Aperam SA

MAD:APAM

Earnings Call Transcript 2024-Q2

[Timoteo Di Maulo, executive]

Welcome to Aperam's Second Quarter Podcast. I'm Tim Di Maulo, Aperam's CEO; and together with Sud Sivaji, our CFO, I will share future insight about the second quarter and the outlook into the third. We will hold a webcast and conference call today at 1:00 Central European Time, where we will answer to your questions. The dial-in details are on our website and the last slide of this presentation. Please take note of the disclaimer in Page 2.

I'm happy to share that a slightly better market environment evolved in the European steelmaking activities in the second quarter. This was just the first step as both demand and pricing still remain clearly below the historical normal. Whatever it is, also a sign that after 7 quarters of extremely low demand and prices, we start to see some recovery. We remain cautious in the face of political and economical uncertainty. However, the combination of better trade protection, a clean inventory chain and cost competitive operation will eventually translate the European economy recovery into significant earning upside. At the same time, the differentiation and growth segments, that means the non-steelmaking activities are all performing solidly. They are in line with guidance and normalized earnings and are on track for realizing their respective 2025 improvement targets. In Brazil, demand remains solid. Shipment and EBITDA were negatively impacted by the delayed ramp-up of the refurbished hot rolling mill in the second quarter. Regional pricing were stable, but tied to the global pricing system. Relatively low import pressure prevail in Europe with an estimated market share of around 18%, which is below the historical [ 22% ]. In the distribution chain, the risk appetite for long lead times remain rather low after the traumatic experience in 2022 and 2023. High transport costs are also beneficial, but ultimately the economic development in China will determine the future direction of the imports.

In the self-help department, Leadership Journey gains are slowly picking up. We realized EUR 12 million gains in Q2 and EUR 15 million in the first half. Nevertheless, we will be on track to realizing the EUR 75 million target for 2024. Why I'm so sure? First, the hot-rolling mill impact in Brazil delayed the realization of associated gains, but this will now be accelerated. Second, we booked EUR 8 million restructuring charges and that validates the EUR 25 million Booster components this year. I would like to link restructuring and [ SG ] this quarter. Restructuring is never easy, but inevitable to secure the long-term viability of the company. Specifically, we have to restore competitiveness after the inflation spike.

I'm very happy as a responsible employer we were able to reach an agreement with our workforce in a constructive and cooperative partnership. Negotiation were tough and sometimes tense but without undue confrontation. Progress was a bit slower than we hoped, but we reached a good compromise. We use natural attrition to the highest possible degree while keeping the Leadership Journey Phase 5 on track. It protects Aperam's cost leadership position in Europe, but also secured employment as we leverage the significant investment in our footprint from the past 3 years. We are happy to have found a way that works for both sides. Let's turn to the market environment. In Europe, demand improved in the second quarter, mainly due to fading destocking. As you see on this slide, distributor inventory marked the new all-time low during the quarter, and we think that it is at the end of destocking. Replenishment of inventory remains, however, very selective. We have not seen any speculative buying as financing costs remain elevated and the demand outlook uncertain. Real demand also improved slightly but remains depressed versus historical normal. 2019 was a recessionary year in our industry, what might serve as a reference point for the current situation. In Q2, these prices initially rolled over from Q1 before starting to rise at a very late in the quarter. There were only small changes regarding the sector trends.

Construction demand remains very low. And due to the empty project pipeline will remain so for some time. Automotive demand is solid, and we see no immediate change. Industrial demand continued to be driven by the dynamic energy and oil and gas areas. We also see some first broader recovery signs. Food, health and catering demand as well as white goods remains below normal, but slowly improved. As already mentioned, new imports remained at a rate at low level during Q2. It should be clear that the future development will correlate with normalization of the European market.

In Brazil, Q2 is a seasonally stronger quarter. Demand remains solid. Imports increased because of the hot rolling mill delay. It prevented us from delivering all required volumes. The unsatisfactory international price environment continued to weigh on margins. Distributor inventory in Brazil is clean, but buying was selective in Q2. Brazilian automotive demand is solid, while transport remains strong. White goods demand is solid, but the wider consumer space is a bit softer. Construction is resilient at a solid level and the capital goods demand continued to be solid.

I hand over to Sud for the financial review.

