Science Strategic Acquisition Corp. Alpha
Q1 2022 Earnings Call Transcript

Published: 26 Apr 2022

[Per Hillström:]

Good morning and welcome to this presentation of the SSAB Q1 Report. My name is Per Hillström. I am Head of Investor Relations. And with us today, we have Martin Lindqvist, President and CEO and also our CFO, Leena Craelius. If we look at the agenda, Martin will start with the first quarter in brief; Leena comes with the financials, bit more details; and then Martin at the end with the outlook and the summary. And at the end, it will be good time to ask questions and we will come back to the inspection of that. So with that, please, Martin, the floor is yours.

[Martin Lindqvist:]

Thank you, Per and good morning everyone. If we start then with the first quarter, we had, I would say, a strong start of the year. We had steel prices on high levels. We had raw material costs also being on high levels and Leena will come back to that. We also had an unplanned stop for shield hearth in one of our blast furnaces in Raahe, which affected the first quarter. And that gave us slightly lower volumes than we had really planned for. But I think we managed to use the volume allocations in a good way and continue to strengthen within our niche segments. We kept costs, SG&A on the same level as Q1 2019 even though we were running operations at a very much higher activity level. We also continued to develop our safety culture. And moving 12 month, we are now at an LTI frequency per million working hour of 1.6%, and year-to-date, we are well below that. And we continue to see good development when it comes to Special Steels, both when it comes to profitability but also shipments and volumes. Some words about Russia’s invasion in Ukraine that has, of course, kept us very busy during the quarter. The strongest focus has been on our 76 employees in Ukraine and also on their families and relatives. Many of them have, for the time being, moved over to Poland, where we have been able to take care of them and use our facilities and, with the help of our Polish employees, create some kind of a safe and sound environment for them. We stopped all sales to Russia and Belarus directly. And we have also stopped all new purchases of iron ore and coal and other materials from Russia. We have been working hard to secure supply of raw materials, iron ore and coking coal and others, for the future, and that has been a focus on – during Q1 and will continue to be a focus. We have also decided to write down our assets in Russia and Belarus, and that is a one-off in the report. And going forward, we are fairly confident or confident that we will continue to source volumes enough to keep production running when it comes to raw materials. But of course, we’ll continue to see disruptions in the supply chains, problems with containers, problem with railcars, problems with the ships and so on. And that, we have been seeing for the last 2 years, I would say. If we then look at steel prices, and these are spot prices and they started to move down in the beginning of the – or the end of last year and beginning of the quarter in Europe, but apparent demand increased during Q1 and spot prices went up. In U.S., prices stayed on a very decent or very good level. And when we look forward, we see that we will continue to have slightly higher prices, contract prices, but we will also see higher raw material cost. And we expect that the peak we saw in apparent demand will normalize. So underlying demand stable, apparent demand more in line with real demand during second quarter. If we look at the divisions, we had strong performance in all divisions. In some of the divisions, we even had record earnings. In Europe, we were slightly lower than in Q4 but still on very good levels with an EBIT margin of 26%. Special Steels, record earnings, EBIT margin of 27%. And Americas, of course very strong performance with an EBIT margin of 40%. Ruukki Construction had an EBIT margin of 10%, which is really good because Q1 is always seasonally the slowest quarter. So not a record quarter, but definitely a record first quarter. And the same goes for Tibnor with an EBIT margin of 9%. So all in all, good performance, good profitability in all divisions and all daughter companies. If we look at the green transition of the steel industry and what we are doing, we came out with a strategic decision to rebuild our facilities in Luleå and Raahe when we released the Q4 report. And to accelerate that in order to meet customer demand, we are now – or we have started the feasibility studies for Luleå and Raahe and the mini-mills, and that is proceeding according to plan. What we are working quite hard with now is access to power or electricity, which will be a key factor. And that we are working with together with the governments in Sweden and Finland. We have also, during the quarter, announced two new strategic partnerships with Polestar, the automotive company, but also with Epiroc. And we have also been recognized by the EU Innovation Fund that has decided to support not only HYBRIT but also the Oxelösund conversion. And for Oxelösund, it is around – we will get around €30 million in support from the Innovation Fund. With that, Leena.

[Leena Craelius:]

Thank you, Martin. Let’s dive into the financials, analyzing a bit more. If we start with the sales, Q1 reaching a level of SEK31.6 billion, which is remarkable. And if we compare with the last year, Q1 being just below SEK20 billion. We are talking about deviation of around 60% higher sales level, which is then the opposite. If we analyze the shipments, shipments, Q1, on the level of 1,664 kilotonnes. And compared to last year, it was above 1,800. So we are having around 10% lower volumes. So clearly, when analyzing these graphs together, we can see that the – on average, the prices have been around 70% higher this year compared to last year, which is pretty well in line with the graph that Martin was already briefly showing. EBITDA and EBITDA margin, Q1, on the level of SEK9.2 billion, 29%. When comparing to last year level, we have doubled the margin as last year, we were on the level of 2.9% and 14.5%. And the graph here on the low side is illustrating the EBITDA per delivered tonne and Q1 this year being on the level of 5,500. And then compared to last year, it has been level 1,600, so quite remarkable improvement. And when we break down the impacts, clearly the biggest positive impact is with the prices, all the division contributing to this

[Martin Lindqvist:]

