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.