Aperam's (APEMY) CEO Philippe Darmayan on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Aperam (APEMY)

Aperam (OTC:APEMY) Q2 2014 Earnings Conference Call July 31, 2014 12:30 PM ET

Executives

Philippe Darmayan – Chief Executive Officer

Sandeep Jalan – Chief Financial Officer

Analysts

Michael J. Shillaker – Credit Suisse Securities Ltd.

Baskin Singovich – Deutsche Bank

Alejandro Abase – JPMorgan

Rocas Bronlazer – Kepler Cheuvreux

Phillip Negoza – ABN AMRO Group N.V.

Jean Devivi – Exan

Alan William – Societe Generale

Stephen Benson – Goldman Sachs International

Operator

Dear Analysts and Investors, welcome to Aperam Second Quarter 2014 Results Conference Call. I’ll leave the floor now to Philippe Darmayan, Chief Executive Officer; and Sandeep Jalan, Chief Financial Officer. Please go ahead.

Philippe Darmayan

Yes, good afternoon, and thank you very much for attending Aperam earnings conference call. Next to me is Sandeep, Aperam’s CFO, and together, we will present the company’s second quarter 2014 results. We are pleased to have once again, improved our profitability and strengthened the balance sheet in the second quarter, thanks in particular to good cash generation and to the successful launch of the last convertible bond.

EBITDA increased quarter-on-quarter as a result of improvement of the stainless steel market conditions in Europe, the continuous progress of the Leadership Journey, the top line strategy and the seasonal recovery in South America. As for the first quarter of 2014, we are also happy to confirm net positive results of the second quarter. Net debt decreased despite the increase of working capital requirements due to higher prices.

Looking ahead, we acknowledge that the improvement of the stainless steel market is underway. But we remain cautious in view of the current economic environment and in particular uncertainties regarding the nickel price evolution and the pressure from imports.

Overall, we are confident that the ongoing projects related to our Leadership Journey and our top line strategy will continue to enhance the operational performance. EBITDA in Q3 2014 is expected to be lower compared to EBITDA in Q2 2014 due in particular to the traditional seasonal effect. We expect net debt to decrease in Q3 of the year and go $550 million.

We will now take you through the Aperam’s Q2 results. In the Slide number 4, you have the safety performance. we will begin with this performance. Frequency rate of the company in Q2 2014 was 1.4, compared to 1 in Q1 2014. Over this semester, we are in progress compared to last year that we must relentlessly double and reinforce our efforts and target the upper accidents in our day-to-day operations. Also contractors also did a very good job in this regard and are now in line with our internal performance. Additionally, Aperam published its third quarter sustainability report in May. We are on continuous process of making this sustainability report more and more complete.

Our goal remains to be the safest stainless steel company in the world by lining the sustainability practices with commercial and operational competitiveness. We want our sustainability approach to permeate all aspects of our business as we believe it has been essential to the company’s overall performance.

Slide 6 will turn to the environment and market. Nickel price peaked at the end of the first quarter, mainly driven by the market confidence on the Indonesian ban and remain in the range of $18,000 to $21,000 per ton over the past weeks. With regard to the stainless steel market, the base price started to slightly increase in Europe in Q2.

Chinese players started to integrate the impact of the nickel price increase in May, but subsequently, the prices decreased again. This shows that uncertainties remain and that we have continued pressure from imports on our market. Next slide will turn on the performance in Q2. Aperam had EBITDA in Q2 2014 of $164 million compared to $129 million in Q1 2014. EBITDA in the stainless and electrical steel segments increased from $100 million EBITDA in Q1 2014 to $124 million EBITDA in Q2 2014. This includes $15 million in Q1 and $19 million in Q2 resulting from positive results from electricity surplus in Brazil. The increase in EBITDA in Europe was primarily driven by better product mix, by a continuous progress of our Leadership Journey and by the impact from slight improvement in base prices.

In South America, the continuous progress of the Leadership Journey, and top line strategy and the seasonal recovery compensated a more challenging environment over the second quarter due in particular to negative effect of Brazilian real appreciation and due to some weaknesses in the electrical steel non-grain oriented markets. The services and solutions segment increased its EBITDA from $23 million Q1 to $30 million in Q2 2014, mainly due to positive contribution of the Leadership Journey and to the positive stock effect related to the nickel price.

The performance of the alloys and specialty segments increased in the quarter with EBITDA of $20 million compared to $15 million in the first quarter of 2014 as a result of product mix improvement and continuous progress of our first Leadership Journey. Slide nine explains the state up to date of the Leadership Journey. Since the beginning of 2011, we performed $401 million positive impact on the EBITDA due to the Leadership Journey. The closure of our plant in Germany, in France, and the precision business is now completed. The Leadership Journey was initially composed of three pillars – restructuring with capacity closure, cost cutting and operational performance.

