Acerinox, S.A. (OTCPK:ANIOY) Q3 2022 Earnings Conference Call October 27, 2022 4:00 AM ET
Company Participants
Carlos Lora-Tamayo – Head, Investor Relations
Bernardo Velazquez – Chief Executive Officer
Hans Helmrich – COO
Miguel Ferrandis – CFO
Conference Call Participants
Tom Zhang – Credit Suisse
Bastian Synagowitz – Deutsche Bank
Tristan Gresser – BNP Paribas Exane
Patrick Mann – Bank of America
Ioannis Masvoulas – Morgan Stanley
Carlos Lora-Tamayo
Good morning, everyone. Welcome to the Acerinox Third Quarter 2022 Earnings Conference Call. Today, the presentation will be led by Bernardo Velazquez, CEO; Hans Helmrich, COO; Miguel Ferrandis, CFO of the Group. After our prepared remarks we will open the line for questions. Please note that all forward-looking statements are subject to various assumptions, as noted in the earnings release and shown on this slide. 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 Bernardo. Please Bernardo, go ahead.
Bernardo Velazquez
Thank you, Carlos. Good morning everyone and thank you for attending our presentation. Today, we are presenting a strong set of results, the highest in our history. Most probably we will beat our historical record that we obtained in 2021 and 2022 results will be most probably the highest ever. We have demonstrated that we can take advantage of the good cycles and now after an exceptional Q2 we will demonstrate that we can control the controllables, the controllable part of the cycle in the downtown of the weak effect that we are leaving.
Excess of optimism in the market led to high imports and higher stocks and now we have to correct the excess of the disparity, but probably the real economy is not so volatile and is not suffering so much. And if we control of our controllables the hangover will not be so severe. You can see starting with sustainability that we’re making progress. But in the current scenario, in quarter three, with the production adjustments based on maintenance, planned maintenance breakdowns and also adjusting our production to our deliveries it is difficult to keep the same level of efficiency in the lines, so that’s why some of our KPIs are not making progress.
But in general, we are very committed with sustainability. We are making progress in the long term. We are fixing more aggressive targets and we are very, very active in the cultural change. Having a look at this impressive set of results we must say that we reached the highest EBITDA ever with €1.2 billion after a provision of €65 million — after an inventory adjustment of €65 million that will put the company in better conditions for the coming months.
I think it’s also important that due to our strong financial position we have been able to control our working capital and even increasing and managing our stocks in order to make the most of this opportunity. A broken market, especially in Europe, we prefer not to enter in this bargain. I would prefer to keep our stocks, our inventories and manage it carefully so that we will release in better conditions most of this working capital in Q4.
This is exceptional situation and this — our trust in our situation and the cash generation that we expect has led our Board of Directors to propose to the shareholders for the next shareholder meeting to increase the dividend to €0.6, which means 20% increase in our dividend and a yield of around 7% based on our current prices. So we are very proud of these results and we have increased our working capital. That’s something that we can manage, that we can control, as control the controllables is our key message, and you will see that in Q4.
Hans Helmrich
Good morning, everyone. This is Hans speaking. Let me take you through what happened in this quarter. So we had a good quarter and weaker market conditions. In the different markets we had a very strong performance in our high-performance alloys market. Stainless business has been going through, at the end of what we can see the restocking process in all the markets, and the current demand has been weakening through the quarter. It is true and you all know that situation in all the markets remain difficult in regards to the cost inflation which is high in all the markets around the world.
If we go through the main markets, United States is our main market. Flat products apparent demand has decreased quarter over quarter. Imports started to decrease, inventories have peaked into what I can say was the highest level and started to reduce through the quarter. Stable base prices remain in the North American market and the Section 232 remains in place as the trade activities continue to be the same in the United States.
Europe, flat products apparent demand decreased as well in Europe as in the United States and quarter-over-quarter. Prices impact by market conditions as we all know, and evidently the most difficult situation is in regards to energy cost, both electricity and gas which had been very high through the fourth quarter. If we go to the rest of the world, lockdowns in China affected by the domestic demand, excess of production has been putting pressure as well in prices in Asia and in the rest of the world.
And if will go briefly into the Acerinox highlights, as explained by Bernardo previously, we have been focusing on controlling what we can control. So we have been putting first — adjusting our production to the demand, and the seasonability of the third quarter which is traditionally affected by seasonability, mainly in Europe. An adjustment of the production to demand including flexing costs in all the facilities, so that we can really flex, and that’s we will be doing. And then we had some planned maintenance activities in the quarter that we have foreseen to be done and we did those very correctly.
With that, I will pass over to Miguel on the financials.
Miguel Ferrandis
Thank you, Hans. Okay, let’s concentrate on page number 6 to have a quick look at the financials of the third quarter. First of all, what appears as evident is that in the stainless steel division mostly it has been a weakness in the apparent demand. It’s clear that the restocking process took place in the second quarter, and actually in the third quarter we seeing a change in the trend and also at the end combined with other factors [indiscernible] slowdown and so on. So this has been the first effect.
Any case, we are presenting today an EBITDA figure for the quarter of €241 million. As you know, we make our most to be predictable in this line. When we released the second quarter figures, we anticipated that the EBITDA third quarter should be in line with the average of the previous year which was the historical record. So this figure is absolutely in line with that message. At that time several of you commented that these appear to be a pessimistic figure and what we have been explaining during the last months is that at the end, we prefer to be prudent, because we understand that with all the uncertainties in most of the areas in these days we understood that probably at the quarter end some inventory adjustment should be made.
