APMSF - Aperam S.A. (APEMY) Q1 2023 Earnings Call Transcript
2023-05-07 09:12:10 ET
Aperam S.A. (APEMY)
Q1 2023 Earnings Conference Call
May 3, 2023 8:00 AM
Company Participants
Tim Maulo - Chief Executive Officer
Sudhakar Sivaji - Chief Financial Officer
Conference Call Participants
Patrick Mann - Bank of America
Bastian Synagowitz - Deutsche Bank
Tristan Gresser - Exane BNP Paribas
Maxime Kogge - Oddo BHF
Krishan Agarwal - Citibank
Tom Zhang - Barclays
Presentation
Operator
Good day. And welcome 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.
Tim Maulo
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 investors 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.
Question-and-Answer Session
Operator
[Operator Instructions]
The first question comes from Patrick Mann from Bank of America.
Patrick Mann
Thanks very much for the opportunity. Good day. I just wanted to ask the shipment volumes are obviously very weak in the first quarter. The [inaudible] 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 as some of the sort of decline in shipments year-over-year attributable to that? That's the first question.
And then the second question I just picked up on something Sudh said in the podcast where he said, 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. Is 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? Or is this the same that you've, sort of we're expecting from capital markets there last year, for example. Thanks very much.
Tim Maulo
Okay. Thank you for the question. So, first of all, I would like to remember that shipments in Q1 for Aperam impacted by the seasonality of Brazil, which is the low season then we have indeed, the destocking which was anticipating due to the fact that Europe had the, remember ended the year with a lot of inventories and a lot of imports. And with the prices declining, the result has been that all the, let's say the distributors, in particular have been destocking. And this destocking leads to a level of inputs that we currently assess as normal, but we still have some, let's say, the rotation which is not 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 Sudh will complement because you were referring to his comment, but fundamentally, there was a sorry, there wasn't a point on DoD was as it is in the upstream is not directly impacting the Q1 because of this is in the supply chain, the DoD in the metal shop stuff will be before the shipments. So the impact will be in Q2.
Now concerning leadership journey, the EUR 300 million has been explained in our Capital Market Day. And we maintain the fact that the old word we have explained and we have launched another in these already, there is part of the EUR 300 million that we are progressively capturing in today's so the target is 2025, the EUR 300 million will be there. As you have seen we are maintaining the path of the leadership journey. And you have also seen that we have accelerated and we will continue to accelerate because of the market tightness with only let's say with respect to the Phase IV, 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 again, we will do it.
Operator
Our next question comes from Bastian Synagowitz from Deutsche Bank.
Bastian Synagowitz
Yes. Good afternoon. I've got a couple of questions. Firstly, could I maybe ask, what has been 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.
Tim Maulo
Okay, so I would say that strikes had some impact, which is not, it's a big issue in the Q1. We don't know how the situation will evolve in France. So I can, because strike is mostly in France. So we have had a couple of days old in Belgium, but fundamentally is the unrest in France. So we will see what will be the impact in the second part of the first half. Now, the DOD is something which is in line with hat was our forecast so we have been prepared. All-in-all, there is some, let's say some impact, but this is in the very low level of numbers maybe in the low two digit EBITDA but even lower, so it is, we will see at the end, but DOD has been prepared and the strike is still uncertain. What is the full scope, but 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.
Bastian Synagowitz
Okay, perfect. Thanks Tim. Then my second question is, when 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 the first quarter, volumes have improved clearly not nearly as much as they could have. Do we expect to get back to what is usually like a normal volume range in stainless and electrical steel in the second quarter you like 260,000- 270,000 tons, which I guess would be like a 20%, 25% rebound quarter- over-quarter. But do you think it's going to be more likely less than that?
Tim Maulo
No. So the rebound will be there of course, because of the seasonal rebound, but we are still in the market where the destocking is not being finalized, or at least they not destocking because of the price pressure. So nobody today, there is a lot of, let's say wait and see due to the fact that prices are low for the moment, that prices are pushed down by the fact that the nickel PI only is low. So the Chinese prices are low. And overall the prices in the rest of the world are putting some pressure on the intention of purchase of the distributors. And on top of that, in 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.
Bastian Synagowitz
Okay, so basically, you're looking at a more muted volume report into the second quarter from your comments than. Can then maybe coming back also on pricing? You made a couple of important points, I guess. But if we look at the key dynamics now, we saw first quarter volumes at the 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. And so if we look at the market setup, we have had like a relatively decent recovery in volumes and then obviously imports have been falling. But then obviously there still seems to be more pressure on European prices as volumes from the import site is putting back in and domestic volumes are basically recovering. So what is driving this significant price pressure in such an environment because usually, I guess I would understand it probably more if there was more direct volume pressure or more import pressure, but there's seems to be less import pressure and yet prices just kept dropping down apparently from your comments.
