Aperam Sa Ord

Welcome to Aperam Q3 podcast. I am Tim Di Maolo, CEO of Aperam. Together with Sudh Sivaji, Aperam CFO, I will explain why Q3 was a tough quarter and how we will surpass expectations again in the future. We will answer your question at the webcast conference call today at 2.30 CET. The daily details are on our website and on the last slide of this presentation. Please take note of the disclaimer on page two and then move to the highlighting on slide three. Reporting the worst quarter in Aperam history is painful. But we have a plan for the turnaround, and we also know that one time effects play a major role here. We hit rock bottom due to a very high inventory valuation charge. and the footprint upgrade caused severe production issues in the upstream operation of our Belgian plants. The problems have been resolved and operations are running normally. The only way from here is up, even though the market environment in Europe remains challenging with very soft demand and still low pricing. Brazil contributed to a solid result. Demand and the outlook are good, but pricing remains a headwind due to its link to the global situation. Imports have normalized after more effective dumping and circumvention protection has been put in place by the European Commission. The Commission is actively working on closing all loopholes. They launched another anti-circumvention investigation against cold-rolled material from Taiwan, Vietnam and Turkey. This is a significant initiative. The three together had a market share of 11.3% in the EU cold-rolled market this year. Because all imports from this country are registered, a retroactive duty seen in other cases is possible. If this initiative materialized, then we are convinced that the measures put in place since 2018 are effective in maintaining a fair global trade play field. In Brazil, a circumventional investigation against some cold rolls produced in China was opened. This is the first of its kind in Brazil, which makes it very significant. Self-help measures within the leadership journey are the key pillar to strengthen our flexible and resilient business model. Phase 4 is still running till the end of the year. We added another 28 million gains during the quarter, and with realized gains of 178 million, we are now clearly beating the target gains. Major areas of improvement were raw material sourcing, efficiency gain scrap, efficiency gain in Brazil, and the downstream integration of the alloy business. We'll share the detail of phase five in February with Q4 results. However, it's clear that the current situation in Europe requires additional measure in the form of dedicated cost-cutting program. We will revert to this later. On the ESG front, we launched our INFINITE brand this quarter. Let's go to the next page. INFINITE, it is our new brand for near zero carbon stainless steel. Why this name? Because stainless steel has an extremely long useful life. It can also be infinitely recycled without any loss of quality. Infinite uses the maximum possible amount of recycled material and is produced with renewable energy. It yields an 85% reduction in CO2 emissions. It therefore benefits our customers in their decarbonisation efforts. Infinite also differentiates Aperam's product offering further. This is not a commodity that can be purchased from Asia. let me remind you that the carbon borer adjustment mechanisms just started this october this makes carbon optimized products like infinite increasingly valuable to user of stainless steel in europe the infinite brand is also a showcase for our our differentiated value chains come together we are recycling champion via ELG. Our distribution activities allow us to close recycling loops. In this way, the combination of ELG and SNS enable us to secure suitable clean fish stock in larger quantities. But there are more entities involved. RISCO process recycled nickel raw material like dust, ashes, and residues. This entity will play a major role during the phase five of the leadership journey. You are aware of the Energia, our FSC-certified forest operation in Brazil. This supplies more than one third of the upper and group's energy on a sustainable and renewable basis. And then there is Botanical, our plant-based nickel source. Harvesting nickel is not like a dream, but you saw the picture on the previous page. Botanical is real and makes good progress. Let's go to the next page. In Europe, the market environment has been difficult for some time and changes is not apparent. Prices have slightly recovered but remain at the level that we previously saw during recessions. Volume remain depressed as the negative economic growth weighs on the real demand and the inventory cycle is still negative. The latter is actually quite interesting. Absolute tonnage and distribution chain is clearly below the seasonal normal level and more in line with previous recessionary. It is not worth it that inventory days are close to a normal level, despite a very low denominator. This will eventually turn into a restocking rush, but not yet in Q4. The nickel price continues to slide and distributors will polish their year-end balance sheet. The sectoral demand picture remains steady and very challenging. Construction is in the dolled rooms together with White goods, where the stocking has made some progress but is not yet completed. Automotive remains the bright spot, while food and beverage, restaurants and catering remain below average. Industrial demand is unchanged, with good business in energy and oil and gas. Everywhere else is quite poor. In Brazil, we see solid volumes continuing to Q4. Distribution is stable, a real demand is supported by very gratifying capital goods and transport demand. White goods are recovering and construction is also seeing some green shots. Pricing is the only headwind in Brazil as a spillover from international markets. Just one add-on to imports. We said for some time that imports will remain unsuspicious in the future. This quarter proves us right again. Furthermore, I have to repeat the potential positive impact of the new anti-circumventional investigation. It addressed 45% of all imports year to date. The additional action and vigilance of the European Commission should therefore keep imports at bay. While the carbon border adjustment mechanism is technically not a dumping or sub-seizure feature, it will further level the playing field with Asia on decarbonization cost. The program has now moved into implementation phase, and as previously reported, stainless steel imports are recorded on Scope 1 and 3. This