Good morning, everybody, and welcome to the Acerinox Earnings Conference Call for the third quarter 2021. My name is Carlos Lora-Tamayo, and I am the Head of Investor Relations at Acerinox. First of all, we hope that you and your related ones are okay in these difficult moments. The call will be led by our CEO, Bernardo Velázquez, and our CFO, Miguel Ferrandis Torres. Before getting started, let me remind you that this conference call is being broadcast on our website, acerinox.com. Now I would like to give the floor to Bernardo.
Thank you, Carlos. Good morning, everyone. We're happy to be here today to present this strong set of results. As we are the first company in our sector to present our results, we will try to be brief in the presentation in order to dedicate enough time to the Q&A session. Let me start with sustainability. We will publish an extensive information package at the end of the year in the non-financial report. We just try to summarize in this presentation that we are moving ahead in our goals and that we are putting sustainability in front of our business. We recently were qualified gold by EcoVadis. We recently released our Acerinox sustainable stainless steel, proving that we are one of the real believers in sustainability and the circular economy.
If somebody is interested in obtaining deeper information about this important topic, please contact Carlos or Maria, and we will be pleased to organize a meeting with you. If we move to the nine months results, I think this slide is self-explanatory, so I'm not going to dedicate time with this. I'm sure that you read the numbers and it's not only the strong EBITDA, strong results, but also a strong situation, a strong balance sheet and a strong general situation of the company. Before we start with our numbers, I would like to explain a little bit the general situation of markets. First, during this COVID crisis, we have experienced different stop-and-go phases in all the industry activity.
We have been. These phases have been different in length and duration and the time that they stop in all the countries. Second, all the companies in all countries prepare themselves for a long crisis by reducing personnel, sometimes temporary or not, and by reducing inventories. We all experience a simultaneous recovery once we knew about the vaccination process or the success of the vaccination process. That means that we were stopping and starting in different times with different lengths in all the countries, preparing the companies with low personnel and low inventories. We experience suddenly the same recovery process at the same time in all countries. What is the consequence?
The consequence is that we are living a chaotic starter process, that we realized the need to replace our inventory levels. We didn't have enough inventories to attend the demand. At that time, we found that the supply chain was totally emptied in all the sectors of our activity. In this picture, we saw that all markets performing strongly at the same time. Trade measures and quotas all around, and less availability of goods on road and maritime transport, high freight costs, and extended delivery times. That led us to the current situation. Like there's disruptions in the supply chain, prices going up in most of the commodities and most of the industries, long delivery times, low stock levels, and difficulties to increase and replace stocks, and how these facts are affecting us.
This is what you can see here in general, and summarizing that we have a very strong order book, that we have more visibility, that we are enjoying higher margins, that we are coming back to a more regional business after many years with the explosion of the Chinese production. We experienced a total globalized industry, and now we are moving back to a more regional business because everybody is not, it's not only transport, it's not only trade measures, not only availability and delivery times, it's also that everybody's redesigning the supply chains. This is very positive for the European and the American players, and this is the current situation. This is more or less what you can see in this slide. It's a good general situation, good performance of Acerinox.
Now, enjoying the current situation, but never forgetting to keep working capital under control, to generate cash, and to keep our traditional cost efficiency that we have improved with all the excellence plans in the last years. In a better situation, not as good as the previous situation that we experienced in 2006 or even in 1998. With lower prices, we can enjoy higher margins because of the efficiency that we have got during these years of hard working. This is more or less what we are presenting in these numbers. After this brief explanation, I will pass the floor to Miguel.
Okay, thank you. On slide number six, you can appreciate more or less the constant growing EBITDA we are experiencing since five quarters ago. What is definitely clear to remark is that at the end, our good position being extremely well diversified, not only geographically, but also in product mix, has allowed us to take advantage of several tailwinds that have been coming gradually, most of them blowing in the same direction. We start to see the recovery in Q3 2020, but then obviously the strong performance of the American market reacting first. Later on, the huge improvements also in Columbus, mostly driven by our diversification in product mix, bringing new types like the mild steel that has been extremely successful in its margin for Columbus.
Also, the remedy of the oversupply in the Asian area create that also Bahru start benefiting from proper margins. The reactivation of the market in Europe, the reduction also on the offering side in the American market through the exit of Allegheny of the stainless create also the fact that the situation in the market was improving in addition in the States. Gradually, after a strong period of strong order book improvements, also VDM in the high-performance alloys division now is experiencing a double-digit margin, and most of it is appreciated in the third quarter. At the end, what we are facing is that we are benefiting all around our product mix, all around our divisions, and all around our geographical presence.
We are actually appreciating that the tailwinds are moving in the same direction. When we analyze these combined effects in the third quarter, we appreciate that we have reached this EBITDA figure of EUR 293 million. We were extremely satisfied, as you may remember, when we present our Q2 figures with EUR 217 million EBITDA. Now we have improved this figure at 35% for reaching this magnificent figure, which makes us a global EBITDA margin in the group of 17%. In addition, as has been stated also, it's an excellent time in terms of cash flow generation.
We have made, even though in these circumstances, and even though the moving up of the net working capital of EUR 134 million, we are able to face that, obviously. Our balance sheet is extremely strong, and we are able to take advantage of this. Even though the increase in net working capital, we have generated an operating cash flow of EUR 77 million. If we go per division, in the stainless steel, we are experiencing the best quarter in the last 14 years as the combined effect, as we are mentioning, of improvements all over the world.