At the beginning 2014, we decided to enhance this program with a new focus with the bottlenecking of our key downstream production lines to avoid opening old capacities when the load is good. Along these lines, we have launched a new project every quarter since the beginning of the year with the upgrade of the finishing line of the Imphy wire rod mill in Q1 with the production improvements of downstream facilities in Genk, in Gueugnon and in Timoteo in Q2.

This quarter, the Board of Directors of Aperam approved an investment of $17 million aiming to upgrade our grain oriented electrical operation in Brazil. This would first extend our product portfolio the high grain oriented electrical steel segment. And second, this should also improve our cost competitiveness in this segment.

I will now turn the presentation over to Sandeep.

Sandeep Jalan

Thank you, Philippe. Good afternoon, everybody. On Slide 11, as Philippe mentioned, we have reported EBITDA of $164 million for the second quarter. Depreciation and amortization expense in the second quarter was $57 million, net of an impact of $21 million, coming from changes in the estimated remaining useful lives of certain tangible assets determined by the management on the basis of a technical review of such assets. Net interest and other financing costs in the quarter were $30 million of which $21 related to interest charges on debt.

Realized and unrealized foreign exchange and derivative gains were nil in the second quarter. Also included in the above slides together were net interest and financing cost. These were lost from other investments of $28 million recorded in the second quarter primarily related to an impairment loss of $29 million booked on our minority stake in Gerdau, a Brazilian steelmaker, according to the prolonged decline of the share price of that investment compared to its book value. Pre-tax income during the quarter was $49 million and additionally, we recorded $13 million of tax expense during the quarter with a net income of $36 million and an EPS of $0.46 for the second quarter.

Moving onto slide 12, on the cash flow, we’ve had a continued good cash flow generation from operations of $47 million in quarter two, compared to $20 in quarter one. Working capital increased during the quarter, resulting in $61 million cash outflow largely due to higher prices.

CapEx was $19 million for the second quarter and free cash flow was positive $28 million during the second quarter. I’ll now move to the balance sheet, as of June 30, our net debt was $663 million, compared to $689 million in quarter one, representing a gearing of 21%.

On June 27, Aperam successfully launched a convertible bond of $300 million, which is due in 2021 with a coupon of 0.625% and an initial conversion price of $43.92. The conversion has been closed in July and the net proceeds of the offering will be used for general corporate purposes and the refinancing of existing indebtedness, including the senior notes maturing in 2016.

Net debt is anticipated to decrease in quarter three as a consequence of continued cash generation and convertible bond retreatment. As of June 30, we had liquidity of $701 million and non-current assets, including intangible assets represented $3.7 billion.

Moving onto Slide 14, despite the varying market conditions over the past three years, Aperam has been able to continuously generate positive cash flow from operations, and continuously strengthen its balance sheet. We have further decided to reduce our target on net debt from earlier declared $650 million to $550 million by the end of 2014. This will effectively reduce our net debt to half by the end of 2014 when comparing to middle of 2011. Our goal here is to further strengthen Aperam’s balance sheet, improving our rating and supporting our objective of financial cost reduction.

Thank you very much. We are now happy to take your questions and I will turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Michael Shillaker from Credit Suisse. Please go ahead.

Michael J. Shillaker – Credit Suisse Securities Ltd.

Yes, thanks very much for taking my questions. Could you give us a bit of an insight into your view of the normal seasonal effect in Q3? Because it's difficult to have called the last two or three years normal, given I think we've had a reasonably strong demand slide in the second half of the year. So, can you give us a sense of your view of the magnitude of EBITDA reduction will be $20 million, $30 million, something like that? And also, are you planning any electricity sales in Q3 also so we can see what the clean base in Q3 would be also?

I think Philippe we talked on the last call and you said very wisely and very clearly that based prices in Europe would have been held back because Chinese exports were still at the low end of the cost curve coming in from Q1. Are you seeing and I know you alluded to it on the call that it'd been volatile, but are you seeing any underlying change in the cost curve, and hence improvement in the structure of the market, given we're now seven months into the year past the Indonesian ban, because it seems like a slow process. Are things actually structurally getting better, in your eyes? And you've clearly – third question, done an awful lot of work on the balance sheet when you look at the slide on figure 14 in terms of reducing net debt. What is the ultimate target? And once you get there, what are you actually going to do? Is it a case of returning cash to shareholders in some way or given there are clearly assets for sale in the market, would you be priming yourself up for potential acquisitions? Thank you very much.

