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

Good morning, everybody, and welcome to this Presentation for the Fourth Quarter and Full Year Results of Acerinox. Another record year for the company, the second year in a row. My name is Carlos Lora-Tamayo and I am the Chief Investor Relation and Communication Officer of the Group. Today, the results will be presented by our CEO, Bernardo Velazquez; our COO, Hans Helmrich; and our CFO, Miguel Ferrandis. For those of you who are here in the room, after the presentation, there is a small gift, a plant that comes from the orchard of A LA PAR's Foundation. Acerinox has had an agreement over the past 2 years with this foundation in order to help people with this ability to have same opportunities in our society. We hope you like it. Before getting started, let me remember you that this conference call is being broadcast on our website acerinox.com. With any further comments, I would like to give the floor to our CEO. Please, Bernardo, go ahead.

Thank you, Carlos. Good morning, everybody. We are here very proud to present what we think are the best results in the history of Acerinox, was the best in turnover, best in EBITDA. And if it is not the best in net profit, it is because we always put our traditional prudence above the success of a new record year and we decided to make an impairment in our investment in Malaysia. But we have been taking advantage of a great situation that we have a lift in the raw material business started in Q4 2020 and lasted until Q2 2022. A good part of the cycle that this time was not neutralized by the overcapacity, we used to say that it's coming especially from China and Indonesia. And that is because the supply chain was totally empty at the time after all the disruptions in the supply chains, all the breakdowns in the economies because of the COVID and also because the cost and availability of ocean freights and [ predefined ] measures as well. So in this situation, there was a feeling in the market of lack of enough supply, which is not real. And all the distributors in the business tried to build up a strong leader of stocks. So the situation at the end was a very good cycle that lasted until the stock levels were more or less at the normal level around the world. And second, when the new situation of the new sentiment of the economy that rumors about recession in the second half of the year or rumors about the Central Bank's measures to stop [ inflation ] or this inflation gave this new sentiment to the market to be prudent and reduce or control the stock levels. And that would have happened around May, June last year. And that was something that was predicted in our budgets, are predicted in our numbers for the year. So there's 2 very different parts. The first half was a super record and the second half that we tried to control the stocking period based on the experience that we have learned during the year, especially in 2007, when there was a similar cycle, and we didn't want to leave this excess of optimism, and we tried to control our products and our inventories and reduce the slowdown. And of course, we have 3 different parts in the world in the business. And every day, are more different that is United States, Europe and rest of the world, especially Asia. Here in this slide, we are presenting 6 important topics of our situation. The first 3 are 3 messages that we think that will improve our business in the coming years and the last 3 are 3 messages remarking our strategy. I think that we have to consider that in the next future, the supply chain is not going to be the same. All the disruptions and things that happened in the traditional commercial flows are changing because of trade measures, but also because everybody, all the purchasing managers prefer to diversify the sources of supply because you cannot trust only in a supplier that is too far away from your factory, especially if they are in the Far East or in China. So this will bring some more material back to Europe. Imports will be less attractive, and we think that it is not the end of the globalization process. But we are living a kind of regionalization or diversification in this global economy. And that will improve the consumption in our main markets because it's not only that our traditional customers are we think that they will buy more from the local suppliers, but also that if that happened in the rest of the industry, in the rest of the economy, more industries will come back to Europe and United States, and that will increase the consumption of stainless steel. And of course, secular economy [indiscernible] and ESG matters that are also changing and contributing for a more regional market, especially because we have a differentiation compared with other producers because of our products, our way of production process. And because Scope 3, the emissions of the vessels, the emissions in ordering of the raw materials and emissions in the way to Europe will increase or will make this material less attractive for companies that want to fulfill the ESG requirements. Point #4 is important because if we are getting these results, it's not only because of the good situation of the market because prices were good, but not the best in our history. And production was not the best in our history, but all the cost-cutting exercises, all the efficiency and programs that we have been applying in the last years are making us more competitive. I'm speaking about the Excellence 360 and this kind of programs that are making us more competitive and our margins are higher than ever. And this is a success of the people of Acerinox. So they have been working very hard. And I think I have to thank all the Acerinox team for this special effort. Of course, we all say I'm proud to speak about the health of the company and the strong balance sheet. Miguel will depend on this. And another point that I think we are doing well in the last year is the capital allocation. The balance between our debt, our shareholders' remuneration and our CapEx that we're trying to find good opportunities. And in this case, we have founded it in the United States again. So some numbers for the year, record sales, EUR 8.7 billion, is 30% more than last year. That was not a recurring sales, but another good year. We have a new record in EBITDA, plus 29% compared to last year because a good cash flow generation, very good productivity, very good [ ROCE ] and added value, giving added value to our products, succeeding in the integration of VDM during the first year inside the Acerinox Group have been able to reach a new production record and a new EBITDA record. It's good because when we presented VDM, we spoke about the synergies beyond the synergies, something that was trying to explain how VDM will help Acerinox Group to enter in new customers, to enter in new niches of the market and to enter high added value products. And this is what we are doing today. And only 3 years, we have integrated 120 new customers in the Group due to this integration and due to the widest portfolio of products that we are offering in the world market. I already spoke about the excellence in our operations, about the excellence in capital allocation, and we are proud to say that the new investment, the EUR 244 million CapEx in the United States, it's something very special, is state of the art, It's also the results of a very hard work and also an effect of the digitalization. We are increasing our capacity in the melting shop and in the hot mill is because we are applying digital tools to increase our productivity, and that will give us an extra capacity of around 15%, 20%, that will give us room to put another controlling [indiscernible] in the plant. So of course, we are increasing our shareholders' returns. We will propose to the shareholder meeting to increase to EUR 0.6 per share, which is a 20% more than the traditional EUR 0.5. I'm proud to speak about our ESG targets, especially about the Platinum award that we got in Ecovadis, something remarkable and the 28% reduction in safety performance. But to speak about the circular economy and ESG, I will give the floor to our COO.

