Aperam SA

MAD:APAM

Earnings Call Transcript 2018-Q2

[Operator]

Dear analysts and investors, welcome to the Aperam Second 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'll present the company's second quarter 2018 results. I am pleased to report that once again, Aperam is delivering an improved quarterly operational performance, thanks to healthy demand in Brazil and in Europe as well as our robust business model. We achieved this despite challenging market conditions and temporary disruption in Brazil due to a national strike. We also continued to maintain our net financial debt at the low level of EUR 20 million during the quarter despite an increase in working capital due to higher raw material prices. In line with our financial policy, our cash returns to shareholders amounted to EUR 90 million in the second quarter, consisting of EUR 55 million of share buyback and EUR 35 million of dividend.I'm also happy to -- with the development of our 3 major strategic initiatives for Aperam. First of all, regarding our disciplined and value-accretive M&A. Merger control proceedings are ongoing for the announced transaction on VDM Metals, and we expect the transaction to be closed during the second half of the year. Secondly, we are making good progress on the transformation of our Europe footprint, with state-of-the-art equipment in Genk cold rolling and annealing and pickling line as previously announced. Today, we are also announcing another investment project in our Genk plant consisting an AOD, Argon Oxygen Decarburization converter. The total CapEx of Genk footprint, including the AOD converter, is about EUR 200 million, and it is planned to be completed during the first half of 2020. Third, the Phase 3 of Leadership Journey, the Transformation Program, is progressing well, with annualized gains of EUR 24 million at the end of the second quarter. Going forward, despite the level of imports in Europe, we remain confident about the fundamentals of the stainless steel market and, in particular, the growth potential of the Brazilian market. We are excited to enter into the next phase of Aperam growth based on our strategic initiative. We expect EBITDA in Q3 to remain higher compared to the previous year, but decreasing compared to Q2 due to the traditional seasonal slowdown in Europe.We'll now walk you through Aperam Q second results. So turning to Slide 4, starting with our priority, which is health and safety of our employees. You will see that our frequency rate was at 1.9 in Q2 compared to 1 in Q1. Although our performance for the first half of the year remained stable compared to the year 2017 at 1.4, I can ensure you that we are putting all efforts to become a zero-accident company. We go now to environment and markets and moving to Slide 6. I will comment on the pricing environment. Nickel prices, although volatile, continue its upward trend with reducing LME stocks and further support from anticipated increase in nickel demand from electrical vehicle cars and a forecast of continued deficit of nickel. Price rose as high as $15,700 in June from a low of $12,500 in January. However, on the first day of July, it, in fact, came down to below $14,000 in light of some concern about some barriers in global growth. Regarding ferrochrome, the European benchmark increased from $118 per pound of chrome in Q1 2018 to $142 per pound in Q2. And Q3 benchmark is at $138. In this context of rising raw material price, stainless steel price continued to rise in Q2 due to raw material increases, however, with an increasing gap with China. Imports in Europe reached the record high there to the levels seen during the highest -- compared to 2014 due to tariff on stainless steel in the United States. As a consequence, European bench price have been under a lot of pressure recently.A recent announcement of [indiscernible] by European Commission is expected to improve the situation. In any case, we remain confident about our capability to mitigate higher pressure on prices and volumes with our Top Line strategy and Leadership Journey. I will now turn the presentation over to Sandeep.

[Sandeep Jalan, Chief Financial Officer]

