Welcome to the Acerinox Earnings Conference Call for the Second Quarter 2021. My name is Carlos Lora-Tamayo, I am the Head of Investor Relations at Acerinox. As you can see, today the presentation is going to be conducted by Bernardo Velázquez, Acerinox CEO, Miguel Ferrandis, CFO, for the first time, Hans Helmrich, COO of Acerinox Group. We haven't had the opportunity to introduce you, Hans, as we would have liked . Due to the COVID situation, this was not possible. Let me introduce you Hans very briefly.
Hans joined Acerinox almost one year ago to reinforce Acerinox Group management. He has more than 26 years of experience in the industrial sector, in companies in the automotive or packaging. Of late, before Hans joined Acerinox, he held various management positions in Cooper Standard in Germany and the U.S. A year late, welcome, Hans.
I think it's a very good half, very good semester to start and being the best results in 14 years. Before getting started, let me remember you that this presentation is webcast in our webpage acerinox.com, where you can find also the annual accounts and interim management reports for the first half of the year. Now I give the floor to Bernardo. Please, Bernardo, go ahead.
Good morning, everyone. I hope that you and your families are okay. At this time, we are going to be the first one in our sector to present our results, so I'm sure that you will have lots of doubts and lots of questions for us. If you don't mind, we will make a very short presentation, and then we will give more time to the Q&A session. Let me start with sustainability. Let me start with sustainability to show the commitment that we have with this new economy. Sustainability is linked as we always consider it in Acerinox, linked with efficiency.
If we are efficient, we increase our efficiency, we will reduce our emissions, we will reduce our CO2 emissions, we will reduce the energy intensity and everything. It's very much linked and inside our traditional culture.
I think that we are very lucky because we have an excellent material that is the paradigm of the circular economy, stainless steel. We produce our stainless steel with more than 90% recycled material. As we always remember, our material, the stainless steel, is long-lasting, but is forever recyclable. This is something that is not the same as some other materials. You can recycle infinite times the stainless steel and you get the stainless steel with exactly the same characteristics as the previous one. You never lose quality when recycling stainless steel. You want to have long-lasting materials producing less, with less emissions through the cycles, then I think stainless steel is something that you should consider.
During this period, we are very happy to announce that we are releasing a new product line that is sustainable stainless steel certified by TÜV, by one of the most prestigious certifiers. We are starting to develop this product, ready for customers that want to get involved and committed with the circular economy and with the sustainability factors. It is good to say that we also got the Gold Level in EcoVadis this quarter. Now that we are reporting in a formal basis our sustainability numbers, these companies have recognized that what we have been doing for many years and our numbers are good enough to be recognized for the first time with a Gold Level.
More than that, even our competitors, our sector recognized our efforts in sustainability and ISSF in the close ceremony that we celebrated in May, our Annual General Meeting, gave us the three awards in sustainability, gold, silver, and bronze. This is very good. We are reporting on a regular basis from now on all our key performance indicators in sustainability as well that you can follow on a quarterly basis. As you can see here, we are making important progress. I think that we need to make a reflection. That is that Europe and most of the developed economies have decided to be sustainable. I think that the society must start recognizing companies and products that are making an effort, an extraordinary effort in sustainability. This is something that we should take into account.
Now, we need sustainable products, and Acerinox will be one of the suppliers of these products. Entering in the second quarter results, let me try to explain what is happening in the stainless steel business.
To understand the situation, we need to remember that the apparent consumption went down in 2019 and in 2022. After two bad years, because 2018, United States was a -2.2% and Europe was -0.3%. 2019, USA apparent consumption was a -9.3%, and in Europe was -4%. After two bad years, we expected to have a better 2020. Everything changed with COVID, with the pandemic, and finally, the number for the year was, in the United States, we lost 10.8% apparent consumption, and in Europe, 13.4%. It is very logical that after three consecutive bad years, the apparent consumption is now growing in most of the economies.
