SSAAF - SSAB AB (publ) (SSAAF) Q4 2022 Earnings Call Transcript

SSAB AB (publ) (SSAAF)

Q4 2022 Earnings Conference Call

January 27, 2023 03:30 ET

Company Participants

Per Hillström - Head, Investor Relations

Martin Lindqvist - President and Chief Executive Officer

Leena Craelius - Chief Financial Officer

Conference Call Participants

Krishan Agarwal - Citibank

Tristan Gresser - BNP Paribas Exane

Dominic O’Kane - JPMorgan

Rochus Brauneiser - Kepler Cheuvreux

Bastian Synagowitz - Deutsche Bank

Alain Gabriel - Morgan Stanley

Andrew Jones - UBS

Presentation

Per Hillström

Welcome to this presentation of the SSAB Q4 and Full Year Report for 2022. My name is Per Hillström. I am Head of Investor Relations. And with us today here is President and CEO, Martin Lindqvist and also our CFO, Leena Craelius. And the agenda, Martin will start to go through the year and the quarter, another record year for SSAB. Leena will go into the financials a bit more in detail. And then Martin will handle the outlook and the summary. And we finish off, as usual, with questions and answers. So by that, please, Martin, take the stage.

Martin Lindqvist

Thank you, Per and good morning. 2022 was, I would say, a very volatile year with a lot of things that we needed to handle with – started with the invasion of Ukraine, problems with transports and so on, but having said that, we had a very good year.

And if we start with one of the most important KPIs safety, we continue to improve our lost time injury frequency. We were just above 1.0, which is compared to the history, really good and I would also say compared to the industry on a good level. We are not done. We need to come down to zero and we have, of course, the ambitions to become the safest steel company in the world. We also had record earnings. The adjusted operating profit was or EBIT was SEK29.3 billion, which was the best year we have ever had. ‘21 was a good year, but this was more than SEK10 billion better for the full year.

We continue to generate decent and strong cash flows. Cash flow before dividend amounted to SEK14.2 billion, so another year with strong cash flow generation. And when we ended the year, we had a net cash position of SEK14.3 billion compared to not that many years ago, a net debt position.

In Q4, we also took an impairment write-down of the goodwill related to the acquisitions of IPSCO and Ruukki of $33.3 billion. That affected as a one-off for the fourth quarter. And the board – we had a board meeting yesterday. The board will propose to the AGM a dividend of SEK8.70 per share. And we have, as you know a dividend policy of putting our dividend between 30% and 50% of net profit, and this is smack in the middle, 40%. The Board will also ask the AGM for that authorization to buyback up to 10% of the shares in SSAB.

If we move into the divisions, Special Steels, record earnings. We had a strong price realization, good development of the product mix. And the EBIT margin for the full year was 24.6%, which is really, really good. Q4 prices and product mix held up very well. We had planned maintenance in Q4, but we also saw a slightly weaker apparent demand in Europe that impacted shipments and result – these two reasons, but still a very good profitability of SEK1.4 billion in Q4.

Another strong achievement is our U.S. plate operations, where we at the full year had an EBIT margin of 38.1%, so more than 38% in EBIT margin. We had record earnings and we continued to increase prices during the year, if we look at Q4, still a very good earnings of $2.7 billion. We saw that prices decreased somewhat in Q4 from very high levels, but all-in-all, a very strong achievement from North American plate or SSAB Americas.

If we look into the plate-related divisions and start with SSAB Europe, for the full year, we had an EBIT margin of 17.1%, which is slightly lower than we had in 2021. In Q4, we had a planned maintenance outage. We decided to do the maintenance on one of the blast furnaces in row that was planned for second half of ‘23. Given the low apparent demand in Europe, we decided to do that already in Q4. And the idea then was that if the market normalizes we would start it up again early in January. And I think we started it up 2nd or 3rd January, so it’s now up and running again. And we saw during Q4 as we knew we would see lower realized prices. Tibnor, it’s a function of the, I would say, Nordic strip market to a large extent.

We saw weak demand, weak apparent demand and lower prices. In this turbulent environment, we managed to continue to take market shares on the distribution market in the Nordics in, I would say, all countries, Finland, Sweden, Norway and Denmark. The big – the main reason for the big negative result is the inventory losses that we take them when prices go down, we have this – so the underlying EBIT was much better, but including inventory losses, it was minus $403 million. And then Ruukki Construction typically run into a lower season in Q4 and Q1. And on top of that, the Nordic construction market slowed up. So they were around zero for the fourth quarter. So all-in-all, three high-performing divisions in the fourth quarter, the strip-related divisions with focus on the European business met lower apparent demand.

If we then continue over to what we are aiming for in mid-term and long-term, 2022 was a very important year for the transition of SSAB. We actually delivered 500 tons of fossil-free steel to our strategic customers. We start now to see not only yellow goods, we see machines from Epiroc, trucks from Volvo and cars starting to use now fossil-free steel. And we see from the partnerships we have in automotive, heavy transport, construction machinery and material handling and also construction, we see a strong demand for these kind of products and a huge interest for this development.

