Aperam SA

MAD:APAM

Earnings Call Transcript 2018-Q3

[Operator]

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

[Timoteo Di Maulo, Chief Executive Officer]

Good afternoon and thank you very much for attending Aperam's earnings conference call. Next to me is Sandeep Jalan, Aperam's CFO. And together, we will present the company's third quarter 2018 results.So starting from Page 3. Our top priority, which is health and safety of our employees, we see that our frequency rate was 2.1 in the third quarter compared to 1.8 in the previous one. My conviction is that the safer the company and the more safety-oriented the employees are, the more performance and sustainable the company will be ultimately. I can assure you that we are putting full efforts to become a 0 accident company.Now if you go to Page 4, with the Q3 2018 highlights. I am pleased to report that Aperam is delivering a strong Q3 2018. Actually, it is the best Q3 we ever achieved, and this despite challenging market conditions in Europe. Both EBITDA and net income were up versus the same quarter last year and in line with the expectations despite a very high import pressure into Europe. We are happy with the recovery of Brazil which continued to progress during the quarter. Thanks to our self-help model and our robust business model, we are able to achieve these results despite adverse market conditions I just described to you. The current market environment demonstrates the importance of the Leadership Journey, the Transformation Program, very, very clearly. As a reminder, here we are addressing the next challenges of our market and anticipate the needs of our customers to offer best-in-class products and services in the most competitive way.I'm happy to report that Phase 3 of the program is progressing as planned, with analyzed gains of EUR 30 million at the end of Q3. We made good progress in all identified pillars. Our solid operating cash flow and our strong balance sheet enabled us to invest EUR 49 million, as well as reward the shareholders with EUR 48 million cash returned in Q3 of which EUR 33 million dividends and EUR 15 million share buybacks. This concludes the buyback program offer, buying back 1.8 million shares, with a total of around EUR 70 million.I hand over now to Sandeep, for more deep look in the financial results.

[Sandeep Jalan, Chief Financial Officer]