Thank you, Tim. Good afternoon, everybody. Moving to Slide 8. Aperam achieved an EBITDA of EUR 150 million during quarter 2 compared to EUR 141 million in quarter 1, with a growing EBITDA margin quarter-on-quarter from 11.6% to now 12.3%. Our quarter 2 results remain close to quarter 2 of 2017, but you also report quarter 2 results in the past many years of Aperam. This demonstrates a very robust operational performance in identical context. There in Brazil, a national truckers' strike temporarily impacted our operations and supplies to customers while Europe was subject to record-high levels of import pressures during this quarter. In such a context, our net income during this quarter was EUR 80 million, leading to a basic earning per share of EUR 0.94. We are now guiding for a decrease in our EBITDA for the third quarter of 2018 due to the traditional seasonal effect in Europe, while Brazil continues its strong recovery momentum. Quarter 3 EBITDA is, however, expected to remain above the level of quarter 3 in 2017 despite weaker market conditions. I will now move to Slide #9 about our segment's quarterly performance. EBITDA for our Stainless & Electrical Steel division increased from EUR 111 million in the first quarter to EUR 123 million in the second quarter. This increase in profitability was primarily driven by positive seasonal effects in South America, which remained in a strong recovery mode and despite having had the temporary effect from the truckers' strike, which led to some loss of shipments close to 20,000 tonnes. And we continue to improve our underlying operation through Top Line strategy and contributions from the Leadership Journey Phase 3.Services & Solutions EBITDA decreased from EUR 21 million in the first quarter to EUR 17 million during the second quarter. This decrease in EBITDA was mainly due to lower shipments. Alloys & Specialties EBITDA has been continuing to improve over the past several quarters. And during this quarter, once again, it has improved to EUR 16 million compared to EUR 14 million during the first quarter, reflecting mainly the improvements in the product mix of our supplies. Moving on to Slide #11 on our profit and loss highlights. During quarter 2, we have recorded an EBITDA of EUR 150 million. Depreciation during this quarter was EUR 35 million. Net interest expense and other financing costs was EUR 4 million, including the cash cost of financing of EUR 1 million and other EUR 3 million representing the amortization of convertible bond premium. Realized and unrealized foreign exchange and derivative losses were EUR 3 million, primarily reflecting some ForEx effects in the dollar dividend announced, which are paid in euros. Income tax results for the second quarter of 2018 was an income tax expense of EUR 28 million. As a result, we have recorded a net income of EUR 80 million during this quarter.I will now move to cash flow on Slide 12. During this quarter, cash flow from operation was at EUR 101 million despite a working capital increase of EUR 18 million. This increase of working capital increase is primarily explained by the higher raw material prices impact, which continued on top of quarter 1 effects. CapEx and other investments for the second quarter were EUR 39 million. Free cash flow before dividend and share buyback for the second quarter amounted to EUR 62 million. During the second quarter, as Tim explained, the cash return to shareholders amounted to EUR 90 million, consisting of EUR 55 million of share buyback and EUR 35 million of dividend, including EUR 3 million coming from the withholding tax from quarter 1 dividend, which was paid during quarter 2, reflecting the movement of dividend quarter-over-quarter. During the second quarter of 2018, the company also repurchased partly the convertible bonds 2021 with a nominal amount of USD 25 million for a total consideration of $31.5 million, which is close to EUR 26 million.Moving to Slide 13. We continued to have a low net financial debt level at EUR 20 million as of 30 of June compared to a net cash position of EUR 32 million as of March 31. The increase of EUR 52 million quarter-over-quarter is mainly due to the continued good cash returns to shareholders, which was at EUR 90 million during the second quarter and with some ForEx effects on the dollar-denominated convertible bonds and partly offset by EUR 62 million of positive free cash flow, as I explained earlier. I will now turn the presentation back to Tim.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sandeep. I'm turning now to Slide 15. We are happy with the progress of Phase 3 of the Leadership Journey Transformation Program. We remind you that this -- under this program, we are addressing the next challenge of our market and anticipate the needs of our customers to sustainably offer best-in-class products and services in the most competitive way. Gains under this program continued to ramp up during the last quarter to reach EUR 24 million annual run rate. We made good progress on all identified pillars. Total CapEx related to the transformation program amounted to EUR 37 million by the end of Q2. Moving to Slide 16 now. We are making good progress on the transformation of our Europe footprint with state-of-the-art equipment in Genk. Now we are announcing another investment project in our Genk plant, consisting of an AOD, Argon Oxygen Decarburization converter. The investment project targets to further enhance cost competitiveness, including energy yield and productivity improvement and higher flexibility. The total CapEx for our Genk footprint, including this investment, all the auxiliaries and utilities and earlier announced investment in Genk cold rolling and annealing and pickling line is about EUR 200 million and is planned to be completed during the first half of 2020.Turning now to Page 17. This slide refers to our financial policy. And in pursuit of enhancing sustainable profitability of Aperam, we have announced the total CapEx investment of around EUR 350 million, consisting of Genk footprint, EUR 200 million, and Leadership Journey Phase 3, EUR 150 million. For 2018, our most important actions are: our CapEx guidance remains at between EUR 185 million to EUR 200 million for the year 2018. The total dividend announced can be paid during 2018 amounts to EUR 127 million. The share buyback has been executed USD 8.2 million (sic) [ USD 82 million ], with 1.8 million shares bought back. We also repurchased EUR 31 million of convertible bonds 2021. So we are now ready to take your questions.

[Operator]

[Operator Instructions] We will take the first question today from Seth Rosenfeld, the investor from Jefferies.

[Seth R. Rosenfeld, Equity Analyst]

I'd just like to learn a little bit more about your expectations for the European market and for your realized prices going into the back half of the year. You commented earlier that obviously, there were some significant pressure with higher imports, lower prices in Q2. With regards to the P&L impact, I guess we would expect to see a drop-down in realized prices in the third quarter. Will the entirety of the recent price pressure be reflected in your Q3? Or would we expect an incremental step-down in the course of Q4, recognizing lead times? And on top of that, we've now heard from 2 of your peers in the European stainless space. They both sounded relatively positive that with safeguard measures now enacted, we could actually see a positive inflection in base prices throughout the course of Q3, perhaps gaining some momentum into September. Can you comment at all about your own expectations, whether or not that could be achievable in the current market?