Also this is a timing which is more easy to appreciate what has been the combined efforts of everybody in the last year through all the excellence plans, all the cost reduction exercise we are doing, the Excellence 360º that we are actually now improving. At the end, all these facts bring us to these results, which allows us to have an average EBITDA margin in the third quarter of 18%. This is we think an excellent demonstration of all the homework we have been doing in the last year. In addition, this creates also as occurs in the for the whole group, a positive cash flow generation of EUR 65 million, given the the necessary increase in working capital to be aligned with the good market momentum we are experiencing.
Keep in mind also that these figures still are facing some difficulties. We are talking about tailwinds, but let's keep in mind also that there are some issues affecting most of this quarter. Malaysia plant, Bahru Stainless was shut down as a consequence of the government decision because of the COVID. There have been other circumstances we are seeing as we shall talk probably later in detail, increase in energy costs. Even through that, we are experiencing these remarkable margins. When we go to the high-performance alloys on page nine, we always state that we are long-term runners, and our strategy is long-term design. We make the acquisition of VDM in March 2020 when the COVID was starting and affecting the whole world.
We always state clearly that this has an absolute strategic improvement providing for the group. We appreciate the improvements and moving through the High-Performance Alloys. It's clear that this sector has been affected by the COVID, but four quarters later, we are back at the level of profits we always mention. We always stated that the High-Performance Alloys should provide us a two-digit margin EBITDA, which was the level prior to the COVID crisis. We are there. The EBITDA margin in this quarter has been 10% as always previously announced, that this should be the normalized level. Also we always stated that the contribution and the normalized contribution of the High-Performance Alloys should be around EUR 7 million per month. We are there.
We have obtained this quarterly EBITDA of EUR 21 million, 10% margin. This shall go up and definitely fit all the synergies that we always have been stating that were there, shall be gradually coming, and therefore we shall also experience improvements from these levels. What's true for the high-performance alloys is that the electronics has performed strongly during the last quarters. The chemical industry also. Now the oil and gas is back. A part of the increase in the order book we appreciated, and we mentioned in the second quarter. In the third quarter, this also has been bringing to the high profitability.
Also, the high-performance alloys division has shown excellent discipline in terms of working capital, and this has allowed to have this figure and this operating cash flow of EUR 12 million. Not everything has been a tailwind for the HPA division. Keep in mind that in July, Germany and the west part of Germany was strongly affected by all the flooding. In this regard, we must say that even though some of several of our customers were affected by the proper measures undertaken for years in the plan for avoiding this flooding and the performance of our teams during that time mitigated that for the profitability, for the efficiency, and fortunately for the plant, there were not huge damage as a consequence of that.
If we go to the page number 10, which is something that if in this year we are extremely proud, a part of the margins and a part of the results is the free cash flow generation. You can appreciate in parallel the figure for the Q3 and the figure for the year- to- date of the nine months of 2021. If you remember the driver of the cash flow generation in the last year, 2020, in which we have an operating cash flow of EUR 420 million, was as a consequence mostly of a strong working capital reduction. We demonstrate our flexibility that time, and that was the driver for the positive cash flow generation.
In this year, what's true is that we have been able to develop and to raise working capital as is clearly appreciated here, almost EUR 400 million of increase in working capital January to September. The extremely good margins and the extremely positive EBITDA has allowed us to, even though facing that necessity of working capital for accompanying the market in this recovery, we have been able to keep EUR 77 million cash flow in the quarter and EUR 194 million accumulated cash flow January to September. We think this is a remarkable figure, and as we stated in the second quarter results presentation, probably the best quarter in terms of cash flow generation we consider shall be the fourth quarter. There still is more room to grow and to improve.
The conclusions are clear on page 11. As Miguel said, we are long-term runners, and we are now experiencing the benefits of our long-term strategy. This is clearly evident. Market conditions are continuing to improve and the visibility remains good. The Stainless Steel section is still producing exceptional results. The HPA section has returned to normalized levels, to pre-COVID levels, after the project business started to recover in March this year. Now, as Miguel said, we have a good order book and also increasing our margins. Also that our discipline in capital allocation, remember, cash is king, and we haven't forgotten yet, you know, this sentence, cash is king, and we are keeping our discipline in capital allocation.
As a result of this, our debt levels is at a very comfortable level. Of course, COVID-19, still COVID-19, cost inflation and supply chain constraints and surprises coming from the recovery of the COVID crisis remain a challenge for Acerinox and for all the companies. In this scenario, we can say that we expect Q4 EBITDA to be slightly higher than Q3, and that, as Miguel mentioned, the cash flow generation is going to be strong in Q4. If we achieve these results, we will achieve the best results of the year ever. This is all from our side.
Thank you, Bernardo and Miguel for the presentation. Let's move now to the Q&A session, please. Operator, please go ahead.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad, or if you would like to withdraw your question, please press star two. The first question today comes from Krishan Agarwal from Citigroup. Please go ahead.
Hi, Bernardo. Hi, Miguel. Thanks a lot for taking my question. Can you talk about a little bit more on the VDM as in how the order book is looking like? Miguel mentioned, okay, German floods impacting the order book and the customer. How should we think about VDM going ahead, especially in the context of, you know, synergies I'm expecting you realize significantly in this quarter and you will realize in the Q4 as well? That's my first question.
Thank you, Krishan. The order book is, you know, after, as I mentioned, after we started closing some projects that were stopped for a long time. We started to see a recovery of our order book. Now we are more selective and we are more focused on margins, but still the order book is very strong. So the visibility we are now facing, an unusual visibility in stainless steel, is for more than three months, in the product business is even more. Now, we can say that we have a strong order book for Q1 and probably for Q2 as well, and increasing margins. The second part of the question was, yes, synergies.
