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Edited Transcript of SSAB.ST earnings conference call or presentation 19-Jul-19 8:30am GMT

Q2 2019 SSAB AB Earnings Call

Stockholm Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of SSAB AB earnings conference call or presentation Friday, July 19, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Håkan Folin

SSAB AB (publ) - Executive VP & CFO

* Martin Lindqvist

SSAB AB (publ) - President, CEO & Director

* Per Hillström

SSAB AB (publ) - Head of IR

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Conference Call Participants

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* Alain Gabriel

Morgan Stanley, Research Division - Equity Analyst

* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Cedar Ekblom

BofA Merrill Lynch, Research Division - Analyst

* Christian Kopfer

Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator

* Gustaf Schwerin

Pareto Securities, Research Division - Analyst

* Ioannis Masvoulas

Macquarie Research - Analyst

* Krishan M. Agarwal

Citigroup Inc, Research Division - Analyst

* Oskar Lindstrom

Danske Bank Markets Equity Research - Senior Analyst

* Robert Redin

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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

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Good morning and welcome to this presentation of the SSAB Second Quarter Report. I am Per Hillström, Head of Investor Relations, and with us today is President and CEO, Martin Lindqvist; and our CFO, Håkan Folin. And the agenda, Martin will start here with the summary of the quarter, also going through the divisions. Håkan will pick up on the financials, and then Martin comes back and presents the outlook, and finally, we will open up for questions. So by that, please, Martin, take the stage.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [2]

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Thank you, Per. So what did we then see during the second quarter? If we start with the Americas, we saw fairly decent demand from end users, but we also saw that Steel Service Centers were quite cautious. For us, deliveries to Steel Service Centers in Americas was roughly 50,000 tonne lower than Q1, and Q1 was not strong either.

We saw spot prices decreasing during the quarter, but also raw material costs or scrap costs decreasing. In Europe, the situation was slightly different. We saw weaker demand in Automotive. Some cautious sentiment from distribution or Steel Service Centers. What we saw was spot prices decreasing slightly during the quarter, but what affected us the most was the rapidly increasing costs for raw material, and we had, at the end of the quarter, or as we speak, iron ore prices of USD 120 per tonne. And when we started this year, we were at roughly USD 65, USD 70. So rapid increase of raw material cost. And I must admit that a more rapid increase than I could foresee when we released the first quarter report.

If we look at the group result, it was SEK 1.3 billion, SEK 300 million down compared to Q2 2018, and also compared to Q1 2019.

If we look into the results, I would say strong performance from Americas with a good year-on-year improvement, Special Steel improved slightly and then Europe declining compared to last year and the major explanation for that is, as said, the higher iron ore costs and Håkan will come back to that in the bridges.

Continue to generate strong operating cash flows, and as you know, we typically generate more cash flow or better stronger cash flow the second half of every year compared to the first half.

If we look into the divisions, Special Steels, an EBITDA margin of close to 14%, which I think is fairly decent. We saw higher prices and a better product mix. We saw good demand in Q2 and we expect the demand to continue to be good in Q3 with the usual seasonal slowdown. We had shipments at the same levels as Q1 this year and Q2 last year. And we saw also here high variable cost and mainly raw material cost, in fact, affecting Special Steels. It's not at the same amount as in Europe, where we have our mill up in Luleå, where we see the impact from the increased iron ore cost more directly, where we have no stocks or consume from hand to mouth more.

Europe, as said, much lower results, SEK 841 million lower compared to Q2 last year. Clearly, higher raw material costs, lower shipments and also lower capacity utilization.

In Americas, good demand continued in several segments, and as said, lower apparent demand or buying pattern from Steel Service Centers. I think this is a strong result, 23% EBITDA margin is quite good in the steel business. So a very good performance from SSAB Americas even though shipments were slightly lower compared to Q1 and Q2 last year.

Tibnor, stable demand, seasonal slowdown, sales higher and that is because part of the quarter was including Sanistål, the distributor we bought in Denmark, where we are going now from a market share of roughly 7%, 8% for Tibnor up to 30%, and we become the clear #2 in distribution in Denmark and that is an important part for SSAB, where we will have a much stronger footprint in Denmark.

We had lower margins compared to Q2 2018 and that is lower margins and also inventory revaluation. We had a positive inventory revaluation in Q2 last year, which we didn't have this year.