Philippe Darmayan

Okay, thank you, Michael, and happy to have you on the phone. For a minute, we thought we had lost all of you and we were quite worried. Okay, I would start with the seasonal effect. It's clear that we do all efforts to reduce the seasonal effect and we strongly believe that we will have a better quarter compared to the previous years. I mean, the delta will be less than the previous years. But I would say this is all I can tell you today. We will do our assets to reduce it, but that’s there will remain a seasonal effect. the market is – particularly in Europe, the market has been characterized in Q1 by a strongest restocking by the distribution.

In Q2, we have seen the real demand being there, but less restocking. And in Q3, we will have, I would say, the normal seasonal effect, particularly in Southern Europe. So, of course, we have done everything and particularly in the services and solutions segment to be capable to be on the market.

But when the customers are not there, it’s difficult to be balanced from the market. So, we suffer in Europe with this effect. So we cannot avoid it that we have done some work in order to mitigate as much as possible. So, I expect less delta than what we used to have in the past.

This is the first point. On the Chinese cost curve, I would say the good point that there is a consensus and we listen to that that the Indonesian ban is a serious ban, and I would say a long-term ban. And I would say that in Indonesia, this really seems to be the policy of the government and all politicians are along the same line.

Therefore, I think this is a structural improvement on the market, which of course, is hurting more that Chinese produces than European produces. We have been quite astonished about the fact that in Q1 and now we confirm in Q2 that there is a kind of an erratic behavior regarding the nickel. I would say there’s no perfect coordination between the pricing of stainless steel and the evolution of the nickel price or the evolution of the NPI price.

And therefore, I would say this is a fact that we have to manage. And for us, the concern is the impressive increase of imports, particularly in Europe, from Chinese and from Taiwanese. And this is the major point of action of our commercial policy. So, we feel that the Chinese, to answer your questions, are in major difficulties and that they are reacting with, I would say, a position which, of course, is rather difficult to understand from the viewpoint of the market and from the viewpoint of the competition. This is maybe why, and in spite we see quite good operations in Aperam; and in spite, we have order book, which is quite good. That we have said in our guidance that we remain cautious beyond the Q3 on the market, because it is not good to have a market on which the main operators are not very visible – cannot be read very easily. Returning cash to shareholders – maybe, I would ask Sandeep Jalan to take this one.

Sandeep Jalan

Yes. so, on the balance sheet, your point, Michael. this is something we are focusing clearly as our goal to continue to strengthen our balance sheet. And towards that, we declared the new goal of $550 million. Actually, we are not unhappy with the level of debt that we have in terms of the gearing. But our main concern remains on our rating, which is still B, and our cost of debt which remains very high.

So, this is our goal to work on and we have other work to do in this area. And of course, after we have a stronger balance sheet, this is a topic that we have to discuss with the Board, and to take a look at all the options, whether it is a dividend, or taking a look at other opportunities that are there, but there is no definitive plan at the moment.

And at the right moment, the Board will surely examine this. Apart from this, I think you were asking another question on electricity sales? So, on electricity sales, we do have some surplus in Brazil and those are the favorable contracts that are sold on the spot market and we have not reduced our production to take any benefit from the electricity prices. We have continued to maintain our strong market presence in Brazil. And of course, whenever we have some surplus, it is sold at the spot market, at the spot rate, which have been fluctuating from a very high prices they had and gone down slightly now to the level of around R$500. And they are not getting any predictions on the electricity prices or electricity income going forward.

Michael J. Shillaker – Credit Suisse Securities Ltd.

So, sorry, does that mean Q3 expects some sales from electricity but a lower number than Q2?

Sandeep Jalan

Yes. it will all depend on the final spot prices and the pricing in Brazil; it is fluctuating, as you can see, from the price evolution of the past many, many months. And it depends on many, many factors on which there is no perfect prediction. So, it will – our level of electricity income will depend on the surplus that we’ll have and the final price that will be in the market.

Michael J. Shillaker – Credit Suisse Securities Ltd.

Very clear, okay. Well done. Thanks very much.

Operator

We will now take our next question from Baskin Singovich from Deutsche Bank.

Baskin Singovich – Deutsche Bank

Couple of questions. Firstly, And Sophia, I really have to say I'm quite impressed by your cash flow performance. So, where I guess your peers are barely managing to keep working capital under control and you already mentioned your rating. So, if I look at your debt metrics you're approaching and you will actually fall below one times in the debt to EBITDA shortly and obviously this seems to be quite inconsistent with your non-investment grade debt ratings.

So, sure we see some positive momentum there. So, could you give us any color on the recent conversations which you had with the rating agencies? And then also what can we assume for your net financials line considering the lower cross debt and falling financing costs? Maybe I'll stop here before proceeding with the other questions.

