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Edited Transcript of SSAB.ST earnings conference call or presentation 23-Oct-19 7:30am GMT

Q3 2019 SSAB AB Earnings Call

Stockholm Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of SSAB AB earnings conference call or presentation Wednesday, October 23, 2019 at 7:30:00am 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

* Alan Henri Spence

Jefferies LLC, Research Division - Equity 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

* Gustaf Schwerin

Pareto Securities, 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 from SSAB. It's regarding the third quarter of 2019. Welcome also to the audience that follows on the webcast. The agenda today, we will start with Martin Lindqvist, President and CEO. He will summarize the third quarter, he will also come back with the outlook. And then we'll also have our CFO, Håkan Folin with us. He will talk about the financials. And when we have ended the presentation, we will open up for your questions. So you will have a chance also to ask many questions here.

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 to start to summarize Q3, we saw a weaker demand, apparent and also underlying demand and a seasonal slowdown in Q3 and especially in Europe. Americas during the quarter held up fairly well. We saw also that it was, to a large extent, strip-related the lower demand. If we look at our more advanced products like Hardox and Special products within but also what we call Premium products in SSAB Europe, they held up better or even increased the volumes during the quarter.

I will come back to the measures we have implemented, but we have implemented since, I would say, beginning of July, some cost measures and we continue to do that. But I will cover that in a slide or two. We still continue to generate decent cash flow, and our expectations are clearly that we will continue to generate strong cash flow. So -- and we are in a situation with a fairly strong, not too strong, but fairly strong balance sheet. But I will come back to that as well. This is not a perfect picture. But I used this because this is how I see it a bit. And this is apparent demand, and there is something on the road happening and someone in the beginning of the chain starts to push the brakes and then the queue builds up, and then you pass this and then the speed turns up. Again, made the slower pace than it used to do, but still at some speed. So this is a picture for me, at least, of apparent demand. So this is apparent demand, and this is real demand then. And as you all know, when apparent demand is below real demand for a while, then there is -- and everyone is pushing stock -- pushing down the stocks in the supply chain, then there will be a rebound, but will be the real demand. So we will see volatility around real demand.

This is a picture showing the price development in the market during the third quarter. And in U.S. for play, it's relatively good demand from end users, cautious sentiment from distributors, plate prices coming down, but also spot prices for scrap coming down during the quarter. So quite okay market for plate in North America.

In Europe, we saw the usual seasonal slowdown and then weaker underlying demand and weaker apparent demand from several segments, and we saw spot prices going down. We also saw during the third quarter, fairly high raw material costs, especially for iron ore. They started to decrease at the end of the third quarter during September, and we will see the effects of that in Q4.

So to sum it up, we ended up with an EBIT of SEK 300 million, and that is SEK 1 billion lower than SEK 1.3 -- no -- SEK 1 billion lower than -- SEK 1.3 billion lower than the third quarter last year. And the lower result was mainly due to SSAB Europe, where we saw the big drop.

Shipments were down compared to third quarter and the second quarter -- third quarter last year and the second quarter this year. If you then look at the cost measures, and we started to implement this already in July. So I felt -- feel that we were pretty early on to it. We have reduced production rates. We closed the blast furnace, the small blast furnace in Oxelösund already in September. We took the decision in July to do that. We have other cost measures that cost measures we have in the industry. We have also set up the company in a more flexible way. So we had, at the end of Q2, we had quite a lot of temporary manning, and we have taken a decision to have temporary manning to meet situations with high demand with temporary employees, have a base manning that we can go down to. So we started to do that. They're also using own personnel instead of contractors wherever it's possible and to a much larger extent than we usually do.

We have also taken the decision to close one of the blast furnaces end of November in Luleå. And the reason for that -- we will have it closed probably 4 to 6 weeks. And the reason for that is that we don't want to build up a slab stock in December because then we will enter into Q1, we'll have too high inventories. So we'll take that down and reduce temporary employees in manning. That will mean short term, some under-absorption in Luleå, but long-term and for the balanced sake of the balance sheet, I think that is the right decision to do.

And what we are doing now is, this is looking forward into Q4. We are taking down temporary employees with roughly 500 people. And then we have other, call it, more short-term measures like the time banks, like temporary reductions in Finland and so on account amounting to SEK 850 million full-time equivalents. So we are taking down the manning with 1.3, 1.4 -- 1,300 to 1,400 people during Q4 then -- to meet -- until the end of December.

You don't have this picture, but I said to Per, let's take that picture. Because this is a picture we showed when we announced that we would acquire or when we acquired router. Again, this shows the flexibility we have in the hot-end system. And as you know, the hot-end system is the least flexible part of the production system. And these are the volumes we can flex between in the Nordic system. So '18, we were running all the blast furnaces. So 1 year ago, we're running all the blast furnaces. Today, we have closed the small one, or idled the small blast furnace in Oxelösund. And what we will do in November is to take down one of the blast furnaces for 4 to 6 weeks in Raahe, so we have these possibilities. And if the market would get even worse, we have another possibility. But this is a way to use the redundant production system, that was not possible either in the old SSAB or in the old outlook. So that's why I brought this picture with me, you recognize it, many of you, since we -- a couple of years ago when we presented it.

