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

Hello, everyone and welcome to the Acerinox First Quarter 202 Results Presentation. My name is Victoria, and I will be coordinating your call today. [Operator Instructions] I'll now pass over to your host, Carlos Lora-Tamayo, Head of Investor Relations at Acerinox to begin. Please go ahead.

Good morning, everybody, and welcome to the Acerinox Earnings Conference Call for the first quarter 2022. Our CFO, Miguel Ferrandis will host the call and will be accompanied as in other occasions by the Investor Relations team. He will start with a small presentation and then continue with the Q&A session. Before getting started, let me remember you that this conference call is being broadcast on our website at acerinox.com. Please Miguel, go ahead.

Thank you, Carlos and Maria, and thank you all of you attending this webcast presentation and interested in our results and our comments. Our figures have been released early this morning, I understand most of you already have gone through the detailed explanations we have made on the results. You can understand that we are proud, we are proud of the figures that we are presenting today. As we always say, we like to be predictable and we like to avoid surprises. So, we try to also give you proper guidelines and forecast for your models and your assumption for the business on these basis when we finish and we presented figures for the fourth quarter, we anticipated that we -- the first quarter was surely going to be higher, this has been the case. But when I say previously that we are proud -- our proudness in this regard is not because of the relevant figures appearing, but the proudness is because the environment in which such figures have been obtained. So this has not been a plain sailing by far, in this quarter we have seen unpredicted circumstances that obviously were not expected and that we have facing for years or decades. We are facing and obviously in relevance, first of all, we must mention the invasion of Ukraine, the war in Northern, Eastern Europe, which obviously -- it's been a human tragedy, but a part of the human tragedy is having its consequences all over the world, it's creating a worrying inflation, it's creating disruptions in the supply chain, it's affected and obviously the uncertainties on the market. These disruptions affect our customers, obviously affect also the producers. In addition, we have seen the consequences that this has created in the raw materials market, with collapse of the London Metal Exchange and then most of March the nickel was out of being listed and this create further uncertainties or difficulties. So at the end, what we must clearly have stated is that, the results are remarkable, but what's more remarkable is achieving these result, which in such an environment. So at the end, it's a big demonstration of quick -- of our quick reaction and a quick adapt and this is consequently one of the things we are most honored today to discuss and we shall talk in detail about that. But prior to enter in the further slides also, as a statement, we want to give a clear position that we have stopped our sales on Russia and at the end we are obviously following the rules, we are restricting all the sanctions and sanction list. Fortunately, in terms of the raw materials, which is one of the areas more affected by the Russian invasion of Ukraine. In this regard, as always has been uncertainty, you know that we are very well diversified raw materials procurement, this has been always our case. Unfortunately this creates that we are not dependent on any -- of any specific single or country. In regard of the raw materials, you know that we are diversified on our companies. We are obviously buying nickel, but we are buying stainless steel scrap and most of our nickel comes from stainless steel scrap. We also buy ferronickel, so we buy from different countries and different players. So, at the end, this advantage and this strategic advantage that we have for having our sole diversified raw materials creates that we are not single as opposed to any specific player. And in addition, with a good relation we have with several suppliers, we made up very, very quick reaction and consequently in the second quarter, we have been obviously ordering of terms of the material that was already contracted, but we have made all the work in order that we shall not be depending on Russian raw materials as early as in third quarter. So, in the second quarter, we have -- we are actually actively working on that and this still minor raw material, actually we are receiving that comes from Russia, which have not be depending there from the third quarter. So in this also, we have had very, very quick reaction. After stopping our sales in Russia, the only activity we are having in Russia is purely, as a consequence of our sustainable commitments and we shall go to the slides in Page #4 -- sorry, Page #3 of the sustainability, but for us also sustainability means loyalty with our workers. We have a few workers in Russia, which have been the one taking care of all our sales and presence in that market, we have stopped activity there. But our sustainability for us means also to be loyal with our people and consequently we are just covering more or less the salaries of these employees, even though we are not having a commercial presence there. This is the only reason why still we appear with an open office in Russia, but with the only basis of at least taking care of our people and their families, which obviously are also big themes of the situation. Going ahead with other issues of the sustainability, we can see some of the KPIs that appears in the Page #3, in this regard, we are making an effort and probably you have appreciated it in the last quarters and especially we released 2 months ago our sustainability report in which we have clear valuation, analysis, clear guidelines, the KPIs we have, we are extremely active on that. And this is not a new rule, what probably is new in our case is that we are more transparent on making it public and more transparent in providing all the data. For us sustainability is not a fashion or is not a window dressing, is not a dig in the box that actually is politically correct, we always have been committed to that. What we are now is making a big effort due to understand where we are, all our achievements, all our improvements and all our ambitious targets. In this regard you can appreciate, in this Page #3, especially in reduction of waste, our main reduction of water, I think we have remarkable figures. In terms of waste reduction, you can see that a 100% of most of our spares or consumable or components are fully recycled and we are talking about grinders, oil pipers, acids, electrodes, plastic and so on. So, we are absolutely committed to this target of 90% validation of the waste for the coming years and we are on that line and we really have achieved a big part of that. In terms of water reduction also, you can appreciate year-on-year strong reduction of 7%. We are also very, very ambitious in terms of the emissions and you can see, for example, since being the baseline the year 2015, as I say, we are here working on that. So this has not just started in year 2020. But if we take the -- as baseline 2015, we have reduced the GHG emission 11%. In this regard, as always is our case, we have a big control of the controllable which is more under our control, clearly the Scope 1, which is our own emissions within that we are clear leaders in the industry, where still we cannot be the clear leaders is in the Scope #2, because at the end in certain of our yearly fees, we are depending from -- at certain level from coal in the new supply and so on. We are in the way, we shall be there, but at least where we have full control of the situation, we are leaders in the industry. If this is also something to remark, as well as the safety performance in which when we compare with the previous year one you can see that the reduction we are having in lost-time injury frequency rate is as good as a 6%. In addition to these rate, we also want to measure that also we feel proud that very quick and efficient reaction and all the prevention measures that we have been putting on place with our -- COVID committee have made that we have been minimizing the effects of the COVID during this quarter. Unfortunately the last -- the last figure we are obtaining in the reports from one of our subsidiaries, we are now in this time in a much more strong and comfortable position with very, very few cases of people facing COVID and in our organization. Having said that, let's move a bit to explain some of the figure or at least to mention some of the figures in Page #4. It appears, first of all that it's a new record profit, at the end you can realize that all the figures are amazing. We prefer to talk about record and to talk about peak because this is not a peak. I think we obtain a new record, but several athletes. We are in position for being even improving our best achievements and obtain additional records. We shall talk later on that -- this we still consider that we still have room to improve in Russia also in the coming quarter. But at the end we have obtained historical new record, for example, in net profit. And also we are having almost our record in terms of EBITDA, this EBITDA of EUR 422 million is the second best in our history, just following the second quarter 2006, so more or less. It was a record established 15, 16 years ago, but in by far a much more different environment. So in this regard at that time there were several and substantial tailwind as you may recall, remember of those of you who which were covering the market at that time. This was the strong driver by this -- for this performance and in this case, this by far has not been the case. So, it's clear that this quarter has been a real challenging one as we expressed in the slide. It has not been days of wine and roses by far. We have been facing a lot of turbulence as we mentioned, but even though that as can be appreciated in the Page #4 of the results comments that we made this morning. I think you can see 7 consecutive quarters improving. And as I said before, still we have room for further improving, any case let's keep on mind and as we put it in for the future, this stairway is to heaven at the end obviously. Sooner than later, we must assume that some correction must take place, but we must be prepared obviously for driving the business in that correction for assuring that at the end the margins shall be there and the consistency on the profit making shall be remarkable for this year that everything is actually on hands to consider that we shall obtain annual record. So this is what I wanted most to mention, the EBITDA margin on a Group basis is 18% and we think as a global overall margin for the business this is something to be especially proud about. Apart of the issues of which I'll talk later about that, but the part of the issues are, we have mentioned in mostly, what are these consequences? You must understand that we have several handicaps in our case for -- in terms of cost structure, which are not obviously controllable as, mostly which is regarding the energy and energy prices that we are facing, not only in Europe, but especially in Spain, which is crazy as we've all seen. And also we have been facing circumstances such as the transport strike that stopped Spain most during March. But even though that, we are presenting these figures and obtaining this global figures for the Group. As I said, it's no doubt, it's a good demonstration of how we