Earnings call: Acerinox maintains stability amid market challenges

In the latest earnings call, Acerinox SA (OTC:ANIOY) (ACX.MC) reported a resilient financial performance for the second quarter of 2024 despite a challenging market environment. The company announced key executive changes, with Miguel Ferrandis transitioning to Chief Corporate Officer and Esther Camos stepping in as the new CFO. Acerinox achieved a strong quarterly EBITDA of €125 million, with an increased margin from 7% to 10%.

Although the stainless steel market remains weak, the company has successfully maintained stable prices and reduced its net debt to €191 million. The high-performance alloys business continues to show robust demand and a strong order book. Acerinox also outlined its strategic focus on higher added value products, efficiency, and supply chain optimization, amidst market uncertainties and operational challenges such as a strike in Algeciras.

Key Takeaways

• Miguel Ferrandis appointed Chief Corporate Officer; Esther Camos named new CFO.
• Q2 EBITDA stands at €125 million, margins improved from 7% to 10%.
• Net debt reduced to €191 million; operating cash flow reached €266 million.
• Stainless steel market weak, but stable prices and debt reduction achieved.
• High-performance alloys business shows strong demand and order book.
• Strategic plans include product value enhancement and supply chain efficiency.
• Acerinox remains cautious but confident in its financial resilience and strategic plans.

Company Outlook

• Acerinox focuses on growth in high-performance alloys with a 15% sales increase and a 20% capacity expansion in the U.S.
• The company aims to maintain stable prices and defend margin levels in the U.S. stainless steel market.
• Acerinox expects to keep Q3 EBITDA in line with Q2 despite market uncertainties.
• The closure of the Bahru plant is underway, with minimal future impact anticipated.

Bearish Highlights

• Acerinox faced a 49% decrease in figures compared to the previous year due to the global pandemic.
• The stainless steel division contended with strikes and reduced market conditions in Europe.
• Acerinox's Spain operations are slowly rebuilding their order book, with a cautious expectation for Q3 and Q4.
• Import pressure in the U.S. market has increased, although Acerinox remains competitive with short delivery times.

Bullish Highlights

• The company reported €20 million in cost savings for the first half of the year, targeting €45 million for the full year.
• Acerinox's acquisition of Haynes is progressing, with approvals expected in Austria and the UK.
• Working capital performance remains strong, with expectations to keep it at low levels.
• Acerinox's leverage ratios are comfortable for the year 2025.

Misses

• Acerinox acknowledged a slow start-up in their Acerinox plant and the negative impact of strikes on Q2 results.
• Capacity utilization in Europe is aimed at 80%, but actual capacity may be closer to 600,000 tons per year due to product mix.
• The company admitted a mistake regarding Acerinox Europe during the call.

Q&A Highlights

• The company discussed the impact of the Bahru plant closure, with ongoing negotiations for the facility's future.
• Acerinox detailed their decarbonization efforts and expansion plans in North America and VDM.
• Mexican steel imports into the U.S. are expected to reduce due to new proof of origin requirements.
• Salary increases from the bargaining agreement are expected to be offset by higher flexibility and improved product mix.

Acerinox is expected to release its next set of results on November 4th, as it navigates through a period of strategic realignment and operational optimization. The company's efforts to streamline its supply chain, focus on high-value products, and expand its high-performance alloys business underscore its proactive approach to counteracting the current market adversities.

InvestingPro Insights

In light of Acerinox SA's recent performance and strategic initiatives, insights from InvestingPro provide a broader perspective on the company's financial health and market position. According to InvestingPro, Acerinox's valuation implies a strong free cash flow yield, which is a positive sign for investors looking for companies that generate cash efficiently. Additionally, the company pays a significant dividend to shareholders, which has been maintained for an impressive 39 consecutive years. This speaks to Acerinox's commitment to returning value to its investors and its financial stability over the long term.

From a financial metrics standpoint, Acerinox has a market capitalization of $2.63 billion, which reflects its size and market influence within the industry. The company's Price/Earnings (P/E) ratio stands at 37.21, although the adjusted P/E ratio for the last twelve months as of Q1 2024 is more favorable at 8.65, indicating potential undervaluation relative to earnings. Moreover, the Price to Book (P/B) ratio of 0.94 suggests that the company's market value is close to its book value, which could imply that the stock is reasonably priced.

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Full transcript - Acerinox ADR (ANIOY) Q2 2024:

Carlos Lora-Tamayo: Good morning, everybody, and welcome to the Acerinox earnings conference call for the second quarter 2024. The call will be hosted by Bernardo Velazquez, our CEO; Miguel Ferrandis, who you all know and was the CFO for the last 25 years, has been appointed Chief Corporate Officer of the group. In addition to his current responsibilities, he will assume those of the indirect procurement, information systems, corporate risk, sustainability and cybersecurity. As you can see, we have also a new face here. It’s my pleasure to introduce you, Esther Camos, who will replace Miguel as CFO of the Acerinox Group. Esther has 30 years of experience in the company. And among other responsibilities, she was the director of consolidation, budgeting, tax, financial reporting and financial planning. A huge congratulations to both of you. As in other occasions, we will start with a short presentation and then continue with the Q&A session. Before getting started, let me remind you that this conference call is being broadcast on our website, Acerinox.com, where you can find also the financial statements and the management report for the first half of the year. And now with any further ado, I would like to give the floor to Bernardo. Please, Bernardo, go ahead.

Bernardo Velazquez: Thank you, Carlos. Good morning, everybody. Very happy for Miguel’s new responsibilities and very happy to have Esther, a new face in our group, I am very happy to have a woman within this group. Presentation. We will speak about efficiency, about flexibility in our business model, so we should make changes in our organization, also looking for this agility and this flexibility and this efficiency in decision-making and in the management team. So that’s the reason of these changes. Moving to the first slide. We are happy to say that we are presenting a strong set of results in a very weak scenario in the stainless steel market and after a 5 months’ strike in the Algeciras plant. After 5 months of negotiations, finally, we reached a good agreement for everybody. We could explain, as we wanted, the necessity to change the business model in the Spanish plan to have more flexibility and to get adapted to the cycles of the economy much faster than today. In this scenario, we have a strong cash generation mainly, it’s also based on the stock management and working capital management, who – and this led us to reduce our debt to €191 million. I think it’s a pretty remarkable number. And as we will explain later with more details, we expect the quarter three EBITDA to be in line with Q2 more or less. Under these circumstances, we targeted to work in the capital – working capital reduction to do – and manage what we can manage. And I think we are in a very good situation with this low debt to be able to access and to have higher targets in the future.

