Outokumpu's (OUTKF) CEO Roeland Baan on Q4 2015 Results - Earnings Call Transcript

| About: Outokumpu OYJ (OUTKF)

Outokumpu OYJ (OTC:OUTKF) Q4 2015 Earnings Conference Call February 11, 2016 8:00 AM ET

Executives

Johanna Henttonen - Investor Relations

Roeland Baan - Chief Executive Officer

Reinhard Florey - Chief Financial Officer

Analysts

Johannes Grasberger - Nordea Markets

Erkki Vesola - Swedbank

Seth Rosenfeld - Jefferies

Bastian Synagowitz - Deutsche Bank

Luc Pez - BNP Paribas

Johannes Grunselius - Handelsbanken

Kevin Hellegard - Goldman Sachs

Hjalmar Ahlberg - Kepler Cheuvreux

Michael Shillaker - Credit Suisse

Johanna Henttonen

Good afternoon, ladies and gentlemen and warmly welcome to Outokumpu’s 2015 and Fourth Quarter Results Webcast. My name is Johanna Henttonen. I am heading Investor Relations at Outokumpu. Today, I am very happy to welcome you to this event and we also have our new CEO, Roeland Baan as well as our CFO, Reinhard Florey, to give the presentation.

Before we start, I would like to remind you that certain information we will be discussing is forward-looking and therefore includes uncertainties and our actual results may differ from our current expectations.

With this, I would warmly welcome Roeland to give the presentation. Please, Roeland, the floor is yours.

Roeland Baan

Thank you, Johanna. Good afternoon. Thank you for coming. My name is Roeland Baan. I am the CEO of Outokumpu since the January 4 and I must say I am glad I am standing here in that capacity and I am glad to be able to lead a company with such a rich history and with such potential going forward into the future.

So I would like to give a general overview of the 2015 results and the Q4 2015 results in a general way, introducing it and then handing over to Reinhard for more details. 2015, in brief, has been a difficult trading environment. Of course, dropping nickel prices throughout the year have influenced it negatively, a lot of elements, not the least the underlying demand at the distributors’ segment, where of course the de-stocking has been going on affecting volumes, specifically in North America.

In Europe, where we have less exposure to the distribution segment, this has been less of an issue and that brings me as well to the very positive side, which is on Q4 we had a stronger performance ending up into an underlying EBIT of minus €11 million to a large extent driven by distribution in Europe, where first of all pricing has been rather resilient due to declining imports. But secondly, because of the measures – cost measures that we have implemented in EMEA.

The other thing to mention as one of the highlights is the de-leveraging of our balance sheet. Due to the divestments in China, SKS and Mexico of Fischer Mexicana, we have been able to significantly reduce our net debt situation to €1.6 billion and are now in I would say more acceptable financial situation than before, not where we want to be, but I will come back to that in a moment. The saving programs, I alluded to it already, have improved our results in EMEA significantly, but we have generally speaking been very good in delivering on them. Again I will come back to it in more detail and Reinhard will have more of the numbers as well on that.

If you have a short look at the outlook for 2016 taking the cue from SMR, the research firm, it still indicates that 2016 will not be a great year. And as we sit here today, I think we just look at the financial markets and the commodity markets and we don’t need SMR to tell us this. It is obvious that this is not the sort of ideal world that we are looking forward to. Especially for us, we are seeing in Americas and Europe if these projections come out, a reduction and negative growth for the world as a whole, a more or less flat market for stainless steel. So, that is the environment that we are looking at for next year.

Shortly back to 2015 and to a point earlier made look at the base prices for stainless steel. Europe has been very resilient in the last year, 2015, very much helped by the anti-dumping measures put there in Europe, which probably is one of the reasons why we had steep drop in the U.S., because these Chinese volumes looked for a new home and unfortunately, found them happily in the U.S. So, the results in the U.S. in spite of the improvement we made ourselves operationally had been under pressure because of those falling prices.

Further to falling prices, you know this graph, LME stocks have exploded in the last couple of years. There has been a small improvement recently, but it’s a drop in an ocean. It really is still at incredible high levels pushing nickel prices further down and keeping them down for the moment. It puts a lid on the nickel prices, especially if you then look as well at the general economic activity, where especially Asia, China growth rates have come down affecting demand for the metal. I said earlier that the falling nickel price specifically affects our demand from the distribution segment. That is a larger segment in the U.S. relatively speaking than in Europe and as a result, in Europe, whether you have good underlying demand still in the direct customers that explains why we have resilient pricing in Europe versus the pressure in the U.S.

To the earlier point of imports, on the left hand, you see the imports into Europe and they are both in absolute as well as in percentage terms. They have come significantly down from 2015 over 2014 whereas if you go adversely to the U.S., you see conversely that they have come up significantly from an average of 25,000 tons a month to 34,000. It is a very, very significant jump and without any changes in the environment that pressure will remain. The de-leveraging, I already said we got a good boost in the arm from the disposals allowed us to significantly pay down our debt. And over the years, from 2013 to now are coming down from 190% to now under 70% is one of the great positives in the story of Outokumpu over the last few years.