have been facing these. We provide some comments of all the issues that have been taking place in the quarter. Yes, these circumstances and you see the red marks, obviously the energy prices skyrocketing in Spain, the transportation that we already have mentioned, the collapse in the London Metal Exchange that we already have mentioned. This could have been a perfect storm if not were by the quick reaction, the adoption of certain measures and how we have been sailing on these travel waters. We are always focusing on the risk of the business and at the end we have experience enough and we have handled crisis enough for taking the proper reactions. One-off of those, I think we must be more proud is how we have been reacting in the crisis in the nickel market. So at the end, it's clear that consequences of the war and especially the relevant position of the Russian nickel in the world create increase on our rally in the nickel prices, reaching some level in which start to appear margin calls and several of the players who are active on the London Metal Exchange had to face margin calls and with a huge cash deposit. And as has been appearing in the media, some of the world leading nickel suppliers was especially forced to make enormous amounts of deposit and this created further speculation and consequently the nickel had to be suspended at the London Metal Exchange and has been suspended most of March. This is something unique, nobody could expect that. And at the end, obviously the market was extremely tension at that time. We are very, very proud of how we react very, very quickly to that. We stopped taking orders in the whole organization, there was a big uncertainty of where the nickel was going to be and what could be the consequences. So, we didn't to take any order or committed to any specific customers. What we did is keeping on running our plans with orders we only -- we have on hand and we're committed to supply our customers on time at the contracted price agreed, but we did not take any orders. And then what we started is negotiation with also the raw material supplier. At that time nobody was knowing what was to happen, but also we realized that these uncertainties, we were in strong enough position in order to offer to pay on cash basis, the reception of raw materials as much as these raw material where at the reference prices of the previous month. So at the end, for a shutdown of our raw material supplier, that guidance that we were in position of paying in cash, created certain comfort and obviously for us assure the position of keeping our plants running with raw materials, but at the reference prices of the prior months and this create a stability for our suppliers, obviously comfort for us and this went so well that probably we were the first player in the stainless world, making the proper announcements that at the end we were accepting orders again. And we offered also and we established, we start doing it in America due to our leading position in the American market that we didn't want any of our customers to be victim of all that big speculation and big rally in nickel prices. So consequently, we excluded from the formula of extra alloys, those crazy days of the nickel market. We -- the appreciation for the market and the quick reaction of our customers probably created that this measure also was followed very, very closely later on in Europe. And at the end, what we are also proud is that this is a circumstance that was also not providing pain for our stable customers at the end will recover back to normality. So this is something that at the end was as I say, a quick and successful strategy reaction, we were in position of doing that. We have a strong financial position as you know, but it had a consequence and obviously the consequence is mostly that we were paying cash, I'm not respecting the 60 or 90 days. And as a consequence of that, the net working capital in this quarter which by itself obviously should be increasing substantially, but in addition has been reinforced by our voluntary decision for assuring us the proper supply and proper prices and this is, as I say, something that has been extremely successful and has been a strong contributor for our proper results in the quarter, probably also for the results on the coming quarter. But as the only point, we must keep on mind is that it is having its effect on the rise in net working capital as you may have seen in the figures. So this is more or less what I wanted to explain regarding this issue. In addition, we have had a strike in Spain, as we mentioned, but if we go now to talk a bit about markets, first of all, our main market in America, still the market is performing very, very strong. The flag products, apparent demand increased, in the last figure we have available January and February 17%. So the market, the North American market is strong, we are seeing sectors that are keeping its strength and we are seeing, for example, all the food industry, all the catering and restoration is there. We are seeing sectors like, for example, the oil and gas that is coming back. We are seeing the sectors in the heavy transport is still we are extremely active. So most of the sectors in America still are keeping strength. We are still in the recovery from the COVID corrections. And in addition, our comfort in our main market is that still we have not seen the definition of the Biden plan, which for infrastructure that shall be probably defined and they define in the coming months. So our visibility in America is, which is our main market, at the end is strong and is solid and is robust at least for the coming, not only months, but quarters. So this is a strong comfort for ourselves. The inventories in America, obviously in terms of retention with high levels of activity, the rotation is still below normal, in pure tonnage the inventories may appear to be normalized, still in rotation corresponding to this activity, still the figure is relatively low, so this is also a comfortable fact. There has been some increases in imports and this is already there. We have seen Taiwan imports in the market, but fortunately no distortioning and especially no distortioning our position in the States. We are obviously having a good portfolio in the states. We supply mostly the master distributors, they buy American in most of our customers is a real issue and consequently we are the favorite suppliers. So in this regard, we have been able to consolidate to price increases and we made the announcement and they were respected for the market. So still our position on our margins in America are very, very healthy and we think that are sustainable and are going to be sustained for the coming months. In the case of Europe, also the apparent demand figures provided by Eurofer shows certain increase 15%, in this apparent demand increase obviously what we must keep in mind is that, having strong imports increase mostly in January and we have seen certain increase in the third part of the year. Obviously, there may be some reasons for that. In principle we understand that it has been also some of our supply and some movement of material mostly from China, Indonesia to Europe. Keeping on mind not only the price gap, but also our timing in which -- with certain of the still COVID combination taking place in China is still with the effect of the Olympic Games and the tracks that must appear in terms of environmental respect and so on. This also create certain movement of material which is there. Also we have the effect of Chinese New Year. So a combination of fact, probably create a temporary movement of material to Europe. We appreciate most of it came in or the big increase came in January. Imports have even reached levels of 33% or 34%. We understand that this is probably as a consequence of these circumstances that are there, but still we must keep an eye on the level of imports. As a consequence of this increase in imports, the inventories now appear to be normalized. We were mentioning up in previous quarters still were below normal and now appear to be normalized. But this is the main effect in Europe, the prices have been high. Unfortunately, this has allowed ourselves to rally not been affected in our margins by the strong increase in the -- mostly in the energy that has been affecting ourselves and consequently, we have been able to keep proper margins in Europe. In the case of the rest of the world, well, this is -- the tensions have been coming as a consequence of these over supply coming from China and Indonesia. The tension is also coming from the London Metal Exchange, even though these distortions, we are seeing some pressure on prices in -- mostly in Asia, but we think that also probably maybe, maybe reduced or at least reduce the gap compare with European prices in the coming months and let's see also what can be expected as we talk later of the prices in, mostly in Europe. In Americas as we say, we have visibility, let's say, more or less what may occur with the prices in Europe. In regarding to Acerinox highlight, you have the figures in production, we're more or less are running in equivalent levels and production of last year. We are talking about holding other effect on all the other disruptions that we have seen experiencing. And at the end also a strong fact of also for our comfort is that, the integration of VDM, how is performing our high performance alloys and the synergies we are updating there, we shall disclose it later. And even though in these circumstances, we have been fulfilling our commitments in terms of capital allocation. So we have finished the purchase of the 4% stock that we announced and then we have like more or less invested EUR 115 million in the share buyback during this first quarter. And even though that and even though of the circumstances, at the end our net debt remains relatively stable with such -- just an increase of EUR 50 million. I think we have -- we have mentioned most of the issues, but yes going ahead to the purest stainless sector, I just want to remark from this EUR 422 million you can appreciate the EBITDA has been EUR 398 million which is a margin of 20%. So, the average margin of the Group in this quarter in the stainless has been 20%. I think this is also absolutely remarkable figure, we are obtaining double-digit EBITDA everywhere. The only place where we may be not so or we're going to be more in the edge definitely is at the USA and Europe, but because of the energy, just for you to understand the extra cost that energy is having in the first quarter this year in the stainless. Compared with the expensive energy we have in the first quarter last year, which already was expensive at that time. But this year, this has been an extra cost of EUR 70 million from which EUR 58 million is the extra cost we are paying in this quarter for energy compared with the one we paid in the first quarter last year. This is absolutely crazy and consequently we think that this is something that probably should be improving in the coming quarters. We are now -- it appears in the media, it appears also in Spain, which is the most crazy energy market in prices. In Europe, it appears to be a solution, unfortunately the situation is going to be relaxed, so obviously this is part of our control. But we consider that this is -- at this time in terms of our figures and our profitability and of course probably still a more dark cloud we have in our scope. We are having, as I say, double digit EBITDA and being the averaged 20%, you can imagine where we are. You can see and you can appreciate in the Group, we try always to avoid these difficulties on