Aperam SA

AEX:APAM

Earnings Call Transcript 2018-Q1

[Operator]

Dear analysts and investors, welcome to the Aperam First Quarter 2018 Results Conference Call. I'll leave the floor now to Tim Di Maulo, Chief Executive Officer; and Sandeep Jalan, Chief Financial Officer. Please go ahead.

[Timoteo Di Maulo, Chief Executive Officer]

Good afternoon, and thank you very much for attending Aperam's Earnings Conference Call. Next to me is Sandeep Jalan, Aperam's CFO and together, we will present the company's first quarter 2018 results.As a reminder, and as announced in January, we will present to you our financial results in euros starting from this quarter. I'm very pleased to report that Aperam improved its profitability compared to previous quarter, despite the fact that the first quarter 2018 was marked by traditional seasonal effect in Brazil, a rise in input cost and a high level of imports in Europe and this was thanks to the solid execution of our Leadership Journey. In Brazil, the ramp-up of the blast furnace #2 after realigning [ works ] has been good and exceeded our expectation. We also continue to maintain net cash position during the quarter, despite increasing working capital due to higher activity and price increase. I'm happy with the development of 3 major strategic initiatives for Aperam. First of all, we are very excited with our disciplined and value accretive M&A, with the signing of a share purchase agreement for VDM Metals, which will create a global specialty alloy producer. We're very happy to have captured this opportunity to strengthen our high asset value product portfolio with lower cyclicality and healthy margins, capturing stronger growth prospects and significant synergy and cash generation potential. Second is the good progress and our recently announced investment in Genk, Belgium, which we'll further transform our footprint with state-of-the-art equipment and value creation potential. In turn, and after an extensive review as part of our yearly strategy development process is the extension of our Leadership Journey with Phase 3, the transmission program with an annualized gain (sic) [ gains target by ] 2020, increasing from EUR 125 million to EUR 150 million. Gains have already started with the ramp up with EUR 13 million at the end of Q1 2018. Looking ahead, we remain cautiously optimistic about the environment and remain highly focused on our operational excellence, customer focus and financial discipline to take us onto the next phase of development based on our transformation initiatives. We expect our Q2 2018 EBITDA to slightly increase compared to Q1 2018. We now walk you through Aperam Q1 results. So turning to Page 4, to the Slide 4. Starting with our top priorities which is health and safety. You see that our performance has improved this quarter compared to Q4 2017. Our frequency rate was 1 in Q1 compared to 1.3 in Q4 2017, and I can ensure you that we are putting all our efforts in certain improvement to become a zero accident company. By the way, I wish to share with you an industrial [ fire ] incident at the excision distributor in the Châtelet plant, where none of our employees were severely hurt. We expect no major impact from this incident, but this once again highlights the high importance of this topic. Now moving to Page 6, I will comment on the pricing environment. Nickel price has rebounded from the below $10,000 per tonne since the second half of 2017, remaining volatile. More recently, we have seen nickel temporary spiking about $16,000, primarily driven by the concern -- by some concern of short-term. Since then, it has normalized to around $14,000 which support came from anticipated surge from [indiscernible], with forecast of continued deficit of nickel and are using [ LME ] stocks. [indiscernible] benchmark price has dropped by about 15% in Q1 2018, but has increased back to $142 per pound in Q2 2018. In this context, some listed price have continued to rise in Q1 2018 due to raw material price increase. However, with increasing gap with China. With high level of imports and increased price gap verses Chinese and also due to euro appreciation versus with dollar we see pressure [indiscernible] prices. However, we believe to be able to largely offset these impact with our top line strategy and Leadership Journey and continue to improve our Q2 results. I will turn now the presentation over Sandeep.

[Sandeep Jalan, Chief Financial Officer]