And I would say, overall, our transformation is on plan. And you know what we are going to do we are going to replace the blast furnaces and coke oven plants with new integrated mini mills in Raahe and Luleå – build complete new mills in Raahe and Luleå. And we are going to take away the blast furnaces and the coke oven battery in Oxelösund, then install electric arc furnace there as well. And this is nothing new for us, because we have been running electric arc furnaces in our U.S. operations for many, many years. This will give us much better flexibility, much shorter lead times and virtually no carbon-dioxide emissions from our operations.

And we are now in Luleå and Raahe running our feasibility studies. They are ongoing. We have started in Luleå the public consultation process for the plant we started that in Q4 and we have all seen HYBRIT development continue to develop the technique and we have during the quarter filed for a number of very, very interesting patents at the European patent office. One prerequisite for this is of course that we have fossil-free electricity. And this transformation will require for SSAB’s part 3 to 4 terawatt hours more electricity than we consume today. But it is, in total, we are going to need less energy. We are just shifting from coal as an energy carrier into electricity. And this will also, the mini mills help us to get more flexibility in the mix. So we could use either a sponge iron or scrap in the melt and that will also help us to be able to reduce volatility, because what we are doing in the company and you see effects of that during 2022. We are reducing, working with increasing flexibility, moving the product mix and everything in order to reduce low point profitability and have a more stable development or a stable situation when it comes to earnings in a very volatile industry.

So I am a strong believer in that, the most stable steel company in this volatile industry will over time be the winner. And when we do this transformation, we will be able to reduce 10% of all the carbon-dioxide in Sweden and all the carbon-dioxide emissions in Finland we will reduce with 7%. So we are also leading the way for the steel industry showing that what was usually called hard-to-abate industry that this is actually possible. And I usually say that without the steel industry doing its homework, there will be no possibility to meet the targets we have setup in the Paris Agreement. On top of this, the 3 to 4 terawatt hours we need for SSAB, we will also need for HYBRIT demonstration plant in Gällivare, another 5 terawatt hours for 2026 in order to start now to produce sponge iron in large scale.

So with that, Leena, I hand over the financials to you.

Leena Craelius

Thank you, Martin. Pretty much was already covered in Martin’s presentation. But if we have a look at the, first of all, the shipments, start with the steel shipments, we can see that the first half of the year, yes, it was strong, stable demand, volumes still growing and then we can see the lower demand on the second half of the year and mainly in the European market, as Martin already indicated, U.S. holding up better and emerging markets as well. If we look at the sales graph, we can see that the prices, yes, they were increasing during the first half of the year, started to go down during the second half of the year and then again, mainly related to European market demand coming down.

Summing up these wonderful bars here, quarterly EBITDA for ‘22 and then analyzing the sales graph, we can say that the sales prices, they were well compensating for the higher raw material costs that we had, higher energy costs, logistic costs, higher maintenance and repair costs, fixed costs and the lower activity level as well, and on top of that, making then SEK1 billion higher result. So we can really be proud about the result in ‘22.

If we then look into Q4, analyzing Q4 ‘22 versus ‘21, prices on group average level, still positive impact. However, the only division here underneath is Special Steel division with higher prices. The other division already had the lower prices. So, Special Steel still compensating for that. We have also FX impact, positive stronger U.S. dollar in the price analysis impacting volumes lower and mainly with the Europe division, Special Steel division and Ruukki Construction. Variable costs related to raw material costs being higher, PCI coking coal, iron ore relatively flat compared to last year and scrap prices slightly lower compared to last year. Fixed cost and capacity utilization were impacted with the Oxelösund maintenance and the repair work in Raahe.

Comparing to Q3, we can see the price development, during the fourth quarter, also the mix becoming slightly weaker. Prices came down in Europe division, in Americas division, holding better still in the Special Steel division, as Martin said, volumes only slightly higher, this mainly coming from the Europe division having a higher portion of standard grades, thus impacting actually negatively the average price level. And the variable COGS here having positive impact and this is primarily coming from the lower cost of U.S. scrap.

Other raw materials were relatively flat compared to quarter-on-quarter, and again, the maintenance and repair activities impacting the fixed cost and capacity utilization. What we were promising during Q3 results release that we will focus on cash generation and releasing working capital, the outcome we can see here, it is actually providing more cash flow than the actual EBITDA. So organization did really, really good job with this task and this is primarily, again, related to inventories. So we were heavily reducing inventories during Q4.

Year-on-year comparison, more than $10 billion better result. Change in working capital and the deviation here is mainly related to higher raw material cost in inventory. Maintenance CapEx on similar level, taxes being high, but as you know, big part of this is related to ‘21 result, strategic CapEx up with the Oxelösund conversion program. And the dividend paid out this year, you can see here, and if the dividend is approved, what is proposed, the dividend payout this year will be around $9 billion. All this led to the very strong financial position that Martin already also showed $14.3 billion net cash – positive net cash.