As a decent operating cash flow, we continue to reduce the net debt. We will continue to reduce the net debt. And I see no reason why we shouldn't continue to generate strong operating cash flow and strong net cash flow. So SEK 1 billion or a bit more than SEK 1 billion during Q3. If we look at the divisions, especially starting with the Special Steels, we saw weaker demand in Europe, somewhat weaker in North America, and we saw major OEMs. I mean, remember the picture with [cube] cars taking out volumes in the supply chain and reducing inventories at an EBIT of SEK 358 million, which is down compared to Q3. It is about lower volumes, but also the margin pressures with a high raw material costs. And where we see, as said, the reduction in volumes is the more strip-related products and Hardox is growing. If you look at SSAB Europe, we see the biggest difference. It is the seasonal slowdown with -- on top of that, the downturn in the business cycle. Even here, the premium product is holding up better than the more standardized products. EBIT was down SEK 940 million. Here, we saw the severe pressure on margins with higher iron ore costs, but we also saw slightly lower steel prices and we also had a midterm repair in Raahe.

Looking at Americas, we saw stable demand -- stable underlying demand, we'll come back to that, there are a couple of segments that are doing quite well. We saw plate prices being reduced or going down during the third quarter, but we also saw scrap prices going down. We saw also apparent demand or apparent consumption among Steel Service Centers in the beginning of the quarter pick up. And then at the end of the quarter, they came back to a pattern, where they started to reduce inventories. And the inventory levels at the end of the third quarter are on low levels. Look at it to what the companies did [Nordic] at the breakeven, more or less, they feel, of course, the general steel cycle in the Nordic region. And I think Ruukki Construction, which is more now what it should be, mainly product business with roofing and components, continue to develop in a positive way. They are not really yet where they should be, but they are moving -- definitely moving in the right direction.

With that, over to Håkan.

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

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Thank you. Good morning, everyone. Some more details then on the figures, balance sheet, also on the raw material side. Starting with an overview in the quarter, the weaker market, higher iron ore cost impacted some of these key figures. We saw sales in the third quarter drop with 9% compared to Q2, 6% was volume-based and 3% were coming from price. However, we always have a drop in Q3. And if we compare Q3 this year with Q3 last year, it was actually only 1% difference in sales. Shipments, as said, down 6% compared to Q2, but only down 2% compared to Q3 last year. On the EBITDA and EBITDA margin side, and here, we see the main difference coming down from the increased raw material costs. We had an EBITDA margin of 7%. It was down 4.5 percentage points compared to Q2. And finally, naturally, then we've done drop in the EBITDA margin and EBITDA in absolute terms, we also saw that EBITDA per tonne shrunk to SEK 800.

If you focus then on the difference, what happened between Q2 and Q3, then we had the drop from SEK 1.3 billion to SEK 300 million, so SEK 1 billion in difference. The main difference coming here from the price side SEK 750 million, and we saw it especially for SSAB Americas. We also saw lower prices for Europe. For Special Steel, actually, on the other hand, we saw a slight improvement in prices. Based on that, we had a better mix in Q3 than in Q2.

Volume, down, impacting with around SEK 300 million coming from Europe and coming from Special Steel. In Americas, we actually had higher volumes in Q3 than in Q2. Then variable COGS, which, to a large extent, is raw material. It's actually only impacting negatively with SEK 170 million. But here, it is a big difference, where in Nordic operations with a higher iron ore, we have a large negative impact. On the other hand, in Americas, where scrap has been moving down, we get the positive impact during the quarter. But when we add those together, it adds up to roughly SEK 200 million. On the positive side in the quarter, we had the fixed cost, impacting positively with close to SEK 500 million. For those of you who followed us for a few years, you know that in the Nordic operations, in the summertime, we have naturally lower fixed costs, when we have this vacation reserve dissolvement, that is around SEK 350 million between SEK 300 million and SEK 350 million, but even adjusting for that, we have lower fixed costs now in Q3 than in Q2. And as Martin talked about, have implemented a number of actions, and we will continue to follow this extremely closely during the fourth quarter as well.

FX is almost negligible. And even if you compare with Q3 last year, FX is extremely small. Many of the other Swedish industrials that have reported have had a big impact on FX. But for us, we buy all the raw material in dollar, and then with the weaker Swedish krona against the dollar, that gives us higher cost. And of course, we benefit when we sell in dollar euro, but since the big change has been versus dollar, the weakening Swedish krona, we don't really get any benefit from that right now. And here on other, negative with SEK 300 million almost, it's -- if we are when compared with Q2, we had a planned maintenance outage in part of SSAB Europe, but then we also had the so-called midterm repair up in Raahe in one of the blast furnaces, giving a lot of under-absorption, and that's part of this other item.

If we then change to the cash flow. We had, as Martin said, a decent cash flow, a bit more than SEK 1 billion in operating cash flow, clearly lower than the last year, mainly coming from the earnings. If we look at working capital, we were actually releasing some working capital this year versus tying up last year. Then we have a number of items, financials and tax, et cetera, then we come down to net cash flow, and we generated SEK 400 million in net cash flow, resulting in slightly lower total net debt. And if we move on to the balance sheet, well, we ended the quarter at SEK 9.5 billion in net debt, which implies a gearing over 15%, so 1% lower than at the end of Q2. The duration of our loan portfolio is now over 7 years, and we are continuously repaying the short-term maturities, which means the net average is stretching out in time. And if we look at our maturity profile here, I would say it's rather undemanding. We have, in total, a bit more than SEK 3 billion for the rest of 19, 20 and 21 and even in 22 weeks, less than SEK 2 billion. So the maturity profile is rather solid, and we continue as we generate cash flow to move the maturities further out in time.