We prefer to keep the information about synergies for the first half from the whole year. No, we are making progress on this. We will present a deep report with the year-end. What I can tell you is that we are going ahead with our synergies. We are going ahead with our trials in all the mills, producing HPAs in the stainless steel plants and stainless steel in the HPA plants. What is more important, we are experiencing very good synergies in the commercial side. I think that our customers are happy to realize that they can get both a high nickel alloys and a stainless steel in the same place, in the same supermarket.
This is the most important thing, that we are now supplying projects with stainless steel, and we are selling high-performance alloys to our traditional stainless steel customers. This is the most important thing that we are realizing, and it's very clear today that what we said at the beginning, you know that one plus one is more than two. VDM plus Acerinox is much better than Acerinox and VDM alone.
Okay, understood. Thanks a lot. My second question is on the capital allocation. I mean, Miguel mentioned that Q4 is going to be, you know, better in terms of cash flow. The net debt is significantly lower versus the last year, and cash flow generation for next year is also looking good. In that context, I mean, how should we think about, one, CapEx? I mean, your guidance for EUR 110 million is looking kind of optimistic for 2021. Then broadly, I mean, are you happy to present that EUR 0.50 dividend, kind of a prognosis to the board for a cash return?
You are in that thought process of, you know, propping up the cash return, probably some higher dividend or maybe some buybacks, in the next 6-12 months.
Thanks for the question. You perfectly defined what we are thinking. Now, it's the same equation. We have in the same equation, CapEx, dividend or buybacks, and of course, debt. You know, and you know that we always look at the debt or the EBITDA debt ratio, not for one year, but through the cycle, because remember that we are in a cyclical business. This is the equation that we are discussing today. We are trying to allocate our CapEx. We are going to, of course, keep our dividend. No, it's we will not reduce the dividend as it's a tradition in the company. We are considering the different allocations that we can give to our cash.
This is something that we are studying, that we will submit to the board of directors, and that will be decided before the end of the year. We will do the best to increase the value for our shareholders.
Okay, got it. Any guidance for the full year CapEx this year? EUR 110 million is looking a bit optimistic.
I cannot tell you. It's maybe we are now at a level of 100, but will depend on the opportunities and the profitability of the CapEx that we're going to get. This is something to be discussed, but I cannot promise today that we are going to increase it, just keep it as it is.
Okay. If I can push you a little bit. You've been running at the CapEx of close to EUR 120 million for the past three years. Is that the sustainable longer term run rate for the CapEx? Or should we have a higher CapEx in our models in the long run than the current run rate?
I think from today, it's okay. With this CapEx, we are covering, you know, all the expenses that we need for maintenance, for digitalization, for sustainability. We have the CapEx that will lead us to get the goals of the sustainability plan. If we need a further uses of our cash, we will increase it of course. Of course, that we are also considering to invest in growth in both the stainless steel and HPA division, but this is something that we cannot disclose today.
Okay, understood. Thanks a lot. That's it from my side.
Thank you.
Our next question comes from Luke Nelson at JP Morgan. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my questions. Three questions on my side. Firstly, just on NAS pricing, there's been four price increases announced year to date. Can you just give a sense of the quantum of the average price realized in Q3 and how much more ASP growth we can expect in Q4 relative to Q3 in NAS? That's my first question.
Good morning, Luke. Thank you for your question, but it is difficult to speak about prices these days. You know, I think NAS is enjoying the market. We have announced like four in total five price increases during the year. Now, according to the specialized magazines, we have a level of $3,940 in September US dollars per ton in the American market. This is all that I can say. We cannot speak about prices with our customers. You know, the NAS is performing very well, and the American market is performing extremely well.
Now, we are trying to increase prices or put the level of prices to the level of demand that we have, and always trying to look after the American market and always trying to look after our customers. We don't want to squeeze customers. We are not here just to get record results this year, no. We will have to serve this customer next year and later, and we want to have loyal customers.
Okay. That's understood. Secondly, you touched on it in your presentation just on electricity. Obviously, taking into account your footprint is not as European-focused as some of your peers, but can you maybe just give a sense of the exposure of Europa to power and natural gas? Then also, I suppose, throw into that any headwinds with VDM. I'm just trying to get a sense of to what extent there is some natural gas and power inflation in Q3 or there could be a bit more of a step-up in Q4.
Electricity is a challenge today, but especially in Europe and especially in Spain. Natural gas prices are increasing in Europe, but at a reasonable level, the same as electricity. We are not suffering this effect in South Africa or in Malaysia, and the problem is focused in our Spanish plant. What I can say is that electricity is a problem in Spain. I've been declaring this as, you know, in the association of the Spanish steel makers, and this is a country problem. You know, as we have declared sometimes, this is costing us a level of EUR 8 million-EUR 9 million per month. You know, something that we have declared to the media, already declared, you know.
This is what we can expect. We don't see the prices are going to move further in this direction up. This is something that we have to resolve in Spain. You know, we are looking for long-term contracts. We are looking for PPAs or increase the number of PPA. We already have a portion of our electricity in PPAs. We are moving to more renewable energies in our mix. You know. This is the current situation, and it's something that we are experiencing today.
Just to push you on that EUR 8 million-EUR 9 million per month, is that an incremental additional cost or is that just the total energy, power cost?
This is the total energy cost that we are paying today on top of the average of 2020.
Okay. Okay, thank you. Final question from me, just on Section 232. Obviously, there was the announcement over the weekend between the EU and the U.S. Can you maybe just talk about, firstly, any financial impact? I'm not aware of any sort of significant intracompany trade flows, but if there are any, to what extent that could be a positive for Acerinox? Then secondly, maybe more broadly, just the market impact you expect potentially with any redirected trade flows from Europe towards Americas, if anything. Just interested to see your views on that.