And the reality has been exactly that, when reaching September and especially with the strong correction we are seeing in most of the market, and mostly in Europe, it was necessary to make some inventory adjustments to put our inventories on net realizable value. This has been a strong effect in the quarter of €65 million and consequently, we have been able to keep our guidance. But what’s remarkable is that €241 million which is the average of our best year in history has been done after a strong inventory correction of €65 million.
This drives to an operating cash flow of minus €50 million in the quarter. This is going to be strongly corrected in the fourth quarter and at the end, we will give a figure with net financial debt of €763 million that is higher than that one of the Q2. We have had relevant issues that at the end have been concentrating in the quarter that had not expected to take place in the fourth quarter. One strongly relevant is that the tax, the tax payments for income tax of the previous strong quarters has been concentrated in this Q3, mostly in July and September.
So only by this issue €140 million have been cash out for paying taxes, which is higher than the whole amount of tax paid in the previous year. So these are relevant figure for being concentrated in work in one quarter. And in addition is the quarter in which we have paid a dividend of €150 million to our shareholders. And in addition, we are involved in the buyback program, as you know. So only for distribution to shareholders, €190 million plus cash out of taxes of €140 million has driven to this increase in net financial debt.
In addition in relevant issues of the increase in net working capital and this has been previously explained by Bernardo as well as Hans, we are increasing working capital in the high performance alloys that which are calculated as a consequence of the very good momentum we are experiencing. But the increase in working capital also in the stainless — in the stainless division has come as a voluntary decision in order as Bernardo explained for not getting nervous, we can keep our controls in place and not accept desperate orders that were coming to the market.
So the correction in the — the correction normally in the downward trend creates a strong cash generation. But in this time, as much as the market was broken in August and most of September we prefer just to keep the stocks and not entered in desperate but against as has been mentioned. As a consequence of that, the strong cash generation, as a consequence of working capital reduction is concentrating mostly in the fourth quarter. It has been delayed probably for one month and we shall appreciate it in the fourth quarter.
This is the most relevant for explaining in the group. When we move to the stainless steel picture what’s relevant is obviously consider, and you shall appreciate the reduction in volumes, in the production. The plant maintenance outage has been taking place in the three main plants. So in Acerinox we had the program maintenance shutdown for July and August, in melting shop and in the hot rolling and this has been also extended to September due to the market situation, as well as energy prices crisis.
In Columbus has been also a program maintenance in the melting shop and in North American stainless, also in the hot rolling, so this issue. Because of this we are seeing this effect in our production figures. And in addition, we are experiencing in the same, let’s say, the net working capital increased by the situation that I mentioned previously. We will move to page number 8 and we enter in the high performance alloys division. This is absolutely a nice topic now to explain. We are experiencing a very, very good momentum in the high performance alloys division. Our order book is full. We are having record, and we are obtaining records in the HPA Division.
VDM is having its historical record in performance. If you see the accumulated EBITDA up to September is €104 million, substantially above the figures that we were forecasting when we made the acquisition of VDM. But what is remarkable also is that we have obtained in this third quarter an EBITDA figure of €39 million. You can see that the one of Q2 was €41 million. So we have had a very strong consecutive quarters in the high-performance alloys division, probably the one of the Q2, which was remarkable but also had a tailwind of the nickel appreciation.
And in the case of Q3, it’s purely the good momentum and good margins and the selection of margins, we are — of products of the best margins we are facing in this time, in which order book, as we are saying is full. So we have seen a recover in most of the sectors for the high-performance alloys and this is more or less providing this good figure. As a consequence of the good momentum, shows that also working capital is moving up, but this is absolutely in line with our plants running full and especially a lot of material to be actually in process in our production, in our production level.
And the cash flow has been, and there has been a positive also free cash flow in the quarter in the high-performance alloys, as a consequence, again even though the working capital after very, very good momentum, achieved in the alloys division. If we go to the cash flow, which is obviously a relevant topic in this quarter, affected by the circumstances that we are talking about. We want to clarify the EBITDA has been relevant in the quarter. I mean that change of different quarter. So this €241 million that we are proud is the average of our best year in our history.
So it’s a relevant figure. But at the end in order to cash out we are appreciating the circumstances that we have been mentioning. So a strong concentration of cash out in taxes, you are seeing also in the dividend and buyback and especially the increase in working capital that we are talking about. This is something that shall be reverted by far in the fourth quarter. But in the third quarter, we have had this concentration of all these facts. When we move to the nine months, the EBITDA generated, as you can appreciate we are in this — in this record figure of €1,196 million EBITDA.
It’s true that up to now the increase in working capital take most of this, but as much as we must appreciate it in a longer period the strong reduction that is coming in place in the fourth quarter should definitely not only move us to have a strong and relevant operating cash flow figure, not only for covering our CapEx, but also for covering the strong distribution to shareholder that is coming in this year. And in addition, we shall provide final figures for the year with a strong reduction in debt compared with that one coming from the previous year.
Bernardo Velazquez
So we are coming to the end. And I would like to try to explain what is the frame of our operations. Now first of all, we all know that we are in a very especial geopolitical situation. I think it is difficult for us, but it’s also very difficult for you to predict what is going to happen in the coming months, because you know probably in the last decade we haven’t lived a moment like this with so many uncertainties. So the visibility is very limited, especially in Europe. But anyway, I think that due to the characteristics of our market, due to our previous performance and you must understand that we are better prepared than other sectors to work with no visibility.
And now we have developed, as we have mentioned many times a very high level of flexibility to be adapted to the cycles. If somebody can do, who can manage and can sail in this turbulent cycles, this is stainless steel, and this is Acerinox. Second is that we have our special market conditions, and I mentioned at the beginning. And this is part of what we call the normal cycle, that this time has been increased due to the excess of optimism in the first part of the year. I mean that excess of optimism led the market to import more than needed.
