Outokumpu's (OUTKF) CEO Roeland Baan on Q1 2016 Results - Earnings Call Transcript

| About: Outokumpu OYJ (OUTKF)

Outokumpu Oyj (OTC:OUTKF) Q1 2016 Earnings Conference Call April 27, 2016 8:00 AM ET

Executives

Johanna Henttonen – Senior Vice President-Investor Relations

Roeland Baan – Chief Executive Officer

Reinhard Florey – Chief Financial Officer

Analysts

Michael Shillaker – Credit Suisse

Seth Rosenfeld – Jefferies

Johannes Grasberger – Nordea Markets

Sebastian Sanovicz – Deutsche Bank

Luc Pez – Exane BNP Paribas

Johannes Grunselius – Handelsbanken

Artem Beletski – SEB

Johanna Henttonen

Thank you so much. Good morning and good afternoon everyone and welcome to Outokumpu’s Q1 Earnings Conference Call. Today, we have our CEO, Roeland Baan; and also our CFO, Reinhard Florey, to discuss the results. Roeland will talk about the overall topics, Reinhard go into financial details and then Roeland will be doing the closing remarks. At the end, we’ll be taking the questions from the participants.

And before we start, I would like to remind you that certain information is forward-looking and therefore includes uncertainties and that may cause our actual results to differ from current expectation.

And with this, Roeland please go ahead.

Roeland Baan

Thank you, Johanna. Thank you for joining us in this call. As you have been able to see from the release the Q1 results were in line with our expectations with an underlying EBIT of minus €20 million. And if you then look into some of the drivers on the positive side, we have very healthy delivery volumes up equally in Europe as well as in Americas, where I do want to single out Americas from rolling because we actually show that we are very successful in the continuing commercial ramp up leading to a record output for this quarter, highest deliveries in the history of our mill.

And before you say, but whereas the results, the results are there, but there is of course still a lag going on from the alloy surcharge. The average nickel price in Q1 was over $500 down to Q4 started to put a drag on the pricing. Operationally, however, the mill is developing very well. You can see it in the operational KPIs that are improving quarter-on-quarter. And in fact if you would look at the sequential results of Americas from Q2 of 2015 to this quarter then you see a sequential improvement on the underlying EBIT in every single quarter. So we are very satisfied with what is happening in the Americas.

On Europe continuing momentum out of the restructuring programs, still continuing in Q1 with strong results in spite again of the – the spirit is trending down with nickel prices, so again, I think we can be very satisfied from programs there. On Long Products, we can be less satisfied. Long Products could have been very much influenced by the turndown in oil and gas and as a result in lower volumes unexpected, but we have taken measures to counteract this move.

Then if you look at the – look at the negative drivers, what is lower base prices specifically in Europe, in Americas it was basically stable, but of course strongly effected as well by the lower transaction prices due to the alloy surcharges conduct. Another clear issue happening in the markets is that with generally speaking lower economic activity and with the specifically lower activity in oil and gas, we see that the arising of scrap are coming down and leading to a significantly higher pricing and higher cost for us as a company.

The situation that we do not see that will alleviate in the short-term, so it's something that we will have to work with. The same goes for ferrochrome. Our results were impacted by lower ferrochrome price – prices Q1 over Q4 for the year before. That trend has continued, so going forward, we will see a less than favorable pricing environments for ferrochrome. And then one that I want to specifically highlight is that we took a €15 million write-down, basically one trade receivable in Europe and that we reevaluated and took position in to get better transparency to take that write-down. And then we have in the Americas, we have still some high priced aged inventory that we took the position to write-down and the impact of those two was very significant given our overall results to the tune of minus €15 million.

If you look shortly at the overall picture for stainless steel for year 2016 not a lot to add to what we have set before. We do not see an environment that is significantly improving and it is pretty stable to look here at the data that are published by SMR. You see that there is a 1% demand growth expected for 2016 and then if you look at the underlying areas sort of Americas is expected to contract slightly at 1%, Europe to contract slightly 2% and then APAC to grow up with 2%. All these of course are changes in the margins, so the most certain position that you can take on this that is a flat market.

And against the background – the backdrop of this market, that’s a quick price – a quick look at the prices, if you look at Europe and then specifically the German as the raw material of pricing, the German pricing for 304 as published by CRU. You'll see that that is basically a stable pricing environment since the end of 2014, which by the way coincides as well with the becoming effective of the antidumping measures in Europe.

If you look at Outokumpu’s base prices in Q1, it actually declined slightly, which is the result of pricing that’s still lingers on from Q4 into Q1 on existing contracts. Then on imports, the import penetration decreased slightly to 24.4%, but still down in the downtrend from 2013 when it hits its peak with the Chinese imports.

