Acerinox SA
MAD:ACX
Acerinox SA
MAD:ACX
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Hello, everyone, and welcome to the Acerinox 9 months 2021 Results Presentation. [Operator Instructions] I will now hand the floor over to Carlos Lora-Tamayo to begin. Please go ahead.
Good morning, everybody, and welcome to the Acerinox earnings conference call for the third quarter 2021. My name is Carlos Lora-Tamayo, and I am the Head of Investor Relations at Acerinox. First of all, we hope that you and your related ones are okay, in these difficult moments.The call will be led by our CEO, Bernardo Velazquez; and our CFO, Miguel Ferrandis. Before getting started, let me remember you that this conference call is being broadcast on our website at acerinox.com. And now I would like to give the floor to Bernardo.
Thank you, Carlos. Good morning, everyone. We are happy to be here today to present a strong set of results. As we are the first company in our sector to present our results, we will try to be brief in the presentation in order to dedicate enough time to the Q&A session. Let me start with sustainability. We will publish an extensive information package at the end of the year in the nonfinancial report. So we just tried to summarize in this presentation that we are moving ahead in our goals and that we are putting sustainability in front of our business.We recently were qualified Gold by Ecovadis, and we recently released our Acerinox sustainable stainless steel, proving that we are one of the real believers in sustainability and the circular economy. If somebody is interested in obtaining deeper information about this important topic, please contact Carlos or Maria, and we will be pleased to organize the meeting with you.If we move to the 9 months results, I think this slide is self-explanatory, so we are not going to dedicate time with this. I'm sure that you'll read the numbers, and it's not only the strong EBITDA, strong results, but also a strong situation, and strong balance sheet and a strong general situation of the company. But before we start with our numbers, I would like to explain a little bit the general situation of markets. First, during this crisis -- during this COVID crisis, we have experienced different stop and go phases in all the industrial activity. We have been -- and these phases have been different in lengths and duration at the time that they stop in all the countries. Second, all the companies in all countries prepared themselves for a long crisis by reducing personnel, sometimes temporary or not, and by reducing inventories. So, finally -- and finally, we all experienced a simultaneous recovery once we knew about the vaccination process or the success of the vaccination process. So that means that we were stopping and starting in different times with different lengths. And all the countries, preparing their companies with low personnel and low inventories, and we experienced sadly the same recovery process at the same time in our countries.So what is the consequence? The consequence is that we are living a chaotic startup process. That we realized about the needs of replace our inventory levels. We didn't have enough inventories to attend the demand. And at that time, we found it, that the supply chain was totally emptied in all the sectors of our activity. So in this picture, we saw that all markets performing strongly at the same time. Trade measures and quotas all around and lease availability of road and maritime transport, high freight cost and extended delivery times. So that led us to the current situation of this disruption in the supply chain, prices going up in most of the commodities and most of the industries, long delivery times, lower stock levels and difficulties to increase and replace stocks. And how these facts are affecting us, so this is what you can see here in general, and summarizing that we have a very strong order book, that we have more visibility, that we are enjoying higher margins, that we are coming back to a more regional business after many years, with the explosion of the Chinese production, we experienced total globalized industry. And now we are moving back to a more regional business because everybody is not only transport and not only trade measures, not only availability and delivery times, it's also that everybody is redesigning their supply chains. So this is very positive for the European and the American players, and this is the current situation.This is more or less what you can see in this slide. It's a good general situation, good performance of Acerinox. Joining the current situation, but never forgetting to keep working capital under control, to generate cash and to keep our traditional cost efficiency that we have improved with all the excellence plans in the last year. So in a better situation, not as good as the previous situation that we experienced in 2006 or even in 1988. With lower prices, we can enjoy higher margins because of the efficiency that we have got during these years of hard working. And this is more or less what we are presenting in these numbers. So after this brief explanation, I will pass the floor to Miguel.
Okay. Thank you. In slide in Page #6, you can appreciate more or less the constant growing EBITDA we are experiencing since 5 quarters ago. What is definitely clear to remark is that at the end of a good position being extremely well diversified, not only geographically, but also in product mix has allowed us to take advantage of several tailwinds that have been coming gradually, but most of them growing in the same direction. So we start to see the recovery in Q3 2020. But then obviously, the strong performance of the American market reacting first. Later on, the huge improvements also in Columbus, mostly driven by our diversification in product mix, bringing new types like the milled steel that has been extremely successful in its margin for Columbus. Also, the remedy of the oversupply in the Asian area create that also Bahru start benefiting from proper margins, their activation of the market in Europe. The reduction also on the offering side in the American market through the exit of Allegheny of the stainless create, also the fact that the situation in the market was improving in addition in the States. And gradually, after a strong period of strong order book improvements, also, VDM is -- and the high-performance alloys division now is experiencing a double digit margin, and most of it is appreciated in the third quarter.So at the end, what we are facing is that we are benefiting all around our product mix, all around our divisions and all around our geographical presence. We are actually appreciating that the tailwinds are moving in the same direction. When we analyze these combined effects in the third quarter, we appreciate that we have reached this EBITDA figure of EUR 293 million. We were extremely satisfied, as you may remember, when we present our Q2 figures with EUR 217 million EBITDA. But now we have improved this figure at 35% for reaching this magnificent figure, which makes us a global EBITDA margin in the group of 17%. In addition, as has been stated, also, it's an excellent time in terms of cash flow generation. We have made even though in these circumstances and even though moving up of the net working capital of EUR 134 million, we are able