Acerinox Sa

Good afternoon and welcome to the Acerinox Third Quarter 2024 Results Conference Call. My name is Borja Riestra and I am part of the AIA department. Today, the call will be conducted by Miguel Ferrandis, the Chief Corporate Officer, Ester Camós, Chief Financial Officer, and Carlos Lora Tamayo, our Investor Relations Director, and now also the Communication and Reporting Director. As we normally do, after the presentation, we will open the line for questions. Let me remind you that this conference call is being broadcast on our website, atherinox.com. Now, I would like to hand you over to Miguel. Please, Miguel, go ahead. Thank you, Borja.

I shall try to make some general comments on the first slides of the presentation. Then Carlos shall give a color of the actual market situation. And finally, our CFO, Esther Camos, should give a detailed explanation of all the figures involved in the quarterly and yearly figures. If we go to the first slide, Q3 2024 at a glance, the title for this slide should be resilience. Clearly, in the first statement, what appears is the consistency in a quarterly EBITDA despite the challenging market conditions. And these challenging market conditions is what we must keep on mind. Two years ago, in 2022, we experienced a fabulous performance in our sector. So all the companies were having peak profit records. We too. At this time, let me bring back the statement of President Kennedy when he said that a rising tide lifts all the boats. So this is what took place at that time. So the demand was overperforming. So all the industry obtained huge profits. In our case, we were the most profitable player and we reported also the highest margins among the industry. But at the end, the excellence is to keep on sailing when the low tide and especially when others run aground. And this is exactly what actually is taking place. We are reporting these quarterly figures. of a bid of 114 million euros, for accumulated year-to-date a bid of 350 million euros. But this has been achieved In the most challenging market conditions, we don't go back for the latest crisis of the COVID years. We need to go back 15 years in the huge financial crisis for reaching equivalent levels of demand in Europe in year 2009. or in America in the year 2011. So in these circumstances, in the worst and toughest market, we are able to achieve, in nine months, 350 million euros. This is in line with through the cycle we were sailing not many years ago. And I think it's an excellent demonstration of what we have been able to achieve. In addition, we were the highest profitable player in the good days. But also in this 2024, as you know, we have been among the industry, the player reporting higher profits and also higher margins. In addition to this, the second comment is related to specific circumstances in the Q3. It's clear that probably it's not... so relevant as it's fully spoiled or influenced by the circumstances of the starting up of our plant in Nacerinos, Europa, after five months stopped by the strike. And consequently, it has had a strong influence of the increase in inventories. We have needed, obviously, to normalize the inventories through all our distribution, as well as in the increasing customers as the consequence of the startup of the activities. So this is clear. that as a consequence of that, on a purely quarterly basis, we have increased our own capital 122 million euros. This issue is neutralized when we analyze the nine months and obviously shall be also neutralized in the coming fourth quarter. So the third quarter is distortion by this fact, but should be understood under that basis. In the third quarter also, we have made the announcement that we have finally reached an agreement for selling Baru stainless. And the selling shall take place during the fourth quarter. In this regard, three years ago, we were stating that Baru stainless was not core business anymore. In May, we announced that we were stopping product. and that we were looking for the better options for barrel stainless. In this regard, what has been prioritized in our running plant, as well as our customers and our suppliers. So we have prioritized the best option for our stockholders and also This has been the year of the expansion and our bet of growing in the high performance alloys in America through the acquisitions of Heinz. When we made the Heinz deal announcement in the 5th of February, we mentioned that probably the completion date should be in the Q3. Unfortunately, the preliminary conversations with all the antitrust authorities have taken longer than expected. In this regard, I want to stress again the differences among the different administrations. While the antitrust approval in the states and the CFIUS approval in the states was obtained easily and very quickly, The procedures in Europe with the different administration and jurisdiction has taken a while. So in this regard, we have need to go passing through foreign direct investment in Italy, in France, in Spain. In addition, we have need to develop antitrust approval in Spain, also in UK, and Austria. The one in Spain was already achieved. Fortunately, last week, We have obtained the final clearance obtained in the UK, and we are only pending in Austria. So it seems that our lawyers and advisors are confident that in the coming weeks also this could be achieved. So consequently, we still consider that the completion date should take place in the year 2024 and probably in the fourth quarter. Regarding to the outlook, It's clear that as a consequence of what we are facing in the market, the seasonal slowdown of our most profitable contributors, which is the stainless in America and the high-performance alloys, the seasonal slowdown of the fourth quarter normally makes that this contribution shall be lower. In addition, with still the uncertainties situation taking place, the weak momentum also. in the European market and the very depressed demand, what we clearly assume is that the adjusted EBITDA of the Q4 shall be lower than that of the Q3. But having said that, it's clear that due to the effect and the contribution of the to our results of the sale of Baru Steelers, the EBITDA reported in the Q4 by far shall be the highest of the year. So this is something obviously to keep on mind. And as I said before, we expect that the working capital shall be normalized as well as the net financial debt as a consequence of that shall also be neutralized in the fourth quarter. Most of this increase that already has been taking place. So this is the Q3 at a glance. If we move to the ESG, our definition of this slide in our case clearly should be committed. We are by far fully committed with the ESG, and in this regard we are proud of the outstanding performance that we are achieving in several areas. So it's clear that that in terms of the circular economy, not only most of our production in stainless is coming for recycling scraps, but also we have obtained 100% recycling of all the consumables, and this is something to reinforce. In addition, we are also achieving more than expected valorization of all the waste reduction, and this is an area that also we are overperforming, as we are by far overperforming in terms of the water withdrawal. So in all these areas that at the end are more absolute parameters and indicators, we are overperforming, and we are proud of that. We cannot be so over-performing in those parameters which are related to production. And at the end, when we refer mostly to energy as well as to emissions, our baseline taking, as is indicated in this slide, is the 2015 year. In the 2015 year, we were running our operations at 87% capacity utilization. In this year, 24, January to September, we are running at 65%. By the nature of our business, by the nature of our plans, it's clear that it's not possible to keep the ambitious targets we have running at such low levels. Capacity utilization, as an indication in the full year 2015, the baseline, the production was 2.3 million tons. In this year, January to September, we are up to now in 1.3. So this is the clear explanation for why in those areas still we put our red dots. And this is something that gradually is improving. Keep also in mind, in terms of of energy, for example, and renewable energy, that our plan who is more active on renewable energy is the plant of Spain that has been closed for more than five months. So as much as this has been put on a stream in the quarter and gradually it's increasing productivity, we shall be obviously improving also are indicators in the energy parameters. In addition to this, we have been also going through substantial initiatives that appear also in the slide. Obviously the most relevant ones are, for example, the carbon product footprint verification in Azarenas, Europa, in addition also in the water, following the water mandate agreement of the United Nations. that also in this quarter has been relevant, as well as all the projects we are participating for the proper use of our slag. For example, also yesterday we were awarded by sponsoring the ESG criteria in most of our suppliers. So this is areas in which we specifically have been clearly focused in this year. One area that we have also improved compared with last year, which is a relevant area, is safety. In regard of safety, we have experienced a 5% reduction compared with last year. Our target is much more ambitious, and as you know, the target is a reduction on 26%. We also think that it's remarkable that we have