Outokumpu - A continuous rollercoaster or a serious investment?

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3798

What are your thoughts regarding next week’s CMD? What do you expect from it and the strategy update? My own guesses/speculation at a high level:

  • Will a small/moderate acquisition or cooperation agreement or other reasonable investment related to increasing US cold rolling capacity be announced? ter Horst has promised to talk about this at the CMD, and if it were an acquisition or similar, it would practically probably have to be announced before the CMD. This own thought is perhaps quite speculative, however, when considering balance sheet targets and the difficult market situation (is there room to invest more significantly now without indebtedness increasing).
  • Ferrochrome and the mine will feature more prominently in the strategy than before, increasing annual production volume? This is also speculative, but is based, among other things, on the mine’s capacity and other things coming to the forefront recently.
  • A strong balance sheet, keeping indebtedness under control, and shareholder returns remain important focus areas.

What are your thoughts? What could be a big surprise, or is it more of a basic update, since the strategy has reportedly been commented on as being relatively sound and no major overhaul is needed?

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3799

As a pick-up to the previous message and related speculations, here are a couple of points from the Q4 press transcript from February 13, 2025, these from the Q&A sections:

Kati ter Horst: Thank you for your question. Maybe I’ll start on that. I think we have looked at the Americas market, how we see the demand developing, and how we see the demand-supply balance developing. I think one of our key conclusions was that we didn’t, right at this moment, see that there would be enough room for additional expansion in controlling capacity. Then at the same time, we communicated that we have been working on debottling our current assets and doing smaller investments in the Americas and in Mexico. That has proceeded well. We have said that there would be 80,000 tons of additional capacity. For now, we have decided rather to do that than make a big investment in the current environment. Like I said, we are keeping the door open and we will continue to see if that moment is right later on. As well, we are looking at other growth options in the Americas and comparing them to each other.

……
Anssi Raussi: Okay, got it. Then about your decision to cancel this gold rolling investment for now. You say here that these new tariffs could have an impact on your analysis but when do you plan to reassess this investment? Also, I think you mentioned that this decision to cancel this investment plan allows you to direct your capital into other areas. What areas are you seeing that would have a better return on capital?

00:37:57 - 00:38:11
Kati ter Horst: Let’s answer like that that America’s market continues to be interesting. We are also looking at other opportunities but also wider in the group and I would like to come back on that more in detail than during our capital markets day in June.

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3800

Outokumpu converts debt into shares.
The company has received conversion notices for 19.1 million euros. The bonds will be exchanged for approximately 7.2 million Outokumpu shares.

Am I calculating correctly that the conversion ratio is 2.7 euros/share?
One would think the share price would plummet, but it barely budges.

What’s wrong with my thinking here?

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3801

There is nothing here that isn’t already known. VVK terms have been known for 5 years, and this operating model (subscription of new shares + cancellation of own shares) has also been communicated and implemented multiple times already. The shares held by the company are not sufficient for the entire VVK sum, and thus it will also be reflected in the share count at some point. There is no change in the total number of shares here, nor will it come as a surprise in the future, so there is no reason for the stock to plummet.

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Thanks Grape for the clarification.
Still, it bothers me that when the share price is around 3.44 and the conversion ratio is around 2.7 (if I understand correctly at all), then if these shares received in exchange for VVK are sold in larger quantities, the price will likely drop.
Or are there perhaps some restrictions on selling in the VVK terms in such a case?

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Your conversion price is absolutely on the right track. Of course, the course might dip a bit IF all (new) owners start selling. On the other hand, I don’t see much difference from the fact that owners already have shares bought at different prices in their portfolios, some even below two euros. The future outlook and current pricing in relation to that is probably what determines who sells when and at what price.

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The convertible bond has been continuously listed on the stock exchange in Germany, and its price has followed the share price. Therefore, in a professional investor’s portfolio, the convertible bond has not been valued at its nominal value but at its market price. Converting the convertible bond into shares thus does not enable a “new profit,” but rather shares at an acquisition price approximately equal to the day’s market price.

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3805

A convertible bond investor may have a different profile than a stock investor.

Indeed, now, those bond investors who, during the zero-interest rate era, acquired 5% interest-bearing securities and received a stock option as an add-on, are ending up as stock investors.

So, one could imagine selling pressure on at least some of those Outsa shares converted from convertible bonds.

