Aperam S.A. (APEMY) Q4 2022 Earnings Call Transcript

Aperam S.A. (OTC:APEMY) Q4 2022 Earnings Conference Call February 10, 2023 8:00 AM ET

Company Participants

Tim Di Maulo – Chief Executive Officer

Sudhakar Sivaji – Chief Financial Officer

Conference Call Participants

Tristan Gresser – Exane BNP Paribas

Dominic OKane – J.P Morgan

Patrick Mann – Bank of America

Maxime Kogge – Oddo BHF

Sandeep Peety – Morgan Stanley

Bastian Synagowitz – Deutsche Bank

Krishan Agarwal – Citibank

Rochus Brauneiser – Kepler Cheuvreux

Operator

Hello, and welcome to Aperam Q4 Results Call. My name is Prisla, and I will be your coordinator for today’s event. Please note, this call is being recorded, and your line will be on listen-only, however you will have the opportunity to ask questions at the end during the Q&A session. [Operator Instructions]

I will now hand you over to your host, Mr. Tim Di Maulo, the CEO, to begin today’s conference. Thank you.

Tim Di Maulo

Hello. Good afternoon, and welcome to Aperam’s Q4 conference call. I’m sure that you all have listened to our management podcast for the quarter. And we are well aware of how we see the state of Aperam business and the overall industry. If you still have work to do the podcast remains available on Aperam website in the Investors section for your reference. And as usual, we can start with the Q&A and we have — I will be a bit to answer to you.

Question-and-Answer Session

Operator

Thank you, Mr. Tim. [Operator Instructions] We’ll take our first question from Tristan Gresser from Exane BNP Paribas. Please go ahead, sir. Your line is open.

Tristan Gresser

Yes. Hi, just two questions, please from my side. The first one on the guidance, so you referred to a normal Q1 EBITDA. Is it fair to look at the legacy business at around maybe EUR120 on average with stainless & electrical, as always, et cetera, for Q1 and then add on top of that, the recycling contribution? And also could you remind us what you consider to be the recycling business normal, kind of, earning power. I think, I remember ELG was around EUR55 million on an annual basis, but not sure about Bioenergia recycle. Thank you.

Tim Di Maulo

Okay. Thank you. So when we are refer in guidance that to an increase, we are referring to Q1 versus Q4. So an increase is always something which has a certain relevance. And it will be, let’s say, in line with the result of previous acquisition of ELG, of course. But Bioenergia was already in the scope, so you have not to count, double count the Bioenergia, because it was already in the scope. So it’s clear that there are two elements that play on that. There will be less negative inventory impact. There is a lower cost of inflation and energy, which have been particularly strong in Q4.

On the same time, we cannot rise the volume as a normal, let’s say, Q1 for two reason, but one is the normal seasonal effect of Brazil, so this happens every year. The second one is that we have a long standstill for DoD, so this will be a very long one for which we are, let’s say, we have anticipate to Q1 something that could have normally been done later. To take maximum profit of the fact that we see the market still in the face of destocking. But of course, this will imply at least the two things: One is more than normal average inventories, and second, that to the Europe volumes will not be at their maximum in Q1.

Tristan Gresser

Okay, that’s helpful. So normal legacy business and then the recycling business, but not the Bioenergia and recycle that we’re here prior. The second one, please, this time on the working capital guidance, I think in the slides you referred to less net working capital release in Q1, but still release. But am I having a hard time reconciling it with the net debt being stable in Q1? Aside from the dividend, the taxes and the EBITDA guidance, any other elements, maybe cash elements that we need to be aware in Q1? Thank you.

Sudhakar Sivaji

Hi, Tristan. Sud here, thanks for that question. So let me take that question of, so to answer the first part of the question, right? So when we say less net working capital release, this is compared to what we’ve done in the past, right? So there’s two reasons for that: One is the fact that we’ve stated extensively in our podcast that we have moved up first phase of our significant retooling of our asset in Genk. As a result, we started building inventories in Q4 and we’ll continue to do it in Q1, so this happens in Q2. So that is one effect, which is the inventory buildup for the shutdown, right? So this is something that you have to keep in mind.

