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Edited Transcript of APAM.AS earnings conference call or presentation 8-May-19 12:00pm GMT

Q1 2019 Aperam SA Earnings Call

May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Aperam SA earnings conference call or presentation Wednesday, May 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sandeep Jalan

Aperam S.A. - CFO

* Timoteo Di Maulo

Aperam S.A. - CEO

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Conference Call Participants

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* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Cedar Ekblom

BofA Merrill Lynch, Research Division - Analyst

* Christian Eric Andre Georges

Societe Generale Cross Asset Research - Equity Analyst

* Kevin Hellegård Nielsen

Goldman Sachs Group Inc., Research Division - Analyst

* Krishan M. Agarwal

Citigroup Inc, Research Division - Analyst

* Luke Nelson

JP Morgan Chase & Co, Research Division - Research Analyst

* Menno Gerard Cornelis Sanderse

Morgan Stanley, Research Division - MD

* Rochus Brauneiser

Kepler Cheuvreux, Research Division - Head of Steel Research

* Sylvain Brunet

Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research

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Presentation

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Operator [1]

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Dear analysts and investors, welcome to the Aperam First Quarter 2019 Results Conference Call. I will leave the floor now to Tim Di Maulo, Chief Executive Officer; and Sandeep Jalan, Chief Financial Officer. Please go ahead.

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Timoteo Di Maulo, Aperam S.A. - CEO [2]

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Hello, everybody, and 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 first quarter 2019 results. Please take note of our statement regarding forward-looking statements.

So let's start with our top priority, health and safety. We report a LTI rate of 1.07 for the

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we reported for 2018, and also by far outperforms the stainless steel industry average. It is almost 3x as high as it is obvious that there remains too much room for further

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major health and safety initiatives that we intensified in 2018 with additional workshops and training courses as we firmly work towards becoming a zero-accident company.

Now if I go to slide

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on the operational side, we achieved a resilient result with an EBITDA of EUR 81 million during Q1. This quarter continue to be heavily impacted by effects still originating from the import flood that hit Europe in the second half of 2018.

Heavy destocking kept pressure on base price for most of the quarter.

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prices. Both together turned Q1 into a tough quarter. However, I am happy to report that the base price have been continuously improved since March as destocking has been completed and safeguards will start to have some effect.

Working capital remained elevated partially due to higher alloy prices and partially due to destocking inventory for receivables that will be collected now.

The Leadership Journey, our efficiency program, with total gains of EUR 200 million till the end of 2020, remains our key lever to enhance our competitiveness and profitability. We made very good progress and added annualized savings of EUR 34 million during the first quarter. This brings the cumulated annualized improvement to EUR 67 million, strengthening our competitiveness. We will look at the Leadership Journey in more detail later again.

I would also like to highlight that we published our 2018 ESG report, and we have included a summary in our investor presentation. We can talk in more detail, but most importantly, Aperam produces the greenest stainless steel globally. We have a benchmark CO2 footprint of less than 0.5 tonne of CO2 for the -- per tonne of steel. One factor is our sustainably cultivated forest in Brazil. We now also include our proven track record and our ambitious target in investor presentation on our website.

Other items to note is the increased dividend of 1.5 -- EUR 1.75 per share, and we started our share buyback in April for up to EUR 100 million. To date, we have bought back 1.6 million shares for EUR 45 million.

I now hand over to Sandeep for the financial review.

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Sandeep Jalan, Aperam S.A. - CFO [3]

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Thank you, Tim. Good afternoon and a warm welcome from my side as well.

On Slide 5, as you can see, our shipments in quarter 1 recorded the usual seasonal increase compared to quarter 4 on the back of Europe. However, volumes remained below quarter 1 of 2018 in the context of destocking. The economic environment in Europe made customers cautious and, especially, automotive was notably weak.

Considering the circumstances with record-low base prices during this quarter and important negative inventory valuation effect, we view EBITDA at EUR 81 million as resilient. The weak fundamentals mainly impacted the Stainless & Electrical segment in Europe, while Brazil declined seasonally.

Services & Solutions recovered due to higher volumes and recovering prices at the end of the quarter, while Alloys & Specialties recorded a pretty normal quarter at EUR 12 million, which was up 71% quarter-over-quarter. With EBITDA per tonne at EUR 162, it is the weakest quarter since 2013 and because of unusually low base prices and negative inventory valuation effects, it does not fully reflect the underlying earnings power of this company.

