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Edited Transcript of ACX.MC earnings conference call or presentation 13-May-19 8:00am GMT

Q1 2019 Acerinox SA Earnings Call

Madrid May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Acerinox SA earnings conference call or presentation Monday, May 13, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Carlos Lora-Tamayo

Acerinox, S.A. - Head of Investor & Media Relations

* Miguel Ferrandis Torres

Acerinox, S.A. - Chief Financial Director


Conference Call Participants


* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Francisco Riquel

Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research

* Francisco José Rodríguez Sánchez

Banco de Sabadell. S.A., Research Division - Research Analyst

* Luis de Toledo

BBVA Research SA - Chief Analyst of Oil and Materials

* Luke Nelson

JP Morgan Chase & Co, Research Division - Research Analyst

* Menno Gerard Cornelis Sanderse

Morgan Stanley, Research Division - MD

* Robert Jackson

Grupo Santander, Research Division - Equity Analyst




Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [1]


Good morning, everybody, and welcome to the Acerinox Earnings Conference Call for the First Quarter 2019. My name is Carlos Lora-Tamayo, and I am the Head of Investor Relations. Our CFO, Miguel Ferrandis, will host the call and will be accompanied, as in other occasions, by the Investor Relations team; Maria Uclés and Carlos Lora, myself. Miguel will start with a short presentation and then continue with a Q&A session.

Before getting started, let us remember that this conference call is being broadcast on our website at acerinox.com. Please, Miguel, go ahead.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [2]


Good morning, everybody. Thank you for your interest in following this presentation. We have made available to everybody early this morning proper explanation of all our results for this first quarter, as well as also the slides we are trying to explain now. So consequently, I think you have a big and proper part of transparent communication. We shall try to make a quick presentation going through the slides in order to give more time for the Q&A session that, probably, after all the information you have been more or less analyzing up to now, shall give you also some better understanding on solving all our key points.

First of all, what we want to express you that, clearly, we are satisfied of the results we are presenting now. It's good results and are remarkable results in the troubled waters in which we are facing. Not only our sectors, it's clear that on the industry side is more or less facing a lot of uncertainties in the actual days since the last months. And maybe, sometime, these uncertainties are overweight compared with the good signs that, at least in our case, the market provides us.

So in this environment, what we must face, stress our satisfaction. We are very, very pleased with this quarter results update, and especially because it's also a good demonstration of how useful was our quick reaction to the curation on the market we appreciate in the fourth quarter. I think this is one of the most probably remarkable of all those aspects of Acerinox. We are not following purely the market wins. We are trying to anticipate and we are trying to react quickly. And this reaction we made in the fourth quarter, you may remember, as we explained, that we adjusted production, and we reduced production in view of the tension we were seeing in the market. We prioritized also the staff reduction internally in the group, and we made a big, big, correction on the stocks, which have also its positive effect on the cash generation. And in addition to this, we also make a very prudent exercise on the inventory adjustments in view of the collapse also we were facing in the prices, mostly in Europe and in Asia.

So at the end, this quick reaction made in the fourth quarter has allowed us probably to face better the difficult January and February this year and began to take a strong advantage and take appropriate speed mostly since the month of March, in which all the bases are evolving better. So it's clear that, as I said before, there are times for uncertainties in the market, and there are big paradoxes because we are seeing good activity in the main -- in most markets -- in our most markets. We are seeing good activity in America. We are seeing good activity in Europe. But even to that, still the pressures are very, very probably lazy in terms of accepting higher base prices. The market probably still is very, very concerned on what may come after, even though the signs up to now are proper and the activity is high is enough, and most of our final sectors are evolving satisfactorily in this year 2019.

On the other side, it's also clear that the commercial tensions and the commercial disputes in other geostrategy markets are affecting the concerns on any type of further correction from the future -- for the future economic growth. This is dropping the raw materials, and consequently a fact that in principle, for Acerinox, for example, 90% of our sales in America and in Europe being probably benefited by the -- this type of trade cases. But at the end, we obtain more or less the concerns of what may come after this. This has its impact on the economic growth. And instead of probably pushing our -- even our share price higher in terms of taking advantages of these tensions in our 90% of the markets generally benefited by trade barriers. But at the end still, we are not seeing that in the proper valuation of our business and of our future results.

So as I said before, it's plenty of uncertainties, and these uncertainties are driving all these paradoxes that we are seeing in the market. Probably the best definition of the first quarter results is expressed in the -- in Page #3. We talk about the market highlights and also the Acerinox highlights for the quarter.

In the market highlights, as we have been telling before, we are seeing an improvement of market activity, especially in the big correction in the fourth quarter. We are seeing increase in activity. I think the activity has been fine gradually during the quarter starting good, but improving substantially from March in Europe and in America. Both of the markets are running very, very satisfactorily. In special, the extra alloys after a big correction in the raw materials after 7 consecutive months of decline, in March, the change -- the trend was changed, and we see a jump in the extra alloys. And definitely, this is also obviously benefiting ourselves, benefiting the margins and also benefiting the order taking. And we have seen gradually during the quarter a normalization of the inventory levels, mostly in Europe and in the States.

It occurred first in Europe and probably late in the quarter in March also in the States. So now the situation for us appears to be very, very well based in terms of inventories in the market, none being high. Even for that, probably as we are seeing in the market, final customers are with proper expectance of consumption this year. And still the stockers and distributors are very, very prudent because of all these concerns and all these uncertainties which is going to be the effect on the consumption probably for the second half of the year. And consequently, the distributors are not very active. The level of stocks have been correcting gradually. We are below normal levels in both America and in Europe. But still the distributors are not being very aggressive and in part are passing all those through. This is our motivation we must follow in the following months.

