Hello everyone, and welcome to the Acerinox Q1 2022 results presentation. My name is Victoria and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. If you wish to withdraw your question, please press star two. If you have joined us online, please press the red flag icon. When preparing to ask a question, please ensure that your line is unmuted locally. I'll now pass over to your host, Carlos Lora-Tamayo, Head of Investor Relations at Acerinox to begin. Please go ahead.
Good morning, everybody, and welcome to the Acerinox Earnings Conference Call for the Q1 2022. Our CFO, Miguel Ferrandis Torres, will host the call and will be accompanied, as in other occasions, by the investor relations team. He will start with a short presentation and then continue with the Q&A session. Before getting started, let me remind you that this conference call is being broadcast on our website, Acerinox.com. Please, Miguel, go ahead.
Thank you, Carlos and Maria, and thank you all of you attending this webcast presentation and interested in our results and our comments. Our figures have been released early this morning. I understand most of you already have gone through the detailed explanations we have made on the results. You can understand that we are proud. We are proud of the figures that we are presenting today. As we always say, we like to be predictable and we like to avoid surprises, so we try to also give you proper guidelines and forecast for your models and your assumption for the business. On this basis, when we finish and we presented figures for the Q4 , we anticipated that the Q1 was surely going to be higher. This has been the case.
When I said previously that we are proud, our proudness in this regard is not because of the relevant figures appearing, but the proudness is because the environment in which such figures have been obtained. This has not been a plain sailing by far. In this quarter, we have seen unpredicted circumstances that obviously were not expected and that we have been not facing for years or decades. We are facing and obviously in relevance, first of all, we must mention the invasion of Ukraine, the war in Northeastern Europe , which obviously it's been a human tragedy, but a part of the human tragedy is having its consequences all over the world. It's creating overinflation, it's creating disruptions in the supply chain. It's affecting obviously the uncertainties on the market.
These disruptions affect our customers, obviously affect also the producers. In addition, we have seen the consequences that this has created in the raw materials market with a collapse of the London Metal Exchange. Most of March, the nickel was out of being listed, and this create further uncertainties and further difficulties. At the end, what we must clearly state it is that the results are remarkable, but what's more remarkable is achieving this result which in such an environment. At the end, it's a big demonstration of a quick reaction and a quick adapt, and this is consequently one of the things we are most honored today to discuss, and we shall talk in detail about that.
Prior to entering in the further slides, also as a statement, we want to give a clear position that we have stopped our sales on Russia. At the end, we are obviously following the rules. We are respecting all the sanctions and sanctions list. Fortunately, in terms of the raw materials, which is one of the areas more affected by the Russian invasion of Ukraine, in this regard, as always has been our strategy, you know that we are a very well-diversified raw materials procurement. This has been always our case. Fortunately, this create that we are not dependent on any specific single or country. In regard of the raw materials, you know that we are diversified on our components.
We are obviously buying nickel, but we are buying stainless steel scrap, and most of our nickel comes from a stainless steel scrap. We also buy ferronickel. We buy from different countries and different players. At the end, this advantage and this strategic advantage that we have for having such a diversified raw materials creates that we are not singly exposed to any specific player. In addition, with the good relations we have with several suppliers, we made a very, very quick reaction. Consequently, in this Q2 , we have been obviously honoring the terms of the material that was already contracted, but we have made all the work in order that we shall not be depending on Russian raw materials as early as the third quarter.
In the Q2 , we are actually actively working on that. This still minor raw materials that we are receiving that comes from Russia. We shall not be depending on that from the third quarter. In this also, we have had a very quick reaction. After stopping our sales in Russia, the only activity we are having in Russia is purely as a consequence of our sustainable commitments, and we shall go to the slide in page number three of the sustainability. For us also, sustainability means loyalty with our workers. We have a few workers in Russia which have been the one taking care of all our sales and presence in that market.
We have stopped activity there, but our sustainability for us means also to be loyal with our people. Consequently, we are just covering more or less the salaries of these employees, even though we are not having a commercial presence there. This is the only reason why still we appear with an open office in Russia, but with the only basis of at least taking care of our people and their families, which obviously are also victims of this situation. Going ahead with other issues of the sustainability, we can see some of the KPIs that appears in the page number three.
In this regard, we are making an effort and probably you have appreciated it in the last quarters, and especially we released two months ago our sustainability report, in which we have clear valuation analysis, the clear guidelines, the KPIs we are. We are extremely active on that. This is not a new rule. What probably is new in our case is that we are more transparent on making it public and more transparent in providing all the data. For us, sustainability is not a fashion or is not a window dressing, is not a tick in the box that actually is politically correct.
We always have been committed to that. What we are now is making a big effort for you to understand where we are, all our achievements, all our improvements, and all our ambitious targets. In this regard, you can appreciate on this page number three, especially in reduction of waste and in reduction of water. I think we have remarkable figures. In terms of waste reduction, you can see that 100% of most of our spares or consumables or components are fully recycled, and we are talking about grinders, oil wipers, acids, electrodes, plastic and so on.
We are absolutely committed to this target of 90% valorization of the waste for the coming years, and we are on that line and we really have achieved a big part of that. In terms of water reduction also, you can appreciate year-on-year a strong reduction of 7%. We are also very ambitious in terms of the emissions. You can see, for example, since being the baseline, the year 2015, as I say, we are years working on that, so this has not started in year 2020. If we take as baseline 2015, we have reduced the GHG emission at 11%.
In this regard, as always is the case, we have a big control of the controllables, which is more under our control, clearly the Scope one, which is our own emissions. We think that we are clear leaders in the industry, where still we cannot be the clear leaders is in the Scope two, because at the end in certain of our geographies, we are depending on at certain level from coal in the energy supply and so on. We are on the way, we shall be there, but at least where we have full control of the situation, we are leaders in the industry. This is also something to remark.
As well as the safety performance in which when we compare with the previous year one, you can see that the reduction we are having in lost time injury frequency rate is as good as 6%. In addition to this rate, we also want to measure that also we feel proud that the very quick and efficient reaction and all the prevention measures that we have been putting in place with our COVID committee have made that we have been minimizing the effects of the COVID during this quarter. Fortunately, the last figures we are obtaining in the reports from all our subsidiaries, we are now in this time in a much more strong and comfortable position with very few cases of people facing COVID in our organization.
Having said that, let's move a bit to explain some of the figures or at least to mention some of the figures. In page number four, it appears first of all that it's a new record profit. At the end, you can realize that all the figures are amazing. We prefer to talk about record than to talk about peak, because this is not a peak. I think we obtain a new record, but as several athletes, we are in position for being even improving our best achievements and obtaining additional records. We shall talk later on that this, we still consider that we still have room to improve in the results in the coming quarter. At the end, we have obtained a historical new record, for example, in net profit.
We are having almost a record in terms of EBITDA. If this EBITDA of EUR 422 million is the second best in our history, just following the Q2 2006. More or less, it was a record established sixteen years ago, but in by far a much more different environment. In this regard, that time there were several and substantial tailwind as you may remember, those of you who were covering the market at that time. This was the strong driver for this performance. In this case, this by far has not been the case. It's clear that this quarter has been a real challenging one as we express in the slide.
It has not been days of wine and roses by far. We have been facing a lot of turbulences as we mentioned. Even though that, as can be appreciated in the page number four of the results, comments that we made this morning, I think you can see seven consecutive quarters improving. As I said before, still we have room for further improving. In any case, let's keep in mind and let's be prudent for the future. This stairway to heaven at the end, obviously, sooner or later, we must assume that some correction must take place.
We must be prepared, obviously, for driving the business in that correction, for assuring that at the end, the margins shall be there and the consistency on the profit-making shall be remarkable for this year, that everything is actually on hand to consider that we shall obtain a new record. This is what I wanted most to mention. The EBITDA margin on a group basis is 18%. We think, as a global overall margin for the business, this is something to be especially proud about.