Thank you, Tim. Good afternoon, everybody. Moving on to Slide 8. Aperam achieved an EBITDA of EUR 141 million in quarter 1 2018, showing an increase compared to EUR 130 million recorded in quarter 4 of last year where the resilient EBITDA margin of 11.6%. Our quarter 1 2018 euro EBITDA is about 12% lower when compared to quarter 1 of last year. And this 12% decrease is more or less reflecting the ForEx impact of euro appreciation versus dollar. We remind euro-dollar was around $1.07 in quarter 1 of last year and during quarter 1 we had an average around $1.23. In other words, quarter 1 2018, USD EBITDA is a bit higher than our quarter 1 2017 USD EBITDA and that quarter 1 2017 was a record quarterly EBITDA for Aperam. Our net income during this quarter was EUR 85 million, which is leading to a basic earnings per share close to 1 euro per share in quarter 1. These results once again confirm the strength of resilient business model of Aperam, and our relentless focus to further improve our performance. In this context, we are guiding for a slight increase in our EBITDA for second quarter of 2018. I will now comment quarterly performance on Slide #9. Quarter 1 2018 represents a record first quarter shipment for Aperam since its creation. We shipped during the quarter 517 kilotonnes. EBITDA of our Stainless & Electrical Steel division decreased from EUR 119 million in fourth quarter to EUR 111 million in the first quarter of 2018. The traditional summer seasonal impact in Brazil and rise in input cost, mainly in electrodes has been partly compensated for by the seasonal recovery and a healthy demand in Europe. As Tim mentioned, in Brazil, the ramp up of blast furnace 2 post realigning work as exceeded our expectations. Services & Solutions EBITDA remains stable at EUR 21 million in the first quarter, despite higher shipments and average selling prices, EBITDA remained stable quarter-on-quarter, mainly due to lower positive stock effect and some mix effects compared to quarter 4. The alloy [ specialty ] EBITDA for the first quarter of 2018 improved to EUR 14 million compared to EUR 11 million for the previous quarter. This is reflecting a continued recovery and solid performance of this business. The increase in EBITDA was mainly due to higher shipments. I will now move to Slide #11. In quarter 1 of 2017 -- 2018, Aperam recorded an EBITDA of EUR 141 million. Depreciation during this quarter amounted to EUR 35 million. Net interest expense and other financial costs for the first quarter were EUR 5 million, including cash for the financing close to EUR 3 million. Realized and unrealized foreign exchange and derivative gains were EUR 4 million positive for the first quarter, and income tax reserves for this quarter was at EUR 20 million. As a result, we recorded a net income of EUR 85 million for the first quarter. I will now move to cash flow on Slide 12. During this quarter, cash flow from operations were positive at EUR 42 million, with a working capital increase of EUR 117 million, which is primarily reflecting higher prices and higher activity. CapEx for the first quarter was EUR 46 million and free cash flow before dividend and share buyback for the first quarter amounted to minus EUR 4 million. Moving to Slide 13. We continue to [ have ] solid net cash position. We're at EUR 32 million net positive cash as of March 31 compared to EUR 63 million as of December 31, 2017, and this after reflecting the continued good cash returns to shareholders, EUR 28 million of dividend having been paid in quarter 1. I will now turn the presentation back to Tim.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sandeep. So now turning to Slide 15. With the successful completion of both phases of Leadership Journey resulting in US dollar [ to around ] EUR 73 million positive EBITDA impact since 2011. I'm happy to report developments on Phase 3 of our Leadership Journey with transformation program. The transformation program launched in June 2017 has been increased after our annual strategic review exercise with annualized gains target by 2020 increase from EUR 125 million to EUR 150 million. CapEx also has increased from EUR 125 million to EUR 150 million. I'm confident that this program will enable Aperam to address the next challenges of our market and anticipate the needs of our customers to sustainably offer best-in-class products and service in the most competitive way. Gains started to ramp up already during the last quarter to reach EUR 13 million annual run rate. We made good progress in all identified assets. For example, we've implemented tooling, [ robust ] production system automation and deployment of data analytics tool for improved quality and reliability. Total CapEx related to the transformation program amounts to EUR 20 million by the end of Q1 2018. Now, moving to Slide 16. The investment project announced last quarter in Genk [ Belgium ] is progressing well. The Genk investment is a new cold-rolling and annealing [indiscernible] line and it will be completed by early 2020, totaling an investment of about EUR 100 million. We confirm our CapEx guidance with the range of EUR 185 million to EUR 200 million. Turning to Page 17. We are happy, and really excited about our recently announced VDM Metals transaction. As a reminder, this transaction represents a purchase price of [ EUR 438 million ] and financing will be through a mix of available surplus cash and debt. The transaction is [indiscernible] complete value accretive. [ Our aim ] is to gain high hybrid value products portfolio with the reduced cyclicality, stronger growth, significant synergy potential and stronger cash generation potential. This transaction will enhance our earning per share [ after ] cash flow from the first year. The transaction remains subject to standard regulatory approval including merger [ control ] approval and we expect to complete this during the second half of the year. I'm now turning to Slide 18. On this slide, you can see our valuable asset portfolio with further strengthened and diversified sources of revenue and profitability by division. In Europe, we are the second largest producer. In South America, we are the largest producer. We are very happy with our Brazil operation, which has continued to maintain a double-digit EBITDA margin, despite the worst economic trough which is much higher than most other U.S. producers. Our Services & Solutions division, allow us with extensive market penetration being close to [indiscernible]. The largest alloy and specialty division will become an important contributor for Aperam with about 22% of gross revenue and 19% of EBITDA on proforma basis. The combination of VDM Metals with Aperam's alloy and specialty division will create a global specialty alloy producer. VDM Metals products offering is highly complementary to our alloys and specialty division. The largest geographical presence, we create a stronger global quality and technological producer, better positioned to fully support the evolution of its capital earnings and [indiscernible] the challenge of the [indiscernible].Moving to the last Slide 19. With the VDM transaction, we have confirmed to maintain our financial policy, with solid shareholder returns and a strong balance sheet, consistent with investment grade ratio, while maximizing the long-term growth and value creation for its shareholders. As a conclusion, despite a traditional seasonal effect in Brazil, rising input cost, mainly electrodes, and the high-level of imports in Europe we were able to improve over quarter-on-quarter profitability and even being a bit higher than our record Q1 2017 EBITDA by looking in U.S. dollar terms. Looking ahead, we are cautiously optimistic about the environment, and we continue to focus on our operational excellence, customer focus and financial discipline to enable Aperam to capture the next phase of development, based on the good progress of our strategic initiative I have described earlier. Now we're open to take your questions.

