Hello, welcome to the Aperam Q2 Results conference call. My name is Kevin, I will be your coordinator for today's event. Please note this conference is being recorded, for the duration of the call, your lines will be on listen-only. You will have the opportunity to ask questions at the end of the call, this can be done by pressing star one on your telephone keypad to register your question. I would now like to hand the call over to Timoteo Di Maulo , CEO. Please go ahead.
Hello, good afternoon, welcome to the Aperam second quarter Q&A. I'm here with Sud Sivaji, we will answer to your question. Just, I assume that you all listened to our management podcast for the quarter, where we detail our views on the current market environment and on the outlook. Before we start with question, let me say that the situation in Europe is difficult and warrants a comparison with 2020.
Both volumes and prices are at absolute trough levels. Still, we generate cash in our differentiated value chain with recycling and with alloys, allow us to post a solid result. We are cost competitive, Europe is a bit positive as a result of the leadership journey gains. Now, I hand back to you, to the operator and to you for the Q&A.
Thank you. As a reminder, if you do have a question, it is star one. Our first question today comes from Tristan Gresser of BNP Paribas Exane.
Yes, hi, thank you for taking my questions. I have two. The first one is, you just mentioned it, you made reference to the COVID crisis. As such, given the lower EBITDA guidance to Q3, I wonder if we could see the COVID levels we've seen at a group level as a support. Do you think the current market weakness, notably in Europe, which is of course different now, could actually turn into something worse than what we saw in 2020? That's my first question.
Thank you very much. I think that is a combination of many factors, but indeed, the comparison is that it is even a little bit tougher due to prices. Prices were at a certain level in 2020, and today they are even lower. We have some one-off elements that we will be explaining maybe later by Sud that also wait. On the contrary, we are compensating for all these headwinds with the progress that we have done compared to 2020. All in all, there are positive and negative, and indeed, the situation is a comparable, very low trough of a cycle.
All right. That's clear. My second question, in your prepared remarks as well, you mentioned a non-performing industry structure in Europe. Could you please elaborate a little bit on that? I mean, we've seen balance sheet improve amongst market participants. We've seen better trade protection. What's really missing on a structural basis, temporary demand weakness aside, in Europe, and do you believe there's still too much upstream and rolling capacity in Europe? Thank you.
No, it's a question of combined effect of what has happened in 2022, with the huge imports and the destocking that has started in Q4 last year, which has not be sold so soon because of the factor of the decreasing demand and decreasing prices. You know that when prices are decreasing, and strongly decreasing, there is absolutely no appetite from anybody to restock. People have continued to look at the next prices as going down. These prices, as you know, are also led by the global, let's say, price level, which are led by China. Prices going down, nobody's restocking.
You create a situation in which all the demand is on very short term and no need to restock, so it is more and more, let's say, subdued demand. We think that the segments also are, except for automotive, are below normal in all our all the segments which are our consumer. In particular, we see that construction, due to the declining of the property prices and the fact that the cost of money, let makes difficult to have money to invest in new property. Construction is very, very poor.
Consumer goods also have reduced a lot. We see that food, health, and catering industry and the other segments are still below average. If I resume, low demand, which is a real demand, no appetite for restocking, we in a trend of decreasing prices. We are coming from a, let's say, a period in which inventory were high. Inventory are low, but the possibility to supply on short term is very easy.
All right.
If your question is there overcapacity in Europe? Is no. No.
Okay.
Europe is well balanced on that.
All right. That's clear. Thank you.
Thanks.
Our next question comes from Bastian Synagowitz of Deutsche Bank.
Yes, good afternoon. Yeah, thanks for the for answering the first question. Seems like what you described that, I think a lot of these sectors, you would see them as temporary. Maybe just a quick follow-up, or just also on the comments you made on inventory in the I think in the podcast.
I think clearly the service center stocks are quite low already, but I guess you mentioned that you still see higher inventories among the in the client's industry. Do you have a view for how long that takes to basically reverse and normalize the inventory level, which you see among the actual processors rather than on the distributor side? That is my first question.
Sorry if I was a little bit unclear. I've not said that inventory are high. I say that inventory are low. Today, when you see the inventory are definitively below normal, demand also is lower. In term of rotation, we can say that this is normal. The effect that we see is that when prices are going down, there is nobody who try to restock, to go up. This create a kind of demand on very short term, and when there is not enough consumption, the demand, a very short term, can be satisfied, you have this effect for which the apparent demand is lower.