We shall talk later about that, but a part of the issues that we have mentioned in mostly the war and its consequences. You must understand that we have several handicaps in our case for in terms of cost structure, which are not obviously controllable by us, mostly which is regarding the energy and the energy prices that we are facing, not only in Europe, but especially in Spain, which is crazy as it's well seen. And also we have been facing circumstances such as the transport strike that stopped Spain most during March. Even though that, we are presenting these figures and obtaining these global figures for the group.
As I said, it's no doubt a good demonstration of how we have been facing this. We provide some comments of all the issues that have been taking place in the quarter, just these circumstances, and you see the red marks, obviously the energy prices skyrocketing in Spain, the transportation that we already have mentioned, the collapse in the London Metal Exchange that we already have mentioned. This could have been a perfect storm if not for the quick reaction, the adaptation of certain measures and how we have been sailing on these troubled waters.
We are always focusing on the risk of the business and at the end, we have experience enough and we have handled crisis enough for taking the proper reactions. One of those I think we must be more proud is how we have been reacting in the crisis in the nickel market. At the end, it is clear that the consequences of the war, and especially the relevant position of the Russian nickel in the world create an increase and a rally in the nickel prices, reaching some level in which start to appear margin calls, and several of the players who are active on the London Metal Exchange had to face margin calls and with huge cash deposits.
As has been appeared in the media, some of the world-leading nickel suppliers was especially forced to make enormous amounts of deposit, and this create further speculation. Consequently, the nickel had to be suspended at the London Metal Exchange and has been suspended most of March. This is something unique. Nobody could expect that. At the end, obviously, the market was extremely tensioned at that time. We are very proud of how we react very quickly to that. We stopped taking orders in the whole organization. There was big uncertainty of where the nickel was going to be and what could be the consequences. We didn't want to take any order or feel committed to any specific customers.
What we did is keeping and running our plans with the orders we already had on hand, and we committed to supply our customers on time at the contracted price agreed. We did not take any orders. What we started is negotiations with also the raw material supplier. At that time, nobody was knowing what was to happen, but also we realized that on these uncertainties we were in a position in order to offer to pay on cash basis the reception of raw materials as much as these raw materials were at the reference prices of the previous month.
At the end, for certain of our raw material suppliers, that guidance that we were in position of paying in cash created certain comfort, and obviously for us, assured the position of keeping our plants running with the raw materials, but at the reference prices of the prior months. This created visibility for our suppliers, obviously comfort for us. This went so well that probably we were the first player in the stainless world, making the proper announcements that at the end we were accepting orders again. We offered also, and we established. We started doing it in America due to our leading position in the American market that we didn't want any of our customers to be victims of all that big speculation and big rally in nickel prices.
Consequently, we excluded from the formula of the alloy surcharges those crazy days of the nickel market. The appreciation for the market and the quick reaction of our customers probably created that this measure also was followed very, very closely later on in Europe. In the end, what we are also proud is that this is a circumstance that was also not providing pain to our stable customers, and in the end, we recover back to normality. This is something that in the end was, as I say, a quick and successful strategy reaction. We were in a position to do that. We have a strong financial position, as you know, but it had a consequence.
Obviously, the consequence is mostly that we were paying cash, and not respecting the 60 or 90 days. As a consequence of that, the net working capital in this quarter, which by itself obviously should be increasing substantially, but in addition has been reinforced by our voluntary decision for assuring us the proper supply and at proper prices. This is, as I say, something that has been extremely successful and has been a strong contributor for our proper results in the quarter, probably also for the results on the coming quarter. The only point we must keep in mind is that it is having its effect on the rise in net working capital, as you may have seen in the figures.
This is more or less what I wanted to explain regarding this issue. In addition, we have had the strike in Spain, as we mentioned. If we go now to talk a bit about markets, first of all, our main markets in America, still the market is performing very strong. The flat products apparent demand increase in the last figure we have available, January and February, 17%. The North American market is strong. We are seeing sectors that are keeping its strength, and we are seeing for example all the food industry, all the catering and restoration is there. We are seeing sectors like for example, the oil and gas that is coming back. We are seeing the zinc sectors.
In the heavy transport still we are extremely active. Most of the sectors in America still are keeping its strength. We are still in the recovery from the COVID corrections. In addition, our comfort in our main market is that still we have not seen the definition of the Biden plan, which for infrastructure that shall be probably defined in the coming months. Our visibility in America, which is our main market in the end, is strong and is solid and is robust, at least for the coming not only months but quarters. This is a strong source of comfort for ourselves. The inventories in America, obviously, in terms of rotation with the high levels of activity, the rotation is still below normal.
In pure tonnages, the inventories may appear to be not normalized, still in rotation, corresponding to this activity. Still the figure is relatively low, so this is also a comfortable fact. There has been some increases in imports, and this is already there. We have seen Taiwan imports in the market, but fortunately no distortion and especially no distortion in our position in the States. We are obviously having a good portfolio in the States. We supply mostly the master distributors. The Buy American in most of our customers is a real issue, and consequently, we are the favorite suppliers. In this regard, we have been able to consolidate the price increases. We made the announcements, and they were respected for the market.
Still our position and our margins in America are very, very healthy, and we think that they are sustainable and are going to be sustained for the coming months. In the case of Europe also, the apparent demand figures provided by EUROFER show certain increase in 15%. In this apparent demand increase obviously what we must keep in mind is that having strong imports increase mostly in January, and we have seen certain increase in the start part of the year. Obviously, there may be some reasons for that.
In principle, we understand that it has been also some oversupply and some movement of material, mostly from China, Indonesia to Europe. Keeping in mind not only the price gap, but also our timing in which with certain of the still COVID confinement taking place in China, still with the effect of the Olympic Games and the tax that must appear in terms of of environmental respect and so on, this also create certain movement of material, which is there. Also, we have the effect of the Chinese New Year. A combination of facts probably create a temporary movement of material to Europe. We appreciate most of it came in or the big increase came in January. Imports have even reached levels of 33%-34%.
We understand that this is probably as a consequence of these circumstances that are there, but still we must keep an eye on the level of imports. As a consequence of these increased imports, the inventories now appear to be normalized. We were mentioning up to now in previous quarters that still were below normal, now appear to be normalized. This is the main effect in Europe. The prices have been high. Fortunately, this has allowed ourselves to probably not been affected in our margins by the strong increase in mostly the energy that has been affecting ourselves. Consequently, we have been able to keep proper margins in Europe.
In the case of the rest of the world, the tensions have been coming as a consequence of this, where supply came in from China, Indonesia. The tensions also coming from the London Metal Exchange. But even though these distortions, we are seeing some pressure on prices mostly in Asia, but we think that also probably maybe reduce or at least reduce the gap compared with the European prices in the coming months. Let's see also what can be expected as we shall talk later of the prices mostly in Europe. In the Americas, as we say, we have visibility. Let's see more or less what may occur with the prices in Europe. In regard to financial highlights, in the you have the figures.
In production, we more or less are running at equivalent levels to the production of last year. We have been talking about all the other effects on all the other disruptions that we have been experiencing. At the end also, a strong factor also for our comfort is the integration of VDM and how our High Performance Alloys is performing and the synergies we are obtaining there. We shall disclose it later. Even though in these circumstances, we have been fulfilling our commitments in terms of capital allocation. We have finished the purchase of the 4% stock that we announced. We more or less invested EUR 150 million in the share buyback during this Q1 .
Even though of all these circumstances, at the end, our net debt remains relatively stable with just an increase of EUR 50 million. I think we have mentioned most of the issues, but just going ahead to the pure stainless sector, I just want to remark from this EUR 422 million, you can appreciate that the EBITDA has been EUR 398 million, which is a margin of 20%. The average margin of the group in this quarter in stainless has been 20%. I think this is also absolutely remarkable figure. We are obtaining double digits EBITDA everywhere.