reduced this 5% compared with the last year, especially in view of the circumstances that are coming in production. So when the plants are running full, obviously it's less risk of potential incidents occurring. All these incidents that have occurred this year mostly are related to minor injuries. It's cutting hands or fingers or some minor damages. But this is a consequence of the constant up and down in production, stop in production. closing partially part of the lines, obviously the five-month strike, and then the reactivation of the production again. So in this year, in which has been such a big number of manual utilization or the stats and and working the equipment on a manual basis for adjusting for putting in the stream or closing it. This is where these incidents have been taking place more than expected, and we are working also for reducing all of these incidents for the coming years. If we move to the following slide, Apologize to Carlos and Esther, my colleagues, in this presentation for today. But if I should choose one slide for today's presentation, this should be the slide. I think it's the most relevant slide to try to understand. The title of this slide should be Strategy, Strategy, and Strategy. And at the end, these are relevant milestones that have been taking place during the year. In addition of sailing, as we have been mentioning, that we are sailing successfully in these challenging times. In addition, we are keeping the expansion plans in North American stainless as well as BDM metals. All of them are on schedule. But in addition, we have passed through three key milestones. So we cannot be purely waiting for the market to recover. In addition, we are by far focusing our strategy on three key areas. In those, as appear in the slide, first of all, I want to talk about Atherinox Europa. Atrinos Europa finally has been implemented, the Bergen agreement for the implementation of a new business model for the plant, and that was needed. So it's clear. that has been painful. The passing through a five-month strike has been painful for everyone. Obviously, this has been spoiling the profitability of the company, but I want just to make some comments regarding the history of Acerinox. Those veterans as myself, even though coming for the second generation, always have been keeping on mind what has been the history of Atherinos Europa. They have been two long strikes in Atherinos Europa in its 54 years of history. The first one took place in the year 77, and that was as a consequence of the implementation of a new salary system in which 40% of the salary was to be variable according on productivity and quality of the production. The implementation of that system created a three-month strike, but finally the system was implemented. So as I told before, we always remember the stories taken of our veterans of how terrible it was facing a three-month strike and shut-off production. But what is clear is that the implementation of that model created a period in which for 30 years, a 3NOX plant in Campo de Gibraltar was the reference plant, the fully integrated plant, and the most competitive plant in the world, and it worked. So it was a painful streak also, but at the end, established the basis for a proper running of the plant for the following 30 years. It was successful, not only for the company, but also it was also successful for the workforce, as the continuous increase in productivity of our plant allows them to have a compensation which is above that proper, not only of the area, but also of the industry in Spain. But the world changed and then therefore the world has changed in the last 10 years or in the last 15 years due to the several known circumstances and then we need to readapt again. So what was needed was to implement a new business model bringing especially flexibility. And being able to prepare to working in these mini cycles that actually are taking place, sometimes quarterly, sometimes there are even cycles or different cycles during a quarter. So we needed to provide a new system which allows us to work in more flexible basis the plant. as well as changing the trend in moving to more customer-centric base, approaching a better market share for final customers, as well as avoiding more commodities standards and focusing on high-value-added products. So it was needed to implement that. At the end, this flexibility brings us, or our workers, the availability to be called, depending on the market circumstances and demand, the versatility to work on different parts of the plant, which also is something extremely relevant, as well as an hours pool that also could be used. in a special target of training that flexibility. At the end, the agreement includes all these areas, so we are very confident that with these new circumstances, for the company and for the workers, we have developed the proper system for we're running successfully Azrinas Europa in the coming years. In addition to this milestone, as we mentioned, we have been focusing. We worked most of last year, as you know, on making the analysis and the study for Heinz acquisition. And we announced the deal on the 5th of May. We are clearly prioritizing the expansion in America. For us, as you know, we always have been stating that this acquisition for us is a AAA investment, and AAA means expanding in America, expanding in alloys, because we clearly addressed that the area to growth More and expand is in the high-performance alloys division, as well as AAA for aerospace, because in our high-performance alloys division, we are more exposed to other areas, such as oil and gas and such as chemical process industries, but especially aerospace was a target area to be placed. As a consequence of that, we went through and we raised and finally made an offer to acquire Heinz that was accepted. And with this, we positioned ourselves in the top of the pyramid of high-value added products. The integration is... Obviously, waiting for whenever the completion can be done. We are working, in any case, in the meantime, in those areas that we are able to work. It's critical that, obviously, until finally obtaining all the antitrust, we cannot enter in certain areas, but we are preparing all the works for a proper finance integration. We also have the the clean teams for working and special designing the future CAPEX that shall bring most of the synergies of this deal. So we are making all the preparation works for that, but we are very impatient for starting working altogether. In this regard, the Acerinox Board of Administration that took place last week in Kentucky was invited and it was done a courtesy visit to Haines and we visited the facility of Haines at Kokomo as well as we have a proper explanation of all the research and innovation areas in Haines, as also having a courtesy first meeting with all the management. So obviously not only ourselves as the management team, but also our board is very excited and very impatient for finally reaching the proper integration and start working all together. And then the third milestone that has been achieved in this year is the final sale of Baru Stainless, as I mentioned before. At the end, it's clear that we have failed on making a profitable business operation in Malaysia. In this regard, as far as I previously mentioned a quote of President Kennedy, as we are in the presidential elections week in the States this year, having mentioned a quote of a Democrat president, let me bring a quote of a Republican president on fair value. and this one probably should be that one of Theodore Roosevelt. It's hard to fail, but it's worse, never have tried to succeed. We tried. We tried to make a state-of-the-art running plant efficient and profitable in Malaysia, but we have not been able to succeed there. Why? Because at the same time that we were putting that plant on a stream, It was then decided the ban at Indonesia for a ban for exporting raw material and consequently huge and massive investments by Chinese groups have been done in Indonesia for transforming the nickel pig iron. the dirty nickel being refined for obtaining stainless steel slabs, and Indonesia moved from a production of 300,000 tons to a production of 5 million tons. So this has changed the status quo of the stainless world all over the world, and the rest of the world has been exposed to that in the last decade. But obviously, the ones who have suffered more that issue has been the neighbor countries and especially those in the area. And in this regard, it was almost impossible to to keeping our re-roller in Malaysia being profitable. So it didn't take sense to expand through a melting shop in Malaysia, but obviously just remaining a re-roller for us also was not core business. So as a consequence of that, as I stated before, we have looked for the best option and the best option for our stakeholders and the best option also for the group has been closing this deal. And we understand that in the Reminder of 2024, everything shall be settled. As a consequence of this, we shall focus on our core markets. It's obvious that our core market in these days is going to be the Western world. It's going to be the Western world for high-value-added stainless steel. It's going to be the Western world also for our high-performance alloys and also getting advantage of having such a flexible and polyvalent plant as is that one of Columbus Stainless. So we are back to basic, concentrating in these core markets for ourselves. Should you explain the market, Carlos?