[Timoteo Di Maulo, Chief Executive Officer]

Okay, thank you for the question. So indeed, the European market has been under a strong pressure during Q2. You have seen -- and this is the combined effect of 2 major subjects, one has been the huge price gap between European prices and China; and the second one has been the deflection of the volumes from the United States due to the Section 232. So this has put tremendous pressure on Europe with imports at 30% around -- we achieved a very high number. We have to go back to 2014 before we [indiscernible] with China to see a few months of this level. While here, we are talking of 6 months of average level. So pressure has been extremely high. In Q3, this will be reflected with some prices, which are still under pressure. But then the positive is that, first of all, our, let's say, global action has been there to mitigate all this price pressure. This price pressure has been extremely, let's say, focused on mostly the spot market and the -- some -- the prices of these commodities. And then the second [ good ] that in Europe, we have [indiscernible], which will put a limit on the pressure of imports. And we strongly believe that this is the good tool to continue to have a sustainable environment for Europe, noting that Europe is also performing fairly well in the sense of the consumption. So we have a strong market, which continue to be strong and forecast to be strong. We have no increase of inventories. So we've seen inventories at the right level, showing also that the reason, let's say, mature, let's say, behavior of all the customers not trying to speculate or going in the direction that can be risky with the volatility of the raw material. So I'm quite confident that after the trough that we have seen now in -- at the end of Q2 and in Q3, we'll go back to a recovery of the level of prices and inventories for Europe.

[Seth R. Rosenfeld, Equity Analyst]

Great. Just from a P&L perspective, can you touch on where your lead times are in Europe right now and whether or not if prices do ultimately inflect in the course of Q3 when you would expect to see the benefit of that in your results?

[Timoteo Di Maulo, Chief Executive Officer]

Well, I think that the guidance has been clear. Our Q3 is a quarter, which will be mainly affected by the seasonal effect of Europe. And considering the series of Q3 of the history of Aperam, it is the best Q3 that we can find in terms of EBITDA. So the effect is there, of course. We can't say there is no effect of the trough of price, but it has been largely compensated by many other initiatives that we have and by our, let's say, business model and the robust business model that we have, which exposes a certain limit to this trough price.

[Operator]

We will now take our next question from Kevin Hellegård, the investor from Goldman Sachs.

[Kevin Hellegård Nielsen, Analyst]

Just 2 quick questions, one relating to 2Q and the national strike impact. Can you quantify at all the impact that it had in Brazil? And was it in terms of lost volumes? Or what was the key negative here, firstly?

[Timoteo Di Maulo, Chief Executive Officer]

Yes, this impact has been seen because, indeed, we had to close -- to stop for a moment our plant, our [indiscernible] due to the transport of raw material and it has been, let's say, an impact of around 20,000 tonnes, which can be recalled on the short term. And okay, this impact has been, let's say, really been mitigated by the very good performance of our plant, which were recalled immediately so it was enough one day to recover the performance of the blast furnace, which has been extremely good performance of the Italian -- of the Brazilian plant.

[Kevin Hellegård Nielsen, Analyst]

Okay. And in terms of your Q3 guidance of down quarter-on-quarter because of seasonality but up year-on-year. Given the base price pressure we are seeing in Europe, what is offsetting that on a year-on-year comparison, like, is it other regions? Or is it also just operational performance of Europe?

[Timoteo Di Maulo, Chief Executive Officer]

We have a different effect. First of all, as I said, all the units are working extremely well. We -- from the -- let's say, better performance is extremely good. We have the effect -- the beneficial effect of the Leadership Journey on all the top line that we have. But one important point is also the recovery of Brazil. Brazil is in a recovery mode with a market which is much better than we have seen in the past. And I repeat, the performance of the plant is extremely good, so all this is an upside for us. It's not yet to the Brazil it was in the time with the market to the full extent, but it is really encouraging.

[Kevin Hellegård Nielsen, Analyst]

And what is the base -- not base, but what is the price trends in Brazil versus Europe? Is -- are prices also heading up again after Asia has recovered somewhat? Or what trends are you seeing in Brazil?

[Timoteo Di Maulo, Chief Executive Officer]

Brazil is a different -- is a completely different, let's say, market. So there can't be a surge of imports in Brazil, so the price pressures are completely different. And Brazil is still a market, which [indiscernible] is very active. And despite the fact that we can continue to import some volume, that is not the possibility to do like in Europe -- like it has been in Europe. The price pressure on price is due to the inflection on the United States. So price will continue to have same dynamic, which is the internalization of [indiscernible]

[Kevin Hellegård Nielsen, Analyst]

Okay, so price is -- price momentum is positive?

[Timoteo Di Maulo, Chief Executive Officer]

Yes. Yes, yes. Price has increased with the raw material, reflecting -- fully reflecting the increase of raw material in Brazil.

[Operator]

We'll now take our next question from Tong Zhang, the investor from Credit Suisse.

[Tong Zhang, Research Analyst]

Just one quick follow-up maybe on Brazil for me. You sounded very positive on the market. Can you sort of just confirm, you're not seeing any indications from end markets that there's any tension, there's any downturn forthcoming in the system? And then just thinking about the fixed income market. You've seen the rail weaken a lot in the last few months, which I guess helps you earnings-wise. How much of that are seeing in the Q2 numbers? And is there a risk that that fixed income leads real demand down going forward? Maybe if you could comment a bit there.

