Aperam SA

AEX:APAM

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to the Aperam Q1 2020 Results Call. My name is Rinkel, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]I will now hand you over to your host, Tim Di Maulo, CEO; and Sudhakar Sivaji, CFO, to begin today's conference. Thank you.

[Timoteo Di Maulo, Chief Executive Officer]

Hello, and good afternoon, everybody. Thank you all for attending Aperam's earnings conference call. Next to me is Sudhakar Sivaji, Aperam's CFO. And together, we'll present the result of the first quarter 2020.Please take note of our disclaimer regarding forward-looking statements.I'm starting from Page 4. Aperam primary focus is on securing the health and safety of our employees, while maintaining business continuity, especially in these demanding times. Our frequency rate was elevated at 1.9 in Q1. However, this was not COVID-19 related. Geert Verbeek, our new CTO, has also taken the responsibility of health and safety for the company.In March, with the spread of COVID, maintaining the health of our people required stronger measure. We decided to temporarily halt all our plants for the time necessary to put in place the required health and safety arrangement, guaranteed social distancing and disinfectant routines. We also imposed a global travel ban. We restricted access to our sites, and we work remotely wherever possible. Thanks to this measure -- to the measures taken, there were -- has been only a small impact on the group. Aperam is now fully able to produce and serve our customers.If we go to the next Page 5 on operational highlights. So as mentioned, we have had temporarily halt of our plants for up to 10 days to put in place the required health and safety arrangements. Our distribution center in Italy was closed due to government orders, and we had minor disruption on the logistics side. This led to some extra costs that are contained in adjusted EBITDA. Additionally, the nickel price continued to decline, which caused higher-than-expected inventory devaluation during the quarter. On the volume side, the first quarter is seasonally strong in Europe, but the seasonally weakest in Brazil. Q1 was pretty normal as Europe benefited from the exhaustion of some quarters that made distributors to turn away from imports and buy on domestic market.Since April, preliminary antidumping duties are now in place and should start to make a positive impact. The countervailing duty case progressed in line with the expectation, and we continue to be optimistic for a positive outcome in July. Prices remain stable and far below the normal value -- level. Looking ahead, the order book started to reflect the shutdown in key customer industry from the second half of March. We will come back on this later.The Leadership Journey progressed well with another EUR 23 million annualized gain during the quarter, which brought the total realized gains to EUR 146 million. Almost 3/4 of the program have now been realized, which demonstrates good progress. You know that the Leadership Journey is extremely important for improving Aperam's competitive position. We will see what kind of adjustment we have to make to the program as markets are shaken by the COVID crisis.I now hand over to Sudhakar, Aperam new CFO. Sudhakar?

[Sudhakar Sivaji, Chief Financial Officer]

Thank you, Tim. Good afternoon, everybody, and a warm welcome from my side as well. My name is Sudhakar Sivaji, and I joined Aperam in April about 3 weeks ago. So I come from the steel industry, and I've worked for thyssenkrupp for the past 12 years in different financial roles in Europe, NAFTA and Brazil. I look forward to working with all of you as CFO of Aperam.Now let's turn briefly to Q1 results. We delivered a EUR 70 million adjusted EBITDA for Q1. This included some negative impacts from COVID-related costs, and as Tim mentioned, higher inventory devaluations on the back of the lower nickel price. However, this completely hides an underlying profitability improvement in our [ EBITDA ]. Our Q1 EBITDA had a meaningful double-digit impact from inventory valuation, whereas we still recorded, if you may remember, valuation gains last quarter.A 9% increase in shipments over quarter 4 contributed to this profitability. We think that China running out of quota was one reason for this. However, higher shipments require higher working capital. Also, CapEx at EUR 45 million was a bit high. This is due to the Genk project running full steam. This will be completed by the end of this year and then improve our cost competitiveness.Despite these items, as you can see, we were able to report a positive free cash flow due to a high cash conversion of 90%. After paying out our planned EUR 32 million for our quarterly dividend, our net debt increased slightly to EUR 108 million.Our balance sheet remains very solid. Moving on to the next slide, you can see that we have a fully restructured balance sheet with very low net debt in both absolute as well as relative to EBITDA terms. Our solid balance sheet gives us security and allows us to look with confidence into the future. We do not have any earnings-related covenants in our financing arrangements, and larger debt repayments are due only in 3 years, that is in 2023.Furthermore, we've been free cash flow positive every year since 2008. Our cash generation ability has gone -- has grown in past years as we have transformed the company bit by bit. We follow the clear principle of producing only in line with firm orders, so we reduce inventory all the time.Please also bear in mind that we expect to collect a BRL 1 billion tax refund from Brazil, which, after if you cut for corporate income tax, grosses up cash over the next 4 years. We have a very experienced management team and are well prepared to deal with the current market and financial situation. Our progressive dividend policy has just been confirmed by the AGM, while we have postponed the share buyback for a period of 6 months. We've done our homework and prepared Aperam for this crisis. We are confident that we will get through this crisis having transformed Aperam for the better.Thank you, and I'll now hand back to Tim for a market overview.