Thank you, Bernardo. Good morning, everyone. Acerinox continues to be a strong contributor to the circular economy in everything we do. As you remember, we had set 6 sustainability targets for 2030, connected with our 360 positive impact plan that you all know. In 2022, many of our KPIs have been affected by our reduced production. Regarding our impact in the circular economy and our sustainable products, we have managed to [ valorize ] more than 79% of the waste we generate in all our operations. We continue to support the fight against climate change through our reduction in greenhouse gases in all our operations, reduction of water consumption with a more efficient energy consumption in all our processes also focus for our factories. This last indicator is the one that has been impacted the most when we talk about the reduction in our operations and production in 2022, as Bernardo mentioned. But we remain committed to achieve and, in some cases, overachieve our 2030 targets that we have set for the company. Thanks to the effort of our teams and suppliers, Ecovadis has recognized us with the 2022 Platinum award, as was mentioned before. Regarding our team's culture and diversity and safety, our teams globally have done an outstanding job in 2022 by reducing by 28% our lost time incident rate, our safety indicator. And we all know that safety remains our #1 priority in what we do in the company. In regards to diversity, we are promoting diversity in the broader sense of the world across all the world, and we consider Acerinox probably the most diverse company in the industry as per today. If we move to how was the year 2022? It was a complex year all in all. We had tailwinds in the first half of the year and supported by a very positive behavior of the market. The second half of the year continued with an acceptable consumer activity, but affected by the high inventory levels that our customers and the distribution had in all the markets. not to forget the very difficult year from an operations perspective. We had flooding [indiscernible] in South Africa, strikes in Spain, supply chain disruptions and many other things happening in all the markets. By region, our main market, as you know, is North America. The [indiscernible] consumer market remained strong through the first half of the year. And in many more of the sectors that we supply, the activity was stable and also the prices in the market. In the case of Europe, the prime demand was in line with the 2021. Inventories were high, as we know, and the year ended up with the lowest level of imports that we had in the year that we'll talk in the Q4 details. But evidently, the biggest impact that we had in operations in Europe was connected to the energy cost, both electricity and gas connected to the war in Ukraine, that was affecting all Europe. The rest of the world was mainly affected by the lockdown in China and the fact that China didn't recover from that lockdown as expected and had a weaker demand through the year that affected the local market in Asia, but as well as the rest of the world. On another hand, our high-performance alloys division had a very strong market through the year and the order book was very strong as well.

Thank you, Hans. The title of the slide, as you can appreciate, these record results in a challenging year. Hans has talked about the challenges. Fortunately, my part should be the records, which is absolutely pleasant. The records in year 2022 appear to be like sports scorecards with certain records, we must achieve in most of the magnitude, historical records, especially in those related to finance. So we are going to go through most of them. First of all, even though the melting production was reduced, we realized the figure of sales achieved in 2022. We are talking about almost EUR 8.7 billion. This is a sales figure that the end creates certain [ vertigo ], [ 80,700 ] it's a magic figure, probably it's the same vertigo we can compare with Tenzing or Hillary when reaching the Everest which almost is that attitude, 8,800. We are in the middle of K2 and in the middle of Everest. But no doubt, it's a magic figure, and it's a magic figure for us. We keep going down and we realized an EBITDA figure of EUR 1.3 billion. Those of you who attended this presentation last year may keep in mind how proud we are and especially managers of our generation always have their reference figure and the magic figure of the magic EBITDA achieved in 2006. At that time, the company was leaded by Mr. Victoriano Munoz. We are proud that today, he is among us attending this presentation and always has been the reference figure that we thought that was unbeatable. Last year, we were able to beat it slightly. So that record figure of EUR 958 million last year, we obtained EUR 989 million. But what is absolutely remarkable is that just 12 months, we have overpassed and beat in a 29% the magic figure obtained last year. So we now realize a new reference, which is this magic figure EBITDA of EUR 1,276 million. We then go down through the P&L, and we enter in the EBIT figures. We shall talk later on. Obviously, the EBIT figure is affected by some strong impairment we have done in Bahru that we shall talk later in other slide. But in any case, what is also remarkable in this record scorecard is that we have been also recording EBIT with and without the handicap. The handicap can be considered in this case, that is the impairment of Bahru, EUR 204 million that we have made at the year-end. Even though obviously, even though after the handicap, we have been with this EUR 876 million of EBITDA report, we have been in record. Obviously, if we're not the case, we should have even been above the EUR 1 billion. So this is also something to clearly put on value as well as the result before taxes and minorities. When you analyze the EBIT figure of EUR 876 million and you go to the result before taxes of EUR 831 million, you realize that at the end, interest and finance expenses is not a headache in this company. At the end it's very, very close, the figure before taxes than the EBIT figure, we are not the player reporting a lower debt in this business. But by far, we are the one experiencing less finance charge, which also is a good demonstration of the health of our financial structure. In addition, the figure of result after taxes and minorities has not been record, just slightly below the one of the previous year. We shall keep this as a reference. And also, I want to remark the figure of the net financial debt, which is EUR 440 million. We need to go back until 2002 for finding such a low level of debt. And the comparison of 2002, we must put in context that was the time in which Acerinox Group conveyed from being a fully integrated plant to being 3 fully integrated plants. In year 2002, we integrate NAS with a melting shop and also we acquired Columbus Stainless. So we have gone to levels of debt running 3 plants running 3 working capitals, running CapEx for keeping 3 plants at the state of the art. And at the end, we are back to that levels and the figures of debt. I think that also this is something to keep in mind. And at the end, all these records have been achieved even though being as prudent as we always are. You know that we are aggressive commercially, we are aggressive industrially, but we are very, very conservative financially. And at the year-end, we shall explain later on, we have made inventory adjustments due to the high uncertainties and volatilities that are in our world, and we have made inventories adjustments of EUR 98 million. In addition, there is an additional record, which is the shareholder return. We have distributed to our shareholders EUR 336 million in this year. This means 14% of market cap. This means a payout on this exceptional profit that we have had this year of a 60% payout ratio. I think this is something also that we must put on value.