Yes, thank you, Miguel. Let's move now to explain the challenging market that we are living in. Maybe first, as a way of introduction, I remind you that both the stainless steel industry market and the high-performance alloys market depend on the economic cycle. Unfortunately, today is not the best time for the cycle, maybe just the opposite. We are living probably in the low part of the cycle. As a reference, you can see in the slide that we include the manufacturing PMI. The data for September is the lowest of the year in Europe and is the sixth consecutive month of contraction in America. So this gives you a sense of how poor the economy is today. But how is reflected all of this in the stainless steel market? Well, the apparent consumption declined last year 20%, both in Europe and the U.S. And this year it's declining even more. This year we are seeing a decline in the U.S. of 1% and a decline in the European market of 0.5%. If we compare the estimates that we have for external consultants for the year 24 with pre-COVID levels, the year 2019, we can realize that the apparent consumption will decline about 17% in the US market and 20% in the European market. So as we are commenting, very weak and extraordinary, and hopefully temporary momentum, the one that we are living in. On the positive side are the inventories. Inventories in hands of big distributors are very low. well below the normal average both in Europe and the U.S. In the U.S. are 21% below the normal average, while in Europe are 13% the normal average. Imports this year are moving up in the United States. It's mainly imports of commodity grades in which we don't have a very big exposure. Probably our peers have more exposure and suffer a bit more than us in this sense. In Europe, in the third quarter, went up as well imports. but are well below the previous years, below 20%, 18%, so well below the previous years. Where we can find more differences is in the market prices. Prices, base prices in both markets in Europe and the U.S. are more or less stable, quarter on quarter. But we were able in the U.S. to maintain this stability at a reasonable level, while in Europe are in a very low level. Okay, so to sum up, in the stainless steel market, the short term is very challenging, but we are fully confident that this will be revert and we will benefit for recovery in the demand. Not only due to the inventory levels are very low, But also, as Miguel explained before, because we did our homework and we have a very solid and clear strategy. If we move to the high-performance alloys market, the demand remains solid. On the positive side, we highlight the oil and gas and chemical process industry. And maybe in the other side, highlight the aerospace industry. You know that today we are not very active in this aerospace industry, but we will be when we complete the Heinz acquisition. Hopefully, all the disruptions that this sector is living today will be solved by the time that we acquire Heinz International. And now, I would like to give the floor to Esther, who is going to explain the results.