[Operator]

[Operator Instructions] We will now take our first question from Michael Shillaker from Credit Suisse.

[Michael Shillaker, MD and Head of Global Steel & European Miners]

Firstly, number one. If you look at the Q2, where you've obviously guided to slightly better, there seem to be 2 key dynamics at work here. One is the seasonal and cyclical recovery in Brazil. The second is probably a seasonally better Europe but a declining price environment in Europe. As we progress through the quarter, which factory is becoming dominant? Is it the Brazil recovery or the European declining price? And hence, I think if we look at the EBITDA exit rate out of the quarter Q2, would it be stronger or weaker than the entry rate into the quarter, is my first question. My second question, just on acquisitions post VDM, which I think is now out of the question. We've been asking for a long time, what are you likely to buy. The balance sheet is still going to be very strong but you've also got a new asset to bed down and you're going to be close to that, sort of just under 1x debt to EBITDA. So does that mean we can rule out any further acquisitions now, any meaningful acquisitions for maybe 2 or 3 years? And hence your focus will be -- on capital allocation will be very much on CapEx and shareholder returns and we can cross further acquisitions off the list. And then the final question, just on European antidumping safeguard measures. How likely do you feel this is? I think some of your peers feel as though it is quite likely. And in terms of the measures, the potential measures that the European commission's likely to take, what really works for you in terms of reversing the trend in European market, which clearly seems to have come under a degree of pressure.

[Timoteo Di Maulo, Chief Executive Officer]

So Q2 indeed will be a mix of many factors. We have pressure on prices. We have some pressures on cost of some -- of electrodes, some energy cost and refractory. We have on the other hand some positive effect, which are for us, especially the Brazil seasonality. We have a good, let's say, Europe, the consumption in Europe is healthy. We see that inventory are at the normal level. So despite the high pressure of the -- in quarter, we see that the consumption is supporting the demand and the operated demand. So all this combined lead us to be optimist on Q2 as we have explained with an end of Q2 which will depend on many factors. So we'll have also an effect of the raw material, which we can't anticipate, not in nickel, not in ferrochrome. So there is some basic which will remain stable. We are confident that the European demand will remain healthy even in Q3. Inventory today -- as of today are under control is despite some imports. We don't anticipate that during Q2 there will be a massive increase of this inventory. So globally, let's say we have positive and some negative. The negative is some price pressure coming from the gap from European price and China. The gap could normalize, depending on the speed at which the raw material will be reflected in the price also in China. So all this will be difficult to anticipate and we don't give any guidance for Q3. So now coming to VDM. VDM is a really good and transformational, let's say, acquisition, fully in line with our cash policy. Now new M&A for the moment, we can't anticipate anything. What we continue to be clear on M&A is that it is not because we have a strong balance sheet that we have pushed to spend money and go for M&A which are not in the respect of what are the criteria, very selective criteria we've taken. So there should be the right price and the right level of synergy and strengthen Aperam and not be a risk for our performance and dilute the performance of Aperam. So we will maintain the strict criteria and we will see if in the future there will be new M&A with good synergy like we see in VDM today. Then antidumping. Let's say that today we are in a different, let's say, mood that there is more, let's say, on about safeguard that European commission is working. Because of the deflection of some deflection that are coming from the Section 232 of the United States. So we know that the European commission is strongly involved and is strongly supporting the steel and also aluminum industry -- European steel and aluminum industry in 2 axis. One axis is the axis of obtaining some, let's say, the [ loss ] from the 232. And second aspect is to -- they have already started to monitor the imports in the way to be ready to implement safeguard measures if we confirm, if it is a confirmation of the surge in imports in Europe.

