Paris Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Eramet SA earnings conference call or presentation Thursday, July 30, 2015 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patrick Buffet Eramet SA - Chairman and CEO * Jean-Didier Dujardin Eramet SA - CFO * Denis Hugelmann Eramet SA - CEO, Aubert & Duval ================================================================================ Conference Call Participants ================================================================================ * Sylvain Brunet Exane BNP Paribas - Analyst * Alain William Societe Generale - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [1] -------------------------------------------------------------------------------- Ladies and gentlemen, I'm really very happy to welcome you today to present to you the half-yearly results of the Eramet Group and to tell you also about the present situation in the markets. With me, as every year, as every semester, there is the CFO, Jean Dujardin, he's on my left, and we shall try and answer your questions later. But let's begin with the beginning, an overview of the results of the Group for the first half 2015. The market right now, metal market is rather depressed. We'll get into this a little bit later. Prices on the market right now are rather low. I'm being euphemistic. On nickel and manganese ore this has had a significant impact on our results, as it is the case for all the mining companies. You may have seen Anglo-American's recent results and all of the other companies will follow suit, I'm sure. In this context sales figure remained quite stable as compared to the first half of 2014. EUR78m is our EBITDA, so you can see the scope of the crisis. Current operating income and net income are negative because of the very low prices of nickel and manganese that I've just mentioned. Our net debt to equity ratio obviously has increased in light of this context and it stands at 30%, but it remains still at a rather moderate level. And if you look at the press, you can compare our net debt to equity ratio favorably with the figures released in the press for a large number of miner competitors. 30% remains moderate. Jean-Didier Dujardin is now going to present to you in detail the global financial situation of the Group and then I'll come back to the details results of each division and tell you what one can think about all this. So Jean-Didier, over to you. -------------------------------------------------------------------------------- Jean-Didier Dujardin, Eramet SA - CFO [2] -------------------------------------------------------------------------------- Here we have a presentation of the various elements according to the various divisions from one half-year to the next. The nickel figures are rather bad of course. Obviously this is due to the fact that nickel prices are rather low, rather weak. I'll get back to this later. On manganese, situation remains positive, but it's down from last year and it's disappointing, disappointing also because the manganese ore prices have gone down very significantly from one half-year to the next. And as regards Eramet alloys, we are moving up and this is satisfactory and this is due to the implementation of productivity plans. That's pretty good in this first semester and we're on the right track here. Now if we analyze the overall evolution of the current operating income, we go from EUR14m to minus EUR70m. In this is presentation what we want to do is to put on the right in red what could be considered to be exceptional non-recurrent events. Obviously we can't add all three red bars to the minus EUR70m, but one can nonetheless say that we should be slightly positive by eliminating some of these exceptional non-recurrent events. I'll come back to this later. Now the left hand side of the table. As regards the volumes, it's mostly the alloy division, where you have an increase of sales, and also Eramet manganese. Eramet manganese, a level of sales which is very high during the first half year of 2015 and the output level is also a record output production level or record production level in the first semester, pretty satisfactory for us. The second, price, is such a negative obviously, which is due 50% to the nickel price that's gone down and also manganese ore prices as well. But we are actually stable or even going up for some grades. On LME we have $6.20. We had $6.50 in 2014. The China CIF prices for manganese ore have evolved also as regards the first half of 2014; that's 5.50. Now as regards foreign exchange, what we've brought up here is the gross foreign exchange impact comparing it to the hedging costs for the first half of 2014 and the market prices for the first half of 2015, which is [one twelfth] on an average. Now we don't actually get the full benefit out of this improvement on the hedging front, but this is one of the elements whose strength is probably going to be corrected. Factor cost going up because of the drop in fuel prices, obviously $119 a barrel and it's now $67 during the semester. That's very good for us. Productivity figures, EUR25m, down compared to the yearly pace that we expect. I may remind that 2014 and 2015 together our target was EUR180m productivity, EUR100m of which actually were realized in 2014, which means that we're on the right track in 2015. You must keep in mind that there is a some impact of the fact that we're lagging behind in some of our plans, like, for instance, reducing staff in some of our units. This is going to be seen in the second half of 2015 and one can understand obviously that the productivity gains were more substantial in the first semester than in the second. The non-recurring events. The first non-recurring event that I would like to mention is the change in the forecast for nickel provisions. We have revalued our nickel inventories as of July 30, 2015 at $5.15, which is pretty low compared to an evaluation of that inventory over $7.00 as of June 30, 2014. So the change represents $56m. What you should keep in mind here is that an improvement of $1 per pound vis-a-vis $5.30 would make it possible for us to get back the $25m worth of provisions. So the idea here is $43m and we could catch up by dollars $25m, so that could go very fast -- that's the very first element -- if we keep it to $1.10. So the first element, which is hope is provisional. The second, EUR29m, this is a really an exceptional event. The first exceptional event is the very bad functioning of our mines and the cost overruns in the [Mundo] plant in the first half-year due to extreme climate events, three cyclones in the first semester and torrential rains, exceptionally torrential rains, much more than over the past years. So these extreme climatic events have aggravated, have worsened our operational costs in this mine, made us lose production up in [Mundo] plant. These are obviously totally exceptional events. Moreover -- that amounts for EUR18m. And for the balance, the balance is simply the fact that we are, as you know, ramping up the Moanda plant in Gabon and also the Grande Cote in Senegal. They're both undergoing a ramp-up phase. During this ramp-up phase we began taking care of the overheads activated obviously in the first half of 2015, this is non-recurrent obviously. And as regards hedging instruments, now indeed we do have a negative impact on the market price because were covered at 1.22 over the semester. Of that 1.22, an impact of minus EUR43m, EUR12m of which are due to the fact that the average price of hedging for the first semester is higher than the annual price. But we'll be catching up. If the dollar remains at the present rate we'll catch up EUR12m out of the second semester. So the result is obviously not very good but the trend, the trend, look at the trend. And if you look at the trends you see that exceptional result of EUR29m can be perhaps -- we can perhaps catch up with this in the second semester. And if nickel picks up we can actually catch up with the whole of our expectations and get into a safe zone. That could go very fast. As