[Timoteo Di Maulo, Chief Executive Officer]

So I think in Brazil, Brazil's situation is the following. We have seen something which is unusual in Brazil is that the consumption of stainless steel is normally twice, the GDP one -- the growth in consumption of the stainless steel is twice the GDP growth. And this has been confirmed in this first 6 months even ahead of our forecast now. And last time, we have indicated a lower number than what we have seen in the reality for the first 2 quarters. We see some sectors, which are performing fairly well like, for example, you can see automotive, you can see white goods. You can see also all the agri -- all the machinery linked to agriculture. So we still have a huge potential with recovery of the capital goods, and this will come aggressively. We are confident of the fact that the major issue that -- which were linked to credit and to the instability of Brazil are not going worse, but on the contrary, will recover in the future. We are also confident on the fact that the exchange rate will give some, let's say, boost to the economy in Brazil because we'll limit the import and that will give us some competitiveness from the -- to the industry or the local industry. So we are quite positive. And remember always that Brazil is by far the developing country, which has the lowest level of consumption per capita. So it's something like between 7 to 10x lower than equivalent country. So the potential of expansion of the internal demand is still very high, and we have a very protected market. So we are quite positive on that even if we might be, let's say, lucid on the fact that Brazil will not recover in 1 quarter what were the level before crisis.

[Operator]

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

[Bastian Synagowitz, Research Analyst]

I have two questions left. So just firstly on your guidance and outlook and just listening to all of your comments, it doesn't seem as if you were terribly bearish on the third quarter. If we now assume Brazil is getting better substantially and then we have mostly some seasonality in Europe, but not actually as much price pressure because, as you said, you mitigated most of it with your product strategy. I guess then, it seems quite hard to believe that you'll be slipping far off, say, EUR 130 million EBITDA earmark. Could you give us a bit more quantitative color and maybe some flow as to how was -- you think -- how bad you think the third quarter could potentially be in EBITDA terms? And then just on the investments, which you're taking and obviously, you're ramping up your activity here quite a bit, could you let us know whether these investments are aiming just for pure efficiency and product improvement? Or is there effectively also some debottlenecking in there as well?

[Sandeep Jalan, Chief Financial Officer]

Bastian, so regarding the guidance for quarter 3, clearly, we are expecting a continued strong quarter where our result will, of course, decrease compared to quarter 2, which was again very near the quarter 2 records. And the primary impact is really coming from the seasonal effects. And we are also finding at the same time that it will be harder than quarter 3 of last year, which was at EUR 115 million and this is consisting of many effects. So of course, first effect of that on Brazil is an improvement momentum, and that is giving us a further recovery and improvement in results. On the other hand, as we've talked about the market conditions, it has been a scenario of very high pressure on the base prices. But clearly, a large part of it is getting offset by all the gains and development that we are having on the Leadership Journey with the plants. So with all these combined impacts, we believe that quarter 3 continues to be a solid set of results and cash generation. Regarding investment, I'll give it back to Tim.

[Timoteo Di Maulo, Chief Executive Officer]

So investments really are linked to our philosophy. They are absolutely in line with the flows of our Leadership Journey. Remember that we have done Leadership Journey in 3 phases. Now we're having the transformation. And the transformation means that we aim at really having the most competitive footprint that can help us to fight with these imports in the future, also improving our flexibility to adapt to the market without having any downside whenever there is a volatility in the volume, in the mix, et cetera. So our focus remains, as I repeat, competitiveness and focus on capital. And this plant is exactly in this line, competitiveness and focus on capital.

[Bastian Synagowitz, Research Analyst]

So just to follow up on that one, Tim, so there's no actual volume addition in these 2 investments?

[Timoteo Di Maulo, Chief Executive Officer]

In -- we -- remember that in Europe, we have the capacity. The question is, how much we use the capacity? And what is the sense of, let's say -- what is the arbitrage we -- the arbitration we do between capacity, added value, service to customer mix we want to do, et cetera, okay? So this has always been, so there is no problem about capacity. This is also why you see that imports have grown, but they are not really striking our results despite the -- I mean, the imports are there, and they have been putting some pressure. But we believe that focusing on these 2 pillars, which is cost competitiveness and the flexibility to follow the demand of customer, we'll be able to. And the capacity are there, all right? Whenever the demand in Europe will be increasing, we can follow the demand.

[Sandeep Jalan, Chief Financial Officer]

What I can add about the impact, clearly, both these investments, the investment in our Genk footprint are very much focused on enhancing our cost competitiveness. And without any volumes improvement, we have the returns which are meeting our very high thresholds, which are in excess of 15%.

[Bastian Synagowitz, Research Analyst]

Okay, perfect. Just one follow-up, Sandeep, if I may, just on my question regarding your guidance. I'm sorry for drilling a little bit deeper, but -- so usually a typical volume correction in Europe is typically around 10% or something like that in the third quarter. So let's say 30,000 tonnes and just working off like a very rough contribution margin, I think we have probably a little bit something around like EUR 20 million EBITDA downside from that side, maybe some downside from the lowest business where we could see a bit of seasonality, yet I guess not so much. And then, obviously, still some positive trends against that. So I mean, from those numbers, it feels quite hard to believe that you're going to drop far off this EUR 130 million market. Do you think that that is a sensible assumption? Or...

[Sandeep Jalan, Chief Financial Officer]

Bastian, yes. I mean, your assumptions regarding volumes in a kind of a ballpark is fine, I mean, we cannot give exact guidance on our own volumes for quarter 3. But traditional seasonal impact in Europe is of that magnitude, which is very typical. And yes, we will see some impact therefrom. But there are many, many other moving pieces as well, as I mentioned earlier. So first and foremost, of course, the continued price pressure, continued improvements on the Leadership Journey and continued recovery and improved results on -- of Brazil. Brazil is also gaining more on volumes because, as I mentioned earlier, we talked about [indiscernible] reform in the previous quarter. And of course, there is an upside that we have on top of the continued market recovery and exchange effect. So all the upside in quarter 3, which will offset the impact and price pressure from the high boost in the market conditions.

