Aperam SA
AEX:APAM

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Aperam SA
AEX:APAM
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Price: 25 EUR 0.56%
Market Cap: 1.8B EUR
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Earnings Call Transcript

Earnings Call Transcript
2021-Q1

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T
Timoteo Di Maulo
Chief Executive Officer

Good morning, everybody. I'm Tim Di Maulo, CEO of Aperam. Together with Sud Sivaji, Aperam's CFO, I will present Aperam results for the first quarter 2021.Please take note of our disclaimer regarding forward-looking statements on Page 2 and then move to the key developments on Slide #3.I'm proud to present you the best quarter in Aperam's history. The earnings trend in Q1 had 3 major drivers. One, in Europe, demand remained strong but imports normalized, which allowed stainless steel price to improve from an extremely depressed level since 2020. The second is that in Brazil, we saw strong demand with a normalizing share of stainless steel in the mix, which is very beneficial for margins. And third is that the higher raw material prices across the spectrum were driving inventory valuation gains. Those added to a low to middle double-digit EBITDA during the quarter. We see the positive environment persisting during Q2, which we'll talk about in more detail later.On the ESG side, we published our 2020 sustainability report in April. As you know, Aperam is the stainless steel company with the smallest CO2 footprint globally. We also have an ambitious 30% CO2 reduction target until 2030 in place. We have been asked what measure we take to get there. Let me give 2 concrete examples that both relate to our Genk plant. First, in 2021, we have built the second largest solar panel installation in Belgium on our site. The plant will have an output of 20.3 gigawatt hours. This is one example on how we decarbonize our energy intake. But another example are the 2 brand-new downstream lines also in Genk that are ramping up at the moment and that are part of the Leadership Journey Phase 4. These ultraefficient lines will save almost 30% of natural gas and more than 40% of electricity compared to the previous installations. The new rolling line will, therefore, reduce CO2 emissions substantially in addition to noticeable cost saving.Q1 was the first quarter of the Leadership Journey Phase 4 with gains of EUR 8 million. Sud will discuss this in more detail later.Trade has been another dominant theme for the last 3 years since the Section 232 came into effect. We are happy to be able to share 2 positive news. End of April, the European Commission suggested setting antidumping duties on cold-rolled coils from Indonesia and India, which account for roughly 25% of imports. There is a consultation phase until late May, and then we expect the preliminary duties will be set. Taking the example of hot-rolled coils where we have 12 months' evidence, now we think that the suggested rates are high enough to reduce the dumping and unfair business practice from these countries. In Brazil, an antidumping investigation against cold-rolled 304 for Indonesia and South Africa was launched. Both together accounted for a meaningful share of imports at dumping condition. A positive decision should, therefore, be supportive for our local operation.Please now turn to Page 4. Another key development in April was yesterday's announcement that we intend to acquire ELG, a strong and well-established actor in the scrap recycling and superalloys business. This opens a new chapter in the transformation of Aperam. We are convinced that we are buying the right business at an excellent strategic fit and at an attractive price with further potential in the superalloy business. We invest in growing recycling and circular economy businesses. This will become a strong pillar of Aperam and employs 1/3 of its workforce.The combination open us cost-saving potential and growth option for Aperam, increased value for all stakeholders. We embark on an exciting journey to external growth, and we expect to be a more profitable, resilient and cash flow generating company than before. We think the strategic rationale speaks for itself with a clear cost and ESG benefit, and we are also happy with the financial side because we believe the terms allow us to add value to stakeholders. We will discuss the ELG acquisition in detail and answer to your questions in the conference call at 1:00.Please turn to Slide 5 to discuss the market environment. In Europe, Q1 is seasonally a stronger quarter. Business remained good to strong in all major end-market segments except for hospitality, restaurant and oil and gas. Automotive demand was base, partly due to the refilling of the value chain. For Q2, we expect good underlying automotive volumes but slightly less inventory-related demand and a slight impact from the shortage of electronic parts. Wet goods and consumer goods remains strong with no sign of easing. Construction was still a bit soft because less projects have been started during the pandemic, but the recovery is now visible. Industrial demand has been quite weak, but we see first signs of improvement. Distributor inventories appear low but are fully consistent with historic Q1 values, both in tonnage as well in days. Seasonally, we would expect further restocking during Q2 that reverses then over the second half.Imports have not changed much versus last quarter. The market share of imports at 20% was consistent with historical normal level. It was lower in hot-rolled where antidumping keeps a level playing field. In cold-rolled, Indonesia and India accounted for 26% of imports. Registration of the imports from discounts started at the 1st of May, and duties later this month should yield a clear reduction. We are confident that the suggested level of antidumping duties against Indonesia and India will help keep imports at a normal level.I now hand over to Sud for the financial review.

