Good day and welcome to today's Aperam first quarter 2023 results call. This meeting is being recorded. At this time, I'd like to hand the call over to Tim Di Maulo, 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 one on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. Our first question comes from Patrick Mann 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 shut down 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 is some of the sort of decline in shipments year-on-year attributable to that? That's the first question. The second question, I just picked up on something Sud said in the podcast where he said, you kn for Leadership Journey® Phase 5, we should expect to see further tangible investments into improving the product mix and higher value portfolio to deliver the EUR 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 , higher value-added products to get to that EUR 300 million? Is this the same that you've, you know, 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 the shipments in Q1 for Aperam are impacted by the seasonality of Brazil, which is the low season. We have indeed some destocking, which was anticipating due to the fact that Europe had remember, ended the year with a lot of inventories and a lot of imports. With prices declining, the result has been that all the, let's say, distributors in particular have been destocking.
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 Sud will complement because you were referring to his comment. Fundamentally, there was a point on the AOD. AOD was as it is in the upstream, is not directly impacting the Q1 because of this. This is in the supply chain. The AOD in the melt shop starts well before the shipment.
The impact will be in Q2. Now, concerning Leadership Journey®, the EUR 300 million have been explained in our Capital Markets Day, and we maintain the fact that all what we have explained and we have launched and are and is already there, is part of the EUR 300 million that we are progressively capturing in the in the days. The target is 2025. The EUR 300 million will be there. As you have seen, we are maintaining the path of the Leadership Journey®. You have also seen that we have accelerated, and we will continue to accelerate because of the market tightness.
With the only, let's say, to respect the Phase 4, we have only few million still to go from the end of the year. Now, Phase 5 is in preparation, and we will be, let's say, more explicit on the Phase 5 at the end of the preparation of Phase 5. 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 Synagowitz from Deutsche Bank. Please go ahead.
Yes. Good afternoon. I've got a couple of questions. Firstly, could I maybe ask, what has been the.
The impact from the strike and then 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. I would say that the strikes have had some impact, which is not, let's say, a big issue in 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 also in Belgium, but fundamentally is the unrest in France. We will see what will be the impact in the second part of the first half. Now the AOD is something which is in line with what was our forecast, so it has been prepared.
is some, let's say, some impact, but this is in the very low level of numbers, maybe in the low 2 digits EBITDA, but even lower. We will see at the end. The AOD has been prepared and the strike is still uncertain what is the full scope. It is split 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, thanks, Tim. 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? Obviously first quarter volumes has 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 260,000-270,000 tons, which I guess would be like a 20%-25% rebound quarter-over-quarter? Do you think it's gonna be more likely less than that?
No. No, no. The, the rebound will be there, of course, because of the seasonal rebound. We are still in a market where the destocking has not being finalized, or at least the, not the restocking, because of the price pressure. 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 nickel pig iron is very low, so the Chinese prices are low. Overall, the prices in the rest of the world are putting some pressure on the intention of purchase of the distributors.
On top, there are especially in Europe, there is some slowdown 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 at the high level.
Okay. Basically what you're looking at a more muted volume rebound into the second quarter from your comments then. Okay. Maybe coming back also on pricing, you made a couple of important points, I guess. If we look at the key dynamics now, we saw first quarter volumes at lower levels, but there has still been a volume rebound of more than 20% over the fourth quarter when I guess destocking was very, very severe. 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.
Obviously there still seems to be more pressure on European prices as volumes, from the import sides are pulling back and domestic volumes are basically recovering. What is driving this significant price pressure in such an environment? Usually I guess I would understand it probably more if there was more direct volume pressure or more import pressure, but there are some seems to be less import pressure and, yet prices just kept dropping down apparently from your comments.
Here you have two effect. One effect is the trend. When there is a trend in which prices are going down, and I explained why, nickel pig iron, the situation in China, the price in China, et cetera. When there is this kind of trend, every buyer is very careful. Okay? We are just coming back from a period of destocking, which is not yet finished because also the final demand has in a certain sense been lower. We are in this, in this period, and everybody's very careful, and nobody is pushing ahead inventory. People are buying on the very short term, and they are not rebuilding inventory. They have still enough in term of number of the rotation of the inventory they need.
In this period, you have no imports because we have no imports in so many months. 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 import with the level of protection that we have in Europe. The protection 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. It's clear?
Yeah, I guess. Thanks for clarifying. I guess what I'm still surprised is that you basically say that obviously imports are not really interesting, so it seems to be more like a European market discipline issue here almost, which is dragging down prices. Do you see this in a different way?
No, no, it's not a, it's not a question of discipline or not. I think it's more the question you have a certain kind, let's say, who imports are distributors. Distributor are in this talking. If they don't need, they buy only what they need. There are still 17% of imports in Q1. 17% is something which is more closer to a normal level of imports. Remember that the normal level of imports is around 22%. This has been established by the commission by during this area. 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, 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 represent 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, we'll be... I am sure that the trend will become normal.
