VDM Metals Holding GmbH

VDM Metals Holding GmbH

Werdohl

Befreiender Konzernabschluss zum Geschäftsjahr vom 01.01.2023 bis zum 31.12.2023

Acerinox S.A.

Madrid/Spanien

(The attached External Auditor's Report, Consolidated Annual Accounts and Consolidated Management Report for the fiscal year ended 31 December 2023, have been originally issued in Spanish. The English version is not considered official or regulated financial information. In the event of discrepancy, the Spanish-language version prevails.)

Auditor's report

Consolidated annual accounts at December 31, 2023

Consolidated management report

This version of our report is a free translation of the original, which was prepared in Spanish. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

Independent auditor's report on the consolidated annual accounts

To the shareholders of Acerinox, S.A.

Report on the consolidated annual accounts

Opinion

We have audited the consolidated annual accounts of Acerinox, S.A. (the Parent company) and its subsidiaries (the Group), which comprise the balance sheet as at 31 December 2023, and the profit or loss account, statement of comprehensive income, statement of changes in equity, cash flow statement and related notes, all consolidated, for the year then ended.

In our opinion, the accompanying consolidated annual accounts present fairly, in all material respects, the equity and financial position of the Group as at 31 December 2023, as well as its financial performance and cash flows, all consolidated, for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain.

Basis for opinion

We conducted our audit in accordance with legislation governing the audit practice in Spain. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated annual accounts section of our report.

We are independent of the Group in accordance with the ethical requirements, including those relating to independence, that are relevant to our audit of the consolidated annual accounts in Spain, in accordance with legislation governing the audit practice. In this regard, we have not rendered services other than those relating to the audit of the accounts, and situations or circumstances have not arisen that, in accordance with the provisions of the aforementioned legislation, have affected our necessary independence such that it has been compromised.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual accounts of the current period. These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Other information: Consolidated management report

Other information comprises only the consolidated management report for the 2023 financial year, the formulation of which is the responsibility of the Parent company's directors and does not form an integral part of the consolidated annual accounts.

Our audit opinion on the consolidated annual accounts does not cover the consolidated management report. Our responsibility regarding the consolidated management report, in accordance with legislation governing the audit practice, is to:

On the basis of the work performed, as described above, we have verified that the information mentioned in section a) above has been provided in the manner required by applicable legislation and that the rest of the information contained in the consolidated management report is consistent with that contained in the consolidated annual accounts for the 2023 financial year, and its content and presentation are in accordance with applicable regulations.

Responsibility of the directors and the audit commission for the consolidated annual accounts

The Parent company's directors are responsible for the preparation of the accompanying consolidated annual accounts, such that they fairly present the consolidated equity, financial position and financial performance of the Group, in accordance with IFRS-EU and other provisions of the financial reporting framework applicable to the Group in Spain, and for such internal control as the aforementioned directors determine is necessary to enable the preparation of consolidated annual accounts that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated annual accounts, the Parent company's directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the aforementioned directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The Parent company's audit commission is responsible for overseeing the process of preparation and presentation of the consolidated annual accounts.

Auditor's responsibilities for the audit of the consolidated annual accounts

Our objectives are to obtain reasonable assurance about whether the consolidated annual accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with legislation governing the audit practice in Spain will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated annual accounts.

As part of an audit in accordance with legislation governing the audit practice in Spain, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

We communicate with the Parent company's audit commission regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Parent company's audit commission with a statement that we have complied with relevant ethical requirements, including those relating to independence, and we communicate with the aforementioned those matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Parent company's audit commission, we determine those matters that were of most significance in the audit of the consolidated annual accounts of the current period and are therefore the key audit matters.

We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter.

Report on other legal and regulatory requirements

European single electronic format

We have examined the digital files of the European single electronic format (ESEF) of Acerinox, S.A. and its subsidiaries for the 2023 financial year that comprise an XHTML file which includes the consolidated annual accounts for the financial year and XBRL files with tagging performed by the entity, which will form part of the annual financial report.

The directors of Acerinox, S.A. are responsible for presenting the annual financial report for the 2023 financial year in accordance with the formatting and markup requirements established in the Delegated Regulation (EU) 2019/815 of 17 December 2018 of the European Commission (hereinafter the ESEF Regulation). In this regard, the Annual Corporate Governance Report and the Annual Report on Directors' Remuneration have been incorporated by reference in the consolidated management report.

Our responsibility is to examine the digital files prepared by the Parent company's directors, in accordance with legislation governing the audit practice in Spain. This legislation requires that we plan and execute our audit procedures in order to verify whether the content of the consolidated annual accounts included in the aforementioned digital files completely agrees with that of the consolidated annual accounts that we have audited, and whether the format and markup of these accounts and of the aforementioned files has been effected, in all material respects, in accordance with the requirements established in the ESEF Regulation.

In our opinion, the digital files examined completely agree with the audited consolidated annual accounts, and these are presented and have been marked up, in all material respects, in accordance with the requirements established in the ESEF Regulation.

Report to the audit commission of the Parent company

The opinion expressed in this report is consistent with the content of our additional report to the audit commission of the Parent company dated 28 February 2024.

Appointment period

The General Ordinary Shareholders' Meeting held on 23 May 2023 appointed us as auditors of the Group for a period of one year, for the year ended 31 December 2023.

Previously, we were appointed by resolution of the General Ordinary Shareholders' Meeting for a period of tres years and we have audited the accounts continuously since the year ended 31 December 2017.

Services provided

Services provided to the Group for services other than the audit of the accounts are disclosed in note 21 to the consolidated annual accounts.

PricewaterhouseCoopers Auditores, S.L. (S0242)

Original in Spanish signed by

Annual Accounts of the Consolidated Group for the year ended 31 December 2023

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Note 2). In the event of a discrepancy, the Spanish-language version prevails.

TABLE OF CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES

NOTE 1 - GENERAL INFORMATION

NOTE 2 - ACCOUNTING POLICIES

NOTE 3 - ACCOUNTING ESTIMATES AND JUDGEMENTS

NOTE 4 - FINANCIAL RISK MANAGEMENT

NOTE 5 - SCOPE OF CONSOLIDATION

NOTE 6 - SEGMENT REPORTING

NOTE 7 - INTANGIBLE ASSETS

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

NOTE 9 - INVESTMENT PROPERTY

NOTE 10 - RIGHT-OF-USE ASSETS (LEASES)

NOTE 11 - INVENTORIES

NOTE 12 - FINANCIAL INSTRUMENTS

NOTE 13 - CASH AND CASH EQUIVALENTS

NOTE 14 - EQUITY

NOTE 15 - DEFERRED INCOME

NOTE 16 - PROVISIONS AND CONTINGENCIES

NOTE 17 - INCOME AND EXPENSES

NOTE 18 - NET FINANCE COSTS

NOTE 19 - TAX MATTERS

NOTE 20 - RELATED PARTY BALANCES AND TRANSACTIONS

NOTE 21 - AUDIT FEES

NOTE 22 - EVENTS AFTER THE REPORTING PERIOD

CONSOLIDATED ANNUAL ACCOUNTS

CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

2. CONSOLIDATED STATEMENT OF PROFIT OR LOSS

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

3. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

4. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

5. CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of euros at 31 December 2023 and 2022)

The accompanying Notes 1 to 22 are an integral part of these Consolidated Annual Accounts.

NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS

NOTE 1 - GENERAL INFORMATION

Name of the Parent: Acerinox, S.A. (hereinafter, "the Company").

Incorporation: the Company was incorporated as a public limited liability company for an indefinite period of time on 30 September 1970.

Registered office: calle Santiago de Compostela, n° 100, Madrid - Spain.

Company object and main business activities: the Group's main business activities, which coincide with the Company object, consist of the manufacture, processing and marketing of stainless-steel products and special alloys. These activities are performed through its subsidiaries.

The Acerinox Group has the most extensive global presence in the production and distribution of stainless steel and high-performance alloys and is one of the most competitive companies in its sector. Acerinox is the leader in its sector in the United States and on the African continent, is widely recognised in Europe, and holds the top position globally for sales in high-performance alloys.

The Group has six stainless-steel plants on four continents, located in Campo de Gibraltar (Spain), Ponferrada and Igualada (Spain), Ghent (Kentucky, USA), Middleburg (Mpumalanga, South Africa) and Johor Middleburg (Mpumalanga, South Africa) and Johor Bahru (Malaysia). In addition, it has five high-performance alloy plants in Germany (Unna, Duisburg, Siegen, Werdohl and Altena) and two more in the USA (New Jersey and Nevada). The Group also has an extensive distribution network that enables it to sell in more than 80 countries. The Group boasts a steel production capacity of 3.5 million tonnes.

Note 5 details all the companies included in the scope of consolidation of Acerinox and the business activities they each perform.

The parent's main business activity is that of a holding company, in its condition as the parent of the Acerinox Group. Acerinox, S.A. approves and supervises the strategic business areas. It also provides various corporate services (including legal, accounting and consulting) and is responsible for the management and administration of financing within the Group.

Fiscal year: the fiscal year of Acerinox, S.A. and of all its Group companies covers 12 months. It begins on 1 January and ends on 31 December.

Authorisation for issue of the financial statements: these consolidated annual accounts were authorised for issue by the Board of Directors of Acerinox, S.A., on 28 February 2024.

NOTE 2 - ACCOUNTING POLICIES

2.1 Statement of compliance

These consolidated annual accounts of the Group were prepared in accordance with the International Financial Reporting Standards (IFRSs) and related interpretations (IFRICs) adopted by the European Union (EU-IFRSs hereinafter) and with the other provisions of the applicable regulatory financial reporting framework.

The 2023 annual accounts were prepared using the same accounting principles (EU-IFRS) as for 2022. The standards and amendments adopted by the European Union and required to be applied from 2023 had no impact on the Group, as described below:

2.2 Assessment of the main standards, amendments and interpretations that will be mandatorily applicable the coming years

There are new standards and interpretations which will be mandatorily applicable in the coming years and have not been applied early by the Group.

The standards, interpretations and amendments approved by the European Union and applicable as of 1 January 2024 which have not been adopted in advance by the Group and which could have an impact, are as follows:

The standards, interpretations and amendments that have not been adopted by the European Union and which have not been adopted in advance by the Group, but which could have an impact, are detailed below:

2.3 Basis of presentation of the consolidated annual accounts

These Consolidated Annual Accounts of the Group were formally prepared by the parent's directors to present fairly the Group's consolidated equity and consolidated financial position as at 31 December 2023 and 2022, and the consolidated results of its operations, the changes in consolidated equity and the consolidated cash flows of the Group for the years then ended.

The figures for 2023 are presented for comparison purposes with last financial year's figures for each item in the Annual Accounts.

These consolidated annual accounts were prepared in euros, rounding the figures off to the nearest thousand, and were prepared on a historical cost basis, except for the following assets and liabilities which were measured at fair value: derivative financial instruments and the defined benefit plans. Inventories were measured at the lower of cost and net realisable value. For the Group's company in Argentina (Acerinox Argentina, S.A.), the rules relating to hyperinflationary economies are applied, as established in Note 14.6.

These consolidated annual accounts were prepared on the basis of the separate accounting records of the parent and of each of the subsidiaries that make up the Acerinox Group. The consolidated annual accounts include certain adjustments and reclassifications made to unify the accounting and presentation policies applied by the Group companies with those applied by the Company. The consolidation principles applied are detailed in Note 2.5.

For the fiscal year beginning on 1 January 2023 and ending on 31 December 2023 the three German companies of the High Performance Alloys Division (VDM Metals Holding GmbH, VDM Metals GmbH and VDM Metals International GmbH) have availed themselves of the exemption permitted under section 291.1 HGB (Handelsgesetzbuch, German Commercial Law) and section 264.3 of the same Law. These exemptions free them from the obligation to present consolidated financial statements of the VDM subgroup, as they are part of a Group that consolidates and publishes its financial statements, and also allow them certain simplifications in the authorisation for issue of separate financial statements.

Preparation of the consolidated annual accounts in accordance with EU-IFRS standards requires the parent company's directors to make certain judgements, estimates and assumptions that affect the application of the accounting policies and, therefore, the figures presented in the consolidated statement of financial position and consolidated statement of profit or loss. The estimates made are based on historical experience and other factors that are considered reasonable. The Group could revise such estimates if changes were to occur in certain events or circumstances. The areas requiring the greatest degree of judgement in applying EU-IFRSs and those involving estimates that are significant for the consolidated financial statements are disclosed in Note 3. Also, Note 4 provides qualitative and quantitative information on the risks assumed that could affect future years.

The Consolidated Annual Accounts for 2022 were approved by the shareholders at the Annual General Meeting held on 23 May 2023. The Group's Consolidated Annual Accounts for 2023 have not yet been approved by the shareholders at the Annual General Meeting. The Company's Board of Directors considers that these consolidated annual accounts will be approved by the shareholders at the Annual General Meeting without any changes.

