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

Hello, and welcome to the Aperam Third Quarter Conference Call. Please note, this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions. [Operator Instructions] I will now hand you over to your host, Tim Di Maulo, CEO, to begin today's conference. Thank you.

Hello. Good afternoon, and welcome to this session that will be a session of Q&A. I will answer to your question with Sud Sivaji, our CFO, I suppose that you have been able to listen to our podcast and to look at the slides in our presentation. So give you the hands for questions.

[Operator Instructions] The first question comes from the line of Tristan Gresser from BNP Paribas Exane.

I have 2. The first one is a little bit on the one-offs. Would you be able to quantify the negative EBITDA impact of the operational disruption in Q3. And when you look at the full year, what's the total amount of one-offs, operational disruption, hedges, valuation impact? And then if you could also confirm that you expect an additional EUR 75 million of EBITDA gain from the Leadership Journey and the cost saving program on top of the alleviation of those one-offs for 2024? That's my first question.

Okay. So the one-off in Q3 have been generated mostly by 2 effects. One was the inventory valuation that was in a close triple digit impact on the EBITDA, this has been amplified by the fact that we have had a disruption in our upstream. You remember that we had already announced the fact that our upstream was intend of being stopped in Genk because we have invested in the new AOD. But we have been out of the upstream because of special maintenance. We had to perform in Châtelet, which is our second line shop. And this second meltshop went much longer than was expected. So there was some kind of mistakes from our suppliers, and this is being, let's say, discussed even with them. But this is the big magnitude of the effect. Maybe later, Sud will give more detail if necessary. Now what we are launching is the Phase 5, this Phase 5 will be disclosed in full in the next earning release, as always, at the end of the full year, we will disclose the detail of the leadership journey. The actual one has been in full completion. We will realize even a bit more than was expected. And at the new leadership journey, we will add EUR 50 million of extra cost savings, which are starting now. So we have not waited the full year that we are starting this now. And indeed, there will be a complement in the leadership journey, which will mean that it will be [ EUR 75 million ] for the first year, [ EUR 75 million ] for the second and then we'll find back the normal, let's say, trend.

Okay. All right. That's clear. Maybe a quick follow-up then, and you can tell me if my reasoning is sound. But if you do -- with the Q4 guidance, if you do EUR 300 million of EBITDA this year, let's say, EUR 150 million of one-off alleviation for next year, EUR 75 million of improvement from the leadership journey and the cost saving program, you should be comfortably above EUR 500 million for next year without any improvement in the market. Is that a fair reasoning?

Look, the reason is not bad. The point is we don't guide because we are always submitted to the ups and downs of raw materials, can be much better if raw material goes up. If raw material goes down, it will be worse, but the reasoning is correct.

Okay. That's fair. And then my second question is on the real demand environment in Europe. You said you don't expect restocking or real demand to improve in the near term. It seems you're bracing for a longer period of mediocre market conditions in Europe as opposed to prior cycles where maybe we had more kind of boom and bust cycle with destocking, restocking. Is that a fair assessment? And then it really seems the key catalyst there is an improvement in real demand. So is that something you would expect during the first half of next year?

So let's say the following: it is extremely complex to forecast the future. Very complex, and it is not possible to give guidance on anything that will be, et cetera. But the philosophy of Aperam is on self-help measure. You have seen that this year could have been a good year in term -- in general terms without the one-off that we have largely disclosed and explained. For next year, what we expect, as you have understood, is that if the market doesn't go differently from what it is today, and the reasoning -- the previous reasoning is okay. it goes up, it's much better, and we hope that it will go up. Today, we have no clue on how 2024 will be, every quarter being different and every quarter is as unpredictable as it has been the precedent one. What we are focused is on what we can do and we leverage on. And what we leverage on is the fact that we have invested a lot as a company to strengthen our portfolio to ramp up with the synergy of ELG to go to strengthen our competitiveness. This may be not apparent in the results of Q3 because of what we have explained, but it will appear in a stable situation in which one-off will not happen. And we will continue to focus to this self-help measure, not expecting from the market. If the market will go better, we will take the full profit of it as has been in the past.

The next question comes from Ioannis Masvoulas from Morgan Stanley.