Sandeep Jalan

So Baskin, this is something we are very closely working with the rating agency. And of course, as a result, we have already seen an outlook improvement on negative to positive by both agencies in April and May. And of course, there are some lag effects that agencies do consider before (indiscernible) any rating upgrade and this is something they continue to work with them. So, there is no definitive plan or a date by this rating improvement could be realized. And this is a discussion that we are continuously having with the rating agencies.

Baskin Singovich – Deutsche Bank

Okay. And then, on the financials line, obviously you shared the bond. We might get some mark-off up on the ratings side – maybe the first step could already have opposed the impact and then obviously you've got the lower amount of cross debt. So, what would be the effect on your financials line? Can probably expect that to fall a little bit going forward?

Sandeep Jalan

Yes, so the first effect will be the technical effect on the net debt level. So, coming from the convertible bond, we should have a net effect of $50 million on net debt. And the rest in terms of the impact on the financial charges, you can see that these bonds we have launched with a coupon of 0.625%. And of course, we had many of the financing. If you take, for example, the old high bonds 2016, the interest rate coupon is 7.375% so you can do the math. In terms of the cash interest cost, we will have a significant benefit. Of course, in terms of the profit and loss impact, you know that the impact will be lesser also because of the amortization of this premium that needs to be provided also as interest cost. But it's going to be significant benefit in the cash flows further on.

Baskin Singovich – Deutsche Bank

Okay. Could you just give us a rough guidance? Because obviously for some of the burning lines I think we don't have the full disclosure. Could you just give us a rough guess for both cash flow and P&L?

Sandeep Jalan

Okay, I can give you just range for the convertible bonds. The cash cost should go down between $16 million to $18 million. And the profit and loss effect should be in the range of $4 million.

Baskin Singovich – Deutsche Bank

Okay, perfect. Thank you. And then my second question is, again, following up on the trade and import balance in Europe. One of your competitors has said very clearly that they expect imports in Europe to fall in the second half. Then yesterday, we obviously again saw USCO lowering prices. I mean, do you have a view on what's happening on the trade balance in the next couple of months? Or is it just completely impossible to assess the situation and the approach the Chinese are basically going for?

Philippe Darmayan

We feel that pressure of the Chinese and USCO on the markets is going to remain. And we estimate that it is one of the concerns we have. But we'd say this is the main justification of our Leadership Journey, which is to be competitive in order to be capable to resist to this import pressures. These pressures come from the fact that the Asian markets obviously are not growing at the speed that they have and therefore they have to find some other markets. And so far, the European market has been the only market which is available without any protection. But enough is enough and obviously Eurofer has been taking this situation, looking at the situation, showing some evidence of the dumping and therefore we have, yes, decided to support this action by Eurofer in order to fair credit's volume, but it must be done in the condition of fair trade.

Baskin Singovich – Deutsche Bank

Okay. And then following up on this and particularly on the ongoing anti-dumping investigation, I understand that you basically handed in – or that Eurofer has been making this case based on data which has been handed in, in Q4 of last year or probably late Q3. Well, obviously since then the situation has been going in absolutely different direction considering what's happening in Indonesia, considering what's happening to the incremental progress in the trade balance, do you think that the European Commission will also take in consideration the recent, let say dynamics or will they simply look back on whatever has been handed in Q3, Q4 last year?

Philippe Darmayan

Yes, it will be done based on the last year.

Baskin Singovich – Deutsche Bank

Okay, thanks for taking my questions.

Philippe Darmayan

Okay.

Operator

We will now take our next questions from Alejandro Abase from JPMorgan. Please go ahead.

Alejandro Abase – JPMorgan

Hi, good afternoon. Really congratulations on this set of strong results. I just have a few questions. Your net debt reduction seems to be really impressive the way it's coming off, the way you're managing the working capital, improving the results with nickel that is growing there. Is there any change in strategy of the use of factoring? This is just a technical question.

The second one is related to this kind of apparently rationale behavior the Chinese stainless steel makers that’s are basically reducing also the price, even though the nickel price going up. There was some news in the market that Chinese nickel began produce or shifting to ferrochrome at the moment. Do you think this is a kind of sign of a potential shift of the demand of stainless steel in China from most any ferritic?

And the third question is related to this Leadership Journey that seems to be working definitely way better than the other restructuring plan of the competitors. What is actually is the real beneficial impact you see in the P&L versus the nominal way that you're declaring, if it's possible just to quantify a little bit? Thank you very much.

Sandeep Jalan

Good afternoon, Alejandro. The first question on the net debt reduction, so I confirm there is no change in our factoring policy. We have announced a TSR program of €250 million and we maintain that range. And we have announced in quarter four our recovery in our TSR utilizations. And we maintain our levels of TSR and factory usage.