[Michael Shillaker, MD and Head of Global Steel & European Miners]

Okay. All right. And is there a preferred method that you would like to see, be it tariffs or quotas?

[Timoteo Di Maulo, Chief Executive Officer]

Sorry, can you repeat because there was a little bit disturb -- your sentence.

[Michael Shillaker, MD and Head of Global Steel & European Miners]

Yes, so is there a preferred method that you would prefer to see, be it tariffs or quotas, in terms imminently reversing the trend in pricing in Europe?

[Timoteo Di Maulo, Chief Executive Officer]

No, I think Michael, there should be for every kind of threat there should be the right, let's say, measure. So today, this reflection is mostly a surge, a global surge of the imports coming from everywhere. So it's mostly the safeguard that we are, let's say, searching for, because it's on a short-term and is not really related to specific import, export that is aggressive or dumping. Then whenever there will be some dumping behavior I think that European commission will work on specific measure on dumping.

[Operator]

We will now take our next question from Pez Luc (sic) [ Luc Pez ] from Exane.

[Luc Pez, Stock Analyst]

So a couple of questions for you. First of all, with regards to the Genk investment project, as you've quantified a bit more the Genk investments and also upgraded the Leadership Journey target. I would like to better understand what is the contribution to the Leadership Journey coming from the Haan investment which I understand is due to be completed by 2020. Whereas, in my understanding the Genk should not be contributing so much to these targets, which you could elevate a bit more on these, this will be my first question. Second question, with regards to the Haan in 2021, could you update us on this please?

[Timoteo Di Maulo, Chief Executive Officer]

So for -- let's say 2 different aspects. Genk is a single project, we have presented this as a single project, is a project of about EUR 100 million, which will be progressively being defined. Today we have already part of this -- from this project which is in the CapEx guidance of the year. And that will start in 2021 so it is out of the transformation program, which is the 3 year '18, '19, '20. On the contrary, Haan has always been inside this program. It's a part of, let's say, the improvement of the service and related mostly to the fact that we transferred the site from an old site, in which we were, let's say, in the rental position, to a new site, which will have better logistic and the possibility to reduce the lead time to customer and also improve our efficiency management of the supply chain and working capital. So these are 2 different aspects of the investment. For the...

[Sandeep Jalan, Chief Financial Officer]

Luc, regarding the convertible bond 2021, there is a short call in July this year. And this short call is subject to the share side performing at 130% compared to the adjusted conversion price. The last adjustment conversion price was at $41.30. And that would mean that this conversion could be exercised once the trading price for certain 20 working days. At any time in July or afterwards, if it's trading at those [indiscernible] the issuer could seek a conversion. And then, there is a bondholder put, which is in January next year. And that bondholder put is for 1 day and that is, again, it's a call to be exercised by bondholders. And at this moment, we have not made any specific intentions or announcements in this regards. We will continue to monitor the market situation the trading of these bonds and all our financing options to see if there is anything to be announced in this regard.

[Operator]

We will now take our next question from Rochus Brauneiser from Kepler Cheuvreux.

[Rochus Brauneiser, Head of Steel Research]

Just maybe one on the potential safeguard measures in Europe. Tim, could you shed some light, how you would see the effectiveness if the [ EE ] would for example go for a quota system, based on, I don't know, if you refer to the last 3 or 5 years then probably the volumes this year could be 10%, 15% lower. How would that impact the market when at the same time the second half of the year is usually seasonally lower? Would that help already to dampen imports or what shall we expect on the market side? The second, more kind of a housekeeping question. Can you give us a sense in P&L terms how much cost has been associated with blast furnace relined down in Brazil? And can you also get a bit more specific on the cost impact you're facing from the electrodes refractory material? And how you were able to at least partially pass that on, have you now installed surcharge mechanism as apparently some of your -- one of your competitor does? Any clarity would be appreciated.