adjusted EBITDA, real EBITDA adjusted and real EBITDA in our case are similar, because there are no extraordinary issues and at the end. Normally we only reflect adjustments, we're on a specific front for example was all the cost related to the VDM acquisition, but in general more or less as you can appreciate, we keep it just for demonstrate that there are no adjustments in our margins and consequently it's very, very easy to understand the profitability and where the profitability comes from. We have obtained this in the stainless with an operating cash flow of EUR 144 million which is also remarkable, despite EUR 249 million investment in net working capital for accompanying the good market momentum, as we are mentioning in our sector, the restriction of cash because of working capital always comes in the good market terms. In addition, we have reinforced this, this year we have mentioned in the raw material procurement, especially in the case of the high performance alloys that we are now moving on the Page #7. The recovery continues in the high performance alloys and at the end, we have seen sectors, which are keeping a very, very strong performance, the oil and gas is back, the chemical industries also remains being extremely healthy. We have our order books now not only strong, but almost full and this allows also to be more selective in the margins and this shall be appreciated in the coming months. For us something also that it's relevant to remark in the case of high performance alloys is the consistency and this is something that we explained when we announced the deal. We -- our industry, the stainless is a cyclical industry, this is clear, we try that our performance is or managing the business is now cyclical, but we are exposed to certain cycles and one of the goals in moving forward to the high performance alloys is obtaining certain stability. So at the end this stability we are seeing there, is strong and consistent sector that provides stability to our more volatile nature of market in the stainless and this is something that is appreciated. We are having an EBITDA of EUR 24 million, most of you remember we always mention that we consider that normalized contribution of EBITDA of VDM should be in the range of in the mid '80s -- in the mid EUR 80 million, around EUR 7 million per month. Only in the first quarter we have obtained EUR 24 million, so this provides a clue that we are even better than that. But also we must keep in mind that for VDM also it has been a difficult period and especially in the case of VDM mostly by the energy prices in Germany, we must face that it's not so simple, obtain the double-digit margin EBITDA that we were mentioning. So, by far, we should be there if we're not by also rocketing prices that energy has experienced in Germany, we are following that. But given the circumstances you can realize that the contribution of EUR 24 million, yes, simply in a quarter is a proper clue of where we can be on the full-year basis, comparing with the EUR 10 million that we experienced in the first quarter were still the high performance alloys was more affected by the COVID. You can also appreciate what has been the quick reaction. Also when we explained the figures of VDM in the fourth quarter, we saw that the EUR 14 million that we achieved in the fourth quarter came as a consequence of a big home work being done for preparing the division for the coming quarters and the recovery of the market and we see some of the issues which already is being appreciated in this figure of the EUR 24 million. In regard of VDM, also to mention, obviously the dependence and in the net working capital and the dependence of the pure nickel has created that we have concentrating more of these raising in the net working capital is in our high performance alloy division. So they -- as a consequence of an investment in net working capital of EUR 96 million at the end we have experienced an operating cash flow of EUR 71 million. Also in regard of VDM, there is one issue to keep on mind and as we explained in the year-end results presentation, we raised a Group debt for the acquisition of VDM and this meant in March 2020, a increase in net financial debt of EUR 398 million. And as we explained on December, yes on the period March 2020 to December 2021, we generate a free cash flow after dividend of EUR 402 million. So what we consider is that, all the debt will rise for the acquisition of VDM probably has been neutralized with the cash flow that the Group obtained from March 2020 to December. And at the end as we like to see, even though it's not a very financial proper definition, but at the end this contribution that VDM provides to the Group now it's for free, because the bill of the acquisition has more or less properly paid up to now. This is also a strong fact of comfort and a demonstration of the value contribution and more or less in terms of our CapEx policy and on a strategic plan or the clear guidelines and clear targets we have for growing and growing, but in certain growth that provides consistent value for the Group. The synergies, the integration process continues fine. We achieved EUR 12 million synergies in 2021 and in the first quarter, we are ahead of what was expected with additional EUR 5 million synergies obtained, which is both more or less what could be the average for the whole year. So it's 29% of the total average prospect for the year. If we go to Page #8, we more or less want to remark also what is our policies and which is our strength in terms of the capital allocation and you can appreciate our 3 main areas of capital allocation. With EBITDA we have generated, we have more or less allocated that. First of all, it's clear that our business is a business to be reinvesting and we are intense in fixed assets and we must keep CapEx going on and the CapEx we have had in this quarter in organic growth inside our plants is -- as scheduled is EUR 22 million. This is obviously a clear necessities of the capital allocation in our business. Redistribution to shareholders is relevant and then we have in this first quarter, we have invested in our shareholders through the share buyback EUR 115 million, this is obviously something to remark. Our shareholder meetings in June share approved a dividend for the third quarter. So, more or less knowing our long-term record in dividends is not difficult to assume that in addition to this, it shall be coming EUR 135 million cash invested also under division to shareholders in the third quarter. So this year probably this allocation is going to be substantially relevant in dividend and in buyback. And in addition, we must have obviously the flexibility for accompanying the market cycles and the market terms for operating the best in each situation and as a consequence if this increase in EUR 345 million. We have debt absolutely well controlled as you know, extremely competitive. So our finance charge is low, but we have is a strong enough position in order to face whatever market terms and all the circumstances. And in this regard, this invest -- we prefer to talk about the invest in working capital has been not only for our company in the market and the total orders in the market and rallies in the raw materials, but especially we have reinforced in this quarter for assuring us supply of raw materials and supply at a proper price. And then if we go to, just to summarize on the conclusions in Page #9. You can see, first of all the -- no doubt then the strong performance of the Group in the quarter in very, very challenging conditions as we have mentioned, but we have obtained these extra costs, so I think we are in way of the most rating that we are in this sector the proper breach of travel orders. We have been in position of obtaining a -- definitely cash flow, obviously affected by the EUR 344 million investment in net working capital, but keep on mind that this is temporary. And at the end, as we announced in the year-end, we understand that having firing all cylinders all around the Group, we were not obtaining substantial distortions in net working capital and that the year should be a strong cash generating year. Obviously, circumstances in the first quarter have changed as much as we understand that is going to be temporary, the reverse of it may come in the second half of the year especially. Keeping on mind that still the increase in the raw material experience from March, at least May sorry, April and May should mean also to consider that still the net working capital may increase in the second quarter and we must be prepared for that. We understand that all these additional raw material that we are paying in cash, obviously shall, as a consequence being reversed and diluted in the second half of the year where shall be most of the strong cash generation then we shall make in this year 2022. Still the uncertainties remain on place are things that are out of our control, but at least in the part that we can see in energies, we think the basis are going to be much more rationale, in the raw materials also we hope so, which for us is a good point. So at the end, in a strong market momentum we prefer to keep the stability on the base prices and at the end not making and not selling expensive product because of the high raw materials involved on it. So and I've just mentioned in the extra alloys if come and if come after June or for the second semester, this should not be an issue as much as May, I know ourselves to consolidate levels of high price. Our order book remains strong, so the visibility is good. For the second quarter, we are -- as we say, we are very, very confident. For the third quarter, or at least, still not having visibility, but we see that the basis for the market, the basis for consumption still remains strong. So in this regard, a part of the disruption that may come in from other external facts, we think that still the market is expected to keep consistent roles and with a strong consumption. And then in this basis, as we have seen before the Q2 EBITDA, we expect it to be higher. How much higher? It's very difficult to predict and I think some -- this may be something to manage in the Q&A session, but we understand that. What we know up to now, it shall be higher, but then let's be prepared for what may occur for the second quarter, if the recommendations on prices and so on at any case is going to be higher and probably a new record. And we're definitely -- we can obviously says is that what we shall keep, these are very, very flexible policy of capital allocation, the driver in the first quarter has been the net working capital, maybe one the situation is probably more calm, we shall analyze what shall come later on, but it is something that probably should be decided for the second half of the year, still we have ideas on mind and you know and we are keeping an eye, we still have probably the willing of growth, but definitely we keep -- we must and not put nervous, not experience a mistake and that cyclical companies create in the good days and try to make irrational investments or relax and keeping absolutely control and discipline throughout the organization. This is our target and in this regard, I think that you can fully trust on us and we by far should not be breaking your expectations for the coming months. This was all from my side, so sorry, if I have taken more time than what probably you should have preferred, but there are several things that probably need to be accompanying, these numbers are not to be explained. So please go ahead to your questions and fortunately for your sharp questions, Carlos and Maria shall support me.