After three years going down, it is clear and understandable that the stock levels in all the markets were very low. I'm not speaking about the stainless steel or stainless steel in factories or in warehouses. I'm speaking about stainless steel in the whole supply chain. There's no stainless steel in warehouses, but there's no stainless steel in pipes and tubes and exhaust systems for the cars, but also there's not enough cars in the car dealers' shops. The situation was a very low stocks in the whole supply chain. Now that, as we reported before, when in last November, the world started to trust on the recovery of the economy with the very good news of the vaccines and these things. People wanted to get ready for the new situation.
Everybody wanted to start replacing the stocks to reach a normal level of consumption, a normal level of utilization. What happened is what is called the bullwhip effect. That in our case, stainless steel, that we are the beginning of the supply chain. All the effects are amplified, and you have a very interesting restocking period. We have to understand that since last summer, as we also reported, the savings in families was translated in a better situation for consumer goods. Things like white goods or house expanding and things, and other things were moving very well. We had, in one hand, a strong recovery in the consumer goods sector. Now in second hand is the stock replacement.
If you add these two things with a recovery in all the countries in the world, plus unexpected high transport cost, plus some trade regulations, at the end, we are coming back to a more regional world, a more regional business that let us have more visibility in our business, increase our order book. As a result of this, as we always explain, when you have a stronger order book, you can select your orders, you can improve your product mix, and you can increase your prices.
This is the situation that we are living today. We have very good business conditions, and this is what is reflected in this number that you can see. You have the strongest EBITDA since 2007. Net sales of more than EUR 3 billion. EBITDA, EUR 378 million. That is 130% higher than last year, 2.3 times.
We have results after taxes and minorities of EUR 203 million. That cannot compare with the only EUR 2 million that we made last year. Always keeping our long-term strategy. Keeping our long-term strategy, that means in this time that we have a strong operating cash. Remember, cash is king for us. We have our net debt under control. With this brief explanations, I will leave the floor to Hans, our new Chief Operating Officer, that started working in September. I'm sure that he thinks that the stainless steel business is very easy. You can only increase prices. We have to consider that we also have two things in our business and through the cycle business.
I think Hans, as Carlos mentioned, was recruited to reinforce our lean management and to bring new ideas from other sectors to help us to keep on improving, because at the end, this is what we are always doing, looking for the excellence. Hans, the floor is yours.
Thank you, Bernardo, good morning to everyone. Pleased to be here today with all of you. Let me talk briefly about what happened in this second quarter in the market, but as well in Acerinox. The market of stainless steel continues to grow. The demand is improving, and the same happens with the high-performance alloys market, with the recovery is going fast and accelerating into new products and new opportunities.
Each region continues to grow quarter-over-quarter, which is good news for all of us. In North America, inventories and imports remain low, and that's an opportunity as well going forward. In Europe, anti-dumping duties for cold roll materials were approved to India and Indonesia, and extended the safeguard another additional three years also happened in this quarter. Within Acerinox, each one of our divisions improved the results quarter-over-quarter.
As said, our profitability is the best in 14 years. Continues the focus on cash performance and operational excellence, which is what we will focus in operations for this quarter and going forward as well. That I will pass it to Miguel.
Well, the chart shows very clearly the evolution and the strong reaction that took place since mid-2020. The strong reaction that came in the third quarter, we start reacting in the stainless side. Later on, with a growth that was expanded through all the units. We have seen the strong reactivation coming more recently, also in the high-performance alloys. At the end, we are seeing four consecutive quarters of growth. When we put this on figures, and we show the figures for this strong increase in profitability, we appreciate that more or less all the variables and all the figures are absolutely remarkable and all the improvements.
All the slides that are coming now are going to be, or you can appreciate that are very self-explaining. I shall just give some messages from each of the slides.