regards cash, in view of the results of the first half-year the cash level at the end of June is obviously not a good story, down compared to what we would have expected in our budget. [NBA], as you can see here, is not enough. As regards working capital requirement, it's gone down. EUR100m is due to the fact -- our objective is actually to get back EUR80m out of the EUR100m. The [EUR4m] working capital requirement of a fiscal nature, we won't be able to recover this. But you know that our working capital requirement was swollen during the first semester because we had to take care of window-dressing operations for a certain number of our clients in order to improve the balance sheet as for June 30, which did not get the parts that they had ordered. And in the alloy division when the clients don't get these parts it has an impact, a direct impact on the cash. Plus we have a certain number of clients who are lagging in their payments. So because of this window-dressing we had this situation, but we'll get over that. And also in the alloys division we've had certain other difficulties, particularly as regards quality, which means that we have some inventories, too much inventory. The situation will be better for the second semester. There's also an element which increases the capacity to get back into a safer zone. I told you that we had a record output of manganese ore during the first semester, a record, so we have there some inventory which will be used, for which we will find outlets in the second semester. So the working capital requirement, that's gone down by -- EUR80m of this drop it's not recurrent. So this is the context of debt increase, which is pretty substantial, but please remember that we have a liquidity situation which remains extremely robust, very sound, with a gross cash EUR760m and non-drawn lines also. We keep therefore liquidity of about EUR2b which is obviously very safe and very satisfactory for ourselves as it is satisfactory for those who lend us -- from whom we borrow. I've forgotten to tell you that we're in this situation of debt increase. Patrick Buffet will be getting back to this later obviously. Now obviously we are applying tremendous pressure to try and reduce our working capital requirement very energetically here, but also we are now in a phase of reducing capital expenditure commitments. So you will see later that the pace in the first half of our industrial investments has gone down sharply and we're really here trying to pull at every single string to our bow for us to be able to reduce our cash consumption. The whole of the Company is mobilized on this front. -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [3] -------------------------------------------------------------------------------- So thank you very much Jean-Didier for these explanations. Now concerning industrial investments, a key word here is selectivity in a context of strict management of cash. For the Group today and for the period that we're still going through, i.e. metal prices, I have set the limit with the EUR400m into 2014, an objective which we perfectly reached, as you can see on the figures, EUR346m. This policy is going to be maintained in 2015, with industrial investments down by 25% in the first half of 2015 compared to the first half of 2014, as you can see on the slide. 2015 industrial investments should come up at a significantly lower level than EUR400m. And this reduction is the consequence of strict capital expenditure selectivity policy in each division. The deferral of our big projects like Weda Bay, the Weda Bay project for which no decision is planned before mid-2017. And we're reaching now the end of an investment period very substantial. You see here the investment peak, 2011, 2012, 2013, before we had a sharp drop in the nickel and the manganese prices. We've lost about 30%, 31% since the beginning of the year in manganese. So it's really spectacular, a spectacular drop. We've never lived through anything like this. Add to that the drop in the nickel prices. So we are at the end of an investment period that ended with the start of TiZir in Senegal as well as the metallurgical complex at Moanda in Gabon, not to mention obviously the metallurgical investment of a strategic nature of the alloy division, very recent project essentially in France and in Sweden for over EUR150m. So we're now ready, we've got everything we need in order to have an investment flow that would be weaker, weaker without in any way endangering our strategic plan. We will continue therefore a massive program of cost reduction and product improvements across a series of action plans that involve all of the Group, including central headquarters and central shared services. The cumulative objective of this cost reduction productivity improvement plan for 2014/2017 is EUR360m annual impact on our current operating income. And that's going to be annual impact to the end of the period, EUR360m annual impact on current operating income at the end of the period compared to 2013, which represents a 13% reduction of the total Group costs compared to 2013. And that means a lot of muscle power. Between now and the end of 2015 we expect that half of the plan, which is a plan all the way up to 2017, but we hope that by the end of 2015 half of that plan to 2017 will be accomplished for a total of approximately EUR180m. We had EUR104m in 2014, which was about one-fourth of our target. So that plan will be pursued very vigorously obviously. Now I'd like you to look at the highlights in our business lines during this period, and starting with Eramet nickel, the leading global producer of ferronickel and one of the world's three leading nickel salts producers. You can see here that the demand of nickel is driven by stainless steel. The world nickel demand remains strong as global stainless steel production remained high and stable in the first half of 2015 at more than 20m tonnes per semester. The first quarter in 2015 improved in comparison to the first quarter 2014, more than an average production centered in China, which, as you know, is nonetheless experiencing a slowdown in its growth, which obviously is going to be the subject of discussion later. But this is something we're undergoing, like all the big mining groups. Obviously this is a commonality we all share, these metal market prices because of the Bloomberg drop that we'll be addressing shortly. At the same time nickel prices erosion continued in the first half year of 2015. Why? Because of the considerable LME nickel stocks increase, with an the LME price average $6.2 per pound compared to an average of $7.8 per pound in the second half of 2014. It's fallen more than 20%. Look at what the price of the dollar now. $1 per pound has a tremendous impact. It can easily breach $100m endpoint, like a $1 over mtdu. It could also be EUR100m. So when you pay as much on the price as nickel and of manganese ore, you can see that the figures climb very quickly. So a drop in 20% from one half-year to the next -- no sorry, if we compare the second half, we compare the second half of 2015 with the second half of 2014 ?- sorry, the first half of 2015, you compared it to the second half of 2014 the fall is 20%, more than 20%. Actually it's rather consensus here. They expect that the law introduced by the Indonesian Government at the beginning of 2014, the ban to export unprocessed nickel, not processed in Indonesia, they hoped they had the consensus that it would have a positive impact on nickel prices in the short term. Many analysts believe that nickel prices will pick up before the 2015. As far as we're concerned, we remain cautious in this area. Cautious, but we do hope that over the long haul with the present trends in nickel, no doubt nickel prices will pick up, but we don't actually no exactly when. Because of the significant stockpiles of both ore and metal built up in China ahead of the ban, considerable stockpiles in China I repeat, and also because the inventories of China metal have been transferred very often, not recorded. Remember the scandal in this area. These unrecorded inventories in China meant that they were outside LME warehouses not anticipated by anyone. The two things together means that LME nickel stocks hit a historically high level, totally, totally unexpected by any expert in the world which explains the reason why the prices of nickel knew this negative trend in the first half of 2015. The LME nickel stocks hit a historical high level at the beginning of June 2015 and this represents, together with the producer inventories, some 24 weeks of consumption. This is something that has never been seen before in the nickel industry. So this is a very, very peculiar situation indeed where we hope ?