U.S. Markets open in 8 hrs 35 mins

Edited Transcript of APAM.AS earnings conference call or presentation 31-Jul-19 12:00pm GMT

Q2 2019 Aperam SA Earnings Call

Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Aperam SA earnings conference call or presentation Wednesday, July 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Sandeep Jalan

Aperam S.A. - CFO

* Timoteo Di Maulo

Aperam S.A. - CEO

================================================================================

Conference Call Participants

================================================================================

* Alain William

ODDO BHF Corporate & Markets, Research Division - Analyst

* Alain Gabriel

Morgan Stanley, Research Division - Equity Analyst

* 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

* Krishan M. Agarwal

Citigroup Inc, Research Division - Analyst

* Luke Nelson

JP Morgan Chase & Co, Research Division - Research Analyst

* Rochus Brauneiser

Kepler Cheuvreux, Research Division - Head of Steel Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Dear analysts and investors, welcome to the Aperam Second Quarter and First Semester 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hello, good afternoon, and thank you very much for attending Aperam's earning conference call. Next to me is Sandeep, Aperam's CFO. And together, we'll present the result of the second quarter 2019. Please take note of our disclaimer regarding forward-looking statements.

In Page 3 of the presentation, we start from Health and Safety, which is our top priority. Our LTI rate was 1.19 for the second quarter of 2019. The first half averaged 1.1, continue to compare favorably with the 1.4 average that we reported for 2018. We also clearly outperformed the stainless steel industry average, which is almost at 3x high. However, it is obvious that there remains much room for further improvement. We'll continue to measure Health and Safety initiatives that we intensified in 2018 with additional workshops and training courses as we firmly work towards becoming a 0 accident company.

Now moving to Slide 4 for the key developments in the second quarter. I'm happy to report that we achieved an EBITDA improvement, in line with our guidance and despite an adverse market environment. The European market remains extremely challenging as the European Commission moves very slowly to resolve the issue of unfair trade.

This demand side has now also substantially weakened, both in Europe and Brazil and on our total volumes -- in our total volumes contracted by 7%. Usually, Q2 is a seasonally strong quarter, but weak economic growth in Europe is clearly visible in several of our key customer industries in global trade friction, make buyers cautious. In Europe, automotive and dry goods demand is weak. Capital goods have recently started to soften as well. And all the construction remains solid because of its longer order book.

In Brazil, we started the year with expectation for an accelerating recovery, but it has not materialize. Demand from all sectors, capital goods, oil and gas, consumer are weak except for automotive. In Europe, we are facing a contracting market this year, while Safeguard quarters have been increased by 5% from the 1st of July. The Safeguard in its current form is not sufficient to restore a normal working environment. The Leadership Journey of our cost-cutting program remains a key driver of Aperam's solid performance despite a combined price and volume squeeze. I'm therefore pleased that the working continue to find a solid savings. We realized annualized gains of EUR 22 million in the second quarter, bringing the cumulative total saving of Phase 3 to EUR 89 million. This puts us in a good path to achieve the target EUR 200 million gain by the end of 2020. We keep our promises and completed our share buyback program in the second quarter, we bought back 3.7 million shares, thereby handing EUR 92.6 million back to investors.

I hand now over to Sandeep for the financial highlights.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Tim. Good afternoon, and good morning to those in the United States. Warm welcome from my side as well. Moving to Slide 5. As already mentioned, we recorded low volumes in quarter 2, which was down 7% compared to quarter 1. Despite the lack of volume, we reported an EBITDA of EUR 95 million, which was 17% improvement versus previous quarter. We think that this is a strong achievement that demonstrate the successful transformation through the Leadership Journey. Higher base prices and a lack of inventory valuation effect also contributed to this and compensated for temporarily higher input cost in Brazil due to the disruption in the iron ore market. Our earnings per share more than doubled quarter-on-quarter to EUR 0.69. Due to the higher EBITDA, together with a positive tax rate on the back of cumulative tax benefits that mostly relate to earlier periods. We now expect the effective tax rate for 2019 to be between 10% to 15% due to this tax benefit.