Tim Maulo
So here you have two effects, one effect is the trend. So when there is a trend in which prices are going down, and I explain why, so nickel PI, don't know the situation in China, the price in China et cetera, when there is this kind of trend, every buyer is very careful, okay, we just coming back from a period of destocking, which is not yet finished, because also the final demand as a in a circumstance being lower. So, we are in this in this period, and everybody is very careful, and nobody is pushing ahead inventory. So people are buying on the very short term and they are not rebuilding, they are not rebuilding inventory, they have still enough in terms of number of days of rotation of the inventory they need. So in this period, you have no imports because, say we have no import since many months, because 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. So the protection is acting correctly. The demand is not high, we need to still to reduce a little bit, the inventory and demand is also not high. This is the situation of Europe Is clear?
Bastian Synagowitz
Yes, guess what, thanks for clarifying. I guess what I'm still surprised is that you basically say that the imports are not really interesting. So it seems to be more like a European market discipline issue here almost which is dragging down prices? Or do you see this in a different way?
Tim Maulo
No, it's not a question of discipline or not. I think it is more of a question that you have a certain kind, let's say who imported our distributors, distributor is in destocking. And 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 inputs is around 22%. This has been established by the commission by during [inaudible]. So, we have 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 micro uncertainty I mean, people are awaiting a little bit. So there are good signs due to the fact that inflation may be is slowing down, there are good signs on the fact that the energy prices are going down. So everybody needs to see what this represents for the industry, because these are good signs. And that we need to see what this means for the industry when this will be clarified in the next month. So I am sure that the trend will become normal.
Operator
Our next question comes from Uyanis Wallace from Morgan Stanley.
Unidentified Analyst
Hi, good afternoon. Thanks for taking my questions, Tim. A few from my side. And the first just a follow up on the situation with 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 and maybe you talked about the impact in Q1 being relatively modest, but can you talk about your expectation on volume in EBITDA impact for the second quarter, please?
Tim Maulo
So I think it's very clear what is the subject of the strike is this reforming -- which is linked to the age of retirement. So again, and this is at the level of national strikes in a context indeed in which there is a general attention also on salary et cetera, but it's not specific to our industry, it is a national subject which is in France and we suppose that all the industry will tell you exactly the same. Then when I told you the impact is very low, double digit, one digit EBITDA. So and this will depend a lot on the evolution of the strike during Q2, which is still unpredictable. So, yesterday, now, the first of May, there was, you have seen on the newspaper, how strong was the reaction on the streets? So, we don't know, but we believe that it will come --.
Unidentified Analyst
Okay, and maybe just want to clarify, then is it a combination of operational disruptions to your plants as well as logistical disruptions? When you talk about the high single digit million EBITDA impact, that's sort of combination of the two.
Tim Maulo
Yes. It is that and because you have to recover, when you disrupt there is a discontinuity in the business, in the processor, and you have to recover some delays or you might have transport costs, which are higher, you can have an extraordinary time that is being paid something like this. It is relatively low, because the utilization rate is not one of the percentages. So it is limited. It is visible, but is limited.
Unidentified Analyst
Okay, perfect. That's very useful then just a second question around the Q2 guidance for, I understand it sort of lower EBITDA in S&E, Europe. And here just wanted to clarify, because typically, you would expect seasonally better volumes, you mentioned the energy cost unwind, and using of the destocking pressure. So these aspects should be positive relative to Q1. So when we talk about lowering EBITDA, is that predominantly driven by the strike effects? Or yes, if you can provide a bit of color there, that'd be very useful.
Tim Maulo
So 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 and steel in stainless steel sector. So it is a mix of different factors. So there is a factor which have linked to prices, as I explained that due to the evolution of pricing in China and the still careful, let's say buying attitude of the distributor, we see that prices are under pressure. So this is one effect. And the second is globally, as international prices are lower. There is also some effect in Brazil of the international prices. So 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.
Unidentified Analyst
Okay, that's very clear. Maybe just one last one for 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 that were highlighting in that sort of comment?
Tim Maulo
So, 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.
Operator
We'll now take our next question from Tristan Gresser from Exane BNP Paribas.
Tristan Gresser
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 and even putting seasonality aside. Are you also seeing some softer real activity levels, and how is it different between, let's say private industrial consumption, and also on Brazil, if you can just touch on the mix effect you expecting to Q2? Thank you.
Tim Maulo
Okay, indeed, Brazil has two effects. The first effect is the global prices, this has always an effect on the price on Brazil and some soft demand. So, Brazil has been has gone to a very good period. And now okay, there is some relatively lower, but for us, it's mostly a question of mix in the sense that we have been in very high demand of a 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 loaded the mill which is running at full capacity. So then, what is the other point was about the private consumption? And so what this is, what do you mean? Yes, I mean, please go on, if you want to clarify?