During January, we have redeemed the convertible bonds 2021 at par amounting to $72 million. This was pursuant to bondholders' put exercise in December of last year. In addition, during March, we had a successful outcome for the fixed price tender for the remaining bonds, hence another 170 -- $137 million were tendered at a price of 107.02%. We have also announced our intention to call the remaining convertible bond 2021, totaling $28 million at par by exercising our issuer cleanup call. Hence, we have no more risk of equity dilution from these bonds.

Our stated earnings per share almost halved quarter-on-quarter, but this is mainly due to the nonrecurring accounting effect, which are relating to the convertible bonds. You might recall that during quarter 4 of 2018, we recorded a positive impact of EUR 18 million in the profit and loss account linked to the option premium amortization. And this had added EUR 0.17 to earnings per share during quarter 4. Contrary to this, during quarter 1, our tender offer for the convertible bonds reversed this amortization of the option premium, and together with the impact of embedded derivatives had a negative effect of EUR 11 million in the financial cost in the P&L account. Hence, this reduced earnings per share by EUR 0.09. Excluding these nonrecurring effects, our underlying earnings per share declined slightly by EUR 0.03 quarter-over-quarter.

We think that the free cash flow of EUR 24 million during this quarter is good under the conditions of this tough quarter, especially as we did not defer capital expenditure. Tim already mentioned that our working capital remained slightly elevated during the quarter beyond the normal seasonal effect, and hence, we expect some reduction in working capital during the next quarters.

Net debt remains at a low level but increased slightly over the quarter. Please note that the increase of EUR 58 million is mainly due to 2 one-off effects. IFRS 16 accounting added debt of EUR 29 million, while buying back the convertible bonds added another EUR 16 million. Despite this, we generated almost enough cash to cover one of the highest dividends in the euro materials space.

I hand over back to Tim for a review of the market environment.

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Timoteo Di Maulo, Aperam S.A. - CEO [4]

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Okay. Thank you, Sandeep. Let's talk about import and safeguards for a moment.

I am in Page 6. Actual Q1 data shows that import volume declined, especially in the cold rolled segment, which is the most important for us. Import catered for 20% of the European consumption during Q1, almost 7 percentage points down from last year. In all fairness, while safeguards might help going forward, they are not the main reason for the decrease. Domestic prices in Q1 were so low and material was readily available in context of destocking, so there was no incentive to turn to import markets. Also, the uncertainty, what kind of safeguard mechanism might be established made importers reluctant.

Although safeguard helped capping import volumes and volatility, the question of exempting certain developing countries still remains to be addressed, in particular in hot rolled. Please bear in mind that apart from unfair subsidies and tax breaks, such nickel pig iron base material is also highly CO2-polluting with a footprint up to 4x the footprint of Aperam. This is something we want to discuss with European authorities for one of the upcoming revisions.

Looking to other market factors in Page 7. Nickel has bounced early in Q1 and this has opened the distribution segment, which facilitated destocking and also pushed stainless steel prices higher, as you can see in the top right hand chart.

Base price has started to recover since March, and although Aperam made good progress, the market is just working its way back from the all-time low. More work needs to be done to reach historically normal levels. At the same time, we are accelerating our Leadership Journey and Top Line Strategy action to fully restore profitability.

Sandeep will give an update on Leadership Journey.

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Sandeep Jalan, Aperam S.A. - CFO [5]

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Let's now move to Slide 9 to talk about our Leadership Journey that has always been and now again is the pillar of our profitability.

As already mentioned, we made very good progress with an annualized EUR 34 million gain during quarter 1. Gains came mainly from procurements, operational variable and fixed cost savings and Top Line Strategy actions, mostly in line with the target split that you can see in the pie chart on the right hand side of the slide.

A very important action during this quarter has been to renegotiate all procurements as one very important factor to counter the competitive threat posed by stainless imports coming from Indonesia. We have recorded very good progress in this respect.

Our new German distribution center in Haan is ramping up at the moment, and we expect additional savings therefrom. We remain fully on track for realizing the targeted EUR 200 million gain by the end of 2020. And we are currently at an annual run rate of EUR 67 million.

I hand over back to Tim for the outlook.

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Timoteo Di Maulo, Aperam S.A. - CEO [6]

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Thanks. So let's turn now to the outlook for quarter 2 in Page 9. We expect earnings to increase quarter-on-quarter, and there are several factors contributing to this. First, base price are recovering from their lows, which is supporting margins. And also, safeguards are starting to help normalize imports and distribution inventory get back to normal.

Second, we will continue to accelerate the Leadership Journey gains, which should strengthen profitability. Also, assuming that there are no surprising alloys price movement, the negative inventory valuation effects that burdened us in the last 2 quarters should disappear.

