Aperam SA

MAD:APAM

Earnings Call Transcript 2019-Q3

[Operator]

Analysts and investors, thank you for standing by. Welcome to the Aperam Third Quarter 2019 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, gentlemen.

[Timoteo Di Maulo, Chief Executive Officer]

Good morning, everybody. Thank you all for attending Aperam's earnings conference call. Next to me is Sandeep Jalan, Aperam's CFO. Together, we'll present the results of the third quarter 2019. Please take note of our disclaimer regarding forward-looking statements. We start with Health and Safety, our top priority. In Q3, our LTI frequency rate was seasonally elevated at 2.2. But the year-to-date average at 1.5 compares favorably to last year's 1.6. However, it is a reminder that we constantly need to work hard and diligently towards our goal of becoming a zero accident company. Let's move to Slide 4 (sic) [Slide 5], with the key developments in the third quarter. The holiday season in Europe always makes the third quarter our seasonal weakest quarter, and this year is no exception. Aperam's EBITDA decreased versus the second quarter, in line with the normal seasonality, while external pressure has remained at a high level. However, we are happy that even at the trough of our -- our flexible and resilient business model is generating resilient result and enough cash to comfortably cover cash return to our shareholders. Our self-help program, the Leadership Journey, remains the major driver for the solid performance in a very difficult market environment with the soft real demand and excessive imports. We continue to make good progress with Phase 3 of Leadership Journey by realizing annualized gains of EUR 16 million in the third quarter. The accumulated total savings of Phase 3 now stands at EUR 1.5 million (sic) [ EUR 105 million ]. We therefore remain well on track to achieve the targeted EUR 200 million gain by the end of 2020. With the persistently challenging economic environment both in Europe and in Brazil and elevated imports in Europe, it is positive news that the European Commission makes progress on the issue of unfair trade. Indonesia is finally covered by the safeguard since the 1st of October, while 2 separate cases on antidumping and countervailing duty have been initiated on hot-rolled imports. We will go through this measure in more detail later, as we expect this to be materialized by mid-2020. Also, Brazil has confirmed the antidumping duty against the China and Taiwan for 5 years, but dropped Finland, Germany, South Korea and Vietnam. However, the import duty of 14% continue to apply to all imports on top of local logistical challenges for any importers. Finally, we have extended our debt maturity profile via successful Schuldschein placement, which further strengthened our solid financials footing. I hand over now to Sandeep for financial highlights.

[Sandeep Jalan, Chief Financial Officer]