And the other one is the fact that nickel prices for example, continue to be still high and while some other prices have come down, raw material prices still are at a stable high level. As a result, if there is any sizable reduction in volumes also or any small reduction in volumes also it’s going to be compensated by the price effect as it looks right now, okay? Now that’s the reason we mentioned in our guidance also, nickel price will play a role going forward towards the end of the quarter how that looks, okay? That’s the first part.

The second part of the question, any other items you have to keep in mind for the cash guidance for Q1? And I guess this is something which you may have noticed in our Q4. There is a larger than normal other cash flow items effect, which is usually double the size of what we show. And this about EUR90 million, right? Of this EUR90 million Q4 effect, slightly more than half, I would say around 50% to 60% of that should revert back in the first half of the year. It comes specifically from a lot of small items, but primarily because of a factor that in Q4, we actually were started purchasing raw materials and building up inventory in preparing for all these major shutdowns we’ve had for 2023.

And there is a significant VAT payable component, which typically in Q4 increases, because the shipments are low and we purchased in preparation for Q1. But this time that effect has been extra magnified, because of the high price of raw materials number one. But also because of the fact that we have built this extra inventory to prepare for the shutdowns coming in Q2. So that’s the reason you say that. So that’s something which you should factor in going forward. But again, to be very clear and give you a clear guidance on that, not in Q1, but coming back in Q2. Is that clear?

Tristan Gresser

Yes. So 50%, 60% of the EUR90 million to be revert back positively in H1, if I understood correctly. But then maybe on the first part, so do you expect to build in working capital?

Sudhakar Sivaji

We expect working capital to be on a euro basis flat primarily.

Tristan Gresser

Okay, flat. Okay. Thank you. That’s all for me.

Operator

Thank you. We’ll move on to our next participant, Dominic OKane from J.P Morgan. Please go ahead, sir. Your line is open.

Dominic OKane

Hello, just a question on the derivatives and specifically the nickel hedging. Could you maybe just give us some details of how to think about, how the book looks, the duration and kind of price exposure? And obviously, maybe same question for FX, given FX moves have been quite volatile in the last couple of months?

Sudhakar Sivaji

So I think firstly, let me split out and say that after EUR90 million I mentioned about 10% of it is from realized derivatives, and it’s a timing effect and it’s going to come back again over the next quarters, okay? So just to kind of — to connect it back just in terms of cash flow.

In terms of EBITDA, when you’re looking at that large number, of that number 80% of that effect is from unrealized derivatives just based on the MTM value on 31st of December, right? Considering the MTM value on the 30th of September, if you look at it, there was a significant jump close to 30% to 40%, 40% jump in nickel price and that’s the part, right? And the remaining part, you can consider it as coming from derivatives, almost 50% from realized FX and 50% from unrealized FX.

Now you have to keep in mind FX derivatives are to match our foreign exchange sales. So the revenues have been realized already. So it’s always been there and it’s just visible now in the ETR or in the EBITDA line items P&L just because of the significant jumps you’ve seen, right? So and unrealized part is again the MTM of the unrealized derivatives we carry.

And the structure of the nickel derivatives and FX derivatives, I can tell you, follows the same structure of our sales contracts, which we’ve given in the past and that’s how we settle these derivatives going forward.

Dominic OKane

Okay. Thank you.

Sudhakar Sivaji

Again, just don’t — please, just a note, it is MTM values, right, on the P&L. 80% of that.

Dominic OKane

Yes. Thank you.

Operator

Thank you. We’ll move on to our next participant Patrick Mann from Bank of America. Please go ahead, sir. Your line is open.

Patrick Mann

Good day. Thanks for the call. Two questions, one is just on leadership journey. So I mean, we’ve got to the run rate pretty much of, I think, there’s only EUR28 million left to go of [Indiscernible], which is only meant to end of next year. So how should we think about it? Is it going to be just a EUR28 million improvement for 2023? Or is the possibility that either you exceed your targets or you bring forward Phase 5. So just how should we think about that and where you are in the Stage 4 — Phase 4? That’s the first question. Yes, I’ll wait to ask the second question after.

Sudhakar Sivaji

So first, Patrick, I know since you’ve been following us for a long time. You know that we structure our leadership journeys on a three-year rhythm. And we would like to stick to that rhythm, right? What we have already done is that the investments for Phase 5, we’ve started announced in 2021 already to bring them forward. What we have not yet announced and we will do that in due course towards the end of the year is the fact how our Phase 5 is going to look like. But our Phase 5 investments, the details have been given to you. And typically, we set a benchmark of at least 15% IRR on our projects. So that should give you a view on the investments we have announced in our Capital Markets Days, we’ve gone ahead and actually given out the CapEx sums for each of the divisions for this space. And you should be able to give a ballpark figure.