Miguel Ferrandis: We clearly keep committed on sustainable development. And we are extremely proud of our contribution to circular economy. In this regard, we are presenting, as normally, the targets on the KPIs we have for the organization. It’s clear that we are overachieving in specific targets and we are extremely proud. We are by far overachieving in water withdrawal with already a 46% reduction from the baseline, so essentially better than what was our target. We are also extremely proud, as I said before, in our contribution to circular economy, especially in waste reduction. So most of our – as our peers in the cycle, we are recycling most of our spares and consumables. We have obtained a 90% valorization of this waste. And in addition, we are even improving. We have closed in this first semester with the support of the regional government on – of Andalucia also another project for using slag as a concrete aggregate. So still, we have room to improve on that. So, clearly, there are areas in which we are overperforming. We are absolutely on the right track on other areas, for example, in terms of diversity, as appears here. We also are comfortable in safety. We have put the two colors on the safety. It’s clear because even though the figures reported for the first semester are not fine yet, obviously, we have been affected in this estimation by the disruption in the first semester, has been also some minor incidents. But we keep also comfortable. During the second semester, we shall be able to fill on the targets established for the year. So in this regard, we are definitely proud. There are two areas which have been not under our control and these are the areas which appear in red or in yellow. This is regarding – obviously, one is regarding the carbon footprint in terms of emissions and the reason is very clear. The most intense and efficient in renewable energy of our plants is the plant of Acerinox Europa. And as you know, 5 of the 6 months of this semester, this plant has not been running. So consequently, we have not been able to take advantage of that use of renewable energy. In addition also, another part which is not under our control yet is the fact of the energy intensity. This is a parameter which is obviously linked to the productivity. And again, we have in one of our plants, as mostly as Acerinox Europa, only running 1 month. But also we must keep in mind that in the actual market conditions, we are not running full in North American Stainless, which traditionally we always have been running full. This is not the case. Still the market is not allowing that. And also in Columbus, we are running at low capacity utilization. Still, we are consequently not favorable for this productivity to be fulfilling our targets. Any case, we are not only waiting for the market to improve, because in addition, as shall be explained later, in our Beyond Excellence Plan, there are a lot of areas in which we can improve. So we shall not only be depending on reactivation of the market because we are also concentrating on that. We are also concentrated in the new decarbonization plan. This shall be published and released in the second semester. We have almost, almost, almost finished it and we shall explain it in more detail in the future presentations. We have also included ourselves and participated in the United Nations Water Mandate Plan led by the United Nations CEO. And in these facts, more or less, what we feel is, as I said before, comfortable. We are by far committed. And all the areas under our control, we are achieving more than our targets. And we feel comfortable that in the others, it shall come soon.

Bernardo Velazquez: Okay, let’s speak about the market environment. Starting with raw materials, you can say that ferrochrome price is more or less stable, but nickel price going down. That is always a headwind for our business. I think we have two clear different parts, stainless steel and high-performance alloys. And in stainless steel, we can also make a big difference between the European and the American market. Moreover, market conditions are similar. If we check the numbers that we have calculated in these markets, apparent consumption in United States after a drop of 20% in 2023 is growing 3%. It was a very modest growth after 20% reduction last year. But inventories are in a historical low number because it’s – we have calculated there is a 15% below the historical average. In the case of Europe, after a 21% reduction in apparent consumption in 2023, steel this year, the apparent consumption is dropping 7%. This is reflecting the weakness of the European consumption. Stock levels are even lower than in United States because we have calculated that it’s minus 26% below the historical average. So the situation, the market conditions are more or less the same. The difference is the way we manage or the conditions inside the country to manage this scenario of weak demand. In the case of United States, we have better prices, stable prices. We managed to keep our prices stable. And we manage with our customers certain deliveries and service and quality that cannot be easily substituted by material from overseas. So we are keeping this level, of course, with the support of the Section 232 measures. In the case of Europe, safeguard measures, as we always say, are not enough when the market is weak. And in this case, we are affected by the low Asian prices – low Asian prices basically, because China has been increasing its stocks and there’s a lot of material available in that area. We are concentrating our efforts in our major markets, but still we cannot say that we’re totally isolated of what’s happening in China. But under this scenario, in Europe, we have low prices and stable imports. Import is not a problem, a level of 14% because prices are not attractive for other countries. In the case of United States, we have stable prices, but that is attracting more imports from the Asian countries and imports has grown from 24% to 27%. Still, it’s not a problem. It’s not an issue for us, but we are keeping this market stable. In the high-performance business, the situation is different because still we are enjoying a strong order book and a very healthy demand. This is once again – that we can say again that it was a good decision to diversify in nickel alloys and high-performance oil because even being also a cyclical business, the cycle is different. So it’s giving us more stability as a group. In high-performance alloys, demand is still good. Aerospace in Europe is still good. In America, it’s a little bit weaker because of the Boeing (NYSE:BA) reputational problems. And oil and gas is still – we are quoting that we are working for important projects all around the world. And electronics and electrical engineering is going well. So the situation is still healthy. In stainless steel, we can say that we are in the low part of the cycle. In high-performance alloys, we are still with a strong demand.