And then the stocks are high and now we have to correct. But this is the normal part of our cyclical cycle that we can manage, in this case amplified by the weak effect. And this situation with little visibility and we have to reduce our stocks and control our productions to adapt them to the current scenario, what we are focusing and what we always do is controlling the controllables. This is what we already mentioned. We cannot — you cannot change the general economy. We cannot change our market, but we can adapt our company to the market conditions.
This is what we are doing, especially focused on efficiency, flexibility and capital allocation. Number four that we mentioned is that even as we have mentioned that as you know we have called this set of results for Q3. We can call them resilient because even in a worst scenario in a downturn, we are reaching a level of results that is more or less at the average of the highest record of our history. So we cannot say that this is — but I think this is very promising that in a downturn, we can maintain a high level of EBITDA generation.
Of course, diversification is helping us. This is very, very important. We are transforming our Group. We are moving our stainless steel production to higher added-value products and more high — added value customers and also the different in the cycles, the rhythm of the cycles in HPA and in stainless steel make us a more and more stable, because today HPA is in a very good situation. We have a very strong order book and also a very important EBITDA generation that is contributing to this stability.
We are focused, as Miguel mentioned, I want to insist in this capital allocation, because with a strong balance sheet and ability to reduce debt, we can play with these figures, and we can adapt our company to trend to get the most of the situation. And this is what we’re doing. So we will generate strong cash in Q4 but we haven’t give our products for free in the momentum that is complicated in the downturn, at the beginning of the downturn, especially in the Europe an business, and we will adapt our company in order to get the best results for our shareholders. I think this is important.
It’s part of our trust in our future. We will control the working capital, even having Q4 EBITDA that going to be lower, not bad, lower than Q3 we will remain resilient. We hope and we are fully convinced that we will get the highest results ever. We believe so strongly in the future and in our situation that we have proposed to increase our dividend from €0.5 per share to €0.6 per share, would mean say a 20% increase. This, we understand that the market, consider the volatility of our business as a higher risk.
And if you want to invest in higher risk company or a higher risk sector you are expecting to receive a higher yield. And now with this I think at the current share prices, we will put our company in a level of 7% yield and I think it is very, very interesting for the shareholders. And finally to remark that we think we are fully convinced that Acerinox is in the best shape in its history. First of all, is the general trends, the macro trends and I think that we all agree that the world is becoming more regional. And is becoming more regional because we have seen with all the supply chain disruptions, with COVID, with this channel problems and with everything that you cannot trust only in a supplier that is thousand of kilometers away from your site.
Also trade defense are contributing to this — are making imports less attractive. So it’s not only that we will have less import pressure, that we’ll have more sales in our local markets and at a better price, but also that the with the situation happening not only standing still but in the whole industry, in our customers and the customers of our customers, at the end that will contribute to higher industrialization in Europe and in the United States. We trust that these movements will make industry to play again a key role in the United States and Europe.
We have been — for many years we have been suffering the globalization effect of all production moving to Asia, not only new production of stainless steel that was built in Asia, but also most or many of our customers moving to Asia so most of the consumption growth was concentrated in that region. And now the situation is reversing now and more industries will come back to Europe and the United States. We will have higher consumption in a more reasonable. We will act as we are a global company, a local company in a global business.
And we are locals in the United States, we are local in Europe, we are locals in South Africa, we are locals in Asia. And this is — we are not based on export. We will not suffer trade defense we will not suffer this effect of regionalization because we are regional in all the markets that we are present that is almost the whole world. It’s important also to mention the transformation again of the Acerinox group with HPA. I think that we have demonstrated that was a good movement. That we have — already VDM is contributing to the stability and increase of results of the Group.
Balance sheet and strong cash generation is something that we have insisted very much because we have a company in a very good financial health. Operational excellence focused on capital allocation, control the controllable. We know how to do it. We have done it before, I think the current management team in place, it is their first crisis that we have suffered or we have lived. You can call this situation today a crisis. This is not — is not so clear. Let’s see what happens, but trust on the management team that we have. We know how to do it. Finally we believe that the current situation of our company is not reflected in the share price. The share price is not reflecting the health of our company.
Probably we are not the only company suffering this situation, but we will do — well the most of what we can do, what we can control, and also we would like to express our trust in the future of our company and to thank our shareholders, our loyal shareholders to invest in Acerinox and increase the remuneration 20% that we expect will contribute to recognize the efforts to be a shareholder of Acerinox in a very volatile business. So we’ll have new opportunities. Our market is very healthy, consumption is good. Stainless steel, high performance alloys will be part of the energy transition and circular economy and all these things. So our future will be better than our present. So this is what we can say.
Carlos Lora-Tamayo
Thank you very much Bernardo, Hans and Miguel for the presentation. Now we can open the line for the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Tom Zhang of Barclays.
Tom Zhang
I have two. I’ll take them one at a time, please. First, just on the Q3 apparent demand in Europe. You’re saying it’s down 22%. Clearly there are lot of issues there in terms of seasonality, destocking, maintenance, import pressure. Could you maybe run us through how you see each of those developing and subsequently do you see demand declining further in Q4 or is it more a stable outlook in Europe? Thanks.
Bernardo Velazquez
Thank you, Tom. Thank you for the question. It is difficult to predict what’s going to happen. In general what we see is that imports are going down, in Europe and in United States. But especially Europe is very difficult to predict, because you know that we are now in the save oil measure system. So the imports have a quarter — a quota per quarter now. So normally imports are very important in the first month of the quarter, and then is going down until, I mean the third month is almost negligible.