[Timoteo Di Maulo, Chief Executive Officer]

Thanks, Sudhakar. Let's now look at the market environment on Slide 8. Imports declined during Q1 by 18% quarter-on-quarter, and the market share of the imports dropped to 25%. Especially in the hot rolled segment, we saw a positive development as imported contracted by 60% versus the Q4 as distributor turns away from the imports.Provisional antidumping duties have been put in place at the beginning of April, but we continue to talk with the European Commission with some urgency regarding revising safeguard quotas to a level consistent with the market development in the COVID recession. Cold rolled price in Europe mostly followed the nickel lower price, but this price in Europe remained stable at a low and unsatisfactory level. More recently, we have seen nickel pig iron price increase, which give us a more competitive cost base versus nickel pig iron-based producer.We are aware of high stainless steel stocks in China, but the pricing difference to China remained in normal range, and we think that pricing downside has been exhausted due to the rising Asian cost base. Inventories have been stable in a seasonally stronger quarter as distributor acted cautiously. Inventory days have been normalized during Q1. While lower activity level might trigger some destocking, we do not foresee as a sharpening inventor cycle.So if we go now to Page 9 for the COVID update and the outlook. Due to our early and decisive health and safety measure, all our production plants are operational now. We don't face any raw material supply constraints. We have adjusted production quickly to lower demand. We can do this flexibly with a low level of penalizing cost. We use temporary employment in Europe to maintain experienced work and reduce all temporary contracts. This give us the ability to significantly reduce fixed cost as volumes decline. We have also frozen all discretionary and nonessential expenses. We have frozen all new CapEx to preserve cash, which reduced our CapEx budget by EUR 50 million year-on-year. We now expect to spend approximately EUR 100 million, of which more than half is for Genk and the Leadership Journey. If you deduct this, you see that our maintenance CapEx is fairly low.While lockdown now gradually ease, the Q2 outlook remains uncertain. However, based on our current order book that now stretches into June, we expect the volumes to decline by up to 25%. EBITDA will reflect this, and the current raw material price will include, again, a meaningful negative effect for inventory. We expect another slight decrease in net debt despite positive free cash flow. I can assure you that we have taken all necessary action to deal with whatever reality we might face over the coming months. We have done our homework, and now Aperam is fully prepared.Let me conclude our presentation with our corporate access schedule, which is fully virtual, of course. We will be happy to give you deeper insight into how to deal with the crisis and our strategy.We take now your question.

[Operator]

[Operator Instructions] And our first question comes from the line of Bastian from Deutsche Bank.

[Bastian Synagowitz, Research Analyst]

I've got a couple of questions. First of all, maybe on your volume guidance, where you talk about the up to 25% decline in the second quarter. Could you please help us a little bit to strip this apart between Europe and Brazil? I guess Brazil would usually be up. Should we expect Brazil to be rather flat or will Brazil be down as well? And is it fair to assume that the decline you will be seeing in Europe may be slightly larger even than the 25%? That is my first question.

[Timoteo Di Maulo, Chief Executive Officer]

So Bastian, so this up to 25% is the maximum that we expect. In fact, we are more in the range of 15%, 25%, but due to the high volatility, we are on the caution side. Then we see more or less similar effects in both continent, with Brazil also being affected by the -- some volume decrease. So there is no major difference between the 2 areas in which we are exposed.

