Acerinox Sa

Good morning, everybody, and welcome to the Atherinox earnings conference call for the first quarter 2023. First of all, we hope that you and your related ones are well. The presentation will be hosted today by our CFO, Miguel Fernandez, accompanied by the rest of the IR team, Maria Euclid, Borja Diestra, and myself. Before getting started, let me remember you that this conference call is being broadcast in our website, atherinox.com. Now I would like to hand over to our CFO. Luis Miguel, go ahead.

Thank you, Carlos, and thank you to all our investor relations team which is present here today among us for giving you certain comments regarding the Q2 figures. Thank all of the attendees in this session. It is just eight weeks ago when we were presenting the exceptional figures for 2022. As we explained, we beat all the historical records of our company. At that time also, we explained the basis that we are passing through the actual environment in our business. Just eight weeks later, what we confirmed is that the basis still are there. There have not been significant changes. But at the end what we feel comfortable and proud about is that the figures that we are presenting for the Q1 2023 capture most of the issues arising in the market that we were explaining at that time. First of all, as we can see in the page number 3, in the Q1 2023 at a glance, the quarterly EBITDA 226 million euros is clearly better than that one of the Q4 as we were explaining that time. Even though the market conditions remain challenging in Europe we have been able to present these satisfactory figures and we are proud of this profitability we are achieving. We are keeping our strategy in most of the areas. We are keeping our absolute control on the controllables and obviously focusing on our sustainable commitments. Our strategy is long term design and we are loyal to the strategy. At the end just giving some initial comment of what shall be coming through this presentation. What we can be comfortable today more or less explaining to you is that the trend is positive. bit that should be higher than Q1. It should be slightly higher. The figures of the Q1 are remarkable. On the actual basis of the market conditions, we feel comfortable for the Q2, but we shall be slightly above the figures we are presenting today. We shall talk later about this. Going through the presentation, in any case, we enter moving to the slide number four when I previously stated that we are proud, our proudness is regarding our figures and regarding our profits, but our proudness is also regarding the great success we are experiencing in most of the areas related to ESG. Our well-deserved Platinum Award recognized by ECOVADIS last year, we think justifies more or less what we are – all what we are doing. We are having great success in terms of waste reduction. I think it's very, very self-explanatory, the slide. We are having great success also in the recycling of consumables, already recycling most of – almost 100% as also appears in the slide. And also we are having great success on water reduction. We keep on track and we are focused on certain areas such as emissions. safety, diversity, and clearly these are our main focus to keep on improving. There are some areas regarding ESG where still we obviously are not so under our control now, mostly related to energy efficiency, keeping in mind the disruptions that have been characterizing the energy market, mostly from 2022. that still are there. These disruptions obviously affect and impact the measures for energy efficiency as well as also are having its effect on the rhythm of production that we are taking. Because of that is the main area in which it still appears in the slide list achievements but it's an area that as much as we are going to be normalized we think that shall appear and we shall be covering all our targets and shall be gradually coming and we hope that starting soon. When we move then to try to analyze the market in page number five, we have made a title for this slide and the coming one which we think it's a definition of most of the issues we want to express today. The traffic is behind us. What is the meaning of the trophies behind us? We are willing to take about two issues, two cents for this statement. One is obviously on short-term basis the quarterly figures, the quarterly results. We saw strong adjustment and correction in the Q4 last year. Consequently, we are stating the trophies behind us. We have come back. to that new probably level that we are seeing of quarterly profitability. But also the process behind us, we want to remark what has been stating from our side since time ago. The last decade was extremely, extremely tough for our sector. Most of the external facts that characterize this difficult decade are in way of normalizing, so consequently our cohort for the coming years is substantially higher. As a consequence of that, we think that the level and the basis of the contribution or profitability of our business are going to be substantially ahead of that one that has been characterized in the last decade. All the homework we have done in terms of excellence, in terms of cost savings, in terms of efficiency, are each day more well appreciated and as a consequence of that we clearly state that we think that the draft is behind us and we have more to celebrate in the coming years than the tough circumstances that we have experiencing from a decade. So when we enter in the issues and being more concrete on the figures relating the first The figures appear in the left side – sorry, in the right side and what we see is that there are very, very satisfactory figures in the difficult environment that we have been trying to define in the left side. So in general what we can see is for a stainless steel market, our main sector, the stocking process still is in the market. we have been facing in most of the quarter a strong stocking process affecting mostly Europe, but affecting also America. And the energy prices, even though are less crazy than the levels that were achieved in the last year, but they still are abnormally high and uncompetitive. And this is something that still remains there. So this is a tough environment. When we compare the situation in America, in the States, and in Europe, just looking at the color of the bullet points, you can appreciate that the basis is more healthy in America. The imports have been corrected year-on-year basis. The inventory is gradually having normalized. Most of the quarters still having high at the service centers and distribution, but fortunately, we think that ending March the situation has almost reached normal. And in view of these circumstances, we are also appreciating the comfort that the base prices in the American market have remained stable, which for us obviously is a strong fact of satisfaction. It's our main market. And on comparative basis, the best prices actually in the stainless market are those of the North American one. The situation in Europe is substantial different, and as you can see, the four bullet points we wanted to remark, three of them are negative. The apparent demand is down 33%. Inventories still remain high, so probably it shall take most of the quarter for the inventories to getting reduced in Europe, and this definitely affects the market. A consequence of