Thank you, Tim. Good afternoon, everybody. Moving on to Slide #6. Aperam achieved an EBITDA of EUR 123 million in quarter 3, which is a record quarter 3 for Aperam and it is up from EUR 150 million (sic) [ EUR 107 million ] in quarter 3 of last year. In a quarter-on-quarter perspective, the decline versus the EUR 150 million achieved in quarter 2 was mainly due to the seasonal summer slowdown effects in Europe. The EBITDA margin remained at a respectable 11% during this quarter. We believe this demonstrates a robust operation performance and tight cost control in a challenging environment, especially in Europe where high import pressure over the quarter has put significant pressure on our base prices.Our net income during this quarter was EUR 72 million, leading to a basic earnings per share of EUR 0.82 in quarter 3 of this year.Moving on to Slide #7. Quarter 3 shipments declined slightly versus quarter 3 of last year, which is reflecting the negative effect from record high import pressures in Europe and also sliding raw material costs. However, thanks to our top line strategy and a better mix, we were able to improve the EBITDA per tonne by EUR 22 per tonne compared to quarter 3 of last year.Looking at the segments in more detail. In the Stainless & Electrical Steel division, EBITDA improved from EUR 86 million in quarter 3 of 2017 to EUR 101 million in the third quarter this year. This increase was the net result of seasonally stable volumes and import-induced price pressure in Europe, which was compensated by a positive effect in South America. Positively, Brazil remains in a recovery mode, including also positive gains from the weaker Brazilian real. Our top line strategy and contributions from the Leadership Journey lends additional support.Service & Solutions EBITDA increased from EUR 7 million last year quarter 3 to EUR 8 million in quarter 3 of 2018 and the increase in EBITDA was mainly due to a better mix.The Alloys & Specialties EBITDA for quarter 3 improved to EUR 9 million from EUR 7 million in the same quarter last year caused mainly by higher volumes and some effects from product mix.Turning now to Slide #8. In quarter 3, Aperam recorded an EBITDA of EUR 123 million. Depreciation was stable at EUR 35 million. Net interest expense and other financing costs for the third quarter was EUR 7 million. Realized and unrealized foreign exchange and derivative losses were EUR 2 million for this quarter. And income tax for the third quarter was rather low at EUR 7 million, as we had some budget of tax effects in Brazil and also a few smaller one-off items. The results, we recorded a net income of EUR 72 million for the third quarter of 2018.I will now move to cash flow on Slide #9. During the quarter, cash flow from operations was positive at EUR 64 million despite a temporary working capital increase of EUR 74 million. CapEx and other investments for the third quarter were EUR 49 million, including EUR 11 million CapEx for the safety of Leadership Journey. Free cash flow before dividends and share buybacks for the third quarter amounted to EUR 15 million. And during this third quarter of 2018, the cash returns to shareholders amounted to EUR 48 million, consisting of EUR 15 million buyback and EUR 30 (sic) [ 33 ] million of dividend. The cumulative cash returned to shareholders amounted to EUR 166 million this year, consisting of EUR 96 million as dividends and EUR 70 million as share buyback. During quarter 3, Aperam also bought back convertible bonds 2021 with a nominal value of $11 million, which is about EUR 10 million for a total consideration which was EUR 11.5 million.Moving to Slide 10, we continued to have a strong balance sheet. We considered this to be an outcome of our financial discipline and assets that we can build on. Net financial debt at the end of the quarter amounted to EUR 64 million, which was up EUR 20 million -- from EUR 20 million as of June 30, and gearing at 3% remains negligible. Now we are also ready to take over VDM once we get clearance from the European Commission and we assume that you have seen that we have filed a detailed Form CO notification with the commission on 23rd of October and a Phase 1 decision is due by 29th November. The slight net debt increase of EUR 40 million quarter-over-quarter is partly due to the already mentioned temporary increase in working capital but mainly due to continued good cash returns to shareholders, which was EUR 48 million during this quarter.Assuming stable exchange rates for -- until the end of the year, we will have close to EUR 200 million cash returns to our shareholders during 2018.I will now turn the presentation back to Tim.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sandeep. Moving now on Slide 12. I will comment on the pricing environment. Nickel prices remained volatile, with a general downturn trend during the quarter. Starting the quarter from 70 -- or $15,000 the price dropped to $12,500 at the end of the quarter. It was -- it has remained weak since then.Regarding ferrochrome. European benchmark declined from EUR 1.42 per pound in Q2 2018 to EUR 1.38 in Q3 as the Q4 benchmark is at EUR 1.24 per pound. To anticipate provisional safeguard measure and despite the further implementation, imports have so far remained at an extremely high and record levels, with some inventory buildup. In the context of high import pressure, it is not a surprise that lower raw material prices started to spill over to stainless steel prices, as this combination temporarily promotes customer destocks. Taking all factors together put tremendous pressure on base prices. Nevertheless, we believe that the downside has been exhausted at the current level and that we have reached the top during Q4.If you go to Page 13, this slide shows how this low European response kept the market wide open to imports. While we are happy that the European Commission shares our view with the safeguard -- that the safeguards are a necessity and they are appropriate, we think that market data proves that actual measures were taken too soft and too slow. European measures look good on paper but has added as a consequence, an inventory buildup cycle at short-term. Especially some items like an exemption for [indiscernible] on the water, exemption for small counts and lack of periodic quarters created a rush to send as much material as possible outside. We take the view that the European Commission has noticed this concern and we have asked for the support of the European Commission to put this safeguard measure in place promptly which should then gradually ease pressure as the destocking progresses. We, therefore, see the current situation as temporary and we are confident that Q4 marks the top.So if we go in Page 15 for the outlook. While we expect volumes to slightly pick up seasonally in Europe, this will not make up for the severe pressure on base price. Volumes in Brazil continue to recover compared to Q4 last year but we expect the usual seasonal slowdown sequentially versus Q3. We expect Q4 result to decrease under the effect of the temporary tough market condition generated by the wave of imports, combined with destocking, in the context of falling raw material prices and with the significant negative P&L impact on inventory valuation. Nevertheless, we expect an adjusted EBITDA around EUR 500 million for 2018.We are convinced that Q4 2018 marks the trough and looking further ahead, we expect the situation to progressively improve as definitive safeguard measures come in force. In addition, we are very happy that the VDM acquisition is progressing. As already mentioned, we filed the notification to the European Commission on October 23 for measure approval and expect an outcome during Q4.With regard to net debt, we expect these to remain at very low levels, excluding the effect of the VDM acquisition. We are expecting a good free cash flow generation during Q4 due to seasonal effect and the release of working capital, which includes some effect of lower raw material prices. All other items remain unchanged. Phase 3 of the Leadership Journey remains back on track and we confirm the total target of EUR 150 million annualized synergy at the end of 2020. We continue into the sustainable improvement of our facility and our CapEx guidance remains unchanged at EUR 185 million to EUR 200 million for 2018. The total cash returned to shareholders announced and paid year-to-date amounts to EUR 166 million. Adding the Q4 dividend of EUR 0.45 per share, we will earn back approximately EUR 200 million to our shareholders.So now, we are ready to take your questions.