Thank you, Leena. So if we then look into the second quarter and start with the markets. I think the underlying demand will continue to be on decent and good levels with the exception of Automotive, where we have experienced low demand for the last number of quarters. And that is, of course, due to lack of semiconductors and others. But apart from that, I would say healthy or good demand or very good demand. If we look at service centers and the apparent demand versus real demand, we see that inventory levels in U.S. are on the low side, so there is no room – big room for destocking in North America. So, apparent and real demand will be on the same level. And if we look at inventory levels in Europe, they are on more normal levels, and we can see and could see during Q1 some kind of wait-and-see mode. But apart from that, with the exception of Automotive, good or healthy overall demand. And I would say that demand for Q&T and advanced high-strength steels continue to increase according to our internal expectations. If we sum that up, we say that demand for steel, and this is apparent demand, is expected to normalize and apparent demand being somewhat lower than in the first quarter, but underlying demand continue on a same level. And as said, global demand for high-strength steels will continue to be good and increase and especially for Q&T. We will have higher or somewhat higher prices and, as Leena said, counteracted by higher raw material cost. And we will have shipments that are higher in Special Steels in Americas and somewhat higher in Europe. So Q2 should also be a decent quarter. And we expect to continue to see, which we have seen in the last, I would say, 2 years, bottlenecks within transportations, problems with getting containers, ships, trucks and so on. But that’s nothing new and nothing that we think will change short term at least, but that we have been living with since 2020. So, to sum it up, a good quarter. Record earnings, continued good trend in safety. We have – continue and we will continue and have continued to generate strong cash flow, and we will do that. And the working capital we are building during the first quarter is, to a very, very large extent, due to higher prices and increased sales. So that is accounts receivable, and that will be, over time, cash on the bank. Our plan for fossil-free steel production continues and are on track and we are announcing a number of – or two new strategic partnerships during Q1 and we have got support from the EU Innovation Fund for the Oxelösund conversion. And we will continue to monitor the effects of the – Russia’s invasion in Ukraine, with, of course, the strongest focus on continue to support our employees and their families but also make sure that we have raw material supply enough to continue to keep production on high levels. With that, I guess we open up for questions.

[Per Hillström:]

Yes, we are ready now to open for questions. And we have good time, but I may suggest maybe in the first round that you keep it to one or two questions to let everybody a chance to speak here. And as always, also, if you have more than one question, state them one at a time to facilitate the process here for Leena and Martin to answer. We can maybe start by checking here in the room in Stockholm if there are any questions here. No. Then I will ask the operator, please, to present the instructions for how to put the question. So operator, please.

[Operator:]

Thank you. And our first question comes from the line of Alain Gabriel of Morgan Stanley. Please go ahead. Your line is open.

[Alain Gabriel:]

Yes, good morning, everyone. Thank you for taking the time to take questions. I have two questions. I’ll ask them one at a time. First one is on capital allocation. How far are you willing to go in building your net cash position? And have you had any incremental discussions with Swedish or European government officials regarding funding for your decarb projects? That’s the first one. Thanks.

[Martin Lindqvist:]

Well, as said, we – our internal goal was to have a net cash position to be able to pay dividend without coming to net debt. We don’t have any – I mean, as Leena said, we will have cash needs for investments going forward, but having said that, we expect the business to continue to generate strong cash flow. So, I think it’s a positive problem within brackets to have, but we haven’t really said anything new regarding cash flow generation other than we will continue to generate strong cash flows and have a strong balance sheet so we can afford the investments we have ahead of us. On your second part of the question, we got this €30 million, which is positive from the EU Innovation Fund. I mean, I think the most positive thing with that was that they recognize us as one of very few substantial and important projects within the European Union. As I said last time, we are not – what is important for us is a level playing field, that we are treated in the same way as all the other steel companies in Europe. But I am a strong believer in that we – the steel industries could and should afford this transition by themselves, but if other steel companies get subsidies or are treated in a favorable way, we expect to be treated in the same way. So, no new answer since the question was up last time.

[Alain Gabriel:]

Thank you very much. And my second question is on the U.S. plate market, clearly, one of your competitors is ramping up their mill. How do you expect the plate market to develop for your business and should we see the SSAB Americas profit as the last hurrah?

[Martin Lindqvist:]

We expect the U.S. plate market to continue to be strong due to a lot of infrastructure needs and so on. And we are also changing our production in especially mobile, where we are investing for more and more Q&T capacities. We will gradually increase the Q&T capacity, which is our focus and which is also what the market really asks for. So that investments – those investments will continue. And then the general plate market, we expect it to stay strong in the future. And the most important thing for us is that we keep the very good cost position we have, especially in Montpelier, where we produce mainly standard plates. So, we are positive towards the U.S. plate market.

[Alain Gabriel:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Vishal Agarwal at Citigroup. Please go ahead. Your line is open.

[Vishal Agarwal:]

Hi, thanks a lot for taking my questions. I have two. The first one is on the Special Steels. The guidance last quarter was for the stable pricing and then we see the actual pricing in the Q1 are sort of higher versus the last quarter. So, what has sort of positively surprised in terms of pricing? And then given the current level of margins in the Special Steels, how much of those kind of a structural uplift do you see you will be able to sustain for the specialty margin in medium to long term?

[Martin Lindqvist:]

No, but maybe we missed out a little bit on the marginal price guidance in some of their divisions last time. And we didn’t really foresee what happened in February in the strong apparent demand. But having said that, I think Special Steels, the prices are more stable, but we have been able to increase them and compensate for increased raw material, but the order intake and the demand has been so strong as well for Special Steels and for Q&T and especially for abrasion resistant steel. So, we have been able to increase margins. Will they be on this level forever? To be honest, I don’t know, but we expect to continue to see strong margins and strong performance in Special Steels. And to a larger extent, regardless of business cycle, if you compare to our business, standard business in U.S., which is the most volatile business we have, I would say that Special Steels and the business we have in Special Steels is by far the least volatile. And that’s why we are focusing on that business as well, because the profitability over time is really good and much more stable. So, what we are doing now in the company within – with the mix and everything is to stabilize – trying to stabilize over time the profitability and to avoid the troughs of very low profitability, so stabilized profitability over time. And the way to do that is of course to increase productivity and cost efficiency but also continue to improve the mix.