If we go to the Q4 results, Evidently, the fourth quarter in our High Performance Alloy had a very strong performance despite the typical seasonability, we know that always the fourth quarter is affected by Christmas, Thanksgiving and all those activities in all the regions around the world. In our Stainless Steel division, we were affected by a strong destocking process by the distributors in all markets and will continue to be impacted by the inflation cost and the high inflation costs that we had around the world, mainly in Europe. The North American market saw a significant drop of more than 40% in the imports, which is good news for all of us. And the stock started to rebalance through the quarter. That means and it continues to do so in the first quarter, as we will talk later on about the projection for the first quarter. In Europe, the apparent demand decrease was weak through the quarter. Prices were impacted by the market conditions of that low demand. But on a positive note, imports dropped as well and more than 50% quarter-over-quarter, which, again, is good news for all of us when we talk about the market situation and coming material from outside of Europe. Miguel?

Yes. In these record results, at the end, we now give some details of the fourth quarter. This is a [ never boring ] sector. So we are presenting a record year. And at the end, we are also showing how has been the correction that we have experienced in the year-end. We must precise at that time that after 8 quarters of consecutive growth, the third and the fourth quarter of 2022, we have experienced a correction. And after these corrections and due to the circumstances that we have mentioned, we have obtained an EBITDA of EUR 90 million. If you go back to some years ago, you may remember in the years '19 and in the year '20, our quarterly EBITDA was very, very stable in the range of EUR 90 million. We have achieved EUR 90 million in this weak fourth quarter, but 2 facts. One, this is as a consequence of this inventory adjustment of EUR 98 million. And in addition to this, definitely we must keep in mind is that as we have stated in the outlook, and our CEO shall explain later on, we are already stating that this is going to be the low and consequently, we expect substantial higher profitability in the first quarter. So we have obtained the low correction of the cycle. The local ratio in this time is equivalent, which was the average EBITDA that we were experiencing 3 and 4 years ago. I think it's a good also demonstration of the increase in the efficiency achieved by the Group in the last years. So we have finally obtained these figures. The EBITDA has been affected by these circumstances, we shall comment them later on. But in addition, it's relevant also to precise how we handle this business. In the periods of the lower profitability, we have made a strong effort and strong discipline among the whole organization, and we have obtained a cash flow of EUR 517 million in the fourth quarter, low quarter of profit, extremely high cash flow making in the fourth quarter, driven by a working capital reduction of EUR 442 million. And this is what we have put in all our efforts in the fourth quarter. And this working capital reduction has been driven by a reduction in inventories in the fourth quarter of EUR 484 million. And at the end, this is something that we must put on value. We know our business. We understand our business when the profits come down when there are circumstances affecting the profitability, we put all our efforts then in creating cash and generating cash of the business. If we go and now we try to explain separately both the stainless steel division and the high-performance alloys. First of all, talking about the pure stainless steel has been also record, has been also record in all the magnitude. So the net sales purely of stainless of EUR 7.5 billion is a new record as the EBITDA on stainless of 1,151. So in the stainless world, those of you who follow the industry and follow all the other players, those results are the best in class. And when I talk about best-in-class, I mean best-in-class in absolute figures, but also best-in-class in margins. So in this regard, we think there are facts to keep in mind and feeling proud about as we are feeling. what we have experienced, obviously, negative part of the profitability has been affecting the fourth quarter and the full year. Because of that, you can see in the diagram that is more or less included in both because [indiscernible] big figures that have its relevance in the fourth quarter, obviously, but also in the year. Let's talk about them. There are 2 facts that have been registered at the year-end that have had a big impact. One is the inventory adjustment. In the case of the stainless steel, we have made an inventory adjustment of EUR 67 million. As Hans mentioned previously, our main market, you know that more than anything, we are North American, North American market is keeping a strong health. But we are seeing a strong weakness in the European market. And consequently, in the stainless mostly in Europe, we have considered that we should make this downward in inventory of EUR 67 million. Why? Because the prices in Europe still are well depressed. We have seen in the year 2022, the maximum base price has historically achieved and also the minimum in the second half of the year. Still, the prices are low. Still, the inventories are high. You normally keep in mind that the first quarter in the stainless always is a healthy period. We normally are running full. But this time, we are seeing that still the weakness remain in Europe, probably we shall need to wait until the second quarter for a normalization of activity. And consequently, there are strong reasons that justify that we have put our inventory in [indiscernible] value, and we have made such impairment on our inventories of EUR 67 million. This has been per one side. On the other side, at the end of the year, we have also reviewed our projections on Bahru Stainless. We normally talk a lot about Bahru Stainless. It's our re-roller in Malaysia. What have created for us to reviewing our production is obviously related to several facts. Still, the situation and the demand in Asia is weak. It has still been affected by several [ confinations ] and the policies taken mostly in China, at the same time that the players in the area were keeping high levels of production and a very, very massive putting on the market, mostly in China and Indonesia of additional productions. And consequently, there is a very, very strong aggressiveness in prices in the area. As a consequence of that, reviewing our projections for year '21, for year '22, we have been profitable in Bahru, we have been having positive EBITDA, but concentrating in the niche of products that made or us to be profitable. If we now understand on this basis that this may take for long, it is clear that we shall not be a possibility of running full the plants and just keeping such a low volume of production with the squeeze on margins that we may have, needing to buy locally semi-product for transforming in cold roll, it appeared that it was the most adequate to make a big exercise of prudency. And consequently, we have modified our projections for the next years. And as a consequence of that, we have done an impairment of Bahru of its assets of EUR 200 million. This has been done at the year-end. And as I say, it's mostly as a consequence of the uncertainties on the market, the squeezing margins and the assumptions that maybe we shall not be in position of running the plant full and just keeping part of its production capabilities. This has been affecting the stainless and another fact. When we move to high-performance alloys, which was a strong bet and our diversification that we entered in moving through the high-performance alloys in year 2020, we must be also extremely proud about the achievements that we have experienced in the alloys through our subsidiary VDM. It has been a record year. We have obtained record year in production, record year in sales with EUR 1.3 billion, but also a record year in EBITDA. You may remember when we explained the acquisition of VDM, we always stated the figure of 2019 has been the historical peak, was EUR 97 million. We always stated our figures and projections are not for keeping that as a reference. And we always thought that more or less the contribution we were waiting for VDM was around EUR 84 million, EUR 85 million per year. In the third year of VDM taking part of the Acerinox Group and with 2 years of COVID, we have been able to achieve this figure of EUR 125 million, which is absolutely remarkable for the contribution of the high-performance alloy division. In addition to this, in this very strong year of 2022, we have obtained more synergies than expected. We have more or less obtained 52% synergies than the one we were expected. We have achieved EUR 25 million synergies for the Group through the high-performance alloys. We have integrated 122 new customers. So we are in no doubt in VDM going above what we were expecting in the past. If we go then to the fourth quarter figure, also, we have made an exercise of prudency in the fourth quarter figure in terms of the net realizable value of our inventories. In the case of VDM, the circumstances are different than in the case of the stainless. The high-performance alloys is keeping a good track. Our order book is full. The market has recovered in most of this sector. You have all the explanations in the results presentation. This is clear. But in addition, there are several facts that may affect the cost structure of VDM coming on to the supply, the orders that actually are in place with the inventories that we have actually on stock for fulfilling that inventories. And consequently, with all the facts that were in the table, keep in mind that the nickel has gone up in the fourth quarter from levels of 20,000 from levels of 30,000. The energy also is still an uncertainty and VDM managed excellently well all the energy procurements for 2022 with some hedging contracts that they had in advance. So the gas and electricity have not been an issue or strong painful for 2022, but probably for 2023, it shall have those effects. And there are some additional extra costs that we have considered that putting on them, we should adjust the net realizable value. And as a consequence of that, in this record year, we have made another exercise of prudency. And we have made at the year-end, this inventory adjustments of EUR 31 million. And at the end, with this, we feel absolutely comfortable for the coming quarters in the high-performance alloys division. If we go to the slide showing the cash generation. It's also several facts to be proud about. In regard of the year, we are talking about the EBITDA figure. When we took the picture of the whole year, obviously, our business is absolutely dependent on the working capital. What we need to have is the strength enough for a company in a good market cycle, and then we have invested in working capital in this year for being in position for filling the market and keeping these results. And this has, on a yearly basis, meant an increase in working capital of EUR 479 million. At the end, this has been one of the main usages of our capital allocated in the year. We also must talk about taxes, and this is something to talk about. You see in the picture, EUR 243 million is taxes, financials and others. But most of it, financials, as we explained before, is not relevant in our case or financial expenses, but we have paid EUR 232 million of taxes in 2022. This has also been sustainable. At the end, being sustainable is that when we are having high profits, obviously, we are contributing in the communities where we are based. So at the end, part of the strong allocation of the cash generation in this year has been through taxes as a consequence of the huge profits that we have been achieving. In addition, we have increased again our CapEx. We are maintaining our policy of keeping robust CapEx for keeping our plants at the state of the art. And with this, we have generated free cash flow in the year of EUR 419 million. The next column is or the next bar is also absolutely remarkable, which is the distribution to shareholders through dividend and buyback. We have invested in our shareholders EUR 336 million in 2022. This is 2.3x what we made last year. And this, again, I insist the 14% of the market cap of the company and a payout of 60% in this year. So this is something also to put on value, has been also commented previously by Bernardo that we have announced to increase our dividend for the coming years. And in addition to this, obviously, still we have a space for reducing our net debt. We have some conversion differences. And at the end, this obviously is a consequence of our financial strategy. Our financial strategy means having a strong cash position in the states. And as a consequence of this, in a yearly view, the dollar has been appreciated. And consequently, this has also contributed partially to this final figure of a net debt decrease in this record year of EUR 138 million. Just going through the fourth quarter, we have talked about the strong cash generation that we have achieved, but I want to remark again, especially in the case of working capital, EUR 442 million, driven by a reduction in inventories of [indiscernible]. This is probably the most relevant issue to comment. At the end, has been a strong net debt decrease in the fourth quarter, quarter-after-quarter in the first 3 quarters of the year, we were increasing working capital and also the debit was obviously reflecting that. But in the fourth quarter, the exercise has meant this strong reduction. The figure which appears of conversion differences and other is EUR 117 million. This is not cash out. This is purely the effect that in the fourth quarter, a part of all this volatility we have seen in other components, we also have experienced the volatility of the dollar. Just in the fourth quarter, even though in the year, the dollar has appreciated compared with ending of 2021. But in the fourth quarter, dollar moved from levels of 0.97 to [ 1.06 ]. This with a strong cash we have in the States created that we have this accounting effect we're moving this to euro of EUR 117 million. But even though that the net debt figure that we are reporting has been reducing in the quarter EUR 323 million.