Philippe Darmayan

Okay. Regarding the NPI and ferrochrome, as you know, Aperam is not working in China and we are not supplied with NPI. And we supply our ferrochrome directly from ferrochrome producers. So, I would say we are not directly in this Chinese question. So, it's for me, I would say, difficult to give you an authorized answer based on real facts. We have our views on what is being done by the Chinese, but I would say they have the same value as the one you can have. So for us, it’s quite difficult. We have read these papers on the ferrochrome evolution and the fact that there has been this reduction in the contract. But frankly speaking, I have no capacity to give you an authorized answer on the subject.

Regarding your question on the Leadership Journey, we have had many times this question. And when we were EBITDA positive, but net negative, I had, of course, many time the occasion to explain that the key point of the Leadership Journey – to see the Leadership Journey in the EBITDA, it would mean getting a price which is not being down. And the main advantage of the Leadership Journey is competitiveness and it is allowing us to load our mills and it is allowing us to resist to these prices coming from import and to this increase of imports from which we suffer.

And therefore, the result of the situation today is directly the result of the Leadership Journey, which is that today, in spite of the Chinese prices to Europe, in spite of the aggressiveness that they show in coming and taking market share and increase of market share, Aperam managed to sell and be profitable. And Aperam managed to sell at competitive price. We are not unfortunately pricing at a price which is not market price because our customers are not subsidizing us. But this is down to the fact that we had this policy to say okay, every capacity which is not competitive – we shut it down and now we put all our people on the fact that they make their cost reduction in the Leadership Journey. Then after that, your question is to say, okay, but all the competitors are announcing the same type of programs. What is different in Aperam?

It’s very simple. There are two ways to answer your question. The first one is focus and the second one is speed. We have been focused on operational efficiency since the creation of Aperam, which was launched by my predecessor. And I can tell you I have no hesitation to stick in the shoes of my predecessor on this subject because it was the right strategy. So, we have focused all the energy of our engineers, of our people on the competitiveness, the cost reduction. And I would say this is this focus.

We are not distorted by any view on developing markets in Southeast Asia or in the U.S. or if you see what I mean. We are focused on our markets, developing the European markets, developing the Brazilian markets and doing this as good as possible with customers that we know and with product that we have to make with lower cost. So, focus is the first answer. And the second is speed. Of course the competition is doing the same, we know that. And we estimate very much the competition and they are great and genius and they are very good guys.

So, this is why our program in which we value a lot the fact that to go fast and maintain a program, this is why, in spite of now the market conditions being better, we still maintain the Leadership Journey, the cash management, because we feel that as of today, it is still the key to remain on this market as long as we still have the threats from the overcapacity coming from Asia. So we maintain this strategy of Leadership Journey. We repeat it not for the pleasure to repeat it because this is the real focus of the Company.

Last point, which I have forgotten, by the way – okay, so I have forgotten last one, but it was not important. I've been already too long on the subject. But then you touch a subject which is key for us. Okay, next one?

Alejandro Abase – JPMorgan

Can I just ask a follow-up question very quickly? Related to this sharp decline in Chinese transaction prices basically dropping $500 more or less from the last peak of May, do you think this can actually undermine the ascent or stainless steel makers in Europe to increase prices into Q4? And the last one is if you see any kind of change in the commercial strategy of ASD since the asset is back in the hands of Disencrupe? Thank you.

Philippe Darmayan

I will ask you to repeat the second one. But on the first one, no, I think one of the – we have some arguments for our European customers, which are directly based from this erratic [ph] because there is not a sharp decrease in China. The price is going up and down, and so that is very difficult to read what is the strategy. And then there is a kind of threat on the customers that the market is moving and that there is no clear view. And what we offer to the market is a sustainable strategy, commercial strategy. And the fact that they know where they are and they know that Aperam will be there whatever happens for them. So if you look at the past month, you had increase and decrease of prices by the Chinese competitors by amount which was extremely important. And this is bringing to the market a kind of uncertainty which the market doesn't like. Can you go to the second question? I’m not sure to understood.

Alejandro Abase – JPMorgan

If you see any kind of change in the commercial strategy in terms of volumes, in terms of prices up from ASD the asset now is back in the hands of (indiscernible)?

Philippe Darmayan

Okay. No, we have seen what they announced on the market, which is that of course they want to take some market shares outside of their core market. This we have seen this. And as you know, we estimate a lot (indiscernible) and so this is of course a true competitor. That’s about no I think we have seen what they have announced.

Alejandro Abase – JPMorgan

Thank you very much for the answer. Congratulations again.

Philippe Darmayan

Thank you.