[Operator]

Our next question comes from Pez Luc, the investor from Exane.

[Luc Pez, Stock Analyst]

Two quick follow-up maybe. Could you be a bit more specific as to the growth you're now seeing in Brazil? Because if I remember right, you were guiding on 7% earlier in the year. Are you in a position to say this is going to be higher? And if so, what number? That's one. And secondly, with regards to the return you're expecting on the Genk footprint improvement, I -- if I remember right, you were talking a return even above 20% in the past at some point. Is it for the -- is it -- well, first, correct saying? And secondly, does this also apply to the AOD investment?

[Timoteo Di Maulo, Chief Executive Officer]

So indeed, the growth in Brazil has been even in excess of the 7% to the 12% named before. So it is a little bit early to be -- that the year will be at this kind of level. But first quarter has been more close to 10% than 7%. So for the moment, we have seen good demand, the recovery of good demand, and we are very happy with the growth of Brazil. We have no sign as of today of downturn so this is good. And let's say, if there is no, let's say, strike in June, we don't see any strike for the moment. So we are quite positive on this. On the return, however, Sandeep, can you...

[Sandeep Jalan, Chief Financial Officer]

Yes, so regarding the -- my returns from our projects, internally, we are very demanding on the return potential of our investment and all those in a condition, which is in line with the market conditions that we see in a context of global reward capacity. And that means we continue to follow the model of our Leadership Journey, where we are continuously enhancing our cost competitiveness and capabilities to serve our customers. And the returns, internal threshold that we follow is the minimum IRR of 15%. And clearly, these announced projects meet these thresholds. And we are very confident that these projects, in fact, have a lot more potential as the market will continue to evolve in the future.

[Timoteo Di Maulo, Chief Executive Officer]

Just to confirm, really, this CapEx for cost improvements and the threshold that we calculate are not based on any kind of, let's say, hypothesis on volumes, on price, or whatever. And it is cost improvement with high threshold and really in excess of the 15%. It's for both the cold rolling plant and AOD without double counting with what is our Leadership Journey, which they own return on investment, which are higher because they have a lot of initiatives, which are on the shorter term. You have seen that the return on the Leadership Journey Phase 3 is at EUR 150 million on recurrent EBITDA gain versus EUR 150 million on CapEx. Okay?

[Operator]

We'll take our next question from Christian Georges of Societe Generale.

[Christian Eric Andre Georges, Equity Analyst]

On VDM, I assume your guidance for Q3 excludes VDM. What's your advice for that? Should we take it into account from Q4? Or do you think we can't yet work out at what point in 2H you're going to be able to account for VDM?

[Sandeep Jalan, Chief Financial Officer]

Christian, so regarding VDM, as you know very well, all these merger control proceedings are ongoing with the European Commission. So at this moment, we cannot and we do not give any guidance for VDM as it is not at all under our control and management. So as of now, all our guidance, whether it is CapEx, whether it is our EBITDA, all that excludes VDM. As and when VDM closing will be done, from that moment on, we will include all the guidance, et cetera, appropriately as required by the market. In the meanwhile, we are making progress on the merger control proceedings. And as we said earlier, we expect the closing to be during second half of 2018. And as of now, we cannot give an exact profile, week or month because this is not -- this isn't by us, but by the authorities. And as of now, the process is ongoing. We will give you more visibility as and when we have it.

[Christian Eric Andre Georges, Equity Analyst]

Okay. And in the meantime, the profit VDM is achieving, all the profit accrues to Aperam once the deal completes. Is that right?

[Sandeep Jalan, Chief Financial Officer]

Yes, you are right, Christian. So we had said earlier as a part of our announcement, there is a document, there is a lockbox arrangement in place since September 2017, which was the effective date for this purpose. And since that date, all the economic results of this entity and the cash flows will belong to Aperam in line with the agreement that we have reached with the seller.

[Christian Eric Andre Georges, Equity Analyst]

Okay. And the last thing, I think that because Brazil has got some agreement with the U.S. under the Section 232 tariff system, have you had any -- we've seen on carbon steel that there has been some more volume shipping into the North American market -- into the GDS market. Has there been any similar situation with you guys on stainless? Has the U.S. become somewhat more relevant?

[Timoteo Di Maulo, Chief Executive Officer]

No. I think that the agreement that has been done between the United States and Brazil and not only with the Brazil, but also with Korea and Australia, is concerning a quarter, which is 70% of work has been shifted to the United States in 2017. So I mean, in fact, this is a reduction. But this reduction is positive for us in the sense that first, we had in 2017, high level of export to the United States because the Brazilian market was really in the trough, while today it's recovering. So this is good to have some more volumes that we can internalize. And second, in the United States, we have better price due to this Section 232. So we benefit -- we are benefiting for the remaining volumes at very high price. So for us in Brazil, this is -- can be seen as positive but not on the surging of volumes, of course, because the -- let's say, the scope of the Section 232 on the contrary to limiting costs.