2.4 Going concern and accrual bases of accounting

The consolidated annual accounts were prepared in accordance with the going concern basis of accounting. Revenue and expenses are recognised on an accrual basis and not on the basis of their dates of collection or payment.

2.5 Basis of consolidation

a) Subsidiaries

Subsidiaries are companies over which the Company directly or indirectly exercises control. The Company is deemed to exercise control when it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Also, the Company is deemed to have power when it has existing substantive voting rights that give it the current ability to govern the financial and operating activities and policies of the subsidiary.

The financial statements of the subsidiaries are included in the annual consolidated annual accounts from the date on which the Group obtains control, and are excluded from consolidation on the date that control ceases to exist.

The Group assesses the date on which control is obtained, also taking into account the possible restrictions established in the contracts that prevent control from being obtained until circumstances that are beyond the Group's control arise, such as approval by an international body or any other condition precedent provided for in the contract.

The Group took into account potential voting rights to assess the degree of control it exercises over the Group companies.

The accounting policies of the subsidiaries were adapted to the Group's accounting policies.

All the subsidiaries that form part of the Acerinox Group and were included in the scope of consolidation at 31 December 2023 and 2022 are listed in Note 5.

b) Non-controlling interests

"Non-controlling interests" represents the portion of the Group's profit or loss and net assets attributable to non-controlling interests. The share of non-controlling interests both in the Group's net assets and in comprehensive income for the year are presented separately in consolidated equity, in the consolidated statement of profit or loss and in the consolidated statement of comprehensive income.

Non-controlling interests in the subsidiaries acquired are recognised at the date of acquisition at the proportionate share of the fair value of the net identifiable assets.

The profit or loss and each component of other comprehensive income are allocated to the equity attributable to shareholders of the parent and to non-controlling interests in proportion to their relative interests, even if this results in the non-controlling interests having a deficit balance.

When the share of equity held by non-controlling interests changes, the Group adjusts the carrying amount of the controlling and non-controlling interests to reflect the changes that have arisen in its relative interests in the subsidiary. The Group recognises directly in equity the difference between the amount by which the non- controlling interests are adjusted and the fair value of the consideration paid or received, and attributes that difference to the owners of the parent. The profit or loss attributable to the non-controlling shareholder from the date of acquisition is recognised as profit or loss attributable to noncontrolling interests.

The Group assesses whether there are any clauses or financial instruments in contracts with non-controlling interests that could oblige the entity to deliver cash or another financial asset, or to settle it as if it were a financial liability, in order to determine its classification and measurement. For this purpose, all the terms and conditions agreed between the members of the Group and the holders of the instrument are considered. To the extent that there is an obligation or settlement provision, the instrument is classified as a financial liability in the consolidated financial statements.

These options are occasionally conditional on the occurrence of an uncertain future event beyond the control of both the issuer and the holder of the instrument. If, in addition, the issuer of such an instrument does not have the unconditional right to avoid delivering cash or another financial asset, it is deemed to be a financial liability of the issuer unless, inter alia, the part of the contingent settlement provision that could require settlement in cash or another financial asset is not genuine, i.e. is extremely exceptional, highly abnormal and very unlikely.

c) Associates

Associates are all entities over which the Group exercises significant influence in relation to financial and operating decisions, but over which it does not have control or joint control. In general terms, the Group is considered to exercise significant influence when it holds more than 20% of the voting power.

The financial statements of the associates are included in the consolidated financial statements using the equity method. The Group's share of the post-acquisition profits or losses of its associates is recognised in profit or loss for each year with a credit or charge to "share of results of companies accounted for using the equity method" in the consolidated statement of profit or loss.

Losses of associates attributable to the Group are limited to the value of the net investment, since the Group has not incurred legal or constructive obligations.

The Group does not have any significant investments in associates.

d) Business combinations

The Group applied IFRS 3, "Business Combinations" (revised 2008) to business combinations carried out on or after 1 January 2010.

The Group applies the acquisition method for business combinations.

The acquisition date is that on which the Group obtains control of the acquiree. The Group considers that control is obtained when the investor, due to its involvement with the acquiree, is exposed, or has rights, to variable returns and has the ability to affect those returns through its power over the investee. In an acquisition, the Group is generally deemed to have obtained control when the consideration is legally transferred and the assets and liabilities of the acquiree are acquired and assumed, respectively. However, control may be obtained at a prior date if, by means of a written agreement, a prior date of obtainment of control is envisaged. The Group considers all pertinent facts and circumstances in order to identify the acquisition date.

The consideration transferred in a business combination is calculated as the sum of the acquisition-date fair values of the assets transferred, the liabilities incurred or assumed, the equity interests issued and any contingent consideration that depends on future events or the fulfilment of certain conditions in exchange for control of the acquiree.

The consideration transferred excludes any amounts that are not part of the exchange for the acquiree. The costs associated with an acquisition are recognised as expenses on an accrual basis.

The Group recognises at their acquisition-date the fair value of assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The liabilities assumed also include contingent liabilities to the extent that they represent present obligations that arise from past events and their fair value can be measured reliably. In addition, at the acquisition date the Group recognises the indemnification assets granted by the seller following the same measurement criteria of the indemnification item of the acquired business, considering, where appropriate, the insolvency risk and any contractual limitation on the indemnified amount.

Until they are settled, cancelled or expire, contingent liabilities are measured at the higher of the amount initially recognised less the amounts that should be recognised in profit or loss in accordance with the standard on recognition of revenue from customers and the amount that would be recognised in accordance with the standard on measuring provisions.

The following are exempted from the application of the general measurement criteria: non-current assets and disposal groups classified as held for sale, long-term defined benefit obligation liabilities, share-based payment transactions, deferred tax assets and liabilities and intangible assets arising from the acquisition of previously granted rights, which shall be measured in accordance with their respective accounting policies.

The assets acquired and liabilities assumed are classified and designated for subsequent measurement on the basis of the contractual terms, economic conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date, except in the case of leases in which the business acquired is the lessor, and insurance contracts.

The acquirer's application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements.

Any excess of the consideration transferred plus the value assigned to the non-controlling interests over the net amount of the assets acquired and the liabilities assumed is recognised as goodwill.

If the business combination can only be provisionally calculated, the identifiable net assets are initially recognised at their provisional amounts, recognising the valuation adjustments made in the measurement period as if they had been known at the acquisition date and restating, where applicable, the comparative figures for the previous year. In any event, adjustments to provisional amounts only reflect information on facts and circumstances that existed at the acquisition date and, if known, would have affected the measurement of the amounts recognised at that date. The measurement period will end as soon as the acquirer receives the information it was seeking about facts and circumstances that existed at the date of acquisition or concludes that no further information can be obtained. However, such measurement period shall not exceed one year from the date of acquisition.

After the measurement period ends, the initial accounting for a business combination is revised only to correct an error.

e) Balances and transactions eliminated on consolidation

Intra-Group balances and transactions, as well as unrealised gains or losses with third parties arising from such transactions, are eliminated on preparation of the consolidated annual accounts.

2.6 Translation differences

a) Functional and presentation currency

The items included in the annual accounts of each Group company are measured using the currency of the primary economic environment in which the company operates (its functional currency). The functional currency of the majority of the Group companies is the local currency, except for Bahru Stainless, Sdn. Bhd, NAS Canada, Inc. and NAS Mexico, S.A de CV, whose functional currency is the USD.

The consolidated annual accounts are presented in thousands of euros, since the euro is the functional and presentation currency of the parent.

b) Foreign currency transactions, balances and cash flows

Foreign currency transactions are translated to the functional currency using the exchange rate prevailing at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated at the reporting date at the exchange rates then prevailing. Any exchange differences that arise from such translation are recognised in the consolidated statement of profit or loss.

Non-monetary assets and liabilities denominated in foreign currencies and recognised at historical cost are translated to the functional currency using the exchange rates prevailing at the date of the transaction. The historical cost of non-monetary assets belonging to countries considered to be hyperinflationary is remeasured at the end of each reporting period, applying a price index to express them in terms of the measuring unit current at the end of the reporting period. Section d) includes a detailed description of the measurement of line items corresponding to hyperinflationary economies.

Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value are translated to the corresponding functional currency by applying the measurement date exchange rate. Exchange differences on non-monetary items measured at fair value are presented as a component of the fair value gain or loss.

In presenting the consolidated statement of cash flows, cash flows arising from transactions in a foreign currency are translated to the functional currency by applying the exchange rates prevailing at the date of the cash flow.

Exchange differences resulting from the settlement of foreign currency transactions and from translation to the functional currency of monetary assets and liabilities denominated in foreign currency are recognised in profit or loss.

c) Translation of foreign operations

For the preparation of the Group's Consolidated Financial Statements, the assets and liabilities of the companies whose functional currency is not the euro are translated to euros by applying the exchange rates prevailing at the reporting date; on the other hand, income and expenses are measured at the average exchange rate for the period. Any exchange differences arising from that measurement are recognised as a separate component of equity and of the consolidated statement of comprehensive income ("translation differences"). The translation differences are reclassified to profit or loss when the company that generates them ceases to form part of the Group.

The Group applied the exemption for first-time application provided for in IFRS 1 in relation to cumulative translation differences and, accordingly, the translation differences recognised in the consolidated annual accounts that were generated prior to 1 January 2004 are shown in retained earnings in reserves.

In presenting the consolidated statement of cash flows, cash flows, including the comparative balances of foreign subsidiaries, are translated to euros by applying the same criteria as those applied for the restatement of the financial statements.

d) Restatement of financial information concerning hyperinflationary economies

On 1 July 2018, Argentina was declared to be a hyperinflationary economy, as it met the classification requirements established in IAS 29. The Acerinox Group has an entity in Argentina, as detailed in Note 5.

The financial statements of an entity that reports in the currency of a hyperinflationary economy are stated in terms of the measuring unit current at the reporting date. Both the comparative figures for the previous year and the information for prior periods are restated only when they are significant for the Group, in terms of the measuring unit current at the end of the reporting period. Since most of the non-monetary items are recognised at historical cost, the restated cost of each item is determined by applying to the historical cost and to the accumulated depreciation and amortisation charge the change in a general price index from the date of acquisition until the end of the reporting period. The Group did not restate the balances for prior years since the impact is not significant.

At the beginning of the first period of application of this standard, the components of owners' equity, except retained earnings and asset revaluation surpluses, shall be restated by applying a general price index to the various items from the dates on which they were contributed or from the date on which they otherwise arose. The restated retained earnings shall arise from the remaining amounts in the consolidated statement of financial position. At the end of the first period and in subsequent periods, all the components of equity shall be restated by applying a general price index from the beginning of the period, or from the contribution date, if later.

All the items in the statement of comprehensive income shall be stated in the monetary unit current at the end of the reporting period. For this purpose, all the amounts shall be restated to reflect the change in the general price index from the date on which the income and expenses were included in the financial statements.

Gains or losses arising from the net currency position shall be included in profit or loss for the year.

Note 14.6 includes the impacts of the measurement of the financial statements of Acerinox Argentina pursuant to this standard both in 2023 and 2022.

2.7 Intangible assets

The Group recognises an intangible asset only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and if the cost of the asset can be measured reliably.

The Group recognises all the intangible assets identified in a business combination separately from goodwill, irrespective of whether the acquiree had recognised the asset prior to the business combination occurring.

Intangible assets are initially recognised at cost. The cost of intangible assets acquired in a business combination is equal to the acquisition-date fair value. The fair value of an intangible asset will reflect the expectations of the market participants at the acquisition date about the probability that the expected future economic benefits embodied in the asset will flow to the entity.

a) Goodwill

Business combinations are accounted for using the acquisition method. Goodwill represents the excess of the cost of acquisition of the Group's interest over the fair value of the identifiable net assets of the acquiree at the acquisition date (assets, liabilities and contingent liabilities).

In the case of the Acerinox Group, the goodwill recognised in the consolidated financial statements includes mainly the goodwill that arose in 2020 on acquisition of all the shares of VDM Metals holding, GmbH.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but rather is assessed annually (or more frequently if events indicating a potential impairment loss on the asset are identified) for impairment, pursuant to IAS 36. Accordingly, goodwill is allocated to each of the cash-generating units of the company to which the economic benefits of the business combination synergies are expected to flow. If the recoverable amount of the cash-generating unit is lower than the carrying amount of the goodwill, the corresponding impairment loss shall be recognised. The recoverable amount of the cash- generating units to which the Group's goodwill is allocated is determined based on calculations of their value in use (see Note 2.11).

Gains from a bargain purchase arising from a business combination are recognised directly in profit or loss, once the assets, liabilities and contingent liabilities of the acquiree have been remeasured, as established in the standard.