[Operator]

[Operator Instructions] We will take our first question from Cedar Ekblom from Bank of America Merrill Lynch.

[Cedar Ekblom, Analyst]

One question for me, just on the potential for more onerous import safeguards to be put in place. Can you please talk about your expectation on timing, what kind of feedback you've had from the European Commission on seeing those safeguards firmed up? And also, can you talk about the mechanism that the stainless steel industry would prefer? Are we looking at a tariff or are we looking at a country-specific quota? And can you also talk about Indonesia in that context? Because Indonesia was very obviously left out of the safeguards in their current form and that's obviously the region of the world where we are seeing a lot of low cost stainless capacity being ramped up.

[Timoteo Di Maulo, Chief Executive Officer]

Okay, thank you very much for the questions. So safeguard has been an issue now, is temporary and will last 200 days from the 19th of July, which means that it will expire at the end of January. The commission has promised that they will release a definitive safeguard measure, let's say, before the expiry and we are confident that this will be done probably before the end of the year, and this is our expectation. As for the mechanism, let's say, that today, the mechanism -- so it's a first step of the Commission and the mechanism has been not fine-tuned enough in the temporary. So there was a mechanism of the shipping clause which was probably not adapted to the situation of imports and pricing, which will not happen anymore. There was no, let's say, country specification. Globally, what we expect is that the commission gives more substance on the country-specific. We have asked for country-specific allocation, including the fact that Indonesia has to be considered part of the perimeter. Now we don't know what will be the final mechanism, but I believe that I am aware that the commission has well understood what is the necessity of the safeguard, what are the specificity of the mechanism that are to be put in place to become efficient and the experience that we have seen with this mechanism will also give, let's say, them a good frame to take a good decision.

[Operator]

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

[Seth R. Rosenfeld, Equity Analyst]

I think, 3 separate questions. First, for Q4, your comment on full year EBITDA around EUR 500 million implies a very sharp Q4 decline. Can you give us any sense of what scale of raw materials inventory or derivative losses you expect in Q4 to better understand the underlying performance? Secondly, with regards to European spot prices. You sound much more confident than your peers that we're now at a trough in pricing. But when I look at the chart in your presentation on inventories, looks like we're still the highest since 2014. Are you still feeling destocking pressure? And do you see any concern of further price downside ahead of January or February with final measures? And then lastly, please, can you comment on the outlook for 2019 contracts? You're amongst the more exposed annual contracts for half-year contracts. What are your expectations for pricing? Is there any downside risk there going into 2019?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So thank you for the questions. First of all, inventories and prices destocking. As you have seen, the increase of inventory has been evident under the pressure of -- especially the second quarter imports, which have reached a record level of 31%. But inventories have been increased by a few days all in all from the KPIs which are, let's say, the typical KPI of the inventory, the rotation has increased a few days. So these few days indeed can be resolved during a period of 3, 4 months. And especially if we assist to a normalization of the level of imports. What has happened with the imports has been extremely, extremely tough and has been combined with the 2 other effects which are evident. One has been the very high spread between the European prices and the import prices. And the second has been the decline of raw materials or decline in all the prices due to the combined effect of the nickel which came down from $15,000 to the $1,200 (sic) [ $12,500 ] and the chrome which has gone down from at the beginning it was EUR 1.44 and now it's EUR 1.24. So all in all, we expect that this market, which has been affected, which was mostly the -- mostly, it was only the spot market on commodities, will recover progressively, let's say, the level -- at the level of routine and the level of, let's say, dynamics on supply and demand, which has been previously in the market. This situation in Q3, Q4 of price, et cetera is the result of an extremely tough alignment of all the bad stuff. Concerning contracts. As I said before, so the effect of these commodities and this price drop has been mostly and, let's say, has been on the commodity and the spot. Contracts are a much more complex dynamic, which is not a tool, let's say, it's not completely related to the market situation. It's related to what you offer as service of technical product, they're totally different products. You have the mix of specialties, you have a mix of services, et cetera. So in contract, the dynamic has been good even during Q3 and Q4. So we don't expect a significant development of the contract business in a -- for the next year.