to face that, obviously. Our balance sheet is extremely strong, and we are able to take advantage of this. And even though the increase in net working capital, we have generate an operating cash flow of EUR 77 million.If we go per division, in stainless steel, we are experiencing the best quarter in the last 14 years as the combined effect, as we are mentioning of improvements all over the world, but also this is a timing which is more easy to appreciate what has been the combined efforts of everybody in the last year through all the Excellence Plans, all the cost reduction exercise we are doing, the Excellence 360 that we are actually now improving. And at the end, all these facts bring us to these results, which allows us to have an average EBITDA margin in the third quarter of 18%. So this is, we think excellent demonstration of all the homework we have been doing in the last year. And in addition, this creates also, as you have seen for the whole group, a positive cash flow generation of EUR 65 million, even though the necessary increase in working capital will be aligned with the good market momentum we are experiencing.Keep in mind also that these figures still are facing some difficulties. We are talking about tailwinds. But let's keep on mind also that there are some issues affecting most of this quarter. Malaysia plant Bahru Stainless was shut down as a consequence of the government decision because of the COVID. And there have been other circumstances, we are seeing as we shall talk probably later in detail, increase in energy costs. But even though that, we are experiencing these remarkable margins.When we go to the high-performance alloys in the Page #9, we always state that we are long term runners, and our strategy is long term design. We made the acquisition of VDM in March 2020, when the COVID was starting and affecting the whole world. But we always state clearly that this has an absolute strategy improvements providing for the group, and we appreciate improvements and moving through the high-performance alloys. It's clear that this sector has been affected by the COVID. But 4 quarters later, we are back at the level of profits. We always mentioned -- we always stated that the high-performance alloys should provide us a 2-digit margin EBITDA, which was the level prior to the COVID crisis. So we are there. The EBITDA margin in this quarter has been 10%, as always previously announced. So this should be the normalized level. And also, we always stated that the contribution and the normalized contribution of the high-performance alloys should be around EUR 7 million per month. We are there. So we have obtained this quarterly EBITDA of EUR 21 million, 10% margin. And this shall go up and definitely all the synergies that we always have been stating that we're there shall be gradually coming. And, therefore, we shall also experience improvements from these levels.But what's true for a high-performance alloys is that the electronic has been performing strongly during the last quarters. The chemical industry also, now the oil and gas is back. So apart of the increase in the order book, we appreciated, and we mentioned in the second quarter, in the third quarter, this also has been bringing to the high profitability. Also, the high-performance alloys division has excellent, good discipline in terms of working capital, and this has allow to have this figure and this operating cash flow of EUR 12 million. Not everything has been a tailwind for the HPA division. Keep in mind that in July, Germany and the West part of Germany was strongly affected by all the flooding. And in this regard, we must say that even though some of -- several of our customers were affected by this, by the proper measures undertaking for years in the plan for avoiding this flooding and the performance of our teams during that time, meant this that for the profitability, for the efficiency, and fortunately for the plant, there were not huge damage as a consequence of that.And then if we go to the Page #10, which is something that in this year, we are extremely proud. A part of the margins and part of the results is the free cash flow generation. So you can appreciate, in parallel, the figure for the Q3 and the figure for the year-to-date of the 9 months of 2021. If you remember, the driver of the cash flow generation in the last year 2020, in which we have an operating cash flow of EUR 420 million was as a consequence mostly of a strong working capital reduction. So we were -- we demonstrated our flexibility at that time, and that was the driver for the positive cash flow generation.In this year, what's true is that, we have been able to develop and to raise working capital as is clear -- appreciated here, almost EUR 400 million of increase in working capital January through September. But extreme good margins and the extreme positive EBITDA has allowed us to, even though facing that necessities of working capital for a company in the market in this recovery, we have been able to keep EUR 77 million cash flow in the quarter and EUR 184 million accumulated cash flow January through September. We think this is a remarkable figure. And as we stated in the second quarter results presentation, probably the best quarter in terms of cash flow generation, we consider it shall be the fourth quarter. So still is more room to grow and to improve.
So the conclusions are clear, in Page 11. As Miguel said, we are long term runners, and we are now experiencing the benefits of our long term strategy. This is clearly evident. Market conditions are continuing to improve and the visibility remains good. The stainless steel section is still producing exceptional results -- its division exceptional results. And the HPA -- the HPA section has returned to normalized levels to pre-COVID levels after the project business started to recover in March this year. Now as Miguel said, we are -- we have a good order book and also increasing our margins.Also that our discipline in capital allocation, remember, cash is king, and we are still -- we haven't forgotten yet this sentence, cash is king, and we are keeping our discipline in capital allocation. And as a result of this, our debt levels is at a very comfortable level. Of course, COVID-19 -- still COVID-19, cost inflection and supply chain constraints and surpluses coming from the recovery of the COVID crisis, it remain a challenge for Acerinox and for all the companies. And in this scenario, we can say that we expect Q4 EBITDA to be slightly higher than Q3. And that, as Miguel mentioned, the cash flow generation is going to be strong in Q4. And if we achieve these results, we will achieve the best results of the year ever. And this is all from our side.
Thank you, Bernardo, and Miguel for the presentation. Let's move now to the Q&A session, please. So operator, please go, of course, ahead.
[Operator Instructions] The first question today comes from Krishan Agarwal from Citigroup.
Can you talk about a little bit more on the VDM as in how the order book is looking like? Miguel mentioned, like a German floods impacting the order book and the customer. So how should we think about VDM going ahead, especially in the context of synergies, which you -- I'm expecting you will significantly in this quarter and you will realize in the Q4 as well? That's my first question.