Luke, still these news are very recent, and we don't have enough analysis because the EU or the American commerce secretary haven't published the reality and these numbers. The first thing that I can tell you is that we are very happy. We are very happy with these new measures because remember that only one year ago, we were wondering if we were going to lose Section 232 measures because the new Biden administration. I think that the Biden administration has realized that the Section 232 measures are good for the country, are good for the industry, and they are supporting these measures.
As it was also expected, they are trying to go back to the traditional partners. You know, I think that the Europe and America cannot be in different sides, you know, in different parties. Now they have negotiated the exemption in Section 232 that is good for the market and is good for the relation between the two regions. We cannot say that is bad for our market. You know, First of all, because still we don't know the numbers, still we don't know the volumes that we are speaking about.
If it is at the level of what Korea or Brazil or Argentina got before in the exceptions of Section 232, the amount of material is not going to be significantly higher than what Europe is today exporting to United States based on exceptions.
Material is exempted because the certain agreements between European producers and American customers. The impact is not going to be very big. Even considering the worst effect that can have for the market will be less than the production that Allegheny is not producing today. In the worst scenario, it's going to be much better than one year ago. I think it is even good for the American market because the situation will release some pressure from our market.
That's very clear. Thanks a lot for your answers.
Our next question is from Alan Spence from Jefferies. Please go ahead.
Good morning, guys. I've just got two quick questions. The first one is around Bahru. It was effectively shut down for about half of the quarter. Could you give us the range about how much of a drag that was on the quarter?
Yeah. Bahru, at the end, it was imposed by Malaysian authorities, the shutdown due to COVID. This has been taking mid Q2 to mid Q3, so it has been split among the two quarters. In any case, what's clear is that the timing and the momentum in Bahru is positive. The reduction of the oversupply that is experiencing there with the cancellation of the export rebates in China and probably the production cuts that also are experiencing there are reducing this oversupply that has been the driver for the Asian market and even for the exports to the rest of the world for several years. So this is allowing to improve the margins in the area, and consequently, as soon as Bahru start operations, which occur mid-August.
Mid-August and then September, we have been able to achieve very remarkable margins and positive EBITDAs also in terms of two digits. We have made a good preparation by going there as soon as the activity was open, and this is what we are now experiencing. In terms of the order book, in terms of being able to choose the most profitable margins, in terms of the product mix, the momentum is positive. We have been affected Q2 and Q3 by the official shutdown, but now we are benefiting from that situation.
Okay. Thanks. For the quarter as a whole, that was helpful about kind of what it did in the second half. Was it able to achieve EBITDA breakeven for the entire quarter?
Yes. Yes, sure.
Okay.
We don't have that one.
Okay. Thank you. My second question is just to come back to VDM. You achieved your double-digit EBITDA margin target in Q3, and you've been talking about some good visibility for Q4, and you know, even potentially into a bit of Q2 for that division. Do you see a further progression in the EBITDA margin, or do you think that 10% is gonna be where you're settling out for the next few quarters?
Well, keep in mind that in VDM, I think we have been there sooner than expected. We mentioned at July presentation that we should be in pre-COVID levels for the fourth quarter. We have been in pre-COVID levels in the third quarter. The momentum October, November looks better. The first part of this year, the strategy in VDM was more filling the mill. Actually, we are allocating to take the best margins, and consequently there still is room to improve. The Q4 shall be healthy in VDM. Obviously, the Q4, we have the seasonal slowdown in December, but in general, we are by far keeping this two-digit EBITDA we are mentioning as a whole for the quarter.
As a consequence of the full order book sectors that we have been mentioning that are coming back, the energy, oil and gas is there. This allows also us to improve margins. This effect combined with synergies that gradually are coming there gives us the full confidence that still is room to improve in VDM. What is more remarkable is that we have been there sooner than expected, but I think we should even improve actual margins.
Okay. That's very helpful. Thanks, guys.
Our next question is from Carsten Riek from Credit Suisse. Please go ahead.
Thank you very much. A couple of questions from my side. The first one on the alloy prices and potentially inventory-related gains in the third quarter. Could you give a bit of color whether this impacted the third quarter or rather not? Because it was quite volatile with regard to the alloy prices during the quarter.
Let me find the numbers .
The inventory gains were where we give you some disclosure in the margins. Keep in mind, Carsten, that t his is not the time. The driver of the profits in this year is not coming as a consequence of the nickel revaluation. When we are comparing and we are seeing that this is the second quarter or is going to be the second quarter ever, and then we will be very confident on that. Keep in mind that when we compare with the previous peak, which was 2006, 2007, at that time, every single day in 2006, the nickel price at the London Metal Exchange was going up. Most of the profitability at that time came as a consequence of the revaluation of the nickel. Nickel has been the driver of our sector for years.
But in this year, 2021, the driver of what we are experiencing in the market is a strong improvement in activity, almost in every sector after a strong correction because of the COVID year, and a gradual improvement in the margin of every product mix. The driver this time is not the nickel, and consequently, the nickel revaluation in our inventories. It may be some effect, and maybe at the end, in average, has been some increase in the nickel price during this quarter as appeared also during the first quarter. This is, in these times, this is probably not the driver of this profitability.
The driver is increasing activity, running most of our plants almost at full capacity, being able to choose the best margins, and then consequently being affected by that. This is not driven by external factors such as could be the nickel revaluation.
Let me add now that we are moving to a record year. We are comparing this year results with 2006. In 2006, nickel reached the level of 41,000, if I remember well. Moving from 20,000 was double the price. This year, it is moving more or less between 18,000 and 20,000. It's more stable. It is stable compared to last year. That time, the electrical charge in Europe went up to EUR 3,200 per ton. Now we are at the level of EUR 2,100-EUR 2,200 per ton. It's EUR 1,000 per ton less than at that time. Of course, more stable. I fully support what Miguel has explained.