I'm happy to report a solid operating cash flow and a cash conversion rate of 102% as we managed to reduce working capital by EUR 32 million this quarter, in addition to a good level of EBITDA. I can assure you that cash generation remains a top priority also during the second half of the year, and we expect to release more working capital. We have also revised our capital -- CapEx spend for the year, down to EUR 150 million from previous EUR 175 million. Net financial debt during this quarter increased from EUR 106 million to EUR 176 million at the end of quarter 2, and it was mostly due to the effect of 93 million share buyback under which we bought back 3.7 million shares of Aperam. Free cash flow of EUR 72 million in quarter 2 is pleasing and more than twice covers our quarterly dividend.

Let me also add a clarification about the dividend. Our financial policy, which is in the rest of this presentation, stipulate a progressive dividend. This progressive dividend has EUR 1.75 dividend per share as the current base, and we expect to maintain it. According to the policy, the dividend will be reviewed by the Board if net financial debt-to-EBITDA is above 1. The intention to pay out 50% to 100% as a mid- to long-term consideration that the Board uses to assess what dividend is sustainable for a longer period.

I hand now back to Tim for a closer look at the market environment.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Sandeep. Let's start with the import in the next page, 6, which remains the most pressing issue. In Q1, we told you that the Safeguard has not been tested and looking at the most recent data, it might be fair to conclude that it is failing again. While total imports are down by 9% year-on-year in Q2, both the plan and the share of the market supply, these are cause of concern. In June, imported tonnage of the cold rolled, declined by only 6% year-on-year versus high base, while hot rolled increased by staggering 46% year-on-year.

What also really matters in the share of market supply. Imports continue to keep an outside share of the market. In June, this was back to last year's peak level at 35%, a sale compared to the promise of the Safeguard to keep it in line with historical share of the low 20s. There is a very obvious and urgent need for the European Commission to sharpen the Safeguard. Imports from Indonesia have increased by almost 180% year-to-date versus 2018, and the exemption on Indonesia must be removed.

Looking at contracting market this year, the quarter relaxation also need to be taken back. Furthermore, the possibility to transfer unused quarter element to subsequent periods need to end. We should learn about the recommission proposal in the next few weeks, but expect the revises of government will only become effective in October. This is 1.5 year delay after the U.S. shuttered the market overnight. I want to add that Europe rewards on restoring a safe health environment in Europe, actively with the European Commission. In Brazil, the stainless steel anti-dumping duty review continues, and I am happy to report that anti-dumping duties were rise to $166 per tonne and confirmed for non-grain oriented electrical steel against China, South Korea, Taiwan and German for 5 years from mid-July '19 onwards.

Let's move to Slide 7. For most of the quarter, nickel credit a comparatively narrow range apart from the recent spike. We will need to wait if this persists. The crown benchmark settled at $1.04 for Q3 2019, down 25% year-on-year. The latter most likely implies a low double-digit negative inventory valuation effect for our term in the third quarter. The stainless steel transaction price has started to decline in the second quarter again. On one hand, this is due to this lagging alloy prices. On the other hand, due to the strong pressure coming from imports in a weak market, this also explains the narrowing of the price versus -- price premium versus Asia.

The inventory chart shows that days of consumption have increased again in Q2, and up on elevated level. However, I can tell you that inventory in terms of material remains clearly below the levels seen in previous years. This demonstrate discipline that discipline prevails in the European system. However, because the current demand weakness this below normal level of inventories, translating slightly elevated days of consumption.

Sandeep will give an update on the Leadership Journey now.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So let's move to Slide 8 to talk about the Leadership Journey, starting with a longer-term view compared to 2014 situation, which you see in this chart. Aperam has come a long way over the years, and we think that the first half of this year proves our success in improving the company. We generated a similar EBITDA per tonne in the first half of 2019 than what we did in the first half of 2014, which was another period where unfair imports had disrupted the market. However, this time, earnings have been generated on a further 27% drop in the base prices. I can assure you if similar base prices prevailed back in 2014, there would have been a deeply red earnings per share and probably not even a positive EBITDA. We generate 4x as much as free cash flow now. And bear in mind that free cash flow back then was achieved on minimal CapEx of just EUR 30 million in first half of 2014, while we are continuing to adequately invest in the sustainability and improvement of Aperam today with EUR 73 million of CapEx spent in first half of 2019.