Miguel Ferrandis: When we go to the consolidated group figures, first of all, this quarterly EBITDA of €125 million is slightly above of that of the first quarter, which was €111 million, slightly above as we committed that it should be in the results presentation of the fourth quarter. So even though the uncertainties that we were facing at that time, but we committed that we should be there and this has proven to be the case. We have improved our margin from 7% to a 10%, so 3 points of increase in our margin is also a demonstration of the higher efficiency we have achieved in the quarter, even though the circumstances that we have been mentioned that have been affecting us. When we reached the first semester figure, we at the end, come to a figure of €236 million of EBITDA in the semester. Those of you who cover our sector understand that this figure with this 8% margin is unique in our sector in these days. And this is the fact that for us we are much more proud about. It’s clear that when we compare it with the figure of last year, we are 49% below, but this is something that is, obviously, is not a surprise. This is a consequence of all the unprecedented situation our market is facing almost everywhere and even though that we are keeping this consistent performance. So at the end, for us, our relevant figures to be achieved, we have had external facts and internal facts as a strike that has been talked and Esther should talk more of it later on. But in these circumstances, apart of the results, we have been able to obtain an operating cash flow of €266 million. And at the end, we closed the semester of 30th June with a net debt of €191 million. So it’s clear that we are well prepared. Our financial strength and our low debt is in the best position now for facing the new challenges we are on with the exciting strategy expansion we are doing that you know it perfectly, we shall comment it later. But we are reaching to that time in the best financial position and well prepared for absorbing the new debt as a consequence of this strategic expansion for our future that we are facing. Now I give the floor to our CFO, Esther Camos. Some of you may have not met her personally, but indirectly, you know her as you have read 100 of pages and reports coming from her. She has been the responsible of accounting consolidation and reporting for the last 20 years. Our financial statements are well recognized and well awarded on worldwide basis. And she has been the responsible of them for the last 20 years. So, Esther, the floor is yours.

Esther Camos: Thank you, Miguel. Well, a pleasure for me to present the half year results as the first time. Well, talking about the stainless steel division, okay, I want to insist on the main drivers of this division in the group. First of all, is the strong contribution of NAS? Secondly, the strike in Algeciras, we also need to mention the seize of operations in Bahru in this half of the year. And of course, we cannot forget about the remaining weak situation of the market conditions, especially tough in Europe, okay? But thanks to our leading position in the U.S., this is allowing us to be resilient in EBITDA, despite the market situation. If we go to the chart, in terms of production, we have been comparing quarter-over-quarter, we have lower production. This is mainly due to the strike. Remember that in the first quarter, we could produce for 1 month, which has not happened in the second quarter. But if we go to the comparison year-over-year, in production, we also have a reduction, but it’s due to the strike. But it’s been partially compensated with increases in the production of NAS and also Columbus. In terms of sales, we had a reduction of 10% basically due to volumes quarter-over-quarter. But if we go to the comparison year-over-year, we need to – despite a part of the volumes due to strike, we also have to mention the reduction in the base prices in the U.S., that we did at the beginning of the year and also the reduction of the alloy surcharge, this makes the 26% reduction. The EBITDA achieved in the quarter has been of €92 million, which is 15% higher than that in quarter one. So despite of the reduction of volumes, we’ve able to get a better EBITDA and this is basically due to the increase in the margins. We have increased the margins in 2 points from 7% to 9%. The EBITDA in the half of the year has been €171 million. And we also want to remark the operating cash flow. We’ve been generating cash flow also in quarter one and quarter two. So the total cash generation for this division has been of €182 million with working capital reduction of €41 million. So it is true that we have been reducing inventories. We have helped to support our customers from our service centers, so that has also contributed to the reduction of inventories. If we go to high-performance alloy, the situation is different, as Bernardo has mentioned. The market conditions of the high-performance alloy are good and the order book is solid. The EBITDA of the quarter, we have increased the EBITDA from quarter one to quarter two in €3 million, and the margins from €8 million to €11 million. And if we go to the half year, we got an EBITDA of €65 million. This €65 million – if you recall, when we bought VDM, we compromised to an EBITDA for the year ranging among €80 million, €90 million, and we are making €65 million in this half year. So we think it is a very good figure. Someone might think, yes, okay, but it’s less than last year. Last year, it was 15% higher. But it is true and we have already explained that last year, we had some metal wind tails that helped – were positive and these have been neutral this year. In cash generation, HPA has also generated cash in €84 million this quarter, also contributed by a working capital reduction of €43 million. And on with regards to capital allocation, I will focus on the half year. As mentioned, we had an EBITDA in the group of €236 million in this period. We reduced working capital in €84 million. We are also proud of our net financial cash in, which is not a cash out. And this is basically due to our competitive financing and also the solid cash that we have in the U.S. Okay? We have paid €73 million all in the quarter of taxes. And in this sense, and talking about taxes, I want to mention that our group is internationally recognized by the OECD we as a low risk profile multinational group and that we have also been awarded as a transparent – for our transparent taxation in this period. So the payment of taxes is just the consequence of the good results that we have had. The operating cash flow has been of €266 million, which has been used for CapEx, €78 million. Someone might think that this figure is lower than expected. But we cannot think that the second quarter will – second half, sorry, will keep the same line. Probably, we are expecting to increase some CapEx for the second half. The total free cash flow is going to – is being €188 million and we have increased – we have paid our dividends as usual and we have increased the dividend in 3%. All these have allowed us to reduce the net debt in €150 million that we have achieved the good figure of – low figure of debt of €191 million.