I'll start with the first one. On the Stainless & Electrical division in Q3, you said that ex one-offs -- on the prepared remarks, you said that ex one-offs profitability was consistent with other recessionary periods in the past. But given all the self-help we've seen that Aperam has delivered in recent years, I would have expected the -- for you to have achieved a higher floor. Why don't you think that's happening? Or is this Q3 much worse than previous recessionary period in terms of realized EBITDA?

So it's clear that Q3 is worse in terms of everything from what we have seen in the previous year. It's even worse than in COVID period. Volumes are lower, prices are lower. There are a lot of elements in terms of price cost squeeze, which are there, and they are extremely tough. When you compare this period to what could have been without the present measure, we will have had a completely different set of results. And I repeat take the reasoning that we just gave before and take the historic of the company. This year is very bad. It's a very recessionary year in terms of volumes. The overall volumes will be the lowest we see since many, many years, prices and material margin. So if you take all this and you see globally, you find all the self-help measure that we have done.

Very clear. And the second question around the Q4 outlook. So you're guiding to lower realized prices. Can you help us reconcile that with the move higher, we've seen in European spot prices since mid-summer. Is it a longer lag that doesn't allow you to benefit from this uplift? Or is there anything else happening in terms of product mix or cost base or anything else at all?

So typically, you have a lag effect because in fact, when you take orders during Q3, you have, let's say, the effect will be after the 3 months, the typical 3 months on top of when you have a 1 month which neutralized like August and half month, which is neutralized like December, you will have the impact of the -- some better spot prices mostly in -- at the beginning of next year. But it is typically a time effect.

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

With my first question, I would just like to follow up on, I guess, where you just stopped on Europe. Could you maybe round off that picture also for Brazil, i.e., what are the exit margins you're seeing in the Brazilian business for the end of the fourth quarter? I guess you've been indicating the exit margins in Europe to be higher in Q4. Will this be the same in Brazil as well?

Brazil is in a different situation than Europe. They are not in a market which has shrunk a lot in terms of volume. The mix is also good. The only problem of Brazil is that you remember how is the pricing in Brazil, so they have an internal price which is linked to the international price. And this link is, let's say, pushing down the price in Brazil because of the international price, which is led by China, this international price in China are extremely low. In Brazil, you have also a typical lower seasonal effect. So they are in a period in which their volumes are lower because it is their summer, and in summer, they have longer holidays than the winter and summer in Europe.

And Tim, could you maybe let us know, there's obviously another, I think, antidumping case in Brazil. So can that also be made retroactive or is this a different mechanism versus Europe?

Good question. We don't know exactly how the equivalent to the European Commission, will act in Brazil with the retroactivity or not. But it is the same mechanism. So it is a question of a circumvention. We know that we have duty against China and some countries have profited to go around the antidumping duties. So we are looking at this anti-circumvention, which is the first time that the Brazilian authorities is applying, but is a very positive, let's say, effect of the work we are doing with them because they are understanding that in the global world, the circumvention is one of the major effect that happens in the trade. And even in Europe, you know that we have 3 anti-circumvention file, which are going on with 3 countries, and we are expecting that in the end of Q1, this will be disclosed by -- the conclusion of the commission will be disclosed. If it goes like for the previous case in anti-circumvention for hot rolled against the Turkey, then the retroactivity will be there and will be extremely efficient.

Okay. And then my second question is on Alloys. And clearly, it's been a very difficult quarter. But from your podcast, I understood that your underlying EBITDA this year has been up by 40%. It's usually a very project-driven business. So what is your order book telling you? And what gives you confidence that you can still double the numbers in that business as targeted?

Yes. Our order book is fully booked for long. We have a very exciting market and development. And we have had some one-off effect in terms of inventory, maybe Sud can explain by this effect. n.

Yes. So Bastian, so the point is -- the reason why we are confident is from our numbers, what we see is that the inventory valuation effect, what we see as negative in this quarter is the exact reversal of the inventory valuation positive effect in '21 and '22, we've seen in this business and which we have also announced with you guys. So it's the exact reversal of this. So there's nothing exotic about it. So it is purely that, number one. And number two is that end of the day, we have guided to this double EBITDA of Alloys & Specialties still 2025. And like Tim said, our order book makes sure that we are confident of reaching this EBITDA with our growth plans.

