Edited Transcript of SSABa.ST earnings conference call or presentation 21-Jul-20 7:30am GMT

And if we take it to division by division. In Special Steels, we reduced the fixed cost with SEK 200 million. We had short-term work allowances and did the planned cost-cutting measures in a decent way. We also, in all divisions, decided during beginning of Q2 to move all the planned maintenance stops that were scheduled for Q4 this year into Q3 given the lower demand and the lower activity on the market.

If you look at SSAB Europe, I think we did a decent job there as well. We saved more than SEK 300 million compared to Q2 last year. And as said, we had one blast furnace idled for the majority of the — most of Q2, and that blast furnace will continue to be idled at least during July and August and some part probably of September as well. We have short-term layoffs and moved the planned maintenance outages into Q2 as well.

Americas is a bit of a different story because we have a higher share of variable costs, and we typically see that cost go down when activities goes down. But we managed to save more than SEK 100 million in fixed cost as well, which I think was a decent achievement. We moved our planned biannual maintenance in Iowa in Montpelier to Q2. It was originally planned for Q4, but we moved it in the end of Q2, beginning of Q3. And I think that was a good decision as well. The common activities we did was, of course, limited traveling, external services sharply reduced. We have used own personnel to much larger extent than we usually do. We have postponed some projects that were not, I mean, time-critical. Group Executive Committee, including me, reduced salaries, and we did a lot of measures, including hiring freeze. These cost savings will continue into Q3 and will continue until we see a pickup in the market and the underlying demand.

We have talked many times about the importance of having a decent balance sheet, and I think we are getting to that position where we have a decent balance sheet. And I expect, as I usually say, I expect us to continue to generate strong cash flows and over time continue to strengthen the balance sheet. But if we look at it as it is of today, we have liquid assets and committed credit lines at the level of SEK 20 billion, and we feel that, that is sufficient given what we see. So we have enough liquidity preparedness to handle the coming quarters. And when we have rescheduled the maintenance outages into Q3, I think we are also, as a company, well prepared to see or to meet a ramp-up in Q4 if that comes. So I think we are in a, I would say, decent position.

If we move to the next slide. If we look at the impact of COVID-19 on SSAB operation, it has been a very strong focus. Health and safety is always a strong focus for SSAB, but this quarter has been very much to make sure that we try to do whatever we can to keep the disease as much as possible outside our own mills. We have taken several measures. We have worked a lot from home, we have reduced traveling to a minimum, we have carefully been planning now the ongoing maintenance outages to avoid outbreaks at the mills of COVID-19, and we have reduced the number of external suppliers into the mills. We have restricted face-to-face meetings, and we have contingency plans for all critical operations, both out at the mills but also at the offices. And we’re working in shifts and trying to do whatever we can to make sure that we can continue to run operations and run the company. We have also focused a lot on securing supply chains. And so far, we have only had minor disruptions during the first half of the year or up until now due to COVID-19.

Next slide, please. If you look at the operating profit, and I will go through the divisions in a second, but if you look at operating profit, I think Special Steels with SEK 485 million or 12% EBIT margin, I think that is okay given the circumstances, and they should be performing better when the standard business is more hit in a situation like this. Americas, fairly breakeven on EBIT level, which, I mean is a reflection of the market and the prices and the volumes we saw in Q2. So I would say, extraordinary low result.

I think Ruukki Construction is keeping up fairly well. It looks like we reduced the earnings or the profit compared to last year. But if you take away the sales of Building Systems that we did in the beginning of Q2, we were actually able to in Ruukki Construction increase the results somewhat compared to Q2 previous year, which I think is also okay.

SSAB Europe, minus SEK 566 million is where we see the biggest hit, and Hakan will come back to the bridge, but we see an absorption, of course, when we closed 1 of 2 blast furnaces in Oxelosund. But there, we see the biggest hit from the market. And then Tibnor, on the same level as Q2 last year, which I think is also, given the circumstances, okay.

Next slide, please, Seth. So as said, Special Steels, an EBIT margin of 12%, which is a slight improvement compared to Q2 last year, and we have had fixed cost reduction with, as mentioned, SEK 200 million. We have seen a positive — small positive effect on the product mix with a higher share of volumes from Oxelosund, and they are typically the more advanced products with higher margins. So that has helped, of course. And we have, as said, now — we are right now standing still in Oxelosund for the annual maintenance that was originally scheduled for Q4. And typically, we schedule the maintenance outages as much as possible in Q4 because that is a normally and typically a slower quarter than the first 3 quarters. But I think the decision we took to take the maintenance outages already in Q3 this year was a good decision.

Next slide, please. If we look at Europe, we see that shipment decreased with as much as 24%, which is a huge drop in shipments. And that leads, of course, to weaker capacity utilization and absorption costs, and it was only partly offset by cost savings. But I think reducing fixed costs with more than SEK 300 million in the quarter, I think that is a good achievement from the organization. As said, we moved maintenance outages into Q3, and we are now ramping up in the Swedish operations after maintenance stops. And so far, it has followed planned, both time-wise and cost-wise. And as said, the blast furnace in Raahe will be kept idle for most of Q3. If anything, we will then — if not, the market requires open it up the second half of September or something like that.

Next slide, please. In Americas, lower shipments affected the earnings. And as said, we were barely at breakeven on operating profit, minus SEK 10 million for the quarter. And the shipments and prices and margins were affected by much lower demand. But we managed to meet that with — partly with reduced fixed cost and also the flexibility we have with a high portion of variable costs. The maintenance outage that started in Iowa in end of June is now being performed, and we will start to ramp up production end of this week or beginning of next week. And so far, it has gone according to plan and no LTIs during the maintenance stop.

