Aperam S.A. (APAM) Earnings Call Transcript & Summary

Hello, and welcome to Aperam Q2 2022 Results Call. I will now hand over to your host, Timoteo Di Maulo, CEO of Aperam to begin today's conference. Thank you.

Thank you. Hello, everybody, and welcome to this call. I'm here with Sudhakar Sivaji, which is the CFO of Aperam. And this call follow the publication of our Q2 results and the podcast with the highlights of the quarter. As this has been published, I start immediately giving you the possibility to do the question and for us to answer.

[Operator Instructions] The first question comes from Ioannis Masvoulas from Morgan Stanley.

Two questions from my side. First, on the M&A front, can you talk about the industrial logic of a potential deal with Acerinox, especially given European Commission's rigid approach and merger remedies that might have diluted any potential synergies? And then second question, in the podcast, you stated that you will not pursue a [ power building ] for its own sake. Does that mean that you are no longer pursuing a merger with Acerinox, i.e., is the deal off the table?

So I think we were clear on the podcast but I'll try to express this differently. First of all, the -- as we have also published, we had a very preliminary discussion. This has been -- has gone public, but it was a very preliminary discussion. And this was in the aim to see if there are industrial synergy, what could have been the risk, et cetera. So after having this -- done this, we have, let's say, let the business down, and there is nothing else today. We -- fundamentally, we maintain our strategy. The strategy of Aperam is -- has been to build on our own resources, doing -- being able to do M&A due to the strength of our balance sheet when this creates value as in the case that we have done in ELG. Now it is not always the preliminary discussion leads to something which becomes concrete. Am I responding in full to your question?

Yes, you are. And maybe just a follow-up, more broadly. It seems that you have appetite for a larger deal, assuming that there is a value creation proposition. Would you pursue other such deals of relatively large scale? Or would you focus more on your existing footprint going forward?

I cannot speak for the future because we don't know. But in any case, today, the priority is to focus on the strategy we have announced in the Capital Market Day, and we'll be fine-tuned in the next one. We have a lot -- we have presented a lot. We have a strategy of development of products. We have a strategy of grow in the circular economy. We are developing with ELG. We are developing with our forest with the recycle. So these are our priorities of today.

The next question comes from [indiscernible] from ODDO BHF.

So you -- in the podcast, you remain reasonably positive on the outlook for Q3, including in Europe. So I wondered whether the pace of decline in terms of shipments, especially in the in the core Electrical & Steel segment and the Services & Solutions segment provided a good indication of how volumes would trend in Q3, leaving aside additional seasonality. So that's my first question.

So it's clear that the seasonality is one important aspect because nearly August will be zero or closed for the southern of Europe. And we have the fact that the business in Europe can face some, let's say, resistance from some kind of distributors to buy more with the high imports. This will have an impact. But fundamentally, our order book is done with contracts with long-term supply. And what we see is that globally, the segments in which we are exposed today, they have for -- even for Q3, a visible order book, which is reasonable and in line with what we have explained. It is clearly that the spot demand can be softer because of the imports, as I said. But we have a much lower exposure than the average on the spot business. So we are quite confident that even Q3 will be a satisfactory one. Then, of course, we have other sectors which are much stronger and even continues increasing, for example, the alloys, with the needs of a solution for the electrification and for the LNG. This is a sector which is strongly improving. We have a very strong Brazil with volumes, which are in line with the best years with a good performance also of the mill and in all sectors, including the electrical steel. So we have positive and some, let's say, slowdown in Europe.

Okay. And perhaps a second question regarding even imports because you highlighted that there was a big surge in Q2. Should we expect that to go down quite significantly in Q3 -- I mean, in Europe?

Why imports have been so high, because of different aspects. The first aspect was that during the first part of the year and the last 1 or 2 months of 2021, due to logistics and due to the fact that the prices were increasing, we have created, from one side, a big gap between European prices and Asian prices. And the second, there has been a lot of material, which has been ordered, were on the very long supply chain. And so people have anticipated a lot the orders under this level of, let's say, logic, first logic profit of this windows in which prices had a gap. And second, because of the logistic, they've not considered that at a certain point, logistic would have recovered, and this is what has happened. So in the first 6 months, the imports has been well about normal. Now the gap in terms of price is resolved. There is no logic anymore to buy in Asia because the nickel has normalized. And so the competitiveness of the European is there. But on top, there is something which is interesting is that even if imports have been high, with the trade difference, which is completely different compared to 2019, the impact on price is completely different. So there can be some lower volumes. That's clear. But the impact on price of the imports is not so much.

