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Edited Transcript of ACX.MC earnings conference call or presentation 26-Oct-18 10:00am GMT

Q3 2018 Acerinox SA Earnings Call

Madrid Nov 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Acerinox SA earnings conference call or presentation Friday, October 26, 2018 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Lora-Tamayo

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

* Miguel Ferrandis Torres

Acerinox, S.A. - Chief Financial Director

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Conference Call Participants

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* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Iñigo Recio Pascual

GVC Gaesco Beka, SV, SA, Research Division - Senior Financial Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

* Luc Pez

Exane BNP Paribas, Research Division - Stock Analyst

* Luis de Toledo

BBVA Research SA - Chief Analyst of Oil and Materials

* Seth R. Rosenfeld

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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

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Good morning, and welcome to the Acerinox Third Quarter 2018 Conference Call. My name is Carlos Lora, and I am the Head of Investor Relations at Acerinox. Miguel Ferrandis, CFO of the group, host today the call. After our prepared remarks, we will open the line for questions. (Operator Instructions)

Before getting started, let me remember you that this conference call is being broadcast on our website, acerinox.com.

Now I would like to give the word to Miguel. Miguel, please.

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

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Good morning. Thank you for your interest and participation in this webcast. We have released early this morning, prior to the market's opening, the third quarter figures, which have been in line with what we are commenting to you almost during the year: a robust figure for the third quarter. Also, we are seeing robust figures for January to September period. The 9 months up to now have keeping a very, very positive trend and -- compared not only with the previous year but also with the forecast. And also, we have introduced in the results presentation and in the press release some comments explaining the uncertainties we are seeing in some of the markets, mostly in the European markets, for the fourth quarter, which probably shall bring us to a tougher-than-expected market in Europe. We shall talk about it later on in the presentation. What's clear is that -- is the market, in which, up to now, the uncertainties actually in place are putting more pressure on the prices side and on the order side, and consequently, this is some of the topics we wanted to share with you during this webcast presentation.

Fortunately, as we normally say, more than any other geographic presence, what we are is North Americans. As you know, 50 -- almost 50% of our sales are in North America. And consequently, one of the facts to understand and to explain in these results is that the strong contribution for the North American market, as much as the consumption in the States is being robust for this full year. And also, as we shall explain later on, we keep confidence on the keeping of this robust performance also for 2019 almost in every sector. We are very, very confident that the profitability of Acerinox, obviously driven, as you know, by North American Stainless shall remain being on place. The fact is how much is going to be this compensated for the uncertainties we are appreciating in the European market. Any case, we shall talk later on about this.

What is probably more remarkable to see up to now is the positive evolution quarter-per-quarter, as appears in the Page #3. We have been explaining since the beginning of the year that we were convinced that 2018 shall be better than the previous years, 2017. And -- but also, as I'd say, unfair comparison in the first quarters, compared with a very, very impressive first quarter achieved last year. So consequently, our explanations during all the year has been on a cumulative basis. We shall probably now overpass profitability of year 2017 until summer this year, the month of July/August, and this has been achieved. So during most of this year, when we have been presenting the figures quarter-per-quarter, we still were below accumulated figures of last year.

But at the end, the robustness and the strong performance of the market and mostly in the third quarter created that. Since July, we have been overpassing the figures of last year, and this drives us to have achieve up to now a figure of sales EUR 3.872 billion, which is 10% ahead the figure of last year, with an EBITDA figure of EUR 422 million, which improves the EBITDA figure of last year in 14%. Considering that 2017 was, at that time, the best year in the last decade, what's clear is that our convincement that this year was going to be better has been demonstrated. We are definitely comfortable that this year shall be a new peak, at least of the last 11, 12 years. And then, consequently, this is also appreciated in the figure of results after tax of 222 -- sorry, EUR 221 million, which is 40%, 4-0 percent, ahead of the one of last year.

So the year is keeping a very, very positive trend. Consumption is doing fine. Consumption is doing fine in most of the markets. And definitely, we are benefiting of this. Even so, there still are uncertainties in the market. And consequently, up to a certain extent, these uncertainties are the one that are affecting probably the performance of the distribution sector and in mostly in the last part of the year, driven especially by the uncertainties that have been coming on regard of the provisional safeguard measures applied by the European Union, as we shall explain later on.

In regard of the raw materials prices, explained in Slide #4. You know that, normally, drivers of our market normally are raw materials. And more than normally, the nickel is the main driver of the evolution of the markets, the consumption, the foreign consumption, the demand and also driving the cyclicality sometimes of our results. What's clear is that the main driver for year 2018 is not going to be the raw materials or the nickel. At the end, the -- what nickel is demonstrating in this year is probably being traded at a narrow gap than other years. And at the end, what's following is also the macro figures, and at the end, partially affected especially in the third quarter, by the macro uncertainties. All the issues arising and appearing, obviously, every day regarding the tensions taking place on commercial trade among mostly America and China, at the end, are having its impact in all the commodity sector. And consequently, the raw materials are reflecting this in the trade evolution. So we have seen, since July, some correction of the nickel; as also, we have seen recently some also small correction in the ferrochrome, which, at the end, are having its impact on the evolution of the extra alloys surcharge. So consequently, since the peak of the extra alloys surcharge we obtained in the month of July, we have been, month-after-month, experiencing certain reductions. So the extra alloys fell down 65 -- if we talk about European markets, EUR 65 in August; EUR 56 in September; and then around EUR 90 for October. So we have had a negative evolution in the extra alloys as a consequence of the nickel correction. That has been the one also creating this phenomenon of wait-and-see, to see if the extra of the coming month is a bit more weaker in order for passing the orders through. And this is a normal evolution in our market.

