Aperam Sa Ord

Ladies and gentlemen, you're currently on hold for today's upper arm for Square to 2023 results call. We're awaiting the arrival of additional participants and should be starting shortly. Thank you for your patience and please continue to hold. Thank you.

Thank you. Thank you. Thank you. Good day and welcome to today's Upper Arm First Quarter 2023 results call.

This meeting is being recorded. At this time, I'd like to hand the call over to Team Di Maldo, CEO. Please go ahead, sir.

Hello, good afternoon and welcome to our conference call. I assume that all you have listened to our management podcast for the quarter. And here we detail the view of the current market environment and the outlook. If you still have work to do, the podcast is always available on website in the investor section for your reference. As usual, this call will always only be on a Q&A. So I now hand back to the operator for the Q&A.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. And please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. The first question comes from Patrick Munn from Bank of America. Please go ahead.

Thanks very much for the opportunity. Good day. I just wanted to ask, the shipment volumes were obviously very weak in the first quarter. Did the Genk shutdown for six weeks have any impact on that? I mean, do you think that without the AOD installation, you would have still had the same level of shipments or was some of the sort of decline in shipments year on year attributable to that? That's the first question. And then the second question, I just picked up on something Sud said in the podcast where he said, you know, for leadership journey phase five, we should expect to see further tangible investments into improving the product mix and higher value portfolio to deliver the 300 million EBITDA improvement by 2025. Has anything changed there? I mean, are you feeling that in this current market environment, you've got to go further downstream or produce, you know, higher value added products to get to that 300 million? Or is this the same that you've, you know, sort of were expecting from Capital Markets Day last year, for example? Thanks very much.

Okay, thank you. Thank you for the question. First of all, I would like to remember that shipments in Q1 for Aperam are impacted by the seasonality of Brazil, which is the low season. Then we have indeed the stocking, which was anticipating due to the fact that Europe had, remember, ended the the year with a lot of inventories and a lot of imports, and with prices declining, the result has been that all the, let's say, the distributors in particular have been destocking, and this destocking leads to a level of imports that we currently assess as normal, but we still have some, let's say, the rotation, which is not at the normal level because of some slowdown of the consumption. If we want to go to discuss on leadership journey, I don't know if we should compliment because you were referring to his comment, but fundamentally, fundamentally, There was a point on the AOD. AOD, as it is in the upstream, is not directly impacting the Q1 because this is in the supply chain. The AOD in the metal shop starts well before the shipment, so the impact will be in Q2. Now, concerning leadership journey, the 300 million have been explained in our capital market day, and we maintain the fact that all what we have explained and we have launched and is already there is part of the 300 million that we are progressively capturing. in the days. So the target is 2025, the 300 million will be there. As you have seen, we are maintaining the path of the leadership journey. And you have also seen that we have accelerated and we will continue to accelerate because of the market tightness. With only, let's say, to respect the phase four, we have only a few million still to go for the end of the year. Now, phase five is in preparation, and we will be, let's say, more explicit on the phase five at the end of the preparation of phase five. Of course, whatever it is possible to accelerate, whatever it is in product mix or any kind of other gain, we will do.

Got it, thank you.

Our next question comes from Bastian Sjangovic from Deutsche Bank. Please go ahead.

Yes, good afternoon all. I've got a couple of questions. Firstly, could I maybe ask what has been the impact from the strike and the six-week maintenance break which you had or the standstill in the first quarter and then particularly how do you expect the strike situation to continue to impact in the second quarter? That is my first question.

Okay, so I would say that the strikes have had some impact, which is not a big, big issue in the Q1. We don't know how the situation will evolve in France, so I can't, because strike is mostly in France. We have had a couple of days in Belgium, but fundamentally it's the unrest in France. So we will see what will be the impact in the second part of the first half. Now, the EOD is something which is in line with what was our forecast, so it has been prepared. All in all, there is some, let's say, some impact, but this is in the very low level of numbers, maybe in the low two-digit, but even lower. So it is, we will see at the end, but the AUD has been prepared, and the strike is still uncertain what is the full scope. But it is a little bit split in between the two quarters. The most impacted will be for sure second quarter, but not extremely high importance.