So we are designing Phase 5 knowing the fact that we are transforming Aperam and what we have communicated is a EUR300 million program until end of 2025. So this will be a majority chunk of getting how do we get to Phase 5, okay? And on your question on the mathematics of there is only EUR28 million left, there’s two parts to the discussion. One, on a practical basis, the program was designed thinking about the fact that 2023 is going to be a year of a lot of investment standstills. And now that the market is also down. We have pulled for some of these investments.

So on a run rate basis, yes, our focus will be to sustain the gains, which we have made in the last couple of years and get the EUR28 million. But if you are going to ask me, are we going to stop saving when we reach EUR28 million, you know the answer from our track record, we will continue doing that.

Patrick Mann

No, good. Thanks a lot, Sud. The second question, I wanted to ask about this Econick, botanical investment in your ventures fund. So I mean in the podcast you said it could actually end up being quite a material contributor to your primary nickel. But obviously, it looks like it’s that pilot plant stage or when do you think you’ll have an idea of whether or not this is kind of work and it’s going to contribute meaningfully? Is it what we know in five years’ time or is this what we know in a year’s time? How should we think about the time frames of whether this payables?

Tim Di Maulo

So we are very excited about this, because we have proven the technology. So the technology is proven. Now it is bringing this technology at a larger scale, and so what we have announced here is after that we have already invested in launching industrial scale pilots in a few countries. And so we are now, let’s say, in a period of a couple of years in which we will ramp up this pilot in — at industrial scale. And then the deployment will come after we have all the learnings at what is the management of this, kind of, project on larger scale, okay?

So you can imagine that there are a few things that have to be fine-tuned, especially in terms of the management of the season of the different kind of ground et cetera. But I’m very confident that in — with this ramp up, we will be starting from the three years from now. Having something which is relevant that can be eventually reported, we will see later. With knowing that what — of what we are sure is that this kind of nickel will be in — among the best in term of competitiveness and will be the only one with the scrap to be at zero carbon impact, because you understand it’s coming from biomass from the company. Biomass will be used also to produce green electricity for the local community.

Patrick Mann

Thanks. Okay, so you’re going to have bio-charcoal, bio-nickel, bio-energy, yes, to be funny.

Tim Di Maulo

Yes. You have understood that. We are really serious in invest in the circular economy and in a greener and greener production of stainless steel. We have invested more than EUR500 million in the scrap collection. We have invested in the forest. We have launched recently the purchase of new 50,000 hectares of forest in Brazil, which we will add on top of the actual ones. So we are investing in that. We are serious and this technology has let’s say, a serious future and we have invested is years that we are collaborating with this university to fine-tune the process and now that the process is finalized. We are launching the — at industrial scale.

Patrick Mann

Okay. Thank you. That will be interesting to see how this develops. Thanks very much.

Tim Di Maulo

Welcome.

Operator

Thank you. We’ll move on to Maxime Kogge from Oddo BHF. Please go ahead, sir. Your line is open.

Maxime Kogge

Yes. Good afternoon, so the first question on the guidance for Q1, is it fair to assume that leaving aside positive inventory valuation, EBITDA will be down in Q1 versus Q4, given that we still have quite muted volumes. And at the same time lower pricing and higher costs? So that’s my first question.

Sudhakar Sivaji

You know, you have to maximize, Sud here. So Maxime, you have to just keep in mind the fast of inventory valuation will also depend basically. And I don’t know if your model has taken the account of the fact that shipments been depressed in Q4. So some of the negative valuation as long as you take time to ship material longer than, you know, we have had second half of the year in which pretty much all producers have experienced due to the destocking in Europe reduction in shipments, right? So this effect will move into Q1.

And if this moves into Q1, the inventory valuation effect, which you are expecting is going to be subdued and not as high. So I can tell you just on an underlying basis without the inventory valuation. If we look at it, between Q4 and Q1, there will be a slight reduction, but not to the magnitude you’re expecting.