Having said that, what's clear is that the consumption is doing good. It's doing good in most of the sectors and it's doing good in most of the areas. So when we see the sector indicators, the figures appear to be fine. In the 3 most representative sectors that normally we include, you can see positive figures in the European market. The last update of this -- the last data available we have is July. We are seeing, obviously, in the last months certain correction regarding the auto industry in Europe by, also, the uncertainties provided by the bottleneck on the modernization of certain motors. But the construction also is doing great, and the home appliances is doing great in Europe.

Consumption, the last estimation we have of the global consumption estimates in Europe is positive in regards of 1%, whereas, even much more positive is in the States. In the States, global consumption has increased 2%. And we must say that this, in the States, is coming almost in every sector. The oil and gas sector, the energy sector is having an extraordinary performance, but also, the trucks. In the States, as you know, we have even more presence in the heavy transport and in trucks rather than in the light vehicles, and consequently, we are also taking benefit for that.

In construction, also, we are seeing very, very positive performance; as also, in the chemical industry, in the paper. So at the end, in most of the sectors, the evolution in the States is very, very robust. The basis for consumption in America is robust. And what we are seeing now and appreciating in our discussions with customers, for the next year, there is full convincement that this is remaining for 2019. So consequently, we remain being very, very positive on the States.

And the situation in Asia also proves certain increase in consumption. Any case, obviously, what we are facing in most of the Asian market is part of the war price that is affecting the market, very, very strong collapse in prices, driven mostly by the new concurrence of the Indonesian presence in the market, which at the end, obviously, is creating price corrections. And we are seeing even that certain historical relevant players, not being able even to compete at certain levels, are procuring semi products from, for example, the new Indonesian big player rather than running their facilities. So this demonstrate, up to certain level, which is the crazy level of prices achieved in the market. So we are seeing a very, very big gap of prices between Asia and Europe and also between Europe and America. So the big distance, obviously in these days, shall be those with American and Asian prices.

Fortunately, for this regard, the temptation of a big wave of Asian's products moving to America, in the States, has been corrected. And consequently, we have seen that the level of imports in the States have reduced. The 232 Section in the States has demonstrated to be efficient in that regard, and consequently, the American market has not been strongly affected by this. And the reduction of the imports market share has been in the range of around 8% in the year 2018.

The situation has not been the same in Europe. The provisional safeguard measures adopted by the European Union, on a long track, may take sense. But as has been established on provisional basis, a global quota established is not creating certain protection against imports. On the contrary, what it's doing is accelerating the imports, as there's a global quota established for almost every player. The temptation is to try the fill that quota as soon as possible and create the distortion, that in the earlier stages of the quota application, players tend to bring most of the materials. So consequently, this provides a new fact of uncertainty in the market these days, of how much material is in the water, pending to arrive Europe, and in addition, maybe how much material has already arrived in Europe and is being stockpiled in the ports pending to passing through customs.

This uncertainty because, at the end, what we are talking is about a pure uncertainty. Nobody really knows what may come. But the problem is that uncertainty sometimes is the worst driver for the markets. So consequently, these uncertainty, combined with a decline in extra alloys, has been creating this effect of distributors not passing orders through and remaining a wait-and-see, considering that it must be more and cheap available material in the market. And this is probably what has been perceived. Up to now, mostly during October -- you remember in the roadshows we have in due during September or early October -- the 2nd and 3rd of October in our Capital Markets Day, we were mentioning that we have seen that the European market was lazy after the summer, still not reacting, and we were hoping that this reactivation should come further on for October. At the end, this is not been the case by the reasons we are indicating. And this fear of additional wave of material coming from Asia is creating this lack of orders being passed through by the distributors, and consequently, there is more struggle in prices.

The level of the stocks in the market, as you can see in the Page 6, in principle, is nothing to be strong concern about. Maybe in the case of European market, in the average, it should be around 2 days above what should be the normal level, 2 days of consumption. So consequently, it is not especially concerning on the European side. In America, it has been even correcting in the last time, as appears in the charts. So instead of 3.2 months, it has moved down a bit to 2.8 months. So once again, America demonstrates that it remains being more robust. And what appears to be more relevant of the stocks available in the market is in the Chinese market, in these days.

So this is affecting in prices as we have mentioned before. The trend of the prices has been negative since July, as we have been expressing, and mostly, as a consequence of the decline in the extra alloys. At the end, this evolution does not allow to react or to keep a strong support on base prices, and because of that, we are seeing additional pressure on base prices. It's a bit paradox that in a year of positive evolution of consumption in Europe, we are having lower base prices than the one we achieved during the crisis of 2008 or 2009. But this is a rarity, what we are seeing. So probably, the level -- as has been appearing in the media, the level of EUR 1,000 base price in Europe is not working and has been coming down and probably more than EUR 100 below this level. So we are seeing big pressure of prices in Europe, and consequently, as we have been mentioning also, lack of orders, waiting for finding more available and cheap material in the market.