Krishan, in the order book, after the -- as I mentioned, that we started closing some project business after March -- some projects that we have stopped for a long time. We have started to see a recovery of our order book. And now we are more selective, and we are more focused on our mines, but still the order book is very strong. So the visibility, if now -- we are facing visibility -- an unusual visibility in stainless steel is for more than 3 months, in the project business it's even more. Now, we can say that we have a strong order book for Q1 and probably for Q2 as well and increase in earnings per share margins. The second part of the question was? Yes, synergies. We prefer to keep the information about synergies for the first half from the whole year, no, but we are making progress on this. We will present a deeper report with the year-end. But what I can tell you is that we are going ahead with our synergies. We are going ahead with our trials in all the mills producing HPAs in the stainless steel plants and stainless steel in the HPA plants. And what is more important, we are experiencing very good synergies in the commercial side. I think that our customers are happy to realize that they can get both high nickel alloys and stainless steel in the same place, in the same supermarket. And this is the most important thing that we are now supplying projects with stainless steel. We are selling high-performance alloys to our traditional stainless steel customers. So this is the most important thing that we are realizing, and it's very clear today that what we said at the beginning, now that one plus one is more than 2. So VDM plus Acerinox is much better than Acerinox and VDM alone.
My second question is on the capital allocation. I mean, Miguel mentioned that Q4 is going to be better in terms of cash flow. Net debt is significantly lower versus the last year, and cash flow generation for next year is also looking good. So in that context, I mean, how should we think about, one, CapEx? I mean, your guidance for $110 million is looking kind of optimistic for 2021. And then broadly, I mean, are you -- I mean, are you happy to present that EUR 0.50 dividend kind of prognosis to the Board for a cash turn? Or you are in that thought process of propping up the cash return probably some higher dividend or maybe some buybacks in the next 6 to 12 months?
Thanks for the question. You perfectly defined what we are thinking. Now, it's the same equation. We have in the same equation, CapEx, dividend or buybacks, and of course, debt. And you know that we always look at the debt or the EBITDA debt ratio, not for one year, but through the cycle, because remember that, we are in a cyclical business. So this is the equation that we are discussing today. So we are trying to allocate our CapEx. We are going to, of course, to keep our dividend. We will not reduce the dividend, that's -- is a tradition in the company. And we are considering the different allocations that we can give to our cash. But this is something that we are studying that we will submit to the Board of Directors, and that will be decided before the end of the year. And we will do the best to increase the value for our shareholders.
And then any guidance for the full year CapEx this year, EUR 110 million is looking a bit optimistic?
I cannot tell you this. Maybe we are now at a level of EUR 100 million, but it will depend on the opportunities and the profitability of the CapEx that we're going to get. This is something to be discussed. But I cannot promise today that we are going to increase it. Just keep it as it is.
And then if I can push you a little bit. So you've been running at the CapEx of close to EUR 100 million, EUR 120 million for the past 3 years, is that the sustainable longer-term run rate for the CapEx? Or should we have a higher CapEx in our models in the long run than the current run rate?
I think for today it's okay. With this CapEx we are covering all the expenses that we need for maintenance, for digitalization, for sustainability. We are getting all the -- we have the CapEx that will lead us to get the goals of the sustainability plan. And we need to -- further uses of our cash, we will increase it, of course. Of course, we are also considering to invest in growth in both stainless steel and HPA division, but it's something that is -- that we cannot disclose today.
Our next question comes from Luke Nelson at JPMorgan.
3 questions on my side. Firstly, just on NAS pricing, there's been 4 price increases announced year-to-date. Can you just give a sense of the quantum of the average price realized in Q3? And how much more ASP growth we can expect in Q4 relative to Q3 in NAS? That's my first question.
Thank you for your question, but it is difficult to speak about prices these days. I think NAS is enduring the market. We have announced like, in total 5 price increases during the year. And now according to the specialized magazines, we have a level of 3,940, in September, U.S. dollars per tonne in the American market, this is all I can say. We cannot speak about prices with our customers. The NAS is performing very well and the American market is performing extremely well. No? So we are trying to increase prices, to put the level of prices to the level of demand that we have and always trying to look after the American market and are always trying to look after our customers. We don't want to squeeze customers. We are not here just to get record result this year. We have to serve to this customer next year and later, and we want to have loyal customers.
Then secondly, you touched on in your presentation just on electricity. Obviously, taking into account you're not -- your footprint is not as is European focused as some of your peers. But can you maybe just give a sense of the exposure of Europe to power and natural gas? And then also, I suppose joining to that, any headwinds with VDM. I'm just trying to get a sense of to what extent there is some natural gas power inflation in Q3? Or there could be a bit more a step-up in Q4?
The electricity is a challenge today, especially in Europe and especially in Spain. So this natural gas prices are increasing in Europe, but at a reasonable level, same that electricity. We are not suffering this effects in South Africa or in Malaysia, and the program is focused in our Spanish plant. What I can say is that electricity is a problem in Spain. I've been declaring this as -- in the association of Spanish steelmakers. And this is a country problem. As we have declared sometimes, this is costing us at the level of EUR 8 million to EUR 9 million per month, something that we have declared to the media -- already declared. But this is what we can expect. We don't see the prices are going to move further in this direction up. But this is something that we have to resolve in Spain. We are looking for long term contest. We are looking for PPAs, so increase the number of the PPA. We already have a portion of our visibility in PPAs. We are moving to more renewable energies in our mix, no? But this is the current situation, and this is something that we are experiencing today.
And just to push you on that $8 million to $9 million per month, is that an incremental additional cost or is that just the total energy power cost?
This is the total energy cost that we are paying today in top of the average of 2020.
And then final question for me just on Section 232. Obviously, there was an announcement over the weekend between the EU and the U.S. Can you maybe just talk about, firstly, any financial impacts? I'm not aware of any sort of significant intracompany trade flows, but if there are any, to what extent that could be a positive for Acerinox? And then secondly, maybe more broadly, just the market impact, you expect potentially with any redirected trade flows from Europe towards Americas, if anything, just sort your views on that?