Maxime Kogge

Okay, okay. And then I have a more general question about hedging, about nickel hedging, because basically why you still need to hedge your LME nickel, because my understanding is that [Indiscernible] is more or less not correlated from the nickel price on LME. And this is one you’re buying actually. And perhaps related to that, are you still able to [pass from] (ph) higher cost for nickel in your selling prices, I mean, the work, I mean, does the mechanism of alloys surcharge still work now a days. I mean, on your activity both in Europe and in Brazil?

Sudhakar Sivaji

See the first thing is that as put forth in our risk management policy, we do have hedges on a certain portion of our inventory, right? Because based on nickel price, as it goes down, we use these hedges to manage the risk of inventory valuation on our inventory, okay, number one.

Number two is that we don’t care if it’s surcharge pricing or fixed pricing, it is an artificial construct. When you look at the total value, we always say that we pass the price of nickel. Imagine when LME nickel went to EUR48,000 in March of 2022, even then prices went up to even EUR6,000 per tonne in Europe, okay? So this is something that you have to keep in mind that there is a pass through. Now the pass through may again depend on the demand cycle, but fundamentally for us, the pass through is still there.

Maxime Kogge

Okay. Okay. Thank you. That’s helpful. And perhaps the last question on Brazil. So you’re quite confident that the new duties imposed on the Indonesian imports will benefit your position? So is it possible to have some ideas about the market share so far of the Indonesian production in Brazil? And what will be now the price differential between Brazilian and Indonesian production as the duties have been introduced?

Tim Di Maulo

So fundamentally, Indonesia, as you know, when has no duty is the price sector in the world, okay, directly or sometimes with the margin with some, let’s say, special circuit. So this duty, which is around 19% adds to the import duty, which we have already in Brazil for all the goods which are imported, which is 11.6%. So you have something like we have a new protection, which reached now 30%, which we consider something extremely important to avoid that the price sector in Brazil being Indonesia, which was the most aggressive policy in the world. So it is something relevant. The — you can let’s say immediately say that from — for the same kind of price that Indonesia do usually, there is a 19% difference and you can calculate.

Maxime Kogge

Okay. Now that’s clear. Thank you.

Tim Di Maulo

Welcome.

Operator

Thank you. We’ll move on to our next participant, Sandeep Peety from Morgan Stanley. Please go ahead, sir. Your line is open.

Sandeep Peety

Thank you, operator. Good morning. I have two questions. Firstly, the company has built in total EUR800 million in net working capital during 2021 and 2022? I understand that net working capital will be flat during 1Q? But can you give us some indication for the full-year? And are you expecting this build to be at least partially released during the year?

And then second question is around what is the volume impact from Genk revamp in 1H? Thank you.

Sudhakar Sivaji

So first things, thanks, Sandeep. First thing, in terms of the EUR800 million accounting, I hope you’re doing it on the same scope without ESG, right? So of that EUR800 million there is two factors you have to keep in mind. One is the fact that which we have shown as a clear chart in Q3, and I can ask you to refer back at that chart in our investor presentation. Is — there is a significant price effect in it. There is no structural volume effect in this EUR800 million build until when you talk about the end of H1 2022. And since then, we started releasing net working capital, right?

So the second fact you have to keep in mind is that since you are taking 2021 start, which we also rightfully do to run our company. It starts with the COVID end use 2020, where there was a significant release in working capital, because I just give you the number, there was a 19% reduction in activity during the COVID year. As a result, we had reduced inventory below normal levels by the same amount. This is the reason in the 2020 year we could already return EUR340 million of cash — sorry, EUR190 of cash, okay? So these two things you have to keep in mind. So there is a normalization to regular working levels inventory in a regular business year, plus enormous price effect. So that is the explanation for your EUR800 million build up and the bridges there clearly, which we have shown

The second part you have to keep in mind is that we have announced a set of transformations. And for this year, I just — in the beginning of the question, I was answering, Tristan and I said that you can expect close to around EUR40 million release during the year from the buildup. And this is something which I have already mentioned in the beginning of the year. However, this year will be a year where we build inventory in one quarter and release it in the next quarter as we do all these transformation projects through our plan to go to EUR300 million EBITDA plus in 2025. Does that give you some color?

Sandeep Peety

No, perfect. And after releasing this EUR40 million, are you then comfortable with the inventory and accounts receivable and payable? Does it go back to levels?

