Outokumpu - A continuous rollercoaster or a serious investment?

Stocks
3626

On Wednesday, 18.12., there will be a pre-silent call. I imagine the market will hear something reassuring in relation to Friday’s panic, which in my opinion was an overreaction (though it didn’t hurt, as I was able to add more ownership). There wasn’t much new information as such. It has been known that EBITDA will decrease, volume will decrease, the market situation is difficult, distributors have inventory, market weakening intensified in Europe during Q3, price levels are still falling, EU industry is still under pressure, etc. Do these have any significance looking at 2025 and especially beyond? No.

I was still pondering whether, when there is often talk of cleaning up the balance sheet and refining the strategy when a new CEO starts, could the longer duration of the maintenance shutdown (was a larger maintenance done than originally planned during a weak market?), and raw material losses (some junk on the balance sheet?) be partly due to the new CEO ter Horst wanting to start his first full year as CEO from the best possible foundation?

The 2024 figures will still go “on the old account,” and ter Horst’s success will begin to be measured from the 2025 figures onwards, compared to the previous year. At the time of the financial statements, we will presumably also hear about possible fine-tuning of the strategy – hopefully something specific about how the lowest emissions are genuinely made into a competitive advantage, also on the bottom line. I also do not believe in cutting the dividend, especially not to zero, as ter Horst himself has been involved in outlining the dividend policy on the board’s side.

13 Likes
3627

There will be nothing left from 2024 to pay out as dividends, as the full year’s result will be loss-making and net debt was €212M in Q3. This is about double what was paid out as dividends this spring.

I personally believe that the dividend will go to zero or a very nominal dividend of a couple of cents will be paid out.

Here is also an image of Outokumpu’s adjusted operating profit, from which you can see how strongly the result has fluctuated.
image

17 Likes
3628

Incredibly poor result for 2024 even though the economy in the US has been performing at least reasonably well and the company has announced that it has been able to achieve a permanent earnings improvement of hundreds of millions this decade.

Next year’s earnings level is completely shrouded in mystery. At least in Europe, there are no signs of increased demand for the product range compared to this year.

The dividend is a maximum of 10 cents for 2024. If there are no signs of improved earnings in spring 2025, the dividend may not be distributed at all.

6 Likes
3629

It will be interesting to see the dividend for spring 2025.

In 2022, it was stated that the goal is a steady, rising dividend, starting at EUR 0.25.

After peak years, a billion in net debt had turned into net debt-free status, and it was stated that the super-cyclical EBITDA is EUR 500-550 million.
It was probably thought that this promise would attract new dividend-appreciating owners to the ownership base.

Well, the dividend policy has been lived through spring 2023 and 2024. It would be quite a U-turn and a vote of no confidence in their own super-cyclical estimate to say “gotcha”. The dividend policy can, of course, be updated with one bang of the gavel.

If 33 million shares out of 457 million shares are excluded, which were bought for a EUR 125 million convertible bond, then EUR 115 million (net) would be the price for the credibility of the dividend policy and super-cyclical earnings thinking, if the dividend were EUR 0.27 / share.

Additionally, next summer, the aforementioned EUR 125 million convertible bond matures. Some 5% interest has been paid on it, and participants also receive a cash payment as an alternative to taking Outokumpu shares. If I recall correctly, the share price for that option is around EUR 2.75/share, which is still a viable option for convertible bond holders. It would be quite amusing if that also had to be paid in cash, when 70-80% of the necessary shares have already been acquired in advance…

The 2024 mid-summer ‘trough’ or bottom of the cycle has proven agonizingly long, while those who care about their money are minting gold with ingots and AI.
Outokumpu’s value is in the order of -25% vs. the COVID lows, taking into account indebtedness…

In accordance with its dividend policy, Outokumpu aims to pay a stable, growing dividend annually.

In 2022, the Board of Directors stated that a basic dividend of EUR 0.25 per share would serve as the basis for future dividend payments in accordance with the dividend policy. The Annual General Meeting decided in April that a dividend of EUR 0.26 per share would be paid for 2023.

24 Likes
3630

I really need to pluck up the courage once more and ask if anyone else has been pondering how the EU’s new regulations affect Outokumpu’s situation. There’s only been one article about this in the last six months, and even that was half-heartedly written from a consumer’s perspective. The title of Outokumpu’s environmental product declaration report was “verified environmental data,” and the year 2026 has appeared in quite a few places. Does this have anything to do with the eIDAS regulation?

