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Edited Transcript of SSAB.ST earnings conference call or presentation 28-Jan-20 8:30am GMT

Q4 2019 SSAB AB Earnings Call

Stockholm Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of SSAB AB earnings conference call or presentation Tuesday, January 28, 2020 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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* Alan Henri Spence

Jefferies LLC, Research Division - Equity Analyst

* Anssi Kiviniemi

SEB, Research Division - Analyst

* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Carsten Riek

Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research

* Christian Kopfer

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

* Ioannis Masvoulas

Morgan Stanley, Research Division - Equity Analyst

* Krishan M. Agarwal

Citigroup Inc, Research Division - Analyst

* Luke Nelson

JP Morgan Chase & Co, Research Division - Research Analyst

* Ola Soedermark

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Oskar Lindstrom

Danske Bank Markets Equity Research - Senior Analyst

* Seth R. Rosenfeld

Exane BNP Paribas, 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 SSAB's year-end report. My name is Per Hillström. I'm Head of Investor Relations at SSAB. And here, we have the agenda for today. We start with our President and CEO here, Martin Lindqvist. He will discuss the year and the quarter. We also have Håkan Folin, our CFO. He will look into the financial in more detail. And then Martin will come back at the end with a summary.

And after that, we open up for questions, as usual, both from here in Stockholm and also from the phone lines.

So by that, Martin, please take the stage.

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

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Thank you, Per, and good morning. We'll start with going back a quarter and I showed this picture last time we met, and this was the feeling going into Q4 with a long queue in a traffic jam. And you can say that this was the order intake or the momentum into Q4. I would say that Q4 was maybe running in this one line. And when we look at Q4, it was a challenging quarter.

We saw a weaker market especially in Europe. We saw destocking. We saw lower shipments. We adjusted our production to the demand. We had one of the blast furnaces, 1 of 2 big blast furnaces in Raahe idled for 6 weeks. We saw a margin squeeze in both Europe and in the U.S. We had quite big planned maintenance outage with a cost of total SEK 850 million. And then we had a strike in Finland that cost us roughly SEK 250 million. We managed to keep up operating cash flow on a decent level, I would say, and that was due to release of working capital.

If we then -- if Q1 -- or Q3, the end of Q3, beginning of Q4, was a queue in a traffic jam, and this was Q4. When I look into Q1 and the first half of the year, I think the destocking is over, and we look at the order intake and the order book, I would say that order intake has normalized. Of course, there is still a question mark. What is the underlying market? Is it 80, 90 or 100 kilometers per hour? Hard to say, but definitely better order intake. We don't have any planned maintenance outages or stops during the first half of the year either. And we expect to see higher production levels and higher shipments compared to Q4.

So how do we then express that in the outlook for Q1? Well, we expect, in North America, demand for heavy plate to be fairly stable -- underlying demand. In Europe, underlying demand expected to increase from relatively low levels. And continued good demand for high strength steels, I would say, also especially related to Europe. Prices somewhat lower for Europe and Special Steels and more stable for Americas. And if we look at volumes Q1 compared to Q4, we expect higher volumes in all 3 Steel divisions.

To sum up the full year then, well, sales were up but profitability was down. We more than halved the profitability compared to 2018. And the biggest contributor to that drop was, of course, SSAB Europe.

We continue to have a decent, I would say, not a good but a decent operating cash flow. And with dividend and acquisitions and so on, we kept the net debt then and the net gearing fairly stable or slightly higher than end of 2018.

If we look into the divisions, I would start with Special Steels. And we saw a slower demand during 2019, especially in Europe with lower shipments. We increased EBIT and EBITDA compared to the previous year. We did 1 important acquisitions, Abraservice, during the second half of the year. That will be helpful over time for us and an important channel to the market.

What we prioritize now is what we discussed during the Capital Markets Day, to continue to grow shipments, and I will come back to that. To shift volumes to more high-strength -- higher-strength steels and better from -- more from stocks and own channels, fully utilizing the production capacities. We are moving on, struggling on with the targets we set up for 2022.

If we look at Europe, it was a year with lower shipments, lower prices and higher raw material costs. And we had, especially during the second half of the year, I would say, an exceptional margin squeeze. And that was also shown in the results, where the EBITDA margin ended up at 3% for the full year compared to 13% the year before.

The strategic priorities are still valid. Nordic home market position, automotive advanced high-strength steels and increase the premium mix within SSAB Europe.

Americas, a very good first half of the year, a more challenging second half of the year with a big outage in Q4 in Mobile. Overall, EBITDA margin of 16.3% for the full year is not that bad, even though, as I said, first half with 23% was, of course, better than the second half, but still industry-leading profitability. That is what they are focusing on, keeping the industry-leading profitability, change the mix step-by-step and also change the way of approaching the market and approaching the customer. So that's -- that work is ongoing.