[Vishal Agarwal:]

Got it. And then my second question is probably for Leena in terms of working capital. Q1 was – has seen a large outflow, SEK4.4 billion. How should we see the working capital evolution in the Q2?

[Leena Craelius:]

Well, Q2 normally is the month when we start to prepare for these big annual maintenances. So, we are building up the stocks to some extent. But of course, we have been discussing that it is very, very important that we keep a good track of our inventories going forward, especially if there is some uncertainty on the market. So, I expect that it should be on a similar level than Q1.

[Martin Lindqvist:]

And for me, it’s – having AR is almost as good as having cash on the bank account. So, it will eventually turn into cash. So as long as we build working capital by AR, I think we can live with it. And if we measure net operating working capital over sales, we are still at competitive levels.

[Vishal Agarwal:]

Okay, okay. Got it. Thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of Seth Rosenfeld at BNP Paribas. Please go ahead. Your line is open.

[Seth Rosenfeld:]

Good morning. Thanks for taking our questions today. Just a follow-up please, with regards to the U.S. plate market first. You are sort of talking about 9% in Q1 year-over-year. Your closest peer, Nucor, is down roughly a third year-over-year. Can you give us some color on the market dynamics between the two leading players in U.S. plate? Do you think you are taking share from Nucor and kind of continue going forward? Start there, please.

[Martin Lindqvist:]

No, but first of all, Nucor is a fantastic company and they are mainly within strip. And in U.S., we are only within plate, and plate is, for them, a smaller part. So I don’t have the exact figures of the plate volume development, but I know that we have been – given the total size of the market, we have been taking market shares during 2021 and I would say also probably during the first part of ‘22. We are at or around 30% market share in North America for plate.

[Seth Rosenfeld:]

Thank you. And just to follow-up your earlier comments with regard shifting to more Q&T, is that something of a concession that in the medium-term, as Brandenburg ramps up in 2023, is that to be essentially prepared to cede some share in standard-grade plate to allow room for Brandenburg to ramp up?

[Martin Lindqvist:]

No. I mean for us, it has nothing to do with Brandenburg. This is the strategy we have. And we see the long-term increasing demand for Q&T, and we are lacking capacities. We must increase Q&T capacity. And one obvious place to do that is in Mobile and continue to invest in quenched and tempered capacity. And that’s what we have been planning for, and that is what we will continue to do. So over time, you should expect to have more and more volumes, Automobile, being Special Steels and Q&T and less volumes of standard plate. But that has nothing to do with Brandenburg or anything else. That is the strategy for SSAB. And as I said, earlier. That is also important because over time, that is more profitable. Of course, a quarter like Q1, when Americas is doing 40%, we have slightly lower profitability in Special Steels. But over time, this is where we should focus and will focus.

[Seth Rosenfeld:]

Great. Thank you very much.

[Per Hillström:]

Do we have any further questions from the phones? I think we might have lost contact. Yes, we will just hang on a bit to see if they can reestablish connection here. There seem to be something has happened with the connection, so we will take a 5-minute break now and then try to come back in 5 minutes. Thank you for your patience.

[Per Hillström:]

Yes. So welcome back. My apologies here. There were some technical problems. But hopefully now we are up and running again. So operator, if you can hear me, if we can have the next question.

[Operator:]

Candidate – sorry for the technical issues. Our next question comes from the line of Luke Nelson at JPMorgan. Please go ahead. Your line is open.

[Luke Nelson:]

Hi, thank you for taking my questions. My first one is just on the Q2 outlook for volumes. In terms of the qualitative comments, they appear quite conservative with demand normalizing at a lower level. I’m just trying to square that comment with your actual guidance, which is actually sequentially showing an improvement across all key divisions, and also the order intake graph for Europe, which shows March was the highest level in a number of months. Can you maybe just sort of talk through the sort of the shipment guidance relative to what appears as sort of more conservative qualitative comments? That’s my first question.

[Martin Lindqvist:]

No, but our comments regarding the market is more apparent demand and real demand meeting during Q2. We saw a higher apparent demand than real demand in Q1. When we guide for volumes, we have the order book to a very large extent for Q2, so we are fairly or very certain of the volumes. So it’s more a sign – or you should interpret it as the market is – I mean, what we saw was a peak in apparent demand when customers were afraid that they wouldn’t get volumes. So apparent demand being higher than real demand. That is more stabilizing now but on good levels for Q2.

[Luke Nelson:]

Okay, thank you. So just in terms of the order intake, what’s roughly the flow-through between that into shipment?

[Martin Lindqvist:]

Sorry, the?

[Luke Nelson:]

The sort of flow-through when those real – the order intake is realized into physical shipments?

[Martin Lindqvist:]

No, but, I mean, as I said, we have – it depends, of course, but we have, to a large extent, already the order book for Q2. So that’s why we can say whether volumes will end. And then there are, of course, some open volumes still, but that’s typically in the beginning of the quarter. So we have had good order intake, and we continue to see decent order intake, so.

[Luke Nelson:]

Okay. That’s very clear. Thank you. And then secondly, if I may, just a sort of longer-term sort of strategic question, I suppose, just given the Russia-Ukraine situation, which has caused pretty significant dislocations in supply but also some pretty interesting developments from a demand point of view. In Europe, obviously, it’s changed sort of the perception around energy independence, and we’ve seen some pretty big numbers around renewable build-out. There is more talk about defense spending as well. Can you maybe just talk through about how you’re positioned – or, I mean, in terms of volumes or shipments or pricing, how you could be positioned to benefit from, say, higher renewable build-out and whether you’re starting to see incoming inquiries from customers around that? Whether you’re seeing more sort of domestic European customers incoming, looking to tie up long-term demand from you given your European position? And then also, on that defense point of view, whether you have any exposure to that, particularly in, say, Special Steels?