But in summary, for the balance sheet, well, we have a fairly low net debt, fairly low net gearing, loan maturities and undemanding maturity profile. So we leave the balance sheet here and move on to the raw material side instead. During the quarter, purchase prices decreased, both for iron ore and coking coal. For iron ore in Swedish krona only 1%, in dollar 2%. And the reason why it's that low is we started the quarter, then iron ore was moving upwards for the first month, 1.5 months, and then it's been moving down in the second half. But on average, it's actually only down 1%. Coking coal has been a bit more slowly moving downwards, and on average, then giving us 6% lower purchase prices in Q3 than in Q2. Both of these will impact us positively on the result in Q4, especially for SSAB Europe and especially if the iron ore holds where it is or even goes down further, given that for Luleå, we have short lead times with the deliveries that we get from LKAB. So we'll get some positive impact on the P&L in Q4.

In the U.S. operations then with our scrap, scrap prices were actually down as much as 10%. Our purchase prices during Q3 versus Q2. And we can see now that even in the beginning of Q4, they have continued downwards. And Martin showed you the market prices for plate during Q3, which went down quite a lot, and we will have lower realized plate price in Q4. We will, on the margin, get some help then also from the scrap development.

Finally then for me, a reminder of the planned maintenance outage that we will have in Q4 that are rather significant. In Q3, we had some maintenance outages in SSAB Europe business. And in Q4, we will have the yearly one in Oxelösund, some additional one in Europe, and then we will have a big one in Mobile in the U.S. We haven't had one in 2 years, and we can actually see that on the performance in Mobile, that it's been a while that there's more unplanned repair needed now during Q2 and Q3, but we will have now the big maintenance outage in Q4. And after that, they expect the mill to run perfectly again. In total, we will have maintenance outage for around SEK 800 million during the fourth quarter.

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

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So then looking forward into Q4. And I show this picture, it's a bit more autumn

(technical difficulty)

colors this time. But if we start with heavy transport, we see reduction in European heavy truck production. We see some signs also slowing down from high level when it comes to railcars and barges in North America. Automotive, I would say, low demand, not getting much worse, but low demand, but the structural growth of advanced high-strength steels within automotive. Construction Machinery, I would say healthy, but lower production levels compared to the peak this spring. Material handling, stable activity in mining, still healthy in around the world. Energy, the only green dot. We see good demand from, especially the North American energy sector from wind towers, wind power producers, but also from pipelines and oil and gas segment. Construction, seasonally lower and signs of it continuing to slowing down in the Nordic region. And then Service Centers. As I said in the beginning, cautiousness in the end of Q3, inventories on low levels, hesitation in Europe and still destocking, but getting down to fairly low volumes in Europe as well. So eventually, they will have to restock.

And we look at our guidance, we say that in North America, demand for heavy plate is expected to be relatively stable. In Europe, underlying demand to be weaker, especially towards the end of the year. And then we talk about apparent demand. So that's what we expect. Low demand for high strength steel, somewhat weaker, primarily related to Europe. And then prices, as Håkan mentioned, they are expected in Q4 to be lower for Europe and America and somewhat lower for Special Steels and the lower iron ore costs will have a positive impact, mainly in Europe, but also for Special Steels.

So to sum it up, I think we are in a pretty good shape with good development of the product mix with a fairly decent balance sheet and with a lot of actions implemented and readiness to implement or more actions if that would -- if the market would so require. Weak demand or weak market in Europe, lower earnings. America, as I said in the beginning, holding up well, high-end products, niche products, more stable than the strip-related products. Measures to reduce costs and continue to reduce costs implemented and already from beginning of July, but now exaggerate or increased speed into Q4. And as said, we expect to continue to produce decent or strong cash flows over the cycle. So if anything, the balance sheet will continue to get stronger. With that...

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

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Yes. Thank you, Martin and Håkan, and then we can open up for questions. We start here, and please state your name and company before you ask. And you are more than welcome to ask more than one question, but please state them one at a time, so to smooth the process here.

So we start here, I think, straight away. Thank you.

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Questions and Answers

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [1]

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Gustaf Schwerin from Pareto. 3 questions from my side. Firstly, on the visibility in your order books for Europe now in Q4. If you can comment a little bit around that? And whether or not it's too early to say anything about the pickup or any potential pickup in demand in the beginning of the next year?

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

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No, but the visibility we typically have is the coming quarter. So we have it for Q4. Then if the market -- if steel prices continue down in Q1, the typical pattern is that buyers, they hesitate to take out the volumes in the second half of December and vice-versa if the prices are picking up. They take out more volume. So typically, that is the big question mark, as always, when the business cycle turns. So when there is uncertainty in the market, but we have a fairly good view of Q4. But beyond that, the visibility is not that good. So Q1, we haven't set any prices or starting to take any orders yet. We typically do at the end of November, mid-November and onwards.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [3]

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Okay. Then secondly, on your iron ore guidance for Q4. As you mentioned, the average price is not that much lower versus Q2. I mean you've been talking about this one quarter lag previously? I mean is there reason to shorten that for the P&L effect or...