With that short visit to the synergy programs and the cost programs, Reinhard will be more specific about it, but what you see is that on the synergies program and the P250 restructuring program we have basically reached the targets. Those programs are at an end so we put a line under it. The same goes for P400, which is our net working capital program. That program we achieved – we overachieved and is closed.

The EMEA restructuring is ongoing and you will see that in 2016, there will be a big part of the savings will start hitting, but still we see a significant gap between our performance and some of our competitors and that gap needs to be closed. So, we are, at this moment, looking into further restructuring and cost measures as well as net working capital measures, which we will be in the coming few months, will come out with more details.

With that, I would like Reinhard to come and present a more detailed numbers on the financial performance for 2015.

Reinhard Florey

Thank you very much, Roeland. Very warm welcome from my side as well, very pleased to give you some more insights into the details and the colors of the numbers for Q4 and 2015.

If we look at the overall performance, Q4 has from the operative side as well as from our net result, we clearly improved towards Q3 and that is not only because of the quite significant impact from the transaction, but also the structural and operative measures that we have implemented clearly showed a positive impact there. So while our underlying EBIT is still negative with €11 million, it is an improvement. And the negative EBIT can ever be the target and never be satisfactory, but it is an encouraging sign that we are making progress. And specifically also EMEA, where we have progressed with structural changes with the closures of the melt shops in Germany have contributed now very positively and this will continue to grow.

If we are looking at the operational environment, we are seeing that deliveries have more or less stayed at the same level to Q3 while sales have gone down 4% from Q3. If we look at 2015 compared to 2014, this is an even more pronounced effect. We have seen that there is some 170,000 tons less deliveries in 2015 and quite a significant lower sales coming from that, some 6.7% decline. However, that did not materialize dramatically in – the change of our profitability. On the contrary, while underlying EBIT with minus €101 million is more or less on the similar level, our net result has significantly improved and has reached a positive result with €86 million in 2015.

We can also see that the number of people employed with Outokumpu has been, as we had anticipated, reduced quite significantly, more than 1,000 people less on-board compared to 2014. If we look at the non-recurring items, we can also see that there has been a quite significant positive effect there, €409 million from the sale of SKS, but also the non-recurring items from the Coil Americas, where there was the cold-rolling effects still visible in the first half as well as the restructuring and redundancy topics have clearly gone down and be reduced compared to 2014 with a lesser negative effect.

If we are looking at the savings programs, Roeland has introduced already quite a lot about that to you. We have reached our target of €470 million that we have been promising for 2015. The targets for the synergy programs as well as the P50 [ph] program have been done according to plan, no lapse of savings there and we have also for the first time now a positive contribution from the EMEA restructuring from the E100 program with some €20 million of savings there. This program is going on and will yield another about €60 million positive in addition to what we have reached so at a level of €80 million savings for 2016 and reaching the anticipated €100 million in 2017.

We have also talked about in the past about the one-time costs for these restructuring programs of about €220 million and we can say that we have taken care of all these kind of costs in our P&L already throughout the years ‘13, ‘14, and ‘15, so that there is only a very small increment still to be expected in 2016. While on the cash out, you can see that we have seen a quite significant negative impact from that specifically on restructuring and redundancy costs, some €94 million in 2015. So also there only a significantly smaller number at about €50 million will incur in 2016. From the cost savings to the working capital savings to the cash relevant topics, we have overachieved on the P400 program quite significantly. So that means that we have freed some cash of €574 million compared to end of 2012. There was also a significant increase between 2014 and 2015. However, that was certainly also helped by lower material prices, lower commodity prices, which had a positive impact as well. We are seeing that in total, our inventory days are still at a comparably high level. So this is potential for the future. We are very much concentrating also in 2016 on this as a potential to further improve our net working capital and extract some cash from that.

If we are going to some details to the business areas starting with EMEA, we can say that there is a very positive development in EMEA. And while Q3 was quite disappointing in results due to seasonal situations and the overall difficult environment, we have been fighting back and Q4 clearly has been recovering and came out with an underlying EBIT of €34 million positive, so that we are seeing a quite significant positive number for the year also in Coil EMEA. We have to see that deliveries overall have not been on the same level as 2014. They have declined by some 5%. Base prices also have gone down in average in 2015 by some €20 per ton, but overall, we can say that the pricing environment has been more stable and resilient in Europe than in the U.S.

So briefly coming to the U.S., there we are seeing that this is still a loss-making area. This is certainly driven by even more difficult environment regarding prices, regarding import levels, but also regarding the general consumption specifically with some impact also from project industry and oil and gas industry there. So we came out at an underlying EBIT of minus €41 million, only slightly more positive, but we are seeing a little bit of a positive trend there. And on the deliveries, we are clearly seeing that Americas is picking up. They are gaining market share while the first half of the year still has been marred by the difficulties we had with the cold-rolling mills in 2014 and therefore, our delivery reliability was not good enough for our customers. This has changed, we have gained ground there. We have now 138,000 tons. So we are gaining speed again in the way how we are ramping up. In principle, if you see that base prices have been down more than $200 per ton during 2015 compared to 2014, you can imagine that this has been not an easy environment. But this is still a very important leg for us, which we are striving to bring to profitability very soon.