[Martin Lindqvist:]

No, but we see and have seen since a couple of years or since the pandemic started more and more regionalizing of steel markets, especially for standard products. We see that in Europe. We see it in U.S. And that is, of course, a lot of different factors behind that, but one is, of course, trade restrictions, quotas and so on. But it’s also environmental issues, I mean, customers not willing to ship standard material all over the world. So that is, call it, regionalization is continuing. And we also see that with transport problems and the ship that had the accident in Sweden seas so on. So we see more and more regionalized steel markets and less and less trade of standard products. That’s one factor. When it comes to the Energy segment and especially in U.S., that is a very important segment where we see good future development. And we also see, given what is happening now in Europe, one of our strong products groups is armored plate, where we see a very strong demand. Unfortunately, you could say – but from that segment, we see very strong and increasing demand. So there are some also effects like that given the situation.

[Luke Nelson:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Christian Kopfer of Handelsbanken. Please go ahead. Your line is open.

[Christian Kopfer:]

Thanks, operator. Good morning, everyone. Firstly, I’m just trying to understand a little bit what’s happened in Special Steels in the first quarter because you also said, Martin, that you have pretty good visibility when you report the numbers for the current quarter. So – and you guided stable prices, if I remember correctly, and then really large projects came up by 7%, which is quite meaningfully above your guidance. So just trying to understand how that was possible because if you have secured some – the volumes, you should have secured the prices in 1-year.

[Martin Lindqvist:]

Yes. We – I apologize. So that missed a bit on that one. No, we were given the very strong demand and the very strong order intake that we saw in Special Steels. It was a possibility not only to increase prices but also – I mean, you can think that Special Steels is just special steel products, which it is, but there is a mix potential in Special Steels as well. And given the very strong underlying demand, we have been working with the mix also within Special Steels. So more specialty products, less construction-related Q&T and so on. So there is a difference also within Special Steels. And we have been working with that mix, which also affects the average price level.

[Christian Kopfer:]

But you are not reporting any mix – but you are not reporting any mix improvement in Q1.

[Martin Lindqvist:]

It depends how you measure mix. But there is a variety of different products in Special Steels. And when you have – when you lack capacity, you try always to steer the capacity where the profitability is the highest.

[Christian Kopfer:]

Right. And then in Americas, you got higher volumes in Americas. But if I look back, typically or, call it, maybe normal delivery levels in Americas is around 500,000 tons per quarter, right? So if I look at your guidance for Q2, it implies that you expect volume shipments to be lower than 500,000 or meaningfully below that. So my question is that the market is in U.S., obviously, is very, very strong. So why aren’t you able to ship more volumes?

[Martin Lindqvist:]

We will ship more volumes in Q2 than Q1.

[Christian Kopfer:]

Yes. But to ship – so, say ship normal volumes. I mean if Americas typically is available to ship around 500,000 tons, so you are not able to ship that in Q2?

[Martin Lindqvist:]

I don’t know the exact number, but we will see higher volumes in Q2. We came into Q1 with fairly low slab inventories and then we had some challenges in Montpelier during Q1. So we will see higher volumes in Americas in Q2 compared to Q1. Where they exactly will end up will, of course, be dependent not only on production but also the possibilities to get trucks, railcars, ships and so on, so...

[Christian Kopfer:]

Right. And then finally for me, just trying to…

[Martin Lindqvist:]

Yes. But just to be clear, Christian, we haven’t taken down capacity.

[Christian Kopfer:]

Yes. That’s good to hear. Then finally, Martin, and yes, about the guidance for Q2 on a more, call it – maybe on an aggregate level. So you guide for higher volumes, higher prices but also higher raw material costs and the higher other costs as well, I guess. So if you take everything together, is it fair to say that you basically expect your underlying profitability to remain at approximately the high – the same level in Q2 versus Q1, plus/minus, sorry?

[Martin Lindqvist:]

Well, you know, Christian, that’s your job, but we expect a decent Q2 as well, yes.

[Christian Kopfer:]

Okay, okay. So but just trying to understand how much you expect raw materials has to go up because that you have in your – of course with – because it’s hard to me to – so much moving parts, so just I’m trying to understand it…

[Martin Lindqvist:]

No, but – and that’s why we opened up a bit also regarding raw material in the report, to make it somewhat easier in a very difficult situation for you guys to try to figure out where we will end up. But we expect a decent Q2 as well.

[Christian Kopfer:]

Yes. Okay, thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Carsten Riek at Credit Suisse. Please go ahead. Your line is open.

[Carsten Riek:]

Thank you very much for taking the question. The first one is on in Fennovoima. What are the strategic implications from writing down the investments in Fennovoima? Do you keep actually your stake in the joint venture for the nuclear power plant? And if not, could it affect the ramp-up of the green steel operations in Raahe and/or your Swedish operations? That’s the first one.

[Martin Lindqvist:]

I mean Fennovoima they – itself wrote down the investment to zero. We keep our stake in Fennovoima, but we wrote it down to zero. It will not affect the transition in Raahe because that was anyhow expected to come before Fennovoima was up and running. So midterm, it doesn’t affect us other than we wrote it down to zero in order to be prudent.

