Acerinox, S.A. (ACX) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Acerinox Earnings Conference Call for the Second Quarter 2021. My name is Carlos Lora-Tamayo, and I am the Head of Investor Relations at Acerinox. As you can see, today, the presentation is going to be conducted by Bernardo Velazquez, Acerinox's CEO; Miguel Ferrandis, CFO; and also, and for the first time, Hans Helmrich, COO of Acerinox Group. We haven't had the opportunity to introduce Hans as we would have liked. But due to the COVID situation, this was not possible. Let me introduce you Hans very briefly. Hans joined Acerinox almost 1 year ago to reinforce Acerinox Group management. He has more than 26 years of experience in the industrial sector in companies in the automotive or packaging. Of late and before Hans joined Acerinox, he held various management positions in Cooper Standard in Germany and the U.S. A year late, but welcome Hans. I think it's a very good half, very good semester to start and being the best results in 14 years. Before getting started, let me remember you that this presentation is webcast in our web page, acerinox.com, where you can find also the annual accounts and interim management reports for the first half of the year. And now I give the floor to Bernardo. Please, Bernardo, go ahead.

So good morning, everyone. I hope that you and your families are okay. And at this time, we are going to be the first one in our sector to present our results. So I'm sure that you have lots of doubts and lots of questions for us. So if you don't mind, we will make a very short presentation and then we will give more time to the Q&A session. Let me start with sustainability. Let me start with sustainability to show the commitment that we have with this new economy. Sustainability is linked as we always consider it, in all fairness, leading with efficiency because if we are efficient, we increase our efficiency, we will reduce our emissions, we'll reduce our Co2 emissions, we'll reduce the energy intensity and everything. So it's very much linked and inside our traditional culture. I think that we are very lucky because we have an excellent material. That is the paradigm of the circular economy, stainless steel. We produce our stainless steel with more than 90% of recycled material. And as we all remember, our material, the stainless steel is long lasting, but is forever recyclable. And it is something that is not the same with some other materials. You can recycle infinite times the stainless steel and you get stainless steel with the same -- exactly the same characteristics as the previous one. You never lose quality when recycling stainless steel. So you want to have long-lasting materials with producing less with less emissions through the cycles, then I think stainless steel is something that you should consider. During this period, we are very happy to announce that we are releasing a new product line that is sustainable stainless steel certified by TUV, by one of the most prestige certifiers. And we are starting to develop this product, ready for customers that want to get involved and committed with the circular economy and with the sustainability factors. It is good to say that we also got the Gold Level in EcoVadis this quarter. So now that we are reporting in a formal basis our sustainability numbers, these companies have recognized what we have been doing for many years and our numbers are good enough to be recognized for the first time with a Gold Level. And more than that, even our competitors, our sector recognized our efforts in sustainability and ISSF in the close ceremony that we celebrated in May, our Annual General Meeting. They gave us the 3 awards in sustainability; gold, silver and bronze. So this is very good. We are reporting on a regular basis from now on all our key performance indicators in sustainability as well that you can follow in a quarterly basis. And as you can see here, we are making important progress. I think that we need to make a reflection as Europe and most of the developed economies have decided to be sustainable. So I think society must start recognizing companies and products that are making an effort and extraordinary effort in sustainability. And this is something that we should take into account. We need sustainable products, and Acerinox will be one of the suppliers of these products. Entering in the second quarter results, let me try to explain what is happening in the stainless steel business. To understand the situation, we need to remember that the apparent consumption went down in 2018, in 2019 and in 2020 too. So after 2 bad years, because 2018 United States was minus 2.2% and Europe was minus 0.3%, 2019 U.S.A. apparent consumption was minus 9.3%, and in Europe was minus 4%. After 2 bad years, we expected to have a better 2020. But everything changed with COVID with the pandemia. And finally, the number for the year was in the United States we lost 10.8% apparent consumption and in Europe 13.4%. So it's very logical that after 3 consecutive bad years, apparent consumption is now growing in most of the economies. But after 3 years going down, it is clear and understandable that the stock levels in all the markets were very low. And not only noting about stainless steel or stainless steel in factories or warehouses, I'm speaking about stainless steel in the whole supply chain. I mean there's no stainless steel in the warehouses, but there's no stainless steel in pipes and tubes and exhaust systems for the gas, but also there's not enough cars in the car dealer shops. So the situation was very low stocks in the whole supply chain. So now that, as we reported before, when in last November, the world started to trust on the recovery of the economy with the very good news of the vaccines and the thing, so people wanted to get ready for the new situation. Everybody wanted to start replacing the stocks to reach a normal level of consumption, a normal level of utilization. And then what happened is what it's called the whip effect. In our case, stainless steel, we are at the beginning of the supply chain, all the effects are amplified and have a very interesting restocking period. But also we have to understand that since last summer we also reported the savings in families was related in a better situation for consumer goods. And things like white goods or house expanding and things and other things were moving very well. So we have on one hand, a strong recovery in the consumer goods sector. In our second hand is the stock replacement. If you add these 2 things, with a recovery in all the countries in the world, plus unexpected high transport cost plus some trade regulations, at the end we are coming back to a more regional world, a more regional business that let us have more visibility in our business, increased our order book. And as a result of this, as we always explained, when you have a stronger order book, you can select your orders, you can improve your product mix, and you can increase your prices. And this is the situation that we are living. So we have a very good business conditions, and this is what is reflected in this number that you can see. We have the strongest EBITDA since 2007. Net sales of more than EUR 3 billion. EBITDA, EUR 378 million. That is 130% higher than last year. And we have results after taxes and minorities of EUR 203 million that can compare with the only EUR 2 million that we made last year. But always keeping our long-term strategy, that means in this time that we have a strong operating cash. Remember, cash is king for us and our net debt is under control. So with this brief explanation, I will leave the floor to Hans, our new Chief Operating Officer, that started working in September. So [indiscernible] thinks that stainless steel business is very easy. You can only increase prices, but we have to consider that we always have 2 things in our business through the cycle business. I think that Hans, as Carlos mentioned, was recruited to reinforce our lean management and to bring new ideas from other sectors to help us to keep on improving because at the end, this is what we are always doing, looking for the excellence. So Hans, the floor is yours.