- where we will see very quickly a deficit in demand with tremendously high inventories. This being said, these LME inventories or stocks are dwindling progressively. They reached their highest level in June, been going through ups and downs since then. But, however, there's a downward trend that is clear since the beginning of June on LME inventories. However, they remain excessively high, which is the reason why nickel prices are so low today. Our nickel production slightly decreased by 3% compared to the first half of 2014. Eramet nickel figures, the sales figure improved vis-a-vis 2014. The drop in cash costs is indeed the priority right now. Because of more productivity and because of the trend in the dollar and fuel evolution, a cash drop already happened, has already taken place so far, which is pretty favourable, since the first quarter of 2015. An independent expert, Wood Mackenzie, you know they are famous for their cost curve for all producers, they have analyzed this. We stuck at the ninth decile for a very long period, in other words not a very good position on this Wood Mackenzie cost curve. But right now after the first quarter 2015 we've moved up to the sixth decile, which is a pretty good result. The cost reduction and productivity improvement plan for Eramet nickel is continuing to bear fruit and has been quantified, and will be continued in a vigorous manner in the coming years. And just to give you a rough idea as regards our global plan for 2014/2017 that I referred to before, remember $360m that we wanted to get vis-a-vis 2013 thanks to the cost reduction and productivity improvement global plan. Well, what we target for Eramet nickel is EUR140m annual gains in current operating income at the end of the period compared to 2013. Let me repeat, that in the current operating income we expect in Eramet nickel EUR140m annual gains. Unfortunately obviously the cost of the various factors that we saw before have weighed negatively because of the problems mentioned by Jean-Didier. Now Eramet alloys. Eramet alloys remains the number two producer for high-power closed-die forged parts and the leading player in world in gas atomized powder metallurgy. Powder metallurgy is actually the future in many areas. This is alloys with very good high characteristics thanks to organization or atomization impacting, getting as a result very high grade. And the Swedish part of our alloy division is really the future for very many applications. So very happy to have gotten into this position in good time so as to now be leaders in this particular field of gas atomized powder. That's a tremendous development potential that we see for us. Now the sales of Eramet alloys rose 8% year on year in H1 2015 mainly due to a robust demand for the aerospace market. They're the main driver. They represent about 20% -- or rather they represent nearly 60% of the division's sales. 60% is the aerospace market for Eramet alloys. This is really one of the sectors that is behaving extremely well on the world economic stage, very positive situation. Sales in the segment rose by almost 20% in this aerospace market compared same time in 2014, lifted by the growth in air transport. Eramet alloys is present in the majority of the major programs represented by Airbus and Boeing. You know that they have announced that they will double their fleet over the next 20 years, but some peoples say even by 2030, despite current difficulties in the energy sector, which is a second major sector in Eramet alloys because we specialize in the nuclear industry and high-powered gas turbines. Obviously we suffered. However, the Eramet alloys increased by 4% nonetheless in H1 2015 compared to H1 2014. However, we still see that this overcapacity of steels, high-speed steels for cutting tools continues in China in a stable but low market in terms of prices and volume. And this is a world phenomenon really, overcapacity in China in this area is a factor that we have to take into account. Obviously it's going to be more difficult. We have an alliance here with a Chinese producer but it's obviously going to be more difficult. It's going to take longer to get satisfactory results in this particular area. However, do keep in mind that we're driven forward by a 60% increase in aerospace and that's very positive for us. Eramet alloys' future is also built on the transformation process that started in 2012 and there are two main objectives, to meet our customers' requirement for competitive and high-quality service; improve productivity, reduce our costs across all our activities. Le Bourget air show that took place in June very recently, we were there obviously. Georges Duval, (inaudible) present here, you can ask them whatever you want about this Le Bourget air show later. Now this air show that was just completed confirmed the very positive perception of Aubert & Duval by our clients. That's pretty good, a pretty good factor in improvement compared the situation three or four years ago. We've been building this up, quality of service, and quality of service has progressed a great deal. As an illustration we received the [SPACE] award 2015, from SPACE. That's SPACE Award given by an association called SPACE. Among its members, Airbus, Safran, and we got the SPACE Award 2015 as the supplier that had made the most progress in customer service. So this is really very tangible proof of recognition from our clients of the fact that we have improved our customer service. And the cost reduction and productivity improvement plan for 2014/2017 in Eramet alloys, we're continuing with this plan. And out of the EUR360m that would have had an impact at the end of the plan, now we have EUR125m of annual gains in current operating income in the Eramet alloys division compared to 2013. This is what we expect at the end of the plan for this particular division to complete both overheads and productivity improvements, these various vigorous commercial actions that we have launched. So how can we not talk about -- of course we have to talk about -- the strengthening of the titanium, the aircraft-grade titanium supply chain in Europe, which is a specificity for Eramet France, particularly one that we have been focusing on for several years. As you know, the supply of titanium is done through our joint venture, UKAD with our Kazak partner that provides the aircraft-grade titanium. And then we have announced in April -- we have the titanium forged by UKAD in France and then in April 2015 we announced the creation of EcoTitanium, the first integrated supply chain for recycling aircraft-grade titanium. You know that in the past American and Russian producers would collect European titanium scraps, including ours, in order to recycle them on their markets. That meant that we were far too dependent. So finally through Eramet the European industry has finally gained the means to compete in that field in order to create a circular economy. And finally we announced in June 2015, Manuel Valls, the Prime Minister, came to inaugurate the creation in the South of France of MKAD in partnership with Mecachrome Society which is dedicated to the downstream machining of titanium parts. And so we filled out the titanium production line, the titanium line, and we have managed to strengthen and improve the results of the alloy sector. Of course it will take time for