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. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you'll be connected to an operator. 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 for in our presentation. So give you the hands for question.
Thank you. As a reminder, if you'd like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. If you change your mind and want to withdraw your question, please press star two. Please ensure your lines are unmuted locally as you'll be prompted when to ask your question. The first question comes from a line of Tristan Gresser from BNP Paribas Exane. Please go ahead.
Yes. Hi, thank you for taking my questions. I have two. 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 two 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 in term of being stopped in Genk because we have invested in the new AOD. But we have been out of the upstream because of a special maintenance we had to perform in Châtelet, which is our second melt shop. And this second melt shop 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 earnings release, as always, at the end of a full year, we'll 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.
As to the new leadership journey, we will add, we'll 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 w ith 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 reasoning, the reasoning is not bad. The point is, we don't guide because we are always submitted to the ups and down of raw material. Can be much better if raw material goes up, if raw material goes down, it will be worse, but the reasoning is correct.
Okay. Okay, that's, that's fair. And then my, my second question is on the real and demand environment in Europe. You say 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 a kind of boom and bust cycle with, with destocking, restocking. Is that a fair assessment? And then it really seemed the key catalyst there is an improvement in real demand. So is that something you would expect during the first half of next year? Thank you.
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've seen that this year could have been a good year in term, in general term, 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, in your reasoning, your reasoning, the previous reasoning is, is okay. If, if goes up, is much better, and we, we hope that it will goes up.
Today, we have no, no clue on how 2024 will be, every quarter being different, and every quarter is as unpredictable as 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, the synergy of ELG, to go, to strengthen our competitiveness. This may be not apparent in the result of Q3 because of what we have explained, but it will appear, 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.
Okay, that's clear. Thanks a lot.
Thanks.
The next question comes from Ioannis Masvoulas of Morgan Stanley. Please go ahead.
Yes, good afternoon. Thanks for taking my questions. I'll start with the first one. On the stainless and 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 for you to have achieved a higher floor. Why don't you think that's not happening, or is this Q3 much worse than previous recessionary period in terms of realized EBITDA? Thank you.
So it's clear that Q3 is worse in terms of everything from what we have seen in the previous year, is 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 precedent 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 history of the company, this year is very bad. It is a very recessionary year in terms of volumes. The low volumes will be the lowest we see since 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, we have done.
Very clear. Thank you very much. And, the second question around the Q4 outlook, so you're guiding to lower realized prices. Can you help us reconcile that with the more higher we've seen in European spot prices since midsummer? 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, or cost base or anything else at all? Thank you.
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 three months, the typical three months. On top of when you have a one month which neutralize, 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 is a typically a time effect.
Okay. Thanks very much. I'll join the queue.
The next question comes from a line of Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yeah, thanks, and good afternoon, all. 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 summer in Europe.
And, Tim, could you maybe let us know, there's obviously another, I think, anti-dumping case on in Brazil as well. 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 a duty against China, and some countries have profited to go around the anti-dumping duties. So we are looking at this anti-circumvention, which is the first time that the Brazilian authorities here 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. Even in Europe, you know that we have three anti-circumvention filings, which are going on with three countries. 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 the anti-circumvention for hot-rolled against Turkey, then the retroactivity will be there and will be extremely efficient.
Okay, thank you. 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 very exciting market and development, and we have had some one-off effect in term of inventory. Maybe Sud can explain better this effect.
Yeah, 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 2021 and 2022 we've seen in this business, and which we have also announced you guys. So it's all, 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 and specialties till 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%-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?
What I can tell you is that the filing speaks for itself, and I cannot have any further comment, as this information I am under NDA. So there, you please refer to what is the public information.
Okay. Got you. Thank you.
Our next question comes from a line of Maxime Kogge from Oddo BHF. Please go ahead.
Yeah, good afternoon. So my first question is on the plant 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 where, when it could take place now, and what would be the impact then? Yep.
Maxime, hi. 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 the 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 plan for the Brazil hot rolling mill, just to be clear.