Just to finish with the presentation and enter in the Q&A. We are in a cyclical business. We are doing our best to reduce the size of the cycles by putting including the HPA division, that is also cyclical, but with a different cycle in the time. We are also trying to increase the average of the cycle, but still we are in a cyclical business. And what does it mean? Is that still, we haven't celebrated the good results of the year, and we are back again starting to manage the lowest part of the stocking period. And this is what we have seen in the second half of the year. It is, first of all, the stocking period started in July last year and is still there. Second, is that we are, as Miguel mentioned, we are conservative in our numbers, and we try to predict the bad situation of the destocking period, and we made the provisions and the impairment that we needed. 3, that we have a success story in with VDM that is contributing to 23% of the EBITDA in Q4, whereas as we are compensating the lower part of the stainless steel cycle that we are now, again, intensifying, we never stopped our efficiency programs, but we are intensifying these programs again. 5, that we keep a very good health in the company, so that gives us flexibility for the future. And also we can be safe in the worst scenarios that we don't expect, by the way, 6 is that we are keeping our fixed strategy is capital allocation, robust CapEx, shareholder remuneration, all with a healthy financial structure. And that situation has been or starting the downturn of the cycle, it's not that bad. I mean, say, we still keep a very good order book in HPA in the alloys division. I think we are very optimistic because there's a lot of projects coming in the business. We have a very strong order book. Our major market in the United States, and I think it's the place to be today. Now we are investing there at the right time. All the programs that they are developing now that will contribute to the consumption of stainless steel. American market, in general, is doing well. So we are very happy to be there. It was a great decision to enter the United States, and we are the market leader very clearly. And the situation, let us say, note that our EBITDA in quarter 1 is going to be clearly higher than in quarter 2. We never give the numbers on the fourth quarter. So, we never give numbers. We never make a forecast, but we can say that the situation is improving, starting to improve, that we understand that the stock level will come back to normal at the beginning of mid-Q2. So the situation is going to be good, and our Q1 is going to be clearly higher than Q4 last year. And that's all.