Okay.
If I may add, Bastian, sorry, just one second to what Tim said. Inventory building also is a bit reticent because, as you've noted, the carrying costs of inventory have gone up compared to the last six years, where interest rates have been traditionally super low, close to zero. Today, if you are a smaller distributor, your carrying costs have gone high, right? The macro environment, what Tim has described, supplemented with the financial situation where interest rates and costs of borrowing are quite high, has an effect.
Yeah. I think, which is, however, arguably, I think that's obviously temporary, as the industry has to rebalance maybe to that new situation. I guess, that, obviously means that maybe the potential for restocking is slightly smaller, but it also means that there's gonna be less, I would say, overhang in the system, which is gonna rebuild on the way up, which is probably healthy. Okay.
Will be. It will, at a certain moment, it will be.
Yep. Okay. Just I want to get back on your guidance, where I think you gave a pretty sharp guidance for all divisions except for stainless. I just wanted to walk through the building blocks here. Volumes will be up, from my understanding, I guess Brazil would usually be better from a seasonal pattern, costs are down in Europe, you're obviously taking the hit on the price side against that.
Is it fair to assume that the earnings drop, which we should see in the stainless steel division, should be maybe not as much and maybe possibly smaller than the drop we've seen in the second quarter versus the first one? Is that fair to say? Was there any further quantification you could help us with for the division?
See, the Bastian, let me take that call, right? The one thing you do have to keep in mind is the fact that, end of the day, there's three factors in play, right? You've mentioned, actually the regional split, but let me talk about the three factors, if it's okay, right? First one is the volume factor, which you spoke about.
Now, the volume effect is primarily, I would characterize it, a slight catch-up from the really abysmally low Q2. Okay? There is no change in seasonality, it's just a marginal catch-up in terms of volumes. Okay? That is one thing. The volume effect plays only moderately into the picture because of the price effect that Tim has spoken about. That is the second part. Okay?
The third and the last part, we tried to be quite clear this time about the one-time effects we have in our business, right, for the European part for this whole year. Those 3 factors actually would play into role for Q3. If you're asking me, would the drop be as similar? I would suggest the drop in 1 case was led by volumes, but in the 2 case, it is going to be led similarly by price and one-time effects. Yeah.
Mm-hmm. Okay.
Just to give you a clear split, Bastian, because Tim referred to that in his answer to Tristan also. We had given about EUR 150 million one-time effect is what we expect for the year.
Mm-hmm.
Right? Let me split it into the three parts, which I mentioned in my part during the podcast. The first part is that of inventory valuation, which is the traditional raw material price-led valuation. Because of the significant drop, as you've seen, in the main raw material prices, nickel is one third the price less during the year, right?
That is something which is significant, and as a result, that is about one third of this EUR 150 million is the regular inventory valuation across the supply chain, driven primarily by raw material prices. Another one third is because due to investments, we are carrying In inventory, higher double-digit tonnage as inventory from quarter to quarter because of our investments.
In a market where price is dropping, there we do have a one-time hit, which should not repeat on a quarter-to-quarter basis. It has nothing to do with operational performance, it is purely to do with the inventory carrying for future quarters. This should not carry over to next year. That's a one-third effect. The remaining third is basically, as the entire stainless industry, in a period of high energy prices, we did have some decisions on energy risk management and hedging, that tunes to the rest third one-time effect on our European business for this year. That's the one-time effects. You do have to keep in mind that the energy effects were positive last year, to the same tune, but it got lost in the EUR 1 billion EBITDA.
this time, obviously, spot prices have dropped. On a mark-to-market basis, if you look at it, there is a one-third hit. Those are the one-time factors. I hope I've given you enough color to model in your Q3.
Okay, no, that has been helpful. Thanks, Sud. I have another one, probably again for you, actually on working capital. Because I guess before you argued that the higher working capital, which you've built over the last two years, was literally only driven by value. If we look at nickel prices, they've come down 30% versus the end of 2022, and they're back to 2021 levels. We look at stainless prices, they're down 30% as well. This end of 2022, and even down 50% versus the levels at the end of 2021.
Now, of course, I see why, I guess the AOD investment obviously causes a deferral here in the working capital cycle, and so you're not maybe seeing as much working capital yet. You're guiding for net debt to be broadly flat. Why are you're not seeing a more pronounced release from working capital? Of course, there have been impairments, I get that, but I would have thought there must be a stronger potential for you to release working capital. Is there maybe another spillover into the new business year because of the AOD?