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

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For Luleå, there is, because there we don't basically have any inventory. So we talked about, on average, one quarter. But if you take Luleå, then it's more 1.5 months actually. So if you take Luleå, then we've seen decrease in prices during the last part of Q3, and that will have a positive impact in Q4.

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

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But there is no change. So it is the same pattern as always. We haven't changed any setup or anything. So it is on average a quarter.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [6]

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Great. And then lastly, on the under-absorption effect in Raahe from, let's say, one of the furnaces. Any guidance on the impact of that.

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

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I would say, roughly SEK 40 million.

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Per Hillström, SSAB AB (publ) - Head of IR [8]

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Yes. We have another question here.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [9]

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It's Ola Soedermark, Kepler Cheuvreux. Can I have a follow-up question on Europe in Q4 outlook. We are not seeing this normal seasonal pickup in volumes there? Is it -- what areas have surprised you most than kind of not picking up?

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

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They are no -- I think the uncertainty on the market has driven down apparent demand. I can't point at any specific sector, but it is, I would say, strip-related products mainly and all over the segment. So there is an uncertainty, and there is a wait and see mode. And that's why I showed the picture in the beginning with the traffic jam, but people are in a wait and see mode and looking what happens on the geopolitical side. What happens with the business cycle and so on. So I wouldn't point out any specific segment that sticks out compared to the others. But automotive has been going down for a while, and it's maybe flattening out a bit. But apart from that, I would say, it's strip-related products in many geographies and segments in Europe.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]

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And when it comes to cost measures you have taken and the temporary manning and time banks, and so when are we going to see the effects? I suppose, it's going to be quite rapid. Can you quantify it?

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

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No, we haven't quantified it, but we will see it in Q4. And we started, as I said, we started the planning already in June implemented part. We took the decision to close down the blast furnace in -- small blast furnace in Oxelösund already in July. And then there is a lead time, but that's closed. And those people, which, to a large extent, for temporary manning, were leaving end of September, beginning of October. So run rate end of this year will be 1,350 temporary employees. And what we have also done is that we typically, during the summer, have a lot of, what we call, summer workers, and we have never been so quick to get rid of them is maybe the wrong word, but to phase them out. So I think we have been quite active this time, reacted quick.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [13]

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And then just a curiosity, what time horizon do you have any idle the second blast furnace?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [14]

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We have said 4 to 6 weeks, but then, of course, it will be dependent on where the market goes in Q1. But the base plan is to idle it 4 to 6-week and store it for second half or take it down second half of November. So until year-end, I would say.

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Per Hillström, SSAB AB (publ) - Head of IR [15]

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Okay. Do we have any further questions from Stockholm? Seems to be nothing left. So then we can open up questions from the phone lines. So I will ask the operator please to present (technical difficulty) questions.

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Operator [16]

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(Operator Instructions) Your first question is from Alain who's from Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [17]

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A couple of questions from my side. Firstly, on the -- if you were to tie in your comments on prices and raw materials into Q4. Can you confirm that the price to cost dynamic will be negative for Steel Europe and Special Steels going into Q4 Q-on-Q? That's the first question.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [18]

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So what do you mean price to cost dynamic. You mean the relative development?

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [19]

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Correct, correct.

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

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Well, we haven't quantified exactly neither on the price nor on the iron ore. The cost of iron ore, the purchase price, you saw on the slide, slightly down in Q3. We'll have a little bit more positive impact if it continues this way in Q4. And then we said the prices for Europe will be down. For Special Steel, on the pricing side, we said they will be somewhat down, but not that much now.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [21]

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So you still expect the margin compression Q-on-Q, right, Q4 versus Q3?

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

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That was what I was not answering. It depends on where prices are heading for the rest of the quarter. That's a bit too early to say, actually.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [23]

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That's fine. And then the second question is on the CapEx outlook for 2020. You've given a soft guidance earlier on the CapEx for next year. Has that changed? Has your thinking changed in light of the blast furnace shutdown that you've announced?

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

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We -- not yet, but we could change that if we feel that it is required. Of course, it's always -- you're a bit more cautious when times are tougher. On the other hand, it's typically more cost-effective to invest during a downturn. So we have a range, and we can, if we feel that's necessary to take it down, yes.

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Operator [25]

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Your next question is from [Vic] who's from JPMorgan.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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Yes, it's Luke Nelson from JPMorgan. 2 questions for me. Just firstly on the under-absorption effect, you mentioned SEK 40 million from raw. Can you just give an indication of what additional under-absorption effects will be given lower volumes in Europe outside of that idling? And then the second question is just on any impact on working capital from the idling of that blast furnace, could you quantify that?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [27]

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I can take the second question first, and then Håkan take the first one. But the reason why we idle the blast furnace is that if we don't do that, we run the risk of having too high slab inventories at the end of the year. And we don't want to take that risk. So we have a strong focus on working capital, as always. And we think this is the good -- the best decision. Then you never know because if the market, for any reason, turns up in Q1, we might lose some volumes, but I'd rather take that risk than entering into next year with too high slab inventories. And this is, I mean, not having perfect visibility, but suspecting that maybe the second half of December will not be booming apparent consumption wise. That's why we take this decision.

