ANIOY - Acerinox S.A. (ANIOY) Q4 2022 Earnings Call Transcript
Acerinox, S.A. (ANIOY)
Q4 2022 Earnings Conference Call
March 01, 2023, 0400 AM ET
Company Participants
Carlos Lora-Tamayo - Chief Investor Relations & Communication Officer
Bernardo Velazquez - Chief Executive Officer
Hans Helmrich - COO
Miguel Ferrandis - CFO
Conference Call Participants
Francisco Riquel - Alantra
Inigo Egusquiza - Kepler Cheuvreux
Krishan Agarwal - Citigroup
Tristan Gresser - BNP Paribas Exane
Tom Zhang - Barclays
Patrick Mann - Bank of America
Bastian Synagowitz - Deutsche Bank
Presentation
Carlos Lora-Tamayo
Good morning, everybody, and welcome to this presentation for the Fourth Quarter and Full Year Results of Acerinox, another record year for the company, the second year in a row. My name is Carlos Lora-Tamayo, and I am the Chief Investor Relations and Communication Officer of the Group. Today, the results will be presented by our CEO, Bernardo Velazquez; our COO, Hans Helmrich; and our CFO, Miguel Ferrandis.
For those of you who are here in the room, after the presentation, there is a small gift, a plan that comes from the orchard of ALAPAR Foundation. Acerinox has had an agreement over the past 2 years with this foundation in order to help people with this ability to have same opportunities in our society. We hope you like it. Before getting started, let me remember you that this conference call is being broadcast on our website acerinox.com.
With any further comments, I would like to give the floor to our CEO. Please Bernardo, go ahead.
Bernardo Velazquez
Thank you, Carlos. Good morning, everybody. We are here very proud to present what we think are the best results in the history of Cedinox [ph] as the best in turnover, best in EBITDA. And if it is not the best in net profit, it is because we always put our traditional prudence above the success of the New York record year, and we decided to make an impairment in our investment in Malaysia.
But we have been taking advantage of a great situation that we have a lift in the raw material business started in Q4 2020 and lasted until Q2 2022. Now as a good part of the cycle that this time was not neutralized by the overcapacity. I used to say that it's coming especially from China and Indonesia. And that is because the supply chain was totally empty at the time after all the disruptions in the supply chain, so the breakdowns in the economy is because of the COVID and also because the cost and availability of ocean freights and for defense measure as well.
So in this situation, there was a feeling in the market of lack of enough supply, what is not real. And all the distributors in the business try to build up a strong leader of stocks. So the situation at the end was a very good cycle that lasted until the stock levels were more or less at a normal level around the world. And second, when the new situation of the new sentiment of the economy that – was rumors about recession in the second half of the year or rumors about the central bank's measures to stop inflection – of this inflection. We gave this new sentiment to the market to be prudent and reduce or control the stock levels, and then what happened around May, June last year. And that was something that was predicted in our budgets, are predicted in our numbers for the year.
So there's two very different parts in the first half. It was a super record in the second half that we try to control the destocking period based on the experience that we have learned during the years, especially in 2007, when there was a similar cycle, and we didn't want to leave this excess of optimism, and we try to control our products, our inventories and reduce the slowdown.
And of course, we have three different parts in the world, in the business. And every day, are more different that is United States, Europe and rest of the world, especially Asia. Here in this slide, we are presenting six important topics of our situation. The first three messages that we think that will improve our business in the coming years and the last three - are three messages remarking our strategy.
We have to consider that in the next future, supply chain is not going to be the same. Nor all the disruptions and those things that have happened in the traditional commercial flows are changing because of trade measures but also because everybody - all the purchasing managers prefer to diversify the sources of supply. But you cannot trust only in a supplier that is too far away from your factory, especially from - if they are in the Firestore [ph] in China.
So this will bring some more material back to Europe. Imports will be less attractive. And I would think that it is not the end of the globalization process. But we are living a kind of regionalization or diversification in this global economy. And that will improve the consumption in our main markets because it's not only that our traditional customers are - we think that they will buy more from the local suppliers, but also that - that happened in the rest of the industry, in the rest of the economy, more industries will come back to Europe and United States, and that will increase the consumption of the stainless steel.
And of course, secular economy, nor is and ESG matters that are also changing and contributing for more regional market, especially because we have a differentiation compared with other producers because of our products, our way of - and production process and because if Scope 3, the emissions of the vessels and - the emissions in ordering of the raw materials and emissions in the way to Europe will increase or will make this material less attractive for companies that want to fulfill the ESG requirements.
In the letter in the - point number four is important because we are getting these results, it's not only because of the good situation of the market because prices were good, but not the best in our history. And production was not the best in our history, but all the cost-cutting exercises, all the efficiency and program that we have been applying in the last years are making us more competitive. I'm speaking about the Excellence 360 and this kind of programs that are making us more competitive and our margins are higher than ever. And this is a success of the people of Acerinox. So they have been working very hard. I think I have to thank all the Acerinox team for this special effort.
Of course, you all say I'm proud to speak about the health of the company and the strong balance sheet, Miguel will deepen on this. And another point that I think we are doing well in the last year is the capital allocation. The balance between our debt, our shareholders' remuneration and our CapEx that I was trying to find good opportunities. And in this case, we have founded it in the United States again.
So some numbers for the year, record sales, €8.7 billion, it's 30% more than last year. That was not a recurring sales, but another good year. We have a new record in EBITDA, plus 29% compared to last year, so a good cash flow generation, very good productivity, very good ROCE and added value, giving added value to our products, succeeding in the integration of VDM during the third year inside the Eternal Group [ph] have been able to reach a new production record and a new EBITDA record.
It's good because when we presented VDM, we spoke about the synergies beyond the synergies, something that was trying to explain how VDM will help Eternal Group to enter in new customers to enter in new niches and to enter high added value products. And this is what we are doing today. And only 3 years, we have integrated 122 new customers in the group due to this integration and due to the widest portfolio of products that we are offering in the world market.
I already spoke about the excellence in our operations, about the excellence in capital allocation, and we are proud to say that the new investment, the €244 million CapEx in United States, it's something very special, is state of the art, is also the results of a very hard work and also an effect of the digitalization.