And as already also mentioned Board yesterday proposed to have SEK8.7 per share as a dividend corresponding to this SEK9 million payable and the authorization for the mandate for share buyback program. The impairment of goodwill was done at the end of the year as a normal annual impairment test process and it led to the write-down of $33.3 billion and it is not affecting the cash flow and all the taxes. Raw material prices, iron ore, leveling out, we saw an increase in prices at the end of the ‘22 mainly related to the China releasing lockdowns. And then on the other hand, coking coal peaking during Q2 in the year ‘22, started to come down rather heavily. But to bear in mind that we do have this lag in the impact of our consumption cost.

Iron ore is around one quarter and it is longer with coking coal. We do have quite substantial inventory still. So, there is longer lag with this price impact in our result. On average level, we can say that Q1 variable costs will be on similar level during Q1 than they were on Q4. What we know is that the scrap prices in U.S. started to go up at year end and have gone up during January. So there we know that the cost will be higher during Q1 compared to Q4.

I will end my presentation for this familiar graph, the cash need of the business. We were indicating that there is a need of $5 billion. For this year, we didn’t quite reach that, but we plan to ramp up and pick up and we plan to spend the $5 billion during this year.

With that, Martin will tell about the outlook.

Martin Lindqvist

Thank you, Leena. So if we take then a look at Q1 and what we expect for Q1 and start with heavy transport, we see a neutral or slightly positive outlook when we look at it sequentially. We see improved supply chain for heavy trucks in Europe. We also see improvement for railcars in U.S. Automotive we see a neutral market or a decent market going forward as well as for construction machinery and material handling. When we look at the Energy segment, we see good demand for wind power and other renewables and wind power and wind towers is a very important segment for us, for our plate business in Europe.

The weak market we expect to see and see is construction, of course, both dependent on seasonality, but also on higher interest rates and much lower construction activity, especially in the Nordics, but I would say, even in Poland and other parts where we are present with Ruukki Construction. But as you know, construction is a big take of volumes for the whole steel industry, less so for us, but it will affect. And then service centers, we expect to see what we usually see lower parent demand and reducing of stocks in Q4. And then in Q1, filling up stocks a bit and having apparent and real demand meeting each other.

If we look at how we guide, we of course realize that we live in an unsecured world with inflation, with the interest rates and the war in Ukraine, but we see stabilization of the European market. We see that spot prices towards the end of the quarter in Europe, is moving up. We see relatively stable demand in North America for the market for heavy plates and we see that prices towards the end of the quarter, is – we have introduced price increases from mid-March. When it looks the high strength steels slowed somewhat in Europe and the apparent demand in Q4, but we expect a stable demand there as well. And Leena covered the raw material costs, but we see that will be overall relatively stable.

So when we guide for shipments, we say that in Special Steels, they will be significantly higher as in Europe and somewhat higher in Americas and then we expect realized prices in Q1 being lower compared to Q4. And there is always a lag between spot prices and our contract prices. And we have the majority a bit more than 50% for us is, as you know, quarterly prices. So if one would take the opportunity to sum up.

I would say, record earnings for the full year 2022 in a very turbulent world around us continued good trend in safety. We are not yet where we would like to be with the ambition of becoming the safest steel company in the world with no accidents or incidents. We are getting there, but this is in every day’s work, and you can never give up. You need to continue to focus and continue to strive to become better. We saw the expected release of working capital in Q4 and a strong cash flow and a strong financial position at the end of the quarter. And I’ve said it many times you should expect us to continue to deliver good and strong cash flows over the cycle, operational cash flows. Dividend, as said, a proposal is SEK8.7 per share, corresponding to 40%, so smack in the middle of the dividend policy and then asking for an authorization for a share buyback program for up to 10% of the outstanding shares.

The transition, the green transition, which is mid to long term, extremely important for SSAB is moving on we have, as said, done these pilot shipments of 500 tons to grateful and happy customers, and our transformation is on plan. But we need help. We need help with, I would say, mostly the most urgent topic for us is power transmission. So as long as we get fossil-free electricity at the right time, at the right place, we will be able to deliver on this very ambitious road map.

So with that, I guess there will be some questions.

Per Hillström

Yes. And we can just start by checking here in Stockholm, if there are any questions from the audience? Okay. Then we will turn to the telephone conference. [Operator Instructions] So by that, please, operator, can you present the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Krishan Agarwal with Citibank. Please go ahead.

Krishan Agarwal

Hi, can you hear me?

Per Hillström

Yes, we can hear you, Krishan.

Krishan Agarwal

Yes. Yes. Yes. Thanks a lot for taking my question. I’m more interested in hearing Martin’s thought on the underlying demand trends in Europe, I mean, your guidance is for volumes to go up significantly higher, which is more than 10%. Can you help us put the inventory destocking tend into the perspective and how the demand for your products are shaping up for the Q1?