Okay, perfect. Thanks, Tim. Then my second question is on volumes. I guess you pretty clearly state that you do expect some more volume recovery in the second quarter. In stainless and electrical steel, what is the magnitude of the rebound into the second quarter? You're looking at the first quarter. Volumes have improved clearly not maybe as much as they could have. Do you expect to get back to what is usually like a normal volume range in stainless and electrical steel in the second quarter, like 260, 270,000 tons, which I guess would be like a 20, 25% rebound quarter over quarter? Or do you think it's going to be more likely less than that?

No, no, no. So the rebound will be there, of course, because of the seasonal rebound. But we are still in a market where the stocking has not been finalized or at least not the restocking because of the price pressure. So nobody today, there is a lot of, let's say, wait and see due to the fact that prices are low for the moment. You know that prices are pushed down by the fact that the nickel p i don't know is uh... is very low so the chinese prices are are are are low and overall the prices in uh... in the the rest of the world are putting some pressure on the uh... intentional of uh... of of purchase of the uh... distributors and on top of that uh... in uh... especially in europe there is uh... some some slow down in some sectors and this is why in volumes even if they are recovering for the seasonal let's say number of days they are not not at the high level okay so so basically you're looking at a more muted volume rebound into the second quarter from from your comments then um okay and then maybe coming back also on pricing you made a couple of important points i guess but uh

If we look at the key dynamics now, we saw first quarter volumes at a low level, but there has still been a volume rebound of more than 20% over the fourth quarter when I guess the stocking was very, very severe. And so if we look at the market setup, we have had still like a relatively decent recovery in volumes and then obviously imports have been falling. But then obviously there still seems to be more pressure on European prices as volumes from the import side are pulling back and domestic volumes are are basically recovering. So what is driving this significant price pressure in such an environment? Because usually I guess I would understand it probably more if there was more direct volume pressure or more import pressure, but there seems to be less import pressure and yet prices just kept dropping down apparently from your comments.

So here you have Two effects. One effect is the trend. So when there is a trend in which prices are going down, and I explained why, so nickel, pig, iron, the situation in China, the price in China, etc. When there is this kind of trend, every buyer is very careful. We are just coming back from a period of this talking which is not yet finished. because also the final demand has in a certain sense been lower. So we are in this period, and everybody is very careful, and nobody is pushing ahead inventory. So people are buying on the very short term, and they are not rebuilding. They are not rebuilding inventory. They have still enough in terms of number of day of rotation of the inventory they need. So in this period, you have no imports because we have no imports since many months because after the huge wave of imports of last year, today with the normalization of price or with the price which have been pushed down more, there is no interest to imports with the level of protection that we have in Europe. So the protections are acting correctly. The demand is not high. We need still to reduce a little bit the inventory and demand is also not high. This is the situation of Europe. Is it clear?

Thanks for clarifying. I guess what I'm still surprised is that you basically say that imports are not really interesting. So it seems to be more like a European market discipline issue here almost, which is dragging down prices. Or do you see this in a different way?

No, no, it's not. It's not a question of discipline or not. I think it is more the question that you have a certain kind. Let's say we import our distributors. Distributor are in in this talking and if they don't need they buy only only what they need There are still a 17 percent of imports in the inquiry into one 17 percent is something which is more Closer to a normal level of imports remember that the normal level of imports is around 22 percent this has been established by the Commission by during this area and So we are a little bit below the normal. The market is a normal market in which there is no appetite to build up inventory because prices are going down. There are also some macro uncertainty. I mean, people are waiting a little bit, huh? So there are good signs due to the fact that inflation maybe is slowing down. There are good signs on the fact that the energy prices are going down. So everybody needs to see what this represents for the industry, because these are good signs, and we need to see what this means for the industry. When this will be clarified in the next month, I am sure that the trend will become normal.