this also the prices remain at very low levels. We have one fact that we consider positive, that is that the imports on comparative basis have dropped. But it's true that it's a positive fact, but it's a positive fact as a consequence of the three difficulties arising in the market. So because of the demand is down, because of the inventories still are high, And because of the prices are so low that there is not such a big gap compared with Asian prices, we are seeing that there is less attraction for imports and consequently this is not as damaging the market as secure. But that's a consequence of the poor performance of the European market. So in view of these circumstances is what we consider that the profitability is high. In contradiction what we are seeing with the stainless, in our high performance alloys, the market remains very strong. We shall see later on and we shall appreciate that the high margins, the good profitability and the good contribution from our high performance alloys division, but this is a sector that actually is keeping a very, very healthy track and this is one of the issues that contribute to our comfort for the coming quarters. So when we put this on the figures, you can see then that all the numbers related to the Q123 are extremely satisfactory compared with the fourth quarter last year compared with the previous one. But any case, the comparison with the first quarter last year in the best momentum in the story of the stainless steel where all our plants were running full, where the prices were showing last year a rally as a consequence of the normalization through all the supply chain. All the restocking occurring in most of the sectors were driving extraordinary performance in the first half of last year. When we compare with the Q1 last year, as may occur also regarding also exceptional Q2. The comparison is obviously not as favourable, but as a consequence of this and considering that that was so exceptional is that we feel much more comfortable showing all the improvements that are appearing as a consequence of the Q4 and how we finished last year. The EBITDA of €226 million for us is a strong and solid and a satisfactory EBITDA in these circumstances. We are giving an EBITDA margin of 13% which shows also the robustness of our figures and then these figures have been obtaining even though making an inventory adjustment at the end of the quarter. The profits are there. The profitability is high. The figures are very solid, but the circumstances, and mostly in Europe, as we are saying, is that the one that we still are more than prudent. We see that still the situation and the prices in Europe is strongly affected. We appreciate now that we are – we have been saying that this is going to take most of the second quarter until being normalized. And consequently we felt more comfortable making inventory adjustment at the end of March for adjusting the net releaseable value of our inventories to the circumstances that actually are taking place in Europe. So we have done at the end of the quarter an inventory adjustment of 82 million euros. Consequently even though after that we must put on value what is the EBITDA chip of 226 million euros. The NEP debt is not a headache for us. It is true that it has been increasing in the quarter. There have been wish of the greater in the cash flow. There have been facts affecting the NEP debt. Obviously we have paid dividend at the starting of the year. The dividend increase that was established for this year also included that half of the dividend was to be paid in the first quarter and consequently this has been one fact. In addition to other facts, mostly related to the working capital, which in the sector that is absolutely now in a good momentum, as is the high performance alloys, we have seen an increase in working capital and this is one of the reasons, as we shall explain later, why the net debt has increased in the quarter. that seriously concerns us at this part of the year and at this part of the cycle and especially at this part of our solid position in all the financial figures. The slide shows also more or less the evolution that we wanted and we have been mentioning previously. The trough is behind us. It's more easily to appreciate it in this slide. The scale is unfair because the rocketing figures of the Q1 and Q2 of 2022 cannot be appreciated in a visible scale and consequently we have broken the bars for showing that profit that we achieved for 422 and 523. Any case, as we have been mentioned, there were exceptional circumstances in the first So this is not what we consider should be the normality. But what we wanted to express in this slide is that it's obvious that the structure of our business is cyclical. This is our field. We must play in this field. But what we are doing our best is improving and changing the contribution, the efficiency, and the profitability of our business. What was normal three, four years ago, this average of the 90, million euros EBITDA per quarter now is the one that we are seeing that is the strong correction that is coming in a time but it appears to be our baseline for a correction time and then quickly we have been recovering and reaching a new level of EBITDA in the range of the 200 million euros, 226 in line with more or less what we also were achieving two quarters ago or in the Q2 21 and so on. This is something that we are stating from time ago. The basis for understanding our group and the basis for putting on value all the excellence plans and all the cost savings that we have been doing allows us to consider that probably our speed cruise now for our quarterly contribution is more in line with the level of the $200 million than the level of the $90 million that we were achieving not so far away from now. just three, four years ahead. If we move just to give a bit more data on the stainless steel and on the HPA going division per division, most of the issues affecting the stainless steel we have been talking about. The figures are really satisfactory and a beta contribution of 197 million euros which and EBITDA margin of 13%. In the actual circumstances, having a two-digit EBITDA margin is remarkable, but in our case it's 13%. So it's something that we must put on value and we are proud about because the momentum is tough, especially the momentum in Europe is tough, compensated by the better momentum that we are having in the States, but also keeping in mind, especially when we compare with the last year in the Q1, that at that time, as we said previously, we were running full. Now, probably in average, we are running close to 80%, but in America, in Europe, and also in South Africa. So most of our plants now are running at lower levels of capacity utilization at that time, but even though that's, and even though the prices, circumstances in Europe, we are keeping that a bit down. It's a very, very robust figure. The cash flow, the operating cash flow in the business shows €113 million, so this is another fact to be proud about. We have kept in this basis a strong discipline in all our working capital issues, so consequently the working capital has not changed. Compared with that of December, it's almost a variance of around €10 million. So it's more or less a strong stability. So we are keeping good discipline in the working capital in stainless, which