If you move to the Americas, you see that an inverse, when the antidumping measures were announced in Europe or became effective, a whole lot of raw material was looking for a new home found a willing one in U.S., which led to a very steep drop throughout 2015 and actually into as well in the first quarter of 2016. And the turn up you see there is basically a turn up for Q2 in April.

Again, on the basis of data from CRU, the base price in the Americas came down by about 2%. In spite of the announced price increases, we announced price increases in December 2015. In spite of that the prices came down still. On the markets, the pricing for Outokumpu was stable on the base pricing. The explanation on why are these prices not going up given the increase is simply that when you announce a price increase, it takes time for old contracts to roll off. So we do expect that. Gradually, we will see these price increases starting to impact us from April of this month onwards.

Important to mention as well that the alloy surcharge of course was down significantly whereas in Europe it was down by about 12%, in the Americas, it dropped by – in the U.S., it dropped by 19%. So, again, lingering effects of what you will see on the next page, which is the development of the nickel price over time. We although we feel that it couldn’t go lower we have seen the dip go lower in Q1 of 2016 whereas the average in Q4 was still about 9,400. It went down to 8,500 in Q1 and it is certainly a loss. As a result on the right hand side of the graph, you can see that this was followed by transaction prices across the globe continuing to drop.

So against this backdrop, I would like to hand over to Reinhard to dig into the key financials.

Reinhard Florey

Thank you very much, Roeland. This is Reinhard Florey, CFO of Outokumpu speaking. Going to the details of the numbers for quarter one. We can see that in terms of the stainless steel deliveries and you have heard from Roeland what the drivers are behind. We have made progress compared to quarter four with level of 574,000 tons. We came up to 600,000 tons in Q1. However, looking at the sales, we can see that the average transaction prices have come down and overall the sales have come down by some 3.4%.

Overall, this led to a situation where we ended up with an underlying EBIT of minus €20 million for Q2 respectively reported EBIT of minus €12 million. The operating cash flow however stayed positive and it stayed significantly positive with number €74 million. And this also led to a situation that our net financial debt was reduced by some €58 million to a level of €1.551 billion at the end of Q1 2016. So, deleveraging of Outokumpu is continuing.

CapEx has been lower than in Q4 and is around the run rate that we are seeing for 2016 to happen. And overall, we can see that the continuation of cost savings to personal reduction has continued from Q4 to Q1 and is down to continue also in the next quarter. I would like to come back a little bit to a couple of upside and a couple of adjustments that we have taken in the understanding of our financial numbers. First of all, talking about reporting practices. There have seen some new regulation. And due to these new regulations, we could have even gone from a quarterly reporting to a half yearly reporting. However, we decided to stay with the quarterly reporting. However being a little bit lighter on Q1 and Q3 reporting, instead still staying in the full scope of IAS 34 in Q2 and Q4 format.

Secondly on the definition of our core parameter regarding profitability, we confirm underlying EBIT as main profitability measure. And we do that because we think that this is the adequate performance measure that shows the best content to our operational performance. The adjustment that we are seeing to our reported EBIT to the IFRS EBIT are twofold. The first it is the material income and expense items, which earlier labeled as non-recurring items.

You probably have also seen that there have been some changes in the definition of non-recurring items by IFRS. So, we are taking that of course into account in our definition here. And the second is that of course we are also taking out the net effect of timing and hedging effects, so the raw material related inventory gains or losses and the metal derivative gains and losses.

Last but not least, we have introduced a new business area structure for the group, which you also have been provided the comparables for, so we have restated the quarterly data available for the past two years. And the reporting structure is now concentrating on three business areas, which is Europe, Americas, and the Long Products. If we are looking into those new structures, starting with Europe, what we can see is that Europe’s performance has been continuously strengthening both in terms of the market presence, European deliveries, as well as the underlying EBIT. Deliveries have grown from 380,000 tons to more than 420,000 tons and underlying EBIT has gone up from $33 million to $42 million in this current quarter.

It is clearly a stronger performance due to stronger deliveries and also cost savings that have been applied over the past quarters getting effective right now as well as also effects from the EMEA restructuring program, which are effective with some $15 million now already. However, we still see that there are some adjustments in there. So, we have some €8 million related to earlier site closures, and some €2 million net effects on the raw material related inventory and metal derivative gains and losses. Included in the underlying EBIT is the effect of the write-down as Roeland has mentioned of trade receivables here in the magnitude of €12 million.

Looking into Americas, again here you can see that on the market side, we have made further progress running into record production as well as a record delivery now with a level of 160,000 tons as deliveries. We are seeing that this is also certainly driven by pick-up in the market, apparent consumption was up by more than 4%, 4.8%. And we also attribute this to a certain degree to announced antidumping and countervailing duty that have been filed in February.

Price increases are sticking gradually. Roeland has explained why this has not been fully effective in Q1. We are expecting more of that impact in Q2. And there have been an impact in the underlying EBIT of €3 million write-down for aged inventory at our mill in Calvert to make sure that we are on a level playing field going forward with our results.