would hold value for the European steel industry in the future. We go to the next page. The market environment is challenging and will most likely not provide tailwind for the foreseeable future. Self-help is the name of the game to restore profitable operation and cash flow that covers maintenance, improvement, capex and shareholders returns. Yes, one time effect will fade at some point in time, but inflation has had a noticeable impact on our cost structure in Europe since the COVID recovery. We must and will reverse this to regain our leading competitive position in Europe. energy and labor are the two major areas where we target the classical structural cost reduction plan additionally in stainless and electrical we refocus capex from mixed improvement and growth to productivity and efficiency and energy efficiency to combat these tailwinds the scope has been defined and implementation for specific measure has commenced The associated 50 million gains will be realized during 2024 and 2025. I want to stress three things. First, the 300 million normalized big DA improvement target to 2025 remains valid. We are in a good way to reach this goal. This initiative takes into account a changed economic environment and contributes to securing it. the growth programs for renewable energy cycle along and specialty and services and solutions are well on track and continue second the cost cutting program will be reported within the leadership journey phase five the starts in january but what we present today is a supplementary program a program to restore competitiveness in europe This comes in addition to the normal 50 million gains per annum that you know from our leadership journey. We'll share more detail regarding Phase 5 with you in February when we will report Q4 results. But you know the target gain for 2024 and 2025 will be 75 million in both years. Third, the source of these measures as you know we have been investing capex for our improvement in mix and flexibility in different european locations to prepare for leadership journey 5. these investments bring in newer more productive equipment and allow us to run our production lines at the lower operating point and efficiently utilize the capacity across the cycle Operating is known for a flexible and resilient business model. You can trust us that we have a plan that makes this company profitable and cash-generative irrespective of the shape of the recovery, be it D, U or L-shaped. Sud will now comment on the financials.

thank you tim and a warm welcome to all of you shipments declined by six percent during q3 it is normal that q3 forms the seasonal trough but this time it compares to an already extremely low q2 base to put this into perspective q3 steel shipments are comparable to the covet crisis trough the weak industrial chain in europe and further destocking are two reasons As expressed by Tim, production issues in our Belgium upstream operations came on top. Without these, Q3 shipments would have been comparable to Q2. Low demand was further reflected in lower realized prices. We also recorded a near triple-digit inventory valuation charge because nickel declined by 9% during the quarter and ferrochrome by another 12%. additionally we had to impair the buffer stocks that we built to safeguard the footprint upgrade in europe and brazil altogether this resulted in the lowest ebitda in our history we had no exceptions no major financial items and a normal tax rate summing all the factors resulted in a negative EPS and a negative operating cash flow. Investing cash flow was also a bit higher because it contains our contribution to the joint venture on M&A for the forest expansion in Brazil. Inventory increased during the quarter due to the buffer stocks for the upgrade in Genk, but has started going down towards the end of the quarter. What we see in Q3 is purely a technical effect where the reduction of networking capital starts with payables reduction. This materializes as a reduction in networking capital in Q4 as the effect translates into inventories when we focus on releasing all volume-related inventory buildup by end of Q4. Net financial debt is therefore temporarily elevated this quarter, but by the end of 2023, it should be at a comparable level to 2022. Our commitment is to maintaining net financial debt below EBITDA over the cycle and is now a clear part of our financial policy. Moving to the next slide to the segment perspective. Recycling and renewables together with Brazil performed solidly while one-time items and the European economic headwind are clearly visible in the other entities. EBITDA in recycling and renewables declined from a very high level in Q2. However, annualizing the 17 million shows that Q3 was fully in line with the guidance we gave for normalized earnings for this segment. scrap volumes declined due to the low stainless steel production in europe as customers destock but pricing was solid and bioenergy had delivered a stable result looking into q4 we expect an ebitda increase due to higher scrap volumes and some year-end effects Stainless and electrical adjusted EBITDA turned negative due to the high inventory valuation charge and the production disruptions in Europe. Reserve volumes were solid with a steady outlook, but prices softened. Like for like, we expect 2023 to surpass all years before 2021. For Brazil, please bear in mind that bioenergy has now reported in R&R. On a purely underlying basis, without one-time effects, S&E's Q3 EBITDA would have been in line with other recessionary phases. We expect a higher EBITDA for Q4 due to higher volumes and less negative one-time effects. But the price-cost spread will remain unfavorable this quarter. SNS is back in black mainly due to reduced price-cost squeeze as we reduce inventory and having slightly better volumes. This is despite Q3 still being highly burdened by inventory valuation charges. We expect a higher and historically more normal Q4 EBITDA as one-time effects fade. Alloys and specialties results look unfortunately so much worse than they really are. As we have disclosed in our capital markets day in 2021, alloys have four to six times the nickel content of regular stainless steel, and the rest also consists of other precious metals such as molybdenum and cobalt. What you actually see is the price decline on all these metals that already had a high impact on reported EBITDA in Q1. On an underlying basis, ANS will have its best year ever by a wide margin. However, this is merely the reversal of the inventory valuation gains we've had in this segment over 2021 