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Good afternoon, ladies and gentlemen, and welcome to today's Q3 2022 conference of Klöckner & Co SE. For your information, this conference is being recorded.
At this time, I would like to turn the call over to your host today, Mr. Felix Schmitz. Please go ahead, sir.
Yes. Thanks, and welcome, everyone, to our Q3 call. With me today are our CEO, Guido Kerkhoff; our CFO, Oliver Falk; our CEO Europe, Bernhard Weiß; and our CEO for the Americas, John Ganem. They will, as always guide you through the presentation, afterwards, we are happy to answer your questions. With that, I would like to hand over to you, Guido.
Thanks, Felix. Welcome also from my side to our Q3 call. Let's directly start with the highlights of this quarter. Shipments were slightly down year-on-year. This is due to a very muted demand, especially during the summer months and background of the negative macro environment. Sales are considerably up year-on-year as a result of the higher average price level compared to the previous year.
Gross profit came in at EUR 305 million, down year-on-year due to the exceptionally high steel price decline. We generated an EBITDA before material special effects of EUR 16 million, and this has to be seen in context. Despite the already mentioned very negative macro environment and unprecedented steel price corrections, our operating result was still positive. It was shaped by the inventory write-down as a result of the significant correction of steel prices, but also by actively and intentionally enforced inventory reduction.
I also want to point out that following our analysis our significantly improved normalized underlying margin that is based on replacement cost, excluding write-downs, is intact. As anticipated, we generated a strong operating cash flow from EUR 163 million in Q3 2022. Our inventories are already now significantly reduced. We will later come to our current initiatives to mitigate our risk exposure for the coming months.
Net debt was higher year-on-year as a result of the high average price levels, it came down quarter-on-quarter due to the actively enforced inventory reduction. Digital sales share at a strong level of 43%, slightly down 3 percentage points, Klöckner Assistant successfully implemented a new core feature. Let's go to the next slide. Despite the difficult environment or precisely because of these developments, we're encouragingly pressing ahead with our strategic initiatives.
As we explained before, we perceived the sustainability transformation of the steel industry was a huge opportunity to grow our business to improve margins. We've just begun to enable our customers to build CO2 reduced value change. We now launch Nexigen. Under Nexigen, we bundle all sustainable business solutions [ KlöCo ].
These solutions not only comprise CO2-reduced products as we also offer CO2-reduced logistics and circularity solutions. Furthermore, we already trained more than 700 salespeople, the first green steel sales force globally to advise and sell sustainable products and services. We were pleased to see that our categorization for CO2 reduced and green steel that we introduced at the beginning of the year was gradually adopted by market participants and proved to be an important tool in comparing [ greenish products].
Through our subsidiary, Becker, we recently delivered the first quantities of CO2 reduced steel in our Pro category to our long-standing customer Mercedes Benz. Cradle-to-gate CO2 emissions total less than 500 kilos of carbon per tonne of steel. We will soon inform you about next steps. Let's go to the next one. Digitalization and value chain automation is one important lever for our Klöckner & Co 2025 leveraging strength strategy, and we work hard to achieve our goals of 0 touch.
Here comes the update on what was achieved during the quarter, our self-developed AI solution Klöckner system processed more than EUR 1 billion of sales volume year-to-date in 2022. Thanks to the commitment and hard work of all employees involved, we recently successfully implemented the new core feature to the Klöckner system. In addition to PDF files, our proprietary AI solution is now able to automatically extract all relevant information from unstructured text e-mails.
This will replace time-consuming processes of manually reviewing e-mails and therefore, further increase efficiency. This new core feature was already rolled out in Germany, further country organization will follow soon. In Q3, we saw a decline of 3 percentage points of our digital sales share year-on-year. The decline is mainly driven by relatively stronger processing business in the United States, which is more related to off-line channels. Despite the decline in digital sales share, the 43% in this quarter still represents a strong level.
With that, I hand over to Oliver for the financials.
Thank you. Before we dive right in, I'd like to briefly show you just as I did last quarter, our consistent and smart net working capital management. This is to be seen in context to the significant correction of steel prices during the last month. Generally, we commit ourselves to a strong through-the-cycle performance. That means fostering opportunities but also mitigating to the downside. Under this concept, we have different initiatives at hand.
