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Good morning to all of you, and welcome to Aperam Third Quarter 2022 Results Podcast. I am Tim Di Maulo, CEO of Aperam and together with Sud Sivaji, Aperam's CFO. I will share some thoughts on a quarter that was a bit more demanding than usual. We will answer your question at the webcasted conference call today at 11:00 Central European Time. The dial-in details are on our website and on the last slide of this presentation. Please take note of our disclaimer regarding forward-looking statements on Page 2 and then move to the key developments on Slide 2. The EUR 2,035 million (sic) [ EUR 235 million ] EBITDA Q3 sits well in the range that we guided for the quarter. It is still the second ever best third quarter on our primary COGS, only surpassed during last year's recovery. The solid profitability highlights our highly flexible business model and our differentiated value chain.
Because of seasonality and the challenging market environment in Europe, adjusted EBITDA for the Stainless & Electrical segment declined meaningfully from the record achieved in Q2. The summer holidays in Europe make the third quarter of the seasonal [ profit ]. This year, we had meaningful additional headwinds in the form of very substantial inventory valuation charge. Energy cost inflation and a pronounced destocking cycle.
The good news here is that the import window that has opened on the [ back ] of COVID restriction and nickel price distortion has closed and trade protection is working fine.
The other positive news is coming from our operation in South America. Brazil continued to run stable, both volumes and earnings-wise [indiscernible] it is peak level in a historical context. Stable energy cost and the flexible multiproduct setup that are constantly upgrading the success story here.
Another reason is the good progress that we make on the Leadership Journey towards 2025 improvement goals. We realized another EUR 17 million gains in Q3. Since the start of Q4 of the fiscal 4, we have now realized EUR 97 million gains, which put us ahead of the plan. Sud will give you more details later. You can rely on us to spend by our financial policy.
We completed -- we announced the second tranche of the 2022 share buyback. We bought back the possible maximum of 5.8 million shares, returning EUR 195 million back to investors on top of the EUR 150 million dividend. We proudly combined a rock solid financial position with the highest shareholder return in the industry.
Our place to not build a net cash position prevent an inefficient balance sheet, and we have the track record. We have bought back shares worth EUR 552 million since 2017, and we'll continue to return excess cash to shareholders per our financial policy.
So how is the market now? It may surprise you, but real demand is decent. Contract business and demand from end user are normal. I see that we're masked by the very strong destocking of distributors. We still sit on [indiscernible] inventory both in absolute terms as well as in days of consumption. We expect restocking to continue throughout the fourth quarter and [ erode ] the seasonal uptick in demand that we normally see in Europe.
Now how do we get there? The excess material originates from China. It was shipped in those few months where huge intercontinental pricing patency opened an import window into Europe. This is the reason why the market share of China has increased from less than 1% to more than 8% in 2022. However, this is a thing of the past now. The windows has closed again and won't reopen anytime soon because trade protection in Europe has strengthened significantly over the past few years. We therefore expect to return to the equilibrium that prevailed since 2015, which means next [ no ] imports from China.
Looking at the various industry, we noticed that the demand has cooled somewhat in some sectors. This should not come as a surprise in the [ fact of ] inflation, price energy cost, and economic uncertainty. However, underlying demand is up very well. Base prices have normalized and we see them as stable.
There was no change in construction and industrial demand and both remain slightly depressed in Europe. Projects get postponed due to an uncertain business outlook and material cost inflation.
Alloys is the bright spot and capacity for our LNG products, a high-margin business is fully booked for several quarters ahead. Brazil is much better because demand -- industrial demand benefits from low and stable energy costs. Additionally, the oil and gas segment that in very distant past was one of the largest user of [indiscernible] is picking up from a very low base.
Consumer goods and food, health and catering has softened, which we attribute to inflation squeezing consumer budget. Also, some inventory has built up in the supply chain that needs to be clear.
Automotive is very spot, both in Brazil and in Europe. Component shortage is in companies are working to clear the order backlog, which support demand for several quarters.
I hand over to Sud for the review of the financial performance.