The only place where we are a bit more on the edge definitely is at the end, obviously, in Europe, but because of the energy, just for you to understand the extra cost that energy is having in the Q1 this year in stainless compared with expensive energy we have in the Q1 last year, which already was expensive at that time. This year, this has been an extra cost of EUR 70 million from which EUR 58 million is the extra cost we are paying in this quarter for energy compared with the one we paid in the Q1 last year. This is absolutely crazy. Consequently, we think that this is something that probably should be improving in the coming quarters.
We are now, it appears in the media that also in Spain, which is the most crazy energy market in prices in Europe, it appears to be a solution, and fortunately, the situation is going to be relaxed. Obviously this is part of our comfort. We consider that this is at this time in terms of our figures and our profitability and our cost, probably still the more dark cloud we have in our scope. We are having, as I say, double-digit EBITDA and being the average 20%, you can imagine where we are.
You can see and you can appreciate in all the group, we try always to avoid these difficulties and adjusted EBITDA, real EBITDA adjusted and real EBITDA in our case are similar because there are no extraordinary issues. At the end, normally we only reflect adjustments where are specific facts, for example, as was all the cost related to the VDM acquisition. In general, more or less, as you can appreciate, we keep it just to demonstrate that there are no adjustments in our margins, and consequently, it's very easy to understand the profitability and where the profitability comes from.
We have obtained this in the stainless with an operating cash flow of EUR 144 million, which is also remarkable despite a EUR 249 million investment in net working capital for accompanying the good market momentum as we are mentioning. In our sector, the extraction of cash because of working capital always comes in the good market terms. In addition, we have reinforced this year, we have mentioned in the raw material procurement, especially in the case of the High Performance Alloys that we are now moving on the page number seven. The recovery continues in the High Performance Alloys. At the end, we are seeing sectors which are keeping a very strong performance. The oil and gas is back.
The chemical industries also remains being extremely healthy. We have our order books now not only strong, but almost full, and this allows also to be more selective in the margins, and this shall be appreciated in the coming months. For us, something also that is relevant to remark in the case of High Performance Alloys is the consistency. This is something that we explained when we announced the deal. Our industry, the stainless, is a cyclical industry. This is clear. We try that our performance is or our managing of the business is not cyclical, but we are exposed to certain cycles. The one of the goals in moving forward to the High Performance Alloys is obtaining certain stability.
At the end, this stability, we are seeing it there. It's a strong and consistent sector that provides stability to our more volatile niche of market in the stainless, and this is something that is appreciated. We are having an EBITDA of EUR 24 million. Most of you remember we always mention that we consider that normalized contribution of EBITDA of VDM should be in the range of the mid-80s, the mid-80 million euros, around EUR 7 million per month. Only in the Q1 , we have obtained 24, so this provides a clue that we are even better than that.
We must keep in mind that for VDM also has been a difficult period and especially in the case of VDM, mostly by the energy prices in Germany, we must face that it's not so simple to obtain the double-digit margin EBITDA that we were mentioning. By far, we should be there if not for the also rocketing prices that the energy has experienced in Germany. We are following that. Even though these circumstances, you can realize that a contribution of EUR 24 million just simply in a quarter is a proper clue of where we can be on the full year basis. Comparing with the EUR 10 million that we experienced in the Q1 was still the High Performance Alloys was more affected by the COVID.
You can also appreciate what has been the quick reaction. Also, when we explained the figures of VDM in the Q4 , we saw that the fourteen million euros that we achieved in the Q4 came as a consequence of a big homework being done for preparing the division for the coming quarters and the recovery of the market. This is another issue which already is being appreciated in this figure of the twenty-four million euros. In regard of VDM, also to mention, obviously the dependence and in the net working capital and the dependence on the nickel has created that we have concentrating more of these rise in the net working capital is in a High Performance Alloys division.
As a consequence of an investment in net working capital of EUR 96 million, at the end, we have experienced an operating cash flow of EUR 71 million. Also, in regard to VDM, there is one issue to keep in mind and as we explained in the year-end results presentation, we raised the group debt for the acquisition of VDM. This meant in March 2020, an increase in net financial debt of EUR 398 million. As we explained on December, just on the period March 2020 to December 2021, we generate a free cash flow after dividend of EUR 402 million.
What we consider is that all the debt will rise for the acquisition of VDM probably has been neutralized with the cash flow that the group obtained from March 2020 to December. At the end, as we like to see, even though it's not a very financial proper definition, but at the end, this contribution that VDM provides to the group now is for free because the bill of the acquisition has more or less properly paid up to now.
This is also a strong factor of comfort and a demonstration of the value contribution and more or less the, in terms of our CapEx policy and our strategic plan of the clear guidelines and clear targets we have for growing, but in certain growth that provides consistent value for the group. The synergies, the integration process continues fine. We achieved EUR 12 million synergies in 2021, and in the Q1 , we are ahead of what was expected with additional EUR 5 million synergies obtained, which is above more or less what could be the average for the whole year. It's 29% of the total average expected for the year.
If we go to page eight, we more or less want to remark also what is our policies and which is our strength in terms of the capital allocation. You can appreciate our three main areas of capital allocation with data we have generated, we have more or less allocated that. First of all, it's clear that our business is a business to be reinvesting, and we are intense in fixed assets, and we must keep CapEx going on. The CapEx we have had in this quarter in organic growth inside our plants is as scheduled, EUR 22 million. This is obviously a clear necessities of the capital allocation in our business.
Return to shareholders is relevant. Then we have in this Q1 , we have invested in our shareholders through the share buyback, EUR 115 million. This is obviously something to remark. As our shareholder meetings in June shall approve the dividend for the third quarter. More or less knowing our long-term record in dividends, it's not difficult to assume that in addition to this, it shall become EUR 135 million cash invested also in return to shareholders in the Q3 . This year, probably this allocation is going to be substantially relevant in dividend and in buyback. In addition, we must have, obviously, the flexibility for accompanying the market cycles and the market terms for obtaining the best in each situation.
As a consequence, this increase in EUR 345 million. We have a debt absolutely well controlled, as you know. It's truly competitive, so our finance charges is low. What we have is a strong enough position in order to face whatever market terms and all the circumstances. In this regard, this investment, we prefer to talk about investing working capital, has been not only for accompanying the market and the turbulence in the market and the rallies in the raw materials, but especially, we have reinforced in this quarter for assuring our supply of raw materials and supply at a proper price.
Just to summarize on the conclusions in page number nine, you can see, well, first of all, there's no doubt that the strong performance of the group in the quarter in very, very challenging conditions as we have mentioned. We have obtained these results. I think we are on our way to demonstrating that we are, in this sector, the proper bridge over troubled waters. We have been in a position to obtain positive cash flow, obviously affected by the EUR 344 million investment in net working capital. Keep in mind that it is temporary.
At the end, as we announced in the year-end, we understand that having fire on all cylinders all around the group, we were not obtaining substantial distortions in net working capital, and that the year should be a strong cash generating year. Obviously, circumstances in the Q1 have changed. As much as we understand that it's going to be temporary, the reverse of it may come in the second half of the year, especially. Keeping in mind that still the increase in the raw material expenses from April and May should mean also to consider that still the net working capital may increase in the Q2 , and we must be prepared for that.
We understand that all these additional raw material that we are paying in cash, obviously, shall, as a consequence, be reversed and diluted in the second half of the year, where shall be most of the strong cash generation that we shall made in this year, 2022. Still, the uncertainties remain in place, are things that are out of our control. At least in the part that we can see in energy, we think the bases are going to be much more rational. In the raw materials also, we hope so, which for us is a good point.
At the end, in a strong market momentum, we prefer to keep the stability on the base prices, and at the end, not making and not selling expensive product because of the high raw materials involved on it. An adjustment in the extra alloys, if come after June or for the second semester, this should not be an issue as much as may allow ourselves to consolidate levels of base price. Our order book remains strong, so the visibility is good for the Q2 we are, as we say, we are very confident for the third quarter or at least still not having visibility, but we see that the basis for the market, the basis for consumption, it still remains strong.