If you look at Tibnor, this is a function of the Nordic market slowdown during the second half of the year. We also started a program in Tibnor to change the setup and the profitability and the efficiency. That program is according to plan or even ahead of plan and will be fully implemented end of June this year, and we will start to see positive effects of that program already during end of Q1 and during Q2.

Ruukki Construction, clear improvement in profitability compared to 2018. Still a lot of things to do, and the strategic target here is to, at the latest 2022, have an EBITDA margin above 10%. We reached 7.2% last year, which is a clear improvement compared to 2018, and we will continue to see that improvement in the coming years. So they did, I would say, a decent and a good 2019, and I expect them to continue to perform in a very good way.

Håkan, financials?

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

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Good morning, everyone, and I will take you through some numbers and also explain what the reasons were for the shift in profitability between different quarters.

As Martin already said, Q4 was a tough and challenging quarter where we had a weaker market and also maintenance outages that impacted. We had sales being down compared to Q4 last year with 12%, mainly because of lower shipments. Shipments were down in all divisions, and in total, around 9%. And we had a slightly negative EBITDA, and hence, also when we do the EBITDA per tonne, also slightly negative.

So what happened then when we compare Q4 last year to Q4 this year, where we had a profit last year of a bit over SEK 1 billion; and this year, negative of SEK 1.1 billion, so a shift of SEK 2.1 billion? The biggest change was in price. That impact was negative SEK 1.8 billion. And especially for SSAB Americas, prices were significantly lower now in Q4 than last year. It also had an impact on SSAB Europe. While actually for Special Steel, prices held up fairly well, which is in line with the strategy we have for Special Steel, more stable market and definitely more stable pricing.

We saw lower volume, as I said, in all 3 Steel divisions. Variable COGS, to a large extent; raw material, not so big change, fairly neutral, but there, it's a very big difference within that component; for iron ore, we had clearly higher costs this Q4 than last year; while for scrap, on the other hand, costs were clearly lower in North America.

Fixed costs, positive this year compared to Q4 last year with SEK 330 million related to the savings actions we've been taking. We've been reducing temporary manning. We've been doing these temporary layoffs in Finland. We've been using flexibility system in Sweden and that's clearly been paying off in terms of fixed costs.

The weaker krona helped on the FX side. And then we have a big negative chunk come from under-absorption. We've been running the -- especially the European production system at the lower level, including idling of one of the blast furnaces in Raahe, and that's SEK 500 million difference compared to Q4 last year.

Then we have another item here impacting positively. Two main points. One is that on EBIT level, we have lower amortization or surplus value. Obviously, not impacting EBITDA, but impacting EBIT. And then we also got an insurance compensation from the production problems we had in Raahe during Q1. We, now in Q4, got an insurance compensation.

But all in all, the difference then of a bit more than SEK 2 billion, it's 3 main items: it's the prices; it's the volumes; and it's the under-absorption.

If we look at Q3 compared to Q4 then, deviation is not as big. We had a slight positive result, SEK 300 million, so it's SEK 1.4 billion difference. But actually, the components are the same. Prices here is SEK 800 million, mainly Americas, again, somewhat from Europe too. Volumes also down in all divisions and the impact of SEK 400 million is roughly evenly split between the 3.

Raw material, somewhat negative -- I'm sorry, not raw material, variable COGS, somewhat negative, raw material, not. But on the other hand, we have the maintenance outages. And when we are running production at a lower level, we usually get less efficiency in the overall output.

Fixed cost is slightly higher than Q3. But as you -- many of you know, we usually -- we always get lower fixed cost during Q3 when we have the summer period in the Nordics. But now, given the actions we've been taking, it's actually almost on the same level in Q4 as in Q3.

FX, no big change. Under-absorption, a bit more than SEK 400 million negative, related to the maintenance outages in Mobile, in Oxelösund and also the overall lower production level.

And Other, it's the same items impacting positively as when we looked year-over-year, the insurance and the lower PPA.

So all in all, not as big deviation compared to Q4 last year, but the same items: price; volume; and under-absorption.

If we move on to cash flow then. We said it's fairly okay or decent cash flow. It's SEK 1.3 billion here during the quarter, despite a slightly negative EBITDA, but definitely helped, to a large extent, by the change in working capital of more than SEK 2 billion.

We also -- if you go down to the very bottom row, we also had a slightly -- sorry, positive net cash flow for the quarter of around SEK 400 million.

If we look at full year operating cash flow of SEK 5.2 billion, lower than last year when we had almost SEK 6 billion. On the other hand, we have SEK 2 billion less coming from earnings. So we have been able to release working capital during the year instead of building that up.

Net cash flow for the year, down here in the bottom, slightly negative at SEK 300 million. On the other hand, we've been paying out dividend, and we've been making 3 acquisitions during the year as well.

And how this then translates into the balance sheet? Well, this is actually rather a stable situation. Net debt excluding IFRS 16 is at around SEK 10 million or slightly below, up somewhat compared to Q3 due to some FX changes, but no big changes.