Internally generated goodwill is not recognised as an asset.

b) Internally generated intangible assets

Research expenditure aimed at acquiring new scientific or technical knowledge is recognised as an expense in the consolidated statement of profit or loss when incurred.

Development expenditure relating to research findings applied to produce new products and processes, or to significantly improve existing products and processes, is capitalised if the product or process is considered technically and commercially feasible, if the Group has the resources required to complete the development programme and if it is considered that it will generate future cash flows that will enable its recovery.

Development expenditure is capitalised by crediting "work performed by the Group on non-current assets" in the consolidated statement of profit or loss. The capitalised costs include the cost of materials, direct labour and directly attributable general expenses.

The Group does not capitalise development expenditure in cases in which, following the start-up of the project, the future cash flows of the projects obtained through research and development activities are not monitored.

The costs incurred in performing activities for which the costs attributable to the research phase cannot be clearly distinguished from those corresponding to the intangible asset development phase are recognised in the consolidated statement of profit or loss.

Capitalised development expenditure is not amortised when the project is under way. Once these projects have been successfully concluded, the expenditure is amortised systematically over their estimated useful lives. In the event that the circumstances that permitted capitalisation of the project expenditure change, the portion not yet amortised is taken to profit or loss in the year of the change in circumstances.

The findings of the R&D&I activities are patented in some cases, especially in the Group's new division dedicated to the manufacture of high-performance alloys.

c) Customer portfolio

As part of the business combination with the acquisition of the VDM Group, the Group recognised an intangible asset arising from the acquired company's customer portfolio.

The Group considers that the relationship with customers arising from a business combination is an identifiable asset provided that it arises from contractual or other legal rights, the rights are separable and they are expected to generate future economic benefits. It is an asset with a finite useful life.

d) Computer software

Acquired licenses for computer software are capitalised based on the costs incurred to acquire them and prepare them for use of the specific software.

Computer software maintenance costs are recognised as such on an accrual basis.

Costs directly related to the production of unique and identifiable computer software by the Group, provided that they are likely to generate economic benefits exceeding those costs over more than one year, are recognised as intangible assets. The capitalised costs include direct labour and directly attributable general expenses.

e) Depreciation and amortisation

Intangible assets with finite useful lives are amortised systematically over the years of their useful life. Intangible assets are amortised from the date on which they become ready for use.

The estimated useful lives are as follows:

The Group does not have any intangible assets with an indefinite useful life.

The residual value, the depreciation method and the useful life of the assets are reviewed, and adjusted if necessary, at each reporting date. Changes in the criteria initially established are accounted for as a change in estimate.

2.8 Property, plant and equipment

a) Owned assets

Property, plant and equipment are stated at acquisition cost or deemed cost less any accumulated depreciation and any recognised impairment losses. Property, plant and equipment acquired in business combinations are recognised at acquisitiondate fair value.

In the event that an item of property, plant and equipment requires a period of time to get ready for its intended use, it is classified as property, plant and equipment in the course of construction. An asset is considered to be ready for its intended use when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Once in use, it is reclassified to the corresponding category of property, plant and equipment, depending on its nature.

The cost of the property, plant and equipment constructed by the Group is determined by following the same principles that would be used had it been acquired, also taking into account the criteria established for the production cost of inventories. The production cost is capitalised by crediting the costs attributable to the asset to accounts under "work performed by the Group on non-current assets" in the consolidated statement of profit or loss.

Borrowing costs arising from loans directly related to financing the construction of items of property, plant and equipment are capitalised as a portion of the cost until the start-up of the asset. Also, the Group capitalises certain borrowing costs corresponding to loans that are not directly earmarked for the financing of investments, applying a capitalisation rate to the amounts used to finance these assets. This capitalisation rate is calculated based on the weighted average of the borrowing costs applicable to loans received by the entity which differ from those specifically designated to finance the asset. The amount of the capitalised costs does not in any case exceed the total amount of borrowing costs incurred in the period.

The cost of property, plant and equipment includes the costs related to major repairs, which are capitalised and depreciated over the estimated period until the next major repair.

After initial recognition of the asset and once it is ready for use, only the costs incurred for improvements that it is probable will give rise to future economic benefits and that can be measured reliably are capitalised. In this connection, the costs of day-to-day servicing of property, plant and equipment are recognised in profit or loss as they are incurred.

The Group classifies spare parts as inventories, unless they are expected to be used for more than one year, in which case they are classified as property, plant and equipment and are depreciated over their useful life. Once a spare part has been used to replace a damaged part, the latter is written off at its carrying amount. Property, plant and equipment spare parts are classified under "plant and machinery" in the breakdown of property, plant and equipment in Note 8.

Gains or losses on the sale or disposal of property, plant and equipment are recognised in profit or loss as operating income or expenses.

b) Depreciation and amortisation

Items of property, plant and equipment are depreciated systematically on a straight-line basis over the years of their useful life. For these purposes, depreciable amount is understood to be acquisition or deemed cost less residual value. The Group calculates the depreciation charge separately for each part of an item of property, plant and equipment whose cost is significant in relation to the total cost of the item.

The residual value, the depreciation method and the useful life of the assets are reviewed, and adjusted if necessary, at each reporting date. Changes in the criteria initially established are accounted for as a change in estimate.

Land is not depreciated, unless it is acquired in usufruct for a certain number of years, in which case it is depreciated over the term of the usufruct.

Property, plant and equipment are depreciated over the following years of useful life:

2.9 Investment property

Investment property is considered to consist of the buildings owned by the Group that are not occupied by it and are held to earn returns, either through rental or for capital appreciation.

The Group only transfers items between "property, plant and equipment" and "investment property" when a change in the use of the property occurs.

Investment property is initially recognised at cost, including transaction costs. After initial recognition, the Company applies the same requirements established for property, plant and equipment.

Lease income is recognised as indicated in Note 2.20-b).

2.10 Right-of-use assets

At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a specified period of time in exchange for consideration.

When the Group acts as lessee, it recognises in the consolidated statement of financial position the assets and liabilities arising from the lease (except in the case of short-term leases and leases for which the underlying asset is of low value). The Group measures the right-of-use asset at cost, corresponding to the present value of the lease payments expected to be made over the lease term.

In order to determine the lease payments, the Group takes into account:

The Group measures lease liabilities at the present value of the total remaining lease payments, discounted using either the interest rate implicit in the lease, if that rate can be readily determined, or the lessee's incremental borrowing rate, for cases in which the rate is not established in the lease.

The Group considers the lease term to be the non-revocable period of a lease, plus the periods covered by the option to extend the lease, if the lessee is reasonably certain to exercise that option.

In determining the term of the lease and assessing the length of the non-revocable period of a lease, an entity applies the definition of a contract and determines the period for which the contract is enforceable. A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party.

After the commencement date, the Group measures the asset at its initial cost less accumulated depreciation and any accumulated impairment losses, adjusted to reflect any remeasurement of the lease liability.

Also, after the commencement date the Group measures the lease liability at amortised cost using the effective interest method. Whenever there are changes in contracts, the lessee shall remeasure the lease liability in order to reflect the new lease payments. The amount of the remeasurement of the lease liability shall be recognised as an adjustment to the right-ofuse asset.

In the case of short-term leases and leases for which the underlying asset is of low value, the Group recognises the lease payments as expenses on a straight-line basis over the lease term.

Note 10 includes detailed information on the right-of-use assets and lease liabilities recognised by the Group.

2.11 Impairment of non-financial assets

The carrying amount of the Group's non-financial assets other than inventories and deferred tax assets is reviewed at the end of each reporting period in order to assess whether any indication of impairment thereof exists. If such an indication exists, the Company estimates the recoverable amount of the asset.

The Group considers that indications of impairment exist when there is/are a significant decrease in the value of the asset, significant changes in the legal, economic or technological environment that could affect the measurement of assets, obsolescence or physical impairment, idle assets, low returns on assets, discontinuation or restructuring plans, repeated losses at the entity or substantial deviation from the estimates made. That is to say, the assessment of the existence of indications of impairment takes into account both external sources of information (technological changes, significant variations in market interest rates, market values of assets, etc.) and internal sources (evidence of obsolescence, etc.).

As established in Note 2.7, the recoverable amount of goodwill, which is not amortised, and of intangible assets not yet available for use is estimated at the end of each reporting period, unless prior to this date indications of a possible loss of value had been identified, in which case the assets would be tested for impairment.

Impairment losses on an asset are recognised whenever the carrying amount of the asset, or of the corresponding cashgenerating unit, exceeds its recoverable amount. Impairment losses on an asset are recognised as an expense in the consolidated statement of profit or loss.

The recoverable amount of an asset is the higher of fair value less costs of disposal and value in use.

In order to determine the recoverable amount, the Group occasionally may hire an independent expert.

Value in use is the present value of estimated cash flows, applying a discount rate that reflects the present market valuation of the time value of money and the specific risks of the asset in question. For assets that do not generate cash inflows themselves, the recoverable amount is calculated based on the cash-generating unit to which the asset belongs, considered as the smallest identifiable group of assets capable of generating cash inflows for the entity that are largely independent of the cash inflows from other assets or groups of assets.

In estimating the value in use of an asset, the Group takes into account the estimated future cash flows that the entity expects to obtain from the asset, expectations regarding possible variations in the amount or timing of those future cash flows, the time value of money and the risks inherent in the asset in question and any other factors that any other market participant would reflect in pricing the future cash flows derived from the asset. The Group also takes climate risks into account in determining future projections.

The effects of uncertainties in estimating the asset's value in use may be reflected as adjustments to future cash flows or as adjustments to the discount rate, with the result being a weighted average of all possible outcomes.

In determining value in use, the Group bases its cash flow projections on reasonable and well-founded assumptions that represent management's best estimates of the set of economic conditions that will prevail over the remaining life of the asset, giving greater weight to external evidence. Also, these cash flow projections are based on the budgets most recently approved by management. These projections generally cover a maximum period of five years, unless a longer time period can be justified.

The Group estimates cash flow projections beyond the period covered by the budgets, extrapolating such projections using a constant growth rate which does not exceed the average long-term growth rate of the stainless-steel industry, or the rate of the country or countries in which the entity operates.

Management assesses the reasonableness of the assumptions on which its current cash flow projections are based by examining the causes of differences between past and current cash flow projections, ensuring that the assumptions on which its current cash flow projections are based are consistent with actual past performance, and considering that the effects of subsequent events or circumstances that did not exist when those actual cash flows were generated justify those differences.

Notes 7.1 and 8.1 describe the variables and assumptions used by the Group to calculate recoverable amounts of both goodwill and tangible assets of the Group for which there is evidence of impairment, as well as to identify the cashgenerating units.

Except in the case of goodwill, impairment losses on an asset which were recognised in prior years are reversed through profit or loss only if there has been a change in the estimates used to determine the asset's recoverable amount since the most recent impairment loss was recognised. However, the new carrying amount may not exceed the carrying amount (net of depreciation and amortisation) that would have been determined had no impairment loss been recognised.

2.12 Financial instruments

The Group recognises a financial asset or financial liability in its consolidated statement of financial position when, and only when, it is a party to the contractual terms and conditions of the instrument in question.

2.12.1 Classification

The Group classifies financial assets on the basis of their measurement either at amortised cost or at fair value through profit or loss or other comprehensive income. The basis for classification depends on the entity's business model and the characteristics of the financial asset's contractual cash flows.

Financial liabilities are classified on the basis of their measurement. In general terms, they are classified as being measured at amortised cost, except for financial liabilities measured at fair value through profit or loss or other comprehensive income.

The Group does not generally reclassify any financial assets or liabilities, unless the business model changes.

2.12.2 Financial assets

A financial asset is any contractual right to receive cash or another financial asset.

Financial assets are initially recognised at fair value plus the transaction costs that are directly attributable to their acquisition or issue.

They are subsequently measured on the basis of each of the categories in which they have been classified:

a) Financial assets at fair value through profit or loss

The Group includes derivative financial instruments in this category, unless they are designated as hedge accounting instruments and meet the effectiveness conditions to be accounted for as such.

The derivative financial instruments included in this category are classified as current assets and are measured at fair value. Transaction costs that are directly attributable to the acquisition are recognised as an expense in profit or loss.

The changes in fair value are recognised in profit or loss. The fair value of financial instruments used to hedge items classified in financial profit or loss (mainly exchange differences) is recognised under "revaluation of financial instruments at fair value". However, for derivatives used to hedge the prices of raw materials used by the Company in the production cycle or earmarked for sale and which are not designated as hedges for accounting purposes, such changes are recognised under "other operating income" or "other operating expenses", depending on whether the measurement gives rise to a gain or a loss.

b) Financial assets at amortised cost

This category includes non-derivative financial assets with fixed or determinable payments which are not traded in an active market. Specifically, it includes loans granted and accounts receivable. They are classified as non-current only when they mature after more than 12 months from the reporting date. They are initially recognised at fair value which, in the absence of evidence to the contrary, is the transaction price plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method, except for accounts receivable measured at their transaction price as they do not have a significant financial component, they are expected to be received in the short-term and the effect of not discounting the related cash flows is not significant.