S
Sudhakar Sivaji
Chief Financial Officer

Thank you, Tim, and a warm welcome from my side as well.Please turn to Slide 6 for a look at the segments this time. Let's start with S&S, which achieved an all-time high EBITDA. You know that our distribution arm is very closely linked to the spot market. So in S&S, you find the fastest impact from the positive volume and price development in Europe. Additionally, S&S is CapEx light but working capital heavy, so the higher input prices yield at low double-digit inventory valuation gain this quarter.In the Stainless & Electrical segment, Europe improved to normal levels, while Brazil produced a record quarter. In Europe, volumes normalized, although this was partly driven by refilling of the value chain, which is most likely not sustainable. Prices started to recover, but due to the order book lag, the average for the quarter remained clearly below the historical normal level. Additionally, Europe benefited from a low double-digit inventory valuation gain. In Brazil, Q1 is seasonally the weakest quarter, but a very strong demand kept volumes at a comparable level this year. Higher prices led to a record adjusted EBITDA.Our Alloys & Specialties segment held up quite well, but we have flagged the gap in the order book in oil and gas related to loan products for some time. This resulted in a solid but slightly lower adjusted EBITDA this quarter. A word to the others line, higher shipments through our own distribution with higher profitability implies higher eliminations.Please turn to Slide 7. So group shipments increased by 14% quarter-on-quarter, more than double the seasonal normal. Resulting scale effects, together with higher prices and low to middle double-digit inventory gains, yielded the best adjusted EBITDA in Aperam's history. The financial result was slightly positive due to a EUR 7 million FX and derivative gains, and a normal tax rate of 20% translated to higher EBITDA into a record earnings per share. Operating cash flow remained almost unchanged quarter-on-quarter and on a solid level despite a significant investment of EUR 123 million in working capital. Working capital reflects higher volumes, higher raw material prices and a positive outlook into Q2. The positive market environment will probably require us to temporarily reinvest additional working capital in Q2.CapEx was front-end loaded at EUR 46 million, the half of it being Leadership Journey related. This is consistent with our guidance for group CapEx at about EUR 130 million for the year. The resulting solid free cash flow at EUR 58 million was enough to cover the dividend payment and reduce net debt to just EUR 56 million. Our balance sheet is ready to take on the debt that comes up with ELG acquisition later this year.Please turn to Slide 8 for the Leadership Journey. We realized EUR 8 million gains during Q1, which is fully in line with the plan. Please bear in mind that the changes to the footprint required the new Genk lines to be up and running. Genk has started to produce its first coils in Q1. But these are complex tools that will still need some time to ramp up before reaching full efficiency. This will then put us in a position to exercise further footprint changes. You will also see this on the cash-out chart to the right.We spent quite a large amount of EUR 23 million on CapEx associated with final payments to Genk. And we invest in improving the capabilities of our Châtelet rolling mill, which will enable us to produce new speciality grades. This has been the first quarter of the Phase 4 program, and we first need to invest, which will then translate into future savings. Cash-out associated with restructuring has not yet started.While executing our detailed Phase 4 plan, we are already working on further improvement measures beyond 2023. Our Board approved the investment for revamping our hot-rolling mill for long products at Imphy with a focus on specialities. And we brought back the Genk AOD project that we postponed due to Section 232. Both projects, together with the planned speciality center in Gueugnon, will further contribute to the reorientation of our product portfolio towards specialities.Tim, back to you for the outlook.

T
Timoteo Di Maulo
Chief Executive Officer

Thank you, Sud. You'll find the outlook on Slide #11. Let's make it short. Q1 was a very good quarter on the back of the recovery. Q2 should be a fully normal quarter. That means that prices fully normalize, while volumes and imports remain at a normal level. As a consequence, we project higher adjusted EBITDA and a record earnings gain. With respect to the usual working capital build during Q2 and post the dividend payment, net debt should decline slightly. So our balance sheet is ready to assume ELG's EUR 357 million enterprise value in the second half. Guidance for group CapEx, the tax rate, Leadership gains and the dividend remain all unchanged.To sum it up, we are looking with high confidence into Q2. There was a lot of news this quarter, and we look forward to discussing our main initiative for strengthening Aperam. On Slide 10, you'll see our Corporate Access schedule, and we look forward to meeting you at one of these events.Thank you for listening. We will answer your question regarding Q1 results and the ELG acquisition in the conference call today at 1:00.