is probably the market more affected. And as a consequence of that, we have been able to achieve this positive operating cash flow of €113. When we compare with that of the last year, It was a bit above but keeping in mind that the contribution coming from the beta was 200 million euros above. So what we have been doing is making a strong commitment and a strong discipline in the working capital section of the stimulus and this has contributed to this operating cash flow in these figures showing improvements in all the units. So we are proud of how we are handling this situation in the stimulus even though We hope that the environment in Europe should improve. When we move to the high performance alloys, the situation is in terms of the market much more better than the one that we are facing in the stainless. The momentum in the high performance alloys is very good. The order book is complete. The margin of the contribution of this business is very, very healthy so at the end we are having figures of 29 million euros EBITDA. We had 21 million euros in the Q4, but we are even above the EBITDA obtained in the first quarter of last year, so the momentum in the high performance alloys is good. The momentum is different of that of the stainless, so as a consequence of that, the driver of of our cash generation as you know is working capital. The working capital has increased in the high performance division. This is as a consequence of the good market times as we are seeing. We are showing certain improvement in inventories in the first quarter. Probably this is going to be more neutralized in the Q2 and also some of the basis of the working capital in the high performance at least division have changed. As we know during last year we have been changing and diversifying the sources of raw materials so some of the basis of our supplier's policy have changed and this is more or less affecting also or at least in these early stages our working capital figures especially related to suppliers. Because of that the combination of both facts have made this increase in working capital and as a consequence of that The momentum shows cash destruction or operating cash flow negative of 132 million euros that we think that gradually should be also neutralized for the coming quarter. So that is not an issue that actually concerns us and we think it is just showing more or less the basis of the high performance of those markets and also more or less the changes in some of the issues or some of the challenges that we have been passing through. But we are not so concerned and we think that gradually this shall be also neutralized during the rest of the year. If we move to page number nine and we see the more or less what is our capital allocation we want to remark the World Balance capital allocation with a clear target that we have more or less in the three main areas. Starting by the end it's clear that we have been paying dividend in the first quarter. As I said before, our board decided increase in dividend payment of 20% per share for year 2023 and then the first dividend has been paid in the first quarter as well as the second dividend shall be paid in the month of July. So the first quarter reflects capital allocation in our three areas of our three key targets for capital allocation, the dividend as we are seeing, as well as the CAPEX. We are increasing our CAPEX. We are investing in efficiency in the group. We also announced recently a part that we are increasing our CAPEXes in most of the plans for increasing efficiency and committed also to the ESG targets that we have marked for our group. But in addition we are in expansion phase and we are starting the expansion phase as you know in our most profitable mill which is North American stainless. So this was previously explained. It still is not so appearing in the figures. It shall be gradual. But when we announced that the CAPEX for this year shall be in the range of 210 million euros, well at the end we have seen also part of this is reflected in the CAPEX of the first quarter of 43 million euros. main target for a capital allocation is keeping the flexibility in the working capital and that flexibility is the one that more or less is also appreciated with this increase in working capital of 173 million Euros and at the end. This is something that as I said before it shall be corrected gradually during the year but it's showing more or less the basis of our business in the first quarter. So going just a conclusion we wanted this presentation to be self-explanatory in terms of the slides and also with the information you also have in the report that we have prepared today. We think that you have a lot of data for understanding the business. But going through the main conclusion, we'll repeat again, the trophy is behind us. So the start of the year has been strong, even though the actual conditions we are consequently proud about these figures. The cash flow up to March is negative on 19 million euros. This is something that should be gradually improved during the year, nothing to be concerned about. There are uncertainties, uncertainties mostly in Europe but still there are facts that keep us alert and then we focus on that. We have talked a lot about Europe, but still we are seeing that the situation in Asia is not healthy and the recovery coming from the Chinese New Year has not been a good march as expected, so consequently still there are high level of inventories in the area. This is something that should be solved or may have also its influence in the coming quarter, so we need to be alert. In our main market, fortunately, the stocking process at the end of March has proven to be effective and we hope that this should allow to increase productivity for the coming quarters. The situation obviously in the prices remain high in the States. Let's see what occurs with the gap compared with other areas, but the American market contains being in a very, very healthy position. And this is another fact of comfort. We have two areas that now are facing very, very satisfactory which is North American stainless and also it's a high performance alloy. So consequently those two areas keep most of our comfort and we think that they are going to be the drivers of the profitability of the group at least mostly in the second quarter. What can we expect for the Q2? Basically, as we were saying before, we are comfortable with the figures for the Q2. We think that shall be above the figures of Q1. The actual circumstance of the market probably should create that we shall be slightly above. In this basis, being so profitable the first quarter, we consider that we can keep the trend with certain improvement, but slightly better. than these figures that we are presenting today. So I think this is most of the messages we wanted to express today. I want to remark again we are proud of these figures because the circumstances really are difficult but we think that we have an extremely well committed team all over the world and the efforts of all our teams all over the world have been able to demonstrate that we are now in these levels of profitability and efficiency and we hope that also the market should put this on value. So thank you very much for your attendance and now all of us feel absolutely delighted to try to solve most of your questions if there is any.