[Timoteo Di Maulo, Chief Executive Officer]

First of all safeguard, so clearly, we don't know when it will happen if it will happen, but the target of safeguard is not to close the market. And what we see with that safeguard is only to limit what is the surge of imports, the event of surge of imports. So normally, it works like this, as a cap on the full year. So if it is, let's say, if some imports are coming on top of the normal volumes, so there will be a decrease in the second part. But this for the moment is very difficult to estimate what can be the impact because it will depend from the moment the safeguard counts how -- what it will be, the way of calculating is it retroactive? How much it will it be retroactive. And which kind of period will be taken, will it be to take in a period of 3 years, 1 year, 2 years, 4 years. We don't know. So we let the commission doing the work with [ euro firm ]. But what is important is the good sign that Europe is taking care of not being squeezed by this deflection which has been originated by the Section 232. We've seen that for the moment, despite the increase of imports that is already is happening in Q1, Aperam has been resilient and as a result has been able to take its part of volumes. And so we're continuing improving our service and the way we approach the market, not to be confronted directly and in the -- with the most aggressive imports. For P&L and cost I let Sandeep answer you.

[Sandeep Jalan, Chief Financial Officer]

So regarding the blast furnace in Brazil. As -- you know that in blast -- we operate blast furnaces in Brazil and there is relining, which was done and completed during quarter 1. And we did not make any specific announcements regarding the CapEx amount. This is fully within the CapEx guidance that we gave for the year and it is our -- it's a part of that guidance. Regarding your third question, on the impact of all the imports, electrodes, refractories [indiscernible] and energy, we see an impact which is in low single -- low double-digits [ euro per tonne ]. In the range that we also confirmed last year about 30 euro per tonne. And we see already this impact starting to affect our quarter 1 results, and during quarter 2 we expect the full ramp up effect of this on our results and that's where we are.

[Rochus Brauneiser, Head of Steel Research]

I asked about your blast furnace, it was more related on the effect which went through your results, not so much on the CapEx.

[Sandeep Jalan, Chief Financial Officer]

So blast furnace relining is an activity which is taking a few weeks, and it's something we anticipate, and we have not seen any major impact on our activity, because typically you plan it many, many quarters in advance. That's kind of relining, so we adjust our stocks to be able to cater to the market fully. So we did not see any effect on our operational results, per se. So it's mainly the CapEx which is an impact, which is already part of our guidance.

[Rochus Brauneiser, Head of Steel Research]

Okay. Got it. On the section on your -- on the safeguard measures in Europe, so there is no concern that this is a general investigation across all products groups. So there is no general concern that stainless steel would not be fully included in terms of quota system or whatever the measure will be in the end, announced by the EU.

[Timoteo Di Maulo, Chief Executive Officer]

For what has been communicated by the commission, there are 19 categories of steel which have been included in the investigation that has been launched. And stainless steel are part of it in full.

[Operator]

We will now take our next question from Christian Georges from Societe Generale.

[Christian Eric Andre Georges, Equity Analyst]

First question is with regard to China. So the furnaces prices have not been moving in the U.S. dollar terms for some time. And that suggests that many of the stainless steel mills in China are probably just making and I understand that a lot of volume is now coming from Indonesia. So the question is, do you feel that there may be a case for some of these Chinese capacity to come under pressure and close. And China is now a net importer so is that a change your monitoring and you are considering? And the second question is on Brazil. I think in February, you had some really high level of imports from South Africa but the question is, do you see, back in Europe some risk of [ value import ] in Brazil and would that undermine the market conditions there?

[Timoteo Di Maulo, Chief Executive Officer]

Okay, so concerning capacity in China, you know that since many years, we have a huge overcapacity in China. This overcapacity in China is one of the big debates in the G20 and has some kind of general guidance from the government to be reducing in the next year. At which speed, we don't know. Indonesia is of course putting even more pressure on this because on one side, the Chinese are, let's say, transferring one of the big problems they have, which is environment, to Indonesia. And second, they are taking some profit of the fact of the proximity of nickel ore that they can find in Indonesia. So to use that nickel figure. So you're right in the sense that if Indonesia will increase the pressure on the lower performing sites in China probably to close. But I will stop to, let's say, speculate on China because there is absolutely no transparency and what I'm saying here can be supported by fact. But there is only the engagement of the Chinese government to do something about this overcapacity. Brazil, so the pressure on Brazil is not increasing or decreasing. We see that Brazil, first of all, we have to remember that Brazil is a very small market. It's only -- it's a market with a lower consumption than the 300,000 tonnes. So it's less than countries like France on a territory which is bigger than Europe. So there is a logistic barrier and there is some extra kind of protection of being there, and so imports can have difficulty to surge. And second, the protection of Brazil is what is the duties which are there on all imports for 14%. So if you add the logistic issue, the small market with, let's say, a need of service even in the remote area, et cetera. We don't see so much the imports in Brazil. The Brazil subject for us is in terms of the domestic demand because it's a fantastic market with high potential to grow. And we are in this moment developing new application for customer to helping them grow. And we see that there is a recovery of Brazilian economy. And we're happy for the fact that after nearly 3 years now, it seems all the signs are positive, and we see some goals being in the range of between 4% to 7% in the first quarter. To be confirmed. That has to be confirmed in the next quarter. But for the moment, we are positive.