Net gearing, 16%, and we have a long duration of our debt portfolio at more than 7 years.

And if we look at what we have outstanding now for the coming 3 years, it's SEK 4.6 billion. So it's a rather low level of refinancing that we need to perform in the coming 3 years.

So overall, the balance sheet and the debt situation is at a fairly stable level. So I will leave it like that for now.

And we move on to something where we have seen quite a lot more changes during this year, the iron ore prices. Red line here is -- sorry, raw material. Red line here is iron ore. We had a very steep increase here during the first half of the year. And now we have seen that our purchase prices have gone down quite a lot during the second half. And in Q4, prices were down with 26% compared to Q3, and this is both then because of fines going down, but also because of our pellet premium have been reduced.

For coking coal, it's not as dramatic changes from iron ore, but it's been steadily moving downwards during the year. And now in Q4, our purchase prices were 22% lower than they were in Q3.

And for North American operations, the scrap prices on average, they were actually -- our purchase price were down 12% during Q4 compared to Q3. But when we look at spot prices here, you can see that they have clearly increased during November, during December and also now in January, and that will spill into our consumption cost during Q1.

While for -- if we go back here, for iron ore, it's typically around 1/4 of a lag for us for scrap -- sorry, for coal, it's a little bit more. But when we look at scrap, it's usually a month or 1.5 month from where spot prices will actually increase and hit our P&L.

Finally then for me, an outlook on the maintenance outage that we will have next year. We will not have any maintenance outage during the first half of the year. We will have a small amount in Europe in Q3. And then just as for this year, the majority of the outages will be in Q4 in 2020.

If we summarize it, we are expecting to have slightly below SEK 1 billion this year compared to a bit over SEK 1.1 billion last year, so around SEK 160 million in lower maintenance costs this year compared to 2019. The big difference is in Americas. Here, we had the outage in Mobile, and that's a larger facility. That's where we have our Q&T line. In 2020, we will have it in Montpelier, and therefore, slightly lower cost.

Okay.

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

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So to sum it up, during 2019 we continued to develop our portfolio. We closed the deal of buying Sanistal, Piristeel and Abraservice. We have added with these 3 acquisitions sales of roughly SEK 3 billion and strong channels to the market where we have control over the channel to the end users.

We also sold. We started to divest Building Systems within Ruukki Construction. So I think the portfolio is pretty much where we would like to have it.

2019 was also a strong year when it came to safety and safety improvement. This is one way you measure it, this is LTI frequence. We are not where we would like to be because we want to be at 0, but we did a fairly decent progress during 2019 and took down the LTIs with 31% and took down the severity with the LTIs a lot during the year.

We also increased our ambitions when it comes to fossil-free steelmaking. We stated that we will be first in fossil-free steelmaking. And as you know, we will inaugurate our big pilot plant up in Luleå this summer. And we will be ready to supply the market with fossil-free steel already Q1 2026.

And we are continuing to invest in our niche areas in high-strength steels and premium capacity. We took -- during the outage in Mobile, we invested in MULPIC in Mobile, cooling -- new cooling technology. We are investing for advanced high-strength steel capacity in Borlänge. And we are also investing in QL6 in Mobile. So a lot of things happened long-term or in order to meet the strategy long-term during 2019.

If you look at dividend, the Board will propose the AGM to have unchanged dividend. And the reason for that is that we expect to continue to perform good in relative terms and expect to continue to generate strong cash flows and strengthen the balance sheet over time.

If you take it in percentage, it is slightly more than our dividend policy, which is typically between 30% and 50%. And this -- with 2019 as a year, it is 144%. But I think this is the right way. And we have the balance sheet in the future to do this without any problem.

If you look at the strategic targets that we presented during the Capital Markets Day, it is about growth, not in total volumes as such, but shift continued to grow Special Steels from 1.3 million tonnes to 1.6 million tonnes; to continue to grow SSAB Services; to continue to strengthen the mix, both in Americas and SSAB Europe; and to keep the market shares, especially on the important Nordic home market. And that is what we are going to deliver on, and that is what we are going to continue to work on short term, midterm and long term.

So to sum it up, Q4 was a challenging quarter. We had weak markets. We had destocking, especially in Europe. We have had extensive planned maintenance. We had production adjusted to lower demand in Q4. We had a decent, I would say, operating cash flow and a decent balance sheet. And we keep the dividend, also proposed to the AGM to keep the dividend unchanged.

When we look into Q1, we see improving apparent demand and no planned maintenance outages.

So with that, Per, I guess, there will be 1 or 2 questions.

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

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Yes. Thanks, Martin and Håkan. It's time for questions now. And we start here in Stockholm. And please, let me -- let us know your name and your company before you ask your question. And it's perfectly fine to ask more than 1 question, but please post them 1 at a time to make this process smooth. So please, we can start right away here at the front.