Having said that, we will move into production figures. We have keep our levels of production in the year in line with the evolution of the market up to now. We have increased our production in the melting side 1.9% up to now, January to September. Having said that, what probably we must keep an eye on is that in view of the actual figures assessed, probably, we may adjust a bit the figure in the fourth quarter in order to -- and not keep the trend going, reduce it in order to absorb part of the inventories that, more or less, we are having -- achieving on place at the end of September. So probably, in terms of production, we shall experience some short correction in the fourth quarter for compensating the level of inventories that we have been keeping and mostly has not been absorbed up to the end of September.

Having said that, we arrive to Page 9 for understanding the evolution of the last year and the level of EBITDAs and EBIT -- and margins of EBITDA achieved in the market. Second quarter shows us a strong increase compared with first one. We moved up from levels of EUR 118 million to EUR 151 million. So we moved up again to above-level digit EBITDA of 11%, which was a very, very healthy second quarter, that it has been overperforming the third one. So we moved up from EUR 151 million to EUR 154 million. And also, obviously, this meant that in the third quarter, we have, in the level of 12%, margin EBITDA coming from 11% in the second one and 9% in the first one. So the evolution of the year, quarter-per-quarter, has been substantially positive. The year has been consistent, with less oscillations than what we have been experiencing in the previous years, and at the end, keeping more a robust track that, any case, assuming what might be the case for the fourth quarter, we keep our convincement, as has been expressed in the release of results, that we shall definitely be above the EBITDA level achieved in the year -- last year of EUR 489 million.

This allows us to think that, probably, because of all of these reasons, we understand that the fourth quarter EBITDA probably shall be lower of the year 2018, at any case, with not a strong reduction coming of what would be the first quarter of the year. So if we have an EBITDA up to now of EUR 422 million, and at the end, we are mentioning that shall be above the level of EUR 489 million, you can understand, at least, where we consider can be our floor. And in addition to this, the level in which we perform in the fourth quarter shall be depending on how this uncertainties evolution during the month of November and December.

In terms of the balance sheet, a part of -- no, there is nothing special to remark at this time, rather, the issue that we mentioned. We have experienced some increase in inventories in the third quarter, moving to these levels of EUR 872 million of working capital. So consequently, the working capital has improved in the fourth quarter -- sorry, in the third quarter, around EUR 100 million. And this is probably the parts in which we shall experience also the correction of this increase in the fourth quarter.

You know that we always mention that the evolution of our cash performance normally is against the cycle. We have been experiencing a positive third quarter. The working capital went up around EUR 100 million. And the fourth quarter, assuming that shall be, probably, a lower quarter of the year in view of the circumstances, what we understand is that, even though, obviously, the profitability shall be lower, but in terms of cash generation, we shall appreciate the correction on the working capital, and consequently, the final figure for the last year shall be providing, by far, a positive free cash flow.

As you can see in the figure of Page 11, the free cash flow generated January to September has been EUR 157 million as the operating cash flow. After CapEx payments, it is up to now EUR 57 million. This increase of around EUR 100 million in working capital experienced in the fourth quarter, that appears -- sorry, in the third quarter, July to September, EUR 102 million, that appears in the chart, has been the one creating, probably, that we have not been able to show up to now, positive cash flow after dividend payment that took place in the month of July, that this is the one that shall come by itself, probably, achieved in the fourth quarter. And consequently, we shall finish the year with a positive cash flow generation, and consequently, showing also improvements and reduction in the figure of net debt that we achieved last year in terms of EUR 609 million and a net debt for the whole period. So we also remain convinced and confident about that.

So in general, this is more or less an explanation of what has been achieved up to now, in that regard, probably has been no surprises. And most of these issues and topics has been discussed with most of you and what we're remaining in the last months. Probably, what is the new issue arising in this presentation of figures is that the outlook for the fourth quarter should be affected by the part of our sales that is more related to Europe, and obviously, Asia, where the prices are very weak. We think that it's more driven to, as we have said, to uncertainties. It's not simple to precise where we shall be because, also, depending on the evolution of the markets for November and for December, that normally is a short month.

America remains very, very robust. This is something that we want to stress. So the figures for America shall remain being very, very healthy. Having said that, what's true is that the seasonal effect, quarter-of-quarter, in America is normally the fourth quarter. It's normally the one a bit more weak. As in Europe, occurs in the third; in America, occurs in the fourth quarter. Normally, December for the American market is a very, very short month, almost 1 to 2 weeks, coming also after the end of November with the Thanksgiving short holiday, this creates -- historically, the fourth quarter in America is the one reflecting that seasonal. But any case, it is not going to be huge because the market remains solid. As compared with the contribution of previous quarter, we must understand that the quarter in America is going to be a bit short. But the margins in America remains as solid and robust. So it's going to be less weeks of activity but keeping strong margins performance.

The situation in Europe, let us see. It's affected -- as is expressed on the press release, the situation in Europe is affected by several uncertainties. We have the material available that, still, we need to precise how much is it. We see the pressure of imports that is affecting prices and margins, and also, the effect of the alloys surcharge. When we express in the outlook that this is affecting prices and margins in all markets, what we reflect is in all markets of Europe and in most of the Asian markets. But obviously, when we talk about markets, we are talking about the big variety of markets. The one that's not going to be affected is the one of North America. So maybe -- I want to remark that, because maybe understanding the -- or just a simple reading of the sentence should not clarify that America is not under this effect, as has been explained before. The ones affected prices and margins are going to be probably all the other markets. Fortunately, 50% of our sales go in the more robust market these days. And the margins that are maintaining shall be a portrait of robust activity, but at the end, shall remain with a very, very successful performance.