The next question comes from the line of Tristan Gresser from BNP Paribas Exane.

The first one, given the inventory valuation gains have had no negligible impact on Q2 results and the Q3 guide, could you please give us a little bit of sense of the scales of this gain in Q2? I mean, is a mid-double-digit a fair assumption? And also in terms of scale and size moving into Q3, is that the same kind of magnitude you expect in terms of reversal?

So Tristan, Hi. On Q2, we gave, I believe, a clear guidance. It is -- we said it's top double-digit, okay? So -- and this will completely reverse in Q3.

All right. That's helpful. When you say it reverse, so you don't -- I thought in the release, you also expect a loss, right? So it's not just the reversal of the gain?

Sorry?

In Q3, I think in the release in the presentation, you mentioned not just the reversal, but the potential...

Yes, yes, yes, when a gain reverse is basically on a P&L, it is a negative effect, right? And our guidance includes this, just want to be very clear. Yes.

All right. That's helpful. The second question I have is on the alloy surcharge in Europe. When I look at my own estimate, the published alloy surcharge started to differ quite a bit from nickel ferrochrome pricing movements and historical calculation standards. So has anything changed there as how does Aperam see the alloy surcharge calculation now versus maybe the past couple of years?

So the alloy surcharge has always been the way to translate to customer -- to pass through customer the cost of raw material. The problem that has led to your question is the fact that typically, when there is a progressive increase or progressive decrease, you see very well the correlation, not knowing the formula that are behind, because the formulas are always the same, contains a lot of variables, which are the exchange rate, the price of iron, the contracts that we have in the different raw materials, et cetera, so the percentage of the raw material. So it is a very complicated formula, which translates this cost. So when it is progressive, as I was saying, you see that the variation are -- they can be simply approximated by somebody who is not behind the real cost of raw material. But with the spikes that have been and the big volatility of price and uncertainty that has been in raw material, this has been a little bit more difficult to see from the external point of view during this last period.

All right. So there hasn't been a change in strategy?

No, strategy, it is the question of -- you cannot, from external and looking simply at KPI which are so volatile, understand if -- I don't know, nickel has been bought at a certain moment or at another moment, what are the effect of the, I don't know, the LME, which has been canceled at certain moment, you cannot assess that.

The next question comes from the line of Rochus Brauneiser from Kepler.

I have 1 question on the guidance. I think on the podcast, you were saying that the EBITDA range for the third quarter is somewhere between what you earned in Q3 2018 and 2021. So midpoint is around EUR 240 million to EUR 250 million. So if I get your statements right about the swing in the windfall gains into losses, so we talk about the delta of about EUR 150 million which means that without any effect from volume and prices, we would arrive at that midpoint. Maybe correct me if I'm wrong. So the question is, what shall we think about the underlying dynamics in the third quarter in Europe? Is this. on the down side, more a question of prices? So is there more a question of volumes in the third quarter in your view? That's the first question.

I'm not sure that we are on the same definition. The -- what we are always publishing is not the underlying, but it is the full result. So it contains the negative effect already of the raw material or at least the best possible estimate of what will be the negative effect of raw material as of today because you know perfectly that this can change during August and September, and there could be some more volatility in one sense or another. But the best estimate we have today is, let's say, leading at the fact that the negative impact of raw material will be of the same magnitude as the positive impact of raw material during Q2, okay? Is it clear? And so the net result will be -- sorry?

No, maybe I got it wrong, when you were saying you had EUR 400 million, including these gains, and this turns into a loss. So the delta between the EUR 400 million reported with, let's say, EUR 150 million minimum, so it would mean that the adjusted EBITDA would be kind of like EUR 250 million, just without considering volume and price effects. That's what I wanted to say. Is that the correct assumption?

No. Suppose the EUR 250 million is what was the number, if you want to go to underlying, you should have to add the negative due to the inventory losses.

Of course. No, that makes sense. I think what it means is underlying you have a higher result, of course, because you deduct the inventory losses again. But on the reported basis, let's say, the inventory effect alone would get you to the midpoint of what you are guiding for the third quarter EBITDA. And this has not necessarily considered a volume or price effect from the underlying business. That was my point.

Rochus, and I think there's a couple of -- so you've understood the exchange, right? So maybe a couple of basis points, right? So point #1 is the fact that we guided to a top double-digit inventory gain in Q2, okay? So I don't know where you're getting the EUR 150 million number from. So that's something which I want you to please keep in mind as you model that. So top double-digit. Okay?