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Questions and Answers

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Unidentified Analyst [1]

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(inaudible) from Handelsbanken. Two questions from my side. Firstly, on the apparent demand now for Q1, you mentioned that you expect destocking to be over. Specifically on the U.S. business, how much of that is just steel service centers driven? And also, if you can say anything on the underlying demand in the U.S., especially for some key segments like energy and [air] transport.

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

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Well, I think it's always hard to say. I mean, it's a completely different order intake than what we experienced the second half of Q3 and beginning of Q4. So strong order intake. Part of that is, of course, end of destocking and, to some extent, probably restocking as well. So what is really the underlying demand? I would say, fairly stable and not moving in any direction. We don't see any huge drops in underlying demand. We don't see any huge increases either, but we see a good order intake. And that is, I mean, the difference in -- I would say, to a large extent, difference in apparent demand. That would be my guess without knowing 100%.

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Unidentified Analyst [3]

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All right. And then secondly, I think you said roughly SEK 40 million for the under-absorption impact from Raahe. If you'd just clarify what that was in the quarter out of the total? And then perhaps, I mean, what's the plan now? It's up and running from January 1. Obviously, one part of it was just reducing slab inventory. So what's your plan for that furnace?

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

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If I come to the second part of the question, I mean, the plan was, as you said, I mean, if we would have been running the blast furnace, we would enter into 2020 with too much slab inventories. So we decided to take it down for 6 weeks. It's always a risk, I would say, to take down and start-up a blast furnace during the winter. And maybe we were lucky this time and maybe we were helped by the mild winter, but it started according to plan, and that's always very nice when it starts according to plan. So the blast furnace is up and running and producing and came up as we hoped, and we will continue to run that. We have no plans to take that down in any foreseeable future.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [5]

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And in terms of under-absorption, that was part of the under-absorption I showed on the bridge there. And I'd say it's between roughly SEK 75 million maybe, we stood a little bit longer than we initially planned.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Ola Soedermark, Kepler Cheuvreux. Special Steel, the volumes were maybe a little bit lower than I had expected in Q4, and I expect a little bit more stable volumes. Can you talk a little bit about it and how it's looking into Q1?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [7]

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It is -- there is a difference between volumes in Special Steel. Special Steels have the responsibility to sell all the hot-rolled products above 700-megapascal. And 700-megapascal and maybe 900-megapascal, they are a bit more strip products, more volatile than if you take Hardox and those more advanced grades. So I would say that for the advanced grades, the volumes were much more stable. And the margins were much more stable and the volatility came into the, call it, more strip-related products, and that's typically what we see. So there is a difference within the product portfolio of Special Steels as well. So the advanced products, the Q&T products, the plate products, much more stable. And if you take specialty products, which is a small segment within specialty, that was actually growing. So the dip or the lower volumes were more the strip-related advanced high-strength steels.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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And the order development during the quarter for less specialized items?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [9]

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Better, at the end of the quarter into Q1.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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And you also talked about some insurance compensation. Can you -- is it possible to quantify it? In SSAB Europe?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [11]

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Around SEK 200 million. And you're right, in SSAB Europe, yes.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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And raw material prices are coming down quite a lot for both coal and iron ore. And we are going to see the most of the effect in Q1, but are we going to see -- assuming stable prices for now, are we going to see continued effects in Q2?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [13]

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We will see most of the effect in Q1, if you assume stable prices going forward. Some of the coking coal will come a bit later, but most of it in Q1.

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Per Hillström, SSAB AB (publ) - Head of IR [14]

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Okay. Do we have any further questions here in Stockholm? It seems not. So I will then ask the operator to present instructions for the people on the phone lines. So please, operator?

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Operator [15]

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(Operator Instructions) Our first question comes from the line of Krishan Agarwal from Citigroup.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [16]

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This is Krishan from Citigroup. Can you please discuss the magnitude of the recovery you are expecting in the first quarter '20 volume given the base in the fourth quarter '19 is so low? So should we expect the volumes to reach to the level of first quarter '19? Or if there is any shortfall, can you broadly discuss the range of the shortfall versus the last year same quarter? Second question is...

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

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Please, one at a time. No, we expect Q1 -- I mean, Q1 is filling up in a decent way. So we expect to run Q1 with good capacity utilization and have, call it, normalized volumes. That means higher than Q4 then.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [18]

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Understand. Understand. And then the second question is more of a housekeeping. You had a SEK 980 million adjustment when you calculate the IFRS net debt and then in the footnote, you have given that it is basically from the derivative adjustment and then some acquired net debt. Can you quantify as in what was the amount for the acquired net debt?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [19]

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Sorry, I don't have that figure in my head, but we can definitely get back to you on that.

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Operator [20]

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And the next question comes from the line of Seth Rosenfeld.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [21]

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Excuse me, just a clarification. The acquired net debt during the quarter was from the acquisition of Abraservice, but the exact amount, we can come back to it too.