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You can start going through it from there…
Tomorrow is CMD, they kindly provided the material already the day before

https://news.cision.com/fi/outokumpu-oyj/r/outokumpu-julkaisee-uuden-evolve-strategian-kasvun-ja-omistaja-arvon-edistamiseksi-seka-paivittaa-ta,c4161486

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A few quick takeaways from the new strategy at first glance; tomorrow’s CMD will certainly provide much more and deeper insight into the topic.

  • No changes to reporting segments
  • The balance sheet is still intended to be kept in good order, but the courage to invest in higher value-added targets is also emphasized. The same comment applies to the dividend policy, where steady and growing is still mentioned.
  • Share buybacks are mentioned as a new element of capital allocation. This is a smart and good addition, provided it is done at the right time (e.g., now would be the right time in terms of the share price).
  • Calvert and Tornio will focus on improving and maintaining cost competitiveness and generating cash flow for products and investments with more growth potential and value creation potential.
  • Investments in current assets (a major mention of a 200m€ investment in Tornio and a shutdown in Krefeld, EBITDA impact over the cycle of 70m€/year) but IN ADDITION, acquisitions are possible in higher value-added products. I consider it likely, based on previous comments (see previous messages), that some special product-producing asset in the US is in sight. What could it be?
  • The chrome mine and ferrochrome operations are brought to the forefront, as I anticipated; the business will begin to develop more independently and aim for growth, no longer primarily just fulfilling its own needs. Good luck on the growth path, Sassi!

Looking forward to tomorrow with interest. Hopefully, the coming years will bear fruit, and to support this, stricter regulation on overcapacity in Asia is also needed in Europe, as well as lasting peace in Ukraine.

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3808

Here are Pauli’s comments on Outokumpu’s new EVOLVE strategy. :slight_smile:

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The afternoon presentation is available on the CMD page.
CMD therefore starts at 13:00, join online
https://outokumpu.events.inderes.com/cmd-2025

Below are a couple of summary slides.

It’s positive that
-there is talk of found growth areas with higher margin/added value
-investment criteria defined, IRR 15%/20%
-increasing Kemi’s role given that there is enough ore

On the other hand, as is understandable, concrete details are left for the future.
Growth through initiatives is always slow and uncertain, and naturally, the most certain thing is the incurrence of costs upfront.

image
image

https://www.outokumpu.com/fi-fi/sijoittajat/investor-calendar-and-events/capital-markets-day

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It was a good opportunity. Smooth presentations, no hype but truly great potential in utilizing chrome reserves - finally a clear roadmap for this and on a relatively fast schedule.
Strict discipline in investments, EBITDA new ‘normalized’ target level approx. 800 million !!, growing dividend from current level !!, cyclical downturn behind us.

Hopefully the EU handles its part quickly, so we can enjoy Outokumpu’s new rise. 1-2 good quarters and target prices above five…

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Here are Antti’s comments on Outokumpu’s Capital Markets Day.

We commented on the company’s strategy as a first reaction based on the strategy release in our previous comment, and with this comment, we supplement the Capital Markets Day’s content compared to the release. The event unveiled Outokumpu’s strategy update for 2025-30, which, in our view, followed a rather classic portfolio strategy. The company has assessed its business-specific value creation and growth opportunities, including capital returns, and built priorities for group-level capital allocation based on these. The strategy clearly distinguishes between core businesses and growth businesses that are more interesting from a value creation perspective.

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Yes, and I liked that the approach to investments is also minimizing carbon emissions towards zero. Yesterday, I increased my own Outsa position by 50%.

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I don’t know what the point was of doing an analysis two days before the company holds its CMD. But Nordea published a report on Outokumpu just before the Capital Markets Day.

Recommendation buy with a target price of 4.3 €

They believe that Outokumpu is well-positioned for an eventually improving market and the share price does not reflect this.

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JP Morgan, on the other hand, lowered [their target] from 4.0 to 3.7 EUR after CMD, reflecting a 35m EUR write-down. Although for the longer term, they raised [estimates] by 200m EUR related to Tornio expansions.

Citi continues with its 3.3€ target.

Clearly, longer-term discussions/intentions do not outweigh the tariff uncertainties and the burden of Europe’s poor state.

https://www.investing.com/news/analyst-ratings/outokumpu-price-target-lowered-to-eur370-on-new-strategy-outlook-93CH-4093065

https://www.investing.com/news/analyst-ratings/citi-maintains-outokumpu-stock-rating-cites-strategic-vision-through-2030-93CH-4092995

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Some of my own takeaways and thoughts from the CMD and the new strategy.