Thank you, Tim. Good morning to all of you, and a very warm welcome from my side as well. Moving on to Slide 6. Quarter 3 always marks the seasonal trough, and this year's seasonality is fully normal with regards to both volumes as well as EBITDA. Quarter 3 volumes declined by 12 -- 10%, while EBITDA decreased by 17% quarter-on-quarter. These are the usual quarterly changes in the absence of valuation effects as negative chrome price effects were compensated by positive effects from nickel. We are happy with the good set of results in a weak market, thanks to strong [ variabilization ] of fixed costs on top of Leadership Journey actions and also maintaining a price of our volume policy. Soft real demand and a high market share of imports keep substantial pressure on the European market, but year-on-year comparison demonstrate that -- the full magnitude of the impact of these factors. Earnings per share declined to EUR 0.47 during this quarter, which is a reflection of the seasonally lower profitability and a normal tax paid compared to previous quarter. Cash flow is, again, the highlight this quarter. They were able to convert 90% of EBITDA into operating cash flow. We spent an unchanged EUR 46 million (sic) [ EUR 26 million ] on CapEx, in line with our annual guidance of EUR 150 million. This is enough to keep our projects on time. The resulting EUR 45 million free cash flow more than covers our dividend and enables us to slightly reduce net debt. We think this is a solid performance for the seasonal trough quarter and the additional pressure on working capital resulting from the high nickel prices, which were well mitigated. Looking ahead, we expect a positive free cash flow in quarter 4, including cash release from working capital and a meaningful reduction in net debt. We successfully placed our first Schuldschein financing during this quarter. This was very well received by the market and highly oversubscribed. They kept a volume of EUR 190 million in final subscription. This allowed us to extend the maturity profile of our debt significantly to an[Audio Gap]6 years, with annual maturities in comfortable range not exceeding about EUR 100 million per year, as you can see from Slide 23 in this presentation. Our balance sheet remains strong at about 0.5x of net debt to last 12-month EBITDA, which you see as a competitive advantage. I hand now back to Tim for an in-depth look at the market environment.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sandeep. So let's go to Page 7 and start with imports. The situation there remained unchanged during Q3, with generous quarter relaxation by 3% in July allowed imports to command an excessive market share of 33% in a reduced market. Especially on hot rolled product, imports remained disproportionate with a 43% market share. Annual country quota allow countries like China and Taiwan to run substantially above their pro rata share and distort the market. We already live with version 3 of the safeguard, but we will continue to seek future safeguard reviews. Quarterly country quotas and reduced quotas in view of the contraction of the European demand are a necessity. The new hot-rolling antidumping and countervailing duty cases that the European Commission opened recently are also very important. Because China, Taiwan and Indonesia together accounted for 84% of all hot rolled imports during Q3. The situation looks marginally better in cold rolled, with an import market share at 30%, which is nevertheless excessive compared to the safeguard original intention to keep imports at historical level, around [ 20% to 23% ]. Also here, several countries make heavy use of their annual quotas. While this will end eventually, it keeps now pressure on price and [ leads ] into volumes of domestic producers for the time being. Since October, Indonesia has been included in safeguard, which is an important step that could ease pressure in 2020. Let's move over the next slide, and let me highlight the values distinct trade measures in existence and in pipeline in Europe. And at the moment, safeguard, antidumping and countervailing duties. Antidumping on cold rolled and the safeguard are in effect at the moment. Import remain high, despite several iteration in the safeguard. However, please bear in mind that the safeguard never intended to stop imports like the Section 232 in the United States. Instead, the aim was only to maintain an orderly level of imports. 25% of duty are applicable only if -- for volumes exceeding the quota, which is quite large at about 1.2 million tonnes. As you have seen, there has been 2 additional trade cases concerning hot rolled launched there recently, which are due for results in mid-2020. In July, the Commission has opened an antidumping case on hot rolled from China, Taiwan and Indonesia. The investigation runs at the moment and should be concluded in Q2 next year. Antidumping is very different in nature to the safeguard. The duty is applied on every tonne in scope, whereas the safeguard duty applies only above the quota. You can see how effective antidumping was in cutting unfair cold rolled imports from China. This incurred a 25.3% duty since 2015. And hardly any [ coral ] material is imported in China -- from China since then. It is worth noting that the 3 council that are investigated accounted for 82 of hot rolled imports during the last 12 months. In October, the Commission also opened a countervailing duty case on hot rolled products from Indonesia and China. The focus here is on subsidies and other unfair advantages that these products enjoy. The recent news from the nickel market may play an important role here. Both antidumping and CVD duties, once realized, will be directly reflected in pricing of imports, thereby restoring a level playing field. Let me turn to other market indicator on Slide 9. You are aware of the nickel price spike that occurred in Q3. News around the nickel or export ban in Indonesia created a sudden market distortion compared to fair prices formed by supply and demand. It is widely reported in the media. You have also seen that LME started an investigation in the last few months in nickel trading. Stainless steel inventory remain normal in absolute tonnes. Yet hopes for a nickel price spike induced a restocking cycle, where [indiscernible] places demand remained weak, both in Europe and in Brazil. This keep inventories days high at -- with [ innovate rotation ]. And so there was little appetite for a speculative demand. The demand side has not changed during the quarter. In Europe, automotive, white goods, capital goods and even consumers remain weak. Also, downward [ momentous ] has eased. We continue to see good demand in construction and general industry. In Brazil, automotive remained good. And capital goods show some life from a very low base, while good demand suffers from a low consumer sentiment. Construction has been weak as infrastructure spending is still contracted. Oil and gas has not started to recover. There was little appetite amongst distributor for restocking on the back of the higher nickel price. The pricing delta versus Asia is within the normal historical range. But this keeps base prices in Europe below the historical normal level. I hand now over to Sandeep for a review of the Leadership Journey.