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Operator [22]

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And the next question comes from the line of Seth Rosenfeld from Exane.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [23]

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Seth Rosenfeld, Exane. Two questions. I'll start out first with the outlook for fixed costs, please. You flagged, I believe, a SEK 420 million of cost under-absorption in Q4 due to the lower volumes on a Q-over-Q basis. The production is expected to increase, and as you mentioned, kind of normalize in Q1. Should we expect that full SEK 420 million cost of under-absorption to reverse in Q1 on top of the benefit of higher volumes on the top line? I'll start there, please.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [24]

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I can't tell you the exact number because I really don't know, but you should expect that to come down a lot. We will run production at better capacity utilizations during Q1, clearly better capacity utilization.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [25]

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Fine. And then specifically on the U.S. markets, obviously, you've seen broad-based weakness in flat steel price in the U.S. during the course of second half of last year. Hot-rolled coil, cold-rolled galv have all bounced very significantly over the past 2 months. Plate has lagged dramatically. Can you comment on why you believe the U.S. plate market is currently a relative loser versus other products? And what could potentially drive some strengthening going into 2020?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [26]

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I think there is, from time to time, a lag between different markets and a couple of years ago, plate were lower than -- or lagging strip products, and we saw the opposite during end of last year and beginning of this year. So there could be a time lag that differs a bit over time.

What we see when we look into our order book in Q1 is that we have good order intake, good demand. We see that lead times are extending. So we'll see what happens with steel prices -- or plate prices compared to strip prices and so on, but they should typically, at least, over time, follow each other, but there could be different lags. And exactly what the lag depends on each and every time, that differs as well. But we should -- you should expect them to follow over time. And you should also expect that, I mean, decent volumes and slightly longer lead times for us and good capacity utilization.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [27]

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Okay. Just one follow-up there on the U.S. There hasn't been very good data available on the actual pace of recovery. Are you able to quantify how the recent price hikes have been absorbed or not by customers? Have you been successful to date?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [28]

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Some of them, yes. There has been a couple of price increases, and as usual, the first price increase is typically to stop the prices to fall. And then we introduce price increases and they stick in the market.

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Operator [29]

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And the next question comes from the line of Ioannis Masvoulas from Morgan Stanley.

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Ioannis Masvoulas, Morgan Stanley, Research Division - Equity Analyst [30]

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Two questions from my side. The first, on working capital. A big quarter in Q4. You released a record amount, SEK 2.2 billion. And the question here is, how much of that should we expect to reverse in Q1, especially given the restart of the blast furnace in Finland?

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

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But you should -- I mean, when sales are -- sales is increasing, you should, of course, expect us to build some accounts receivables and so on. So that will come. But we still -- I mean, looking at it a bit, call it, midterm to slightly longer than just Q1, we still see potential in releasing working capital. And we are running our net operating working capital project and have done a lot of benchmarking and see that we -- even though we have done a lot the last couple of years, we still see continued potential to release working capital and become more capital efficient.

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Ioannis Masvoulas, Morgan Stanley, Research Division - Equity Analyst [32]

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Okay. And the second question on the dividend. Payout ratio, well above the guided range. And the question here is, given the low gearing levels, would you be comfortable levering up the balance sheet modestly to continue paying an attractive dividend? Or should we see that today's announcement as a one-off?

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

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You should -- I mean, you should expect us to continue to strengthen the balance sheet and generate good cash flow. Last year, we did some acquisitions and so on. But you should, over time, expect us to continue to strengthen the balance sheet, and, I mean, keeping the dividend is a sign of that. So I wouldn't say it's a one-off. I'm a strong believer in a stable dividend over time. So yes, it was slightly higher than the range we have given. But that range should be seen over time, not every single year.

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Operator [34]

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

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [35]

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Just a couple of questions from me. Firstly, on CapEx. At the Capital Markets Day, you guided an average SEK 3 billion over 2020 to 2025. So is that an appropriate level for 2020 spend? Can you just give a bit more granularity on that? That's my first question.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [36]

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Yes, that's an appropriate level for 2020 as well.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [37]

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And does that include or exclude HYBRIT spend? And if not, how much?

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

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HYBRIT, that's not really CapEx because that's what we inject as equity if needed into the HYBRIT company. So it includes the transition that we're doing in Oxelösund in terms of starting building the new electric arc furnace and related activities. It does not include potential equity injection into HYBRIT, no.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [39]

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Okay. And second question, just on net debt. There was a SEK 950 million negative impact from derivatives and revaluation effects. Can you just articulate whether you expect that to reverse? And if so, under what price scenarios would that happen?

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

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That depends very much on the exchange rate differences. During the quarter, we had a quite significant change in the Swedish krona versus the U.S. dollar, and that's what triggered that main impact. If that's going to reverse or not, that obviously depends on if it would go the other way around in Q1, so that's hard to say. But that was the reason why it happened in Q4.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [41]

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Okay, that's fine. And final question for me. Just it sounds like there's still a threat of strikes in Finland. Can you provide any additional granularity around where those risks currently sit from where you're sitting, please?