[Sandeep Jalan, Chief Financial Officer]

Seth, regarding your first question, regarding the raw material effect and going into quarter 4. As Tim described, this weakening of nickel price and chrome price is recent for the past couple of months, and this is expected to translate in 2 effects in our quarter 4 results. Number 1 being in our P&L account. So in the P&L account, there will be some negative inventory effects, and this is expected to be in a double-digit range. You can understand, it's very difficult to precise an exact number because the raw material situation will continue to evolve from now until the year end. But clearly, when we took -- take a look at the prices as of now, we are expecting a negative inventory effect which will be in double digit euro million. The counter is a positive effect in our cash flow. As we have seen all the past years and quarters and the working capital consumption that we had during the year was also coming a large part from the increase in these raw material costs. And as these costs go down, so the impact on the working capital relief will be much greater than the decrease in the EBITDA part. So this is what we are expecting in quarter 4.

[Operator]

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

[Christian Eric Andre Georges, Equity Analyst]

Just 2 questions. First of all, on your Alloys & Specialties operation. Clearly, the profitability is coming out a lot weaker than it was in the third quarter last year, and that's after you had a very strong first half. So if you could just give us a bit more detail about what's impacting this, if it's also the same kind of situation you're describing with imports. And the second thing is the outlook you're seeing post the election in Brazil, if you're seeing a strong continuation of the improvement you've been highlighting in recent weeks.

[Sandeep Jalan, Chief Financial Officer]

Christian, so regarding our Alloys division. Our alloys division indeed had strongly recovered in first half of the year and even going forward into second half of the year, we see very good order book and market conditions in our nickel alloys business. Quarter 3 result, they are improving versus quarter 3 of last year but not so much compared to quarter 2, which is going down. It is a large part due to product mix effects, as well as the seasonal effect, which we faced in quarter 3. Going forward, we are expecting our alloys result to slightly improve into quarter 4.

[Christian Eric Andre Georges, Equity Analyst]

Thanks. And on Brazil, in terms of how you're seeing the next few months?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So Brazil, what we have seen since the beginning of the year has been a very positive development. This positive development has been a combination of different effects. So a part has been the real demand which has increased by 4%, 5% as we have said. And also, we have had some positive effect on the exchange rate. Now, the elections are done. What Brazil has suffered in the past was mainly the lack of stability, the lack of any kind of political strong guidance for the country, and it was difficult to create an environment, an economic environment, in which the industry could work, and especially on all the parts which are the capital goods. So the infrastructure, the big projects, et cetera. We believe, and this is a little bit -- is confirmed also by the exchange rate. You see that the strengthening of the real in a way is the confirmation that the expectation now are on the -- on a more stable environment in which creating more business. And for us, Brazil remains extremely important because our Brazilian plant is fit for Brazil. We are in a unique position there and we are in a market which has a possibility to develop much more than any other country which -- because of the consumption per capita, which is 7x lower what the consumption per capita which you can find in the developed countries. So we remain confident. I think that we need to see in the few months to come, how this government will take, let's say, the role, how they will, let's say, start to work on the economy, et cetera. But there are a lot of expectation and good expectation on Brazil.

[Operator]

We will now take our next question from Sandeep Peety from Morgan Stanley.

[Sandeep Peety, Research Associate]

I have 2 questions. Can you first explain what is the portion of other and elimination, which is plus EUR 5 million during the current quarter and how should we look at that going into Q4 in 2019? And the second question is on Q4 EBITDA. You said it's going to be lower versus Q3. So should we think that this is going to be the lowest level that the company has seen in the last 2 years?