When we purely analyze the second quarter, as has been remarked, it is the strongest since year 2007. The strongest since the last 14 years. Keeping in mind, in any case, how different was the market at that time and which were the drivers that led to that profitability in that period with a strong and constant revaluation of the nickel and consequently of all the inventories all around the world. The situation now is absolutely different. We have enabled to obtain figures as remarkable as those just in a different market conditions with a much more stable nickel.
At the end, this is as a consequently also of the strong improvements and cost reduction and increase in efficiency we have been doing that with a proper tailwind of market conditions now appears as our results in our P&L.
The EBITDA is very strong. What also must be remarked is the cash flow generation. When we present the figures of the first quarter, we anticipate that we were saying that the second quarter should be even better. We have seen that this has been coming as an increase in EBITDA of 35%, but also, and even though the increase in capacity utilization, increase in production, increase in volumes, what we have been seeing is that we still keep an operating cash flow.
It's remarkable keeping an operating cash flow in a momentum in which the working capital increase and continue increasing. We saw increases of EUR 130 million in the first quarter. We anticipated also that for the second quarter, we expected increase in working capital of around EUR 100 million for all the units that are running at high capacity utilization.
This has been appreciated, but the increase in working capital has been even absorbed by the increase in margins, the increase in efficiency, and consequently, the operating cash flow has been EUR 84 million in the quarter. This is something to clearly remark is very relevant. As is relevant also, the figure of the net debt remains absolutely under control. We are showing figures of net debt of EUR 158 million, even though when we compare, for example, with equivalent figure in the second quarter last year, which is very similar, but in the figures this year appears also that in June we have paid a dividend. The whole dividend of EUR 135 million has been already paid.
This is reflected in the debt figures at the end of June, as also is reflected the increase in working capital that, as we have stated has been of EUR 253 million. Also, keeping in mind that was just one year ago, we will raise additional debt of EUR 313 million for the acquisition of VDM Metals. It's very simple to just analyze and conclude how should have been a normalized debt in our group with not these three facts that have been appearing and showing in the figures we are reflecting at the end of June.
This is going to be the peak of the debt in the group in this year, and the second semester and especially the fourth quarter shall bring a strong cash generation and a strong net debt reduction in the whole group.
If we just separate in our main divisions, the stainless and high-performance alloys, going to the next slide, just showing the stainless. It's very relevant also to appreciate the EBITDA of EUR 201 million, which is 32% higher than the one of the previous quarter. What's relevant also is that at the end, for being appreciated, what we are seeing now is the consequences of all the homework that has been achieved. At the end, we express last year all our efforts that we're doing in variabilizing the fixed cost. This appreciates. When we saw the figures in the stainless, we appreciate that with increase in melting shop in this period of around 28% in the whole semester, the operating expenses have only gone up 12%.
In this regard, it's clear that we have made a special effort in the increase in efficiency, and all this is appreciated , as well as all the improvements in p lant as soon as we have had these tailwinds. I think the evolution of the stainless steel division has been remarkable, and keeping also in mind that have been circumstances in the quarter that could have spoiled a bit, but I think that this has been very properly and efficiently handled by the management. We have had some problems on some supply in oxygen in South Africa. We are having some disruption also in the north of Spain, in [audio distortion], with a certain strike.
We have had, in different units, some problems that have been very properly solved, and consequently, we have been able to develop these figures and also remain very positive for the coming quarters, as shall be explained later on. If we move to the high-performance alloys, what is probably more relevant to remark, you have all the figures in front of you, is how successfully is taking place all the integration. We have been able to achieve the most relevant milestones that were planned one year ago. Consequently, we are seeing that a lot of best practices, more than 70% best practices, have been implemented. More than 250 trials have been done in the stainless operations plans for processing alloys. A lot of new products have been created in different alloys.
