Aperam SA

MAD:APAM

Earnings Call Transcript 2021-Q3

[Timoteo Di Maulo, Chief Executive Officer]

Good morning, everybody, and welcome to Aperam Q3 2021 results comments. I'm Tim Di Maulo, CEO of Aperam. I will comment quarter's highlights and trends together with Sud Sivaji, Aperam's CFO. We will answer to your question at the webcasted conference call today at 2:00 Central European Time. You'll find the details on our website and the last slide of this presentation. Please take note of our disclaimer regarding forward-looking statements on Page 2 and then move to the key developments on Slide 3. The third quarter is usually Aperam's seasonal trough, so I'm more than happy to present another set of record results, the third in a row. Market trends remain positive, both in Europe and in Brazil. Strong demand is reflected in a very solid order book. Prices continue to be supportive and combined with another EUR 11 million gains through the Leadership Journey 4, more than compensated for import cost inflation. We also take recurring strong demand and very solid order book as a confirmation of our growth and improvement strategy to 2025. This is the time to upgrade our footprint and to improve our product portfolio. This will enable us to transition to a higher normalized earnings level in the future. At the same time, we think about our shareholders. We completed the announced share buyback in September. We added an addition EUR 100 million back to our shareholders on top of the EUR 140 million dividend that we will pay this year. This cement our industry-leading cash return to shareholders. We are not just claiming an efficient capital allocation, we are living it. Regarding unfair trade in Europe, there is more positive news. The European Commission extended the antidumping duty on cold-rolled products from China and Taiwan by another 5 years. Positively, it also broadened the scope EBIT. It has been widely flagged that Europe and United States agreed to change S232 into a tariff-rate quota. As Aperam has no industrial footprint in U.S.A., we see only upside from this change. Historically, we shipped high-value material to the United States, which we could resume in the future. More important, however, is the derisking of the European market as the new regime prevents a base price decoupling to the disadvantage of Europe as it happened in 2019 and '20. In Brazil, the long-discussed import duty cut by 10% from 14% to 12.6% happened in November. As you know, we are investing in our assets. We believe in the growth of the market in Brazil, and the product portfolio upgrade will also increase our competitiveness versus imports. The ELG process remains on track, and the commission has published the case officially in October, which means the clock is ticking. No issue have emerged so far, and we continue to expect to close the transaction this year. On the ESG front, we made major progress versus our Vision 2030 targets. Aperam is the first stainless steel producer, received certification for ResponsibleSteel for our main sites in France and in Belgium. On Slide 4, we take a closer look. In ESG world, the focus appear to be a bit narrow on greenhouse gas emission at the moment. We are happy that we already have a leading position in the CO2 emission arena. Even more important, we have a footprint that can be adopted to Net Zero with comparable small CapEx. Our scrap and electricity-based production in Europe is a key asset. Please note that Aperam Stainless Europe is already today aligned with taxonomy criteria applicable to activities contributing to climate change mitigation. We invite you to compare our environmental and social performance with the sector, and you will see that also here, we are leading from the front. ResponsibleSteel, however, goes far beyond just the CO2 or environmental aspect. ResponsibleSteel is the standard-setter and the auditor for the steel sector in all aspect of the E, the S, and the G. The standard for social and governance aspect like neighborhood relations, responsible sourcing, human rights and labor conditions are defined and then audited and verified on site. We are proud that Aperam is the first stainless steel company that has received the certification of its plants. This guarantees to our customers that our steel is responsibly produced, with the responsibly sourced raw material and the minimized impact on the environment. Having this certified is an asset that we expect to gain massively in importance over the coming years, especially versus imports that mostly originate from sources that fall way behind domestic European standards. Please now turn to Slide 5 for the market upside. With regards to the market environment in both Brazil and Europe, I can repeat most of what I said in Q2 already. Demand remains good on both sides of the Atlantic, with strength especially in consumer-driven sectors. Demand for the automotive industry was mildly impacted by components shortage. The same was true for construction demand due to the levered prices and shortage of construction material. However, this was balanced by the continuing recovery of laggard segments. Our capacity is therefore fully utilized, and our order books is very solid and offers a long visibility. Distributors inventory in Europe has increased slightly, but actual tonnage remains 14% below the seasonal average. Also the inventory reach remain below normal. Usually, we see some destocking till the end of the year as customer polish their balance sheet. This appears to be less needed for this year. On the import side, you might notice an increase in hot-rolled segments. This is a reflection of early 2021 market condition that some importers use opportunistically. The market share of cold-rolled imports was flat quarter-on-quarter. Despite the good availability of stainless product, the strong demand drove base price higher. While we stated that pricing had just normalized on average during the first half, they are now at a premium compared to the past. However, please bear in mind that part of this is a reflection of input cost inflation, especially higher prices for natural gas and electricity. These are industry-wide phenomena, and as long as demand remains strong, we expect this to be reflected in end products prices. I hand over to Sud for a view of our financial performance.