And still we are finishing October, but we don’t have the numbers of October. So we see less pressure in the market, but we don’t have the numbers to warranty this. In United States we can clearly say that the imports are now going down. So that means — but imports going down doesn’t mean that the apparent consumption will increase. I mean with imports going down apparent consumption will also go down. But what is important there also stocks will go down. And this is what we need.
Tom Zhang
Okay. And then maybe just on the — so as I understand your agreement in Spain on the melt shop is you’re able to run two week long period layoffs. It sounds like your net working capital release strategy is to sort of run down inventories, which implies you need to reduce your melt production. How comfortable are you with the sort of labor agreements that you have in place or do you think you might need even longer shutdowns into winter beyond that sort of two week period?
Bernardo Velazquez
You know that I think we took the right decision in March this year when electricity prices started to go up, when we stated that temporary layoff with our workers in the Spanish plant is temporary. I would like to insist on this. And this temporarily layoff let us be flexible in our cost us, in our labor cost and we are adapting our labor force to the current situation. So we decided not to put more pressure in the market. I think this is important as part of the decisions that we have taken for the last part of the year. We didn’t want to put more pressure on prices in the European market.
We didn’t want to bargain our stocks so we are keeping a reasonable level of production adapted to the level of demand that we have. So I think this is a responsible attitude and we are applying the temporary layoff in order to be responsible with the market. For the coming quarters. Who knows? It will depend on the stock situation. We think that the real demand is not so bad. Of course it is not as good as it was in the previous part of the year, but is not so bad, that once the distribution sector will add up the stocks to the current situation. So the current expectation that is modern situation, then we will come back to production.
Again and this is important to distinguish in the stainless steel business more or less 50% is end users, 50% — for the full production, for the producers for the mills, 50% is distribution, 50% more or less is in users distribution sector. It is full now so the readapting the purchases in order to regularize the stocks. In the end user business we are delivering our orders that we have already contracted with our customers and the situation is more stable. So once we will stabilize the distributor business, there will be back in a higher production level again.
Tom Zhang
Okay. But as a sort of base case even though you had these maintenance outages in Q3 you would expect your melt production to roughly stay flat in Q4 or do you think risk that it declines even further?
Hans Helmrich
Tom, this is Hans. We expect it to remain at similar levels in a global basis, talking about the whole situation in all the factories around the world. And as Bernardo said we have the opportunity definitely in spinning all the facilities that we have for flat and long products to flex, according to the market demand. And we can use as many days or weeks as we need depending on the demand.
Operator
Our next question comes from Bastian Synagowitz of Deutsche Bank.
Bastian Synagowitz
My first question is just on your outlook. I appreciate it’s obviously difficult to frame in this environment, but in the past you’ve been always giving us a little bit of a firmer steer as to where you see the actual EBITDA guidance. So is there may be a floor for fourth quarter EBITDA, you could point us towards, like a level you would be feeling comfortable with? And then also could you let us know how far, if any, you’re still expecting any further inventory impairment at current metal prices?
And then secondly, could you maybe also just quantify the degree of working capital release you’re expecting in the fourth quarter. Miguel. I guess you already have been saying that you expect a healthy reduction versus last year’s net debt, but maybe if you could just give a bit more color on this that will be great. Those are my first two questions.
Miguel Ferrandis
It’s difficult. As you said there are several uncertain issues for making predictions. Any case let’s try to [indiscernible] with inventory adjustments. Our inventory actually is properly valued for market circumstances. But as I said here in July there are still several question marks. What’s going to be the situation for the first quarter? On a regional basis, we understand as appears in the results report that it should be improvement in the market for the first quarter as much as those inventories that are actually more than covered by the huge wave of imports that came in July are neutralized.
This should be the logic. We understand that the imports are going to be rationalized. So consequently the level of stocks shall also normalize. And this should be more or less a rational scenario. But we must keep on mind that there are several uncertainty factors, especially in Europe. We must combine the war, consequences of the war and also the energy crisis and skyrocketing prices of energy, mostly in Spain in the space, as well as in other countries, but obviously we are affected by the energy prices in Spain.
So this is what makes difficult to make predictions. So consequently, we say that EBITDA shall be lower than the third quarter. EBITDA shall be lowered, and this €240 million. So regarding on that this appears to be clear. So having said that, what I can more say is that we have obtained almost €1.2 billion EBITDA, €1,186 million. The consensus at Bloomberg gives us an indication of the year of the average of all of you, in the range of €1,350 million or something like that.
We feel comfortable with that. We cannot be more accurate on further predictions or be more aggressive, because we don’t know what’s coming. If we should just repeat, which is not going to occur, we should be in €1,400 million and something. We are going to be below that. So maybe with Bloomberg — Bloomberg consensus, we are comfortable, who knows. But three months on advance we feel comfortable with the average of all the analysts that are appealing in the Bloomberg. This is the most I think I can say at this time.
Bernardo Velazquez
Sebastian, this is Bernardo here. I would like to add something that is interesting, not the same that most of the economies are surprised that we are moving to a recession or a slowdown of the economy with say zero unemployment in many areas which is unusual. It is also unusual that we are leaving a downturn situation in the stainless steel business with a stable nickel price.
And this make the situation unique in our normal cycles, because, first of all, because the adjustments in inventories will depend on nickel price and also because the level of correction in most of the distributors will also be linked to the nickel price. So if nickel is stable, you don’t have the necessity to get [indiscernible]. So this is also interesting that this can make the cycle less severe than others. Let’s see.
Bastian Synagowitz
Thanks for the color, on the EBITDA side as well. Just a quick follow-up on that one. If we look through your regional units, is it fair to see that — to assume that basically in the fourth quarter, European Spain will basically be EBITDA loss making, Africa, Peru maybe closer to breakeven or also negative and then particularly you’re obviously now standing out with a very, very significant decent positive result. Is that like a fair reflection of how your regional EBITDA contributions will likely look like?