This demonstrates that Leadership Journey actions do make a difference. Aperam is now a different company than it was back then. Today, Aperam is a much more resilient company that is highly cash generative, even in adverse conditions and solidly based on a strong balance sheet. Now moving to Slide 9. And to give you details about Phase 3 of the Leadership Journey. We were able to maintain the high pace seen in quarter 1 and added further annualized gains of EUR 22 million during this quarter, distribution and the top line strategy as well as purchasing external services, transport and sourcing, the major contributors to savings this time.

Our new German distribution center in Haan, continues to ramp up at this moment, and we expect additional savings and therefrom. Half of the time allocated to Phase 3 has now passed, and with roughly half of the gains realized at EUR 89 million annualized recurring gains. We do have a good momentum that -- and we remain on track for realizing the targeted EUR 200 million gains by the end of 2020.

I hand back now to Tim for the outlook.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Sandeep. Let's move to the outlook in Page 10. Of the third quarter, we expect a normal seasonality by historic standards and guide for a decrease in EBITDA. Additionally, there are a number of challenges and headwinds this year. Mainly, weak demand and lack of volumes, record high imports from the unresolved Indonesia case and their relaxed quarters, low base price, higher raw material cost in Brazil. Finally, at the current crown benchmark, we likely face low double-digit negative inventory effects in the third quarter. While we need to see if the nickel price value will last.

On the positive side, we believe that Indonesia will fall under this Safeguard from October onwards. And Europe then continued to work with European Commission of resolving the quarter relaxation of our storying is at present in environment. Sandeep also mentioned about the CapEx budget revision to EUR 150 million, but we confirm the Leadership Journey gains target remains unchanged at EUR 200 million until the end of 2020. So let me conclude the presentation with our corporate access schedule that you will see in Page 11. We are looking forward to meet you at one of these events and provide plenty of opportunity to address your questions in person.

And we are now ready to take your questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We've taken our first question for today is from the line of Alain Gabriel.

--------------------------------------------------------------------------------

Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Two question from my side. And this is Alain Gabriel from Morgan Stanley. Firstly, on the new CapEx budget that you have articulated for 2019. How much confidence or how much comfort do you have in that new level? And how much do you think this would not jeopardize the integrity of your operations, what sort of stay in business, normal level should we expect going forward? That's one. And two, on the shipments into Q3. Clearly, you've had a weaker seasonal uptick in Q2. So you have a much lower base for Q3. Will the year-on-year decline in Q3 be in line with the historical averages or slightly less pronounced, given your lower base in Q2?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So thank you for the question. So in CapEx, remember that there are 3 components. There is a component, which is the maintenance CapEx and other components, which is the Genk plant, the new line. And then there is a part which is more linked to Leadership Journey. What we have done, we have stressed all the parts, but being sure, being sure that we are not sacrifice anything that will lead to the gains of the Leadership Journey 200. And second priority has been to be sure that the ramp-up of the line in Genk will remain exactly the same timing and exactly with the same performance. And of course, there will be some of other part of the investment that has been simply postponed to next year. But this is the minority of the part. This -- the part of renegotiation of a -- in stretching all kind of expense is also extremely important.

In shipments, in Q3, we see the seasonality and the seasonality effect will be on the base of the market, which is lower than the typical market of Europe, and that has been until now. Then it will be also subject to linked to the more short-term demand, which is, for the moment unclear, we are far from the short-term demand, the spot demand that will be in September, just after the holidays.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

We are now taking the next question from the line of Alain William from ODDO.