[Christian Eric Andre Georges, Equity Analyst]

Great. And as the current condition is the oil price, is that a policy impact on Brazil demand looking forward?

[Timoteo Di Maulo, Chief Executive Officer]

Yes, in Brazil, the price is always linked to international price with the internal leaders from Brazil. So the level of price has been -- can be correlated more or less to what is the international price. And the evolution of prices that you can see depending on raw material, depending on the pressure. But we are positive in this moment.

[Christian Eric Andre Georges, Equity Analyst]

Sorry, I meant the oil price, the improvement in the oil price. Does that have an impact on the Brazil market?

[Timoteo Di Maulo, Chief Executive Officer]

Sure, the improvement of oil price has 2 consequence. One is on the energy cost, which will impact everybody, okay, globally in the world. So it will be something which has expedience in being transferred into [ good price ] at a certain moment. Second, if this is sustainable, this means that probably this will boost a little bit the recovery in the investment done in the oil and gas. So I can't anticipate what will be in particular in Brazil the effect, but remember that one of the segment that has the most been penalized by the [ oil history ] in Brazil has been the oil and gas. All the story of Petrobras has practically zeroed any kind of investment in Brazil, despite the high potential that Brazil has as a sector.

[Operator]

We will now take our next question from Seth Rosenfeld from Jefferies.

[Seth R. Rosenfeld, Equity Analyst]

A couple of follow-up questions on the Brazilian market. I think you noted just a moment ago you'd seen some decent demand growth in the first quarter. Can you give us a sense going into Q2 what your expectations might be for full year 2018 demand growth? And what level of confidence you have on that versus where you were in months past? And second, when you think about what that impact is of recovery in Brazilian demand, what impact will that have on your export mix? I know in the past you've talked about exports as being lower margin than domestic sales. Should we expect to see a commensurate decrease in exports in the quarters ahead? And then lastly, if you could give us an update on the Brazilian trade policy situation. It's my understanding that some of the antidumping duties are up for renewal, staggered throughout the course of 2018. What does is the latest on that? What's your confidence if those are renewed?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So let's start from recalling what is Brazil. Because Brazil is a unit which has roughly, let's say, 800,000 tonnes of full capacity. This is splitting in 4 product lines. One of the [ product ] line is stainless steel, the second is electrical steel-oriented [ grain ], the third one in non-oriented electrical steel and special carbon steel. So what we do is always to manage the product mix and maximize the charge on the plant to be sure that we fully charge the plant. Taking the best out of the 4 product lines. And I will say that one of the results, a fifth product line if you allow, it is the [indiscernible] stainless steel. So we always manage to mix this. Whenever the domestic demand is good, we maximize our position inside Brazil, because this is the best product we have, the best logistic prices are the best so Brazil is the best margin. Then whenever it is necessary we arbitrate between export between carbon steel, between non-electrical -- non-oriented [ grain ] electrical steel, et cetera. So all antidumping, I think I've already more or less given the answer just before. So we are working on expansion of antidumping. For the moment I can't announce anything, but what is important, and I repeat, is mostly being able to be cost competitive in service, very strong in service, and being able to protect mostly by our logistic. And our logistic and proximity with customer. Also remember that Brazil has a fantastic opportunity to grow. Being one of the countries with 200 -- more than 200 million people and the lowest consumption per capita that you can find in the world. So we expect that the recovery of Brazil will mean for us the restarting of the growth of the internal consumption, which is normally -- has always been double compared to the internal [indiscernible].

[Operator]

We will now take our next question from Kevin Hellegard with Goldman Sachs.