Okay, but the point is I just made it simple saying top double-digit, I said it's EUR 75 million. And if, let's say, it is EUR 75 million turns from a plus EUR 75 million into a minus EUR 75 million, then the swing will be EUR 150 million just on a hypothetical number.

Yes. Okay, but now you understood, it's just the reversal, right? So it's a...

It's a reversal, not more than that, yes.

Yes. And then you have the basis points between Q3 of 2018 and Q3 of '21. So I think that's a good start for you to model, right? So...

But that hasn't touched operational trends in terms of price and volumes yet. And so what I try to think about where you see more of a moving part, is it more on the price side or on the volume side in the third quarter?

Tim has given an answer to the previous thing, and I repeat that, is that the underlying demand is stable, there is destocking happening on distribution, right? So that gives you a guidance on volumes, plus you have to take in the seasonality into account.

You have to take to the seasonality, Brazil strong, Europe low with some impact on the spot demand, okay? And then we have a strong alloys. And altogether, we have given a guidance which is -- this was the guidance of being in between the best quarter and better than the second best quarter 3.

Okay. Then the second question is on consumer demand. I think you said on the podcast that demand seems to be still very stable. What is your current view on things, let's say, in 6 months forward as we are seeing inflationary trends impacting purchasing power of households? What is your sense about what we should expect in terms of consumer demand in Europe and Brazil?

So I will not give a long-term guidance because this is difficult in this moment. We are also, let's say, looking at the same sources that you are. So for the moment, what we see is what our customers are doing. And so for the moment, we don't see important slowdown. We see destocking or some slowdown in the demand from those who have inventory, so typically the spot demand of distributors. We see good demand in Brazil, and we have no anxiety about Brazil. We continue to see that in Brazil, there are good, let's say, news even from oil and gas, which was absent and was one of the segments, which was the most important in the past for Brazil. And on top, we are pursuing our product development with good results in alloys and in other high-grade products for stainless steel. So these are -- this is the visibility that we have as of today. And so we are in a good shape. We are doing the investment, all the investments that we have done in the plants are ramping up according to our plan. So in Genk, in Chatelet, we'll have the new coiler at the end of the summer, so as was forecasted. We are quite confident even if, of course, the -- let's say, what we see is the same as you. We see that there are question mark about the global economy, et cetera, which will be for everybody.

Okay. And maybe more of a housekeeping question. Is it -- would it be possible to get the volume figure for the steel shipments in the second quarter because the audio report is more kind of a mixed bag between the scrap and the steel number, which is a bit difficult to reconcile?

I can give you because we have published it in our press release, Rochus. So it was, for Q2 of 2022, 432,000 tonnes.

Okay. Maybe I missed that number, sorry.

Fine. No, it's okay. That's why we're here, 432,000 tonnes.

The next question comes from Christian Georges from Societe Generale.

First question is just going back to this M&A issue. Looking forward, if you have to move for another acquisition, do you feel strategically you would benefit from a third geography for your stainless steel activity on top of Europe and Brazil?

Can you specify better what you have in mind?

Well, I'm thinking like do you feel that being present in North America or being present in Asia would add strength to your current strategy? Or do you think it's an unnecessary expansion area?

So I think that all the ideas has to evaluate on what is the value creation. So expanding in Asia, what is the value creation in Asia, where China has not yet sold at the overcapacity is the question mark. But Asia is a big market and a growing market -- is a growing market for us in terms of specialties. So we have invested in China for alloys, and we have invested in India. We are continuously doing this. We will continue to do that. So Asia, indeed it is interesting, but mostly for the alloys. In the United States, you see the frame and the scenario so it is a country which has not so big volumes and the presence of producer is enough. So this -- I don't think it is wise to have a greenfield there.

Okay. Very clear. And my second question is on energy cost. I mean I think in Q1, Q2, you were highlighting that you already took on much higher energy costs in Europe, in particular. Looking to the winter coming up, do you -- should we be concerned that there may be some squeeze on your margins from steel elevated or even higher energy costs? Is that an issue you're keeping an eye on? Or are you comfortable about it?

Yes. We have already in our guidance, taken account whatever we know about the energy cost. It's clear that the increase of energy cost is putting a stress and an extra cost on us and especially it is an extra cost versus the Asian competitors. But luckily, we have a strong trade defense on that, but it is something which is a concern for all Europe and for all producers of any kind of goods, the factor of energy cost. Then we have a different situation. We have then the most -- the cheapest energy cost in Brazil, which is good for us. We have some contracts. We have some hedging, so there is a mix. But of course, Europe has to solve this problem of the energy costs globally as a problem. We are not exposed to the countries which have the most, let's say, expensive cost of energy, but we are not either exposed to the lowest, so we are in the midrange.