[Sandeep Jalan, Chief Financial Officer]

Thank you, Tim. Moving on to Slide 10. Let's take a look at Phase 3 of the Leadership Journey, Phase 3. We are happy with the continued good progress towards our targets. In the third quarter, we added annualized gains of EUR 16 million in a seasonally low quarter. The accumulated gain stood at EUR 105 million at the end of this quarter, which puts us well on track for realizing our goal of EUR 200 million gain until year-end 2020. In the third quarter, gains were contributed mainly by operational improvements as well as procurements covering raw materials and other. CapEx associated with the Leadership Journey was EUR 6 million during this quarter, and accumulated total CapEx amounted so far to EUR 78 million. The realization of the Leadership Journey thus remains well within our plan. You can see on Slide 21 the improvements in Aperam's results over time, thanks to these Leadership Journey actions, despite operating in a very difficult external market environment. I now hand back to Tim for the outlook.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sandeep. Let's move to the outlook in Page 11. For the third quarter, we expect a normal seasonality, hence an increase in EBITDA. Our forecast is that the weak demand environment will persist. Regarding imports, annual country quota, potentially a low imports to remain at an elevated level during Q4 despite the inclusion of Indonesia in the residual quota. This should keep pressure on volumes and price. Our CapEx guidance for the year implies a slightly higher CapEx for Q4. We continue to maintain efficient working capital and expect some relief, therefore, from -- during quarter 4. Hence, we expect net debt to decrease in Q4. This year so far has been a very tough market, and Q4 will continue to be tough. Despite this, we are very happy with the unmatched cash generation capability of Aperam.Let me conclude our presentation with our corporate access schedule in Page 12. We are looking forward to meet you at one of these events and provide plenty of opportunity to address your question in person. We are now ready to take your questions.

[Operator]

[Operator Instructions] We will now take the first question today from Jason Fairclough of the investor firm, Morgan Stanley.

[Jason Robert Fairclough]

It's Jason Fairclough from Bank of America. I think they got that one wrong. Just 2 questions from me. One on scrap, and then one on M&A. We have seen scrap discounts starting to open up a little bit lately. I'm just wondering if you think we could be at the beginning of a period of secular increase on scrap discounts. And then secondly, on M&A. You have looked at it in the past. There are distressed sellers of assets. We're arguably pretty close to a cyclical low. Is now the time for you to use your balance sheet to full advantage?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Thank you for the questions. So on scrap, the situation is the following. As the -- it is a market. So whenever a market is tight, the product tend to increase. When a market is, let's say, less tightened and the availability is higher, the price tend to decrease. Today, there is -- on top of this, which is normal market effect, there is something which is the nickel and normally [ scrapped then ] to increase a lot when nickel went up, but this increase of nickel is not really based on supply/demand. And it is something which is more temporary and linked to announcement, et cetera. So there has not been [ a real good ] time for adjustment. And probably, probably there is no sense in continuing to see nickel linked strictly to LME. So -- which means decoupling and a real, let's say, market, real market means in a market linked to supply and demand. So -- and concerning M&A, I will say that M&A, yes, there is always opportunity. We will always be a very attentive company because we have this -- a strong balance sheet, and we will take any good opportunity that will -- might be in the market. But also with our profile, with our style, whenever a project is interesting, it's not because it's cheap, but because it creates sense and value, not only strategically, but also from a value creation for Aperam. So today, there is absolutely nothing that we can share. But as a company, we have the duty to stay attentive. And whenever there is an opportunity, and especially, as you said, in low cycle, that could be, we will be happy to take it.

[Jason Robert Fairclough]

Tim, can I just follow-up on the nickel and the scrap? And you're saying that -- I think you're hinting at it, but are you saying that we actually need to see scrap pricing just decouple from LME nickel altogether?

[Timoteo Di Maulo, Chief Executive Officer]

Yes. I mean, what is -- what I was saying is that, as prices globally should be linked to supply and demand and not linked to some short-term effect on, let's say, some exchange rate or some market. We can be, in a sense, different. We can show different price compared to what is the supply and demand price. And scrap, which has all the raw materials as in ferrochrome, as iron ore, et cetera, they [ should ever ]. And I think we are in a good way to make sure that this market will continue to be closer and closer to supply and demand.

[Operator]

We will now take the next question from Alain Gabriel from Morgan Stanley.