[Carsten Riek:]

Okay. Perfect. The second question I had is, how much did actually the absence of the plate volumes from especially Ukraine help your business in Europe in the current quarter? And will it also do that for the next foreseeable future because Ukraine is usually a big, big kind of plate exporter into Europe?

[Martin Lindqvist:]

No, we don’t sell any standard plate outside the Nordic region, a fairly limited or very limited volumes overall in standard plate. Our standard plate market is in North America, and that is locally produced in Mobile and Montpelier. So we are not on the European plate market with the exception of fairly limited volumes to the Nordics, where we typically don’t see a lot of Ukrainian or, from time to time, some Russian material but not typically any Ukrainian material.

[Carsten Riek:]

Okay. Perfect. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Patrick Mann at Bank of America. Please go ahead. Your line is open.

[Patrick Mann:]

Thank you very much. Two quick questions. You just – you spoke a little bit about the market normalizing from Russia and Ukraine disruptions and spoke about apparent versus real demand. I’m just wondering, longer-term, how do you think – or what do you think is solving for the iron units that Europe has lost as a result of Russia/Ukraine? I mean are you – do you think it’s higher imports from other countries, higher domestic production, lower demand or some kind of combination of those factors? And then the second question is just, I mean, we’ve also seen much higher energy and electricity costs in Europe, which you are somewhat protected from. I mean does this change your view on your strategic position in Europe to decarbonize? I mean, for example, building an EAF in Spain seems a lot more challenging versus your position. So are you feeling more confident now that you’re on the right track? Or how are you assessing your strategic position? Thank you.

[Martin Lindqvist:]

No, I feel very confident that we are on the right track. And I think it is all about the relative position and the relative cost position of – or the relative cost of electricity. And I think being in the Nordics or Northern Nordics is the place to be. I’m also very positive because what we are aiming for, these mini-mills, they are typically at a size that fits our business model very, very well. I mean they are at similar sizes as we have in Luleå and Raahe and Borlänge today. So I’m very confident that we are doing the right thing. And if anything, we have seen during the first quarter as well increasing interest and increasing demand for future deliveries of fossil-free steel. So I’m very positive. And I think we are in the right region, we have the right product mix, we have the right size for taking this step. And then your first question regarding raw material supply and iron ore supply into Europe. First of all, we are the only European steel company within flat carbon that are 100% pellet dependent. So we typically, in the history, bought the absolute majority of our pellet needs from our partner, LKAB. And then when the sanctions – or the war started and the other supplier we have had historically were hit by sanctions and we stopped all purchases from that supplier and other suppliers, potential suppliers in Russia, it is still, in the total scheme of it, fairly limited volumes, and we have been able to cover for those volumes. And we will continue to work with LKAB and supply as much as possible via LKAB. So I think we are, in that aspect, also in a very good position given the turbulence on the raw material market. How that will play out for the other players in Europe using a combination of pellets to a small extent and then mainly fines and running their own sinter plants, I don’t really know. I can guess, but I don’t really know how that will play out for them. But in relative terms, I would say – I would claim that SSAB is in a very good position in a turbulent environment.

[Patrick Mann:]

Thank you. I mean maybe just a quick follow-up there. I mean do you think you could have greater ambitions then? I mean if – given your relative energy position or relatively cost competitive, let’s say, energy relative to the rest of Europe, do you think there is a chance to go for a bigger share of the market?

[Martin Lindqvist:]

Yes, over time…

[Patrick Mann:]

Or do you have to focus on what you are doing now, yes?

[Martin Lindqvist:]

We are fully occupied with the plans and doing the feasibility studies in line with the plans we presented a quarter ago. But over time, I think there will be possibilities for SSAB to continue to develop the company and shift the mix and increase volumes of specialty steels and so on. So – but I have a hard time seeing that we would invest in production elsewhere than where we are today.

[Patrick Mann:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Bastian Synagowitz of Deutsche Bank. Please go ahead. Your line is open.

[Bastian Synagowitz:]

Yes. Thanks and good morning. I only have two quick follow-ups, please. Just on your product mix, Martin, you mentioned armor plates, and I imagine just over the last couple of years, armor plate probably hasn’t been a product which has been heavily emphasized in your overall product mix whilst obviously being very profitable. So, what has been roughly like a volume run rate in that product – or in that end market? And what is your volume capability on an annual basis in that segment? That would be my first question.

[Martin Lindqvist:]

First of all, in Special Steels, we have, I would say, volume restrictions. We are fully – we are using all available production capacity. So, it is about changing the mix and take away something and put in something else. And right now, armor plate is a small, but very profitable product and segment for us. And of course, with increased spending in different countries, the interest is, of course, increasing compared to how it looked a couple of years ago. And we are also trying to help Ukraine and – to produce material for safety vests and so on. So, it is – unfortunately, from a broader perspective, the interest has increased a lot recently.

[Bastian Synagowitz:]

Yes, I definitely imagine. Could you maybe give us some numbers here? I mean what’s been the tonnage you shipped out last year? And what would be your theoretical volume capability in that segment even though that would mean you would have to take away something from somewhere and then allocate it into that business? But if you – what’s been armor plate last year? And if you were running at full steam, what would be the volume number, roughly?

[Martin Lindqvist:]

I don’t think that we have disclosed that.

[Per Hillström:]

Or we can come back to last year’s number. But like Martin said, the capacity, that will depend on what we take away, dimensions, etcetera. So, it’s hard to give sort of a new number there. But we can share the last year’s number.

[Martin Lindqvist:]

But we have higher capacity. Not total capacity, but we can shift the mix if that would be required, to more armor plate and less of other products.

[Bastian Synagowitz:]

Could you at least give us maybe a number which you could do in armor plate if you were running it at full steam?