Thank you, Bernardo, Hans, and Miguel for the presentation. Let's move now to the Q&A session. We will take first your questions here in the room and then we will move for the conference call. Yes, please.

Francisco Riquel from Alantra. And first question is you can update on the destocking cycle. Previously, you were guiding for it to be completed in the first quarter, now extending it to the second quarter. So if you can comment on the level of stocks in the main markets, imports, how they started in '23, and supply/demand overall in general. And then in particular, also in the U.S. business, you have managed to preserve a good level of base prices during the downturn. So I wonder if you think that these good levels will be sustainable when the restocking starts. And then in Europe, I understand that most of the write-downs are allocated to the European division. So you would be suffering more than the European peers. If you can explain this gap if you are suffering more with the cost inflation, energy, and with the production cuts, if you are giving up some market share or not? And then I have a second question in terms of capital allocation for '23. Working capital, you have released almost half of what you had in the previous quarter. Do you believe that there is room to reverse more or given that you will have to restock again. So working capital CapEx, how much will you accommodate in total and for the U.S. investment that you have announced and your views about buybacks at this point of the year?

United States, the situation in United States is better than in the European market and the market is more, I have to say, organized. The expectations are better. The general consumption is strong. It's strong in construction. It's strong in the automotive industry again. So in general, consumption is good. So we are managing to keep the prices under control now that the imports are very low. And due to the uncertainty and to the necessity to drop stocks in the distributors, imports are not attractive for them. If they order some materials today, they will arrive in the United States in 5 months. So we are back in the situation of this lack of visibility or uncertainty that makes less attractive imports because of this. It's safer to buy in the United States. So it is probable that in the close future once the stocks enter in a normal level that our customers will start comparing prices in the United States with the rest of the world, but still as we can offer very short delivery times, we are reducing the risk in the supply. So most of them prefer to buy locally. And even if we have to make some price cuts, will not be dramatic, we think. In the case of Europe, yes, the situation is worse in Spain than in other areas. And this is only due to one thing that is the energy cost. I think that is affecting us more than to our competitors. It is difficult to speak about the electricity prices or gas prices because every country has their own systems. I think that we have to look for -- we have to insist that we need to have a European energy market. I think this is very important because for an European problem, that is the lack of gas or the energy prices, we are adopting local solutions, and this is very dangerous for Europe. I think that we need to do something and Spain especially has to do something to reduce the energy cost because all the electro and gas-intensive industry will have no future in this country. And this is very important. I think the government is aware of this, and they are working on this, but still the situation is worse in Spain than in other areas. In terms of market share, I think we -- all the European players, we are doing more or less the same with different solutions and with different results, but we are very responsible of taking care of our markets, and we are trying to reduce production at the level of the real consumption. I think this is what we are doing. And so more or less, we are doing all the same. So we are losing or we have lost market share last year compared to imports or imports have been winning this market share. I think they reached an average of 35% last year, above the traditional 25% that was in the previous year. So imports took advantage of this situation, but the European players more or less are the same. So our market share compared to our peers here is more or less the same. CapEx for next year, you have to think that we need CapEx to keep our factories updated. There's kind of maintenance CapEx and we have CapEx in ESG, we have CapEx in digitalization, and we have an investment in the United States that is USD 244 million. You know that the maturity time of our investments is normally between 3 and 4 years. So if you split the EUR 244 million in 4 years and you add it to a normal CapEx of the group, you will have the level of CapEx in 2023. Miguel, do you want to add something?

Yes. Regarding working capital, in principle, it should not be a big raise of working capital in the first quarter, let's say, more or less, which is the evolution is the market is as it is, we have seen, obviously, in January, which is the only one that we can talk. The figure of sales in America is going up, and this is reflecting, but still, we are -- as we are keeping low levels of production in other plants, we are obviously not having further consequences either in inventories or more or less in suppliers. So we don't expect that there shall be a big raise in working capital for the first quarter, not in Stainless, maybe partially in Alloys as much as keep its growth, but we don't think it shall be substantial. Regarding the buyback, this is something that still is not defined. What was agreed was to increase the dividend and having a flexible policy of [ deciding ] buyback when needed. We have achieved an 8% acquisition of our shares in the year 2022. With this, we have neutralized the 4 consecutive years of scrip that we had during the financial crisis in Europe. So up to now, what we have [indiscernible] specific plan. It shall depend on the profitability and the cash evolution of the company as well, obviously, on the share price of Acerinox. So we are having a flexible policy but not a clear commitment yet.

Any other questions here in the room?

Inigo Egusquiza from Kepler Cheuvreux. Sorry to come back on the CapEx, Bernard and Miguel. The normalized CapEx should be similar to the EUR 125 million that we have seen in 2022. And on top of that, we include the U.S. expansion plan, the EUR 244 million in 4 years. This is the first question. And the second question on Bahru. After the impairment you have done of more than EUR 200 million, could you please update us on the different alternatives, if there is something on the table? You mentioned during last year that you were analyzing different alternatives, potential joint venture, a full disposal? I don't know if you can update us.