[Sandeep Jalan, Chief Financial Officer]

Sandeep, regarding your question on the others and elimination. This others and elimination, this line is represented by some cost of the holding and corporate and another important component being the eliminations. As you can imagine, that the Stainless & Electrical division is selling a lot of its materials to Services & Solutions, which is a separate division. Of course, there is a profit in the Stainless & Electrical division. And if inventories are at the end of the quarter, we are obliged as per accounting rules, to eliminate those margins and that is done in others and elimination. Now during this quarter that you have seen, that margins went down compared to the previous quarter. And that means a lower value of elimination. That means some relief from the elimination of margin which was done previously. So it's very difficult to give a precise guidance about this. You can take a look at the past years and globally total. It's very difficult to give quarterly how these numbers could move up and down. But clearly, when the margins are going up, you can expect higher elimination and vice versa. When it's going down, it's releasing because there's not enough profits to eliminate. This is how it's working. Now, regarding quarter 4 EBITDA, quarter 4 EBITDA is going down compared to quarter 3 due to all the effects that Tim described: record-high imports, high inventories, low base prices and additional destocking and negative raw material effects that we talked earlier. And in fact, when you take a look at last time, in 2014, quarter 4, the import situation was even lower. We had 29% imports. Right now, you're taking a look at 31% imports level. And clearly, the situation of raw material negative effects that we see is really very, very high, significantly high compared to that time. And at that time, we were in a range of about EUR 80 million to EUR 83 million and we expect to remain around these levels, even after having absorbed all these impacts that we talked about, including the negative raw material effects.

[Operator]

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

[Carsten Riek]

Two questions left from my side. The first one is on the base prices. You mentioned that we probably see the worst of the troughs in the fourth quarter. What does it mean with regard to the base price level? Do we see a drop or do you see a drop in your base prices of about EUR 20, EUR 30? Or do we talk about EUR 50, EUR 100? That's the first question.

[Timoteo Di Maulo, Chief Executive Officer]

So on base price, I think we have never given a guidance because it is always difficult to describe base price, which are the result of a mechanism of adding the lesser charge and so the transfer of raw material plus the base price, and this is the full price. On top, you have to remember that as Aperam, we are relatively exposed to the spot market, to the total spot market. Relatively that means that we have also a spot market, but it's not the large majority. So the problem of the base price is that has put a strong pressure, an unprecedented pressure under these huge imports and under the fact that there has been a combination also of a spread with China and raw materials which have been extremely high in the moment in which the imports are being started and going down in the rest of the quarter. So all in all, it's a combination of many effects which has put a tremendous pressure. Now this kind of level of price is unprecedented. Unprecedented because if you look at the history of the stainless steel of the last 5, 6 years, you don't this kind of level, and we are confident that there is no more room for decrease. And on top, there is -- there has been -- this price has been generated because of specific conditions. As I said and I repeat, the condition where to try to anticipate the release of the safeguard within a context in which the gap between European and Asian prices were extremely high and where the raw material had a swing. So all this combination has led to this base price, but this is over. This is over because our raw material has normalized, because the gap with China has normalized and because the imports have, in a sense, already started to normalize with the safeguards which has started. And we believe, and this is why we believe that there will be a further normalization, that the definitive measure of the safeguard will be efficient and more efficient than what we have been until now.

[Carsten Riek]

Okay, good. The other question I have is on the product mix in the Alloys & Specialty Stainless business. Obviously, we are seeing quite a bit of increase in revenues per tonne, actually at 7%. Still, it looks like the costs have even increased further. First of all, could you shed a little bit of light why we have seen that massive increase in revenues per tonne? What kind of product mix impact was in there? And b, why have the costs actually increased even more?

[Timoteo Di Maulo, Chief Executive Officer]

So as you probably know, in Alloys versus Stainless Steel, the product mix is extremely diverse for 2 reasons. First in Alloys, we produce flat, long products, components, et cetera, this is the first. Second, we have a mix of what is, let's say, very long-term project with something which is more recurrent. And third one, it is the mix of products depends of the alloy you are selling. There's products that are at 90% of nickel, we have products which are at 40% of nickel and pricing is completely different. So depending on the quarter, you may have a completely different effect, which are linked to this mix of, as I repeat, type of product, type of deal or longer project with the normal and recurring part, and the mix of grades, so the nickel content. So -- and in particular, when you have nickel which is increasing and going at $15,000, you might have -- if you have a mix which is a rich of grade with a high content of nickel, you may have a much higher revenue per tonne.

[Carsten Riek]

So that means that your mix average improved quite a bit but -- so that the costs were even more. Okay, got it. It's probably the aviation industry which performed quite well, why you have seen that big of a return.