We are increasing our capacity in the [indiscernible] hot mill is because we are applying digital tools to increase our productivity, and that will give us an extra capacity of around 15%, 20%, that will give us room to put another controlling [ph] million in the plan. So of course, we are increasing our shareholders' returns, and we will propose to the shareholder meeting to increase to €0.6 per share, which is a 20% more than the traditional €0.5.
I'm proud to speak about our ESG targets, especially about the Platinum award that we got in Ecovadis, something remarkable and the 28% reduction in Safety performance.
But to speak about the Circular Economy and ESG, I will give the floor to our COO.
Hans Helmrich
Thank you, Bernardo. Good morning, everyone. Acerinox continues to be a strong contributor to the Circular Economy and everything we do. As you remember, we had set six sustainability targets for 2030, connected with our 360 positive impact plan that you all know. In 2022, many of our KPIs have been affected by a reduced production.
Regarding our impact in the Circular Economy and our sustainable products, we have managed to valorise more than 79% of the waste we generate in all our operations. We continue to support the fight against climate change through our reduction in greenhouse gases in all our operations. Reduction of water consumption with a more efficient energy consumption in all our processes also focus for our factories.
This last indicator is the one that has been impacted the most when we talk about the reduction in our operations and production in 2022, as Bernardo mentioned. But we remain committed to achieve and, in some cases, overachieve our 2030 targets that we have set for the company. Thanks to the effort of all our teams and suppliers. Ecovadis, has recognized us with the 2022 Platinum award, as was mentioned before.
Regarding our team's culture and diversity and safety, our teams globally have done an outstanding job in 2022 by reducing by 28%, our lost time incident rate, our safety indicator. And we all know that safety remains our number one priority in what we do in the company. In regards to diversity, we are promoting diversity in the broader sense of the work across all the work and we consider Acerinox probably the most diverse company in the industry as per today.
If we move to our - how was the year 2022. It was a complex year all in all. We had tailwinds in the first half of the year and supported by a very positive behavior of the market. The second half of the year continued with an acceptable consumer activity, but affected by the high inventory levels that our customers and the distribution had in all the markets.
Not to forget the very difficult year from an operations perspective. We had flooding in Germany and South Africa, strikes in Spain, supply chain disruptions and many other things happening in all the markets. By region, our mid-market, as you know, is North America. The air [ph] consumer market remained strong through the first half of the year and in many more of the sectors that we supply, the activity was stable and also the prices in the market.
In the case of Europe, the prime demand was in line with the 2021. Inventories were high, as we know, and the year end up with the lowest level of imports that we had in the year that we'll talk in the Q4 details. But evidently, the biggest impact that we had in operations in Europe was connected to the energy cost, both electricity and gas, connected to the war in Ukraine that was affecting all Europe.
The rest of the world was mainly affected by the lockdown in China and the fact that China didn't recover from that lockdown as expected and had a weaker demand through the year that affected the local markets in Asia, but as well as the rest of the world. On another hand, our High-Performance Alloys division had a very strong market through the year and the order book was very strong as well.
Miguel Ferrandis
Thank you, Hans. The title of the slide, as you can appreciate is record results in a challenging year. Hans has talked about the challenges. Fortunately, my part should be the records, which is absolutely pleasant. The records in year 2022 appear to be like sports scorecards with certain records, we must achieve in most of the magnitude, historical records, especially in those related to finance. So we are going to go through most of them.
First of all, even though the melting production was reduced, we realized the figure of sales achieved in 2022. We are talking about almost €8.7 billion. This is a sales figure at the end creates certain vertical, 80,700 it's a magic figure, probably the same vertical we can compare with Tenzing or Hillary when reaching the Everest, which almost is that attitude, 8,800. We are in the middle of K2 and in the middle of Everest. But no doubt, it's a magic figure, and it's a magic figure for us. We keep going down and we realized an EBITDA figure of €1.3 billion.
Those of you who attended this presentation last year may keep in mind how proud we are and especially managers of our generation always have their reference figure and the magic figure of the magic EBITDA achieved in 2006, at that time, the company was leaded by Mr. Victor Manuel [ph] We are proud that today, he is among us attending this presentation and always has been the reference figure that we thought that was unbeatable.
Last year, we were able to beat it slightly. So that nine - record figure of 958 last year, we obtained 989, but what is absolutely remarkable is that just 12 months, we have over passed and bid in a 29% the magic figure obtained last year. So we now realize a new reference, which is this magic figure EBITDA of €1,276 million.
We then go down through the P&L, and we enter in the EBIT figures. We shall talk later on. Obviously, the EBIT figure is affected by some strong impairment we have done in Bahru that we wish I’ll talk later in other slides. But any case, what is also remarkable in this record scorecard is that we have been also recording EBIT with and without the handicap. The handicap can be considered in this case, that is the impairment of Bahru, €204 million that we have made at the year-end.
Even though obviously, even though after the handicap, we have been with this €876 million of EBITDA report, we have been in record. Obviously, if we're not the case, we should have even been above the €1 billion. So this is also something to clearly put on value, as well as the result before taxes and minorities.
When you analyze the EBIT figure of 876 and you go to the result before taxes of 831, you realized that at the end, interest and finance expenses is not a headache in this company. At the end, it's very, very close, the figure before taxes than the EBIT figure. We are not the player reporting a lower debt in this business. But by far, we are the one experiencing less finance charge, which also is a good demonstration of the health of our financial structure.
In addition, the figure of result after taxes and minorities has not been record, just slightly below the one-off of the previous year. We shall keep this as a reference. And also, I want to remark the figure of the net financial debt, which is €440 million. We need to go back until 2002 for finding such a low level of debt. And the comparison of 2002, we must put in context that was the time in which Acerinox Group conveyed from being a fully integrated plant to being three fully integrated plants. In year 2002, we integrate NAS with the melting shop and also we acquired Columbus Stainless.
So we have gone to levels of debt running three plants, running through working capital, running CapEx for keeping three plants at the state of the art. And at the end, we are back to that levels and the figures of debt. I think that also - this is something to keep in mind.
And at the end, all these records have been achieved even though being as prudent as we always are. You know that we are aggressive commercially, we are aggressive industrially, but we are very, very conservative financially. And at the year-end, we shall explain later on. We have made inventory adjustments due to the high uncertainties and volatilities that are in our world, and we have made inventories adjustments of €98 million.
In addition, there is an additional record, which is the shareholder return. We have distributed to our shareholders €336 million in this year. This means 14% of market cap. This means a payout on this exceptional profit that we have - had this year of a 60% payout rate year. I think this is something also that we must put on value.