Thank you, Bernardo, and good morning to everyone. Pleased to be here today with all of you. So let me talk briefly about what happened in this second quarter in the market but as well in Acerinox. The market of stainless steel continues to grow. The demand is improving. And the same happens with the high-performance alloys market with the recovery is going fast and accelerating into new products and new opportunities. Each region continues to grow quarter-over-quarter, which is good news for all of us. In North America, inventories and imports remain low, and that's an opportunity as well going forward. In Europe, antidumping duties for coal raw materials were approved to India and Indonesia and extended award another additional 3 years also happened in this quarter. Within Acerinox, each one of our divisions improved the results quarter-over-quarter. And as said, our profitability is the best in 14 years, continued to focus on cash performance and operational excellence, which is what we were focusing in operations for this quarter and going forward as well. With that, I will pass it to Miguel.

Well, the chart shows very, very clearly the evolution and the strong reaction that took place since midyear 2020, the strong reaction that came in the third quarter, and we start reacting in the stainless side, later on with a growth that was expanded through all the units. And also, we have seen the strong activation coming more recently also in the high-performance alloys. So at the end, we are seeing 4 consecutive quarters of growth. When we put these on figures, and we show the figures for this strong increase in profitability, we appreciate that more or less all the variables are and all the figures are absolutely remarkable and all the improvements. All the slides that are coming now are going to be -- or you can appreciate that are very, very self-explaining. So I shall just give some messages from each of the slides. First of all, when we purely analyze the second quarter, as has been remarked, it is the strongest since year 2007, the strongest in the last 14 years, keeping on mind in any case, how different was the market at that time and which were the drivers that led to that profitability in that period with a strong and constant revaluation of the nickel and consequently of all the inventories all around the world. The situation now is also a little bit different. So we have been able to obtain figures as those just in different market conditions with a much more stable nickel. But at the end, this is as a consequence also of the strong improvements in cost reduction and increasing efficiency we have been doing that with a proper tailwind of market conditions that appears as our results in our P&L. The EBITDA is very, very strong, but what also must be remarked is the cash flow generation. When we presented the first quarter, we anticipate that we were saying that the second quarter should be even better. We have seen that this has been increase in EBITDA of 35%, but also -- and even though the increase in capacity utilization, increase in production, increase in volumes, what we have been seeing is that we still keep an operating cash flow. And it's remarkable keeping an operating cash flow in a momentum in which the working capital increased and continue increasing. We saw increases of EUR 130 million in the first quarter. We anticipated also that for the second we expected an increase in working capital of around EUR 100 million for all the units that are running at high capacity utilization. So this has been appreciated. But the increase in working capital has been even absorbed by the increase in margins, increasing efficiency, and consequently the operating cash flow has been EUR 84 million in the quarter. So this is something to clearly remark. It's very, very relevant. As is relevant also, the figure of the net debt remains absolutely under control. We are showing figures of net debt of EUR 838 million, even though when we compare, for example, with equivalent figure in the second quarter last year, which is very similar. But in the figures, this year appears also that in June, we have paid a dividend. So the whole dividend of EUR 135 million has been already paid. So this is reflected in the debt figures at the end of June. Has also been reflected the increase in working capital that, as we have stated, has been of EUR 253 million. And also keeping in mind that just 1 year ago, we raised additional debt of EUR 313 million for the acquisition of VDM. So it's very, very simple to just analyze and conclude how it should have been a normalized debt in our group with not these 3 facts that have been appearing and showing in the figures we are reflecting at the end of June. This is going to be the peak of the debt in the group in this year and the second quarter and especially -- sorry, the second semester and especially the fourth quarter shall bring a strong cash generation and a stronger debt reduction in the whole group. If we just separate in our main divisions, stainless and high performance alloys going to the next slide, just showing the stainless, it's very, very relevant also to appreciate the EBITDA of EUR 201 million, which is 32% up from one of the previous quarter. What's relevant also is that at the end, for being appreciated, what we are seeing now is the consequences of all the homework that has been achieved. So at the end, we express all our efforts that we're doing in whatever