Thank you Miguel for the presentation. Let's move now to the Q&A session please.

Thank you. If you would like to ask a question, please press star, followed by 1 on your telephone keypad. If you choose to withdraw your question, please press star, followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. We ask you please speak slowly and clearly as possible. Our first question today goes to Tristan Gresser of BNP Paribas Exane. Tristan, please go ahead. Your line is open.

Yes. Hi. Good morning. Thank you for taking my questions. I have two. The first one is on the U.S. market. Can you discuss a little bit the market conditions there? I mean, you flagged that the stocking has ended, demand has improved quarter on quarter. There's been a shift toward domestic buyers. So how sustainable are those trends? And would you still expect some pricing adjustment to take place in the near term in the U.S., notably given the elevated regional pricing differential? That's my first question.

Yeah, thank you Tristan. The situation in the States, as we said, the market remains healthy. There has been obviously a de-stocking taking place. We think that probably end of March the situation is almost normalized. There are some facts affecting the market. Well, on one side affecting not only the distributors that were keeping high level of steps, but also in addition some of our final customers at the end even were having some production disruptions due to the supply of some components that have been affecting their demand. This is something that gradually should be normalized. We previously stated in America more or less our standard is running full. thing on the actual basis and we have been adjusting our production in the States and we have been running at levels of 80 percent capacity utilization. With that we are covering the market needs as it is. The prices in America are much more stable than in other areas so consequently the prices remains and have been remaining robust. It's true that there is a price difference among America and every part of the rest of the world. The imports have not been raising in the States and consequently up to now the situation is healthy. But we must keep an eye that anytime the price gap and especially as we were mentioning before, we are seeing high level of inventories in Asia. the demand and the increase in consumption in Asia after the Chinese New Year has been not as high as expected, but the production levels in March have remained very, very strong. So there are inventories in the area that gradually probably need to be adjusted. These adjustments shall take place in the second quarter. We think that maybe there shall be some production adjustments. We are seeing some news and some of the players that are adjusting the production. But we must keep an eye on the fact that may be also imports, this should have its effect on imports. The American market or the basis of the American market and especially in certain of the end users is really driven by the buy American. As well as probably Europe is much more an easy highway to introduce material. In the case of America, the basis of the American customer is more focused on on the local products but having said that if the price differential is so high this may have its effect. We still are not concerned but we are keeping an eye that this price differential should not attract too many imports. Still we have not seen that but we must be focusing properly to see if this may be impacting the prices in the coming quarters. But as we have seen before, let's see what comes in this second quarter and how we are passing through the summer. At the end, from now up to June, we are not concerned. Let's see what may be taking place for the second semester, but still it's a bit premature.