Bernardo Velazquez
If we go to the Q4 results, evidently, the fourth quarter in our High Performance Alloy had a very strong performance despite the typical seasonability. We know that always the fourth quarter is affected by Christmas, Thanksgiving and all those activities in all the regions around the world.
In our Stainless Steel division, we were affected by a strong destocking process by the distributors in all markets and it will continue to be impacted by the inflation cost and the high inflation costs that we had around the world, mainly in Europe.
The North American market saw a significant drop of more than 40% in the imports, which is good news for all of us. And the stock started to rebalance through the quarter. That means this continues to do so in the first quarter, as we will talk later on about the projection for the first quarter.
In Europe, the apparent demand decrease, was weak through the quarter. Prices were impacted by the market conditions of that low demand. But on a positive note, imports dropped as well more than 50% quarter-over-quarter, which, again, is good news for all of us. When we talk about the market situation and coming material from outside of Europe, Hans?
Hans Helmrich
Yes. In these record results, at the end, we now give some details of the fourth quarter. This is a never boring sector. So we are presenting a record year. And at the end, we are also showing how has been the correction that we have experienced in the year-end. We must precise at that time that after eight quarters of consecutive growth, the third and the fourth quarter of 2022, we have experienced a correction. And after these corrections and due to the circumstances that we have mentioned, we have obtained an EBITDA of €90 million.
If you go back to some years ago, you may remember in the years '19 and in the year '20, our quarterly EBITDA was very, very stable in the range of €90 million. We have achieved €90 million in this weak fourth quarter, but two facts. One, this is as a consequence of this inventory adjustment of €98 million. And in addition to this, we're definitely - we must keep in mind is that as we have stated in the outlook, and our CEO shall explain later on, we are already stating that this is going to be the low and consequently, we expect a substantial higher profitability in the first quarter.
So we have obtained the low correction of the cycle. The local ratio in this time is equivalent, which was the average EBITDA that we were experiencing three and four years ago. I think it's a good also demonstration of the increase in the efficiency achieved by the group in the last years. So we have finally obtained these figures. The EBITDA has been affected by these circumstances, we shall comment them later on.
But in addition, it's relevant also to precise how we handle this business. We - in the periods of the lower profitability, we have made a strong effort and strong discipline among the whole organization, and we have obtained a cash flow of €517 million in the fourth quarter, low quarter of profit, extremely high cash flow making in the fourth quarter, driven by a working capital reduction of €442 million.
And this is what we have put in all our efforts in the four quarter. And this working capital reduction has been driven by a reduction in inventories in the fourth quarter of €484 million. And at the end, this is something that we must put on value. We know our business. We understand our business when the profits come down when there are circumstances affecting the profitability, we put all our efforts then integrating cash, in generating cash of the business.
If we go - and now we try to explain separately both the Stainless Steel division and the High Performance Alloys. First of all, talking about the pure stainless steel. Has been also record, has been also record in all the magnitude. So the net sales purely of stainless of €7.5 billion is a new record as the EBITDA on stainless of 1,151. So in the stainless world, those of you who follow the industry and follow all the other players, those results are the t-in-class.
And when I talk about best-in-class, I mean best-in-class in absolute figures, but also best-in-class in margins. So in this regard, we think there are facts to keep in mind and feeling proud about as we are feeling. What we have experienced in the - obviously, the negative part of the profitability has been affecting the fourth quarter and the full year because of that, you can see in the diagram that is more or less included in both because our strata big figures that have its relevance in the fourth quarter, obviously, but also in the year.
Let's talk about them. There are two facts that have been registered at the year-end that have had a big impact. One is the inventory adjustment. In the case of the stainless steel, we have made an inventory adjustment of €67 million. As Hans mentioned previously, our main market, you know that more than anything, we are North American. North American market is keeping a strong health. But we are seeing a strong weakness in the European market. And consequently, in the stainless mostly in Europe, we have considered that we should make this downward in inventory of €67 million. Why?
Because the prices in Europe still are well depressed. We have seen in the year 2022, the maximum base prices historically achieved and also the minimum in the second half of the year. Still, the prices are low. Still, the inventories are high. You normally keep in mind that the first quarter in the stainless always is a healthy period. We normally are running full. But this time, we are seeing that still the weakness remain in Europe, probably we shall need to wait until the second quarter for a normalization of activity. And consequently, there are strong reasons that justify that we have put our inventory in a very small value, and we have made such impairment on our inventories of €67 million. This has been per one side.
On the other side, at the end of the year, we have also reviewed our operations on Bahru Stainless. We normally talk about a lot about Bahru Stainless. You know, it's our re-roller [ph] in Malaysia. What have created for us to reviewing our production is obviously related to several facts. Still, the situation and the demand in Asia is weak. It has still been affected by several combinations and the policies taken mostly in China, at the same time that the players in the area were keeping high levels of production and a very, very massive - putting on the market mostly in China and Indonesia of additional productions. And consequently, there is a very, very strong aggressiveness in prices in the area.
As a consequence of that, reviewing our projections for year '21, for year '22, we have been profitable in Bahru. We have been having positive EBITDA, but concentrating in the niche of products that made our - us to be profitable. If we now understand on this basis that this may take for long, it is clear that we shall not be - possibility of running full the plant and just keeping such a low volume of production, with a squeeze on margins that we may have, needing to buy locally semi product for transforming in cold-rolled.
It appeared that it was the most adequate to make a big exercise of prudency. And consequently, we have modified our projections for the next years. And as a consequence of that, we have done an impairment of value of its assets of €200 million. This has been done at the year-end. And as I say, it's mostly as a consequence of the uncertainties on the market, the squeezing margins and the assumptions that maybe we shall not be in position of running the plant full and just keeping part of its production capabilities.
This has been affecting the stainless and another fact when we move to high-performance alloys, which was a strong bet and our diversification that we entered in moving through the high-performance alloys in year 2020, we must be also extremely proud about the achievements that we have experienced in the alloys through our subsidiary VDM.
It has been a record year. We have obtained a record year in production, record year in sales with €1.3 billion, but also a record year in EBITDA. You may remember when we explained the acquisition of VDM, we always stated, the figure of 2019 has been the historical peak was €97 million. We always stated our figures, our projections are not for keeping that as a reference. And we always thought that more or less the contribution we were waiting for VDM was around €84 million, €85 million per year.