The third quarter is -- the third factor is seasonality as Q2 is a seasonally stronger quarter in Brazil. You might think that this is also true for Europe. However, due to slow economic growth in the region paired with weaknesses in automotive segment and also white goods, this year is different. We expect lower volumes in Q2 and work intensively on reducing fixed costs to minimize the impact of this on our results.

We expect net financial debt to remain at low level, supported also by working capital release. But please bear in mind that we are now executing the share buyback, which leads to some additional cash out. All other items remain unchanged. Our CapEx budget is EUR 175 million, including Leadership Journey-related spending and a part of the Genk investment.

IFRS 16 recurring effects are negligible at about EUR 8 million per year in EBITDA. As discussed, we confirm the EUR 200 million gain from the Leadership Journey till the end of 2020.

Let me conclude our presentation with our corporate access schedule that you'll find on Page 10. We are stepping up our corporate access effort and are looking forward to meet you at one of these events to discuss the Aperam investment case and value strategy in person.

We are now ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take the first question today from Krishan Agarwal from Citigroup.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [2]

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My question is more on the ASPs into the Stainless & Electrical businesses where you reported a slight increase into the ASP into the quarter. Can you help us to understand as in what is driving this ASP increase, while ASP into the Services & Solutions business is down EUR 200 per tonne? Is there any kind of a lag effect from the contract, and should we factor in the lower ASPs into the Q2?

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Timoteo Di Maulo, Aperam S.A. - CEO [3]

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In Q1, sorry, sorry, can you slightly repeat the question. Your question is Q4 to Q1 or Q1 to Q2?

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [4]

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Q4 to Q1 ASP was higher in the Stainless & Electrical businesses by slightly like EUR 20 or something, while -- yes...

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Timoteo Di Maulo, Aperam S.A. - CEO [5]

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Yes. So the point is always we have a complex mix of products, regions, et cetera, which are not easy to compare. Just bear in mind that Brazil as part of the products which are different. There are alloys, which have prices which are completely different. So I have not the clear split between the different effects, but let's say what I can say is that, typically, in Europe, the base price have been at very low level and comparable in base price to Q4.

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Sandeep Jalan, Aperam S.A. - CFO [6]

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Yes. So if I can add here, Mr. Krishnan. The fact that the total average selling prices, when you take a look at our Stainless & Electrical steel division, it has gone up slightly by EUR 12 compared to quarter 4. And this is composed of the 2 elements: number one, as Tim mentioned, that, yes, indeed, base prices are even decreasing on top of quarter 4. So this was a trough of the prices and partly compensated by the alloys and the mix effect. So this is the total effect, EUR 12, that you see here.

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Operator [7]

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We will take our next question from Luke Nelson from JPMorgan.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [8]

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I have 2 questions. Can you just clarify the exact amount for the negative inventory effects in the Q1 results, just to get an idea of the adjusted Q1 EBITDA for the quarter-on-quarter bridge? And then can you also just give an indication for the potential like-for-like margin impact in Europe in Q2 just based on the low volumes that you've sort of alluded to?

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Sandeep Jalan, Aperam S.A. - CFO [9]

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Yes. So regarding the negative inventory valuation effects, the effect in quarter 1 is pretty similar to quarter 4. We had already said during quarter 4 that we had low double-digit million euro effect in our results, and the momentum was very similar in quarter 1 with a little bit different mix of alloys. But this time, chrome was falling steeply by 10%, from EUR 1.24 to EUR 1.12, and this was leading the bulk of the effect, while nickel was slightly improving during the quarter. But again, are not fully reflecting in the inventory because there was a ramp up on the nickel price increases and the lag effect, this is not reflecting in quarter 1. But the effect in totality was pretty similar to quarter 4.

Now in terms of the effect of price improvement in the base prices that we have talked. Yes, clearly, it will start reflecting in our quarter 2 results, but you can imagine, as we have said in the past at all locations, it's not translating on 100% of our order book, this is more for the spot orders. And then, again, for the contract, you'll start getting a lag, but we expect to see some positive momentum there and our quarter 2 results from that.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [10]

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Okay. And then maybe just one follow-up, just the political situation in Brazil. Just sort of any additional commentary you can give on potential tariffs that were talked about over 2018, that would be appreciated.

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Timoteo Di Maulo, Aperam S.A. - CEO [11]

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Yes. We have no news about tariffs. As you know, this -- there has been a discussion in the government on our reform -- the global economy in Brazil, so this is still under discussion with a lower level of taxes for company with lower level of import tax. This is -- this will begin over a few years, but it is not yet decided. And even, it is not discussed daily, so it's something that will come probably in the future.

For the rest, we have all the file, which are ongoing, and we are in the renovation of all the files. But the import duties, as you have correctly remembered, the most important, let's say, tax that we have in Brazil.