Sudhakar Sivaji

Sandeep, again, just to give you an example, December 2022 to Jan ‘21, nickel has gone up 81%, ferrochrome has gone up 27%, electricity has gone up 112%, natural gas has gone up 290% and then you go to the smaller particles like very ferro silicon, molybdenum, everything what we pass through. And if you look at this, these are price effects and we have said that as soon as the price effects come down will automatically release no structural changes needed on our parts. So it completely depends on the price from a digital device.

Sandeep Peety

Okay. Thank you.

Operator

Thank you. We’ll move on to our next participant, Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open.

Bastian Synagowitz

Yes. Hi, good afternoon, all. I’ve got a couple of questions. Can I please follow-up on the stillstand, which you plan for the new AOD in Genk? What will be the EBITDA impact, which should take to that in the first quarter, I presume there will one — will be one, will that be also dragging into the second quarter? That is my first question.

Tim Di Maulo

So we don’t show this as an impact on EBITDA, whether you have to take in mind that this kind of standstill are very important, because it is something like six weeks of the melt shop stoppage that we have and that we will have to do the second one during the maintenance time in summer, which will be then at the beginning of the ramp up for September. We have prepared the company with inventories, and so as it is the upstream, so you have seen and this is the question of everybody why our inventory has been higher-than-normal in — at the end of Q4 and higher-than-normal in Q1. It is exactly because we needed to prepare for the upstream, it is a long distance still, which has an impact.

So this impact is — by the way, it is a good moment, because in fact, we have processed also for relatively low cost of the energy, which has been in a trough during the last, let’s say, the last weeks. A relatively good price of the raw material, compared to what we have seen in the past. So it is — has been a good moment. But there is an impact on the net working capital.

Bastian Synagowitz

Thanks for clarifying, Tim. Maybe just to follow-up, but I guess given the magnitude, I presume, there’s still like a certain OpEx effect on EBITDA as well. You’ve been talking about working capital. But I’m sure there must be something on the earnings side as well. Is that at least set to assume even though if you don’t quantify it pretty long?

Sudhakar Sivaji

No. But — so the question is always, Bastian, on — this is a project which we have announced as part of our transformation to 2025. So this is a CapEx project and when we announced, we said it is going to improve the mix. It is not a maintenance project. It is transforming the AOD footprint in Genk to produce higher value products to connect it to the downstream. If you remember the discussion on how we will produce our downstream entity in France and Gueugnon to make not just one type of commodity, but three types of products. This is a transformation on the upstream side to our company with that to improve our mix. It’s not capacity addition.

So as a result, it is not maintenance, okay, they might be negligible in the scale of quarter’s results, FX on OpEx, but it is not — it is a CapEx project and it’s in the CapEx guidance we have given you.

Tim Di Maulo

And always with the return, because this project is in line with the leadership journey. So there will be important economy of scale, for example, in closing an older converter that we have already — we are already using with a much less efficiency cost of consumable, cost of energy, et cetera. So there is a high level of savings in term of energy, because we are putting the last technology to cogenerate and reduce the impact of the energy. So it will — the efficiency will be excellent and a part of our leadership journey. But this will come when it will be fully ramp up. From the moment, we cannot disclose this is part of the normal leadership Journey.

Bastian Synagowitz

Yes. No, thanks for that. I’m clear on what you’re aiming to do there. I guess just when you take out an asset on the upstream side with a lot of fixed costs, for six weeks, one would have expected that there is certain cost impact and that is what I was asked, but seems like there is going to be at least not a significant from what you’re telling us.

Tim Di Maulo

I understand what you say. So indeed, when you do in your logic. There is a lower production due to that. And so in fixed cost, there is a clear negative impact for this. There is a disruption of the flow, et cetera. So we have to spend, we don’t quantify externally. We know carefully the figures. We know quantify externally the impact, but there is an impact linked to that. You’re right.

Bastian Synagowitz

Yes. Okay, okay. Cool, we’re waiting for it. We’re going to see it in the second quarter, I presume then. Then over to my next question, which is on your electrical steel project in Brazil. Can you maybe certainly remind us what is your current capacity? I think there have been a couple of movements. The last number I had in my mind is around 18,0000 tonnes, I’m not sure that is still correct. And then maybe can you also let us know where this number will go to as your — I think upgrading it in a thought you actually here increase your — also your volume capability, but maybe that’s not correct?