In the third year of VDM taking part of the Acerinox Group and with 2 years of COVID we have been able to achieve this figure of €125 million, which is absolutely remarkable for the contribution of the High Performance Alloy division.
In addition to this, in this very strong year of 2022, we have obtained more synergies than expected. We have more or less obtained 52% synergies than - the one we were expected. We have achieved €25 million synergies for the group through the High Performance Alloys. We have integrated 122 new customers. So we are in no doubt in VDM growing above what we were expecting in the past.
If we go then to the fourth quarter figure, also, we have made an exercise of prudency in the fourth quarter figure in terms of the nevertheless double [ph] value of our inventories. In the case of VDM, the circumstances are different than in the case of the stainless. The High Performance Alloys is keeping a good track. Our order book is full. The market has recovered in most of this sector. You have all the explanations in the results presentation. This is clear.
But in addition, there are several facts that may affect the cost structure of VDM coming on to the supply, the orders that actually are in place with the inventory that we have actually on stock for fulfilling that inventories. And consequently, with all the facts that were in the table, keep in mind that the nickel has gone up in the fourth quarter from levels of 20,000, from levels of 30,000.
The energy also is still an uncertainty in VDM managed excellently well all the energy procurements for 2022 with some hedging contracts that they had in advance. So the gas and electricity have not been an issue or strong painful for 2022. But probably for 2023, it shall have those effects. And there are some additional extra costs that we have considered that putting on them we should adjust the net revisable value. And as a consequence of that, in this record year, we have made another exercise of prudency, and we have made at the year-end, this inventory adjustments of €31 million. And at the end with this, we feel absolutely comfortable for the coming quarters in the High Performance Alloys division.
If we go to the slide showing the cash generation. It's also several facts to be proud about. In regard of the year, we are talking about the EBITDA figure. When we took the picture of the whole year, obviously, our business is absolutely dependent on the working capital. What we need to have is the strengthen of - for a company [ph] in a good market cycle, and then we have invested in working capital in this year for being in position for filling the market and keeping these results. And this has, on a yearly basis, meant an increase in working capital of €479 million. At the end, this has been one of the main usages of our capital allocated in the year.
We also must talk about taxes, and this is something to talk about. You see in the picture, €243 million is taxes, financials and others, but most of it, financials, as we explained before, is not relevant in our case or financial expenses. But we have paid €232 million of taxes in 2022. This has also been sustainable. At the end, being sustainable is that when we are having high profits, obviously, we are contributing in the communities where we are based. So at the end, part of the strong allocation of the cash generation in this year has been through taxes, as a consequence of the huge profits that we have been achieving.
In addition, we have increased again our CapEx. We are maintaining our policy of keeping robust CapEx for keeping our plants at the state of the art. And with this, we have generated free cash flow in the year of €419 million.
The next column is - or the next bar is also absolutely remarkable, which is the distribution to shareholders through dividend and buyback. We have invested in our shareholders €336 million in 2022. This is 2.3 times what we made last year. And this, again, I insist the 14% of the market cap of the company and a payout of 60% in this year. So this is something also to put on value has been also commented previously by Bernardo that we have announced to increase our dividend for the coming years.
And in addition to this, obviously, still we have a space for reducing our net debt. We have some conversion differences. And at the end, this obviously is a consequence of our financial strategy. You know, our financial strategy means having a strong cash position in the States. And as a consequence of this, in a yearly view, the dollar has been appreciated and consequently, this has also contribute partially to this final figure of a net debt decrease in this record year of €138 million.
Just going through the fourth quarter, we have talked about the strong value generation that we have achieved, but I want to remark again, especially in the case of working capital, 442, driven by a reduction in inventories of 488. This is probably the more relevant issue to comment.
At the end, has been a strong net debt decrease in the fourth quarter – quarter-after-quarter in the first three quarters of the year, we were increasing working capital and also the debt was obviously reflecting that. But in the fourth quarter, the exercise has been this strong reduction.
The figure which appears of conversion differences now that this €117 million. This is not cash out. This is purely the effect that in the fourth quarter, a part of all this volatility we have seen in other components, we also have experienced the volatility of the dollar. Just in the fourth quarter, even though in the year, the dollar has appreciated compared with ending of 2021. But in the fourth quarter, dollar moved from levels of 0.97 to 1.36, this with the strong cash we have in the States created that we have this accounting effect we're moving this to euro of €117 million. But even though that the net debt figure that we are reporting has been reducing in the quarter, 323.
Bernardo Velazquez
Just some tips to finish with the presentation and enter in the Q&A. We are in a cyclical business. We are doing our best to reduce the size of the cycles by putting - including the HPA division, that is also cyclical, but with a different cycle in the time.
We are also trying to increase the average of the cycle, but still were in a secular business. And what does it mean is that still, we haven't celebrated the good results of the year, and we are back again starting to manage the lowest part of the stocking period. And this is what we have seen in the second half of the year.
It is, first of all, the stocking period started in July last year and is still there. Second, is that we are, as Miguel mentioned, we are conservative in our numbers, and we try to predict the bad situation of the destocking period, and we made the provisions and the impairment that we needed.
Three that we have a success story in with VDM that is contributing to 23% of the EBITDA in Q4, where is the - as we are compensating the lower part of the extensive [ph] cycle that we are now, again, intensifying. We never stopped our efficiency programs, but we are intensifying these programs again.
Five, that we keep a very good health in the company, so that gives us flexibility for the future and also we can be safe in the worst scenarios that we don't expect, by the way. Six, is that we are keeping our fixed strategy is capital allocation, robust CapEx, shareholder remuneration, all with a healthy financial structure. And that the situation has been - or starting the downturn of the cycle is not that bad. I mean, as a – we still keep a very good order book in HPA in the alloys divisions, and we are very optimistic because there's a lot of projects coming in the business. We have a very strong order book.
Our major market is United States, and I think it's the place to be today. Now we are investing there at the right time. All the programs that they are developing now that will contribute to the consumption of Stainless Steel. American market, in general, is doing well. So we are very happy to be there. It was a great decision to enter the United States, and we are the market leader very clearly. And the situation, let us say, note that our EBITDA in quarter one is going to be clearly higher than in quarter two. We never give the numbers, no, but I think...
Miguel Ferrandis
In the fourth quarter.