Next slide, please. Tibnor, as said, on the same level as last year, which, I think is okay given the circumstances. We saw a weaker demand impacted by the lower economic activity in the Nordic region. And we compensated lower sales by both the ongoing restructuring program that is going according to plan and where we’ll see the full effect of that program during the second half of this year, but also additional cost measures. And sequentially, Q2 was a stronger operating profit than Q1.

Next slide, please, Slide #12, and Ruukki Construction. Ruukki Construction was the only division or daughter company where we saw a stable underlying demand. And as said in the beginning, we divested the Building Systems in Q2 and got the money for that in Q2. And if we compare both revenue and especially operating profit, there was a slight increase compared to Q2 last year if we [cling] for Building Systems. So I think Ruukki Construction is now what we wanted to be, a big customer and consumer of color-coated materials, an important part of the integrated supply chain of SSAB, and they continue to develop their business, and they are doing it in a decent way.

Hakan?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [4]

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Thank you very much, Martin. Good morning, everyone. And as Per said, I will dig into some more of the details on the financial results.

Starting with an overview then on Page #14. Sales were down in the quarter, of course, impacted by COVID-19, and they were down by as much as 27% versus second quarter last year and 19% versus Q1. And shipments also dropped for the same reasons. And actually, when we look in this graph, you can see shipments were actually the lowest we’ve had since 2017 at least, down 17% versus last year and 20% versus Q1. EBITDA margin, 5%; and the EBITDA per tonne delivered steel of SEK 500 per tonne.

Next slide, on Page 15. When we look at the result development, we started comparing year-over-year. The drop in earnings were, as Martin said, a bit more than SEK 1.5 billion, a very big change in terms of pricing, and this is mainly coming from Americas. Actually, even — majority is coming from Americas. There’s also some coming from SSAB Europe, but it’s impacting earnings by SEK 1.7 billion.

Since volumes were down 17%, we also get the big volume impact on the earnings, almost SEK 900 million related to COVID-19, mainly impacting SSAB Europe. Also in Special Steels, the drop in shipments in absolute tonnes were not as large in Special Steels. On the other hand, for every tonne we lose there, we also lose more earnings.

The drop in price and margin were compensated on the cost side, both on the variable cost with lower raw material costs, but also then on the fixed cost, and fixed cost being as much as SEK 800 million lower in Q2 this year compared to last year. Somewhat negative on FX, close to SEK 200 million, and weaker Swedish krona than dollar. And then on absorption, given the lower volumes, then we had low production rate in — especially, SSAB Europe. On the other hand, we had very strong and high level of production in Special Steels compensating somewhat. The positive item on Other relates to a large extent to lower amortization of surplus values. But all in all, a drop of SEK 1.5 billion coming from the price level, the volume and absorption somewhat mitigated then by our lower cost level, both on the variable and on fixed rate.

If we then instead compare sequentially, it’s not as big figures. We’re moving from SEK 343 million to positive to minus SEK 251 million. Pricing here is actually impacting somewhat positively. It’s Europe and Special Steels positively and slightly negative for Americas. And then the big drop in earnings is in terms of volume, which has an impact of SEK 800 million, mainly in Europe, but also Americas and Special Steels. Variable costs, slightly positive, relates mainly for scrap and coking coal. And then fixed costs being close to SEK 400 million, it’s lower in Q2 than in Q1. And one of the reasons why there’s a big change was SEK 800 million when we compare Q2 to Q2 and now SEK 400 million when we compare Q2 to Q1. Normally, during the second quarter in the Nordic operations, we kick in a lot of summer workers, and we start training them already in the second quarter of the year. This year, given that we have moved the maintenance outage, we have also changed the vacation plans, and we have made an agreement with the unions how to mitigate. We are actually able to run production with much lower level or almost no level of summer workers and thereby able to save more. FX, almost no change. And then on absorption, close to SEK 500 million coming mainly from SSAB Europe, including them, having one of the blast furnace idled in Raahe.

So in summary then, it’s volume and unabsorption impacting negatively from Q1 to Q2, but compensated by the cost level and especially then the fixed costs.

Okay. If we go to Page 17, then we have the overview of the cash flow. We had an improvement in operating cash flow from Q1, more than SEK 1 billion better, and lower earnings then, of course, as we just looked at. But instead of building working capital as we did in Q1, we now have a release of working capital of more than SEK 200 million. Also, if we compare with Q2 last year, we had a buildup of working capital, but in this quarter then, a release of working capital. So not a great cash flow, but a positive operating cash flow and then also, on the last line as well, a slightly positive net cash flow.

If we then move to the balance sheet. And we look at our debt situation, we had a net debt now of SEK 12.8 billion. We have a net gearing, it’s been fairly stable for a while, around 20%, this quarter, 21%. Duration of the loan portfolio is rather long. It’s more than 5 years. It’s lower compared to last year. One reason is [one you has had], but also we have more commercial paper at the moment, both being more than 5 years. And we are at a comfortable level with our liquid asset and committed credit lines, over around SEK 20 billion at the end of the quarter, which is almost 30% of rolling 12-month rates.

If we look at the maturities then, we have maturities remaining for this year of around SEK 2.5 billion. Most and almost all of that refers to commercial papers. And if we look at the coming 3 years or 2.5 years, the rest of this year, 2021 and 2022, we have in total SEK 8.5 billion maturing. And to put that in comparison with the cash and the backup facilities of SEK 20 billion, we’re very comfortable with the liquidity situation we have in relation to upcoming maturities. And we did take a look at actions during March before COVID-19 fully started to have an impact to make sure that we are able to sit in this complex situation right now.