And then lastly, maybe if you can give us even a bit of color on how much that project will be contributing to the leadership journey, because I suppose electrical steel must be a pretty profitable business here, not just today, but also obviously with the outlook. So if you could give us maybe a little bit more color on that, that’ll be great.

Tim Di Maulo

So you’re right. We are very excited with the story of the electrical steel, because electrical steel has a brilliant future in not only for — because everybody is talking about the electrical car, electrical vehicle in general, but it is also distribution. We have the two lines, one line is the oriented grains, which is more niche, but they are extremely important in their profitable products, because they are on the transformer. And this, of course, with the more and more use of electricity, there is a big demand already today.

And second for the electrical car for all the application in electrics. Electrical still are very important for Brazil, because remember, we have a capacity, total capacity, which is around 700,000 tonnes, 800,000 tonnes out of it. The Brazilian market is only in the range of 375,000 tonnes. So we are not aiming to export stainless, so you have the complement, which is in larger majority, the electrical steel, both for oriented grain and non-oriented grain, which is the common electrical steel use for electric car.

And on this kind of non-oriented grain, we are — I will say, at the top of technology with the possibilities are already easy grades. Whenever there is a demand. And by the way, with an impact with something which is interesting, because as our production is based on charcoal, it is the lowest CO2 content in the world.

Bastian Synagowitz

Yes. Tim, thanks for that. Can I just follow-up and sorry, I didn’t really follow all of the numbers correctly? So I thought you had around 180,000 tonnes of electrical steel capacity taking both GEO and non-GEO together? And how is this going to move? Is this going to go to such a 300? Sorry, I was not able to follow it?

Tim Di Maulo

So in term of capacity and what we serve, it is more complex than this, because it depends a lot of the mix, okay? So you have a hot rolling mill, which is around 850,000 tonnes or 900,000 tonnes. Then you have fundamentally stainless steel, which is nearly 40% electrical steels, which are a big part of the complement and the rest is some special carbon steel. So you might have seen some numbers, which depends also on the mix where the — where there is the major constraint is on the oriented grain, which are limited on non-oriented grain. We have capacities, which are much higher. And we are developing with the new investment, but we are developing more on qualities.

So we are upgrading the level of quality of our electrical steel instead of increasing the volumes. [Multiples Speakers] in the — in a little days more in that in the range, so probably you are referring to figures which are on the sales, then you have some yield, you have some part.

Bastian Synagowitz

Okay, okay. Thanks for walking us through that. Then very last question on the new nickel venture. I already tried hard with Tristan, but I didn’t get anything out of it. Could you let us know maybe how much CapEx plan to invest during the pilot phase in the next couple of years? So how much is this going to be?

Tim Di Maulo

So it is part of what we keep the most secret. So we will not give guidance on this. But the fact that we are not declaring big numbers means that there are not huge numbers. What is important is then while we are working since years in R&D and we deal with our partners and the technology will be developed — we developed. We will deploy now that is added to the technology has been developed.

Bastian Synagowitz

Okay. Understood, understood. Thanks so much.

Operator

Thank you. [Operator Instructions] Let’s move on to our next participant, Krishan Agarwal from Citibank. Please go ahead. Your line is open.

Krishan Agarwal

Hi, Tim. Thanks a lot for taking my question and apologies for the croaky voice. Most of the questions have been answered. If I can ask you on the market situation in terms of the targets you have given on the slide five. Inventories are coming down and then ports at normal levels or record — at low levels. So, I mean, if I think from a purely from the marketing perspective, this is the kind of ideas set up where production is running low, imports are lower and inventories are normalizing?

Would you like to share some kind of anecdotes from your order book, as well have you started in those early signs of market underlying demand improving or the restock happening? Where the lead times are? Just a broader view on how the things are looking like from the market point of view?

Tim Di Maulo

So thanks for the question. You know, that our market is unfortunately once again a market, which has been submitted to the very high volatility, which has been created by the special condition of the age of nickel, et cetera. So this special condition are very unique, okay. I’ve never seen in my life that such a big muscle import have arrived in Europe in a so short-term. So we are in the final phase of the destocking and destocking has not yet finished, but you see that there are not anymore of the condition to import, which is a good sign, because this means that the destocking will happen.