is the fixed cost, this appreciates. So when we saw the figures in the stainless, we appreciate that with increasing melting shop in this period of around 28% in the whole semester, the operating expenses have only gone up 12%. So in this regard, it's clear that we have made a special effort in increasing efficiency. And all this is appreciated as well as all improvements in plant as soon as we have had these. So I think the evolution of the stainless steel division has been remarkable. And keeping also in mind that having circumstances in the quarter that could have spoiled it a bit, but I think that these have been very, very properly and efficiently handled by the management. We have had some problems on some supply in oxygen in South Africa. We are having some disruption also in the part of Spain [indiscernible] with a certain strike. So have had in different units some problems that have been very, very properly solved. And consequently, we have been able to develop these figures and also remain very, very positive for the coming quarters, as shall be explained later on. If we move to the high performance alloys, what is probably more relevant to remark, you have all the figures in front of you, is how successfully is in place all the integration. We have been able to achieve the most relevant milestones that were planned 1 year ago. And consequently, we are seeing that a lot of best practices, more than 70% best practices have been implemented. More than 250 trials have been done in the stainless operations plants for processing alloys. A lot of new products have been created in different alloys. A lot of best practices shared among the teams and the specialists in both the alloys and the stainless commodity world. So this has been extremely, extremely successful. And as a consequence of this, we have obtained synergies, which are 40% above than the synergies that were precise for being achieved at this period. In addition, it's clear that in the second quarter, what here is a strong improvement in the order book in the alloys sector. The last quarter, the high performance alloys and especially our division keep a relevant track in supplying sectors such as chemical processing or the auto, electronics. And what also has been relevant in the second quarter is that it's coming the oil and gas, and we start seeing orders of oil and gas. So with this huge increase in the order taking in the second quarter, which will be appealing, obviously, in terms of margin activity in the coming quarters, also now we are in position of changing our strategy. Up to now more involved in filling the mill; now more involved in being very, very selective on the margins of the order taking. And this shall consequently contribute in proper improvements on the profitability, in the performance of the division in the coming quarters and we are going probably to reach the pre-COVID levels sooner than expected. And this is a very, very positive indication for the second semester of this year in VDM, which up to now is trading at EBITDA margin of 8%, which is also close to the expected levels that we always mentioned on the 2 digits, reaching the 10%. So the reaction has been quicker and very, very efficient. And this is something to be proud about. If we just move to see how is the effect on the cash flow for the group. I think in terms of capital allocation, it's also one of our key issues in terms of focusing the most. And this is something also that we are extremely, extremely proud. When you see the figures, we are showing not only the quarter but also even the first semester. It's clear which are our priorities. We are having a very, very relevant EBITDA, which has compensated even huge increase in working capital. And in this regard, this has been our first prioritized investment in this period. So for us, the main investment has been being in position of accompanying the growth in the market by the huge increase in working capital, as has been the case. This has a very, very quick return and shall be appreciated and is being appreciated already, not only in the margin but also in the cash generation and this, as I am stating, shall be coming mostly in the second semester. So the first investment for us in this period has been the working capital and it's going to be very, very successful. We are -- in terms of capital allocation, also, we are very, very strict in regard of the CapEx. So as you may remind, we announced around EUR 100 million CapEx in the group for this year. And at the end, we have achieved until done EUR 49 million. So we are keeping a strong discipline. We are not getting relaxed by the good momentum on the market. So we are prioritizing also just the most relevant CapEx, and we are not getting comforted with a good momentum. And this is also relevant, and we keep very, very committed on that. And in addition, we paid a dividend last year in the month of November, as you remind, but also this year it has been anticipated in the dividend and has been paying in the month of June. And also up to now, in the first semester appears also in terms of our capital allocation, the dividend that has been paid in the first week of June. So this shows our priorities for keeping the business and keeping the business on the long-term run. One is obviously our company and be able to develop the working capital. Also, we need to keep a good control on the CapEx and obviously the proper distribution to our shareholders.