We'll now start the Q&A session. [Operator Instructions] And the first question comes from Francisco Riquel from Alantra.

The first one is about the imports from Asia into Europe. You can elaborate more, you mentioned that was mainly from China and in January, what I wonder if you're seeing any impact in terms of pricing during the second quarter and giving up the price gap between Europe and Asia is -- has widened, if you are able to pass through the alloy surcharge mechanism to clients in the second quarter. And also in terms of market share dynamics, you mentioned import penetration 33%, 34% if you are giving up a volumes market share to the imports or not? And also related to this, I understand that South Africa is being included in the European safeguards now from May, what impact in volumes and market shares shall we expect also? And then the second question is about cost inflation in the second quarter versus the first quarter. You think that the first quarter has been the peak or if there is incremental cost inflation to come? And in this context, if there is a slight growth in EBITDA or supplies to margins in the second quarter or not?

Thank you, Franco. I shall go to some of your points and probably Carlos also shall explain some of the others. Well, in regarding of, first of all, the inflation at the end most of it, we know that we were selling in a inflationary time, but the main driver in our case, obviously is energy. In energy, we are a bit more relaxed for the coming quarters. Our energy concern mostly is Spain, as I mentioned before. Always energy has been our more uncompetitive fact in Spain and as a consequence, this goes probably to your second question, this is one of the reasons why we -- our strategy also put on value of the possibility of investment, investing in South Africa for not being so dependent on the energy costs in Spain. So and we are going back 20 years, so you understand that our strategy is long-term oriented, any case, sorry, let's go first for energy and then we touch the goal of South Africa. This has been our -- always complain, but the complain we're now, our Energy was so high as being in the level of EUR 50 megawatt, then went up to levels of EUR 200 or EUR 220 megawatt and we reached greater levels at mid-March in which more or less, it was a level of EUR 450 megawatt. And at that time is when we decided, yes, to stop production at Algeciras that took around 3 days. So it was a big enterprise, but we clearly cannot be efficient and running -- running the basis and our melting shop paying such incredible and crazy prices. Now the situation has rationalized, so it went back more or less to the border of the EUR 200 as appears in the media. And what appears in the press and we all are -- all we are reading is, especially with this more or less position that we are facing in Portugal and Spain in the union is that it appears to be more in the media an issue that it can be at a level sort of EUR 160. If this is the case, combination of this with the PPA that we already have, there is not so many PPA available in Spain, I have not been, but we have been doing our best and we are moving forward. So, with this level by far we can sail and accept that. We hope that it shall rationalize even more, but this is something that may come in the coming months and by far this shall be advantageous. I think this is the -- this is the fact which is the big distortion or it affects especially Spain, in a minor extent Germany, but this is something that should improve our margins on an equal-to-equal basis. And then, let's say, more or less if this allows us also to have and to keep this consistent margins that we are having in Acerinox Europe. We -- as we mentioned and you follow us, Franco, we mentioned that the big contribution or the big change in the contribution shall be appreciated in the first quarter in a sort of, it has been there, because in the previous year still we have some term contrast taking on the COVID crisis. But now the competitiveness of Acerinox Europe appear strongly and if we are in the edge of these 2 double-digit is because of energy. The energy is there and just comparing purely Acerinox Europe year-on-year, extra cost of EUR 55 million is a lot of our EBITDA. So, because of that still we have a big room to improve in our margin. So the actual momentum is good, but in the actual momentum we have certain handicaps and this is one of it. So we think on this basis on a equal-to-equal prices, obviously our costs should be improving as discussed. And when we start to see and this is also some of the issues you were mentioning some possibility of pressure on prices coming or coming from the third quarter, at least the relevance of this impact in the euro per ton is so big in Acerinox Europe doesn't even -- if the base prices start to correct a bit keeping on mind that we are in historical levels of prices, this should not be an issue if it's accompanied by rationalization of energy. So this is something that we keep on mind and because of that we still feel comfortable. If we go to South Africa, as I anticipate, for us, South Africa, in terms of the Group strategy had certain advantages, one on the energy because we always understood energy in Spain is a strong headache and consequently for keeping our market share in Europe and for a combined European market and the rhythm of the European market, instead of investing and further melting in Spain, the Group decided to invest in some capabilities in South Africa and we are bringing some of them from South Africa. South Africa is a strong market by itself and we are doing good business there, you are -- you know we are doing good business in the stainless, we are doing good also in the mild steel and some material also comes to Europe because part of our strategy is that we supply Europe from these 2 melting shops. We are by far not concerned about this Southwest because with the level of tonnage we are bringing, we are -- we can be absolutely under the quarter, so this for us is not going to be an issue. So with South Africa, we feel comfortable. In addition, obviously now this is the -- the trade cases are taking it to about everywhere. We shall not be affected. We are seeing also then maybe in Brazil also it appears now a strong reduction. Brazil always has been a market absolutely overprotected as much as it appear to be a more open market. We also may have possibilities even to grow and to further. So in terms of the trade cases, one of the advantages of being so well diversified geographically is that we have the flexibility to accompany the market whenever it grows and reacts. Maybe for the imports, Carlos?

Yes and as you mentioned Franco, growing significantly in the first quarter, but it's true that they are not disturbing the market, no. We are seeing imports coming from China, from Indonesia, from Taiwan picking up and maybe highlight China now that as you may know in the previous years they were exporting about 2,000 tons, 3,000 tons per month and in the first quarter, they increased more than 20,000 tons to 25,000 tons per month. I think we can introduce a bit in the initial remarks, but we think that this is due to the -- on one hand, the Winter Olympic Games, the restrictions of CO2 emissions, then the Chinese New Year, the COVID shutdowns, all of this creates that the China export a significant amount of material in Q1. We understand that Chinese government still is a focus in the capital market and this policy will remain and that the situation will stabilize moving forward. So it is not a -- we should keep an eye on, obviously, but hopefully will slow down. The price gap is huge between Europe and Asia, but this should take into account also all the logistic issue, not the freight cost that is very high now, about USD500 to ship from Asia to Europe, the 25% tariff. So we are not seeing yet a pressure in terms of prices. No, we did that in that in Q2, we will be -- we are able to translate to make the pass through of the all the surcharge to the customer with no problem. So, initially there is no disruption in terms of prices either.