[Bastian Synagowitz, Research Analyst]

Got it. Okay. Okay. And should there be any major changes in your product mix? So typically, I thought Brazil would usually get a little bit better because of the volume uptick on the domestic market?

[Timoteo Di Maulo, Chief Executive Officer]

You are referring on product mix in Brazil?

[Bastian Synagowitz, Research Analyst]

Actually, both regions, i.e., product mix in Europe and Brazil, i.e. will the per tonne margin in those markets see any major changes?

[Timoteo Di Maulo, Chief Executive Officer]

No. Major changes, I will not say that there are major changes. But of course, there are some segments which are taking less, typically automotive. And the mix of automotive is -- the mix of automotive, in this mix, yes, we see some changes. For the rest, I will say that it is more regional in Europe in the sense that it depends a lot on Italy, Spain or Germany or other countries. And in Brazil, no, I will not say that we see something which is very special in the mix.

[Bastian Synagowitz, Research Analyst]

Okay. Okay. Then my next question is basically on your EBITDA guidance, where I just wanted to get a bit of a better understanding on your earnings sensitivity in the second quarter. Now I appreciate it's obviously very difficult to say at the moment. But if we sum up the different building blocks, we basically have another negative impact from metal prices, which you highlighted, but possibly no actual standstill. But then, of course, the volume decline. On the other side, obviously, you're saying that you'll be able to flex down most of the fixed costs pretty much in line with the volume decline you're seeing, suggesting that, that is more or less linear. So from those comments, would it be reasonable to infer that like EUR 30 million to EUR 40 million EBITDA is a reasonable, say, assumption corridor for the second quarter, maybe even at the lower end? Or is there any floor in earnings you would be comfortable to give if we ignore for a moment that there could always be obviously disruptions from standstills or metal price volatility, which we are not maybe foreseeing for the moment?

[Sudhakar Sivaji, Chief Financial Officer]

Bastian, this is Sudhakar. And look, we deliberately decided not to give you specific guidance on the EBITDA for the next quarter considering the volatility. And -- but I will confirm all the factors you did mention. The impacts may change over the period of the quarter. So that's my color on that.

[Bastian Synagowitz, Research Analyst]

Okay. Okay. Fair enough. Then my last question is -- yes, sorry, go ahead.

[Timoteo Di Maulo, Chief Executive Officer]

Yes, sorry. The importance is that flexibility in cost means that, okay, there will be an effect which will be mostly linked to the volumes, and this is what we are aiming at.

[Bastian Synagowitz, Research Analyst]

Okay. My very last question...

[Timoteo Di Maulo, Chief Executive Officer]

Yes. Go on, go on.

[Bastian Synagowitz, Research Analyst]

And then my very last question is just on cash flow, where, I think, you're obviously guiding for a positive free cash flow despite not guiding, obviously, for an EBITDA number. Is it fair to assume that you are baking in some working capital release? And if so, could you least share maybe how much scope you see for a working capital release in the second quarter? And if you have any view for the full year already? Even though, I guess, it's very difficult to say, I'd appreciate that as well.

[Timoteo Di Maulo, Chief Executive Officer]

So Sudhakar?

[Sudhakar Sivaji, Chief Financial Officer]

Yes. Based on the working capital, Bastian, yes, we will be releasing working capital. As I mentioned in my speech, we are just to -- now cutting inventories based on production. So there will be a release. And for the rest of the year, that is something which we prefer not to comment at this point of time with the volatility, which we do have. But you have to just look at our practice over the past 12 years actually to see that. On that front, we have successfully improved. So rest assured that we will continue working on that.

[Operator]

We have our next question from the line of Christian from Societe Generale.