Martin Lindqvist

We – As you know, we took planned outage earlier almost three quarters earlier than previous planned because we realized that the apparent demand in Q4 would be lower than the underlying demand or the real demand. And we expected to see low volumes, especially the second half of December with a lot of customers taking holidays instead of working over the weekends. And that’s what we saw. We also expected to see steel service centers, reducing volumes and working with, call it, working capital management and when we look forward, look at the order book, look at the order intake and also volumes or yes, the volumes in the supply chain, we see that there will be higher shipments in Europe. I mean the market in Europe has been I would say, decent and fairly stable during 2022. And then it has been bottlenecks. It has been bottlenecks in transport. It has been bottlenecks in semiconductors and so on. And they are not completely gone, but they are getting better and better or easier and easier to deal with. And we see especially when it comes to transports that’s seasoning up. It’s not perfect yet or not normal yet, but it – and that’s why we are then on a fairly stable market guiding for higher volumes or significantly higher volumes in Q1.

Krishan Agarwal

I understand. And then concerning the business in the U.S., the plates business, I mean, you have recently announced a plate price hike. I mean, plate prices are relatively higher level compared to the other product into the U.S. So can you help us understand what’s driving that spend in the plate market?

Martin Lindqvist

It’s supply and demand. We see a strong and stable demand in U.S. And you’re right. I mean, plate prices, even though they came down a bit in Q4, they are still on high levels and margins are on high levels. And when we look forward, we see a lot of needs for plate going forward as well with investments and see wind towers, strong demand. We see good demand from OEMs. We see railcars now starting to pick up. So it is, I would say, a function of that we see good order intake, good demand.

Krishan Agarwal

Okay. Okay. Thanks a lot.

Operator

The next question is from Tristan Gresser with BNP Paribas Exane. Please go ahead.

Tristan Gresser

Yes. Hi, thank you for taking my questions. I have two, please. The first one on shareholder returns, your fact that the dividend proposes in line with your policy. But can you discuss a little bit of buyback? How should this be viewed within your capital allocation strategy and explained a little bit the reason behind it. Also, as you’re soon to embark in really large decarbonization investment, what gives you the necessary confidence to launch this buyback? And maybe if you can link that to maybe the earnings power you can see on a more normalized basis if it’s higher than in the past? Thank you.

Martin Lindqvist

I mean to start with the last part of the question, I think what we are really working hard with is to stabilize earnings and lift low point profit. And it’s a number of things. I mean, one big part is, of course, the mix. We know that the volatility more advanced products like special steels and advanced high-strength steels and so on. It is – they are lower over the cycle. So lifting low profitability points and have more stability in earnings. And we do that also by constantly looking at possibilities to create flexibility in the production system and the cost and so on. So we can adjust production, adjust the cost level and so on. And you could say, smooth out is probably a bad expression but even out a bit. So I think it’s so important to this focus to low point profitability. Then when we look forward, I mean, first of all, the dividend is, as I said, in the middle of the range. And after a record year with SEK29.3 billion in EBIT and a very good net profit you should expect us to live by the dividend policy. And then when we look at the company and the possibilities to continue to generate strong cash flows, we see that we can do the investments required. It will be more dependent on when we get the outer circumstances in place like fossil free electricity and power transmission. Then I think having a mandate of a share buyback program, is good. And then you can use that when you feel that the balance sheet is strong. And I think that the net cash position of SEK14.3 billion strong balance sheet. And for the time being, we don’t need to pile up cash. We should be able to return cash to shareholders, and that’s the main thinking and reasons behind these two proposals.

Tristan Gresser

Okay. That’s very helpful. The second question is on Special Steel. Can you discuss a little bit market conditions and how do you expect 2023 to develop in Europe and rest of the world? You mentioned that demand has softened a bit in Europe, but you only guide for 5% price decline. So – does that mean you’re continuing your price of a volume strategy there? And if that’s the case, how should we think about the 1.6 million-ton target on the volume? Is it still achievable for this year? Thank you.

Martin Lindqvist

I think in Special Steels, it is – I mean, it’s so easy to think that Special Steel is just Special Steels, but there is a broad variety of products within Special Steels. And what we are doing also within Special Steels we are moving the mix, and we have some products that are profitable, and we have some products that are extremely profitable and we are, I mean, launching now new products like Hardox HiTuf, Hardox 500 and they are starting to ramp up and we are introducing – I mean, what was 10 years ago niche products, 400 Brinell or Hardox 400 is now, I would say, a commodity and we don’t really produce that anymore. So we are moving the mix as a total, but we are also improving the mix. We have this part of Special Steel that is we call it Specialty, which is expandable rock balls and some other very, very interesting products and we have these Armox and protection plate products as well. So it is about moving the mix. So I would say what we need to achieve is a combination of both, keeping up the stability in the earnings and the profitability and expand volumes. And we have been investing quite a lot in order to be able to do that. We are now taking into the Phase 2 of the QL6 or the next expansion of the QL6 was taking on stream end of Q4, beginning of Q1. So we can increase with another 100 – a bit more than 100,000 tons on yearly production. So we see that there is still a lot to do on the market development and product development, application development.