Ruukki Construction. I think fairly decent performance. Sales up, higher volumes in all business units. We're continuing to improve our product business. We've also, yesterday, signed a contract to divest Building Systems. So what we have left now in Ruukki Construction is Roofing and Components, and that is core business for us. So we have, in that aspect, optimized the portfolio, Building System did not consume a lot of our own steels, but Roofing and Components are the biggest customer we have for painted materials. So now we have taken Ruukki Construction into what we want it to be. We have sold Russia, we have sold Romania, we have closed some operations and now systems. So I think now we have the part that is really core for us. With that, Håkan, I leave the floor to you.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [3]

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Thank you, Martin, and good morning, everyone. I will, as usual, go through some more details on the financials, including our cash flow, balance sheet, and also the raw material situation.

But if we start with an overview, we saw a slightly weaker trend in our group earnings now during the second quarter. Sales were actually still on a high level, above SEK 20 billion. They were up 7% compared to Q2 last year, and 3% compared to first quarter of the year. If we compare to last year the same quarter, it was mainly driven by increased prices and also weaker Swedish krona.

If we then look at shipments, they were slightly down compared to Q1 and down by 5% compared to Q2 last year, mainly driven by SSAB Europe, where shipments were down 6%.

EBITDA at the level of about SEK 2.4 billion and the EBITDA margin, although down slightly from Q1, it's still at around 12%, which still at a decent level, I would say.

Finally, when we look at EBITDA per tonne delivered steel, while given the lower profitability, it went down around SEK 200 versus Q1. However, if we compare to Q2 last year, given that we also had lower shipments, we were actually on the same level at around SEK 1,400 per tonne delivered steel.

If we then look at what happened between the quarters in terms of profitability. Comparing to Q2 last year, we lost around SEK 300 million. Prices were up with SEK 620 million, or impacting EBIT with SEK 620 million. This was mainly driven by Americas and also Special Steels, while for Europe, prices were actually slightly down.

If we look at volumes, negative impact of SEK 220 million, and as said before, this was driven by Europe with minus 6% in shipments. Special Steels on the other hand had a flat development year-over-year.

Variable COGS had an impact of SEK 365 million, and this is to a very large extent, driven by the increased iron ore prices. As Martin talked about, the increase has been rather rapid and significant, and if we compare spot market prices for fines now versus 1 year ago, they are roughly double, $60 versus $120.

In here, we actually have a positive development on the scrap side, where scrap is lower now in Q2 than last year, but given the extreme rise in iron ore, that is overshading that part.

A bit higher fixed cost compared to last year, or close to SEK 400 million. A few reasons for that, one is that we have been running 2 blast furnaces in Oxelosund, we were not last year. We have a very strong focus, as you know, on production stability. We have increased our maintenance and repair work during the quarter. And then in the U.S., even though we call it fixed cost, salaries are extremely variable in the U.S., and when we are producing a lot and when we're earning more money, salaries in U.S. by -- automatically goes up.

FX compared to last year had a slightly positive impact, SEK 80 million. The positive impact comes from the weaker Swedish krona in terms of sales. On the other hand, since we buy most of our raw material in dollars, that to a large extent, offset it, but slightly positive. And then here in other, well, it's SEK 40 million, it's not much to talk about but it's slightly lower capacity utilization this quarter than last year.

If we instead compare Q2 to Q1, well, the change is roughly the same, it's a bit more than SEK 300 million in the negative direction, but the components are actually rather different. Here, we have somewhat lower price in Q2. Special Steel actually had stable prices even slightly increasing given the better mix, but for Americas and for Europe, we saw lower prices in Q2.

Volumes is basically no impact. Ruukki Construction seasonally higher, Special Steel Europe, basically flat and then somewhat lower volumes in Americas.

And variable COGS, positive impact was SEK 75 million, that, at least when I saw it first, was a bit surprising given, again, the increase in iron ore. But we have, during Q2, saw quite a lot of decrease on the scrap side and also some other raw material and consumables like alloys had moved for us in the right direction. So overall, we have a positive impact on variable COGS.

Fixed cost is higher in Q2 than in Q1, also because we had higher repair and maintenance cost. We had a few specific items, like there was a thunder struck in Luleå that impacted production, where we had to increase some of the maintenance work. And we have also now started taking in summer workers, that also impacts fixed cost. However, as we have said before, we have not increased the total amount of fixed employees compared to when we finished the redundancy program in the end of 2016. But we have adjusted with more temporary and more summer workers in order to be able to produce according to demand. And that is obviously for us something that we will address going forward.

No impact on FX. Other, we are running with a bit higher capacity utilization in Q2, that's the main explanation, especially since we were [stranded] with one of the blast furnaces in Raahe during Q1.

Moving on to cash flow instead. We had a solid operating cash flow now in Q2 of SEK 1.7 billion. It was actually better than Q2 last year, where we had SEK 1.3 billion and it was better than Q1 with SEK 1.1 billion. That was on the operating level. Then if we move down to net level, well, we were paying for the acquisition of Sanistål, we were also giving dividend to the shareholders, so net cash flow was actually negative by SEK 1.6 billion.

