that something we can look forward to?
You could gradually look forward to that, yes.
Okay. And then finally, on Europe, in the outlook statement, you mentioned that demand and prices for steel is expected to remain unchanged in Q4. Could I interpret that, given the movements in spot prices in Europe for flat steel, to be a bit of upward momentum on the strip products, offset by a bit of lower momentum on the niche?
I have some problems to hear your questions, but when we talk about ... In EMEA, we mainly have, we only have contract prices. Then I said there has been a positive momentum on spot prices, and prices are trending upwards. We say that in average, we expect stable prices, but that is due to our contract structure.
Okay.
So if the price momentum continues upwards, you will see that gradually also show up in our contract prices.
Okay, understood. Thank you very much.
Okay, please state the next question.
We have a question from Mr. Carsten Rie k at UBS. Please go ahead.
Thank you very much. Just on the pricing, as I just heard it, what we have seen so far, at least in China and Europe, is that the prices rolled over. So the positive pricing momentum, which we have seen up to beginning of October, has clearly faded. Is that something which you also see in your order intake or in your behavior of the clients already? So that's the first question. Let's do it one by one. That's fine.
As said, I mean, we have quarterly prices, and those prices were taken during the end of third quarter for the fourth quarter. So we know fairly well where the prices for our deliveries will be in Q4. What will happen with spot prices? I don't really know, but if they trend upwards, you will see that in contract prices going forward. And if they trend downwards, you will see that in contract prices going forward as well, and that will be from Q1 then.
Fair enough. The other thing I spotted is, if I look at your production numbers, especially in EMEA, I noticed that they were up 33% year-over-year, while your shipments were only up 8%, which means you heavily went into, I would say, restocking. Do you expect demand going up that much? Or, do you expect some outages, or, how do you deal with these kind of higher production in EMEA going forward?
I would say it's more an effect when you compare to last year, where we last year we noticed that there were a destocking in the market happening in the third and the fourth quarter, and we then reduced our production in the third quarter to match the market demand. We are not overproducing now because we either will have a outage or that we believe in a significantly different market. But it's more the effect when you compare this third quarter with last year's third quarter.
Yeah, no, I just looked at the shipments in EMEA and APAC, and if I add them together, we are getting a bit over 440,000 tons. You also ship a bit to Americas from Europe, but even if I put that together, you have a yield ratio of more than 1.15, which means clearly you restocked, because otherwise I can't explain it. That's just on the sidelines. The other effect I saw is on the net working capital. SEK 800 million from net working capital was pretty much what you... I believe, a little bit more, what you showed in operating cash flow. If it goes better, I mean, do we actually see the peak in net working capital release here?
Or, do you think you can further take down net working capital?
We have since a couple of years worked in a very structured way to take down net working capital. We talked about it before. We look at stocking points, supply chain solutions, central stock, regional hubs, and how we handle local stocks. So everything else equal, you will see over time continued working capital efficiency. On the other hand, we also see that stock sales is a more important part of our business and service model, so that will somewhat offset that. But we don't feel ready in the working capital efficiency, and we have more things to do in work in progress when it comes to finished goods and supply solutions.
My very last question is on Americas. The EBIT was positive, which was at least some positive in the results, but if I look at the overall profitability in Americas, it might not justify the goodwill you currently have on the book. Can we expect some actions here in the fourth quarter? What do you think?
We have recently done an impairment test of our goodwill in North America, and we see no reason to change our view.
Okay, thank you.
Okay, next, question, please.
We have a question from Mr. Gustav Sandström at Erik Penser Bank. Please go ahead.
Thank you, operator, and good morning, everyone. To start off, to what extent have you been shipping slab externally in September and the beginning of October?
In Q3, we had 50,000 tons of slabs.
How has that developed into Q4?
We expect to ship some slabs in the fourth quarter as well.
Ballpark figure, pretty much the same sequentially, or?
Yeah, no, probably not more and, not zero, so yeah, somewhere between there.
All right, thanks. Also, how is your market share for higher added value products developed in Americas and EMEA, respectively, throughout the quarter?
I think we have fairly stable market shares. We have, of course, suffered from the segments not buying so much, but we can't see that we have lost any market shares. I wouldn't guess that we are taking any substantial market share either. I would say fairly equal.
That goes for both markets?