and 2022, albeit faster than a five-month frame. The volume contraction was seasonal and will reverse in Q4. Together with a fading inventory valuation charge, we project an EBITDA increase in Q4. Others on elimination was once again positive at 5 million euro EBITDA due to intercompany elimination when sales price moved down faster than raw material costs. Because of corporate costs and intersegment profit elimination, a negative number is normal here and we expect that to show in Q4. Moving to the next slide, let's take a closer look at working capital and what caused the increase. Most of you take the end of 2020 as a starting point and ask yourself when the accumulated 784 million euros networking capital addition in the cash flow statement will flow out again. there are three factors at play raw material prices value chain differentiation and footprint upgrade let's start with raw material prices nickel averaged close to sixteen thousand dollars during q420 and was 28 percent higher during q323 that is an obvious and big driver however all our products contain 18 ferrochrome and that is also up by a third over that period Furthermore, you're aware of how electricity and natural gas prices have evolved since the Russian war in Ukraine started. This is also an important driver for networking capital. The working capital investment that happened in 2021 is a good proxy for the price effect driven working capital addition. These input prices cannot be influenced by us, but account for more than 60% of upfront networking capital increase. This will flow back only once raw material prices reverse again. The second component is the footprint upgrade. These investments are a key building block for the 300 million like-for-like EBITDA improvement to 2025. They enable us to produce a better product mix and less commodity grades. The new AOD in Genk and the hot rolling mill upgrade in Châtelet in Brazil are examples of this. These big investments are like open heart surgery and require buffer stocks to safeguard operations. We said in the past that these buffer stocks will reverse in Q4 and this year, which allows us to reduce networking capital by about 200 million euros. The remaining block is due to the differentiation of our value chain. We consolidated ELG at year end 2021 and we target to grow our alloys business significantly. Both are key building blocks for reaching our 2025 improvement target. Both also have a structural impact on networking capital. ELG, due to its different business model, affects ratios like networking capital to sales or rotation days, as it is a trading entity. In real terms, business working capital is a fast-rotating pure trading stock, of which 75% is already sold in the next eight weeks. But our returns benchmark on this invested capital remains high. ELG contributes through the cycle EBITDA of 55 million and adds 24 million synergies. That's operating at a 16% ROCE, so it is a sound investment. For alloys, we target historical EBITDA to double by 2025, as we follow an organic path. In alloys, you don't see it at the moment, but the underlying EBITDA is up by more than 40% this year, and our multi-year order book makes us confident to double ANS EBITDA by 2025.

growth is based on our unique in more grades but we are also ramping up substantial project business with very attractive margins back to tim for the outlook thank you soon the guidance is easy this time after eating rock bottom the only way is up our order book indicates slightly higher shipments Q4 is a seasonally softer quarter in Brazil and in Europe, the economic environment remains challenging. Normally, distributors of the stock towards the year end to polish the balance sheet, and we see no reason why this year should be different. Regarding EBITDA, we will have a less negative inventory valuation charge, but realized prices will still decrease which is a drag on earnings. Based on today's pot raw material price, I would say 50 to 60 million adjusted a big deal. However, because there is still a lot of quarter left where raw material price can move and impact the inventory valuation, we cannot give a guidance, but only after few raw material price are known. Sudar already explained that the working capital release will drive Q4 cash flow. Yes, capex will be higher in Q4. To match our 2023 capex guidance, 93 million remain to be invested. Nevertheless, we project net debt at the end of the year to be a similar level year on year. A solid and efficient balance sheet is then a good base to start 2024. Let me make one remark on the dividend. We do have a progressive dividend policy, full stock. We have therefore slightly adjusted the financial policy to make this as clear as possible. We deleted somewhat confusing link between the dividend and net debt to EBITDA. to leave no doubt that we are committed to following a progressive dividend. Historic low quarter naturally raises questions about the implications for our roadmap and what levels we have to steer up and back on the road of success. Our roadshow schedule provides you many opportunities for dialogue in Europe and in the US. If you can't make this event, then please feel free to contact Aperam Investor Relations. We are happy to accommodate requests for corporate access and your feedback is valuable to us. Please also note that we will hold the next Capital Markets Day in Paris on 27th of February with an emphasis on Brazil, bioenergia and decarbonisation. In conclusion, times are very tough, but we are convinced to have the right strategy and the right tactics to set the company back on the road of success. We share with you the leadership journey booster. Next quarter, we will share with you the whole phase five program. There are a lot of high value, non-volatile business opportunity in our differentiated value chain. that will surprise you carbon offset by all or bicycle are just three of them. You will learn more at our capital market day in February in Paris. Let me clearly say that we are actively steering this company towards the twenty five improvement, executing all projects linked to the leadership journey and when accounting for the one of time effect there is a clear progress we can and we will master this crisis by leveraging our strength by ingenuity and right sizing the business we ask for your trust and invite you to be part of the journey thank you for listening to upper and q3 management podcast we lost the conference call today at 2 30 continental european time to answer your question Wish you a pleasant day and hope to see you again at the Q&A.