[Martin Lindqvist:]

To be honest, I don’t have that from the top of my head. So, Per will come back to you with the numbers for last year, but we can increase that capacity, yes. But then we need to take away something else.

[Bastian Synagowitz:]

Yes. Okay. No, sounds good. I guess every ton you are selling there probably come at a few hundred euros per ton premium versus the other segments. So, I guess it’s still going to be an attractive business. So, then my second question is just a follow-up on Alain’s question earlier, just dwelling further on capital allocation and balance sheet. Is there an absolute target level for your net cash position which you have in mind before you will consider options such as additional shareholder returns? We have talked – always talked about building a bit of balance sheet buffer, but obviously, your current cash generation run rate is so strong you are going to generate the dividend in literally a single quarter or more than that. So, is there an absolute net cash position which you are aiming for?

[Martin Lindqvist:]

No. What I said last time, which is, I think I believe is the right answer is that, I mean we should be able to pay a dividend over time according to our dividend policy. I think that is very, very important. We should also be able to do our investments for the future, this transition into fossil free. And I am – I was 100% convinced a year ago. Now, I am more than 100% convinced that this is the right way for SSAB. And I am convinced because we see the huge interest from our customers and partners and their appetite for this in the future. So, we are now thinking how can we speed it up, how can we do that in a smarter and more cost-effective way, and that is what we call the – internally the feasibility study. And then I think that the dividend we paid now in beginning of April was a good, decent level, in line with the dividend target, so to say. But we don’t have a target saying that we should have a net cash position or anything. The only thing I am saying that I have a hard time seeing regardless of investments and so on, that we would end up in a tough net debt position any time. And then, of course, it’s a positive thing to think about how the shareholders want to use their money that is in the company if they want to have. Of course, they want stable dividend over time, which we should deliver. And then if they want to have the money stay and work in the company or if they want to have some other – us to take some other measures. But that is, for me, a very positive thing to think about because we are clearly in a different position than we were 5 years, 6 years, 7 years, 8 years or 3 years, 4 years ago. And as I said, I am convinced that we will continue to generate strong cash flows.

[Bastian Synagowitz:]

Okay. Thank you. Thanks Martin.

[Operator:]

Thank you. And our next question comes from the line of at Bloomberg Intelligence. Please go ahead. Your line is open.

[Unidentified Analyst:]

Good morning. Thanks for taking the questions. Just a quick one on CapEx. Can you just remind us what the split is between sort of maintenance or sustaining CapEx versus strategic growth CapEx? And maybe just a bit of a guidance in terms of how your CapEx spend will evolve throughout the year. It’s obviously a bit like in Q1. It typically builds up to a crescendo in Q4. Are you going to follow the same sort of profile?

[Leena Craelius:]

Well, usually, throughout the years, the CapEx development – well, also, we can see that during Q1 that we are slightly behind the planned level. So, there has been some delays and postponement with the projects. But the target is still to reach the target of the CapEx or the frame that we have set. So, there is a bit of a hockey stick impact throughout the years. I don’t have the split for you regarding the R&C and strategic money-wise. But of course, the R&C is related to the maintenance activities and replacement activities to keep the current system up and running. And then the strategic, the big ones this year we have related to Oxelösund, the conversion program, and also to Mobile Q&T expansion. So, those are the biggest ones.

[Martin Lindqvist:]

But R&C is typically roughly plus/minus something, around SEK2 billion per year.

[Leena Craelius:]

SEK2 billion.

[Martin Lindqvist:]

Could differ between SEK1.6 billion to maybe SEK2.2 billion, SEK2.3 billion. But also, with – now with the strategic plan we have, we will not – of course, for the existing facilities, we will keep them in shape, but we will not invest in them – all of them, call it, going concern, and because we know that around 2030, we will shift over to the mini-mills. So, that will, of course, over time also take down the CapEx needs in Raahe, Luleå and Borlänge.

[Unidentified Analyst:]

Got it. Thank you. Just a quick follow-up. But then that impact, you are probably not going to see it in the next couple of years. That will be more sort of lower stay-in-business CapEx. That effect, you will probably only see towards, let’s say, the middle of the decade, or would you start to see it as early as next year, for instance?

[Martin Lindqvist:]

Now what we – as Leena pointed out in her presentation, we will start to see CapEx spending now, especially in the Oxelösund conversion, already this year and also the investments in Mobile in increased acuity capacity. But I agree with you, we can handle that with our cash flow.

[Unidentified Analyst:]

Okay. Got it. Thank you. Thanks very much.

[Operator:]

Thank you. And our next question comes from the line of Rochus Brauneiser of Kepler Cheuvreux. Please go ahead. Your line is open.

[Rochus Brauneiser:]

Yes. Thanks for taking my question. One follow-up, Martin, on the plate side in Europe. So, we are seeing very high pricing due to the supply disruptions from Ukraine and Russia. What is your view today, how long that dislocations and high prices can be maintained? And in that context, what kind of opportunities do you see to produce more plate in Europe when you think, what you mentioned, you are only in the standard market in the Nordics? Are there any – isn’t there any reason to produce more and use the price premium you are getting for plates right now? That will be my first question.

[Martin Lindqvist:]

We don’t have that capacity. We have a plate mill in Raahe that is partly producing standard plate. But in Oxelösund, there is no room for standard plate production. And I think it would be a mistake to short-term start to produce standard plate in Oxelösund, because the demand for Q&T and more advanced products is so high. And even though I mean, back to the example with North America with an EBIT margin of 40% in Q1, that was obviously higher than the EBIT margin we had in Special Steels. But over time, what is so important for us is to continue to grow the niche business, continue to develop the product mix because I think it’s very, very important that we continue to secure the downside, so to say, make sure that the stability in the earnings is increasing and we see less and less volatility. And given the size we have and given the knowledge, I am 100% convinced that, that is within specialty, and we should continue to focus on that and not short-term try to optimize standard plate volumes. But having said that, in Raahe, we can produce standard plate, and we are doing that. But that is mainly and only for the Nordic market, and that’s the way it will be in the future as well.