The Group makes the required valuation adjustments in accordance with the expected credit loss model, which takes into account historical claims incurred and other external factors. The impairment losses are calculated as the difference between the carrying amount of the aforementioned assets and the present value of the estimated future cash flows that they are expected to generate, discounted at the effective interest rate calculated upon initial recognition. These losses are recognised as an expense in the consolidated statement of profit or loss and are reversed with the recognition of income in profit or loss when the causes of their original recognition cease to exist.

The impairment loss model used by the Group is based on a historical analysis of the average credit losses at each of the subsidiaries and on the claims incurred under the credit insurance policies taken out, taking into account any non-recoverable amount (maximum coverage of 85%-95% and deductibles), and any post-claim recoveries, whether from the insurance company or the customers themselves. These estimates are reviewed within the Group's credit risk control system (Commercial, Financial and Commercial Risk Departments, the Risk Committee and the Corporate Risk Management Department), which continuously monitors the particular markets of each subsidiary, receives the input of specialists from insurance companies and reviews future estimates from international organisations of renowned prestige (IMF, OECD, etc.), also taking into account the macroeconomic estimates of each country. The Group takes into account and monitors significant changes in credit risk that may arise during the terms of the loans.

Amounts relating to discounted notes and bills and factoring of trade receivables are classified until maturity as trade receivables and, simultaneously, as current bank borrowings, unless substantially all the risks and rewards associated with those assets have been transferred, in which case they are derecognised.

The Group considers that it has transferred a financial asset when it has transferred the rights to receive the cash flows from the asset, or when it has retained the rights but has assumed the contractual obligation to pay those assets to another entity. In this case, the Group also considers the various additional conditions established in the standard (it has no obligation to pay any amount to another entity, unless it receives the cash flows derived from the financial asset; it cannot sell or offer the transferred financial assets as collateral; and it has an obligation to pay the cash flows received without significant delay). Also, if the Group does not retain the risks and rewards associated with those assets, it derecognises them.

Most of the factoring arrangements entered into by the Group meet this definition and, therefore, are derecognised from the consolidated statement of financial position.

c) Financial assets at fair value through other comprehensive income

This category includes the Group's ownership interests in the share capital of other companies over which it does not have control or exercise significant influence, and which it does not hold for trading.

These assets are generally classified as assets measured at fair value through profit or loss; however, the Group availed itself of the irrevocable option permitted by the standard to choose, on initial recognition, to present subsequent changes in fair value in other comprehensive income, since these assets are not held for trading.

They are initially recognised at fair value which, unless there is evidence to the contrary, is the transaction price plus any directly attributable transaction costs.

These assets are subsequently measured at fair value, provided that this can be measured reliably, recognising the gain or loss in other comprehensive income.

The fair value of listed securities is determined by reference to the share price. The fair value of financial assets not listed on an organised market is calculated by discounting future cash flows.

Ownership interests in the share capital of companies included in this category and whose market value cannot be measured reliably are measured at acquisition cost less any impairment losses.

Acquisitions and disposals of investments are recognised at the date on which the Group undertakes to acquire or sell the asset. Investments are derecognised when the rights to the cash flows from the investments expire or have been transferred and the Group has transferred substantially all the risks and rewards of their ownership.

The difference between the selling price and the fair value of financial assets at fair value through other comprehensive income is recognised in other comprehensive income.

2.12.3 Financial liabilities

For measurement purposes, the Group's financial liabilities are classified under the following categories:

a) Financial liabilities at amortised cost

This category includes the accounts payable and bonds issued by the Group.

It includes non-derivative financial liabilities with fixed or determinable payments. They are initially recognised at cost, which matches their fair value, less any transaction costs incurred. They are subsequently measured at amortised cost using the effective interest method. Any difference between the amount paid (net of transaction costs) and the repayment value is recognised in profit or loss. However, trade payables maturing within one year which do not have a contractual interest rate and are expected to be paid at short-term are stated at their nominal value.

The Group derecognises a financial liability when the obligation specified in the contract is either discharged or cancelled or expires.

When debt is refinanced, the Company assesses the significance of the modifications made to determine whether they are substantially different and, therefore, recognises the effects of the new agreement as if it were an extinguishment and, simultaneously, the recognition of a new loan. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, qualitative factors will be taken into account in the evaluation, such as the change in the interest rate from variable to fixed or the change in currency. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

Also, the Group has entered into reverse factoring arrangements with various financial institutions in order to manage payments to suppliers. Trade payables payment of which is managed by the banks are recognised under "trade and other payables" until the related obligation is discharged or cancelled or expires.

b) Financial liabilities at fair value through profit or loss

The Group includes derivative financial instruments in this category, provided that they are not financial guarantee contracts or designated as hedging instruments.

They are measured at fair value. The amount of the change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income. The remaining amount of the change in the fair value of the liability shall be presented in profit or loss, unless such treatment would create an accounting mismatch in profit or loss, in which case the entire fair value change shall be recognised in profit or loss.

The fair value of financial instruments used to hedge items classified in financial profit or loss (exchange differences and interest) is recognised under "revaluation of financial instruments at fair value". However, for derivatives used to hedge the prices of raw materials used by the Company in the production cycle or earmarked for sale and which are not designated as hedges for accounting purposes, such changes are recognised under "other operating income" or "other operating expenses", depending on whether the measurement gives rise to a gain or a loss.

At the Acerinox Group, derivative financial instruments are generally used on a short-term basis and, therefore, the change attributable to the credit risk is not significant.

2.12.4 Hedge accounting

The aim of hedge accounting is to represent in the financial statements the effect of the Group's risk management activities in which derivative financial instruments are used to hedge exposure to certain risks that might affect the statement of profit or loss. A hedging relationship qualifies for hedge accounting under IFRS 9 only if the following criteria are met:

At the inception of the hedge, the Group designates and formally documents the hedging relationship and the objective and strategy for undertaking the hedge.

Derivative financial instruments are initially recognised at acquisition cost, which matches fair value, and are subsequently measured at fair value.

Derivative financial instruments that do not qualify for hedge accounting are classified and measured as financial assets or liabilities at fair value through profit or loss. Derivative financial instruments that fulfil the criteria for cash flow hedge accounting are treated as such. Therefore, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income and subsequently recognised in profit or loss in the same period or periods during which the hedged expected future cash flows affect profit or loss.

The Group prospectively discontinues hedge accounting when the hedging instrument expires, is sold or the hedge no longer meets the criteria for hedge accounting. In such cases, the cumulative gain or loss recognised in equity is recognised in profit or loss.

The Group only undertakes cash flow hedges.

2.12.5 Fair value measurement

Financial instruments recognised at fair value are classified, based on the valuation inputs, in the following hierarchies:

2.12.6 Renewable Energy Contracts (PPA)

The Group has signed PPA (Power Purchase Agreement) contracts for the purchase of long-term renewable energy. These contracts are concluded through the physical purchase of energy consumed by the Group in its stainless-steel production facilities. These contracts do not allow cancellation through the exchange of financial instruments. They are therefore supply contracts for the Group's own use and the Group recognises the energy purchases in the income statement at the time of delivery for consumption and does not treat them as financial instruments.

2.13 Inventories

Inventories are initially recognised at acquisition or production cost. Subsequently, when the net realisable value of inventories is lower than their acquisition or production cost, the appropriate write-downs are made, with the related effect recognised in profit or loss.

The Group uses the same cost formula for all inventories that have the same nature and a similar use within the Group. They are measured using the weighted average cost formula.

Finished goods and work in progress are measured at the weighted average cost of raw and other materials consumed, incorporating the attributable portion of direct and indirect labour and general manufacturing costs based on the higher of normal production capacity or actual production. The Group does not include the cost of underutilisation of production capacity in the value of finished goods and work in progress. These are recorded directly as expenses for the period.

Net realisable value is the expected selling price of those goods less costs to sell. In the case of work in progress, the estimated costs of completion are also deducted from this price.

The Group does not write down raw materials if the finished products in which they will be incorporated are expected to be disposed of at or above production cost.

Any write-downs that reduce inventories to their net realisable value are reversed, up to the cost of the inventories, if the circumstances that gave rise to the write-downs cease to exist.

2.13.1 Emission allowances

The Group recognises CO ₂ emission allowances as inventories.

CO ₂ emission allowances are measured at acquisition cost. Freely allocated emission allowances are initially recognised at their market value on surrender. Simultaneously, a balancing entry for a grant is recognised for the same amount under "deferred income".

Emission allowances remain classified as inventories until surrendered.

At the end of each reporting period the Group assesses whether the market value of the allowances is lower than their carrying amount in order to determine whether there are any indications of impairment. If such indications exist, the Group determines whether the allowances will be used in the production process or earmarked for sale, and only in the second case shall the appropriate write-downs be recognised. These write-downs are reversed when the causes that gave rise to the writedown of the emission allowances cease to exist.

A provision for contingencies and charges is recognised for expenses relating to greenhouse gas emissions. This provision is maintained until the Group is required to discharge this obligation by surrendering the corresponding emission allowances. These expenses are incurred as the greenhouse gases are emitted.

In the case of freely allocated emission allowances, at the same time as the expense is recognised, the corresponding part of the deferred income account is cancelled, using an operating income account as the balancing entry.

In the case of exchanges of emission allowances, and since the Group's allowances were all freely acquired, the accounting treatment adopted by the Group is that applied to exchanges that lack commercial substance. The Group derecognises allowances surrendered at their carrying amount, and the amount received is recognised at fair value on surrender. The difference between the two values is recognised under "deferred income".

Note 11, inventories, includes detailed information on the emission allowances allocated and used in 2023 and 2022.

2.14 Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits at banks and other short-term, highly liquid investments, provided that they are readily convertible to cash and are subject to an insignificant risk of changes in value.

In the consolidated statement of cash flows, the Group classifies interest received and paid as cash flows from operating activities, dividends received as cash flows from investing activities and dividends paid as cash flows from financing activities.

2.15 Grants

2.15.1 Grants related to assets

Grants related to assets are grants received by the Group for the acquisition of property, plant and equipment and intangible assets. They are recognised under "deferred income" in the consolidated statement of financial position. They are initially recognised at the original amount awarded, provided that there is reasonable assurance that the grants will be received and the Group fulfils all the conditions attaching to them. They are subsequently taken to profit or loss on a straight-line basis over the useful lives of the related assets financed by the grants.

2.15.2 Grants related to income

Grants related to income are grants received to finance specific expenses. They are recognised as income as the expenses are incurred. Grants relating to the free allocation of CO ₂ emission allowances are credited to profit or loss when the related greenhouse gas emission expense is recognised.

2.16 Employee benefits

Employee benefits may comprise both short-term and long-term obligations, which include:

Long-term commitments include:

The accounting policies followed by the Group where there are long-term commitments to its employees are as follows:

a) Defined contribution plans

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all the employees the benefits relating to the services rendered in the current and prior periods.

Certain Group companies make mandatory, voluntary or contractual pension plan, life or other insurance policy contributions. Once the contributions have been paid, the Group does not have additional payment obligations. The contributions are classified as employee benefits and are recognised in profit or loss on an accrual basis. The benefits paid in advance are recognised as an asset to the extent that they may give rise to a cash refund or a reduction in future payments. No provisions are recognised for the defined contribution plans, since they do not give rise to future obligations for the Group.

b) Defined benefit plans and other obligations

A defined benefit plan is an obligation acquired by the Company to its employees to remunerate services rendered. These obligations are established in accordance with the local legislation in certain countries or contracts signed to that effect, or are included in collective bargaining agreements prevailing at certain Group companies.

Accrued obligations are calculated as the present value of the accumulated benefits accrued by the employees until the reporting date, using actuarial assumptions. The calculations are made by independent experts. The Group companies recognise any corresponding provisions to cover these obligations.

The existing obligations may be classified as follows:

The Group meets the obligations relating to the outsourcing of these commitments in the countries where this is applicable.

The defined benefit liability recognised in the consolidated statement of financial position corresponds to the present value of the defined benefit obligations existing at the reporting date less the fair value of the plan assets at that date. The Group recognises changes in the actuarial valuation of the obligations in other comprehensive income.

Where plan assets include qualifying insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of the insurance policies is considered equal to the present value of the related payment obligations and, accordingly, the Group nets the two positions in the consolidated statement of financial position.

The actuarial value of both the post-employment obligations and the pension benefits that have not been outsourced is calculated by an independent expert. The measurement is performed using the projected unit credit method, taking into account mortality tables, interest rates, discount rates, expected future salary increases and growth rates. In the case of postemployment obligations, estimates of future increases in healthcare expenses are also taken into account.