--------------------------------------------------------------------------------

Alain William, ODDO BHF Corporate & Markets, Research Division - Analyst [5]

--------------------------------------------------------------------------------

So I have 2 questions, if I may. First, could you elaborate on the positive mix effect you experienced in Q2 and which geography benefited from that? Second question, could you quantify the impact of higher iron ore price on your Brazilian operations? And when do you expect the impact to criminates based on your inventory cycle on that business?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So regarding your first question on the positive mix effect, so -- and in the current circumstances. As you can see that there is, of course, far higher pressure on the commodity ranges where they face strong pressure from the imports. So working on optimization of our top line actions, one of the actions clearly is to continue to improve and strengthen our mix on the sales and product portfolios, and this is what we work on, and we can see the impact of that as well as in the alloys and Specialties division, we have seen an improvement coming from that. Regarding your second question on the iron ore prices, as you are very well aware that during the first quarter of this year, we -- there was an incident in Vale, one of the facilities. And this led to a very sharp overall global spike in the iron ore prices. In Brazil, we have the blast furnaces, which are fed with the iron ore. But clearly, the stainless steel market and our sales prices, they are not correlated with the iron ore prices. So yes, they continue to face a certain squeeze from this international high prices of iron ore. However, as you know that the price situation on ore has continued to remain high for last few months. We hope that it will not last forever. And we expect things to normalize. As you can also read in many, many research reports as well.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question is coming from the line of Luke Nelson from JPMorgan.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just a question on inventory effect, which you guided to low double digits within Q3 guidance, just confirming exactly what is in that guidance around nickel? And then also, is it possible to give any sensitivity around that low double-digit number based on what spot prices are? That's my first question. And then secondly, just on working capital, Q2 was particularly strong. If you can just provide a bit more quantitative guidance around expectations on working capital in Q3 and by year-end?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So first, regarding the inventory effects. You know that it's difficult to give a precise guidance where nickel could finally be, it has been very volatile, particularly in the last couple of weeks. So we don't know where it will end. So -- and the recent -- and depending on how long it lasts, it may have eventually certain impacts. But it might be more for quarter 4. As you know that there is some lag effects. On the contrary, we have for ferrochrome, very well known. The impacts for drop in benchmark prices, which are already into coming -- starting to come into our accounting from July from 1st of July. So clearly, this would have some impact, and we do have a good visibility. So this impact is about a low double-digit impact that we have guided in our results.

Coming to your second question, which is about the working capital. Yes, as you know that in working capital, we had consumed some money over past couple of years. Right now, we are in a release mode also on the back of lower volumes, and we are paying a strong attention on this. And thanks to this, there has been this good level of release in quarter 2, and we would expect further cash releases, as I said earlier, from working capital during the rest of the year. Taking a look at quarter 3 and due to seasonal effect. It's not always, let's say, very, very positive working capital during quarter 3. But again, on the overall during second half of the year, we would expect a strong release of working capital and the level of cash generation will continue to remain very, very strong and very sufficiently covering our cash payouts.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is coming from the line of Krishan Agarwal from Citigroup.

--------------------------------------------------------------------------------

Krishan M. Agarwal, Citigroup Inc, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Just a quick housekeeping question. If you can quantify the tax benefit in the second quarter?

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [12]

--------------------------------------------------------------------------------

Hello. So regarding the tax benefits. This tax benefit pertains to the previous year and quarter 1 of this year and this tax benefit, we got a final ruling, and then we made the full impact for this 1.5 year during quarter 2. And this impact was close to EUR 15 million, which has led to positive cash impact, positive impact in our P&L account with a positive tax rate. This effect on a recurring basis, also will be there on a going-forward basis. And as part of our ETR guidance that we have given now that, for this year, we expect our ETR to be in the range of 10% to 15% compared to the normal 20% to 25%. That's number one.

Number two, you can take a look at our cash flow as well. The cash taxes for the quarter was positive. And this is also due to the fact that we received certain refunds for the tax -- for the excess tax paid in some of the jurisdictions in the previous year. So overall, all this also reflects a strong cash generation ability of this company, wherein we also have a lot of tax losses carryforward. And on top of very low interest cost, you see close to EUR 2 million in our cash flows for interest. We do have a cash generation profile, which is really unparalleled in the industry.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question is coming from the line of Rochus Brauneiser from Kepler.

--------------------------------------------------------------------------------

Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [14]

--------------------------------------------------------------------------------

Just a couple of follow-ups. The one is on the evolution of seasonality in Europe. I guess, you mentioned before that you expect the usual seasonality. Maybe you can't confirm that because when I look at the numbers, based on your wording, it sounds like that Europe in Stainless & Electrical steel, it was down probably more than 10%. And if I would add the usual seasonality in previous years, it would be down another 15% in Q2 -- Q3, which would imply for the whole year that the European shipments would be well over 10% down. Is that the kind of thinking you have in terms of market direction for this year?