Yeah. If anything, maybe slightly better when we are ramping up now QL6 in Americas.
Great. And finally from me, you mentioned you have a competitive cost position in Americas. Can that position be sustained with the new DRI capacity coming on stream from some of your competitors?
We are looking into what effects that will have, but my clear view is that we will be able to keep that cost advantage.
Great. Thanks. That's all for me.
Okay, next question, please.
We have a question from Mr. Jeff Largey at Macquarie. Please go ahead.
Yeah. Hi, good morning. It's Jeff Largey at Macquarie. I just had a question on the mining CapEx and that end market, which is key obviously for your premium products. Can you give a sense of the visibility you have? I mean, it's been, I guess, you know, now a couple quarters where we've seen some weakness from you guys, or your comment has been that the demand there has been weak. But I guess my question is, you know, what kind of visibility do you have? I mean, we've seen from mining CapEx OEMs, you know, like this week with Caterpillar, disappointment in terms of their outlooks for the mining CapEx cycle. You know, we've seen from the miners that CapEx continues to get cut, and it probably isn't coming back anytime soon.
So I guess my sense is in terms of how it affects SSAB as a headwind. I mean, are we still to see, you know, a number of quarters of declining orders from that key end market, or is it? Do you think we're kind of near a bottom? And then, you know, the final point, which-
...We, of course, sell to new projects, but we also sell to call it the service market. I mean, even if you have a bucket in abrasion-resistant steel or a dumper body, they will eventually wear out, and then we will be there to service that market. We have seen a decline over the last or for a couple of quarters. And when we look upon this, we are not expecting it to get worse. We also focus a lot on the aftermarket with what we call wear service. We have a business unit supporting that segment, and we see, I would say, a decent development in our wear service business.
We are not right now expecting, from our point of view, the mining market to continue to deteriorate further.
You expect it to essentially stabilize at these levels? I mean, I assume the hope would be that other end markets that you service start to pick up.
Yeah, something like that.
Okay, great. Thank you.
Thank you. Next question.
The next question comes from Mr. John Duce at Exane. Please go ahead.
Yeah. Hi, John Duce from Exane. First question on the mix, I guess, it's a bit of the continuation of the question you had earlier on the mining CapEx. First, how has the mix changed versus Q2 2013? Do you have seen further deterioration in the mix? And then, how do you see that going forward? Would you expect lower share of niche products in Q4 and maybe in the first quarters of 2014? This is my first question.
We had a negative mix compared to Q2, in terms of our niche share, and also, as we mentioned in the presentation, especially on our quench products related to mining and related to construction equipment, were lower in this quarter and then impacted the profitability. If we take going forward, we don't expect that the niche share will deteriorate further. On the other hand, we believe that we will see some improvement in the niche sales, in the coming quarters, both fourth quarter and also in beginning of next year.
Okay, what is the driver behind that? Because obviously, we just talked about the mining. Caterpillar, just one, I mean, expectation of CapEx in that market are fairly bleak for 2014. So what would be the driver behind the mix improvement, let's say, for the first quarters of 2014?
Well, if we take comparing Q4 now with Q3 as a starting point, we are normally have the highest niche share within Europe, and sales in Europe are fairly low in this quarter due to seasonality. That will give us a natural, improvement going forward into Q4. And if we look into the next year, we see some positive signs in some market, and especially, we don't believe that, as we mentioned before, that things will deteriorate further.
Okay, thank you. The second question I had was about the maintenance costs. So you had $50 million in the U.S., which means, about SEK 250 million, in Sweden. This is way above last year. So I was wondering, what, what was the reason behind that?
Well, I would say the summer outage in Sweden was not way above last year, but of course, last year we didn't have the outage in Mobile. Typically, in Sweden, a summer outage for us cost SEK 200 million-SEK 250 million.
Last year was, if I'm not mistaken, SEK 100 million in Q3 in Sweden?
200.
200.
What we said was there's a difference with what the actual cost for it was and how much it has impacted our result, because we have an actual cost for the work that's being done, but then it also, since we are shutting down, we are missing out on deliveries, and we are getting a higher under absorption cost. So you need to separate those two items.
Okay. So the SEK 300 million this quarter is the full impact?
Yes.
Okay. Okay, thank you.