And this is our comfort also for the starting of the year 2019. In America, we see that everything is fine. In Europe, we probably, maybe, depending also of the final measures -- safeguard measures adopted by the European Union, maybe January, early February, as much as the uncertainty is clarified. When these measures come in, in this regard, not only the industry but also final customers are pushing for some quota per country or some quota per quarter. We shall compensate this effect that we are suffering of the wave of imports coming simultaneously prior the quarter and turning in. So if Brussels is in position to clarify that with adopting the final measures, we think that the basis of the European market remains to be robust, and consequently, sooner or later, the prices in Europe should follow the trend adopted by the consumption figures.

So this is the point up to now. Let us go for the Q&A. Probably, I shall observe -- or I shall try to provide some clarification to most of your questions. Okay.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Seth Rosenfeld from Jefferies.

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Seth R. Rosenfeld, Jefferies LLC, Research Division - Equity Analyst [2]

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Starting out on the European market. Can you just give us a sense of where lead times currently are in the region, recognizing the sharp decline in prices and what time period will that hit your P&L? Secondly, around this time, each year, we normally hear from you and your peers beginning new contract negotiations for the forward year. Can you give us any sense on how current market volatility expect to impact those 2019 contracts? And then lastly, on the U.S., you paint a very positive picture for the U.S. market. We have overheard of a sharp decline in lead times over recent weeks in the U.S. Can you comment on whether or not you're seeing some similar activity of buyers stepping out of the market in the U.S. as you've already commented on in Europe?

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

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Thank you, Seth. Well, regarding America, this is nothing that we are seriously concerned about. At the end, it's true that we have been experiencing the fact of the reduction on the extra alloys. November is -- in November, also, there are some elections taking place. This normally creates in America a certain effect on the market, and -- but it's going to be a short effect. We have seen that some of the players were showing a certain reduction of the lead times in terms of 1 week, but we think it may be corrected. So these are, as I said before, this is a normal seasonal effect in the States in the fourth quarter. And time to time, when also there's a certain elections taking place, this provide certain uncertainties, and at the end, there is more -- maybe more material available. But the level of the stocks are not concerning in the States. So consequently, some of the players show or indicate there is some reduction that could be 1 week of that. We think it's a momentum. So in the States, we are not concerned about that. And then the issue regarding the European market, at the end, the fact is more or less as we are seeing. How -- understand the actual situation because with the contracts we are closing for the year 2019, in terms of the negotiation of these contracts, the final customer sector, if consistent and robust, and therefore, we are negotiating at normal or rational prices. So in this regard, we are not seeing -- we are not suffering pressure on our price discussions for the next year. So more or less, with the level of stable customers we have -- final customers, our long-term relation, we are keeping the bases of prices that were achieved for the negotiations on this year. And consequently, we are not seeing that reduction being translated to the final customer side. It's an issue probably more on the distribution and the distribution being in a wait-and-see. We are not concerned about the final customer. The paradox in Europe is that the consumption is great and the prices are not in line with consumption. In America, the prices are in line consumption. And in a good market term, the market has been able to move prices up and accepting their prices. But in Europe, in a good market time, the uncertainties and the, more or less, lack of a clue of what's coming on and what may come on from Brussels, how to consider the imports, how many of the imports were already in place when the provisional measures were announced. And even for most of the players, probably, as far as the Bill of Lading was considered prior to the imposition of the safeguard measures, that material being in the water has not been contemplated for the quarter. So because of that, we are seeing an increase of imports substantial in the European market, moving up to 30%. And apparently, the quotas are not strongly filled yet. So -- but this is a consequence of what we are mentioning. As much as it was announced when it was going to come, the safeguard measures, probably most of the players were sending the material and using, obviously, the Bill of Lading as a demonstration that their material was already contracted prior to the safeguard measures entering. And consequently, because of that, still up to now, apparently, the quotas have not been enoughly fulfilled, even though in the last weeks, we are seeing much more activity coming in the market and passing through customs. So this is what now is appearing. And in addition to this material passing through customs, what we are appreciating also is the material that may be, still, has not been passing through customs, but it's piled in Europe and is waiting for when the quota appears to be more filled to pass it quickly. And this may be the effect for the next time. So consequently, this allows us to think that it's not going to be simple to see a move-up in prices prior to the year-end, because evidences says that there's material in the market probably more than the one appearing in the figure of the distributors. We know the figures of the distributor. We have included the graph. This is not something especially concerning, but probably, there still is material available that has not been officially imported or passing through customers (sic) [customs]. This is the uncertainty, and probably, uncertainty is what kills more the stability in prices and also on the order book.

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Operator [4]

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The next question comes from Carsten Riek from UBS.

The next question comes from Jose Maria Canovas Garcia de Blanes from JB Capital Markets.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [5]

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A few questions from my side. So first of all, you are talking about the working capital regression expected for the fourth quarter. Here, Bloomberg consensus is pointing to a net debt for 2018 of EUR 540 million, and your consensus was pointing to EUR 650 million, the one you sent previous to the release of the results. Do you still feel comfortable with those figures? Or should we expect something different here? Then regarding the safeguard measures that you were talking about, could we expect the European Union to implement -- instead of -- foregoing for the quota to change their mind and go for a tariff? Or is that something that you would rule out? And finally, just to know if I understand you correctly, when you were talking about the fourth quarter EBITDA, did you mention that it should be around the ones in during the first quarter of this year? Just to confirm that, the last one.