[Sudhakar Sivaji, Chief Financial Officer]

Hello, and a warm welcome to all of you. Three record quarters in row, and again, record quarters from Brazil and S&S. In the S&E business, Q3 is a seasonally trough quarter in Europe, and this year was no exception. After exceptionally high Q2, regular distributor destocking happened in Brazil ahead of the seasonally weaker quarters. The 2 factors explain why stainless and electrical steel shipments contracted by 13% versus a very strong Q2. Adjusted EBITDA was at a comparable level in Europe as higher prices and higher inventory valuation gains compensated lower volumes and higher costs. We expect a seasonal improvement in Q4 despite the energy cost inflation. In Brazil, a strong product mix and favorable prices resulted in the best quarter ever. For Q4, we expect the usual seasonal decrease and will have a small impact from asset upgrades planned in 2022. The volume side at S&S, our distribution arm, also witnessed the usual seasonality. This was more than compensated by higher spot prices and higher inventory valuation gains. We expect a mild destocking cycle in Q4, which should also support our volumes. Lower inventory valuation gains should be reflected in EBITDA. S&S benefits directly from the current regionalization of supply chains, which supports our ambitious growth targets for this segment. We shared it with you in our Capital Markets Day presentation. On our Alloys & Specialty segment, we experienced the usual seasonal demand drop in Q3. This is reflected in EBITDA due to comparatively high fixed costs despite slightly higher inventory valuation gains. We expect a seasonal improvement in Q4, which should put Alloys & Solutions on track for a year above average. Others and eliminations still reflect the high internal shipments from stainless and electrical steels to S&S that can cause comparatively large eliminations. Our corporate costs have not changed materially. Please move to Slide 7 for the Aperam group view. Q3 volumes were purely seasonal, as said. Because of the recurring strong market environment, we expect the usual improvement in Q4 and more so in Q1 next year. The negative effects on the earnings side were more than compensated by the higher prices, tighter cost control and higher inventory valuation gains. This resulted in the best EBITDA in Aperam's history. It is important to note that this was achieved despite a first impact from cost inflation. We had to absorb costs in Q3 due to a long order book on one hand and higher spot prices for energy and electricity on the other. The same will be true to a larger extent for Q4, which we expect to see a higher impact. Going forward in subsequent quarters, we expect compensation via higher prices if the situation lasts structurally. The financial result was positive this time due to a EUR 10 million ForEx gain caused by the stronger Brazilian real. EPS declined by 5% quarter-on-quarter. This is due to a normalized tax rate to 19% from a 7% in the previous quarter because of an absence of exceptional gains from the PIS/COFINS and tax loss carryforwards that we enjoyed in Q2. Again, Q3 EPS itself is larger than whole of 2020. Moving to the cash flow statement. Because of the higher profitability, we were able to generate a good operating cash flow of EUR 110 million despite another EUR 175 million investment into working capital. This is reflected in a cash conversion of 40%. We will look at working capital in more detail later. Cash and interest payments at EUR 10 million remain low due to our solid balance sheet and our existing use of state tax loss carryforwards, including PIS/COFINS credits in Brazil. Thanks to the improved performance of Brazil since Q3 of 2020, we expect to consume all of the PIS/COFINS credit since then until the end of 2021. CapEx at EUR 21 million was a bit below the guided run rate. We stick with our annual guidance of EUR 165 million, so Q4 will see a higher CapEx of about EUR 70 million. The resulting cash flow at EUR 90 million is in line with our guidance, and this was more than enough to cover the dividend and slightly more than half the share buyback. The SBB is the only reason for the slight increase in net debt intra-year. As a reminder, we expect to close the ELG acquisition in Q4, which will add debt to the balance sheet as per the signed lockbox agreement. Please turn to Slide 8. We added EUR 416 million working capital in the first 9 months this year on a euro basis. This increase was entirely price driven and it's an industry-wide phenomenon. Nickel has increased by 42% this year, and the ferrochrome benchmark has increased by 58%. Published scrap prices are up 40%, and all of this is driving up inventory. Stainless steel transaction prices in Europe have more than doubled, which is driving up receivables.I would also like to clearly state that we will not squeeze working capital artificially in Q4 for a couple of reasons. First, Q1 is a seasonally strong quarter. And today, we have a solid order book, which indicates a very good start to 2022. We, therefore, prepare for a volume increase and would like to manage our working capital without jeopardizing that. Secondly, I shared with you at the Capital Markets Day we are putting our growth program into action. Asset upgrade programs in Brazil and Europe are required to realize our efficiency gains and improve our product portfolio. We, therefore, deem it prudent to temporarily carry high inventory to deliver book material. Please move to Slide 9 for a review of our self-help program. We gave you all details at the CMD in September on how the Leadership Journey will transform Aperam into an even more cash generative and more profitable business and also add a noticeable growth component. We are implementing these measures now. During Q3, we recognized EUR 11 million gains, bringing the accumulated gains to EUR 34 million after 3 quarters in 2021. This is just shy of the annual target we shared with you. Major contributions came up from the ramp-up of the new downstream lines in Genk, the lowest cost facility in Europe and from sourcing and raw material efficiency. Despite postponing some structural gains to serve the current market environment, higher variable management gains offset these through better yield. And yes, you see, we are fully on target to achieve this year's target gains. Next year's Leadership Journey gains and the year after are then increasingly incorporating growth measures that we started to invest into already this year and which we will step up next year. Tim, back to you for the outlook.