[Alain Gabriel, Equity Analyst]

Two questions from my side. Firstly, on your outlook on Slides 10 and 11 on the demand for Q4, which appears to be still subdued and soft. Do you see any evidence of an inflection point in demand in either Europe or Brazil, based on the order book that you are seeing today on either pricing or volumes? Is there any hope that Q1 will be the inflection point? That's one. And two, on your working capital release. Can you quantify the magnitude of the range of release that you expect in the final quarter?

[Timoteo Di Maulo, Chief Executive Officer]

So the -- on demand, we don't see today any sign of a different trend for the few months to come. And there is no bad news, no good news -- or there are a lot of bad and good news, which are mixed and doesn't give a real sense. What we have taken as a profile of a company is the flexibility. And so -- and this probably is something that we will continue to repeat. Our business model is resilient because when there are volumes, we can take them. When there are no volumes, we have to [ flexibilize ] our cost. And the resilience in the result that you see are depending on the fact that whenever the volumes are not there, we stay on a more conservative level of volumes and reduce the costs. So for Sandeep, working capital, maybe?

[Sandeep Jalan, Chief Financial Officer]

Yes. So Alain, moving on to your second question regarding the working capital. So in quarter 4, we are giving a guidance for a continued healthy cash flow generation coming from, first of all, from a healthy level of EBITDA, which we expect to slightly increase. And of course, this will be partly mitigated by the CapEx. CapEx guidance for the year is EUR 150 million. For year-to-date, so far, we have spent EUR 100 million. So that is -- there will be an important cash outflow on CapEx. On top of these flows, we would expect some seasonal release on working capital as well. At this moment, it is very difficult to quantify a number of working capital because, as you know, that even from now on until year-end, there will be certain movements in raw material prices and market prices. And these are very difficult to project. But we will still expect certain release in working capital, which should only contribute to this cash flow. And with this, we should be moving our net debt back down again. So that's a very good news for us.

[Operator]

Our next question comes from the line of Bastian Synagowitz from Deutsche Bank.

[Bastian Synagowitz, Research Analyst]

I have 3 questions. The first one is just on the pricing dynamics in the European market. How far have you been able to list prices in the transaction-based portion of your European business? And do you have any hope that you will be recovering the rising nickel costs in the next quarters? Probably assuming that at least part of your cost base is still referenced to maybe LME nickel and not just the scrap price. Then secondly, on Brazil, it seems like there has been a bit of dynamic when it comes to the Brazilian import duties, which I understand the Brazilian government now aims to cut to just 4% in the next 4 years. You mentioned before that this could potentially balance with a lower corporate tax rate. But that probably can't compensate the entire pricing side you would lose if this really would be implemented. Could you please give us your updated view on that situation? And then lastly, on dividends. I think on the last call, as far as I remember, you said that the net debt-to-EBITDA covenant of less than 1 is the main covenant to your dividend policy, which I guess we can safely expect that you'll keep it in the foreseeable future. Are you still happy to confirm that this is the main covenant you have? And that you will be -- or that you would be happy to stick with that with the view as of today?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. Thank you, Bastian. So starting from price. So I can't anticipate anything about price. It will depend a lot of the dynamic on supply and demand, as I said previously. What we see is that prices have been under pressure for an offer trade in Europe. So 1/3 of the imports, which have determined strictly the level of price and the quantity available for the normal competitors in Europe. We have a set of trade measures. One is just the [indiscernible], which was the inclusion of Indonesia from the 1st of October in the safeguard. The other, let's say, under the study of the Commission. These measures combined will have an effect, will have an effect because reduce the unfair trade. And so reducing the unfair trade, we will restore a more normalized level of price when they will be there. For the rest, we have seen prices very, very low, really very low because the surge of the imports has been extremely, let's say, [ halting ] in the context of decreasing demand, decreasing on real demand in Europe, with some countries which were the locomotive of Europe, like Germany, that have slowed down significantly. So all the impact is there. I don't see how this will continue to go the trend. So more on the optimist side than on the pessimist side from now on.