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

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Okay, thank you. First of all, regarding the cash, the cash flow generation, we think that most of this increase in working capital should be absorbed in the fourth quarter, so definitely, a part of the cash entering through the standard business. We shall experience some reduction in the working capital, and at the end, this should drive us a position, depending more or less of the situation up to now to December. Obviously, in terms of the working capital, it's a big sensitivity of what may occur, for example, in December regarding the entry of orders, maybe even if -- still, in Europe, we see -- we are not seeing when the uncertainty should arise. In the Americas, it should be fine. But in general, what we are thinking is that this quarter, by far, should be a working capital reduction. The -- as I said before, most of the increase of the working capital has been the inventories, but in view of the actual circumstances, we prefer to keep -- we prefer to put certain discipline on prices. And consequently, we have preferred to not bargain this much scale to the market or not selling it at crazy prices. So at the end, we prefer to be consistent on keeping pricing discipline through all our commercial network, and because of that, inventories have been a bit high at the end of September, and this shall be adjusted in the fourth quarter. So we shall probably adjust production in order to compensate that. So just with that, we shall see a stronger cash generation coming from this. Shall we be able to achieve the consensus? Maybe. I think -- I shall not be surprised if we experience that correction. The third quarter, if you look at the evolution of our cash generation in the fourth quarter, the highest cash generation in the last year was the tough quarter of third quarter, which was terrible. But at the end, we obtained operating cash flow positive of EUR 160 million. I -- we have, still, not full idea of where we are going to be in terms of profitability. But in terms of working capital reduction, we hope that we should be at least compensating that increase of the third quarter, and only with this case shall be more than EUR 100 million. So in general, we think that, still, the consensus is acceptable. So if there's a big change, we shall realize and appreciate it. And -- but we think that, still, this is -- up to now, this is achievable. Other question, sorry, was regarding?

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Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [7]

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The safeguard measures.

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [8]

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Yes. The -- we are -- we cannot be confident that the system of the quota shall be changed, moving to a duties one. What is clear is that the effects on the measures adopted in the States has been radical and well appreciated starting day one, and the measures -- or the provisional measures adopted by Europe hasn't proven to provide certain protection to the European market for unfair competition. So up to now, this has been the evidence. But we are now confident that Brussels should change the system. Probably, the quota should remain. We should love other system, but we must assume that we must play with the rules in the market. The quotas should remain. As much as all the claim from the industry and from the final customers is that the quotas should be established per country or per quarter -- or simultaneously, per country or per quarter, it should be an excellent possibility for the market. So most of our -- we think our probabilities have recovered, assuming that the quotas should remain, should be moving to a system in quota per country and quota per quarter. If possible, just with that, more or less, we shall normalize the imports through around the quarters and through around the year and not suffer in this big way.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [9]

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Okay, perfect. And the last one wasn't a question, just to confirm that you said that the EBITDA in the fourth quarter should be similar or in the levels -- around the levels of the ones seen in the first quarter. Just to confirm if that was correct.

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [10]

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No. My words -- obviously, still, there are several facts that do not allow us to be precise because we are depending also on these uncertainties and evolution of the market. In general, my words was that the fourth quarter is going to be probably the lower in the year. So we are saying that it's going to be very difficult to achieve figures equivalent to the first quarter. If we achieve first quarter figures, we should be even ahead of what was the consensus expectation for the year. So we think that, at this regard, it appears very difficult to achieve the first quarter. So as we also have indicated that we shall be ahead last year figure, which was a very good year, this means that where can be the EBITDA? Any place between probably the first quarter. And EUR 67 million, that should be the differences between the EUR 422 million that we have achieved and the EUR 489 million we achieved last year. So in that -- it shall not be a correction equivalent of the one we experienced in third quarter last year, by far. We are not going to be there. But I do not know how proximately we are going to be to the first quarter last -- this year. But we understand it's going to be worse than the first quarter this year.

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Operator [11]

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The next question comes from Luc Pez with Exane.

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Luc Pez, Exane BNP Paribas, Research Division - Stock Analyst [12]

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One additional, maybe a follow-up with regards to the European situation. I must admit, I'm a bit surprised by the different comments you're making. I can see the whole negativity we are hearing in the sector and across a number of industries like autos, but stainless is not so sensitive for me as to autos. And the remarks you're making on the safeguard quotas filling, when you look at the monthly takeup rate, has not shown a big increase relative to the trend we were seeing in the first place. So therefore, my question is, are your negativity towards Europe more related to the fact that these measures haven't led to a decline in imports? Or are you experiencing a more import pressure into Europe? That's my first question. And the second, could you maybe share with us the level of contribution in your Q3 of your raw material inventory effect? And what are your projection with regards to Q4? Because I'm inclined to think that this is maybe also driving down your expectations for the final quarter.