Bernardo Velazquez
Bastian, you know us very well, but I cannot say yes or no. I think that we never give the numbers per company and we cannot answer this question.
Bastian Synagowitz
Okay, fair enough. And then on the working capital point, is there more color you could give us on the working capital release you expect?
Miguel Ferrandis
Yes. The working capital is going to be as strong, as I explained previously. We are more or less experiencing this strong production in the world in the fourth quarter. It should have start earlier but as was mentioned with this very big wave of imports that arise in Europe, for example, in the month of July demand, the first month of the second quarter. Keep on mind that these imports were material that was contracted in the second quarter, when the price gap between Europe and Asia was around 1,800 according to CRU. So on that basis, even though the port, even though the duties, even though the freight or whatever, obviously, it was very, very favorable for Asian exporters to place material in Europe.
All of this entry in July have been creating this overstocking in the distribution. So at the end, the distribution sector was absolutely quiet and as we stated before, was not willing to take any material unless at crazy tenders that we didn’t want to enter, and we didn’t have the necessity to enter. Maybe some players could be more cost cash involved, was not our case. So most of September, we have been very, very quiet with the distribution. This has now been reappearing. So this is going to concentrate more in the fourth quarter. So this reduction in working capital that normally takes place in the change of the trend, this time is going to be appreciated in the fourth quarter because in the third one, this effect in the seasonal slowdown of the summer period has created and at the end we have strongly begun to reduce it late September. And then consequently, October to December, we shall have a huge effect.
As I said before, and you know how prudent we are in terms of capital allocation, the operating cash flow that we’re generating in the year shall cover obviously all the CapExs, but also the very strong increase in distribution of shareholder that we are contemplating this year, that is going to be roughly speaking around €330 million. So at the end we are providing here the strong figures in terms of cash, but most of the cash generation is going to come in the fourth quarter. Let’s keep on mind that in the first quarter the momentum was excellent. In the second quarter, we have the crisis of the nickel at LME. So nickel prices were rocketing. In addition, we had our successful strategy at that time of anticipating — of assuring the supply of raw material by paying in cash. Obviously, this increased strongly the second quarter working capital figures. And in the third quarter, we have more or less delay, the strong reduction by the reasons I mentioned.
So consequently, all these effects are the ones that should revert in the fourth quarter. The fourth quarter is going to be a very strong quarter in terms of working capital reduction and consequently, cash generation. And there are not going to be a strong cash-outs in taxes or in distribution because this has been concentrated up to now. So consequently, most of the working capital reduction shall go straight forward to the cash generated and to the reduction in debt.
Bastian Synagowitz
Okay. Then my last question is coming back actually on strategy around Peru, which obviously we didn’t see you selling during the very strong up cycle over the past 2 years. Do you still believe that you will be able to find a strategic solution for Peru, and if that’s not the case, what are your plans to basically generate an appropriate return through the cycle with these assets?
Bernardo Velazquez
Yes, Bastian, thank you for the question. You know that we are always open to every possibility, but Peru is now performing well. And this is not a problem for the group. And given this position as a global company and we have supply, the international customer from — in all parts of the world, and Peru is not a problem as you can think that it was before. We are making profits in Peru. The situation is healthy.
Bastian Synagowitz
I mean, when you say you’re making profits, obviously, we know that the last obviously six quarters have been very, very strong. Before, the business was probably not as stable, I guess, for the last six quarters. Obviously pretty much all assets were generating decent returns. But when you say you’re profitable, does it mean you’re basically really expect more reliable sustainable return in Peru also in the quarters ahead?
Bernardo Velazquez
We started to be positive in Peru before the tailwind of this situation. We adopted the strategy there and we selected the group of customers that were giving us a better margin, because of the exigencies of the sector or basically because we have some more special materials that are not so big competition, that the Chinese or Indonesia are out of this range, because of the special thicknesses or because of the special chemical composition. We have been able to manage this and to find our niche of the market with less production but keeping our level of competitiveness in the good situation with a tailwind. We have been increasing our production again and trying to pick because the situation was good for everything. And now we are back. We haven’t started back to the previous strategy and we are comfortable there. But anyway Bastian, if we have an opportunity, we’ll study it.
Operator
Our next question comes from Tristan Gresser of BNP Paribas Exane.
Tristan Gresser
First, please can you discuss a little bit market condition in U.S. and also why you remain so confident there into year-end and maybe into next year? We’ve seen some weakness in base prices, I presume, not from your side, but also some appliance maker cutting guidance, warning of weaker demand. So what makes the business so resilient and what makes you so confident about the near-term outlook there?
Bernardo Velazquez
Okay, thank you Tristan. Thank you for the question. I think the situation in United States is totally different. I’ve been in United States visiting our plant and visiting some customers a last couple of weeks ago and I think that the situation is totally different. Nobody is speaking about the war there and nobody is speaking about the energy crisis.
So I mean, the situation is — the frame is much more stable, much more flat that it can be in Europe. So the situation for our customers is good and all the — this is our confidence is not based on general economical number. We’re not economists. We’re only considering what the information that we have received from our customers, mainly in every sector, because the stockists are speaking about the digestion of the excess of stock in a few months coming from 5 to — from 3 to 5 depending on the level of consumption, depending on the seasonality, because now you know that United States will start in November with Thanksgiving and Christmas in December. But we are pretty confident that they will digest the excess of the stock very soon. And I think that the distributors and service centers are adapting also very responsible strategy and they are keeping the level of prices, and that makes the American market much more stable than the European.