Tristan Gresser
Yes. On the real demand side, have you seen some softening, and especially between, let's say, private consumption and industrial consumption?
Tim Maulo
So I think the only, let's say, difference we can see is that while in Europe, automotive is the most brilliant maybe is not the most brilliant in Brazil, but that's all, and the rest is 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.
Tristan Gresser
Okay, thank you. And 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, and given the progress on those projects and the new projects you mentioned in the prepared remarks they 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.
Sudhakar Sivaji
So, Hi, Tristan. Let me take this one. So yes, the CapEx for this year. So 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 in the last 18 months on different parts of our mills, and I'll come to that in a minute. And we typically wait for one leadership journey to be done to start the next leadership's journeys projects, this time, we are not doing that. That means we continue to accelerate and move that in as soon as possible. So just to make sure the gains are there, and also to meet our 2025 transformation where we have promised EUR 300 million in growth. That's the first part. The second part is that, as part of this yours investments, we have clearly spoken about the investment first of all, where we are doing in the coal 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 instead of three coal rolling mills to put two coal rolling mills in the middle of France, which can do more products. So that's an investment is happening.
The second thing is for improving our mix, we have spoken about the AOD investment in [inaudible]. And then there are hot rolling mill investments in Brazil and in alloys which are taking place which will aid their transformation. So these are the investments which are happening this year. And this you can see in our presentation also on slide 8, when the gains are coming and whereas the investments are happening, so it's clearly there. Now, in terms of next year, we would definitely, typically we do not guide for the entire year you know that. Also because, the part of our CapEx, which is considered maintenance CapEx is flexible, depending on the utilization, so we'd like to look at it, but the strategic CapEx you have received in Capital Market Day, most of the strategic CapEx plan for the transformation for 2025 already announced.
Operator
Our next question from Maxime Kogge from Oddo.
Maxime Kogge
Yes. Good afternoon. So first question is on Brazil. So you pointed out the positive impact from new tariffs on Indonesia and important in the [inaudible]. 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 again pricing too low to really be offset by these new tariffs? So that's my first question.
Tim Maulo
So fundamentally, Brazil has always important in southern part, so we have a very high market share, but the market is open to import, even if protected by the import duties and tariffs. What we have, let's see blocked was at the dumping of Indonesia, which was possible due to the subsidies that they have received. And this is mostly an effect on the lowest price that were put in Brazil, from Indonesia, which were impacting the market, but then the rest of the market will be a balanced supply between our domestic production and the imports.
Maxime Kogge
Okay, and the second question, yes, as we got in share buybacks. There haven’t been any new share buybacks since early Q4. And still you're 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 [inaudible] generation in terms of --
Tim Maulo
No, not the two points you have raised are not blocking us, we are maintaining our policy of shareholder returns and so you can be confident that this will remain, but we have also consideration which depends on the geographical and local situation. So we tend to let's say, to consider that this is not the right moment, we have done a share buyback at the end of last year. So now if there will be the right moment there, we will be able to do this in the future.
Operator
Our next question comes from Krishan Agarwal from Citibank.
Krishan Agarwal
Hi, thanks a lot for taking my question. One for Tim. See, you said the energy cost is sort of unwinding. But then if you want to compare the energy costs to the level of 2021, I guess there is a still EUR 5,200 but none of, no additional cost for the stainless steel mills. So is that something you are seeing in your P&L? Or and then have you been able to pass on these energy cost to your customers?
Sudhakar Sivaji
So I know Christian, you wanted Tim to answer that. But let me attempt and after that, Tim can complete, if he wants. So 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. So we're 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 the price increase also led by China demand situation. Now what part of that is because we are not able to pass on EUR 50 energy or what part of it is because the global price situation is depressed. I'm not able to split up, Krishan.
Tim Maulo
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 PI and et cetera. So this is not something that the, it's of a magnitude which is much higher than the simple pass through of the energy cost.
Krishan Agarwal
Understand. And then my second question is on the recycling business, I mean, this business is averaging close to EUR 45 million EBITDA run rate for the past four quarters, I mean, is that something kind of we should take it as a structural run rate for this business? And considering that I mean, has your payback period calculation being massively beaten on the upside with these run rates for the acquisition?
Sudhakar Sivaji
So, Krishan, firstly, no, we do not believe that this is structural, we do see and we've 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. So 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 acquisition which is considered with the good payback?