Regarding adjustments from the underlying EBIT, what we see is that we have received an agreement with the insurance companies, regarding our cold rolled mill failures due to the multiple failures in the second half of 2014 after already having received some insurance payments in the past quarters. There has been an agreement that an additional insurance payments of €25 million will be paid to Outokumpu in our Bakka area. So we have booked €25 million in our profitability. However, we expect that to be the cash effective in Q2.

So the cash of that has not yet been received in Q1. And on the other hand, we have here €8 million negative effect from the net of timing and hedging effect. Coming to Loan Products; as already mentioned, sort of a disappointing performance regarding the underlying EBIT in spite of some increased deliveries due to the lower prices, high competition in the markets and a weak product mix in specific in this first quarter. We have a seen a loss €4 million as an underlying EBIT. Prices have been under pressure both in Europe and in the U.S. We are seeing this as a result from the low nickel prices and still the subcu demand from the oil and gas industry and related industries here.

There is of course also some import pressure from Asia and we are seeing now in Q1 a gradual pick up in all the in-take where we would expect some positive effects on that in quarter two for our Long Products side as well. We are also applying cost saving measures according to the overall corporate program in this area. So, it is a clear target to bring this business area back to profitability in short time.

If we are looking at the cash flows side, we have come up with performance of the free cash flow of some positive €57 million in quarter one, mainly coming from an operating cash flow of €74 million reduced by CapEx cash of €17 million. And this also leads to a situation where we have a total of €166 million as cash and cash equivalents on our books. Overall liquidity reserves are €900 million, not counting liquidity that we have on top of these was €130 million of the facilities that will mature in February 2017. So for this year, it is still above €1 billion of liquidity.

The net debt has decreased by €59 million to a level of 1.55 and we see that in the next slide, the deleveraging has now continuously happened since 2013 where we had a record of €3.56 billion of net debt to now €1.55 billion. Gearing has stayed at the same level of quarter four at around 70%. If we are looking at the debt maturities and our debt profile, what we are seeing is that with the extension of our maturity of the main part to 2019. We have now in 2016 a couple of maturities among which effectively of 150 [ph] million bonds to be repaid in June is the only real maturity, the other amounts are short-term facilities, which we are revolving and which will not lead to a cash up.

In 2017, we have been around €400 million of bilateral loans maturing and many of the other maturities are as you see undrawn as the specific use of the part of the facility of the syndicated credit loan that has been extended to 2017. Then in 2018, you see that there are hardly any maturities that gives us a very good ability to use 2017, 2018 to refinance for our 2019 major maturities and prolonged these further to the future.

In order to facilitate further refinancing measures, we have taken a rating by the end of Q1. It came out with a B3 rating with a positive outlook at the rating agency Moody’s, which has also rated our outstanding bond with a B2 rating with a positive outlook as well. And this is the starting point for what we feel will be a positive experience as a rated company going forward.

With that, I will give back to Roeland for developing industry as well as our outlook.

Roeland Baan

Yes, so if you look through our occasions for Q2, again no magic there [indiscernible] for 2016 looking at a pretty flat year and use it as well in the expectations for Q2 or Q1. A slight up-tick expected in the Europe and a slight downtick in Americas. So basically a flattened volume.

So if you then look at more specifically Outokumpu, we – in general if you look at the market in Europe, we still see that the underlying demand in most of the key sectors outside of oil and gas is very healthy and this is where we have our main focus. Our exposure to oil and gas is limited in our European business. And the stock levels amongst distributors are slightly above historical average, but not desperately soft. So, no, we do not expect any downward pressure from that.

If you look at the Americas, there you have clearly seen that the stock levels among distributors were already low. They have been pushed even lower. We see that we are significantly below historical average. And we do see as well that the delivery times are moving out slightly.

That we have announced the two price increases already in December of last year and in Q1. Another price increase was announced in April, bringing the total of increases now to close to $240 a ton. Again, we would have caution that it doesn't translate immediately into orders of cash coming in. We do have contracts that are quarterly, half yearly and yearly. And so the way it impacts depends from contract to contract, from customer to customer. But we do see the greater impact starting from this month in this quarter.

And then important to note is that the Chinese imports have been addressed with anti-dumping investigation. In March, already injury was confirmed by the Department of Trade. We are now in the process where over summer, we expect that preliminary duties will be announced and that then with sort of consultation and will then be effective as per the first quarter and in 2017 as per our expectations.

Again these, all these moving parts, we expect delivery volumes to be sequentially flat. And as a result for underlying EBIT to remain at a similar level as in Q1. Again, there’s moving parts in there, we don’t have positives clearly as I said. We have the pricing, we have still relatively good volumes but it will be burdened by a weaker performance of a ferrochrome because of continuing downward pressure on pricing of ferrochrome and a weaker dollar.

