Aperam SA

MAD:APAM

Earnings Call Transcript 2022-Q4

[Timoteo Di Maulo, executive]

Good afternoon to all of you, and welcome to Aperam Fourth Quarter 2022 Broadcast. I am Tim Di Maulo, CEO of Aperam. Sud Sivaji, Aperam's CFO, and I will present to you a Q4 that might have been the cyclical trough already.

I will answer your question at the webcasted conference call today at 2:00 Central European Time. The dial-in details are on our website and on the last slide of this presentation. Please take note of our disclaimer regarding forward-looking statements on Page 2.

And then we move to the highlights of that on Slide 3. In the fourth quarter, we realized EUR 129 million EBITDA, pretty much in the middle of guidance range. A further decline quarter-on-quarter, but a good result considering the many headwinds in what could be the cyclical tough quarter.

Q4 reflects destocking, cost inflation and another substantial inventory valuation charge, mainly in all our European businesses. But it also idealize the resilience of our differentiated value chain, running above historical normal fourth quarter with more than half of the EBITDA being contributed by upstream and downstream operations. Brazil continued to perform solidly. Only good news came from the regulatory environment. First, imports in Europe has been normalized and this should last.

Additionally, the European Commission has recognized [indiscernible] convention of existing duties against Indonesia through Turkey.

Third, the commission further detailed the carbon border adjustment proposal. The full details should come at a later stage, but it is very positive that there is a movement towards a full scope 3 assessment of imports to create a truly level playing field.

Overseas, the WTO ruled against the Indonesian nickel or export band. While the decision has been appealed, it is a very positive sign and allows the European Commission to counter the subsidiary of Indonesia without further delay. But the great news of this quarter is that Brazil introduced a counter-varying against Indonesian cold-rolled material at almost 90%. This will directly benefit our operation.

Self-help and improvements remain the core of Aperam. we realized another 25 million leadership journey gains and Phase 4 programs run ahead of plan. You know that we are in line with our financial policy, so we canceled the 2 million shares bought back in 2021. We also intend to cancel the share that we bought back in 2022 at a later stage.

Finally, I want to talk about ESG, but in a differentiated way than you are used to. I'm delighted to announce that Aperam has joined force with Acerinox. Acerinox is the global known leader in hyper-accumulating plants. Together, we are in the process of developing agriculture-based nickel production at a scale with a newly formed botanical joint venture.

Pilots have already started in several countries. Botanical targets the first quartile on the nickel cash cost curve. After the full ramp up, nickel production should cover a major share of our primary nickel requirements.

Recycle. Our nickel recycling unit will also play an important role in this value chain. But this initiative is more than just business. It helps Aperam realize its zero-net commitment, and it will operate responsibly and fully aligned with the UN SDGS. A successful botanical will empower local communities by providing employment and also by supplying renewable energy as a byproduct to these advantaged communities. This is the second major investment of Aperam, recently formed venture capital arm. We fund innovative ideas that will help us operationally, technically or within the ESG scope.

[ Mobil ], a German technology company was our first investment. Their product, a super fast polygon laser scanner, will give us a high differentiated product offering in the future. We have built a relevant investment pipeline. So stay tuned for more.

Let's look at the next slide on the current market environment. Overall, the fourth quarter developed in line with expectations. The import window has closed for good and imports have fallen back to the historical normal level. The market share of Chinese controlled materials has more than halved at -- to 4.5% in Q4. We expect that to further normalize to below 1% seen between 2015 and 2021.

Antidumping duties are effective measures and in the absence of major price disruption, we expect it to stay that way. Additional measure by the European Commission could even tighten imports further. Imports are [ one process step ] to below the imports. The situation has improved compared to the end of September as inventories have been reduced by 84%. But compared to the historical average year-end inventories are still slightly elevated in absolute tonnage. The softer demand environment, however, turned this into high inventories days. Sentiment is clearly improving and first stockist are cautiously replenishing material. We expect Q1 to be slightly impacted by further destocking.

Real demand has cooled slightly in Q4, mainly in sectors like construction and consumers that are sensitive to higher interest rates and cost inflation, and we noticed a slight inventory hovering there. Demand in food, health and catering has stabilized at a level that reflects tighter consumer budgets. The automotive industry, on the other hand, continued to record good demand supported by a stronger order backlog in Europe and is improving in Brazil.