In this regard, a part of the disruptions that may be coming from other external factors, we think that still the market is expected to keep a consistent course and with a strong consumption. In this basis, as we have seen before, the Q2 EBITDA, we expect it to be higher. How much higher is very difficult to predict, and I think this may be something to comment in the Q&A session, but we understand that what we know up to now, it shall be higher. Let's be prepared for what may occur or for the Q2 if commodity prices rise and so on. At any rate, it's going to be higher and probably a new record.
What definitely we can obviously assess is that what we shall keep is our very flexible policy of capital allocation. The driver in the Q1 has been the net working capital. Maybe when the situation is probably more calm, we shall analyze what shall come later on. It is something that probably should be decided for the second half of the year. Still we have ideas in mind and you know, and we are keeping an eye. We still have probably the will to grow, but definitely we must not get nervous, not experience the mistakes that cyclical companies create in the good days and decide to make irrational investments or relax, keeping absolute control and discipline through the organization. This is our target.
In this regard, I think that you can fully trust on us and we by far should not be breaking your expectations for the coming months. This was all from my side, so sorry if I have taken more time than what probably you should have preferred, but there are several things that probably need to be accompanied in these numbers and not to be explained. Please go ahead to your questions. Fortunately for your sharp questions, Carlos Lora-Tamayo and Maria shall support me.
Thank you. We'll now start the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you wish to withdraw your question, please press star two. When preparing to ask a question, please ensure that your line is unmuted locally. The first question comes from Francisco Riquel from Alantra. Please go ahead.
Yes, good morning. Thank you for the presentation and for taking my questions. The first one is about the imports from Asia into Europe. You can elaborate more. You mentioned that it was mainly from China and in January, but I wonder if you are seeing any impact in terms of pricing during this Q2 . And given that the price gap between Europe and Asia has widened, if you are able to pass through the alloy surcharge mechanism to clients during the Q2 . And also in terms of market share dynamics, you mentioned import penetration 33%-34% if you are giving up volumes, market share to the imports, or not. And also related to this, I understand that South Africa is being included in the European safeguards now from May.
What impact in volumes and market shares shall we expect also? Then the second question is about cost inflation in the Q2 versus the Q1 . You think that the Q1 has been the peak or if there is incremental cost inflation to come? In this context, if the slight growth in EBITDA also applies to margins in the Q2 or not? Thank you.
Thank you, Francisco . I shall go to some of your points, and probably Carlos also shall explain some of the others. Well, in regard to, first of all, the inflation at the end, most of it, we know that we were selling in an inflationary time. The main driver in our case obviously is energy. In energy, we are a bit more relaxed for the coming quarters. Our energy concern mostly is Spain, as I mentioned before. Always energy has been our more uncompetitive factor in Spain. As a consequence, this goes prior to your second question.
This is one of the reasons why we, our strategy also puts value on the possibility of investing in South Africa for not being so dependent on the energy costs in Spain. We are going back 20 years. You understand that our strategy is long-term oriented. In any case, sorry, let's go first for energy, and then we shall talk about South Africa. This has been our longstanding complaint, but the complaint when our energy was so high as being in the levels of EUR 50 MW, then went up to levels of EUR 200 or EUR 220 megawatts. We reached crazy levels at mid-March, in which more or less it was a level of EUR 450 megawatt.
At that time is when we decided just to stop production at ArcelorMittal. That took around three days. It was a peak in the prices, but we clearly cannot be efficient and running the business on our melting shop, paying such incredible and crazy prices. Now the situation has rationalized. We went back more or less to the border of the EUR 200 as appears in the media.
What appears in the press, what we all are reading is especially with this more or less position that they are facing Portugal and Spain in the union, is that it appears to be more in the media the issue that it can be at the levels of 160. Though if this is the case, the combination of this with the PPAs that we already have, there are not so many PPAs available in Spain. I have not been, but we have been doing our best, and we are moving forward. With this level, by far, we can say we can accept that. We hope that it shall rationalize even more, but this is something that may come in the coming months.
By far, this shall be advantageous. I think this is the fact which is the big distortion, or it affects especially Spain, in a minor extent, Germany. This is something that should improve our margins on equal-to-equal basis. Then let's see more or less if this allows us also to have and to keep these consistent margins that we are having in Acerinox Europa. As we mentioned, and you follow us, Paco, we mentioned that the big contribution or the big change in the contribution shall be appreciated in the Q1 by Acerinox Europa. It has been there because in the previous year still we have some term contracts taking on the COVID crisis.
Now the competitiveness of Acerinox Europa appears strongly. If we are on the edge of these two double-digit is because the energy is there. Just comparing purely Acerinox Europa year-on-year, extra cost of EUR 55 million is a lot of our EBITDA. Because of that, still we have a big room to improve in our margins. Usually the actual momentum is good, but in the actual momentum we have certain handicaps, and this is one of it. We think on these basis, on a equal-to-equal prices, obviously our costs should be improving if this cap at the.
When we start to see, and this is also some of the issues you were mentioning, some possibility of pressure on prices coming from the third quarter, at least the relevance of this impact in the European return is so big in Acerinox Europa that even if the base prices start to correct a bit, keeping in mind that we are in historical levels of prices, this should not be an issue if it is accompanied by a rationalization of the energy. This is something that we keep in mind, and because of that, we still feel comfortable. If we go to South Africa as I anticipate, for us, South Africa, in terms of the group strategy, had certain advantages.
One is the energy, because we always understood that energy in Spain is a strong headache. Consequently, for keeping our market share in Europe and for accompanying the European market and the rhythm of the European market, instead of investing in further melting in Spain, the group decided to invest in some capabilities in South Africa. We are bringing some material from South Africa. South Africa is a strong market by itself, and we are doing good business there. You know we are doing good business in the stainless, we are doing good business also in the mild steel. Some material also comes to Europe because part of the strategy is that we supply Europe from these two melting shops.
We are by far not concerned about these safeguards because with the level of tonnage we are bringing, we can be absolutely under the quota. This for us is not going to be an issue. With South Africa, we feel comfortable. In addition, obviously now the trade cases are taking place in advance everywhere. We would consider we shall not be affected. We are seeing also that maybe in Brazil it appears now a strong reduction. Brazil always has been a market absolutely overprotected. As much as it appeared to be a more open market, we also may have possibilities even to grow and to export there.
In terms of the trade cases, one of the advantages of being so well-diversified geographically is that we have the flexibility to accompany the market whenever it grows and reacts. Maybe for the imports, Carlos?
Yeah. As you mentioned, Paco, imports grew significantly in the Q1 , but it's true that they are not disturbing the market, no? We are seeing imports coming from China, from Indonesia, from Taiwan, picking up. Maybe highlight China, no? That, as you may know, in the-
In the previous year, they were exporting about 2,000-3,000 tons per month. In the Q1 , they increased more than 20,000-25,000 tons per month, no? I think Miguel introduced a bit in the initial remarks, but we think that this is due to, on one hand, the Winter Olympic Games, you know, the restrictions of CO2 emissions. Then the Chinese New Year, the COVID shutdown. All of this creates that China exported a significant amount of material in Q1, no?
We understand that Chinese government still is focused on the internal market and this policy will remain and that the situation will stabilize moving forward. We should keep an eye on, obviously, but hopefully will slow down. The price gap is huge between Europe and Asia, but you should take into account also all the logistics issues, the freight cost that is very high. You know, about $500 per ton to ship a ton from Asia to Europe at the 25% tariff, you know.
We are not seeing yet any pressure in terms of prices. We see that in Q2 we are able to make the pass-through of the alloy surcharge to the customer with no problems. Initially, there is no disruption in terms of prices either.
Perfect. Thank you very much.
Thank you. Our next question is from Ioannis Masvoulas from Morgan Stanley. Ioannis, your line is open. Please go ahead.