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

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They are postponed for 2 weeks, and the negotiations are ongoing. So we hope to -- that they will come to a solution where we can avoid strikes during Q1. So -- but I'm not part of the negotiations, and I don't have the latest update, but I know that the discussions are ongoing, and the start of potential strikes is postponed for 2 weeks.

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Operator [43]

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And the next question comes from the line of Carsten Riek from Crédit Suisse.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [44]

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Just 2 small questions from my side. The first one is on the insurance compensation because you mentioned it's SEK 200 million. We have seen a year before, another SEK 100 million. My question is, are there any negative -- is there any negative impact on the insurance premium post those payments? Because usually, insurance premiums tick up after those payments? That's the first one.

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

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Over time, that might be the case, but not short term.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [46]

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Okay. So there's no kind of short-term negative. The second one, what makes you actually that confident to keep the dividend at SEK 1.50? You already mentioned the improving volumes. How do you see actually the steel price side going forward, especially in Europe?

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

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But I said I'm confident with keeping the volumes, given the cash flow generation, I expect the 2020 and the coming years. So I -- that's what I said. How steel prices will develop during 2020, it's too early to say. We have a fairly good view that we communicate in the outlook for Q1. And then we have seen that maybe spot prices have started to move in the right direction, but we haven't started any discussions or any negotiations for Q2 yet. It's too early.

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Operator [48]

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

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [49]

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Just 2 left for mine. The first one, kind of following up on what Luke was asking about. I appreciate you don't have the clarity whether a strike in Finland will go ahead, but if there was one to repeat, is the impact that you guided to, being the one in December, a similar number we should think about? Or are there any kind of additional measures you can put in place ahead of time to mitigate that?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [50]

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We are working with that, of course, and trying to mitigate what we can. This time, I mean -- during Q4, it was a strike among electricians, blue collars and some others. Also in the -- some short strikes in the harbor of Raahe. We have -- or they have agreed on a collective agreement with the blue collars. So this is, as I understand it, white collars and senior-salaried employees. Then it depends how long this strike is and what will happen, but it's -- I mean, everything else equal, it is, call it, slightly easier to run production -- or, call it, slightly more complicated to run production when we have strikes among blue-collar employees compared to if we have it with white-collar employees. But we have white-collar employees also, of course, being very vital for the production. So it depends how the potential strike will look and how we can try to mitigate. But we are working with different scenarios and following it, the negotiations and what happens in Finland, very closely.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [51]

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Okay, that's helpful. And then just another one on Tibnor and the cost savings there, the SEK 200 million run rate as of the second half of this year. Medium term, do you think you can sustainably hold on to those cost savings? Or is there some risk that that margin will get transferred to customers?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [52]

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Well, we will definitely reduce the costs with at least SEK 200 million. And then, of course, we will not -- and the reason is, I mean, the idea is to increase profitability to a level where it should be because they have not been performing the last couple of years on acceptable levels. And we talked extensively about that during the Capital Markets Day. And that's the idea.

And while -- looking into the program, it is slightly ahead of plan. So I'm not worried that we won't meet that. Then what happens with the profitability is, of course, also a mechanism of steel prices and the competition and so on, but I'm very convinced that we will meet the cost-saving target as such.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [53]

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And just one last one, going back to the dividend. Given what you said so far, it sounds like under the current outlook you have, SEK 1.50 per share might be a base level dividend we can think about for 2020?

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

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No, but what I said is that, I mean, if you take the dividend policy and apply that on the EPS of 2019, the dividend should be, of course, mathematically lower, but we are confident for the future. And we think that the balance sheet currently is not in very bad shape. And if anything, it will become stronger and stronger. So that's -- that was the reasoning behind the keeping the dividend. So we are quite confident when we look at our possibilities midterm.

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Operator [55]

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And the 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 [56]

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Just a few follow-ups from my side. Firstly, on Americas, if you could comment a little bit on the inventory levels that you see on your customers. You have previously said that they are on very low levels. Is that still relevant?

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

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Yes.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [58]

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Have you seen them changes a bit or in any direction?

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

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Well, we haven't seen the latest statistics, but we have seen that the order intake in Americas has been on good levels.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [60]

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And as you also said, Martin, you said that the underlying demand is perhaps stable in Americas. But still, prices have been struggling quite a lot, but import have -- imports seem to have come down quite materially. So do you see -- is the destocking phase, is that the real, call it, the reason for the weak trend, would you say?

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

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I would say that destocking was part of the -- a big part of the explanation during Q4. And then, of course, the current order intake we see and have seen lately, is that only destocking or not? Well, there is a huge -- I mean, there is a different -- when destocking is over. So no, we have had good order intake since, I would say, beginning of December or something.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [62]

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Right. And then on Europe, do you have any -- or what's your contract structure these days? Is it primarily...