Hi, Tristan. Yeah, no, that's a fair question, right? The point is that the cash release is going to come in Q4, Tristan, just because of the fact that end of the day, it's a technical effect. You build inventories, and in Q3, when the investments are being done, you reduce the inventories. What happens technically is basically, you reduce payables first, and you take first a hit on your cash, and then you actually release the cash as that moves through the system. It's purely technical. Does that clear?
Yeah, I guess, yeah, I think my point, though, is why should we not expect an even stronger working capital release? I guess when you're guiding, you know, for net debt to be, say, broadly flat, I guess with somewhat reasonable assumptions here, you can only factor in a very, very minor working capital release versus the levels you had built until end of 2022. If we look at stainless prices, if you look at nickel prices, I mean, they've come all down much more significantly, not just versus end of 2022, even versus end of 2021. I guess my point is, why not more?
No, that's a correct, Bastian. Bastian, because I believe you have just the price effect in mind, but we had guided to two different parameters. One is the fact that we said we will have the Genk AOD during this year, once in Q2 and once in Q3 investments, and because of that, we'll carry inventory, right? The second thing, we have also said that there is a investment shutdown in Brazil for the Q1 of next year.
Typically, we choose to do the investment shutdowns in Q1 in Brazil because that is the weakest quarter, so you don't lose a lot of volumes. As a result, you will see a technical effect because we carry some cash end of the year before we release it end of Q1 next year. That is the delta you're missing, I guess.
Okay.
It's primarily two investments, Tristan. The pricing-led releases are happening as we speak. Yeah.
Okay, okay.
Does that clear?
Would you describe that guidance of keeping net debt broadly flat year-over-year, would you describe that as conservative? Conservative, because, again, I think the magnitude from potential value here should be, I think, much more significant.
No, I wouldn't consider it as conservative, because end of the day, I think, we are translating the fact that we did have a cash release last year already as nickel prices and scrap prices got down. What happened is the last 15 days of the year, nickel prices went up to EUR 30,000, right? Raw material prices don't get determined because of 15-day price increase in nickel value for last 15 days of 2022, right? Besides that, on a raw material basis, yes, raw material prices have come down. But these raw material prices have not come down compared to beginning of 2021, where we were at EUR 17,000 level.
If you look at it, we are broadly where we started out in, I would say, March of 2022, before the nickel crisis.
Okay. Okay, all right.
So-
Thanks for the color.
As a reminder, if you do have a question, please signal by pressing star one on your telephone keypad. The next question today comes from Krishan Agarwal of Citibank.
hi, thanks a lot for taking my question. Quick clarification from Sud on this EUR 150 million, one-time effect. Did I get it correct that EUR 150 million one-time effect is for the full year? If that's the case, would you be able to help us, as in how much of that is already booked in first half?
see, the part of this one, EUR 150 million is also based on valuation effects, right? Expecting how the prices are going to develop. At current projection, we are making it on one third first half and two thirds second half. That's the reason for our relatively conservative guidance for Q3.
Understand. The second question is more industry-wide, maybe for Tim. I mean, you mentioned that Europe is now positive or profit-making, even if the prices are lower than what they were in 2020. Obviously, cost focus and the leadership journey gains have played a bigger role in that. If you look six months or 12 months down the line when now volumes are recovering, do you see a scenario where price recovery is more shallower as compared to what price level we have seen in the past, now, five to 10 years? There is a case that normalized margins are lower for the industry.
No, I don't think so. I think it's a temporary situation. We have a kind of acceleration of the cycle. You have seen that in 2021, 2022 have been very extreme in the upper side, and now they are extreme in the downside. We are far from the normal of the market, and we are perfectly clear on the fact that the protection in Europe is much stronger, and protection is a main point for the volumes in Europe. Now, we have, we are in a situation in which the demand, the real demand is lower.
We expect the real demand to recover, especially, as I said before, there is a, in this moment, a kind of mindset of everybody to be shorter and shorter and not take any risk due to the fact that prices are going down. Okay? It is a context which is a bit extreme. Is it clear what I'm saying?
Yeah, I mean, I get your point, but I also get that, okay, there is a sense of uncertainty as in how, you know, stronger or pronounced or shallower the recovery is going to be. Yeah, I think that's it.
Okay.
Thanks a lot.
Thanks, Arun.
As a final reminder, it is star one to ask a question. Our next question comes from Tristan Gresser of BNP Paribas.