Looking into the three other business areas very briefly, Asia of course, extremely difficult market, extreme overcapacities there and we have decided to take out our engagement regarding operations in Asia while we are still staying in the business with our input volumes from Europe, specifically also on specialty grades, which gives us good results. So you can see that with this consolidation of SKS in December, also our fourth quarter result has clearly improved and is now at a minus €3 million level of underlying EBIT. In Quarto Plate, Quarto Plate has been a difficult environment already in 2014 and we have been striving for a turnaround. And clearly, there is a better result in 2015 and 2014, but it’s still negative. So efforts still have to go on and we are seeing quite significant potential that this will come to positive numbers soon. Deliveries have been growing, and this also shows the efforts that we are taking in Degerfors in Sweden in our main European part and underlying losses have been reduced by – to a level of €23 million compared to €30 million in last year. In long products, this is quite a resilient business. However, in fourth quarter specifically the U.S. business also has been hit by lower prices, overcapacities and difficult market environment. So we ended up with a small negative number of minus €3 million, but in total still a positive underlying EBIT for the year in long products.

Of course, main focus was not only on the structural improvements and the operational improvements but also cash flow improvements and there you can see quarter four had a very strong impact on our cash flow for the year. While operating cash flow was positive, specifically the net cash from the investing activities, which is the delta between the divestments and the investments, came out with €319 million positive and ended up at a free cash flow for the group of €321 million. This also led to a free cash flow for the full year of positive €205 million and that helped certainly to de-leverage the company in the way that Roeland has explained. Cash and cash equivalents stayed more or less at the same level as did also the liquidity, where we have a very comfortable level of €1.1 billion in the group at the end of this year.

Financial stability has clearly improved, not only from the de-leveraging and the improvement in gearing, but also from the maturity situation that we have taken care of in quarter four by refinancing efforts. So, we have renewed and extended the revolving credit facility to 2019 with a tranche of €655 million and remaining additional €145 million maturing in February 2017. Through the de-leveraging, we had been able to prepay and take down our exposure in our loans by a significant value and you can see that we now have maturities on a quite normal level for 2016 and 2017 whereas the bulk has been shifted to in time 2019 and 2020.

With that brief excursion into the financials, I would like to give back to you, Roeland, for the outlook and guidance.

Roeland Baan

Thanks, Reinhard. So, on outlook and guidance, first to level set again looking at the projection by SMR, you will see that in Q1 2016 versus Q4 of ‘15, what we see is expected drop in real demand, both in EMEA and in the U.S. of about 2%. So, on top of that and you have probably seen it today, nickel prices decisively dropped under 8,000 tons. So, there is little wind in the back to be expected from there either. However, in spite of these facts and in spite of the trading environment that we expect for 2016 as a whole to be still pretty tough, we estimate that the first quarter delivery volumes will remain at a similar level as the fourth quarter of 2015. At the same time, I have been talking about the restructuring cost efforts in EMEA that will continue to work its way into our results and that resulted – although we see mitigating effects coming from there that Q1 2016 will still be an underlying negative EBIT.

Now, on to a bit of a different subject and that is – it says here, the CEO’s first 40 days at the office. There were weekends as well. So, it’s not that bad. The last 5 weeks, what I have been doing to familiarize myself with the company is I have been traveling around extensively and I have visited basically all our facilities, our major facilities bar one, I haven’t seen Sheffield, but for the rest, I have been to all of them. And the one thing that I can say to my own comfort as well is that we, as a company, have absolutely excellent assets. I have been totally impressed by what I have seen to the point with my 15 years in the industry comparing to what I have seen, which is common in our industry, we are ahead. We have better assets than the average. We have well-invested assets. We have modern assets. We have assets that can compete with any other in the world. We have high levels of automation. So, there is a very clear signal for me that we have – the bones of the company are extremely sound.

The other thing that was very clear is our people, walking around, talking to our operators, sitting on the pulpit asking people what they want, what they think, there is an absolute passion on what they are doing. There is an identification of the people with the company. They like the company. They want to succeed. They want to learn. They want to get better. So, we have clearly – we have the right elements to be competitive.

The other thing that’s very obvious is that we have come a long way with the acquisition and then the whole restructuring that has been done. Coming in from outside and seeing it for the first time, what I have seen and then I talk especially about Europe is that we now have an extremely well-balanced system. You can’t talk anymore about a plant here and plant there and it is a balanced system, where we have a great balance between the downstream and the upstream, the hot end and the cold end that is operating as one organism together and that is very interdependent as well, highly efficient, very, very again well-balanced as a system. So, that’s good.

Looking at the U.S. where you have a slightly different system, because it’s Calvert there as the main driver. Again, Calvert is a fantastic asset. It is an amazing asset with young, new people and there are people who do not come from our industry, who were in hotel management 3 years ago and learned the business. And again you see that same drive of wanting to succeed and wanting to learn and we have – we sent people from Tornio recently there to help and people suck up the thing. So, there is a tremendous base. Still we are underperforming our competition. That’s obvious.

And there are a few things there that I want to comment on. One is the focus of the company in the last 3 years has been very much how to digest an enormous acquisition. We bought a company of the same size with its own very strong culture, with its own asset base that was optimized around what the company was. We needed to integrate that and that has been where the focus has been. It took efforts, resources, focus away from maybe what our core base business is. Still, the result is great.