If you go then to Page 19 where we have the cash needs of the business on top of the maturities then, where we have cash needs of around SEK 3 billion for this year, and cash needs then consisting of CapEx and net interest and taxes. We have postponed some of the CapEx program. We talked about that last time as well, and the capacity expansion in Mobile of [conversion] coming from material and also the start of the Oxelosund conversion to electric arc furnace. We have not postponed the end date, but we have postponed the start. Interest rates will be fairly stable year-over-year, and we will have lower taxes in 2020. We had quite high taxes in ’19, paid tax, but it will be lower in 2020, also because of lower earnings. So around SEK 3 billion in cash needs.

If we then move on to raw material on Page #20. Our purchase prices for iron ore and coking coal, they were stable during the quarter. For iron ore, it was basically unchanged, both in Swedish kroner and dollars. However, we did see iron ore spot prices, that started to increase in May, and they are currently at a high level. And that will have an impact already in Q3, mainly for SSAB Europe, where we have — for the Lulea production, where we have a low level of inventory of iron ore, and we basically buy it on a daily basis from LKAB. So there, we will see an impact on the cost side as well. Coking coal, the average coking coal prices were basically also stable, unchanged compared to Q1. Here, spot prices have actually held for a long time being on a slightly downward trend, and they have continued like that also into Q2.

On Page 21, then we have the scrap spot prices, which is scrap than what we buy for our operations in the U.S. Our own purchase prices for scrap were basically unchanged as well in Q2 compared to Q1. And the scrap spot prices are at a fairly low level in the U.S., and we have seen for the July buy that they have started — they have continued actually to [decrease].

Okay. On Page 22 then, and finally, from my side, a few words on our planned maintenance outages in 2020. We have changed the timing. Most of them were planned to be performed in Q4, and we have moved almost all of them to Q3. The reason is then as we expect that demand doesn’t — consequence of COVID-19 will continue to stay rather weak in Q3. We’d rather do the maintenance outage now, and we [review] then if there is an improvement in demand in Q4. All in all, the cost for the maintenance outage will be around SEK 900 million this year versus SEK 1.1 billion in 2019. And we will, of course, in Q3 see the impact, both on the cost, the unabsorption, but also on impact on shipments in all 3 steel divisions during the [quarter].

Okay. Back to you then, Martin, for the outlook.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [5]

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Thank you, Hakan.

If you move to the next slide, Slide 24. So what we tried to do during the second quarter was to focus on things that we could influence ourselves with cost savings and running operations in a decent way as possible without losing focus on long-term development and without slowing up the development long-term of SSAB. And the Q3 will be a very important quarter for SSAB because we will start production of fossil-free steel in our plant up in Lulea, in the hybrid plant in Lulea during the third quarter according to plan and according to schedule. And we will continue to develop the road map and execute the road map to be the first steel company globally with a fossil-free steelmaking at the latest 2026. So this pilot plant will now be inaugurated and start to produce fossil-free steel. We will also continue to focus on developing the Special Steels business. But for Q3, this is for SSAB a very big event, and we will now be ready to start to do prototypes and work together with customers to develop their applications with fossil-free steel. And we are in that process discussing with customers how to help them to get the best possibilities out of this fossil-free steel going forward.

If we move then to Slide 25. We don’t see many segments or any segment with strong demand. We see fairly weak demand in most of the segments. But in — if you take Heavy Transport and Automotive underlying better than Q2, mean the automotive industry in a big part of the heavy transport industry were more or less standing still in Q2, and they are opening up now and start to produce. So Heavy Transport, some recovery. Automotive, production gradually started. And we continue to see an underlying structural growth in advanced high-strength steel. Construction and Machinery, another important segment, we see a relatively low production level, so we expect relatively low production levels in Q3, both in U.S. and EU. Material Handling, low demand for new equipment, yes, will continue, but then on a healthy level. And mining operations continue at a fairly — we expect it to continue at a fairly stable level in Q3. Energy, oil price continues to be under pressure. Wind power and transmission segments, more stable. Construction held up fairly well with a healthy demand and stable development and support from some seasonality, typically better in Q2 and Q3 than Q4 and Q1. We see some risk here of some kind of slowdown. And then Service Centers, always a swing factor, generally, a fairly cautious sentiment. But when we look at inventory levels, and especially in U.S., we see that the inventory levels are on a very low level.

So all in all, uncertainty into Q3. But if anything, we expect demand to pick up from very low levels at least towards the end of third quarter.

Next slide, please. So if you then take that into SSAB, we expect shipments in Americas to be roughly at the same level as Q2. Shipments in Europe and Special Steels are expected to decrease because of the maintenance outages and so on. And if we look at the prices for Q3 compared to Q2, we expect somewhat lower prices in SSAB Europe, with lower contract prices partly mitigated by a positive product mix. In Special Steels, prices somewhat lower. And in SSAB Americas, relatively stable prices.

So if we move to the last slide, before Slide #27, before we start to take questions and comments. I think — as said in the beginning, a fairly different quarter, the second quarter, with a lot of internal focus and a lot of focus on things that we can influence ourselves without short-term survival, without losing focus on long-term development. I think we did a lot of actions to reduce costs in — during Q2, and that will continue into Q3. The outlook is, as always, uncertain, but this time, maybe a little bit more uncertain than previous. But we see some signs that in on could start to improve late in Q3. We continue to try to take care of our balance sheet. And we have, if not a strong balance sheet, but a decent balance sheet. And over time, it will get stronger. We have liquid assets and committed credit lines of SEK 20 billion, which, as Hakan pointed out, will more than cover all the cash needs we have for this year and also for coming years. And we continue to focus on 2 things long term: to develop the Special Steels business and then the transitioning to fossil-free steelmaking, with the ambition to be first steel company with fossil-free steel to the market, and also to start during this fall, so together with customers, develop fossil-free steel applications and start to do prototypes and work with customers.