[Christian Eric Andre Georges, Equity Analyst]

So just a lower volume, but making higher profits.

[Timoteo Di Maulo, Chief Executive Officer]

Yes. Yes, of course. But remember always, for us, any [ tonnes ] sold in Brazil is the best.

[Operator]

We will take the next question from Menno Sanderse, the investor from Morgan Stanley.

[Menno Gerard Cornelis Sanderse, Managing Director]

A couple of small clarifications. Just on Genk, is the IRR you talked about pre- or post-tax? And secondly, I assume this is an addition to the EUR 150 million benefit from the Leadership Program. And finally, on Genk, how many -- or how much of this investment do you think others in the market cannot or are not doing over the same period? So how do you think it actually affects your competitiveness relative to others? And then secondly, on Brazil, you were very difficult to hear, sorry about that. Did you actually say that the 20k of lost tonnes was recovered immediately in the second quarter? Or was it -- has it been pushed out to later in the year? And are you, by any chance, worried about the impact of the election? It doesn't sound like it, but it just seems to be quite a momentous event in the third quarter and the fourth quarter, which could affect economic outlook slightly.

[Timoteo Di Maulo, Chief Executive Officer]

Menno, so first, regarding your question on the IRR. So all the IRR, the way we calculate is typically taking the cash flows into account and not necessarily EBITDA. So it's really post-income tax.

[Menno Gerard Cornelis Sanderse, Managing Director]

Post-tax, yes.

[Sandeep Jalan, Chief Financial Officer]

And it is -- yes, it's always. It's the realization of all the cash flows what we see from any investment. And yes, the EUR 200 million investment is on top of a separate ongoing initiative on the Leadership Journey Phase 3, which is EUR 150 million of CapEx. And these gains are not double counted to become on top of whatever Leadership Journey initiative are ongoing. Regarding the [indiscernible]

[Timoteo Di Maulo, Chief Executive Officer]

Yes. On the CapEx, you have -- you had also the question [indiscernible]. I don't think it's so much relevant for us. We see that in the world, first of all, we are competing against the world. And in the world, the CapEx in stainless steel have been really abundant, even too much. What we focus on is to be the most competitive. We are in Europe. We have [indiscernible], and we focus on the competitiveness of our plant. And these 2, let's say, these combined investments on the footprint of Genk will significantly increase the already strong performance of Genk. So this is about the CapEx.

[Menno Gerard Cornelis Sanderse, Managing Director]

Sorry, sorry. I probably didn't explain myself correctly. Do you think others are doing the same? So yes, the competitiveness of Genk is improving in terms of costs where it is today. But are others that are in the market improving in the same way? So are -- is Aperam creating a competitive advantage or is it just investing to keep up?

[Timoteo Di Maulo, Chief Executive Officer]

I don't know how you can interpret this. I don't know how it can be interpreted, our alpha. But I mean, you are always trying to be more competitive in this market because it's a need of the market. Then the question is what is the need, what is the speed and what is the, let's say, the focus of the company in doing it? You have seen that in Aperam, we have launched our Leadership Journey in 2011. Since 2011, we have communicated every quarter what we have done in terms of cost competitiveness with always the same constant message and constant KPIs and the constant tracking of what we have done, and we are continuing to do that. So this is our philosophy. I can't, let's say, see or counter this, let's say, comment on the speed of the others. Everybody will tell you that we are doing cost improvement because this is a need of the market. There is nobody who is going to say I will not do it. The question is [indiscernible]. Okay. So I cannot comment more, sorry. On Brazil, you had a question, one is the 20-kilo tonne. So the 20-kilo tonne I've lost in the sense that, as you know, we have always, let's say, fully loaded in Brazil and blast furnace is not something that can be, let's say, increasing the performance more than from capacity. So this is not something that we have lost for Brazil. But the performance of the blast furnace especially after the revamping that we have done on the bigger work that we have finished in the first quarter, is extremely good. And this is what I said, the performance in Brazil is improving because of this performance. And second, about election, we are not so much worried. And so in the sense that we have gone through any, let's say, major events in Brazil, you remember about all the claim of the corruption for the president, all these major subjects that has been spoken in Brazil during the last 3 years. So we don't see how it will be different. And on the contrary, we see, as we said, a better climate for the economy and the competitiveness of the industry, which is loosened by the exchange rate. So we are positive the figures of the first 6 months, which could have been eventually also under the question mark of election, are confirming that -- this positive mode of Brazil.

[Operator]

And we'll take the next question from Cedar Ekblom of Bank of America.

[Cedar Ekblom, Analyst]

One follow-up question on Brazil. Can you give us some context for where you see the recovery in that market? If we look at where the trough was in 2015 and where we've seen previous peaks, how far do you think we are through the recovery scenario in Brazil?