What we have here is fantastic, but now we need to bring this to the next level by refocusing on the base business, refocusing on the core and I can guarantee you that what I have seen and what I have heard and what I know is that we can clearly see these areas of improvement. It’s not something where you stretch yourself and say, what’s wrong with us? There is nothing wrong with us. It is basically you can see the areas of improvement. You can see the opportunities everywhere. And that brings me to basically sort of broad outline on what we need to do.

And I start on the right side of this slide, the building of long-term competitiveness. If you go and look at the internal side of our plans, you see pockets of excellence everywhere, you see methods of working that are different, but are good. What we don’t have is a real manufacturing excellence system that brings up best practice, that drives performance, efficiency etcetera. What we don’t have is a very strong supply chain management that brings it all together and makes sure that we bring down our inventories that we up our delivery performance that we bring down our cash conversion costs. So, there are enormous improvements that in the old fashioned way rather than selling assets as we have done in the past to make our money. We go back to the old fashioned way of making money, which is concentrate on where the rubber hits the road in our business.

Same with our customers’ side, we have tremendous opportunity with our customers. We have great products. We have a fantastic product portfolio, but we are not optimizing it. We have to streamline that. We have to have the company led from the front, from the customer end in order to leverage on that part. These issues are not quick fixes. This is not a silver bullet. This is not flip a switch and we are there. This is a pathway to success. It will take years, 3 years, 4 years before you are really there at your excellence point. So, in order to get there and to deserve the time to get there, we need to do a few quick fixes and they are there as well. One of them very clearly is further bringing down our debt. For me, that is a primary objective is to de-leverage the company further and we have the opportunities. As Reinhard said and showed, we are still very heavy in our working capital and we have a very large chunk of money locked into our working capital that we can get out without, I would say without too much trouble. It will – again, it’s down to hard, hard work, but we can get it out. We have sort of defined it. We are working it into details and there is significant improvement there.

The other one is SG&A. We are complex due to how we got together, how the company was formed and we have to get the complexity out. We have tremendous opportunity in bringing down our SG&A costs and not only does it take out costs, it brings efficiency that in itself is a flywheel to improve performance. So that’s another thing that we are working on additionally with my whole team and with the other teams as well to bring that to a very quick, short program to take those costs out. Obviously, Coil Americas and you saw already we have a gradual improvement. We have a fantastic improvement in our volumes in spite of the difficulty in the market, we see our market share growing. We are pretty successful there. We have a new team on board there.

We have a new leader, Mike Williams, who has an incredible pedigree, fantastic leader. He brought in, in October a new operations leader, world class and early January, we got a new commercial leader in as well with – and whom I put enormous faith. So we have a new team there. They are already moving fast ahead, and things are happening. The costs per ton are coming down due to the focus on our manufacturing [ph]. So I can see as well there the dynamics and the progress going to happen. So obviously, there are many more things, but those are the things where we, on the short-term can make a difference, bring that debt down, get our initial results up and deserve with that, the longer term journey to sustainable excellence. Although we are a long way already in defining these plans, I unfortunately cannot yet share the details with you, but we will do so in the coming months.

And with that, I would like to hand over to the floor.

Johanna Henttonen

Thank you, Roeland very much. Thank you. Also, I would like to welcome Reinhard here. So operator, we are soon ready to start the Q&A session with both Reinhard and Roeland.

Question-and-Answer Session

A - Johanna Henttonen

Okay. So as usual, we will start the Q&A from the Helsinki audience and I believe that we have [indiscernible] here with the mic. So if you do have a question, kindly raise your hand so we will get a microphone to you. And after Helsinki, we will continue with the conference call participants, so I believe that in here, we have one question, the first one?

Johannes Grasberger

Hi. It’s Johannes Grasberger from Nordea Markets. My first question is related to the U.S. operations and the fact that one of your competitors has recently shutdown their operations, ATI Allegheny, which I assume is releasing some 100,000 tons, 150,000 tons of market share, any comments on that whether you have already seen some effects on your operations for Calvert, maybe on increasing order intake or capacity utilization since the plant is shutdown?

Roeland Baan

The only thing I can say is that our order intake progress in North America is in line with our expectations.

Johannes Grasberger

And those expectations are for I suppose improved order intake?

Roeland Baan

They are for the expectations for improvement, yes.

Johannes Grasberger

Okay. My second question is on the volume guidance for the first quarter, so stable volumes, but I suppose after the sale of SKS, is that comparable volumes between Q4 and Q1, so Q4 volumes are looked at without volumes that SKS produced or is that not comparable, which means that there is more volumes coming out from another plant?

Reinhard Florey

Well, first of all SKS has already been deconsolidated in December from the numbers. So you would not meet a huge difference there and what we mean is that it will be on the levels that are in the papers that you can see.

Johannes Grasberger

Good. Then actually one more question on Americas, it looks like the average selling price in that segment is quite low compared to the market prices whereas you are actually achieving, say a premium price in the European operations, which to me means that the mix in Americas is quite weak still compared to what the stable operations in Europe are doing. So should we assume that if the ramp-up goes ahead at Calvert the actual average selling price will improve from the current level, which has also a positive impact on the bottom line?