[Sudhakar Sivaji, executive]

Thank you, Tim, and a warm welcome, everyone. Let us just start with adjusted EBITDA. Technically, it is EUR 1 million or EUR 2 million above what we guided at the last quarter, primarily due to the inventory valuation after processing the data that the valuation benefit turned on to a tiny bit higher than the first estimate. EUR 86 million adjusted EBITDA, yes, that is an improvement, but only from the depths beyond a 2019 style downturn. The recovery has a lot of upside potential as current pricing remains consistent with the recession. Looking at the quarter-on-quarter bridge. The improvement is mainly due to the margin recovery in the European steel operations and a very low double-digit inventory valuation gain. We have 2 exceptional items this quarter, EUR 8 million restructuring costs related to the Leadership Journey Booster. This makes the delta to stated EBITDA. Depreciation contains a EUR 3 million impairment charge for an old redundant alloys production line. The financial effect mainly reflects that we started the quarter with peak net financial debt and the tax is positive in the P&L because of a EUR 56 million net deferred tax asset on tax losses. EPS turned positive at EUR 0.82 and remains positive at EUR 0.13, excluding the special effects. Cash flow should be no surprise as we delivered the first tranche of the net working capital reduction that we promised this year. The Brazil buffer stocks for the hot rolling mill upgrade were consumed. During the first half, net working capital was almost neutral and a 56% cash conversion during that period is quite good for a very challenging phase. Regarding Q3, we project a small increase in net working capital, mainly due to a technicality as purchasing and payables drop in the summer quarter. This should translate into a higher net debt for Q3 before we release working capital in Q4 again.

Back to Q2, the net working capital and the margin increase allowed us to generate an operating cash flow of EUR 136 million. We spent EUR 26 million in CapEx, which left EUR 111 million free cash flow. We already spent 69% of our CapEx budget for the year in the first half. I confirm 2024 CapEx at EUR 150 million. We expect to spend the remainder relatively evenly between Q3 and Q4. After paying EUR 37 million dividend, net debt was reduced by EUR 67 million to EUR 607 million. So we made a good step towards the EUR 550 million we guided for at year-end, assuming stable commodity prices. Net debt-to-EBITDA ratio decreased to 2.8x and should clearly move towards a 1x ratio at the year-end.

As shown last time, without our trading inventory in the recycling business, the ratio would drop close to 0 in Q2 and net cash towards the end of the year. As always, please bear in mind that the whole working capital and net debt outlook is conditional on stable raw material prices. Moving to the next slide on the divisions. Apart from a slightly more beneficial inventory valuation, the segmental performance was in line with expectation and guidance. Europe recovered. Brazil stagnated due to the onetime effect. Recycling and Renewables, Alloys & Specialties and Services & Solutions, our differentiation in growth segments posted normalized high results in a challenging economic environment. R&R's EUR 20 million EBITDA corresponds to the normalized run rate that we shared with you. The slight increase versus Q1 is due to higher shipments as stainless production improved somewhat, and this has compensated for slightly lower prices. For Q3, we expect a slightly lower result as scrap prices softened due to seasonality, while Bioenergia is stable.

S&E, adjusted EBITDA improved substantially to EUR 59 million. While there were some inventory valuations gained in the bridge. I want to highlight a significant mix improvement in Europe as an important driver that more than compensated the price cost squeeze that we guided for. This is a reflection of our growth and improvement strategy and powered by the investments we poured into our footprint over the past years. Additionally, the Leadership Journey gains demonstrate our cost leadership in Europe with the higher leverage to improving market conditions in Europe. Brazil, on the other hand, was impacted by the delayed ramp-up of the hot rolling mill, which erased the normal seasonal uptick. For Q3, Brazil should benefit from slightly higher volumes as the hot rolling mill is now fully operational and Q3 is seasonally a stronger quarter. However, global prices continue to weigh on Brazil. For Europe, the summer quarter marks the seasonal trough with some small inventory valuation headwind in the quarter-on-quarter bridge. We therefore project a comparable result for the segment.

S&S achieved adjusted EBITDA at EUR 16 million despite a persistent weak market environment that is evidenced by slightly lower prices, slightly higher volumes and an inventory valuation gain more than compensated for this. Our distribution growth strategy is progressing well for which you find proof in an EBITDA per tonne at EUR 82 per tonne in Q2. At a low cycle, even this matches the historic normal margin that we shared with you at the 2022 Capital Markets Day, showcasing our capability build up towards 2025. Assuming no further distortion from raw material prices, we expect lower EBITDA in Q3 due to the seasonal summer slowdown in volumes. Alloys & Specialties at EUR 20 million delivered exactly the normalized run rate we guided for this year. The quarter-on-quarter decrease was mainly due to a softer mix and slightly lower volumes. Both are due to the ending of a high-margin special project as we guided last quarter, unless negative inventory valuation works partially against that. Demand in our key markets for alloys remains high, and our LNG capacity is booked out for years.