Yes, I mean, you have the numbers, you know that we did buy it for EUR 30 million of equity. So 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. So kudos to the team there. Now, we are on track to deliver synergies and that will also help us improve the value of the business and we are on track there also, this year we expect to have achieved two thirds of the synergy by end of the year. So we are on track there. Now, we have to understand when we look at the segment, there is also a component coming from our renewables which is our forests or bioenergy forests in Brazil. Now, in this also we have announced investments and we have intensified to improve the profitability and also the sales from this business. So that business is also contributing about 20% higher than what it used to contribute in the past as part of the larger Aperam group. So these two effects combined, are contributing this specific set of circumstances. So 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 to EUR 20 million we have guided to so, yes, over the cycle. So the past performance has been above average.
Krishan Agarwal
Yes, so just to clarify EUR 55 million from recycling, EUR 15 million for renewable and EUR 24 million synergies.
Sudhakar Sivaji
The EUR 24 million synergies will show up in stainless sorry, EUR 24 million synergies will show up in stainless, Krishan as we've always said.
Tim Maulo
So, this is the starting, okay, can I just to clarify, this is the starting point of course, we are expanding the business and so this Aperam recycling renewables is becoming one of the pillars of Aperam and will be very visible in our numbers. This is why we are showing more clearly since the acquisition of the LG. So the expectation is that even if this this quarter has been a little bit higher, but you will see over the historical numbers a growth of this business and a stability above the cyclicality of the typical stainless steel business.
Krishan Agarwal
Understand. And then quick follow up on Sudh’s explanation. So is it fair to assume that when you guide it 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.
Sudhakar Sivaji
Yes, that would -- 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, so it's even a shorter order book than the stainless business so we'll have to keep a look on that but we are looking at, I mean we have guided to normalizing compared to the record numbers we've seen this quarter.
Krishan Agarwal
Okay. And the last final question, maybe of the housekeeping nature, the eliminations item has been a bit of a volatile in the last three to four quarter from between positive and negative. What would be your suggestion for Q2 modeling point of view, just the elimination item?
Sudhakar Sivaji
I have presented 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.
Operator
[Operator Instructions]
Our next question comes from Tom Zhang from Barclays.
Tom Zhang
Hi, good afternoon, gents. Thanks for taking question. Just one, just one final one for me, the standstill in Q3. I understand that [inaudible] again, maybe if you could just clarify what that's for, and how long it's going to be? Should we expect another six week impact similar to Q1? And how the impact on EBITDA again sort of spreads out? Is it mostly going to be a Q3 issue? Or is it going to be spread out over Q3 and Q4? Thanks.
Sudhakar Sivaji
Hey, Tom. So if you remember last year, when we were talking about it in our Capital Markets Day, we did announce that this was going to be a three month long investment. And when we saw that the market demand was loosening up in the first half of the year, we split that investment into two parts and pulled ahead, first part, which is six weeks. So it is the same investment. It is just that it's been split up into two parts to take advantage of the market situation, just so -- just we have to remember that part. So 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 because 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. So if prices go up or down that will have an impact. So is that clear?
Tom Zhang
Yes, great. Thank you and just to clarify, you've obviously split it into the mill works totally fine 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.
Sudhakar Sivaji
So the part is basically I'll start and then Tim can add on is that, so we are doing this investment for to improve our mix to produce the latest mix possible. And the new investment consists of two things, one is creating the basic new unit but also now adding decarb related investments where we take in cogeneration, we take in energy recovery and everything. So this is the split and that's what is happening. Tim, you want to add?
Tim Maulo
Yes, indeed, so the fact that the distance still is a bit longer is because we use this opportunity also to increase the cogeneration and the recovery of energy from the fundamental shop. And this means that on top of the decarbonization we have also savings in energy. So all these of course, it takes a little bit longer than simply installing a new AOD.
Operator
Thank you. And 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 for any additional or closing remarks. Over to you, sir.
A - Tim Maulo
Okay, thank you. Thank you very much for all your question and for this discussion. So you have seen that the situation as of the environment has been tougher than it has been in the previous let's say, years or last two years. But also you can see that result of there and are fully in line with our let's say step to the EUR 300 million. So 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 are going down. You have seen that volumes are at low level, at some historically low level that cost also, external cost has been very high in terms of energy, gas, et cetera. So, but all-in-all, we are continuing to have good cash generation. We are delivering in line with our business plan. And this despite tougher condition than we were expecting in the business plan, this comforts us a lot that we are in a good way and I hope that you will be let's say recognizing this in the figures that we are showing.
So and we also I would like to stress the fact that we plan to revive our [inaudible] line with our financial policy, but we have the flexibility and we use this flexibility. So thank you for attending the call. And I wish you a good day. And look forward to meeting you again. Bye-bye.
Operator
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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Aperam S.A. (APEMY) Q1 2023 Earnings Call Transcript