The Group recognises as an expense for the year the cost of services rendered, which corresponds to the increase in the present value of the defined benefit obligation resulting from the provision of services by the employee in the current year.

In addition, the Group recognises as an expense the net interest on the defined benefit obligation, which corresponds to the change during the year in the defined benefit obligation resulting from the passage of time.

c) Share-based payment transactions

The Group applies IFRS 2, Share-based Payment, to equity-settled transactions in which the entity receives goods or services in exchange for shares of the parent.

In accordance with the terms of the share-based payment plans approved by the Group, the equity instruments granted do not vest immediately, and do so when a certain service period is completed, so the Group recognises an expense on a straight-line basis over the period in which the rights to receive such shares vest, recognising at the same time the corresponding increase in equity.

The Group measures the goods or services received, as well as the corresponding increase in equity, at the fair value of the equity instruments granted, at the grant date. Fair value is determined by the market price of the entity's shares adjusted to take into account the terms and conditions on which those shares were granted (except for vesting conditions, other than market conditions, which are excluded from the determination of fair value). The Group uses the appraisal of an independent expert, who uses the Monte Carlo method for this valuation.

When the obligation to deliver its own equity instruments is to the employees of a subsidiary, the events must be qualified as a "contribution", in which case the parent recognises an increase in the value of its interest in the subsidiary, with a credit to its own equity instruments, and measures it at the fair value of the equity instruments transferred at the grant date.

Upon delivery of the shares, the accounting difference between the equity item cancelled and the treasury shares delivered is recognised with a charge to the parent's reserves.

2.17 Provisions

The Group recognises a provision when:

The amounts recognised in the consolidated statement of financial position correspond to the best estimate at the reporting date of the disbursements required to discharge the present obligation, after taking into account the risks and uncertainties relating to the provision and, where significant, the interest cost arising from discounting, provided that the disbursements that are to be made in each period can be reliably estimated. If discount rates are used, the increase in the provision as a result of the time elapsed is recognised as financial expense for the year.

2.18 Current/Non-current assets and liabilities classification

In the consolidated statement of financial position the Group classifies assets and liabilities as current and non- current items. For such purpose, assets and liabilities are considered to be current when they are expected to be realised or settled within 12 months after the reporting date, or when they are cash or cash equivalents.

2.19 Income tax

The income tax expense comprises current tax and deferred tax.

Current tax is the tax expected to be paid in respect of the consolidated taxable profit or tax loss for the year, using tax rates enacted at the consolidated statement of financial position date and applicable to the current year. Current tax also includes any adjustment to the tax payable or receivable for prior years.

Deferred taxes are calculated using the balance sheet liability method based on the temporary differences that arise between the tax bases of the assets and liabilities and their carrying amounts in the consolidated annual accounts. Deferred taxes are determined by applying the tax rates (and laws) enacted, or substantively enacted, at the consolidated statement of financial position date, and which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

The effect of a change in the tax rate on the deferred tax assets and liabilities is recognised in profit or loss, except to the extent that it relates to items previously charged or credited directly to the consolidated statement of comprehensive income.

Deferred tax liabilities are always recognised. Deferred tax assets are recognised to the extent that it is considered probable that taxable profits or deferred tax liabilities will arise in the future against which the temporary differences can be offset.

The Group recognises in the consolidated statement of financial position the deferred tax assets arising from tax loss or tax credit carryforwards, provided that they are recoverable in a reasonable period of time, also taking into account the legally established limits for their use. The Group considered a period of ten years to be reasonable if permitted by tax legislation. For this purpose, the Group performs future earnings projections approved by management, which take into account present macroeconomic and market circumstances, and adjusts these projections based on current tax legislation in order to determine the taxable profit or tax loss.

Deferred tax assets are reduced when it is no longer considered probable that sufficient future taxable income will be generated or there are no deferred tax liabilities against which the assets can be offset. Reductions are reversed if there is renewed expectation that sufficient taxable income will be available against which the derecognised balance can be utilised. Both the deferred tax asset reduction and its subsequent reversal are recognised as an increase or decrease in the tax expense, respectively, in profit or loss in the year in which they arise.

The Group only offsets deferred tax assets and liabilities if it has a legally enforceable right to do so, the assets and liabilities correspond to the same tax authority and the Group plans to realise current tax assets or settle current tax liabilities on a net basis.

Deferred tax assets and liabilities are recognised in the consolidated statement of financial position under non-current assets or non-current liabilities, irrespective of the expected date of realisation or settlement.

When tax audits result in a tax deficiency to be settled, the Group generally recognises such amounts as a current expense for the amount payable, and a deferred tax expense for the change in assets or liabilities arising from temporary differences resulting from the related tax assessment. If the amount payable is contested and the Group decides to file an appeal against the tax assessment, and furthermore considers that a favourable outcome for the Group is highly probable, it recognises an asset for the amounts previously paid and which it estimates will be recovered.

In connection with the limited scope amendments introduced by the IASB related to the new Pillar 2 tax regulations approved by the OECD, the Group has decided to make use of the temporary exemption for the recognition of deferred tax assets and liabilities and the expense resulting from the calculation of the minimum tax rate of 15%. Note 19 contains detailed information on the above tax standard and the analysis carried out by the Group during the year and its potential impact.

Certain companies forming part of the Consolidated Group have reserves which could be taxable if distributed, since certain legislation envisages withholdings at source that affect the payment of dividends. The Group recognises the tax effect in this connection whenever it considers that the reserves will have to be distributed in the foreseeable future, which will give rise to the reversal of the temporary difference. That is to say, the parent shall not recognise a deferred tax liability when it considers that such reserves will not be distributed in the foreseeable future. The Group shall also reverse the temporary difference, against profit or loss for the year, when legislative changes eliminate or reduce the tax liability relating to those reserves.

The Company has been taxed under the consolidated tax regime since 1998. As agreed by the shareholders at the Annual General Meeting held on 28 May 2003, Acerinox, S.A. and certain of the subsidiaries with registered office in Spain form part of a consolidated tax group on an indefinite basis, with the exception of Metalinox Bilbao, S.A.U. and Inoxidables de Euskadi, S.A.U., which file tax returns separately. At 31 December 2023 and 2022, the consolidated tax group was made up of: Acerinox, S.A., Acerinox Europa, S.A.U., Roldan, S.A., Inoxfil, S.A., Inoxcenter, S.L.U. and Inoxcenter Canarias, S.A.U. As a result of the consolidated tax regime, reciprocal receivables and payables between Group companies arise, due to the offset of tax bases between them.

2.20 Revenue

Revenue is an increase in economic benefits during the year in the form of additions or increases in the value of assets or decreases in liabilities that result in an increase in equity and are not related to owners' contributions.

Revenue depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognised when a customer obtains control of the good or service sold, i.e. when the customer has the ability to direct the use of, and obtain substantially all of the benefits from the good or service.

The Group takes into consideration the five-step model to determine when, and for what amounts, revenue should be recognised:

A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate an unperformed contract without compensating the other party (or parties).

The main types of the Group's revenue and other income are as follows:

a) Sales and services

Revenue from the sale of goods is recognised in the consolidated statement of profit or loss when control of the goods is transferred to the buyer. No revenue is recognised if significant doubts exist in relation to the recovery of the amount owed or the possible return of the goods. Sales revenue is recognised at the transaction price, which is the amount of consideration to which the entity expects to be entitled in exchange for transferring the goods or services promised to a customer, excluding amounts collected on behalf of third parties.

A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate a contract without compensating the other party (or parties). The stainless-steel sales process is performed through sales orders. From this perspective, the orders arranged by the Group with customers do not give rise to a right or obligation enforceable in advance, since the parties are entitled to unilaterally terminate an unperformed contract without compensating the other party until such time as the goods are delivered. Therefore, no obligation arises until the goods are delivered.

Depending on the commercial terms and conditions of sale, the control and risk of the goods may be transferred when the materials are shipped from the Group's facilities or when they are delivered to the customer. The Group takes into account these terms and conditions of sale to determine the timing of revenue recognition. Revenue from the sale of goods is recognised in profit or loss when control over the goods is transferred to the buyer.

The Group considers all of the following factors when determining the transaction price:

Revenue is recognised net of taxes, returns and discounts that the Group considers probable at the date the revenue is recognised, and after the elimination of intra-Group sales.

b) Lease income

Lease income is recognised in profit or loss on a straight-line basis over the term of the lease.

c) Dividend income

Dividend income is recognised when the right to receive it is established.

2.21 Environment

The Group carries out actions the main objective of which is to prevent, reduce or repair the damage that might be caused to the environment as a result of its business activities.

Expenses arising from environmental activities are recognised as expenses in the year in which they are incurred. However, the Group recognises environmental provisions, where necessary, by applying the general criteria detailed in Note 2.17.

The items of property, plant and equipment acquired to be used on a lasting basis in the Group's operations and the ultimate purpose of which is to minimise environmental impact and protect and improve the environment, including the reduction or elimination of pollution, are recognised as assets using measurement, presentation and disclosure criteria consistent with those discussed in Note 2.8.

2.22 Changes in accounting estimates and policies and correction of errors

The Group applies IAS 8 to recognise changes in accounting estimates, changes in accounting policies and the correction of errors. In this regard, the Group recognises changes in accounting estimates in the year in which they occur. Accounting errors are corrected in the year in which they occurred, restating the comparative information presented in the consolidated financial statements, where the errors are material. Changes in policies are recognised retrospectively, adjusting the opening balances of each affected equity component, from the previous year presented, unless a specific transitional provision exists for the initial application of a standard or interpretation.

NOTE 3 - ACCOUNTING ESTIMATES AND JUDGEMENTS

In preparing the consolidated financial statements, Group management is required to make certain judgements, estimates and assumptions that affect the application of the accounting policies and, therefore, the figures presented in these consolidated financial statements.

The accounting estimates and judgements are assessed on an ongoing basis and are based on historical experience and other factors, including expectations regarding future events that are considered to be reasonable. The Company may revise such estimates if changes were to occur in certain events or circumstances.

The Group makes estimates and judgements regarding the future. The resulting accounting estimates may differ from the corresponding actual results. Changes in estimates are recognised in the Group's consolidated financial statements prospectively, as established in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

The main estimates made by the Group are as follows:

a) Impairment losses on goodwill and other non-financial assets

Once a year, the Group tests goodwill for impairment, in accordance with the accounting policy detailed in Note 2.11.

At each reporting date the Group reviews whether there is any indication that its property, plant and equipment has become impaired, taking into account the criteria established in the policy. If any such indications exist, the entity estimates the recoverable amount of the asset in question. The recoverable amount of an asset is the higher of fair value less costs to sell and value in use.

The recoverable amounts of the cash-generating units in this year have been determined based on calculations of their value in use. Some estimates were made by an independent valuer.

The calculations of value in use are made using reasonable assumptions based on past returns and future market production and development expectations. Some of these assumptions relate to sales, margins, discount rates and perpetuity growth rates, which involve a high degree of judgement. In recent years, energy costs have also become more significant in the estimates, and the Group performs sensitivity analyses on possible changes in energy prices, mainly in European companies. Notes 7.1 and 8.1 detail the analyses conducted by the Group in 2023 and 2022.

b) Fair value of derivatives and other financial instruments

The Group acquires derivative financial instruments to hedge its exposure to exchange rate and interest rate fluctuations, as well as to fluctuations in certain raw material prices. The fair value of financial instruments not traded in active markets is determined using valuation techniques based mainly on market conditions existing at each reporting date, and provided that financial information is available to carry out this valuation. Note 12.2.4 provides further information on the financial instruments measured on the basis of these assumptions.

c) Provisions

As indicated in Note 2.17, the provisions recognised in the consolidated statement of financial position reflect the best estimate at the reporting date of the amount expected to be required to settle the obligation, provided that the materialisation of this outflow of resources is considered probable. Changes in envisaged circumstances could cause these estimates to vary, and they would be revised if necessary.

In the case of provisions arising from litigation in respect of which there are legal proceedings under way, the lawyers or independent experts determine the likelihood of occurrence of the events giving rise to the need to recognise a provision. In cases in which it is considered possible, although not probable, that an outflow of resources will occur or it is difficult to reliably determine the amount of the provision, the Group shall consider the provision to be a contingent liability and disclose the information in the notes (Note 16).

d) Net realisable value

As mentioned in Note 2.13, the Group estimates the net realisable values of its inventories in order to recognise the appropriate valuation adjustments. The expected selling prices of the inventories less costs to sell are taken into account when determining the net realisable value.

e) Determination of employee benefit obligations

Pension and similar obligations are determined on the basis of actuarial valuations which take into account statistical rates published by official bodies relating to future valuations such as expectations of salary increases, growth rates, mortality rates, discount rates, etc. These rates may vary significantly depending on economic and market conditions, which would cause variations in the obligations recognised in the financial statements. These assessments are carried out by independent experts.