I won’t even try to explain the problems a small metal industry company has faced, but the idea is that in the future, things will be based on trust. For example, if we consider a hydrogen investment that receives public funding, then a reporting obligation arises. What could be nicer than being able to monitor it in real-time :grinning:

Well, if you read every article on the EU’s website, you’ll get some idea of how it works. I can post last spring’s training material here, which superficially explains the idea. The presentation is general education and can be used in many different fields. And that’s not all, a kind of carbon tariff calculator is coming to Microsoft Copilot, aimed at professionals. Apparently, this works by entering product information, and it gives the tax amount. Does anyone know more, as I’m not a professional? I spotted this in an Eduhouse presentation.
YSD digital wallet for participants.pdf (1.8 MB)
EU-Carbon Mechanism

The summary of this is that if a product does not meet the given criteria, it cannot be sold without getting caught, and this is easy to monitor :grinning:

4 Likes
3631

Pyysäri analyzes Outokumpu;\n\nOutokumpu varoitti | Sijoitustieto.fi

26 Likes
3634

Here is Petri’s company report on Outokumpu. :slight_smile:

The weak cyclical situation is now severely punishing Outokumpu’s result, as also indicated by the profit warning issued on Thursday, according to which the Q4 result will fall into negative territory. The stock is priced very moderately in relation to our estimated through-cycle earnings level. This keeps us patient, even though the wait for a more favorable phase of the cycle has been prolonged on several occasions. In the current situation, the free cash flow, clearly falling into negative territory, erodes the share’s value, so reflecting this and changes in forecasts, we lower our target price to 3.5 euros (previously 4.0 euros), but reiterate our ‘add’ recommendation.

11 Likes
3635

I don’t remember the exact wording anymore, but in an interview, Malinen and Piia (CFO) together stated that the intention is to pay a stable, growing dividend over cycles. During good times, a buffer is accumulated, from which dividends are paid during bad times. And the current CEO has been involved in deciding this dividend policy; the state is unlikely to be against paying a high dividend.
But in any case, an interesting situation regarding dividend payment.

14 Likes
3636

On the same line regarding the dividend due to principled and communication reasons, etc. Of course, then again, the result and figures would suggest that the dividend will be cut. We remain waiting.

Do I recall correctly that Outokumpu possibly intended to announce its US investment plans by the end of the year? Are measures related to increasing cold rolling capacity likely to be expected?

An interesting detail in the timing and content of the profit warning (e.g., extended maintenance work during the service shutdown) is that the mine and the Tornio plant were on strike organized by the Industrial Union on Thursday, December 12th, and the profit warning was issued late on Thursday evening. https://www.teollisuusliitto.fi/tyoelama/tyotaistelu/lakkoilmoitus-25-11/

4 Likes
3637

A goal is a goal and now is now.

It would be against the owners’ interests to decide on dividend distribution with borrowed money.

The year 2025 could also become very challenging as the so-called annual agreement has had to be negotiated in a poor market.

11 Likes
3638

It might be in the owners’ interest to start share buybacks now to acquire the missing shares to settle that VVK without dilution.

The authorization for this is from the general meeting, and that VVK will need to be handled soon anyway.

10 Likes
3639

What if the VVK holders do not exercise their right to convert the loan into shares, but instead want their money back? This is a perfectly valid scenario at this moment with these share price levels.

The balance sheet and shareholder value will quickly be in trouble again if, at the same time, investments are made, own shares are bought, the VVK is paid in cash, and dividends should still be paid, all while the business is not generating any internal revenue :slight_smile:

11 Likes
3640

Of course, VVK holders can take it as cash. That might come into question if the share price were still below the conversion price in July, which is now around 2.75e.

I wouldn’t consider it a very realistic scenario.

Unless a company operating with the “industry’s best balance sheet” dilutes shareholder ownership and at the same time pays dividends, even though its own shares could have been bought half a year earlier at a P/B=0.3 price. :sweat_smile:

3 Likes
3641

I would not pay dividends in this situation. The previous estimate of profitability has been far too optimistic. In my opinion, it is concerning if top management cannot admit their mistakes. As the market and external factors are extremely difficult to predict.

It indicates a skewed culture if this downturn is not addressed. At worst, the downturn will last longer than expected, and then the balance sheet will be in a mess. It would be good to enter a rising market with a healthy balance sheet, allowing investments to be started at the beginning of the upturn, not at the end.

Buying back own shares is probably the smartest move at this P/B if no other use for the money can be found and it absolutely has to be gotten rid of.

5 Likes
3642

From the beginning, I have been against Outokumpu’s new dividend plan and have repeatedly criticized it here.

“Dividend Policy
According to its dividend policy, Outokumpu aims to pay a stable, growing dividend annually.
In 2022, the Board stated that a basic dividend of 0.25 euros per share would serve as the basis for future dividend payments in accordance with the dividend policy.”