Our next question is from Ioannis Masvoulas from Morgan Stanley.

My first question is around energy costs in Spain. You mentioned the potential cap that Spain is looking to introduce, I guess, in natural gas, and that translates to electricity costs. So my question here is, does this benefit only your electricity costs or potentially your direct gas purchases? And could you perhaps quantify the earnings benefit that you expect for this year from this policy? And also, do you need to repay part of all of this benefit over time? And I'll stop here.

We think that it's going to be benefiting both. So no doubt at the end as one is linked to the other, the rationalization should come on both of it. So this -- we are still in Spain, as we mentioned before, we still have strong depending on the spot prices, even though we are involved in some of the platforms that get in the market for some of the electro intensive, but still the availability of the PPAs has not been huge in Spain. And we -- I think at the year-end, we have [ 17% ]. Now it has been increased more. Now we are seeing also more possibilities, and we are involved in several discussions to participate in more projects, but it is something that could take a bit more time. So we are not so concerned for the 2023 and so on. Still probably the main turbulences are coming in the -- still in the coming months. And consequently, we must face that. Our comfort is that it appears that this 160 that is coming by the government. So we obviously cannot quantify. It hasn't been precise yet. But more or less, everything appears that instead of being more or less suffering these levels in the 200 or 220, we appear to have some gap in the level of 160. And keep in mind that we -- with 220, 230, we were able to -- and we still were running the plant and accepting it and absorbing that cost in our margins. The only time where we decided that we prefer just to stop production is when we reach the level of 500 or 400, which is absolutely crazy. So fortunately, this is not the case. I think the worst is already over. The rhythm in which this shall be more rationalizing and this is something to be determined. But the situation has been so -- on a national basis has been so dramatic that finally, the government and the European Union has taken a role on putting some more rationalization on this, and this is a good fact for us.

Great. And maybe one more question on the shareholder returns. You exceeded expectations on earnings generation and deleveraging. Would you consider launching another tranche of the buyback during the year? Or is it still a December 2022 decision? And is there another 4% remaining under the current authorization?

Well, the authorization that was done for the 4%, this is to be -- this already has been used. And consequently, the shareholder meeting that is taking place mid-June shall be the one deciding the confirmation of that share. So the program is almost done. And consequently, those shares shall be fully amortized from next month. Having said that, still, we are not going in a further decision. And at the end, it's -- as we have been mentioning, it's a fact of flexibility. Keep in mind that the first quarter has been huge in terms of profitability, but not in terms of cash. So consequently, our clear target was net working capital. We understand that it's going to be more relaxation in the net working capital. And at the end, it shall be decided. So we always mentioned that we have always in mind the possibility of growth. And I think the growth is a strategic position for the group, and this is something we must keep on mind. When shall be that growth coming? This is obviously pending to be determined. So in terms of capital allocation, probably the -- what must be on the balance is the necessities and the distraction of the market that meant an increase in working capital, combined with the opportunities and possibilities of making certain investments of -- or acquisitions, it appears the proper group at a proper price. And also in addition, the return to shareholders still is not in the table, where to or when to proceed with a pending 4%. And this is something that shall be decided, but there still is no agenda for when -- that. Our times more -- are driven more on a prudent basis in terms of adopting to the market conditions still is not decided.

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

The first question is just on inventory gains. So can you maybe just give us an idea of how much of earnings this quarter was driven by high inventory revaluation? And then just maybe to follow up with that capital allocation question. I mean you did EUR 422 million, you're trading at sort of below 3x EV EBITDA. I mean is it possible to make an acquisition at such a low price relative to your own shares? I mean how do you weigh up looking at your low valuation on your stock and compare that to possible acquisitions in the market? Or is it a case of diversifying and maybe trying to get a better cost position away from Spanish energy pressures?

Well, first of all, regarding inventory gains, this is not simple even to determine for us because at the end, there are a lot of costs involved in our inventory material and in our working process and in our finished goods. And this is related not only to nickel, it's on to other raw materials. It's also to some of the other consumables and spur, which have been strong inflationary. So it's very, very difficult to precise what comes from where and what should we contemplate it. And when we analyze the cost involved in our material pure nickel, the nickel-related inventory gains or all the raw materials, the inflationary effect of the electricity and some others. So we could spend hours even with all our calls responsible discussing how to analyze and presenting that and it's not an easy solution. What is clear is that, obviously, our inventory has been revaluated. This is clear. The revaluation is not coming as a huge increase of tonnages. We are keeping the tonnages under control. This is very important because as you know, and we always have mentioned it, what we must be is prepared in absolute discipline all around the group that if any time the market corrects or the raw material corrects, it should be also a sure temporary effect because at the end, we shall be absolutely optimized in terms of our inventories. We are trading these days with 40% level of inventory that the one we were having in tons in the previous year of 2006 when the market or when the nickel corrected at that time. Our strategy of having big network distribution created a big impact on our profitability. So we have made a lot of efforts in the last decade in order for supplying just in time and from the plants and not being exposed by our corrections. Consequently, the inventory gain shall be a momentum, it's not a driver of this profitability, as you can imagine. And the inventory loss, if it comes -- when it comes, it should also be a temporary. This is one of the reasons why we are saying that the profitability in the second quarter should be slightly better because we must keep an eye that there is no certainty of what may come mostly in Europe from the third quarter. For us, the actual situation is not the best because at the end, expensive nickel creates that it's expensive extra alloys. And consequently, what we prefer is the stainless be competitive with a strong base price and not so relevant extra alloys. And as much as the part of the extra alloys rationalize, it may have a temporary effect of 1 month, but shall be more simple to consolidate proper level of base prices. So keeping this in mind, has it been inventory gains in the quarter, yes, by far. For us, it's almost impossible even to determine how to match because of all the inflationary elements that are taking place there. It has been a proper momentum. We started the year in $19,000 per ton of the nickel. It went up at the end of March, I think it was in $31,000. So obviously, but the average of the quarter is around $24,000, $25,000. So part of it has been, obviously, as a consequence of the temporary effect of the nickel rally. But as I said, this is temporary. Our material is average on cost. And consequently, when things are increasing the extra alloys that month, we have improved in profitability. And then if it's a drop, maybe we have some correction. What's relevant is that we are not depending on the P&L for the revaluation or we are not exposed to a big devaluation. So it has been, by far, it has been taking place this year because the raw materials have been moving up, but it's very, very difficult to quantify. What is relevant is that, it shall not be either the driver of the correction when it comes back, when it comes down. And this is something that we are keeping an eye, obviously, and having a very, very controlled level of inventories, not only in the distribution, but also in our plants. This is the one that should determine the profitability of the second quarter. If it's needed to make some adjustments, maybe it's going to be slightly better. If the adjustments in due that were needed, maybe it shall be better. But any case, have the comfort that this is not a peak and the profits on the second quarter shall be higher.

And then just acquisitions versus share buybacks when you're trading at -- I mean, I get you to 2x EBITDA.

Yes. In our case, it's clear that our sector and the multiples that our sector is trading in the stock, and this is not only us. This is a sector in Europe are absolutely not aligned with the momentum of the market is passing and we must -- we made a remark that this is especially affecting Europe and not so affecting America. So we understand that the evaluation of American players in both steel, stainless and alloys are trading at other multiples and there has been a strong management or correction to the European structure. This is something that we must keep an eye on, and we think that any time should be starting to normalize. So it's not rational to see at the levels that stainless steel players, for example, we are all on the 3 of us we are trading in these days. Our market cap in use of the profitability that more or less we are having at this time. This is something that any time probably should rationalize a bit more as we are seeing that in America has not been the same case. On this basis, for us, we understand clearly that our investments in our equity as we have been doing with the buyback is adequate, but having also the flexibility for having a proper maneuver in whatever acquisition could take place if they come. And also, if there is distortions, which still we have macro uncertainties in these days in Europe, and we must have the flexibility for being properly selling in whatever circumstances. So because of that, there is not a, let's say, necessity of taking quick decision on this basis. We have almost finished the 4% buyback program. We are just amortizing, and we shall decide now what for the second semester. But what is clear is that the decisions on these areas are to take not to be adopted with certain count, I'm not in a hurry. So we are not desperate for any -- making any great acquisition as we are not desperate for making any specific announcements. But at the end, would have its consequences. We understand that the cash flow generation in the second semester shall be strong. And in that time, we shall be in a position to be more precise on when to allocate it. But still it's a bit soon, and still there are uncertainties in the market.