[Christian Eric Andre Georges, Equity Analyst]

Two questions. The first one on your Alloys & Specialties division. Is that division more impacted by the COVID conditions? In the first quarter, it looks like you may have had more of an impact on [ shipment ]. And looking to the next few quarters, do you -- are you seeing perhaps a more specific impact on your order books? Is the first question. And the second is on Brazil. Are you getting worried about the political developments there? Putting aside COVID, when things normalize, do you believe that we may be facing more headwinds with regards to the economic conditions?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. On alloys, the specificity of the first quarter has been that they were relatively early in the -- let's say, the COVID effect in the plant closure. But we don't see, for the moment, any impact on the order book. Remember that on alloys, we have a longer order book. We are more on contract, long-term contract, et cetera. So it's, let's say, less volatile as order book than the stainless steel. On Brazil, yes, we see the political trouble of Brazil, but this is no news either. We are living with this political trouble since 2015. Remember Lula and all the story, all the elections, all the Lava Jato, all this. So it is really no news. What will be the impact of COVID in Brazil? We have -- as in Europe, we are discovering because there are some, let's say, industries that are taking measure, some states that are put in place some confinement, and this has an impact on the volumes. But for the moment, I will not say that this -- I don't want to be blind, but I will not say that Brazil is -- seems much different from what Brazil has been during the last 4, 5 years.

[Operator]

We have our next question from the line of Tom Zhang from Crédit Suisse.

[Tom Zhang, Research Analyst]

I just got 2 quick ones. Firstly, on the Q1 raw material impact, just wondering if you could help quantify, in the ballpark, what sort of number that was. And then for Q2, a bit of color again on the negative raw material loss. And then also just on shipments, as I think we talked about earlier, your guidance is a little bit more negative, and I think some of your peers are up to 25% quarter-on-quarter. Is that really just conservatism? And then on Brazil, I would just check with you. Brazil fuel association recently guided real demand to be down as much as 40% in Q2. Do you think that is a reasonable number for us to think about the geographical split? Or is that too negative?

[Timoteo Di Maulo, Chief Executive Officer]

So first of all, on the raw material, so the negative effect were, in particular, in Q1. Q2 is still partially to be done. The -- globally, raw material have no, let's say, shortage. So we have availability of the raw material. We have not seen any problem in the supply of raw material. Then considering shipments, our guidance is a guidance of up to. Then probably, there are other kind of guidance and can be something -- as I said, we can indicate a range. My kind of range is in the range of 15%, 25%. So this is why we said up to 20% to 25%. And concerning Brazil, I think that stainless steel industry, carbon steel, other material, et cetera, they all have different cycles and estimate. We see that our estimate is that it will be very similar for us than it is in Europe. So we are in the same range of shipments that we are in Europe for stainless steel.

[Tom Zhang, Research Analyst]

Okay. Understood. And just -- go ahead.

[Sudhakar Sivaji, Chief Financial Officer]

So let me add on to what Tim said about the raw materials and inventory effect or the raw material effect in Q1. So we did mention that the lower 2-digit impact in Q1 was on back of the nickel price. Now you have to remember and compare it with the gains we made in Q4 of last year. So because of our value chain, this impact will be present in Q2 as well is what we expect, but the extent of the impact is something, which I think we cannot quantify at this point.

[Operator]

We have our next question from the line of Rochus from Kepler.

[Rochus Brauneiser, Head of Steel Research]

Yes. I just want to get to your volume comment, Tim. You said you can think about this 15% to 25% range. Exceptionally, can you give us a bit of color on how bad it was in April? And do you already see, based on the order book you have and what you see in terms of order intakes right now, that this is already the kind of floor, is the May in line with April? Or is this already pointing to a bit of an improvement? That would be my first question. The second one is, can you give us a bit of help how much of your employee in Europe are subject or working under short-term work or are at short-term work right now or similar schemes? And what kind of cost relief can you expect from that tools on average? And then I guess, can you give us an update on this Brazil cash back effect? What do we expect in terms of these tax refunds? And how do these spread over the coming years? I think I stop here.

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Thank you for the questions. So being a stainless steel producer, we have a very good understanding of our order book for the quarter being at, let's say, not at the mid of May, but close to the middle of the quarter. So there is no -- I can't say that there is something different between April, May and June because it depends a little bit regionally of the plant restart and from the order book. So for me, the most important guidance is that we are very solid in the guidance of volumes, which is the range between the 15% to 25%. On this, we are very solid on that. So the risk is extremely limited that we have disappointment on that.Then in -- we don't disclose on what is the impact of the cost, the temporary, et cetera. But what has to be clear is that we are using, as all the company, the temporary employment whenever there is a reduction of the volumes. And this is in parallel, so as much as we reduce the volumes and the need of workers, we use the possibility, which are given by the flexibility of the contracts that we have in every country. But -- and this is extremely interesting because we believe that this is, let's say, the best way to address the actual crisis and keeping the experimented and well-trained workforce that we have in the plant. So this allow us to variabilize a very high level, the cost. And so we are flexible. We can keep a decent level of cost, even at lower volumes, and we will continue like this. But we don't disclose, let's say, exact number on that. On PIS/COFINS, I let Sudhakar, so -- give the numbers.