Okay, perfect. Thanks, Tim, for taking the question.

Our next question comes from Ioannis Masvolas from Morgan Stanley. Please go ahead.

Hi, good afternoon. Thanks for taking my questions, Tim. A few from my side. First, just a follow-up on the situation with the strikes. Can you give us a bit of color if this is just a wage dispute, and if so, any indication on demands from the labor force and timing of resolution? And maybe you talked about the impact in Q1 being relatively modest, but can you talk about your expectation on volume and EBITDA impact for the second quarter, please?

So I think... it's very clear what is the subject of the strike is this reforming trance which is linked to the age of retirement and this is at the level of national strikes in a context indeed in which there is a general tension also on salary etc but it's not specific to our industry it is a national subject which is in France, and we suppose that all the industry will tell you exactly the same. Then when I told you the impact, the impact is very low, double-digit or one-digit BDA, so this will depend a lot on the evolution of the strikes during Q2, which is feel unpredictable. So yesterday, no, the first of May, there was a, you have seen all in the newspaper, how strong was the reaction on the streets. So we don't know, but we believe that it will come down.

Okay. And maybe just, just one point to clarify, then is it a combination of, uh, operational disruptions to your plants as well as logistical disruptions. When you talk about the high single-digit million EBITDA impact, that's the sort of combination of the two factors?

It is that, because you have to recover. When you disrupt, there is a discontinuity in the business, in the process, and you have to recover some delays. You might have transport costs which are higher. You can have an extraordinary time that it has been paid, something like this. It is relatively low because the utilization rate is not 100%. So it is limited. It is visible, but it's limited.

OK, perfect. That's very useful. And just a second question around the Q2 guidance for, I understand it's sort of lower EBITDA in S&E Europe. And here I just wanted to clarify because typically you would expect seasonally better volumes. You mentioned the energy cost unwind and easing of the stocking pressure. So these aspects should be positive relative to Q1. So when we talk about lower EBITDA, is that predominantly driven by the strike effects? Or, yeah, if you can provide a bit of color there, that would be very useful.

So, thanks. I would like to clarify something. In general, we don't give guidance between Europe and Brazil. So, it's globally on the electrical and steel sector. So, it is a mix of different effects. So, there are effects which are linked to prices, as I have explained, due to the the evolution of price in China and still some careful, let's say, buying attitude of the distributor. We see that prices are under pressure, so this is one effect. And the second is globally, as international prices are lower, there is also some effect in Brazil of the international prices. So it's mostly a question of price in a context of limited demand and a lot of wait-and-see attitude from all the buyers.

Okay, that's very clear. Maybe just one last one from me on your comment around some of the end markets in Europe softening relative to the beginning of the year. Are there any clear standouts in terms of that softening? Is it construction or are any of the other sectors worth highlighting in that sort of comment?

So, indeed, the construction is the most apparent of the sectors. I will say that The construction is in a bad mood, while the other sectors are slightly below average, and only automotive remains in the right direction.

Okay, that's great. Thanks a lot. You're welcome.

Thank you. We'll now take our next question from Tristan Gresser from BNP Paribas. Please go ahead.

Yes, hi. Thank you for taking my questions. I have two. The first one on Brazil. Can you discuss a little bit what's going on in Brazil? We've seen probably a weak start of the year for carbon steel there. And even putting seasonality aside, are you also seeing some softer real activity levels? And how is it different between, let's say, private industrial consumption? And also on Brazil, if you can just touch on the mix effect you expect into Q2. Thank you.

Okay. Indeed, Brazil has two effects. The first effect is the global prices. You know that this has always an effect on the price in Brazil. in some soft demand so brazil has been has gone through a very uh very uh good period and now now okay there is some some relatively lower but for us it's mostly a question of mix in the sense that we have been in a very high demand of stainless steel during during the last uh let's say quarters Now the demand is normalizing, and we have a mix effect, which means that other products, as you remember, we are always using other products in the management of the mix and to load the meal, which is running at full capacity. So then what is the other point was about the private consumption and this is what you mean? Yeah, I mean, please go on, if you want to clarify.