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

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And then on the under-absorption side, the big items we have in Q4 or the planned maintenance outage, which result in under-absorption, which we have some in Europe, not that much, more in Special Steel, even more in Americas. Then we have guided for shipments roughly in line with Q4 versus Q3 for Europe. And I think that you can use as a basis for calculating the under-absorption for Europe as well.

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Operator [29]

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Your next question is from Zach from Exane.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [30]

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This is Seth Rosenfeld of the Exane BNP. A couple of questions, please, on the U.S. plate market. Your shipments in the third quarter is going to strongly outperform your closest peer, Nucor, who reported yesterday. They call it severe customer destocking throughout Q3 contributed to low shipments. You, of course, saw growth both year-over-year and quarter-over-quarter. First, can you comment just about the nature of customer destocking in the U.S., do you see this as getting worse as we head into Q4? Are we now finally hitting a level of stability with low inventories? And then secondly, can you comment a bit on underlying demand trends in the U.S. for heavy equipment and for infrastructure? And to what extent do you see either of those as potentially structurally weakening as we go into 2020?

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

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What I said -- what we have said is that if we take the segments in U.S., I think Energy segment is still holding up pretty well. I talked about heavy transport and then for us, it is, to some extent or to a large extent, barges and pressure vessels, railcars, and we see some signs of that weakening. But in Q3, the underlying demand was quite okay and the volumes were quite okay. And I would say also, the margins in Americas were quite okay. So what that will mean going into 2020, will be dependent on so many things. But what we can see or what we can comment is what we see in Q4.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [32]

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Okay. In terms of apparent buying activity from Service Centers in the U.S., can you just give us a sense of how we see that moving in recent weeks? Has it gotten worse or better compared to what you saw earlier on in the quarter, please?

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

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I think we saw some restocking or we saw some restocking beginning of Q3, and then it turned around and we saw destocking. And maybe that's changed a bit on the margin. But what we can see from official statistics is that the inventory levels in that segment or among the Steel Service Centers are not on the high side, they're quite the opposite. So if the market doesn't collapse fully, then there need to be some restocking. But we also see a pattern with this, call it uncertain situation, that steel buyers are buying more from hand to mouth. They buy what they -- exactly what they need and not more than that. So -- and that's why we see the destocking. We also see that in some other patterns. We see more stock sales than direct orders and so on. So we see the hesitation in the system. But before lower month on hand and so on for Steel Service Centers in North America quite closely, and we are in a lot of contact with them as well. So at the end, sometimes it needs to be a destocking. Exactly when that comes, it's hard to judge, but it should be probably sometime during Q4 or at the latest beginning of Q1.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [34]

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One last question, if I may. Back in Europe with the recently announced idling of Raahe, how do you think about the options to extend the outage going into 2020? Obviously, you've commented already about the need to reduce slab inventories into Q1, but what sort of market conditions would it require that offline as we go into the first quarter of next year, please?

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

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That's an option. And what I showed in the picture, we have another step that we can take as well, is the market. So what I really like is -- with SSAB right now is the flexibility we have built into a system that is from the beginning, extremely rigid. And then time will tell and market will tell and outlook will tell. But the plan right now is to have it idle 4 to 6 weeks. And as said, beginning or closing down the blast furnace end of November, second half of November and keep it idle until year-end, and then we'll take the decisions to either start it earlier or prolong the outage when we have the data points to prove, what decision is the smartest way to -- thing to do. But I think that is a possibility, and we are in pretty good shape as a company with flexibility, with balance sheet, with product mix and so on. So for me, this is, call it, a relative game is probably not the right thing, but I think we are in pretty good shape to handle whatever market situation there will be.

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Operator [36]

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Your next question is from Grant from Macquarie.

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Unidentified Analyst, [37]

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My question has been answered.

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Operator [38]

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We have Alan Spence from Jefferies.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [39]

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I've got 2 questions. The first one on iron ore procurement. We can all see what the benchmark fines prices have done. But obviously with a large step down in the Atlantic pellet premium in September and further step down in October, can you remind us if you will benefit on a one-to-one basis for those lower pellet premiums?

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

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The reduced pellet premium will have an effect on us, yes.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [41]

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I'm sorry, I didn't catch that.

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

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No, sorry, I mean, having a cold. So now the reduced pellets premium will have an effect on us, yes.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [43]

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Then exactly how the structure works, we have agreed with the suppliers that we will not disclose. But yes, lower pellet premium on the market will, over time, also give a lower cost for us.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [44]

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Will it -- without quantifying the scale of benefit, will it benefit you in Q4?

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

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Yes.