[Timoteo Di Maulo, Chief Executive Officer]

Thank you, Sud. We look with confidence to the coming quarters. We expect very strong earnings to prevail in Q4 despite the seasonally headwind in Brazil. As mentioned, this is a bit stronger this year as we will lose some high-margin shipments due to already announced upgrade of our production lines. In Europe, we faced headwinds from higher energy costs. We expect this to continue into Q4 and gradual ease thereafter. With higher base price and seasonally higher volumes compensating for the headwind, we expect underlying earnings to further improve. Adjusted EBITDA also contains inventory valuation, which we expect to be at a lower level in Q4. Adding all up, we guide for a slightly higher adjusted EBITDA in Q4. This should be followed by a seasonally stronger Q1. On the cash flow side, we expect a slightly higher free cash flow. Sud already explained that we need higher working capital to deliver higher Q1 volumes despite the stainless steel in Europe and in Brazil. The asset upgrades are necessary for realizing our growth strategy, which will improve Aperam's earning potential. We will, therefore, also spend higher CapEx in Q4, in line with our announced CapEx budget. Closing the ELG acquisition in Q4 will drive up debt for a moment. Despite this, we will retain a very solid balance sheet despite a working capital build. We are proud to be the company with the highest cash return to shareholders. Our financial allocation policy is the cornerstone of how we run the company. We promise not to accumulate net cash, and you can trust us to honor our promise. Now our Corporate Access schedule Post Q3 allows for plenty of content to discuss the market and on our strategy, and we are always interested in receiving first-hand feedbacks. Thank you for listening to our Q3 comments. Sud and I are available to answer your questions at the webcast conference call today at 2:00 Continental European Time.