The next question comes from Moses Ola from JPMorgan.

Actually, it's a quick follow-up to what you've just spoken about with cost of energy in Europe. But I wanted to speak to your exposure to natural gas and any effects from potential natural gas rationing in Europe. I know that your operations in Germany don't really use natural gas, but are there any secondary impacts there that we should be cautious about, i.e., what extent could rationing impact customers' production? And then, yes, so could you just please touch on maybe primary and secondary impacts from natural gas rationing, please?

So I'd say that, in general, what we know from what we see as a global problem of natural gas is that we have the plan not to be directly impacted as far as the natural gas remains with the actual indication that we have at the level of the European Commission. Our plants are in Belgium and France. We don't -- we have no consumption of gas in Germany, as you have said. We have action plans and contingency plan in case of temporary, let's say, lack of gas. So our plants are structured. But this is not for as of today, always, you should have contingency plan in case of some problems, break of the supply chain. We are not -- for the moment, we are not concerned too much to this problem. The problem is mainly the cost, which is indeed an extra cost, and it is for everybody.

The next question comes from the line of Bastian Synagowitz from Deutsche Bank.

I've got 2 quick questions, please. Tim, in your podcast, you said that you focused on the Leadership Journey, and you did actually not feel that anything was missing in your company. Can you please confirm that this means that you have not been the party which initiated the talks back then? I sense there's still some confusion around the topic. So it would be great if you could set this clear. And then my second question is just on the market situation in Europe. And I guess you highlighted that imports, obviously, one of the main sources for the softness we are currently seeing in Europe, and then we also have, obviously, pressures from destocking. So I'm wondering where do you see inventories in your broader customer spectrum and, given that you seem to believe that prices have hit the trough already, so you see that the destocking is basically close to be complete already, i.e., we kind of get volume stability as we move into the fourth quarter?

So I will say that we have been very clear about the fact that we believe in our strategy. We are very much, let's say, focused on our strategy. And about your question, we have signed an NDA, so there is nothing to say more. So I'd say that's all we can comment about the story of the -- and now about inventory, inventories are, as I said, mostly in the part of the commodities and in the part of distributors. So this is where, let's say, the most that there should be a period in which this inventory will be reabsorbed. At which speed will depend a lot of the market and the capability of the actors to keep inventory a little bit higher for -- depending on the level that they are. But our strategy has always been to be more on end user and typically end user have not huge inventories, and this is what give us some, let's say, lower stress on what is the problem after all.

The next question comes from Ioannis Masvoulas from Morgan Stanley.

Just a follow-up question. And I don't want to beat a dead horse, but going back to Rochus' question on guidance, because I'm also struggling a bit. So if we start with EUR 400 million of EBITDA and we assume, let's say, EUR 100 million of inventory valuation, which fully reverses, we're going from EUR400 million down to EUR 200 million of EBITDA on a reported basis and then taking into account volume and pricing, that probably gets us up to EUR 100 million. Is that the right way to think about it? Or am I missing something?

Frankly, probably, we are not explicit enough. So our guidance is clear, we are in that range, which has been already named, which is a range of, let's say, EUR 200 million, EUR 250 million because -- why this gap, because there could still be other, let's say, aspect of the raw material that are not yet forecasted and can happen during August and September. The volatility of our raw material are very well known. So this will be the published result, which contains everything, which contain our, let's say, sales price and the negative effect that we will have, okay? The negative effect that we will have due to the devaluation of inventories in the upper range of double-digit. So you can, from this, calculate very easily what is the underlying, if you want, an underlying saying, okay, I start from this, I add the inventory devaluation and the underlying will be higher than the published result.

[Operator Instructions] The next question comes from the line of [indiscernible] from ODDO BHF.

I have follow-up questions. So first, regarding natural gas, are you able to substitute natural gas with other feedstocks like electricity or propane in your production process and to what extent? So that would be my first question. And the second question is on M&A. So you have a target to not go beyond 1x of net debt to EBITDA. So does it mean that, I mean, if you go for a big acquisition, I mean, you would necessarily have to finance a deal. I mean, if that result was exceeded with [indiscernible]?