everything to grow together but the pieces are in place. It was very important to have done this and setting things up before the crisis in order to have the right timing. Now then, some key figures for Eramet alloys. We have broadly seen increasing in figures, we have sales -- sorry, we have current operating income of EUR15m, which is very much in line with 2014 and which is in line with the aims to improve productivity as well as our policy of being rigorous and selective in our investments. As far as manganese is concerned, now I'm not going to give you all the specifics. We continue to be a world leader. The main use of manganese is for carbon steel, but global carbon steel production has dropped by 2% for the H1 compared to 2014 because of the slowdown in the construction sector. China accounts for half of global production and its carbon production, that is to say China's, has decreased by 0.7% in H1 compared to H1 of 2014. That means 2% on a global level. There was a 0.7% decrease in China. That is significant, but minus 0.7% in China means minus 2% in the rest of the world. So the rest of the world has decreased more than China and we have dropped, registered a decline in production in the United States of 2.7% -- sorry of minus 9% for the United States. We hope that that figure doesn't show more long term trend. We were quite surprised by the figure. Due to the global drop of carbon steel, the CRU CIF spot prices for China for high-grade manganese, in other words that's the high-quality Moanda production, which is the high-grade manganese ore, has fallen by more than 30%, and that's quite something, since the beginning of 2015. In June 2014 we were at $4.35 per dmtu. That's the standard unit that we use for manganese. So in June 2014 we had $4.35 dmtu, in September 2014 $4.35 as well and in June 2015 we've dropped to about $3 per dmtu. And that is a very significant drop compared to 2014. $1 per dmtu has an impact of about EUR100m on the EBIT of the Group so it is a very high impact change on the Company despite all of our gains in productivity. In addition to all that there has been a general drop in demand for carbon steel. South African producers that have recently come on to the market were able to get an advantageous position thanks to the drop in the exchange rate for the rand. There have been other exchange rates that have allowed the rand to be cheaper and as a result to improve the competitiveness of the South African producers. So that too had an impact. So these different factors have had an impact on cost but I have to underscore and insist on the fact that the intrinsic qualities of our deposit in Gabon, in Moanda, give us a very strong position on the cost curve of manganese producers. We really have an extremely advantageous position. We have an extremely competitive position on a global scale so I'm not particularly concerned by the future of manganese ore. We had a result in our results, in our revenues, due to the global drop in prices, but that's all. The prices for manganese alloys compared to manganese ore have stayed stable. It's fared well. The prices are broadly stable. You see a graph here which shows price of manganese alloy in Europe and you can see how stable they've been. This is important and it's important that they've been able to maintain their prices. Despite the drop in the price of the manganese ore, many of the alloy processing factories have maintained their prices. So this is all good news. Didier, it's a good thing that Didier is here because it's important to mention that our manganese production level has followed EUR1.85m -- 1.85 tonnes in the first half of the year. That's a historic record. I'm also glad to announce that we've improved our performance for transportation of manganese ore from Moanda to the port of Owendo, because again we have achieved a historic record for the manganese ore at 1.97m tonnes, very close to 2m tonnes in the first half-year 2015, which is in line with our annual target of 4m tonnes, which I had announced a number of years ago, of manganese ore shipments per year. So we've achieved that in the first half year 2015 and we have to maintain this level in the second half of the year. And I'm sure that everybody is going to keep their eyes on the results, as will Philippe. Moreover, there's been a major program to modernize the Transgabonais railway which is operated by SETRAG and we are a concession holder. Well, this is a webcast so let's say we manage some of the Gabonese railways, clearly having a close relationship to the official authorities. So obviously that means we also have passenger transportation, we have freight and we are completely on top of the conditions which we manage along with our partner, the Gabonese State. So we have a major modernization program for the railway network in Gabon, we are in cooperation with the government of Gabon and the President of Gabon has taken a keen interest personally in this project. We have a funding plan working with the international financial corporation, which is a subsidiary of the World Bank, as well as PROPARCO which is a French agency for development. I think we've made great gains on that front with a very strong plan that is going to improve the stability of the network and avoid any train derailment. There was one last year and we took the necessary measures in order to avoid these in the future. We have been working with our team of experts in railways who have already managed railways throughout Africa and more specialized in this particular field, which is after all, despite what you might think, somewhat different from standard mining activities. Next now we have the inauguration of the Moanda Complex, which you're familiar with I'm sure. In the second half of 2014 we started production at the metallurgical complex in Moanda in Gabon. This has been one of our priorities. It's been one of the specificities of our Group compared to more Anglo-Saxon groups. We try to show the creation of value with the countries and regions in which we operate. For instance, you have the Equatorial Mining Company, which is completely owned by the government of Gabon, and it is partner in COMILOG, which is a Gabon-based subsidiary which we have a majority stake in. We own 67% of it ?- sorry, 64%, and the government owns 29% and Carlo Tassara has another 7%. So this is how we've set up our subsidiary in Gabon, which is basically the subsidiary in Gabon has allowed us to develop our manganese production and also to improve our connection and our influence over Africa in Gabon and beyond, as the government of Gabon is very interested in working very closely with us in order to keep developing new projects or new looking to more new investments possibly in the future. I'm sure that price levels for metal raw materials are going to go back to normal soon and it's going to have a positive impact on the Group's results. So we have these two highly advanced factories that are on site and this is something quite new for Africa as a whole because outside of South Africa this is the first time that in Africa, on African soil, in this case in Gabon, that there is processing of manganese ore. There is the silicomanganese production and the electrolytic manganese metal production with a capacity target of 20,000 tonnes per year. These two factories have been opened fairly recently by the President of the Republic of Gabon. It was a major event for the government, for the country and for Eramet. We organized a major launch ceremony, which was organized with the colleagues from the mines as well and which was used in order to pitch a broader growth model around Africa. As you know, Africa has fairly positive growth forecast. Still in Africa, but this time in Senegal. We look at our stock or core businesses. We work on extraction of mineral sands in order to process ilmenite, which is a titanium ore used upstream in the titanium downside chain of pigments, and zircon, which is primarily used to make ceramics. So, as you can see, outside of nickel and manganese, we also have production of other metals, which China is quite fond of and has called for. With the slowdown in China, we can wonder -- we can question just how much there might be demand for it, but let me assure you that there will continue to be growth in this market. 