APMSF - Aperam S.A. (APEMY) Q2 2023 Earnings Call Transcript

2023-07-28 09:45:20 ET

Aperam S.A. (APEMY)

Q2 2023 Earnings Call Transcript

July 28, 2023 08:00 AM ET

Company Participants

Tim Di Maulo - CEO

Sudhakar Sivaji - CFO

Conference Call Participants

Tristan Gresser - BNP Paribas Exane

Bastian Synagowitz - Deutsche Bank

Krishan Agarwal - Citibank

Maxime Kogge - ODDO BHF

Presentation

Operator

Hello, and welcome to the Aperam Q2 Results Conference Call. My name is Kevin, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions]

I would now like to hand the call over to Tim Di Maulo, CEO. Please go ahead.

Tim Di Maulo

Hello. Good afternoon, and welcome to the Aperam second quarter Q&A. I'm here with Sud Sivaji and we will answer to your question. Just I assume that you all listen 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 questions, 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 and our differentiated value chain with recycling and with alloys allow us to post a solid result. We are cost competitive and Europe is EBITDA 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Tristan Gresser of BNP Paribas Exane.

Tristan Gresser

The first one is -- and you just mentioned it, you made reference to the COVID crisis. And as such, given the lower EBITDA guidance into Q3, I wonder if we could see the COVID levels we've seen at a group level as a support or 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.

Tim Di Maulo

So thank you very much. So I think that the 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 suit that also wait. And on the contrary, we are compensating for all these headwinds with the progress that we have done compared to 2020.

So all-in-all, there are positive and negative and indeed, the situation is a comparable very low [indiscernible] cycle.

Tristan Gresser

All right. That's clear. And 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. So 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?

Tim Di Maulo

No, it's a question of a 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 not appetite from anybody to restock so 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. So price is going down. Nobody is restocking and if you create a situation in which all the demand is on a very short-term and no need to restock, so it is more and more, let's say subdued demand. Now 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 makes it difficult to have money to invest in new property. Construction is very, very poor. Consumer goods also have reduced a lot. And we see that food, health and catering industry and the other segments are still below average. So if I resume low demand, which is low real demand, no appetite for restocking in a trend of decreasing prices, and we are coming from, let's say, a period in which inventory were high.

Now inventory are low, but the possibility to supply on short-term is very easy. If your question is, is there overcapacity in Europe is no, no. Europe is well balanced on that.

Operator

Our next question comes from Bastian Synagowitz of Deutsche Bank.

Bastian Synagowitz

Thanks for answering the first question. It 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, 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 -- in the Appliance 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 processes rather than on the distributor side?

Tim Di Maulo

Sorry, if I was a little bit unclear. I've not said that inventory is high. I say that inventory are low -- today when you see the inventory are definitively below normal but demand also is lower. So in terms of rotation, we can say that this is normal. But the effect that we see is that when prices are going down, there is nobody who try to restock to go up.

And this create a kind of demand on very short-term. And when there is not enough consumption, the demand very short-term can be satisfied. And so you have this effect for which the apparent demand is lower.

Sudhakar Sivaji

Let me add Bastian, sorry, just one second to what Tim said. Inventory building also is a bit reticent because as you note, the carrying cost of inventory have gone up compared to the last six years, where interest rates have been traditionally super low, close to zero. And today, if you're a smaller distributor, your carrying costs have gone high, right? So the macro environment, what Tim has described, supplemented with the financial situation where interest loss and cost of borrowing are quite high, has an effect.

Bastian Synagowitz

Yeah. I think which is, however, arguably, I think that's obviously temporary as the industry has to rebalance maybe to that new situation. But I guess that obviously means that maybe the potential for restocking is slightly smaller, but it also means that there's going to be less, I would say, overhang in the system, which is going to rebuild on the way up, which is probably healthy.

Tim Di Maulo

Will be, will be. It will, at a certain moment, it will be.

Bastian Synagowitz

Yeah. Okay. Then just I want to get back on your guidance, where I think you gave a pretty sharp guidance for all divisions, except for Stainless. And I just wanted to walk through the building blocks. So volumes will be up from my understanding, I guess, Brazil would usually be better from a seasonal pattern.

And then costs are down in Europe, but then you're obviously taking the hit on the price side against that. So 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?

Sudhakar Sivaji

So see, the -- Bastian, let me take that call, right? So 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? So you mentioned actually the regional split. But let me talk about the three factors if it's okay, right? So 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? And there is no change in seasonality. It's just a marginal catch-up in terms of volumes, okay? So that is one thing. And 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?

And the third and the last part, and 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 three factors actually would play in the role for Q3, okay? So if you're asking me, would the drop be as similar, I would suggest the drop in one case was led by volumes. But in the second case, it is going to be led similarly by price and one-time effects. Just to give you a clear split Bastian, because Tim referred to that in his answer to Tristan also. We had given about €150 million one-time effect is what we expect for the year, right?

So 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? So that is something which is significant. And as a result, that is about one-third of the €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 inventory, higher double-digit tonnage as inventory from quarter-to-quarter because of our investments.

Now 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 inventory carrying for future quarters, right? So this should not carry over to next year. So that's one-third of it. And 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.

And that tunes to the rest third one-time effect on our European business for this year, okay? So 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 €1 billion EBITDA. And this time, obviously, spot prices have dropped on a mark-to-market basis, if you look at it -- there is a one-third hit. So that's -- those are the one-time factors.

I hope I've given you enough color to model in your Q3.

Bastian Synagowitz

Okay. No, that has been helpful. 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. And then if we look at nickel prices, they've come down 30% versus the end of '22, and they're back to 2021 levels. If we look at stainless prices, they are down 30% as well versus end of '22 and even down 50% versus the levels at the end of '21.Now of course, I see why, I guess, the AOD investment obviously causes the deferral here in the working capital cycle.