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

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Yes, it will. But that's also when we talk about the iron ore purchase price that I showed on the slide earlier, that includes also, that's what we are actually paying. So it also includes the pellet premium that we're paying. But yes, it will have a positive effect in Q4.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [47]

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Understood. My second question is around the destocking at the Service Centers. Absent an inflection in steel pricing, how many more months do you think this can continue before inventory levels reach a level that they just can't go any lower?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [48]

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That's a very good question. That is hard to answer, but we follow the statistics. And then, of course, what we compare with historical patterns and they are on the low side. Can they go any lower? Probably. Can they go a lot lower? No. So it will be, I would say -- I can't promise that it will be during the fourth quarter, but it will be during the fourth quarter or maybe during the first quarter. But there is no big inventory -- surplus inventories in that supply chain.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [49]

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And now you're especially referring to Americas.

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

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Yes. Where we are more dependent on Steel Service Centers than we are in Europe, where we have typically the majority of the volumes going directly to end users or sub suppliers.

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Operator [51]

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Your next question is from Christian from Nordea.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [52]

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And it's Christian Kopfer from Nordea. Just a few short questions from my side. Firstly, on lead times, is it fair to say that you have felt price decrease much quickly this time, both in Americas and in Europe?

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

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Compared to?

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [54]

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Compared to previously. I mean, previous quarters where there is typically 1 quarter lag, I guess, on the price mechanism. And it's fair to say that you have felt the price decline faster this time?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [55]

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In Americas, maybe, but we also saw the uptick in prices going quite rapidly up. And looking at margins over scrap, they are still on decent levels compared to history. They were on very high levels Q1 and Q2, when we had the EBITDA margins of 23%. Now we have 16%, as Håkan pointed out, and I think that is still descent profitability in the steel industry. But...

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [56]

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And then on demand. I mean, Martin, you usually say that the underlying demand in Americas is around 10 million tonnes per year on plate. Have you -- do you have any figures how it's developed so far on apparent demand in Americas on plate versus the underlying demand?

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

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I think they have been pretty much in sync during Q3. So we have had a decent order intake, decent order books. So it has not been mainly a volume issue.

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

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So why do you think margins are coming down dramatically, is it because of imports or what is?

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

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I think, the promotion of things. But what we have seen in U.S. is plate margins or place prices following raw material costs. That was not the case in Europe when it comes to iron ore and steel prices. We have seen in that aspect, a fairly normal pattern. And then we have seen somewhat shorter times from plate producers. Maybe we have had slightly better lead times, so longer lead times than competition. So if you compare ourselves to the market, I think we have maybe lost less volumes and less prices on the North American plate market, if I read it correctly.

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

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Okay. And finally for me, on the cost savings, have you felt -- did you feel any tailwind from cost savings in Q3 or will that come fully in Q4? And...

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

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It will only come in Q4. We closed -- we idled the blast furnace in Oxelösund, I think it was the 15th or 17th of September. And then, of course, we started, as I said, we had a lot of summer temps in the system during the summer. And typically, we keep not all of them, but some of them all the way through November. They were gone, probably not the right word, but they left the company during August, which is not the typical pattern. We typically, even though we call them summer workers, we keep them -- some of them during the fall as well, which was not the case this time. So we adjust the manning and the costs in line with production levels and expect production and sales levels.

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

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Correct. And on the total cost savings that you see, even though you don't comment on the numbers. But I guess it's mostly from people with staff reduction.

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

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Yes, it is, to a large extent. But also, as I said, I mean, using own employees where, we typically use contractors and sub suppliers. And we are looking at all possible levers and we had a solid plan, and we stick to that plan. And we have, as I showed with the blast furnaces, also possibilities to do more. So I feel, in relative terms, pretty confident that we will handle this in a good way or continue to handle it in a good way. And we were quick to start this time compared to a number of years ago because we have more levers to pull.

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Operator [64]

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Your next question is from Carsten from Crédit Suisse.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [65]

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It's Carsten Riek from Crédit Suisse. Only 2 questions left from my side. The first one is on the free cash flow generation in the fourth quarter. After you decided taking Raahe down until the year-end, at least, I would have -- I would guess that your net working capital release into the fourth quarter will be actually way more pronounced than we expected earlier. That's the first question, sorry. I come with...

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

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Without joking, I don't know what you expected. But we typically have -- Q4 is typically the best cash flow generating quarter, so to say. And as you say, it is the reason why we closed Raahe is to focus on working capital. So as I've said, not moving into next year with too high slab inventory. So I think it's -- the conclusion was that it's better to close for 4 to 6 weeks and then optimize working capital.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [67]

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I can't give you the number, SEK 1.4 billion in free cash flow for the last quarter.

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

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Well, we will not build, as I see, it's a lot of working capital during the fourth quarter.

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Carsten Riek, Crédit Suisse AG, Research Division - Director & Co-Head of the European Steel & Mining Research [69]

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Okay. The second question I have is more just digging a little bit deeper into the inventory situation. You already characterized the situation as being in a destocking mood, and that's what take pretty much for Europe. But could you go through the different regions, means U.S., North America and Europe, whether you see similar trends or whether they are diverging trends?

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

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No. But I think at the end of Q3, as I said, beginning of Q3 in North America, we saw restocking amongst these Service Centers because they, on average, entered Q3 with fairly low inventories. And then towards the end of Q3, we saw destocking again and that's a normal pattern and people -- or that's part of the value chain typically speculates on steel prices. When steel prices are moving down, inventories go down and vice versa. So -- and then in Europe, I rather see destocking in the system, not only -- I mean, I'm not talking so much about Steel Service Centers, but sub-suppliers, subcontractors, OEMs, and so on. So I would say, destocking in the system before year-end. So if you take what I call the (inaudible) is lower than underlying demand. That's how we conclude.