Bernardo Velazquez: Thank you, Esther. Moving to our strategy. I think, as Miguel mentioned before, we have a strong a sustainability strategy, but not only this because we are following our consistent and clear strategy to increase added value products, to be more customer centric and provide solutions for the industry, for a sustainable industry with the broadest portfolio of heat and corrosion resistant materials in the world. Our group has the broadest portfolio. We can supply from the more commodity stainless steel to the more sophisticated nickel alloys, every kind of solution for the industry. In this case, in the stainless steel, of course, after negotiating the Union contract, I think that we are fully aligned today to start changing our strategy and moving our production strategy to higher added value product with more feasibility and versatility to get adapted to the cycles of the market. Focusing in our main markets and following the idea that we have developed in previous meetings that the globalization process is in place. We want to be more regional and we are concentrating in our major markets where we can provide to our customers a better service, better quality and more attention. That’s why we decided to stop our activities in Bahru Stainless in Malaysia. And in top of this, we are going ahead with our investment in NAS to increase our capacity by 20%, as we explained before. And we are developing new alloys and mild steel grades and stainless steel grades in South Africa that most probably is the most flexible factory of stainless steel in the world. In the case of nickel alloys, of course, we are going ahead with Haynes. As Miguel mentioned in previous meetings, the AAA investment, focused in alloys, American and aerospace. We got most of the permits, including every permit in the United States, CFIUS, that is a Foreign Investment Committee, and antitrust. And we got also the approvals in Europe antitrust, and we are still pending for the regulatory approvals in Austria and in U.K. We expect to close the deal by the end of quarter four. With this, I think we are going ahead with the strategy that we presented to you. We are very clear. We tried to be transparent and predictable. And now, I think we are doing our homework and we are moving our business to a more stable and in the cycle – through the cycles and also moving to end users business that will give us higher profitability and stability in the future. One of the important topics that we wanted to bring today is the new excellence plan, what we call the Beyond Excellence. We have been speaking about our excellence plans during the last 15 years. We adopted these plans in 2009, and since that time, we have developed several plants with a total, more or less estimated savings per year of more than €300 million. With that system, we have reached a moment that is more difficult to make improvements based on benchmarking and based on benchmarking initiatives. And we have changed the approach, and we presented recently the new one. And I think that we have to reinforce the idea that we are still capable to improve our competitiveness, to reduce our costs and to manage our business better than today. Of course, for these purposes, we are using all the tools that we have available in the market, including advanced analytics and artificial intelligence. We have based this Beyond Excellence Plan in 6 pillars. There is decarbonization. We want to decarbonize our business. We have plans in sustainability to reduce CO2 emissions, but we want to make money with this. We don’t want to consider it expensive. We want to get profit from this kind of decarbonization. We have another pillar that is efficiency. Of course, with raw materials optimization and looking for the use of more recycled materials and more scrap and a more circular economy. Customer-centric, as I have repeated several times, quality, service, close to the customer because that makes the difference between the Acerinox business and import business in our major markets. R&D, very important. We have to develop new grades of stainless steel and new nickel alloys that will give us a privileged position in the market. We have to focus on productivity, always on productivity, and now we have the tools to do it with the advanced analytics and artificial intelligence, because there’s a lot of predictive maintenance and possibilities to improve maintenance and the change of items in our equipment and to increase productivity by reducing the breakdowns. And finally, supply chain, in an area that we are concentrating our efforts in better use of better raw materials and better management of our inventories and of course, consequently of our working capital. We are very happy of the results that we are showing today because we have a target for the year of close to €45 million in real savings in this year. And we have reached €20 million, it’s 44% in 6 months, but this is not symmetric. So we will make more progress in the second half. So I think that we – from now on, we’ll reinforce the results of this plan, because I think that this is interesting and would give us another way of growth. It’s not only that we are entering or increasing our presence in high-performance alloys with a Haynes acquisition, we are expanding VDM with new investment that will increase our sales by 15%. We are reinforcing our business in Europe and with the new Union contract in the United States with another big investment plan that will increase capacity by 20%. But also, we still have room to improve. We have room to grow with this cost savings initiatives. With all these pieces, finally, we reached the conclusions. As I would like to summarize what we have mentioned until now, is that we are proud to present this strong set of results with a satisfactory EBITDA in H1 with a very strong cash generation that will put us in a very good position to face all the challenges that we have at the end of the year, including cash acquisition. We have a stable and very solid shareholder return, €0.62 per share. We have paid half of this during the first half. We have already paid in July the second part. We are facing a challenging scenario with weak market conditions, with a lot of visibility and – sorry, with a lack of visibility and a lot of uncertainty as what can happen in the market. But, on the other hand, we can say that inventories are in a historical low record and that any change in the economy, any trust on the economy can lead the market to bid for stainless steel more, to start rebuilding inventories and that will change totally the business conditions. And of course, we have strong order booking in HPA, in VDM that will give us stability and more homogeneous results through the quarters. Haynes acquisition is going ahead. CFIUS has the green light. It was very important. We are waiting for the results in Austria and in UK. We don’t expect any problem. And this scenario, we think that we are a resilient company. And in a third quarter that normally is the weaker quarter in the year. And with this being in the low part of the cycle and with apparent consumption moving down in the European, in United States, so we can be proud to say that we will keep our EBITDA in Q3 in-line with Q2. We don’t have too much visibility, but we think that quarter three is going to be in-line. And that’s all from our side, Carlos.

Carlos Lora-Tamayo: Thank you, Esther, Bernardo, Miguel for the presentation. And we can move now to the Q&A session, please.

Operator: Thank you. [Operator Instructions] Our first question today comes from Tom Zhang from Barclays (LON:BARC). Your line is now open. Please go proceed.

Tom Zhang: Hi, good afternoon. Thanks for taking our questions. Two for me, please. The first one, just could you give a bit more color about the speed of the Europa ramp up? I mean, it’s, obviously, a site that’s been out for a long time. Was part of the new agreement you planned to, I think, in future years, idle the plant in August for 2 weeks anyway. Can you just give us an idea of how quickly that’s going to be back up and running? And as a result, how much of that €28 million EBITDA cost is actually going to reverse in Q3? Does it fully reverse? Or is there still going to be some impact? That’s the first one.

Bernardo Velazquez: Thank you, Tom. I can say that we have restarted our operation in Acerinox Europe surprisingly well with no failure, no major failures in the main equipment. Everything is working, and we’re able to start our production in June and July. I cannot say that this is moving in a normal way, because now we have to rebuild our order book. We don’t want to destroy the market going to cheaper prices. So we are reestablishing our relations with our major customers. We are negotiating the orders for the quarter – the third quarter. And we are trying to have a reasonable and responsible start up moving up, but with our regular customers and taking care of the level of prices.

Tom Zhang: Thank you. And maybe just a sort of slight follow-up. I suppose you mentioned utilization rates at South Africa and NAS not being fantastic. Can you just remind us what kind of volumes were being sent in to Europe from those assets? And whether or not now that Europa is ramping up, there’s sort of more risk to utilization rates in the other businesses into Q3? Thanks.

Bernardo Velazquez: So it’s difficult to predict, but roughly – and please understand that these are not precise figures. We will try to run the mill in August, more or less, or in July at 20% of capacity utilization and move step-by-step to reach in October-November the level of 80% of utilization. This is more or – this is our target. We’ll try to…

Tom Zhang: That’s in Europe?

Bernardo Velazquez: In Europe. And that will depend, of course, of the market environment.

Tom Zhang: Got it. Do you have similar numbers for NAS and Columbus for utilization?

Miguel Ferrandis: Yes. NAS is more or less running above 80%, but in the ranges slightly above 80%. In the case of the South African market, which also is facing similar conditions than the European one, we are slightly above the 60%, so in the range of 62%, roughly speaking Columbus; 82%, roughly speaking, NAS.