And if we then move to the balance sheet, well, the net -- negative net cash flow, obviously, have an impact on our net debt, which increased during the quarter, and now stands at SEK 9.9 billion. We had an increase in net gearing of 3 percentage points, moving from 16% up to 19%. However, it's still clearly below the target that we have with the net gearing that normally not should exceed 35%.

Duration of the loan portfolio is over 6 years and if you look at the graph here, you can see that for '20 to '23, we have very low upcoming maturities, it's below SEK 2 billion every year. In 2021, it's almost SEK 0. In '19, we have around SEK 3 billion, that's mainly commercial papers, and as we generate cash flow, we will continue to reduce that as well.

But all in all, both on the absolute amount of debt but also on the maturity profile, we are very confident in the situation we have right now.

Finally then for me on the raw material side. And here we have had a rather dramatic development during the quarter. We have seen our pellet purchase price increase by 18% in Swedish krona in Q3 versus Q1; slightly less in dollars, 14%. And as we have said before, this higher cost will, to a large extent, impact Q3. Martin already talked about Luleå, where we have seen the impact in Q2, since we don't have any, basically no iron ore inventory. But for the other integrated sites, Raahe and Oxelosund, we will see more of this impact coming into the third quarter on the P&L side. Coking coal actually moved in the other directions, down by 9% percent in Q2 versus Q1.

And as scrap for our U.S. operation, scrap prices actually continued to decrease in Q2. Our purchase prices was 10% lower in Q2 versus Q1. And this is rather unusual, because typically, iron ore and scrap, they have a rather good correlation. If iron ore goes up, scrap usually follows, and the other way around when it goes down. But what we are seeing now, with the extreme highs in iron ore prices and at the same time, scrap prices going in the other direction, it's rather unusual. And that's obviously benefited our Americas operations, where we are scrap-based, but on the other hand, as we've seen in the result, it's hurting our integrated operations, like SSAB Europe. Okay, back to you, Martin.

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

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So if we then start to look at the segments, the picture is a bit more colorful than what we showed in -- of the Q1, and Automotive is clearly weak. If we look at Heavy Transport, Construction Machinery and Construction, it is healthy, not as strong as it was, I mean, not growing as it was, but on decent levels. Energy and Material Handling still on very good levels. When we look at Service Centers, as said in the beginning, that we saw a cautious behavior in North America and also in Europe during Q2. My guess would be that we, during the second half of Q3, looking at official statistics and mouth on hand, we'll see Steel Service Centers restocking or start to buy. So that is what we are saying, but I would say on underlying, also on healthy levels.

When we look at the outlook, we expect to see continued decent demand or relatively good demand for heavy plate in North America. In Europe, underlying demand to be somewhat weaker. And then we have the usual seasonal slowdown in Europe.

Good demand for high-strength steel, even though we also there see a seasonal slowdown, but we expect to see continued good demand.

Prices, lower prices in Europe and Americas, and somewhat lower in SSAB Special Steels. And as Håkan alluded to, higher raw material cost will also continue to affect us in Q3.

So if we sum it up, what I think was good in this quarter was Americas, very strong earnings, good result improvement. Europe, we lost margins, we were down at 5% EBITDA margin, to a large extent due to higher iron ore costs. We are now -- we have built the system since the acquisitions of Ruukki with much more flexibility. We will, during the third quarter, close the small blast furnace in Oxelosund when we have finalized the midterm repair of the -- one of the blast furnaces in Raahe. We have today roughly 1,000 employees with variable contracts, or temporary employees that we can reduce if the market turns worse. And we have plans already in place for a somewhat more hesitant or weaker market and we will execute them and we have already started to execute them. And we can do -- we can do that in line with where the market develops.

We will continue to generate good cash flows. We have already today a stronger balance sheet than we have had before. And as said, during the second half, we typically generate more free cash flow than during the first half, and we will continue to generate positive cash flow and strengthen the balance sheet. And that will give us freedom to operate regardless of business cycle. And as said in the beginning, we will have -- continue to optimize our asset portfolio and yesterday, signed a contract to sell Building Systems within Ruukki Construction. So we have the portfolio today that we feel fits SSAB and the acquisitions we have done has been to become stronger and have a better grip on the channels towards the end users. So with that, Per, should we open up for questions?