Operator

We will now take our next question from Rocas Bronlazer from Kepler Cheuvreux. Please go ahead.

Rocas Bronlazer – Kepler Cheuvreux

Yes. Hi, this is Rocas Bronlazer from Kepler Cheuvreux. Can we go back to the demands environment in Brazil? And Philippe, can you gives us some comments how the order situation the order book has changed over the past three months and how is the share of business you're doing domestically was the business on the export side? Maybe also could you give us some worth indication how much currently the domestic portion is in your Brazilian business?

And maybe can you also speak a little bit about the background of the lower earnings contributions from the Brazilian electrical steel business? Is this related to imports? Maybe can you also give some quantification for the negative effects? And second question is on this European imports. Can you give us a rough idea what the market share imports has been in the last one or two months? Is this now more closer to the 30% versus the range of 20%, 25% we have seen over the last 12 months? And maybe thirdly, can you give us the reason for the timing why you are changing your depreciation policy now?

Philippe Darmayan

Depreciation for what policy?

Rocas Bronlazer – Kepler Cheuvreux

Yes, the depreciation policy.

Philippe Darmayan

Yes, yes. Okay, okay. I get it. Okay, demand in Brazil – the past call, we had many discussions on Brazil growth. And I think I got a lot of questions where you were saying there is some slowdown in Brazil. And I told you where we don’t think. It's clear that we are today seeing this small challenging environment over the second quarter. And this started in electrical steel, which is a business in which we are in direct relationship with the customers so there is no in between, no distribution and so forth. So – non-grain oriented electrical steel first.

It might be an effect of the World Cup; might be also be a more deeper effect due to the inflation and due to the slowdown of the macroeconomics – that GDP in Brazil is 1%. So, it’s normal that the real consumption goes down. And we stopped seeing this. We estimate that – with this in mind, we estimate that the inventories in Brazil are quite high, and so that there might be also some slowdown in stainless steel starting from now.

And in this case, I would say we are ready to increase our sales and our volumes in the South American market, maybe expect Argentina, as you know. As we feel that we have some grounds for compensating one by the other. But so far, we still believe that the Brazilian market is a market in which we can develop and we do not reduce our effort in this market. But clearly, we have a more challenging environment in Brazil regarding to this respect. Regarding the European imports, I know that one of our competitor has given figures. We don't disclose the import figures on this. What we say is that there has been a tremendous increase of imports by the Chinese and by the Taiwanese – that's for sure and this is something, which we feel as going to continue in Q3.

Regarding depreciation, I will pass to Sandeep.

Sandeep Jalan

Yes. so regarding depreciation, as you know – in accordance to the IFRS standards management has to continuously take review of the remaining useful life of the asset because the depreciation is based on that. And we have an ongoing program of maintenance and total maintenance CapEx, which is also extending the useful life and still the instruction this review has been done now. And according to that, now we are at least getting our depreciation, which is having an impact of $21 million.

What we have to see in terms of our depreciation, our depreciation last year excluding impairment effect was about $290 million and after this change, we should be more in the range of $250 million to $270 million of depreciation levels. Okay, other question.

Operator

We will now take our next question from Phillip Negoza from ABN AMRO. Please go ahead.

Phillip Negoza – ABN AMRO Group N.V.

Yes, good evening, gentlemen. Most questions have been asked. But I have a few minor questions. Maybe to start with the services and solutions division, part of the EBITDA growth was driven by the reevaluation impact. I was wondering if you could maybe quantify how much that impact roughly is. And then secondly, maybe on the CapEx, I think that it has been down, as well, year-on-year, if I'm correct. I was wondering what level we should be looking for as a run-rate going forward. And then the last question it was a clarification on the electricity surplus. I understand that the level of the impact would depend, of course, on spot prices. But in terms of the amount of electricity surplus, would that be similar to what we have seen in Q2 or in the first half of the year?

Philippe Darmayan

Okay, no we don’t disclose the details for services and solutions; of course, it's quite easy to calculate as it is strictly linked with the raw material price increase. But it's clear that it’s not only the windfall gain which is explaining this amount, the service and solution is doing very well. And those on the sell side the market shift part and on the cost. So this is clearly not, I would say, due to only the material position. But it is clearly part of what services and solutions has been doing. Regarding the CapEx, the maintenance CapEx that we estimate necessary for this company for continuing doing the environment cost reductions, the maintenance of the equipment is $100 million. We are, of course, spending more than $100 million and this is dependent on the growth that on the strategic find that we can find.