[Rochus Brauneiser:]

Okay. So, maybe I had wrong numbers in mind. So, I thought your plate milling was kind of 500,000 tons, 600,000 tons large, but you are probably running well below that capacity level. So – but maybe I have…

[Martin Lindqvist t:]

No, but we are producing volumes of Special Steels there as well. So, the standard volumes is not to that. We are using that for other things on the other programs.

[Rochus Brauneiser:]

Okay. Okay, it makes sense. Then the second question is on your price guidance for Europe. You are seeing somewhat higher prices. When shall we expect the price spike in the European flat steel market to become more visible, or – and how much of these price movements have been already discounted and then reflected in Q1? So, I would have maybe expected a more positive price outlook in Europe in Q2.

[Martin Lindqvist:]

No, but if you follow spot prices, then there is typically a quarter lag or something before it hits our P&L. We have – the majority of the volumes we have are quarterly prices, and we will see higher prices in Q2 compared to Q1, as we have said. And I think a good proxy is to follow the spot price development in Europe and then apply quarter’s lag or something. And then, of course, the third part is to look at the mix. And what we saw in Q2 as well as what we have seen in the last 1.5 years or so is a negative mix effect of automotive being slower. And we are only in the advanced high-strength steels within automotive. So, the high-grade martensitic steel is up to 2,000 megapascal. So, I mean that is, of course, overall disturbing the mix a bit because we don’t see that growth due to lack of semiconductors and others. But we still have, on the – in the other segments, a positive mix shift. But overall, it doesn’t show because of automotive.

[Rochus Brauneiser:]

Okay. Fine. On this – on the plate market side, how do you think about the sustainability of these high plate prices? Think these disruptions might continue for more time? To what extent do you think this can be mitigated by plate imports or slab imports from Brazil or China? What are you seeing in the market to – how this tightness or perception of tightness is developing?

[Martin Lindqvist:]

First of all, if you talk about Europe, for us that is only a Q&T market, quenched and tempered plates, and we don’t see much of import because of – they don’t have those capabilities in Latin America or in Asia. If you take the standard plate market in U.S., there are still quotas and there are also with this infrastructure package, there is also – when it comes to governmental spendings in different areas, it needs to be melted in U.S. So, I don’t see, in that aspect, import from other parts of the world playing a huge role. We will still see imports into U.S. because U.S. is – or North America and U.S. is structurally undersupplied. So, it needs to import. But I see, short-term and mid-term and also long-term, good demand for plate in – underlying demand for standard plate in North America for infrastructure, for energy and other segments.

[Rochus Brauneiser:]

Okay. Thanks for clarifying it.

[Operator:]

Thank you. And our next question comes from the line of Kevin Knitterscheidt of Handelsblatt. Please go ahead. Your line is open.

[Kevin Knitterscheidt:]

Hello. Thanks for taking my question. I have a long-term question concerning decarbonization and the market for green steel. A lot of especially German steel producers rely on natural – the transition technology for their decarbonization. Looking into the rising gas prices, what is your expectation? Would this exacerbate the expected shortage of green steel in the future? And what are implications for SSAB? Thanks.

[Martin Lindqvist:]

No, but we have chosen a different route. We are going to use hydrogen, and we are going to produce the hydrogen with fossil-free electricity in electrolyzers. So, that’s the route we have chosen and what we are focusing on. What others are doing and the reasons for them to do that, you need to ask them.

[Kevin Knitterscheidt:]

But it will influence the market for green steel in the future as it can be expected that the shortage will get even more short in the future when a lot of people can produce the way they wanted to.

[Martin Lindqvist:]

Maybe. But what we have decided to do together with our partners, LKAB and Vattenfall, is not only to produce steel without an emission, but to create a value chain without any emissions, all the way from the iron ores up in the mountains in Northern Sweden until the finished plate or finished coil or whatever it is out at customers. So, we have chosen, call it, a slightly different, maybe compared to other European steel producers, definition of green steel and fossil-free steel and the fossil-free value chain. So, in that aspect, we might be a little bit hardcore, but that is what customers and partners appreciate and what they really want. And we have that possibility because we have fossil-free power generation in the Nordics, and we are continuing to build out fossil-free power generation. So – and we will not be dependent on natural gas in our transition.

[Kevin Knitterscheidt:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Andrew Jones at UBS. Please go ahead. Your line is open.

[Andrew Jones:]

Hi. Just one question on the cost evolution. We have sort of touched on it already. And since you talked about sort of flattish profitability quarter-on-quarter, I just want to better quantify some of those rising costs. I mean we can see on a one-quarter lag the impact of the raw material index prices. But can you talk to some of the other cost inflating items and actually quantify them? I mean I would have assumed the power, call it, inflation in Sweden and the U.S. is relatively small, potentially changing – some of your suppliers of raw materials might add some transport costs. Maybe you could talk to the impact of changing your suppliers and what impact that could have. And maybe any other factors – I mean are labor costs likely to increase materially quarter-on-quarter? Any other factors that you can point to, to help us better understand the offsetting factor of these rising costs? Thank you.