Tom Zhang: Got it. Very clear. Thank you, I will turn it back.

Operator: Our next question comes from Tristan Gresser from BNP Paribas (OTC:BNPQY) Exane. Your line is now open. Please go ahead.

Tristan Gresser: Yes. Hi, thank you for taking my question. The first one is on the inventory losses. In Q1, I think you reported a €44 million negative impact, and you expected some of the lower impact in Q2. So how much pressure did you see in what’s included in the EBITDA? And given the trajectory of nickel prices, are you expecting further pressure in Q3? And could it be as large as in Q1?

Miguel Ferrandis: We are not expecting further pressures, keeping in mind that we have done the most on reducing our inventories. So consequently, the mass of our inventories now is low. And consequently, there is not so many items in which we are exposed to make price adjustments or reasonable price adjustments. So consequently, this is not going to be a driver for the coming quarter.

Tristan Gresser: Okay. That’s very clear. And then on the U.S. stainless market, I mean, we had this view that we have reached a bottom in terms of pricing and demand. But we’ve seen some CRU, for instance, published lower base prices recently, and we’ve also seen some softer demand on – for carbon grades. So is there a patch of weakness at the moment in the U.S. Stainless market? And do you feel confident that you can defend current margin level?

Bernardo Velazquez: Thank you, Tristan. I think that we are keeping our prices in a stable way because the American market is stable. I also read in some magazines that the prices were dropping a little bit in United States, but this is mainly is deliveries from stock from the service centers. This is not our business. We are supplying from mill to end user or from mill to big distributor. So this is not our case. We are keeping stable prices, and we trust that we will be able to keep them also stable in the second half of the year.

Tristan Gresser: Okay, perfect. Thank you very much.

Operator: Our next question comes from Ioannis Masvoulas from Morgan Stanley (NYSE:MS). Your line is now open. Please go ahead.

Ioannis Masvoulas: Yes. Good afternoon. Thank you very much for the presentation. First question from my side. With the new operating model in place in Spain, do you expect the business to be EBITDA positive assuming you hit the 80% utilization rate and assuming current stainless price in Europe? Thank you.

Bernardo Velazquez: Of course, we expect positive EBITDA in quarter three and quarter four, but this is our plans. Let’s see. Because still we are, as I mentioned before, we are rebuilding our order book. We are negotiating new prices with our customers, and we need to know the results of these negotiations and also in the environment that we are living today. But in our plans, we are expecting to move to positive in quarter three.

Ioannis Masvoulas: Okay, very clear. And second question when it comes to Haynes and regarding the Austrian and UK antitrust investigations, do you foresee any meaningful remedial measures needed to close the transaction such as potentially some plant divestments across Europe? Or do you think you can find solutions with limited footprint and financial implications?

Bernardo Velazquez: You know that remedies in our sector are not so simple. No. Haynes has no production in Europe and VDM has most of the production in Europe in different places. So remedies in this, as you mentioned, closing any plant or this kind of remedies will not be very easy. But we are not expecting this kind of problems in Austria and in UK. I think that we are – we trust. We don’t have any concentration in those markets. In UK, Haynes is more concentrated in Aerospace, while VDM is more concentrated in chemical and oil and gas. So if we analyze our numbers deeper, I think the UK antitrust authorities will realize that we are not damaging the market at all. In the case of Austria, I mean, it’s the – we have a strong concentration of VDM’s product. Most probably is the concentration of our customers there more than our material. And VDM – sorry, hence, has a very, very low presence in that market. So we think that we will be able to reach all the approvals from these countries.

Ioannis Masvoulas: Okay. Great. Thank you. And last one from my side. On working capital, performance has been very good in the first half of the year. As you ramp up production in Spain, shall we expect to see a build during the quarter? And if so, could you give an indication of the potential range? Thank you.

Esther Camos: Yes, okay. Regarding working capital, we have a very strong policy on keeping working capital on low levels. It is true that with the ramp up, we might be increasing some – the inventories, but we don’t expect them to increase a lot because of our strategy. But remind also that working capital is very much dependent on what raw materials are doing. So that will much depend on what level of nickel we get on the second quarter, which is unpredictable, okay? But all that in our hands in terms of strategy, we are deeply following what is happening with the working capital.

Ioannis Masvoulas: Okay. Great. So if we were to assume stable nickel prices, you would think that working capital remains within the two digit €1 million range as a bill for the quarter.

Esther Camos: Yes, maybe increasing some, but not significant – not with significant decreases.

Ioannis Masvoulas: Great. Thank you very much.

Operator: Our next question today comes from Bastian Synagowitz from Deutsche Bank (ETR:DBKGn). Your line is now open. Please go ahead. We’re getting no audio, so we will move on to our next question from Moses Ola from JPMorgan (NYSE:JPM). Your line is now open. Please go proceed.

Moses Ola: Hi, everyone. Can you hear me?

Bernardo Velazquez: Yes. We can.

Operator: Yes. We can hear you.

Moses Ola: Okay, thank you. So I just wanted to clarify on the capacity utilization target in Europe. If I look over the past few years, you’ve not gone above 70% utilization in Europe. So just want to understand, am I looking at the right capacity of 700,000 tons as theoretical? Or is there, I guess, a lower capacity that we should look at if there are any bottlenecks that stop you from achieving the theoretical capacity.

Bernardo Velazquez: Thank you, Moses. It is always s difficult to speak about capacity and about capacity utilization, because it depends very much in the product mix that we are producing. It is not the same to produced commodity stainless steel grades than going to more sophisticated products. So most probably, we have changed the capacity calculation in our Algeciras plant to – will be at the level of 600,000 tons per year with the current product mix. So that’s why you will think that this 80% that I mentioned is high for the historical average or the last year average, but it’s not.

Moses Ola: Okay. So I guess, should I then look at that 80% as – versus last year’s production perhaps? Would that be a better gauge?

Bernardo Velazquez: Yes, more or less.

Moses Ola: Yes, okay. Thanks for that, Velazquez. And then also just wanted to, I guess, clarify on the guidance here. So if we look at the first half of the year, if we exclude the impacts of the strike of around €40 million then the run rate is pretty significantly higher versus what you’re guiding into Q3. How much of that is, I guess, perhaps expectations on volume decline? And then also what are you seeing in the Americas in terms of business activity, I guess, into a U.S. election as well? Are you seeing perhaps a deferral or delay of demand, so perhaps maybe a stronger pickup into Q4?