And by doing this I find what I wanted to say a moment ago, which is that we – I was saying we have not changed our strategy, which is cost leadership and reducing the net debt. We have changed the strategy by saying that we are now looking for growth opportunities. And I’d say this is, of course, done with strategic investment. And this is what we have done in Q1 with the alloy segments in which we had worldwide position for the wire in alloys. And so we have decided to extend by 50% our capacity and be capable to answer and consolidate our number one position in the world in the segment.

This is one answer. This is another answer on the oriented grain in Brazil that we supply today. Where we found we have developed the process for high quality oriented grain. This has been developed in Timoteo always we invested a pilot two years ago and we are now ready for implementing the full capacity. And this is the project, which we believe is going to increase the contribution that this segment is doing to Timoteo.

And so, all this to come back on the CapEx – all these projects are being add. And so you can estimate this year something like $120 million, $170 million due to all this investment, which has been launched. And that’s I would say if your question is on what is the sustainable CapEx level of Aperam, I think you can start from the $100 million in maintenance plus some estimates on what we can bring with our search for growth opportunities.

Phillip Negoza – ABN AMRO Group N.V.

Okay, thank you.

Philippe Darmayan

And regarding the electricity surplus, what I want to say is first of all, you might consider all this as a spot phase and it is a spot phase, but based on the strategic design. Strategic design was to be capable in Brazil with the possible shortage of electricity to be sure and to be secure in our risk management policy regarding the electricity supply. So, we have actually too much electricity. We have of course, discussed with the utilities about getting flexibility from them, and we realize it is impossible or whether difficult where will continue this positive type of high flexibility. But so far, we didn’t get the answer that was that is fine for us.

So, we have a surplus and so we do some trading of the surplus. What is important for us is what Sandeep initially said, which is that we it is a surplus. We are not arbitrating stainless steel or electrical steel. We have to selling electricity as you may have heard; this was done in South Africa. We are not this type of company. We are selling – benefiting of, I would say, market condition for the surplus. And when it is big amounts at the when we are reporting today. Of course, we signal this to the market.

When we are in a position to sell at a price which is a price we buy, then there is no profit and we don't signal it. But today, it's clear that the price of electricity in Brazil has gone up at a level which was, as Sandeep said, five times the old price. And so, there is a huge benefit that on which we make, of course, some profit for Q3. We still find that we estimate that there will still be some surplus, but very lower level, as maybe you have seen that the Brazilian government got very concerned about this increase of the electricity price and the Brazilian government is doing everything they can and we understand very well to get to normal price level for electricity, in which case the profit that we have done, of course, would be much smaller than the one we have reported in Q1 and Q2.

So, my message is first of all, this is structural; it is the benefit of spot is not an arbitration. And third, we understand that the Brazilian government is trying to get things in a more normal level in this case, we will dispose of the electricity surplus with a profit which will be lower and what we have made today.

Operator

We will now take our next question form Jean Devivi from Exan. Please go ahead.

Jean Devivi – Exan

Yes, good morning. Jean Devivi from Exan. Thanks for taking my questions. First, on the anti-dumping, so you said you expected import pressure to remain quite hefty throughout Q3 and for the remaining of 2014. Should we not assume that the very fact that the European Commission launched an investigation might, in fact, result in import pressure as a player can be used in Europe – some potential sanctions ahead?

Philippe Darmayan

Well, generally speaking, I'm an optimistic guy. So, yes, I think that there will be some understanding from everyone that what is not acceptable has to become acceptable. And so, that there will be some anticipation from the market and that things will come back into normal, maybe not waiting for the European Commission to take the final decision, but I would say it is not my intention to take a position. Once again, this is you also, this is Eurofer file and then we estimate that this initiative from Eurofer is welcome. And I would say this is what I wanted to say.

Jean Devivi – Exan

Okay, thanks. Then second question on the restocking in Europe. So, you said that there was some clear restocking in Q1. Do you think we're back to some kind of normalized level of stock or would you expect restocking to continue having a positive impact in H2 this year?

Philippe Darmayan

Well, Aperam will send you the update of the inventory follow-up that we present at each road show. And we estimate today that the inventories in Europe are in rotation at normal level. They are not at huge level as the one we saw in the past. They are up compared to December, but in December, they were completely crazy on the other sense. They were extremely low. And so, we are now at the level of rotation, which we estimate is the normal one.

Jean Devivi – Exan

So, we should expect the upper in demand to be more in line with the real demand going forward?

Philippe Darmayan

Yes.

Jean Devivi – Exan

Okay, thanks. Then coming back to two small technical questions –

Philippe Darmayan

I come back on this point. As you know – well, you know our business. The nickel evolution and the feeling on the nickel is very important. And there is a feeling, clearly, that the ban is something serious. And so the whole market in Europe is extremely cautious on the subject. And so we do not anticipate massive destocking in the European market due to this environment in nickel, which quite clear. So set the rise rotation at the highest level and we don’t anticipate the reduction in the inventories.