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Operator [12]

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We will take the next question from Rochus Brauneiser from Kepler.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [13]

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Two from my side, please. Tim, can you speak a bit more specifically about the magnitude of price recovery you're seeing in the market right now? Because when I look at some of the data providers, they haven't really shown any base price recovery there, so maybe you can help me a little bit on that side. And what do you think about the market now as you are soon heading into the summer where demand is usually the weakest for seasonality reason? And if this coincides with the continued weakness in auto and, as you said, obviously, the consumer side, the white goods side is also going down?

What do we expect for the supply/demand balance over the summer? And do you see any similar protection cuts, supply side measures in the market as [it comes] when Mittal made some bigger announcements? And the second question related to that, what do you think about the safeguard mechanism here? I think one of your competitors sounded quite confident about that. What are your expectations going forward if this mechanism were to happen? Would you expect imports to keep pressing -- pressing into the European markets?

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Timoteo Di Maulo, Aperam S.A. - CEO [14]

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Thank you for the question, which are, let's say, our core discussion today. So, first, I remember that I never give guidance on precise prices. This is for different reasons, including antitrust. What I can say is that we start the year with the lowest ever prices as base price in Europe. March, as seen already in the bookings and also in the result of Service & Solution, which are there, an increase of price, and this increase of price, which is in March, far from the normalization, is continued during Q2. And will be, let's say, the results still are ongoing, which will depend on the, let's say, pressure from import or volumes pressure, market, et cetera. And the arbitration that the commercial direction in case of Aperam will do between the right level of price, the right level of volumes of the import, et cetera, okay?

So this is something which is recovering. What I can confirm here is that the price is in recovery and Q2, from our perspective, have promising prices but still there is work to be done to reach the traditional level, the normalized level of prices, which we had in the last, let's say, 5 or more years.

So this is one point. The second point is that Europe is, today, under 2, let's say, different, let's say, pressure -- flow. There is one part of the -- it is reduction of import. This reduction of import has been, let's say, generated by, as I said, the low prices, the fact that we are -- Europe was in destocking. And so this has been the reaction of Europe to this massive import in 2019, but -- in 2018. But it's also the factor that the safeguard has mechanism -- has a mechanism which is, let's say, built to be efficient.

Now we have not yet, let's say, seen the real impact of the safeguard for the simple reason that it has started in the mid of February. And so before having some statistic and see what will be the real impact in the way the safeguard will work, there will be some months. And during these months, we have to address with the commission the unsold subject, which is typical Indonesian developing country. But there is only one country, which is at stake, which is Indonesia. And for this, we are working.

Referring to the question of what is the real demand, so it is no surprise because it is under the rather same [situation these months] is that automotive is slowing down, in particular in some areas like Germany. And there is -- we see a softening also in the white goods. But, okay, this is part of the market. We will see if it is only temporary and if it is typical, let's say, behavior of the supply chain of the carmakers to produce more whenever the -- there is some kind of inflation of the order booking and this will appear later.

In any case, I mean, as always, as producer of stainless steel, our job is to produce and to put in the market what is the best for customers, adapting our cost and being flexible and by [realizing] our cost, looking at the best margin for the company. This explains why our guidance also today is not the -- there is strong increase of volumes in Q2, there is no reason for.

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Operator [15]

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We will take the next question from Sylvain Brunet from Exane BNP Paribas.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [16]

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Maybe 3 questions for me. The first one on the Leadership Journey and on Slide 8, which was pretty positive in this release. Could you help us understand how to frame the sequence of contributions, given the number was very impressive, EUR 67 million in the first quarter? It's more than double the run rate in Q4, so keen to understand whether there were some low-hanging fruits or whether some initiatives were brought forward or whether you were simply over-delivering over the quarter. And my second question, first, on white goods, you talked about some weakness there and autos as well, which were the markets which were positively growing and, basically, absorbing these existence?

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Sandeep Jalan, Aperam S.A. - CFO [17]

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Okay. So I can start with answer to the first question. On Leadership Journey, we are very happy with the progress that we are making. And, yes, this program started at quarter 1 of last year, and since then, we delivered EUR 33 million at the end of last year, and we are in a ramp-up phase. And in quarter 1, we recorded especially very good performance on all the procurement action, and this was really necessitated by the fact and was the main reason of why we expanded our Leadership Journey in the pie chart that you see on the Slide 8, was the addition of all these raw materials and other purchasing negotiation, which became absolute necessity in context of the new competitive challenged posed by Indonesia. So, basically, this is a work we started at the end of last year, beginning this year, and we could already record fantastic progress in this regard. And there are further actions ongoing to deliver more and more gains on this aspect into our P&L account. Because these are negotiations, sometimes it's in contract and not fully translated into our EBITDA. So all this is ongoing and very good to further strengthen our Leadership Journey.