Okay. We have a few more questions in line, so please state the next question. Thank you.
Our next question comes from Mr. Johan Sjöberg from Carnegie. Please go ahead.
Thank you. If you look at CapEx for this year, where do you see it?
Well, you can see that we've been so far during these three quarters on a very low level.
Yeah.
We will have a higher CapEx in the fourth quarter, but overall, for the year, in total, both maintenance and strategic CapEx, we will be below SEK 1 billion.
Below SEK 1 billion. Looking at 14 and 15, is there any reason to assume any difference there?
We typically have a maintenance CapEx need of SEK 1 billion per year. And as we have said many times before, we can take that down a certain year. And so plus, minus something around SEK 1 billion in maintenance CapEx, and then strategic CapEx is, of course, up to us to decide when we see good opportunities.
Yeah, but you haven't started on any strategic major CapEx trends or anything like that?
We just stick with saying that.
Yeah.
Roughly SEK 1 billion per year is the maintenance CapEx need.
Okay. Coming back to the price development in the US, you said that you raised prices with $30, now you go for a second round with just in two weeks time, you know, $20 here. It. The first price increase, has that been fully implemented, or?
That was, this is always for, for new orders, not for contract prices.
Yeah.
And we are implementing that as we speak.
Okay. That's the $30, right?
Yes, and that is effective on new orders from today.
Okay. I also saw that the depreciation or the amortization on it dropped from around about SEK 200 per quarter to SEK 150.
I assume that the question would be if this is something that's gonna continue, and if so, the answer is yes. The PPA has now decreased somewhat to a lower level.
Okay, so it's 1:50. Sorry, my line went crazy there.
Yeah, even a little bit below SEK 150.
Okay, so 150 is the new level to assume here?
Even below that, you can say-
Okay, sorry.
120.
You know, I understand.
120, 130.
Is it, is it still the case, Håkan, that you don't have any covenants on, on your debt?
Yes.
And also, excuse me, an old rusty analyst here, but if you look at the stoppage in the third quarter in Sweden, all things equal, how much did that impact results?
SEK 250 million.
You probably said that. Okay, 250 million SEK. The final question here, also, Europe seems to be screaming for some profitability improvement, and you are taking actions, of course, with your cost-capping programs. But you're also guiding that you will see higher iron ore costs in the fourth quarter, whereas you're referring to flat prices. I mean, if you compare it with the U.S., sure, in the U.S., you have a market-leading position here, and in Europe, you are a small producer. But I mean, what can you do, basically, in Europe?
Continue to be very active on the market, continue to describe all the possibilities by using our steel, continue to be cost-effective, more cost-effective, more productive, continue with all the programs we are running when it comes to different parts, and then, yeah, continue the way we are working.
I understand that, Martin, but still, I mean, in order to turn EMEA around, you need price increases. I mean, sure, you can take actions, and I fully appreciate that, but in terms of in order to get this back into decent profitability, you need some price increases. And right now, how would you describe the shape of the market? Is it just completely impossible to raise prices right now in Europe?
I would say we are not the price leader in Europe-
No, I know.
for ordinary steel, but I would say that the market, as we have said, is we are not expecting any big swings in the market in the short term, fairly unchanged or stable demand.
Yeah. Okay, perfect. Thanks so much.
Thank you. Next question, please.
Our next question comes from Mr. Johannes Grunselius from ABG. Please go ahead.
Yes, hello to everyone. A few questions. First, on the European market, I mean, we read that there is a relative weakness for plate, and there is a relative strength for strip products. Can you give some color on that, please, Martin, or so we can... Furthermore, I mean, should we expect this to look this to continue entering 2014?
I mean, you're right, and you see that in our Q3 report, relative weakness in plate in Europe, and a relatively stronger than compared to plate, strip development. And that is, call it, at least a normal historical pattern, and then that will change. But what we should expect during 2014 is too early to say.
Okay.
As said, for Q4, we expect fairly stable demand overall.
Yeah. How do you explain the current situation with the relative differences between the grades? Is that a supply thing or a demand thing?
I would say demand thing.
Yeah. Then on the outlook more for next year, for APAC, Tibnor, you were making losses in both divisions now in the third quarter. Was there anything unusual there, and how should we look at things in 2014?