Roeland Baan

So the – it’s true that currently our volumes in the U.S. have been mainly going through the distribution segment. We clearly have plans to migrate part of our sales more into the so called bill of materials and into direct customer sales. However, it is effect of the market that in U.S. just in general, the distributor segment is much more significant than it is in Europe. But yes, we are moving up the mix.

Johannes Grasberger

Okay. And then the final question is on the SMR forecast for minus 2% demand in Europe and the U.S. during this year. Maybe a couple of words on that because the euro is still weak and exports from Europe are increasing. So which segments do you see that are actually coming down because construction looks like that is bottoming out, automotives are doing fine, so just a couple of words on that, what is taking down the demand?

Reinhard Florey

Although, indeed automotive is running fine, you have other sectors where it’s pretty poor. Oil and gas is obviously down significantly. Heavy industry is expected to be down significantly. And then again, the famous distributors, that is still in a factor in the market that you have to count on. You saw the graph over 50% is distributor volume for the market as a whole. And as long as nickel prices remain depressed with the tendency down, that volume will be low.

Johannes Grasberger

Okay. Thank you.

Erkki Vesola

Hi. It’s Erkki Vesola from Swedbank. A couple of questions for me as well coming back to Coil Americas or the market, is there any prospect after heavy prop that the base prices would improve in the Americas market in the course of 2016?

Roeland Baan

I would assume that the prospect is always there. The – I think the issue is that there are many unknowns and uncertainties. The volatility is there. Obviously, if volatility abates and stabilization comes into the market, you would see potentially an improvement, but to speculate on that is wrong.

Erkki Vesola

And linked to that, how much shoot to the base price improving in order for you guys to reach a breakeven level at Coil Americas?

Roeland Baan

I would like to not comment on that.

Erkki Vesola

Okay. And then more housekeeping question regarding 2016 CapEx, is there any guidance by year?

Roeland Baan

Our 2016 CapEx will be around €140 million.

Erkki Vesola

Okay, thank you.

Johanna Henttonen

Do we have more questions from Helsinki at this point? If not, operator I think we are then ready to move to the conference call participants. I would also ask of course conference call participants identify themselves before the question. Thank you.

Operator

Thank you. [Operator Instructions] The first question comes from Seth Rosenfeld from Jefferies. Please go ahead. Your line is now open.

Seth Rosenfeld

Good afternoon. This is Seth Rosenfeld at Jefferies. Just a couple of different questions. First, starting out on the balance sheet, obviously, you have had some success de-leveraging significantly in the past quarter driven by asset sales, but you noted earlier on the call their goal of further reducing net debt in the near term. I recognize you can’t say a lot I suppose, but could you just give us some target for medium-term what sort of level you would like to be at either in terms of absolute net debt or perhaps gearing given that’s where your covenants are. Also you have made some progress recently of refinancing your debt in order to reduce your annual cash outflows. Do you see further opportunity for that in the medium term or is that going to be something that you have kind of hit the nail on the head thus far? And then separately, a question on outlook for the EU, clearly, last year’s anti-dumping measures helped block imports from China and Taiwan. We have seen growth in volumes from other countries in recent months. How is that affecting your business? Are these new volumes as damaging to price as China was? And are you ultimately seeing a bit more downward pressure looking out into the spring of 2016? Thank you.

Roeland Baan

So Reinhard, you can take the first part.

Reinhard Florey

Yes, sure. Thanks Seth for the questions. Regarding in general, the asset sales, of course, that had a significant positive contribution and we see that also as part of active management of the company that we optimize the balance sheet by non-negative measures. So, please keep in mind that with the assets that we have taken out, we have not reduced our EBITDA potential that we have in the company. So, this will not have EBITDA contributors on the contrary. There were negative results coming from that. So, in that sense, of course, this is some extraordinary topics that we had, but the overall de-leveraging was also coming from some operative topics around the net working capital. If it comes to medium-term targets, please bear with us that this is not the time yet before specifically Roeland has taken up the full view and his program to talk about medium targets, but one thing is for sure, de-leveraging will go on.

If it comes to refinancing, yes, the refinancing efforts have been taken from our point of view hopefully at the right time and the right scope. Regarding further refinancing, there are always opportunities for us. We have access to several pockets of money in the market be it daily money in terms of local markets or be it bonds. There is one pocket that we are not planning to look into that is any kind of rights issue or something like that. That is not on the agenda, but other possibilities we have, but we will calibrate that very much with the opportunities regarding cost and the possibility to have further improvement of our interest costs there. So, we will not have to take any steps which will deteriorate this. On the contrary, our target clearly is also to take our interest cost down.

Roeland Baan

As far as the question around the EU anti-dumping and the effects that we see for 2016, as you saw, there was a significant impact in 2015 on imports. However, there will still be, of course, import pressure coming from countries like India, South Africa with the low rand, etcetera, which will put a natural cap on what you can and cannot charge. However, as said before, prices have been very resilient and we expect that to continue.

Seth Rosenfeld

Great, thank you very much.

Operator

Thank you. The next question comes from Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is now open.