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Timoteo Di Maulo, Aperam S.A. - CEO [18]

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Okay. So for white goods and auto, indeed these 2 segments probably the most impacted for the moment. What we see is that there is a strong resilience of capital goods, which is an important sector for us. And a lot of, let's say, all other segments, which are, let's say, addressed typically by Service & Solution, they are much more stable and cannot impact at all by the softening of the -- since more a kind of reaction to therefore these big 2 exporters. Then some problem related to the real economy of the European, let's say, countries.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [19]

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Interesting. And maybe just one very quick follow-up on strategy. Basically, after the reversal on VDM at the end of last year, if you could just recap for us where -- how should we think about Aperam's strategy going forward. Are you still willing to look for opportunities to upgrade the mix if and when opportunities arise? Or should we assume that you will be focusing more on your existing assets in the foreseeable future?

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Timoteo Di Maulo, Aperam S.A. - CEO [20]

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So the bulk of our strategy remains. So our strategy has been to reduce our exposure to commodities, working on the expansion of the alloys, working to the expansion of our direct access to customer, et cetera, will remain.

Today, let's say, the focus -- the main focus of the strategy for 2019 has been clearly defined by the CapEx allocation, the EUR 175 million, which are allocated for all, let's say, project which will increase the competitiveness of the company of which one important is the Genk footprint. And we have all this EUR 100 million, which will -- which are spread over 3 years, which are linked to Leadership Journey, plus the usual maintenance CapEx.

Our strategy is there. What is clear is that Aperam remains a company with nearly no debt, a strong financial balance. We will maintain this financial balance. And we will be, let's say, looking at eventual opportunity which will create value. It was a pity not having being able to have VDM because this will have created real value for the company. Okay, it's not -- it's something we have started to work internally on the expansion of our alloys and we will continue.

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Operator [21]

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We will take the next question from the line of Kevin Hellegård from Goldman Sachs.

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Kevin Hellegård Nielsen, Goldman Sachs Group Inc., Research Division - Analyst [22]

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All my questions has been answered.

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Operator [23]

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We will take the next question from Menno Sanderse from Morgan Stanley.

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Menno Gerard Cornelis Sanderse, Morgan Stanley, Research Division - MD [24]

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Two questions. One a bit more midterm, actually, let's start with that one. You mentioned it a couple of times in your presentation that, currently, it's obviously not the profitability that you would like to see over a full cycle. So assuming mid-cycle economic and demand conditions and this current scope of Aperam in terms of capacity and capital employed, but also the new reality on supply growth and the safeguarding, what do you think the business should be able to generate in terms of annual EBITDA? Of course, I'm not asking you to say when. And in relation to that number, how has the company thought about the dividend of EUR 175 million or EUR 140 million per year? And how did it come to the conclusion that, that was the right number to pay out?

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Timoteo Di Maulo, Aperam S.A. - CEO [25]

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So what we -- we have a very clear financial policy, and this financial policy, which is translated in EUR 175 million plus EUR 100 million, so around EUR 240 million, is something which is, let's say, very well, let's say, managed and embedded in with our perspective or the value of this business. Now it is absolutely impossible for me to give you, let's say, guidance on the number for EBITDA, et cetera. What I can say is that what we have seen in the last 2 quarters is something which we have never experienced before in terms of disruption of the European market.

We are used -- we have been, let's say, used to this kind of disruptions when, for example, China ramped up, up to 7 million, 8 million tonnes of overcapacity, which, by the way, they are still there. Now there is this big investment done in Indonesia, which has increased this without any official protection and -- except in Europe, not on the rest of the world. The problem has been the rest of the world. We can consider that this situation is not there to last, but in any case, what we are doing is to work internally to improve the profitability of the company, which is today considered the trough. And increase the profitability of the company for us is whatever happens in terms of, let's say, [EUR 0.20], et cetera, it will be an upside to the fact that we are looking at working on Leadership Journey and improving our product mix, improving our exposure to customer, and let's say, all this self estimations.

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Menno Gerard Cornelis Sanderse, Morgan Stanley, Research Division - MD [26]

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Okay. And in -- would you want to cover that, what you mentioned, EUR 250 million cash outlay, with your trough earnings? Is that your objective? Is that how you thought about it?