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Per Hillström, SSAB AB (publ) - Head of IR [5]

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Yes. And we will start by asking the operator, please, to present the instructions on how to ask a question. So please, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Alain Gabriel from Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [2]

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A couple of questions from my end. Firstly on the profit bridges between Q2 and Q3. Now clearly, for Europe and Americas, we can observe the prices on the screens, but for the Specialty Steel business, you have highlighted that there's somewhat weaker quarter into Q3. How can we, or can you help us quantify the delta versus Q2? Is -- are the first 9 months of 2018 an example of -- or a good benchmark to look at the quarterly run rate? And that's the first question. Secondly, on the cash needs of the business and the CapEx...

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [3]

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We will take them one by one. No, but we expect to see -- we typically see a seasonal slowdown in the third quarter.

We see -- in some of the segments, continued very strong demand, and some of the segment, maybe some hesitation, but no dramatics in Special Steel, as I see it. So I would say, rather plus or minus something similar like a seasonal slowdown.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay. And my second question is on the CapEx and the flexibility and the willingness to reduce CapEx in the current environment.

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

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No, but we have flexibility there. And we have shown that over the years. And as said, priority #1 is to continue to strengthen the balance sheet. On the other hand, I mean, we also have a strong focus on production stability, but we have flexibility when it comes to CapEx, yes.

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Operator [6]

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Our next question comes from Ioannis Masvoulas from Macquarie.

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Ioannis Masvoulas, Macquarie Research - Analyst [7]

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Three questions from my side. The first for Håkan. I was also surprised with the sequential development in variable costs. Could you quantify the cost headwind coming from iron ore specifically in Q2?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [8]

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I don't have the figure on top of my head, but it was a significant negative, but we can get back to some -- you have the impact of what we bought in Q2 versus Q1, and also in Q1 versus Q4 from the last presentation. But we can get back with a more detailed answer on that, but I don't have it from the top of my head.

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Ioannis Masvoulas, Macquarie Research - Analyst [9]

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And second question, again on cost. So if we look at your coking coal purchase price was down about 9% sequentially, but if I look at spot prices, the quarterly average is relatively stable Q2 versus Q1. So what explains that sort of discrepancy?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [10]

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Well, actually, one should remember, we don't buy very much in Q1 given that up in the north of Sweden and Finland, we don't get the boats to come up during Q4 and Q1 basically. So our buy in Q1 is very limited. So there might be some discrepancies because of that.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [11]

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We only consume from stock and buy very limited volumes, mainly to Oxelosund.

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Ioannis Masvoulas, Macquarie Research - Analyst [12]

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I see. Okay, perfect. And maybe another question again on costs. You mentioned your flexibility around the labor force, and I believe you released around SEK 300 million for seasonal cost reduction at least in Q3. Given the flexibility around contractors, should we expect the cost reduction to be more pronounced this year in Q3?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [13]

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It shouldn't be less at least.

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Ioannis Masvoulas, Macquarie Research - Analyst [14]

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Could it be meaningfully higher though?

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

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It depends where the market goes, but as said, I mean, what we have -- we have set up the company and you know this industry, we typically build a blast furnace and then we run it 24/7 for 15 years. So flexibility is not very easy. But in the European system, we have set it up to be as flexible as possible, when it comes to manning, redundancy and production, specializing in lines and so on. And then Americas is a completely different business where we have electric arc furnaces and, I mean, really if you exaggerate a bit, we don't have any fixed cost, we only have variable costs. I mean, salaries are variable and so on. So we can adopt, for being a steel company, we have set the company in a position where we can adopt to different market environments in a very rigid business setup.

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Operator [16]

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Our next question comes from Krishan Agarwal from Citigroup.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [17]

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My question is on Americas, where price to cost spread seems to have been stable, slightly negative than what we have seen in the Europe. Can you help us to understand as in how much of the decline in the scrap is already reflected into Americas in the Q2? And how much of the decline we should expect in Q3 to come through?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [18]

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In Americas, we buy scrap every month, so you see a fairly quick, what you call it, you see fairly quick effect of it in the P&L. We need to remember also that we are coming from very high margins. So -- but I would see -- you have seen the majority of it in the P&L given the short lead time.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [19]

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Okay. And then is it fair to assume that the 25% of the business in Special Steel is also scrap-based being in America so that will also benefit to that extent?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [20]

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In U.S., it is scrap-based and in Oxelosund and the Nordic mill, it is blast furnace based or iron ore-based. We can, of course -- that is also part of the flexibility. We can play a bit, if you excuse my language, with that system as well. I mean, if scrap is -- and we can also, to be honest, play a bit in the Nordic system with the scrap content in the converters, where we typically could be between 17% and up to 24% of scrap in the converters. So we have some flexibility that we can utilize. But we can also, with the system we have built up, with the, call it, the redundant production system, we can produce more scrap-based if iron ore is very high and scrap is, in comparison, lower. So that also gives us some flexibility, yes, which we did not have before.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [21]

