Aperam S.A. (APAM) Earnings Call Transcript

Just on the new trade case in Europe. Given the retroactive application we've seen since last summer, when this is announced, I don't believe there will be much of an impact on the marketplace and especially given that volumes are pretty low. But given there has been some exclusion to those duties, do you believe those exporters that could have been out of the market could now come back, and also if you could maybe provide us a sense if you have it, of those exclusion, how big are they, let's say, those exported that got this exclusion, how much do they represent of the supply? Do you get a sense or do you think it's not going to be that much of a factor?

So thanks for the question. First of all, on retroactivity. Yes, there is retroactivity, but you have noticed that as everybody knew about the retroactivity, everybody has prevented -- well prevented from importing from the countries which were considered in the circumvention. So I have not the customs detail, but I don't expect that this will generate a lot of attractivity duties to be paid by the importance because everybody knew very well what could have happened as it has happened already last year in the case of the anti-circumvention against Turkey for our product. Concerning what is the defense of this anti-circumvention, we think it is a good measure because also introduce something which is extremely important for the future, which is the concept of melt and pour. So yes, there are some exclusions. But these exclusions have been with the concept of justifying and giving the origin of the material in the concept of melt and pour. And this will open even for those who have been excluded the possibility in the future to be drafted into the anti-circumvention, and concerning how much of the, let's say, imports have been, let's say, considering the anti-circumvention, I would say that the majority -- the large majority of those who have increased, and this was the sense. The sense of this measure is not to, let's say, close the European market, but to assess all the unfair behaviors, which have been, let's say there during the period of investigation. So we believe that the large majority will be assessed.

We will take our next question from Bastian Synagowitz, Deutsche Bank.

I'll start off with a couple of follow-ups and maybe housekeeping ones as well. And the first one is actually on Brazil. Tim, you mentioned this EUR 10 million cost item in relation to the, I think, the problems in the hot rolling mill. Was this just a pure cost headwind? Or did this include the all-in effects from lower shipments as well?

This includes mostly all effect.

Got you. Okay. And then maybe one for Sud on the cash flow bridge, which I think you're providing on Page #8. There is this EUR 31 million other item. What is in there, please? It's a pretty large item, particularly now that your overall cash generation and earnings level is obviously pretty low.

You're talking about the cash flow bridge, right? Look, in the beginning of the year, there's 2 effects. One typically the first quarter, there are like profit sharing agreements, bonuses and those things, right? That's part of it, that's a onetime effect, which happens. And the other part is that you remember that last year, as we finished and ramped on all the investments, we cut net working capital drastically in the last quarter, right? So if you're comparing Aperam to peers, and that's something which I always say, please be careful that you compare apples to apples, which is that we cut net working capital ahead of the cycle, ahead of the peers, which means that our net working capital cut happened last quarter already. Now when we build up this quarter and we buy raw materials, there is a VAT imbalance and that contributes to a large part of that. And this will compensate across the year as we sell more and the inventory draws down. Is that clear?

So a quick follow-up there, please. So does it mean that other item, which is separate working capital does actually include certain working capital component? Did I understand that correctly?

No, no, it's basically when you buy raw materials or something or when you purchase supplies, when you purchase consumables, you pay back charges. And in the first quarter, when you actually go ahead and do advance purchase or build inventory, those that charges get built. And after that, when we actually go into the other quarters and when we receive the VAT payments from our customers, they get canceled out to cash. So that's the profile typically -- if you go back and see in the past years, it's always been there when we go out and purchase more in terms of supplies, working capital, the higher VAT payments and then it gets balanced towards the rest of -- as production goes down or as net working capital gets cut.

Okay. Got you. That is clear. And then just one question here. Like, I mean, is Europe actually making money? Is Europe back to breakeven as you're making money here?

Yes. So in our assumption, I can give you a clear number, Q1 Europe's breakeven. It's even slightly positive, okay? And that is without the inventory valuation effect. If you add the inventory valuation effect, it's even double-digit positive. And in Q2, our forecast includes a very positive Europe, which is, for us, almost a normal EBITDA number considering the crisis situation we operate in. I'll just remind you about the margins we operate in, if you take base price. And you do remember that we are at historical lows compared to even COVID quarters in Europe, right? In COVID quarters, we were at 700 this base price margins. And today, we are even lower than that. Operating at that level of profitability, we are still -- we are still at what we would consider for such a crisis level as normal profitability. So I'm happy that our cost control measures also temporary until the restructuring happens have started working in Europe.

Okay. Okay. But maybe coming back to the situation, and I guess, [Indiscernible], I think I asked also a similar one in the last call, but guess, like obviously, the situation is extremely tough. I guess we all understand that obviously volumes have improved at least seasonally. There has been clearly at least a bit of tension on the market from the current strike situation. So conceptually, all the 4 players in the market is obviously not a high number. We've gone temporarily to maybe just 2. We are now back to maybe 3 players in the market. I guess, as you say, like imports at the moment are not really your enemy. So there is obviously the demand side, but I guess who knows really when that's coming back. I guess the question is, do you really feel that the European price discipline is really broken. And do you think we even need another consolidation step or even closures to get this repaired?