[Operator]

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

[Rochus Brauneiser, Head of Steel Research]

Three for me. The first is again, on the outlook for base prices. I guess you're sounding quite confident that the definitive safeguard measures are becoming more effective. Let's assume that there could be a country per country mechanism involving Indonesia. Isn't there the risk that if the pressure from there remains high that over time, the low prices from Asia keeps building into Europe or at least are capping the recovery of the base prices still in -- over the next 12 months? The second question is on Brazil. I'm not sure how much insights you have about what the new President might want to do. What I was hearing is that obviously, there are ideas to push the infrastructure business which would be good for steel consumption. But apparently, also talks about that there could be some loosening of import duties to keep prices from rising too much. And the third question is can you give us a specific number how much your contract portion is in your European business? That's it from my side.

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So the outlook on base price. I feel confident, yes, because let's say, the worst of what could have happened has happened in Q4. And from now, I see already that this is not happening anymore. So the gap in prices between Europe and Asia is not anymore at the level that it has been in Q2. The level of imports are not anymore at the level of Q2 and will go back. And fundamentally, when we see our performance, we can understand that this part of the business which has been impacted by this kind of extremely -- extreme condition is only a small part of our business. Of course, we are impacted because we have some part of commodity, but it is not a large majority. So I'm quite confident that with this, let's say, when the condition which have generated this trough will be disappear -- will disappear, at the end disappear, the condition will recover. There will be some time, but we have seen that there is not -- there has not been a huge buildup of inventory. In the past, in this condition, the market would have increased inventory by 1 month. Here is -- or even more. Here, we are talking of few days. So this is something that in the frame of the next few months will be absorbed. So I'm confident on this. On Brazil, the fact that the internal economy will improve is an excellent news for us and especially because what has been lost in the stainless steel has been all the capital goods and the infrastructure as you correctly pointed. The losing of -- the loosening of the import duties is a part of what is in discussion but has to be done with the rules of the game. First of all, let's say, we have to see what will be the real, let's say, government, but what we count especially in Brazil. We count on a position which is very strong, with a competitive effect in Brazil. We are the only one in a small market with a logistic which is hopeful. And even if there are some imports, okay. But the import, if the imports are the compensation of a much stronger market, for us, it will be good. For the moment, this is very hypothetic and we are not in, let's say, scale, but in the short term this duty will drop. And finally, we don't give so much the part of our contracts but you can understand that from the fact that we have a large exposure to the alloys which are 100% in contracts. We have, as Aperam, we have always been very much focused on end users, on contracts, on customers. With -- the long-term relationship in Brazil is the same. The large majority are direct customers with lower exposure to, let's say, spot sales. In global, our contracts are a majority of what we sell, and this creates a kind of stability of our portfolio of activity, which is good, especially when there is volatility in the market.

[Rochus Brauneiser, Head of Steel Research]

Okay. I understand that you don't want to get more into details about it. Can you give us a bit of a flavor whether the contracts you have are usually more on the 3-month side or annual side? Is there any difference between Europe and Brazil?

[Timoteo Di Maulo, Chief Executive Officer]

So when we refer to contracts, the large majority of the contracts which -- to which we refer are annual. We have a few contracts which are longer than annual and we have also smaller contracts but this is more typical for service and solution to have a contract of 3 months or 6 months for customers which are smaller or medium-sized. Sorry, what was the question on Brazil? It's the same. I mean, do we have exactly the same mix also in Brazil, if this was the question or the specific question on Brazil?

[Rochus Brauneiser, Head of Steel Research]

I think this was fully answering the question.

[Operator]

We will now take our next question from John Tumazos from John Tumazos Very Independent Research.

[John Charles Tumazos, President and Chief Executive Officer]

It's John Tumazos. Excuse me, I'm in the U.S. and I'm not as familiar with the European market conditions as the U.S. conditions. When you're talking about imports into Europe, are you saying that there is a world oversupply? Last year, stainless steel output globally was up 10%. First quarter this year was close to 10%, world steel output, 5% last year, 5% this year. Or are you referring to the U.S. Section 232, 25% tariffs?