If we move more to Europe, it's clear that import pressure now is going down in this regard compared with the similar period of last year's. Import is down 26%, so the actual market share of Europe coming from levels of 30% is in the range of 22%. We have been probably lucky that the final safeguard measures coming on February has given the market much more stability and much more rationale, as probably the provisional measures taking in July last year provide certain confusion on the market. So fortunately, this has been gratified. The quota per country established definitely is improving the situation and also avoiding several of the mess and the tricky issues that we appreciated in the second half of last year of certain material that was internalized on to Europe.

But the fact and the paradox, as we have been saying, is that the imports have been substantially corrected and if the inventories have normalized, still the prices remain low. And this is as a consequence of the uncertainties. Still the prices in Europe are very, very low. And then we think that rationalization should take place sooner or later, but still the market is a bit concerned. Probably some of the explanation we can see this time is that in the market, the stocks are not substantially high. We make a big correction on our stocks in the fourth quarter last year, and maybe some of the other players did not make such a correction. So actually, they want to keep their plants full running, but still they have inventories in place. And consequently, maybe this is the fact that is not allowing to raise prices from these historically low base prices that we are suffering in Europe.

We think probably a rationale should gain and the higher control of imports, combined with a proper position of stocks as much as the distributors began to feel a bit safer. And the uncertainties we are suffering are qualified. This should have also its effect on the prices. But probably with the actual correction of the nickel in the last weeks, maybe we need to wait for that more for late the second quarter or even for the third quarter.

In the States, the situation is fine, I think, definitely more than any other geographical area, where Americans -- it's almost 50% of our sales come in the States. And this is one of the obvious situations that is improving our profitability in the States. The market is doing fine, the final customers and especially the sectors, in which we are running properly. Also, the imports are very, very well-controlled in the States. And consequently, we have been benefiting by increasing volumes, mostly late February and especially in March and with a stable level of prices.

Also, we see the prices compared with the first quarter last year by far has been -- have been higher. In the States, we have seen a gradual improvement in the prices -- in the base prices all over the last year. Still they start declining in January and February. Probably was not benefiting the situation for the margins, but also March has been a highly contribution and improvement in margins in the States and shall also remain for April and so on.

So the situation in America is doing better. The market probably facing the worst environment is Asia with oversupply still in the market and especially after the trade cases, more difficulty to place material in the more protected. America and Europe is keeping still big supply of material available in the market, and this definitely is pushing prices down.

So this is the environment in which we are facing. How Acerinox has performed? I think we have already mentioned the quick reaction in the fourth quarter has allowed us to recover margins in Q1, and this is very, very easily appreciated.

You can see the 56% increase in EBITDA compared with the fourth quarter. In general, all the figures coming from the previous quarter are highly satisfactory, but still cannot compete with the figures obtained in the first quarter last year with very, very high levels of activity and in an environment in which all operators and extra noises were going up. So still the comparison with the Q1 last year is unfavorable, as appears in red, but with a very, very strong improvement coming from the previous quarter, the fourth quarter 2018.

NAS' strong performance has been one of the drivers in the Acerinox Group. America is the market, as we have said, it's doing better, not only in terms of activity, but also in terms of prices. The other plants definitely are contributing less to these profits, and this is something that at the end can be easily understand by the combined effect of the very, very low prices in Asia and also the extremely low prices in Europe that at the end even has its impact mostly for Acerinox Europa and for Columbus.

We have big production improvements consequently coming from the fourth quarter after all the corrections we made. So 22% increase in melting, that's still not reaching the levels of the first quarter last year. And once again, I think it's a good demonstration of the positive cash generation we have achieved in the quarter.

So as you know, for us, cash is king. We are prioritizing the cash, and this is appreciated quarter after quarter. So this positive cash generation has made the fact that at the end, given our debt, remains very, very low, absorbing also some extraordinary effect, which has been the share buyback program that has also impacted only in this quarter, roughly speaking, in EUR 49 million. So even so, the debt has been slightly increased, but much more less even than purely the effect of the buying back.

So I think in general, the cash -- it's not only the strength of the balance sheet of the group, which is well recognized in Acerinox, but also it's the positive cash generation we are regularly having is even contributing that the situation is improving quarter-after-quarter.

If we go to the raw materials. We saw the effect that we have been mentioning. The big decline coming mostly since June last year has created this effect in the extras of 7 consecutive months. January and February, also the extra was declining, and then this new trend of the raw materials in the starting of the year, mostly since mid-January, have its effect on the extra alloys mostly from March.

So at the end with this, we are entering in a period in which also April and May, the extras are doing better. And probably we shall see some correction in June. The decline in the raw materials that we are seeing, after all the political strategic tensions in the last weeks, may affect probably the extras for May. And this is one of the issues that is keeping this very, very prudent approach coming from the distribution. And consequently still more or less, it's difficult to predict what is coming -- what is going to come later on.

In terms of prices, you can see that once again, there are big gaps among the areas, higher prices. Higher final prices no doubt actually are in the States with a certain gap of around $230 between America and Europe, and then a higher correction also going for the Asian prices. So at the end, we are a global player. We face in every market, so definitely all the tensions, all of the price corrections in the area affects us. But it's clear that almost 88% of our sales are related to America and Europe. And fortunately, at least, more or less, we are less affected by the big correction in prices that takes place in Asia, especially in the circumstances that this is more difficult to play that production from Asia now moving to Europe and in America. So in this regard, at least we more or less are relatively comforted about our geographical exposure to the areas that probably now are the ones, especially America, are facing better.