Now there is a couple of question mark about the market. So some markets are, let’s say, under pressure, because of the high interest rate and typically in construction and consumer goods. Other markets are solid like automotive food and beverages and also increasing and improving significantly in the capital goods. So we are confident that at the end of the destocking phase, which is happening, so we should be at the end very soon. As you can see from the figures, there will be recovery of the demand. Now for us, it is not so bad or not so impacting that the final consumption is plus or minus 5%. This is not a problem, because with plus or minus 5% or even 10%, we can leave. We have enough capacity to [variabilize] (ph) our cost. And to adapt our capacity to the real demand.

What has been destroying the market in the second half of the year has been this massive import with — I don’t know if you have seen the figures about in second half — in the first half of the year, imports have reached in some months incredible level up to 50% of the mark. So this has been the part which is bad for the market. Now the normalization, I’m sure will come. We have in front of us, on core at least still, I don’t know few weeks. And we are fully in line with our, let’s say, industrial plan also. We are stopping at the right moment, et cetera. At the end of destocking, the possibility of recovery of the market at a normal level is there.

Krishan Agarwal

Yes. Okay, okay. Thanks a lot.

Tim Di Maulo

Is it clear your answer?

Krishan Agarwal

Yes, yes. I mean, that’s a fantastic update. And then if I can try my luck with the Sud, a little bit. There’s a lot of new positive and a negative of inventory impact, particularly on the stainless & electrical and recycling. Is there any way you can help us guide on the magnitude of both the negative and the positive? Just to make the modeling for the Q1 a little easier?

Sudhakar Sivaji

Sorry. I mean, the thing is that we were talking about very high-double-digit effects for the last two quarters in different directions. And I mean if prices of raw materials remain the same as there — they’ll be probably, I would say, mid-double digit.

Krishan Agarwal

Okay, okay. That’s fantastic. It’s like I had luck on my side today. Thank you for…

Operator

Thank you. We’ll move on to our next participant, Tristan Gresser from Exane BNP Paribas. Please go ahead. Your line is open.

Tristan Gresser

Yes. Hi, maybe just one quick follow-up. On the import situation in Europe, I think in your prepared remarks, you shared quite a positive message there, but we’ve seen Asian prices relative stable with European prices picking up with higher raw material. So just wanted to confirm that is still your view at the moment with current market condition the door is now not slightly open again? And also, I think in your prepared remarks, you also flagged that some potential additional measures the European Commission could take. Could you tell us a little bit more is that ongoing cases or new cases you potentially looking at? Thank you.

Tim Di Maulo

So thank you for the question. It is very, very simple to see this in one of our slide, page one or seven, where you can see that the gap versus Asia price in U.S. dollar per tonne has been extremely high from the second half of last year to let’s say April of this year. This incredible gap has been, let’s say, the fruit of many reason. On top, reason of linked to the logistic, the very high cost of logistic, the gap between the correlation of the LME to the normal nickel used by stainless steel producer, the situation of Asia where the lockdown has increased a lot to the inventory and sold inventory in China, which has been a big push to sell in Europe.

So a lot of reason for which the wind of imports has been extremely high in between the second half of last year 2021 and the first half of 2022. Now the gap of price is normal. So you have the normal premium that is asked for an import. You have the cost of the transport cost. The service is high. And on top, when the volatility of the market is also high and there is not the booming expectation that we had at the beginning of the year, people are much more careful and tend not to invest in inventory and trying to speculate.

On top, I think there has been some bad surprises for some of the people, which were importing, because at the end, even if they have imported much lower prices at a certain moment, the — some imports have arrived at much higher price than the price of the European. So I’m quite confident that the situation that we see today of a very low level of imports is structural. And compared to what was in the past, the measure, the trade defense measure are extremely powerful and will be effective in a normalized market.

Tristan Gresser

Okay. That’s very helpful. Thank you.

Operator

Thank you, Tristan. It appears there is no further — sorry, we have another participant, Rochus Brauneiser from Kepler Cheuvreux. Please go ahead. Your line is open.

Rochus Brauneiser

Yes. Thanks for taking the question. Sorry, a bit late on the call, so I’m not sure whether this has been answered before. I’d like to understand how we shall think about directionally for the European part of the stainless business, I would guess that Europe segment was loss making in Q4 probably for the first time in many years? Are you — would you already expect it to turn positive in Q1 again? Or is that more a Q2 story?