10% of the site is owned by the Senegalese government, along with TiZir, which is a 50-50 joint venture between Eramet and the Australian company Mineral Deposits Limited. And in addition the production aims to achieve 7% of the market for zircon and titanium ore. That's not bad at all. Along with the Tyssedal plant in Norway, which we bought with [Tilfoss], and which needed the supply, this upstream supply in the long term in order to be able to produce -- as you know, they also need sulphate. This is something that's well known to the professionals. So this Norwegian factory, along with our site in Senegal, are going to have major use ore growth in the future. 2015 is going to be a pivotal year for Grande Cote, for this site, because we're going to ramp up and we're going to continue to ramp up in the second half of this year allowing us to reach our targeted grades in the first quarter 2016. When we compare the figures through the first semester of 2014, you can see that there's been a contribution of [EUR80m], so sales have increased moderately. There has been a 30% drop at the same time in the price of manganese ore since the beginning of the year. And there have been EUR360m of improved efficiency and cost reduction, so that has EUR75m target of annual gains in current operating income. And we've managed to do that despite extremely challenging market conditions. Frankly, let me tell you that since I started to lead the group in 2007, I've never seen such a bad economic situation. All of the major mining groups echo that sentiment, and often have described it in extremely stark terms. The market situation is extremely tough. There has been a major impact by the slowdown in China. These conditions have had an impact on all mining and metallurgical companies over the last semester. The fact is that both the price for manganese and nickel ore are at a historical low at the same time. So inevitably, that has a major impact on the Group. Let's not forget that the Bloomberg list, which compiles the indexes for a number of different, 20 different raw materials, that also contains the figures for nickel, has dropped overall by 27%. Prices have dropped by 27% in one year. We are now at the lowest point of the Bloomberg list in 13 years. These falls are especially acute in 13 years, again, especially for key economic products. The drop in metal prices has had a major impact on the economy. On the other hand, the downturn in China has also had an impact. In addition, there's been a major ramp up of production capacity for raw materials over the last few years. There was this fancy of the super-site that could do everything and produce a huge amount of raw materials, but economists at some point started to ring, to sound the alarm because simply running wild on growth without keeping track of the growth of consumers -- China, for instance, and the BRIC countries, you can see the announcements from Brazil recently. Neither the BRICs nor the CIVETS are ready to pick up the slack from China's downturn. As a result, we have a major impact from China and noone else to boost growth in the wake of the Chinese downturn. As a result, we're at the lowest point in 13 years. This means there was overinvestment during years when we believed in the super-cycle. These things have more or less stopped. All the major miners have slowed down. As you know, now they're no longer concentrating on individual sites, but they're trying to have a piecemeal approach in order to diversify. I'm not going to say small is beautiful, but it's better to have a more limited scope in different types of activities rather than trying to grow for the sake of growth. The drop in the Shanghai stock market has also had an impact on raw materials, particularly those highly dependent on Chinese demand, as you can see from the previous slides. So downturn in China, excessive increase in production over the last few years, some other issues with China. And when you look at the Bloomberg list, you can see that the nickel has been shown to have the deepest fall in a single year within the Bloomberg index for non-agricultural raw materials. It has dropped by 23%, meaning that we are just behind sugar and coffee. And as far as metal is concerned, nickel has seen the worst drop of all metals in a year. So you can see what a major challenge we're facing. In a situation that is so strongly characterized by low metal crisis, Eramet has continued with determination its program to reduce costs, improve productivity as well as reinforce its activity in capital expenditures. Anything that we can push back or delay will be delayed or pushed back. We are going to sell off some of the non-strategic assets through a program that we're setting up. We launched the program recently and I'm not going to talk about a further right now, but it's going to be fairly clear and it's going to have a major impact. Financial liquidity is still nearly EUR2b. The price of nickel and manganese has been low for some time. I remember nickel manganese prices that were at $750 per dmtu. And so you can see how much price has dropped over the last few years. And despite that we've managed to maintain our liquidity levels because we haven't made any major acquisitions. We pretty much closed the cash register and kept an eye on it. As a result we have a debt to equity ratio, net debt to equity ratio of about 30%, which is all good. We have a slide showing that our gearing is quite a bit better positioning. It's more favorable to many of our competitors. All of this shows that we are in a solid financial situation. And we are also very soundly positioned in very high potential markets. For instance, nickel, which is used in stainless steel, experts expect that -- we can see the consensus of experts if you're interested a little bit later. But the most recent projections show that there will be an improvement in nickel prices. But personally I'm still very cautious about that. I don't want to assume that just because experts think that's going to happen, it's going to happen. And so I'm making sure that the Group is going to maintain its financial soundness, even if we have to deal with historically low nickel prices for another couple of years. So I'm certainly not going to take for granted things that could end up being wrong and have a negative impact on us. The Group has also managed to get an excellent position on the cost curve of manganese ore producers. We're talking again at a global level. Given the level of our inventory, of our reserves, we have a global leadership position for the high-grade manganese. Don't forget that manganese cannot be replaced in carbon steel. This is not the case for nickel because we can move to different types of metals. We can switch out nickel for other types of alloys when the price gets too high. Manganese, on the other hand, cannot be replaced. You always have to have the same proportion of manganese per tonne of carbon steel that you're producing. It is one of the strengths of the demand for manganese. And so we expect that to continue helping the market in the future. And the growth of aerospace, the aerospace market remains firm. So, as you can see, the Group is well-positioned on growth markets. And, further, the ramp up in recent investments, which was decided before the crisis, continues with the modern metallurgical complex in TiZir and Senegal, Moanda in Gabon. In general Africa is going to be a major site for investment and focus for the Group. And we're also going to continue the ramp up as we look at future investments in titanium and KAB, which was recently decided, and which are going to contribute to strengthening our leadership position in the coming years. There's an old Japanese proverb that says that a tree knocked over