Normal CapEx, in fairness, can be at the level of EUR 140 million per year, more or less. If you have something that will include in ESG because we have some CO2 savings programs and also more or less the EUR 60 million that we can put per year in North American Stainless will be at the level of EUR 200 million, EUR 220 million. That is a reasonable level. Regarding Bahru, of course, we are looking for all the alternatives. And we are still keeping this in mind, we are looking alternative, we are looking joint ventures, we are looking for solutions and the way to improve our business there, but there's nothing new.

I'm [ Gregor ] from Deutsche. Congratulations on the figures 2022 and on the many highlights you've presented. My question would be, what are the lessons learned from VDM acquisition? And where is your appetite in terms of inorganic growth? I know it's a tricky one, but if you can say anything.

No, it's a very good one. I mean, lessons learned, that is good that. There's a world outside the stainless steel world and we want to explore it. I think this is what we have learned. What happened is that there's not many companies the same like VDM. VDM has been perfect for us, it matches perfectly. It's all that we wanted, and we are now in 3 years it is a success story. It's a new record. Integration is going really well. They are part of the group, totally integrated today. And we are #1 in the HPA business in the world. So I think this is something unique and something very difficult to repeat. So, of course, we are looking for alternatives. In our financial structure, as we mentioned, we can be very flexible. So the debt is under control. Now we are at the level of 0.35x EBITDA. So this is very good. So that means that we can keep the level of CapEx, we can keep the level of debt, we can keep the level of shareholder return. And if we have an opportunity, we can go for it. So we are continually exploring, but it's difficult to find something that can be integrated as well as VDM in the group, but we will not forget it.

Any other question here? Okay. So let's move to the conference call, please.

[Operator Instructions] Our first question today comes from the line of Sandeep Peety from Morgan Stanley.

So I have a couple of questions. Firstly, can you help us understand different moving parts of 1Q guidance of clearly better versus 4Q levels of EUR 90 million with focus on expectations on inventory revaluations and volumes?

Okay. Well, we expressed clearly, clearly gave an indication that, by far, the worst is over. But the factors clearly also should be put in context that in this with several uncertainties still in the market, we are talking about geopolitical conflict in Europe, we are talking about energy, and so let's see when comes the normalization, the [ activation ] of the market. And consequently, if it's necessary to proceed again or not with inventory adjustments in March. So we must be prudent because still there is several uncertainties. So we are conservative. We are more than comfortable now with inventories adjustments, but then what may take place at the end of the quarter for the orders coming in the second quarter, it still is uncertain. So we prefer to talk about clearly better. We think it's a proper message. You appreciate the strong inventory adjustment we have done. So this provides us a strong comfort. What may be the considerations taken for the market for the second quarter still is unknown.

Sandeep, on the second part of your question regarding volumes, what we expect is that the Q1 will be slightly better than what we had in the Q4 in the stainless steel business. We see the markets in North America and Europe being positive versus what we had seen in the Q4.

Our next question today comes from the line of Krishan Agarwal from Citigroup.

Bernardo and Miguel, a very detailed presentation. If I can push a little bit more on the Q1, the guidance. So basic premise of the Q1 guidance is that the EUR 90 million EBITDA for Q4, add back EUR 98 million from the inventory, you reach EUR 190 million, and then a little bit of a volume increase, but then energy costs and the underlying weakness flowing from the Q4. So we are looking something EUR 150 million plus. Would that be a kind of a wild assumption or you are comfortable with that for Q1?

Krishan, no, I think it's -- what we said it is clearly higher. That means -- and as Miguel explained, that we can generate an EBITDA that can be better than -- clearly better than quarter 4 and also that we have to be prudent, and we have to see how is the situation at the end of the first quarter, and then we will establish again our [ NRB ] provisions. That will depend on the situation. The situation is improving, and we will be able to release some of the provisions that we made. If not, we will keep it. We are always conservative. I don't know if I answered your questions.

Medium-term question on VDM. I remember 12 months back, you were talking about [ EUR 7 million ] per month kind of a normalized rate for VDM EBITDA. And then on top of that synergies. 2022 clearly has been much higher than those numbers. Should we believe that EUR 100 million plus EBITDA for VDM is kind of a normalized number going forward in 2023 onwards?

Okay. So don't put the target too high. We bought the company of around EUR 80 million per year, and we got to EUR 120 million something. So we are very happy with this. That will depend on the situation, of course. In this market, we have a very good reputation, and we can manage the cycles, we can manage the prices, and we have very, very loyal customers. So can we keep it or not? That was a record -- a new record in production. Can we keep it this year? We will try, but that will depend on the market conditions for sure. But what is clear is that depending in normal condition, with the normal energy price, we can be optimistic. Maybe not EUR 125 million cannot be the normalized EBITDA for the company, but we can be optimistic.

The next question today comes from the line of Tristan Gresser from BNP Paribas.

The first one maybe also, sorry, on the Q1 guidance. The volumes you had in Q4 were probably the lowest on melt shop production since the global financial crisis. And you talked about a slight improvement in volumes, potentially some inventory adjustment that still could take place in March. What is driving this cautiousness in your view? What's taking place in the market in Europe and in the U.S.? And also maybe more specifically, do you expect to hit the double-digit margin at the group level in Q1?

Regarding to volumes of production and sales, we started the destocking period in July last year, as I said, and it was very strong at the end of the year. This is normal. All the companies want to reach the end of the year at the lowest level of debt. We have to be nice in the photo. We have a lot of bankers here that they know perfectly that we have to be nice at the photo, and we will try to reduce the working capital at the end of the year. And this is what happened. Now the situation is better. And normally, Q1 is always a period of restocking again. In this case, it cannot be possible because still the distributors are trying to [ adapt ] inventories. But the situation is not as bad or it's not as conservative as it was in Q4. So we expect a higher volume of production. Miguel, do you want to add something in regard to margins?

Well, yes, basically, I think we are talking -- we clearly have stated, there's going to be improvements in the first quarter. We have the uncertainties. When we go to Bloomberg and we check more or less which is the consensus of the analysts, it is understood that 2023 is going to be a much more difficult year. And purely the consensus of Bloomberg is talking about EUR 660 million for the year. This means dividing 4 quarters, the average will be EUR 160 million. So at the end, I think that with the guidance that we are giving and keeping on mind more or less, which is the consensus, we contemplated on the circumstance that we are having, I think that there are fires for keeping in control. The situation in the States remains very healthy. It has been stated. The uncertainties are more in Europe, but more than 50% of our sales is in the States. So consequently, our margin in the first quarter should be substantially higher than that one of the fourth one. No doubt.