Sudhakar Sivaji

So Rochu, hi. No, we did not answer this question, so I’m glad to take this one. So Europe was, if you take out inventory valuation effect on operational basis, was positive also in Q4 or so, just to give you an idea, okay? And the second thing is the fact that in Q1, if the inventories or raw materials continue to be priced the same, it would be within and without inventory valuation positive.

Rochus Brauneiser

Okay. Is it fair to assume that the earnings improvement you’re guiding for that’s primarily coming from the inventory evaluations, is that correct?

Sudhakar Sivaji

Depends because end of the day, we do have inventory valuation effect, but like I answered Krishan, it’s close to the mid-double-digit improvement, right? So — but there is also an operational improvement coming from a Europe, which is basically at very low levels of destocking and which is gaining back in Q1.

Tim Di Maulo

So I think the question could be answer more clearly in this way. You know that Brazil, Brazil is in the low season, so it will not be the normal support for the profitability of the company. But Europe is recovering in the sense that some headwinds that we have had during Q4, for example, the very low volumes or the very high impact of the energy are much lower. And on top, we have the inventory valuation.

So fundamentally, the structural result of Europe will improve and the structural result also the service and solution will improve. All the other division will be in line with their normal seasonality. But Brazil is a fundamental piece in our story. So when you have Brazil, which is in low season, then this mechanically reduced the result of the company.

Rochus Brauneiser

Okay. That makes sense. Then I have another question on your balance sheet. On the balance sheet line where you have your trade receivable and payables that is ended the year with something like 23% of sales. Thinking directionally for the whole year of 2023, would that kind of level is sticky? Or would you expect that the level of inventory in the system are coming back to levels you have recorded maybe two or three years ago, which was more on the magnitude of 15%? Is that something that you can achieve within every year? Or is this something which is more like a multiyear story if at all?

Sudhakar Sivaji

So, Rochus, this is a question I answered, Sandeep already, so I can repeat that, you have to keep in mind. No, no, that’s fine, I’m glad to answer, because it’s important to understand. See like there’s three structural changes, compared to 2021 or two, three years ago what you mentioned. First is that there is a significant add in inventory and a net working capital just because of our recycling unit, which for net working capital purposes should be modeled like a trading unit. We’ve mentioned this before, a significant part of our business in our recycling business is six to eight-week rotation, scrap blending collection activity. So this is a significant add, right? So you remember that we guided when we acquired that inventory or net working capital there alone was EUR600 million. So that’s a net working capital position you have to pull out of this if you’re comparing to two, three years ago.

Number two, is the fact that raw material prices and I did read out this especially nickel, ferrochrome and also capitalized raw material in form of inventory, sorry, electricity and energy cost effects have significantly jumped in. I’m talking about 30%, 50% and 80%, compared to those positions you’re talking about comparables.

And third and the last one is that if you’re exactly taking two years ago, it was a COVID phase where we had a 19% reduction in market demand. So volumes back then and as a result net working capital had also been reduced. You know how quick we are and reacting to market changes in releasing net working capital. That’s why we started releasing already in Q3 2022. So there is a volume effect also coming back to normal. See, we do tend to forget that although this destocking is bad, we are nowhere near the crash, but that happened when COVID happened.

Rochus Brauneiser

Okay, okay.

Sudhakar Sivaji

Those are the three effects, just to be clear, I don’t know if I give you enough information to work on?

Rochus Brauneiser

No, no. That makes perfect sense and okay, great. Thank you very much.

Operator

Thank you, Rochus. It appears there is no further questions at this time. I’d like to turn the conference back to Mr. Tim for any additional or closing remarks. Thank you.

Tim Di Maulo

Okay. Thank you very much. And thank you very much for your question and likely discussion as always. We have been able to convey you the message that we see the trough behind us. So the very bad situation that we have lived in 2022 at the second part, which was exactly the opposite of the fantastic situation that we have had in the first part. So all in all the years was good, but we are looking at a year with some challenges, but with a lot of possibility for us to demonstrate that our business model is resilient and will translate in a solid cash flow and earnings for our shareholders.

So we will be on the road by March, and the preliminary schedule are very rich. So I’m happy that there is an interest for us. And I wish you a good weekend and see you soon around the Road Show. Thank you very much and bye-bye.

Operator

Thank you for joining today’s call. You may now disconnect.