[Martin Lindqvist:]

No, but you are right, I mean we see cost inflations in many areas. It comes with raw material, the underlying cost inflation, but also finding new suppliers and so on. And so we see cost inflation there. We see, as Leena pointed out, cost inflations in a lot of areas. And we were able to cover that with increased prices or – in Q1, and we were able to increase margins. And what we are saying for Q2 without being very specific is that we will continue to see increased prices, and then we say that those price increases will be, to some part or to a large extent, counteracted by raw material inflation and other types of inflation in SSAB. But all-in-all, as said many times now, Q2 should be a decent quarter as well regardless of that profit-wise.

[Andrew Jones:]

Yes. And just – kind of just on your raw material supply, can you just remind us how much – I know in coking coal you are sourcing from Russia, Belarus before. And do you have definitive agreements in place for replacement of that supply from other suppliers yet, or is that still a work in progress?

[Martin Lindqvist:]

No, but we sourced, I think roughly 10% of the iron ore last year from Russia. And this year, very limited volumes, and that has been taken care of. It is still a work in progress, but I am very convinced that we would be able to get the raw material we need for this year. And then we need to continue to find alternative sources and alternative suppliers. But we actually started – or the supplier organization, the purchasing organization, actually started that work already in January.

[Andrew Jones:]

On the – what about on the coal side, because the iron ore, it seems like LKAB is the fallback. But what about the coal side? What have you look – I mean how much exposure did you have? And where are you looking to replace that?

[Martin Lindqvist:]

We have – the biggest exposure was for PCI coal, and that we have been working now since January to find alternative suppliers. And as said, I am convinced that we will have enough for this year. And then we will continue to look at alternatives and start working with suppliers to get other PCI coal than Russian PCI coal. But so far, we have managed.

[Andrew Jones:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Ria Sharma at Goldman Sachs. Please go ahead. Your line is open.

[Unidentified Analyst:]

Hi there. And so I have one question. So, we understand that some of the SEK2 billion of taxes from financial year ‘21 are to be repaid in financial year ‘22, as you previously flagged. Could you advise how much of this has already been recorded in the first quarter? And how should we be thinking regarding the timing of the remaining payment during the year?

[Per Hillström:]

Did you mean now the taxes we did not pay in ‘21 that will be delayed until this year?

[Unidentified Analyst:]

Yes.

[Leena Craelius:]

Yes.

[Per Hillström:]

Yes, because some of that was paid in Q1. I don’t know, Leena, if we can…

[Leena Craelius:]

Some of that was paid in Q1. But of course, we still have payables occurring in Q2. I don’t have the exact figures now to give out. But you saw the tax payables in the cash flow report.

[Unidentified Analyst:]

Sure. I mean do you know roughly how much of that will be repayable during the remainder quarters?

[Per Hillström:]

No, we don’t have an exact guidance on Q2, you mean of how much of the overhang. It will be a part of it, but we cannot give you a clear number.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

And we have had one further question come through. That’s from Seth Rosenfeld at BNP Paribas. Please go ahead. Your line is open.

[Seth Rosenfeld:]

Thank you. Just two quick follow-ups, please. On Tibnor, obviously very strong results in Q1, can you give us any update on your sense of profitability going forward for this business with spot prices beginning to moderate with the cessation of those windfall gains? And then secondly, Ruukki saw somewhat a seasonally strong performance in Q1 as well. Give us an update on what drove that strength and sustainability into Q2? Thank you.

[Martin Lindqvist:]

If we start with Tibnor, we are growing and taking markets shares, and we are building out the network of Tibnor in Sweden. We call it Handelsståls Europe. And so we are building out with more outlets, and we expect volumes to continue to increase over time. And we expect to take market shares in the Nordics both organically, but we are doing quite a few also smaller and midsized acquisitions within Tibnor. Then of course, when – market prices, if and when they turn, we will see revaluation of stocks in Tibnor. But I think the underlying profitability regardless of windfalls should continue to improve in Tibnor. And that’s the plans they have and that’s what we expect to continue to see. If you take Ruukki Construction, I mean Q1 is typically the weakest quarter from a seasonal point of view with winter in the Nordics, and that was also the case in Q1 this year. But having said that, the profitability was still, for being a first quarter, very good. And they managed to handle market price development of their raw material, color-coated material, in a good way and increase margins. But they should seasonally be better in Q2 and Q3 than in Q1.

[Seth Rosenfeld:]

Great. Thank you very much.

[Operator:]

Thank you. And we have got one further question in the queue. That’s from the line of Tom Zhang at Barclays. Please go ahead. Your line is open.

[Tom Zhang:]

Good morning. Thanks very much. Just one very quick clarification, just on the sort of European shipment guidance. So, you have already mentioned most of that as sort of apparent demand and real demand normalizing. But just given that strong order intake, could you just confirm you haven’t seen any noticeable change in order cancellations in April as a – as sort of panic from the Ukraine-Russia situation fades?

[Martin Lindqvist:]

No, we haven’t.

[Tom Zhang:]

Okay. So, the increase in European shipments, I mean we would have expected maybe a bit more of a reversal from Raahe, but it’s very much just less restocking demand is the only real driver?

[Martin Lindqvist:]

No, but we – as said, we expect higher volumes, and part of it is due to the shield hearth we have in Raahe, we will have higher production in Q2. But the market is there for higher volumes. So, we have – yes. And we have not seen any increasing numbers of cancellations or not even problems for customers to pay their invoices. I would say quite the opposite.

[Tom Zhang:]

Okay. That’s very good. Thank you.

[Operator:]

Thank you. That seems to be the final question at least, so I will hand back to our speakers for the closing comments.

[Per Hillström:]

Okay. Thank you and that concludes today’s conference. Again, apologies for the technical problems. But thank you for the attention, all the good questions. Thank you, Martin and Leena, and wish you a nice day.

[Martin Lindqvist:]

Thank you.

[Leena Craelius:]

Thank you.