Bernardo Velazquez
In the fourth quarter, than in the fourth quarter. So we never give numbers. We never make a forecast, but we can say that the situation is improving, starting to improve, that we understand that the stock level will come back to normal at beginning of mid-Q2. So the situation is going to be good, and our Q1 is going to be clearly higher than Q4 last year. And that's all.
Question-and-Answer Session
A - Carlos Lora-Tamayo
Thank you, Bernardo, Hans, Miguel for the presentation. Let's move now to the Q&A session. I will take first your questions here in the room and then let - and then we will move for the conference call.
Francisco Riquel
Francisco Riquel from Alantra. Thank you for the presentation. And first question is you can update on the destocking cycle. Previously, you were guiding for it to be completed in the first quarter, now extending it to the second quarter. So if you can comment on the level of stocks in the main markets? And imports, how they started in '23? And supply/demand overall in general?
And then in particular, also in the U.S. business, you have managed to preserve a good level of base prices during the downturn. So I wonder if you think that these good levels will be sustainable when the restocking starts.
And then in Europe, I understand that most of the write-downs are allocated to the European division. So you would be suffering more than the European peers. If you can explain this gap, if you are suffering more with the cost inflation, energy and with the production cuts, if you are giving up some market share or not?
And then I have a second question in terms of capital allocation for '23. Working capital, you have released almost half of what you had in the previous quarter. Do you believe that there is room to reverse more or given that you will have to restock again? So working capital CapEx, how much will you accommodate in total and for the U.S. investment that you have announced and your views about buybacks at this point of the year? Thank you.
Bastian Synagowitz
Thank you, Francisco. United States, the situation in United States is better than in the European market, and the market is more organized. The expectations are better. The general consumption is strong. It is strong in construction. It is strongly in the automotive industry again. So in general, consumption is good. So we are managing to keep the prices under control.
Now that the imports are very low, and due to the uncertainty and to the necessity to drop stocks in the distributors, imports are not attractive for them. If they order some materials today, they will arrive in your districts units in five months. So we are back in the situation of this lack of visibility or uncertainty that makes less attractive imports because of this type. It's safer to buy in the United States.
So it is probable being near [ph] close future once the stocks enter in a normal level that our customers will start comparing prices in United States with the rest of the world. But still, as we can offer very short delivery times, we are reducing the risk in this supply. So most of them prefer to buy locally. And even if we have to make some price cuts will not be dramatic, we think.
In the case of Europe, yes, the situation is worse in Spain than in other areas. And this is only due to one thing, that is the energy cost. I think that is affecting us more than to our competitors. It is difficult to speak about the electricity prices or prices because every country has their own systems. I think that we have to look for - we have to insist that we need to have a European energy market.
I think this is very important because for a European problem, that is the lack of gas or the energy prices, we are in local solutions, and this is very, very dangerous for Europe. I think that we need to do something and Spain, especially have to do something to reduce the energy cost because all the electro and gas-intensive industry will have no future in this country, which is very important. I think the government is aware of this, and they are working on this, but still the situation is worse in Spain and in other areas.
In terms of market share, I think we - all the European players, we are doing more or less the same, with different solutions and with different results, but we are very responsible of taking care of our markets, and we are trying to reduce production at the level of the real consumption. I think this is what we are doing. And then so more or less, we are doing all the same.
So we are losing or we have lost market share last year compared to inputs or imports have been winning this market share. I think that they reached an average of 35% last year above the traditional 25% for - that was in the previous year. So imports took advantage of this situation, but the European player is more or less are the same. So our market share compared to our peers here is more or less the same.
CapEx for next year, you have to think that we need CapEx to keep our factories updated as kind of maintenance CapEx, and we have CapEx in ESG. We have CapEx in digitalization. And we have an investment in the United States. That is US$ 244 million. You know that the maturity time of our investments is normally between 3 and 4 years. So if you split the 244 million in 4 years and you add it to a normal CapEx of the group or you will have the level of CapEx in 2023. Miguel, do you want to add something...
Miguel Ferrandis
Yes. Regarding working capital in principle, in the - it should not be a big raise of working capital in the first quarter. Let's say, more or less, which is the evolution is the market as it is, we have seen, obviously, in January, which is the only one that we can talk. The figure of sales in America is going up, and this is - that is reflecting, but still, we are - as we are keeping low levels of production in other plants, we are obviously not having further consequences there and inventories are in - or more or less in suppliers. So we don't expect that there shall be a big raise in working capital for the first quarter, not in stainless, maybe partially in alloys, as much as keep it growth, but we don't think it's a bit substantial.
Sorry. Regarding the buyback, this is something that still is not defined. What was agreed was to increase the dividend and having a flexible policy of decided buyback when needed. We have achieved an 88% acquisition of Ashores [ph] in the year 2022. With this, we have neutralized the four consecutive years of a script that we have in - during the financial crisis in Europe. So up to now, what we have noticed on a specific plan. It shall depend on the profitability and the cash evolution of the company as well, obviously, on the share price of Acerinox. So this is - we are having a flexible policy, but not a clear commitment yet.
Carlos Lora-Tamayo
Any other question here in the room?
Inigo Egusquiza
Inigo Egusquiza from Kepler Cheuvreux. Sorry to come back on the CapEx, Bernardo and Miguel. The normalized CapEx should be similar to the 125 that we have seen in 2022. And on top of that, we include the U.S. expansion plan, the €244 million in 4 years. This is the first question.
And the second question on Bahru after the impairment you have done of more than 200, could you please update us on the different alternatives, if there is something on the table? You mentioned during last year that you were analyzing different alternatives, potential joint venture or full disposal? I don't know if you can update us. Thank you.
Bernardo Velazquez
Thank you, Inigo. Normal CapEx in the stainless can be at the level of €140 million per year, more or less. Now if you have something that we will include in ESG because we have some CO2 savings programs and also more or less the €60 million that we can put per year in North American stainless will be at the level of 200, 220. That is a reasonable level.
Regarding Bahru, of course, we are looking for all the alternatives, and we are still keeping this in mind. We are looking alternative. We are looking at joint venture. We are looking for solutions and the way to improve our business there, but there's nothing new.
Unidentified Analyst
Good morning. I'm Gregor from Deutsche. Congratulations on the figures 2022. And on the many highlights you've presented. My question would be, what are the lessons learned from VDM acquisition? And where is your appetite in terms of inorganic growth? I know it's a tricky one, but if you can say anything? Thank you.