Yes. Hi, just to follow up on the short-term action plan. I know you're still finalizing it, but what are the measures you're looking into, and how they're different from maybe the past down cycle? If you could tell us if they're in temporary in nature or a bit more structural? If maybe if you can tell us also about the scale of it that is incorporated in the guidance, and is it more Q2, Q3 or Q4 or both? Any color there would be appreciated. Thank you.
Fundamentally, we have our leadership journey, which is already accounting for EUR 150 million at the end of the second quarter, and we will do more in the next quarter. On top, we have temporary measures, some flexibilization of the work and temporary, let's say, solution that we did with our contracts that we have. We have some structural. Let's say, this will be more explicit in our release of Q3, but there is a mix of two, knowing that leadership journey and what will be coming on top of the 150 that we have promised is structural by nature.
Okay, the temporary measures should already have a certain impact into Q3. Those are, I think, you already implementing.
Yes, we'll have an impact-
Yeah
on Q3 and Q4, in the two quarter to come.
All right. That's pretty clear. Maybe one last question on the market environment. I mean, we've seen Asian stainless steel prices weakening of late. The ARP can maybe open a little bit more. I know the key concern is demand in Europe at the moment, but do you believe that we should not be concerned at all by this, let's say, weakness in Asia, and you're not concerned for around the imports flow into the second half?
The, as before, the protection we have in Europe is now much stronger than we have had in the previous, let's say, crisis for demand, which was 2019. Much stronger. Today, we don't see this as the main driver. The problem is the volumes in Europe are extremely low. You see that the imports are not so high in the first six months. What is clear is that the general trend of price in the world has an impact, because this is the leading price is always China.
When this price is at a level which is so low as it has been, this has, as a consideration, is translated in the European market, in Brazilian market, as an effect of the duty plus the internalization cost, et cetera, on the price. This is logic. We see that China is at a sustainable level of price, because at this price, all the operators in China, we are sure are negative, and some announcements are confirming that. It is a question of when China will rebound. Let's hope it will be very soon.
Yes, thank you.
Our next question comes from Maxime Kogge of Oddo BHF.
Yeah, good morning. Sorry, I joined a bit late. I don't know if this question has already been asked. The first one is on alloys, where you had a very decent performance this quarter, and I was wondering whether you are still on track to achieve your guidance of increased EBITDA this year versus last year for the division, given that, I mean, year to date, you're still tracking below last year. Whether you were also online to achieve double EBITDA by 2025. That would be my first question. The second question is about the marketplace in Europe. We have four players right now. There's a lot of overcapacity apparently.
Do you see this situation with four large players as viable in the long term, or would you like to see some consolidation?
First, it is a clear yes, we are in line with our plan, and we are very satisfied of the progress of the alloys. There are some few inventory effects in their results, but they are, they are fully on track, and we are sure that by 2025, they will have doubled their EBITDA. Knowing that all the projects are proceeding very well, and we are, as I repeat, very well on track. On the second, overcapacity in Europe, no, I disagree. There is no overcapacity in Europe. There is a temporary lack of demand. There is an industry which is facing destocking phase, which is facing a decrease of the demand.
On top, I said before, we are in a context in which when prices are decreasing, nobody calls for new order or supply, and they wait for the very short term, being sure that with a lower utilization rate, there is the possibility to have short-term supplies. If you are referring to the fact that there is a lower utilization rate in Europe today, yes, because demand is lower. At a normalized level of demand, a normalized level of the imports, which is important to be said, imports are not high and will not be high because the protection is much higher. The capacity in Europe are well under control. There is no overcapacity.
Okay, that's clear. Thank you.
As there are no further questions at this time, I'd like to hand the call back to Timoteo Di Maulo, CEO, for any additional or closing remarks.
Okay, thank you very much. As usual, very interesting question. The times are challenging, you have seen, for the moment, we have successfully managed the situation, and similarly to this, even in other moment before this quarter. We are facing a tough Q3, that should also mark the trough. The first shot are visible already.
We have an experienced leadership team, and we are aware of what is expected of us, and we know that cost improvements and further value chain amendments are part of the solution. We will therefore realize the EUR 300 million EBITDA improvement to 2025, and further differentiate our supply chain. I wish you all a nice and relaxing holiday, and hope to see you in September when we are back on the road again. Thank you very much, and have a nice day.
That does conclude today's Aperam Q2 results conference call. We thank you all for participating, and you may now disconnect.