With the current prices and the development that we see is going forward, the net impact of raw material-related inventory and metal derivative gains and losses will be expected – are expect to be marginal, if any at all.

I would like to go back a few weeks and just put back into memory the improvement program that we have announced starting with our vision which is to be the best value creator in stainless steel by 2020 through customer orientation and efficiency. And we will bore you by saying this every single time that we meet, because this is really what we believe in and what we are going for.

To get there we have defined six must win battles. And again I have explained them in our last call, we won't go through them, we will only say that they are all underway. There is tremendous activity going on in the company to define, design, and implement all different parts of all these must win battles, leading to the financial targets in 2020 of an EBIT of €500 million, return on capital employed of 12%, and gearing below 35%.

However, as we have said as well, a number of these issues specifically we will talk about culture in the high performing organization or manufacturing excellence. These are initiatives that take time to really start giving full run rate result. And in the meantime, we have to get some step changes in place.

We have announced the new organizational set up. This is progressing as planned. We are still on track to flip the switch in the 1st of June and operate in the new format as from the 1st of June. This is necessary because the new organization is the enabler for the second big point on the agenda, which is our SG&A cost reduction of €100 million run rate by the end of 2017. And of course the other one is, we are still very actively pushing on the network and capital reduction of at least €200 million this year. And you have seen already the results in Q1 where we made a pretty big step forward in achieving that goal, all to get in the end at the intermediate step, but in 2017 all the net debt of €1.2 billion. As far as we can see, we are well on track at this stage, and we are very satisfied with the underlying performance of our businesses.

With that, I hand over to the questions.

Johanna Henttonen

Very good. Thank you, Roeland, and thank you, Reinhard. Operator, we will be ready to take the questions.

Question-and-Answer Session

Thank you. [Operator Instructions] We will take our first question from Michael Shillaker from Credit Suisse. Please go ahead. Your line is open.

Q - Michael Shillaker

Yes. Thanks very much. So three questions if I may Roeland. The first question just on ferrochrome. Given I think it €0.10 moved down in the contract in the second quarter. Is it reasonable to assume that's a headwind of about €25 million into the second quarter? And given that the ferrochrome price is largely followed the rand down, but the rand is basically been strengthening in the first part of this year. Is it reasonable to assume that we're going to get a stabilization in ferrochrome or maybe even something better than that into Q3.

Second question on ferrochrome, clearly given the move down in the rand over the last few years. And the tenge, I guess your position on the cost curve in ferrochrome has relatively weakened quite considerably. What are you doing to come back? Is there any real focus on targeting the ferrochrome cost? And at what costs are you actually or at what price ferrochrome you actually breakeven at the moment? And I guess if the price did continue to fall and you fell below that, what is the plan B on ferrochrome? Because integration is great in a rising market, but it can be a real negative in the falling commodity market. So that's ferrochrome.

And the third question really on demand. I think it was figured on Page 5, the SMR outlook is pretty grim. If you look at it negative Europe, negative the U.S. But I guess the question then is how does that actually square with the price hikes that have gone through in stainless steel on one hand. And how does that square with what's going on in carbon steel, where I guess four or five months ago everyone would have said something similar on demand, and that market has turned around very quickly and it looks like demand is going absolutely gangbusters out there.

And how ready are your commercial guys to accept that the market forecast may be completely wrong and given here we talked about inventories, we talked about imports lower, price is going up, that actually demand accelerates. And you've got to be ready to take, especially you guys I think you've got to be ready to take advantage of that. So how prepared are your commercial people that those forecast is must be that they may be actually just playing wrong and too pessimistic. Thanks a lot.

Roeland Baan

All right. Thanks, Michael. If I can start with the last one, what is the markets’ forecast is wrong. We have given you the markets’ forecast as given by third-party outside independent agencies, and that’s what for the communication we actually – we will stick to. By definition, our commercial people are very prepared for anything. We have an extremely competent and capable commercial outfit. These are people who are in the market all the time who have their finger on the pulse. And know exactly what to do where and how to react to what issues. At the same time, our actions are flexible enough to react and tandem with that. So I hope you're right and that the gangbusters come our way as well and we ready to react.

If I move to ferrochrome, and you are a little bit out of the ballpark, but I can give you a ballpark. The movements in both the pricing of ferrochrome from Q4 to Q1 and the movement in U.S. dollar will have an impact of about between €15 million and €20 million. More important to know is that – and this comes a regulatory of question about how costs competitive are you. And we have always said that we are profitable, I can tell you we are still. So more than that I do not want to share.

What do we do to increase cost competitiveness? Look, we are still at the same place in spite of rand, the same place only on the cost competitive curve. That doesn't mean that we sit back on our laurels. We are actually investing in expanding the lifetime of the mine, and increasing continuously our operations to greater cost competitiveness.