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Sandeep Jalan, Aperam S.A. - CFO [27]

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Yes. So elaborating on our financial policy, which is very clear that on the shareholder returns you have the first element, which is the base dividend, and we started from $1.25. Over the last 40 years, we have consistently increased it every year. So now we are at 1.75. The pay out policy is that we will be between 50% to 100% of earnings per share. So as you can see, compared to the earnings per share, we are at 53% of payout on this dividend. So we are very well at the lower end of this earnings per share. And clearly, with our internal plans of Leadership Journey, we are aiming for an improvement of our underlying results. So this will continue to strengthen and we are very confident.

Then this aspect of the share buyback is an additional element to the cash deployment action, which has to be seen in light of all the priorities in front of the company, which is all the internal growth options, like Genk, what we have announced; external opportunities, like VDM or others. We are -- or our share buyback that we have done. So we are evaluating each time with the Board what are the most interesting value-creating propositions for the group. And in line with that, we announce additional others from time to time. So in a nutshell, what I can say, we are very confident of this progressive dividend policy. And having looked at our long-term plans, we are confident not only maintain but continue to grow it and continue to remain the strongest balance sheet and the strongest cash return to shareholders, this we can count on.

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Menno Gerard Cornelis Sanderse, Morgan Stanley, Research Division - MD [28]

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That's very clear. Just one boring short-term question, sorry. Timo, you mentioned quarter-on-quarter decline in volumes in Europe. That was a clear message. But you also said, "Look, we're going to focus strongly on cost because we're deliberately not growing the volumes." Do you expect the cost focus to offset the normal negative operating leverage from those lower volumes? Or do you still expect the net impact from those volumes to be slightly negative and then, hopefully, potentially, make it up on better ASPs?

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Timoteo Di Maulo, Aperam S.A. - CEO [29]

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It's a mix. It's a mix because it is a product mix, cost and price. So it depends on what we do is to do the best for the company, of course. If you want to increase at any cost, volumes, when market is not asking for it, so then you make some concession on price or -- et cetera. So this is something really difficult in a company, but we have a strong financial team, which is working together with operational and commercial, and this is very well under control.

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Operator [30]

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We will take the next question from Cedar Ekblom from Bank of America.

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Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [31]

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I've got 3 questions to follow up on the potential inclusion of Indonesia in the import safeguards. Firstly, can you discuss whether you are pushing for Indonesia to be included for both HRC and CRC imports? And I'm asking that because they have become a meaningful player on the HRC side, but on the CRC side, they still look like they're quite light in terms of import flows. Secondly, can you please discuss if you are hoping to have Indonesia included on a stand-alone quota basis? Or if you think it's more likely that the European Commission would include Indonesia in the Other Country bucket? And then, finally, could you discuss if you think having Indonesia included just on an HRC basis will have any real meaningful impact to the European supply/demand balance and particularly for your business, considering you are really competing in the CRC area?

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Timoteo Di Maulo, Aperam S.A. - CEO [32]

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Okay. So thank you for your question. So indeed, we are discussing for both hot rolled and cold rolled. This is because, in fact, Indonesia has a higher penetration in hot rolled than in cold rolled. And this is typical because of the, let's say, the product trend of Indonesia in cold rolled is extremely mixed. And even as an importer, if my memory is correct, they are at 15,000 tonnes per quarter, which is not big volumes. Why? In hot rolled, they represent a lot, and this is typical because their main, let's say, advantage is more linked to the upstream and all the advantage that they have on nickel pig iron.

So concerning the fact if it is a specific quota or it will be in developing country for the moment, I don't know what will be the position of the commission. But I think that it will be more or less equivalent being, today, one of the biggest importer in the added -- let's say, in the additional quota for the developing countries. So it will be more or less equivalent that you have in one or on the other. And the third question was if we are working on HRC -- what was the third question?

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Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [33]

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No. The third question was just to understand how you think about the impact...

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Timoteo Di Maulo, Aperam S.A. - CEO [34]

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HRC.

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Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [35]

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If Indonesia just gets an HRC quota because in CRC, to your point, they are not a meaningful player yet, although maybe they'd become one, one day.

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Timoteo Di Maulo, Aperam S.A. - CEO [36]

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No, no. Also in cold rolled, they are above the threshold of 3%. This has been confirmed by the commission. So what the commission has confirmed is now Indonesia is in the -- over the threshold to be considered in safeguard. This has been confirmed. Now what was not confirmed, and this is something which we are a little bit nervous, is at which speed they will revisit the rules and they will put them in the safeguard, okay? This is the only thing which is in discussion today. For the impact of HRC, yes, there is an impact because we are also seller of hot rolled. But remember, that hot rolled is something which is not totally, let's say -- for which they are not totally disruptive as they have been in -- for the rest because in hot rolled, the main importer today still remain China. And China has not antidumping duties in hot rolled, okay? So in hot rolled, we will have this safeguard, and I believe that the, let's say, the impact is -- will be positive as soon as they will be included for all the sector of the hot rolled.