So with that, Per, I think we are finished with the presentation.

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Questions and Answers

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Per Hillström, SSAB AB (publ) – Head of IR [1]

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Yes. We’re ready then to move into the Q&A. (Operator Instructions) So — but operator, please present the instructions for the Q&A session.

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Operator [2]

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(Operator Instructions) Our first question comes from the line of Gustaf Schwerin of Handelsbanken.

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Gustaf Schwerin, Handelsbanken Capital Markets AB, Research Division – Research Analyst [3]

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Yes. Gustaf Schwerin, Handelsbanken. Three questions from my side. I’ll take one by one. Firstly, on your deliveries in Americas, only down 3% year-on-year in Q2. Is there anything specific distorting the picture here? Have Service Centers needed to restock a bit? Because I’m positively surprised by that number.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [4]

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Gustaf, your line is quite bad. Could you repeat the question? To have to speak more closer to the microphone or something.

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Gustaf Schwerin, Handelsbanken Capital Markets AB, Research Division – Research Analyst [5]

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Sure. Is it better now?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [6]

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Yes.

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Gustaf Schwerin, Handelsbanken Capital Markets AB, Research Division – Research Analyst [7]

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Okay. Great. Yes. So firstly, on your deliveries in Americas for the quarter, only down 3% year-on-year. I’m wondering if there’s anything specific distorting the picture here. Have the Service Centers needed to restock a bit? Because I’m positively surprised by that number.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [8]

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No. What we have done during the second quarter, we have not seen much of restocking in Service Centers. And as said during the presentation, the inventory levels of Service Centers are at historically low numbers. So we have actually been taking market share during the second quarter. That’s the explanation.

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Gustaf Schwerin, Handelsbanken Capital Markets AB, Research Division – Research Analyst [9]

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Great. Then secondly, on the visibility now in your order books for the second half of the year, I mean I understand it’s quite cloudy. But any comments on that then? Are you chasing spot volumes now to fill your mills?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [10]

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I mean, as said, I mean the picture is a bit blurry and not — so the visibility is not so good. But we are taking some volumes. I mean during Q2, there were no volumes available. Is that spot volumes or not? Well, maybe some smaller batches of spot-related volumes, yes. But what we expect is what we presented. I mean we — about the volumes. And as always, July and August in Europe will be — July in the Nordic region will be very slow, and August in Europe will be very slow. But we have an order intake that makes us believe that we can have deliveries in line with what we gave as an outlook for Q2.

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Gustaf Schwerin, Handelsbanken Capital Markets AB, Research Division – Research Analyst [11]

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Great. And then lastly, can you comment a little bit on how you have seen the import situation developed during the quarter? Perhaps — well, specifically in Europe, yes.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [12]

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Right now I would say that price levels in Europe are so low, so we don’t see right now much of import. It’s a very limited import now end of Q2, beginning of Q3.

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Operator [13]

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And our next question comes from the line of Alan Spence at Jefferies.

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Alan Henri Spence, Jefferies LLC, Research Division – Equity Analyst [14]

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I have 2 questions. The first is on M&A and consolidation, not necessarily in large potential corporate transactions, but actually more of potential bolt-ons or similar. Given the current market, are you seeing good opportunities out there to perhaps improve your share in either particular products or geographies?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [15]

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Yes. And as we have said before, we are looking at this small and midsize acquisition, like Sanistal, like Abraservice, and we are looking into some possibilities. And if anything, you could say that it might be — or even more interest than the market is — or call it, slightly more attractive when the market is a bit slower than normal. So we haven’t changed our mind. We focus to continue to develop the company long term and try to get the balance sheet where we can do this small and midsize acquisition, and we will continue to do that.

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Alan Henri Spence, Jefferies LLC, Research Division – Equity Analyst [16]

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And the second one, on cash flow for Q3. You’ve clearly flagged the headwinds from maintenance and seasonality. Was there substantial — are there decent inventory levels going into the quarter that will support throughout a decent working capital release? How perhaps negative do you expect cash flow to be for Q3?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [17]

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It was a bit hard to hear your question, but I’ll try to answer it. We have been building some inventories during Q2, given that we will have the maintenance outage now in Q3, especially in Special Steels. So from that point of view, we definitely do expect that we will release some working capital in terms of inventory during the third quarter.

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Alan Henri Spence, Jefferies LLC, Research Division – Equity Analyst [18]

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And how long or how large perhaps with that working capital release will be? Just given maybe everything else that’s happening, do you think you’ll be free cash flow negative? Or/and to what extent?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [19]

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We typically don’t guide for an exact number, but of course, we will have maintenance outages in all steel divisions, which will impact the earnings. And then somewhat, we will offset that by having some release of working cap.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [20]

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But without going into a specific quarter, you should expect us to continue to generate free cash flow and continue to strengthen the balance sheet over time. That’s for sure. And we have plans for that, and we are working with things to make that happen.

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Operator [21]

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And our next question comes from the line of Seth Rosenfeld at Exane BNP Paribas.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [22]

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If I can start out first with the outlook for fixed cost savings and then come back to the U.S. plate market. With regards to fixed costs, the SEK 800 million highlighted savings in Q2 seemed to come significantly above the earlier guidance for SEK 1 billion annualized basis. Can you just walk us through the moving parts for what drove that beat? In particular, if you can quantify approximately how much was tied basically to furlough schemes. And then — sorry, last part of this is, looking forward, if you can give us some update on the continuity of furlough schemes, when you expect that policy support to expire.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [23]

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No. About SEK 800 million is compared to second quarter last year. If you take it sequentially, it was SEK 375 million or close to SEK 400 million. And when you plan for a cost program, you have a lot of activities. And then you typically take a haircut and say, well, we will not be successful in all aspects, and maybe we’ll reach 75% or something like that. I must say that the response from the organization has been, first of all, very quick, and people have really put their best efforts into this. And we have had a very strong focus on 2 things: safety and then cost savings. And I think the outcome is maybe slightly better than I expected or hoped for. So yes, we have done — it has gone slightly better than — or the outcome has been slightly better than we expected.