Bernardo Velazquez: You’re right.. As we mentioned, there’s a lot of uncertainties in the market, not only in United States but also in Europe and in the rest of the world. I think that it is even more important for the Europeans than for the Americans what happen in the American elections. Because we think – we fully believe that any candidate that can be the new President in United States is going to be supportive for the industry. There’s no doubts about this. I think that both Trump and Biden in the presidential campaigns have been always speaking about support the American industry and the Buy American program. This is – no doubt some of this is creating some wait and see position. But no more than what we have had during this part of the year. In our guidance, of course, we are considering the slow start up of the Acerinox plant. So we have finished the strike and we will not have the effect of the strike, but we will have the effect of low capacity utilization. And also, you have to add some seasonality in our numbers. So that’s the reason why we are expecting to be in the same level than in quarter two.

Moses Ola: Okay, thank you. That’s clear. And then just finally from me. If we look back to the initial communication about the acquisition of Haynes, you targeted a pro form a leverage level of 1.5x this year and reversing back to 1.2x next year. Obviously, with greater visibility now on earnings and the debt level to the end of the year, that perhaps – is that guidance in your view still relevant at this point just given where market consensus is on the leverage? And perhaps could there be further ways to release cash flow? I see, obviously, CapEx at the start of this year has run far under the €250 million target you discussed for this year. So maybe if you could clarify on that as well.

Miguel Ferrandis: Yes. We announced on February the Haynes acquisition, our understanding, we were at that time more optimistic that all the antitrust procedures should be solved more quickly. So our assumptions should be that any time during third quarter, we should be able to acquire Haynes. Now as we said before, we understand that finally all the regulatory approvals may come in the fourth quarter. At the end, it may vary. Maybe we are going more to the close of the year. So still it’s a bit unsure. And then consequently, as longer as we take during the year, the acquisition price, as you know, is already fixed. But then the contribution that Haynes should provide, obviously, should be depending on the period that Haynes is incorporated in our group. And let’s see if finally at the end everything is sold prior to year-end. So on that basis, we understand that the ratios that we were providing must be understand on an annualized basis. As I said before, what we are doing is our best in order to reach in a very comfortable position of low debt, keeping in mind that our net financial debt shall increase at that time. And then the contribution of an American player and especially in this sector, normally the fourth quarter, we know that it’s a weaker quarter in contribution. So on that basis, let’s say that should not be the best time. If finally, we are in closing and obtaining the approval for closing it in November or December. But at the end, looking on the long track, we feel very comfortable with these ratios for the year 2025. So it has nothing to do with this issue. And at the end, regarding also the point of the evolution of the American market, maybe also it’s clear that this there are some temporary issues in terms of overstock and maybe some delays that are taking place in the aerospace orders. But this is something that is not coming now. Probably, it should not be appearing in ‘24 figures, but maybe in the coming years shall be when probably Haynes should be full participating in the group. So we are not concerned about that and we feel very comfortable with the guidance we did as well as with the ratios. On an annualized basis, it’s going to be achieved any case.

Moses Ola: Okay, thank you very much, Miguel, and good luck to you on your new role. And welcome, Esther, it would be a pleasure to work with you.

Esther Camos: Thank you.

Operator: Our next question comes from Bastian Synagowitz from Deutsche Bank. Your line is now open. Please go ahead.

Bastian Synagowitz: Yes. Hi, good afternoon. Can you hear me now?

Bernardo Velazquez: Yes.

Bastian Synagowitz: Perfect. That’s glad to hear. I just have one last question, actually following-up on the implications of the bargaining agreement, which was obviously pretty hard work. Now my understanding is that this is one of the, I think, key requirements, which you basically need to also be able to produce and run the plant in a much more flexible way, i.e., also produce maybe nicher and more profitable grades. So could you maybe quantify what the annual earnings impact of these changes will be once we’re back in a sort of normalized environment and once we will be able to see the full effects? And is this part of this cost initiative and efficiency program, which you’ve just announced?

Bernardo Velazquez: Thank you, Bastian. I think that – first of all, I would like to point out that we have been focusing on the new strategy, flexibility, and we never had a tough discussion about salary increases. It was a change of model. It’s a change of model that we need to develop our new strategy and I think that will reach it. I think that we mentioned in our presentations that during the last – during the 4 years of duration of this Union contract, we will increase salaries at the level of 13% based on the expected inflection. But we will compensate with our flexibility and with a less rigid structure that increases. And at the end, we expect the salary – the labor cost will remain flat for the period, but with a higher flexibility and higher focus on high performance alloys, more sophisticated stainless steel, with more delivery to end users, in general, to more focus in added value products. But we will expect to have a flat influence during the period.

Bastian Synagowitz: So the cost impact – do I understand correctly that the cost impact is flat because you’re going to offset, maybe, the wage increases, which with flexibility and the fact that may be you don’t maybe you don’t have to pay as much for things such as overtime.

Bernardo Velazquez: You are right.

Bastian Synagowitz: But then there’s going to be some incremental benefit from basically being able to produce more nicher and more profitable products. Is that correct?

Bernardo Velazquez: That’s right.

Bastian Synagowitz: And how much is going to be the effect of maybe producing the, say, upgraded products and improving your mix overall. Is this included in the €100 million number? And maybe so how much?

Bernardo Velazquez: Difficult to quantify.

Bastian Synagowitz: Okay, fair enough. Thank you.

Operator: Our next question comes from Maxime Kogge from ODDO. Your line is now open. Please go ahead.

Maxime Kogge: Yes. Good morning. Just a question on Bahru. Can you perhaps quantify the impact of the closure on your EBITDA in Q2? And I believe there is still a land there, which you hoped to sell for a pretty good price? Have you started negotiation in that respect? And when could that come through? And I think you have a pretty modern setup there. So there were also plans to move that to other places, too. So can you also provide an update in that respect?