Michael Shillaker

Okay. I'm sorry can I just ask one final question? Now you've done your deep dive and come up with a strategic plan. Are you still more or less every day looking at strategy, looking at strategic planning within or is this now you've done it, and this is now purely about execution. What are we going to expect going forward?

Roeland Baan

You can expect a total focus on execution. The strategy is a simple bit, the execution is [indiscernible].

Michael Shillaker

Okay. Well, listen, all right, thanks a lot.

Roeland Baan

Thanks, Mike.

Operator

We will take our next question from Seth Rosenfeld from Jefferies. Please go ahead. Your line is open.

Seth Rosenfeld

Good afternoon, Seth Rosenfeld from Jefferies. A couple follow-up questions. First on the outlook for European base prices, given the Q1 debt in the reported base prices, how are you looking at that going into spring as the market leader do you think that there's room to regain some of that drop or push prices higher into H2 if nickel remain stable or are we looking at kind of spot stainless base prices at best for the remainder of this year. And from an ASP perspective hitting your P&L and did your Q1 ASPs already reflect that drop in benchmark prices or should we see incremental pressure in the Q2, trying to understand of your contract structure in the European region.

And then lastly just one specific question on your guidance to be roughly flat underlying EBIT Q-over-Q, are you stripping out the €15 million of inventory and receivables write-down, so I looking at kind of a €5 million Q-on-Q comp or should we looking at that the negative €20 million as a starting point? Thank you.

Roeland Baan

Okay. Starting with the last point, we're stripping out the €15 million. And then in the first point, outlook base prices, we don't give any outlook. So it’s something that I cannot comment on.

Seth Rosenfeld

I guess it’s more specifically than, if you look at something like the inventory levels within the EU where you’ve commented for a couple of quarters now that they’ve been slightly elevated and serving as a bit of pressure on your pricing power in the region. How do you see your distributor or customer inventories moving within Europe today versus maybe what you had guided to as a three months ago.

Roeland Baan

I think the same thing goes, although, it’s slightly over historic leverages. We do not see at this stage any move to destocking, nor do we see a reduction – a significant reduction on demand from the distributor segment. And if you don’t look at the underlying end-user demand that we see are still very healthy. I think that that sums up more or less where we’re coming from.

Seth Rosenfeld

That’s great. Thank you very much.

Operator

And we’ll take our next question from Johannes Grasberger from Nordea Markets. Please go ahead.

Johannes Grasberger

Hi gentlemen, it’s Johannes from Nordea. Can you hear me?

Roeland Baan

Yes.

Johannes Grasberger

Yes, cool, okay. I’ve got a couple questions. Well, I have to check on the second quarter guidance as well. So what sets the stats so are we talking about €5 million, underlying EBIT guidance, then plus any potential write downs that you could have in the second quarter similar to Q1?

Roeland Baan

Go ahead to it.

Reinhard Florey

We are guiding that underlying EBIT will be at about the same level may be in Q1. And I think this – it can be taken literally, because of course that can be always one-time effect. But if you have operated one-time effect, they will not be eliminated from underlying EBIT anymore. This is the new rule that we have seen in IFRS. So that is exactly the reason why we’re putting that in our underlying and over the guidance has been quite clear that it will be similar to underlying.

Johannes Grasberger

Okay. Maybe just to follow-up on that one. Do you expect any write-downs of these trade receivables or hedge inventory values in the second quarter?

Reinhard Florey

No, we are actually not having an indication that that would be necessary. We have been on the situation that we have continued doing risk adverse assessment of this. Of course, if you have major movements in the market, you can never exclude such a topic. But from that point of view we are rather conservative in taking an approach today.

Johannes Grasberger

Just to may ask about this guidance because if I heard right Roeland was saying that the Q2 guidance in stripping out write downs, was this incorrectly heard or not?

Roeland Baan

Well, it’s me being clumsy in expressing. Stripping out means that they’re in there.

Johannes Grasberger

Okay, okay very good. Then a couple of other detail questions. So can you say how much of the cash non-recurring items were paid out in Q1? And what does the cash out plan looks like, including the new savings program for this and next year?

Reinhard Florey

What we have guided for is that the new program of SG&A reduction will result actually in some provision of €40 million that we will take in where we are expecting that €5 million will be cash effective in Q2.

Johannes Grasberger

And were there any non-recurring cash items in the first quarter?

Reinhard Florey

There were non-recurring cash items which means payout from provision in first quarter, yes.

Johannes Grasberger

Can you – can you say how much those were?

Reinhard Florey

They were in a small double-digit magnitude, some €15 million.

Johannes Grasberger

Okay thank you. Then the third question regarding the Tornio steel mill strike, any verbal cost estimate, what the impact would be on the second quarter about?

Reinhard Florey

We have refrained from giving direct impact of that directly, but it is a fact that this was an annoying incident. And such a thing doesn’t go immediately without an impact. However, we are trying in the context of the total EMEA, structure to have remedies against that.