[Timoteo Di Maulo, Chief Executive Officer]

So it is not, let's say, only the question of recovery. Brazil, as I said before, has a growth, which is in stainless steel normally double than the GDP growth. So this is 1 quarter so the recovery will be at the speed -- double speed than the GDP, so this is something that we need to see in the future. But the second point is that we see sectors, which are improving extremely well so we see the automotive, which are really having a good momentum, quite good with the levels of, let's say, of growth at around 7%. We have capital goods, which have a strong potential because, remember that what has disappeared was real capital goods. So we are confident. And what is our confidence is mostly on the potential of this consumption per capita of Brazil, Brazil being so far below the rest of the world that whenever the economy will, let's say, be normalized, we strongly believe and we are helping also the industry to understand the benefit of stainless steel and how stainless steel will fit in the sustainability of the country.

[Operator]

We will take the next question from Rochus Brauneiser of Kepler Cheuvreux.

[Rochus Brauneiser, Head of Steel Research]

I have one more generic question. I guess in your outlook comments, you are mentioning your confidence in the structured outlook for the industry. In that context, I'm curious to hear your thoughts, how you see the Asian market moving forward. At the moment, China is apparently flooded with material coming from Indonesia, and they might -- they now started this -- the dumping investigation. Obviously, as of next year, there's the second production plant being ramped. How do you see the equilibrium in the Asian market? And how do you see as of now how that might spill over into the Western markets? Because at the end, we have a kind of a system, which is moving up or down with what's happening in Asia. That's the first question. The other one is maybe, can you help me again on the pricing trends in Brazil? As far as I understood you, you mentioned that you -- the Brazilian operations are following closer to the U.S. prices. My understanding is that, okay, Brazil does well on the domestic side, but the pricing is in a way influenced by what's happening in Asia as well. Okay, with the time lag maybe, but it's also following the markets in Brazil. And only to the extent you're exporting to the U.S., it is linked with the U.S. market. But maybe I got that point wrong in -- early on.

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So 2 questions on Asian market under the consequence of some investments. So first of all, Asian market and China, because the big subject is China. And on China, let's say the capacity is weak. We know that there are so many, let's say, evidence. We are seeing many evidence on the fact that local authority is working on reducing the overall capacity, reducing the most polluting plant, closing them down when they are polluting so much. And there is this fact of Indonesia, but Indonesia to be compared the reality what is Indonesia is representing a few percent of the total capacity of China. Yes, there is, let's say, some kind of initiatives that are coming from the local producer because we've seen the Indonesian competitiveness due to the -- this advantage on nickel. But the end -- at the end is a few percent of the total consumption that is in China. And this is, by far, well below the overcapacity we have seen in China. These effects are far from us, so we are focusing more on our markets. Our effect on the markets we've seen will be 30%, and the effect will be mitigated by all the initiatives that we are taking internally, meaning we are constantly working on our end user, we are constantly working on our business model being out of the commodity, et cetera. And secondly will be the [indiscernible], which will put a limit. So the rest will be an internal vision subject, knowing that for us, the antidumping on a hot rolled is a non-event because we are not, of course, a producer of [indiscernible] products that goes to China. Concerning the pricing of Brazil, I would like to be clear. Pricing -- prices in Brazil are always the highest, let's say, globally among the highest in the world because there is 2, let's say, protection. One protection is in the normal duties, which are 14% fixed for any kind of imports coming to Brazil. Plus Brazil has a strong protection due to its own logistic. It is a huge country and bigger than Europe with a consumption which is, let's say, 20x below Europe, something like this. So it is extremely difficult to grow in Brazil. This means that the pricing are higher. And on top, we have also compared to the most aggressive countries in the world like China. We have antidumping, which are -- which adds on this protection. But today, they are not the principal -- the main protection. The main protection are the first 2 I said. So prices in Brazil continue to be the most interesting prices for us despite the, let's say, the strong increase that has been in the United States. This increase in, let's say, something, which has, for our part, recovered the gap of the United States versus, let's say, Europe, as price, of course, is on top because this protection on [ 25 ]. But still, we prefer to sell in Brazil than selling in the United States.

[Rochus Brauneiser, Head of Steel Research]

Okay. Maybe one quick add-on on the base price outlook again. I think we have heard from your competition that we have seen during this Q2 market distortions that the players moved over to effective pricing, which has led apparently to base prices below EUR 900. And apparently, now the expectation is that the prices are going up with the safeguard measures. Can you give us a sense whether you expect the base prices in the fourth quarter to be moving back to the levels we have seen before the -- rerouting of trades law from the U.S.? Or do you think this is getting to be much more difficult because of the ongoing market turbulences, and particularly the weak pricing in Asia?

[Timoteo Di Maulo, Chief Executive Officer]