Second, in all our conversations with end users, including appliances product, General Electric plant is our neighbor plant, is in Louisville, just a few kilometers away from us. We were over there and they also think that they have — they have been living in an exceptional period during the COVID, during lockdown, these people — they were investing in their own homes and now the situation is becoming normal and normal is good. The prediction for next year are good even here.
People do not want to have a long-term view. Normally at this part of the year we would be speaking about deliveries for 6 months or even for 1 year. And now in most of the markets, customers, and also we are comfortable with this we are speaking about 3 months visibility. But they are very optimistic for this — sorry, not very optimistic. They are reasonably optimistic for this next 3 months and that make us feel so comfortable with this.
Hans, if you want to add anything?
Hans Helmrich
Yes, we have had the opportunity to talk to many customers, both on the distribution, and on the end customer consumer. It’s exactly what Bernardo said. And also, it’s true that our customers still have some backlogs of production from previous months. They are having labor needs in the marketplace in North America, which is very important and that’s making them be still optimistic about the volume remaining at historically good levels. So that they can continue with the current market situation.
Tristan Gresser
All right. That’s helpful. And my second question is about the commentary you made about Q1, and obviously you expect some improvement. When you talk about improvement, are you talking about demand, prices and also EBITDA, maybe to increase quarter-on-quarter into Q1? That’s my second question.
Bernardo Velazquez
Of course, Q1 is too far. We never give forecast for more than 1 quarter. But what we expect is that during Q4, during Q3 and Q4, most probably the market will absorb and will digest the excess of stocks and then the situation will improve, in some — somewhere in Q1 next year. But we cannot tell you exactly what will happen. I think if the situation is better, if the stocks are normal in Q1, then deliveries will be more normal, price pressure will be less. So the situation will become more normal and that will affect, of course, our profit and loss account.
Operator
Our next question comes from Patrick Mann of Bank of America.
Patrick Mann
Two questions please. Just on the tough environment, it can throw up opportunities. So is there anything you are thinking about or any potential M&A that you might embark on, given that I think a lot of smaller producers or distributors are under quite a lot of pressure here? And then the second question, you kind of spoke about adjustments to production being mainly demand driven or adjusting to demand. If you could just talk a little bit about how energy prices play into your production decisions and whether that’s going to be a new sort of operating parameter for Acerinox in Europe going forward kind of? I’ll leave it there.
Bernardo Velazquez
Patrick, thank you for your question. We are continuously looking for opportunities. This is something that we are monitoring all the time and it’s part of our activity. And as you said the challenging conditions probably will arise opportunities. We are considering this. We are still — we don’t have, of course, we don’t have a decision of what we haven’t — we haven’t chosen the right or the next movement. But we are always focusing on this. And based on our success in VDM integration, we are happy to be a participant in this sector.
Maybe Hans, you can answer the second part.
Hans Helmrich
Patrick, this is Hans. What you said is correct. We have the ability to flexing our production base in both conditions. One is the market demand and the situation in the market. And secondly as where the energy costs, depending on the energy costs, our — the agreements we have with the unions and they’ve been very collaborative in this sense, allow us to make those decisions as we need within a very short-term. And we have done it both ways. So initially the first we did in the second quarter was already connected to this situation, energy cost situation in Spain, and we have been usually with both cases.
Patrick Mann
And then maybe kind of related to that, you spoke about deliberately holding back on working capital inventory, not to just kind of sell up for higher sale prices. How do you assess that? Do you kind of compare what prices are relative to replacement cost either produced in Europe or imported and then kind of set that as a floor for what you’ll sell at? Yes, just trying to understand what’s the kind of minimum you would go to, how you’d determine whether a price offered is for inventory that you’ve already produced, whether that’s a fair price or whether you should sit out the market and wait?
Bernardo Velazquez
Let me explain a little bit about the pricing situation in Europe. I’m sure that you have been in a flea market when you are looking something that you are not interested because you don’t want to buy it. Normally the seller offers a very low price and you can bargain a lot. Now this is what is happening in the European market now with — in summer times with the seasonality, with the lower perspectives and everything and higher stocks. Mills want to increase sales to customers, to distributors that do not need these materials. So what are they doing? Okay, I will buy it if you offer me a very discounted price. But this is not the market price. And this is just an opportunity price. If somebody is desperate to make cuts, if somebody need desperately to make cuts, they can go to this level of prices. This is not our case. We have a comfortable financial situation. We don’t need to enter in this situation. So we are keeping control of our business and we are like saving this material, saving these future profits because we think that in the future we will have better opportunities. We don’t need to be — we are not desperate to sell today. This is the idea.
So what is market price for the last months? There was no market price in Europe. It was just opportunity price. Now that situation is becoming more stable, we will see the level of stability because probably as imports are going down, with the situation the stocks will go down and the situation will be more normal and we will go back to normal levels. And these normal levels will include an extra — not an extra, I mean it’s not in a formula. I mean we’ll include the cost of energy in Europe that is the same for the German, for the French, for the Belgium, for the Spain and so we are all living in this energy crisis and we’ll have to reflect the situation in prices. But that will be in a stable situation and that’s why we are not participating in this bargain.