Luke, still the -- these news are very recent, and we don't have enough analysis because it hasn't been the EU or the American commerce secretary haven't published the reality under these numbers. But the first thing that I can tell you is that we are very happy. We are very happy with these new measures because remember that only one year ago, we were wondering if we were going to lose Section 232 measures, because the new Biden Administration. And I think that the Biden Administration has realized that the Section 232 measures are good for the country, and good for the industry, and they are supporting these measures. But as it was also expected, they are trying to go back to the traditional partners. And I think that Europe and America cannot be in different sides -- different parties. And now they have negotiated this exemption in 232, that is good for the market and good for the relation between the 2 regions.We cannot say that it's bad for our market. First of all, because still we don't know the numbers, still we don't know the volumes that we are speaking about. But if it is at the level of what Korea or Brazil or Argentina got before in the exceptions of 232, the amount of material is not going to be significantly higher than what Europe is today exporting to United States based on exceptions, because most of the material is exempted, because the certain agreements between European and producers and American customers. So the impact is not going to be very, very big. But even considering the worst effect that can have for the market, will be less than the production that Allegheny is not producing today. So in the worst scenario it's going to be much better than one year ago. So I think it is even good for the American market because this situation will release some pressure from our market.
Our next question is from Alan Spence from Jefferies.
I've just got 2 quick questions. The first one is around Bahru. So it was effectively shut down for about half of the quarter. Could you give us -- give a range about how much of a drag that was in the quarter?
Yes. Bahru, at the end, it was imposed by Malaysian authorities, they shut down due to COVID. This has been taking mid Q2 to mid Q3, so it has been spoiled among the 2 quarters. Any case, what's clear is that the timing and the momentum in Bahru is positive. The reduction of the oversupply that is experiencing there with the cancellation of the export rebates in China and probably the production cuts that also are experiencing there, are reducing this oversupply that has been the driver for the Asian market and even for the exports to the rest of the world for several years. So this is allowing to improve the margins in area. And consequently, as soon as Bahru start operations, which occurred mid-August -- mid-August and then September, we have been able to achieve their remarkable margins and positive EBITDAs also in the terms of 2 digits. So we have make a good preparation, but going there as soon as the activity was open, and this is what we are now experiencing.So in terms of the order book, in terms of being able to choose the most profitable margins, in terms of the product mix, the momentum is positive. We have been affected Q2 and Q3 by the official shutdown, but now we are benefiting from that situation.
For the quarter as a whole, that was helpful about kind of what it did in the second half, was it able to achieve EBITDA breakeven for the entire quarter?
Yes. Yes, sure.
And then my -- okay. And then my second question is just to come back to VDM. You achieved your double digit EBITDA margin target in Q3. And you've been talking about some good visibility for Q4. I think even potentially into bit of Q2 for that division. Do you see a further progression in the EBITDA margin? Or do you think that 10% is going to be where you're settling out for the next few quarters?
Well, keep in mind that in VDM, I think we have been there sooner than expected. We mentioned at July presentation that we should be in pre-COVID levels for the fourth quarter, we have been in pre-COVID levels in the third quarter. The momentum, October, November looks better. The first part of this year, the strategy in VDM was more filling the mill. Actually, we are allocating to take the best margins. And consequently, still is room to improve. The Q4 shall be healthy in VDM. Obviously, the Q4, we have the seasonal slowdown in December. But, in general, we are, by far, keeping this 2-digit EBITDA we are mentioning as a whole for the quarter. And as a consequence of the full order book sectors that we have been mentioning that are coming back -- the energy, oil and gas is there. This allows also us to improve margins. So this effect, combined with synergies that gradually are coming there gives us the full confidence that still is room to improve in VDM. What is more remarkable is that we have been there sooner than expected, but I think we should even improve actual margins.
Our next question is from Carsten Riek from Credit Suisse.
A couple of questions from my side. The first one on the alloy prices, and potentially inventory related gains in the third quarter. Could you give a bit of color whether this impacted the third quarter or rather not? Because it was quite volatile with regard to the alloy prices during the quarter?
Let me find the numbers because the...
The inventory gains were -- or we gave you some disclosure in the margins. Keep on mind, Carsten, that this -- this is not the time. The driver of the profits in this year is not coming as a consequence of the nickel revaluation when we are comparing and we are seeing that this is the second quarter -- or is going to be the second quarter ever, and then we will be very confident on that. Keep in mind that when we compare with the previous peak, which was 2006-2007, at that time, every single day in 2006, the nickel price at the London Metal Exchange was going up. So most of the profitability at that time came as a consequence of their evaluation of the nickel. Nickel has been the driver of our sector for years. But in this year 2021, the driver of what we are experiencing in the market is the strong improvement in activity almost in every sector as a strong -- after a strong correction, because of the COVID year and a gradual improvements in the merging of every product mix.So the driver this time is not the nickel and consequently, the nickel revaluation in our inventories. It may be some effect. And maybe at the end, in average, has been some increase in the nickel price during this quarter as occurred also with the -- during the first quarter. But this is -- in these times, this is probably not the driver of this profitability. So the driver is increasing activity, running most of our plants almost at full capacity, being able of choosing the base margins and then consequently being affected by that. But this is no driver by external fact as could be the nickel revaluation.