And within that, gradually, also Europe should follow the trend. But it's clear that we must remark also the big gap we are facing in -- between, for example, prices in America and in Asia of more than $700.

And in the level of inventories, as was mentioned, in Europe, the inventories have performed satisfactorily and being reduced in the first quarter. So in terms of the average, in the European market, the revenue is taken for your money is in the 7,000 tonnes. Probably the last figure for March is around 10,000 tonnes of that. So I think it's a big correction coming from the average. This is positive.

And in terms of days, as you can see also in the blue line, if the days -- if the normalized level of stocks is slightly in the terms of 2 months, 59 days, actually, we're at levels of 55 days. So the situation in inventories is -- in Europe is positive.

In America, the improvements in the inventory levels has accrued gradually and, at the end, has been more normalized at the end of the quarter. So the revenues in America, as you know, is 1 month higher than in Europe. So the levels is 3 months actually in March is in the level of 2.9. So it has been normalized. Still we're a bit high January and February, but has been normalized.

And still in the -- we have more or less in line with the average reference, maybe a bit high, but taking in account the actual high activity, probably this situation is going to be normalized. So the situation of inventories is almost normal in the States and even below normal levels in Europe.

Where we are seeing high level of inventories is in the Chinese market. There is not too much transparency of the real effective inventories in China. But at the end, from the 2 main follow levels of Wuxi and Foshan, it's a bit contradictory in some of those Wuxi inventories apparently having going down, but Foshan having increasing. But at the end, we're through with the combined figure of both. It's above-normal levels. So we've seen China at this stage where still we see high levels of inventories.

All this comes to the effect on results, as we have mentioned later. It's clear the comparison is tough with the first quarter last year, in which the basis of the market were a radical difference. But what's true clearly is that when we compare with the quarter we are coming from -- for the -- from the fourth quarter, all the figures are substantially improved, increases in EBITDA of 56% and increases of more than 100% in result after taxes on minorities. So this, as a consequence, has been experienced of the quick reaction that we made in fourth quarter and allow us to recover margins in this Q1.

So the basis of production and EBITDA is here. I think we have talked mostly about all of them. And you can see, as we expressed previously, the net financial debt is very, very well controlled with levels of EUR 573 million, even after the buyback program of the EUR 49 million, as expressed, which is also appreciate in Page 9 in the cash flow. As you can see, with an EBITDA of EUR 90 million in the quarter, the operating working capital, especially in March, has been increasing. So this -- because of this, in terms of cash flow, we have the EUR 47 million effect of the increase in operating working capital.

But then the rest of the areas affecting definitely financial, taxes and all the others has been more or less providing cash -- positive cash in terms of EUR 4 million. And with this, we'll reach the operating cash flow of EUR 47 million in the quarter, keeping our CapEx program in phase with EUR 30 million of payments of CapEx. We'll reach this free cash flow generation in the quarter of EUR 17 million, which is highly satisfactory.

After the buyback of EUR 49 million spend in the quarter, we'll have this negative effect in the cash of EUR 32 million. That has been the driver of this EUR 20 million increase in the debt. But I think this is also another area to focus and to be proud about of the big cash generation. But at the end, in a normalized exercise, is allowing us not only for going through buyback program, but also for increasing the dividend, as has been expressed, with a clear target also of reducing debt during the year.

The balance sheet is very, very strong in our case, so there is nothing to be confirmed. And all the bases are evolving properly, so I think we shall not give too much time to this.

And then let's go to the improvements and potential improvements and then productivity and efficiency plans we actually have in place. For the last 10 years, we have been giving a lot of details and analysis of all the excellence plan that we have working. We have the 5 consecutive excellence plan putting on place, establishing the proper benchmarking amount among all the plans of the group and establishing more or less the key references for all the plans to replicate the success that each of the other have to obtain in each of the lines.

This has been extraordinarily satisfactory in the last decade, and this is one of the drivers that we are having the margins we are keeping in these days with prices EUR 300 or EUR 400 or dollars below the level of prices we achieved in the previous decade. So it's clear that this excellence plan has improved a lot through the efficiency and the profitability and leadership of Acerinox Group, but also in all these savings that we were going -- that we were achieving on reducing variable cost by the benchmarking among plants, you may remember that the first one was providing us savings of EUR 97 million, EUR 52 million the second, EUR 53 million, EUR 50 million. The floor plan each time, there was little room for improvement. So the first -- the fifth plan provide us with the EUR 27 million of savings. So if we aggregate all these figures, we are talking of probably EUR 279 million of savings after 5 consecutive plans.

But each time, the room was getting narrower. And consequently, now we have redefined a new way of increasing in productivity and efficiency. This was, I think, very well explained when we made the release and the results presentation for the full year. But still we want to remark that we shall be also appreciating in this year. And at the end, all the new technologies, all the data analytics is allowing us to increase productivity and efficiency in the production side and through the supply chain. And at the end now, with the new sensors, with all the data we have available from our -- of all the plants, we can run a much more predictive analysis and evaluation, early detection of qualities for replacing all the supplies for the machinery, so realizing potential defects and so on.

And then a whole combination of this driver for the next 4 years at the end should make us savings probably in the range of EUR 125 million, as is expressed in Page 26. The biggest part, obviously, is going to be in the production side with all the predictive maintenance, the increasing productivity and quality, reliability in the types we are producing, but also what we are supplying to all our commercial and supply chain in terms of logistics, on-time delivery, avoiding reprocesses and so on.