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Okay, I understand. And then one for Håkan. I mean, the tax, the cash taxes was higher in the second quarter. Is there anything more coming in the third quarter higher than normal?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [22]

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No. Second quarter was exact, as you say, it was higher than normal, but that should be a one-time thing. So it should not be the same in Q3, no.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [23]

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Okay. And then a follow-up. I mean, you sort of seems to have increased the maintenance cost estimate from SEK 200 million to SEK 280 million for the third quarter. Is there any change in the expectation in terms of the plant maintenance?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [24]

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No. We have the plant maintenance in the report. And if you would compare what we have now compared to the previous quarter, it's a very small change, but overall, no, there is no change.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [25]

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Okay. And then finally, can you help us update as in what is the position on CO2 certificate, and was there an incremental cost in the second quarter? What should we expect in the second half?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [26]

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Sorry, can you repeat that?

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [27]

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Can you help us to understand your position in terms of CO2 certificate? And is there any incremental cost coming in, in the second half of 2019 from CO2?

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

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No. No incremental cost in the second half of 2019.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [29]

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And you are sort of covered?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [30]

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Yes.

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Operator [31]

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Our next question comes from Gustaf Schwerin from Pareto Securities.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [32]

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I have 3 questions, I'll take them one by one. Firstly, if you can elaborate a little bit on your view on the European steel market now, what's holding back there? The prices, given the current input costs, is this simply just good availability after the decrease in Automotive demand or is sort of overall underlying demand so weak that we basically won't see an uplift in pricing? Any comments on that would be very helpful.

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

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I think the main driver is the decrease in Automotive and that gives, call it, big steel producers more dependent on Automotive than us. I mean, looking for volumes in other segments, and that gives, of course, more available material on the European market. What is a bit strange though is, or what is not according to normal historical pattern, is that there is a strong correlation between steel prices, spot prices, and iron ore prices. And the spot prices have been flat to slightly down when -- at the same time as raw material prices or iron ore prices have peaked and that is a bit unusual. I'm expecting that correlation to come back over time, but if that happens during Q3 or not I don't know, but my guess would be that there are other steel companies than us also feeling the margin squeeze on the European market. And if anything, as always, the Nordic market is a bit less volatile than Southern Europe. But that of course remains to be seen. But that would be my guess.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [34]

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Okay. Then secondly, do you want to disclose the price tag for the divested Building Systems? And also, is the remainder of the Construction business now seen as core given the steel offtake you have?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [35]

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As a channel to the market, in that aspect, it is core. Do we always need to own 100% of it? No, but we need to have influence and control. So I would say that what we have left now in Ruukki Construction is core because they are the biggest customer to our color coating lines in Hämeenlinna, Kankaanpää, Finspång. We will come back to more details about systems, but as said, they consumed very little of our steel. So they were mainly a contractor and we are not in that business, we are a steel company. So in that aspect, it was to -- you could -- to put it bluntly, clean up the portfolio.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [36]

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Okay. Fair enough. And then lastly, I know you normally don't give this, but can you give any feeling for the iron ore impact in Special Steels quarter-on-quarter?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [37]

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Well, it's a bit mixed for Special Steel given the question we had before, that partly, we produce in Mobile, which is scrap-based and then partly we produce in Oxelösund, which is iron ore-based. But if you net those 2 out specifically for Special Steel, it's still a negative development raw material-wise for Special Steel.

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Operator [38]

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Our next question comes from Oskar Lindstrom from Danske Bank.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [39]

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Three questions from me. I'll take them one at a time. First off is iron ore. How much of the higher iron ore prices out there are now in your numbers in Q2?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [40]

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As Håkan said, I mean, in Luleå, to a large extent; in Raahe and Oxelösund, less so, where we have iron ore stocks and there is a lead time. In Luleå, we don't have any iron ore stock, we get the trains from LKAB more or less every day. So we will see more effects of that in Q3. We have not been specific exactly what we have seen, but in Luleå, to a very large extent and less so in Raahe and Oxelösund.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [41]

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And mind you, could -- now we talk about our average prices during -- purchase prices during Q2 versus Q1, and actually both during Q1 and during Q2, you saw an increase in the absolute number during both of the quarters. And that will obviously, now we can only talk average, but that will also have an impact of course.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [42]

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Yes, because that's what I was looking for, percentage, sort of you're saying our market price for the steel that we -- or the iron ore that we purchase is up X, our average cost in Q2 was up Y, and the difference there is what's left. But you don't want to -- communicate a number.