Johannes Grasberger

Okay, okay thanks for that and then three sort of larger questions. First of all on the U.S. market and just thinking here that what is the main reason for a higher output at the U.S. operations? Have you seen new costumers choosing to place orders that covered instead of competitors? Or is there a volume ramp up kind of a result of less important to market and kind of a consequence of more demand being channeled to the domestic mills in the U.S. market?

Roeland Baan

There has been a drop in inputs slightly. So that of course helps the local producers. We also are clearly regaining the trust from the market after the problem of 2014 where we unfortunately did not fulfill our contacts and our deliveries with our customers. And these customers were a little bit – becoming a little bit shy. We have now enough history behind us of significant improvement and very reliable, both quality and delivery performance. And so we do see an increasing penetration into the market.

Johannes Grasberger

And I must say I’m a little bit puzzled about the week for Americas given the big up ticks in the base price and high steel output. And as you mentioned, I guess it’s then correct to assume that the profits are still way down by certain fixed price contracts which are kind of underneath and that are diluting the spot price effects for you. And those will presumably fade out in the coming months given the expectation of increasing prices are or is this the case?

Reinhard Florey

That’s correct. Again, if you look at the portfolio, you have a mix for spot contracts, quarterly contracts, half-yearly contracts, yearly contracts. So the way the price increases effect the average price at which we actually ship out is highly dependent on profile of our customers. So that’s one on the base price. And as I said of course on top of that you had in Q1 a 19% drop in alloy surcharge.

Johannes Grasberger

And then my final question as a follow-up on that one is that correct me if I’m wrong, but I’ve kind of understood that the U.S. steel market is closer to the spot market and the European steel market and at least last year you had around 25% of direct mill delivery contracts. And is the share of those contracts going up or after the kind of the correction in the prices that you are seeing obvious let’s say closer to the spot market gain in the U.S. business than in the European business?

Reinhard Florey

Direct mill is not the same as spot. We have the non-direct mills, not the same as spot. You have non-direct mill, I showed this, we had delivered on contract. So spot is – it could be direct mill, it could be distributed, it can be any segment. However, our share of the bill-of-material and direct mill is improving compared to what it was in the past.

Johannes Grasberger

Okay, thanks. Those were my questionnaires.

Operator

We will take our next question from Sebastian Sanovicz from Deutsche Bank. Please go ahead your line is open.

Sebastian Sanovicz

Yes. Good afternoon gentlemen, I’ve got three questions. My first one is following-up on

Ferrochrome. If the European benchmark price would be stable around the current €0.82 level, would we then still see a negative impact spilling over into the third quarter, quarter given that how your pricing works and maybe also the lack from the alloy surcharge and so. How much of that would possibly impact having in mind the €15 million to €20 million negative you mentioned previously?

And secondly, could you give us a bit of clarity on your CapEx? I understand that your normalized maintenance CapEx will be closer to €170, €180 at least that’s what you mentioned in the last call. Now you also mentioned some extra for your ferrochrome mine, could you please give us any color as to how much this may be and will there be any other, say, CapEx extra in the next two to three years?

And then lastly could you please explain why weaker dollar in the U.S. is negative, I would have thought that as long as you are in a loss making scenario in Americas any weakening in the domestic currency should actually be good for your group accounts. Thank you.

Roeland Baan

So Reinhard, if you take the Q3 thing.

Reinhard Florey

Yes, on the ferrochrome side the €0.82 is referring to a contract price and the contract price is applied for a quarter. This means the spillover effect is minimal. There might be some smaller but in comparison to the total impact clearly a very small impact from that. It is more or less applied for a full quarter. If it stays at the same, then spill over is minimum.

Regarding the CapEx question just to clarify that, we say that our mandatory maintenance CapEx is actually at that level between €70 million and €80 million. And all on top there is relating either to development CapEx for cost improvement or specific projects or specific investment projects, for instance, NIFO project in Nirosta in order to close the Benrath facility. But then on top we have investments into our strategic part which is on the one hand side the ferrochrome side where we are extending the mine in order to keep also for the coming years and decades, the same level of accessibility, and as well as some investments into our energy projects, which are also there to provide a longer term supply security from the energy side. We have anticipated that the CapEx cash out for 2016 will be only slightly north of €140 million in this year.

And going to the U.S. dollar question, the impact of the U.S. dollar is definitely a negative one when we have a weaker U.S. dollar on the ferrochrome, because we are producing in the euro zone. And that means that of course in the competitive comparison that is difference than that comes directly to our profitability. And other than that we of course going to have translation effect that they are more on the balance sheet than in the profitability.