So it's a big and very, very ambitious program that we are designing internally with the support also of Minsait from the Indra Group. And at the end, we are highly, highly committed, all the organization, in obtaining this EUR 125 million saving, albeit it's going to be gradual. In Page 27, you have what we expect for year 2019 is this -- probably this EUR 24 million, followed by additional EUR 35 million in next year, EUR 27 million. So each year, gradually, we shall be improving, additional EUR 26 million in 2022 and, at the end, having this record run savings of EUR 125 million from 2023.

So this is probably still areas that we can improve. And with all the new technologies and with all the data available now, we are fully committed to still taking this huge advantage.

And at the end of our concluding, what is the outlook? I want to remark that still a lot of the signs that we are seeing, a lot of the basis for our markets are running properly, but still there are uncertainties and are macroeconomic uncertainties for the near future.

But what we can see, and at the end what is more or less under our control, is probably good prospects for the coming months, good prospects for the second quarter. The inventories in Europe and in the States are reasonable actually. The imports are expected to remain under control. These are positive facts. All our efforts and then all our quick reactions and anticipating to the changes in the market allows us to take certain advantages, as has been demonstrated in the second quarter. But still what's clear is that the market conditions remain very, very, very competitive, especially in terms of prices.

So there is not too much visibility for the second quarter also with the effect of the [strong risk] coming down in June, we see that more or less back of the order group, mostly coming from the distribution actually is taking more time for being finally fulfilled. What we clearly know now is that we can expect improvement in the EBITDA in the second quarter, but at this stage, we prefer to be prudent. So let's see which is the evolution of the next months. We'll keep comfortable with the profitability for the second quarter, and then let's see what's coming before providing a more or broader view what that can be coming probably after the second quarter results release for the second semester of the year. And this is all from our side.


Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [3]


Thank you, Miguel. Thank you for these highlights of Q1. Let's move now to the Q&A session, please. Before your question, state your name and company, please. Thank you.


Questions and Answers


Operator [1]


(Operator Instructions) The first question comes from Francisco Riquel from Alantra Equities.


Francisco Riquel, Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research [2]


Francisco Riquel from Alantra Equities. First one on -- in regarding Europe volumes and prices. And volumes, you mentioned that the import penetration has fallen from 30% to 22% and that the inventories have normalized. So I wonder if you can update us, what are you in terms of utilization rate in Europe? And where do you think the European peers are in terms of utilization rate? And if you believe that now that the safeguard measures are in place, you will be able to recover the premiums that you lost during 2018 or not?

And then in terms of prices, how far are you in terms of utilization rate to be able to improve base prices? Do you believe that the recovery in the EUR 1,000 per tonne marketing base prices in Europe, is it all up at some point later this year or if you think that, that is currently out of reach with the current situation?

And then second question is regarding the guidance. So I wonder if you can help us with a range at the EBITDA level, but that would be appreciated. I know the uncertainties that you have mentioned. The nickel price is falling. The global players are doing, I thought the safeguard measures should now help you more? And then just tied to this, I wonder if -- what is the average duration for the contracts in Europe? And how much have you tied to lower prices at this point in time?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [3]


Thank you, Francisco. Well, in Europe, I think we have covered some of the areas. It's -- as -- there are positive signs, and those are very clear. I think we have been talking for the last year that in Europe in the last decade, while Europe was making a big effort in rationalization and adjusting production, the imports took a significant market share in the European market. So this move that the imports that historically were in the range of 12% of the European market reach levels of 30% mostly in last year, and especially more or less from certain countries that were coming. It appeared to be a very, very unfair situation also for the European industry. And at the end, this is something we have been facing and claiming for.

Finally, the safeguard measures were brought in place, and they are starting to be effective, but are starting to be effective since this first quarter because the provisional ones create a big mess in the market. So this creates part of the -- was one of the reasons of the collapse that occurred in the fourth quarter, all the tricky issues of material the theoretically was supposed to be on the water when the provisional measures were adopted in July. And this material has been entering mostly in October. So at the end, it was a big oversupply coming at that time. Fortunately, we are lucky enough that in the definite measures, in the clear, Brussels have been much more strict in terms of what should be considered for being the material when it's going the material, passing through the customs in Europe. It has brought a lot of light. And also the issues of establishing quotas per countries. So at the end, this provides a much more stable performance of the imports in the market. It's clear that imports must be accepted, that we must have rationale in the imports, for which country they are coming. And consequently as much as this is properly monitored, the situation shall be broadly much more logical in terms of the market and avoiding this oversupply that has been providing a lot of pain.

So in this regard, this now is working. The issue is that these definite measures came in February. So consequently, we have in -- we have seen most of the improvements probably coming from March.

Also, probably because of the ridiculous levels of prices that we are facing actually in Europe, this has contributed that at the end, even most of the quotas have been already -- have not been already covered. Probably I think it has been reported maybe Turkey, Taiwan are now more covering their quotas, but now the rest of the countries. And at the end, even there is not so attraction for introducing material in Europe at these prices. So this effect is there on the market.

We think, in addition to this, the level of stocks and distributors, as we say, has been normalized. Maybe still there is high level of stocks at certain producers, but at the end, they keep still their stocks in place and are selling that material of the stock in the market at the same time they are keeping high levels of output. In our case, we made the reaction by correcting our production in the fourth quarter last year and consequently now, we are selling production material to the market.

But maybe still in the market, there is some stock material coming from the players. And in this regard, probably some of the European player is actually trying to recover part of that market share lost against imports. And this is -- has not been contributing to normalized level of prices. And because of that, the base prices have been very low. This makes a big battle, especially when the extra alloys are going down.