Thank you. And having a good quarter or a good semester should never be an excuse not to focus on cost control and continuous improvement. So this is what Excellence 360 is all about. We continue to focus even through the good chance in our cost base. And this is what you can see in the chart where we achieved an annualized base EUR 58 million of savings. Our teams are doing a great job in identifying further opportunities for the months and quarters to come. And we already recovered what we missed last year in 2020 due to the COVID situation and the lower volumes that we had. We have not incorporated the high performance alloys until now, but the good news is that going forward, high performance alloys division is going to deliver EUR 15 million in the next 3 years on this same Excellence 360. All our operational teams are focused on cost control and cash generation, and this is what Excellence 360 is all about. So thank you.

So we are coming to the end. So remember our traditional long-term strategy, we are focusing as we have mentioned focus on our long-term strategy, and we cannot forget that this is a cyclical business, and we have to look at the business in through the cycle parameters. As I mentioned before, with all this new situation, the improvement of market condition has accelerated and still is improving, and that gave us more visibility so that we can program our plans there, we can adapt the product mix to the necessities. So it's the best in years. Then with this situation, the stainless steel division posted a remarkable quarter; the strongest, as we mentioned, since 2007. And also, we have a clear recovery since March, with the order intake in March in the HPA division, what is very positive for us. As Miguel mentioned, the integration process is going pretty well, and we are very excited with the possibilities that we have with the 2 divisions working together. As Miguel explained, with our working capital increase due to better market conditions, [ we have ] dedicated most of our cash generation. But now in the second quarter, we will be in a better position; we'll release some of this working capital, and we expect to finish the year in a better and a good cash generation. So we can say that in the first quarter, we will continue focusing on cash. We'll have a very strong cash generation. And also, we can foresee that the EBITDA in quarter 3 is going to be higher than in quarter 2, and we will reduce the net debt. So this is all from our side. So we can start, Carlos, with the Q&A session.

Okay. Thank you for the presentation. Let's move now to the Q&A session. So please, operator, go ahead.

[Operator Instructions] Our first question comes from Alan Spence from Jefferies.

I've got 3 questions. I'll take them one at a time. The first one is on the price increase you announced in North America recently. Just wondering if you could give us an update how that's being accepted so far by customers? And what's the time frame before it will be fully reflected in your results?

We have released this letter to our customers last week, and this price increase will be effective first of August. So still we don't know, but we trust very much that it will be well accepted in the market. How this will affect in the profit and loss account, we'll have to see. We never give these numbers.

Sorry, I didn't need the profitability change, but just given contracts, if it is accepted, how long before it would be in there?

This is for contracts. So there will be affecting more or less 1/3 of our production in the assessments and after 1 quarter to 2/3 of our production.

Okay. And the second one is on VDM. You gave some helpful commentary around the next couple of quarters. But just with a strong order book right now, do you have any early sense for where the margin could be in early 2022?

Miguel?

Well, as was previously explained, we have seen and we anticipated that the margins are improving, we are going to reach the pre-COVID levels in terms of margins in the second semester. This means that probably we can be trading in those levels, and we're talking about 2 digits EBITDA probably for early 2022. So we feel very, very comfortable on that, and we have seen a strong reaction of the market. And consequently, we think that this is achievable for 2022. In addition, gradually, which shall also be appreciated the synergies that are to come. But at least reaching pre-COVID levels in early 2022, we feel very comfortable with that.