by the wind, uprooted by the wind, has more branches than roots. Let me tell you that in our case, our tree is very solid, it's solidly rooted. So I'd like to thank you for your attention and I'd now like to hand the floor over to Jean-Didier so that you can get the answers to your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Sylvain Brunet, Exane BNP Paribas - Analyst [1] -------------------------------------------------------------------------------- Thank you very much. Hello. Sylvain Brunet from Exane BNP Paribas. I have three questions. The first has to do with hedging and part on fuel and part on exchange rates. Could you give us some insight into how you can quantify the effect for nickel mostly, but also for manganese? On the EUR43m that you mentioned, the figure EUR43m. And also the philosophy on the fact that you're -- there's a change in philosophy to hedging. We can always be wary of expert forecasts, but there seems to be a trend, a further trend towards a weakening euro. So historical investment has borne fruit, but doesn't it seem a bit dangerous to have forward versus options? And I'm wondering, I'm not sure whether you looked into it, but could it make sense, given that you have competitors who all report in US dollars, to also have your profit and loss statement in US dollars? -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [2] -------------------------------------------------------------------------------- Well, we're going to answer question by question. And I'm going to let Didier answer more specifically when it comes to the whole dollar issue. As far as the general philosophy of hedging is concerned, why take the risk of pegging, of being pegged to exchange rates? The general philosophy is that the US dollar, the worth of the US dollar increases, raw material prices go down. And there's another much more direct link, which is that when the price of raw materials, of commodities goes down, production costs go down. The fact is that these companies, which are in the emerging economies, where the raw materials produced, are facing the fact that their own currencies' value goes down as the price of raw materials goes down. As a result, they have a natural type of hedging and so don't need to hedge as much. But it's a different situation in the Eurozone, where the level of the euro is not linked to raw material prices. As a result, Eramet is more sensitive to that than its competitors. This is one of the key reasons for Eramet's hedging policy as opposed to some of our competitors. What are the goals as far as exchange rates are concerned? We have to be as sensitive as possible to when the US dollar changes can have a positive impact on us. If the US dollar's value increases, we don't get net benefit from the increase, but we still try to get minimum benefit from that. For instance, if you look at the last 10 years and the impact of the hedging policy, it has quite broadly been very positive. This year it's been negative. There was some loss compared to what would have happened if we had been on spot prices for the entire year. But over the last 10 years I can guarantee that we have earned much more than how much we've lost this year. And the figures speak for themselves here. So for us, with an increasing dollar, that's the situation. You also have to give increased visibility to the teams to prepare the budget and you have to try to smooth over exchange rates in the long term, which means that we're facing a situation today where we may have to question what will happen if the dollar will remain at this level for a long time or maybe even strengthen over the long term, without leading to a major shift. But history has so far shown us that it's best to be cautious. There haven't been any losses, again. Bear in mind that it wasn't really a loss that we suffered, simply that we didn't earn as much as we could have otherwise. But for the [2003] to 2014 period our hedging policy has quite clearly allowed us to earn just over EUR200m -- just under EUR200m for [2003] to 2014. For 2015, we may have had lower profits, of about EUR65m, depending on the rate of the dollar. But this has been a fairly unique year. And so, yes, there has been loss of revenue of EUR65m. So that's been a shortfall. But you have to have a long-term plan in this type of industry. Jean-Didier, would you like to contribute? -------------------------------------------------------------------------------- Jean-Didier Dujardin, Eramet SA - CFO [3] -------------------------------------------------------------------------------- On the question of accounting for our balance sheet results in dollars, reporting in dollars, well, our assets essentially are quoted in euros and our debt is in euros essentially. And we're very happy to have a euro debt right now. Had we had a dollar debt, a debt denominated in dollars, it would have been more difficult. So we keep to the euro here. Now the weight of the dollar on our balance sheet, on our results, is not really enough for us to change our reporting currency. Obviously, we are very sensitive to the ups and downs of the dollar. But we have other forms of sensitivity offsetting the possible sensitivity to the dollar. So I'm not sure it would be a pretty good idea to switch reporting currencies. It's not even worth trying or exploring. I think really obviously what we need in -- it would have to be in all of our drivers back to the dollar, which is not the case. Now as regards fuel, in the EUR43m gap, there is no fuel impact. Because that's a comparison, at 137 which would be average hedging cost for first half 2014 and 122, 122.80 exactly, which is the average hedging costs for the first half 2015. May I remind you that there is an improvement potential totaling EUR12m. In the second semester the average hedging costs should be more or less 117. So on average, it would be better than 180. It will be under 120, I hope. It depends obviously on the price of the euro. As regards fuel, we've got some hedging. We have a shortfall in the first half, rather weak, the hedging costs at $67 per barrel vis-a-vis $58, which is a gap of some 7m, 8m difference. For the time being, we still have hedging costs for the second semester, which are on average 55, 60, let's say. And we have nothing or practically nothing for 2016. So we still remain very sensitive, highly sensitive, to the drop in fuel. And we've benefited from this right from the start of the drop in fuel prices. Because remember, we've still got 109 for semester 2014 and now it's 67, so there's a 37m difference. Out of the 37m difference obviously. We could have had, without hedging, we could have had an extra 7m. So this 7m, I think I could add to the non-recurring effect to adjust the results of our trends to 2016. So that's what I would say on this. Any other questions? -------------------------------------------------------------------------------- Sylvain Brunet, Exane BNP Paribas - Analyst [4] -------------------------------------------------------------------------------- I have two other questions. The contribution of TiZir in manganese. And also, I would like to know whether at the end of the first half you had made any tests at all. Shed light on the testing situation between now and the end of the year. -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [5] -------------------------------------------------------------------------------- Well, the auditors are here. Our statutory auditors are present. The tests were made at the end of June, completed at the end of June, and there was no reason to carry out any supplementary tests. If you obviously want to add something, Mr. Auditor, since you are present in the room? But in any case, you can bear out what is being said. The tests were made, so nothing new to report. On TiZir, negative contribution, you said? There is a negative contribution, EUR9m, for the first semester. And that is indeed the fact that we've moved to overheads. The ramp up in sales is not enough to absorb overheads; that's the