Okay. Very interesting. Then I've got a very last one, if I may, because I think a few weeks ago, one of your peers was up about 4% to 5% on a press report, which suggested that they would be supplying into Tesla's Cybertruck, but I think they couldn't actually confirm that on their conference call. At the same time, Tesla has apparently filed a request for Section 232 exclusion for supply from your Genk facility. Can you maybe give us a bit of color here? Have you already signed any agreement? So what's happening there?

So what I can tell you is that the filing speaks for itself, and I cannot have any further comments as this information is under NDA. So please refer to the -- what is the public information.

Our next question comes from the line of Maxime Kogge from ODDO BHF.

So my first question is on the planned maintenance break in Brazil. I think that was scheduled for early next year, and that should have led you to build up some inventories at the end of the year. And now I understand it's no longer planned this way. So can you tell us why you postponed that break and when it could take place now? And what would be the impact on?

Maxime, Sud here. No, thanks for that question. So it starts this year, end of this year, and it goes on to the first quarter of next year. So that's how it was always planned. The inventory we are releasing ahead of time is basically, we see the current market situation. And when we see how things are, and as Tim has explained, we are planning next year irrespective of the recovery. So we've gone ahead and planned a release of inventory from raw materials and other parts of the system where the buffer is not met. So there's no postponement of that investment shutdown. It's just that the current market scenario allows us to release inventory in other parts of the system to compensate for that. So that's the reason you see the inventory release earlier already in Q4 of this year. The investment shutdown doesn't move planned for the Brazil hot rolling mill, just to be clear.

Okay. No, that's very clear. And second question is on your forest expansion. I think there was a big cash out this quarter. And can you perhaps outline the next milestones payments that are planned? And how should we think about the EBITDA contribution from this expansion in forest and what could be the step-up and the stages to this increase?

So in terms of our renewables business, which is the forest business, we did present the detailed plan in the Capital Markets Day last year, and we will also discuss this in detail our entire bioenergy expansion plans in the next Capital Markets Day on 27th of February, which you should have probably gotten a blocker for. So if it's okay for you, I'll resolve that part of it. This year, we do expect a cash out, and you've seen a bulk of the cash out already for the first 9 months. There might be a few million euros for the next year, but it's in the scope of our CapEx, what we have already announced, CapEx or M&A cash out that we've announced, so there's nothing significant planned for end of the year.

[Operator Instructions] Or next question comes from the line of Patrick Mann from Bank of America.

Yes, can you hear me?

Yes, we can hear.

So most of my questions on the quarter have been asked. So maybe more of a strategic question. Your kind of big listed peers have footprints in the U.S. and are looking at expanding the operations there and everybody seems much more bullish on the outlook for the U.S. market given the inflation reduction act and just general stronger economic growth. When you look at your footprint, do you feel like you're happy with the sort of European and Brazilian footprint and the current growth that you've got? Or would you look to expand into new markets? And would something like the U.S. interest Aperam in the future?

Okay. So U.S., okay. It is -- there is no need to discuss so much about U.S. We see that U.S. has a good tailwind. So for us, our story is very clear. We will realize the EUR 300 million increased EBITDA by 2025. We will transform the company in a sustainable company in terms of what we are investing in recycling of renewables. And we have differentiated our business model in more specialties, more added value products, and we have the full potential of Brazil, which is there. Then all opportunity will be taken into consideration. We have a strong balance sheet. We are very confident on the capacity of the company to generate cash as we have always been doing. So the one-off, it is difficult sometimes to discuss all this when you are in a quarter like Q3 with a lot of one-off, et cetera. So -- but we remain absolutely confident that whenever there will be an opportunity to continue to grow, this company will continue to grow.

Our next question comes from the line of Krishan Agarwal from Citibank.

One for Tim. I'm looking at the chart on Slide #5 on the distributor inventory and then the days are looking slightly higher than what we've seen in the COVID lows. So Tim, I mean in your experience of having seen multiple cycles, would you consider keeping the utilization rates intentionally lower in your European operations? And then we have seen some bit of a earn-out pickup into the production numbers which you have seen across the industry. Is there any kind of optimism people have started seeing behind the ramp up the production? And what is your experience on that production ramp up kind of a situation?