The next question today comes from the line of Tom Zhang from Barclays.

Just 2 for me, please. We've talked quite a lot about the U.S. and Europe already. Maybe you could just comment a bit on Columbus utilization rates and sort of the demand environment in South Africa. I know normally you switch between carbon and stainless depending on how the market is developing. So maybe just thoughts there. And then just a clarification on Bahru. The impairments, you mentioned, it was taken predominantly because of the more difficult operating environment. Can you just confirm there were no changes in, for example, discount rates in the accounting assumptions? And it was really just all driven by a more difficult environment in Asia.

Tom, I can take the first part of your question in regards to the situation in Columbus in South Africa. I think we managed to get Columbus to probably the most flexible plant in the world as per today with the production of our traditional stainless steel both for the local market and for exports into the rest of the world. Columbus has managed to get also a stable production in mild steel and carbon steel for very specific applications in the local market, which has been driven the successful applications as per today. And that helps driving flexibility, allowing us to drive production depending on how we see the stainless steel and the mild steel production. So the local business is restarting in South Africa as well for stainless steel, so we are positive about the situation with Columbus for the first quarter.

We are making trials now to start producing nickel alloys in South Africa. So that will be the most flexible plant in the world. The only plant in the world that can produce carbon steel, stainless steel and nickel alloys.

And regarding Bahru, what we have done is, as we explained before, is extreme conservativism in the projections, in projections and in previous year, we were assuming that gradually, Bahru should run almost full. And now what we have considered is a scenario that we keep Bahru running with a niche production for specific players, but not developing a whole capacity utilization of its asset. As a consequence of that, in the actual circumstances, with the low margins in the area, it has appeared that this was the proper impairment to do, and this has been the exercise. So as I said before, we have been profitable, positive EBITDA EUR 21 million -- positive EBITDA EUR 22 million. But assuming that maybe it's more prudent to consider that we shall be just partially running the plant and with the margins very, very squeezed according to the local suppliers and the weak demand, it appeared to be actually reasonable to make such impairment. And with this, more or less, we are absolutely comfort on what may come for the next future for Bahru Stainless.

The next question today comes from the line of Patrick Mann from Bank of America.

I just wanted to ask maybe a clarification on Bahru. After the impairment, what's the carrying value of that plant? And then maybe just going back to volumes because obviously, last year, volumes were much lower year-on-year and all back-end loaded. How should we think about the group volumes from Acerinox going forward? It doesn't sound like you're expecting a very sharp bounce back now, but presumably the second half will be better. But then we also have the capacity increase in North America. So maybe if you can update us on what's your long-term total volume expectations in stainless and when do you see yourselves getting there?

Patrick, I can take your second question, and I'll let Miguel talk about the first one later. So in 2022, you have to remember that we had some specific maintenance stoppages around the world in some of the factories, mainly here in Spain, but it happened in some of the factories, and we were affected by the -- as well by the lower volumes in the second half of the year. So that's what we think. And we see the first quarter, and that's the guidance we use for the first quarter that those volumes going up, and we don't expect this year going forward into the year, those significant maintenance activities going on this year. There were one-offs happening last year. And also, evidently, the investment for North American Stainless on the long term is not going to be available this year. We'll take, as Bernardo said, several years to get that production available for the local market.

After all these impairments, as you shall appreciate in the financial statements, you can check it, it's in the web page, the current value of Bahru after the impairment should be in the range of around EUR 35 million.

The next question today comes from the line of Bastian Synagowitz from Deutsche Bank.

My first one is actually another follow-up on guidance. And sorry to come back for that, but I'm still not 100% clear. But there was couple of moving parts, and you mentioned a potential another impairment depending on how the market goes. We obviously don't really know. So I guess it's probably easiest to just leave that aside because we really don't know how metal prices will develop. If we just look at the balance of volumes, which will be better and then probably ASPs, which will still decline, if you just take a look at that component, if you look into your order book, would you then say, EUR 150 million or so or better? Does it actually make sense from [ DSO ] point of view, given that the underlying Q4 performance was obviously close to EUR 200 million EBITDA, which is pretty strong in the context of the very, very weak volumes, which you've had? Would you be comfortable when we ex out the potential impairment impact with EUR 150 million [ plan ]?

It's very embarrassing, Bastian, when we are talking about clearly [indiscernible]. You want just to wring the exact figure. There are several facts. Your figure -- I don't feel uncomfortable with your figure. I'm not making any commitment or any further explanation. But it could be. I think it's rational.

We never give the forecast. We never give our prediction.

Absolutely. No, I just wanted to basically see whether like in terms of the moving parts, the broad bandwidth, direction obviously makes sense, and totally appreciate that there is no precise guidance. Otherwise, you obviously would have written it into the release. So thanks for the clarification. And my second question is another follow-up on the Malaysian business. And again, I'm trying to understand the situation. So in October, you obviously said Bahru was performing well. It was profitable. I guess the impairment at least stands a little bit in contrast to that, although clearly, I think that's also a function of your conservative accounting approach really with clearing the deck here on that business. But could you maybe let us know what the cash flow profile forward will look like. Last year and maybe also in 2021, I guess we can't see it in your disclosure, but has Bahru been cash flow positive in both those years?

So finishing with the guidance, I think that we can say what we have already said, the volumes are going to be better. So this is something you have to understand. Volumes will be better because we have been cutting and electing our inventories during the last part of the year. And also margins are going to be better because we have been digesting the excess, of course, that we have in our inventory. So it is clear. Regarding Malaysia, I think that we are very proud of the performance of our Malaysian plant. What happened is that the situation in the area is very competitive. We are competing there with the giant of the world, that is Tsingshan that based in Indonesia. There's some -- we don't know if there will be more projects in the area or not. But we are not saying that we will have worst results. What we are seeing is that the projections of Bahru Stainless will not be as positive as we thought at the beginning. It will be positive. We have a positive projection but not as good as we would I think before. And that was the reason that we have reviewed the value of the company, and we went to this impairment. We think that is a very, very conservative. And I think that we should be -- we must be conservative.