And my last one is on the sustainable stainless steel line that you're launching. What's the CO2 reduction compared to your standard products? And what is the type of volumes you might be thinking about that for next year?

We don't have a specific CO2 targets that we're going to be declaring at this morning in time. What we can share is that the main products are going to be focused on the sustainability of stainless steel. It's going to be focused on the recyclability of the materials used, but as well the use of renewable energies. And how these are going to be combined into a certain volume, that is going to be specifically dedicated with this TUV stamp that will allow us to mention that this is a sustainable steel that we are selling.

You mentioned volumes. We can say that -- we can guarantee that we can certify the sustainable more than 15% of our production, but it is much more than the current demand. So we have to develop the line of these products.

Our next question is from Tristan Gresser from Exane BNP Paribas.

I have 2, please. First, maybe on the outlook for Q3. Would you still expect some weaker seasonality we usually see in Q3 in terms of volumes? You could even see volumes up sequentially given the strength in demand in all regions. And looking at the margin performance you have here in Q2, how sustainable is this? Were there any raw material amount of gain in Q3 as we've seen --sorry in Q2, as we've seen in Q1? And I will start there, please.

Okay. Let me answer your questions. I think seasonality, we don't expect a strong seasonality in quarter 3. We have, of course, some reductions in Europe as it is normal but less than before, less than in the previous years. And we think that the American economy is performing very well, and we will not see the seasonality in the United States. So we are pretty comfortable with the situation in Q3. And how sustainable the margins are? We maintain the level of production, we maintain our cost under control, and we push prices up if we can, with the more visibility on the stronger order book. We feel very comfortable as well with the current margins and will of course, will try to increase.

All right. That's very clear. And maybe 1 question on the ETF and the European legislation around carbon credit. Can you give us some idea where your current status of carbon credit inventory is? When do you expect to witness cost inflation when you need to buy more regularly on the market? And also how would the new ETF registration impact that status quo? So maybe some thoughts on the ETF. And also on the Carbon Border Adjustment Mechanism, stainless is excluded for now from the legislation. What is your view on that? Are you hoping to get included in the Carbon Border Adjustment Mechanism?

This question is enough for 1 conference because the carbon problem and the carbon matters are very complicated. In the case of the credits, you know that we have been and we still are receiving free allowances. And also, we have some savings in this allowance that will let us work comfortable for the coming years as well. So this is not a problem, and we are not going to suffer the cost inflation that you mentioned. What is going to be the future of the carbon commerce and carbon border and these things is difficult to know today because this is just a project in the European Commission. What we know is that there's a real political interest to establish this carbon border because otherwise who will lead the European Union and protect it. And this is not fair. If we want to be sustainable and want to reduce the emission, we have to protect the producers that are working with this scenario because, as we have mentioned many times, if we are not protected with this kind of tool like the carbon border tax, probably the production of many things will move to other countries with more relaxed legislation in environmental matters so that we will be exporting this CO2 credits. So we're giving them the advantage to increase production against the European producers and consequently increase the CO2 and every kind of emissions since in this country the legislation is more relaxed, as I said. So I think that the -- our representatives in the European Union now recognizes that this is something that we have to take care. And there's a political interest to establish the carbon border tax. How are we going to do it is another question, not because the complexity of the European Union is high. And once you have the interest to do it, it is difficult to establish the right mechanism, satisfying all the -- not only the European Commission but also all the individual member states. So this is a very interesting matter. We are following it very, very closely. As you know, from our position in UNESID, the Spanish association, and in Eurofer, we are working hard on this to protect our interest. You have been following Acerinox for many years and you know that since many years ago we have been craving for this kind of tools, for this kind of protections or at least to play against the other producers that are not in the same level playing field.

Our next question is from Patrick Mann from Bank of America.

I wanted to ask around imports into Europe. So we've seen a reduction. I want to get your views on how much of this is cyclical. So because demand is strong globally, and we are reopening and as you mentioned earlier, inventories throughout the supply chain are low? And how much of it is because of these increasing trade barriers, for example, well, and the most -- the best example being the antidumping on Indonesia and India. Just trying to get an idea of if we start to see the restocking cycle play out and the tightness eases, where do you think imports would sort of settle at what kind of level?