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [13]

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Well, regarding the quotas, as we are experiencing the issue, it's more or less on a long-term run, establishing quotas on an annual basis and establishing some limit for the constant increase of imports. That's okay. The fact is the quota that you decide to implement may have, on the short term, some bad effects and this has been proven to be coming or have come in this year. So as I said before, we think that, probably, a lot of material -- in the times prior to the quotas being announced, a lot of material probably was dispatched. And just because of the Bill of Lading being in a prior date to July, that was not included in the quotas, even so that material has been coming to Europe in -- on September. So consequently, we think that this have been the tricky measure, that most of these imports has been trying to introduce the material prior to the quotas. In addition, after that, probably, we did not see a big inflow of imports in the month of September, but in October, the intensity of the material passing through customs has been higher. So more or less, the figures that are public for the global quota is at -- still has been achieved a low figure. I think, around in the 30s, in the mid-30s is the last figure published for cold roll. But if we take the average, more or less, of the last week, this figure goes up to almost the 70s percent. So if we establish the average of the material that has been passing in the last weeks available, this has been substantially higher. So consequently, we think that the rhythm of covering the quota is higher now than at the beginning of the quarter, and this is the fact that maybe not contributing to much to the possibility of a big improvement in the European market. So this is the -- this has been the fact. So we must be a bit patient. We think it's difficult to see big changes because, at the end, probably, whenever the quota is appearing to be reaching certain levels, maybe 70% or something like that, maybe the importer shall retain themselves of bringing more material that may come through a few months later, when the quotas are achieved. So because of that -- these time still has not arrived. Maybe it arrives any time in late November or early December. But what, in our opinion, has proven not to be effective is the provisional measures adopted up to now and that system of quota. So we hope that should be, more or less, corrected by Brussels in the month of February. In regarding of the raw materials, it has not been big evolution in the year. We -- our inventory adjustment has been substantially reduced, and the effect on raw materials evolution has been negligible. So in regard of that, we have not seen a big devaluation of any raw material in hand. And our adjustment of -- our adjustment in the period for internal or net realizable value of our inventories is EUR 2 million. So it's very, very negligible.

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Luc Pez, Exane BNP Paribas, Research Division - Stock Analyst [14]

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So you would not expect a big impact from that in Q4, if I understand correctly?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [15]

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In the, sorry?

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Luc Pez, Exane BNP Paribas, Research Division - Stock Analyst [16]

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In the Q4, it should not have a big negative impact?

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

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No, no. No on the raw material side and not in the material. That -- actually, we're adding our stock. So this is not a big concern.

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Luc Pez, Exane BNP Paribas, Research Division - Stock Analyst [18]

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Then maybe a follow-up question with regards to how you see base prices in your book evolving when you get into Q4, and maybe if you can split between what you're seeing for the U.S. and Europe.

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

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Well, in the situation of the U.S., the base prices are absolutely stable. And in this regard, we have not seen any tension, so we have been keeping constant our base prices. Some of the -- in some of the media, we have seen gradual pressure on the prices and the base prices in the States. By far, it's not among us and our customers. So maybe some of the distributors in the last month when, still, the level of scale were high or in that dark situation, with the seasonal slowdown late November/December, maybe offering certain discount. But this is not what we are seeing. So we have been surprised reading that on Platts because, at the end, it's not what we are achieving. So we are seeing no pressure in the base price in the States, as I am saying. What we are obviously is experiencing, that month after month after month, the situation up to now has been a correction in the extra alloys because of the evolution of the nickel and in the ferrochrome. Consequently, the ferrochrome, also, in the States, as we always mention, is reflecting in extra alloys, huge of it in first month. And consequently, the first month of the correction in the ferrochrome normally in the States is October. But having said that, in the waste prices, we are not seeing pressure. In the extra alloys, we are -- the market is obviously accepting what is coming from the raw materials evolution. But the understanding is that, it appears that we shall, after this October, probably show some more stability. So in this regard, more or less, we are not seeing big changes.

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Operator [20]

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Our next question comes from Bastian Synagowitz.

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

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(foreign language)

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

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Sorry?

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

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Can you hear me?

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

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Yes, Bastian.

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

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Miguel, I have just one last question, actually, and that is on European prices. You've been talking a little bit about the market, and you obviously said that the situation is quite weak. But last quarter, you obviously said that prices are rebounding in September, and I think that's actually what we've seen. But then it seems like they haven't really gone up further. And actually, some data suggests they have actually been falling off again in October. So could you talk a little bit about what is actually happening here? Are you indeed seeing another fallback in base prices in Europe? Or is it more that you do see destocking and prices, I'm not sure, just going up further?

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

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Thank you. Well, more or less, you know the situation. The moving of the European prices, at the end, has been driven by probably time of July, in which just the effect of the safeguard measures was there. Still, the performance of the market was being robust. So in this regard, we came from a rolling time in the summer. The slowdown of the seasonal timing in Europe, combined with the decline of the extras, began to put certain pressure, and at that time, also, is in line with what we have been commenting with you and commenting with the market. The reaction that normally occurs in the first, second week of September, this time, was not achieved. And we appreciated that the market was lazy. And then this began to, more or less, be confirmed in October. So we -- at a certain level, we were in a wait-and-see to see if after the correction in the extra alloys, at a lower extra in October, the markets should react. But at the end, what we have seen is, as the market also in October, the orders entry has been affected. The distributors has been out of the market, willing to clarify what was going on regarding the imports and the material coming in the water or at least piled at the ports. And because of that, the market remains in a wait-and-see. We think in August, we appreciated crazy prices, but at the end, this was not realistic or wasn't sustainable. There were some trial orders in the market, crazy -- I'm talking about August, in terms of 750 or something like that. This appeared on the media. And then when we commented in September, what we saw is that these were not the levels achieved. So maybe it was not an increase in the prices. It was that, that certain tenders that have been seen during August were, still, not there anymore. The media are reporting prices, by far, below the levels of 1,000, maybe in the range of 800 to 900. And this is probably where we are actually. So it was not as an increase of base price occurring in September. It was that, that crazy tenders that were, at certain level or at some point, appearing in August of crazy levels, of 700, were not more or less maintained. So we think it is a fact. But the market has not allowed us to consider what is a consistent increase in prices. And this, in Europe, has not occurred in the second semester. So we have probably been trading at this level. In the range 800 to 900 is probably where the base prices should be considered to be now, which is, by far, below the 950 or the 975, where we were in the top of the crisis of the 2008 and '09. So the parallels in Europe that we are seeing is that consumption doing fine and our prices doing horrible because of the imports. This is something that, sooner or later, we hope that should be more harmonized.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [27]