Okay. I move on to the second question. On pricing, to what extent has the weaker demand in Automotive sort of now fully spread to other segments which can impact? Or is there a potential for the weak Automotive demand to spread to even further?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [43]

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That's, of course, very dependent on how Automotive will continue to develop during the rest of the year, but Automotive is one of the big consuming segments globally for steel. So of course, it has had an impact on other segments as well and overall prices, definitely. That's what we see. That I guess, that is part of the explanation why we see -- or a big part of the explanation why we see stable prices when everyone is suffering from heavily increased raw material costs.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [44]

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And looking at Special Steels, your guidance for somewhat lower prices, is that as a consequence of overall lower benchmark steel prices? Or is it only a seasonal thing? Because I think you mentioned something about a season as well.

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

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What we see is typically seasonally lower demand during the beginning of Q3. So these are our contract prices grade per grade slightly down on average. On the other hand, we have also mix improvement and so on, so. But that is, I mean, is more on the margin, I would say.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [46]

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Still, it's, like Martin said, it is grade by grade. There is a difference between the very high-end product in Special Steel and the not very high-end product in Special Steel, and obviously, the higher up we come, the less -- the general price trend will impact the Special Steel price.

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

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So it's mainly 700 megapascal and those, call it, lower grades that we sell in Special Steels. But if you take the advanced Hardox and Armox and Strenx steels, you don't see that effect.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [48]

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Okay. And is there, you mentioned, a mix effect, but should we expect a negative mix effect also then?

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

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You should, over time, expect that we will continue to shift the mix as we have done previous year. That is what we are aiming for. So then how it's -- I mean, difference between quarters is always, I mean, a quarter is not a very long time, but over time, you should expect us to continue to improve the mix, not only in Special Steels, but also in SSAB Europe. But if you compare today Europe as an example with a couple of years ago, we have had a much higher portion of what is called black coal, the most volatile product there is. And we have today, much more cut-to-length, sintered, galvanized, color-coated and so on. So we try to move up product mix-wise as well, not only in Special Steels but also in Europe. And there is a huge difference in pricing and volatility between a Hardox 600 and a Strenx 700, as 2 extreme examples.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [50]

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Okay. My final question is on Americas pricing, and any update you could give on the market there? And with the announced price increases, have they had any impact?

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

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I think it's a bit too early to tell. Some impact, as I see it, but it's too early to tell.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [52]

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But to be clear, the price -- announced price increases have been on strip material, not on plate material so far.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [53]

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Yes. But you're not seeing any movement in your end markets yet? Is that how I should see it?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [54]

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We guide for lower prices in -- and we also have a lag because we have a mix in U.S. of contract prices, spot prices, and what we call it, project orders. So what we are guiding for is lower prices in Q3. And then what will happen with the spot prices during Q3, I think it's too early to tell.

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Operator [55]

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Our next question comes from Bastian Synagowitz from Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [56]

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I've got 3 questions left. My first one is on Europe. So from what you're saying on the second quarter numbers, you've been mostly impacted by higher cost and not so much prices so far. And prices will also be coming down and you're telling us costs will go up. And then at the same time, you'll obviously have the maintenance break. Now with all of these components, and also the cost measures you've got in place, will you be confident to say that you won't slip into EBITDA losses in Europe in the third and the fourth quarter? Or are we indeed running the risk to drop into a loss-making territory? That is my first question.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [57]

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No. But the guidance we gave is slightly lower prices or lower prices in Q3 and higher raw material cost. And then it depends, I mean -- so that's the guidance we gave. And then maintenance outage. And then you have to do the math.

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

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Okay. Fair enough. Then my second question is on the cost initiatives, which you've highlighted, and I was wondering whether you could give us any number to quantify the cost cuts you're talking about with regards to the next 2 quarters. Then also on your plans to switching off the small blast furnaces in Oxelösund when Raahe comes back. This is pretty much marked in stone or would you potentially consider to keep the larger blast furnace in Raahe off for longer, and hence the smaller blast furnace running instead to take out even more volumes?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [59]

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No. Not as it looks now. But as said, we have the flexibilities to, I wouldn't say independent of market scenario, but we can handle a much worse market scenario if that would present itself. So what I'm trying to say is that we have a flexibility built into the system, and that gives us the opportunity to react fairly quickly without any substantial cost of reducing manning or anything else. And then of course, I mean, this is a cyclical industry, this is what we know and what we are used to and we are, if anything, more well-prepared at this time for any events than we have been before. So in that aspect, I'm very confident. And we have -- I mean, Oxelösund, that is roughly 120 people, but as said, in total, we have more than 1,000 people on flexible contracts. So I think we can, everything else equal, react accordingly to whatever market situation that presents itself.