And for instance, in a down cycle situation, we don't always follow the same initiative. Initiative will always be linked to the market environment and the demand and supply data that we read out of the tools. During the last quarters, we could translate the positive price dynamics of 2021 and early 2022 immediately into record operating results with industry-leading quarter-over-quarter performances.
However, our sensitive net working capital management also mitigated negative windfall effect in downward cycles such as in quarter 4 2021. Now in this very challenging macro environment, we took again action, and we're actively driving down our inventories to mitigate the risk for the upcoming winter months, where we do not expect any positive opportunities to occur in contrast to recent [ sites ]. Our inventories in tons are already today on the level of the pandemic peak.
While this has an impact on the profitability of this quarter and also the 2 ones to follow, we make sure to bring in strong cash flows, which was already visible in Q2 and now in Q3. With that mitigating move against the background that we are currently observing rather a stabilization in prices and the fact that the period of price decline was short, we will reset our exposure towards spring to be ready when opportunities might come back again.
Despite the macro headwinds, our normalized underlying margin, excluding write-downs and windfall losses is clearly intact and on good levels. Despite the negative environment and thanks to our net working capital management strategy, we can expect a high profitability and in addition, on exceptionally positive cash flows from operating activities for the full year 2022. Let's take a look into shipments sales, gross profit and gross profit margin for quarter 3. Shipments were 3.5% below the previous year's level.
Sales considerably increased by 16% year-on-year from EUR 2 billion in quarter 3 2021 to, EUR 2.4 billion in quarters through 2022 due to the higher average price level in all operating segments. Gross profit was at EUR 305 million after the record gross profit of EUR 542 million in quarter 3 2021. Gross profit margin went down year-on-year from 26.6% to 12.9%, quarter-on-quarter down from 19.7% to 12.9%. We will now focus on the EBITDA for the group.
EBITDA came in at EUR 16 million after EUR 277 million in the previous year. Despite the exceptionally negative market environment, significant price corrections and weak demand, the operating result was still positive. This number is considerably down due to the significant steel price decline, the inventory write-downs and actively enforced inventory reduction to mitigate risk exposures as outlined before.
Year-on-year, we saw a negative volume effect of EUR 19 million due to the exceptionally negative macro environment and the weak demand, especially during the summer months, July and August. The negative price effect of EUR 249 million year-on-year resulted from the significant steel price correction. OpEx was up by EUR 2 million, driven by higher expenses for shipments and operating supplies and tools due to the higher cost per ton. Moreover, we had EUR 9 million of positive FX effects. We are now coming to cash flow and net debt.
Q3 already saw a net working capital release of EUR 134 million, fully aligned with our net working capital management initiatives. Taking into consideration interest and tax payments of in total, EUR 33 million, cash flow from operating activities came in strong at [ EUR 163 million ] for 3 2022. Including net CapEx of EUR 36 million, free cash flow was at EUR 128 million.
Therefore, our net financial debt decreased from EUR 903 million at the end of quarter 2 2022 to EUR 806 million despite FX and swaps of in total EUR 24 million. Let's jump to the next slide. Our balance sheet remains very strong and rock solid. Our equity is up and the equity ratio remains solid at 46% as well as gearing 38% and the leverage at 1.3x. Overall, this very strong balance sheet enables us to manage our inventories dynamically, also going forward and will support us to further grow the business according to our strategy.
With this, I hand back to Guido.
Thanks. Before we come to the business outlook of the region, allow me a few sentences on what we have achieved during this year and what we expect for the remainder of. We're not just committed to the profitability of a single quarter. We're clearly focused on a high performance through the entire cycle. After the positive pricing dynamics at the beginning of this year, our strong profitability in the first half of 2022, the entire market observed an unprecedented correction in prices. We cannot just participate to the upside, but we'll certainly have to digest also the negative price effect.
However, it is on us to decide how to manage this and like in the last 24 months, we're actively steering our inventories to the best position with a now way for more often changing our market dynamics. We're actively reducing our risk exposure for the winter. Inventories are already now on pandemic levels, they will go further down.