You should expect Tibnor to behave in line with the market, and you should expect us to continue to increase the number of customers in APAC. We have increased the number of customers in Asia Pacific with 500 customers this year. Unfortunately, we have not been able to compensate for the big 5-6 big OEMs that have not been buying that much so far this year. But you should expect us to continue to develop-
Yeah.
the Asia Pacific market with more customers.
The reason why you lost the OEMs, is that because of competition or any reasons?
The main reason is because of big inventories of finished products for them.
Right.
They are not buying.
Yeah. Then on Tibnor, I mean, historically, you always outperformed other steel distributors in Sweden. It doesn't seem to be the case here in the most recent quarters and not in the third quarter. Is that correct, do you think, or am I missing something? And can you give some color on that?
There are some one-offs in, not in Q3, but accumulated in Tibnor this year, both positive and negative one-offs. You should expect Tibnor to continue to perform good compared to their peers.
Okay. That's all for me. Thanks very much.
Thank you. Next question, please.
Our next question comes from Mr. Stephen Benson from Goldman Sachs. Please go ahead.
I just wanted to come back to the mining CapEx side of things. Actually, so roughly what proportion of your volumes or percentage of your volumes head towards the mining industry? Am I correct in thinking it's around 10%?
Well, I don't have the exact figure, but a lot, as you know, of the yellow goods producer are shipping machines like a Caterpillar to mining-related facilities. And that, of course... So for us, I mean, yellow goods and mining goes more or less hand in hand. But I would say within Quench & Temper, that segment is more than 10%.
Okay, and then of that, what would be the split of, say, OpEx versus CapEx? But, yeah, you, because you're clearly trying to move more towards the OpEx side of things.
I don't have the exact split, but the clear focus for us is OpEx with the wear service business. But also, I mean, all these machines needs to be repaired. You need to change buckets, you need to change dumper bodies. And even if you are not opening any new mines, you will buy new machines, excavators or big trucks. But I mean, OpEx is important for us.
Yeah.
will be gradually more important.
Okay. But there, there's still... I mean, there must still be a decent chunk of CapEx, volumes there. I think, I'm no expert on the mining side, but, I know the forecast here is for mining CapEx to be down 20%-30% maybe next year, globally. So that, you know, I'm just wondering what, what you see offsetting that you know, that potential volume decline, but what, what positive signals are you seeing out there to kind of replace those volumes that are likely to not be there next year?
We are not seeing any extreme positive signals, but our conclusion is that at least the time we can overlook is not getting worse than what will happen during the second half of next year, or we don't have that visibility.
Okay.
We can just read the statistics.
Because you know, you say in the report that that had a big, you know, a pretty big impact on the mix, you know, the slowdown in the mining and construction-
Yeah.
-sector. You know, so you think that that's going to improve next year?
Yeah.
Or will it just stay at the same low level where we're at now?
We haven't said anything about that.
Okay.
We're just trying to comment the coming quarter.
Okay. Another question, just coming back to IPSCO as well. So by my calculations, the carrying value of that is at over $2,000 a ton, where you could probably build a new plate facility in North America today for about $800. So why... you know, what, what are the underlying assumptions that mean there doesn't need to be any, you know, or, or that it keeps passing the impairment test when the, the carrying value per ton seems, seems out of line with where things are?
I mean, when you do an impairment test, you look upon it in a longer perspective, and we do it exactly the same way as we have done it, not with the same figures, of course, but according to the same principles as we have always done. And we have recently done that impairment test, and we see in that impairment test that we have sufficient margin over the book value. So for us, this is not an issue.
And are there any hurdles, hurdle rates that, you know, you must meet in the next year, to maintain that? Because I seem to recall in the notes there was something about, you know, if there was a 4% decline in gross margin or something, that you might review it. But, you know, I just wondered if you could—if there are any specific hurdles, could you just let us know what they are?
I don't know if Håkan can answer that, but I, I don't know that in detail, to be honest.
There are no specific hurdles. As Martin mentioned, we take a long-term view on it, and we need to see that it can defend the book values, but no specific hurdles, no.
Okay. Okay, thanks very much.
Thank you. Let's take the next question, please.
Our next question goes to Mr. Alexander Eydeland from Morgan Stanley. Please go ahead.