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

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Okay. And like if you would just add up all of the cost initiatives, so temp workers and everything else you've got in place, so how much would that be per quarter in the next 2 quarters?

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

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We haven't given that. But we have plans for, call it, fairly decent actions.

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

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Okay. So I don't know, like, is it like SEK 500 million to SEK 700 million for the temp workers, so just working with like a rough industrial salary, is that like a fair assumption?

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

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We haven't given any guidance for that. What we have said, once again, is that we have flexibility to react to different market scenarios, both up and down, and I'm confident that -- and that together with a much stronger balance sheet than we previously had, I'm confident that we in relative terms will come out of this quite okay, whatever it is that is coming. But I'm not seeing a collapse. So -- and we see a seasonal slowdown in Q3, more hesitation on the market, yes, extremely high raw material prices. But my guess would be that the correlation between raw material prices and spot prices for steel will come back because it has always been there. The correlation between scrap and iron ore will also come back, so yes. What I -- the only thing I'm saying is that in a cyclical industry and cyclical markets, we are better prepared than ever.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [64]

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Okay. Okay. No, that is my impression as well. But maybe let me just ask in a different way. To release the 1,000 temp workers, so what would be the utilization rate in the European operations you would need to drop to? Would this be like 85%, 80%, what is the sensitivity there?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [65]

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We haven't done that math. I mean as said, we can quickly adjust to different market scenarios and then to speculate how it would look in a year from now or 6 months from now or 2 years from now, it is impossible. The visibility we have is the coming quarter. And we have taken the actions to cope with that.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [66]

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Okay. All right. Then just my last question is on scrap. We've been hearing that the stock level for scrap in years have come down quite a lot and that it would imply that there may be a rebound in scrap prices, which is quite likely now. Obviously, scrap markets are very opaque. But do you share that view? Or what are the trends which you are seeing in the scrap market at the moment?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [67]

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I probably see the same things as you do, and read the same reports. What we have seen during Q2, and I guess, that is, I mean, part or to a large extent to driving the iron ore prices is restocking in China. When it comes to scrap, I don't see anything special, I wouldn't say that. What I know, at least, that they are on high or low levels.

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Operator [68]

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Our next question comes from Cedar Ekblom from Bank of America Merrill Lynch.

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Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [69]

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And 1, 2 questions. Should we be expecting anything more than a normal seasonal decline in volumes in Europe in the third quarter? It's usually between 10% and 15%. I would assume that the top end of the range is something more reasonable in this current environment, but do we need to be thinking about a greater decline in shipments quarter-on-quarter?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [70]

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I would say, I think your assumption is fair, that it's more in the higher range than in the lower range if you take a historic perspective, but we wouldn't expect very much more dramatic fall in that now.

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Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [71]

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Okay. And then a follow-up question, just on the mix in Europe. Your realized prices have proved to be a lot more resilient than the sort of list prices that we see from more commodity-grade products. How much of that is down to lags? And how much of that is actually down to the fact that your mix is improving, and if it is, if it is mix, are there more benefits that we can expect in the third quarter? Or do you think that you've realized your full mix potential at the moment?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [72]

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It's a combination, of course. But you have to, I would say, call it, mix is done. First of all, you have the product mix, where we have been working since a number of years with improving the product mix and we'll continue to do that. The example I gave, moving away from black coals and into more advanced products. And then you also have the geographical mix, where we typically see the biggest volatility in Southern Europe and less so the further north you go. So you could say in that aspect, it's both product mix and geographical mix. And then of course, we don't sell much at all on spot pricing. We typically sell on quarterly contracts. So there is also, of course, a lag. So it's a combination of those 3.

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Operator [73]

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Our next question comes from the line of Christian Kopfer from Nordea.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [74]

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Just a few follow-ups from my side. Firstly on Special Steels, I think you, Martin, have previously mentioned that you've been looking at margin that you reached in Q1, it was almost 14% on EBIT and that margin is what you think Specialty should be more or less over time. And -- but now it was down to less than 11% in Q2 and it seems you're guiding for further margin deterioration in Q3. So the question is, do you still stick to the target, the margin target that you should be at around Q1 levels over time, not in the short term, of course, but over time?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [75]

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Definitely.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [76]

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Okay. And the follow-up question on that is then how do you aim to reach that?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [77]

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We'll continue to work with the product mix, increase volumes, realizing the plans we have set, but the product mix is an important part, and increased volume is another part. But over time, yes. And you should also expect much less volatility on the Special Steel products, less so in the more advanced grades produced in Mobile and Oxelösund. And slightly more volatility than in, call it, in more standardized, if you use that word, part of Special Steels, like Strenx 700 and those grades that are more strip-related and with slightly more volatility.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [78]

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Okay. But did I understand you right that you expected mix in Special Steels to improve some in the next quarter?