A lot of best practices ensure among the teams and the specialists in both the alloys and the stainless commodity world. This has been extremely successful. As a consequence of this, we have obtained synergies which are 40% above than the synergies that were precise for being achieved at this period. In addition, it's clear that in the second quarter, what appears is a strong improvement in the order book in the alloys sector. The last quarters, the high-performance alloys, and especially our division, keep a relevant track in supplying sectors such as the chemical processing or the automotive electronics. What also has been relevant in the second quarter is that it's coming, the oil and gas. We start seeing orders of oil and gas.
With this huge increase in the order taking in the second quarter, which shall be appearing obviously in terms of margin activity in the coming quarters. Now we are in a position of changing a bit the strategy. Up to now, more involved in filling the mill, now more involved in being very selective on the margins of the order taking. This shall consequently contribute in a proper improvements on the profitability of the performance alloys division in the coming quarters. We are going probably to reach the pre-COVID levels sooner than expected.
This is a very positive indication for the second semester of this year in VDM Metals, which up to now is trading at EBITDA margin of 8%, which is also close to the expected levels that we always mention around the two digits, reaching the 10%.
The reaction has been quicker and very efficient, and this is something to be proud about. If we just move to see how is the effects on the cash flow for the group. I think in terms of capital allocation is also one of our key issues in terms of focusing at the most. This is something also that we are extremely proud.
When you see the figures, we are showing not only the quarter, but also even the first semester. It's clear which are our priorities. We are having a very relevant EBITDA, which has compensated even the huge increase in working capital. In this regard, this has been our first prioritized investment in this period. For us, the main investment has been being in a position of accompanying the growth in the market by the huge increase in working capital as has been the case.
This has a very quick return and shall be appreciated and is being appreciated already, not only in the margins, but also in the cash generation. This, as I am stating, shall be coming mostly in the second semester. The first investment for us in this period has been the working capital, and this is going to be very successful. In terms of capital allocation, also, we are very strict in regard of the CapEx. As you may remind, we announced around EUR 100 million CapEx in the group for this year. At the end, we have achieved until June, EUR 49 million.
We are keeping a strong discipline. We are not getting relaxed by the good momentum on the market. We are prioritizing also just the most relevant CapEx, and we are not getting comforted with the good momentum.
This is also relevant, and we keep very committed on that. In addition, we paid a dividend last year in the month of November, as you remind, but also this year it has been anticipating the dividend and has been paying in the month of June. Also, up to now in the first semester appears also in terms of our capital allocation, the dividend that has been paid in the first week of June. This shows our priorities for keeping the business on the long-term run. One is obviously accompanying and be able to develop the working capital. Also, we need to keep a good control on the CapEx and obviously the proper retribution to our shareholders.
Thank you. Having a good quarter or a good semester should never be an excuse not to focus on cost control and continuous improvement. This is what Excellence 360 is all about. We continue to focus even through the good chance in our cost base, and this is what you can see in the chart where we achieved an analyzed base, EUR 58 million of savings.
Our teams are doing a great job in identifying further opportunities for the months and quarters to come, and we already recovered what we missed last year in 2020 due to the COVID situation and the lower volumes that we had. We have not incorporated the high-performance alloys until now, but the good news is that going forward, high-performance alloys division is going to deliver EUR 15 million in the next three years on this same Excellence 360.
All our operational teams are focused on cost control and cash generation. This is what Excellence 360 is all about. Thank you.
We are coming to the end. Remember our traditional long-term strategy. We are focusing, as we have mentioned, focus on our long-term strategy, and we cannot forget that this is a cyclical business, and we have to look at the business in through the cycle parameters. As I mentioned before, with all this new situation, the improvement of our market condition has accelerated and still is improving. That gave us more visibility so that we can program our plans better, and we can adapt the product mix to the necessities. It's the best in years. With this situation, the stainless steel division posted a remarkable quarter, the strongest, as we mentioned, since 2007. Also, we have a clear recovery since March, with the order intake in March in the HPA division.
What is very positive for us is, as Miguel mentioned, the integration process is going very well, and we are very excited with the possibilities that we have with the two divisions working together. As Miguel explained, with our working capital increase due to better market conditions, has dedicated most of our cash generation. Now in the second quarter, we'll be in a better position.