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Operator [37]

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We'll take the next question from Christian Georges from Societe Generale.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [38]

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The first one is I think, earlier, you asked if it would make sense for either you or someone in the domestic stainless Europe to reduce production level, like ArcelorMittal has announced. I mean, is it something we should think could trigger an acceleration of the price recovery?

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Timoteo Di Maulo, Aperam S.A. - CEO [39]

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I don't know if this is -- can be seen as similar. So ArcelorMittal has a much bigger size than Aperam or any other competitor in, let's say -- I don't know so well the specific problems of the market of (inaudible) to discuss about what do they do. What I think is that every producer can take the right decision in the way of, let's say, making an arbitrage between reducing costs, increasing price and taking volumes, putting pressure, et cetera.

So this, I suppose, is the most efficient. And in the past years, the European, let's say, stainless steel story has been a story of reducing overcapacities. Understanding that this way of looking at cost volume, et cetera, has a sense and this is why we -- all the industry has reduced the overcapacities just to avoid that this becomes a problem.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [40]

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Okay, makes sense. And the second question is on Brazil. In your slideshow, you are highlighting that condition is actually improving. I mean is that still the case now, especially the oil industry improving? Is that something you are recording for second quarter as an improvement volume-wise? And to what extent is the supportive FX impact on competitiveness offsetting part of the financial benefits to the group on consolidation?

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Timoteo Di Maulo, Aperam S.A. - CEO [41]

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Okay. So I'd leave the second one for Sandeep. But Brazil, we have been extremely happy with Brazil for 2018, and you have seen that they have a good year. And we are extremely happy with Brazil because the team in Brazil have done a very good performance in reducing costs, increasing the efficiency of the plant and capturing all the market opportunities.

Brazil is still a country with, let's say, a lot of upside, which are not totally expressed or not expressed with some volatility in this moment because some kind of reforms are not yet done, et cetera, so -- which is explained a little bit with the exchange rate, which are we are in a weak area, Brazilian real, and also exposure to some external market. But the strength of Brazil is well protected and a market in which we have a position, a strong position and with a lot of upside that we are developing. Just, sorry, one market which has not yet delivered and we are still waiting for is oil and gas. Oil and gas are still to come, was the biggest promise of Brazil in the past and has still to come. The oil and gas -- the oil price of today is, let's say, should boost the recovery in Brazil. And also what is happening in the ex Petrobras perimeter, in which they have restarted with a lot of JV, et cetera. They have restarted part of what has been totally suspended during the last 4 years.

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Sandeep Jalan, Aperam S.A. - CFO [42]

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So coming to the second part of your question. So on top of a strong competitivity of Brazil and strong upsides from the market growth potential, ForEx has been continuously weakening, but not so much between quarter 4 and quarter 1. It has been pretty similar. But as you can see that, in the current environment, Brazilian real is more between 3.9 to 3.4, so slightly weaker, so this may have some upside going forward. At the same time, Brazil is also having some impacts from iron ore price increases. As you might know that Brazil is our only blast furnace that use iron ore. And in context of price increases of iron ore and pellets, they do have some impact, which is a low double-digit effect. But overall, Brazil will continue to improve also with the seasonal recovery and all these effects into the next quarter.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [43]

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So you're saying the Q2 recovery, seasonal recovery, is still ahead of the FX and raw material headwinds?

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Sandeep Jalan, Aperam S.A. - CFO [44]

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Absolutely, absolutely. We see solid growth in results out of Brazil, starting into quarter 2.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [45]

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Okay, great. And then just one last quick one, on Shinchang. I mean, it's probably some time away. But they are apparently going ahead with a new mill in Zimbabwe. I mean, did you think that's going to make the situation of Shinchang competition even worse?

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Timoteo Di Maulo, Aperam S.A. - CEO [46]

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I don't know exactly because this is a project for the moment, which has been announced. We will see. So I think, in general, these kind of projects have produced, yes, some strong advantage in cost, but have also to be final because these are project which have some kind of $15,000 to $20,000 per tonne of CapEx, which then have to be at a certain point in time repaid. So you've seen that there are many announcement. There was the China support Westcom, which was withdrawn. There was the project in South Africa that is on hold, et cetera. So let's see. Let's see. What we know is that if there is a level play, we will be competitive enough and we will continue to deliver.

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Operator [47]

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We will take the next question from Krishan Agarwal from Citigroup.