Good morning, this is Alex from Morgan Stanley in London. My first question is also on Europe. Is there any way you can run your operations more efficiently? I mean, clearly, we've seen that European producers are going volume before price, and as you mentioned, you're not the price setter. Is there any way that you just go for more volumes instead of price, so increasing market share outside the Nordic market?
We have increased market share in the Nordic market, and especially in the Swedish market. There is always a possibility, and will always be a possibility, to run the operations more effective. What we suffer from, if you compare us to other steel companies, is what I talked about, the stronger Swedish krona. We have so far this year lost SEK 600 million in the P&L due to that, compared to last year. That is, of course, something we have to live with. We don't like it, but we have to live with it and increase our efforts even more to be more effective. That is a problem for not only SSAB, but for all Swedish producers and all Swedish companies.
Is there any chance that you increase market share in Germany and in other parts of Europe, where demand is decent? Is there any upside volume-wise?
We are constantly striving for increasing market shares in all markets for our niche steels. For standard steels, well, we are not a standard steel producer in that respect, so we can sell... I mean, standard steel is mainly, I would say, the Nordic market for us.
Okay. My second question is on the iron ore, the 6% increase that you've seen sequentially. Is it fair to assume that third quarter versus second quarter, the negative impact was SEK 50 million-SEK 80 million, around that range, from higher raw materials?
We don't give that specific number, but you're right about the increase in iron ore. On the other hand, you can also see we had a decrease on the coking coal.
Okay. My next question is on free cash flow generation and working capital. I mean, clearly, we've seen decent free cash flow, but looking in the next year, at some point, working capital reduction will come to an end. What are the options that you have in terms of free cash flow generation going forward?
We feel that we are not over with all the things we can do. This is, for us, a gradual and focused work. We can be better when it comes to optimizing the production flow and flow efficiency. We can be much better when it comes to reducing waste. We still see opportunities to continue to reduce the working capital structurally.
Okay, fantastic. My last question is, what was the feedback from clients in the U.S. after the first round of hikes? It is the $30 per short ton. Was there any pushback or does it feel now more comfortable to get through it?
Well, I haven't heard anything about any massive pushbacks.
Okay. Fantastic. That's it from my side. Thanks a lot.
Thank you. Next, question, please.
Our next question comes from Mr. Sampsa Karhunen from DNB. Please go ahead.
Seems like we have no one there.
No one from DNB. Let's take the next question.
Yeah, next question.
Our next question goes to Mr. Christian Kopfer from Nordea. Please go ahead.
Okay, thanks. Good morning, and thanks for the presentation. All my questions have more or less been answered. Just one final one from me. On the D&A charges or depreciation, you have usually written off some SEK 650 million per quarter, now it's going down below SEK 600 million this quarter. Was it some specific factor behind this, or should we expect depreciation to go up again?
The specific factor was what we mentioned before, regards to the PPA in relation with the IPSCO acquisition, where one portion was fine was written off in total during the third quarter. So in that sense, you can expect a lower level for that part going forward.
Okay. So, basically, the Q3 level is representative for the coming quarters?
Yes, and actually, if we want to be granular, since this was written off in the middle of Q3 or in July, I think it was, it will actually be even slightly lower than in Q4.
Okay, thanks.
Thank you. Next, question?
Our next question goes to Mr. Nitesh Agarwal from Citigroup. Please go ahead.
Hi, thanks for the presentation. I have a question on Q4 volumes. Sorry, if it has already been answered. Where is the increase coming from? Is it just the U.S.? As you said, demand is up in Asia, but inventories are also high there. So does this imply U.S. is the only driver?
Sorry, could you please repeat that question? We have a hard time hearing here.
Sure. My question is on the fourth quarter volumes. Where is this increase coming from? Is it just the U.S.? As you say, demand is up in Asia also, but the inventories are also high there. So does this mean that U.S. is the only driver for the increase in Q4 volumes?
What you should also keep in mind is that, even though we say demand in Europe will be roughly flat, we have the seasonal summer situation in Europe, which is why we had lower volumes in Europe in Q3 than Q2, and we expect that to be changed in the fourth quarter.
Okay, thanks.
Okay, thank you. Next question, please.