We will release some of this working capital, and we expect to finish the year with a better net debt and a good cash generation. We can say that in the third quarter, we will continue focusing on cash. We will have a very strong cash generation, and also we can foresee that the EBITDA in quarter three is going to be higher than in quarter two, and we will reduce the net debt. This is all from our side.
We can start, Carlos, with the Q&A session.
Okay, thank you for the presentation. Let's move now to the Q&A session. Please, operator, go ahead.
Thank you. Ladies and gentlemen, registration for the Q&A is now open. If you are already registered, please do so again. To register a question, please press star followed by one on your telephone keypad. If you change your mind, you can press star followed by two. Please ensure you're unmuted locally before asking your question. Our first question comes from Alan Spence from Jefferies. Alan, your line is open. Please go ahead.
Thank you, and good morning. I've got three questions. I'll take them one at a time. The first one is on the price increase you announced in North America recently. Just wondering if you could give us an update how that's being accepted so far by customers, and what's the timeframe before it will be fully reflected in your results?
We have released this letter to our customers last week, this price increase will be effective first of August. Still, we don't know, but we trust very much that will be well accepted in the market. How this will affect in the profit and loss account? We'll have to see. We never give these numbers.
Sorry, I didn't mean the profitability change, but just given contracts, if it is accepted, how long before it would be in there?
This is for contracts, that will be affecting more or less 1/3 of our production in the first months and after one quarter to 2/3 of our production.
Okay, thank you. The second one is on VDM. You gave some helpful commentary around the next couple of quarters. Just with a strong order book right now, do you have any early sense of where the margin could be in early 2022?
Miguel.
As was previously explained, we have seen we anticipated that the margins are improving. We are going to reach the pre-COVID levels in terms of margins in the second semester. This means that probably we can be trading in that levels, and we are talking about a two-digits EBITDA, probably for early 2022. We feel very, very comfortable on that, and we have seen the strong reaction of the market, and consequently, we think that this is achievable for 2022. In addition, gradually, we shall also be appreciated the synergies that are to come. At least reaching to these pre-COVID levels in early 2022, we feel very comfortable with that.
Thanks. My last one is on this Sustainable Stainless Steel line that you're launching. What's the CO2 reduction compared to your standard products, and what is the type of volumes you might be thinking about that for next year?
Good morning. We don't have specific CO2 targets that we're going to be declaring at this morning time. What we can ensure is that the main products are going to be focused on the sustainability of stainless steel. As well the use of renewable energies and how these are going to be combined into a certain volume that is going to be specifically dedicated with this TÜV stamp that will allow us to mention that this is a sustainable stainless steel that we are selling.
You mentioned volumes. We can guarantee that we can certify the sustainable more than 15% of our production 1-5. This is much more than the current demand. We have to develop the demand of these products.
Okay. Thank you very much.
Our next question is from Tristan Gresser from BNP Paribas Exane. Please go ahead.
Yes. Hi, good morning. Thank you for taking my question. I have two, please. First, maybe on the outlook for Q3. Would you still expect some weaker seasonality we usually see in Q3 in terms of volumes? Or you could even see volumes up sequentially, given the strength in demand in all regions? Looking at the margin performance you have here in Q2, how sustainable is this? Were there any raw material one-off gain in Q2 as we've seen in Q1? I will start there, please.
Okay. Let me answer your questions. I think seasonality, we don't expect a strong seasonality in Q3. We'll have, of course, some reductions in Europe as it is normal, but less than before, less than in the previous years. We think that the American economy is performing very well, and we will not see the seasonality in the United States. We are pretty comfortable with the situation in Q3. How sustainable the margins are? If we maintain the level of production, we maintain our cost under control, and we push prices up if we can with more visibility and a stronger order book, we feel very comfortable as well with the current margins. Of course, we will try to increase.