The normalized EBITDA target level rises from the current 500-600 million euros to 750-850 million euros by 2030. Debt servicing costs will also rise, as a higher leverage than current will be allowed. However, the net income level should clearly improve, and investments in growth areas also aim to reduce the cyclicality of earnings. Dividends will continue to be paid, and the starting point from which they will gradually increase is the current level.

Europe

  • A 200 million euro investment is coming for an annealing and pickling line in Tornio, while two will be shut down in Germany. Implementation during 2026-2027, full 70 million euro EBITDA impact from 2028 onwards(?). The improvement in EBITDA could be less in a weaker market (e.g., 50) and more in a stronger one.
  • A study has been initiated in Avesta for the production of high-nickel products. There seemed to be strong belief in the market, as well as in their own capabilities and profitability, and it doesn’t require a huge investment, but 100-200 million euros if I understood correctly. Timewise, this probably won’t be completed before the annealing and pickling line in Tornio(?).
  • Import pressure from Asia is strong, and very strong lobbying efforts are underway towards the Commission, which hopefully will yield results quickly.

Americas

  • Extracting efficiency and profitability from Calver with small investments.
  • No acquisition or growth of capacity in basic products.
  • I expect a smaller acquisition to be made in the special grades sector. What could be a potential target?
  • The USA and Mexico might reach an agreement that allows the export of rolled products from Mexinox to the USA without tariffs.

Ferrochrome

  • Demand for Outokumpu’s FeCr is continuously growing, and a premium in all sales prices.
  • Capacity to increase production AND sales exists without investments(!).
  • In 2028-2030, higher concentration FeCr products and pure chromium metal may be added to the product range, but with larger volumes in the next decade. Also other metal grades.

Overall, the new strategy and the concrete actions presented are, in my opinion, positive. They are keeping their feet on the ground with the development of new metals/alloys, but these could bring something unexpectedly good in the next decade. I believe that a future better steel cycle will bring appreciation to Outokumpu and its share price, and the cash flow generated from it should well cover these growth investments. Let’s just hope that the upcycle truly starts to materialize in 2026 and 2027.

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Convertible bond conversions, new share issues, and treasury share cancellations are now complete as a whole. The total number of shares increased by approximately 17 million shares. The total number of shares is now 473 million, of which less than 2 million are held by the company.

Outokumpu Oyj: Subscription of shares based on the conversion of a convertible bond and simultaneous cancellation of own shares

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I came across this article from three days ago, “The stainless espresso”. Some Asian lobbyist beefing it up…?

EU steel makers report highest turnovers in decades

European steel makers continue to point to their declining crude steel production as evidence of their industry being in a serious crisis.

The fact that the figures from the in-house steel makers’ association EUROFER completely contradict this steel crisis means that this artificially created crisis can really only be seen as an absurd joke.

Without losing sight of the general approach of the steel lobby specialists, let’s take a simplified look at the year 2024, whose figures were recently published by the association.

EU steel makers have increased turnovers by over 65% since 2022

Average turnovers in 2024 were 215 billion euros, with production at 146 million tonnes per year. In 2023, average turnover was still €191 billion, compared to production of 140 million tonnes. This means that EU steel mills were able to increase their turnover per tonne of steel by more than 8%. Compared to 2022, the turnover of domestic steel mills in 2024 was even more than 65% higher – with steel production down by around 4%.

EU steel makers increase turnover but still cut jobs

At the same time, domestic steel makers also cut more than 5,000 jobs last year (Source: EUROFER, approx. 303,000 employees in 2023, approx. 298,000 in 2024). In addition, from 2023 to 2024, raw material prices (e.g. iron ore) fell by almost 11% and energy costs in the EU (non-household consumers) by approx. 10%.

SMEs are being cheated out of competitiveness

With figures like these, one really wonders who needs to be protected from what or whom? In any case, EU steel makers do not need to be protected, given their questionable methods, arguments and figures.
Rather, small and medium-sized enterprises, traders, importers and consumers of steel and stainless steel must finally be protected from large corporations.

The behaviour of the steel makers oligopoly is destroying the competitiveness of domestic SMEs. We therefore call for genuine democracy in Brussels. The socialist planned economy and self-service mentality of EU steel makers has had its day.

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