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

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It's a combination of 1 year, half year and quarterly contracts with the majority being quarterly contracts. So -- but I mean, into Q1, there is always a combination. I mean, that's where you typically renegotiate the half year contracts and the yearly contracts. So it is a mix, but I would guess that at least it's what? -- 60%, 65% being quarterly contracts.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [64]

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Okay. And have you already signed the prices for the half year contracts or...

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

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Yes.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [66]

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Can you say anything on prices?

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

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No, we guide for prices for Q1, but we have signed contracts for Q1 with maybe 1 or 2 exceptions, maybe. But -- so we have signed full year contracts, half year contracts and all the quarterly contracts, all the contracts up for negotiation for Q1.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [68]

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And we guide for somewhat lower prices in Europe, Christian, and the reason is these longer-term contracts that we have signed because they will be lower. Then in Q4 we had some spot deals, which we will not need to have in Q1, which will help prices but will be then offset by the longer-term contracts.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [69]

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Right. That's understandable. You said that mix was a little bit negative, right, for Americas in Q4, but you are working on improving the mix. So what do you expect the mix in Q1 to be?

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

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No, but we were standing still -- we were standing still in Mobile due to the maintenance outage. And from Mobile, we produced a more, call it, advanced products or the fatter mix or the better mix. So we were running Montpelier, which is typically, I mean, a mill for cost-efficient standard steel production and standard plate production.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [71]

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Right. And then finally then, can you just say what the -- what was your total cost for iron ore pellets and coking coal in 2019?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [72]

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Total cost in absolute terms or?

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [73]

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Yes. I mean, I have the figure for 2018. But I just wanted to see if you have the updated figure as well.

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

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Oh okay. We have to get back on that, Christian. I don't have it in my head.

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Operator [75]

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And the next question comes from the line of Anssi Kiviniemi from SEB.

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Anssi Kiviniemi, SEB, Research Division - Analyst [76]

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It's Anssi from SEB. A couple of questions left from my side. First of all, looking at your inventory level that you have on yourselves, how happy are you with the current level, as we are entering into 2020, given the current market outlook?

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

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But I think there are always room for improvements, but I would say they are -- and possibilities to become more efficient when we measure capital turnover. I wouldn't say that the inventory is -- maybe with the exception of coking coal, is much too high. But having said that, there are still possibilities when we look into it to become more efficient, but we don't have slab inventories and inventories that gives any reason for concern. And the reason for that is, of course, that we took the decision to close the blast furnace in Raahe. But that means also that we didn't consume the coking coal we expected to consume. And you know that we're taking coking coal before the ice season and we pile up stocks during the winter. So we have not consumed coking coal in the volumes we expected to do in normal winter. Iron ore or pellets, we can flex more with, because then we have transports all over the year. So with the exception of coking coal, I wouldn't say that any big worries, but still potential to become more and more effective.

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Anssi Kiviniemi, SEB, Research Division - Analyst [78]

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Okay. Then second one is on savings. Basically, since you reported Q4 results, you highlighted yourself, I think it was some SEK 330 million positive impact, call it, compared to last year. So what should we expect when we enter into 2020 in Q1 and Q2? Will savings continue and kind of could you give some kind of indications on that side?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [79]

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But we will continue to be cost cautious, and we have implemented some things that we will continue to run and some measures. On the other hand, I mean, we will not use short-term layoffs in Finland and so on and flexicurity measures in Sweden because we will run production at a different level. So we will not take those, call it, short-term flexibility measures, but we will, on the other hand, not increase temporary manning either. So it's more like the short-term actions we took in Sweden and Finland and that will not be the case in Q1 compared to Q4.

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Anssi Kiviniemi, SEB, Research Division - Analyst [80]

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Okay. That's clear. Then my last question is on the Finnish industrial strike. I mean, 2 weeks, that's a long period and running the blast furnaces without the white collars. Can you do that for 2 weeks? Or should we expect that if the strike situation escalates, you need to idle your blast furnaces in Raahe or kind of how should we think about that?

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

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It's a good question. I think it's a bit too early to answer because that will depend on how the potential strike will look. Let's come back to that. I still hope and think that they will be able to solve this problem with the 24 hours for white collars in Finland. So -- but we have different scenarios, and we are trying to take or prepare for the measures to mitigate, as much as we can, the potential -- the negative effects of a potential strike. But of course, it will affect us if it is -- if it will be a strike, yes.