The Group recognises in the consolidated statement of financial position the amounts arising from its employee benefit obligations, based on the actuarial valuations performed by independent experts.

Note 16.1 includes detailed information on the assumptions used in 2023 to perform the valuations.

f) Recoverability of tax loss and tax credit carryforwards

Separately from tax legislation, which in many cases allows the recovery of tax losses without limitation, as established in the related accounting policy (Note 2.19), the Group recognises in the consolidated statement of financial position the deferred tax assets arising from tax loss and tax credit carryforwards, provided that they are recoverable over a reasonable period of time, which the Group has set at ten years. The Group regularly assesses the recoverability of available tax assets through earnings projections approved by management, to conclude as to whether they will be recoverable in the aforementioned reasonable period.

The Group takes into account the tax laws applicable to the determination of tax bases in the future, the restrictions on offsetting tax bases imposed by certain laws and the impact of minimum payments set in certain countries. Note 19.3 includes detailed information on the Group's existing tax assets and the bases used to determine the recoverability of recognised tax assets.

g) Recognition of a deferred tax liability arising from investments in subsidiaries

As established in the accounting policies (Note 2.19), certain companies forming part of the Consolidated Group have reserves which could be taxable if distributed, since certain legislation envisages withholdings at source that affect the payment of dividends, as well as limitations on the deductibility of gains from other countries distributed in the form of dividends. The Group recognises the tax effect in this connection provided that it considers that such reserves will have to be distributed in the foreseeable future. At the same time, the Group shall also reverse this temporary difference against profit or loss when new legislative changes eliminate or reduce the tax liability of these reserves.

Since 2022, as a result of the entry into force in Spain of the amendment to income tax affecting the tax exemption for dividends received from Group companies, the aforementioned tax exemption for dividends received from qualifying ownership interests applicable to the parent of the Acerinox Group has been reduced to 95%, whereby it will be taxed on 5% of the dividends it receives from its subsidiaries, which will be treated as non-deductible expenses relating to management of the ownership interest. As with the distributable reserves mentioned in the previous paragraph, the Group also takes into account the tax effect if it believes that the distribution of reserves from subsidiaries will be required in the foreseeable future.

Although there is no dividend distribution policy for subsidiaries, the Group analyses annually whether retained earnings of Group companies should be distributed to the parent company. The repatriation of dividends made in recent years guarantees the equity position of the parent company, meaning that management does not deem it necessary to distribute the reserves of its subsidiaries. Future repatriations of dividends are expected to be made based on the results obtained year by year. The Group does not therefore consider it necessary to recognise a deferred tax liability associated with such retained earnings.

h) Recognition of deferred tax liabilities under Pillar 2 standards

As explained in accounting policies, in December 2021, the Organisation for Economic Co-operation and Development ("OECD") published the "Pillar 2" model standards for reforming international corporate taxation. The standard requires affected large multinational companies to calculate their effective GloBE ("Global Anti-Base Erosion") tax rate for each jurisdiction in which they operate. Such companies will be required to pay an additional tax on the difference between their effective GloBE tax rate per jurisdiction and the minimum rate of 15%. This standard has yet to be implemented in Spain, although it is mandatory for financial years beginning on or after 1 January 2024.

While, as permitted by the amendment introduced by IAS 12, the Group has made use of the temporary exemption for the recognition and disclosure of deferred tax assets and liabilities related to income tax arising from Pillar 2, the Group is conducting an analysis based on the 2022 country-by-country report figures to determine the possible application of safe harbours, at least during the transitional period of 3 years foreseen by the rule. This would exempt it from calculating the minimum tax. From the analyses performed, no significant impact appears to arise from the application of this standard, as in the jurisdictions where the Group's main entities are located, effective taxes exceed the minimum payment of 15%.

NOTE 4 - FINANCIAL RISK MANAGEMENT

The Group's activities, in both its stainless steel and special alloy divisions, are exposed to various financial risks: market risk (foreign currency risk, interest rate risk and price risk), credit risk, liquidity risk and climate risk. The Group aims to minimise the potential adverse effects on its financial profitability through the use of derivative financial instruments, where appropriate to the risks, and by taking out insurance policies. Note 12.2.6 includes a detailed analysis of the Group's derivative financial instruments at year-end.

The Group does not arrange financial instruments for speculative purposes.

4.1 Market risk

Market risk arises from changes in market prices due to exchange rate or interest rate fluctuations or changes in prices of raw and other materials or supplies, which can affect the Company's earnings, its equity and the measurement of its assets and liabilities.

4.1.1 Foreign currency risk

The Group operates internationally and in various currencies, particularly in the US dollar, and is therefore exposed to foreign currency risk. Foreign currency risk arises from commercial transactions as well as from financing and investment operations, and from the translation of financial statements the functional currencies of which is not the Consolidated Group's presentation currency (the euro).

Monetary assets and liabilities denominated in foreign currencies are translated to the Group's functional currency at the reporting date at the exchange rates then prevailing. Any exchange differences that arise from such translation are recognised in the consolidated statement of profit or loss. To avoid fluctuations in the consolidated statement of profit or loss due to changes in exchange rates, and to ensure the expected cash flows, the Group uses derivative financial instruments to hedge most of its commercial and financial transactions performed in currencies other than the functional currency of each country. To this end, at the beginning of each month and subject to fortnightly review, each company considers its loans in non-local currency, the balances of its trade receivables and payables to suppliers in foreign currency, the sales and purchases in foreign currency forecast for that period and the currency forwards arranged. The Group may take commercial or financial transactions as a whole into account to evaluate its total exposure when hedging foreign currency transactions. The Group hedges balances with third parties and between Group companies.

The Group's business model is to hedge foreign currency risk through the use of derivative financial instruments and there is an economic relationship between the hedged item and the hedging instrument. The Group, mainly in its Stainless Steel Division, hedges cash flow risks for transactions performed in foreign currencies that are recognised in the consolidated statement of financial position; accordingly, any change in the derivative valuation is recognised in the consolidated statement of profit or loss and is offset by any changes that occur at each reporting date in the monetary items recognised in foreign currencies. The designation of these instruments as hedging instruments does not give rise to any accounting differences in the Group's consolidated statement of profit or loss. Consequently, in general, financial instruments designated to hedge foreign currency risk exposure arising from commercial transactions or transactions between Group companies are not treated for accounting purposes as hedging instruments. Instead, the Group categorises these instruments at fair value through profit or loss.

In the high-performance alloys division, as the manufacturing period is longer and orders are negotiated at a fixed price and much further in advance than in the stainless-steel division, hedging is performed immediately upon receipt of customer orders to ensure that the cash flow received matches the cash flow of the negotiations performed. The financial instruments arranged are valued at fair value through profit or loss.

The derivative financial instruments used by the Group to hedge this risk consist of foreign currency purchase and sale forward contracts in accordance with the policies approved by management.

The fair value of foreign currency forward contracts is equal to their market value at the reporting date, i.e. the present value of the difference between the current forward rate and the contract rate.

Note 12.2.6 details the financial instruments arranged by the Group to hedge this type of risk at 31 December 2023 and 2022.

Lastly, the Group is exposed to foreign currency risk as a result of the translation of the separate financial statements the functional currency of which differs from the Group's presentation currency, particularly the US dollar and the South African rand. The USD/EUR exchange rate at 2023 year-end was 1.1050, while at 2022 year-end it stood at 1.0666 (USD depreciation of 3.6% for the year). The exchange rate of the South African rand to the euro at 2023 year-end was 20.3477, while at 2022 year-end it was 18.0986 (rand depreciation of 12.4%).

The Group does not use financial instruments to hedge foreign investments, since these are strategic long-term investments.

Neither the Group's future profits nor the expected dividends are hedged, the latter only being hedged as soon as they are approved. Note 14.4 includes a breakdown of the changes in translation difference items in the year.

Sensitivity to changes in these currencies with respect to the euro, with other variables remaining constant and based on the translation rates at the end of 2023 and 2022, respectively, was as follows:

(Amounts in thousands of euros)

4.1.2 Interest rate risk

The Group's financing comes from various countries and is provided in various currencies (mainly in the euro, the US dollar and the South African rand), with a range of maturity dates and with loans mostly tied to variable interest rates.

The Group's financial liabilities and financial assets are exposed to fluctuations in interest rates. To manage this risk, interest rate curves are analysed regularly and derivatives are occasionally used. These derivatives take the form of interest rate swaps which qualify for recognition for accounting purposes as cash flow hedging instruments. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account interest rates at that date and the credit risk associated with the swap counterparties.

In addition, the Group takes out fixed-rate loans to reduce its exposure to interest rate fluctuations. However, the Group did not take out any fixed-rate loans in 2023.

70% of the Group's loans and private placements are at fixed interest rates (these figures include those loans closed at variable interest rates but hedged with an interest rate derivative).

As in 2022, the Group has continued to actively manage its loans during 2023. The majority of the Group's financing at 31 December 2023 corresponded to loans and private placements. Of these, almost 80% were due to mature in over a year.

Note 12.2.3 explains all new loan negotiations undertaken throughout the year.

In 2023, the Group has contracted five floating rate loans for a total amount of EUR 155 million, but has not contracted any interest rate derivatives to hedge against changes in the floating interest rate.

The last two years have been marked by interest rate increases. The rate hike that started in 2022 came to an end in the middle of this year. The last FED hike took place in July, reaching the highest level in 22 years (5.25%-5.5%). In Europe, increases slowed in September 2023, with the highest level since 2001 (4.5%).

Due to the continued increase in interest rates and the high percentage of fixed-rate loans, the Group has decided not to contract new derivatives in 2023.

The risk to the Group from rising interest rates is limited, as the Group's net financial debt amounted to EUR 341 million, with bank borrowings of EUR 2,135 million and cash balances of EUR 1,794 million. Acerinox has currency deposits in US dollars. These USD deposits provide a remuneration that is higher than the remuneration of the euro interest rates to which most of the Group's variable interest rate loans are referenced, thereby mitigating the risk of an increase in interest rates.

In 2022, the Group did contract a derivative (Interest Rate Swap) with Caixabank for EUR 260 million.

Note 12.2.6 details the financial instruments arranged by the Group to hedge this type of risk at 31 December 2023 and 2022.

In relation to the Group's interest rate sensitivity, had interest rates on its outstanding debt at year-end been 100 basis points higher, with all other variables remaining constant, the consolidated profit after tax would have been EUR 9.2 million lower (2022: EUR 7.2 million lower) due to higher borrowing costs on floating-rate debt not covered by interest rate swaps. The effect on the Group's equity of such an increase in interest rates across the entire interest rate curve would have been an increase of EUR 0.1 million (2022: an increase of EUR 5.3 million), since the higher borrowing costs would have been comfortably offset by increases in the values of its interest rate hedging derivatives held at the reporting date.

4.1.3 Price risk

The Group is exposed to several types of price risk:

1. Risk due to energy price fluctuation

Over the last years, the high volatility in the price of supplies, principally gas and electricity, have acquired special relevance.

As the Group's factories are electro-intensive consumers of energy, these variations pose a risk due to the impact they have on the manufacturing costs of both stainless steel and high-performance alloys.

The steel sector requires an intensive use of energy to melt scrap and ferroalloys in electric furnaces to obtain molten material, as well as the use of fossil fuels such as natural gas in the heating and melting processes. Acerinox is therefore working to continuously improve its production processes, promoting innovation and the development of more efficient and cleaner technologies in steel production and supporting advances in less polluting and more sustainable processes.

Although energy prices have fluctuated worldwide, they have been particularly relevant in Europe, which means a loss of competitiveness compared to other producing countries in the world. The Group has factories in Spain, Germany, the United States, South Africa and Malaysia.

While energy prices in Europe are down this year from their peak levels in 2022, when they were primarily affected by Russia's invasion of Ukraine and international sanctions, they remain at very high levels compared to previous years. In the other countries where the Group has its factories, energy prices have risen by 20-25%. Gas prices, however, have fallen by around 60% in the United States and remained constant in South Africa.

The average price of electricity for the Group in Spain in 2023 is 30% higher than the costs of its factory in the United States and 20% higher than in South Africa. In the case of gas prices, the two plants have around 80% cheaper costs.

In 2023, the fall in gas and energy prices at the Campo de Gibraltar plant alone, which is most affected by cost volatility, meant a reduction of EUR 138 million compared to the previous year's prices. On the other hand, in 2022, the increase in prices compared to 2021 had a negative impact of EUR 136 million, only in that plant.

The Group seeks to mitigate the effects of volatile energy costs by improving the efficiency of energy consumption and by entering into PPAs (Power Purchase Agreements). As explained in the section on the Group's accounting policies, forward purchase contracts for energy are realised through the physical purchase of energy consumed by the Group in its stainlesssteel production facilities. They are therefore supply contracts for own use.