All right. Thank you. That's very clear. Maybe one question on the ETS and the European legislation around carbon credit. Can you give us some idea where your current status of carbon credit inventories, when do you expect to witness cost inflation when you need to buy more regularly on the market? How would the new ETS legislation impact that status quo? Maybe some thoughts on the ETS and also on the Carbon Border Adjustment Mechanism. Stainless is excluded for now from the legislation. What is your view on that? Are you lobbying to get included in the Carbon Border Adjustment Mechanism? Thank you.
This question is enough for one conference. Because the carbon problem and the carbon matters are very complicated. In the case of the credits, you know that we have been, and we still are receiving free allowances. Also, we have some savings in this allowance that will let us work comfortable for the coming years as well. This is not the problem, and we are not going to suffer the cost inflation that you mentioned. What is going to be the future of the carbon commerce and carbon borders, and these things is difficult to know today because this is just a project in the European Commission.
What we know is that there's a real political interest to establish this carbon border because otherwise we will leave the European Union and protect it, and this is not fair.
If we want to be sustainable and want to reduce the emission, we have to protect the producers that are working under these scenarios because, as we have mentioned many times, if we are not protected with this kind of tool like the carbon border tax, probably the production of many things will move to other countries with more relaxed legislation in environmental matters.
That we will be exporting these CO2 credits or giving them the advantage to increase production against the European producers and consequently increase the CO2 and every kind of emissions since in these countries the legislation is more relaxed, as I said. I think that our representatives in the European Union now recognizes that this is something that they have to take care of and there's a political interest to establish the carbon border tax.
How we're going to do it is another question. The complexity of the European Union is high, and once you have the interest to do it is difficult to establish the right mechanism satisfying not only the European Commission, but also all the individual member states. This is a very interesting matter. We are following it very closely. As you know from our position in UNESID, the Spanish association, and in Eurofer, we are working very hard on this to protect our interests. You have been following Acerinox for many years, and you know that since many years ago, we have been claiming for these kind of tools, for these kind of protections, or at least to play against the other producers that are not in the same level playing field.
All right. Thank you.
Our next question is from Patrick Mann from Bank of America. Please go ahead.
Good morning. Thank you very much for the opportunity. I wanted to ask around imports into Europe. We've seen a reduction. I want to get your views on how much of this is cyclical. Because demand is strong globally, and we are reopening, as you mentioned earlier, inventories throughout the supply chain are low. How much of it is because of these increasing trade barriers, the best example being the anti-dumping on Indonesia and India? Just trying to get an idea of, if we start to see the restocking cycle play out and the tightness eases, where do you think imports would sort of settle at what kind of levels? Thanks.
It is difficult to split these imports if they are coming because or they are not coming because of the safeguard measures or because the anti-dumping duties or it's because the local markets. I would give you a couple of examples. For example, countries that they have quota under the safeguard measures and are not using this quota, like for example, South Korea.
This means that they have also a very strong market. I think that there's a strong market in China, a strong market in India. The measures that the Chinese government has taken to eliminate the export rebate of the 13% is a clear sign that they want to keep production inside the country, to promote the recovery period and also to avoid inflection. This is something similar to what is happening in India, that they have temporarily eliminated the trade barriers.
This is also a clear sign that they want to protect the local market and with an inflection. Also some signs in the same sense in Brazil, that they are reducing 10% the duties. In general, I think that most of the markets are very strong today, and then producers are focused on local markets. Now, if you add the cost of transport, know that from USD 50 per ton has moved to close to USD 500 per ton.
That's another reason, to finish with this globalization process and be more focused on regional and local sales. Another example is U.K. For example, U.K., after Brexit, is not included in anti-dumping source of safeguard measures and the profile of the imports and everything is imported there, or most of the consumption is imported. Even European producers are increasing market share in U.K.