Yes, good morning. Thanks for the presentation. My first question is around the energy costs in Spain. You mentioned the potential cap that Spain is looking to introduce, I guess, on natural gas, and that translates to electricity costs. My question here is, does this benefit only your electricity costs or potentially your direct gas purchases? Could you perhaps quantify the earnings benefit that you expect for this year from this policy? Also, do you need to repay part of all of this benefit over time? I'll stop here. Thank you.
We think that it's going to be benefiting both. No doubt at the end as one is linked to the other, the rationalization should come on both of it. This at least still in Spain, as we mentioned before, we still are strongly depending on the spot prices. Even though we are involved in some of the platforms that are giving the market for some of the electricity intensity, the availability of the PPAs has not been huge in Spain. We, I think, at the year-end, we have 17%. Now it has been increased more. Now we are seeing also more possibilities, and we are involved in several discussions to participate in more projects.
This is something that could take a bit more time. We are not so concerned for 2023 and so on. Still probably the main turbulences are coming in the, still in the coming months, and consequently, we must face that. Our comfort is that it appears that this hundred and sixty that is coming by the government, so we obviously cannot quantify. It hasn't been precise yet. More or less, everything appears that instead of being more or less suffering these levels in the EUR 200 or EUR 220. We appear to have some cap in the level of EUR 160. Keep in mind that we with EUR 220, EUR 230, we were able to.
We were still running with the plant and accepting it and absorbing that cost in our margins. The only time where we decided that we prefer just to stop production is when we reach a level of 400, which is absolutely crazy. Fortunately, this is not the case. I think the worst is already over. The rhythm in which this shall be more rationalizing, and this is something to be determined, but the situation has been so on a national basis, has been so dramatic that finally the government and the European Union has taken a role on putting some more rationalization on this, and this is a good fact for us.
Great. Thanks very much. Maybe one more question on the shareholder returns. You exceeded expectations on earnings generation and deleveraging. Would you consider launching another tranche of the buyback during the year, or is it still a December 2022 decision? Is there another 4% remaining under the current authorization?
Well, the authorization that was done for the 4%, this already has been used, and consequently, the shareholder meeting that is taking place mid-June shall be the one deciding the cancellation of that share. The program is almost done and consequently, those shares shall be fully amortized from next month. Having said that, still we have not made a further decision. At the end, it's as we have been mentioning, it's a factor of flexibility. Keep in mind that the Q1 has been huge in terms of profitability, but not in terms of cash. Consequently, our clear target was net working capital.
We understand that it's going to be more relaxation in the net working capital, and at the end, it shall be decided. We always mention that we have always in mind the possibility of growth. I think the growth is a strategic position for the group, and it is something we must keep in mind. When shall be that growth coming, this is obviously pending to be determined.
In terms of capital allocation, broadly, what must be put beyond the balance sheet is the necessities, and the distortion of the market that meant an increase in working capital, combined with the opportunities and possibilities of making certain investments or acquisitions if it appears the proper group at a proper price, and also in addition, the distribution to shareholder. It still is not on the table whether to or when to proceed with the pending 4%, and this is something that shall be decided, but still is no agenda for when on that. You know, our timing is more driven on a prudent basis in terms of adapting to the market conditions. It still is not this. It still is not decided.
Thank you very much.
Yes.
Thank you. Our next question is from Patrick Mann from Bank of America. Patrick, your line is open. Please go ahead.
Hi there. Thanks very much. The first question is just on inventory gains. Can you maybe just give us an idea of how much of earnings this quarter was driven by higher inventory revaluation? Then just maybe to follow up with that capital allocation question, I mean, you know, you did EUR 422. You're trading at sort of below 3x EV/EBITDA. I mean, is it possible to make an acquisition at such a low price relative to your own shares? I mean, how do you weigh up looking at your low valuation on your stock and compare that to you know, possible acquisitions in the market? Or is it a case of diversifying and maybe trying to get a better cost position away from Spanish energy pressures? Thank you.
Thank you. Well, first of all, regarding inventory gains, this is not simple even to determine for us because at the end there are a lot of costs involved in our raw material inventory and in our work in process and in our finished goods. This is related not only to nickel but also to other raw materials. It's also to some of the other consumables and spares which have been strongly inflationary. So it's very difficult to precisely determine what comes from where and what we should contemplate when we analyze the cost involved in our material, purely the nickel, the nickel-related inventory gains or all the raw materials or the effect of the inflationary effect of the electricity and so other.
We could spend hours, even with all our core responsible, discussing how to analyze and price that, and it's not an easy solution. What is clear is that our inventory has been reevaluated. This is clear. The revaluation is not coming as a huge increase of tonnages. We are keeping the tonnages under control. This is very important because, as you know, and we always have mentioned it, what we must be is prepared in absolute discipline all around the group, that if any time the market corrects or the raw material corrects, it should be also a short temporary effect because at the end, we shall be absolutely optimized in terms of our inventories.
We are trading these days with 40% level of inventories that we were having in tons in the previous year of 2006 when the nickel correction at that time. Our strategy of having big distribution network created a big impact on our profitability. We have made a lot of efforts in the last decade in order for supplying just in time and from the plants and not being exposed to corrections. Consequently, the inventory gain shall be a momentum. It's not a driver of this profitability, as you can imagine. The inventory loss, if it comes, when it comes, should also be temporary.
This is one of the reasons why we are saying that the profitability in the Q2 should be slightly better because we must keep an eye that there is no certainty of what may come, mostly in Europe, from the third quarter. For us, the actual situation is not the best because at the end, expensive nickel creates that it's expensive extra alloys, and consequently, what we prefer is the stainless be competitive with a strong base price and not so relevant extra alloys. As much as the part of the extra alloys rationalize, it may have a temporary effect of one month, but shall be more simple to consolidate proper level of base prices. Keeping this in mind, has it been inventory gains in the quarter? Yes, by far.
For us, it's almost impossible even to determine how to match because of all the infra-inflationary elements that are taking place there. It has been a proper momentum. We started the year in doing $19,000 per ton of the nickel. It went up to, at the end of March, I think it was in 31. But the average of the quarter is around 24-25. Part of it has been obviously as a consequence of the temporary effect of the nickel rally. As I said, this is temporary.
Our material is average on cost, and consequently, when there is an increase in the extra alloys that month, we have improvement in profitability, and then if it's a drop, maybe we have some correction. What's relevant is that we are not depending on the P&L for the revaluation, or we are not exposed to a big devaluation. It has been, by far, taking place this year because the raw material have been moving up, but it's very difficult to quantify. What is relevant is that it shall not be either the driver of the correction when it comes back, when it comes down.
This is something that we are keeping an eye on obviously and having a very control level of inventories, not only in the distribution, but also in our plants. This is the one that should determine the profitability of the Q2 . If it's needed to make some adjustments, maybe it's going to be slightly better. If the adjustments in June are not needed, maybe it shall be better. But in any case, have the comfort that this is not a peak and the profits on the Q2 shall be higher.
Thank you. Then just acquisitions versus share buybacks when you're trading at, I mean, I get you to 2x EBITDA.
Yes. In our case, it's clear that our sector and the multiples that our sector is trading in the stock, and this is not only us, this is the sector in Europe, are absolutely not aligned with the momentum of the market is passing. We must remark that this is especially affecting Europe and not so affecting America. We understand that the valuation of American players in both steel, stainless, and alloys are trading at other multiples, and there has been a strong punishment or correction to the European stocks. This is something that we must keep an eye on, and we think that any time should be starting to normalize.
It's not rational to see at the levels that the stainless steel players, for example, of the three of us, we are trading in these days our market cap in view of the profitability that more or less we are having at this time. This is something that at any time probably should rationalize a bit more as we are seeing that in America has not been the same case.
On this basis, for us, we understand clearly that our investment in our equity as we have been doing with the buyback is adequate, but having also the flexibility for having a proper maneuver in whatever acquisition could take place if they come, and also if there is distortions, which still we have macro uncertainties in these days in Europe, and we must have the flexibility for being properly sailing in whatever circumstances. Because of that, there is not a, let's say, necessity of taking quick decision on this basis. We have almost finished the 4% buyback program. We are just amortizing, and we shall decide now what for the second semester.