Bernardo Velazquez
I think is a very good one. I mean, lessons learned that is good that there's a world outside the stainless steel and we want to explore it. I think this is what we have in. What happened is that there's not many companies the same like VDM. VDM have been perfect for us not this much specifically, it's all that we wanted, and we are now in 3 years.
This is success story. This is a new record. Integration is going really, really well be part of the group, totally integrated today. And we are number one in the HPA business in the world. So I think this is something unique and something very difficult to repeat. So of course, we are looking for alternatives.
In our financial structure, as we mentioned, we can be very flexible. So the debt is under control. Now we are at the level of 0.35 times EBITDA. So this is very good. So that means that we can keep the level of CapEx. We can keep the level of debt. We can keep the level of shareholder return. And if we have an opportunity, we can go for it. So we are continually exploring, but it's difficult to find something that can be directed as well as VDM in the group, but we will not forget it.
Carlos Lora-Tamayo
Any other questions here? Okay. So let's move to the conference call, please.
Operator
Thank you. [Operator Instructions] Our first question today comes from the line of Sandeep Pate [ph] from Morgan Stanley. Please go ahead. Your line is now open.
Unidentified Analyst
Hi. Good morning. So I have a couple of questions. Firstly, can you help us understand different moving parts of 1Q guidance of clearly better versus 4Q levels of €90 million with focus on expectations on inventory revaluations and volumes? And I'll take my next question after the first one.
Bernardo Velazquez
Okay. Well, we expressed clearly – clearly gives an indication that by far, the worst is over. But the effect of clearly also should be put in context that in this with several uncertainties still in the market, we are talking about geopolitical conflict in Europe. We are talking about energy. And so let's see when comes the normalization, the activation of the market. And consequently, if it's necessary to proceed again or not with inventory adjustments in March. So we must be prudent because still there is several uncertainties.
So we are conservative. We are more than comfortable now with the inventories adjustments, but then what may take place at the end of the quarter for the orders coming in the second quarter, it still is uncertain. So we prefer to talk about clearly better. We think it's a proper message. You appreciate the strong metal [ph] adjustment we have done. So this provides us a strong comfort. What may be the considerations taking for the marketing for the second quarter still is unknown.
Miguel Ferrandis
Sandeep, on the second part of your question regarding volumes, what we expect is that the Q1 will be slightly better than what we had in the Q4 in the stainless steel business. We see the markets in North America and Europe being positive versus what we had seen in the Q4.
Operator
Thank you. Our next question today comes from the line of Krishan Agarwal from Citigroup. Please go ahead. Your line is now open.
Krishan Agarwal
Hi, Bernardo. And hi, Miguel, very detailed presentation, thanks for that. If I can now push a little bit more on the Q1 guidance. So basic premise of the Q1 guidance is that the €90 million [ph] EBITDA for Q4, add back €98 million from the inventory, you will reach to €190 million and then a little bit of a volume increase, but then energy costs and the underlying weakness flowing from the Q4. So we are looking something €150 million plus. Would that be a kind of a wild assumption or you are comfortable with that for Q1?
Bernardo Velazquez
Thank you, Krishan. No, I think it's - what we said is it is clearly higher. That means as Miguel explained, that we can generate an EBITDA that can be better than - clearly better than quarter four and also that we have to be prudent. We want to see how is the situation at the end of this quarter, and then we will establish again our NRV provisions that will depend on the situation. The situation is improving, and we will be able to release some of the provisions that we made. If not, we will keep it. We are always conservative. I don't know if I answered your question.
Krishan Agarwal
Medium-term question on VDM. I remember, I mean, 12 months back, you were talking about €7 million per month kind of a normalized rate for VDM EBITDA. And then on top of that synergies, 2022 clearly has been much higher than those numbers. Should we believe that €100 million plus EBITDA for VDM is kind of a normalized number going forward in 2023 onwards?
Bernardo Velazquez
So don't put the target too high. We bought the company of around €80 million per year, and we ended 120 something. So we are very happy with this. That will depend on the situation. Of course, in this market, we have a very good reputation, and we can manage the cycles, we can manage the prices, and we have very, very loyal customers.
So can we keep it or not? That was a record - a new record in production. I will give it this year. We will try, but that will depend on the market conditions for sure. But what is clear is that depending in normal conditions with the normal energy price, we can be optimistic. But maybe not 125 cannot be the normalized EBITDA for the company, but we can be optimistic.
Operator
Thank you. The next question today comes from the line of Tristan Gresser from BNP Paribas Exane. Please go ahead. Your line is now open.
Tristan Gresser
Yes, hi. Thanks you for taking my questions. The first one maybe also, sorry, on the Q1 guidance. I mean the volumes you had in Q4 were probably the lowest on melt shop production since the global financial crisis. And you talk about a slight improvement in volumes, potentially some inventory adjustment that still could take place in March. What is driving this cautiousness in your view what's taking place in the market in Europe and in the U.S.? And also maybe more specifically, did you expect to hit the double-digit margin at the group level in Q1?
Bernardo Velazquez
Regarding to volumes of production and sales, we started the destocking period in July last year, as I said, and was very strong at the end of the year. This is normal. All the companies wants to reach the end of the year at the lowest level of debt. We have to be nice in the photo.
Now we have a lot of bankers here that they know perfectly that would have to be nice at the photo, and we will try to reduce the working capital at the end of the year. And this is what happened. Now the situation is better. And normally, Q1 is always a period of restocking again.
In this case, it cannot be possible because still the distributors are trying to adapt inventories. But the situation is not as bad or it's not as conservative as we were in Q4. So we expect a higher volume of production. Miguel, do you want to add something regarding margins?
Miguel Ferrandis
Well, yes, basically I think we are talking - we clearly have a stated there's going to be improvements in the first quarter. We have the uncertainties. When we go to Bloomberg and we check more or less, which is the consensus of the analysts, it is understood that 2023 is going to be a much more difficult year. And purely, the consensus of Bloomberg is talking about €660 million for the year.
This means the varied in four quarters, the average will be 160. So at the end, I think that with the guidance that we are giving and keeping in mind, more or less, which is the consensus we contemplated on the symptoms that we are having. I think that there are price [ph] for keeping in control.