[Sudhakar Sivaji, Chief Financial Officer]

Sure. Yes. So let me take the question on cash or tax refunds in Brazil. So as you may know, this is a case which has been comprehensively won by Aperam in the past about taxes, which we were levied upon and we overpaid, so to speak, taxes on taxes, which the courts in Brazil have decided in our favor, along with many other taxpayers to be refund. So the sum is basically BRL 1 billion in local currency, that is. And this BRL 1 billion has to go through a set of processes and documentation, as we probably discussed in the last earnings release, and we have started that process and documentation. You've seen that in Q4, we have booked an undistributed gain of EUR 70 million in Q4 in EBITDA. So we expect to get this BRL 1 billion in -- at cash naturally after tax deduction because these are subject to corporate income tax or profit taxes over the next 4 to 5 years. There is a process and documentation going on, and when this is done, it will be recognized on our P&L, but the cash impact should happen over the next 4 to 5. I hope that's clear.

[Rochus Brauneiser, Head of Steel Research]

So I couldn't remember. I thought on last call, I got the impression that you wanted to be more specific on this already at the Q1 stage.

[Sudhakar Sivaji, Chief Financial Officer]

Right. So we did expect a court ruling in April, beginning of April, which is scheduled for the 1st of April in Brazil. Unfortunately, because of the ongoing COVID situation, that has been moved. And once we have visibility on that, we should be able to tell you when we book these cover [indiscernible].

[Rochus Brauneiser, Head of Steel Research]

Okay. Understood. Maybe one small add on. When -- in the performance of your alloys business, I think, at least in the past, that business has been also disproportionately exposed to the energy sector. Can you give us a bit of a color how the collapse in the oil price is now playing into the business potential on the energy side of the business?

[Timoteo Di Maulo, Chief Executive Officer]

So probably in -- probably you are referring to oil and gas, mostly.

[Rochus Brauneiser, Head of Steel Research]

Yes.

[Timoteo Di Maulo, Chief Executive Officer]

So there are different part of oil and gas. First of all, we are very much exposed in what is LNG. Everybody knows that we are the specialist, the worldwide specialist of LNG. And LNG, on the contrary, is a sector that we see that is continuing to be very solid and with project which are still ongoing and for the next year. Then there is a smaller part, the smaller part, which is on the oil and gas, but we are not so much exposed to this part. We have a very broad range of other products. And we are not exposed also to aerospace because aerospace for us has been really a very, very small, really a few percent of our business.

[Operator]

We have a next question from the line of [ Olivia ] from Bank of America.

[Unknown Analyst]

I have 3 short ones. So the first slide is a quick follow-up on the alloys. I think for Q1, the margin seems to be a bit surprisingly low. So I think going into the rest of the year, my question is, how should we think about the margin involvement? So I guess this, in theory, should be a defensive business unit. So should we actually expect that to normalize?

[Timoteo Di Maulo, Chief Executive Officer]

So Q1, as I said, has been impacted for the plant closure due to COVID, while our order book has been completely normal. Now going forward, it is early to have a forecast on what will happen in terms of volumes and the impact. But globally, as I said before, this unique -- this kind of order book that we have on alloys is more stable than the stainless steel, which is more on commodity and spot, et cetera, so less volatile.

[Unknown Analyst]

Okay. And second question is, earlier, you commented that the cost base of Asia is going up. Did I hear that correctly?

[Timoteo Di Maulo, Chief Executive Officer]

Can you repeat? The cost base...

[Unknown Analyst]

Did you comment earlier that you think the cost of production in...

[Timoteo Di Maulo, Chief Executive Officer]

Yes. The nickel pig iron is going up. Yes, some price increase, we have seen this in the nickel pig iron evolution, which means that this impact will have an effect in the competitiveness of the, let's say, Asian producers, which are mostly based on nickel pig iron, yes.