What is clear is that the decisions on these areas are not to be adopted with a certain calm and not in a hurry. We are not desperate for making any price acquisition, as we are not desperate for making any specific announcement that at the end could have its consequences. We understand that the cash flow generation in the second semester shall be strong, and in that time we shall be in position to be more precise on when to allocate it. Still it's a bit soon, and still there are uncertainties in the market.
Got it. Thank you.
Thank you, Patrick, for your question. Our next question comes from Carsten Riek from Credit Suisse. Please go ahead.
Thank you very much. Quite a few questions have been already answered. I'm coming back to the inventory-related gains. Miguel, can you remind me whether you do a hedging policy or not? Because in the past, you didn't do any hedging on the back of alloy surcharge or alloy price changes. Did that change? And if not, is it fair to assume that your inventory gains should actually be higher than that of your peers in the current quarter?
Let's start with the stainless. In the stainless, we are not hedging. Fortunately, as much as Europe adopted the price structure divided in base price plus extra alloys with that working and respected in Europe, we have a natural hedging, and with that we feel very comfortable. Not in the States, not in Europe, obviously our main market isn't needed then or to make some type of hedging coverage. As a consequence of that, I do not know how the others are facing the raw materials.
In our case, as we are not making hedging in the nickel for the sales, we have not been affected by all the disruptions in the London Metal Exchange. We were not needed, there were no margin calls, we didn't need to make any type of special deposit, or we have not experienced any loss because of that. On that basis of this natural hedging that we are having, at the end, what we have is the revaluation or the momentary effect of the revaluation when the nickel goes up. Then, maybe, when there is a correction of the nickel, we have also that momentary effect.
As much as our order book is normally related to two months, this is something that can be accepted, and even in the downturn, it can be diluted. In this basis, with this, we feel very, very comfortable. In this regard, I definitely state that we are not making actually hedging on the stainless. We were analyzing possibilities, especially when the disruption of the market with the Asian imports made a tsunami, and Europe was managed at effective transaction prices. Fortunately, this is not a huge necessity in this day. This is clear for the stainless. The basis of the High Performance Alloys are different than the order book for the High Performance Alloys.
The participation in certain projects created that the strategy needs to be covered and the long-term strategy, assuming five to six months for our order books and assuring a proper price to all the places we participate, moves us to in the High Performance Alloys we are more active on the hedging, and this is the case. As a consequence of that, you can appreciate that the stability in the High Performance Alloys is always higher because the turbulences affect more. This is the only part in our group that we make, up to now, the nickel hedging. It always has been developed by VDM and I think very satisfactorily. This for us is a strong factor of comfort.
As I am saying, our order book in VDM takes for more than five to six months and sometimes even for more than a year. We are participating in projects and the maturity of our production for supplying that material is so long that in that case it makes sense. This is the only part in which we have been obviously active in the hedging and we have had no distortions in the last months.
Perfect. That explains actually one other question I had on the High Performance Alloys. One probably on the outlook, because clearly the market gets concerned about the second half and potential disruptions in demand. My question is on this one on the outlook. Are you currently concerned that the high stainless steel prices could discourage stainless steel demand, especially in Europe? Could we see actually a higher demand for ferritic grades based on the relatively higher nickel price? How would you react to that kind of market condition?
Well, as we said, for us, the business scenario is not this one in which we are supplying an expensive product. The prices in Europe are in historical peaks. For us, the driving of the business is not assuming that we must be trading at levels of EUR 1,800 of base price and more than EUR 3,000 in the extra alloys because at the end this dilutes the competitive advantage of the stainless and consequently on this basis, we are not so concerned that apparently, for example, the nickel now is trading below the 30s, now is in the mid-20s.
This means that April, May, still we are seeing increase in the alloy surcharges. Probably in June, we shall see certain correction in the alloy surcharges. For us this is good because with a correction in the alloy surcharges, it's much more simple to keep a reasonable level of base prices. We do not need that these base prices remain being EUR 1,700 in Europe because this is on a long term run, is not sustainable. At the end, as Carlos has mentioned already, there has been imports. But when we compare the price gap between Europe and Asia, the price gap has been almost reaching EUR 2,000, and this has created this attraction at the end of further level of imports.
We must keep in mind that with the duties plus the transport cost in Europe at the end, there is a barrier of around 1,200-1,300 EUR per ton. This is a strong barrier. We do not need to be in a price gap with Asia in the levels of 2,000 because at the end, you probably even though with the barriers, the attraction for putting more material in Europe shall be there. So in our case, a correction coming in the nickel or rationalization of the nickel is not concerning us. And whenever it comes, it shall be well received.
As I said before, we do not need these levels of EUR 1,007 or EUR 1,800 in base price, so we can recuperate healthy levels of base prices in Europe. In our case, as much as the energy appears also to be rationalizing, it can be even better. The cost saving that what could be some adjustments in the base price, and we must face that. We are prudent for whatever may be the circumstances on the summer that normally in Europe is the slowdown, but we don't see a big change in the fundamental of the demand. Still we are not seeing that it is moving onto ferritic. Still the market is trying to normalize after the COVID, and we think that still there is consistency.
We are not scared about that.
Perfect. Very clear. Thank you very much, Miguel.
Thank you, Carsten.
Perfect. Thank you, Carsten, for your question. Our next question comes from Tristan Gresser at BNP Paribas. Please go ahead.
My question. If I may just follow up a bit on Carsten question about demand. If we look at demand on consumer goods, more specifically EUROFER, for instance, just cut their 2022 demand forecast for domestic appliances by 3% last week and is now expecting -3% growth. So I understand that Q2 orders are booked and you have good visibility, but when you look at the H2 outlook, is it more a sense that those forecasts that seems a bit bearish are not necessarily accurate with what you're starting to see for Q3? Or does it just simply mean that you just don't have visibility moving forward?
Well, thanks for the question, Tristan. At the end of the day, we have visibility for the Q2 , you know, and the Q2 remains good. At the end, demand is in good shape. Still we do not have visibility for the third quarter. That doesn't mean that we are going to see a slowdown. No, but we prefer not to give you know, comments with the visibility that we have. That is the Q2 of the year. In this sense, we are confident that the situation will remain strong, you know, for the next quarter.
America, obviously, when 50% of our sales come from America and America remains being strong, and in America we have more visibility, so we are not concerned about the third quarter by far in America. Where we are is prudent in Europe, but at the end it's difficult to make, as Carlos mentioned, it's difficult to make or to take a position today, not only us, but also for the market, because at the end, still obviously there is. We are seeing high prices. We have seen this big increase in imports in January and this already took place. We don't think this should be structural and especially not structural if the price gap is more controlled. What we need to is to be prepared.
We are not seeing a strong correction on prices, but we are seeing is that the prices at these levels on a long-term run are not sustainable. As we are saying, it shall be depending on the nickel. If the nickel remains so strong, the pressure shall be on the base prices. If the nickel relaxes, it shall be more simple to keep the strong base prices, which for us is more into our margins. I think this is a general uncertainty that is in the market for us and from our customers. Consequently, this balance between the imports entering accepting the duty with market demands still is there. Let's see obviously how much time it takes.
With a war on Europe, there still is uncertainty on how long it will take. What appeared that was going to be a very quick war has proven not to be. Obviously the basis shall be different if we assume that this is going to take long or not. There are more uncertainties. In view of those uncertainties in Europe, we prefer to be prudent. We are not concerned of a strong correction, but we prefer to be prudent and assuming that some price tensions may take place. As much as this is more placed on Europe and not in America, we think that still we are very consistent on our figures for the third quarter.
Not visibility yet in Europe for that.