In the industrial space, energy projects are strong and [ oil ] RPS is recovering. Demand is good in Brazil for ethanol and oil and gas. Generally, the sentiment in the market has improved over the past few weeks, and we expect this to be reflected in Q1 shipments.

I hand over to Sud for the review of the financial performance.

[Sudhakar Sivaji, executive]

Thank you, Tim, and a very warm welcome to all of you. The press shipments due to destocking, energy costs below [ are ] from the previous quarter and a highly negative inventory valuation. In that perspective, we delivered a very solid fourth quarter.

Before 2021, anyone would have considered EUR 129 million EBITDA as a better-than-normal Q4. So within a challenging environment, Aperam has clearly strengthened its resilience via the leadership journey and our differentiated value chain. The flexibility of our business to create value in all scenarios remains unmatched. There weren't any one-offs in Q4, but the financial result is unusual this quarter with EUR 114 million FX and derivative valuation losses.

Nickel increased 42% during Q4, so the negative result was mainly driven by unrealized results on nickel derivatives and the realized FX derivatives were compensated by revenue side gains. However, the nickel volatility will wash out over the cycle.

On the cash flow side, 2 numbers stand out in Q4. We were able to release EUR 197 million working capital which funded a higher-than-normal CapEx of EUR 143 million. We are putting the 2025 improvement plan into action and fully spent the budgeted EUR 300 million CapEx in 2022. Aperam has a high and consistent cash generation ability as evidenced by a 12% free cash flow yield for Q4 and a 13% yield for 2022. This is the basis that allowed us in a year with an unusual high working capital requirement and significant investments in our footprint to hand back a record EUR 345 million cash to our shareholders, and all of it was earned. Once again and 7 years running, Aperam remains the stainless player with the highest cash rewards for shareholders.

Moving to the next slide. Let me talk about our financial policy. Our financial policy is clear when it comes to rewarding shareholders. We have a progressive dividend policy. And after strategic CapEx and M&A opportunities, if we have excess cash, we hand it back via share buybacks or special dividends. Our track record proves that we live by this financial policy, and it's quite simple and efficient. The excess free cash flow left over from 1 year is a return to the shareholders the next year.

The graph on the left shows the free cash flow since 2017 and the cash returns of the following years to shareholders should match each other. Remember, there was a EUR 500 million acquisition of ELG in between, yet our debt to EBITDA is unchanged at 0.4x. We combine strong returns with an efficient balance sheet, and we are happy to maintain the way it is. Based on the record 2022 and improving outlook in 2023, we expect to continue our shareholder return policy.

Now let's move to the right-hand chart. The piece feels like a distant past. But let me remind you that 2022 marked a year with record adjusted EBITDA for Aperam. Looking at how we use that EBITDA, we think we did a good job as custodians for our shareholders. 24% went into building net working capital. That is an unusual item, but is a pure reflection of higher commodity prices.

During the year, nickel went up by 43% and electricity about 148%. Once these mean revert, the net working capital locked in will turn into cash flow again as the intensity is unchanged. We spent only 16% on tax and debt reduction, and both positions should remain low also in the future. While we strike a fine balance between improving and strengthening our business within the 2025 strategy and returning cash to shareholders as laid out in our financial policy. The 32% of adjusted EBITDA that we returned to shareholders and the 28% that we invested in strengthening our operations to create strategic shareholder value reflect that thinking.

Moving to the next slide. We show that we make good use of that growth CapEx. It is a major driver for the progress of Phase 4 of the leadership journey, our self-help program. We realized another EUR 25 million gains in the fourth quarter. And after 2 years, we've already realized a total of EUR 122 million. We targeted EUR 150 million till the end of 2023. The gains realized so far will be sustained in a year of major investments in transformation, and we are very confident to reach the goal.

About half of Q4 gains came already from our improved footprint, the alloys growth project, sourcing gains and the synergy from ELG acquisition made up the balance. After spending EUR 300 million CapEx in 2022, we plan the same number for this year.