Looking ahead, there is a clear seasonality in the alloys business with Q3 seeing a seasonal dip. Even in a long order book business like alloys, seasonality will always be there since we utilize summer to also perform annual maintenance in a business running at 100% utilization. Assuming a neutral inventory valuation, we expect the same pattern this year with a lower Q3 results. At the time, when we provided the guidance for the 2024 A&S earnings outlook, this was already known. So the number stands and A&S is on track to become a EUR 100 million EBITDA segment.

Others and Elimination looks very negative this quarter, and there are 2 reasons for this. First, this reflects the margin improvement in the European market. We had similar episodes like this in the past, in 2021 during post-COVID recovery and margins improved and triggered higher intercompany eliminations. You need to consider that this time, we come from an extremely depressed margin level, so the base is set very low. Second, due to our extended value chain, there is also more material flowing inside the company from Recycling to our Stainless Europe segment to S&S causing higher profit elimination. We've said that in stable markets, this line should be a high single-digit negative number per quarter. From this perspective, the positive numbers that we booked during the 2023 trough are now reversing. For Q3, you may plan with a normal number again.

Moving to the next slide. Despite the Q2 improvement, the overall situation remains quite challenging. This keeps the Leadership Journey, our self-help program, at the center of our efforts. EUR 12 million gains in Q2 were realized via mix improvements, the scrap integration and performance and the debottlenecking of S&S. If you had the forest expansion, these are exactly the main drivers of Phase 5 that I named in last quarter's podcast. I'm aware that EUR 15 million gains in the first half could be mistaken for a slow start of Phase 5. Sure, we have some catching up to do, but the delay in the Brazil footprint upgrade had a big impact. Now the mill is running smoothly and the gains will be realized. I also have to stress the significance of the labor agreement in Europe. Bear in mind, we guided the Booster component at EUR 25 million this year, and these gains will also be added over the second half. We are harvesting the fruit of the last 3-year CapEx spend. Automation has yielded efficiencies, and we also have to right size capacity on some product lines. However, the mix improvement that we now start to realize from new products is a key part of this margin improvement. Together with the further progress in purchasing, and the improvement in the non-steelmaking activities, we are on track for realizing the EUR 75 million gains target this year. Regarding the wider question where Leadership Journey gains are visible, I think the first half is a good example. The differentiation in growth segments yielded normal results despite a challenging economic environment with low volumes and significant price pressure. With regards to S&E Europe, the Q1 to Q2 bridge demonstrates how high the leverage to a comparative small market improvement is. Obviously, the further cyclical recovery potential fully supports and validates our case for a EUR 300 million EBITDA improvement in a normalized economic environment.

I now hand over back to Tim for the outlook.

[Timoteo Di Maulo, executive]

Thank you, Sud. For the outlook, I would like to remind you that about 2/3 of our business is in Europe, so we follow the European seasonality. Here, Q2 is the seasonal peak where Q3 is the seasonal trough. We still forecast comparable volumes as Q2 was negatively distorted in Brazil. We guide for a slightly higher EBITDA, mainly because the hot rolling mill related costs drop out. Pricing should be slightly beneficial and the Leadership Journey gain start to materialize. However, against the [indiscernible] forecast, all of our differentiation and growth segments, slightly lower in Q3 for seasonal reason. Assuming stable raw material price, we also expect a slight headwind from inventory valuation. With volatile commodity price, this could still change. This indication does, therefore, not constitute guidance, which we can provide only after raw material prices have known. We'll provide an update in early October. Sud has already talked in detail about the cash flow and the debt development. So I just repeat that we expect net debt to increase in the third quarter and then to drop in the fourth again. All other guidance items remain unchanged. So it has been a tough year so far, and we are now all going into a well-deserved summer break.

We'll be back on the road in September and hope to be able to share good news with you regarding a continued normalization of the market. Please reach out to our IR department, which -- with feedback or if you require corporate access. We took one step back to normality this quarter. Several more are still to be taken. Looking beyond the next quarter, the EUR 300 million EBITDA improvement target to 2025 remains on track. This quarter has showcased our progress in the steelmaking segment. The footprint investment-driven cost and mix improvement is clearly visible in Europe. Cost leadership has been restored, which gives us a high leverage to the business cycle. Brazil should add to this in subsequent quarters. Our value chain transformation to Recycling & Renewables, Alloys and Service is performing already with the successful 2024 ramp-up. The full potential will be unfolding in 2025. Thank you for listening to Aperam's Q2 management podcast. We wish you a pleasant day and look forward to your questions in our conference call.