Let me add to something to Miguel, because now that we are moving to a record year, we are comparing this year results with 2006. In 2006, nickel reached the level of 41,000 if I remember well, and moving from 20,000 was the double the price. This year, it is moving more or less between 18,000 and 20,000. So it's more of stable -- pretty stable compared to last year. And the same, the alloys sales in Europe went up to EUR 3,200 per tonne and now we are at the level of EUR 2,100, EUR 2,200 per tonne, so is EUR 1,000 per tonne less than at that time. So -- and of course, more stable. So I fully support what Miguel has explained.
The second question I have is, and I don't raise this question very often, but we have the highest stainless price difference cold-rolled 304 between Europe and the U.S., at least as I have records, which is 20, 25 years. So we are about more than $700 premium in Europe compared to the U.S. Do you believe this is actually a sustainable level because historically, we had actually almost no premium or discount between those 2 areas. What is your view on this one?
Carsten, I think that first of all, is that, I do not believe that this is the true difference between the 2 market, because today, there's mess in the information that we are reading about prices. And it is mess because as I mentioned, that there's a chaos in the recovery process. There is a chaos also in this kind of information, because we are mixing what United States is delivering to the market in the months that we are seeing. So now we are speaking about November prices in United States, November delivery time in United States. We are comparing these prices what would the some European distributors are negotiating with some customers for delivery in May or something like that or even for spot prices when material is very difficult to be found in the market. So there's a mix of information that we have tried to explain to these kind of magazines, because I think they are confusing the markets. But as you mentioned, this is sustainable. There's always equilibrium between the 2 markets. And even with high freight cost cannot be true.
That's very helpful because I was just a bit confused here as well, because I just saw the numbers.
The next question is from Patrick Mann at Bank of America.
Most of my questions have been asked. I did just want to follow-up a little bit on electricity and energy costs in Europe or Spain. I mean, if prices stay elevated, are you fully exposed already? I mean, so if prices stayed here, would we see your costs are already reflecting that? Or would you expect costs to go up further? Or I suppose another way to ask the question is, how much of your electricity purchases are on spot? And how much are contracted or hedged at the moment?
Well, the electricity, no doubt, is some of the fact that it's spoiling the competitiveness, mostly of the Spanish plant. I think in this regard, the situation is more rational in the States or in South Africa. In the case of Acerinox Europa plant, we are being affected. This has been a gradually increase in the prices, but most drastically appreciated in the last months. So especially September, as previously Bernardo stated, we are seeing extra cost compared with equivalent September of last year of around EUR 88 million. In a time in which we are improving recurrently the margins and improving the product mix, moving margins up as a consequence of gradual increase in better order taking and the mix of term contracts compared with more short term contracts is coming gradually to our P&L. This is something that we are absorbing. And fortunately, it's not so well appreciated.When we analyze the long term growth for the nickel, we see that it's unanimously contemplated that it is not going to be stabilized at this level or even growing and probably any time on the second half of next year shall be some relaxation. On the time being, we are benefiting, and our margins are improving month after month, because the actual activity volumes and the strong demand all was up, but for us, no doubt, is a concerning fact. And this is something that we must face that is losing the competitiveness of the European industry, and we realize that there is actually a big claim among all the European industry for solving that.In terms of our electricity strategy, this is something that is confidential, so we cannot disclose on that. But just let you know that where we are more affected is in -- obviously, in Acerinox Europa, and we hope that sooner than later, this should be rationalized a bit from actual levels. And we hope that -- probably the worst is to be suffering in the fourth quarter. Even though that the margins in the fourth quarter, we expect for Acerinox Europa are going to increase. So energy is relevant as a cost issue for our industry, but not -- is not as critical as in other sectors.
The next question comes from Tristan Gresser from Exane BNP Paribas.
The first one, maybe on European base prices to the comment you made earlier. You're saying there is a discrepancy between data providers and what you're seeing on the ground. And I think what we're looking at from data providers in the European base price of EUR 1,800. What is the level you're seeing that is maybe closer to U.S. base prices level?
I'm sorry, Tristan, but we cannot answer this question. Price information is very sensitive.
And for the European market, are you now fully back to the dual pricing system that was not working over the past 2, 3 years?
Yes, this is true. This is -- fortunately, we are now in the system, the [indiscernible] plus base price.
And maybe another question there. Do you think that the recent momentum we've seen in European base prices is also due to the energy inflation? And do you believe that the supply and demand dynamics into year-end could support eventually a further price increase?
I think that the price is always a question of production and demand. Sometimes, remember, in recent years, we have been suffering price increases and cost increases, we couldn't pass it to the customers. So this is now a different situation. So the customers want to buy more material, they want to assure the supply and they are paying more. So it's a question of a healthy market, supply and demand. That's all. We can increase our prices it's because our customers would like to pay more, but not because we have a higher cost.
And maybe another one on scrap. The discount between scrap prices, the only scrap prices and the corresponding kind of virgin raw material basket has reduced quite significantly over recent months. If you could maybe touch on what is driving that? And if you had any specific impact on your raw material costs? And also, if you can touch, I think the European Commission is discussing a potential export scrap ban, what consequences could this have for you?
Of course, again, I cannot speak about the scrap discounts or scarp prices. But what I can tell you is that there's enough availability of scrap in European and the American market. Sometimes people are confusing the situation between carbon steel scrap and stainless steel scrap. Because of these movements to sustainability to reduce CO2 emissions, many carbon steel producers are moving from blast furnaces to electrical furnaces, so they need more scrap. But this is carbon steel scrap. As some people can think that in this balance, there will not be enough carbon steel scrap in the market. But in stainless steel, all the producers, except the Chinese or Indonesia using nickel pig iron, the rest of the producers, we are -- all using stainless steel scrap for many years, no? So the situation is the same. It's not changing, and we have enough availability.Related to the ban. You know that the European Union is never supporting this kind of measures. The raw materials ban, it is something that is -- as you going against the WTO rules. Another thing is that there's a limit to export waste or -- and this is something that is under consideration, but still, there's no -- nothing related to this.