Our next question comes from Carsten Riek from Credit Suisse.

Quite a few questions have been already answered. But I'm coming back to the inventory-related gains. Miguel, can you remind me whether you do a hedging policy or not, but because in the past, you didn't do any hedging on the back of alloy -- or alloy price changes? Did that change? And if not, is it fair to assume that your inventory gains should actually be higher than that of your peers in the current quarter?

Let us start with the stateless. In the stainless, we are not making hedging. And unfortunately, as much as Europe adopted, fortunately, again, the price structure divided in base price plus extra alloys, with that being working and respected in Europe, we have a natural hedging. And with that, we feel very, very comfortable. So not in the states, not in Europe. Obviously, our money market is needed to make some type of hedging coverage. As a consequence of that, I do not know what are the others, how the others facing the raw materials. In our case, we have -- as we are not making hedging in the nickel for the stainless. We have not been affected by all the disruptions in development and that has changed, so we were not needed. There were no margin call. We didn't need to make any type of special deposit or we have not experienced any loss because of that. So on that basis of this natural hedging that we are having at the end, what we have is the revaluation of the momentary effect of the revaluation with the nickel goes up. And then maybe when there is a correction of the nickel, we have also that momentary effect. As much as our order book is normally related to 2 months, this is something that can be accepted. And even in the downturn, it can be diluted. So in this basis, with this, we feel very, very comfortable. And in this regard, I definitely state that we are not making actually hedging on stainless. We were analyzing possibilities, especially when the disruption of the market with the Asian imports made a Tsunami, and Europe was managed at effective transaction prices. But fortunately, this is not a huge necessity in this day. So we -- this is clear for the stainless. The basis of the high performance alloys are different than the order book for the high-performance alloy. The participation in certain projects created that the strategy needs to be covered on the long-term strategy, assuming 5 to 6 months for our order books and assuring proper price to all the places we participate, move at that in the high-performance alloys, we are more active on the hedging. And this is the case. As a consequence of that, you can appreciate that the stability in the high-performance alloys is always higher because the turbulences affect more. But this is the only part in our group that we make up to now that we make the nickel hedging. It always has been developed by VDM and I think very, very satisfactory. So this for us is a strong fact of comfort. But as I am saying, our order book in VDM takes for more than 5 to 6 months and sometimes even for more than a year. So we are participating in projects and the maturity of our production for supplying that material is so longer that in that case, it takes sense. So this is the only part in which we have been obviously active in the hedging, and we have had no distortions in the last months.

Perfect. That explains. Actually, one other question I had on the high-performance alloys. One, probably on the outlook because clearly, the market gets concerned about the second half and potential disruptions in demand. My question is on this one on the outlook. Are you currently concerned that the high stainless steel prices could discourage stainless steel demand, especially in Europe? Could we see actually a higher demand for ferritic rates based on the relatively higher nickel price? And how would you react to that kind of market condition?

Well, as we said, for us, the business scenario is not this one in which we are supplying an expensive product. So the prices in Europe are in historical dip. And for us, the driving of the business is not assuming that we must be trading at levels of EUR 1,800 of base price and more than EUR 3,000 in the extra alloys because at the end, this dilutes the competitive advantage of the stainless. And consequently, on this basis, we are not so concerned that apparently, for example, the nickel now is trading below the 30s. Now it's in the mid-20s. This means that April, May, still we are seeing increase in the extra alloys, probably in June, we shall see certain correction in the extra alloys. And for us, this is good because with the correction in the extra alloys is much more simple to keep reasonable level of base prices. We do not need that these base prices remain being EUR 1,700 in Europe because this is on a long-term run, it's not sustainable. And at the end, as Carlos has mentioned already, there has been imports. But when we compare the price gap between Europe and Asia, the price gap has been almost reaching EUR 2,000. And this has created this attraction at the end of the level of imports, but we must keep in mind that with the duties plus the transport cost in Europe, at the end, there is a barrier of around EUR 1,200, EUR 1,300 per ton. This is a strong barrier. We do not need to be in a price gap with Asia in the levels of EUR 2,000 because at the end, probably even though with the barriers, the attraction for putting raw material in Europe shall be there. So in our case, a correction coming in the nickel or rationalization of nickel is not concerning us. And whenever it comes, it shall be well received. And as I said before, we do not need these levels of EUR 1,700 or EUR 1,800 in base price. So we can recuperate healthy levels of base prices in Europe. In our case, as much as the energy appears also to be rationalizing. It can be even better the cost saving, that could be some adjustments in the base price, and we must face that. We are prudent for whatever maybe the circumstances on the summer that normally in Europe is a slowdown, but we don't see a big change in the fundamental of the demand. And still, we are not seeing that it is moving on to ferritic. Still, the market is trying to normalize after the COVID, and we think that still there is consistency. We are not scared about that.

Our next question comes from Tristan Gresser at BNP Paribas.

My question, if I may just follow up a bit on Carsten's question about demand. If we look at demand on consumer goods, more specifically, you refer for instance, just got their 2022 demand forecast for domestic appliances by 3% last week and is now expecting minus 3% growth. So I understand that Q2 orders book, and you have good visibility. But when you look at the H2 outlook, is it more a sense that those forecasts that seems a bit bearish or not necessarily accurate with what you're starting to see for Q3? Or does it just simply mean that you just don't have visibility moving forward?

Well, thanks for the question, Tristan. At the end of the day, we have visibility for the second quarter. And the second quarter remains good. The final -- the end demand is in a good shape. And still we do not have visibility for the third quarter. This doesn't mean that we are going to see as we done but we prefer not to give you to make comment with the visibility that we have that this is the second quarter of the year. And in this sense, we are confident that the situation will remain strong for the next quarter.

America, obviously, when 50% of our sales comes from America and America remains being strong. And in America, we have more visibility. So we are not concerned about the third quarter by far in America. Well, we are as prudent in Europe. But at the end, it's difficult to make, as Carlos mentioned, it's difficult to make or to take a position today, not only us, but also for the market because at the end still, obviously, there is -- we are seeing high prices. We have seen this big increase in imports in January, and this already took place, but this is -- we don't think this should be a structural and especially not structural if the price gap is more controlled. So what we need to is to be prepared. We are not seeing a strong correction on prices, but we are seeing is that the prices at these levels on a long-term run are unsustainable. And as we are saying, it shall be depending on the nickel. If the nickel remains so strong, the pressure shall be on the base prices. If the nickel relaxes, it shall be more simple to keep the strong base prices, which for us is more into our margins. And -- but I think this is a general uncertainty that is in the market for us and from our customers. And consequently, this balance between the imports entry accepting the duty with the market demand still is there. And let's say, obviously, how much time it takes. And also with a war on Europe that still is uncertainty on how much would it take? So what appeared that was going to be a very, very quick war has proven not to be. And obviously, the basis shall be different if we assume that it is going to take for long or not. So there are more uncertainties in view of that uncertainties in Europe, we prefer to be prudent. We are not afraid, we are not concerned of a strong correction, but we prefer to be prudent and assuming that some price tensions may take place. But as much as this is more placed on Europe and not in America, we think that still we are very, very consistent on our figures for the third quarter. But not visibility yet in Europe for that.