Let me remind you that we do not invest in capacity additions but in upgrading our footprint to deliver better mix and profitability. Our organic growth CapEx comes with a minimum IRR of 15%. So we are confident it will create value for shareholders. We completed the upgrade of our electrical steel business in Brazil, and we are in the midpoint on a number of initiatives. The new AOD that we build in Genk is a major project that was planned for the end of 2023.

In order to make use of the market situation, we split it into 2 phases and have advanced the first phase into March-April. Other major projects are the upgrading of the hot rolling mills in Châtelet, in Belgium, Brazil and also for alloys in [indiscernible] France. While the upgrade in Châtelet is complete and the ramp-up is starting in Q1, we target to complete the other 2 projects going into 2024.

In 2025, our upgraded asset base will allow us to produce a better mix, which is a major driver behind that EUR 300 million EBITDA improvement that we target to realize by then.

Moving to the next slide. Let's take a look at the segment performance. Recycling and Renewables delivered a very strong quarter with EUR 55 million adjusted EBITDA. On one hand, this proves that recycling business is capable of performing solidly in any given market environment. It also demonstrates the short-term reaction time to market changes, which is part of the realized synergies. In the fourth quarter, the segment also benefited from some positive valuation effects, and we expect a normal Q1 result in line with the recurring [ earning ] power.

Stainless & Electrical has 2 very different stories to tell at the moment. On one hand, there is Europe where destocking has noticeably impacted shipments. Clearly, that leads to some missing contribute in margin. However, another consequence is that high raw material and energy costs were carried over into the fourth quarter as shipments were missing. This had a noticeable negative impact on European EBITDA.

South America, on the other hand, continued to perform stable at a high level with the usual seasonal quarter-on-quarter decrease. Costs are supported by low and stable energy costs and the product mix is solid but flexible. For Q1, we expect Stainless & Electrical to improve substantially despite the usual seasonal trough quarter for Brazil.

S&S is closest to the spot market. So shipments reflect the soft demand. EBITDA improved quarter-on-quarter, mainly because it has a shorter order book compared to the upstream business. So the inventory valuation and the cost impact eases earlier. However, the negative EUR 4 million EBITDA is still a reflection of a negative inventory valuation and depressed pricing in the fourth quarter. For Q1, we expect an improvement towards a historically normal Q1.

Alloys & Specialties. At EUR 12 million, we delivered the guided normalization post the extreme weather impact in Q3. We continue to guide for a better 2023 compared to 2022 and expected Q1 at a historic normal Q1. Others & Eliminations was again possible at EUR 28 million as guided last quarter. This is a reflection of the intercompany elimination in times where sales prices have normalized but substantial raw material costs remain in inventory and the reversal of the significant negative eliminations from the previous quarter. Assuming stable raw material prices, this should return to normalcy, a low double-digit negative figure in Q1.

I now hand back to Tim for the outlook.

[Timoteo Di Maulo, executive]

Thank you, Sud. Q4 was tough, but the sentiment has improved, and it seems as if we have passed the cyclical trough. Q1 is seasonally stronger in Europe, but the seasonal trough in Brazil. Destocking should continue. And in addition, we have a longer stance still in Genk for the AOD upgraded this quarter.

Consider all this, we expect slightly higher shipment quarter-on-quarter in Q1. We expect this to translate into a higher adjusted EBITDA versus the fourth quarter. The increase should be in line with the average historical seasonal improvement. Pricing has been stable for some time, but realized pricing should be a headwind for the last time together with some cost inflation. Assuming stable commodity prices, swing in inventory valuation should work against this.

We expect net debt to remain stable as we will have lower CapEx on one side, but likely need some working capital for the Genk [ stainless ] steel and the higher nickel price. The other items from the financial policy are unchanged. In line with our progressive dividend policy, we recommended an unchanged dividend of EUR 2 per share. Sud already explained that our CapEx budget is unchanged at EUR 300 million for 2023, split into EUR 150 million for maintenance, energy efficiency and decarbonization and EUR 150 million for realizing the 2025 improvements.

The environment keeps changing at a fast pace, but weak and upward trends. We are solid back on the road and looking forward to meeting our shareholders and prospects. It will be great to see you in person at one of these events.

Thank you for listening to Aperam Q4 management podcast. We will host a conference call today at 2:00 Continental European Time to answer your question. We wish you a pleasant day and hope to see you again at the Q&A.