[Kevin Hellegård Nielsen, Analyst]

Most of my questions have already been answered. But maybe if you can add a little bit. Can you give any color on where you see base prices on current orders that you're negotiating at the moment, I expect you're negotiating for June or July, versus where base prices were in 1Q in Europe?

[Timoteo Di Maulo, Chief Executive Officer]

You know that we normally avoid to give any guidance for 2 or 3 reason. On top of which, there is which kind of reference we take and secondly, we are typically mostly oriented not on the spot market but on end user. We got this value and et cetera. So we don't give a price as guidance. What we say, and I repeat, is that prices are under pressure in the second quarter, between this gap which is [indiscernible] between Europe and the import and China [ with the ] reference side. We expect it has been in part being due to this deflection of the United States, in part due to the raw material evaluation and depending on the profile of the raw material this [ guide ] will move. Today we are in a historical high. You've seen if you look at the graph of Page 6 of the presentation, you can see that whenever the gaps increase then decrease, there is a kind of a trend, which is reversing quarter by quarter.

[Operator]

We will now take the next question from Bastian Synagowitz from Deutsche Bank.

[Bastian Synagowitz, Research Analyst]

I've got 2 follow-ups left and they're both on the market. Just firstly, again on the Chinese prices. I guess, given the very low Chinese prices most of your competitors were convinced that the Chinese players currently don't make any money. You just mentioned as well that you expect Chinese price to follow raw materials and Western market prices but usually it's been the Chinese prices leading everything else. And this time, they are basically not. So do you share the view that the Chinese are not making any money here? Or do you believe that a large part of the Chinese capacity and also the new Indonesian capacity are simply that low-cost that it is able to procure, essentially import factors cheaper and produce still profitable at these very low prices? And then my last question is again on China and also what the situation means for Europe is what I understand there is about 2 million tonnes of additional cold rolling capacity starting up in both China and Indonesia now in the second quarter. And I guess that suggests that the supply pressure is rather getting more than less and that is not quite linked to Section 232. So do we really need to rely on the European commission decision on safeguard duties to ease the pressure on the European market? Or do you see anything else which may help to turn the market around in the forthcoming months?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Are they making money or not? Of course, at the price that we are selling and if you look at the raw material price, the quarter -- the actual quarter is much lower than was the quarter 1 in 2017. This is a simple calculation and simple, let's say, way of looking at the margin compared to the raw material costs. But as I said before, we are used to these kind of ups and downs of the Chinese producers. Normally, it is something which has a kind of cycle of 2, 3 quarter maximum, so then it will reverse and you can see easily, yes, so in the Page 6. So the money is not always the way that leads their behavior. There are a question of the accumulation of raw material. There's a question of their internal targets in terms of volumes. So we can't so much understand what are their behavior. But as I repeat, there is a kind of a cycle ups and down and we can expect that a certain moment this will renormalize. Concerning Indonesia, of course, Indonesia is putting some pressure, because they are cost competitive. But now we have to see what is Indonesia compared to China, because Indonesia for the moment is something like [ EUR 2 million to EUR 3 million ] production while we see that China today is something like [ EUR 30 million ] production. So yes, they have an impact but the impact is limited and the main problem of China is the huge overcapacity they have there, which has not been resolved for the moment. And which they are still promising that they will act. And when you see that in cold rolled there is the new capacity coming, this new capacity are also related to what is important in China, is that the China is growing with a growth of between, let's say, 5%, 6% every year. And 5%, 6% every year means in term of their consumption between [ EUR 1 million and EUR 2 million ] consumption, in term of consumption. So we'll always see some new capacity coming. Global capacity will be absorbed or not, depending on the fact that the Chinese will close the oldest plant, the most polluting plants and the -- they respect or not, let's say, the guidance of the central government.

[Bastian Synagowitz, Research Analyst]

Very helpful. Just one more question on capital allocation if I may. If we look at the payout ratio, it recently was at the upper end of your target corridor. Now post the VDM acquisition would you aim to continue this policy or would you shift the focus over to a stronger deleveraging maybe in the first phase [indiscernible] before you push up payout ratio back into the 100% level, which -- the way it has been before?

[Sandeep Jalan, Chief Financial Officer]

Our financial policy remains intact, and we will continue to maintain strong investment grade ratios. At this moment, net debt-to-EBITDA ratio stands at less than 1x and that we wish to maintain. And this will allow us to continue to maintain not only solid shareholder returns between 50% to 100% of the earning per share, but also continue to capture any value accretive opportunities that the board will continue to examine as they arise.

[Operator]

We will now take our next question from Carsten Riek from UBS.