Perfect. That's very clear. The second question I have is, and I don't raise this question very often, but we have the highest stainless price difference, cold rolled 304, between Europe and the U.S., at least as I have records, which is 20-25 years. We are about more than $700 premium in Europe compared to the U.S. Do you believe this is actually a sustainable level? Because historically, we had actually almost no premium or discount between those two areas. What is your view on this one?
Carsten, I think that first of all is that I do not believe that this is the true difference between the two markets, because today there's a mess in the information that we are reading about prices. It is a mess because as I mentioned, that there's a chaos in the recovery process. There is a chaos also in this kind of information because we are mixing what United States is delivering to the market in the month that we are seeing. Now we are speaking about November prices in United States, November delivery time in United States. We are comparing these prices to what some European distributors are negotiating with some customers for delivery in May or something like that, no?
Even for spot prices when material is very difficult to be found in the market. There's a mix of information that so we have tried to explain to these kind of magazines because I think they are confusing the markets. You know, as you mentioned, this is unsustainable. There's always an equilibrium between the two markets, you know?
Yeah. Okay.
Even with freight, the high freight cost cannot be true.
Okay. Perfect. That's very helpful because I was just a bit confused here as well because I just saw the numbers. Perfect. That were the two questions I had from my side.
Thank you.
The next question is from Patrick Mann at Bank of America. Please go ahead.
Hi. Thank you very much. Most of my questions have been asked. I did just want to follow up a little bit on electricity and energy costs, in Europe or Spain. I mean, if prices stay elevated, are you fully exposed already? I mean, so if prices stayed here, would we see your costs already reflecting that? Or, you know, would you expect costs to go up further? Or I suppose another way to ask the question is, you know, how much of your electricity purchases are on spot and how much are contracted or hedged, at the moment? Thank you.
Well, the electricity, no doubt, is one of the factors that is spoiling the competitiveness, mostly of the Spanish plant. I think in this regard, the situation is more rational in the States or in South Africa. In the case of Acerinox Europa plant, we are being affected. This has been a gradual increase in the prices, but most drastically appreciated in the last months. Especially September, as previously Bernardo stated, we are seeing extra cost compared with equivalent September of last year of around EUR 88 million.
In a time in which we are improving recurrently the margins and improving the product mix, moving margins as a consequence of gradual increase in better order taking and the mix of term contracts compared with more short-term contracts is coming gradually to our PNL. This is something that we are observing and fortunately is not so well appreciated. When we analyze the long-term curve for the nickel, we see that it's unanimously contemplated that it is not going to be stabilized at this level or even growing. Probably any time in the second half of next year shall be some relaxation.
For the time being, we are benefiting and our margins are improving month after month because the actual activity volumes and the strong demand allows that. For us, no doubt it is a concerning fact. This is something that we must face, that is losing the competitiveness of the European industry. We realize that there is actually a big claim among all the European industry for solving that. In terms of our electricity strategy, this is something that is confidential, so we cannot disclose on that. Just let you know that where we are more affected is, obviously, in Acerinox Europa and we hope that sooner than later, this should be rationalized a bit from actual levels.
We hope that probably the worst is to be suffering in the fourth quarter. Even though the margins in the fourth quarter we expect for Acerinox Europa are going to increase. Energy is relevant as a cost issue for our industry, but it's not as critical as in other sectors.
Okay. Got it. Thank you very much.
The next question comes from Tristan Gresser from Exane BNP Paribas. Please go ahead.
Yes. Hi. Thank you for taking my questions. The first one maybe on European base prices, to the comment you made earlier. You're saying there is a discrepancy between data providers and what you're seeing on the ground. I think what we're looking at from data providers in the European base price of EUR 1,800. What is the level you're seeing that is maybe closer to U.S. base prices level?
I'm sorry, but we cannot answer this question. No. Price information is very sensitive.
All right. For the European market, are you now fully back to the dual pricing system that was not working over the past two, three years?
Yep, this is true. Fortunately, we are now in the system, the alloy surcharge plus base price.
Okay. Maybe another question there. Do you think that the recent momentum we've seen in European base prices is also due to the energy inflation? Do you believe that the supply and demand dynamics into year-end could support eventually a further price increase?
You know, I think that prices is always a question of production and demand. You know, sometimes, you know, if you remember in recent years, we have been suffering price increases and cost increases, and we couldn't pass it to the customers. This is now different situation. The customers want to buy more material. They want to assure the supply, and they are paying more. It's a question of a healthy market supply and demand. That's all. If we can increase our prices, it's because our customers would like to pay more, but not because we have a higher cost.
All right. That's helpful. Maybe another one on scrap. The discount between scrap prices, stainless scrap prices and the corresponding kind of virgin raw material basket has reduced quite significantly over recent months. If you could maybe touch on what is driving that and if it had any specific impact on your raw material costs. Also, if you can touch, I think the European Commission is discussing a potential export scrap ban. What consequences could this have for you?
Of course. Again, I cannot speak about the scrap discounts or scrap prices, but what I can tell you is that there's enough availability of scrap in the European and the American market. Sometimes people are confusing the situation between carbon steel scrap and stainless steel scrap. You know, because of these movements to sustainability to reduce CO2 emissions, many carbon steel producers are moving from blast furnaces to electric furnaces, so they need more scrap. But this is carbon steel scrap. Some people can think that in this balance there will not be enough carbon steel scrap in the market. In stainless steel, all the producers except the Chinese or Indonesian using nickel pig iron, the rest of the producers, we are all using stainless steel scrap for many years. No?
The situation is the same. It's not changing. We have enough availability.
All right. Thanks a lot.