Yes, on the real demand side, have you seen some softening and especially between, let's say, private consumption and industrial consumption?

So I think the only, let's say, difference we can see is that while in Europe automotive is the most brilliant, maybe it's not the most brilliant in Brazil, but that's all. In the rest, the lower, let's say, consumer demand. is not due to the other sectors which are performing correctly, like the white goods, which is doing well. The food, all the agriculture is still performing well.

Okay, thank you. And my second question, if I can push a little bit on the CAPEX side, First, could you remind us what growth projects from the leadership journey are included in the 2023 CAPEX guidance? And given the progress on those projects and the new projects you mentioned in the prepared remarks that could come, is it still fair to assume that CAPEX will potentially remain stable after 2023 around this 300 million mark? Or when you look at those investments that you will require to reach the 2025 targets, you will need to push that a little bit higher. Thank you.

So, hi, Tristan. Let me take this one. So, yeah, the capex for this year. So there's a couple of things you have to understand. First thing in my podcast and Tim clarified that when we said axle rating. we meant basically we've announced these capex investments the last 18 months on different parts of our mills and i'll come to that in a minute and we typically wait for one leadership journey to be done to start the next leadership journeys projects this time we are not doing that that means we continue to accelerate and move that in as soon as possible so just to make sure the gains are there and also to meet our 2025 transformation where we have promised 300 million euros in growth. That's the first part. The second part is that As part of this year's investments, we have clearly spoken about the investment, first of all, where we are doing in the coal rolling mill. If you remember, we announced actually in the end of 2020 where we said that we would come back and invest. in our downstream, optimizing and closing instead of three coal rolling mills to put two coal rolling mills in the middle of France, which can do more products. So that's an investment that is happening. The second thing is for improving our mix. We have spoken about the investment in gang. And then there are hot rolling mill investments in Brazil and in alloys which are taking place, which will aid their transformation. So these are the investments which are happening this year. And this you can see in our presentation also on slide eight, when the gains are coming and where the investments are happening. So it's clearly there now. In terms of next year, we would definitely, typically we do not guide for the entire year. You know that also because, you know, the part of our CapEx, which is considered maintenance CapEx, is flexible depending on the utilization. So we'd like to look at it. But the strategic CapEx you have received in capital market day, most of the strategic CapEx plan for the transformation for 2025 already announced.

All right, thank you. Thank you. We'll now take our next question from Maxime Kage from Ordo. Please go ahead.

Yeah, good afternoon. So first question is on Brazil. So you pointed out the positive impact from new tariffs on Indonesian imports in the S-code. Do you see some first benefit from that as the year is now pretty much advanced? I know that imports were very high last year. I mean, should we expect that to go down significantly? Or is Asian pricing too low to really be upset by this new tariffs? So that's my first question.

So fundamentally, Brazil has always imported a certain part. So we have a very high market share, but the market is open to imports. even if protected by the import duties and tariff. What we have, let's say, blocked was the dumping of Indonesia, which was possible due to the subsidies that they have received. And this is mostly an effect on the lowest price that we have put in Brazil, from Indonesia, which were impacting the market. But then the rest of the market will be a balanced supply between our domestic production and the imports.

Okay, and the second question is regarding share buybacks. There hasn't been any new share buybacks since early Q4, and still you are generating a lot of cash in Q1. What can you say on this topic? Do you feel constrained by the current weak environment, or do you feel encouraged by the still healthy cash generation in terms of...

No, the two points you have raised are not blocking us. We are maintaining our policy of shorter returns, and so you can be confident that this will remain. But we have also consideration which depends on the geographical and the local situation. So we tend to, let's say, to consider that this is not the right moment. We have done a share buyback at the end of last year. So now if there will be the right moment, we will be able to do this in the future.