Miguel Ferrandis
And in addition, yes, for your understanding your question regarding the inventory adjustment. As you know we are extremely conservative. So what we make at the end of the period is that we take all the items we have in our stock, that compared with our order book and our order book entry and accepted, which is a realistic order book. Obviously, we are not taking that bargain, as Bernardo has been explaining. But the order book that we are really having with the reference of the prices. And then all the items in our stock, that should reflect a loss according to that, according to that accepted order are the ones that are adjusted. And this is the most conservative way to proceed. We do not make an average from those — profitable with those that we have lost. We just register and adjust the value of those who made a loss. And what’s clear in this situation and this is one of the reason why we cannot be providing more guidance because still — part of it we are not having is what may appear with energy cost. Energy cost now obviously is taking a relevant, very relevant role of the prices in Europe and obviously affecting our cost and at the end for the future who knows what is going to be the energy prices. Or if in the coming months, as Bernardo is addressing, shall appear some sort of changes in order to compensate the energy costs in Europe. So that could be effect of neutralizing but we cannot introduce it from now. Because of that what should be the inventory adjust during December is still is open depending on what is the energy position. What we know is that up to now we are absolutely properly valued in our inventories and consequently after that inventory adjustment of €65 million, which is remarkable. But we feel very, very comfortable for the coming quarter.
Operator
Our next question comes from Ioannis Masvoulas of Morgan Stanley.
Ioannis Masvoulas
A few left from my side. The first one, we talked a lot about destocking among distributors. But can you talk about real demand among your end using industries? Have you seen any weakness incrementally relative to your July updates across Europe or the U.S.? Or do you see the market remaining stable?
Bernardo Velazquez
Thank you for your question, Ioannis. I think the market is more or less stable, or the real demand of our end users is very stable. But they are also trying to adapt the stocks. So they have reduced their rhythm of production a little bit, not as much as distributors for sure. Now they are adapting the inventory situation to the end of the year, but their demand is still stable. So this is what we can say.
As I said before, in all the regions, our strongest region in North America we see that underlying demand is stable. Really there is some sustainability as Bernardo said, coming in the fourth quarter and everyone is looking for the year-end inventory levels and managing those stock levels in that sense. The sectors as in the automotive industry is coming back now with the availability of electronics again. That’s also happening with appliances. With the lower prices of stainless steel and of many, many, many raw materials, also some projects that were postponed are coming back. So in general, the situation is good, the industry is very good, food processing industry is good. So in general, construction is a little bit more ducted, but this is — but in general, the situation is good for us in the stainless steel. In the high-performance alloys, it is different. The demand is very strong. Many projects that were frozen previously are now back, especially in oil and gas and in chemical industry. The world today is investing a lot of money in projects in oil and gas and chemical industry, and this is giving us a very strong order book in high-performance alloys.
Ioannis Masvoulas
Right. Second question, going back to working capital. Can you talk about the reasons for the reduction in payables in Q3, and also, when we look at the developed, let’s say the past several quarters starting in Q1 ’21, you’ve actually billed €1.5 billion. How long do you think it’s going to take you before you can release the vast majority of it? Or is there a structural element around higher energy and other costs, that mean we need to assume that it’s going to be a structural working capital relative to history?
Miguel Ferrandis
Well, thank you. Regarding payables, the situation in the third quarter at the end is obvious, as a consequence of, we have been paying in the third quarter all that raw material at 90 days payment term, that entered in late second quarter. So we have been paying the raw materials for the full running production that took place in the second quarter. This has been cash out and keeping on mind that we have strongly adjusting our production figures in the quarter as a consequence not only of the maintenance program, but also as a consequence of we are adjusting actually our production to demand. So what we are is actually buying much less material in comparison with the previous quarter. So these create a strong reduction in payables. This is more or less as a consequence of a change in the trend. In a normalized scenario this should be accompanied by a stronger reduction in inventories by the reason we have mentioned. This has not been taking place in September and shall occur mostly from October on the year and consequently, these shall be the big change for the fourth quarter.
Regarding your other comment, it’s true that obviously in this relevant figure of the net working capital, we must keep on mind several facts. You are talking obviously about certain inputs in the cost that obviously have its relevance in these days. But another one that has a strong relevance obviously is the currency effect. More than anything we are Americans. 50% of our sales are in America. So consequently, it’s clear that for our business is good, for our profitability is good, when we separate and isolate purely the working capital, the weight of the working capital in this time is higher as a consequence of the pricing of the dollar, because we are more dollarized in terms of our production and our figures. And this is also another fact to keep in consideration.
So it’s a combination of raw material that has been going up and actually obviously has increased during the year and now we are in the range of $23,000 per tonne on LME. This has its relevance compared with the previous year, plus the other cost inputs, especially the energy plus the currency, plus the volumes as a consequence of the cycle in which we are coming from. So this is a combination of all these effects.
Ioannis Masvoulas
That’s very clear. Then a very last question from me. We spent a lot of time talking about energy costs and energy challenges and you have outlined the energy efficiency target by 2030. And looking at your Slide 3, you haven’t made much progress in the past few years. How should we think about the target, is it still achievable? And can you perhaps talk about some of the initiatives you’re undertaking?
Bernardo Velazquez
Yes. You know that the energy efficiency is part of our Excellence Plan. We have been very focused on this. And what I can say is that we are the best player in Scope 1 emissions in the industry. What it means our energy efficiency is the highest in the industry. So this is interesting and that’s why our challenges are — our goals are very challenging for us. In the last situation with this volatility, our equipment is normally made for continuous working. Once you have to accelerate too much, once you have to cut production or up production, then that is — the energy efficiency is suffering. And that’s why our numbers are not progressing as we expected. Now that we are again in a controlling situation, I think that will come back to this, and of course with the current prices, this is a key issue for us. So we are very focused on this. We need to — we are taking several initiatives. We are making — we are defining our CapEx strategy for sustainability matters and efficiency at the end. You know that I always say that the efficiency and sustainability is the same. At the end we are speaking about saving energy, saving money, and reducing CO2 emissions, which is the same.