Well, I think that we must clarify on one point. This base price of which you make reference is one of the possible reference of pricing. Pricing are always a complex mix between delivery and mechanism of pricing and aging nickel. So you have a fixed price. You have a price with the base price, plus a little surcharge of the month. And then you have price plus a little surcharge of the day, et cetera. And you have, on top, comp. So the market is a mix of all these kind of prices, including the fact that it is very difficult to assess on a single quarter, on a single period a reference due to the fact that depending on when the order has been booked and when it will arrive, it can have a completely different assessment of what is the content of raw material from which you are extracting this base price. So this base price is a construction, which is we have a full price, okay, meaning, let's say, actually in the market, seeing the price gap, seeing the pressure coming from the diverted volume from the United States. I think, okay, we have some opportunity. We take this opportunity as the full price. And then at the end, what has happened is that at the moment you take this opportunity, a few weeks later, nickel is at $15,000. And okay, the $15,000 makes you believe that you have both raw material at $15,000 and so you take the full price minus the $15,000 and you extract the base price, okay? And so this shows a kind of pressure on price. The pressure on price has been seen very well in the slide that you have in our presentation. You see very big gap with China. This gap is not something unknown. We have already experienced this kind of gap and this kind of pressure on prices in the past. The gap is the premium that the European is paying for -- the European, let's say, consumers are paying for domestic production. And it will go up and down depending on the evolution of raw material, depending on this, let's say, pressure or more or less pressure. So I will not take this reference as an absolute reference of what is the price in Europe. I will say mostly the fact that the mix of pricing is changing dynamically. We are following this very well. There is the mechanism of passing through the raw material, which remains in place. So all the raw material increase and decrease has -- goes to the price mechanism and the edging. And the rest is the fact that, as we have announced, there is a pressure, but this pressure is compensated for us for what we are doing as initiatives for our business model and for the fact that we have all the partial export to the commodities. Hope I have clarified.

[Operator]

We will take the next question from Philip Ngotho of ABN AMRO.

[Philip Ngotho, Analyst]

I have 2 follow-up questions on Brazil. I appreciate your extensive comments on it. I was just wondering if you can indicate without disclosing what the exact earnings levels are, how much lower in percentage terms the current EBITDA level is from the pre-crisis levels. And my second question is on the antidumping duties that you referred to. If I'm not mistaken, they're due to expire in October this year. And I was wondering if you have any indication on whether the authorities are planning to extend this. What your view is on that?

[Timoteo Di Maulo, Chief Executive Officer]

So I'll start on the duties. Duties is very -- I would like to clarify because sometimes there is a confusion. Import duties [indiscernible] expedition. It is only the antidumping, which are on some countries, which are on top of the import duties, okay? So we see as major protection of Brazil the import duties, which are 14%. These import duties are on the large majority what is imported in Brazil. It's kind of a parity of Brazil compared to the rest of the world. And we don't see this disappearing, and it's a risk on the short term. On the contrary, they are there to stay. For the antidumping duties, on some countries, which have these antidumping duties, we have revision of the most important of these duties on China [indiscernible]. The revision will be -- will start in -- at the end of Q3. And the -- this duty or this revision will last between 9 months and 12 months. And if at the end of the revision, the commission -- the Brazilian Commission find that they are not anymore the condition for China to dump, then eventually, they can drop them. This is a discussion that we have with the commission. From our point of view, there is no sense in saying that, today, China will not be tempted to continue to dump in the world because this is what is happening, still happening, and -- with the overcapacity. So we are quite confident that this will not be an issue. But nevertheless, our focus remains in Brazil. The competitiveness of Brazil, let's say, giving to customer the possibility to be served in a way that nobody can challenge.

[Sandeep Jalan, Chief Financial Officer]

Philip, coming back to your first question regarding the real earnings. So clearly, they do not indicate the quarterly earnings for Brazil. However, based on all that we have said previously, we see a strong momentum in Brazil. Our results -- and for last year, we had a result, which were still remaining at a low level, EUR 118 million compared to the -- compared with the peak of EUR 175 million that we had in 2015. And clearly, there is a big recovery potential as the domestic market continues to recover. We mentioned earlier some of our end sectors, suggesting a growth of 7% or more in automotive, in white goods, and in agri sectors has a lot in capital this sector. And our growth in EBITDA is in double digits. And of course, this is something to be confirmed later during the year. But as of this moment, we remain very happy with the progress on our Brazilian result. And there is a very, very strong potential for Brazil on the demand increase, on the per capita growth and also now capitalizing the [indiscernible]

[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 thank you for the questions, very interesting question about the situation in -- both in Europe and Brazil. So you have seen that we are quite happy that despite the headwind we have had in Q2, we can present a solid result in Q2 at EUR 150 million. And we are also confident that the result in Q3 will be seen as very positive due to the fact that will be the highest in a series of Q3 since the inception of Aperam despite all the headwinds, but with some good news also because it's not only the headwinds that we have talked about. So first of all, we have a solid demand, both in Europe. In Brazil, there is a recovery. So we see there the potential. We have continued recovery also of our units like the alloys. We have some prospects of growth in Brazil for the next year and even more long-term, but we are working with the trough on this. And also in Europe, we see that the European Commission has taken the right measure to smooth down the impact of all of these disturbing Section 232, all this high pressure coming from Asia. So all this is positive. We are strongly focused in continuing our story, which is based on the pillar of competitiveness and focus on customers. We will continue to show you the results, the progress of this philosophy. And on top, what we are excited about is the initiative -- the strategic initiative we are taking, which are in the sense of strengthening the competitiveness of our footprint in Europe. You have seen about Genk, we have discussed about it, of increasing our focus on customers, the high-end products with the VDM acquisition, which will be closed at the end of the year. And also, we continue to apply our very shareholder-friendly policy with the confirmation of the focus on high return for shareholders. So this is the focus of the company. And I thank you very much for assisting to the conference call and have good holidays for those who profit of summer for holidays. Bye-bye.

[Sandeep Jalan, Chief Financial Officer]

Thank you. Bye.