[Carsten Riek]

Just one more question left, and that is on the Châtelet plant, which probably was on fire, today at least, apparently 3 employees were injured. Tim, you mentioned there's no kind of big impact. But what I'm interested, why actually has been there a fire? What caused it and is there really no impact on the operations?

[Timoteo Di Maulo, Chief Executive Officer]

So yes, this plant you know is our upstream in Europe. So is the hot plant in which we have all the hot phase. And whenever there is a kind of industrial incident in this hot plant is always something more spectacular than in a cold rolling mill, where there everything is cold. So this incident is an incident that has happened in a substation of -- for the dissolution of oxygen near the [indiscernible]. We are now in the phase in which we are examining, because it's just happened. What I can say is that no one of the 3 workers that were close to the fire have been, let's say, now they are home and there is no consequence for them. So they have been only in observation for a few hours in hospital because this is normal procedure when we have this kind of incident. The fire has lasted 1.5 hours, and it has been put under control very soon by the good behavior of the people -- of our people on the site and the intervention of the fire brigade in a very short time. So as of the consequence, we don't anticipate the consequence on the plant. Of course there will be some reparation. We are estimating in EUR 1 million or EUR 2 maximum million. But it's very early to say exactly what is the figure. So it's a small incident, and we have all the supply chain that is able to absorb this incident. So we are not forecasting a big impact on the next quarter. So for the moment, we are, let's say, still examining, because it's very recent. But I took my duty to inform because we see the public news and you could have had some question.

[Carsten Riek]

Perfect. That's very helpful. The other one, which might be a follow up, it's on the import situation. It looks at least like the last 2, 3 years that a low nickel price actually helps your recovery story more than an increasing nickel price because China's not coming along that much with its import into the area, which in turn suggests that they have a different kind of cost base with the nickel pig iron. Could that be a problem in the future for the nonintegrated stainless steel players?

[Timoteo Di Maulo, Chief Executive Officer]

Good question. But I tend to disagree, in the sense that we have different profile today. Today there is a premium to buy nickel pig iron which doesn't give really cost competitiveness to Chinese on raw material. So the point is that, whenever there is evaluation in the price of raw material, there is a difference speed between disciplined European producer and Chinese because there is a totally different way of managing inventories. You see that inventories in China is a normal way of working. So they anticipate. They put more -- they try to anticipate the raw material when they increase. They increase inventory, they decrease inventory, et cetera. This volatility in price is mostly due to the adaptation and not to the absolute value of the price of raw material. So I think this -- we are transferring to the sales price all the difference in price of raw material. At the end, the Chinese producer do the same. But we do this with a different timing and this creates gaps, which are observed today. But in long term, and I think that there is no real subject of -- in which Chinese will be more, let's say, advantaged by the fact that nickel price is higher or lower.

[Operator]

That is the end of the question-and-answer session. For further questions, please contact the Investor Relations department. I would now like to turn the call back to Mr. Di Maulo for any additional or closing remarks. Please go ahead, sir.

[Timoteo Di Maulo, Chief Executive Officer]

So we all thank you very much for participating to this call. Of course, this is a good moment, and we are very happy in Aperam because of the results, which are showing once again the resilience, despite some headwinds. We are showing that there is certain kind of optimism for the second quarter, despite also some headwinds. But our transformation program, our, let's say, focus on cost competitiveness on top line, on the basic of the performance of the company are still there. And we're happy to show that our results are positively increasing. And consistent with our transformation program and with the progress we have done in the efficiency. We're also very happy and proud with the work we have done in term of the transformation, let's say, transaction, with this value creation opportunity to buy VDM. VDM is a great company and we have -- we see that they have skilled people, which will make Aperam even a biggest and strongest company. And really, let's say, we have some future with this company because we will reduce the cyclicity of price with more long-term development of product, with more sophisticated product and good margin. And we will strengthen our R&D and our innovation. This is a perfect transaction in the sense that it's the right time. It is thanks to our strength in the Leadership Journey, and in our balance sheet that we are able to do this, maintaining our very strong balance sheet and maintaining our price, our cash policy to investor. So this will give us the possibility to continue in our strategy giving maximum satisfaction to our shareholders in the cash and in the payout, which remains between 50% to 100% of earnings per share. So thank you very much, and I will meet some of you in our roadshow. So thank you, and see you for the next call for the next quarter. Bye-bye.

[Sandeep Jalan, Chief Financial Officer]

Thank you, bye-bye.

[Operator]

And that will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.