Our next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes. Good morning, gentlemen. My first question is just following up on the European plate market. I guess besides the recent recovery in strip prices, actually, Southern European plate prices have, has ticked up quite steeply relative to Northern Europe, and I appreciate that this refers more to the commodity grades, but do you already see that this easing pressure from Southern Europe allows you to become a bit more aggressive on the prices in your segments as well? Maybe I'll stop here before continuing.
Not really, but, but that is, at least historically been a normal pattern, but we haven't seen any signs of that yet.
Actually, if you look at the plate prices in Southern Europe, I think they have been on a continuous, discount, probably around, $50, at least, relative to Northern Europe. And seems like really for the first time in, I guess probably, almost a year or more, basically, this, this gap has been closing. And, so I was wondering that, for example, also the idling of some of the capacity which we've had there has already fed through to, I mean, not really obviously a structural change, but at least slightly, a slight easing in the market.
Well, everything else equal, that is, of course, positive, but the price model for quench and temper is different compared to spot prices.
Okay, thank you. Then the second question is on the structural trends in niche business and your Finnish competitors obviously making a very strong push into the niche products as well. Do you see them becoming incrementally aggressive, which would probably mean that the niche premium does come under structural pressure, or is the competitive landscape just behaving as it always did?
We don't see any big changes in the competitive landscape, no.
Okay. Thank you.
Okay, thanks. Now we take the next question, please.
The next question comes from Mr. Sampsa Karhunen from DNB. Please go ahead.
Yes, good morning. I'm sorry, I was dropped off earlier. Many of the questions answered, but just a couple of questions. I'm wanting to get to understand, how do you see about the EMEA market? And basically, what is the timeline that you see that you want to turn it profitable? Because-
If you're looking at it currently, and obviously the volumes are coming up a little bit for Q4, maybe mix is slightly better. You maybe get a little bit closer to black numbers, but it's still gonna be rough times going forward. So what is the timeline that the management gives when you're going to turn the EMEA business profitable? Is it a year? Is it two years? Or are you just sitting and waiting that the market is gonna be helping you out?
Definitely not. We are very, very anxious to do that, and we're working very hard to do it as well. So we are not just sitting and waiting for a market recovery. We will turn this, the EMEA business into a profitable business, by doing a lot of things. And we need, probably over time, some help with the market, especially given the strong Swedish krona. But, that is something... The currency effect is something that we can't influence ourselves, so we need to be even better and smarter.
So basically, we are expecting to hear something early part of 2014, that you're taking action, or?
We are continuously taking actions to be more effective and both when it comes to working capital, but also how we run the mills in an effective way. So you will see continued and gradual improvement of that going forward.
Can I, can I just, ask quickly that what is the options that you really have? I mean, there isn't really any kind of a closures that you would make any sizable savings. What, what are the options that you have in your, in your map?
The ones we just talked about. I mean, as you say, we can't do any sizable capacity closures.
Okay, very good. Second question that I had: Can you just give an update on the kind of quenched steel capacity in the U.S.? What is the capacity utilization? How is it progressing overall?
The QL6 investment we did is ramping up according to plan. We are now producing both Hardox and Weldox of different grades for the Americas market. So, so it's running more or less, I would say, according to plan.
Okay. Thank you. That's all for me. Thanks.
Thank you. Seems like we have one additional question, so please go ahead.
Our last question comes from Miss Stephanie Bothwell from Bank of America. Please go ahead.
Yes. Hi, gentlemen. Thanks for taking my question. I'd like to focus just on the U.S. business. You've obviously just introduced price hikes into that market. I was wondering if you'd give some color onto what extent you've been seeing imports into that market, and whether or not you've seen any price pressure because of that. And then secondly, just on scrap prices, how do you see that evolving as we move into the latter half of the year?
If we start with import, we see normal patterns. I would say a year ago, we saw very high import levels into NAFTA. We see more normalized levels right now, and we also see some attempts from some countries to reduce imports. When it comes to scrap, the normal seasonal pattern is that scrap seasonally goes up during the winter season because of a more, call it, problematic scrap collection process or something. But typically, you see that seasonal pattern going up during the winter and then coming down during the summer. But apart from that, we are not seeing right now, at least, any big or extreme changes.
Okay. Thank you.
Thank you. Now we don't have any more questions over the phone. Before we finish off, I just want to check if there are additional questions from the room here. No? Okay, then I would like to thank you for attending the meeting, and thanks.
Thank you very much.
Thank you.