Fortunately, for March, April, May, the situation now being more normalized should improve. But what we need is a clear sign of what can expected for the raw materials coming on. And with the big decline in the last weeks, this is -- the issue of the extra shall go down in June creates level now in mid-May, probably the distributors still remain inactive.

So this is the fact that provides us to remark that the basis for the market are good, but there are uncertainties are the ones that are keeping the distribution side very, very prudent on passing orders and are passing at the minimum orders level for maintaining the activity. But on the production side, the -- our customers, the final customers are the ones who feel confident on the rhythm of growth in this year. So consequently, in this basis, we feel comfortable enough.

It's difficult within the market now for the circumstances. In following the apparent consumption, we are seeing the big changes from the imports -- strong imports coming down now the playing of the European players and the deliveries of the European market. So probably we need some months more for normalization, especially keeping in mind that the safeguard measures came in February. So there is not too much visibility at this stage.

March, April are going to be very healthy months. May, the basis of the extra alloys going down is keeping this over-uncertainty in the market. And consequently, there is not too much visibility to foresee where we can move in the second quarter. We think we are going to be ahead of first quarter, but at this stage, we prefer to be very, very prudent.

You know that our sector, the cycles in the happy days 10 years ago, the cycles took for 2 to 3 years, but now the cycles in the last 2 or 3 years happening quarterly, and even more recently, 1 or 2 months. So more prediction of -- what can we expect from now still is a bit difficult. We are comfortable for improving figures in the second quarter, but still we prefer to be prudent. And let's see if we have more visibility and more transparency when we release the figures in 2 months more from now.

I think we shall be higher. America is doing fine. And this is -- obviously, for us, is a good indicator. America is doing fine in activity and in prices. And the customers keep absolutely positive and healthy. So in this regard, this part of our market is doing fine. Let's see the others, how can we -- but we prefer to be prudent and just consider there's going to be improvements, but we prefer not to quantify because there is not too much visibility in this regard.


Operator [4]


The next question comes from Francisco Rodríguez from Banco de Sabadell.


Francisco José Rodríguez Sánchez, Banco de Sabadell. S.A., Research Division - Research Analyst [5]


I have 2 questions, please. First one will come in the Asian market. I would like to know what could happen to make Asian market a bit more rationale? Do you see any signs that this could happen? And I know the capacity closure is expected or something of that sort.

And the second one is related to the Asian market and the big gap in prices with the U.S. What could -- if this could have an impact in the future in the U.S. market. Do you feel that could be the case?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [6]


Thank you. Well, in regard of Asia is more or less the part of the world in which actually there is more pressure. It's clear that it's a lot of material available because of more or less this correction of material previously exported out of the area and now remaining there. So at the end, this should be normalizing. We have seen some further production adjustments coming mostly in China. And this is clear, but still probably the market needs to absorb that oversupply, which is there. And keeping in mind that the exporting markets of Europe and America are pretty close.

So on this basis, our basis probably for the Asian market in the rest of the year is still remains probably tight in terms of prices. And at the end, as normally occurs when we talk about China, some of the news that are coming of some production adjustments that we think are definite than other. But what also occurs is that still when there is bigger stocks in the market, the consequence is on the effect. And the effects on consequences in the real market of these closures take more time for being appreciated.

We are seeing also that some of the players are moving more to the 200 series and reducing their output to the -- in the 300 series and moving more to the 200 series by a pricing issue and a cost issue. And this is something that we have seen in the past. At the end -- this, for us, is not a bad sign. So for certain end users that in Asia can be covered the 200 series as much as there is more moving to the 200, probably, there shall be more space for rationalizing also prices and margins in the 300 series. But this shall take some more time for being appreciated.

So because of the cases in place, it's clear that the market now, that needs to absorb these circumstances in the Asian market. We have read even that for a market that historically has been pretty closed for imports, as has been the Japanese, now it's facing also big pressure coming from imports in Japan. So at the end, this is something that the around Asia needs to be absorbed. But what is clear also is that the Asian countries also are now willing even to protect. So we need also to see the consequences, for example, of the trade cases that China now is imposing. And at the end, this, obviously, is a big reaction, for example, for the Indonesian imports, that this may have its effect.

So at the end, gradually, we are seeing that several of the players in the end market also are willing more or less to protect their production side with cases among other players. So this is something that should have its big effect. We think it shall be rationed -- being rationalized, that oversupply. But on the short, medium term, still this shall be provided further pressure. So we need a bit more time for appreciating all these adjustments and rationalization of production how may face the market. On the short run, what we have seen is this increase in the 200 series.


Operator [7]


The next question comes from Menno Sanderse from Morgan Stanley.


Menno Gerard Cornelis Sanderse, Morgan Stanley, Research Division - MD [8]


Two very brief questions. First on Malaysia, obviously, there was still a very large EBIT loss last year for the full year. How has that progressed into the first quarter of this year? And what steps can Acerinox take in Malaysia to make things better from where we were in the first quarter?

And the second question is that with respect to Page 9 in the statements where you gave the very helpful bridge from EBITDA to free cash flow. You alluded to it a little bit in your prepared remarks, but it was a very large movement in other working capital and a very large negative movement in others. Can you just give us a little bit more insight in how sustainable these numbers are and if they will reverse in the second or third, fourth quarter?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [9]


Thank you. Well, first of all, Malaysia, it's clear we are talking of how there is a struggle position of the prices are in Asia, and also even for the rollers. But one of the issue for us in the first line we talked about that the big contribution was coming from America and lower from the other plants. What's good is that we are taking lower contribution. It's not negative contribution, it's lower. So for us, fortunately, and I think this is also a remarkable fact in view of what's taking place there, is that it has been taking positive EBITDA Bahru Stainless in Malaysia in the first quarter. I think this is something that probably should be remarket. But at the end, it's true that on the -- trading on that circumstances. And especially for our reroller, this is a sign.