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Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [48]

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Most of my questions are answered. If I can ask a follow-up on your procurement where you mentioned that you've made a strong progress. Does it mean that, okay, there has been some progress in the scrap discount, as in the scrap discount has gone better for you?

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Timoteo Di Maulo, Aperam S.A. - CEO [49]

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So when we see procurement, for us, procurement is not only raw material, but is a lot more. So typically, all plant have contracts with an external company for many services, from transport to some kind of handling, et cetera. And indeed, scrap has been one of the raw material, but there are also other raw materials. So we are targeting everything, every single source of cost of Aperam, from the paper we are writing on, to the rest, will be targeted for -- with our Leadership Journey. And we are -- let's say, among that, there is also scrap.

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Operator [50]

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We will take the next question from Bastian Synagowitz with Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [51]

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I've got 2 quick questions left, please. And my first one is just a follow-up on the European price dynamics. Tim, you seem to be quite positive on the near-term price momentum. But if we look at the probably most important market parameters, we get domestic demand on one hand, which you say will be slightly down in the second quarter. And then, obviously, the price spread for Asia, on the other hand, which has widened again. What makes you so confident that prices will not pull back if these customers being very cautious on bringing imported material now with these cut measures? Or is it just the recovery from the tranche that is what you saw at the end of last year? Was there something else which we're missing? And then, secondly, on the Brazilian market, you mentioned raw material prices, which have been better or have been up. But what have your ASPs done recently? Have you been able to keep margin stable or even expand margins a little, similar to the European business?

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Timoteo Di Maulo, Aperam S.A. - CEO [52]

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So let's be clear on what is happening on price. 2018 has been, let's say, a kind of perfect storm. Why? Because the 2018 has not been caused by Indonesia or something like this. 2018 has been caused by the 232 and the deflection of all the material that all these parts versus the United States has been done to Europe with a mechanism of safeguard, which instead of blocking and protecting as a safeguard name should inspire, its name, instead of doing this had, on the contrary, attract, okay? I'm very negative on this because when you are in a period in which the gap with Asia was very high and Trump threatened to put the 232 in place, and we let 6 months before the moment he implements and the moment Europe implements, this attract a lot of imports to prevent the ramp-up of the safeguard. And on top, safeguard have been put in place with a mechanism which were the 200 days without any consideration to, let's say, to seasonality and with the shipping close which added 45 days on top. So this has put to the price at a level which have been unseen, even when there was the surge of imports from China, which have generated the antidumping in Greater China.

Now what is happening today is that we have experienced this trough of prices in the Q4 and Q1, which is a level of price which is not normal and is so much not normal that imports have not even come because of this because of price. So -- and from this moment, it is, let's say, our role to recover a more sustainable level of price despite the fact that the market will be oversupplied and has over been -- oversupplied during the last 5, 6 years with the China overcapacity.

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Sandeep Jalan, Aperam S.A. - CFO [53]

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So coming to second part of your question, Bastian, regarding Brazil. Going into next quarter, we can see clear improvement in our Brazilian result, not only from seasonal effects, but also from the demand improvements, particularly talking about -- in particular about the negotiations on the raw materials. Yes, we do expect positive negotiation effects in Brazil. But at the same time, we do have the iron ore price increase effects due to the blast furnace operations, which is a low double-digit million euro effect. But large part of this is also getting compensated by the level of ForEx where it has been currently for the past month or so into quarter 2. So overall, Brazil, remaining -- continuing to deliver solid set of results, improving in quarter 2.

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Operator [54]

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Ladies and gentlemen, this is the end of the question-and-answer 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.

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Timoteo Di Maulo, Aperam S.A. - CEO [55]

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Okay. So thank you very much for having participated to the call. And I hope to see you soon around a more closer, let's say, discussion in face-to-face. My final message. We are Aperam. We are the same company and we are facing lately the same difficulties in the external -- from the external market where we have experienced during the last year.

Our markets are upping and down due to this overcapacity and this disruption coming from Asia, mainly. It is something which is not unusual for us. We have a strong story of Leadership Journey, which means for us the capacity to front this situation with a self-measure not expecting that the prices will save us, that the commercial team will be the only way for supporting the company, but working deeply and fast on the realization on -- of our self-measure.

You will have an update every quarter. You will see what we are able to do and this will be translated in our results, knowing that we're still the company with the best balance sheet with nearly close to 0 net debt and with a stronger cash generation for the sustainability of the company.

We are still investing in the sustainability of the company and for granting to our shareholders a fair return. Thank you very much and see you soon and bye-bye.

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Sandeep Jalan, Aperam S.A. - CFO [56]

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Thank you.

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Operator [57]

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