Okay, no, no, that's very clear. And, and second question is on your forest expansion. I think there was a big cash out this, this quarter. And can you perhaps outline the next, milestones, payments that are planned? And, and how should we think about EBITDA contribution from this expansion in forest, and what could be the, the step up, and the, the stages to, 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, yeah, on 27th of February, which you should have probably gotten a blocker for. So if it's okay for you, I'll reserve 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 nine months. There might be a few million EUR for the next year, but it's in the scope of our CapEx, what we've already announced, CapEx of M&A cash out what we've announced. So there's nothing significant planned for end of the year.
Okay. No, that's clear. Thank you.
Before we proceed to the next question, a final reminder, if you'd like to ask a question, please press star one. Our next question comes from a line of Patrick Mann from Bank of America. Please go ahead. Patrick Mann, please go ahead.
Yes. Can you hear me?
Yes, we can hear you.
Thank you. Sorry about that. So most of my questions on the quarter have been, have been asked, so maybe more of a strategic question. Your kind of big listed peers have footprints in, in the U.S. and are looking at expanding their operations there, and everybody seems much more bullish on the outlook for the U.S. market, given the Inflation Reduction Act and the, 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 future? Thanks.
Okay. So, US, okay, it is, there is no need to discuss so much about US. We see that US has a good tailwind. So, for us, our story is very clear. We have to... We will realize the EUR 300 million increase the EBITDA by 2025. We will transform the company in a sustainable company in terms of what we are investing in, recycling renewables. And we have differentiated at our business model in more specialties, more added value product, and we have the full potential 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 to sometimes to discuss about this when you are in a quarter like Q3 with a lot of one-off, et cetera. But we remain absolutely confident that whenever there will be an opportunity to continue to grow, this company will continue to grow.
Got it. Thank you very much.
Thanks.
Our next question comes from a line of Krishan Agarwal from Citi. Please go ahead.
Hi, thanks a lot for taking my question, one for Tim. I'm looking at the chart on slide number 5 on the distributor inventory, and then the days are looking slightly higher than what we've seen in the COVID lows. So but Tim, I mean, in your experience of having seen multiple cycles, would you consider keeping the utilization rates, you know, intentionally lower in your European operations? And then we have seen some bit of a not pick up into the production numbers, which we have seen across the industry. Is there any kind of optimism people have started seeing behind the ramp on 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 where your, your question is, are we at the end of the destocking? I will say yes, I, we are at the end of the destocking, even if, even if the very low level of inventory is still, is still showing some kind of high rotation or high number of day in term of rotation. Remember that in this industry is, is typically, like this, so you go down, and then all of a sudden, when the activity restarts, everybody is wanting to refill the inventory, and so immediately you have, you have a kind of sort of shortage. There is always a, a multiplicator effect on, on, 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, this can seem a little bit scary, but in reality, there is a positive effect, which is the effect or the fact that the anti-dumping, anti-subsidy, anti-circumvention measures are starting to have 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, 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.
Understand. And then a bit of a clarification from Sud. In the guidance, you've said that, there possibly may be some bit more of a, you know, inventory mark-to-market, 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, Christian, I think you're asking about the inventory valuation, right?
Yes, yes.
The inventory valuation, I guess isolated Q3, looking at it, it's a little dangerous. We've always clearly stated, and if you look at it, compared to say, 2021, 2022 and 2023, the three 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 two years, which is crashing this year and reversing. Of this, there is a one-time effect of a mid-double-digit million EUR, 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 effect or investment buffer decisions 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 effects from the last year. The remaining part is due to the one-time 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 continued to drop, but not at the pace like they dropped in the first half of the year and in Q3. Based on this outlook, we said there might be some inventory valuation losses and nothing more. It's all based on raw material prices, right? We are coming from nickel, which was at $29,000 mid-last year, to $18,000. For example, or ferrochrome, the same thing. It's all based on raw material prices. Hope I made myself clear.
Yeah, yeah. Understood. Okay, thanks a lot.
Thank you.
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 result. 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 will 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 are huge investment. We have invested ahead of the market, and so this will give us an advantage of investing for, 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 roadshow, very soon, with Torsten, with Sud.
And so, I will be happy to meet some of you. 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.