The next question today comes from the line of Moses Ola from JPMorgan.

I have 2 questions, which I'll take one at a time. And first one is also on the Q1 EBITDA bridge. So focusing on inventory valuations and also energy costs. So obviously, in the current market we cannot have much visibility on the commodity prices move into the rest of Q1. But if prices were to hold where they are, would you say that the quarter-on-quarter impact of the inventory valuation should be more positive in Q1 versus Q4? And then also on energy cost, how much of your energy costs are hedged into 2023? Should we expect some roll-offs from 2022 into 2023? And I'll ask my next question after that.

On the second part of your question on the energy cost, we have right now around 30% hedging on energy cost here in Spain, which is what we are affected most by the increases. We see probably in the first quarter a level of energy that is going to be stable through the quarter. That's what we see right now. And that's what we are considering [ at this moment ] for our projections for Q1.

Energy prices is a European problem. We have different prices in the different European countries, but it's only European problem. We have a normal price in the United States. We have a normal price in South Africa and in Malaysia. So it's only affecting the Spanish plant. And as Hans mentioned, we have been increasing the level or the volumes of PPAs that we have contracted. And I think that from next -- from this year, we will start applying around 30% of PPAs in our energy costs.

Okay. And then Q1 appears to be my favorite topic today. Clearly, better. Clearly better means clearly better. Clearly, better means that the worst is over. Clearly better means that the basis of the market are better, but we do not expect a big increase in working capital. But still, we have uncertainties in the second quarter, and then we prefer to be prudent. We have seen the volatility, talking about the exchange rate, for example, in the dollar and in the euro during the year, this is one fact. We have seen the volatility in the nickel in the fourth quarter. This is another fact. We still are suffering, obviously, the consequences of the crazy war of Russia-Ukraine. So there are -- still the supply chains are not normalized. And still, we have seen a terrible increase in imports in Europe, reaching market shares of 31%. Distributors are still with large inventories. This must be reduced. When shall the market reactivate and what shall be the consequences in the price? What shall be our visibility at the end of the quarter for what may take place in the releasable value for the second quarter. Still, we don't know. But shall be clearly better.

Okay. And also on the growth CapEx into North America stainless. So could you please provide your estimates on the incremental tons of this investment? And how does this change your product and geographical mix? Specifically, how should we consider your footprint in Europe going forward? It currently stands at about 20% of shipments, but this would probably edge lower following this investment. So how should we consider this part of the business going forward?

The new CapEx is a beautiful project. And it is beautiful because we are starting increasing the capacity of the melting shop, not with new equipment, but improving the logistics of the melting shop. And how can we improve the logistics of the melting shop is using the new tools, using a digital twin. That's the way that we found out what are the bottlenecks of the logistics of the melting shop and that will let us increase the capacity between 15% and 20%. And how can we manage that in hot rolling? We will do it also using digital tools to increase the productivity of the mill. So we will not need investment or a big CapEx to increase our capacity. It is based on digital information and analysis. And then we will spend the EUR 244 million, basically, in the new cold-rolling mill and the upgrading of the [indiscernible] pickling lines. So that means that with a very reasonable CapEx, we will increase our capacity between 15% and 20%. And this is -- we never give numbers of how productive it's going to be or how is it going to contribute to the margins. But as you can understand, with a reasonable CapEx, we will increase production 15%, 20% to follow the rhythm of growth of the American market, so the payback of this impairment is going to be very fast. That will increase our capacity and our sales in the United States. We are not trying to win market share there. We're just trying to accompany the American market in the growth. So we are a clear market leader, and I think that we are a good market leader in the United States. So we don't want our customers to feel that they will have a lack of local production in the future. And we promise to them that we will support the market in the future with the future growth. And I think that they can be very happy to have North American Stainless as market leader there. So that is going to change the geographical mix. Of course, that will balance a little bit the current balance of our geographical needs, but because we will increase a portion in United States, but that will take 3 years. So more or less, you can make the numbers. It's not very difficult.

Our final question today comes from the line of Krishan Agarwal from Citigroup.

My questions have all been asked. But if I can do a follow-up on Bahru, thoughts from Bernardo. You've taken an impairment of EUR 200 million-odd in the Q4, carrying value is EUR 135 million. Now you've been saying that you are looking for the option for the operation. But then what is your thoughts on the potential valuation in case you [ look to ] engage into any kind of a transaction? Does that EUR 135 million value gives you a kind of a starting point? Or you will still be looking for a normalized valuation for the business irrespective of impairments you have taken?

In terms of strategy, there's nothing new during this year. I mean, what we have done is that we are resizing Bahru Stainless to dedicate the production to high added value products and to the niches of the market with less competition. That's why we reduced our production there. Doesn't mean that we are going to keep this production forever. But we will try to focus on these customers, and we'll try to increase our volumes in these customers, and we'll try to find similar customers with added value that are not in the range of products that the normal commodity makers in Indonesia and China are doing. So we will increase our production. So we have a strategy there. That doesn't mean that we feel that we are weak in the area. And we'll have to do something. It's not a problem today, so we can keep Bahru Stainless as it is today. We are growing in margins. Today, we are not speaking about losses in Bahru. We are positive. We will be more positive next year because we are increasing volumes in each product, and this is positive. In the way we'll find the other options, we are open to everything to cooperate with some of these big guys in the area to increase sales or do something together or we are open to everything in Bahru.

Any further questions here in the room? So this has been everything from our side. Thank you very much again for attending this presentation, and we hope to see you in the next publication of our results that will take place on April 27. And now we will be happy to share our Spanish wine with all of you that are here in the room. Thank you very much.

To celebrate the record results. Thank you very much.