And – if you look back in history, we have been able to grow the QT business with – I think it’s around 7% to 8% per annum, and we expect to continue to see that growth. Not every quarter, sometimes a little bit lower, sometimes a little bit more, but over time, so to say. So – and when we discuss with the customers and partners and big OEMs, there is a big interest for these kind of products. So we’re trying to keep up the profitability on a stable level. I mean last year was really, really good, but keep stability, which it usually is and continue to expand volumes and invest for expanding volumes. And we will invest when we see that production becomes a bottleneck. That’s the plan.

Tristan Gresser

Okay, that’s very clear. Thank you.

Operator

The next question is from Dominic O’Kane with JPMorgan. Please go ahead.

Dominic O’Kane

Good morning. Thanks so much for taking the questions. I have three quick questions. Just again, going back to capital allocation and I guess the buyback, with the dividend and the buyback, you’ll be seeing a lot of cash move out of the business in the first half of the year, so about SEK15 billion. How should we think about your thinking about the balance sheet longer term? And again, that question is really directed to the sustainability of a potential rolling buyback program. My second question is just...

Martin Lindqvist

Please, let’s take them one at a time. No, but – we expect, as I’ve said many times now, to continue to generate good cash flow. We should be a business with good cash flow generation. And we are not planning to put the company in a situation where we have a big net debt, but we are not going to pile up unnecessary much cash either because that belongs to the shareholders. So have a balanced, call it, profile of the balance sheet is, as I see it important. And we are – even though we are working hard and striving to become less volatile, we need to remember that we are in a volatile environment and in a volatile industry. And that requires decent strength of the balance sheet. So you should put that into the equation and also see that dividend in line with the dividend policy and also a strong belief that we will continue to generate decent cash flows over time. And we have, of course, done the simulations and the planning for I mean, a lot of different scenarios for the coming transformation of SSAB, and we see that, that will not be the main bottleneck. The main bottleneck will be the availability of fossil-free electricity at the right time, at the right place.

Dominic O’Kane

Thank you, that’s very clear. And then just two follow-up questions on the accounts, so for Q4 within the other line, you had $323 million. Could you maybe just help us sort of dig into that number a little bit more? And how should we think about that for Q1? And similarly, working capital, big release of working capital in Q4, do you think you’re now towards the end of that inventory destocking? Can we expect maybe a little bit more working capital release in Q1?

Martin Lindqvist

I will take the second question and then let Leena answer the first one. But we have been – for the full year, we have been building working capital and a large part of it is, of course, prices. But we have also – I mean when Russia invaded Ukraine, we bought a lot of alloys. We bought a lot of raw material from Russia especially we bought 100% of the PCI coal. We stopped that immediately. And when you do that, you need to in a hurry find other suppliers, you need to test the new material. And then you typically buy more than you will actually consume because you don’t really know if the raw material as such or PCI or something else will work in the process. So when we closed ‘22, we had, I think, more than 400,000 tons of PCI coal in stock and we need in a normal – under normal circumstances, a little bit less than 200,000 tons. So there are pluses and minuses. Yes, if sales continue and prices continue, we will probably build some working capital, but we still have possibilities to release working capital from raw materials. So we are focusing a lot on cash conversion. I mean making sure that the result we make ends up as free cash flow. And then that will, of course, be dependent on the market and prices and so on, but some possibilities on raw material, probably building up some other stocks. So – but we should not I mean we have not done something abnormal in Q4, and we have not done something abnormal in 2022. It is, to a large extent, the price component. The working capital buildup of almost, was it SEK9 billion or so for the full year. So working capital management will always be a priority regardless if we have a high net debt or a high net cash position.

Leena Craelius

And Dominic this 300 in something in the other line, being positive now in Q4, that line is related to this elimination of intercompany transactions and we have reduced the inventories in our divisions. Thus, the group level elimination is positive in Q4. So it is moving up and down, depending on the inventory levels and the transfer prices we have within the divisional transactions.

Dominic O’Kane

Okay, thank you.

Operator

The next question is from Rochus Brauneiser with Kepler Cheuvreux. Please go ahead.

Rochus Brauneiser

Yes. Hi, good morning, all. Martin, I have a quick question on the situation and actually on your first stage of your conversion program – can you give us an update where you stand now on the permissions for the transmission lines in for Gällivare and also for the Oxelösund, I think you mentioned before that this is still a priority. So I guess this is obviously taking a bit longer. So any color where we are and when you expect the decision on the demo plant actually?

Martin Lindqvist

Now first of all, in Oxelösund, we have got the permission from [indiscernible] in Sweden that we will get the power line that is appealed and we knew that would be appealed. I think it’s 40 people – persons that have appealed that to [indiscernible] to the lower court, so to say. And then the [indiscernible] needs to take a decision, and it’s very hard to say when they will take that decision. And depending on that decision, if they would be as positive as [indiscernible] that might be appealed to the higher court [indiscernible]. And then they could either say, well, we have a decision in [indiscernible] or they can say we will not take this up or they can say this is so important we will take it up and then it will take some more time. So, it’s very hard to say exactly when we will get the permission because we are now into the court process. So, the court process is starting. But we are working, as Leena showed, we are doing the investments and we will invest in electric arc furnaces in Oxelösund. That’s no doubt about it. And then we are dependent on the court process and how fast that will go and if there will be additional appeals or not and so on. So, we know at least that we have the decision for [indiscernible] which is very important. Then when it comes to Luleå and Raahe, I would say that Raahe is moving on quite nicely. In Luleå, we are working then with the power transmission together with authorities and the municipality up in Luleå. And that work is ongoing as well. But the most important part, short-term or mid-term, is the development in Oxelösund and we are working hard with that. But now it is – that process is beyond our influence or control.