The objectives pursued by contracting PPAs are threefold:

Only the Group's Spanish factories have this type of contract. The contracts signed, mainly by the Acerinox Europa factory, which has the largest volume of these contracts, guarantee 43% of Acerinox Europa's consumption until 2029, considering normal production levels. Acerinox has contracted an annual volume of 380.32 GWh until 2029.

In the area of high-performance alloys, the impact of energy price increases this year was limited by the hedging policy applied.

Due to its electro-intensive nature, energy cost management is a strategic area for the Group and a constant element in excellence plans. The Group is constantly analysing alternative sources of supply in order to reduce costs.

Reducing energy consumption is a key issue for Acerinox. Therefore, Acerinox has set a target of reducing the energy intensity of the stainless-steel division by 7.5% in 2030 compared to 2015 levels.

Due to the impact of energy price fluctuations on the Group's costs, management has included this variable as a key assumption in valuations and forward estimates, particularly in Europe, and sensitivity analyses to energy price fluctuations are under way. A 10% fluctuation in the price of energy, both electricity and gas, compared to 2023 prices would have meant an upward or downward change in expenditure of around EUR 31 million, with all other variables remaining constant. The Group tries to pass these impacts on to sales prices, but as it is a competitive market with producers in different countries, this is not always possible.

Emission allowances have remained at constant levels over the last two years at around EUR 80/allowance. The volatility of the price of allowances has hardly any impact on the stainless-steel division, given that the Spanish factories have enough free allowances allocated to them to cover their needs. As described in the accounting policy in Note 2.13.1, when the free allocation rights are consumed, income in the same amount is recognised at the same time as the expense is recognised and the corresponding part of the deferred income is reversed. Therefore, any increase in the price of rights allocated free of charge will be offset by income, thus not affecting the Group's income statement.

In the case of the high-performance alloys division, the free allocations obtained are lower than plant needs, meaning that rights have to be acquired on the market. In view of the significant price increase and future forecasts, the Group decided to implement a long-term purchase plan in 2021, acquiring 100% of the rights that it expects to use during 2022 and 2023, thus hedging against price fluctuations. This purchase was made at very competitive prices and below current quotations. The Group continues to systematically monitor price changes and take advantage of opportunities to meet its consumption needs.

2. Risk of changes in raw material prices

The Group's exposure to raw material price fluctuations is different in the stainless-steel division than in the high performance alloys division, since, although both of the Group's divisions use metals listed on the London Metal Exchange as raw materials, the performance of demand and the way in which raw material price changes affect the markets are substantially different in each division.

2.1. Raw materials used for the stainless-steel division

Stainless steel is an alloy of iron, chromium (> 10.5%) and carbon (< 1.2%) to which other minerals such as nickel or molybdenum are added to give it certain properties. Nickel is one of the minerals that are present in all austenitic alloys, the most common on the market, in a variable percentage between 6 and 22%. Both nickel and molybdenum are listed on the London Metal Exchange and their prices are therefore subject to fluctuations in market prices.

The cost of raw materials accounts for about 70% of the total cost of the product, and of this, nickel accounts for about 50%. Therefore, nickel price volatility has a direct and significant effect on the cost of stainless steel. Consequently, the strategy in relation to setting selling prices and the repercussion of such fluctuations is one of the most critical functions and requires significant market knowledge. The price of nickel, because of its influence on the cost of stainless steel, ultimately determines the price of the final product, and there is a direct correlation between the two prices.

However, stainless steel is a "commodity" product where consumers, belonging to different sectors such as metal traders, construction, engineering, automotive, kitchen appliances, industrial machinery, etc., value trust in some manufacturers more than others, but where the final price is ultimately the key to supplier selection.

Producers try to pass on the volatility of raw materials in the price of the final product through a variable price mechanism called "alloy surcharge". The alloy surcharge is a mathematical formula, calculated on a monthly basis by each of the market's stainless-steel producers, that takes into account changes in the prices of certain raw materials (particularly nickel, chromium and molybdenum) and fluctuations in the EUR/USD exchange rate. The application of this alloy surcharge allows nickel price fluctuations on the London Metal Exchange to be passed on to customers during the order manufacturing phase, as well as fluctuations in the prices of other raw materials and in the EUR/USD exchange rate.

While this mechanism is consistently followed in some markets such as the United States and South Africa, it does not work in the same way in Asia, where producers offer fixed prices at the time of negotiation. This has an impact on markets where imports are higher, such as in Europe, which sometimes prevents this pricing system from being passed on to the end customer.

As was the case from the second half of 2022 onwards, in 2023, the mitigating effect of the alloy surcharge on the risk of price changes performed differently in the United States and in Europe. While in the North American market the alloy surcharge is always respected and is a factor of price stability, in Europe the traditional system of base price and alloy surcharge has been partially replaced by an effective pricing system due to import pressure.

Over the course of the year, demand remained at a very low level due to excess stainless-steel inventories in the supply chain and geopolitical instability, keeping prices under pressure throughout the year and reaching unprecedented record lows.

However, in the United States, where the Group has a significant market share, the Group's strategy of containing supply in order to maintain prices has been very effective and has enabled the Group to contain fluctuations in base prices.

The downward trend in the price of nickel persisted over the period, beginning in 2023 above USD 31,000/t and ending at a price near USD 16,500. One of the main reasons for this sharp fall was the increased availability of all nickel sources. The gradual increase in stocks on the London and Shanghai metal exchanges also contributed to maintaining this downward trend in the price.

The Group aims to minimise the impact of fluctuating raw material prices by keeping low inventory levels across the production chain, along with applying an alloy surcharge mechanism.

Due to all the variables involved in the price mechanism and the influence of the markets, determining the Group's sensitivity to price volatility in the stainless-steel division is very difficult.

2.2. Raw materials used for the high-performance alloys division

The high-performance alloys division involves alloys whose content of listed metals such as nickel is much higher than that of stainless steel, reaching up to almost 100% in certain alloys. In addition, they may also contain other metals such as copper, cobalt, aluminium and molybdenum. The metal content in this type of alloys accounts for 2/3 of the total cost of the product and the selling price of these alloys is up to 10 times higher than that of stainless steel. The manufacturing period lasts around three to four months and, accordingly, the Group must purchase metals several months before they are sold.

Due to the percentage of metals in the total cost of the product and the associated price volatility, customers in this sector always demand fixed prices, which the Group guarantees when orders are received, initially assuming the full risk of raw material volatility. To mitigate this risk, the Group has a metals trading department in this division, which is responsible for entering into derivatives on the LME (London Metal Exchange) to hedge the metal purchases required to manufacture the products demanded by customers. In the case of metals not listed on the LME, natural hedges through physical stock are undertaken.

In order to avoid the volatility caused by the valuation of these derivatives in the income statement, following the incorporation of the High Performance Alloys division into the Group, it was decided to carry out an analysis of the economic model and hedging relationships in order to assess the possible application of hedge accounting to these derivatives. At 1 January 2021, hedging relationships for new derivatives entered into from that date were documented and a model to ensure hedge effectiveness was implemented, so the Group started to apply hedge accounting for the recognition of a large number of these financial instruments. Note 12.2.6 includes detailed information on these instruments.

A 20% increase in the price of listed metals, which the Group hedges through forward purchases and sales, would currently have an impact on the valuation of derivatives of EUR 19 million, which would have a direct impact on other comprehensive income (equity). On the other hand, a 20% drop in the price of these metals would have a negative impact of EUR -19 million on the Group's equity.

2.3. Risk of price distortion due to the accumulation of stock in the market

The stainless-steel market is characterised by robust demand, which has grown at an annual rate of approximately 6% for over 50 years. The demand for stainless steel for all industrial applications and its presence in all industries guarantee that this growth rate will be sustained in the coming years. Although end consumption continues to grow steadily, the fact that this market is largely controlled by independent wholesalers leads to volatility in apparent consumption, based on their expectations regarding nickel price trends on the London Metal Exchange (LME) and their resulting stockpiling or inventory realisation strategies.

Fluctuations in the price of nickel also affect consumer demand. Reductions in the price of nickel tend to go hand in hand with short-term drops in demand. Conversely, a rise in nickel prices tends to go hand in hand with higher demand. To lessen the risk associated with the predominant market control held by independent stockists, the Group's strategic approach involves emphasising direct sales to end customers rather than relying on stockists. The Group's commercial network allows for the distribution of products to end customers via warehouses and service centres, facilitating sales stability and mitigating this risk.

2.4. Risk of overvaluation of inventories

The convenience of maintaining sufficient inventory levels at the Group's warehouses entails the risk that these inventories might be overvalued with respect to their market price. The Group mitigates this risk by keeping strict control of its inventory levels.

The valuation of raw materials, work in progress and finished goods at average cost also helps to reduce the volatility of costs and, therefore, the impact of nickel price fluctuations on margins.

During the year, an adjustment of inventories to net realisable value of EUR 65 million was necessary due to the continued fall in prices.

4.1.4 The impact of Russia's invasion of Ukraine

Although the conflict between the two countries has continued throughout the year, it has not had a significant impact on the Group. Energy prices have corrected from the levels reached at the beginning of the conflict, which has allowed the Group to reduce its costs, as explained in the section on energy price risk.

As far as the Group's business was concerned, from the moment the war started, its exposure in Russia was reduced to a minimum and sales were halted. The Group is currently in the process of closing its commercial office in that country.

With regard to purchasing, the Group has very diversified sources of supply of raw materials and follows a strategy of responsible purchasing. Significant efforts were made since the beginning of the conflict to secure alternative supplies, which made it possible for the Group not to be dependent on Russian raw materials.

Due to the uncertainties that existed at the outbreak of the war regarding Germany's dependence on gas supplies from Russia, the Group set up a monitoring committee to assess the impact of possible measures in that country and to mitigate the consequences. Ultimately, the country acted swiftly to seek alternative sources from other countries and none of the initially expected risks materialised.

Management considers that the impact this conflict could have on future projections is not significant.

4.2 Credit risk

Credit risk is defined as the possible loss that could be incurred through failure of a customer or debtor to meet contractual obligations.

The Group's exposure to credit risk is determined by the individual characteristics of each customer and, where applicable, by the risk inherent to the country in which the customer operates. Due to the diversity of its customers and the countries in which the Group operates, credit risk is not concentrated in any individual customer, sector or geographical region. None of the Group's customers, whether in the stainless steel or the high- performance alloys division, account for more than 10% of the Group's total sales.

The Group hedges its commercial and political risks either through credit insurance companies, or through letters of credit and bank guarantees extended by banks of recognised solvency located in countries with low financial risk. Credit insurance hedges between 90% and 95% of declared commercial risks, depending on the country in which the customer is located and the insurance company, and between 90% and 95% of political risks. The Group's main credit insurer has an Al credit rating from Moody's and an A (excellent) rating from A.M. Best.

In 2023, payouts of EUR 351 thousand were collected under the credit insurance policy (2022: EUR 742 thousand).

A Risk Committee is responsible for monitoring the Group's credit risk policy. New customers are analysed in conjunction with the insurance company, which assigns a covered amount, enabling the Group to offer its general payment terms to those that fulfil the required credit conditions. Where required, the Risk Committee also performs a case-by-case analysis of customers' creditworthiness, setting internal risk limits and payment terms. Otherwise, payment in cash is required.

The Risk Committee consists of representatives from the sales, financial and legal departments. The risks of the companies that make up the Acerinox Group are analysed and information is, in turn, received from the Delegated Risk Committees of North American Stainless, Bahru Stainless, Columbus, Grupinox (which represents the sales network in Spain) and VDM Metals.

Among other duties, the Risk Committee reviews the status of past-due debts, monitors sales with excessive exposure and authorises the transfer of internal risk or, depending on the amount, requests approval from the Management Committee. The Group has a formalised credit risk policy that ensures the control of credit risk in the trading companies by defining various internal risk levels, which must be approved by the responsible persons named in the policy.

The Group has long-standing commercial relationships with many of its customers. Delays in payment result in specific monitoring of future deliveries, payment terms and the review of credit limits.

Where permitted under local legislation in the country in which the customer operates, retention of title clauses may exist, to secure recovery of goods in the event of default.

The Group occasionally uses other financial instruments to reduce credit risk, such as factoring operations. The Group derecognises factored financial assets when the risks and rewards of these assets have been substantially transferred.

The Group makes the valuation adjustments to trade receivables it deems necessary based on an expected credit loss model which analyses the average credit losses at each of the subsidiaries and the claims incurred on the credit insurance policies taken out, as detailed in Note 2.12.2.

Note 12.2.1 details the changes in valuation adjustments to trade receivables.

The consolidated balance of trade receivables at 31 December 2023 was EUR 560,002 thousand (2022: EUR 575,036 thousand), and revenue in 2023 amounted to EUR 6,607,978 thousand (2022: EUR 8,688,494 thousand). This represented an average collection period of 31 days at the Group (2022: 24 days).