Our next question is from Bastian Synagowitz from Deutsche Bank.
I've got 2 questions left, please. And the first one is just following up on Bahru. Miguel, can I push you a little bit more here to tell us what the negative impact from the Bahru closure has been in the course of the third quarter in EBITDA terms?
Well, as I said before, since Bahru is back second half of August and full September, we have in the range of the 2 digit EBITDA. But previous 1.5 month, it was closed. So the average at the end, more or less, you can assume that shall be a positive EBITDA margin of around 6% to 7%. So that's there, because we have been nonworking 1.5 month. So that's the situation in Bahru. Bahru already start appreciating very healthy margins coming after difficult years prior to the closure, so it was a pity and that the plant should be closed for that period, but the recovery had a start earlier. So as you know, Bahru, for several years, this effect of the oversupply in the region, mostly driven by Chinese and Indonesia exports having spoiling the margins in the area, but the situation has been improving most of the 2021. So Bahru start experiencing positive margins early in the year, then it was probably stopped as this political decision for this 2.5 months, unfortunately, now is there. So in this range, what we are actually now is optimizing our production in this last part of the year in order for recover the sales that spoil us during that period. So consequently, the fourth quarter in Bahru, we expect it to be strong.
So basically, we have to think about it in a way that you probably lost about, say, EUR 10 million, EUR 15 million EBITDA in the first half of the third quarter and then basically fully caught up for this in the second half of the third quarter. And hence, obviously, your run rate margins, which you carry into the fourth quarter will improve a lot?
In general, yes, you prefer not to enter in so strict details, but more or less, the basis are -- and duration is there. It's going to be a good and healthy quarter for Bahru.
Okay. Miguel, then secondly, more generally on the group. If we look at the margin drivers, obviously, for the month and quarters ahead, you obviously already said costs will go up. And despite the significant increase in energy costs in the European business, your margins will go up. Nevertheless, you've had a couple of price increases in Europe. And then, I guess, what you haven't talked about much is obviously the annual contracts, which will be resetting, and I guess they will be resetting only as of the 1st of January next year. So is it fair to assume that like status-quo today, we're only going to see your peak margin realization in the course of the first quarter from what you can see today?
Well, as we have been stating, we have several tailwinds. We have only -- in these days, we have one headwind and the headwind is no doubt, energy in Europe. So we must face that. It is affecting us, as we have been mentioned, but we can -- we hope that as much as it's not going to be at these levels forever, it shall be gradually more rationalized. We must be prudent for our budget, obviously, in the first half of next year, assuming that maybe steel energy remains high. But we -- as much as you say, we are improving our margins because, as you stated, the term contracts that are taking most of this year are averaging with high prices that actually can be achieved in the spot market. Probably in the first quarter next year, the margins should improve for Acerinox Europa. So in this regard, the effect of suffering a whole quarter expensive energy costs shall be, at the end, fortunately, compensated by better margins in the order taking, all the negotiations we are doing for the term contract for the coming year, obviously, are taking from the basis of actual prices that are substantially above the prices we were discussing in November, December or January last year. So the situation has changed dramatically. As we mentioned before, we started or we finished last year in a clear target of filling the mill, and now we can be much more selective with the margins. This shall be appreciated and shall more than compensate the increase of energy costs in Europe.
The next question comes from Ioannis Masvoulas from Morgan Stanley.
The first one, the balance sheet is strong and cash flow generation is improving. So you seem to have greater flexibility to reinvest in the business. Can you talk about some of the initiatives you're considering across the group and specifically in the U.S., where melting production is well below capacity? I'll stop here for the first question.
Well, in general, the situation now, still we are obviously fixing the strategy and planning and programming for the coming year. We are running most of our plants as full, as the order book now is full everywhere. And now we are also redefining -- we have changed our product mix and consequently, some of the historical figures we were mentioning of our nominal capacity in some of our plants now are not the ones we actually can achieve. So, consequently, what is clearly that we have been very strict in the last years in view of the situation of the market, we have prioritized, obviously, the cash for the business. We have been making the necessary CapExes, but with great discipline for saving cash for the growth. And now we're in a growing period and we -- what we must analyze is how to increase productivity for obtaining the best margins and cost savings everywhere. In addition, we have, obviously, several investments that must be done in accordance with all our sustainability targets. This is something to be appreciated. But also in addition, we have growth CapEx. And I think we have growth CapEx from -- in our actual plans.And as we have been stating, for us, we always considered that our diversification through the high-performance alloys was a natural area also for growth. So we understand that we have a way of improving also and maybe expand through further consolidation or acquisition in the all of the high-performance alloys. So we are open also, and we have a rather studying possibilities. So consequently, in these times, we are fixing the strategy for the next year, areas to growth, areas to invest. And this is something that shall be probably clarified and discussed internally from now to the year-end. And at that time is when we shall make probably the necessary comments for you to understand which is our expectance for the coming year in terms of CapExes, capital allocation and also in terms of resolution to shareholders.