The second question is on Brazil, again. Maybe can you clarify your lag time until the spike in the iron ore price is becoming fully P&L effective, Timoteo? And what kind of measures are you taking at the moment to mitigate those cost effects?

And the third question is more generically on the European political response to these trade frictions, I guess you formulated what you expect from the guys. What is the current thinking about political direction under the new government? Do you think it's just a continuation of what we have seen over the last couple of years? Or could there be any directional adjustment to -- in response to what's happening out there in the world?

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [15]

--------------------------------------------------------------------------------

Okay. Thank you for the question. So just to clarify, what we communicate in generally is that the sector of stainless steel, the production of stainless steel and electrical steel, both for Europe and Brazil. First half of the year and second half of the year are not equal. And typically, the seasonality shows some kind of 10%, 15% lower demand in second half of the year than in the first half of the year. This, of course, can be -- it will be different between quarter-to-quarter, because I remember that in our business, there is also apparent demand effect. So there is sometimes effect of stocking, destocking, depending on prices, et cetera. So we can't be more specific on this. But what is clear is that the real demand for -- due to the number of working days, per man per month et cetera is in this range, half 2 is below half 1 by 10% to 15%.

I will take the -- immediately, the part of the European response and political response. So today, there is a lot of attention from all member states to what is happening to the steel sector. And the (inaudible) knew that we are always seeing a lot of support by member states everywhere. Now we know that the European Commission has been extremely slow in responding to the challenge we have. We are not at all United States in terms of speed and determination. We are not at all China, which are the 2 biggest markets after the Europe. But we have seen in the past that the European Commission at the end when has put in place efficient measure of this work. And this was the case of 2014, with the anti-dumping with China. So now we are continuing to work and our determination to have a fair level play is at the strongest ever, and I'm confident that in the future, there will be some positive, but we can't precise when. So now Sandeep, if you can...

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [16]

--------------------------------------------------------------------------------

Yes. Hi, Rochus. So regarding your question about Brazil and iron ore effects. So as you know well that iron ore prices is -- it starts to go up towards the end of quarter 1. We do have certain lag, you are absolutely right. And that's why this impact started to hurt us more from -- towards the end of quarter 2. But in quarter 3, we would have the full effects from this lag and we have to see how it continues to develop the iron ore prices. However, we would expect the prices to normalize at a point, as they have remained on the back of certain unusual conditions very high and disconnected to the carbon scrap prices and so on.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

The next question is coming from the line of Cedar Ekblom from Bank of America.

--------------------------------------------------------------------------------

Cedar Ekblom, BofA Merrill Lynch, Research Division - Analyst [18]

--------------------------------------------------------------------------------

I've got 3 questions. Firstly, have you seen any evidence of restocking it at all at consumers, based on the move in nickel that we've had in the last 6 weeks or so? The second question is about the stainless steel scrap discount in Europe. Can you give us some color on what's actually happened with scrap pricing? Has the discount narrowed or widened over the last 3 months, and how do you see that moving into the third quarter? And then finally, on the import situation and the potential change in the Safeguards. If I look at that chart on Page 6, it shows the Indonesian imports. If we remove Indonesia from the equation entirely, which I don't think is actually going to happen, I think that Indonesia will be allowed to come in, in some way or form, you still have imports running at 25% or so of consumption. So how can we be that optimistic that any shift in the import safeguard is actually going to create any real pricing tension in the European market?

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [19]

--------------------------------------------------------------------------------

Thank you for the question. So we can see the restocking due to the nickel because nickel was absolutely unexpected. So if the surge of nickel of $3,000 approximately but not at all forecasted. Nobody could have had the time or the crystal ball to understand what has happened, what could have happened with nickel. And today, there is no real reason to believe that something structurally has happened to nickel. So this will go up, at least not as far as I understand it. So -- and by the way, nickel, in 5 days, has gone from $15,000 to $14,300. And now it remains more or less in the range of $14,000, $14,300 so is that there is some uncertainty. So I don't think that for the moment, we can see any relevant movement inventory linked to the nickel and doing a movement today, in my opinion, is more risky than an opportunity.