Rochus Brauneiser

Right. But based on what you are saying or not saying the plan still is that you are being available with the green steel production with the 1.3 million tons by end of 2025, I guess?

Martin Lindqvist

Beginning of 2026, we have said. But I am saying that we are still on plan. We have not seen anything that we need to change the plans. But as I have said, the good thing is that we have already delivered 500 tons of fossil-free steel, and we start to see now the first applications also out in the market being used, not just as demonstrations and examples, but actually being used in production and being – so that’s very positive. And that is also building the market and building the interest for these kind of products. So, we are working very hard, and I am myself spending quite a lot of time discussing with authorities and politicians and try to do whatever I can to speed up that process. But as said, it is not fully in our control.

Rochus Brauneiser

That makes sense. Then I have another question on the market outlook for Europe. So, 2022 was an outstanding year for the plate business because of what happened in Ukraine and the resulting bottlenecks from there. How do you look at the market now for 2023? So, we are seeing some easing of bottlenecks, some other suppliers are coming to Europe. How do you see – how stressed, how tight will be the market for the current year? And how do you see the demand in Europe actually moving?

Martin Lindqvist

First of all, plate, standard plate in Europe for us is a very small segment. We only deliver standard plates in the Nordic region. And we have had good demand for the fairly limited volume we have for standard plate in the Nordics. And when we look at the order book and the visibility we have is typically one quarter that will continue in Q1. So, we are fairly marginal producer or we are a very marginal producer of standard plate. We have one plate million in Raahe and we produce what is it, roughly 250,000 tons or something on a yearly basis.

Rochus Brauneiser

Yes. And then maybe more generally on demand, I think you made clear in your remarks that the destocking process is similarly coming to an end. So, what is your thinking around the underlying demand right now, you move in the soft lending them or you are a bit more capital on the real underlying demand for ‘23 in Europe?

Martin Lindqvist

Well, if you talk about strip products, I would say, for Q1, stable demand and we guide for significantly higher volumes in shipments then. So, we see that the contract prices will be lower because, as I said in the beginning, there is a lag between spot prices and contract prices, but we also see that spot prices towards the end of the quarter is starting to move up. And that is of course, a positive indication if that stands. But I would say, overall, fairly stable underlying demand with some segments being quite good and some segments like construction being quite weak, but in total, stable. So for us, it’s more a situation of what we produce and what we have in the order book. And I said it was very low volumes in Q4 due to very low apparent demand. And then the – when we took that outage two quarters, three quarters earlier than previous plan, we thought that maybe Q4 is the low point, and then it’s better to do that outage and plan maintenance instead of waiting to Q2, Q3 ‘23, when the market hopefully is slightly better than what we saw in Q4.

Rochus Brauneiser

Okay. Would you say that your comments on fairly stable real demand, is this just for the Q1, or is this your general income for the whole year?

Martin Lindqvist

The visibility we have is the coming quarter. Then we have the order book and the order intake. So, that I can say for sure. Then you never know, I mean when we talked a year ago, I couldn’t dream of invasion of Ukraine. So, there is always possibilities for black swans or what you call it to come up. So, it will also of course, be very dependent on the macroeconomic situation and what happens with the board in Ukraine and so on. But for Q1, then I don’t know of course, but then we have the order book and the order intake, and that’s the visibility we have.

Rochus Brauneiser

Okay. Makes perfect sense. Okay. Thank you very much for your answers.

Martin Lindqvist

Thank you.

Operator

The next question is from Bastian Synagowitz with Deutsche Bank. Please go ahead.

Bastian Synagowitz

Yes. Good morning Martin and thanks for taking my questions as well. I just wanted to get back to a HYBRIT and your green transition. So, first of all, I wanted to check where do you stand on securing the additional finding support, which you talked about in the third quarter? And then also on CapEx, so beyond the SEK5 billion CapEx budget, you are guiding for, for 2023, can you please update us also on the financing for HYBRIT itself? And are there any possible additional need for capital injection into HYBRIT in 2023 and 2024 as well?