Enough. If I can add something, I would say that -- we only said that we are experts in debottlenecking of our plants. So we are continuously investing and continually analyzing where are the bottlenecks of our plant and continuously investing in the areas that we can improve or structurally improve our situation and our business with a fast return -- a fast capital return. And this is something that we never stop doing. So we have been doing this during the crisis. So we have invested due to the crisis, and we will keep on investing in these kinds of things. As you mentioned in United States, we are -- we haven't still reached 100% of our capacity utilization. And of course, we are studying, how can we reach this and how can we debottleneck our melting shop and the rest of the lines to increase capacity. So to increase production and of course, even to increase our capacity now because this is something that we regularly do is we run our lines many times to more than 100% capacity utilization.Now this is debottlenecking the equipment and considering everything, efficiencies and digitalization it's also key for this, because we will increase our productivity and increasing productivity, of course, we will increase our capacity. So we're busy with this. But please keep in mind that we want -- all we want a structural growth of our company. VDM is a clear example of this. And the traditional investment in production capacity is a clear example, always focusing on structural growth.
And maybe a follow-up on this. You talked about the sustainability investments that you need to take -- undertake in order to deliver your carbon reduction targets. Your peers have come out with a more detailed road map and how much they're willing to spend over the next decade. When do you think you're going to be able to give us a bit more clarity on the moving parts and the overall CapEx you expect as part of these initiatives?
So thank you for the question, Ioannis. We are busy with this -- we released our sustainability plan. We are now preparing the road map. And I think that we will be ready to present it with the full year results. So I think this will be more or less the timing, because now we are a plan by plan trying to understand the needs and trying to think what to do. Sometimes, in some cases, like in Europe or in United States, we have access to PPAs. In some other countries there's no access to PPAs, we have to study if we will invest by ourselves and what can do and how can we make the most of our efficiency and try to reduce CO2 emissions through utilization of our heat gases and these kind of things. It's a deeper study, and that we are busy with this, and we will present it probably -- most probably with the full year results.
And very last question from me. In the past, you talked about a target leverage of 1.2x net debt to EBITDA. I understand that's through-cycle average. But can you talk about how you look forward in terms of the earnings part of the business? Because if we take, I think, your historical average EBITDA, you have invested in the business, we are in a better part -- in the cycle. How should we think about that when you consider your either buyback or a higher dividend for the full year? Just interested to hear your thoughts on that.
Well, as you mentioned, we always state the 1.2x, and in our sector, 1.2x is an ambitious figure. So its averaged through the cycle. We still consider it's an ambitious figure. Any case, it's clear that this year, we are going to be substantially below that. And at the end, when we analyze the figures and the net debt at this time of the business, keeping in mind that just one year ago, we increased our debt in EUR 400 million through the acquisition of VDM, EUR 313 million for the purchase. We also absorbed existing debt of VDM of EUR 85 million. So almost EUR 400-odd million was raised our debt last year as a consequence of that. And in this year, net working capital has increased also, which has been our first allocation of capital in this year, but has also increased in the range of EUR 400 million. So our actual figure of net debt of EUR 760 million is more or less covered by these 2 circumstances. So the momentum is extremely sweet. And the cash generation, as we mentioned in the fourth quarter is going to be strong. So we shall finish this year with probably extremely, extremely consistent and strong figures. But we understand that it is not going to be the average for the cycle. As Bernardo mentioned, we are -- we must think in additional growth, and this is to come. And consequently, the equation or the Sudoku now is to find the proper balance among growth, investing in the business, obviously, a contribution to shareholders and be in position of facing whatever time of the cycle and with the strength. Just one year ago or 15 months ago, we were in a clear demonstration that we have liquidity. And now the market was facing challenges that never were foreseen before. So what we must be is flexible for keeping our strength and our strategy at every part of the cycle.
In addition to what Miguel has said, I would like to mention that this is not just a dramatic movement that you reach 1.2x, and then you take a decision immediately. No. I think that we need to find the best time to take the right decision.
Our next question is from Alain William from ODDO BHF.
I have 3, please. First, can you give us more granularity into your end markets? Just to understand what's driving this trend? Second question, regarding the change in working capital requirement, what should we expect into Q4, specifically? And then the third question, I guess, the shareholder structure is more open following the exit of Nippon Steel. Is it a concern for you and the Board? And do you have some kind of protection against an [ austerity ] approach?
Thank you, Alain. Yes, let me start with markets. I think markets are performing very well in most of the sectors. In the case of stainless steel, we started after summer 2020 with a very good performance, especially in the appliance sector and the rest of the sector we are coming sequentially, no? But now we can say that everything is more or less moving in the good direction, except if there are some exceptions, the car industry because of the problems with the supply chain. But we can see today, of course, appliances is very healthy. The food processing industry, is very healthy, everything related to catering, to refrigeration, to industrial equipment everything is moving fast. Everything is really good. And the only -- in the case of stainless steel, probably the only sector is automotive industry because of the problems that everybody knows.In the case of the high-performance alloys, it's more or less the same. Even in this case, we haven't been affected yet by the -- we haven't been affected in the automotive industry. We are supplying our customers regularly, and we haven't suffered any decrease in the demand from this sector. Electric and electronical appliances is extremely healthy. The chemical industry is also booming. Oil and gas is back, and there's a lot of projects moving in the world, not -- maybe we think that oil and gas is there, but from the European perspective. But some other countries like Brazil, like the Middle East or even some projects in the North of Europe, in the North Sea are moving. So oil and gas is also okay. And if we miss a sector, this is aerospace. It is the only one that we can say that is still not moving. Some of our peers, as Allegheny mentioned that -- in public evaluation -- that this sector is moving up, but still, we haven't seen this recovery in our order book. The -- Miguel?