All right. Thank you. My second question is more on the guidance. for Q2. I mean, if I look at the negative inventory adjustment for the past, let's say, three quarters, it took out maybe 17, 19 million of performance. If I look at the guidance, it probably, and you can tell me, it still implies some elevated negative inventory impact. So my first question is, is that fair to make that assumption? And how should we think about that? Can you explain how you make those adjustments? I believe they're mainly in Europe. And at some point, do you expect some cost alleviation there and not being forced to do so, especially if the stocking ends? Thank you.

Thank you. Well, the fact is effectively obviously concentrated in Europe. The level of margins that we are achieving in the States, as we said before, is healthy enough. Our inventory adjustments is calculated item per item and then we are more or less adjusting the value of the inventories to the net releaseable value of each of the items and it's not an average so we are more or less correcting every item that should experience a loss. The actual basis of the European market, the situation of the of the prices in the European market still is very tough. And consequently we are seeing a level of prices in Europe that we almost have not seen ever. And this is something that we must keep an eye on. We are very prudent. The uncertainties that are affecting also the European market remain there. We reached levels of 39% market share of the Asian imports at the end of last year, in the last quarter of last year. So this needed to be diluted. Maybe two or three months ago, we were contemplating that this should be neutralized at the end of the first quarter. And nowadays, what we are seeing is that still it's going to take more time. Maybe this time drives us to the end of the second quarter. Still, the stocks are high, but if this drives us to the end of the second quarter, we must keep an eye on that the seasonal slowdown in Europe also takes place in the third quarter. It's difficult to predict at this time that after that normalization of the stocks, it shall be a strong correction in the demand. the figures for our third quarter should be high. So on that basis we prefer to be prudent. We are very, very conservative when we make these inventory adjustments and we found absolutely rational and adequate to correct our inventories in this range. We are experiencing very low prices and still having certain costs that are absolutely uncompetitive. Energy prices are not as crazy as were last year, but in any case they still are very high. And this is one circumstance also that affects the cost of our production and the cost of our inventories. So this is the reason. What can we expect for the second quarter? It shall depend obviously of how we see the picture for the end of June and what is going to be the seasonal effect this year. If the situation of the inventories are corrected and there have not been increases in imports, maybe shall not be needed such an adjustment. But keeping in mind that we enter in the summer, the slowdown, we prefer to be prudent. So on this basis, we think it's adequate, these inventory adjustments. Let's see what takes place.

All right. That's really helpful. Thank you.

Thank you, Tristan.

Thank you. Our next question goes to Patrick Mann of Bank of America. Patrick, please go ahead. Your line is open.

Thanks. Hi, Miguel. Maybe to follow on Tristan's question about the guidance, just so that I absolutely understand, let's say 226 in EBITDA this quarter after an 82 inventory write-down, so excluding the inventory write-down of 300. your guidance for slightly better in the second quarter? Is that assuming a similar level of inventory write-down? Or, yeah, so would it be, you know, if we don't have an inventory write-down and it's slightly better, is over 300 possible?

If the basis of the European market appears to be okay for the third quarter, that could be the case. The issue is... what may take place in the summer in Europe. And the summer in Europe is the season of lockdown. So on this basis, what should be needed to do at that time? We still have not, obviously, all the facts, but let's be prudent on that. Any case, even though we should have to make an inventory adjustment at that time, we think that we are going to be Slightly better. The better and what is defining the better, obviously, is not a fact that we can now precise because it shall be depending on the level of the inventory adjustments to be done. But we are comfortable that the figure should be above the one that we are presenting today.

Got it. And I appreciate you have to be conservative. I understand that. I just wanted to check. I was completely understanding the guidance, but it wasn't slightly better without the inventory write-down. And then just one more question, if you don't mind. You said apparent demand you thought was down 33% year-on-year in the first quarter in Europe. Can you give us an estimate of what the split is between, you know, what do you think real demand has done and how much of that? Is it all inventory or what's your read on the underlying real demand or speed of use? Thank you.

Well, at the end it's a combination of your setting. First of all, obviously the stocking and the inventories, but at the end the real underlying demand still is not healthy in most of the sectors. At the end this is a consequence, as we are saying, of all these uncertainties that still remain in Europe. We still are obviously having the conflict in place, there has been obviously the additional concern that took place with all the financial issues taking place also on the financing institutions at the end. This creates more concern and at the end there is less confidence of a robust reaction and at the end this is affecting every sector. that still is there. And then some of the issues that we have been explaining for the states also may be affecting GDOT. It's not only the final demand but also several of our customers are having also failures in part of the supplies of other companies. So consequently they are adjusting our production and they are adjusting their orders until they get normalized. So the combined effect of all these issues are the ones that are spoiling the European market in this time.