And then what will happen in Q3, I think depending on the market, I mean we have set up — one important part of acquiring Ruukki was to get flexibility into the system. I mean SSAB stand-alone or the old Ruukki stand-alone would not have been able to mitigate this turbulence in such a way that we could do as a combined company. I mean it would have been impossible to close the blast furnace in Raahe or close the blast furnace in Lulea for the old SSAB. So we have built flexibility into a very rigid system, and we will continue to do cost measures and cost activities as long as the market makes it necessary to do. And then, of course, part of it is things that we do when the market is very tough, and then parts of it is the things that we will — I mean structural cost savings, so to say, with the reduced manning and fewer white collars and so on. And that will be also visible over time. But parts of it is, if not one-offs, so things you do when the market is very tough.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [24]

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With regards to furlough, is it possible to strip out or just to highlight what proportion of those savings came specifically from the government furlough schemes? And at what date do you expect those tailwinds to potentially subside?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [25]

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It was actually not a huge portion. It was not the majority at all. It was more related to that we were doing other things such as hiring freeze, not taking summer vacations, reducing the external consultant or maintenance work, doing maintenance work ourselves, et cetera. So furlough schemes was mainly in Sweden and Finland. We were doing it elsewhere as well. But in terms of — money-wise, it was mainly coming from Sweden and Finland and being around SEK 100 million of those SEK 800 million. And look, going forward, at least in Sweden and Finland, we would expect those to be in place also for Q3. And then after Q3, then we’re back to the visibility into Q4 if we would need it or not. But for Q3, we are expecting to continue.

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Operator [26]

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And our next question comes from the line of Tom Zhang of Credit Suisse.

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Tom Zhang, Crédit Suisse AG, Research Division – Research Analyst [27]

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Yes. Gents, can you hear me?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [28]

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Yes.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [29]

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Yes.

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Tom Zhang, Crédit Suisse AG, Research Division – Research Analyst [30]

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I just had 2 quick questions. The first one, a follow-up on the Americas, please. So you mentioned you were gaining share in the market. How confident are you that you can maintain that share? Because I noticed pricing has already come down quite a lot in Americas, but you’re now guiding to both flat pricing and flat volumes. Is there a risk that competitors might be catching up on any price declines?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [31]

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I mean market share typically differs quarter-by-quarter and over time. But we have, in our Americas operations compared to most of the competitors or all of the competitors, a decent cost position and a very good quality position. And typically, we lose less when the market is tough. So in Q2, we were taking market share. How that will look? It depends — I mean in Q3, it depends on the total market, but we expect fairly stable volumes in Q3 compared to Q2. That is what we are guiding for. And what that will end up in market share-wise, it’s too early to tell. But in Q2, we took market share. That’s why we kept up volumes compared to many others.

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Tom Zhang, Crédit Suisse AG, Research Division – Research Analyst [32]

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Okay. Understood. And just a second question, please, on Tibnor. So you flagged that you’re going to be reaching the full benefits of restructuring from H2. Could you give a sense of what level we are now, and as a result, what we can expect incrementally from Q3?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [33]

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We haven’t been explicit of that. But the — we — I thought that the profitability over time in Tibnor was too low, and we needed to increase that over time and change ways of working, reduce the manning structurally and do things smarter. But apart from that as well, in combination with taking market share in the Nordic region, because we should, as — I mean Tibnor is mill-connected, and they should be able to be the best supplier over time. And in — what we have seen now in the first half of the year and especially during Q2 is the execution of those actions in the structural cost reduction plan, and that has been following plan, and we will see the full benefits of that during the second half, but we have also seen that we are taking market share. So we are following the plan that we have put up. And then, of course, the absolute result will be dependent on the market sentiment. But I’ve seen, so far, we are following the plans, and I’m satisfied with the growth they are doing, and we will see effects of that, not only in this quarter, but in the coming quarters as well. A couple of percentage points.

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Operator [34]

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And our next question comes from the line of Christian Kopfer of Nordea.

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Christian Kopfer, Nordea Markets, Research Division – Senior Analyst of Metals, Mining & Oil and Sector Coordinator [35]

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Yes. Just a few questions from my side. Firstly, just a clarification on Americas where you guided for pretty much stable prices into Q3 while we have seen spot prices deteriorating during the second quarter, which should, I guess, in normal circumstances, also affect the next quarter, which is Q3. So could you just give a little bit reason behind seeing stable prices while spot prices are down?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [36]

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Well, spot prices on average are down, but on the other hand, they started to increase somewhat during the latter part of the second quarter. And based on that, then we are guiding for stable prices. And of course, if spot prices would — and if you look last week, spot prices continued to increase somewhat in the U.S. If they would, from now on, will start to decrease, then, of course, it might be different. But as far as we — what we see right now, we expect rather stable price.

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Christian Kopfer, Nordea Markets, Research Division – Senior Analyst of Metals, Mining & Oil and Sector Coordinator [37]

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What’s the typical price lag now in the U.S. would you say?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [38]

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It’s around — it depends on how long our order book is. So typically, in a strong market situation where we have longer order book, then it takes longer time. And in a more weaker situation, it goes quicker. So maybe on average, you can say half a quarter or so.