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Operator [71]

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Your next question is from (inaudible) from Bank of America.

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Unidentified Analyst, [72]

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So I have just 2 questions remaining. First one, just push a little on the labor layoff. Do you expect any potential pushback? Or should we just expect that to continue as the execution to happen as you plan. Is there any (inaudible) package related to it? And if so, would that be a material financial impact, et cetera?

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

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No. I would say, yes and no. No packages related to it, and you should expect it to be executed.

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Unidentified Analyst, [74]

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And this benefit is to realize in the next quarter, yes?

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

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Yes. Perhaps even during this quarter, yes.

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Unidentified Analyst, [76]

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And would there be any impact on the realization rate, or in the longer term, do you plan to replace a late of labor by system or automation or anyway?

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

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No, but what we're trying to do is to work with, call it, probably the wrong word, but with the base manning, and then move over the business cycle with temporary employees. So when the business cycle is really good, and we experience a lot of tailwind, we have a larger amount of temporary employees and also contractors. And then when the volumes go down, we -- the plan is then what we do, we reduce the temporary employees, we reduce the contractors and so on. And then we have within the base manning, different systems to create flexibility. So for white collars in Sweden, we have a system that we call Flex Security; and for blue collars in Sweden, we have a system called [2 for Time Banks], where we can swing between positive salvos that we can use when the volumes are lower down to negative salvos we have, I would say, flexibility there. And then in Finland, we do the usual things. We have this short-term layoffs, which is possible to have in Finland. And in U.S., we have a different setup, where we mainly pay for prime yield. So when we are producing a lot, our employees get very good salary. And when we are reducing production, when times require the salary goes down quite a lot. And then we also play with contractors because we have mainly own employees in what we call prime operations, but then we can use them also in parts that is not prime operations, scrap handling and so on. So it's not a super flexible, but that's our way to set up a system to get some flexibility in a very rigid system. And with this setup, there are no big costs related to flexibility.

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Unidentified Analyst, [78]

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Okay, understood. And the second question is, I know it's still a bit early, but do you think in the industry, there's -- just happens to be a combination of low-priced environment, weak demand and high (inaudible) cost for the third quarter. But do you think this is as bad as it gets. So in terms of demand outlook for next year, at the moment, is there any comment that you could give, please?

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

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No. I don't know that. But the only comment I can give is that the correlation between steel prices and raw material prices, they are over time, at least, that correlation is very high. And we didn't see that in Q3. So over time, I expect that the correlation still to be there. Exactly how that will play out in Q1, it's too early to say.

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Operator [80]

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Your next question is from Bastian from Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [81]

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It's Bastian from Deutsche. I have a few questions left, if I may. And my first one is on your cost structure, and probably one for Håkan. Will there be any benefit from the holiday reserve in the fourth quarter or will the SEK 350 million benefit from the quarter completely reverse in your cost balance? That would be my first question.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [82]

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To make it simple, you can say it will reverse.

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

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Okay, perfect. And then the next one is in Europe, which, I guess, probably had the worst results or the worst results since the reporting of SSAB Europe. And I guess, that's due -- despite the fact that you actually have a much higher share of the automotive business, as you always say, which should typically be higher margin as well. Obviously, I appreciate the fact that the market is very tough, but what has caused this because at similar volume levels in the past, it used to be more profitable. I know you should have considerable mix benefit from the higher share of automotive business. Or is the margin in that business not quite as good?

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

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No, but it's a combination of the repair and tough margins, the difference between sales prices and raw material.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [85]

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What we had in Europe, that sticks out a bit in this quarter is, like Martin said, this raw and midterm repair. It's -- the cost of it is mainly investment. But then we were standing still in the blast furnace for around 8 weeks, getting quite a lot of under absorption for that period of time as well.

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

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And other costs related to that. Yes.

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

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Got it. Okay. But the contribution margins in the automotive business, which you have been growing are still considerably higher versus the average of Europe?

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [88]

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Yes.

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

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Okay. And then lastly, just on your broader upstream setup in Europe, and you already talked about your flexibility in your European operations. But also your EBITDA run rates are negative and they will get worse in the fourth quarter. From what you're saying, the idling of the capacity is meant to be temporarily. But do you think that potentially a more structural change to the division may be required, i.e., maybe taking out one of the blast furnace services permanently and maybe changing the upstream strategy towards a partial external slab supply agreement, just to make sure that the running capacity is always being fully utilized and you basically buffer the peak and dips with external procurement? Is this something you've been thinking about? Or is this just difficult given your remote location up in the north of Europe, where you have to enter the Nordic...

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

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Theoretically, it is possible, but it doesn't really make sense. And that's -- I mean, with the flexibility we have -- when the market is good and when we then would require external slab stay, as they are very expensive and also from time to time, hard to find. So we have decided to keep this setup, which is a huge difference compared to when the 2 -- when SSAB was 2 companies, SSAB and Ruukki. So I think this flexibility gives us good possibilities to optimize the system. And as I showed in the beginning, there are further steps to be taken, if that is required. So I think our idea is to continue.