Jean Devivi – Exan

Okay, understood. Yes, then two technical follow-up questions. First, Sandeep, I think you mentioned the share of the convertible bond accounting in the net debt reduction?

Sandeep Jalan

Yes. so it’s going to be about $53 million impact on the net debt.

Jean Devivi – Exan

Sorry, $50 million?

Sandeep Jalan

$53 million on the net debt

Jean Devivi – Exan

$53 million, okay. Okay, understood; thank you. And then that was it, I think. Yes, that was it. Thank you.

Operator

We will now take our next question from Alan William from Societe Generale. Please go ahead.

Alan William – Societe Generale

Yes, hi everybody. Just one question left on my side. It’s regarding the net debt target of $550 million. Sandeep, I was just wondering if you could tell us – given the uncertainty in the markets. what makes you so compatible with this new target?

Sandeep Jalan

Yes. Alan, we had earlier declared a target of $650 million. and of course, with the convertible bond raise, we would have a technical effect of $53 million. And then supported by our continued good cash generation and good EBITDA levels. Also that very good working capital management, as well as CapEx management. We are fairly confident that we can realize the goal of $550 million that we are setting as additional target.

Alan William – Societe Generale

Okay. That’s clear, thanks.

Operator

We will now take our next question from Stephen Benson from Goldman Sachs. Please go ahead.

Stephen Benson – Goldman Sachs International

Hi, thanks for taking the question. I wanted to discuss the seasonality in the third quarter. Your flagged inventory levels are quite high in Brazil then a more normal level in Europe and said that the delta might be similar to prior years. Just for Europe as an example last year in the third quarter, EBITDA dropped by about $20 million, $18 million the year before. Is that a reasonable delta going into the third quarter? Or is it more like 2011 where it dropped by over $50 million?

Philippe Darmayan

No, I think I will no go further that way I answer to the first question. The delta will be less than the last year, but I don’t want to go further.

Stephen Benson – Goldman Sachs International

Okay, that's helpful. And does that apply to Brazil, as well, given the high stock levels there? Because the Brazilian business was quite stable quarter-on-quarter in 2013. So this is EBITDA 3Q versus 2Q.

Philippe Darmayan

Well, we estimate that the underlying EBITDA I mean without the electricity sales in Q3 should be slightly improved in Q3 compared to Q2. We estimate that this restocking that I was mentioning on the stainless steel should be at least compensated by the contribution of our cost Leadership Journey and by the volumes that’s we have booked with other cost base in South America. So the with attribute some kind of compensation and so, that’s we estimate the underlying EBITDA should slightly improve.

Stephen Benson – Goldman Sachs International

Okay.

Philippe Darmayan

Both of you competitors in Europe any way have flagged up, good prospects or better prospects of base pricing from the third quarter or in the second half given the developments that we are seeing from the Chinese. How do you feel about your second half pricing in analyst assumptions that base pricing might go up by 50 year of $100 of ton in 2015. Is that still way too early to think that’s possible?

Philippe Darmayan

Well we will follow the market price. We will follow the market price and as we have proven in this quarter and as we have proven as soon as we can increase the price, we will do so. It’s clear you can hear what I'm saying – that we are concerned about the high level of imports. We know that all the book will be. We hear that the pricing – there are some attempts to increase the pricing, but okay I repeat what we see over there which is that the pricing is set by the Asia, by Asia and that up run is working and selling in marketplace and this is. Okay, Sandeep.

Stephen Benson – Goldman Sachs International

Okay. Okay.

Philippe Darmayan

Just a minute Sandeep is putting a note…

Sandeep Jalan

I think we have seen some improvements in the base prices Stephen clearly in Europe, but of course as well as mentioned that overall ability on pricing is kept by the import pressure.

Stephen Benson – Goldman Sachs International

Understood, okay. Thanks very much.

Operator

That concludes today’s question-and-answer session. For further questions please contact the investor relations department. I would now like to turn the call back to Mr. Darmayan for any additional or closing remarks. Please go ahead.

Philippe Darmayan

Well I would like to thank you for this call. I would like to once again say that we have been quite proud of the performance of Aperam this quarter. When compared to last quarter, to the quarter or the second quarter of last year, all our divisions have increased their volumes, their EBITDA is much better. So, we feel our team has been doing a fantastic job and we are extremely proud of the response that you are giving us with your analysis and I can tell you that this is something which is deeply communicated inside our company and that people appreciate a lot. So thanks to all, I wish you all very nice vacation if you leave, as I'm going to do that in a minute for the summer vacation and we will be very happy to come back with you in September. Thank you.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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