Okay, perfect. Thanks, thanks, Tim, for taking the question.
Our next question comes from Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions, Tim. A few from my side. The first is 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? 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?
I think it's very clear what is the subject of the strike is this reform in France, which is linked to the age of retirement. This is at a level of national strikes in a context indeed in which there is a general tension also on salary, et cetera, but it's not specific to our industry. It is a national subject which is in France. We suppose that all the industry will tell you exactly the same.
When I told you the impact is very low, double digital, one digit EBITDA, this will depends a lot on the evolution of the strikes during Q2, which is still unpredictable. Yesterday, the first of May, there was, you have seen on the newspaper how strong was the reaction on the streets. We don't know. We believe that it will come down.
Okay. Maybe just one point to clarify then. Is it, combination of, operational, disruptions to your plans as well as logistical disruptions? When you talk about the EUR high single digit million EBITDA impact, that's the sort of combination of the two factors?
Yes. 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 extraordinary time that is being 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.
Okay, perfect. That's very useful. Just a second question around the Q2 guidance for... I understand it's sort of lower EBITDA in S&S Europe. 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. These aspects should be positive relative to Q1. When we talk about lower EBITDA, is that predominantly driven by the strike effects? Yeah, if you can provide a bit of color there, that'd be very useful.
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 steel and stainless steel sector. It is a mix of different factors. There are factors which are linked to prices, as I have explained, due to 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. The second is globally, as international price are lower, there is also some effect in Brazil of the international prices.
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?
Indeed, the construction is the most apparent of the sectors. I will say that construction is bad mood, while the other sectors are slightly below average and only automotive remains in the right direction.
Okay, that's great then. 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. Even putting seasonality aside, are you also seeing some softer real activity levels? How is it different between, let's say, private and industrial consumption? Also on Brazil, if you can just touch on the mix, effect you expect into Q2. Thank you.
Indeed, in Brazil, has two effect. The first effect is the global prices. T hat this has always an effect on the price in Brazil. In some soft demand, so Brazil has gone through a very good period. Now, there is 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 the last, 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 mill, which is running at full capacity. What is the other point was about the private consumption and so what this is what you mean? Yeah, I mean.
Yes.
Please go on. 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?
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 of 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. 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? 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 EUR 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.
Hi, Tristan. Let me take this one. Yeah, the CapEx for this year, there's a couple of things you have to understand. First thing, in my podcast, and Tim clarified that when we said accelerating, 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. We typically wait for one Leadership Journey to be done to start the next Leadership Journey's projects. This time, we are not doing that. That means we continue to accelerate and move that in as soon as possible. Just to make sure the gains are there and also to meet our 2025, you know, transformation where we have promised EUR 300 million 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 cold 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 3 instead of 3 cold rolling mills to put 2 cold rolling mills in the middle of France, which can do more products. That's an investment that is happening. The second thing is for improving our mix. We have spoken about the AOD investment in Genk. There are hot rolling mill investments in Brazil and in alloys which are taking place, which will aid their transformation. These are the investments which are happening this year.
This you can see in our presentation also on slide 8, when the gains are coming and where the investments are happening. It's clearly there. Now, in terms of next year, we would typically, we do not guide for the entire year. You know that. 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. The strategic CapEx you have received in Capital Markets 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 Kogge from ODDO BHF. Please go ahead.
Yeah, good afternoon. First question is on Brazil. You pointed out the positive impact from new tariffs on Indonesian imports in the EScal. Do you see some first benefits 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 offset by this new tariffs? That's my first question.
Fundamentally, Brazil has always imported southern parts, so we have a very high market share, but the market is open to imports, even if protected by the import duties and tariffs. What we have, let's say, blocked was the dumping of Indonesia, which was possible due to the subsidy that they have received. This is mostly an effect on the lowest price that we are put in Brazil from Indonesia, which were impacting the market. Then the rest of the market will be a balanced supply between our domestic production and the imports.
Okay. The second question, yeah, is regarding share buybacks. There hasn't been any new share buyback since early Q4. 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 high cash generation?
No, we are not. The two points you have raised are not blocking us. We are maintaining our policy of shareholder returns, you can be confident that this will remain. We have also consideration, which depends on the geographical and local situation. We tend to consider that this is not the right moment. We have done a share buyback at the end of last year. Now if there will be the right moment and there are, we will be able to do this in the future.
Okay. Thank you.
Thank you. Our next question comes from Krishan Agarwal from Citi. Please go ahead.
Hi. Thanks a lot for taking my question. One for Tim. You said the energy cost is sort of unwinding, if you were to compare the energy cost to the level of 2021, I guess there is still EUR 50-100 per ton of no additional cost for the stainless steel mills. Is that something you are seeing in your P&L or have you been able to pass on these energy costs to your customers?
I know, Krishan, you wanted Tim to answer that, but let me attempt, and after that, Tim can come later if he wants to. Yes, this price delta, like you say, is always there for all European competitors. 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 same levels. 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.