It is difficult to split this. They are coming because -- they are not coming because of the safeguard measures or because of the antidumping duties but because of the local market. But I will give you a couple of examples of more countries that they have quota under the safeguard measures and are not using this quota, like for example South Korea. And this means that they have also a very strong market. I think that there's a strong market in China, a strong market in India. The measures that the Chinese government has taken to eliminate the export rebate of the 13% is a clear sign that they want to keep production inside the country, to promote the recovery period and also to avoid inflection. This is something similar to what is happening in India, that they have temporarily eliminated the trade barriers. So this is also a clear sign that they want to protect the local market. And with an inflection also some signs in the same sense in Brazil; they are reducing 10% the duties. In general, I think that most of the markets are very strong today, and then producers are focused on local markets. Now if you have the cost of transport from USD 50 per tonne has moved to close to USD 500 per tonne, that's another reason to finish with this globalization process and be more focused on regional and local sales. Another example is U.K. For example, U.K. after Brexit is not included in antidumpings or safeguard measures. And the profile of the imports and -- everything is imported there, almost all of the consumption is imported. But even European producers are increasing market share in U.K. So that means also that there's not a -- so that is not only driven by antidumping and safeguard measures. So I think that today the most important thing is that most of the world markets are very strong and that producers are concentrated in the local business. But anyway, we are very happy that the European Union is also taking a conscious of what we have been suffering in the EU of unfair practices. And now they are supporting with the safeguard measures to avoid this flooding of EU with materials that previously were going to the United States, and also is now a very clear focus on fair practices from other countries like Indonesia and India and they approved this antidumping.

Our next question is from Ioannis Masvoulas from Morgan Stanley.

A couple of questions on the outlook. You noted that strong free cash flow in the second half. Do you expect to release fully the working capital investment that we saw in H1? And related to that, how are you looking to deploy this strong cash flow? Is it a case for a buyback in the second half? Or would you also consider a potential direct stake purchase from Nippon Steel, assuming they're willing to exit fully from your share register. And I'll stop here, if that's okay.

Well, in terms of the working capital for the second semester is not going to be reversed all the all the figure that is appearing in the first semester. Keep in mind that still in the third quarter, as we have seen, we shall see some even increasing activity. So maybe still some increase in the working capital in the third quarter and maybe the stronger reduction shall take place in the fourth quarter, but not matching the figure that has been appearing in the first semester. So at the end, it may get stabilized for the fourth quarter. But the figure is not going to be purely symmetric. The fact is that in the fourth quarter with certain production of the working capital and no strong areas of cash-out it shall be a strong cash generation and net debt reduction for the group, but not matching the figure of the increasing working capital in the first semester.

The possible buyback that I think is the trending topic today. There's nothing to comment here. Remember that we all have to look at the -- through the cycle numbers, not only the current situation, we have to consider the full cycle. And we haven't taken any decision yet. Of course, it's something that we are considering, that we are studying, but there's no decision taken. This has to be decided by the Board of Directors later have to be approved by the Annual Shareholder Meeting. So there's no comments here.

Okay. Understood. And maybe a follow-up question on VDM. I saw in the slide, you talked about EUR 15 million target of cost savings by 2023. Just to clarify, is that on top of the 3-year synergy target of EUR 22 million.

So these are all operational activities and savings, which are, yes, on top of the integration savings that we consider at that time.

Our next question is from Robert Jackson from Banco Santander.

Bernardo, Miguel and Hans, just a few questions. First of all, regarding North America, how are the negotiations developing with ATI? And could we expect positive impact in this -- during this year from those to volumes? That was my first question.

Robert, as you probably know, ATI came to an agreement with the unions and the employees and they resumed operations -- they are resuming operations right now. They communicated to the market that they are going to be leaving the traditional stainless steel business and focus on the high performance alloys business. in North America. We see a strong demand for the products that we're putting. And evidently we are [indiscernible] to our customers, partially also their customers, to provide the needed materials that they have in the marketplace.

So we could be seeing volumes this -- even this year?

Already some of those volume's flowing into our mills this year already. That happened already since they have been in strike for many months now.

Okay. Second question, regarding the disruption you've mentioned in the first half in South Africa and Spain, what other potential risks could be on the second half, more in South Africa? Could you flag any other risks that you may be seeing?