Due to the short-term decline, inventories will be more or less reset when opportunities might be visible again towards early next. The uncertainty in the markets remain, but they should not be approached with inactivity. Recent stabilization of prices is also supporting our approach. Moreover, we're seeing 2 things. Firstly, our improved underlying margin, excluding write-downs, is intact. Secondly, markets are not fully falling apart, like one could get the impression when reading the media or seeing capital markets volatility.
We're experiencing broad-based headwinds and challenging macro environment but no massive destruction of demand so far. Due to our net working capital strategy, we are now set to deliver still a very strong profitability with an expected EBITDA before material special effects of around EUR 400 million for the year and a very strong operating cash flow.
With that, I'd like to hand over to Ben.
Yes. Thank you Guido. For Europe, we are currently in a challenging business environment due to the price decreases. However, mills have already taken out capacity from the market, and in this context, we have started early to take short positions to stringently manage our net working capital and to push our volumes. We therefore aim to reposition our inventory at lower cost level rather sooner than later.
We continue to implement measures to decouple more and more from price cyclicity and to reduce earnings volatility and reduce risk exposure starting on the procurement side with our strategic supplier approach and continue to invest in higher value-add businesses equipment at our sites in Felton, Kaufhof and Bremen. We are also driving our post-merger integration of Hernandez and RSC into [ Becker stainless ], implementing synergies with the other product lines and our distribution business, both on the market approach and footprint optimization. And coming to our sectors, overall, apparent demand is muted, as Guido said, but not fully destructed due to customers' fear of recession and energy cost increase despite their order books being full.
In the construction section, increasing interest rates are, of course, affecting the residential sector. However, infrastructure projects are stable and compensate, especially due to the energy distribution swap. In machinery and mechanical engineering, we have no change compared to the last call. We see strong order books and no negative trends so far.
For automotive, supply chain is recovering from shortages on critical materials such as ship. This topic is trading more and more. Call-offs are increased as expected. Shipbuilding, however, no major change compared to the last report, this sector aims to be under pressure, and with that, I would like to hand over to John.
Thank you, Bernhard. For the U.S. overall, we are seeing underlying real demand up a modest 1% to 2% in 2022 with solid year-over-year gains in transportation, energy, heavy equipment and residential construction leading the way. Supply chain and labor constraints remain a factor but appear to be mitigating to some degree. Most large OEM customers continue to report significant production backlogs.
Heavy destocking in the second half of the year will likely cause apparent consumption to turn negative in 2022 as we expect transactional buyers to remain cautious in the face of weaker seasonal demand and downward to moderating market prices. Similar trends are reflective of Klöckner shipping levels where contractual business is generally stable at close to pre-pandemic levels, while our spot transactional business has been negatively impacted by the destocking effect as well as our own aggressive inventory reduction strategy. Regarding pricing, our general sense is that prices for most products are now stable or will find a cyclical bottom by the end of the year. This view was supported by mill production capacity reductions, falling inventories across the supply chain and what has been a significant drop in finished imports over the past 3 months.
Turning to the specific sectors. Construction spending in the U.S. year-to-date is up 10% year-over-year. Residential has been the main driver, but growth has begun moderating in the face of declining affordability due to the record high home prices and increasing mortgage rates. Expect headwinds to increase as we move into next year, but overall housing starts still expected to remain at reasonable levels, albeit lower than 2022.
Activity in the non-residential construction sector has remained steady, with actual spending levels increasing in recent months as non-res square footage put in place usually lags housing starts by 12 to 18 months. Activity in this segment should also get a further boost in 2023 from the infrastructure spending bill. Manufacturing and mechanical engineering, we see our appliance and electrical segments currently steady, as manufacturers continue to deal with production constraints and still significant backlogs.
Other than normal Q4 seasonal effects, we expect demand to remain stable into early 2023, with some clear downside risk for a slowdown due to weaker housing starts and falling consumer spending. Heavy equipment segments, on the other hand, are also steady with low inventories and large backlogs. We do expect this segment to see positive growth again in 2023 as non-res and infrastructure projects will be positive demand drivers.
Energy markets are also expected to continue expanding next year as high oil prices support increased drilling activity and as investments in renewables continue to accelerate. North American automotive production is up 13% year-over-year as supply chain constraints are slowly addressed. October sales reached $14.9 million annualized in October, which was the highest rate since January.