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Operator [91]

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Your next question is from Oskar from Danske Bank.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [92]

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This is Oskar Lindstrom. I have 3 -- no, 4 questions, actually. The first one is if you could say anything about the size in terms of EBITDA or EBITDA impact of the actions that you're now taking to reduce costs? And what about the timing of this?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [93]

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No, we haven't communicated it, and you can probably do a lot of the calculations. But it will -- I mean we started in July, and then the big -- one of the biggest steps was idling the blast furnace in Oxelösund, and then that was done mid-September. And then, of course, we gradually take out the temporary employees. And the next big step will be idling of the blast furnace in Raahe. So it will come gradually. Some effects already in Q3, but the full effect will come in Q4 gradually.

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

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How much of the full effect did we see in Q3?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [95]

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A fairly small part if you take these measures I showed. But what I also said was that we took out these summer workers, and that was quite a few. And we typically do that gradually from August and onwards. But now we finalized everything of it during August. And you could say that if you compare, or can show the comparison in the bridge compared to Q2. And if you take away the vacation reserve, you can see that we had 100 as net, a bit more than EUR 150 million or most EUR 100 million.

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

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SEK 100 million.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [97]

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SEK 100 million, sorry, lower fixed costs.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [98]

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Compared to Q2.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [99]

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Yes, Compared to Q2.

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

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And that would that mainly be the impact of cost actions taken already?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [101]

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I would say so, yes.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [102]

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All right. And then a second question is on maintenance stops. What's the plan for -- how much of an impact should we plan for in 2020? Do you take more maintenance stops because you expect lower demand? And then or...

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [103]

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Then it's not a maintenance stop. So we will have the ordinary maintenance stops. And I mean this -- the fourth quarter, first of all, I will say that the timing is quite okay for taking the maintenance stops, so we didn't, of course, decide that during Q3. That was decided long time ago. But we have also learned that maintenance stops in Q4 from a market perspective are typically the best season to take it, even though it is a more -- a bit more complicated to take them in Q4, especially for blast furnaces and so on if the weather gets cold. But I think it's good to have -- history shows, at least, that it is good to have the maintenance stops in Q4 from a market perspective. But you should expect normal maintenance stops next year as well. And then what we are doing in Raahe in December with one of the blast furnaces, not the maintenance stop, that is idling capacity due to not the increase in working capital.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [104]

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All right. And now that -- I mean we're seeing a slowdown in markets, et cetera. Should we expect some kind of a -- I mean we've talked about the price changes, but what about mix changes that you will feel in both Americas and Europe, let's -- perhaps in the fourth quarter, anything that we should watch out for?

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

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Now you should expect us over time to continue to improve the mix. That is for sure. That's what we are working.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [106]

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So you're not seeing any sort of pause in that during 2020, for example?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [107]

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I don't know, because we, as said, we don't have that visibility. But if you take Q3, there is a difference in order intake and in volumes, if you compare niche products compared to more standardized products. Niche product is still growing, not much when it comes to Hardox and special products within Special Steel, but they are growing. And the more strip-related products in Q3 are the ones with reduced volumes.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [108]

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I was trying take a bit short-term perspective, you have in Q4 in, as I said, Europe, we always have less of the color-coated material, which goes to the roof, for example. And that is a product with a good margin. So we have a -- short term, we have a slightly negative mix impact in Q4 for Europe.

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

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But that's the usual seasonal pattern.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [110]

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Yes. But I'm kind of trying to get to is, I mean, if markets weaken and prices generally do go down, do we see customers trading down in terms of quality and that having sort of an additional negative mix impact on you?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [111]

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In a tough market, that could be partly the case, yes. With history, it has been.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [112]

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Okay. So -- and then my fourth question is about costs for CO2 emissions. Is that something which impacted you on the third quarter now compared to last year? And what kind of outlook do you have for that?

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [113]

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No, it didn't. And the outlook we have is that it will be more and more expensive to meet the carbon dioxide emissions. And that's why we are -- partly why we are running the hybrid project, even though hybrid is quality business development project, where we see growing interest from broad number of customers. But one of the main triggers is, of course, (inaudible), and I think it is the right thing to happen, that anything carbon dioxide will be more and more expensive over time.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [114]

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But if, let's say, you reduce production, does that have a positive impact on to the cost? In addition of...

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [115]

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Then we will use less emission rights, and we can potentially save them then for the future. So long term, in that aspect, it will have a positive effect, yes.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [116]

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All right. You would save them, not sell them, I guess, you said.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [117]

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Yes.

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Operator [118]

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There are currently no more questions in queue. I'd like to hand the call over to -- the call back to your speaker today, please continue.

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Per Hillström, SSAB AB (publ) - Head of IR [119]

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Thank you, operator. And then we can just check if there is any final follow-ups here in Stockholm? No? Okay. Then we can conclude today's conference. Thank you very much for the attention, and we wish you a pleasant day.

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Martin Lindqvist, SSAB AB (publ) - President, CEO & Director [120]

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Thank you very much.

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Håkan Folin, SSAB AB (publ) - Executive VP & CFO [121]

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Thank you.