So let's say that for natural gas in -- it's clear that in the long term for -- if we -- it is part of our plan to reduce the CO2 emission with greener energy and so greener energy can be hydrogen in the long term but should be green nitrogen and will be electrical. Also this is not something that you can switch on and switch off on only few months. I don't know how much today you can say that you can save -- make economy between electricity and gas has been as this is a calculation that has to be done depending on the country in which you are and the kind of application, but this is not the short term. For the short term, it's clear that natural gas is part of our production process and will remain, and we are investing in -- for the midterm to replace with the technology that I just said. For the rest -- and I will say for our financial policy, our financial policy has not changed and will remain. This is very clear. So we stay on what we have published. We keep the company in a strong balance sheet and especially today, we think that having a strong balance sheet is a good asset for a producer in a cyclical economy. We are releasing cash, as we have said, well in advance because we saw that the raw material will go down. And so we have taken all the measure to improve the level of net working capital. Despite this, some buildup of working capital has been necessary due to price, but mainly it's price. Now pricing going down, this will further boost the cash release.

Okay. And perhaps just the last one on CapEx. It was, again, very low in Q2. So are you facing any difficulty in rolling out your expansion program in both Brazil and Europe?

No, no, no. Our CapEx are not something that should be every day you pay exactly when we have guided this on the fact that a big part of the expenses, because what you see is the cash CapEx, will be in the second half, but this is the question of the cycle of the investment that depend on when there is the ramp-up, what is the planned -- there are orders to the suppliers. And so they have schedule, you have a down payment, you have 30%, you're -- no, this has nothing to do with something which is delayed.

The next question comes from Tristan Gresser.

Yes. Just a follow-up, please, on the comments you made around your alloys business. Could you elaborate a little bit on the potential acceleration of the growth strategy? I think you mentioned you can be a beneficiary of the business with the energy crisis maybe in Europe. Can you help us understand a bit what kind of products you're talking about? And also if you're able maybe to quantify the impact on the volume side or on the EBITDA side? I know that you have a target to double EBITDA of the business by, I think, 2025. So any color there would be appreciated.

So you are right, and we have published already the fact that by 2025, our target is to double. We think that the business is proceeding in the direction we had in mind and we'll have in the next couple of years, a booster, which is typically the LNG. So liquid gas -- liquid natural gas is a booster because I remember you that we are an absolute leader in the solution [indiscernible] for the tankers, which transport the LNG. So we have seen -- I will say that the -- this LNG has doubled the [ request ] that was forecasted. And this is a relevant part. It is a very relevant part of what we do already in alloys and specialty. And we also have the, let's say, forecasted the -- of strengthening alloy and specialty with the investment that we are doing in the downstream and typically in the [ finished ] project in Gueugnon, which we have explained in the Capital Market Day. So we are aligning the increasing demand with the capabilities and capacities and increasing also the cost competitiveness of our solutions. So everything is in the right direction for always.

The next question comes from [indiscernible] from Credit Suisse.

Just one question on the Recycling and Renewables business, please. Could you quantify how much the recovery of the price-related one-off cost of EUR 53 million that was seen in the first quarter contributed to the business' EBITDA figure in the second quarter? Was it fully or only partly recovered?

So it was completely recovered. So basically, we said -- we guided this year annually. Just to give you some frame for reference, right, we have historically said that this business is about EUR 60 million, EUR 65 million, EUR 55 million from the recycling part and the rest from the renewables part. This is what we've guided in the past over the cycle, and we said this year will be an above average year. So the first half of the year was on that run rate for an above-average year.

The next question comes from Rochus Brauneiser.

The first is on the tax rate. I guess you're running a bit above the tax rate you have guided in the past. So it's more like a 25% and 20%. What shall we assume now for the rest of the year and for the future?

25% is a good rate to assume, Rochus.

Okay. And in your net debt guidance for the third quarter, have you baked in the whole of the EUR 100 million from the second tranche of the share buyback?

Sorry, can you please repeat that, because the last part I got cut, sorry?

No, the guidance you have given for financial debt in the third quarter, have you considered that the whole EUR 100 million from the second tranche of the share buyback is occurring in the third quarter?

It considers a significant portion. Now if all of it occurs or not is something which you have to wait and see how the conditions are met. So -- but it does consider a majority of it.

Okay. That makes sense. And then finally on this inventory swing effect again. I guess, these inventory gains in the second quarter that largely occurred in the European stainless business, correct?

It was all across all divisions.

Okay. So that means in the end, with this huge swing, the reported EBITDA in Europe will be still positive, yes?

We comment on Stainless and Electrical segment, yes, but Europe also.

There are no further questions. I will hand back to your host.