Miguel Ferrandis: Thank you, Maxime. Well, basically, still the alternatives still are there. What is clear is that we stopped production. As has been stated, we stopped production on the month of May, and then we are in the way of finding the best solution for Bahru and for the group. There are certain costs that have been recorded in the second quarter, more or less for retrenchment as well as for some of the cancellations of supplies and so on. This is, obviously, the part that should be reflected in this second quarter, it’s in the range of around €8 million. For the coming months, more or less, at the end, we are in the process of determining which is the best solution. We are having all the necessary conversations with key players for a solution of even selling the business as it is or selling separately the assets. And we are receiving tenders for each of these possibilities. So still we need some months to determine which is the best option. And what is clear is that, most of the pain regarding negative contribution coming from Bahru already is there. So there shall not be additional figures that should minorize the group results from now on as we make a huge improvement at the end of last year, whatever may come, shall be a positive contribution on an annual basis by far.

Maxime Kogge: And yes, just the last one on import pressure in the U.S., because this has been a big theme in carbon steel and this has been driving down prices quite heavily in the last few months. It seems that in stainless steel, there is not that – the threat is not that visible. Can you confirm that? And why do you think that the stainless steel market is better shielded from imports there than carbon steel is?

Bernardo Velazquez: We cannot say that we don’t have import pressure in United States, because import market share went to from 24% to 27%, so it’s increasing. So, we cannot increase our prices there because we will lose more market share. But today, with the Asian prices plus all the freight cost that is moving up, plus the 25% duty, plus the cost of internalization is already delivering the material inside the United States, more or less is at the level of the current market price. So, I think that is not a good option for importers to import more, because with the lack of visibility when you are importing from Asian countries, delivery times can be at the level of three months, while when buying locally, you can have the material in 30 days. So, I think that we can compensate with our short delivery times the more attractive price as Asian prices. Also, we are assuming part of our customers’ risk, and we are reducing the risk by delivering the material very fast. So, we are comfortable with the situation.

Maxime Kogge: Alright. Thank you.

Operator: Our next session today comes from Oscar Rodriguez from Banco Sabadell. Your line is now open. Please go ahead.

Oscar Rodriguez: Hi. Good afternoon. Oscar Rodriguez, Banco Sabadell. First of all, congrats Miguel and Esther in your new roles. And just one question from my side, it’s regarding South Africa. Could you provide a bit of color about the growth situation there? If we look at the EBITDA figure for the whole stainless steel division, it’s not very clear its contribution. And at the same time, follow-up of your comments before, thinking about the levels of utilization that you may provided, should we assume that you are not serving to Europe from Africa at this point? Thanks.

Bernardo Velazquez: Thank you, Oscar. In our strategy, moving to regionalization, so we think that South Africa in the future will have to be less dependent on exports to Europe and more concentrated in the African market. And also with the hope that one of these days, the African or some of the African economies will wake up. South Africa, during the quarter two, has been supplying materials to Europe to substitute the cities of some of our customers that couldn’t receive material from in Europe. So, South Africa has been increasing the export activity to Europe, but this is not the strategy for the future. There are certain markets that we are very active from South Africa, including in the Middle East, including Latin America that for proximity and opportunities in the market, we can work with Columbus. But step-by-step, South Africa, Columbus will have to be concentrated in – more in the local markets. That’s why we are trying to develop this flexibility in the plant that I think is the most flexible in the world, because we can produce at the same time stainless steel, nickel alloys and mild steel. So, South Africa for us today is not a problem. It’s in positive numbers normally. No, so it’s not a cash consuming, so I think it’s a part of our strategy and we are comfortable with the position there. There is not many companies in the world can say they have more than 50% market share of a whole continent, we have this position in South Africa. So, I think that we have to defend this position and keep South Africa as a strategical part of our group.

Oscar Rodriguez: Okay. That’s helpful. Thanks a lot.

Operator: Our next question is from Robert Jackson from Banco Santander (BME:SAN). Your line is now open. Please proceed.

Robert Jackson: Hi. Good afternoon Mig, Esther and gentlemen. Regarding Acerinox Europe, can you talk about your plans for balancing the investments to decarbonize Acerinox Europe and also to improve this plant, which has suffered significantly over the last few years. And how are you going to combine that with the VDM products and integration between the two plants. Just basically give us some more visibility on what your plans are for the Acerinox Europa. That will be my first question. Thank you.

Miguel Ferrandis: Thank you, Robert. In regarding of the decarbonization, as I said before, we are presenting a new program that we are almost closing it for being approved at our Board in the coming quarter, and we shall make it public. So, it shall be plenty of that available there. So, probably for the year-end, we can give more details and more disclosure. As you know, in terms of the carbon footprint, as we have said, the Acerinox Europa is the most intense in renewable energy. We have been suffering that in the first semester, the lack of activity. But once we normalize with the ramp up of the production, this shall be highly appreciated. So, in this regard, is the plan – where this area is absolutely much more relevant and we give the trend. So, we have also the programs in place that have been explained regarding the excel program. So, we are there. The issue of Acerinox Europa for running material for or trolling material for VDM, we are already there. As much as its efficient and its effective and the transport cost and so on justifies it, we shall keep on doing. But this has no relevant consequences in terms of the carbon footprint. So, keep in mind that when we – it’s a high qualified production, but for a relatively reduced number of tons compared with the tons we are using in the stainless work. So, on the actual times, as has been expressed that we still have capacity available in South Africa, the issue – sorry, in Acerinox Europa, the issue for being transforming or being producing material for VDM takes sense in Acerinox Europa as well as in Columbus as has been the case.

Robert Jackson: Bearing in mind, Acerinox Europa, 2 years ago, you invested in improving the cold rolling capacity. Could we expect to see any significant investments over the few following years to again further improve the efficiency of Acerinox Europa in order to be more competitive versus some very efficient Asian and Chinese players?

Bernardo Velazquez: You know, Robert, that we are constantly trying to debottleneck our facilities and trying to find new opportunities to grow. And of course, we have these plans for Acerinox Europe, but this is still not the moment. We are now concentrating in our expansion in North American stainless, VDM and with the case of Haynes. It doesn’t mean that we don’t have plans, but this is the moment to concentrate in the current expansion plans.

Robert Jackson: Okay. Just final question, regarding the Mexican steel imports into the United States, which will now be subject to 25% Section 232 tariffs, unless proof is provided that the products were melted and poured in North America, could this help to be more supportive and reduce those 27% input levels? Just what’s your opinion on this change?