For the discount of scrap, of course, one of the reason of the, let's say, of the fact that we keep our profitability at a certain level is also because the discounts have increased. As you know, this is a sensitive information because it's a competitive information. And we can't disclose about the level, but nickel in scrap have to adapt to a lower level and the adaptation to the parity to nickel pig iron has not been completed now. But in the long term, what we are working for is to have the parity between the cost of nickel in scrap and the cost on nickel pig iron.

Then the question of Indonesia, it's a good -- an interesting question because what is happening with Indonesia, when you have an infinite capacity of the import -- of import in Indonesia. Then there is only one price in the market, which is the Indonesian One, which is a price, which I think is not good for anybody. Not even for the other countries exporting to Europe. And this has a clear, you can see this clearly on the part of that the demand versus the China have decreased. Then if you contain Indonesia in a certain level, there is less pressure, and this price will not become the only one price that will be negotiated for imports. And this will release the pressure. Okay? This is the division that we can add. So this is why putting Indonesian in the Safeguard and having a fair quarter for Indonesia is fundamental. Then once prices will not be -- once prices will not have the only reference of Indonesia, then it creates the question of which kind of level of volumes European producer wants versus their market share in imports. And this is a fair game. I mean, that we have lived many years with imports, without any Safeguard and fighting against prices of the imports coming from all countries from Korea to in Malaysia, South Africa, all the other countries. The problem today is really Indonesia and the fact that they constitute the only reference in price.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question is coming from the line of Bastian Synagowitz from Deutsche Bank.

--------------------------------------------------------------------------------

Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

I just have 2 questions left. My first one is on inventories. When you look at the inventory levels in Europe, in absolute terms, do you think that there is more scope for destocking? And if so, do you have a view how much longer the destocking is likely to last? And then secondly, lastly, can you please remind us what is the amount of iron ore used in Brazil versus the scrap in alloys, which you're feeding into the operation.

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [22]

--------------------------------------------------------------------------------

So in terms of inventory. I mean a lot will depend on the market. So in [some tends] -- on the market, as always an effect when the market is slowing down. Everybody is try to reduce the inventories. But the speed of reducing inventory is never the same of the speed of the reduction of demand because this happens with some lag effect. So today, inventory are relatively low. The only -- as Sandeep has already explained, the fact is that the new base of consumption has decreased so much that the rotation appear as high. But I am confident that there is some relatively low room for further decrease of inventory.

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [23]

--------------------------------------------------------------------------------

Hi, Bastian, regarding your second question on the magnitude of iron ore uses in Brazil. As you know that in Brazil, our production profile it consists of not only stainless, but also many other products. Carbon steel and electrical steel, which are mainly produced through the blast furnace route. Certainly, on the stainless, we do have a mix. A certain part of that production is done through the recollected scrap, but not to the same magnitude like Europe, where we use more than 85% through our own scrap. But it is much less in Brazil. So clearly, a large part of our production gets the metal from the blast furnace route. And that's why iron ore is an important part of our raw materials. And that's where we do face this short-term price impacts.

--------------------------------------------------------------------------------

Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

And just in terms of the tonnage, like what is the rough tonnage, if you take like a normal mix between like tungsten products and stainless?

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [25]

--------------------------------------------------------------------------------

So Bastian, we have not disclosed the exact magnitude of the iron ore that we buy. But yes, I mean, if we put the matter around a large part, a majority of our production is coming through the blast furnace route in Brazil, our shipment is around 650 kilotonne or so. And if we work backwards to the hard metal and then you follow the coefficients for iron ore uses, you can put a little math around and they will reach back the numbers.

--------------------------------------------------------------------------------

Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Okay. Maybe just a follow-up on the Brazilian market? You've been talking a little bit about Europe already, but your third quarter typically is a stronger quarter in the Brazilian domestic market. Do you see a domestic strength also this year? Or is there domestic Brazilian market actually going into a decline in the third quarter and the overshipments maybe remain more stable with a more in-favorable mix towards exports?