Okay. That's clear and helpful. Thanks a lot. Second question. Can you just confirm then, has there been any hedging losses in Q1? And also, with the guidance for slightly higher EBITDA, could you give us maybe a bit more color on the moving pieces there, notably on shipments? And maybe an update on the strike. Has there been any impact of this strike potentially to shipments into Q2? And also in the guidance, I understand that it's difficult to pinpoint inventory gains for Q1, but am I correct to assume that in your guidance you do not forecast any increase of inventory gain and maybe there are some inventory losses you foresee there?
Okay. I can confirm there has not been any type of hedging loss in the Q1. No data. Get absolutely certain on that. A slightly higher EBITDA, what means? It means it's going to be higher. Why we say slightly? Because still there are facts not known, and consequently, what we know is we have a big comfort for April and May. In June, we see that the extras probably is going to be lower. This should create obviously some tension in the market with definitely with customers and just trying to predict what could be the trend and especially the trend for the summer season and for the summer slowdown. As a consequence of that, maybe we need to make some adjustments at that time.
Today, we should not be needing to make any inventory adjustment. This is today. Maybe at the end of June on proven basis for the seasonal slowdown, because of the nickel weakening, it takes place. If it comes, it's not going to be huge. At the end, this obviously should be appearing in June. Because of that, we prefer just to say slightly, because if we need to make some inventory adjustment, in that case, we shall be variable. If it's not needed, it should not be slightly. At the end, as I said before, this is not a stairway to heaven. The prices are so high, and our willing is the stainless to remain competitive.
A correction in prices is not a drama if we keep our discipline in stocks. It shall be a temporary effect on some stock devaluation, but shall not be huge. As much as shall be mainly allocated in Europe, in our case, shall be compensated by the strength remaining in the American market. In regard to the shipments, the strike affected deliveries obviously in March in Spain, and we are trying just more or less to neutralize it with higher deliveries than in April and now for May, those are stabilized. This effect shall be corrected. There are always effect. At the end, as we normally say, we are well-diversified for not being so affected for any specific issue.
The transporter strike affect us in Spain in March, but now we are normalized. As for example, in the case of South Africa, it has been several problems also in the port with some inundation and all the storms taking place. Consequently, maybe in April, the deliveries of Columbus are affected, but we hope that this shall be recovered in May. When you are not dependent on a single location, you can react, and at the end, these distortions are just a temporary effect that can normalize after it. In this regard, for Spain, we are not concerned. We think now the situation is normalized.
We adjusted some slow figure of our production because of the three days closure of the melting shop, and then later on because of the strike also, we have an additional two more days. Now that's it. With the actual level of energies we can proceed. We are not satisfied, but we don't expect further distortions in the Spanish plant in the Q2 .
Okay. That's very clear. Thank you.
Perfect. Thank you, Tristan, for your question. Our next question comes from Luke Nelson at JP Morgan. Please go ahead.
Hi. Good morning. Thanks for taking my questions. Two from my side. If I can just, firstly focus on the working capital build. Can you maybe just talk to how much volume that inventory build underpins it? Given your comments that you've opportunistically gone out and paid cash for some inventories, can you maybe just talk through how far that extends to, and sort of whether that's into Q3, Q4? Related to that question, with regards to your stainless steel sales, are you gonna pass on spot alloy surcharges based on spot pricing, or will you pass on through the raw material costs at the price that you purchased in February or whenever you went out and acquired it?
I'm just trying to assess to what extent you can potentially offer on better terms, and whether that could potentially translate into market share gains, particularly in Europe. That's my first question.
Well, in regard to the working capital, as I said, more or less from this increase in working capital, I think from this figure, big figures just for you to understand, for this EUR 345 million, maybe around EUR 80 million has been this rise of material that has been paid in cash and consequently has been an increase in inventories now neutralized by increasing suppliers. So maybe if not have been because of that, the increase in working capital should be a figure more in the range of around EUR 250 million, something like that. This is more or less big figures, but just for your model to understand how much has it been.
In principle, we consider that it shall not be more of these effects for the second semester. Maybe obviously, part of this policy, which was started on March, shall be also affecting the Q2 . As I say, affecting as a deliberate strategy of having the proper material. Keep in mind that we are, as I said before, we are now negotiating with different suppliers for the proper diversification of raw materials. This is taking place, obviously, in the discussion with each of the suppliers. Now, we must establish the bases.
The bases normally are referred to the London Metal Exchange prices in case of the nickel, in case of the scrap, and consequently, the reference is always coming from London Metal Exchange, and always then considering premiums above the prices of the London Metal Exchange. Still, the most reliable way for taking place, where the extra alloys come from is the London Metal Exchange.
In our case, when I read, I think this weekend, some of the specialists' reports on the market, CRU or Metal Bulletin, I don't remember, one of them was mentioning that there was a bit of uncertainty in Europe because the formulas of the alloy surcharges were different in Europe for each of the players, which at the end, for us, is an absolutely logical scenario, because all of us, we have our own formula for trying to obtain an alloy surcharge from the nickel price evolution. March has been so crazy that each of us decided to take some policy of how many days or should be considered, and that's all.
I mentioned previously that we were the first to give some guidance on the market that was going to be our extras, alloys and which were the data that we were excluding from the formula in order for not affecting our customers. Because of that, probably, we see that each of us is facing differently. In our case, always the reference, which at the end also is the best one for the customers and for the customers assumptions for the future, is understanding that the reference should be the LME. It's public data, and then they can make their own predictions of what can be expected. We don't think we are going to change that.
Okay. Just for my understanding. You went out and paid cash for around EUR 80 million worth of inventories in working capital, which I think you mentioned was in the month prior to the nickel spike. It's probably at low $20,000-a-ton nickel price. That's been capitalized in your inventories. It doesn't sound like there's been some inventory revaluation effects, sort of here and there, but it doesn't sound like it's significantly sort of an effect, but maybe correct me if I'm wrong there in my understanding. I'm just thinking in terms of the P&L and the cash flow into Q2 and Q3, that you will unwind the inventories that capitalize that a pretty low nickel price.
You'll pass on an alloy surcharge at spot nickel of high sort of at $20,000-$30,000 a ton. Is that how we should be thinking about it? Or so that would imply that there's pretty strong cash generation and margin gains to come.
More or less. At the end, I follow your analysis. Keep in mind that this has been taking place in March. What we prefer is to anticipate that payment. In a normalized scenario, this material should have been paid 90 days later. So maybe end of June or starting of the third quarter. Consequently, if the issue should have been stopping there, at the end, this should have been this extra increase in the net working capital for the Q2 , and maybe neutralize at the end of the third quarter. As much as in April, we also have done something equivalent, maybe it take a bit longer, and it shall have an effect in the third quarter.
I still consider that in the Q2 , in addition to the nickel average moving up April and May, probably in the Q2 still we must wait some increase in net working capital and the whole illusion of it shall be for the third and Q4 , because at the end, that cash out should not be taking place and consequently, we think the situation shall be normalized. We understand that the first semester we are providing figures of increasing working capital. In this first semester, probably up to May, there shall be some inventory gains because the nickel is going up.
Normally, as normal occurs, our second semester shall be our strong cash flow generator and all the effects also reinforced by this factor we have mentioned of the prompt payment shall be in addition to the strong cash inflow that is expected for the second semester.
Okay. That's clear. Thank you. Sorry, one final question from me. Just, given the well-publicized troubles from the Southeast Asian stainless peer during the quarter and the impact obviously with nickel, are you seeing any changes in their behavior? Just, I suppose you have pretty good visibility given the relationship with them at Baru. I'm just interested if at all those financial impacts have affected how they frame volumes over value or anything like that, or do you expect any changes going forward?
Well, not at all. We have a specific niche of products in Baru that is the one we have chosen for Baru running profitable. Fortunately, we do not have such a big aggressive competition in this market because it's not a more commoditized market that is coming from other players. We are keeping our margins in Baru. We are keeping the double-digit EBITDA in Baru. The momentum there is good. We understand that there is some. It has been this oversupply we mentioned moving mostly to Europe. Also, we appreciate some increase in the States coming from Taiwan.