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Christian Kopfer, Nordea Markets, Research Division – Senior Analyst of Metals, Mining & Oil and Sector Coordinator [39]

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Yes. And in Europe, we have started to see prices coming up, of course, from a very low level. But have you seen any reasons behind that? Is it demand-driven? Or is it more supply response in the market?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [40]

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I would say it’s more supply response in the market and also increasing raw material. There’s basically a need for an increased plate and strip prices in Europe because the margins for the steel producers are very resilient.

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Christian Kopfer, Nordea Markets, Research Division – Senior Analyst of Metals, Mining & Oil and Sector Coordinator [41]

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Yes. And then finally for me, on the cost savings. I think, Martin, you mentioned that you will see some of the cost savings being visible over time. Can you mention something on the magnitude on how much cost savings you expect to realize over time?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [42]

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No, not really. That will be so dependent on the market. But of course, there is a structural part in this as well. I mean Tibnor is a good example, doing some other structural things, but that is typically what we do in this industry. We are getting better and better and fewer and fewer.

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Operator [43]

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Our next question comes from the line of Viktor Trollsten of DNB.

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Viktor Trollsten, DNB Markets, Research Division – Analyst [44]

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Yes. Martin and Hakan, this is Viktor at DNB. So I’m a bit curious and interested in — if you could talk a bit about capacity utilization in the quarter. I note a very positive trend in the rolling production in Special Steels. And the way I look at it, capacity utilization should be up closer to 90% now on a 12-month rolling basis. Could you comment a bit on how we should look on, yes, cost absorption and maybe the impact on the mix also going forward?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [45]

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As Hakan said, we were building inventories before the maintenance stop in Oxelosund or in all divisions, but especially in Special Steels. So we were producing more than we were selling and building inventories. And then we — during the maintenance outage, we will consume those inventories, both work in progress and finished goods. And so far, now we are standing still and doing the maintenance stop, and we’ll continue to do that during July and beginning of August and consume from the stocks we have built up. So so far, we are following that plan. And then as said, I mean July, August, the capacity utilization will be much lower due to the annual maintenance stops.

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Viktor Trollsten, DNB Markets, Research Division – Analyst [46]

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Okay. But I remember or I recall that you have had some historical issues in the rolling production. Is this a sign that things are, let’s say, normalizing and that — yes, could you comment if this is the new normal level, so to speak?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [47]

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I would be extremely happy if I could promise that. But no, the production has been stable this year. And I think we are — the organization in Oxelosund has so far at least ran the production at a much more stable level. And that is visible in — if you measure whatever you measure. I mean equation hours in the rolling mill or — another good KPI is LTIs. We are at 0.9 LTIs per million working hour, which is, I would say, best in the west, more or less. And so they are running operations in a very good way. And hopefully, we learned a lot. And we did learn a lot during the difficult times where we had the production issues. But can I promise that we will never ever see a production disruption in Oxelosund? Again, no, of course, not. But so far, so good, I would say. And they are at a better level. We have — and we have worked with it. We have changed operation practices, we have changed maintenance practices, we have done a lot of changes, we have done a lot of personnel changes. I mean the new head in Oxelosund, she’s doing a fantastic job. So it’s not pure luck, I would say. We have done a lot of things ourselves. But we’ll be — we will never ever see production disruption again? Well, I would be extremely happy if I could say it, but I can’t promise that. But currently running production at a different level, and we have learned a lot and taking measures from those learnings. That’s what I could say.

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Viktor Trollsten, DNB Markets, Research Division – Analyst [48]

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Okay. And also, a question related to fossil-free steel. I mean we have received some news on some of your competitors also going the hydrogen well for producing fossil-free steel. But I note that in terms of costs, they have guided for much higher costs related to what you have communicated previously. Could you comment something about your cost for producing fossil-free steel, if that still stands? And what’s your relative comparative advantage versus competitors?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [49]

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First of all, I think we haven’t changed our view on the cost of producing fossil-free steel. And I think it is extremely important and more and more asked for by the market, and that’s maybe why some of our competitors have recently changed their view. I can only comment on what we are doing. And I said, we are taking a very important step now in Q3 with starting up the pilot plant. So we will actually be producing fossil-free sponge iron. And we have already today electric arc furnaces in America. So we can start to do trials together with customers and help them with prototypes. And we are in that process now, discussing with very interested customers and trying to figure out where we should best use these batches of fossil-free sponge iron and fossil-free steelmaking that we can do already today. Then, of course, the huge and most important step will be taken in advance of 1st of January 2026 when the whole site of Oxelosund will be fossil-free. And we will also be able to produce fossil-free slabs for Automotive, as an example, to be rolled in Borlange. So we are on that journey, and we haven’t changed our mind. And I think if you compare us at least up until now compared to a lot of competitors, we started earlier. And we are, as I know, the only company that are starting now with actual production. So I think we have, call it, a time advantage. And we are trying to make sure that we increase that time advantage and not lose it.

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Viktor Trollsten, DNB Markets, Research Division – Analyst [50]

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So I guess the conclusion is that you will get more of a cost advantage if the industry goes more towards fossil-free steel. Is that correct?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [51]

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Yes. This will be a premium product, at least, to start with. I think the industry needs to go this way. But in the beginning, this will be definitely a premium product with a premium pricing. That’s my personal view.

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Viktor Trollsten, DNB Markets, Research Division – Analyst [52]

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Fantastic. And just lastly, in terms of what you’re seeing for end Q3 in terms of underlying demand, could you just give some flavor of what you’re seeing in your order books and what segments that sticks out right now?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [53]

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But — I mean we are not going to experience heydays at the end of Q3. But what we see, I mean if you take Automotive as one example, they were standing still in Q2. Now they are opening up, producing at lower levels, but still opening up. If you take Heavy Transport, a lot of them were standing still in Q2. Now they are opening up and start to produce. So I mean that’s what we see. So if you take Automotive, from 0 order intake to something is at least some difference.