While consumer demand may pull back slightly in 2023 due to affordability issues, current sales remain well below equilibrium rate of $17 million, with still low dealer inventories and strong fleet demand, auto production is expected to rise again in 2023. Shipbuilding remains stable with expected growth for Klöckner in 2023 as some new naval programs begin to ramp up. So in summary, we see Q4 demand stable with normal seasonal effects in November and December.
Prices should be generally range-bound as we enter 2023 with limited further downside risk depending on product line. Falling imports, low inventories and continued mill production discipline should combine to create a more balanced supply-demand dynamic as we head into the new year.
While demand side risks are real for housing, appliance and consumer goods manufacturing, there remains some unique and positive tailwinds in less consumer sensitive segments that make us cautiously optimistic for 2023. Additionally, the end to the current destocking cycle should provide some further year-over-year upside potential for parent consumption.
With that, I'll turn it back over to Guido.
Thanks, John. Let's come to the outlook for the full year 2022. Despite the headwinds laid out earlier, we continue to expect strong full year results. Sales are expected to increase significantly compared to the previous year, shipments slightly below prior year. EBITDA before material special effects is anticipated to come in at around EUR 400 million despite the slowdown in earnings momentum Q3 and Q4 2022 due to the significant correction in steel prices. In addition, we expect an exceptionally positive cash flow from operating activities. We're now looking forward to your questions.
[Operator Instructions] Your first question comes from the line of Alan Spence from Jefferies.
I've got 2 questions, so I'll take them one by one. Just first one, if you could give any early thoughts on Q1, and I'm not asking you to give us a guidance here, but just more so if we do have a stabilization in prices from today onwards, would those windfall losses be digested before the end of the year? Or would you expect those to continue into Q1?
No, Alan, I think assuming that demand stays where it is and process stays stable, we would still see some windfalls going through in Q1 because look, the contractual business that we do have has some delay and you've seen there were some write-downs we had on our inventories, but still compared to the price decline we saw that is rather limited to the effect, but again, let me state the current underlying business that we signed is margin-wise intact compared to our replacement cost. So yes, digestion will still be there in Q1, but the outlook as things stay stable is not [ a bad path ].
Okay. Got it. And second one, would you be able to help us with even a rough range about what you think the net working capital release could be in Q4? And then also just speak a little bit about how you're thinking of what to do with such a strong cash flow in Q4. Is it just pay down more debt? Or have you had any discussions with your large shareholder about whether they will be able or willing to participate in a buyback that would allow you to scoop up some cheap shares?
First of all, no, on net working capital, we want to further in tonnages, reduce where we are and then see what the outcome will be and how it goes and how far we will come there and replacement costs are lower, so therefore, it should be a strong cash flow. What we will do with all of that is to be seen then, first of all, is clearly reducing our debt that's the priority right. Everything else is too early to speculate.
[Operator Instructions] There are currently no further questions. I will hand the call back to you -- sorry, Alan came back into the queue. I'll just open his line for you.
I thought I would jump in with another one. Can you just speak a little bit more around automotive demand in both U.S. and Europe. I mean there was a quick comment about improved call-offs in Europe, but in the U.S., how are we seeing that demand recover post summer? And if you had to kind of put an estimate on where the demand relative to normalized rates in both regions, what would you estimate that to be?
I think in the U.S., we're currently producing at a 14 million unit rate. I think the feeling is we should see another 7%, 8% increase next year. Of course, in the U.S., the auto sector is not quite as large for us as it is in Europe. But we certainly see strength across the board, but really more so in Mexico. Mexico has really been quite positive.
Well, for Europe, we see actually a steady take-off for materials for the Q4 after, let's say after the seasonal lower levels before also triggered by supply chain constraints. So that looks good. For next year, the overall question is how much of the consumption demand will be staggered due to, let's say, recessional fears in the consumption behavior. But overall, we see no growth, but we see a steady offtake for the Q4.
There are currently no further questions. I will hand the call back.
Let’s try to finalize it then as we have the ad hoc statement already beforehand, I think there was not so much news and not too many questions to be expected. I hope we could clarify the situation a little bit how we see it going forward. And thanks for the questions and for listening.
Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect. Speakers, please stand by.