[Sandeep Jalan, Chief Financial Officer]

So Bastian, thanks for the question. So moving on to the answer to your second question in context of Brazil. So in Brazil, as we have said on our previous calls, as well as what you might have read in the media, for Brazil, the government plan is to strengthen the overall economy and make the economy more and more competitive on international steel business. And import duties reduction is a part of that plan. So there is no, let's say, concrete time line or amount at the moment which are on the table, but the overall plan first consist of streamlining and simplifying the local plethora of taxes. As you know that in Brazil, there's one other country where there are a lot of -- lots and lots of indirect and direct taxes, federal and state. So there is an overall plan to first overhaul the local system, which will -- very, very, of course, useful for us and for the overall economy. It will increase the competitive, which we welcome very, very much. And number two, of course, there will be a phased decrease of these import duties, which will be matched by the indirect tax benefits that we'll capture. So in fact, this should be an opportunity for us and not a risk. As you know, we are used to operate without import duty, even in Europe. And we will continue to have a fair level of trade protection with the antidumping to take care of any unfair trade behavior. You have to also keep in mind, regarding these duties, these affect not only our sales, but also our sourcing of raw materials. So overall, this is not a net [ loss ]. So in totality, we are, in fact -- we welcome this development, which is overall to strengthen the economy, to stimulate more and more consumption and more growth in the country. And this will be overall good for Aperam. Your last question regarding dividend. As you have seen from the very healthy level of cash generation, Aperam cash generation continues to remain very, very strong, thanks to our business profile. And we continue to maintain a healthy cash return to shareholders, and we are very comfortable with this financial policy with progressive dividend, a base dividend of EUR 1.75 and then any additional actions to be decided by the board with discretionary basis. We therefore include [indiscernible] for the cash returns. And this threshold of net financial debt-to-EBITDA, this is a threshold of 1x, but also we are very comfortable. As you know, in the last quarter, we are at 0.5x, so we are very comfortable with this level. Of course, if at any time we cross this level, of course, both will reexamine the policy, and we are very comfortable at this point.

[Bastian Synagowitz, Research Analyst]

Okay. Just, Tim, briefly following up on your comments on the pricing, if I may. Now what you say, that you basically expect some help, obviously, from the further trade protection and that you expect that to be derisked or a better price level in Europe. Given that you said earlier that you deem the current spread toward the Asian price level [ as sale ], does that mean that in the context of the trade protection, you do expect a structural widening of the spreads to Asian prices once the trade protection has come into full effect?

[Timoteo Di Maulo, Chief Executive Officer]

So this is a question that is -- are difficult to answer because the dynamics of -- in China and Asia are extremely complex and depends a lot of their own economy, the growth in China, et cetera. And on top, they are very much influenced by the typical behavior of China, which accumulates inventories of raw material of stainless, et cetera. So it's very difficult to do this. What I can, let's say, say with certainty is that there will always be a premium of the European offer because you are here, you have a service, you reduce the risk for customers. You give them on top, technical assistance, et cetera. So you have a premium in Europe and will remain. Then this premium can be, let's say, reduced by unfair trade, and this is what we have asked the Commission to take care of. Once this will be taken care of, there will be the restoring of a normal market with a premium versus Asia. But I mean, we will never have decoupling of what is the European price with Asia because there will always be a price at which it's better to import. That's normal. And by the way, we don't want to close the European market. Our intention is not at all to close European market because our customer is -- we, as a consumer, need a diversified offer and even a competitive offer. Only we ask to the Commission is to take care of our fair trade and apply the real rules that are on the commerce, on WTO to every country, including Europe, which is the only one that today is really poor in a world where you have the United States, you have even China having a trade that [ would defense ] against Indonesia, and we have the only one without.

[Operator]

Our next question comes from the line of Rochus Brauneiser from Kepler Cheuvreux.

[Rochus Brauneiser, Head of Steel Research]

It's Rochus from Kepler. Two questions, but one is more generically on the European market. Tim, can you talk a bit what exactly or what needs to happen in the European market that the traditional surcharge mechanism is coming back into play? Is this just a question of import levels going down from here? Can you also talk a bit about how you see the inventory situation continuing until the rest of the year? How much incremental destocking potential is available there? And thirdly, can you comment on to what extent the removal of the Brazilian antidumping duties from several countries is impacting your business?