For us, having a positive EBITDA is a big success and, in this regard, we must be proud about. And then it's clear that Bahru is facing in -- I think in the market in which actually is more oversupply. We are having the positive EBITDA. This, for us, is a good indicator of the efficiency as much as the quality of our production is very, very well appreciated and has been even well appreciated also when we have exported it to other areas by final customers as much as the -- some of the Indonesians now or some of the Chinese are moving more to 200 series, this is something that also could give for Bahru more space.

And in addition, well, I think we must be patient. It's clear that our sector and our business, our investments are for the long run. So we are -- actually, they're absolutely -- [reeling] records of efficiency in the States came after 20 years. So it's true that the penetration of Bahru in the Malaysian market has been, in the last decade, has been the toughest run in the history. And even though that, it is having positive EBITDA.

I think for our emerging business, in these circumstances, having a positive EBITDA is a good indication of efficiency. The market in that area is as horrible as it's known. The players in the area are not so transparent, are not listed companies. So at the end, it's not simple to compare. But when we compare with other emerging plants in other parts of the world, the positive EBITDA is not so simple to achieve. So this is something that, for us, we must keep that in mind.

And then the other is in addition to the -- in -- yes, in response to your working capital, a working capital increase in the -- and have its effect obviously on the cash flow but increase in working capital in May mostly with this 47 -- with EUR 47 million. What we try for a better understanding is separate. And when we talk about using this EUR 47 million, what we purely talk about is inventories, trade debtors and creditors. And we segregate all the other's aspect. And in the other's aspect, there are bigger -- a big flow of issues. Some of the area that obviously has its relevance in the cash, but not so in the result, is related. For example, the EUR 22 million adjustment we made in the fourth quarter last year, this is -- this has been neutralized in terms of -- obviously, of the EBITDA has not its cash effect. We have also the other debtors and other creditors affecting. We have the conversion exchange differences with the dollar that are huge in this year compared with the lower dollar we have last year of 1.23. So when we make the bridge at the end, we try to express the most clear one, which is purely operating working capital, inventories, debtors and creditors and, at the end, the other fact, neutralize that increase in the operating working capital.

And this is the good effect. But it's a combination of all decisions, other debtors/creditors. It's a combination of the exchange differences, keeping in mind the dollar in place. There is the effect on cash of the inventory adjustment that definitely has, in terms of accounting it's clear because we are now in December. But the effect in the cash must be neutralized in this year -- in this quarter. And this is the effect -- the aggregated effect of the others compensate the pure increase in working capital.

And then after that, also, we must see that we are reporting EUR 570 million left, but the finance charges of the quarter is 0. So at the end, the extreme competitiveness of our debt is something in place. So it's not only the effect of the cost of the debt, but also we are more or less running with more or less all the FX in terms of compensating the low reduce of our debt. And because of that, we haven't -- none of the players reporting less debt, but definitely we are always the players reporting less cost of the debt. And I think this is part of our problem.


Operator [10]


Your next question comes from Luke Nelson from JPMorgan.


Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [11]


Previously, you indicated the new EUR 85 million line would provide a cost saving of EUR 25 to EUR 30 a tonne. Can you just give a sense of how much of that saving was realized in Q1, and how much potential margin expansion, if any, you expect sequentially from that in your Q2 guidance?

And then secondly, just on the ATI exclusions announced late last month, could you just talk through what you're hearing following that news and how you expect market conditions to evolve going forward?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [12]


Thank you, Luke. Sorry, I did not understand. The first one is more or less regarding the margins of what?


Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [13]


So the EUR 85 million cost improvements that you -- I think you previously talked about at the Capital Markets Day a EUR 25 to EUR 30 a tonne benefit from that relative to AP3, sort of whether there's any sort of material improvement quarter-on-quarter we can expect coming from that or whether it's sort of a wash.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [14]


Well, we have no detail on that. At the end, more or less the improvements are there. So what we gained with the line, as was expressed in the Capital Markets, is a replacement of the old one with higher productivity and now suddenly high quality, the basis on that quarter-on-quarter at the end in the crazy pricing situation of the European market. At the end, this productivity has -- all the productivity of the European plant is actually affected by the prices in Europe. So the situation should be highly appreciated as much as there is a rationalization on the pricing environment with the productivity in Europe improves and -- in Acerinox Europa, sorry, improves March, April very quickly in terms of better adoption to -- of the positive recovery in the market in terms of the extras going fine.

And from our -- as I said before from our final customers, the situation is healthy and solid. And in this regard, we shall benefit from that. The issue is -- the effect on the market that the distributors still are not so active. But we cannot and we have not given the info of purely that specific plan, how it's evolving in this quarter in the situation. I think it's an aggregated mass, the one which is suffering the market conditions.

Regarding the issue in the States, well, this is something that at the end has been on the table for 1 year over now. And at the end, finally, it's clear that the trade and commerce in the States did not allow the exemption for Allegheny in the joint venture with Tsingshan. What we are absolutely and we are more or less in conversations with Allegheny in terms of offering them our capability for producing material and being able to sell material for them, if, as much as they indicated, they are in the way of keeping running the Midland plant. So in this regard, for us, it's fine. And at the end, if the basis for them cannot be achieved through importing material from Indonesia, we are fine for supply material from Kentucky if they are good, too. So I think in that regard, we are in conversation, but still nothing finally has been indicated.