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Operator [82]

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

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [83]

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My first question is on Special Steel. The profitability of that business, obviously, used to be very stable and now you're saying that prices are coming down, but obviously, costs are coming down as well. If you look at the overall profitability of the portfolio in Special Steel, could you give us some steer on whether you expect that to be stable from what you see in your order book when you compare it to the first half of last year, and when you still, I think, had EBITDA per tonne margin north of SEK 2,000? That is my first question.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [84]

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It will depend on the mix. But if you take product by product, we expect the margins over time to be fairly stable. We will see some effects, as Håkan pointed out, a lower raw material cost and slightly -- and stable prices. So it will depend very much on the mix. And the mix differs a bit or the volatility in the portfolio differs a bit with higher volatility of 700 material strip-related advanced high-strength steels and less volatility on Hardox and strength plates. But over time, we still believe and see that there is a potential to continue to increase margins in Special Steels with better big mix and higher volumes.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [85]

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Okay, understood. And now looking into your order book, when you look into those mix effects you mentioned, do you see rather profitability expansion from your mix in the first half of 2020? Or is profitability getting a little bit worse or just stable? Any color you could give us on that?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [86]

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No, but I would say that the order intake we have had and the order book we have now is more normalized compared to Q4. So we continue to see increasing demand for the more advanced products, but we also see that the lower quality -- the products with higher volatility, the order intake has come back compared to Q4.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [87]

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Okay, perfect. Then I have another question following up on the energy transition strategy. When will you decide on the investment for the upstream infrastructure of the demonstration plant at the HYBRIT JV, i.e., the electrolyzer and DPI plant and whatever is required there? And what are the capital requirements for the demonstration plant as a whole?

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

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We are working with that plan right now. So it's a bit too early to say. But we will come back to that, but the work is ongoing, and we're working together in the HYBRIT development, AB together with Vattenfall and LKAB and we'll discuss that and come to some kind of conclusion during -- I would say, during this year or the first half of this year. So let us come back to that.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [89]

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Okay. So there's no actual guidance on like what the capital requirements will be also for you, on top of the CapEx which you have laid out?

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

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No, not for the demonstration plant. For the pilot plant, that will be finalized this summer, we know what it is. And I mean, compared to the figures we talk about, that is minor investments for SSAB. But we need to come back to the demonstration plant because that is a full-scale production plant. And that investment will be done by HYBRIT. So the 3 companies together, and then there will be some other investors or yes, in that as well, potentially.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [91]

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Okay. Got it. Will these investments into HYBRIT already start this year as well potentially?

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

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No, but they are already ongoing with the pilot plant. For the demonstration plant, I would say, maybe minor investments this year. I mean, pre-studies and so on, and they are already ongoing.

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Operator [93]

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(Operator Instructions) Our next question comes from the line of Oskar Lindstrom from Danske Bank.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [94]

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A couple of more or less follow-up questions from my side. I mean, the first one is on your price guidance for Special Steels in Europe in Q1. You're saying that your prices should be slightly lower. But does the better order books mean that you will have a better mix Q1 versus Q4? So again, that I understand this correctly.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [95]

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For Europe, yes. Because in Europe, we took some spot orders during Q4, which we will not do in Q1. On the other hand, as I said before on the pricing, we now have renegotiated a yearly and the half yearly contract and given where spot has gone during 2019, those will be with lower prices. But from a mix perspective, overall, yes, Q1 will be better than Q4 for Europe.

For Special Steel, it -- we will have a continued good mix in Special Steel as well. But there, we are not taking the spot dates as we did in Europe. So it's not a big change there, that is more a factor that, as I showed in the bridges, we have been holding up the prices for Special Steels very well. We will see a slight decline we expect during Q1. On the other hand, we also see lower raw material costs. So margin-wise -- gross margin-wise for Special Steels, it's not a big difference between Q1 and Q4.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [96]

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But -- so you're not saying that in Europe, for example, the more positive mix could or will compensate for the lower prices that you've contracted?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [97]

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No.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [98]

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Okay, fine. My second question, also on the HYBRIT. How will you report the -- when will the net debt of the JV start to impact your net debt?

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

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No. It's a 33% joint venture, so we will not consolidate HYBRIT.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [100]

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All right. And the capital injections could -- you'll have to see when they come?

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

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Yes.

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

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Yes.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [103]

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Okay. And then the final question is on the dividend for the year. You're saying now that you're focusing more on the balance sheet and keeping a stable dividend. Should we see this as being a slightly new thinking versus the kind of guidance for 30% to 50% of EPS?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [104]

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No. You should -- we still have our target when it comes to dividend. What I said was that second half of 2019 was a bit special and Q4 was a bit special. Looking forward, we see strong possibilities for the companies. We felt that -- and we also see possibilities to continue to strengthen the balance sheet. And I don't see the balance sheet being a huge problem as a starting point where we stand today. So that was more the reasoning behind it.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [105]

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Okay. So we shouldn't see that this is the kind of dividend you'll have as long as you can keep this type of balance sheet? You will continue to be EPS-based.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [106]

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That's a matter for the owners and for the AGM to decide. But this is the proposal for the AGM for 2020. And then let's come back in a year and see what we propose then for the upcoming AGM in 2021.

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Operator [107]

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As there are no further questions, I'll hand it back to the speakers.

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Per Hillström, SSAB AB (publ) - Head of IR [108]

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Okay. Thank you. Do we have any follow-ups here in Stockholm? Seems no, okay. So then we can conclude the conference. Thank you, gentlemen, and thank you for the attention, and we wish you a nice day.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [109]

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Thank you.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [110]

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Thank you.