[Timoteo Di Maulo, Chief Executive Officer]

So to clarify, we are in a world in which the oversupply is the rule of the game imposed by China and Chinese, let's say, as the expansion of Chinese is Indonesia. So there is a huge oversupply, huge overcapacity of stainless steel. What has happened is that Europe has been so far, let's say, in a normal way of working with a market which is ruled by supply and demand with, let's say, a competition coming from Asia at lower price, but with the premium in Europe, due to the fact that we have a better offer in terms of service, in terms of lead time, we have reduced the risk for customers, we have local assistance, et cetera, et cetera. What has changed specifically in the condition of 2018 has been the introduction in the United States of 232 which has caused a deflection of some bonds from United States to Europe. What has happened is that the 232 is a very hard measure to protect the American market with 25% on every quantity coming in the United States. And so practically, 90% or more than 90% of the volumes coming to the United States are imposed of 20%, 25%. In Europe, what has happened is due to the starting of 232, is that people have tried to anticipate the safeguard measure of which probably they didn't even know what exactly was the way of working. Saying okay, if it happens, that this measure are hard for me. The best is that I anticipate the market, I anticipate the application of the measure, importing more and this is what has happened at the beginning of the year and particularly in Q2. And in a context in which prices were extremely attractive because there was a drop, a significant drop of prices in Asia while in Europe, prices were good. So this big gap has invited the importers to import more than usual, which then has been a problem. Why? Because importing so much in a context where prices on the contrary were falling because of raw material going down has led to a sudden destocking. As soon as you have imported too much, you see that your prices are high so you try to immediately to destock, and so this is the effect on the market. I hope I have answered to your questions.

[John Charles Tumazos, President and Chief Executive Officer]

Sure. And if I could elaborate on my question a little bit. In the U.S., the total import volumes maybe fall 4.5 million tonnes this year and the import share falls 4%. But some of the decline is semi-finished steel and the U.S. lost exports to Canada because the Canadians retaliated, so we lose 2.5% of our production that doesn't go to Canada. So in the U.S., we don't think the imports and exports really changed a lot. The American mills raised their prices, the foreign exporters deliver the steel and they eat the tariff, they pay the tariff. Maybe the imports in the United States would've risen 5 million or 10 million tonnes without the 232 because there's a world oversupply, carbon steel and stainless steel. But the change in import volumes is not huge here.

[Timoteo Di Maulo, Chief Executive Officer]

Yes, probably. So first, probably you are referring to figures that are mixed between carbon steel and stainless steel. For stainless steel, fees are likely different. What is imported in the United States, we are a small importer of the United States, we are importing more specialties. And this is something which has been impacted by the 232 duty, but I think that your figures are not referring exclusively to stainless steel.

[John Charles Tumazos, President and Chief Executive Officer]

Right, I'm talking total. That's right, excuse me.

[Timoteo Di Maulo, Chief Executive Officer]

Yes. Because these are -- I mean, even in Europe, the situation of different kinds of steel is quite different. The characteristic of stainless steel is that they travel better due to the fact that the impact of the transport costs on price is lower.

[Sandeep Jalan, Chief Financial Officer]

In fact, John, if I can give you some numbers from the statistics that we have for the United States. The imports of stainless steel into United States was around 25%, which has retracted significantly to 18% now, which is 7% down and we have seen a similar increase in Europe in percentages.

[Operator]

That is the end of questions and answers 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.

[Timoteo Di Maulo, Chief Executive Officer]

So thank you to all for having participated to this call. Of course, you have seen that in a way, we are happy with the results that we have had, which are demonstrating that we can, let's say, stay well in line with our objectives even in a very tough market condition. Proving that the, let's say, the working on self-help measures, working on the business model on the fact of we're focusing on the end-user, on products with high added value is the good choice that we have done, and we are continuing. Remember that we are continuing focusing on the improvement of our mix. With the arrival of VDM, this will be even more evident in our portfolio of activity. We have some upside which are coming with Brazil. We think that Europe is competitive. In the past, this set of headwinds will have, let's say, completely changed the story of the company. And in fact, even with the record year for imports and with such a huge drop of the base price due to a temporary, let's say, trough, we are presenting results which are -- which we believe are good with a balance sheet which is one of the best that you can find in the market. So thank you very much for having -- assisting, and see you in the roadshow or in the next conference call. Bye-bye.

[Sandeep Jalan, Chief Financial Officer]

Thank you. Bye.

[Operator]

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