Okay. That's clear and helpful. Second question, can you just confirm then, has there been any hedging losses in Q1? And also with the guidance for slightly higher EBITDA, could you give us maybe a bit more color on the moving pieces there, notably on shipments? And maybe an update on the strike? Has there been any impact of this strike potentially to shipments into Q2? And also in the guidance, I understand that it's difficult to pinpoint inventory gains for Q1. But am I correct to assume that in your guidance, you do not forecast any increase of inventory gain and maybe there are some inventory losses you foresee there?

Okay. In the -- I can confirm that has not been any type of hedging loss in the Q1. Not at all. So get absolutely certain on that. The slightly higher EBITDA, what means, it means it's going to be higher. Why we say slightly because still there are facts not known. And consequently, what we know is we have a big comfort for April and May. In June, we see that the extra probably is going to be lower. This should create obviously some tension in the market definitely with customers and just trying to predict what could be the trend and especially the trend for the summer season and for the summer slowdown. As a consequence of that, maybe we need to make some adjustments at that time. Today, we should not be needing to make any inventory adjustment. This is today. Maybe at the end of June, on a prudent basis for the seasonal slowdown because of the nickel weakening, it takes place. If it comes, it's not going to be huge. But at the end, this obviously should be appearing in June. Because of that, we prefer just to say slightly because we need to make some inventory adjustment. In that case, we shall be -- it's very viable. If it's not needed, we must -- it should not be slightly. But at the end, as I said before, this is not a stairway to heaven. So the prices are so high and our willing is still is to remain competitive. Correction in prices is not a drama if we keep our discipline in stocks, it shall be a temporary effect on some stock devaluation but shall not be huge. And as much as shall be mainly allocated in Europe in our case shall be compensated, but the strength remaining in the American market. In regard to the shipments, the shipments affected -- sorry, the strike affected deliveries, obviously, in March in Spain, and we are trying, yes, more or less to neutralize it with higher deliveries than in April and now for May, those are stabilized. So this effect shall be corrected. There are always effect. At the end, we are -- as we normally say, we are well diversified for not being so effective for any specific issue. The transport strike affect us in Spain in March, but now we are normalized. As for example, in the case of South Africa, it has been several problems also in the port with some [ innovation ] and all the storms taking place and consequently, maybe in April, the deliveries of Columbus are affected, but we hope that this shall be recovered in May. So when you are not dependent on a single location, you can react and at the end, these distortions are just a temporary effect that can be -- can normalize after it. So in this regard, for Spain, we are not concerned. And within now, the situation is normalized. We adjusted some slow figure of our production because of the 3 days closure of the melting shop and then later on because of the strike also we have an additional 2 more days. But now that's it. And with the actual level of energies, we can proceed. We are not satisfied, but we don't expect further distortions in the Spanish plant in the second quarter.

Our next question comes from Luke Nelson at JPMorgan.

Two from my side. If I can just firstly focus on the working capital build. Can you maybe just talk to how much volume that inventory build underpins given your comments that you've opportunistically gone out and paid cash for inventories. Can you maybe just talk through how far that extends to and whether that's into Q3, Q4? And then related to that question, with regards to your stainless steel sales, are you going to pass on spot alloy surcharges based on spot pricing? Or will you pass on through the raw material costs at the price that you purchased in February or whenever you went out and acquired it? I'm just trying to assess to what extent you can potentially sort of offer better terms and whether that could potentially translate into market share gains, particularly in Europe? That's my first question.

Okay. Well, in regarding of the -- in regarding of the working capital, as I said, more or less from this increase in working capital, I think from this big figures and just for you to understand for this EUR 345 million, maybe around EUR 80 million has been this kind of material that has been paid in cash and consequently has been increasing inventories now neutralized by increasing suppliers. So maybe if not have been because of that, the increase in working capital should be a figure more in range of around EUR 250 million, something like that. This is more or less big figures, but just for your model to understand how much has it been. In principle, we consider that it shall not be more of these effects for the second semester. And maybe obviously, part of this policy, which was started on March shall be also affecting the second quarter. But as I say, affecting as a delivered strategy of having the proper material. Keep in mind that we are, as I said before, we are now negotiating with different suppliers for the property diversification of raw materials. So this is taking place, obviously in the discussion with each of the suppliers. Now we must establish the basis, the basis normally are referred -- the London Metal Exchange prices in case of the nickel, in case of the scrap. And consequently, the reference is always coming from our London Metal Exchange and always then considering premiums above the prices of the London Metal Exchange. So still the most reliable way for taking place, where is the extra alloys come from is the London Metal Exchange. In our case, when I read, I think this weekend, some of the specialist reports in the market, CRU or Metal Bulletin. I don't remember, one of them was mentioning that there was a bit uncertainty in Europe because the formulas of the extra alloys were different in Europe for each of the players, which at the end, for us, is an absolutely logic scenario because all of us, we have our own formula for trying to obtain an extra alloys from the nickel price evolution. And the March has been so crazy that each of us decided to take some policy of how many days should be considered. And that sorry, I mentioned previously that we were the first giving some guidance of the market that was going to be our extra alloys and which were the day that we were escalating from the formula in order for not affecting our customers. And because of that, probably, we see that each of us is facing differently. In our case, always a reference, which at the end also is the best one for the customers and for the customers assumptions for the future is understanding that the reference should be they will meet public, it's public data, and then they can make their own predictions of what can be expected. So we don't think we are going to change that.

Okay. Just from my understanding. So you went out and paid cash for some for around $80 million or euros worth of inventories in working capital, which I think you mentioned was at the month prior to the nickel spike. So it's probably below $20,000 a ton nickel price. So that's been capitalized in your inventories. You -- it doesn't sound like there's been some inventory revaluation effects sort of here and there, but it doesn't sound like it is significantly sort of an effect, but maybe correct me if I'm wrong there and understanding. So I'm just thinking in terms of the P&L and the cash flow into Q2 and Q3 that you will unwind that working -- the inventories that would capitalized at a pretty low nickel price, but you will sell -- you pass on an alloy surcharge at spot nickel logs high $20,000, low $30,000 a ton. Is that how we should be thinking about it? Or -- so that would imply that there's pretty strong cash generation and margin gains to come.

More or less, at the end, I follow your analysis. Keep in mind that this has been taking place in March. What we prefer is to anticipate that payment. And a normal -- in a normalized scenario, this should -- this material should be -- should have been paid 90 days later. So maybe end of June or starting of the third quarter. And consequently, if the issues should have been stopping there, at the end, this should have been this extra increase in the net working capital for the second quarter and maybe neutralized at the end of the third quarter. But as much as in April, we are also have done something equivalent. Maybe it take a bit longer and shall have an effect in the third quarter. So I still consider that in the second quarter, in addition to the nickel average moving up April and May, probably in the second quarter, still we must weight some increase in net working capital and the whole dilution of it shall be for the third and fourth quarter, because at the end, that cash out should not be taking place. And consequently, we think the situation shall be normalized. So we understand that the first semester, we are providing figures of increase in working capital. In this first semester, probably after May, there shall be some inventory gains because the nickel is going up. But normally, as normal occurs, our second semester, shall be our strong cash flow generator. And all the effects also reinforced by this fact that we have mentioned of the prompt payment shall be in addition to the strong cash in that is expected for the second semester.

Okay. That's clear. And sorry, one final question on May. Just given the well-publicized troubles from the Southeast Asian stainless peer during the quarter and the impact, obviously, was nickel. Are you seeing any changes in their behavior? Just I suppose you have pretty good visibility given the relationship with them at Bahru. I'd just be interested if at all, those the financial impact has affected their how they frame volumes over value or anything like that? Or do you expect any changes going forward?