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [27]

--------------------------------------------------------------------------------

We see a high stability. We are expecting a strong recovery in Brazil. You have seen that there has been a correction in the expectations since the beginning of the year, a few times. So while the growth of Brazil were expected at, let's say, a stronger level to the forecast has been divided by 4 or 5x. So it's not a decline, it's not declining, it's not decreasing, but is in more in stability. So we'll see a stable Q3, with some effect that are also for Brazil and so the iron ore and globally, the price in the market because, as you know, the Brazilian prices are based on the parity with the global market. And today, globally, prices are low and for Brazil are low also.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question is coming from the line of Christian Georges from Societe Generale.

--------------------------------------------------------------------------------

Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [29]

--------------------------------------------------------------------------------

Two questions. First one is then on base prices, which have somewhat recovered in Europe in the first half. Are you taking some pressure again now? And do you -- are you worried that you have to -- over the summer on into September, some production could come through. That's one. Two, on [Chin Chan], we've heard reports, [season] confirmed, some disruption with their production level. And they don't say that some postponement of some of their planned investments? Is it something that you heard as well? Or do you have any more evidence of it? And third, my line wasn't very good, on what you said about dividends, would you mind to say again with the guidance you're giving us on your dividend for the year?

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [30]

--------------------------------------------------------------------------------

Okay. So on mid-price in the previous guidance, we saw that prices were recovering in the second half -- in the second part of Q2. This has happened. The problem has been that you have seen this in the graph that without any kind of protection from Safeguard immediately after the recovery of price, there has been a spike in the import. And this has been as limited and reverses happened for a certain extent, the recovery of prices.

So as I told before, whenever there is, let's say, a market price versus market share. And so the highest is having the price is the highest we can expect in the imports, et cetera. So only with the solving with the case of Indonesia, we will see a sustainable recovery.

Concerning [Chin Chan], we have read the papers, but we have no further information about this. Remember that it's a relatively recent information. And whatever has happened in Indonesia so that we don't know. The consequence of this will be after our shipment and the reception. And so there is a lag effect between 45 days and 2 months. So for the moment, we don't know anything about what is the consequence of it.

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [31]

--------------------------------------------------------------------------------

So Christian, I'm coming to your question regarding the dividend. Earlier, I made a clarification regarding it. So the dividend base for this year, which has been announced earlier this year was EUR 1.75 dividend per share. This is a new base, which has been decided by the Board, and we expect to maintain it. Based on this, we expect to pay this year, EUR 142 million as dividend and EUR 93 million of share buyback, which has been executed. This leads to cash returns at EUR 235 million. Now regarding the dividend policy, clearly, EUR 1.75 is the new base that we aim to maintain it, and the dividend will be reviewed only when the financial debt-to-EBITDA is about 1.

--------------------------------------------------------------------------------

Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [32]

--------------------------------------------------------------------------------

Okay. So you're not ruling out increasing it, you're just saying at the very least you will maintain it? Is that the message?

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [33]

--------------------------------------------------------------------------------

So we follow a progressive policy. So every time we are taking a look at the long-term trend and decide a base that we are confident to maintain over a mid- to long term. And so EUR 1.75 is the minimum base that we are comfortable with. And it's a discussion, as you know, at the quarter 1, with the full year results. That is the time at which Board is reviewing, taking a look at the net income, cash flows, and all these ratios, that there is a payout ratio, whether it's end of the EBITDA ratio and our entire business plan and the long-term prediction. So we are pretty comfortable with this new base of EUR 1.75.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

That 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.

--------------------------------------------------------------------------------

Timoteo Di Maulo, Aperam S.A. - CEO [35]

--------------------------------------------------------------------------------

So thank you for having listened to this conference call, which is the last before holidays. So in summary, you see that we are facing strong headwinds from price, demand, the global economy, et cetera. Despite these headwinds, we are putting in place new actions, which will -- are extremely interesting, because it's a new stimulus to create a stronger and stronger company. We see that we are facing this kind of cycle, in a totally different way than compared to the past. And we are sure of our cash generation and the progress of our Leadership Journey. So thank you very much, and I hope that you will spend a good holidays and good rest for this summer and see you at the comeback.

--------------------------------------------------------------------------------

Sandeep Jalan, Aperam S.A. - CFO [36]

--------------------------------------------------------------------------------

Thank you very much. Bye-bye.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

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