Thank you.

Thank you. Our next question goes to Christian Agarwal of Citi. Christian, please, your headline is open.

Hi. Thanks, Miguel. My question is partly answered earlier, but if I can push you a little bit in terms of The shipment improvement which we have seen in Q1, I mean, how much of that improvement you would attribute to coming from the U.S. and how much of that is coming from Europe? And then as a kind of supplement to that, the profitability split, if you were to make a guess, I don't know, I'm sure you don't give the split on a regular basis, but From a directional point of view, how should we read that the majority of the increase has come from the US or it is coming from the Europe as well on the underlying basis?

Sorry, Christian, regarding more or less, I don't know if I understood properly. If not, please correct. In terms of volumes, we have been improving in Europe. because we were parting from very, very low levels in the second half of last year. We know, as we announced, we made or we extended certain of the program maintenance shutdowns. We were adjusting production. We have also the terrible level of energy prices achieving in Europe, and consequently we adjusted production there. So in the first quarter, what we are seeing is that The increase is coming in volumes from a more normalization of Europe and South Africa. In the case of North America, the volumes have been reduced because we normally run there at high levels of capacity . What we are doing now is being very selective in America in the product mix that provides the proper margins. Consequently, the margins of America remain high, but we have been reducing our volumes there. So if we just precise on volumes, it's lower figures in America and higher in the others. But the margin contribution is substantially higher in America than in the rest.

I understand. And then in terms of profitability split, If you were to make a directional estimate, did the Europe see the increase in the Q1 versus the Q4?

In profitability, yes, because the Q4 was dramatic.

Okay, okay. Thank you.

Thank you.

Thank you. Our next question goes to Ioannis Masboulis of Morgan Stanley. Ioannis, please, the headline is open.

Hi, good morning. Thanks for taking my questions. First one is on Europe. You just mentioned that you've seen improved profitability quarter over quarter, but could you provide a bit of color whether Europe was EBITDA positive in Q1 after the inventory valuation?

It's slightly positive, let me say it that way. We are not so precise on the figures per division, but let's say that's slightly positive.

That's after the inventory adjustment, right?

Yeah.

That's very clear. Thank you very much. And second question is on what you alluded to around the Chinese oversupply and potential for an export threat later in the year. Where would you expect to see the highest impact with that? export pressure comes through Europe or the U.S.? And the reason I'm asking is that right now we have a very high U.S. base and all-in price relative to other regions, so which region will be the most impacted in that scenario? Thank you.

Up to now, still we have not seen any big increase in the flow coming from Asia. As we said before, We are not appreciating imports. The import penetration has been lower in this first quarter because there has not been attraction, but mostly because of the difficult environment we are seeing in Europe. So maybe in Europe is not going to be the case, and even the European players at this time with such uncertainties are not willing to enter in Europe bringing material, sustaining supply terms for material coming from overseas and so on. In the case of America, America normally is a more difficult market for imports. Still we have not seen a big flow of material moving from Asia to the States. Obviously in the States in addition we have the two sections taking place. There are some – we are reading more or less that there are some announcements of production adjustments coming mostly in China. There was probably better expectance of the demand reactivation in March and then as we were saying production of – the mill production has been high but the demand remains lower. But in most of the end uses still the comfort is there. So what we expect is that the local demand in Asia should more or less gradually be recovering and then diluting this high level of inventory. So not necessarily all this material is to be shipped overseas. We understand that this normalization because the confidence still is there. And I think there are sectors after the, with the relaxation of the COVID measures, It's being appreciated, higher activity and higher demand in the Asian market. What was expected is a strong reaction in March. This has not been taking place. Maybe we need to wait a bit more. So there are no basis for sea that is going to be a big tsunami of material leaving Asia, moving to other areas. Still it's a bit premature, but we understand that the demand shall be right in there. by the fact that maybe there are production reductions and some expected shutdowns taking place in this quarter in order also to neutralize that as far as we are reading.

That's very clear. Thanks so much.

Thank you.

Thank you. Our next question goes to Bastian Sinigowitz of Deutsche Bank. Bastian, please go ahead. Your line is open.

Yeah, thanks and good morning all. Miguel, I've got two questions. Firstly, on costs. In your presentation, you say that energy prices still remain high, and I guess you probably still must have been shipping out a lot of inventory which has been produced with very high energy costs. Energy costs are maybe still elevated, but clearly we start to see a significant easing on the energy markets. So do you expect to see some relief in realized energy costs in the second quarter? And is there any way you could even quantify that for us?