I understand that the company’s board wanted to stabilize Outokumpu in the eyes of investors by promising shareholders more stable cash flow.
But the idea is completely absurd when compared to the image posted by Iikka:

kuva

They committed to a stable, growing dividend, and two years later they either have to pay dividends with borrowed money :-1: or break their promise, which the current CEO was making on the board :-1:

https://www.outokumpu.com/fi-fi/news/2022/outokumpu-sai-strategian-ensimmäisen-vaiheen-päätökseen-etuajassa-–-käynnistää-toisen-vaiheen-ydintoimintojen-vahvistamiseksi-ja-julkaisee-siihen-liittyvät-uudet-nimitykset-ja-taloudelliset-tavoitteet-3118445

Outokumpu promised EBITDA, investments, emission reductions, dividends. Everything at the same time. At that point, Outokumpu’s R12M EBITDA was +1209 MEUR! There was certainly already a view into the future, and after the next quarter, R12M EBITDA was 1533 MEUR!

Now we are in a situation where R12M EBITDA is 189 MEUR and the result is clearly at a loss! The next result will deepen the loss even further.

During a boom, they promised the moon and the stars, and now the business is making a loss.

In heavy industry, ramping up investments takes a long time, and investments are made with decades into the future in mind. Investments should not be canceled just because the market is temporarily difficult, but…
“Our goal is to significantly reduce carbon dioxide emissions, and focus areas also include responsible sourcing, as well as diversity, equality, and inclusion. In the second phase, we will also make targeted investments in productivity and sustainability and focus on a customer-centric operating model.”
“600 million euros in capital expenditures over the next three years”

There is no money, and no money is coming. Net debt has started to grow, so perhaps considering stopping all “unnecessary” things? If there really was money to spend now, one could buy own shares from the stock market at P/B=0.3 and with a 2026 forecast EV/EBITDA=2.5…
…or we can pay those dividends with borrowed money and put it into “sustainability” and hope that it eventually brings money to the owners?

15 Likes
3643

Progress continues regarding Sustis, with Betolar’s low-emission solution for the chromium mine.

If only Outokumpu could monetize its leading position in this field.
Actions with impact, but at least unclear regarding financial impact.

The solution will be taken into production use at the beginning of 2025 at Outokumpu’s Kemi chromium mine, which will achieve carbon neutrality as the world’s first operating mine by the end of 2025.

“The carbon neutrality of the Kemi mine is an important, concrete step on Outokumpu’s journey towards ambitious climate targets. We are committed to reducing our carbon footprint with our own measures as much as possible with available technologies. The development project in cooperation with Betolar supports the reduction of emissions throughout the mine’s entire value chain,” says Martti Sassi, Director responsible for Outokumpu’s ferrochrome business.

4 Likes
3644

However, cyclicality can be well predicted, as can unprofitability at the bottom of a weak cycle; this has always been the case in the industry, and no change is in sight.
The dividend was promised to be paid even through weak cycles, knowing full well that they always occur. It would be cheating the owners if the dividend were not paid now.

Unfortunately, nowadays, there is hardly any return to be gained from Helsinki stocks other than through dividends, so I personally hope that it will be paid as promised; otherwise, I would never have bought the stock. A dividend would reduce the stock’s, in Kummun’s case, very large downward fluctuations. Now we are going this low because the market does not believe in the promised dividend.

Helsinki 5-year return index -2%, with dividends included index +24%.

8 Likes
3645

For some reason, OP still believes in the promised dividend even after this profit warning. Hopefully, someone will ask about this in Wednesday’s briefing.

3 Likes
3646

The dividend must be based on profit distribution. A good example of this is Citycon, which year after year distributed excessive capital returns relative to the company’s free cash flow, the consequences of which are well known to all of us.

Since next year’s annual contracts will have to be made in a very poor market, and next year does not look better compared to this year either, there is a risk of the company’s net debt growing by over €500M during the next 16 months, which is too much for a capital-intensive industrial company susceptible to such significant shifts.

2 Likes
3647

-What I’ve read about these annual contracts is that several steel companies are not willing to enter into long-term agreements at this price level. At these price levels, Chinese steel is not competitive. In Europe, energy prices are high, and the Chinese are buying cheap raw materials/energy from Russia.
-Outokumpu should stop its low-emission efforts, switch to coal, and focus on efficiency/margins; perhaps that way, quicker decisions could be made at the EU level regarding certain problems. Next, Trump will raise tariffs in America; perhaps it’s time for the EU to harmonize tariffs with them and stop the endless investigations if it intends for us to still have our own production available in the future.
-Remove executive bonuses/share-based incentive programs until the company can pay owners a steady “growing” return; we’ve struggled for 10 years, and the stock valuation hasn’t changed even though debts have been paid and money has been raised from owners through share issues. It feels like the company’s market value is unaffected no matter what is done/produced; perhaps it’s better to make this a proper dividend-paying company → even now, it’s humorously priced, considering how much money has been invested in factories. I also suspect long-term investors want some return.

5 Likes