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

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I think what Martin said before was that one quarter is a short time period, but over time, we should definitely continue to see mix improving in Special Steel, yes.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [80]

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I heard that, but you're -- you were talking about lower prices, somewhat lower prices, especially in Q3, but on the other hand, mix is improving. That is what I heard, but maybe I...

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [81]

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What I said was that when we talk about prices, we talk about product per product. And I mean, if you take 700 megapascal, we will see slightly lower prices. But we -- on top of that over time, you should see continued mix improvement as we have seen. I didn't say any specific about the mix in Q3, because one quarter is too short. But over time, you should expect us to continue to improve the mix in Special Steels.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [82]

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Yes. And on the divestment of Building Systems, you say that the impact on EBIT is 0. Can you say something about the EBITDA impact?

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

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Very limited.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [84]

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Okay. Perfect.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [85]

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I would say embarrassing limited.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [86]

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Right. And then finally on the maintenance cost, I mean, Håkan, you said that your maintenance costs are increasing slightly. But to be fair, I mean, shouldn't the maintenance cost impact be decreasing because of lower margins? I mean, the outage should be less.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [87]

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Håkan was talking about the first half of this year and we have been spending more on maintenance with a very strong focus on production stability. We have flexibility when it comes to maintenance costs. And we have been spending on maintenance, and especially preventive maintenance during the first -- already from Q4 last year and then during the first 6 months of this year. And we have a flexibility there to go up and down as we have with investments. And I think we have proven that over time as well.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [88]

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What is the reason that maintenance costs are expected to increase slightly in the fourth quarter, for example?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [89]

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That depends, of course, when we have the maintenance, the yearly maintenance stops. We have them typically in Q3 and Q4.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [90]

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Yes, sure, but versus your previous guidance, it seems that you have taken up -- it's not a big thing, I just wonder what is driving the increase?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [91]

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No. I don't think we have an increase in Q4 compared to Q1. It's SEK 40 million higher in total.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [92]

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Yes, but that's because we have the maintenance stop in Special Steel in Q4 and we have no, practically no maintenance outage, yearly maintenance outage in Q1.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [93]

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But if you compare to previous guidance, it's not a big difference though, it's a small -- I mean, we update and see what we're going to do basically all the time and we planned this maintenance outage. And at the end of Q2, we know more than we knew at the end of Q1, so that's -- sorry, I misunderstood your question, Christian.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [94]

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I did as well.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [95]

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Okay. No worries. I just -- so the question is, I mean, if margins are lower, then the impact from maintenance should be lower. I mean, or...

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [96]

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Yes. But actually, in those tables, Christian, what we specify there is the direct cost for the maintenance work, especially for external companies coming and doing it. And we specify the under-absorption cost, but we also write very explicitly that it does not include lost margin. So for exactly that reason that we don't want to speculate how much more this will go up and down.

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Operator [97]

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Our final question comes from the line of Robert Redin from Carnegie.

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [98]

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Just one follow-up. Did you say that the smaller blast furnace in Oxelösund was sort of a part reason for the higher fixed cost year-over-year in the year-over-year cost or operating profit bridge? And if so, now that you idle that one, how much would you expect to save on an annualized basis?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [99]

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Yes. We said that absolutely, because we were not running that in Q2 last year, we were running it in Q2 this year. And what we have said that it's in total, it's around 100 workers that we have extra now in order to run the small blast furnace in Oxelösund.

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [100]

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All right. Yes, so you save that. But do you also save running that production at higher utilization or efficiency somewhere else, saving some money?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [101]

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Well, you can say that in terms of fixed cost, we also save some on the maintenance work that we have to do when we are running one extra blast furnace. On the other hand, if you look specifically at Special Steel, you will see under-absorption cost being high when we're not running the small blast furnace. But overall, the larger blast furnace in Raahe is clearly much more efficient than the smaller one in Oxelösund. So when we look at from a group perspective, this is the most efficient way to handle the current situation.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [102]

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And if you look at specifically at fixed cost, they will be clearly lower because we have 120 people working at that small blast furnace.

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Operator [103]

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Okay. So as there being no further questions, I'll return the conference to the speakers.

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Per Hillström, SSAB AB (publ) - Head of IR [104]

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Okay. Thank you for the attention. That concludes today's conference. And we wish you all a nice summer. Thank you.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [105]

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Thank you.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [106]

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Thank you very much.