Bastian Synagowitz

[Technical Difficulty] performance. Firstly, can you please give us a little bit of color on whether you think that we’ve reached the trough in Q4 and whether we will already see at least a little bit improvement in the first quarter? And then secondly, given that fourth quarter volumes weren’t actually that bad, actually they were quite good, how much of any future improvement to get to EBITDA breakeven is really in your hands on – is this maybe more a function of what the market and maybe base prices are doing? And then the last question is for Roeland. You already gave us quite a bit of color and detail on what you think needs to change, which is great. You also said that you are not planning to divest any asset near term, which I guess is very understandable and I guess certainly the good price you got for the SKS assets have visibly given you a lot of time on the balance sheet now. However, we are obviously still having the U.S. asset, which is probably state-of-the-art in theory, but in current EBITDA run-rates and I am referring to Q4, it’s basically burning at least 14% of your market capitalization in cash burn. So clearly, this needs to be fixed very quickly one way or the other. I appreciate that intuitively. It makes a lot of sense to try to solve the situation on a standalone basis, but would you categorically rule out any strategic partnership or even putting the asset up for sale should you not be able to fix the cash burn quickly? Thank you.

Johanna Henttonen

Bastian, it’s Johanna here. Could you please repeat the early part of your first question, because we didn’t actually hear here if you meant group as a whole or specifically some of the business areas?

Bastian Synagowitz

Alright. Sure. Sorry for that. So, I was referring to the U.S. whether you could give us any color on whether you think that we have reached the trough in Q4 and whether we will already see a little bit of improvement in Q1. And basically the second part of this question was whether you think that getting to EBITDA breakeven is really more in your hands or whether this is more a function of what the base price is in U.S. too from here onwards?

Johanna Henttonen

Thank you. So, Coil Americas is the next question.

Roeland Baan

So I would take the question one and two as one if you don’t mind. I feel that we always have to do what we can to make sure that we are as resilient as possible and as robust as possible in whatever environment we are operating in. So, our own efforts to reduce cost, to improve our mix in the market and to increase our share are to me the most important moves. Ultimately, of course, there are always things in the market that you cannot control and we need to make sure that we suffer from those less than the others. Whether the Q4 is the trough, it is a matter of can you look into the crystal ball and tell me what happens to nickel prices, Chinese imports, etcetera? It’s not something that you can answer. But again, the thing that I can answer is that we will improve our own controllable gain and bring it to best-in-class. Are we – will we contemplate divestment of our assets or our partnerships or – I would say at this moment very clearly that the U.S. operations are a key cornerstone of our strategy. Even if you have a short-term outlook that doesn’t look great given what we see and what happens in the markets in nickel prices that doesn’t take away the long-term strategic importance of that asset.

Bastian Synagowitz

Very clear. Thank you. Maybe one brief follow-up on the debt situation if I may. If I remember correctly, there was a step up clause in one of your bonds if you are not getting the rating by 2016, could you give us any update on the situation and maybe share with us the impact if you should not get any rating by the end of the deadline?

Reinhard Florey

Sure. That is correct. There is a step up clause in one of our bonds. It’s about a €250 million bond, so not a very large part. The topic of rating is for us always in the agenda. The topic of timing is to be assessed when it is appropriate for the company to take that and that is not something that would be appropriate to comment at that moment, but instead, it’s on the agenda and timing will be more or less communicated when we are at the moment where this is beneficial for the company. You will have certainly good understanding that current situation in the market is difficult, but on the other hand, Outokumpu is improving. So, we have our hands in that.

Bastian Synagowitz

Okay, perfect. Thank you and thanks for taking my questions.

Operator

The next question comes from Nick Pez from BNP Paribas. Please go ahead. Your line is now open.

Luc Pez

Hi gentlemen. Sorry I did not sure you know my name. A couple of questions, if I may, as a follow-up on your first thinking, Roeland with regards to need for more cost cuttings, could you maybe share with us if you have in mind, I know it’s a bit early stage, the need for more closures or would you have more in mind, the idea of better clustering some of the sites as some of your competitors do, that will be my first question. And second question related to anti-dumping would be the following, do you see room for more anti-dumping measures in Europe targeting India or other countries and where do you stand with regards to anti-dumping in the U.S.?

Roeland Baan

Okay. Thanks Nick.

Johanna Henttonen

It’s actually Luc.

Roeland Baan

Luc?

Johanna Henttonen

Yes.

Roeland Baan

Luc, okay. Sorry, Luc. So on further closures or clustering as I said, in U.S. there is nothing to cluster because basically that is Calvert, which is then following a tandem specifically with Mexinox. In Europe, we have reached a very balanced state of affairs. If you would take the – what we have on the off-stream side in our hot-rolling and our cold-rolling, combine that as a system, it is very balanced. If you would take out any more capacity, de-cluster or close, you would upset the balance and you would actually do yourself a disservice. So I don’t foresee that at this moment. As to anti-dumping measures, whenever there is unfair competition, we will actually of course, actively try to have that investigated wherever it comes from, whatever product it is. That goes for Europe, but it goes for the U.S. as well.

Luc Pez

Do you have any finding in mind, timing, whatever?

Roeland Baan

We have nothing in mind. We are looking into it of course, actively. And again as I have said if we have the feeling that there is unfair trade, then we will push for investigation.

Luc Pez

Thank you.

Operator

The next question comes from Johannes Grunselius from Handelsbanken. Please go ahead.