[Timoteo Di Maulo, Chief Executive Officer]

Okay. So on the alloy surcharge, you have to remember that in reality, the European market has always been a mix of different pricing. And the pricing of full, let's say, full price, not distinguishing between base price and alloy surcharge, has always been a large part of the sales that we have done in the past. But then we had also mechanism of alloy surcharge based on daily, on monthly, or even hedging on the base of customer demand. This mix of pricing is still there today, and we will continue. So where -- we will have more and more, let's say, full price when there are -- we have confronted where customers are confronted to high imports. And we will have a less full price when, let's say, the offer will be more European. Why? Because the advantage of the base plus alloy surcharge for the customer is a way to mitigate the risk. When a distributor, a customer and user, whatever it is, take a position in buying, it takes the risk of having a price, which will be later too high or maybe have the possibility to have this, which is lower than market price. The alloy surcharge is a mechanism, which has been put in place to, let's say, reduce the risk to -- for customers to be in a position different from the market. So depending on what will be the market, this mechanism will continue to stay together. And if the market will be, let's say, dominated by imports as it is today, there will be much more, let's say, full price attitude or request. When the market will be more European, so not the [ confronted ] -- the alternative will be a base plus alloy surcharge and will be more in base plus alloy surcharge. So it is a mix which will continue. Concerning inventory. Inventory, you see that while inventory are more or less normal in terms of quantities, in terms of rotation days due to the lower consumption, they are high. Yes, there is an effect -- there is effectively the possibility of some further destocking. But this is not as big as has been at the beginning of the slowdown of the, let's say, the consumption. I think that we might see something like 1 week, which represent something like 2% or 3% of a global consumption. This can still happen during the next month, but will depend a lot of what will be the level of price and the level of recovery and consumption. So now concerning Brazil. And as Sandeep already has anticipated, so the major concern for us was China and Taiwan, and this has been confirmed. So these 2 countries have always been the most aggressive in Brazil and have been able, in the past, to cancel the 14% duty plus the logistics cost with dumping prices. And this is why the Commission in Brazil has confirmed the antidumping duties. While the other countries have less, let's say, aggressive, and they have a much more business profile, so the dumping is not that evident, but we will stay attentive. For the moment, we don't expect any kind of, let's say, of consequence, of real consequence because as said, the 14% is already, let's say, strong protection. And on top of the 14%, you have to consider always that Brazil is a relatively small market in terms of quantity, but very complex in terms of logistics. It is as big as Europe, but with the consumption which is nearly 15x lower. So this is the way we see it.

[Rochus Brauneiser, Head of Steel Research]

To maybe as a follow-up on the surcharge mechanism. I know this is hard to answer. How much do you think need imports to go down in Europe in order to have the more traditional mix in the price offering? Do we need to go back to the kind of 20%, 22% market share? What do you think that the market is jumping back to the more surcharge -- to a higher share of surcharge and base prices somewhere halfway in between? Anything you can share?

[Timoteo Di Maulo, Chief Executive Officer]

So on top of the difficulty to answer this -- to this question, I would say that it is not, let's say, something which is extremely interesting for us. It should be more interesting for customers than for us. For us, the point is having a level of price which is not dumped, that is not the result of unfair trade. But we are really happy to do to our customer the full price if they prefer this full price. We -- there is no problem. There is absolutely no problem in doing this, okay? It's a question of their risk, how they want to manage their risk. They want to smooth it down, take the risk immediately or take the risk later or et cetera. We have always said customer with a mix of these different mechanisms. And of course, our pricing is based on the fact that in total, the margins should be preserved. That's all. That's all. And so I'm not -- I'm sorry, I can't answer better to this question because for us, it's not a question that we discuss internally, because we are happy with the -- all the 3 mechanisms.

[Operator]

Our next question comes from the line of Seth Rosenfeld from Exane BNP.

[Seth R. Rosenfeld, Research Analyst]

First one on Europe and then moving to Brazil, please. With regards to the European antidumping and countervailing investigation for next year, you seem significantly more excited about this than your 2 peers in the European market. Just wondering if there's been any change in buyer behavior that gives you this confidence, excitement. My understanding is that import registration will start in January, with lead times in mills likely starting to roll all over into the new year. Are you already seeing any change in buyer behavior? Are they coming back to domestic suppliers as a result of this? Or still very much looking forward and hopeful? And then secondly, with regards to Brazil. Can you just give us a bit more color on market conditions, your estimate of the year-to-date demand trends? And any forecast for 2020? And with the iron ore price coming down a bit in recent weeks, can you just confirm exactly to what extent or when you think that will start to benefit your cost base in Brazil?