Sebastian Sanovicz

Thank you. Briefly following-up on the CapEx part now considering the strategic components which you mentioned is this what brings us closer to the previously mentioned $170 million or $180 million CapEx for maybe 2017 and 2018 or the years after? So would that be a good number to be working with or will be just reminder on the $140 million, $130 million level which you have been guiding for 2016 as well?

Roeland Baan

I think for the way forward a level of $170 million and $180 million would be too high for us, I’d rather say its between the current number and the $160 million number depending on the individual years that is not coming in a very, very equal stream of course but that would rather be the iterate CapEx range that we are seeing adequate for Outokumpu as we are in a very well invested space.

Sebastian Sanovicz

Okay, perfect. Thank you. Now, just one follow-up on the trade receivable which you have been writing down what has happened to you did your counterparty default or what has gone wrong?

Roeland Baan

No one has defaulted, and we have done a risk assessment and decided to be on the careful side and take this write down.

Sebastian Sanovicz

Okay, but is it essentially, is it the liquidity position of your customer which has triggered this event or what is the reason behind it?

Roeland Baan

We are not commenting on any details regarding our customer.

Sebastian Sanovicz

Okay, fair enough. Thank you.

Operator

[Operator Instructions] We will take our next question from Luc Pez from Exane BNP Paribas. Please go ahead. Your line is opened.

Luc Pez

Hi, gentlemen, most of my question have been answered. But I would have one remaining could you be maybe a bit more specific to impose more delays to Americas business as to which is the exact structure of your contract there which is the share of quarterly lag contracts, quarterly efforts for this year or whatever ballpark at least so that we may better understand how the price filters through your P&L in the coming quarters? Thank you.

Roeland Baan

Luc, it’s a question that I get regularly from our competitors and don’t answer. So I’m afraid I cannot answer it through the structure of our contract business in the U.S.

Luc Pez

If I may add a follow-up therefore I must say like one of my colleague I’m quite surprised you see you ramping so fast volumes especially at a time where the imports are coming off. That can easily explain why prices are not moving up and therefore that would be detrimental to your case into the U.S. What would be the comments you would make to that? Are you so confident that the U.S. rate case is going to move in your direction or…

Roeland Baan

The evidence is very clear we have an increase of $160 a ton in December. We have announced another $80 a ton in February and there was another announcement of $80 in April. So the move is clearly up and you can see that as well in the market, it’s just a matter of when does that start filtered through into your average pricing.

Luc Pez

But what I mean is that even when you look at the crew numbers you can see that only $40 of what has been announced yet to-date has been sticking which led to me think that maybe having a more pricing of volume strategy would help you capture on more prices rather than volumes?

Roeland Baan

Again, for the crew just records transaction prices, and that includes as well what has gone to the contracted business. So just watch the space is the only thing I can say.

Luc Pez

Okay. Thank you.

Operator

We will take our next question from Johannes Grunselius from Handelsbanken. Please go ahead. Your line is open.

Johannes Grunselius

Yes, this is Johannes from Handelsbanken. I hope you can hear me, gentlemen?

Roeland Baan

Yes.

Johannes Grunselius

Yes, good, good. Most of my questions have been answered but I would like to ask you about the Q2 guidance here, because I mean Roeland, you’re very clear that you will have headwind from ferrochrome prices lower ferrochrome prices. You gave a ballpark number how that impacted your fourth quarter. So maybe this impact is like $15 million, $20 million now in Q1.

But on the other hand, you have tailwind I suppose from better prices. I also see that in the report that there was an unusual high negative impact from others in eliminations. And yes, you should also have more positive tailwind from cost cutting. So I’m surprised you’re not guiding us the second quarter, what am I missing here in the moving parts? Thanks.

Roeland Baan

No, you’re not missing a lot, Johannes. There is one element that I mentioned and we haven’t quantified whether it has a significant impact, and that is the rising scrap prices. So the input cost is going up due to as I said reduction in the risings, and upward pressure on pricing and intrinsic nickel. So that has an influence. And the other thing that you did mention in your balance is the allied surcharge, which has a significant impact and that sales streams through into Q2 as well. So for the rest I think you are spot on.

Johannes Grunselius

Okay, that’s helpful. It’s pretty big impact then from scrap prices.

Roeland Baan

Yes.

Johannes Grunselius

I just want to come back to your also explicit guidance for Q2. Sorry this has already been discussed a few times here in the call, but just to be certain. So the underlying EBIT was minus €20 million and if we would adjust for the inventory write-offs and the receivable write-offs this number would have been minus €5 million. Am I correct that you refer – that we should use minus €5 million as a reference for the guidance for underlying EBIT for Q2?

Roeland Baan

Use minus €5 million.

Reinhard Florey

Yes, let me repeat, we have guided on underlying EBIT there is only one number for underlying EBIT in Q1 and this is minus €20 million.

Johannes Grunselius

Okay.

Roeland Baan

We have just explained that within this underlying there are some effects that we have seen, that we have referred in our guidance clearly to the underlying EBIT number.