That means also that is not only driven by anti-dumping and safeguard measures. I think that today the most important thing is that most of the world markets are very strong and that producers are concentrated in the local business. In any way, we are very happy that the European Union is also taking conscious of what we have been suffering in the EU of unfair practices. Now they are supporting with these safeguard measures to avoid the flooding of EU with materials that previously were going to the United States, and also is now a very clear focus on unfair practices from other countries like Indonesia and India. They approve this anti-dumping.
Great. Thank you very much.
Our next question is from Ioannis Masvoulas from Morgan Stanley. Ioannis, please go ahead.
Hello. Good morning, gentlemen, thanks for taking my questions. A couple of questions on the outlook. You know that strong free cash flow in the second half, do you expect to release fully the working capital investment that we saw in H1? Related to that, how are you looking to deploy this strong cash flow? Is it a case for a buyback in the second half, or would you also consider a potential direct stake purchase from Nippon Steel, assuming they're willing to exit fully from your share register? I'll stop here, if that's okay.
Well, in terms of the working capital for the second semester, is not going to be reversed all the figure that is appearing in the first semester. Keep in mind that still in the third quarter, as we have seen, we shall see some even increase in activity. Maybe still some increase in the working capital in the third quarter, and maybe the stronger reduction shall take place in the fourth quarter, but not matching the figure that has been appearing in the first semester. At the end, it may get stabilized for the fourth quarter, but the figure is not going to be purely symmetric.
The fact is that in the fourth quarter, with a certain reduction of the working capital and no strong areas of cash- out, shall be a strong cash generation and net debt reduction for the group, but not matching the figure of the increase in working capital in the first semester.
Okay.
The possible buyback that I think is the trending topic today. No, there's nothing to comment here. Remember that we only have to look through the cycle numbers, not only the current situation. We have to consider the full cycle, and we haven't taken any decision yet. Of course, it's something that we are considering, we are studying, but there's no decision taken. This has to be decided by the board of directors, later have to be approved by the annual shareholder meeting. There's no comments here.
Okay. Understood. Maybe a follow-up question on VDM. I saw in the slide you talked about a EUR 15 million target of cost savings by 2023. Just to clarify, is that on top of the three-year synergies target of EUR 22 million?
No. These are all operational activities and savings, which are, yes, on top of the integration savings that we consider that time.
Okay. Thank you very much.
Our next question is from Robert Jackson from Banco Santander. Robert, please go ahead.
Hi, good morning, Bernardo, Miguel, and Hans. Thank you for taking my questions. First of all, regarding North America, how are the negotiations developing with ATI? Could we expect positive impact during this year from those extra volumes? That would be my first question.
Robert, good morning. As you probably know, ATI came to an agreement with the unions and the employees, and they resumed operations. They are resuming operations right now. They communicated to the market that they are going to be leaving the traditional stainless steel business and focus on the high-performance alloys business in North America. We see a strong demand for the products that we're producing, and evidently, we are giving answers to our customers, partially also their customers, to provide the needed materials that they have in the marketplace.
We could be seeing some volumes even this year?
Already seeing some of those volumes flowing into our mills this year. That happened already, since they have been in strike for many months now.
Okay. Second question, regarding the disruptions you've mentioned in the first half in South Africa and Spain, what are the potential risks could be for the second half? More in South Africa, could you flag any other risks that you may be seeing?
Hello, Robert. It's a good news is that, of course, in production, in the industrial activity, you always can have risk, or you always have risk. Our business is how to run and how to manage this risk. We are very proud to say that we have been able to reduce the impact of these disruptions, and that is not going to affect our profit and loss account. We always have a B plan. We always have a risk management system.
Okay. My final question, regarding VDM, could you give us an idea of which markets VDM is gaining more exposure to and which markets the pipeline is exposed to? Thank you.