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E

Understood. And then just looking ahead, I mean, do you see more downside to European base prices in this environment, if say, the destocking just goes a little bit deeper? I think amidst all the uncertainty, is that something which at least we could potentially see, I guess? And I think there's also fear that obviously Indonesia, I think, which stopped shipping too much into China, they actually keep redirecting more material into other markets. So do you see more risk on base prices from here?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [28]

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We don't think there must be much more space from this level, so we don't think that this should be going tough. And as I have said before, in our long-term contracts for next year and our negotiations for the contracts for next year with fixed customer, we are not experiencing such a pressure. So we are finding in the customers consistency in terms of the business evolution and more or less a price trend in line with the ones negotiated for this year. So we think that this is a momentum, and we think that sooner or later, it shall be corrected. So probably, we are in the tough or in the worst of the timing now because of these issue of the uncertainties of the material in the water or material piling the ports and when it's coming through customs and when it's going to fill the quota. It still appears there's going to be Asian material available. So this provides us very difficulty to improve the conditions of the market probably prior to Christmas. But we think that after Christmas and for the new year, we hope that the situation should change, and especially, as soon as Brussels clarify, which is going to be the final application of the quotas.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [29]

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Okay, okay. Very clear. Maybe just one very last follow-up. And I think it's actually -- probably a tricky one, but was the -- I think the problem we have now is we still have some scope in the quota and we still have the time windows. So obviously, at the moment, it seems like imports are indeed accelerating a little bit. And we don't know what the EC will be doing, but what may happen is, of course, that we may get just new time windows. So we have got a 200-day time window, and let's say, maybe we get another quarterly time window or maybe we get a monthly time window or maybe we get a yearly time window. But do you see a risk that once we get this essentially any, say, potential positive seasonality early next year may essentially be absorbed by a very, say, upfront-loaded import push again?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [30]

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We think that if they're willing is to protect the market, it's a clear target of keeping the imports at levels of the average of the last years. And we think that Brussels should establish a formula in which that is achieved and nothing which more or less the market is driven to this mess. In addition to this, maybe -- that we must also keeping in mind that some of the player, in this regard, obviously, we're talking about Indonesia that was not considered for the provisional once, as a fact that they have been improving the volumes, could be considered for the February final ones. So this obviously shall be in addition. So in general, we think that they're willing. And the willing of the European Union is to solve the problem. Maybe up to now, it has not been achieved a solution, but we think that the final formula should contribute to clarify and solve the problem and not providing additional pain. So on that basis, the logic is that the market will have positive consumption evolution. The prices should evolve accordingly. And we think that this is coming. We hope it's coming sooner or later. We hope no needing to wait until the week of February for clarification and maybe beginning to see it in January. But it is a bit soon for that.

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Operator [31]

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The next question comes from Luis Toledo from BBVA.

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Luis de Toledo, BBVA Research SA - Chief Analyst of Oil and Materials [32]

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I have just one remaining question. It's regarding the adjustment in production that you could be looking in fourth quarter. I would like to know if there's -- if it would be similar across plants or if we should expect weaker production levels in Europe or you will also consider adjusting the production on the States.

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [33]

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No. The adjustments, obviously, the markets that are actually receiving more or less -- less orders entry is obviously for Spain and South Africa, and it's mostly driven for the European sales. So consequently, we -- our adjustments shall take place mostly in the Spanish plant and the South African plant. It's not going to be huge, but it's more or less in line for compensating this increase in inventories that we have seen. But at the end, we are talking about EUR 100 million increase in the working capital in the quarter, and this, roughly speaking, at an average price of 3,000. We are talking about 30,000 to 40,000 tonnes, that's it. So we shall obviously try to harmonize that, and then it shall be depending on the evolution of the entry orders now in November for the remaining of the year and for next year. It's going to be -- so it's not a big announcement of reduction of production. It's a comment that the working capital increase shall be probably corrected in the fourth quarter, and especially in the case of inventories. We shall probably use our production in order to dispatch our material. That's it.

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Operator [34]

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The next question comes from Iñigo Recio from GVC.

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Iñigo Recio Pascual, GVC Gaesco Beka, SV, SA, Research Division - Senior Financial Analyst [35]

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Just -- sorry to insist in EBITDA, Miguel. Did you mention that EBITDA for this year could be between EUR 422 million and EUR 489 million?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [36]

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No. What it was established is that EUR 422 million is the EBITDA we have achieved up to now. And as much as we are seeing that the year 2018 shall be better than 2017, this means that, at least, we are going to achieve EUR 67 million, at least. So we are -- gave you a guidance on the floor. And on the other side, I have told you that we're saying it shall not be better than the first one. So I have given you a floor and a cap. And then among that, we should be -- but the indication is that, clearly, we shall be ahead of last year.