[Unknown Analyst]

Yes. So my question is -- because I think a lot of Chinese stainless mill companies have already built their NPI processing plants in Indonesia. So it's a relatively quick process. It takes a few months. So afterwards, do you still think the relative cost advantage that Aperam have can still hold? Just thinking beyond COVID.

[Timoteo Di Maulo, Chief Executive Officer]

I think it's a long discussion, but just to be sure that within the -- there are 2 kind of producer, the producer which are in Indonesia, which have invested a few years ago to build up capacity in nickel pig iron in Indonesia with a cost base, which is extremely competitive, and we remain extremely competitive when they are fully integrated. These are few. And in fact, the most one, the most -- the biggest one is that [indiscernible]. The large majority of the Asian producer are in China. And in China, nickel pig iron is done from imported nickel ore and on this imported nickel ore, the cost has increased, but this is on China, okay? And we were referring previously to the nickel pig iron producer and cost in China mainly, where there is a large majority of volumes. The volumes are there.

[Unknown Analyst]

Okay. So -- and just one last quick one. Can you comment on the minimum business cash needs on an ongoing basis for the rest of the year, please? Given -- taking into consideration of all the cash preservation measures you've implemented?

[Sudhakar Sivaji, Chief Financial Officer]

[ Olivia ], Sudhakar here. Thanks for that question. I'm sorry, with the current volatility and everything which is going on, we continue to focus on the measures in our hand. And at this point of time, I think we cannot give you a color on that.

[Operator]

We have a next question from the line of Seth Rosenfeld from Exane BNP.

[Seth R. Rosenfeld, Research Analyst]

If I may, on 2 different topics. First, with regards to European imports and second on shareholder returns. You touched on in your presentation, the recent decline in import penetration. I'm just wondering if you can touch on the price behavior of those imports. Obviously, demand has fallen quite sharply into Q2, but have you seen that inflection imports begin to allow Aperam to regain some market share or potentially raise base prices or from your peers in the region? And then secondly, with regards to shareholder returns. Can you just touch on Aperam's ability to continue paying this strong dividend even whilst accepting some limited state support to the short time work schemes given the political pressure to pull back on shareholder returns? And with regards to the buyback, obviously, that's been delayed for 6 months. Under what market conditions would you look to restart that buyback, please?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Thanks. So I will not comment, as usual, on market share or giving guidance on price because these are a competitive, sensitive question. But what I can say is that imports have declined because of the quota, with an effect that has been, let's say, compensating partially what has been the reduction of the market in the recent weeks due to the -- due to COVID. Now how much this will stay? We are in discussion with the European Commission to make sure that the level of safeguard will be adopted at the level of the global market and the economy because this will maintain a fair level of imports in Europe. And this is global. It concerns all the volumes of imports. Then we have one specific antidumping case, which is the -- on hot rolled, and this is operational from -- let's say, from the beginning of April and will have an effect on the hot rolled imports from country like Indonesia, China and Taiwan, and will have an effect. It's no doubt having an effect in -- on the hot rolled. Knowing that this effect on hot rolled is starting, let's say, in April, and we have to see later, what -- how it will be translated. So it's only 10 days -- it's now 20 days that this antidumping is there, and the effect has to be seen in the longer term. But I'm very confident that this will have an effect, which is not yet, let's say, visible. And on top, remember that there are also other fines like the countervailing duty that could come in the future and in the short-term future because we are talking of the next 3 months that can be activated.On dividend, yes, we have given a guidance that we are confident that with the strength of the balance sheet of the company, with the fact that we are continuing generating cash, the company can continue to have a fair dividend for its investor. And this is why the AGM has confirmed the initiation of the dividend. And I repeat, we are really confident that the policy that we have put in place a few years ago of the progressive policy dividend will be confirmed even -- strongly confirmed. I'm fully confident on that. On share buyback, our way of reasoning is the following: was -- as for CapEx, as a foreign expense, et cetera, is the typical reasoning that every company in front of this situation should have. It is, okay, let's see, let's see. Let's preserve the cash and let's see what is the situation. And whenever the situation will be clearer, we will propose the necessary measure to the shareholder. It's clear that on top of this, we will respect all the regulation. Whenever there will be any new regulation or mandatory requirement from the government, we will do it, but we are not taking any kind of special subsidies. We are only using the flexibility of the labor laws that we are using since ever in Europe, in particular. So for the moment, there is no mandatory limits for what we have activated in term of dividend.