Martin Lindqvist

Not for 2023, 2024. We don’t really – well, I don’t really know yet, but not for 2023. And just to be clear, what I was talking about or at least what I meant when we talked about this in Q3 is the importance of a level playing field. And we are not in that aspect, dependent on financial help. But we think it’s so important that we have equal treatment for all steel companies in Europe. And now we see some examples and some other signs that might not be the case. So, we are stressing that issue, the level playing field. But as Leena showed in her presentation, we – the capital need for ‘23, we are fairly certain or we know the capital need and the investments. And the investments will now in this transition start to increase a bit over ‘22. And that is mainly the transformation of Oxelösund. Then of course, we spend a lot of cost on the planning and on the transformation office and hiring project leaders, and so on in order to do this mid-term to long-term as well. But we will start now to invest more money in order to transform Oxelösund. But what is really important to remember as well, the option was not to do nothing because we need to do this, either do this transformation, which makes a lot of sense, and it is very profitable. The alternative would have been then to build a new coke oven battery, which makes no sense. So, we are working as hard and as fast as we can. But I said many times now, we are also dependent on things that are partly at least or to a large extent, out of our control when it comes to power transmission and those things.

Bastian Synagowitz

Okay. Thanks a lot. Just on the financing support, have you at least seen some early indications? Do you feel like the government is open to still help you on the financing side and basically close to get to what some of the other governments are doing, or is this a situation where you obviously went ahead with good intention in the sense of doing it on your own and now as they know, you want to do it on your own, they basically just leave you with it? Have you been receiving any early response on that?

Martin Lindqvist

It’s not black or white. And let’s come back to that question if and when we have something to say. But I must say that we – from the government in Sweden and Finland, they look at this in a very positive way. And they also realize that the steel industry needs to do their homework in order for us to meet the Paris Agreement. But they also realize that this is, at the end, also a very important matter for competitiveness, not only for SSAB, but for the value chain and the demand and the customer interest is there and that they realize and recognize.

Bastian Synagowitz

Okay. Thanks a lot. And my second question is just coming back on your cost guidance for raw material costs. You guide for costs to be flat on a group level in the first quarter. And on the other side, it’s pretty clear that scrap costs are arising. So, does this mean that on the European blast furnace operations, you are still expecting costs to come off? I think that’s the guidance, but I just want to confirm that that assumption is correct.

Leena Craelius

Well, during Q1, the cost of consumption in the beginning at least, will be on a very similar level than Q4. Minor reduction could be happening at the end of Q1, but only minor. We do have the high inventories with coals, PCI coals and the – yes, also inventory with iron ore. So, we don’t see the benefit of the cost reduction yet, it will come a bit later.

Bastian Synagowitz

Excellent. Thanks. Thanks Leena and thanks for taking my question.

Operator

The next question is from Christian Ko with Colonel Steel [ph]. Please go ahead.

Unidentified Analyst

Yes. Good morning everybody. Martin, I have a question on the outlook regarding the realized prices, which you say will be lower in the first quarter, although the spot prices are rising at the moment, is that because the contracts are quarterly and were signed at an earlier stage. And by that logic, would that mean that in the second quarter, the price – the realized prices should be higher.

Martin Lindqvist

No. But you are correct. There is a time lag. We have very, very limited volumes on spot. And we typically have quarterly contracts. That’s the majority of the contracts. Then we have semiannual contracts and annual contracts. And you typically sign the contracts, I would say, mid or early second half of the previous quarter. So, that’s why we know where the prices will go. And then you are correct that right now, the spot prices have been improving. And if that – that is typically a good indication where the contract prices will move with a lag.

Unidentified Analyst

Okay. Thank you very much.

Operator

The next question is from Alain Gabriel with Morgan Stanley. Please go ahead.

Alain Gabriel

Yes. Hi. Good morning and thank you for taking my questions. I have two questions. I will have one at a time. First one is on capital allocation. You now have a very different financial framework business than you have ever had in the past. Do you think it’s time to revisit your capital allocation policy? And what factors do you consider and the trade-off between dividends and buybacks? That is my first question.

Martin Lindqvist

Without answering it, we will have a Capital Markets Day in end of March, and we might come back to that topic then.

Alain Gabriel

Okay. Thank you. And my second question is on the Nordic system, the transformation. So, you seem to be exclusively focused on the downstream investments in mini mills, which is somewhat different to what you are doing at Oxelösund. It seems that the value along the value chain is mostly in the green auto making or producing the green sponge iron. Are you not worried that by focusing on the downstream exclusively, you are leaving lots of value on the table further upstream?

Martin Lindqvist

But I think that is a misunderstanding. What we are focusing on is to create the fossil-free value chain together with partners starting up when the iron ore is in the mountains beneath the ground until finished products and trying to find synergies and smarter ways of working along that value chain. How that will look exactly in the future, we don’t really know. What we know today is that HYBRIT is focusing on developing the technique of producing fossil-free sponge iron is planning to do this pilot plant. And then it could, as we have discussed before, it could look a bit different in different parts of the world. I mean we are producing steel today in Sweden, Finland and U.S. And the exact setup, we don’t really know yet, and that could – that might differ a little bit between regions as well. But the plans we have communicated so far, we are sticking to and moving on along to those plans.

Alain Gabriel

Thank you.

Operator

The next question is from Andrew Jones with UBS. Please go ahead.

Andrew Jones

Hi Martin. Thanks for taking the question. Just on the tons of the mini mills. I mean I know you have feasibility studies are ongoing, but can you talk about the timing when we expect to see completion of those and when the spending is likely to ramp up? And annually, what sort of – what’s your latest thinking on the scale of the total group CapEx once you get started on those projects. And that’s the first one. I will just come back with something else.