Robert, what -- it's a good news is that, of course, in production, in the industrial activity, [ business ] can have risk or you have risk and our business is how to run and how to manage this risk. And we are very proud to say that we've been able to reduce this -- the impact of these disruptions, but that is not going to affect our profit and loss account. So we always have a B plan. We have always have a risk management system.

Okay. And my final question. Regarding VDM, could you give us an idea of which markets VDM is gaining more exposure to and where the pipeline will [indiscernible].

Of the main markets where VDM is active, I have to say, one is electronics and electric items, and this is a market that is happening in stainless steel as well, that is booming. It's performing really, really well. And the high performance alloys are used, for example, in small appliances like dryers or toasters or these kind of things, but also in the OLED TV, the new technology, that needs very stable materials. So this is very good. Second, automotive. Automotive until now and for us is running very well. So we haven't seen any signs of depression of this market. Automotive for us is performing very well. Sales market is oil and gas. And we can say that there's a recovery in the oil and gas business, maybe not in Europe, maybe we don't see it in Europe, but we have projects in Qatar, in Emirates, in Brazil, in some other countries that are going well. So these projects are giving us lot of order intake. The chemical industry is also a very good sector. It's a sector that is performing very well, that is also booming and that is investing in new plants and new equipment. So it's also good. The only thing we miss today is the aerospace industry. This is still no progress on that, especially in the United States and Europe. And this is the only sector that we are missing. But in general, we can -- we see a good activity, and this activity will improve during the second half of the year.

And geographically, would you say the Middle East is very relevant.

Not really but not because it's not relevant because most of the equipment is made in Europe. So we are supplying this material in Europe that will be finally for the engineering company, whatever released to the Middle East, but the transformers are in Europe.

Our next question is from Carsten Riek from Crédit Suisse.

I have 3 questions. I want to take that one by one. Special alloys, the first one. You mentioned a better order book and that it will show further earnings improvement in the second half. What kind of levels are we talking about, 8% EBITDA margin? Is that already a level you are satisfied with? Or do you clearly go for double digit? What kind of level could we expect in the second half?

As has been stated, we are in the good trend. So it shall be improved gradually. We think we may be close to seeing the double-digit here during the second half, but not as an average for the period. So this is a global recovery. And then consequently, maybe we'll reach that level. If we consider on an annual basis, it could be assumed. But for the whole semester, 2-digit figure, this is clear. Maybe this is coming for the next year, but not in the second semester. But in the coming months, we may see that.

Perfect. The second question I have is on the cost inflation. We see the usual cost inflation out of the alloy element and [ RAP ], but we're more interested in the usually more sticky cost inflation because a lot of companies currently talk about this. But do you see the same, especially from a labor perspective, that cost will increase going forward? And what kind of level do you expect?

Carsten, so we are -- Excellence 360 is one of the tools that we use to mitigate cost increases, and we are working in continuous improvement activities to mitigate those cost inflations that we see, mainly when it comes to efficiency in our lines and working, and our teams are doing an outstanding job of managing those situations. We do see the inflation mainly on materials, as you have seen, and that's where it has been over the last months, the situation. And evidently as well, energy costs, in Europe mainly, are going through the roof and that's what we're working as well to mitigate those through efficiency but it's really significant increases that we are seeing there.

Okay. Good. Perfect. And the last question is on the Carbon Border Adjustment Mechanism. I completely agree it's an important step forward. But does it also mean that we will see a greater removal of other antidumping measures, which to some extent are based on the same argument as we get closer to the introduction of Carbon Border Adjustment Mechanism.

Not related. This is not related. Antidumping is regarding the unfair practices, and we have that. And this is related with our fair practices in market activities. Safeguard measures is only related with Section 232 in United States. It's a mechanism to avoid the imports that were going to United before invaded Europe because they're closer of the American market. So it's another thing. And carbon border tax is a totally different story. It is not clear it's going to be applied or it's going to be compared by per country or per producer. I think it should be per country. And then they will compare the level of emissions and that will be compared with the best-in-class in Europe, and the difference will be applied in a kind of not tax, it's a compensation. But this is like 3 different effects. Not related between them.

We have no further questions. Thank you.

Okay. Thank you very much. There is no further questions from the website. Well, just you already answered regarding the buyback. There is no more comments in this sense. So this is all from our side. Thank you very much for your questions and joining us. And we hope that you have a very good day and to see you on the next webcast on the third day of November. Have a good summer break. Thank you very much.