Related to the ban. You know that the European Union is never supporting this kind of measures, you know. R aw materials ban, it is something that is going against the WTO rules. Another thing is that there's a limit to export waste or. This is something that is under consideration, but still there's no nothing related to this.
All right. Thank you.
Our next question is from Bastian Synagowitz from Deutsche Bank. Please go ahead.
Yes. Good morning, gentlemen. I've got two questions left, please. The first one is just following up on Bahru. Miguel, can I push you a little bit more here to tell us what the negative impact from the Bahru closure has been in the course of the third quarter in EBITDA terms?
As I said before, since Bahru is back, the second half of August and full September, we have been in the range of the two-digit EBITDA. The previous month and a half, it was closed. The average at the end, more or less, you can assume that shall be a positive EBITDA margin of around 6%-7%. That's that because we have been non-working a month and a half. That's the situation in Bahru. Bahru already start appreciating very healthy margins coming, you know, after difficult years prior to the closure. It was a pity that the plant should be closed for that period, but the recovery had a start earlier.
As you know, Bahru, for several years, this effect of the oversupply in the region, mostly driven by Chinese and Indonesian exports, spoiling the margins in the area. The situation has been improving most of 2021. Bahru started experiencing positive margins early in the year. It was probably stopped as this political decision for these two and a half months, unfortunately, now is there. In this range, what we are actually doing now is optimizing our production in this last part of the year in order to recover the sales that spoiled us during that period. Consequently, the fourth quarter in Bahru, we expect it to be strong.
Okay. Very clear. Basically, we have to think about it in a way that you probably lost about, say, EUR 10 million-EUR 15 million every day in the first half of the third quarter, and then basically fully caught up for this in the second half of the third quarter. Hence, obviously, your run rate margins, which you carry into the fourth quarter, will improve a lot.
In general, yes. You know you prefer not to enter in so strict details, but more or less the basis are and duration is there. It's going to be a good
Okay. Great.
A good and healthy quarter for Bahru.
Okay. Thanks, Miguel. Then secondly, more generally on the group, if we look at the margin drivers, obviously, for the month and quarters ahead, you obviously already said, costs will go up and despite the significant increase in energy costs in the European business, your margins will go up. Nevertheless, you've had a couple of price increases in Europe, and then I guess what you haven't talked about much is obviously the annual contracts, which will be resetting, and I guess they will be resetting only as of the first of January next year. So is it fair to assume that like status quo today, we are only going to see your peak margin realization in the course of the first quarter from what you can see today?
Well, as we have been stating, we have several tailwinds. We have only in these days one headwind, and the headwind is no doubt energy in Europe. We must face that. It is affecting us as we have mentioned, but we hope that as much as it is, it is not going to be there at these levels forever. It shall be gradually more rationalized. We must be prudent for our budget, obviously, in the first half of next year, assuming that maybe still energy remains high. We, as much as you say, are improving our margins because as you stated, the term contracts that are taking most of this year are averaging with the high prices that actually can be achieved in the spot market.
Probably in the first quarter next year, the margins should improve for Acerinox Europa. In this regard, the effect of suffering a whole quarter expensive energy cost shall be at the end, fortunately, compensated by better margins in the retaking. All the negotiations we are doing for the term contract for the coming year, obviously are taking from the basis of actual prices that are substantially above the prices we were discussing in November, December or January last year. The situation has changed dramatically. As we mentioned before, we started or we finished last year in a clear target of filling the mill, and now we can be much more selective with the margins. This shall be appreciated and shall more than compensate the increase of energy costs in Europa.
Okay. Very clear. Thanks, Miguel, and thanks for taking my questions.
Thank you, Bastian.
The next question comes from Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Hello, good morning, and thanks for taking my questions. A few left from my side. The first one, the balance sheet is strong and cash flow generation is improving, so you seem to have greater flexibility to reinvest in the business. Can you talk about some of the initiatives you are considering across the group and specifically in the U.S., where much of production is well below capacity? I'll stop here for the first question. Thank you.
Well, in general, the situation now is still we are obviously fixing the strategy and planning and the programming for the coming year. We are running most of our plants as full as the order book now is full everywhere. Now we are also redefining. We have changed our product mix, and consequently, some of the historical figures we were mentioning of our nominal capacity in some of our plants now are not the ones we actually can achieve. Consequently, what is clear is that we have been very strict in the last years in view of the situation of the market. We have prioritized, obviously, the cash for the business.
We have been making the necessary CapEx with great discipline for saving cash for the group. Now we are in a growing period, and what we must analyze is how to increase productivity for obtain the best margins and cost savings everywhere. In addition, we have obviously several investments that must be done in accordance with all our sustainability targets. This is something to be appreciated. Also, in addition, we have a growth CapEx, and I think we have growth CapEx from in our actual plans. As we have been stating, for us, we always consider that our diversification through the high-performance alloys was a natural area also for growth.
We understand that we have a way of improving also and maybe expand through further consolidation or acquisition in the world of the high-performance alloys. We are open also, and we have our radar studying possibilities. Consequently, in these times, we are fixing the strategy for the next year, areas to growth, areas to invest, and it is something that shall be probably clarified and discussed internally from now to the year-end. At that time is when we shall make probably the necessary comments for you to understand which is our expectations for the coming year in terms of CapEx, capital allocation, and also in terms of distribution to shareholders.
If I can add something, I would say that, you know that we always said that we are experts in debottlenecking our plants. We are continuously investing or continuously analyzing where the bottlenecks of our plant are, continuously investing in the areas that we can improve or structurally improve our situation and our business with a fast return, in fact, a fast capital return. This is something that we never stop doing. We have been doing this during the crisis, so we have invested during the crisis, and we will keep on investing in these kind of things. As you mentioned, in the United States, we still haven't reached the 100% of our capacity utilization.