Yes, your second question was regarding working capital for Q4. As we explained before, the tailwinds almost everywhere have been coming gradually. So this move that we experienced a strong working capital increase in the first quarter, but followed by -- which was around EUR 150 million, followed by another of EUR 100 million in the second quarter. And, again, in the third quarter, more or less, all these tailwinds that have come almost everywhere made an additional strong increase in working capital in a range of around EUR 130 million. So having said that, the situation now with all the tailwinds now being actually there, we do not expect big changes in working capital in the fourth quarter. So at the end, the -- this shall not be a substantial in the fourth quarter. Maybe, obviously, it's more difficult to precise now, considering the slowdown in the last part of the year in some of the market and closing -- less activities or less weakened activity in December and so and so. So it's very, very difficult to precise the figure of inventories.But more or less, what we are seeing now is that working capital shall remain flat or just some increase, but not so relevant as has been the case in the previous quarters. As a consequence of that, most of the generation of the EBITDA shall be coming as operative cash flow for this fourth quarter.
Regarding shareholding, the first thing that I would like to say is that, I am very sad for the exit of Nisshin Steel of our shareholding, but it is something that happened 2 years ago, when Nippon Steel took over Nisshin Steel. I have a lot of friends in Japan, and I miss my friends of Nisshin Steel, and I miss that the good relation and cooperation with Nisshin Steel. But that's something that finished 2 years ago when Nippon Steel took over Nisshin. So for us, I think it's -- we are free now -- not that Nippon Steel declared that we were not part of their strategy. It is better that they have been in their selling process. And now there's no clouds in the markets. Regarding if this -- we feel comfortable with this. I think we feel comfortable in the market, and we feel comfortable with all the measures that we have in the market as it is today. We cannot try to find any activity against the hostile takeovers. And I think we have to follow the rules of the market. We are comfortable today as we are. We have a more higher amount of shares in the market. That means that we'll have more liquidity in the market, and that can be positive for us, no. Maybe not many years ago, we were criticized in some extent because more than 50% or around 60% was seated in the Board. So the free float was very short. Now I think it is very healthy. We feel comfortable with the shareholding the way it is today.
We currently have no further questions on the telephone. So I will hand over to Carlos for the webcast questions.
Thank you very much. There are several questions from the webcast. Most of them are already answered that was related to the capital allocation, Section 232. But maybe one left, and that is coming from Inigo Egusquiza from Kepler Cheuvreux, as is as follow. Is the 17% EBITDA margin sustainable? Could you explain the reasons for this impressive quarterly margin even with energy cost inflation impacting your business?
Inigo, we are back. We see this is sustainable. Obviously, our sector is cyclical. We must always keep that on mind. I think the yearly EBITDA margin we achieved in 2006 was 16%. So more or less, the situation in this quarter is above that level. It is a quarterly figure. We understand that the fourth quarter shall also be in similar range. We are -- after several years passing through the desert, now we are experiencing a lot of tailwinds in most of the areas. But our visibility is that at least for the first half of next year, we are seeing that it's going to be a good momentum. So more than establishing it is sustainable in the long-term, what is clear is that we have the possibility of appreciate now with all the homework we have been doing in cost reductions and competitiveness in the last year that we can trade in -- always in 2 digits and being -- assuming that more or less our frame should be moving from peaks at these levels or even a bit higher in a potential peak. But when the correction comes, we remain having at least a figure in the 2 digit or close to the 2 digit. That should be more or less assumption that we must take from now.What's relevant, we have been experiencing difficulties in a period in which several of our areas were experiencing different troubles. Nowadays, we think that most of the problems are already solved. The structural oversupply in Asia coming from China and Indonesia appears now to be better balanced. There are no additional projects now, which are supposed to come shortly. So we think that the market shall be better balanced in the coming years. This shall be beneficial, but beneficial not only for Asia, but also for the rest of the world. So on this basis, let's hope that now this -- we go back to this period in which the cycles took 2 or 3 years and not these many cycles of quarters where we have been living in the last decade. So probably the bases are better now for the coming future.
Thank you for your comment, Inigo. I think we have to understand that in our business, we have been suffering the excess of or the lack of demand after the 2008 crisis, the tough situation that we suffered in the European and the American market. At the same time that we suffered the explosion of say production in China, no? And this is -- this led our business to a very low level of base prices, and we have seen in our performance now the situation is changing structurally. As Miguel mentioned, there's changes in the world, especially, not only is the freight cost, not only trade measures, it's also that maybe probably you know that China has eliminated the export rebate, what is important because they want to concentrate their production -- their local production in local sales. And they're even speaking about an export tax. And they have opened the door for Indonesia. That is also a Chinese market. Some people are starting to call it Indonesia. Because these Chinese producers producing in Indonesia are mainly focusing in China. And now they have eliminated the antidumping against Indonesia in China. So that means that this area will be concentrated in a regional market, China, Indonesia and probably the Philippines.And now with the rest of the measures that we have mentioned. Europe is more for the European, Americas more for the Americans. And in some extent, I cannot say that this is the end of the globalization, but in some extent, we are de-globalizing our world. We are coming back to a more regional world. And this is very positive, because we'll eliminate all the unfair practices in our business, and for prices. And now we will manage between -- in more traditional way and we have demonstrated that we have improved very much these years. Not that we have flexibility enough to make the most of the good cycles, as we have demonstrated, and also efficiently enough to make the most of the increase of prices by getting higher margins than before. I think this is very important. It's something that we must keep in mind for the coming years or the coming cycles. This cycle is just starting, no? I think that what Miguel mentioned, the new prices for next year, the new situation, visibility that we have, that we cannot say that we are in the top of the cycle. That this is something that is starting and we are -- we will, for sure, make the most of this.No, I think there's a -- I think that's all from our side. Carlos, I don't know if we have more questions.
Okay. There is no further questions. So thank you very much, Bernardo, Miguel, and thank you to all the participants and listeners to join us today. That concludes our third quarter 2021 conference call. Have a good day. Thank you very much.
Thank you.
This concludes today's conference call. Thank you all very much for joining.