So it is difficult to say because there are a lot of elements that are in this kind of equation. There is also the fact that globally in the world, prices, et cetera -- in United States, prices are very low globally, okay? And so this induces a factor that you have always a balance between what is the global price versus the European price, et cetera. And what the people doesn't assess very well is what is the real tension of supply in Europe in reality, the few weeks of strikes has been partially mitigated by some inventory that have been probably used by the competitors to smooth down the effect of the strike and on the fact that the real demand is not there. And there is no tension of scale in the inventory. So this is not giving any boost to a price increase. So the question of discipline is not a question of discipline is that few of the elements, which should give a sense to a price increase are not yet there.

Okay. And so basically, to turn this around, you don't think it actually needs closures or another consolidation step. Obviously, the question is whether the EC would even allow that to happen. Obviously, it would be difficult with the history, but you don't think that, that is needed.

I think that the most effective will be some recovery in the consumption and the confidence of the customer because also our customers are in a very bearish mode. So they are not allowing any price increase also because they are not allowed to increase prices.

Okay, understood. And then maybe turning this over to Brazil. I guess if Europe is making money. It also shows that Brazil at the moment is obviously not making money obviously in a much, I would say, more beneficial situation there, some monopolists also being at least partially protected by duties, even though the government obviously has just rejected your request to lift the import protection. But I guess if they are saying we're not protecting you more, I guess it does mean that you basically have one lever left to basically address it, which is cost. So do you think you have an actual cost issue there in Brazil in the sense that, well, you've been protected by import duties, you've been doing okay, but now the pressure has been rising too much. So you really have to go much more into your cost structure if the government is not working for you in a more forceful way.

Tim, you talk about it. Go ahead, and then I'll complete about the cost structures.

No, the point -- first of all, I will say that what has happened in reality is nothing in the sense that the measure that we are in place since a few years are remaining in place. So we have a duty to enter in Brazil. We have a situation in Brazil across [competitively] in Brazil, and Sud will take more on the cost, and that is not changing. Brazil has gone through some destocking, but the real consumption is very good. The problem of Brazil is that when international prices are low as the mechanism of the price in Brazil is linked to the international price, plus the duty internalization and the premium to be in Brazil. The price level is lower, and you can see that in any curve that represent Brazil, Europe, et cetera. Brazil is still a premium, but with a price level, which is much lower than it was in the past.

Yes. Thanks, Tim. So Bastian, so important to understand that there is 2 effects, right? One is that we've talked about Brazil and the effect of seasonality and this hot strip mill effect, right? We have to be very clear that international prices as Tim has explained, are working at very low margins. And in these margins, basically, for Q2 outlook, Q2 is the first normal quarter of Brazil in the year, you understand. Brazil will probably be a very low double-digit EBITDA because of the hot strip mill issue, okay? We are talking about probably the lowest double-digit EBITDA effect possible, which is like EUR 9 million, EUR 10 million effect possible, okay? This is purely a temporary effect because of the hot strip mill. The cost competitiveness of Brazil has not fundamentally changed, right? End of the day, our 4 product portfolio ensures that we operate with the highest cost competitiveness, and in the Capital Markets Day, I've shown you a chart there, landed in Brazil. Brazil is -- thanks to also our own charcoal, which we use in our blast furnaces, the most cost competitive product to sell in Brazil, right? And that situation has not changed. And I showed you that chart about a month ago, and nothing has changed. So it is not a cost situation. It's purely seasonality in Q1. And in Q2, that EUR 9 million to EUR 10 million effect resulting from hot strip mill ramp-up. That's it.

Got you. Okay. So you don't seem to be that very -- because, again, that was my point. I think prices in Brazil after let a premium to international, and I get international prices are low, but yet it seems like in Q1, at least you've not been able to make money despite, I guess, seasonality being maybe weaker, but demand, as you say, is still apparently more -- much more normal and decent relative to most other markets. So does this mean that we could and should, I guess, see a relatively powerful snapback in Brazil and the operational and financial performance going into the third quarter, I'm clearly not asking you to give the third quarter guidance. I think it's just too early. But at least conceptually, we've got these items. We've got the EUR 10 million cost item. I think seasonally, usually, Brazil also strengthens further into the third quarter. I guess with all of those pieces you're giving us here, at least that sequential step-up would be my guess. But yes, at least maybe curious to hear what you have to say here initially.