Thank you, Tim, and a very warm welcome to all of you. As Tim said, EUR 235 million is an extremely strong result in a historical perspective, showing our improved profitability compared to pre-COVID periods. We delivered everything we promised with EBITDA on the guided range, significant free cash flow and a further net debt reduction despite the share buyback.
A 20% shipment decline is more pronounced than the usual Q3 seasonality, was well explained by the strong inventory cycle that we face in Europe.
The negative scale effects are another headwind for the solid result demonstrates that we are a good when it comes to flexibilizing fixed costs. The top double-digit inventory valuation charge on the back of lower raw material prices of nickel, ferrochrome and iron ore was therefore the main impact on the quarter-on-quarter bridge. Normalizing base prices, together with higher input costs had also a negative effect.
The P&L is free from exceptional items, but you'll see the financial result contains EUR 64 million FX and derivative valuation losses. This is a reversal from the previous quarter, and a large part of this is the unrealized position based on negative valuation on quarterly closing as markets are volatile.
In EPS, these were somewhat offset by a EUR 25 million deferred tax asset. EPS declined by 60% to EUR 1.64 due to the lower EBITDA. However, this is still the highest pre-COVID EPS.
Cash flow was the highlight this quarter. Despite the lower EBITDA, we were able to generate a strong free cash flow of EUR 209 million. Now this translates into an annualized 43% free cash flow yield based on the end of quarter market cap. We handed back EUR 123 million to shareholders via the share buyback and the quarterly dividend and still able to reduce net debt by EUR 89 million. The net debt of EUR 482 million. To remind you, it's only the working capital of our recycling division. And with the net debt to EBITDA at 0.4x, we are at that sweet spot between a strong and efficient balance sheet.
Moving to the next slide. While we continue to lead the market and network of capital discipline, looking at the net debt bridge in detail shows that the cash flow did not originate from net working capital release mainly but reflects a high structural cash conversion.
The right-hand chart demonstrates that Aperam has a structural cash conversion of about 90% of its EBITDA when it comes to operating cash flow.
The cash conversion is structurally unchanged from the past but was distorted over the past few quarters by material additions to net working capital because of price. This should level out the cycle now that we appear to be post-peak raw material prices.
We expect to release a higher amount of net working capital in the fourth quarter. However, let me repeat our net working capital development. Our structural inventory is lean, so the price side is the main driver, as we showed last time at the Capital Markets Day, to almost EUR 1 billion in addition to net working capital since the beginning of 2021 will only be fully released if raw material prices go full circle.
At the beginning of this week, we were still far from the level we saw at the beginning of 2021. Nickel was 43% higher. Ferrochrome, even on the lower Q4 benchmark, was 31% higher. But it is not only raw material, higher energy costs are also reflected in working capital. As these prices go back to where they were historically, our working capital will return into cash flow.
Back to the bridge. We stick to our guidance for this year on CapEx. We will have a larger cash over in the fourth quarter as part of our strategic plan to deliver EUR 300 million EBITDA improvement compared to the historic norm. With lower earnings but a higher release of working capital, we project the Q4 net debt reduction similar to Q3. This assumes unchanged markets till year-end.
I also want to stress that we plan to hold optimal net working capital as usual and will not artificially run down inventory just to rebuild it in Q1.
Next slide. Let's take a closer look at the segments. Recycling & Renewables delivered another very solid quarter. With EUR 84 million EBITDA after 3 quarters, the segment has already achieved annual guidance. This might be a surprise to some of you, given that pricing and demand for scrap were board depressed during the quarter.
ELG, however, as a scrap trader is able to protect margins in an over business cycle. The super alloy business has also recovered and the benefits from a solid aerospace demand.
BioEnergia is always a stable contributor. All of this makes us expect to see another strong result in Q4.
On Stainless & Electrical, it is a tale of 2 regions. On the one hand, we have a strong and stable business in South America, where Q3 is a seasonal peak quarter with the result comparable to last year. On the other hand, the European business suffers from low volumes, cost inflation and a very significant inventory valuation effect. For Q4, we expect the trend in Europe to continue while Brazil should see the normal seasonal decrease.
At face value, one could think that we might have a temporary disadvantage of energy costs, yet as our results show our European competitiveness delivers results that hold up well versus the competition.