Thank you, Carlos. Thank you, Miguel. Okay, let's talk now about the consolidated group results. If we first start by looking at the quarters, we had a first quarter with an EBITDA of 111 million, a second quarter with 125, and a third quarter of 114, which once again proves the resilience of the group in the adverse market circumstances where we are. In terms of margins, we achieved a 7% margin in quarter one, 10% in the second quarter, and we are still in 9% in the third quarter. And it is important to mention that this 9% has been achieved, and it's two points higher than first quarter. even though the extra law, especially in America, has been going down month by month in this third quarter. Even though there are no significant changes in the EBITDA, looking at the quarters, in the profitability, the quarter has been marked, and it's important to mention, by two factors. The first one is a weaker demand than expected in the American market. And the second one is the increase of activity for the group in Acerinox Europa after the five months of strike. And in this sense, it is important to remark that the operations have been run and started without any incident. We have not had any failures, but we need to still highlight that the weak demand in Europe continues to be a fact, especially in stainless, not really in high-performance alloys. where it is a more long-term market and therefore more stable and solid in this period. Going to the nine months, we have achieved an EBITDA of 350 million. We think we are in a unique position in the sector and to prove that, I just want to go back to history. We are, and remind you that we are in a level of demand sub-production similar to what we had in 2009. And remember that 2009 was the only year in history where Acerinox had negative demand. EBITDA at the group level. Now we are in a range of, we are in the 350, and these 350 has been, for those ones that follow Acerinox for many years, this has been like through the cycle EBITDA not so long ago. Another point to remark is the net financial debt. We have ended September with a net financial debt of 453 million, which possibly for some of you might think that this is a high level or a not expected level. But just to highlight that this is caused by a temporary extraordinary effect due to the ramp-up of Oceanox Europa and the consequence of the increase in the working capital that we later will explain. But definitely we expect a reduction in the net financial debt for the fall quarter. Going to stainless and let's start by productions. If we look at the productions, we will see that there's been a significant increase of 90,000 tons from quarter two. And this is due to the ramp up after the strike. We needed to fill in all the supply chain, the group supply chain in Europe, and that has caused for the quarter an increase in inventories and the consequent impact in the operating cash flow that we will have. mentioned later. But this again, we think it is a temporary factor that will be solved in the fourth quarter. It's just a question of filling in all the supply chain. In terms of sales, they remain very similar as the levels of quarter two. And this is, again, due to the weak demand, the seasonality, and the low recovery after the summer. In terms of prices, and that's another point to remark, we are keeping base prices stable also in America and in Europe. We have mentioned it several times. It's part of the strategy just to sacrifice volumes but keep the prices. And this is, again, what we are doing. even though I think this is a merit with the special weak demand that we are suffering in this period. And these allow us to keep the margins stable in a 9% and even better than what we got in the third quarter of 2023. If we look at the year-to-date figures, the EBITDA for the stainless have been 258, which is lower than what we got in 2023. But again, this has been affected by the five-month strike in Atherinox Europa. In terms of operative cash flows, we had in the nine months, we had a positive cash flow, operating cash flow of 97 millions. Again, this has been affected by this quarter and the ramp up again of Atherinox Europa with the increase of inventories already mentioned to fill in the supply chain and some also in customer due to the due to the increase of sales in Europe. But again, expected to revert in quarter four. Going to high-performance alloys, the situation is different than what we have explained for stainless. There's a good and stable level of demand, especially in sectors like oil and gas, chemicals, electrics, not really in aerospace, but as you know, this is not the main market for BDM, so this has not... This has not had an impact in our case. The other book is stable, also in terms of volumes and in terms of margins. It is true that there is an absence this quarter of the tailwinds of the nickel effects. I remind you that last year we had a very positive effect on that, and we have been remarking this all the time. This is something that allowed us last year to have the best results ever in high-performance alloys, and currently this is being neutral this year. For the third quarter, we are having a slightly lower EBITDA than in the second quarter, but it is due to the seasonality and the reduction of production normally that we had in the month of July due to the holidays. In the nine months, we are achieving an EBITDA of 93 million, and here I just want to remark that Before we bought BDM, the biggest result that they ever had in history and the best one was in 2019 when they got an EBITDA of 96 million. We are now achieving 93 in nine months. And the last thing to remark is the operating cash flows. The operating cash flow, BDM has achieved a positive operating cash flow in the nine months of 106 and positive also in this quarter of 22. And going to capital allocation and net financial debt, As mentioned, one of the main factors in the quarter has been the increase in the working capital, already mentioned, due to the ramp-up of Atherinox Europa, and mainly focused on the increase of inventories. This is an extraordinary temporary effect, as already mentioned. Other factors, other important things in the quarter has been the payment of the dividend of 77 million. And I think it's very important to mention here the impact of the conversion differences of 71 million. This is a pure accounting effect due to the cash deposits that we have in the States. You know that part of our strategy is keeping big deposits in the U.S. The exchange rate was at 1.12, actually is 1.08. So this is just a reference to explain that probably this effect would revert if the exchange rate continues in the same rate as they are today. Okay, but it's a purely accounting effect, it's not a cash out. In terms of if we go to the nine months, we see that the operating working capital, the increase is much lower than what we have had this year, and we expect it to be positive in the 12 months. We have also in the nine months payment of taxes of 93, which again shows a contribution to sustainability and also the profitability of the group, which means paying taxes there where you have the profits. In terms of capex, possibly you might expect it, and we have guided you to maybe a higher capex than what we have had in the nine months. Here, I think important to mention that we expect, due to the strike, we have also postponed some payments, but we expect the full quarter to have a stronger capex than what we have had in the third, first quarters, and we possibly will end in a range of the 200 million capex. Okay, we have the payment of dividends of 154 millions, and then the conversion difference, as you see, in the nine months is much lower. All of it has made the debt to increase in 112 millions, which is, as Miguel mentioned also, we expect to reduce it in the end of the year. And you can let me get it.

Okay, yeah, the title of this slide should be the end. At the end, fortunately, we are now going quick to the Q&A. But having said that, let's repeat again some of the key messages of today's presentation. First of all, the results obtained, resilient EBITDA is something clearly important. to reinforce. We are obtaining an equivalent figure of that one, which was the average through the cycle four or five years ago. And in addition, we are the best in class in our industry. So we are the best in class in the good days. We are the best in class in the tough days, such that of today. We are not especially concerned about the increase in net financial debt up to September. This shall be neutralized. Obviously, we are focused and we have a strict and clear discipline for our working capital. This shall appear in the fourth quarter, so it shall be solved easily. In addition, in terms of the shareholder return, these days we are having a remarkable 7% dividend yield. I also want to remind that during our history, we always have or maintain or increase the dividend. Never, ever. we have stopped paying dividend or canceling the dividend. So at the end, this is something obviously clear in terms of our policy and regarding shareholders. And thinking on the outlook, it's clear that we have not a clear visibility in the stainless for the coming quarter. The market is going to remain tough, and we assume that. The situation in HPA is much more stable, and this is, as always has been stated, one of the beauties of moving to high-performance alloys is facing different cycles. In the low cycles of stainless, the cycles of the alloys are different, and consequently we are also benefiting from that in these days. Regarding the Haines acquisition, we are impatient, and let's hope that everything shall be closed soon, and during the Q4 we can announce the closing of the deal. And in regarding of the outlook, the Q4 EBITDA shall be the highest of the year as a consequence of the sale of Paris Stainless. The purely adjusted EBITDA is a consequence of the market circumstances as we have been repeating and repeating today shall be lower than that of the Q3. And we shall neutralize that increase in net debt and probably keeping for similar levels of that one of last year. And probably this is most of the comments we wanted to convey you. Thank you for your patience. And now let's go to the Q&A session.