reason. -------------------------------------------------------------------------------- Alain William, Societe Generale - Analyst [6] -------------------------------------------------------------------------------- Hello. Williams from Societe Generale. I have three questions. First, I want to know, where manganese production is concerned, whether at any point in time you would be envisaging closing down some facilities to reduce manganese ore output in light of the presence of demand situation and the drop in prices? Anything you can do in order to balance the market, rebalance the market. And in respect of this, would it be possible to know what is happening with the marginal producers? Do you see some reductions in production in the offing? Another question on alloys. You talked about quality problems in the first half of the year. I wanted to know whether these problems have been solved. What type of problems were they in fact? -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [7] -------------------------------------------------------------------------------- Well, alloy quality problems. Well, first of all, let me address manganese. On manganese ore, no need to reduce production, because our cash cost is notably lower than the sales price. Even after the drop that we have seen, which is very sharp, we continue having a cash cost and a full cost, which places us on the safe side. Nowhere is here. We are not in the habit of releasing our cash cost. That's Moanda, but please keep in mind that it's, on the cost curve vis-a-vis competitors, very well placed, can't be better. So we're really very happy with this biological asset of tremendously high quality. And there's no reason whatsoever -- we're the last people in the world to shut down production, to close down any of these production facilities. We have every trust in manganese, every possible trust, no worries at all where manganese ore is concerned. This is an extraordinarily robust area for the Group. This is a blessed period. During the blessed period when manganese ore had normal prices, manganese ore represented 90% of the income of our Group. People think we're a nickel group. People are wrong, because even though we attach a great deal of importance to nickel and New Caledonia, the roots of the Group are to be found today more in manganese. May have started in nickel, but the manganese division is the biggest contributor to our results, in the good as well as in the bad years. And we're building up here tremendous power and even greater potential thanks to this coordination and cooperation with the Gabonese government, in perfect understanding with them. So we have other projects that I would not mention in the manganese sector, that we're preparing in silence, waiting for better days. They're not out in the open. So no fears where manganese is concerned. Now, alloy division quality issues. We told you that customer service had improved tremendously. We got the SPACE award. And perhaps here I should ask Denis Hugelmann, who is the Director General of that division who had personally quite a role to play in improving customer service, and also improving productivity and reducing costs. Many of you know Denis. He was one of the big leaders of ArcelorMittal, one of the main leaders of Areva during the good years of that group, and we've been so lucky to have him join Eramet. Every single day that goes by shows that his is a major contribution to our Group, helping us to move forward with the assistance of the Deputy Director General of that division, Georges Duval. He is contributing so much of the improvement of that division. So my dear Denis, on quality customer service. -------------------------------------------------------------------------------- Denis Hugelmann, Eramet SA - CEO, Aubert & Duval [8] -------------------------------------------------------------------------------- Ladies and gentlemen, improvement of service has already been presented, made it possible to ameliorate the supply chain, improve on-time deliveries to customers. The quality issues mentioned -- well, they're not really quality problems at all. We are talking really about industrialization work. You may all recall that our big aerospace customers are developing new projects, Airbus 350, for instance, new programs made with many composites, and therefore ramp up of titanium, particularly big spare parts made of titanium. And every time this new type of program is launched, there's industrialization work and the machining of parts before obviously they are ready for large-scale production. So this industrialization and ramp up phase of these big titanium parts do pose at times a little bit of a problem as regards adjustment, specifications etc. But there's also a leverage effect when we're talking about working capital requirement and inventories, because the titanium price per kilo is much higher than the steel price per kilo. So it's got a significant impact. But it's not preoccupying. It's one of the reasons for which Aubert & Duval will know well known, the quality of their products, the quality of the parts that they machine. It's just this industrialization phase where the necessary working capital requirements must be taken into account etc. etc, but not any basic quality-related issues. -------------------------------------------------------------------------------- Patrick Buffet, Eramet SA - Chairman and CEO [9] -------------------------------------------------------------------------------- Any other questions? There was a question on marginal producers. Yes, manganese ore marginal producers. Philippe Vecten, who is the boss of the manganese division, will complete what you have said, about the fact that the South African producers have been helped along by the drop in the rand, which is continuing, by the way. Well, on South Africa, for the time being, exports continue at the same pace. We don't see any let up here. However, in Gabon, (inaudible) small mines stopped, but they're going to restart again. In Brazil also there was a facility that was stopped. We've seen in the papers that two small mines in Cote d'Ivoire stopped production. But basically the producers have produced hundreds of thousands of tonnes per annum. What is difficult to forecast is what's happening in China. In China, substantial local production and at resin prices, alloy producers have every interest in increasing the amount that is imported for their factories. But it's difficult to put a figure on this, because future situation is uncertain. Before the recent devaluation of the rand, we used to say that under $5 per dmtu, which is the situation today in fact, road haulage in South Africa was no longer foreseeable. But then problems happened, the rand went down, and today road haulage is what it is. And it's very difficult for South African producers to imagine an improvement there, but exports remain what they are. So where Transnet is concerned, the situation remains stable. [Newport's] improving. South Africa is getting itself organized. And don't forget that this is an ore that is much less rich than the Moanda ore, than our own ore. It's at 37%, whereas we reach 44%, 45%. Yes, another question? -------------------------------------------------------------------------------- Alain William, Societe Generale - Analyst [10] -------------------------------------------------------------------------------- Yes, another question on the balance sheet. Because there is a strong deterioration in the free cash over the period. Gearing remains under control today, but is there any concern over the balance sheet and, if so, why? -------------------------------------------------------------------------------- Jean-Didier Dujardin, Eramet SA - CFO [11] -------------------------------------------------------------------------------- Well, it seems to be that 30% for a business such as ours is rather moderate. It wouldn't be a catastrophic situation if the gearing was still to go up a little bit. This being said, I believe that in our world situation of uncertainty, where