Of the main markets where VDM is active, I have to say one is electronics and electric items, and this is a market that it is happening in stainless steel as well, that is booming. It's performing really well. These high-performance alloys are used, for example, in small appliances like dryers or toasters or these kind of things, but also in the OLED TV. Now, this is the new technology that needs very stable materials. This is very good. Second, automotive. Automotive, until now, and for us, is running very well. We haven't seen any signs of depression of this market. Automotive, for us, is performing very well. Sales market is oil and gas. We can say that there's a recovery in the oil and gas business.
Maybe not in Europe, or maybe we don't see it in Europe, but we have projects in Qatar, in Emirates, in Brazil, and in some other countries that are going well. These projects are giving us a lot of order intake. The chemical industry, I think is also a very good sector. It's a sector that is performing very well, that is also booming, and that is investing. It's investing in new plants and in new equipment, it's also good. The only thing we miss today is the aerospace industry. Still no progress on that, especially in the U.S. and in Europe. It's the only sector that we are missing. In general, we see a good activity, this activity will improve during the second half of the year.
Geographically, would you say the Middle East is very relevant?
Not really, but not because it's not relevant. It's because most of the equipment is made in Europe. We are supplying the material in Europe that will be finally for the engineering company, whatever, released to the Middle East. The transformers are in Europe.
From Carsten Riek from Credit Suisse. Carsten, please go ahead.
Thank you very much. I have three questions. I will take that one by one. Special alloys, the first one. You mentioned the better order book and that it will show further earnings improvement in the second half. What kind of levels are we talking about, 8% EBITDA margin? Is that already a level you're satisfied with, or do you clearly go for double digit? What kind of earnings level could we expect in the second half? Thank you.
As has been stated, we are in a good trend. It shall be improved gradually. We think we may be close to seeing the double-digit figure during the second half, not as average for the period. This is a gradual recovery. Consequently, maybe we reach that levels. If we consider it on an annual basis, it could be assumed, not reaching for the whole semester a two-digit figure. This is clear. Maybe this is coming for the next year, not in the second semester. In any of the coming months, we may see that.
The second question I have is on the cost inflation. We see the usual cost inflation out of the alloy element and scrap, but we're more interested in the usually more sticky cost inflation, because a lot of companies currently talk about this. Do you see the same, especially from a labor perspective, that costs will increase going forward? What kind of level do you expect?
Carsten, good morning. Excellence 360 is one of the tools that we use to mitigate cost increases, and we are working in continuous improvement activities to mitigate those cost inflations that we see. Mainly, when it comes to efficiency in our lines and working, our teams are doing an outstanding job of managing those situations. We really see the inflation mainly on materials, as you have seen, and that's where has been, over the last months, the situation. Evidently, as well, energy costs, in Europe mainly, are going through the roof, and that's what we're working as well to mitigate those through efficiency, but it's really significant increases that we have seen there.
Okay, cool. Perfect. Thank you. The last question is on the Carbon Border Adjustment Mechanism. I believe I completely agree it is an important step forward. Does it also mean that we will see a gradual removal of other anti-dumping measures, which to some extent are based on the same argument as we get closer to the introduction of Carbon Border Adjustment Mechanism?
Good morning, Carsten. No. That is not related. This is not related. Anti-dumping is regarding the unfair practices, we have that, this is related with unfair practices in market activities. Safeguard measures is only related with Section 232 in United States. It is a mechanism to avoid that input that we are going to United States before invaded Europe because they're closer of the American market. It is another fact. carbon border tax is a totally different story.
It is not clear it's going to be applied or it's going to be compared by per country or per producer. I think it should be per country. Then they will compare the level of emissions, that will be compared with the best in class in Europe, the difference will be applied in a kind of not tax, it's a compensation.
This is like a three different effects, not related between them.
Okay, perfect. Thank you very much for the explanation.
We have no further questions. Thank you.
Okay. Thank you very much. There is no further questions from the website. Well, just you already answered regarding the buyback, that there is no more comments in this sense. This is all from our side. Thank you very much for your questions and joining us. We hope that you have a very good day and to see you on the next webcast on the third day of November. Have a good summer break. Thank you very much.