Thank you very much, the three of you.

If you would like to ask a question. Perfect.

Yes, please go ahead.

Thank you. If you would like to ask a question, please do so now by pressing start followed by the number one on your telephone keypad. Our first question comes from Tristan Gresser with BNP Paribas. Tristan, please go ahead.

Yes, I thank you for taking my question. I'd start with two. First on the US, we've seen the US pricing premium over Europe decline quite a bit here to date. What has been the main driver of that is that supply, that demand. And do you still believe the U.S. should trade at a premium on a normalized basis? And if you could also tell us how much of that weakness we've seen in the U.S. has died to the election. And once we get past the election, would you expect some restocking once buyers get more visibility?

Okay, thank you, Tristan. As we commented during our presentation, prices in the U.S. remain stable quarter-on-quarter, base prices, okay, although I think it's transaction price that due to the decline in nickel price and consequently the alloys are charged. It's moving down, but base prices remain stable. We experienced some slight decline at the beginning of the year, but then we managed to maintain it as stable. It's true maybe that the alloy short charts impact faster in the U.S. than in Europe, and this is why maybe you have this sense that the gap in prices between both markets is squeezing. But the base price, that at the end of the day is what gives us the margin, we will manage to maintain stable.

And the demand side, would you expect some restocking after the election, or do you think most of the demand weakness is tied to something more structural and not necessarily temporary?

Not structural. Probably it's a temporary fact. Every four years, the election time always provides some additional uncertainty. This actually is taking place. It's taking place in addition of depressed demand. As Carlos has stated previously, last year the decline in demand was around 20%. This year it still is a slightly negative figure. This is a fact that is there. For us, it's temporary. At the end, it's a similar phenomenon in Europe and in America in terms of demand. So it's not the whole Western world where the industry is disappearing. What is clear is that there are different facts that are affecting the market, but we understand clearly that this is temporary challenges, and at the end, it shall recover. The rhythm of that recovery still is pending to determine. We are actually negotiating with our main customers for the coming year, so it still is a bit premature. Let's see how it works. As Carlos mentioned before, everything is properly based for a quick reaction. Whenever the demand wakes up, the recovery is necessary, the stocks shall normalize, the apparent consumption shall reaction very quickly. So this is, but this is still is pending to come. We understand that this may come during 2025, mostly in the States, which is where we have more visibility or especially more dialogues with the final customers and so on. It's understood that it shall be coming. But probably it's not going to be a radical change from the Q1. It's something that probably shall be coming during the year. So in this basis, at this time, our best approach to the market, mostly in America, is that it's going to be a transition year, but gradually during the year.

Maybe just one thing is that the fourth quarter, as you may know, Tristan, is by seasonal reasons the weakest of the year, with Thanksgiving, Christmas and so on. So maybe it's a bit soon to see a restocking, at least a big restocking. in this fourth quarter of the year. And as Miguel mentioned, we should wait until 25, no, at some point in 25 to see this progressively reactivation of the apparent demand.

Okay, that's very clear. My second question is also on the demand side and also in the U.S. The aerospace weakness, you mentioned obviously the supply disruption that we've seen. Can you remind us what's the percentage of aerospace currently for the HPA division? And then when you look at Haines, where it's a bigger chunk of demand, obviously, how do you see the operation up there? Does that put into question the EBITDA target? Last time we got a big disruption in the aerospace industry, I think it was during COVID, and then it took some time for the space to recover. So How are you looking at this?

Well, the aerospace in our HPA business accounts for probably less than 10%. So as we commented, we are not very, very active. But we are more exposure to the European market than to the US market. So probably we are at least less affected than others in this sense with these disruptions that are suffering in the sector.

In this regard, the aerospace, as Carlos says, is around 10% in today's structure of our production. Clearly, one of the goals for us to grow in the States through Haines is moving more on the aerospace. So on this basis, as has been stated in the quarterly results made by Haines during the year, this is something that obviously actually is affecting Haines. the profitability of these days. But at the end, let's keep on mind that what Boeing is experiencing these days is clearly a momentum effect. And probably these delays at the end shall be accompanied by higher orders for the coming years. So as much as our plan and clear strategy is long-term oriented to to develop this business and expanding in the States, it's clear that all these delays that have been affecting the 2024 and maybe the start of 2025 at the end shall be moved to higher demand in a later stage whenever we are not only fully integrated but also obtaining the synergies and with additional capacity of the CAPEX on plans. So on our strategy, This is nothing to be concerned about.

Okay, that's very clear. Thank you very much.

The next question comes from Yanis Mazoulas with Morgan Stanley. Please go ahead.

Yes, hello. Thank you very much for the presentation. A few questions from my side, and I'll start with a follow-up to Tristan's question around the U.S. alloys exposure that will increase post-HANES. What's your sense in terms of a potential for a more gradual recovery in the aerospace? How would that impact your production targets and some of the investments you're planning for HANES? And ultimately, could it lead to a slower realization of your synergy target? Thank you.

Thank you, Ioannis. The synergies achieved after the expansion phase announced for Haines and all the CAPEXs that have been already stated that are going to take place there are CAPEXs that shall be put on stream for the years 28, 29, 30. So on this basis, The actual momentum and the disruptions that is actually taking place in that space by the temporary issues affecting Boeing is something that we are absolutely comfortable that shall be solved for that time. So this is not meaning for us a change of our views for those days. On the contrary, as I previously said, we understand. that these delays taking place in the 2024 shall move to further increase in the order books for that period. So we keep on fully convinced and committed that our target for introducing us more in the aerospace industry is the strategy to follow.

Thanks for that. Second question, just coming to Europe. So your commentary of the Q2 results suggested that the Spanish plant would be EBITDA positive by the end of Q3, which doesn't seem to have materialized. What's your weakness there? Because my sense is that European demand hasn't really deteriorated over the past two or three months. It's probably stable at low levels. Some color there would be very useful. Thank you.