Well, not on all, we have a specific nature of products in Bahru, that is the one we have chosen for Bahru running profitable. Fortunately, we do not have such a big aggressive competition in these markets, because it's not more commoditized market that is coming from other players. So we are keeping our margins in Bahru. We are having there, we are keeping the double-digit EBITDA in Bahru. And at the end, the momentum there is good. So we understand that there is some -- it has been -- these are supplier we've mentioned moving mostly to Europe. Also we appreciate having increase in the States coming from day one, but they wound up having coming to Europe from probably was this momentum occurred in June by the circumstance taking place in China. And in addition, in anticipation also for the Chinese New Year and also attracted by the big gap of prices, so probably this was the situation. A part of this on the niche products we are having in Bahru, we are keeping our order book and it appears to be consistent and we are also keeping the margins and even though the increase in raw materials, the effective transaction prices are accepting that. So, Bahru now is providing a stable contribution and we don't expect it to be lower. So, but as I say, we are not in a massive presence in all the markets in Asia, we are focusing on the nature of products where we can keep that margins.

Our next question comes from Krishan Agarwal from Citibank.

Most of them have been taken. One last question I have is on your taxes in the quarter. I can see the cash tax is very low at around EUR 2 million -- at around EUR 8 million outflow versus more significant amount like EUR 60 million, EUR 70 million you had in the last quarter. Is there anything which is keeping this shortfall in the quarter on the cash taxes and do you see the cash taxes ramping up in the next quarter and going forward?

No. Yes, it's an issue, we pay the taxes and paying off when we -- when we talk about taxes in the cash flow, obviously, it's more or less a effect so we are having of interim taxes payment and so on, and then the calendar referring to its tax authorities has its own energy and normally there is a higher -- this is a higher tax payment and consequently a higher cash out in the second semester, which is the time in which more or less they have been officially approved and decided the results for the previous year. So this is the basis in the chart what appear is other minor effects and because of that, it appear a bit really close figures. But as I say, this is purely the cash out according to the calendar that we are having in the main jurisdictions. The part -- we are happy to pay taxes, when we are profitable and as much as we have been profitable everywhere, we understand that average these 23% to 25% of taxes shall be paid on a worldwide basis this time in the Group. So in terms of the effect on cash, it shall be depending on calendar established by every tax authorities in each of the countries.

Okay. Understand. And then the CapEx spending in this quarter is looking a little light at EUR 22 million. Do you see another year of under EUR 100 million CapEx or CapEx still no catch up later in the quarter?

Obviously, in the cash flow, the CapEx is pure effective payment done to the supplier of the machinery. So, it's purely a temporary. So we still keep our targets for the year, which is going to be EUR 140 million to EUR 150 million and that is purely a temporary issue. So, it's not so -- it's not something that we provision to be more or less on a constant monthly basis and consequently it's pure timing effect, they shall be higher in the coming -- it shall be higher in the coming months. So we normally always have a distortion among the cash out for paying the CapEx and the increase in assets we have in the accounting as a consequence of receiving the invoices of the equipment we are incorporating, but this is purely a temporary issue.

Our next question comes from Robert Jackson at Santander.

The first question is regarding Columbus. Is Columbus performing better versus Spain? And also and then secondly, considering that the exposure, Columbus exposure to the carbon steel production, is the order book as strong as the stainless steel for the coming months? That's the first question.

Columbus is not affected by the energy cost in Spain, fortunately for them and as we say this has a big relevance in the date. So at the end the margin -- Columbus has 3 profitable division. At this time, the stainless steel in South Africa, which is robust, the mild steel which also remains stable and robust and also the part of the exports on the stainless steel, and at the end, consequently the 3 main markets of Columbus are doing well. In addition, the energy prices, obviously it's not irrational as it is on Spain. So, in this regard, at this time, you put everything in the equation, you understand that Columbus is -- once you take that 20% average for the Group, when I say that they ones facing the energy was probably in the edge of the double-digit, you got to understand that the rest of the Group shall be above. You know, Robert that we prefer not to disclose figures by country, but more or less your analysis is fair enough, and you can understand the picture.

What about the updated order book for carbon steel, bearing in mind that, it is looking weaker for the coming months in terms of guidance from yourself or others?

The niche of mild steel where Columbus is in South Africa, especially for water pipes and so on is very, very stable. So in this regard the mild steel Columbus produce is only for local market and specific for that niche of markets where there is no competition. So, consequently this is not affected by the activities of Eurofer. So this is the nature of product where Columbus is. We are not exporting mild steel from Columbus, it's not our wallet, it's not our sector, we are just keeping that niche, that sector and for local market.

Okay. Second question regarding Bahru, bearing in mind that Bahru's strategy is price over volume and considering the prices in Asia have suffered significantly, has Bahru seen any -- has been impacted by volumes versus the previous quarters?

We are keeping -- we are satisfied by running Bahru with proper margins, but with more or less a stability in the volumes. As I said before, there is some niche of product in which we can be healthy profitable in Bahru and we are there. So, we prefer not to be aggressively competing with commoditized product coming from other sources. And at the end, we are not running full, but we are running Bahru with a level of price and margins that model we feel very, very, very comfortable. So, we are adjusting that for assuring that the material we have is more or less keeping that margins. We have increased the volumes on Eurofer -- the actual circumstances compared with 2021, but keeping that rationale of our target, there is not running full the plant, but is taking advantage of specific nature of product with a proper margin, and with more a stable demand. And I think in that regard, you know Bahru for the year was a headache in the Group and nowadays we have driven the design properly and we are very comfortable on that, with that driven the production.

My third question is related to NAS. In terms of the improvement in volumes in the first quarter, has there been any significant improvement or increase because of the gaining market share, thanks to allocating to exit, is that -- and you started to see that impact in results or is that yet to come in in the coming quarters?

More than market share, because at the end you know we are running full in Americas since time ago, more than getting market share what we are is in position of taking the best margins achievable and be selective on the margins and be selective on the customers and be selective on the specific distributors. And at the end, for us, we have a leading market position in America, this is clear, it's not so simple to gain market share, but what we can now is be absolutely much more selective on the order taking in terms of margin. And this is appreciated in the margin we are having in this space. So more than market share is full, being fully selective on the margin of the order we are getting. But we try and confirm that today more than 50% of the melting hub that is produced in the States is coming from our plant from North American states.

Our final question comes from Bastian Synagowitz at Deutsche Bank.

And just a very quick last question from my end please. Miguel, VDM performed very strongly and seem to be upbeat on margins. It is a business which is obviously more exposed to project and as the order book grows, that would usually mean that the effect of better pricing power is still ahead of us is probably the stainless business where we are somewhere nearing the margin peak. Do you still see scope to push higher on the EBITDA run rates was the EUR 24 million, which you just delivered?

In general, the market, as you are saying, Bastian, the market is doing great. There are sectors that are coming back. So our order book now is full and we are also selective from margin, so in VDM we were able to keep the plant running at certain type of the COVID crisis, but with lower margin products and this now is starting to be appreciated. So that you say is right and it's fair. But keep on mind that the order book for VDM is long, so that is 6, 7 months. So, this has nothing to provide big distortions on our partners in the following quarter. So we set trend, but the trend is positive and the trends of margins on efficiency is going up in VDM, this is absolutely fair.

Okay. Perfect. And then, just last one, I guess from your commentary, I also ensure that there is no supply chain stress in that business for Nickel, Chrome or the other specialty metals, which you're using?

No, not at all. Not at all. We have been running, we have been running the plant full and have seen no disruptions.

At this time, there are no further questions and I would like to pass back over to Carlos for any final remarks.

Okay. Thank you very much. We have 2 questions from the web, but as the call is running a bit long, we will contact you later, if you don't mind. Okay, so thank you very much for joining us to this call and hope to see you in the next report release note, that will be on July 29th. Have a nice day, thank you very much.

Thank you.

Thank you everybody so much for joining today's call. You may now disconnect your lines.