On S&S, EBITDA turned negative, which is solely due to a significant negative inventory valuation charge. Our distribution business is closer to the spot market and therefore, the volume decline is no surprise. We expect Q4 EBITDA to return to positive numbers despite another very significant inventory valuation charge.
Alloys & Specialties, Q3 might be a bit of a surprise given the positive commentary that we gave at the Capital Markets Day. However, we stand by it and the alloys are on a clear structural improvement path. The Q3 result is therefore an aberration due to a noticeable impact from an extreme weather event that caused flooding and disruption at our plant in [indiscernible]. Without the extreme weather impact and the negative inventory valuation, adjusted EBITDA for A&S would have been clearly at 2021 levels. However, the weather impact will be recovered in Q4, and we expect to have a solid Q4 result.
Moving to the next slide. Cost inflation is picking up, and our [indiscernible] program is the main tool to counter this. We made solid progress with cumulative gains of EUR 97 million since Phase IV of the Leadership Journey started. Q3 contributed solid gains of EUR 17 million.
This quarter, our raw material efficiency, combined with our Recycling segment, have performed very well and are major building block for this achievement.
The Leadership Journey is also the key initiative to realize the improvement potential with our differentiated value chain under the 2025 strategy. On top of many small initiatives, the major contributions come from 3 projects that we have presented to you at our Capital Markets Day in greater detail already.
First, the growth plan and alloys is benefiting from having additional capacity through the changes in our European footprint. This will result in a positive mix affected Alloys & Specialties in the coming quarters as demand picks up.
Second, the lower shipment volumes due to inventory cycle also gave us the opportunity to implement cost savings from reducing the number of rolling centers, downstream in our stainless division in Europe. Through reorganized material flow, we will not lose capacity, but the efficiency gains will require less FTEs in the future.
The third major value chain improvement came from S&S. You saw an in person in September and the realized part of the downstream growth plan that we shared with you has begun delivering results. The question, if we would reduce our strategic target and also CapEx going into the downturn, it's coming up more frequently in investor meetings lately. My clear answer is that Leadership Journey and the execution of the 2025 strategy will make Aperam a stronger and more competitive company, and we stand by it.
I take this opportunity to remind you of our 15% IRR expectation from all CapEx projects. Cyclical downturns actually open up the possibility for additional improvement potential to the competitive position as we demonstrated with our Genk investment in 2020.
Again, I remind you that we are flexible on sustenance CapEx if demand remains sustainably low. We are solidly financed, and we have the track record that our CapEx spend creates value for shareholders.
I now hand back to Tim for the outlook.
Thank you, Sud. From our point of view, Q4 should face a similar trends as Q3. Destocking, waiting on European volumes and Brazil facing a seasonally slower quarter, we expect stable to marginally higher volumes. We project a decrease in adjusted EBITDA due to the cost inflation and normalized pricing that is now also running to the P&L. Together, this will be the main drivers for Q4, especially as there will not be much relief from inventory valuation as ferrochrome price moved lower.
So [indiscernible] expect an adjusted EBITDA in line with what was normal in the pre-COVID world. Despite high inflation, restocking and the energy cost increase, this proves the resilience and the structural improvement of our business model.
This promise, we will release some more net working capital. And due to our high cash conversion, and we expect a solid operation cash flow despite the lower EBITDA. Our CapEx guidance has not changed and implies a significant step-up in CapEx spending in Q4. This is a normal seasonal spending pattern with higher investment in the fourth quarter when maintenance in the year-end slowdown, make it easier to do larger projects.
After paying the quarterly dividend, we expect to retain enough cash for further strengthening the balance sheet. There are challenges higher, but we proved in the last cycle that our competitiveness is well set to cope with changes to the economic environment. Since then, we have added the differential value chain with Recycling & Renewables and the alloys expansion together, it manifests itself in a flexible and resilient business model.
We are always interested in your feedback and we give you opportunity to meet us. It will be great to see you in person at one of these events.
Thank you for listening to our Q3 management podcast. We will host the conference call today at 11:00 Continental European tile, to answer your questions. It is a slightly unusual time today, but with our former [indiscernible], we didn't want to disrupt their call much. Have a nice day and see you later.