It's true that we understood when we just were coming back to activity, we understood that gradually during the quarter we could be able to reach certain positive figures, mainly in September. But the situation probably has not allowed that to take place yet. First of all, still the market remains being very weak. And in addition, it's true that after five months of a strike, we have not lost customers, and especially we have not lost the target customers we already face ourselves to be supplying to. But in these very weak demand days, We are not obtaining orders for the remainder of the year because our customers mostly have focused on the suppliers for keeping their necessities. So in this dormant demand, the normalization for Atherinos Europa has not been taking place at the same rhythm. This is something that shall come for the 2025, and we expect it to come, but has not been able to achieve it in the in the third quarter. We are improving quarter after quarter, but the demand still is very weak in Europe. Sorry, just to add, Ioannis, Probably in the actual days, it's not obtainable profitability in Europe for none of the players. So still the prices are depressed and the demand is very poor. So in this environment, we don't consider... that any of the players should have black figures at the bottom of the P&L. So it's probably everyone should need to wait, and we hope this is to come in on the 2025. So by itself, in these days, probably it's very difficult to achieve that.

Okay, understood. And our last question for me on the Q4, how do you guide for lower underlying EBITDA quarter-by-quarter Shall we look at Q4 22 and 23 as a reference, where we generate around 90 to 95 years of EPDI? Is that a reasonable range, or do you have some additional comments here?

Okay. The situation of the demand is not at the levels that we were in 2022 or 2023. Okay. So we really expect an increase. that to be in a low range for quarter four, especially quarter four is also affected by the seasonality of the normal market, but the American market, sorry. But it is true that the levels of demand are set. Last year, there was a drop of 20%. And in this year, we are not recovering anything of the drop of last year. So just looking at the external figures and at the macroeconomics figures that we are having this year, they are being whereas that was the situation in the past. So we expect a low fear. It is true that in our case it will be positively affected by Baru, okay, in terms of reported Vida. Okay, in the case of Baru, you know that we made an impairment last year, which dropped all the value almost to zero or to the value of the lands, and we might have also at the end of the years some extraordinary positive effects due to the accounting effects of the conversion difference. part of the EBITDA that we could have as negative because of the lack of demand could be compensated in terms of reporting EBITDA by the sale of Baru.

That's clear. Thank you very much.

The next question comes from Maxine Koga with Ojo BHS. Please go ahead.

Good afternoon. So my first question is on precisely the accounting gain you plan to achieve on Baru. I think the land was something around 40 million in your balance sheet, while the net proceeds are 95 million dollars. So is the accounting gain you plan to realize in Q4 the difference between the two?

Well, from an accounting perspective, it's not exactly that difference, okay, because you need to take into consideration also the historical value of the investments that we have done over the years in Baru. OK, so there is an effect also which is kept on according to accounting rules. There is an effect which is kept on result, which is the conversion difference. In our case, those are those are positives. OK, so and those will be released at the same time we losing we we lose the control of. Those conversion differences, it will depend on the date in which we do the transaction. But for you to have an idea, the conversion difference, the positive conversion difference that we have as of September are in the range of the 80, 90 million. So it will be a better profit than the difference between the 40 million and the 95 million.

Okay, that's clear. And second question is on the situation in Europe. So I read in the press that you started a layer scheme in Spain. So could you shed some color on the related impact in terms of capacity utilization and perhaps cost savings? And can you shed perhaps further color on the capacity utilization in all your plants through the world, at least NASA and Columbus?

Well, in Spain, you know that we have this tool of the temporary layoff that allow us to adapt to the demand, our production plan to the demand. In this sense, as you mentioned, we activate it at the beginning of October. Workers are already coming back to the plant. It will be by phases, it depends on the necessities, but the melting hot, cold rolling, it depends on the necessities, one week or another. But I repeat, this is a tool that we have to flexibilize our coast and our production plant in the plan. The capacity utilization for the third quarter, it's about 60%, roughly speaking. And then for the fourth quarter, depends on the market situation, we will adapt.

Okay, and just the last one. So it's on your pro forma net leverage strategy. At the time of the acquisition of ENDS, you plan to achieve 1.5 times at the onset and bring that down to 1.2 in 2025. Since then, I think that the BDA generation has been a bit weaker than your expectations, although free cash flow has been broadly in line, despite the seasonal tick-up we have seen in Q3. So what's your latest estimate for net leverage? at the end of Q4, when the HEMS acquisition is supposed to close?

Well, it still is a bit premature in any case. As we have indicated, the debt was rising in Q3. We understand that this should be neutralized in the Q4 in equivalent terms, so probably As a rough indication, still is a lot of circumstances to take place, we understand that should be in line with that net financial debt that we reported at the end of 2023. So having said that, I think that 2023 it was in the range of 340 million euros or probably should be in that range. In addition, we have the time of when we are closing the deal of Haines. It's obvious that the picture, as much as we have to get close to the end of the year and the closing year, if we are Finally, any time late November, early December, just to close the deal of AIDS, by far we shall not be able to contribute our EBITDA with a high contribution coming from purely European. almost one month, which also normally is the seasonal slowdown in the States, as we mentioned. And we are putting all the debt in the same equation. So still the targets are reasonable on a medium term. But the photo finish of the 31st of December, if the Haines is finally taking place late November, shall be spoiled by that. But in the normality, of the developing of the coming months, still we think that this is achievable. It's a pity that at the end it's out of our control. So we control the controllables, but as I said before, the dealing with all the different administrations, mostly in Europe, regarding all these procedures has been lengthy, and at the end We are prepared for making a quick closing as soon as we get all the approvals, but this is still pending to come. So we do not know if it shall be late November, mid-November, early December. We are prepared for that. Obviously, for our financial director, it's something to keep in mind as we are moving $800 million for paying Heinz shareholders. But we are still pending from a third-party administration. that has its own procedures and its own time. Let's see when it comes. This assuming that finally, as we consider, it shall be approved in phase one. If finally it should be needed additional analysis or discussions and it could be delayed, we should move to early 2025. But let's hope that this does not happen and we still are achieve in place. So we are not in this regard concerned about breaking our KPIs. Yes, because the deal is taking place at the latest part of the year. We are long-term runners. Okay, thank you.