Maybe not released yet. Probably, as we have been saying before, talking about the big figure, 100 euros per megawatt, it's uncompetitive, but obviously we compare with what we are experiencing one year ago, it's substantially less dramatic. We think that this, and it appears to be a certain that the curve should be keeping going down. We are seeing, when we attend and we see all the PPAs market, it appeared and the trend of the curve is to be going down. But probably not yet coming for the second quarter. We think that gradually should be coming more. We are, and we know that we are involved in that there are several projects coming on renewable energy, but starting summer 23 or later on, or even more for 2024. So more or less there is a common understanding that these figures should be normalized, but for the Q2 I still consider that this range where we are moving now is what's considered to be normality. So it's not going to be a short-term issue.

Okay, thank you. Then my second question is just again coming back to the U.S. market and the demand situation there. You said you were running around 80% utilization rate, I guess, in the first quarter, which is reflecting the destocking environment. Could you give us maybe just a broad guidance as to the utilization rate level you expect in the second quarter? Are you going to be back closer to full utilization? Are we going to move maybe into the 90s or so? And then I'm also wondering what are the demand dynamics which you see particularly in your direct end customer business? I know that most of your business there is obviously more related to service centers here. You've been seeing the stocking, so it's probably more difficult to gauge the underlying picture. But what is the picture you're seeing with your direct end customers? And have you seen any changes in the dynamics there?

With our direct end customers, as we said,

As we said previously, we are seeing in some of our customers that they are also affected by some of the problems in obtain more or less part of the components from other industries and consequently their orders are going down. When we see in our case Our sales, for example, to the domestic appliances, the sales have been experiencing a reduction, but the customers feel comfortable that their demand is not in line with that. So more or less, some reactivation there could take place. For us, the heavy transport in which we are present, as you know, we are less present in America in the light vehicles. For us, it's not a strategic niche to be present on. But we are very present on the high transport tractor trailers and vans. And this is a sector that is doing healthy. And in this regard, we keep comfortable with that. And order books now appear to be more or less healthy, at least until the Q3. So in that basis, the heavy transport remains doing fine. Those related to the food industry appear to be solid order books as their new business line come online and there are investments in new equipment for industrial kitchens and associated equipment and so on. So the food service and handling equipment is doing okay. Still we are waiting to see what may take place In regarding of the infrastructure regulation passed last year, most of the large projects for which funding has been requested and assigned so far have not reached the point in which orders for pipe and tubes are being processed. So this still is to come. We always have been stating that this was coming in the States and when other sectors should probably start more to stabilize we also have the comfort that this is still to come. But still this has not been precise and we hope that this shall be gradually coming. But still the pipe and tube has not been seen the reaction that we are waiting since the Biden plans was announced. And this is more or less most of the sectors that we are supplying. In general the situation is As we say, it's relatively robust. The final sector, our final customers remain fine. The stock is having the one that needed to dilute their inventories, but from the final customers we keep the comforts. And as I said before, the final customers, the Buy American in the States is an issue. So I think that we have been obviously prioritizing these customers and I think we are focused on the constant and proper supply. So in this basis we think that the imports that are more aggressively affecting other markets probably in the States still have less strength as a consequence of that. Obviously the distributors are open but we keep the comfort on that part of the market. When are we going above actual levels of capacity decision? We are not in a rush because still we are seeing that the margins are satisfactory for us. What we do not want is to more or less break the actual balance. We think that the situation for April-May more or less should remain in these levels. Let's see if gradually we are able to recover previous levels and targeting maybe those of 90% that you were mentioning. Maybe not about that, at least on the coming months.

Great. Thanks for that, Miguel. Very helpful, Carla. Thank you.

Thank you. Our next question goes to Moses Ola of JP Morgan. Moses, please go ahead. Your line is open.

Hi, Miguel. Thank you very much for taking my question. Most of my questions have been asked already, but I just wanted to see if you could provide a comment on local media reports of labor disruptions at your operations in Spain, I appreciate if you cannot at this moment comment on this, but could you perhaps provide a timeline on when some of your wage negotiations are due and essentially just also like the capacity of some of the operations in Spain? Just give us a framework of the production there.

Yes, thank you, Moses. Well, it's true that it appears some announcement of some warning of a strike in Afriosopa and unfortunately it was cancelled and at the end there was a final decision for keep on running and keep the production in the plant. It's true that we are in the process of the wage agreements. Probably the starting process has been more tense than normal and we think maybe a bit more aggressive than normal. new unions entering the business, and some of them are more aggressive in their approach and so on, and this has been creating noise. Then in the assemblies, you know, it always appears that the most radical is the one that is more followed and so on, but we have seen with great comfort that even though the initial approach was aggressive, or finally, it has been decided not to go to the strike and keep the ball running and keep with the discussions and so on. This year is a year of political elections in Spain, taking place some local and regional ones in May and probably the national ones in November, December. The years of elections always create further tension and especially when it takes at the same time that the way discussions always more or less appear to be also some political issues that justify that some of the approaches are more aggressive or not and so on. But we are keeping the discussions. We have been opening and keeping open the negotiations. All the explanations have been properly given. We are committed more or less to the dialogue and we stay with great comfort that finally it was cancelled, the decision to go on strike and the plant is running. We shall be keeping the negotiations and we hope that during the year we shall reach a proper agreement for all the parties.