Johannes Grunselius

Yes. Hello everyone. It’s Johannes Grunselius, Handelsbanken Stockholm here. Just a few questions, I am curious to hear a little bit about your initial thoughts here on new cost savings, I realize this is very early stage, but could you give us some kind of hint what kind of magnitude and scale we are talking about here? Thanks.

Roeland Baan

I could, but I won’t. We are – again, we have clearly identified a number of areas. We are – I have mobilized a large part of the senior management in the company. We actually had a meeting with the 50 most senior leaders early last week to go through the potential programs to do more defining. We are back working to put meat on the bone and as I have said earlier, which is based in the next couple of months, we will come with details.

Johannes Grunselius

But I mean it clearly sounds that there is something quite tangible going on here, am I right?

Roeland Baan

Yes.

Reinhard Florey

Yes, thanks. And I will wait for the details and when are you presenting those, will that be in conjunction with the Q2 report or will it come in between quarters, quarterly reports or do you know at this stage?

Roeland Baan

We don’t know at this stage, but I like your persistence.

Johannes Grunselius

Okay. And then I have also a question on the markets, could you give us a little bit of an update what’s your insights into the inventories in Europe among your – in the systems and among distributors and if you also could give us an update on that, on where we are in terms of inventories in the U.S., please?

Roeland Baan

So in both regions, de-stocking has been going on and we are basically at our average or below average levels in both regions. That doesn’t, however automatically translate into increased demand. The only thing you can say is that there is less room for de-stocking than there might have been in the past, but what we see currently is that the distributor sector lives hand to mouth as long as the nickel prices stay depressed.

Johannes Grunselius

But I have a final question and that’s your thoughts on the base prices in Europe, I mean you said it several times here in the presentation those are pretty stable although the market situation is so tough, what’s your thoughts on that, how come that the base prices have held up that well in this weak market?

Roeland Baan

I think it is because of the underlying demand that we have still experienced in Europe. We were talking about the automotive sector, which of course is a big driver in Europe, very healthy. The white goods is still very healthy. So I think that plus the fact that, that is automatically a higher end market, where it makes a difference where the material comes from and imports have less effect will stabilize pricing.

Johannes Grunselius

I see. Thank you very much for answers. Thank you.

Operator

The next question comes from Kevin Hellegard from Goldman Sachs. Please go ahead. Your line is now open.

Kevin Hellegard

Hi there, good afternoon. I just wanted to hear given what you have done on your net debt and your interest cost, can you give any sort of flavor of around which level of EBITDA you will be free cash flow breakeven at this stage?

Roeland Baan

Reinhard?

Reinhard Florey

Just to get your number – your question right, the free cash flow has been at €205 million positive for this year. So in that sense, we are clearly more than breakeven for this year.

Kevin Hellegard

Just like what level do you need to be breakeven, I guess there was a lot of divestments in here as well, like what level of EBITDA will you roughly need to be at to be breakeven?

Roeland Baan

Well, maybe just to give you the building blocks there, what we are having in addition to our EBITDA cash flow, we are having some depreciation, which is not cash relevant in the magnitude of some €230 million. But if we are taking the investment costs, we said that the total investing interest costs that we have here is about €160 million in 2015, which will go down in 2016. And if you take the CapEx, Roeland has already given the number. So if you add that up, there is not a lot of tax payments that we would have on the cash side, so that gives you roughly the number of EBITDA.

Kevin Hellegard

Okay. Thank you.

Operator

The next question comes from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead. Your line is now open.

Hjalmar Ahlberg

Hello. Thank you. Just on U.S. and the base prices, you have announced the base price increase in January of €160 million, but you are not saying how much that actually will be effective in 2016, can you elaborate a bit on that and can you also say if the higher prices will then have potentially a negative impact on volume assuming that will compete with low prices in Q3 and Q4?

Roeland Baan

Yes. So start with the second part. We don’t expect any influence on volumes from this. We have to see for the 4Q to all extent this price rise sticks. So we don’t have the full visibility on that yet.

Johanna Henttonen

Okay. And then a question on the scrap market, can you quantify the effect that increased scrap prices had in Q4 and what you see for Q1, will you see increased price in Q1 as well or have you seen it stabilizing?

Roeland Baan

Reinhard?

Reinhard Florey

Well, on the scrap prices, we do not give any kind of details. I mean this is a very strategic way of how our procurement works, how our use of that works. There has been some negative developments, but that is very clear because the availability of scrap with such poor nickel prices is subdued, but that has nothing to do that we would not have enough scrap, but there is some negative impact there, but we will not quantify that.

Hjalmar Ahlberg

Alright. And then just on base price in Europe, you were able to increase prices of around €15 in Europe, do you see this holding up in Q1 or do you see it reversing as prices has just been not increasing in general?

Roeland Baan

I – again, it’s we do not comment on pricing, but I think the guidance was clear enough.

Hjalmar Ahlberg

Okay. And just the last one, on Degerfors, you said you were aiming to increase standard products in that business area. How do you think that will affect profitability and so on? And are you increasing your volumes by taking market share or do you see the market growing?

Roeland Baan

So due to increased efficiency, we have been able to lower our overall costs on the products and as a result we have now access to parts of the commodity market that we would maybe have shunned in the past.