Okay, thank you.

Thank you. Now our next question comes from Christian Agarwal from Citi. Please go ahead.

Hi, thanks a lot for taking my question. One for Tim. See, you said the energy cost is sort of unwinding, but then if you were to compare the energy cost to the level of 2021, I guess there is still 50 to 100 euros per ton of additional cost. for the stainless steel mills. So is that something you are seeing in your P&L or and then have you been able to pass on these energy costs to your customers?

So I know Christian you want to attempt to answer that but let me attempt and after that Tim can complete if he wants to. So yes this price delta like you say is always there for all European competitors and What has disappeared is that among different European competitors, there used to be energy parity and disparity. In 2022, this has disappeared. So almost everyone's operating at the same levels. So we are not at a disadvantage to the rest of the market. That's something to keep in mind when you talk about pricing. The second thing is that Tim has spoken about a price squeeze also led by China demand situation. Now, what part of that is because we are not able to pass on 50 euros energy or what part of it is because the global price situation is depressed? I'm not able to split up, Christian.

No, I think if I can complement, today the major effect on price is really the situation, the macro situation and the global situation of prices. led by China, the nickel, pig iron, et cetera. So this is not something that – it's of a magnitude which is much higher than the simple pass-through of the energy cost.

I understand. And then my second question is on the recycling business. I mean, this business is averaging close to $45 million. euros of EBITDA run rate for the past four quarters. I mean, is that something kind of a, we should take it as a structural run rate for this business? And considering that, I mean, has your payback period calculation being massively beaten on the upside with these run rates for the acquisition?

Kirsten, firstly, no, we do not believe that this is structural. We do see and we have always published also these are specific circumstances in the recycling business. We guided to and we still stick by that 55 million euros per year on an average is our over-the-cycle EBITDA for the recycling business. So they have been performing above average. we have said that it is definitely a good advantage for us to have also because of the 24 million euro synergies which we have promised which remember show up on our stainless europe balance sheet first thing the second thing is the fact that is it a acquisition which is considered with a good payback yes i mean you have the numbers you know that we did buy it for 30 million euros of equity So, yes, in this case, the timing has worked well, and the team has worked also very hard to deliver these numbers, especially in a difficult year like last year and also in the first quarter. So kudos to the team there. Now we are on track to deliver synergies, and that will also help us improve the value of the business, and we are on track there also. This year we expect to have achieved two-thirds of the synergy by the end of the year, so we are on track there. Now, we have to understand when we look at the segment, there is also a component coming from our renewables, which is our forests, our bioenergy forests in Brazil. Now, in this also, we have announced investments and we have intensified to improve the profitability and also the sales from this business. So that business is also contributing about 20% higher than what it used to contribute in the past as part of the larger APARAM group. So these two effects combined. uh are contributing this uh specific uh set of circumstances so structural we have guided to over the cycle uh recycling 55 million euros plus you can add another 15 million euros for renewables that's the structural guidance overall 15 to 20 million euros we've guided to so yeah over the cycle so the past performance has been above average

Yeah, so just to clarify, 55 from recycling, 15 for renewable, and 24 million synergies.

So 24 million synergies will show up in stainless. Sorry, 24 million synergies will show up in stainless, Christian, as we have always said.

Okay. So this is the starting point. Of course, we are expanding the business. And so this Aperam Recycling and Renewables is becoming one of the pillars of Aperam and will be very visible in our numbers. This is why we are showing more clearly since the acquisition of the ELG. So the expectation is that even if this quarter has been a little bit higher, but you will see over the historical numbers, the growth of this business and the stability above the cyclicality of the typical stainless steel business.

Understand. And then quick follow-up on Sud's explanation. So is it fair to assume that when you guide for the Q2, you assume a normalizing quarter from a recycling and renewable business point of view, and then if the market turns out to be better, that probably is an upside?