We have a lot of initiatives based on the use of our heat gases, exhaust gases to produce steam or to produce electricity. This is several projects that we have. Of course, we are increasing our participation in renewable energies. Probably next year, after next year we will start having more or say our 20% of our consumption will come in Europe, would come from renewable energies. We are also improving the efficiency of our burners, of our pharmacies and of our electrical furnace in the melting shop. We are also having very interesting projects in digital transformation, like for example using big data to analyze what is the best way and the — the best way and the best time to melt our steel in the electrical furnaces reducing energy consumption and analyzing the peaks and the weaknesses of the process. And so we have a lot of initiatives, and that will be reflected in the Excellence Plan and of course in the targets in sustainability.
Operator
We have a question from [Maxime Co] of ODDO BHF.
Unidentified Analyst
And just reverting on the general situation, is it possible to quantify the — I mean the headwinds we presented in Q3? I mean basically you had much higher gas prices, but conversely prices for electricity went down in Spain from the reliability prices in H1. And they stayed usually in the regions of the world. And following on that, I mean, could we expect a tailwind actually for energy in Q4, given the recent distribution of the gas prices, electricity prices have also come down. So could that be a tailwind in Q4 or is that too early to say?
Bernardo Velazquez
Well, in regard to the first part, electricity prices is still by far, we cannot say that electricity prices have reduced in Spain. When we look at the figures of July to September, we are more or less Spain, 6x the equivalent electricity cost that we are paying, for example, in the state. So the gas is obviously an issue that is damaging all the industry all around Europe and all around the world in these days. Gas obviously, has been one of the most inflationary energy inputs on a worldwide basis.
Electricity in our case in Spain it is absolutely out of control. It appear that Spanish government had some tools in order to try to establish a cap and this has not been working. So at the end we have seen energy prices in Spain also being crazy in terms of reaching levels in of around €280 per megawatt, which is absolutely unsustainable for the industry in Spain and we are seeing a lot of electro-intensive industries in Spain are forced to close because of that.
So the energy issue still is absolutely out of control and broadly is our main headache in these days. The other factors are we have more tools to play with and still the electricity appears to be for us our original unsustainable issue to keep running full our melting in Spain at these cost of electricity, We understand that it’s going to go down, but in third quarter has been has been terrible.
Hans Helmrich
Just a couple of years ago we were complaining about gas prices in Europe because €20 per megawatt hour was considered a high price. Now we are thinking that €80 is cheap, that is 4x more, I think. This make the European industry unsustainable. I mean we have to complete this very — we are speaking about regularization of our markets, but we are still in the global market and we have to suffer the pressure of imports from other regions with more stable electricity and gas price. And this is a European problem and we expect that we are working with the European and Spanish authorities to find a solution at the European level. We think that we need to do something at the European level because most of the European countries or all the European countries are suffering this excess of electricity and gas prices, but we hope all this — that they will understand and also the situation will come down and then we will find a better solution because at the end it’s the European industry which has to compete against other areas that will affect not only to stainless steel and not only to the electric intensive industries but there will be at the end that will affect the general industry and this is a European problem.
Unidentified Analyst
Okay, and then assuming energy prices remain this high, I mean sustainably, I mean what are your options and what are the ways available to you to improve your competitiveness in the European Union’s financial footprint to offset that?
Hans Helmrich
As we mentioned before, we are, first of all, so we are trying to buy renewable energy, PPAs if they are available at a reasonable price. And secondly, of course, we are very focused on efficiency. This is our main focus and investment that will make us more efficient and investment that will make us to reduce our CO2 footprint, reducing the energy consumption.
Bernardo Velazquez
We have alternatives. We say we are a global company, and for example, South Africa, it has a very stable electricity and gas price today. So if this situation becomes very critical, we can also — we can always bring slabs from South Africa to Spain.
Operator
We have no further questions on the phone line. So I’ll hand back to Carlos.
Carlos Lora-Tamayo
Yes, thank you. We have several questions from the website. The first one is coming from Inigo Egusquiza, Kepler Cheuvreux, and is as follows. What could be the net debt by year-end? Consensus has something below €300 million, which is a bit aggressive. Any color on that please?
Miguel Ferrandis
Yes, €300 million at this this time I consider it to be aggressive. Maybe that could have been the case starting of the year, keeping in mind also that we have invested in the buyback program, roughly speaking, the second buyback program around €100 million. After this we consider that €300 million shall be low. Last year, last year-end figure was €570 million. We are going to be below that, and strongly below that. I think we shall be below €500 million. But any place from €400 million to €500 million appears to be logical at this time. But obviously depending on the market circumstances we shall move it in that range. I hope more growth to the €400 million and to the €500 million, but still it’s a bit premature to define. But having said that this mean our debt to EBITDA ratio for the year of 0.3x, which in our sector is absolutely a fabulous figure. With this, definitely we are very comfortable.
Carlos Lora-Tamayo
Thank you, Miguel. Next question comes from Cesar Sanchez from Renta 4.
Congrats for the results. Taking into account the current market situation, this would be unthinkable a few years ago. I have only one question if I may. Could you get some color about prices for the long-term contracts for 2023 and how they convert with those of the previous year?
Bernardo Velazquez
Very sorry, just said about it, we cannot speak about prices or comparisons.
Carlos Lora-Tamayo
Okay. And the last question is coming from Leon Izuzquiza from Bestinver that’s in line with [SMR] question. Can you share with us how the negotiation of the annual contracts for 2023 are going? How might they contribute to 2023 compared to 2022?
Bernardo Velazquez
No answer.
Carlos Lora-Tamayo
Okay. So there is no further questions. So thank you for joining us in this call. Have a good day. Thank you very much.
Bernardo Velazquez
Thank you.
Operator
This concludes today’s call. You may now disconnect your lines.
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