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Operator [54]

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Our next question comes from the line of Bastian Synagowitz of Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division – Research Analyst [55]

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I’ve got 3 quick questions as a follow-up. I’ll start with one on the SEK 800 million cost savings which you mentioned. So you will obviously be able to keep those and retain those savings in the third quarter. Now in a scenario where demand also remains weak even beyond the third quarter, would any of those savings come back? Or for how long could you basically fully retain those savings? And is there maybe anything in there also which has a bit of a permanent nature even if demand is coming back?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [56]

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But given the demand we saw in Q2, we were able to run operations with those cost-saving actions. And so we will adjust to demand and to the need we see in the market. And I mean, of course, there are some things that we can’t keep on doing or not doing forever. But I would say that a large portion of them would say, if the market stays on the same level, if the market improves, some of the cost savings will go away or, say, some of the actions will be taken away. I mean if you take, as Hakan mentioned, we have a very limited number of summer temps this summer. We are doing a lot of more things with own personnel where we typically use sub-suppliers or contractors, not only in North America, but also in the European mills. So we are trying to push or utilize every lever we can see, and we will continue to do that as long as the market sentiment requires. And then there is some structural components in Tibnor or in other parts of the organization that we will benefit from over time, even with full production or a more normalized market. But we are prepared to continue to do whatever we can to try to mitigate the weak market with internal actions that we can fully control ourselves. I mean the external market pricing and raw material costs and the underlying demand as on, that we can maybe reflect over, but we can’t influence. What we can influence is cash flow generation and the cost side of the business.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [57]

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And then, Bastian, just to remind. For Q3, yes, we will continue with the savings action for sure, but we do have the maintenance outages in Q3, and those will, of course, that will be quite extensive cost for those as we have specified.

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Bastian Synagowitz, Deutsche Bank AG, Research Division – Research Analyst [58]

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Yes. Sure. No. Absolutely. That is actually my next question. Now usually, when we look at the third quarter, you’re usually able to compensate a significant amount of these maintenance costs with these overtime accounts which you usually charge against the cost as a benefit. Now could you please let us know, will you get the same magnitude of compensation this year given that hours across the European business probably have been slightly less this year?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [59]

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We will have roughly the same — that — the solvent of vacation reserve, we will have the same roughly in Q3 this year. But then normally, we don’t have this much maintenance costs in Q3, but that effect will be roughly the same.

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Bastian Synagowitz, Deutsche Bank AG, Research Division – Research Analyst [60]

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Okay. Okay. Good. And then very lastly, on volumes in Special Steels is what I understood, you overproduced volumes in the second quarter just for the third quarter maintenance break. And I think if I look at the numbers, production ran almost flat out while shipments were down obviously a bit more than 20%. Is there any color you could give us in terms of the magnitude of the volume decrease we should expect in the third quarter on the production side? From the numbers, it suggests that volumes may potentially halve in terms of steel production. Or is that too aggressive as an assumption?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [61]

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What we did in — from a production point of view, we produced as much as we could in Special Steels. And then we said the better we produce in Q3, then we will — sorry, in Q2, then we will take a longer maintenance or we will stop the mill for a longer time period because we deem that it’s expected to run as full as we can. So we will now have a few weeks longer — the original, the maintenance outage was planned to be roughly 4 weeks. We will now have it a few more weeks where we will not run production at all. And then instead, once we start up again, then we will continue to run at full speed. So you will see the opposite effect in Q3 compared to Q2. In Q2, you saw production not going down, but shipments going down quite a lot. And then in Q3, you will see that production will go down more than shipments.

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Bastian Synagowitz, Deutsche Bank AG, Research Division – Research Analyst [62]

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Okay. And in terms of the length of the outage, is there any color you could give us versus what you were originally planning for? Is it like 8 weeks or so, or…

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [63]

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We were already in planning for 4 weeks, and it will be a few weeks longer. So 7, 8 weeks, something like that.

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Operator [64]

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And our next question comes from the line of Ola Soedermark of Kepler Cheuvreux.

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Ola Soedermark, Kepler Cheuvreux, Research Division – Equity Research Analyst [65]

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Yes. Most of my questions have been answered, but I have a follow-up on the M&A question earlier in the call where you said that you are looking at small and midsize acquisitions, as you always do. But your name have been mentioned in certain news media during the quarter regarding maybe a little bigger consolidation of the European steel industry. Have you any comments on it?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [66]

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No. We — I mean I read those articles as well, and we never comment on rumors. The only comment I can make is that I’m happy that at least some — I feel we’re in a position that some companies could see us as an attractive partner, and I think that is the positive thing. But then, I mean there are always a lot of speculations and rumors, and we never comment on them. If and when we have something to say, we will do that, but these are rumors.

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Ola Soedermark, Kepler Cheuvreux, Research Division – Equity Research Analyst [67]

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A follow-up again and maybe another angle on the question. Do you see if you’ll participate in a bigger European consolidation that you are diluting the impact of HYBRIT in the longer term?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [68]

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What? If — sorry?