Yes, thank you for that. Is there actually a deadline for any agreement to take place? And so far in your negotiations, are you seeing weight increases in line with, let's say, inflation over the past year or maybe above or below?

Well, we are feeling, following the calendar, we understand that it shall take place prior to the end of the year, but probably it shall take time. Any case, being solved during 2023, but probably for the second half of the year.

Okay. Thank you very much.

Thank you, Melissa.

Thank you. Our next question goes to Robert Jackson of Banco Santander. Robert, please go ahead. Your line is open.

Good morning, Miguel and team. First question is related to Columbus. Has Columbus been suffering from numerous disruptions in South Africa and thus would have affected the results?

Well, in general, Columbus has... The first quarter of Columbus normally is the seasonal summer slough down there. So most of January until February starting still is still is the summer holidays and the summer period. So this is an issue that has been taking place. There has been some energy issues in the energy supply, especially in the last time. This is something affecting the whole country. And then our team there is making good effort for obviously, as we said before, we are not running full. So consequently, what we are trying is to is to run the plants in the times where we have electricity available and so on, and keeping our production and keeping our targets. So in general, we are doing business. It's true that the starting of the year, especially the first quarter, normally is the weakest in Columbus, but we are doing okay. The part of the exports from Columbus is the one that obviously being Europe the natural market, the exports there are low so the contribution of that business is going down. But in part of this model we are running much has been a satisfactory, very satisfactory month in terms of deliveries and also in terms of production. As a consequence of the issues that we are seeing in the state, we are producing more We have been producing more mild steel and stainless, and the margin is a bit lower. It's a much more flat type, but it's running. It's satisfactorily running, and in principle it's okay. The main concern now is the issues of the failure in the electricity that is experiencing the whole country, that we are trying to do our best in managing the plant for being as less exposed as possible. A national problem. It's not under our control.

Okay, but despite the second quarter, it looks better, bearing in mind the seasonality and probably less disruptions.

Yes, I think so.

Second question related to VDM. If I look at the EBITDA margin, the fourth quarter is 6% and the first quarter is 9%, and production-wise, very similar levels. Is there any impact from mix effect? So the mix of the sales is significantly different, or what's behind the significant improvement in margins?

The margins have been high. There has been some When we move to BDM, for us, obviously, internally in the group, we must keep on mind the differences. We normally used to say that BDM is our boutique, so we are talking about million tons in stainless, and sometimes we are talking about the levels of production in BDM, and then the effect that may have disruptions of 2,000 to 3,000 tons in a quarter appear to be obviously showing percentage disruptions. But this is something that at the end – in January there were some issues fortunately solved affecting production and BDM consequently this change has been normalized during March. We have been able to keep good margins but then maybe the sales have been lower. As a consequence of that affecting sales and affecting the finished good areas and this is something that gradually shall be solved. As a consequence of this is probably one of the reasons why we have seen this increase in inventory that is more working process and this shall be neutralized during the year. So we are not concerned about that but it's true that the sales figure has been a bit lower than what should have been. as well as the finished goods. Having some challenges in that area, as I say, fortunately are solved. So during the year, they shall have no impact, but maybe some issues occurring in January has been affecting those areas. But it shall be normalized during the rest of the year, and the margins remaining high. So the beta margin is high, as you are saying, as much as we keep good margins, and we are in position for for normalizing the sales, the deliveries, and the finished goods areas. It should not be affecting this or experiencing these effects. We understand that also the contribution and the profitability should be higher in the second quarter.

And this is funny. NAS in North America, I guess, is also benefiting significantly from the strong energy sector or exposure to the energy sector, which I Could be in the range of 10, 15% of sales. Is that visible?

No, I think it's much more lower than that. So the sector is relevant, but it's lower than that.

Okay. Thank you very much.

Thank you, Robert.

Thank you. We have no further audio questions. I'll now hand back to Carlos for any webcast questions.

Okay, thank you. There are a couple of questions from the webcast, but already answered by Miguel, so we can conclude the conference call here. Thank you again for joining us on this call and for all your questions. Our next report of results will be on July 26, and we hope to see you there.