We are not surprised at the end by more or less the non-obtaining of the exemption in view of more or less the circumstances and in view of how the trade cases are running on. But if this is providing some pain for Allegheny, we are in position of supplying material from us as much as our capabilities and compensate that effect to them.


Operator [15]


The next question comes from Robert Jackson from Banco Santander.


Robert Jackson, Grupo Santander, Research Division - Equity Analyst [16]


Just a few minor questions. First of all, have you -- have there been any significant improvements in the mix of your portfolio in NAS? Or when I'm thinking of that with the sort of BA line, which has maybe helped margins also to improve during this first quarter?

And then second question is in -- regarding -- going back to the last question made by a colleague regarding the slight reduction in NAS. You're currently negotiating with Allegheny. Could that be relevant volumes for your production of flats to Allegheny in terms of seeing improvement in utilization rates in NAS?

And then thirdly, the final customers in terms of -- in projects, is that becoming more relevant? So that helps you reduce the volatility of the uncertainties that you're having with the distribution side? Is that -- could you give us any idea of how that's developed over the last few years just to understand the potential improvements in the future. Those would be my questions.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [17]


Thank you, Robert. Well, in regard to, for example, the breakdown in the States, what we are seeing in the States, for example, in terms of sectors, there are some sectors that are not evolving fine. For example, the car industry. The light car industry is not doing fine, but probably the sector that we are less exposed from North American Stainless, in the truck sectors that we are -- for us is one of our relevant customers, the truck sector is growing. So -- and this is a sector to which we definitely are participating. So in this regard, there are 2 sectors, probably the 2 sectors that appear more weak. One is the car industry. And in the light car, we are not so this is not affecting us. And another sector that is up to now, January to March, non-reporting good figures, which is the domestic appliances even for the -- all the players more or less still give comfort that this sector should grow around 3% in the year. But still the first quarter, figures are not negative. But the key customers on that sector, we are growing with them. So at the end, it's clear that even is a sector that it's not growing by itself, at least not up to now, as we are taking for that sector market share that previously was covered from imports.

In our case, we are quickly running our BA plan. And that we -- planned expansion for us is being very satisfactory. But as I say, when we talk about the players in that sector, which actually we are -- they are our customers, and we are supplying regular in them, they still keep confident for the remaining of the year. So in this basis, we must say that we are happy enough.

Your point on the issue on the exemption in Allegheny, at the end it's clear that Allegheny more or less has a [rock and niche] for the -- rolling the material and also the Midland plant. So consequently, we are running our -- hugely our cold-rolled in the States, but is still in the melting shop. According to our historical record achieved, we are in high level and we are running more or less almost full. But as you know, our melting shop in the States still has some available capacity. And consequently, we are open definitely to discuss with Allegheny, and I think we have already offered them that possibility up to our possibilities. And I think other players are doing the same. So probably the issue now for Allegheny, if it can cover its necessities coming from the other players in the market. And this is something that should be studied.

So still, as we always have been reported, our capacity in the States is in the range of 1.4 million tonnes as I think we have never achieved. So when we thought that we are running full is that, according to our analysis, it's through our historical maximums. And we are beating maximums year-after-year in the States, but still we have some capacity available at the melting. So this is something that we are open definitely to discuss with Allegheny.

And the other question regarding the final market, this is one of the parallels we have seen. The final market in Europe is doing fine, the final customer. So the part of the final customers for us is performing fine and uses better consumption. The ones that are keeping a hand-to-mouth basis is the distributors. But at the end, the market is -- the basis of the market are the ones that are known. The distributors in Europe, roughly speaking, mean 50% of the market. So it's a big player. And consequently, we -- part of our stable, long-term-oriented customers are also distributors.

The uncertainties in place up to now is the one that are keeping them to be prudent, especially for you, but we think that it shall be more qualified. And with a low level of imports and with a controlled level of contributors, I think the situation should be normalized. As I expressed previously, maybe some of the players in Europe still want to keep a huge productivity of running plants and where with high level of inventories. And not make the correction we've made in the fourth quarter. And maybe because of that, there is material available coming from the producers. So this is the one that sooner or later should be neutralized. And I think this may move, that the prices and the base prices should put a line with a good evolution that we are seeing in the consumption in most of the final markets.

So what should be the logical is that we have markets in general with positive indicators. Combined with less imports available, it should be more simpler, bringing a better margin evolution on the year. But this may come gradually, and still we are not seeing that. But we hope in one to ones more or less of this basis of definitely having its effect on the market.


Robert Jackson, Grupo Santander, Research Division - Equity Analyst [18]


I just have one follow-up. Can you -- the increase in long products, this 1.9% year-on-year, can -- any specific reason behind that increase? Or do you have all the other areas dropped significantly? What products go up some?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [19]


The situation with the long product, Robert, is okay, as I mentioned, both in Europe and the U.S. In some sectors, such as oil and gas, are performing quite okay. And also keep in mind that in Europe, for example, the quotas of the safeguard measures have been achieved. So I think probably with all of this, we can measure that the performance of Roldan and NAS in long product in the U.S. are performing quite okay.


Operator [20]


The next question comes from Bastian Synagowitz from Deutsche Bank.


Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [21]


Miguel, just a brief follow-up on the ATI affiliation. Could you please guide us a bit more closely on the possible tonnage, which you couldn't and what supply? As you said, you have got 1.4 million tonnes capacity, but would probably still keep a certain level of buffer in your system. So would 50,000 tonnes or so be a reasonable number? And when would you also expect these shipments to start? That would be my first question.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [22]


I think this is a commercial discussion that actually is taking place. So consequently, I cannot provide you much more guidance because what is there is that we have been offering it to Allegheny. I think the non-exemption came very, very recently. And probably actually the team also at Allegheny are doing the best of when they can source material from, and I think they are -- probably the discussion is taking place. I understand that definitely by far with us and also with maybe some other players. So still we cannot quantify more, and -- but it's something that I know that has been offered and, as I say, it's been under discussion. So no -- maybe later on we can provide with more data, but not at this stage.


Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [23]


Okay. Okay, no problem. Just a brief follow-up in terms of how you would actually approach this because, obviously, so far, there's not really like an actual market for merchants like them. Would you basically design the pricing mechanism in a cost-plus way as well as we've seen, for example, in the carbon steel market? Or how would this work?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [24]


Still I have not approved of how this should work. I think we are in the early stages probably to analyze, which is going to be the necessities. And we should be more or less that cost strategy and consequently to being discussed. But I say, what is true is that after receiving the non-exemption, what we clearly offer is that we were in position to supply. And these conversations are taking place, but, frankly speaking, I am still not informed about the stage. More or less I understand that the technicals and the commercials from both sides in the States are going with that, but it's nothing more info I have at this stage. This is something that probably now it's a commercial discussion that's certainly taking place. But still I have no clue of final conclusions on that.


Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [25]


Okay. I mean, do you have any visibility when the discussions will actually conclude? Will this be still in the course of the second quarter or you think that may be dragging into the third one?


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [26]


I don't know. I think also it probably shall be depending on the clear necessities of Allegheny. So -- and how to cover them. So I think from our side, the tenders and the offers can be done quickly, and the strategy should be the one that are manned by themselves. So I think probably it should be more depending on Allegheny than on our side.


Operator [27]


The next question comes from Luis de Toledo from BBVA.


Luis de Toledo, BBVA Research SA - Chief Analyst of Oil and Materials [28]


Two questions from my side. Miguel, you stressed the cost competitiveness of Acerinox, and maybe you could provide us an update on your view on scrap versus nickel pig iron base production route.

And the second question is on -- I think in local press, there's some comments considering the possibility of Acerinox Europe importing black coils from Asia, and I would like to know if there's a plan that you might be considering, it could be the creation of unions and what implications it could have on your integrated model.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [29]


Thank you, Luis. In regard -- well, at the end in the -- yes, in terms of the cost competitive issues, as you know, for us, stainless steel scrap always mostly in Europe and in America have been one of our key more or less strategic tools. In this regard, we are having availability of Acerinox scrap. And this is some of the issues that probably is a driver for -- of our efficiency. So I think other players, and especially in other areas of the world, now is very, very fashionable talking about, for example, the nickel pig iron. In our case, more or less, most of our necessities mostly in Europe and in America are coming. And our nickel necessities for our [significant,] most of it is coming from the stainless steel scrap. We are natural and preferred customers for stainless steel scrap dealers. And this, for us, can be probably has advantages and has efficiency as before other players in the nickel pig iron. I don't think in that regard, we lose competitiveness with some of the new players that are mostly driven in the raw materials by having such success.

In this regard, it's clear that the stainless steel scrap reference in price is following the trend of the nickel. But this is something which is also in line with our cost structure and in line with the pricing mechanisms taking place. So the trend of the scrap availability follows the trend of the scrap prices -- or sorry, follows the nickel one. In certain times, when there was a strong [remuneration, an aberration] of nickel, we appreciated that some of the scrap dealers were not willing to bring their scrap to the material at such low prices. And consequently, in those days, our flexibility move us more to orient ourselves for our nickel. But this is, at the end, part of our strategy. So we need to look at our most effective basket mix, and this is what we are moving for.

I don't think, in this regard, there are big changes in this first quarter. So still in Spain and in America, most of our necessities are covered from stainless steel scrap. And then we have the -- we have South Africa. It's power-ups also for Columbus. Columbus is extremely efficient in terms of ritic, as we always say. And so for ritic, I don't think there is any plant in the world as efficient as Columbus can be. But in the country, plenty of nickel. It stood at non-huge availability of stainless scrap makes Columbus even more dependent from pure nickel. And in this regard, this an uncompetitive advantage in reference with the others because the scrap provides certain cost savings. But this is more or less what we are actually seeing. And maybe at the end, some of the strategy for our next future should be also that Columbus could begin to be importing stainless scrap. So this is something that is rational if the nickel availability of material is not so competitive for them.

But in regard of the standard supply in Europe and in America, we are not seeing big changes. The other, I think, has been what you have been mentioning for the local press is something coming and probably has been in the local media in the plant of Campo de Gibraltar mostly related with a wage discussion that actually is taking place. And at the end, what's clear is that and what has been put on the table in that discussions is more or less the capacity and the availability for the group to prioritize efficiency and definitely prioritize to have the most competitive product for facing in this competitive environment. And this is something that we have been able to benefit from that, not so related, maybe so label discussions that normally has not been reaching to such a rational point. But even when we have been suffering the, for example, any special property damage of fire in some of the facilities or in some of the sellsumers, we were able to compensate that pain by increasing production or changing product mix in other plants, in other lines. So this is something, when we are working with 4 different plants, you have much more flexibility to solve specific problems. And this is probably in line of this and part of these discussions taking place, it is what was explained and maybe has appeared in the press. But at the end, the group has possibilities of bringing material, also make progress from other plants. But I think it must be understood in this context.


Operator [30]


Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the word to the company. Thank you.


Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [31]


Okay. Thank you very much for all your questions and for joining us in this call. Just to remind you that we will release the second quarter and first half results on July 26. We hope to see you then. Thank you very much.


Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [32]


Thank you.