Bastian, I would like to clear up absolutely one probably misunderstanding we seem to have, which is that in Q1, I said that earlier to the question that Europe broke even, right? And then I said Europe broke even that basically shows that Europe has made a progress from Q4 of last year and Q3 of last year, where they were very strongly negative. However, it also clearly indicates that almost all the results you see for the stainless and electrical segment, which came from Brazil, which basically means for Q4 with low shipments and low seasonality, I would go back and revise if possible, your statement about Brazil, we did not make money or we hardly made money in the Q4. We are used to '21 and '22 numbers, but I just want to remind you to take you to Brazil before '21 and '22, there, again, without BioEnergia, Brazil was making close to EUR 80 million to EUR 100 million over a year. Split that into 4, it's EUR 25 million. Adjust for seasonality for Q4 and Q1, you will understand where the Q1 and Q4 results are. So I would please reconsider the fact that you're looking at Q1, where Brazil is not making money. Our guidance towards hot strip mill having an effect is purely a Q2 effect. And in Q3, this onetime effect will be removed. And we are confident on that. Is that clear?

Yes, that is clear. Again, I mean, I basically took your EUR 6 million in Q1, and you said it's breakeven-even in Europe, I guess it doesn't leave that much for Brazil, and that was my conclusion basically. But yes, I understand you.

We will take our next question from Zenande Meyiwa, UBS.

Just at a high level, going back to Europe. I recall you mentioned that there's a competitor of yours, a smaller competitor without naming names, that's aggressively buying market share in the form of increased volumes and lower prices and flooding the market. Is that still the case coming into Q2? Or has there been a pullback given the depressed prices? Or is it just purely a macro and lack of demand that's limiting the pricing increases.

No I think there is no evidence of effect of any -- let's say, producer, which is going crazy in this period. So we have had the strikes and then the strikes insulated some of the competitor might have lost volumes in a low market, but not -- there is no real fight. I think that the majority of the actor of the market are fully understanding how difficult is the situation and that the needs of, let's say, taking measure to reduce cost and to be reasonable in what is the situation even for price. Prices have not decreased since some time. And on the contract price, I have had some slight improvement, but the question is that this is a slight improvement, I said before, need also a comeback of the demand and some different modes of our customers.

We will take the next question from Tom Zhang, Barclays.

Just one clarification ensued. Earlier, you mentioned Q1 Europe Stainless. You said it was small positive EBITDA without the inventory valuation effect and then double-digit positive, including the valuation effect. Did I hear that correctly?

It was the other way around. So basically, if you include inventory valuation effect, it's a negative effect. So -- so yes. So just to, again, set that discussion, right? If you look Stainless in Europe, Electrical -- Stainless and Electrical result for Q1, the earlier exchange with Bastian shows that it was EUR 6 million. And when I said that Stainless Europe turned positive breakeven, most of that 6 million came from Brazil. Now let's take a year, a low year earlier for Brazil, which was about EUR 70 million, EUR 75 million like 2019. which is comparable to now. And if that year gets split up for seasonality, there's not a lot of delta to that EUR 6 million you will find in Q1. So you can use that to build up for Q2 when the seasonality is over and the EUR 10 million negative effect and then again reversed that EUR 10 million negative effect in Q3. Does that make sense?

Correct. No, it makes sense. Sorry, I must have just misheard because from the earlier comment, it sounded like the inventory effect was positive, which would have been with -- all clear.

As a reminder, -- we'll take our next question from Maxime Kogge, ODDO BHF.

Just last question on my side, do you know why stainless steel was left outside the new quota and import duty system in Brazil? Is it because you're the only national player there that would be a risk that you benefit too much from this situation?

No, no, no. The quota is fair, but the point is that many products were excluded. The quota -- the system of quota in Brazil has been put in this way. So they have about 30% more of the imports that have been in the best years of Brazil. So in this case, the quota is not working at all. It's not efficient tool. So it's like if you can allow -- it is like [Indiscernible] in Europe. The [Indiscernible] in Europe, established at the beginning that you have on an average of 3 years, establish the market share. And whatever it is on top of market share, it is penalized by 25% and below 83. In Brazil, they have taken a much larger approach saying whatever it is above the market share plus 30% is also the quota. So in this case, it's not efficient. So it's not something that is of interest. Now what we count much more on Brazil is on the normal [credit defense] measures. And here, we are actively working, and I hope we'll have some good news very soon. Okay. I think that there are no more questions. So thank you for having attending at this call today. There was a lot of discussion about Europe, about the one-offs, the strike, the disruption, what is the situation, et cetera. I will [Indiscernible] key message is very simple. The market remains extremely challenging in Europe for both volume and price. And even in this very tough moment, I will say that we see that our efforts on the cost control are paying. We see that Europe had a turnaround. So from breakeven to Q1 to positive in Q2, nearly normal. So this is a very positive result of our efforts in cost. Our investments are at the final step of being fully operational. This will boost our results for the times to come. Better consumer spending, lower interest rate and lower energy costs eventually will lead to a normalized market. And at that moment, we will see all the result of the efforts we have done with our Leadership Journey. Today, it is still difficult. So just we have not so much spent time on the fact that Aperam combines the best-in-class ESG performance and the sustainability growth in 2025 -- versus 2025. So this is also to keep in mind because our target remains the same. I wish you a nice weekend, I hope to see you on the road soon. Bye-bye.

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