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.