Bernardo Velazquez: I think that will help. I think the Mexican producer, Mexinox, as you know, that is part of the Outokumpu Group and it is re-roller. It’s never damaged in the American market and is mainly concentrated in Mexico. But sometimes, Mexican customers or some of Mexican importers can bring material from other countries and after a small process or whatever, send it to United States. And this is what the new measures are avoiding nowadays. Now that United States decided to apply the melted and poured origin of material, not – that is not aligned with WTO rules, but that reflects better where the material has been done with the carbon footprint in the place that was melted. So, now in the United States moving from WTO rules to this melted and poured, that means that the origin of the material is the place where this material was melted. So, that will avoid non-American material reentering via Mexico in United States. Most of the raw materials that this Mexican plant is using are coming from the Alabama plant of Outokumpu, so that is not a problem. They will be able to continue with this process. But some other players will not be allowed to enter material in United States without duty when the material is not melted in North America. Very clearly, this is part of the American protectionism, and it’s interesting that Mexico is also working in this direction.

Robert Jackson: Okay. Thanks very much. And I wish Esther and Miguel, the best in your new role.

Miguel Ferrandis: Thank you.

Esther Camos: Thank you so much.

Operator: Our next question is a follow-up from Tom Zhang from Barclays. Your line is now open. Please go ahead.

Tom Zhang: Hi. Thanks for taking the follow-up. And it’s a very quick one. So, you mentioned earlier, I think that you expect positive EBITDA for Europe already in Q3. I know you didn’t disclose for Q2, but in Q1, I think it was minus €31 million. I can’t imagine it got a lot better in Q2 with the extra month of strikes. So, it sort of feels like it’s a €30 million improvement just in Europe that you are baking in, which then, if I put that against your guidance for flat EBITDA for the group, kind of implies quite a bit of weakness elsewhere. It sort of sounds like U.S. is quite good, VDM is obviously fine or HPA, sorry, is fine. Is there anything else that I am missing, or is it just some conservatism that’s being baked into that flat quarter-on-quarter guidance? Thanks.

Miguel Ferrandis: Thank you, Tom. You know us, there is no visibility as previously has been expressed. The market is extremely weak and consequently we prefer to be prudent and conservative on this basis. We are entering in the seasonal lower quarter. We are seeing that according to the nickel price evolution, nickel alloys is expected also to go down and this has a quick effect also mostly in the States. On this basis, we would prefer to be prudent. We feel comfortable that these results can be repeated. It’s true, as you are saying, that we shall not experience the big loss that we have had in the Q2 as consequence of the strike. But at the end, we also are contemplating some bit more soft performance in other divisions, mostly driven by this fact of the Q3. So, on these bases, and with the lack of visibility in the market and with the uncertainties, what is more prudent is to consider that in the third quarter, we shall be in line. Bernardo said previously of being positive EBITDA…

Bernardo Velazquez: I was too optimistic.

Miguel Ferrandis: Maybe sorry for correcting my boss. Maybe updating positive EBITDA during the quarter, which does not mean for the full quarter.

Bernardo Velazquez: You are right.

Miguel Ferrandis: During the quarter we shall be, maybe not in July, not in August.

Tom Zhang: Understood. That makes more sense. Thank you.

Operator: Our next question is from Moses Ola from JPMorgan. Your line is now open. Please proceed.

Moses Ola: Hello. Again, just a quick follow-up from me, I just wanted to clarify, so the CapEx guidance of €250 million for 2024, is that still retained? And then of course, as you mentioned, Miguel, given the integration delays for Haynes, if I go back to the initial guidance of €200 million CapEx from next year, could that also be delayed, just trying to build a sense of group CapEx for 2024 and 2025.

Esther Camos: Okay. With regards to 2024, okay, we will – we can say we will keep at the high level. So, it’s the – what we have been doing during the first quarter – during the first half is not going to be the same as we will be doing for the second. It is true that some of the CapEx might be going slightly down, okay, but not significantly. So, we just keep a track of this more or less figure, just a bit reduction, but not an important one.

Bernardo Velazquez: If I can add something, Esther, we have lost five months of this project development in Spain. So, we will not be able to recover all this CapEx. So, I mean we will not have time to develop all the projects that we have in mind for in 2024, some of these projects will pass to 2025.

Miguel Ferrandis: In regard to Haynes, when we disclosed the €200 million CapEx to be done in Haynes, we were not contemplating at that time that this shall be starting in ‘24. And in addition, we must keep in mind that we are extremely respectful with all the regulatory approvals and consequently, we are not having any further analysis or details and common discussions with Haynes in this regard. So, this shall come later on. So, the decisions on the CapEx and the fine tuning of the necessary CapEx to be done is something that still we have not been discussing and shall be coming later on. But by far, not in ‘24, it shall be any case discussed as soon as we take control of Haynes. And keep in mind that it shall not be starting day one. So, obviously, more or less, we should just fix which are the necessary equipments assigned to the proper suppliers and then we shall need a waiting time. So, in the evolution of the €200 million is not in the first 2 years where it’s going to take place, the most relevant part of that. So, in terms of the group, we shall accomplish. We probably, as you know, next year, it shall be more our CapEx related to the investments to – that we are running in NAS and in VDM and later on, shall be gradually having more relevance, those more driven to Haynes.

Moses Ola: Very clear. Thank you so much.

Operator: We have no further questions in the queue at this time. So, that concludes today’s Q&A session. I will now pass the floor back to Acerinox management team for closing remarks.

Bernardo Velazquez: If I can say something, because I would like to apologize for my mistake regarding Acerinox Europe, but we are so excited with the new plant, with the newer strategies in Acerinox Europe that are more living in the positive scenarios and dreaming to be able to do all these things after the term negotiation or five months of negotiations with the unions there and getting a final agreement that’s going to be positive for everybody. And I trust very much our people in Acerinox. They have understood what is the situation, have understood that we need this flexibility, and have understood that we need everybody’s support to make this – our company very successful again. So, I apologize for that.

Carlos Lora-Tamayo: Thank you, Bernardo, for the clarification. And thank you everybody for joining us during this call and for all your questions. And we hope that you have a good summer break. And just remind you that the next set of results will be on the 4th of November. Thank you very much.

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