What part of that is because we are not able to pass on 50 EUR energy or what part of it is because the global price situation is depressed, I'm not able to split up, Krishan, so.
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. This is not, this is not, something that the it's of a magnitude which is much higher than the simple pass-through of the energy cost.
Understand. Then my second question is on the recycling business. I mean, this business is averaging close to EUR 45 million of EBITDA run rate for the past four quarters. I mean, is that something kind of a, you know, we should take it as a structural run rate for this business? Considering that, I mean, has your payback period calculation been massively beaten on the upside with these run rates for the acquisition?
Krishan, 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 EUR 55 million per year on an average is our over the cycle EBITDA for the recycling business. They have been performing above average. We have said that it is definitely a good advantage for us to have also because of the EUR 24 million 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 EUR 30 million of equity. 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. Kudos to the team there. We are on track to deliver synergies, and that will also help us include the value of the business, and we are on track there also. We've this year we expect to have achieved two-thirds of the synergy by end of the year, so we are on track there. We have to understand when we look at the segment, there is also a component coming from our renewables, which is our forests, our BioEnergia forests in Brazil.
In this also we have announced investments, and we have intensified to improve the profitability and also the sales from this business. That business is also contributing about 20% higher than what it used to contribute in the past as part of the larger Aperam growth. These two effects combined are contributing this specific set of circumstances. Structural, we have guided to over the cycle, recycling EUR 55 million, plus you can add another EUR 15 million for renewables. That's the structural guidance overall, EUR 15 million-EUR 20 million we've guided to. Yeah, over the cycle. The past performance has been above average.
Yeah. Just to clarify, EUR 55 from recycling, EUR 15 for renewable and EUR 24 million synergies.
The EUR 24 million synergies will show up in stainless. Sorry. EUR 24 million synergies will show up in stainless, Krishan, as we have always said.
Okay.
This is the starting. Okay, just to clarify, this is the starting point, of course, we are expanding the business. This Aperam Recycling & Renewables is becoming one of the pillar of Aperam and will be very visible in our numbers. This is why we are showing more clearly since the acquisition of ELG. The expectation is that even if this quarter has been a little bit higher. 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. Quick follow-up on Sud's explanation. 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. It's even a shorter order book than the stainless business. We'll have to keep a look on that. We are looking at we have guided to normalizing compared to the record numbers we've seen this quarter.
Okay. The last final question, maybe of a housekeeping nature. The eliminations item has been a bit of a volatile in the last 3 to 4 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, Krishan. 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. Okay. Thanks a lot. That's it from my side.
Thank you. As a reminder, to ask a question at this time, please signal by pressing star one now. Our next question comes from Tom Zhang from Barclays. Please go ahead.
Hi. Afternoon, gents. Thanks for taking questions. Just one, just one final one from 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?
How the impact on EBITDA, again, sort of spreads out. Is it mostly gonna be a Q3 issue, or is it gonna be spread out over Q3 and Q4? Thanks.
Hey, Tom. If you remember last year when we were talking about it in our Capital Markets Day, we did, and announced that this is going to be a 3-month long investment. When we saw that the market demand was loosening up in the first half of the year, we split that investment into 2 parts and pulled ahead first part, which is 6 weeks. It is the same investment. It is just that it's been split up into 2 parts to take advantage of the market situation. Just so we are clear on that one, that part. On, if you know earnings impact, there's two parts.
One is the increased fixed cost part, which is 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. If prices go up or down, that will have an impact. Is that clear?
Yes, sorry. Thank you. Just to clarify, you've obviously split it into the mill works totally fine, you know, 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?
The part is basically, I'll start, and then Tim can add on, is that we are doing this investment for, to improve our mix, to produce the latest mix possible. The new investment consists of two things. One is creating the basic new unit, but also now adding, you know, the decarb related investments where we take in cogeneration, we take in energy recovery and everything. This is the split, and that's what is happening. Tim, you wanna add something?
Yeah, indeed. This standstill is a bit longer is because we use this opportunity also to increase the cogeneration and the recovery of energy from the melt shop. This means that on top of the decarbonization, we have also savings in energy. All this, of course it takes a little bit longer than simply installing a new AOD.
Understood. Thank you very much.
Thank you. It seems there are no further questions in the queue. With this, I'd like to hand the call back over to Tim Di Maulo, CEO, for any additional or closing remarks. Over to you, sir.
Okay. Thank you. Thank you very much for the for all your question and for this discussion. You have seen that the situation of the environment is has been tougher. Tougher than has been in the previous, let's say, years or last two years. Also you can see that the results are there and are fully in line with our, let's say, step to the EUR 300 million. We are in, 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 have gone down.
You have seen that volumes are at a low level, at some historically low level. That cost also, external cost has been very high in term of, energy, gas, et cetera. All in all, we are continuing to have a good cash generation. We are delivering in line with our business plan. This despite tougher condition than we are expecting in the business plan. This comforts us a lot, that we are in the good way. 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 shareholder in line with our financial policy, but we have the flexibility, and we use this flexibility. 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.