So thank you for the question. So if I understand your question is, are we at the end of the destocking? I will say, yes, we are at the end of the destocking even if the very low level of inventory is still showing some kind of high rotation or high number of days in terms of rotation. Remember that in this industry is typically like this. So you go down and then all of a sudden, when the activity starts, everybody is wanting to refill the inventory. And so immediately, you have kind of shortage. There is always a multiplicator effect on the market. In terms of what is happening in the market in terms of utilization rate, et cetera. I will say that this year is very, very low. As I told before, we have never seen a year like this with the apparent demand and the real demand, which is below COVID time. Now what is the -- this can seems a little bit scaring, but in reality, there is a positive effect, which is the effect or the fact that the anti-dumpingn anti-subsidy, anti-circumvention measure are starting to have effect. And so the imports are going down significantly down. And in the second half of the year, the figures show that imports will be at a very low level, also because prices are, let's say, very tight in Europe, but this leads to what -- it leads to the fact that in -- when you take out the famous one-off, the level of activity and the level of volume could come back very soon, and we can be more positive on the beginning of the year.

I understand. And then a bit of a clarification from the Sud. In the guidance, you've said that there's possibly maybe some bit more of an inventory mark-to-market and subject to market conditions. So essentially, you're saying that the full triple digit, which you had in this quarter will not necessarily reverse in Q4.

So you have to understand, Krishan, I think you're asking about the inventory valuation, right? The inventory valuation I guess, isolated Q3, looking at it, it's a little dangerous. We have always clearly stated and if you look at it compared to take 2021, 2022 and 2023, the 3 years, and we've always guided to inventory valuation gains and the losses clearly. And in the podcast also, I talk about the effect on inventories because of that, right? So from that principle if you look at it, we do have, and that is the number which Tristan mentioned earlier, inventory valuation gain from the last 2 years, which is crashing this year and reversing. Of this, there is a onetime effect of a mid-double-digit million euro which is because of the different inventories and the windfall effects which we have built in. This will reverse or this will not happen anymore because, obviously, these are because of operational effects or investment buffer additions which have been made, right. So the triple-digit inventory valuation, which you see in Q3 is a large percentage, I would say, a large double-digit percentage a reversal of the FX from the last year. And the remaining part is due to the onetime effect due to the maintenance issues or due to the investment-related inventory buildup issues in Europe, okay. So if inventory prices were to rise, yes, some of this, again, will translate into a gain. And -- but it is purely based on raw material prices. Our outlook for Q4 was based on the fact that raw material prices continue to drop, but not at the pace like they dropped in the first half of the year and in Q3. And based on this outlook, we said there might be some inventory valuation losses and nothing more. So it's all based on raw material prices, right? So we are coming from nickel, which was at [ EUR 29 ] mid-last year to [ EUR 18 ]. So for example, or ferrochrome same thing. So it's all based on raw material prices. I hope I made myself clear.

There are no further questions, so I'll hand you back to Tim to conclude today's conference.

Okay. Thank you very much for having participate to this call. I suppose that we have clarified how this quarter has been tough. It has been clearly disappointing for us because we have never been used to present this kind of results. But it is so clear how much this is linked to one-off effect, and it is so clear how -- what is our plan that I'm confident and I feel that you should be also confident on the fact that our future continue, and we will be on track on the EUR 300 million that we have promised by 2025. The projects are there. The ramp-up of the investment sometimes is a bit difficult because they have huge investment. We have invested higher of the market. And so this will give us an advantage of investing first. But of course, when you are in the middle, there is always some disruption and some complexity to manage. We will be on the market very soon. So I hope we'll meet on the market -- on the road show very soon with Thorsten with Sud. And so I will be happy to meet some of you. And I remember you that an important event will be our Capital Market Day because in this event, we will show you something which is a bit different from the usual steel industry. And so I really invite you to participate because it will be great. Thank you very much, and see you next.

Thank you for joining today's call. You may now disconnect your lines.