Martin Lindqvist

And let me pause that question until I think we will cover part of that very important question during the Capital Markets Day. But as said, I mean today, we don’t really know. And the reason for that is when we will be able to execute that. And the reason for that is of course, that we don’t know exactly when we will get fossil free electricity or the power transmission or the fossil fuel electricity. In Oxelösund, we are fairly certain that we will get it in time. So, that plan stands. In Luleå we don’t know yet. That work has just been started and in Raahe even though it moves on quite nicely. We don’t know there either. We are working with the government and the authorities in Finland as well. So, to be honest, we don’t really know. And that’s why we have said – I think we have phrased it around 2030 or so. There are possibilities to do it slightly earlier, but we can also handle if we have to do it due to the power transmission slightly later. And when we look at it, an optimal situation for us is to do it when we in order to avoid blast furnace relinings and big investments or investments in production facilities that we will not run long-term. But then of course, it is so important with these mini mills. We reduced lead times a lot, and I mean a lot, and that will release working capital needs, but we also increase flexibility. So, this is also an integrated and important part of what I talked about before, reducing the low point profits and stabilize earnings over the cycle, which I think is also very important. And then last but not least, the huge interest from customers. And coming back to these 500 tons, which is not a lot in the scheme of it, but we see the demand, we see the interest, and we are – we could sell much more than 500 tons today, I can promise you if we have the ability. So, we are really working hard.

Andrew Jones

Okay. And just as – I mean, a couple of follow-ups to that. One is just on like the pricing of that product. I mean you have been quite reserved in commenting on green premiums in the past. But I mean how are you feeling and as we go through time and you are selling more of these volumes? I mean what are you thinking about the potential for green premiums in the longer term once you have meaningful volumes of the product on the market? And also just on that issue would be permitting and so forth. Does the new government have a materially different view to getting some of these projects moving compared to what we have seen with the green party was sort of more was in the correlation. How are you seeing the sort of changing landscape with regard to regulation?

Martin Lindqvist

To be honest, I don’t see any difference. I think the new government in Sweden, they are – they understand this perfectly well, and they are very positive, and they see the same picture as we see. I think that this is – first of all, this is business development. This is developing new products. This is developing new co-operations within the supply chain. So, at the end, this is about competitiveness, and the market is there, the customers are there. And then it is also very good for the climate. So, it’s a win-win-win-win, you could say, and they realized that. And I think they are they are public, you said it. I mean we had the EU Commission together with the Swedish government, up in Kiruna a couple of weeks ago, the full year commission, and we had the possibility, me and some other Martin Lundstedt from Volvo to explain this value chain and what we are aiming for. So, I think there is a big interest and then they just need to help us with authorities and others in order to make this happen. When it comes to premium, I am convinced that there is a premium, and we see that there will be a premium. The reason why I am a bit cautious is that you never know how long that premium will be there, because I hope that this will be the new way of producing steel and then you would rather have call it, a cost advantage or I mean some advantages compared to traditional steelmaking due to emission rights, due to cost, due to flexibility and due to the market being willing to pay slightly less for traditional steel, so to say. So, in our calculations, we have been pretty cautious when it comes to premium for green steel. We think we know that it will be a premium. It depends how long it will last, but that’s not taken into the calculation in order to justify these investments.

Andrew Jones

Okay. Thank you.

Operator

The last question is from Juan Jang [ph] with Bank of America. Please go ahead.

Unidentified Analyst

Thank you for taking my question. Good morning all. I have just got a quick one on the timeframe of the buyback. Would you give us a bit of guidance of under what timeframe are you looking to do the share buyback?

Martin Lindqvist

What you typically do and I guess I am not trying to tell you something that you don’t really know. But the Board has decided to ask the AGM for the mandate, and that mandate they will have until the next AGM and then they need if they want to ask for another mandate. So, it could the earliest to start after the AGM. And then how you do it and how you sequence it and so on will be a later decision. But the decision is to ask the AGM for that mandate. And that mandate is valid until the next AGM, and then you need to come back. So, it’s too early to say.

Unidentified Analyst

Thank you very much.

Per Hillström

Yes. Operator, we did not have any more questions. Then I will thank Martin and Leena. Thank you also for all the good questions. Before we leave, just – like Martin said, we will have the Capital Markets Day here 20th of March in the Central of Stockholm. Then also site visit to Luleå for those who are interested in that. So, please don’t forget to register here on ssab.com for this event or to save your seat.

Martin Lindqvist

We would be more than happy to host you up in Luleå as well. And if you haven’t seen this and have the opportunity, I would really recommend you to see this HYBRIT facility and this groundbreaking new technology.

Per Hillström

So, by that, we thank you for the attention, and wish you a nice day.

Martin Lindqvist

Thank you very much.

Leena Craelius

Thank you.

For further details see:

SSAB AB (publ) (SSAAF) Q4 2022 Earnings Call Transcript