Of course, we are studying how can we reach this and how can we debottleneck our melting shop and the rest of the lines to increase capacity. To increase production and of course, even to increase our capacity, you know, because this is something that we regularly do, is this, we run our lines many times to more than 100% capacity utilization. Now, this is debottlenecking the equipment and considering everything, efficiencies. The utilization is also key for this, you know, because we will increase our productivity and increasing productivity, of course, we will increase our capacity, you know. We're busy with this, but please keep in mind that we want always want a structural growth of our company, you know.
VDM is a clear example of this, and the traditional investment in production capacity is a clear example, you know. Always focus in a structural growth.
Thank you very much. Maybe a follow-up on this. You talked about the sustainability investments that you need to undertake in order to deliver your carbon reduction targets. Europeans have come out with a more detailed roadmap and how much they're willing to spend over the next decade. When do you think you're gonna be able to give us a bit more clarity on all the moving parts and the overall CapEx you expect as part of these initiatives?
Thank you for the question, Ioannis. We are busy with this. We released our sustainability plan. We are now preparing the roadmap, and I think that we will be ready to present it with the full year results. Now, this I think this will be more or less the timing, you know, because now we have a plan by plan trying to understand the needs and trying to think what to do. You know, in sometimes, in some cases, like in Europe or in United States, we have access to PPAs. In some other countries, there's no access to PPAs.
We have to study if we will invest by ourselves and what we can do and how can we make the most of our efficiency and try to reduce CO2 emissions through utilization of our heat gases and these kind of things. It's a deep study and we are busy with this, and we will present it probably, most probably, you know, with the full year results.
Okay, that's clear. Very last question from me. In the past, you talked about a target leverage of 1.2x net debt to EBITDA. I understand that that's a through cycle average, but can you talk about how you look forward in terms of the earnings part of the business? Because if we take a 10-year historical average EBITDA, you have invested in the business, we are in a better point in the cycle. How should we think about that when you consider your either buyback or higher dividend for the full year? Just interested to hear your thoughts on that.
Well, as you mentioned, we always state the 1.2 and in our sector 1.2 is an ambitious figure. As averaged through the cycle, we still consider it an ambitious figure. In any case, it's clear that this year we're going to be substantially below that. At the end, when we analyze the figures and the net debt at this time of the business, keeping in mind that just one year ago, we increased our debt in EUR 400 million through the acquisition of VDM, EUR 313 million for the purchase. We also absorbed existing debt of VDM of EUR 85 million. Almost EUR 400 million was raised our debt last year as a consequence of that.
In this year, net working capital has increased also, which has been our first allocation of capital in this year, but has also increased in the range of EUR 400 million. Our actual figure of net debt of EUR 760 million is more or less covered by these two circumstances. The momentum is extremely sweet. The cash generation, as we mentioned in the first quarter, is going to be strong. We shall finish this year with probably extremely consistent and strong figures. We understand that this is not going to be the average for the cycle. As Bernardo mentioned, we must think in additional growth, and this is to come.
Consequently, the equation or the sudoku now is find the proper balance among growth, investing in the business, obviously a distribution to shareholders, and be in position of facing whatever time of the cycle and with strength. Just one year ago or 15 months ago, we were in a clear demonstration that we had liquidity enough. The market was facing challenges that never were foreseen before. What we must be is flexible for keeping our strength and our strategy at every part of a cycle.
In addition to what Miguel has said, I would like to mention that this is not just an automatic movement. No. That you reach 1.2, and then you take a decision immediately. No. I think that we need to find the best time to take the right decisions.
Thank you very much.
Our next question is from Alain William from ODDO BHF. Please go ahead.
Yes. Good day, everybody. Thanks for taking my question. I have three, please. First, can you give us more granularity into your end markets, just to understand what's driving this strength? Second question, regarding the change in working capital requirement, what should we expect into Q4, specifically? The third question, I guess the shareholder structure is more open following the exit of Nippon Steel. Is it a concern for you and the board, and do you have some kind of protection against a hostile approach?
Thank you. Thank you, Alain. Let me start with markets. I think markets are performing very well in most of the sectors, you know. In the case of stainless steel, we started in the summer of 2020 with a very good performance, especially in the appliance sector and the rest of the sector were coming sequentially. Now we can say that everything is more or less moving in the good direction, except there's some exceptions, the car industry because of the problems with the supply chain. We can see today, of course, appliances is very healthy. The food processing industry is very healthy. Everything related to catering, to refrigeration, to industrial equipment, everything is moving fast. Everything is very good.
In the case of stainless steel, probably the only sector is automotive industry because of the problems that everybody knows. In the case of the high-performance alloys, it's more or less the same. Even in this case, we haven't been affected yet by the. We haven't been affected in the automotive industry. We are supplying our customers regularly, and we haven't suffered any decrease in the demand from this sector. Electric and electronical appliances is extremely healthy. The chemical industry is also booming. Oil and gas is back. There's a lot of projects moving in the world, not maybe we think that oil and gas is dead, but from the European perspective.
Some other countries like Brazil, like, in the Middle East or even some projects in the north of Europe. In the North Sea are moving, so oil and gas is also okay. If we miss a sector, this is aerospace. It is the only one that we can say that is still not moving. Some of our peers, Allegheny mentioned that in public declaration that this sector is moving up, but still we haven't seen this recovery in our order book. Miguel.
Yes. Your second question was regarding working capital for the Q4. As we explained before, the tailwinds almost everywhere have been coming gradually. This move that we experienced a strong working capital increase in the first quarter, but followed by which was around EUR 150 million, followed by another of EUR 100 million in the second quarter. Again, in the third quarter, more or less, all these tailwinds that have come almost everywhere made an additional strong increase in working capital in a range of around EUR 130 million. Having said that, the situation now with all the tailwinds now being actually there, we do not expect big changes in working capital in the fourth quarter.