So you're not maybe seeing as much working capital yet. But you're guiding for net debt to be broadly flat. So why are you 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 or is there maybe another spillover into the new business here because of the AOD?

Sudhakar Sivaji

Hi, Bastian. Yeah, no, that's a fair question, right? So -- but the point is that the cash release is going to come in Q4, Bastian, just because of the fact that end of the day, it's a technical effect. So you build inventories. And in Q3, when the investments are being done, you reduce the inventories.

But 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. So it's purely technical. Is that clear?

Bastian Synagowitz

I guess yeah, I think my point though is, why should we not expect an even stronger working capital release. So I guess when you're guiding 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. But then if I 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 '22, even versus end of '21. So I guess the point is, why not more?

Sudhakar Sivaji

No, that's correct, Bastian. So Bastian because I believe you had just a price effect in mind, but we had guided to two different parameters. One is the fact that we said we will have the [indiscernible] AOD during this year, once in Q2 and once in Q3 investments. And because of that, we will carry inventory, right? The second thing we have also said that there is investment shutdown in Brazil for the Q1 of next year.

And 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 released at the end of Q1 next year. So that is the delta you're missing, I guess. So it's primarily two investments different. The pricing-led releases are happening as we speak.

Bastian Synagowitz

Okay. Okay. But would you describe that guidance of keeping net debt broadly flat year-over-year, would you describe that as conservative? Because again, I think the magnitude from potential value here should be, I think, much more significant.

Sudhakar Sivaji

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. Now what happened is in the last 15 days of the year, nickel prices went up to €30,000, right? And raw material prices don't get determined because of a 15-day price increase in nickel value for last 15 days of 2022, right? So besides that, on a raw material basis, yes, raw material prices have come down, but the raw material prices have not come down compared to beginning of 2021, where we were at €17,000. So if you look at it, we are broadly where we started out in, I would say, March of 2022 before the nickel crisis.

Operator

[Operator Instructions] The next question today comes from Krishan Agarwal of Citibank.

Krishan Agarwal

Quick clarification from Sud on this €150 million one-time effect. Did I get it correct that €150 million one-time effect is for the full year? And if that's the case, would you be able to help us as in how much of that is already booked in first half?

Sudhakar Sivaji

So see, the part of this one, the €150 million is also based on valuation effects, right, because expecting how the prices are going to develop. So 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.

Krishan Agarwal

Understand. And then the second question is more industry-wide maybe for Tim. I mean you mentioned that Europe is positive or profit-making even at 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. But if you look 6 months or 12 months down the line when no 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 five to 10 years?

And then there is a case that normalized margins are lower for the industry?

Tim Di Maulo

No, I don't think so. I think it's a temporary situation. When you -- so we have a kind of acceleration of the cycle. You have seen that 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. And especially, as I said before, there was -- there is, 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? So it is a context which is a bit extreme. Is it clear what I'm saying?

Krishan Agarwal

Yeah. I mean I get your point, but I also get that, okay, there is a sense of uncertainty as in how stronger or pronounced or shallow the recovery is going to be [indiscernible].

Operator

[Operator Instructions] Our next question comes from Tristan Gresser of BNP Paribas Exane.

Tristan Gresser

Just a 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 can tell us if they're temporary in nature or a bit more structural, maybe if you can tell us also that the scale of it that is incorporated in the guidance? And is it more to Q2, Q3 or Q4 or both? Any color there would be appreciated.

Tim Di Maulo

So fundamentally, we have our Leadership Journey, which is already accounting for €150 million at the end of the second quarter, and we will do more in the next two quarters. But on top we have temporary measures. So some flexibilization of the works and temporarily, let's say, solution than we did with our contracts that we have. And then 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 million that we have promised is structural by nature.

Tristan Gresser

Okay. But the temporary measures should already have a certain impact into Q3. Those are things you already.

Tim Di Maulo

Yes, will have an impact on Q3 and Q4 in the two quarters to come.

Tristan Gresser

All right. That's pretty clear. And maybe one last question on the market environment. I mean, we've seen Asian still stainless steel prices weakening of late [indiscernible] 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 import flow into the second half.

Tim Di Maulo

So the -- as I said 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, 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 6 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. And 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 markets in Brazilian market as an effect of the duty plus the internalization costs, etcetera, 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. So it is a question of when China will rebound. Let's hope it will be very soon.

Operator

Our next question comes from Maxime Kogge of ODDO BHF.

Maxime Kogge

Sorry, I joined a bit later. I don't know if this question has already been asked. But 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 and whether you were also online to achieve double EBITDA by 2025? So that would be my first question.

And the second question is about the marketplace in Europe. We have four players right now. There's a lot of overcapacity apparently. So do you see this situation with four large players as viable in the long term or would you like to see some consolidation?

Tim Di Maulo

Okay. So first, it is 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 fully in 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 in 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 are -- which is facing a destocking phase, which is facing a decrease of demand. And 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 the 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, but it's 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.

Operator

And as there are no further questions at this time, I'd like to hand the call back to Tim Di Maulo, CEO, for any additional or closing remarks.

Tim Di Maulo

Okay. Thank you very much. As usual, very interesting question. The times are challenging, you have seen. But for the moment, we have successfully managed the situation and similarly to this even in other moments before this quarter.

We are facing a tough Q3 that should also mark the trough. The foreshots are visible already. We have an experienced leadership team, and we are aware what is expected of us, and we know that cost improvements and further value chain amendments are part of this solution. We will therefore realize the €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.

Operator

And that does conclude today's Aperam Q2 results conference call. We thank you all for participating, and you may now disconnect.

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