Johannes Grunselius

Okay, thank you very much.

Operator

So, we will take our next question from [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

Thank you. Just one more question on the U.S. on the pricing there. You mean you don’t say how much is contract but could you say that I mean will eventually all your product be impacted by prices or is it some not impacted at all of this recent price hikes?

Roeland Baan

If you say eventually with look timeline through 2017 you would be right, look there is a part is yearly contract and it will basically continue at the fixed pricing.

Unidentified Analyst

Okay. And could you say something on the amended price but what you currently booking your standard 304L [ph] grades U.S. at which price base price level it is now?

Roeland Baan

No, I can’t help you there, sorry.

Unidentified Analyst

Okay. And on shipment for Calvert, do you have any full year indication for that in volumes terms for 2016?

Reinhard Florey

I can’t give you any full year indication other than saying that the commercial ramp up is continuing. And again I want to stress we are extremely happy on the progress we are making in Calvert both operationally and commercially. So very satisfied with what’s happening there.

Unidentified Analyst

Okay and then looking on the inputs I mean you’ve been discussing but do you have any the level in Europe do you see it stabilizing at this level so to see moving in other direction in the rest of the year going forward.

Reinhard Florey

It depends on the exporters I can really not answer that.

Unidentified Analyst

Okay. Do you….

Reinhard Florey

I think what is important sorry, to make a bit of a less flip in the answer, what is important is that we don’t mind imports as long as they are at a level playing field. We can’t compete with any serious competitor in this market from wherever the product comes.

Unidentified Analyst

Okay, thanks. And you just mentioned the impact from scrap prices in Q1 how much big is impact going into Q2 compared to Q4 or just Q1 or is it the similar effect going into Q2 versus Q1?

Reinhard Florey

Probably from a financial point of view, the impact that we are feeling in Q2 has very much to do with the Q1 price development because you’re purchasing the material of course six weeks to eight weeks before your final delivery. So that is a little bit of spill over effect. If its not that we are indicating a negative development in Q2 to happen regarding scrap pricing this would be a completely irrelevant for us to point to any kind of direction here. But what we are saying is that what we have seen in Q1 happening and what is impacting us will have a negative impact in Q2 which also explains why the progress that we are making in terms of both pricing volumes and our efficiency is not fully visible in what we are guiding for in Q2.

Unidentified Analyst

Okay, and then just one on the write-downs again, I mean historically what’s a typical level of write-downs for a quarter compared to the €15 million this quarter. And if you look back at the historically underlying EBIT have you included write-downs in those or have you done, have it excluded?

Reinhard Florey

Write-downs are topics that are only happening according to the prudence of how we are seeing the commercial situation and the economic situation. They have no pattern. And a normal quarter goes without write-downs and if there are write-downs then they have a certain reason why they are being applied. But this is not something that we are guiding for or this is not something that has also a history that always repeats in that thing. So those are in the same one time effect. However, in this case they are included in underlying EBIT because they are operationally related and according to the new rule that is not an adjustment in the sense of that nonrecurring that you would do.

Unidentified Analyst

Okay, thanks and then just a last one on your balance sheet I mean you’re being working a lot to get your net debt done and its going in the right direction, I’m just looking at some of your [indiscernible] metal rising equity being pressured by creditors. How are you seeing your pressure from creditors developing in the last few quarters.

Reinhard Florey

Well, first of all, I think we have again strengthened our ability to have access to the capital market with being a rated company now clearly having access also to raising bond markets and other financial instruments. We have also a good liquidity at hand to invest and I think from the financial stability this is going to be improvement of the company. We do not compare with companies like ArcelorMittal that has complete other dimension of debt level and we are also not having any kind of equity rise [indiscernible].

Unidentified Analyst

Okay, thanks a lot.

Operator

We will take our next question from Artem Beletski from SEB. Please go ahead. Your line is open.

Artem Beletski

Yes, this is Artem from SCB, real two quick ones from my side. First relating to ferrochrome should be expect normal seasonal pattern in terms of production for Q2 so volumes should be down maybe 20% quarter-on-quarter in Q2.

And the other one is really related to European base prices. So your prices were down some €50 [indiscernible] in first quarter. Does it relate to such a bigger mix what you have seen compared to first quarter or is the market pressure bit more substantial compared to what the CIU [ph] is projecting.

Reinhard Florey

On ferrochrome seasonality we see a stable development Q-over-Q. So I’m not aware of the seasonality you’re referring to. And as far as European base prices are concerned, our dip is more due to mix than anything else.

Artem Beletski

Okay, thank you. That’s all from my side.

Operator

There are currently no questions in the queue.

Johanna Henttonen

Excellent, so many thanks for participating in the call today. Thank you, Roeland, thank you Reinhard. And our next report will be for the second quarter and the date is July 26. So thank you for your participation. Bye.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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