The one that have been coming to Europe probably was this momentum occurred in June by the circumstances taking place in China, and in addition, in anticipation also for the Chinese New Year, and also attracted by the big gap of prices. Probably this was the situation. A part of this, on the nature of products we are having in Baru, we are keeping our order book, and it appears to be consistent. We are also keeping the margins. Even though the increase in raw materials, the effective transaction prices are accepting that. So Baru now is providing a stable contribution, and we don't expect it to be lower. As I say, we are not in a massive presence in all the markets in Asia.
We are focusing on the nature of products where we can keep that margins.
Thanks a lot.
Thank you, Luke, for your question. Our next question comes from Krishan Agarwal from Citi. Please go ahead.
Hi, Miguel. Hi, Carlos. Thanks a lot for taking my question. Most of them have been taken. One last question I have is on your taxes in the quarter. I can see the cash tax is very low at around EUR 2 million, at around EUR 8 million outflow versus a significant amount, like EUR 60-70 million you had in the last quarter. Is there anything which is keeping this shortfall in the quarter on the cash taxes, and do you see the cash taxes ramping up in the next quarter, in going forward?
No. Just it's an issue, obviously, the taxes and paying off, when we talk about taxes in the cash flow, obviously it's more or less the effect we are having of interim taxes payment and so on. Then the calendar referring to which tax authorities has its own inertia and normally there is a higher, this is a higher tax payment and consequently a higher cash out in the second semester, which is the time in which more or less they have been officially approved and decided the result for the previous year. This is the basis in the chart where appear these other minor effects, and because of that it's appeared as really close figures.
As I said, this is purely the cash out according to the calendar that we are having in the main jurisdictions. We are happy to pay taxes when we are profitable, and as much as we are being profitable everywhere, we understand that, on average, these 23%-25% of taxes shall be paid on a worldwide basis this time in the group. In terms of the effect on cash, it shall be depending on the calendar established by every tax authorities in each of the countries.
Okay. Understand. The CapEx spending in this quarter is looking a little light at EUR 22 million. Do you see another year of under EUR 100 million CapEx or CapEx will, you know, catch up later in the quarters?
No, obviously, in the cash flows, the CapEx is purely effective payment done to the supplier of the machinery. It's purely a temporary. We still keep our targets for the year, which is going to be EUR 140 up to EUR 150. It's purely a temporary issue. It's not something that we provision to be more or less on a constant monthly basis. Consequently, it's purely a timing effect. It shall be higher in the coming months.
We normally always have a discussion among the cash out for paying the CapExes and the increase in assets we have in the accounting as a consequence obviously of receiving the invoices of the equipment we are incorporating. This is purely a temporary issue.
Okay. Got it. Thanks a lot.
Thank you so much, Christian, for your question. Our next question comes from Robert Jackson at Santander. Please go ahead.
Hi, good morning, Miguel and Carlos and Maria. The first question is regarding Columbus. Is Columbus performing better versus Spain? Second, considering that the Columbus exposure to the carbon steel production, is the order book as strong as the stainless steel for the coming months? That's the first question.
Columbus is not affected by the energy cost in Spain, fortunately for them. As we say, this has a big relevance in the actual data. At the end, the margin, Columbus has three profitable division at this time, the steel in South Africa, which is robust, the mild steel, which also remains stable and robust, and also the part of the exports on the stainless steel. At the end, consequently, the three main markets of Columbus are doing well. In addition, the energy prices obviously is not irrational as is the case of Spain. In this regard, at this time, if you put everything in the equation, you understand that Columbus is.
When you take the 20% average for the group, and I say that the one facing the energy was probably in the edge of the double digits, you can understand that the rest of the group should be above. You know, Robert, that we prefer not to disclose figures by country, but more or less your analysis is fair enough and you can understand the picture of the group.
What about the order book for carbon steel, bearing in mind that it is looking weaker for the coming months in terms of guidance from UFA or others? Is that affecting-
No, but keep in mind that the nature of mild steel where Columbus is in South Africa, especially for water pipes and so on, is very stable. In this regard, the mild steel Columbus produce is only for local market and specific for that niche of market where there is no competition. Consequently, this is not affected by the statistics of UFA. This is the niche of product where Columbus is. We are not exporting mild steel from Columbus. This is not our goal, it's not our sector. We are just keeping that niche, that sector, and for local market.
Okay. Second question, regarding Baru. Bearing in mind that, Baru's strategy is price over volume, and considering that prices in Asia have suffered significantly, has Baru been impacted by volumes at all versus the previous quarters?
We are keeping, you know, we are satisfactorily running Baru with proper margins, but with more or less stability in the volumes. As I said before, there is some niche of product in which we can be healthy profitable in Baru, and we are there. We prefer not to be aggressively competing with the commoditized product coming from other sources. At the end, we are not running full, but we are running Baru with a level of price and margins that more or less we feel very comfortable. We are adjusting that for assuring that the material we have is more or less keeping that margin.
We have increased the volumes due to the actual circumstances compared with 2021, but keeping that rationale of our target there is not running full the plant, but is taking advantage of a specific niche of product with a proper margin and with more or less stable demand. I think in that regard, you know, Baru for years was a headache in the group, and nowadays we have driven the business properly, and we are very comfortable on that, with that rhythm of production.
Okay. My third question is related to NAS. In terms of the improvement in volumes in the Q1 , has there been any significant improvement or increase because of the gaining market share, thanks to Allegheny's exit? Are you starting to see that impact in results, or is that yet to come in the coming quarters?
More than making market share, because at the end, you know, we are running full in America since time ago. More than gaining market share, what we are is in position of taking the best margins achievable and be selective on the margins and be selective on the customers and be selective on the specific distributors. At the end, for us, you know, we have a leading market position in America. This is clear. It's not so simple to gain market share, but what we can now is be absolutely much more selective on the other settings in terms of margin. This is appreciated in the margins we are having in the States.
More than market share is being fully selective on the margins of the orders we are taking.
We can confirm that today more than 50% of the melting salt that is produced in the States is coming from our plant, from North American Stainless.
Okay. Thank you very much for the answers.
Thank you, Robert.
Thank you, Robert, for your question. Our final question comes from Bastian Synagowitz at Deutsche Bank. Please go ahead.
Yeah, good morning. Just a very quick last question from my end, please. Miguel, VDM performed very strongly and you seem to be upbeat on margins. It is a business which is obviously more exposed to projects, and as your order book grows, that would usually mean that the effect of better pricing power is still ahead of us. This is probably the stainless business where we are somewhere nearing the margin peak. Do you still see scope to push higher on the EBITDA run rates with the EUR 24 million, which you just delivered?
In general, the market, as you are saying, Bastian, the market is doing great. There are sectors that are coming back. Our order book now is full, and we are also selective on margins. In VDM, we were able to keep the plant running during the COVID crisis, but with lower margin products, and this now is starting to be appreciated. What you say is right and it's fair. Keep in mind that the order book for VDM is long, so this is 6-7 months. This is nothing to provide big distortions on a quarter to the following quarter. It's a trend, but the trend is positive and the trends of margins and efficiency is going up in VDM.
Yeah, this is absolutely fair.
Okay, perfect. Thank you. Just last one, I guess from your commentary, I also infer that there is no supply chain stress in that business for nickel, chrome or the other specialty metals which you're using.
No, not at all.
Yeah.
Not at all.
Okay. Thanks a lot.
We have been running the plant full, and there has been no disruptions.
Excellent. Thanks.
Thank you, Bastian.
Perfect. Thank you so much for your question, Sebastian. At this time, there are no further questions, and I would like to pass back over to Carlos for any final remarks.
Okay. Thank you very much. We have two questions from the web, but as the call is running a bit long, we will contact you directly if you don't mind. Okay, so thank you very much for joining us to this call, and hope to see you in the next report release. No, that will be on July 29th. Have a nice day. Thank you very much.
Thank you.
Thank you everybody so much for joining today's call. You may now disconnect your line.