[Timoteo Di Maulo, Chief Executive Officer]

So I don't know about our competitors, but I'm not excited on antidumping. I'm putting only facts that I tried to be -- at least as a fact and pragmatic as possible. The safeguard, including Indonesia, for which we have, let's say, battled during, let's say, 1.5 year is there. And this is a simple fact and this is positive. Because Indonesia had the possibility to increase the quota -- the market share in Europe to the 200%, okay? So this is simply a fact. And I welcome the decision of the European Commission at the end to do this, even if it is 18 months delayed compared to what should have been expected. On the other antidumping, my point, I tried to repeat my point because it's important. My point is I don't see today any, let's say, signs on the economy to be sure that price next year will increase. The only possibility, the only upside could come from the antidumping and the CVD because they will restore, let's say, a fair level play. But as always, the European Commission is difficult to be forecasted, because they can take the right time when they have the right side. They have been even extremely efficient. But sometimes, it's longer and take more time or don't happen. You see in safeguarding, safeguarding, we have reached the third version, and we are still, let's say, working to have a fourth version because with the relaxation is not yet the target of reaching the -- back the 22%, 23% of the market share, normal market share of imports will never be reached with the relaxation of 5% plus 3% plus 3%, which is in the actual version and in a market which is declining or reducing. So you see, it's very difficult. It's not at all my point to be excited about AD. On Brazil, the real economy is -- unfortunately, I can say nothing new, nothing new. The economy remains the economy of a country which is consuming a very small quantity of stainless steel. Remember, I told before, it's 15x less than Europe. It's very, very small. If you put Brazil in Europe, the geographic view will cover Europe. And from a consumption point of view, it will be Belgium or something like this, okay? So it's really, really a small country with small volumes with an interesting possibility for the future because this means also that has a potential. And today, there are no news. The big industry, the capital goods remains flat at very low level, while the rest of the economy continue to stay there. Like in automotive and white goods, et cetera, this continue to be more or less the same trend of the last year. What is good is that we are compensating some disappointing, let's say, news that we were expecting from the restoring of the capital goods, with the new application, new developments and new, let's say, new product. But this has, let's say, a ramp-up time, which will last months and years.

[Sandeep Jalan, Chief Financial Officer]

Seth, if I can add on to that. Brazil, clearly recovery did not materialize this year. But going ahead, as you can see, let's say, from the macro indicators in Brazil, a lot of positive sentiment, particularly in last few weeks, with further cuts on interest rate reaching now record low level in last many years. And Brazilian real also strengthening a little bit. Stock markets in Brazil are also reaching back to high level. So all this is indicating toward some optimism in the economy, also from an important pension reform, which was passed recently. And all this is, let's say, taking the economy back to optimism once again. But again, we cannot count on. Brazil has been in a recovery mode for the last 2 years, but recovery has not materialized. But at least the recent news looks to be positive. They're still not translating into our order books. You asked also about iron ore impact in Brazil. Iron ore, clearly, the recent reduction in the iron ore prices would normalize the Brazil results once again. But there will be a lag, so quarter 3 and quarter 4 will still have certain iron ore price increase impact because we are running with the blast furnace and there is some lag due to the stocks and pricing. But going forward, it is something which should be positive for Brazilian costs.

[Operator]

Our next question comes from the line of Alan Spence from Jefferies.

[Alan Henri Spence, Equity Analyst]

Just 2 quick ones left for me. First one, on the guidance for Q4. I was hoping I could push you a little bit to perhaps give us some ranges of what you feel a slight increase might be. And secondly, on Alloys & Specialties, there is a strong margin performance in the quarter. EBITDA flat, even though sales were falling sequentially. The lower costs that were mentioned that compensated that, was that something unique to the third quarter? Or can we expect that to sustain into the fourth quarter?