Yes, I would say that this is something which we have to wait and see because we have always said that recycling has an order book of about six weeks, so it's even a shorter order book than the stainless business. So we'll have to keep a look on that, but we are looking – I mean, we have guided to normalizing compared to the record numbers we've seen this quarter.

Okay. And the last final question, maybe of a housekeeping nature. The eliminations item has been a bit of a volatile in the last three to four quarter from between positive and negative. What would be your suggestion for Q2 modeling point of view, just the elimination item?

I have presented in my podcast question, I expect it to reduce. As the prices go down, the pricing between the segments also go down, and this means that I expect the elimination to reduce.

Okay. Thanks a lot. Back to you.

Thank you. As a reminder, to ask a question at this time, please signal by pressing star 1 now. And our next question comes from Tom Zank from Barclays. Please go ahead.

Hi, afternoon, gents. Thanks for the question. Just one final one for me. The standstill in Q3, I understand that's Genk again. Maybe if you just clarify what that's for and how long it's going to be. Should we expect another six-week impact similar to Q1? and how the impact on EBITDA again sort of spreads out. Is it mostly going to be a Q3 issue, or is it going to be spread out over Q3 and Q4? Thanks.

Hey, Tom. So if you remember last year when we were talking about it in our Capital Markets Day, we did announce that this is going to be a three-month-long investment. And when we saw that the market demand was – loosening up in the first half of the year, we split that investment into two parts and pulled ahead first part, which is six weeks. So it is the same investment. It is just that it's been split up into two parts to take advantage of the market situation. Just so, just we have cleared that part. On, if you know, earnings impact, there's two parts. One is the increased fixed cost part, which is, you know, we do it in summer just because we take advantage of also the market situation, right? The next part is basically something which remains to be seen, which is that how Q4 market develops. The impact comes not primarily from reduced volumes, like Tim said, because this is planned into guidance already. The impact comes in because you build inventories ahead of time, and these inventories get shipped in the last quarter of the year. So if prices go up or down, that will have an impact. So is that clear?

Yes, very. Thank you. And just to clarify, you've obviously split it into – the mill works totally fine at the moment. There's no sort of change operationally because you've partially done the AOD and you're just finishing it off later. That's right, right?

So the part is basically, I'll start and then Tim can add on, is that we are doing this investment to improve our mix. to produce the latest mix possible. And the new investment consists of two things. One is creating the basic new unit, but also now adding you know, de-carb related investments where we take in cogeneration, we take in energy recovery and everything. So this is the split, and that's what is happening.

Tim, you want to add something? Yeah, indeed. So the fact that this time still is a bit longer is because we use this opportunity also to increase the cogeneration and the recovery of energy from the melt shop, and this means that on top of the decarbonization, we have also savings in energy. So all this, of course, it takes a little bit longer than simply installing a new EOD.

Understood. Thank you very much.

Thank you. And it seems there are no other questions in the queue. With this, I'd like to hand the call back over to Tim DiMauro, CEO, for any additional or closing remarks. Over to you, sir.

Okay, thank you. Thank you very much for all your questions and for this discussion. So you have seen that the situation of the environment has been tougher than has been in the previous, let's say, years, or last two years. But also you can see that the results are there and they are a fulling line with our, let's say, step to the 300 million. So we are just in the middle of the leadership journey gains and what we have promised. We can see that the results which are coming in a very, let's say, tough moment all in all because prices are going down. You have seen that volumes are at a low level, at some historically low level. That cost also, external costs have been very high in terms of Energy, gas, et cetera. But all in all, we are continuing to have a good cash generation. We are delivering in line with our business plan. And this despite tougher conditions than we are expecting in the business plan. This conforts us a lot that we are in the good way, and I hope that you will be, let's say, recognizing this in the figures that we are showing. We also, I would like to stress the fact that we plan to reward our shareholders in line with our financial policy, but we have the flexibility and we use this flexibility. So thank you for attending the call and I wish you a good day and look forward to meeting you again. Bye-bye.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.