[Operator]

[Operator Instructions] We have a last question from the line of Luke Nelson from JPMorgan.

[Luke Nelson, Research Analyst]

Two questions from me. My first question is, again, just on the guided 25% fall in shipment in Q2. Is it possible to give a sense of how volumes would track in Q3 relative to this quarter, if we take that June -- take the June run rate forward? And then my second question is more strategic, long term. I mean clearly, in the past, you've shown an interest in M&A. Your balance sheet is strong, as you just mentioned before, with the buyback. And in this current environment, asset prices are cheaper or at least cheaper than they were 6 to 12 months ago. So maybe can you just remind us again of how M&A fits with your strategy, the criteria that you're employing? And what potential business areas or customer segments could be of interest?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Thank you for the question. So first of all, the -- let's say, we -- in a market like this one, giving a guidance above the quarter, and this is ongoing quarter, is not something which we like because it is -- typically, can be wrong, can be also right, but it is typically wrong. We have some volatility, and we have to manage with the volatility of the volumes that we see. And in particular, the volatility of the volumes in this moment of the COVID will depend a lot on first phase, second phase of the illness or whatever will be the confinement or not confinement in the state. So this -- there is nothing that I can say more, other than the fact that we are confident that we are in this level of volumes, that we are variabilizing our cost at the level of these volumes. And then that we will continue to variabilize our working capital, and we continue to generate cash. This is one remark.Concerning M&A, nothing has changed. Really, nothing has changed. We have had always a very good balance sheet since the last, let's say, 3, 4 years. We have a strong balance sheet. We have looked at M&A. We will continue to look at M&A with the same criteria, strategic criteria. For us, M&A is not a way to put money somewhere. It is -- has to create value for the company, has to be compliant with all the perimeter of the company and has to -- not to endanger the balance sheet. So once we have this criteria, which is creating value, strong value, we have a threshold, which is strongly recreative on the IRR, that does not endanger our balance sheet and create a sense -- also strategic sense, then we are -- we continue to be open. So it is not -- if it was a good moment because prices became very attractive, we will look at, but we will always look with -- in mind the fact that it has to create value and has not to be, let's say, strategic greening or simply the opportunity because the price is cheap. It's not because it's cheap that can create value in the future.

[Luke Nelson, Research Analyst]

Just to push maybe a little bit more, just the comment on engaging the balance sheet. Is -- I mean what level of leverage or gearing is -- would be acceptable?

[Timoteo Di Maulo, Chief Executive Officer]

Well, no, this is not something that has -- eventually, is not limited. It depends also on what shareholders and investors can see as a synergy. If you have a fantastic opportunity, it can be a value -- different, I don't -- the question is the question of how it can create value? Whenever it creates value, and we are convinced that it will create value, we'll propose this to shareholders.

[Operator]

We have no further questions in the queue.

[Timoteo Di Maulo, Chief Executive Officer]

No more question? Okay. So if there are no question, my final remark will be, as you can expect, on our priority of today. Our priority of today are to be sure that in our plants, our people come -- will stay safe, can safe -- stay safe and work in conditions that are adapted to grant their safety and the safety of their family. This is our utmost priority of the moment.The second priority is that we continue to see high volatility, and this high volatility is taking care by our team. We have been through cycle, many times. I'm here since 33 years in stainless steel. The large majority of the team has always been there during the crisis which we have had in the past year, the cycle in Brazil, the cycles 2008, 2009. But before this, we had other -- many other cycles during the decades in which myself and my team were there. So we are confident that we know how to handle this crisis. We are also confident because we have a very strong balance sheet. This is something which is safe for a company in this situation, which give us a lot of freedom in choosing which kind of customer we serve, which kind of options we take. And we also have the possibility to continue to be a company which is regarded positively from investors.So with this, I will -- I thank you for listening to our call, and we'll see you in one of the other investor meeting or for the next quarterly call. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.