The situation in the States remains very healthy. It has been stated. The uncertainties are more in Europe, but more than 50% of our service is in the States. So consequently, our margin in the first quarter should be substantially higher than that one of the fourth one, no doubt.
Operator
Thank you. The next question today comes from the line of Tom Zhang from Barclays. Please go ahead. Your line is now open.
Tom Zhang
Hi. Morning, gentlemen. Thanks for taking our questions. Just two from me, please. We've talked quite a lot about the U.S. and Europe already. Maybe you could just comment a bit on Columbus utilization rates and sort of the demand environment in South Africa. I know normally you switch between carbon and stainless depending on how the market is developing. So maybe just some thoughts there.
And then just a clarification on Bahru. The impairment, you mentioned it was taken predominantly because of the more difficult operating environment. Can you just confirm there were no changes in, for example, discount rates in the sort of accounting assumptions? And it was really just all driven by a more difficult environment in Asia? Thanks.
Hans Helmrich
Tom, I can take the first part of your question in regards to the situation in Columbus in South Africa. I think we managed to get Columbus to probably the most flexible plant in the world as per today with the production of our traditional stainless steel, both for the local market and for exports into the rest of the world.
Columbus has managed to get also a stable production in mine still in carbon still in for very specific applications in the local market, which has been driven successful applications as per today. And that helps driving flexibility, allowing us to drive production depending on how we see the stainless steel and demand for production.
So the local business is restarting in South Africa as well for stainless steel. So we are positive about the situation with Columbus for the first quarter. We are making trials now to start producing nickel alloys in South Africa. So - and that will be the most flexible plant in the world. The only plant in the world that use carbon steel, the stainless steel and nickel alloys.
Miguel Ferrandis
And regarding Bahru, what we have done is, as we explained before, is extreme - the conservatism in the projections. In projection than in previous year, we were assuming that gradually Bahru should run almost full. And now what we have considered is a scenario that we keep Bahru running with a niche production for specific players, but not developing a whole capacity utilization of its assets.
As a consequence of that, in the actual circumstances with the low margins in the area it has appeared that this was the proper impairment to do, and this has been the exercise. So it's - as I said before, we have been profitable, positive EBITDA '21, positive EBITDA '22. But assuming that maybe it's more prudent to consider that we shall be just partially running the plant and with the margins very, very squeezed according to the local suppliers and the weak demand, it appeared to be actually reasonable to make such impairment. And with this, more or less, we are absolutely comfort on what may come for the next future for Bahru.
Operator
Thank you. The next question today comes from the line of Patrick Mann from Bank of America. Please go ahead. Your line is now open.
Patrick Mann
Good day. Thanks very much for the opportunity. I just wanted to ask maybe a clarification on Bahru. After the impairment, what's the carrying value of that plant? And then maybe just going back to volumes because obviously, last year, volumes were much lower year-on-year and all back-end loaded.
How should we think about the group volumes from Acerinox going forward? It doesn't sound like you're expecting a very sharp bounce back sort of now, but presumably the second half will be better. But then we also have the capacity increase in North America. So maybe if you can update us on what's your long-term total volume expectations in stainless and when do you see yourselves getting there? Thank you.
Hans Helmrich
Patrick, I can take your second question, and I'll let Miguel talk about the first one later. So on 2022, you have to remember that we had some specific maintenance stopages around the wall in some of the factories, mainly here in Spain, but it happened in some of the factories and were affected by the - as well by the lower volumes in the second half of the year. So that's what we think, and we see the first quarter and that the guidance we use is for the first quarter that those volumes going up, and we don't expect this year going forward into the year, those significant maintenance activities going on this year.
There were one-offs happening last year. And also, evidently, the investment for North American stainless in the long term is not going to be available this year. It will take us, Bernardo said, several years to get that production available for the local market.
Miguel Ferrandis
After all these impairments, as you shall appreciate in the financial statements, you can check it in the web page, the current value of - value after the impairment should be in the range of around €135 million.
Operator
Thank you. The next question today comes from the line of Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is now open.
Bastian Synagowitz
Yes. Good morning, all. And thanks for taking my question. My first one is actually another follow-up on guidance. And sorry to come back for that, but I'm still not 100% clear. But I mean, there was a couple of moving parts, and you mentioned a potential another impairment depending on how the market goes. We obviously don't really know. So I guess it's probably easiest to just leave that aside because we really don't know how metal prices will develop.
If we just look at the balance of volumes, which will be better and then probably ASPs, which will still decline. If you just take a look at that component, if you look into your order book, would you then say, €150 million or so or better? Does it actually make sense from today's point of view, given that the underlying Q4 performance was obviously close to €200 million EBITDA, which is pretty strong in the context of the very, very weak volumes, which you've had. Would you be comfortable when we x out the potential impairment impact with 150 plant?
Bernardo Velazquez
It's very embarrassing, Bastian. When we are talking about clearly on just to bring the exact figure. There are several facts your figure, I don't feel uncomfortable with your figure. I'm not making any commitment on any further explanation. But it could be - I think it's rational. So...
Miguel Ferrandis
We never give the forecast when our position.
Bastian Synagowitz
Yes. No, absolutely. No, I just wanted to basically see whether like in terms of the moving parts, the broad bandwidth direction, obviously makes sense and totally appreciate that there is not no precise guidance if otherwise, you obviously would have written it into the release. So no, thanks for the clarification.
Then my second question is another follow-up on the Malaysian business. And again, I'm trying to understand the situation. So in October, you obviously said Bahru was performing well. It was profitable. I guess the impairment at least stands a little bit in contrast to that, although clearly, I think that's also a function of your conservative accounting approach really with clearing the deck here on that business.
But could you maybe let us know what the cash flow profile for Bahru looked like last year? And maybe also in 2021, I guess we can't see it in your disclosure, but has Bahru been cash flow positive in both those years?
Bernardo Velazquez
Thank you, Bastian. So finishing with the guidance, I think that we can say that we have already said that the volumes are going to be better. So this is something we have to understand. Volumes will be better because we have been cutting and acting our inventories during the last part of the year. And also margins are going to be better because we have been digesting the excess of cost that we have in our inventory. So that it is clear.