[Sandeep Jalan, Chief Financial Officer]

Yes. So thanks a lot for your questions. So regarding quarter 4 guidance. So quarter 4, there will be some seasonal recovery for Europe, but a seasonal weakness in Brazil, which is very traditional. So these are some 2 offsetting elements. But we see that the net impact will be slight positive, so we are not expecting a large increase, but we expect that the result should stay in a positive channel. It's very difficult to indicate a number, but it will be a slight increase that we're expecting.Coming back to alloys' results. Yes, in alloys division, we had certain positive cost developments. Also, thanks to the Leadership Journey actions as well as in alloys, there is an important mix element. The EUR 12 million of EBITDA that you see in both previous quarters indicate a healthy level of EBITDA. And we would continue to expect a good level -- good, healthy level of results from alloys division.

[Operator]

Next question comes from the line of Krishan Agarwal from Citigroup.

[Krishan M. Agarwal, Analyst]

Most of my questions are already asked and answered. Quickly, in the third quarter number, can you indicate as in how much of the negative impact you had from the ferrochrome mark-to-market? And just to give us a sense that your guidance for a slight increase in fourth quarter, does it kind of increase on an underlying basis? Or not?

[Sandeep Jalan, Chief Financial Officer]

Okay. Thanks, Krishan, for your questions. So as we said that in quarter 3, we're expecting some negative impacts from ferrochrome, which was very well-known at the inception in July when we gave the guidance. So then, yes, nickel has been in a positive channel. So these negative effects, they were offset by the nickel positive development. Now our EBITDA guidance moving on to quarter 4 have always been on a reported basis. So on a reported basis, in quarter 3, we have EUR 79 million. And on this, we expect a slight improvement in quarter 4.

[Operator]

Next question comes from the line of Luke Nelson from JP Morgan.

[Luke Nelson, Research Analyst]

Just 1 question from me. Just looking at the Q3, this [ Q2 ] waterfall for Stainless & Electrical. Is it possible to break out the contribution from the improved mix effects? And then following on from that, what are your indications on how that would trend into Q4, just given your guidance of increasing volumes in Europe, offset by reductions in Brazil?

[Sandeep Jalan, Chief Financial Officer]

Yes. Thanks, Luke. So when you take a look at Stainless & Electrical Steel division, and as is very traditional and you'll find back also in the previous years, the very important development is on the steel shipment front, where you see that the steel shipments were down nearly 9% from 440 kilotonnes to 400 kilotonnes, and primarily due to the Europe seasonality, which is very, very traditional. And this was leading to an important effect on EBITDA, which you see, went down from EUR 79 million to EUR 57 million in quarter 3. And moving on into quarter 4, you will see clearly that this, Europe will have a recovery in shipments, whereas Brazilian shipments will go down, and there will be a slight increase in the shipments that we might expect.

[Luke Nelson, Research Analyst]

But in -- question was more in terms of just the contribution from mix effect. Is it possible at all to quantify that outside of the volume mix?

[Sandeep Jalan, Chief Financial Officer]

So the mix effect comes from this Europe versus Brazil mix because on the other hand, normal product mix, we don't see any important change between the 2 quarters. You can see that the sales prices are pretty stable quarter-over-quarter. So it's basically the Europe sales being lower and Brazil sales continuing to stay resilient and not changing much. But it has an important effect also in the profitability mix and eventually in our EBITDA as well.

[Operator]

That is the end of the question-and-answer session. For further questions, please contact the Investor Relations department. I would 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]

Okay. Thank you very much for having participating to this call. You have perfectly understood that this quarter has been characterized by a market and environment which has been extremely difficult, really extremely difficult from volumes point of view, from price, the import pressure and destocking, et cetera. What we have done has been to -- not to search for volume at any price, but being, let's say, mostly focused on costs. And on top of what we have done in terms of Leadership Journey, which we have reported and you have seen, we have also [ variabilized ] the level of cost to the plan to adapt to this at the volumes because of the search for volume could [ have ] be easier for this, but it is not making our company stronger. And so this set of measures has shown the efficiency in the results we are reporting with a solid EBITDA in this kind of condition and in the quarter, which is seasonally the weakest one. And also, in term of the cash flow generation, which is substantial, and let's say, totally in line with our financial policy, which we confirm in term of investing for the sustainability of the company and in term of return to shareholder. So thank you very much. And let's see, as with the roadshow and the meeting, we have already explained for the next quarter. Bye-bye.

[Sandeep Jalan, Chief Financial Officer]

Thank you. Bye-bye.

[Operator]

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