The next question comes from Moses Olar with JP Morgan. Please go ahead.

Thank you very much for taking my question. A few from me as well. I just wanted to focus first on shipments within the quarter, which were actually quite strong. Previously in the past, you've given us cover on capacity utilization for the quarter. Could you speak to perhaps where utilization was for North America in the quarter? Europe and then also what are your expectations on shipments into Q4, please? That's my first question.

Well, we should precise that we are not reporting sievments. We are reporting melting production. That is not the same as we explained during the presentation. We need to fill in our supply chain in Europe. So production in this quarter was higher than sievments. This is on one hand. And on the other hand, the capacity utilization in the quarter, we were at levels of about 60% in Spain, about 70-plus in the States, and 65%, roughly speaking, in Columbus in South Africa.

Okay, brilliant. Thank you very much for that, Carla. And then secondly, just on, I guess, expectations for profitability in Europa, if the previous target was to be towards breakeven in Q3, which was not achieved, what are your current expectations in Q4? Are you essentially guiding for less result or continuous improvement, even though they'll not breakeven?

It's going to be difficult at the end. Keep on mind in the Q4 the low level of capacity utilization. We are also making some temporary layoffs, as Carlos mentioned, as a consequence of that flexibility that was brought in the wage agreement. So we are normalizing, but I do not dare to say to what extent this normalizing should take place or shall take place in the Q4. In addition, obviously, maybe that situation is feasible if we see a reactivation of the market in the Q4. In the Q1 of 25, which still we have not that visibility. So contemplating our quarterly figures, the fact that there is a reactivation of the market in January or the fact that the market in January still is depressed, may have a big effect, especially if it's needed or not to make further inventory adjustments. So at the end, we are getting close to the break-even, but on the actual market days, it's not such a clear picture if we are going to achieve this in this period or we need just to wait for the coming year. We are getting close to the break-even, but we still are not there.

Brilliant. And just finally from me, it seems broadly there is this market expectation that post-U.S. elections we could see stronger trade protectionism measures, particularly in the U.S., which would obviously benefit producers such as ourselves. We've seen, obviously, discussions at the start of this year as well for the import protection versus even neighboring trade partners in the U.S., such as Mexico and Canada. Just broadly, if those realizations do not come through post-U.S. elections, how do you see, I guess, the long-term prospects of the U.S. market? We've seen this year import penetration rise higher versus last year. We look at investments yourselves and peers are making, which is to essentially win back some more import share over the medium term. If we don't see that level of heightened trade protectionism measures, do you still view that these investments can carry the same level of returns as you expected, let's say, one, two, three years ago?

Well, our strategy in the States has made us obtaining and improving margins, even though at this time, and this especially took place, for example, during last year, in a time in which the imports were rising. But at the end, we have been able just to drive our production most to the to the high value added types and being less exposed to the pure commodity types. So the imports in the States are mostly related to the pure commodities, and we are not depending on purely such commodity types from our customers. So consequently, in this regard, The status quo up to now for us is fine as it is. Obviously, at the end, if it were a tsunami and were an excess of material, this could distortion the picture. At the end, the states need imports because at the end, it's an import market. It's true that in this circumstance, not as a consequence of the imports, but as a consequence of the demand, is while we are running our plant as lower capacity utilization that what was historically our standards. but this is a consequence of the demand. So for us, that concern is not so related to the imports. So in this regard, in terms of what may happen on the elections, We always have found a difference than with the European administration, that the American administration is very effective. And it has been effective, the Democrat administration, and Obama put in place the anti-dumpings to China. It has been also effective, the Republican administration, when Trump administration implemented the 232 section. And at the end, the Democratic administration of Biden also has been fully respected, the 232 section. So in that, it's not going to be big changes. At the end, obviously, when we analyze the pros and the cons of the two possible candidates, it appears to be also more, let's consider, business-friendly Trump. But on the other side... Still, we need to redefine all the infrastructure and the IRA program of the Biden administration still has not been materialized in pure amounts of stainless. So a democratic administration maybe also should be sensible. to the IRA and bringing additional investments that should need stainless for that, especially in uses. So in general, what we must say is that our trust belief on the possibilities of the American market for the coming future is not depending on who really is going to win the elections. So in both of the cases, the prospects for America remain very robust.

Thank you so much. That was really helpful.

The next question comes from Tom Zhang with Barclays. Please go ahead.

Hi, afternoon. Thanks for taking our questions. Just two short ones for me. Could you help walk us through some of the exceptional costs that you might have seen through Q3, by which I mean, did you have any negative inventory valuations? Were there any sort of catch-up maintenance costs for the Europe assets? if you have a sort of estimate on the strike impact or sort of live strike impact on Q3. And then just what you're baking into the Q4 guidance, both on the inventory valuation side and what kind of costs we should think, you know, are associated to this short-term working stoppage. Thanks.

Okay. In terms of inventory valuation cost, okay, this is – This has not been really a fact in this quarter. It's true that we have increased inventories, but our cost of inventories has not been that high so as to increase the so as to increase the provisions in the quarter. Of course, we always have that valuation effect, which in this quarter, I think the adjustment that we made is not really significant, was in the range of the 30 millions. So as long as the expectation for the fourth quarter is to reduce the inventories and the circumstances in terms of prices and costs should remain stable, we don't expect a very big impact in terms of stock valuation. About the maintenance cost, it's true that the run-up of the factory in Atherinox Europa has been extremely successful. We didn't have any extraordinary maintenance cost that makes us to mark or to change our provisions to quarter four. So it's been really very successful. So we do not expect any extraordinary cost affecting four quarter other than those related to the low demand. But we do not really think there is going to be any exceptional thing other than our day-to-day business. for the fourth quarter. And we do not expect any high impact of the stock valuations at the end of the year in the sense that we are putting all our efforts to reduce our stocks.

Sorry, that 30 million, that was a nine-month number or that was just in Q3? negative devaluation, sorry. What was the 30 million number?

Yeah, no, the 30 million is the total adjustment that we have on our inventories at September figures. So the inventories have been written down by these 30 million in September.