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Ola Soedermark, Kepler Cheuvreux, Research Division – Equity Research Analyst [69]

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If you are diluting the impact of HYBRIT in the longer term, that you are diluting your capability to be fossil-free if you’re participating in a larger European consolidation.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [70]

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I haven’t thought about that. I mean, as I said, we have the ambition to be the first fossil-free steel producer in operation, and then we have a plan for the other mills. And that time plan is fairly long, but this is well received by the market. And that time plan originally was made up to when we are at the end of the economic life length at certain equipment. But if this will be — would be very well received on the market, we can speed up that time plan. But the first important step is now Q3 with the pilot planned 1st of January 2026 in Oxelosund. And if the market really like these products, we can take the next mills quicker than the original time plan. So as always, we are trying to focus on our operations and what we can do ourselves. And that — then you can always reflect on what the other companies are doing, but that doesn’t help us. The only thing I see right now is that more and more companies are talking about hydrogen and fossil-free steelmaking and that — I’m convinced that we are moving in the right way for SSAB. But if anything, that makes me even more sure that this is the right way to go. And I’m happy for SSAB’s sake that we are first in line, and we started already 3, 4 years ago, and we are now executing those plans. And we can also afford to do it, and we continue to invest. And we are following the time plan, we are following the investment budget. So we haven’t scaled down anything when it comes to hybrid or our ambitions when it comes to fossil-free steelmaking, and if anything, I would say, quarter-by-quarter and day-by-day, the interest from the customers and the market increases.

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Operator [71]

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And our next question comes from the line of Luke Nelson at JPMorgan.

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Luke Nelson, JPMorgan Chase & Co, Research Division – Research Analyst [72]

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Just 2 questions. First one is circling back on the fixed cost reduction which you mentioned before. So if I just think on Q3 relative to Q2, should we actually be expecting sort of a similar quantum of fixed cost reduction? Just in the context of your comments around the vacation reserve release, which I think last year was around SEK 350 million quarter-on-quarter. So is there additional capacity for fixed cost reduction quarter-on-quarter? And that’s my first question.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [73]

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I mean, as Hakan said, we will have all the maintenance stops in Q3, and that will cost — and we have guided for what it will cost, but it will cost a lot of money. Last year, if you compare Q3 to Q3, last year, we had the majority of the maintenance outages in Q4. So that will be a huge difference if you compare Q3 to Q3.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [74]

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And also, if you compare with Q2, you asked, can it be more than Q2? It will be roughly that number. You said around SEK 300 million extra. But on the other hand, we will have the maintenance outage which will cost more than that. So in that sense, yes.

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Luke Nelson, JPMorgan Chase & Co, Research Division – Research Analyst [75]

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Okay. That’s clear. And then just on that topic of maintenance in Q3, there are still clearly sort of restrictions on personnel. To what extent is that a risk around conducting maintenance in Q3? Do you have the ability to get the right personnel in and to do these planned stoppages on time and on budget in Q3?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [76]

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Yes. And if we have learned anything over the years, it is that production stability is extremely important. And you saw what production stability gives us during the first half of this year in Oxelosund, as an example. So we will not — I mean in order to save costs, we will not jeopardize production stability. We will get the manning we need, we will get the contractors we need, and we will do all the work we deem necessary to keep a stable production over time. So we will not try to do any stupid savings.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [77]

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What we are doing is — in terms of from a COVID-19 perspective, we are taking a lot of actions that we obviously did not take in previous year, that maintenance workers are from different companies. There are different locker rooms, and they are not living at the same place, et cetera. So we have…

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [78]

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Not taking the same exactly locker rooms, sleeping together.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [79]

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We are taking a lot of actions to do everything we can to make sure that we don’t get any outbreaks at the site.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [80]

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And so far, so good. And we are doing that together, both in U.S. and Finland, as we — and together with the authorities to do whatever we can to mitigate a big outbreak.

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Operator [81]

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And our next question comes from the line of [Lucas] of [Samlyn’s Media].

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Unidentified Analyst, [82]

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I have a question about the chance for fossil-free steel production in Oxelosund. Do you have any notice about when the process to convert to fossil-free production will start? And will the delay result in any increased costs for the change?

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [83]

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No. But we are — I mean our plan is to start production 1st of January 2026, and we haven’t changed that plan. That is what we are still aiming for, and I think it’s possible to do. So when Hakan said we were delaying some things, so I mean when you do big projects, you always do a lot of things in advance. And we still have in our grand scheme or in our time plan room for different things to happen. But we haven’t changed the ambition to be up and running 1st of January 2026, and we think that is definitely possible.

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Operator [84]

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And the last question in the queue so far comes from the line of Anssi Kiviniemi of SEB.

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Anssi Kiviniemi, SEB, Research Division – Analyst [85]

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One question left, and it’s related to Q3 outlook for SSAB Europe. You highlight that the prices are expected to be somewhat lower, but mix to be positive. So 2 questions related to this. Where does the positive mix effect comes from? Is it coated products or something else? And the second question is that, do you see a possibility that the net effect of these could be, as a matter of fact, flat quarter-on-quarter? So could you help us on that?

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [86]

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The mix effect is mainly coming from Automotive, where we sold very little material to Automotive in Q2 and we don’t expect huge volumes in Q3 either, but we at least expect somewhat of an improvement. And Automotive volumes are — which are typically then processed more than hot-rolled coils sold at a higher price. So that’s mainly the positive mix effects that we are expecting. Could it mean that prices are flat quarter-on-quarter? Potentially, yes. I mean we always don’t know exactly. But right now, the way we look at it, we believe the prices will be somewhat down not a lot.

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Operator [87]

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And as there are no further questions in the queue at this time, I’ll hand back to our speakers for the closing comments.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [88]

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Okay. Thank you. And by that, we thank you for the attention. And that concludes today’s conference call, and we wish you a nice summer. Thank you.

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Håkan Folin, SSAB AB (publ) – Executive VP & CFO [89]

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Thank you. Bye-bye.

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Martin Lindqvist, SSAB AB (publ) – President, CEO & Director [90]

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Thank you. Bye.