Hjalmar Ahlberg

Okay, I see. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Michael Shillaker from Credit Suisse. Please go ahead.

Michael Shillaker

Yes, thanks a lot. Mike Shillaker of Credit Suisse. So, three or four questions if I may. One question briefly which may have been answered and if it has I apologize. Just on Q1, the implied guidance, is that – that’s weaker than Q4, I think given the comment that costs will only sort of partially mitigate the current downward pressure on base prices or whether it’s the increase in scrap cost. So, is that correct? And is there any form of quantification you can give for how much weaker you think Q1 would be? The second question more sort of strategic for Roeland, how are you looking at the cycle? How do you build a long-term cycle into what you think you need to do at Outokumpu? Because I think if we look the last 7 or 8 years since the crisis, a lot of CEOs have come up with cost reduction plans that have consistently been eaten away by a weaker cycle. So, how do you sort of build that into your thinking so that you actually get ahead and we actually start keeping cost reductions as opposed to just treading water, because I think that’s going to really sort out the men from the boys going forward?

And another question for Roeland as well, look, your times at Aleris and Mittal and I guess especially Aleris, which I think was quite a turnaround story. Can you give us some sort of feel in terms of what you did there, what was similar between what you see there and what you achieve there relative to what you think you can achieve at Outokumpu, because obviously I totally appreciate you are not going to give targets, but it will be quite interesting to see what you think you did in Aleris especially that you could compare with Outokumpu and how do you see the challenge at Outokumpu relative to the challenges you have had at Aleris and Mittal? Thank you.

Roeland Baan

Alright. We can start with the Q1. What you said is the implied guidance, I would say that your interpretation rather than what I said. So, I will leave it at that. When we get to the long-term cycle versus the – is the cost reductions – are they sufficient? I think what I said before I see – we have done a lot of cost reductions that have come out of the restructuring, where you have a lot of assets in one heap that you have to then streamline and get into something that has industrial logic. That has been done. That has led to a lot of cost reductions, not necessarily to your sustainable competitiveness yet. The next level that we are looking at is addressing that sustainable competitiveness. And as I said before, there is absolutely no reason in what I see and what I have identified as opportunities that we will – we cannot be one of the most, if not the most competitive player in this field. And that by definition makes you much less – but makes you not impervious, but much less vulnerable to any of the cycles. So I hope that answers your question. It’s not just, in other words, pure cost-cutting, it is as well to get into your operational excellence to be more competitive than the next guy.

And that brings me a little bit to your last question on Aleris. The program we set up there was very much around indeed optimizing the portfolio and optimizing the portfolio was on the assets, on the products and on the customers. So, we went through a similar exercise there, where we closed some of the facilities in order to get better utilization in what was left and the better facilities. We sold some of the non-core businesses that we had, which you could liken to what we have done with SKS and we very much focused on the market side. So, we tilted the company from an asset-led organization to a sales-led and customer-led organization, which brought us very clear advantages in especially again the higher added value segments that we targeted. We also – and I think this is the one thing that is very, very similar. We also in Aleris did not have a clear manufacturing excellence operation system, which we introduced and which over the periods of 5 years, we got operating and which basically almost guaranteed productivity gains of – in the first instance, 4% or 5% per year. And then as you get the low hanging fruit out, we still gained 2%, 3% a year on productivity based on the program of excellence and the sharing of best practice. So, a lot of the issues there are the same as we have here in Outokumpu, which brings me to the point where I said I think we know what to do.

Michael Shillaker

Okay. And just – so a follow-up question on that. So, the 5 years was the plan, but you said that actually tangible results started coming through relatively quickly after maybe 1 year?

Roeland Baan

The tangible results start filtering through early on. The size of it is something else, but yes, you will, within the early days, so the 18 months of the program, you will already see it bite significantly.

Michael Shillaker

Okay. And just on Coil Americas, how much do you think so far given what you have looked at has been just mismanagement or bad management of the asset? And how much do you think has just been just bad luck, bad cycle, because again I don’t know where we would be if we didn’t have the U.S. de-stock last year, but when you look at it, how much do you think effectively the performance has just been impacted by the fact we have just been in a massive de-stocking, where do you think we would be without that?

Roeland Baan

Well, Mike, I find it very difficult to answer the question. I wasn’t there in the years when this facility was built and started up. I don’t know the circumstances on which it was done. I don’t know what the market did in those days. So, it’s very hard to comment. What I do know is what I see today, which is a plant that has a fantastic flow going through, that has great assets that has people that – and maybe that’s the only thing where I see the great advantage that have been trained over the last few years to get up to a level where they understand the business and the equipment they are using and where there is this enormous wish for improvement and that is where I bank on.

Michael Shillaker

Okay. Roeland, thanks for the answers and good luck.

Operator

Thank you. There appears to be no further questions. I will turn the conference back to you.

Johanna Henttonen

Excellent. Many thanks. Anymore questions here in Helsinki? Alright. It looks that everything is clear. So with that, I would like to thank you for participating today this conference call and webcast. Thank you, Roeland. Thank you, Reinhard. And also, a reminder that our Q1 report will be out on the April 27. Thank you so much.

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