At the end, this shall not be as substantial in the fourth quarter. Maybe, obviously, it's more difficult to predict now considering the slowdown in the last part of the year in some of the markets and the closing less activities or less weekend activity in December and so on and so forth. It's very difficult to predict the figure of inventories, but more or less what we are seeing now is that working capital shall remain flat or just some increase, but not so relevant as has been the case in the previous quarters. As a consequence of that, most of the generation of the EBITDA shall be coming as operating cash flow for this fourth quarter.
Regarding shareholding, the first thing that I would like to say is that I am very sad for the exit of Nisshin Steel of our shareholding. It's something that happened two years ago when Nippon Steel took over Nisshin Steel. You know, I have a lot of friends in Japan and I miss my friends of Nisshin Steel and I miss that good relation and cooperation with Nisshin Steel, but that's something that finished two years ago when Nippon Steel took over Nisshin. For us, I think is we are free now.
Now that Nippon Steel declared that we were not a part of their strategy, it is better that they have finished the selling process, and now there's no clouds in the market, you know. Regarding if this, we feel comfortable with this, I think we feel comfortable in the market, and we feel comfortable with all the measures that we have in the market as it is today. You know, we cannot try to find any activity against the hostile takeovers and think we have to follow the rules of the market. We are comfortable today as we are. We have a more higher amount of shares in the market.
That means that we'll have more liquidity in the market, and that can be positive for us. Now, not many years ago, we were criticized to some extent because more than 50% or around 60% was held in the board. The free float was very short. Now I think it is very healthy, and we feel comfortable with the shareholding the way it is today.
Okay. Thank you very much.
We currently have no further questions on the telephone, so I will hand over to Carlos for the webcast questions.
Thank you very much. There are several questions from the webcast. Most of them are already answered. That was related to the capital allocation Section 232. Maybe one left. You know that is coming from Iñigo Egusquiza from Kepler Cheuvreux, and it's as follows. Is the 17% EBITDA margin sustainable? Could you explain the reasons for this impressive quarterly margin, even with energy cost inflation impacting your business? Thank you.
Thank you, Iñigo. We are back. We see if this is sustainable. Obviously, our sector is cyclical. We must always keep that in mind. I think the yearly EBITDA margin we achieved in 2006 was 16%. More or less, the situation in this quarter is above that level. It is a quarterly figure. We understand that the fourth quarter shall also be in similar range. We are after several years passing through the desert, now we are experiencing a lot of tailwinds in most of the areas. Our visibility is that at least for the first half of next year, we are seeing that's going to be a good momentum.
More than establishing it is sustainable in the long term, what is clear is that we have the possibility of appreciating now with all the homework we have been doing in cost reductions and competitiveness in the last year, that we can trade in always two- digits. Assuming that more or less our frame should be moving from peaks at these levels or even a bit higher in a potential peak, but when the correction comes, we remain having at least a figure in the two- digits or close to two- digits. That should be more or less assumption that we must take from now. What's relevant, we have been experiencing difficulties in a period in which several of our areas were experiencing different troubles. Nowadays, we think that most of that problems are already solved.
The structural oversupply in Asia coming from China and Indonesia appears now to be better balanced. There are no additional projects now, which are supposed to come shortly. We think that the market shall be better balanced in the coming years. This shall be beneficial, but beneficial not only for Asia but also for the rest of the world. On this basis, let's hope that now we go back to this period in which the cycles took two or three years and not this many cycles of quarters where we have been living in the last decade. Probably the bases are better now for the coming future.
Thank you for your comment, Iñigo. I think we have to understand that in our business, we have been suffering the excess of, or the lack of demand after the 2008 crisis, the tough situation that we suffered in the European and the American market. At the same time that we suffered the explosion of production in China. You know, and this led our business to a very low level of base prices, and you have seen our performance now. The situation is changing structurally, as Miguel mentioned, there's changes in the world.
Especially, not only is the Fed call, not only is trade measures, it's also that maybe probably you know that China has eliminated the export rebate, which is important because they want to concentrate their production, the local production in local sales. They're even speaking about an export tax. They have opened the door for Indonesia. That is also a Chinese market. Some people are starting to call it Indonesia, you know, because the these Chinese producers in Indonesia are mainly focusing in China. Now they have eliminated the anti-dumping against Indonesia in China. That means that this area will be concentrated in a regional market, China, Indonesia, and probably the Philippines.
You know, and now with the rest of the message that we have mentioned, Europe is more for the European, America is more for the Americans. To some extent, I cannot say that this is the end of the globalization, but to some extent, we are deglobalizing our world. We are coming back to a more regional world. This is very positive because it will eliminate all the unfair practices in our business, unfair prices, and now we will manage betwee, a more traditional way.
We have demonstrated that we have improved very much in these years, you know, that we have flexibility enough to make the most of the good cycles as we have demonstrated, and also efficient enough to make the most of the increase of prices by getting higher margins than before. I think this is very important. It's something that we must keep in mind for the coming years, for the coming cycles. You know, this cycle is just starting.
I think that what Miguel mentioned, the new prices for next year, you know, the new situation, visibility that we have, that we cannot say that we are in the top of the cycle, that this is something that is just starting, and we will for sure make the most of this. No, I think that's all from our side. Carlos, I don't know if we have more questions.
Okay. There is no further questions. Thank you very much, Bernardo, Miguel, and thank you to all the participants and listeners to join us today. That concludes our third quarter 2021 conference call. Have a good day. Thank you very much.
Thank you.