So it's for the year, so not for the quarter. Yeah, okay, that's fine. And then, sorry, just the other question. Miguel, earlier you mentioned just in Europe, You know, you haven't lost any customers, but you're seeing some of them look at other suppliers to meet their needs. So it does feel like, you know, at least for the end of this year, there's a little bit of market share loss. I mean, what's the strategy to kind of win those back next year? Is it on pricing? Is it on reliability of supply once you've got Europe up and running? Yeah, just curious on that side. Thanks.

Not in pricing. Clearly, it's more in terms of, obviously, reliability of the supplying, as you are saying. So we have not lost customers, we have lost orders. And at the end, clearly, our customers have been needing to cover from other sources. And this, combined with the low demand at the end of the year, has created this effect that the volumes have been a bit lower than expected. Having said that, through our conversations that actually are taking place for the supplying and the commitment agreements for the coming year, we are realizing that we have had that effect coming in this quarter, but we are not losing that that order books for the coming year. So in this regard, by far, we are not going to make any aggressive policy in terms of pricing. This is not the solution for actual days. And as much as our goal is directly approaching the final customers and having more close and consistent participation and working together with the final customers in the supplies. We feel comfortable that all these customers remain confident when the solution has been already there and is active. So we are negotiating on this basis for the coming year and that's it. We do not expect further impacts on these circumstances.

Okay, makes sense. Can I squeeze in one more? Sorry, just on U.S. aerospace and Hanes acquisition, you've obviously seen one of your European peers now talk about making inroads into the U.S. aerospace business. I understand, you know, USAP is more stainless engineering steel, but, you know, it feels like that's them opening the door to put more nickel alloy products into that market. How different is that product from what Hanes does now? Are you worried at all about another competitor coming into the market? Just any color there would be interesting. Thanks.

Well, first of all, at the end, obviously, we have a great respect for Aparam, as we have a great respect for Universal. And at the end, the fact that their focus and their strategy is in line with us, also for us, is a clear reinforcing issue. So... so we fully understand that upper army in these days is is contemplating the the american market due by its strength as a possibility for the future and mostly in their space universal and haines are not competitors at all at the end both supply to the aerospace industry, but in different areas. Heinz is more oriented to the hot part of the motor, while Universal supplies different components, the landing gears and hydraulic part of the systems and so on. So on that regard, focusing on the aerospace industry, but it's different type of products. So more or less Universal is more what we could call steel tools, and Heinz is more oriented, as I said before, to the hot part of the motors due to its nickel-alloy structure. So on this basis, We respect the strategy of Aparam. We share the views on American alloys and aerospace, but we are not competitors. Heinz is not competing with Aparam. with Universal. Universal is probably selling most of its product through distribution, while also Heinz going more to the final customers. And at the end, in the case of Heinz, obviously with key participation of all the innovation and research and so on. So in this regard, for us, it's fine. Clearly, When we made moving to America, we always focused on Heinz, and we have been following Heinz for a while. In our case, the proper complementarity was through BDM and Heinz. because the niche is common, and the synergies are to be obtained through BDM and Heinz. So in the case of Universal, it should be a different scenario. So for us, it's more a clear demonstration that not only we, with our presence in America, but also other key players as Aperam, understand that America is the place to be. And also the aerospace sector is a sector to cover and to improve the presence and has proper prospects for the future. So we consider that this reinforces more our strategy rather than concerns us because it's not a real competitor.

Makes sense. Thank you for the call. I'll send it back.

Our final question today comes from Tristan Grether with BNP Paribas. Tristan, please go ahead.

Yeah, just a quick follow-up on Heinz and the pending situation with Austria. Obviously, it's taking a bit more time than expected. Can you confirm then the closing is still expected in Q4? And is there any risk of disposals? I'm trying to understand why Austria has been such an issue given that the presence is limited. So if you could give us a little bit of color on the process and why you're confident on the closing That'd be great. Thank you.

Thank you. Well, we are confident because our understanding, obviously, is that the combination of the two players is not really providing big changes to the Austrian market. And this is something that has been stated. The BDM has a higher participation in the Austrian market because there are two key customers for BDM that are strong in Austria. And in the case of Heinz, the presence is negligible. So we never expected that this could be an issue for the Austrian authorities. Maybe the global picture of what could be the aggregated figure appear to be some figure that, for some of the responsibles of the administration, deserve a further procedure or a more detailed procedure or analysis, but this is not as a consequence of the combination. This is a consequence because two relevant customers are strong players in Austria and are customers for BDM. Having said that, it's true that this has been probably the pending milestone that we have. Other countries where there were more participation of both players have been already passing with no difficulties, and the last one has been UK. So nowadays it's only Austria. We are obviously in an open procedure. And we are just waiting to see if finally the decision is just to give us the allowance. If we are not contemplating at this stage that remedies could be taken, if remedies could be taken, we should look for remedies. For us, it's purely a matter of time. We are impatient to do it as soon as possible. If it takes one month, two months, three months more, okay, it should be painful, should be a delay of some of the participation in common analysis that we should be making together. We have prepared, for example, if that were the case and if it were to be delayed, The specifications of all the equipments that need to be ordered to the equipment suppliers could be delayed two, three, four months. Okay, we have already designed a clean team, approved by the antitrust rules in order that should be that members of that clean team in both sides, the one that should start discussing this issue. But we understand that probably is not going to be needed and the key responsibles on the technical areas should be they were participating on conversations from both sides. It has been frustrating, and I think we also stated that in the previous presentations, because we never foresee that Austria should be a problem, but nowadays they are the only one, and let's hope that the situation is finally approved as soon as possible. We are prepared for closing as soon as we obtain the allowance, and our lawyers are confident that this may come in the coming weeks. Let's hope that it occurs in this line.

Those are all the questions we have time for today and so I'll turn the call back to the management team for closing comments.

Thank you very much to the three of you for the presentation and also for the answers given and to all of you for your presence here in person or virtual. We hope to see you soon in the full year 2024 results presentation. That concludes our third quarter 2024 conference call. Thank you very much and good afternoon.