raw materials are concerned caution is required. We had bond issues at the right time because we got increased cash, accumulated cash at SLN and at COMILOG during the peak manganese price period, and nickel price periods, which meant that shareholders' equity went up tremendously. And through public investments and private placements cautiously carried out, we got a level of liquidity of almost EUR2b. With this, and the gearing at the present level, we're pretty comfortable. And even with a higher gearing, the situation would not be anomalous either. But we shouldn't go beyond a certain threshold of gearing, let's say 60% or 55%, 60%. That would be impossible to imagine obviously in the long haul, without taking considerable risks, because of the volatility in the price of metals. So we do have a margin, but not a huge one. Things move very fast with the prices of metals so we'll have to remain watchful. If there is a key word here to keep in mind, I would say a couple of things where Eramet is concerned. First of all, watchfulness, remain watchful, watchful. And cash is king; this is number two. I would add, as was said earlier, that's the whole of the Group is trying to reduce its working capital requirements, reduce inventories. We have excessive inventory is in June. That has to go down. I remind you that there was some impact of the window-dressing, rather substantial impact that disturbed us in June. In the second half of the year we're going to reduce the working capital requirement. That is an extremely important, a key objective that we're totally devoted to. Then we are also undergoing a phase of reduction in industrial investments. This went down very sharply in the first semester of 2015 compared to the same period 2014. We are very watchful where industrial investment is concerned. Patrick also said that we've launched a program for disposal of non-strategic assets. So the whole of the Group is trying to protect its cash. And may I remind you that we have substantial liquidity, volume growth, cash almost EUR100m non-drawn credit lines. We've never really voluntarily drawn from any of these lines. These are safety lines, our safety net for our shareholders and for our bondholders. So there, in that area, we are completely mobilized into keep our head above water in these very difficult times. Let me ask Denis Hugelmann, if he will. We have a working capital requirement problem with the alloy division that has to be solved. What are the big plans to reduce WCR in alloys because we can't be happy when the present WCR for alloys is far too high. So Denis Hugelmann is working on this head on. This is one of his basic priorities right now. I would say that the question of the WCR is all the more sensitive as titanium is going up, with higher WCR for identical tonnage. So in a way it's more or less the same dynamics as in the service area, customer service area. What we did in customer service was to improve the circulation and delivery, on-plan delivery of the various parts throughout the whole process. And when you speak of the improvement of customer service, by one and the same token this has a very beneficial impact on WCR because materials go much more quickly through the production line and therefore that's a positive impact. That's number one. Number two, right now we're discussing very constructively with our customers, because when customer service is improved, reliability of delivery goes up. Then the discussion is what level inventory, what is the level of inventory we require in order to ensure customer service? And when service does not reach the required level then you would have to have an inventory to make it possible, to make sure that you would deliver your customers on time. Now here we are in activities talking about figures that are not as big as in the automotive industry, but where circulation of products is concerned, this obviously means we have two improve our face-to-face discussions with the customers as regards the logistical aspects to our contracts. And then there's another very important job. We talked about a certain number of adjustments, corrections that we had to make. For instance, customers do not necessarily receive the parts that they had ordered because they themselves are adjusting their working capital requirement and they want to avoid having excessive inventories. It's one of the consequences of improving customer service because when you improve customer service, obviously customers, they order so much as they used to order and above. So here, the work -- the key word is adjusting, adjusting raw materials, the supply of the raw materials, supply of the parts etc. Get the two, raw materials, working on raw material, the actual delivery of the parts once they have been machined and once they are ready, getting these two adjusted. Which obviously we have a pretty good set-up right now. This is one of the reasons why we been able to improve customer service to begin with. And this is why we got the SPACE award. So this is the kind of work that goes across all of the compartments in working capital requirement, from supplies of raw materials, through launching a production on the basis of raw material you have. Obviously the lead time has to go down even though we much remain with lead times that are rather long because of the various phases from raw materials to actual delivery of the parts to the customer, the various phases are pretty long. Unfortunately, you can't contract them. However, this is work across all the production lines. The idea is not to be static at all, ever, which means that the target -- we always think of the target obviously -- the target here is that as soon as you get a production order, you're not going to have to wait and sit on it. The minute you start working at it. There's nothing new under the sun here. We are just applying some very basic principles of operational excellence in manufacturing industry that we are setting up, and we are developing in all of our plants in the Group. So this is the kind of work we are doing right now, plus obviously work hard on the logistical conditions in the contracts that we enter into with our customers. To put it in a nutshell, that's how we are doing. These are subjects on which I could go on ad infinitum because it's pretty complex. It's very simple in each of the departments and phases. However, it gets complex as soon as you start laying them over on top of each other. Industry is the art of execution, the art of implementation. Any other questions? No further questions? No further questions then. Well then, it only remains with me to thank you indeed very much indeed for having come here today. It's the time of the year when things are not easy because we're right in the middle of our holidays so thank you for your presence, for having paid such careful attention. Thank you for the quality of your questions, always very good questions, and we remain available to you. And the various division leaders and Dujardin are available to you to answer any questions that you may still have and that you didn't put to us now. We try and give you the best possible explanations, with Philippe as well, who is in charge of strategy and communications. Philippe, stand up, because you may not know him. He is the successor to Philippe Joly. He takes care of very many things with me. He is in charge of relations with investors, and all things related to the Group strategy. So Philippe Gundermann is also at your disposal. This is in the press release. Indicated in the press release you can see his particular details. So do get in touch with us if you have any questions, because we are transparent. We want to give out as much information as possible in these critical times. Thank you again. -------------------------------------------------------------------------------- Editor [12] -------------------------------------------------------------------------------- Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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