Regarding Malaysia, I think that we are very proud of the performance of our Malaysian plant. What happened is that the situation in the area is very competitive. We are competing there with the giant of the world that is Shinshan [ph] that is based in Indonesia. And there's some - we don't know if there will be more projects in the area or not. But we are not saying that we have loss results. What we are seeing is that the projections of Bahru Stainless will not be as positive as we thought at the beginning. We'll be positive. We have a positive projection but not as good as we could in before. And that is the reason that we have reviewed the value of the company, and we went to this impairment that we think that is very, very conservative. And I think that we should be - we must be conservative.
Operator
Thank you. The next question today comes from the line of Moses Ole [ph] from JPMorgan. Please go ahead. Your line is now open.
Unidentified Analyst
Hi, Thank you very much for taking my questions. So I have two questions, which I'll take one on time. And first one is also on the Q1 EBITDA bridge. So focusing on inventory valuation and also energy costs. So obviously, in the car market, we kind of sit you commodity prices move into the rest of Q1. But if prices were to hold where they are, would you say that the quarter-on-quarter impact of the inventory revaluation should be more positive in Q1 versus Q4?
And then also on energy cost, how much of your energy costs are hedged into 2023? Should we expect some roll-off from 2022 to 203? And I'll ask my next question after.
Bernardo Velazquez
On the second part of your question on the energy cost, we have right now around 30% hedging on energy cost here in Spain, which is what we are affected most by the increases. We see probably in the first quarter, a level of energy that is going to be stable through the quarter. That's what we see right now. And that's why we are considering this monitor [ph] for our projections for Q1.
Energy prices is a European problem. We have different prices in the different European countries, but it's only European problem. We have a normal price in United States. We have normal price in South Africa and in Malaysia that is only affecting the Spanish plant and as mentioned. We have been increasing the level of the volumes of PPAs that we have contracted. And I think that from next -- from this year, we will start applying around 30% of PPAs in our energy cost.
Miguel Ferrandis
Okay. And then Q1 appears to be my favourite topic today. Clearly, we mean clearly ,better means that the worst is over. Clearly means that the basis of the market are better that we do not expect a big increase in working capital. But still, we have uncertainties in the in the second quarter, and then we prefer to be through that.
We have seen the volatility, talking about the exchange rate, for example, in the dollar and in the euro during the year. This is one fact. We have seen the volatility in the nickel in the fourth quarter. This is another fact. We still are suffering obviously, the consequences of the crazy [indiscernible] So there are still the supply chains are not normalized. And still, we have seen variable increase in imports in Europe, reaching market shares of 31%. Distributors are still with large inventories. This must be reduced.
When shall the market reactivate and what shall be the consequences in the price? What shall be our visibility at the end of the quarter for what may take place in the resale value for the second quarter we don't know, but shall be clearly matter.
Unidentified Analyst
Okay. Thank you for that. And also on the growth CapEx into North America stainless. So could you please provide your estimates on the incremental tons of this investment? And how does this change your product and geographical mix, specifically, how should we consider your footprint in Europe going forward? It currently stands at about 20% of shipments, but this will probably edge lower following this investment. So how should we consider this part of the business going forward?
Miguel Ferrandis
The new CapEx is a beautiful project. And it is beautiful because we are starting increasing the capacity of the melting shop now with new equipment, but improving the logistics of the melting shop and how can we improve the logistics of the melting shop, the new tools, using a digital twin. Now that's the way that we fund it at what are the bottlenecks of the logistics of the melting shop and that will let us increase the capacity between 15% and 20%.
And how can we manage that in hot rolling, as we will do it also using digital tools to increase the productivity of the mill. So we'll not need investment or a big CapEx to increase our capacity based on digital information and analysis. And then we will spend €244 million, basically in the new cold-rolling mill and the upgrading of the Alimak [ph] lines. That means that with a very reasonable CapEx, we will increase our capacity between 15% and 20%.
And this is - we will never give numbers of how productive is going to be how is it going to contribute to the margins. But as you can understand, with reasonable CapEx, we will increase production 15%, 20% to follow the reason of growth of the Europe - the American market. So the payback of this impairment is going to be very fast.
That will increase our capacity and our sales in the United States. We are not trying to win market share. They were just turning to accompany the American market in the growth, so we are a clear market leader, and I think that we are a good market leader in the United States. So we don't want our customers to feel that they will have a lack of local production in the future. And we promise to them that we will support the market in the future with the future growth, and I think that they became very happy to have North American stainless as market leader there.
So that is going to change the geographical mix. Of course, that will rebalance a little bit the current balance of our geographical needs, but because we will increase a portion in the United States, but I will take 3 years. So more or less, you can make the numbers. It's not very difficult.
Operator
Thank you. Our final question today comes from the line of Krishan Agarwal from Citigroup. Please go ahead. Your line is now open.
Krishan Agarwal
Thanks a lot. My questions have all been asked. But if I can do a follow-up on Bahru thoughts from Bernardo. You've taken an impairment of €200 million-odd in the Q4. The carrying value is €135. Now you've been saying that you are looking for the option for the operation. But then what is your thoughts on the potential valuation in case you were to engage into any kind of a transaction? Does that €135 million value gives you a kind of a starting point? Or you will still be looking for a normalized valuation for the business, irrespective of impairments you have taken?
Bernardo Velazquez
In terms of strategy, there's nothing new this year. I mean, what we have done is that we are resizing Bahru stainless to dedicate the production to higher-value products and the niches of the market with less competition. That's why we reduced our production there. It doesn't mean that we are going to keep this production forever. But we will try to focus on these customers, and we'll try to increase our volumes in these customers, and we try to find similar customers with added value that are not in the range of products that the normal commodity makers in Indonesia and China are doing.
So we will increase our production. So we have a strategy there. That doesn't mean that we feel that we are weak in the area and we'll have to do something. But we have to do something it's not a problem today, so we can keep the stainless as it is today. We are growing in margins. Today, we are not speaking about losses in Bahru, we are positive, and we will be more positive next year. And because we are increasing volumes in each products, and this is positive. During - we find the other options that we are open to everything to cooperate with some of these big guys in the area to increase sales or do something together or we are open to everything.
Question-and-Answer Session
Carlos Lora-Tamayo
Any further questions here in the room? So this has been everything from our side. Thank you very much again for attending this presentation, and we hope to see you in the next publication of our results that will take place on April 27. And now we will be happy to share Spanish with all of you that are here.
Bernardo Velazquez
To celebrate the record results. Thank you very much.
For further details see:
Acerinox, S.A. (ANIOY) Q4 2022 Earnings Call Transcript