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Operator [37]

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

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Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [38]

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Okay, thank you very much. We have 3 questions from the website. The first one come from Anindya Mohinta. It's regarding the base prices in Europe and the U.S., but I think Miguel has already commented about that. The second one, it's coming from Cedar Ekblom of Bank of America, and it's as follows. Please, can you spend some time discussing the proposal by EUROFER to adjust the import safeguard so that the quota is set on a country-by-country basis? Is there any detail you can get when a decision may be made? Is Indonesia being a target to have a quota based on potential new production rather than historic import levels?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [39]

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Well, at the end, in this regard, as you know, according to how the procedure is going on and the timing, it's difficult to precise what shall be the final formula adopted by the European Union. What is clear is that the global system quota has proven not to be effective. At early times, the market was assuming that what was going to come is a quota per country, which is in line, obviously, of the average of the last years, and then probably, establishing some correction from the bigger inflow, what we have seen in the last few years, mostly, for example, in terms of cold roll coming from, obviously, the big jump in Taiwan; or in hot roll, the big jump from China, when the, more or less, European Union established this for the cold roll, but then China increased drastically their hot rolls sites together. So having said that -- then we have seen another market. Indian has also increased their stake in the last year. We're also monitoring and also seeing obviously South Korea. So there are certain markets that have been growing. As much as we establish quota per countries, according to their past evolution, it's clear that Brussels can obtain its target of expecting, obviously, a free fair trade, but in addition to it, establish some limits. This should be very effective, but this was not the decision that has been taken on provisional basis. Because of that, some of the players are demanding that as a proper possibility for trying to protect the market, especially from these unfair imports are coming from. In addition, what has proven to be -- what has been in place, is that the global quota for a whole period is not solving as solution because, at the end, all the players try to make -- be part of the -- in the early part of the quarter, applied, all the big imports, in order for getting certainty that the other -- they weren't suffering the duties, shall be the others. So what this may create -- effect is a big wave of imports, overstock in the market, a lot of material available, dropping of prices. And at the end, this should be difficult to recover once the quota are applied. So as much as it's established on a recurrent quarterly basis, for example, it should be much more simple to adjust and not creating these effects. But at the end, the main thing that they are creating is increasing the cyclicality and being in position of suffering in the proper market terms, the big wave of imports coming, that at the end, are putting pressure on prices. And it's much more difficult to raise prices than reduce them, as we have been experiencing in the last months. So consequently, we think that the rationale should move to a system per country and per quota. And several of -- I'm sorry, per quarter and per country. And several of the players in the industry are asking for that. Let's hope that Brussels should be, now, more open to reconsider this. The other issue was Indonesia. Indonesia has been, at certain level, let's say, distortioning (sic) [distorting] a bit the market, as much as their entrance has been huge but has been very recent. So when it was established, the provisional [server] was not contemplated. Because of this, most of that penetration has been recent, but nowadays, it could be also considered for the final ones. But this is obviously ahead of our control and ahead of our analysis, so let's see finally what the European Union decides. So we still have no clue of that.

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Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [40]

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E

A final question is coming from Christian Georges of Societe Generale Investments. How relevant are increased Indonesia exports in the Asian marketplace? Does it impact U.S. and also Europe?

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Miguel Ferrandis Torres, Acerinox, S.A. - Chief Financial Director [41]

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Well, the ramp-up -- at the end, probably, on the long run, what shall impact mostly is obviously the Asian market. Unless -- also, there are some rumors in the market also that even, for example, China could establish certain cases from the Indonesian imports. Let's see more or less how this evolves. But the -- where the material is going to probably put more pressure is in the Asian market. The American market is pretty, in this times, is pretty closed and it's difficult. The presence of Tsingshan in America, if it comes, should be by the way of a joint venture with Allegheny. And this, actually, is being been reconsidered and Washington should take some decision on that. But we know that it's more or less in line with what could be the productivity of the Allegheny facility now. So this is a fact that obviously shall be now reconsidered in Washington. But we are not seeing that, apart of that, Tsingshan should create additional big pressure in the American market because of the duties system. So this is a part that we shall see. Still -- Washington has decided if it's excluding or not in the 232 case the imports of Tsingshan for supplying the joint venture with Allegheny. And the market shall decide if Allegheny needs material. As has been with markets, there are other players in the market that are able to provide them, if finally, Tsingshan is not excluded from the 232 Section. So we shall see. This shall be decided. And still, we have no approval. But apart of that, we do not see additional possibilities. And Europe is a market that up to now has been more open to imports and -- but now has taken this market share of 30% and maybe there is -- or could be the higher market share in Europe if -- by not too much from now. So consequently, we think that what definitely Brussels needs is to make a clear position, in order -- if this is going to be more protective or not and also appreciating the consequences of the provisional ones. So we shall see. But what can be the case is that not being considered in the provisional. It could be also included in the definite, because at the end, it's a big growth that has been achieved in the market in the last 2 years and this is well appreciated in all the statistics. So we think that, therefore, if this comes, where the material should remain probably more supply in is the Asian market.

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Carlos Lora-Tamayo, Acerinox, S.A. - Head of Investor & Media Relations [42]

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Thank you, Miguel. There is no further questions, so thank you to all the participants, listeners for joining us today. That concludes our third quarter 2018 conference call. Thank you very much.