Credit risk insurance was taken out for 53% of consolidated net sales (2022: 51%). Cash conditions existed for 4% of sales (2022: 3%). Confirmed letters of credit or guarantees were used to hedge credit risk in 1% of consolidated net sales (2022: 1%). Domestic sales by North American Stainless Inc., which entail a very low risk due to the collection period of under 30 days, accounted for 37% of consolidated net sales (2022: 41%), allowing deliveries to be controlled and reducing potential impairment losses.

The analysis of the age of the receivables is as follows:

(Amounts in thousands of euros)

The Group has made provisions for EUR 4,107 thousand (2022: 4,868 thousand of euros). A provision was made for EUR 543 thousand in 2023 (2022: EUR 864 thousand), accounting for 0.008% of sales 2023 (2022: 0.010%); the Group's expected credit loss ratio is 0.018% (2022: 0.019%).

Most of the past-due receivables are insured and generally reflect customary delays in trading activity (84% of past-due receivables are aged less than 30 days). At 16 February 2024, over 85% of the aforementioned past-due balances had been collected (2022: 90%).

In view of the default rates in all industries, the Group considers that the above figures are highly satisfactory and confirm the success of its commercial risk policy.

In short, neither the accident rate nor payment delays are higher than in any other year, even against the backdrop of geopolitical uncertainty. The Group does not expect significant impacts in the future in view of the risk coverage policy in place and the high percentage of risks covered.

Any advances to non-current asset suppliers are hedged through bank guarantees issued by the supplier and confirmed by banks of recognised solvency.

In relation to the credit risk of bank balances, as a general rule only banks and financial institutions that are rated by an independent third party with an "investment grade" credit rating are accepted. The Group has no significant concentration of risk, as the likelihood of default by the banks and financial institutions thus authorised is remote, based on their high credit ratings.

4.3 Liquidity risk

Liquidity risk is the risk of not being able to meet present and future obligations, not having the funds required to perform the Group's activities.

The Group is primarily financed through the cash flows arising from its operations, in addition to loans and financing facilities.

During the year, the Company has maintained good access to liquidity through long-term loans and financing facilities in excess of the amounts needed at any given time.

The Group's cash resources are centrally managed in order to optimise resources. The Group's debt is primarily concentrated within the parent of the Group (more than 65% of total gross debt at year-end).

Based on its cash flow estimates and considering its investment plans, the Group has sufficient funding to meet its obligations, and maintains a sufficient level of undrawn credit facilities, as well as high levels of liquidity, to hedge liquidity risk.

In 2023 and 2022, no defaults occurred on the principal or interest of the Group's various financing facilities.

At year-end the Group had access to short- and long-term financing facilities totalling EUR 2,807 million and approved non-recourse factoring facilities amounting to EUR 530 million. The amount drawn down on the financing facilities at 31 December 2023 amounted to EUR 2,135 million and EUR 297 million on the factoring facilities. In 2022, the short- and long-term financing facilities available to the Group amounted to EUR 2,786 million, and non-recourse factoring facilities amounted to EUR 480 million, while the drawdowns against the financing facilities amounted to EUR 1,989 million and drawdowns against the factoring facilities amounted to EUR 329 million. At 31 December 2023, cash and cash equivalents amounted to EUR 1,794 million (2022: EUR 1,548 million).

Cash and cash equivalent balances are available and there is no restriction on their use.

The Group makes short-term cash placements -never exceeding six months-and only at banks of recognised solvency.

In addition, the Group continuously monitors the maturity profile of its financial debt in order to establish the longest possible annual maturities.

In this regard, the most notable financing operations in 2023 were as follows:

These financing transactions are explained in Note 12.2.3.

The most noteworthy financing transactions in 2022 were as follows:

The analysis of the Group's payment obligations at the end of 2023 is as follows:

(Amounts in thousands of euros)

The balances of "payable to suppliers and other payables" do not include payables to Public Administrations. All the maturities of the debt with suppliers are short-term.

"Other non-current financial liabilities", which are categorised as liabilities with an indefinite maturity, mainly relate to deposits and guarantees that have no specific maturity date or for which the date of repayment is unknown. The remainder are leasing payments.

Future cash flow maturities include the principal plus interest based on contractual interest rates at year-end.

Approved investments not recognised under property, plant and equipment under construction at the reporting date are not included.

4.4. Climate risk

Stainless steel is a sustainable and durable material, and one which is highly resistant and infinitely recyclable. Despite these positive qualities, the steel sector accounts for a considerable proportion of global industrial emissions. This phenomenon is due to the intensive use of energy needed to melt scrap and ferro-alloys in electric furnaces in order to obtain molten material, as well as to the use of fossil fuels, such as natural gas, in the heating and melting processes. Reducing emissions in the steel industry is essential to mitigate climate change and meet global targets.

Acerinox is aware of the risks it faces that stem from climate change. The company pays special attention to environmental protection and the efficient use of natural resources in the development of its activities.

Acerinox is committed to decarbonising its operations through the implementation of the Positive Impact 360° Sustainability Master Plan. This plan includes eco-efficiency and climate change mitigation as core components and aims to reduce the intensity of greenhouse gas emissions (Scope 1 and 2) by 20% by 2030, with 2015 as the reference year.

The Group has also introduced a sustainability and climate change policy supported by complementary policies that define its commitments to mitigate climate change.

Acerinox's model for managing climate change follows the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and includes information on governance, strategy, risk management and opportunities, as well as metrics and targets. Acerinox understands that business management is linked to a commitment to sustainability which takes the form of the specific, ambitious and measurable objectives that are set out in the company's Sustainability Plan.

The Board of Directors is ultimately responsible for the Group's climate change management through the sustainability and audit committees within their spheres of influence.

The Group's climate risk management is integrated into corporate risk management.

Climate risks are overseen by the Audit Committee of the Board of Directors, as part of its function of overseeing the comprehensive risk control system. Likewise, climate risks are examined in the Sustainability Committee, which is also part of the Board of Directors.

In order to strengthen risk management, a physical and transition risk analysis was conducted in 2023 following the TCFD methodology. The study considered the impact that climate change would have on each of the Group's facilities over two time horizons, 2030 and 2050, and under two climate scenarios. Details are included in the Non-Financial Information Statement.

The Company has joined the UN Global Compact's Climate Ambition Accelerator initiative in Spain. It is a programme to guide companies in setting quantifiable emission reduction targets based on science and developing concrete plans to achieve them. Through this initiative, it is hoped that Spanish companies, including Acerinox, will become leaders in climate change mitigation.

Acerinox defines its commitment to climate change mitigation through four key principles:

In addition, during 2023, the company worked on the development of the new efficiency plan, "Beyond Excellence", for the next three years, 2024-2026. The Plan was approved by the Board of Directors at the close of 2023 and comprises six key components, with a focus on productivity and automation, efficiency, decarbonisation and environmental initiatives.

The Company is striving to make progress in decarbonising its business model. Acerinox is working to reduce the amount of CO ₂ released into the atmosphere and other polluting gases associated with the iron and steel process to achieve a significant improvement in air quality and reduce the impact on human health and neighbouring ecosystems. To achieve these goals, the Group has short- and medium-term initiatives divided into the following key focus areas:

These measures are aligned with the Sustainability Plan's climate change targets for 2030, compared to 2015. Sustainability officers at each factory monitor them every month, alongside the corporate sustainability team. The progress of the objectives is reviewed quarterly by the Sustainability Committee, and appropriate actions are taken in each instance.

Acerinox established sustainability objectives linked to its environmental, social, and corporate governance performance, aligned with its Positive Impact 360° Sustainability Master Plan and the main international standards (Paris Agreement, Sustainable Development Goals, etc.). The monitoring of climate change related targets is shown below:

At the end of the year, Acerinox had reduced its emissions intensity by 3% compared to 2022, and by 11% compared to the base year of 2015 (2% increase in 2022 compared to 2021 and 8% reduction compared to the base year).

During the year, Acerinox increased its energy intensity by 6% compared to 2022 and by 8% compared to the base 2015 year.

In the last two years, the combined effect of the increase in imports, especially in 2022, the high inventories in the distribution chain and the energy crisis, exacerbated by the invasion of Ukraine, has led to a decline in stainless steel production. This decrease worsened the indicator of energy intensity per tonne of steel produced, although the total volume of emissions decreased due to the increased use of renewable energy. Acerinox has increased its renewable energy contracts and has certificates for 616,880 MWh (2022: 284,750 MWh), a 117% increase compared to the previous year.

During the year, Acerinox reached 80% of recycled waste, 1% higher than in 2022.

During the year 2023, Acerinox reduced water consumption by 3% vs the previous year, a reduction of 18% over the base year of 2015.

The impact of climate risk on financial statements are both wide-ranging and potentially complex and will depend on sectorspecific risks. When analysing future business estimates, probability scenarios are presented in which not only the physical consequences of climate change are assessed, but also the changes in environmental regulations to deal with it. These are the so-called physical risks and transitional risks of climate change, with both having economic and financial consequences.

The impact of climate risk on the Group's financial statements is structured into three main areas: analysis of the recoverability of non-financial assets, determination of the useful lives of plants and equipment and credit ratings.

With regard to recoverability analyses of non-financial assets, the Group has incorporated climate risk in the estimates, making the corresponding forward-looking judgments. The growth rates used and discount and risk rates are market ratios that also implicitly reflect the valuation of climate risk. These rates do not differ significantly from those applied in previous years. Due to the nature of the business, we feel that there is no material impact from climate change risk that would indicate impairment for any of the Group's CGUs or their inventories.

Regarding the determination of useful lives set out in Note 3, Group management determines the estimated useful lives and related depreciation charges of its plant and equipment based on valuations carried out by experts, taking into account technical innovations, variations in the activity levels of the plants, regulatory changes etc. Management periodically reviews the depreciation charge, which is modified whenever the estimated useful lives are different from the lives previously applied. The recurrent maintenance plans and investment proposals carried out by the factories take into account efficiency objectives and adaptation to new technologies, thus contributing to climate change.

With regard to credit ratings and the limitation that regulations impose on financial institutions to provide financing to unsustainable companies, the European Commission has published its classification of sustainable finance, which serves as a tool to help financial agents and companies define which activities are considered as such. The EU Taxonomy provides a universal definition of the environmental sustainability of economic activities at European level and contributes to the dissemination of consistent and transparent information on how companies are progressing in line with EU-wide transition plans and contributing to the EU's environmental objectives. In accordance with the provisions of the Regulation, companies subject to the presentation of their Non-Financial Information Statement must include in their directors' reports information related to the degree of sustainability of their activities. In particular, non-financial companies must disclose the proportion of turnover, capital expenditure and operating expenditure (capex and opex) that complies with the Taxonomy Regulation. Implementation is being phased in progressively.

The first exercise carried out in 2022 was to identify the potential activities that could be considered sustainable (eligibility) based on the above indicators. In 2023, an assessment has been made of the technical criteria provided for in the Regulation, which will determine the alignment of activities with the Taxonomy.

In terms of eligibility criteria, stainless-steel fabrication has been considered, according to the taxonomy regulation, as a potentially sustainable (eligible) activity.

The activity, in addition to being eligible, must demonstrate that it meets the requirements of Article 3 of the Regulation which, in summary, are:

So far, the technical criteria of substantial contribution to Objectives 1 and 2 (climate change mitigation and adaptation) contained in Annex I and II of the Climate Delegated Regulation have been adopted. In the case of stainless steel, these technical criteria only apply to electric arc installations and set specific thresholds for the carbon intensity indicator per tonne of product and the percentage of scrap used.

The Group has published in its non-financial information report revenue, capex and opex indicators based on alignment criteria, which determine the proportion of each of these items coming from products or services related to economic activities that are considered aligned.

At year-end, there are six sustainable financing facilities with an outstanding amount of EUR 647.4 million. These loans tie the financing cost to the performance of two established indicators that are reviewed annually. The first four sustainable loans signed in 2020 and 2021 have a KPI linked to the annual reduction in CO ₂ e emission intensity (Scope 1 + 2) and the other indicator is linked to the annual reduction of the accidents with leave frequency rate. The last sustainable loan signed at the end of 2021 and novated in June 2022 retains the first KPI linked to CO ₂ e emissions (Scope 1 + 2) and replaces the KPI for accidents with leave with a KPI that measures the increase in renewable energy intensity. The latest sustainable financing facility was signed in 2022 by VDM, where the margin is dependent on the VDM Group's rating issued by Ecovadis. Failure to meet the two KPIs would result in a very marginal increase in the cost of these financing facilities, but in no case would it result in the early maturity of these.

Note 8 details the fixed assets whose purpose is the minimisation of environmental impact and the protection and improvement of the environment, as well as the environmental expenses incurred by the Group.

4.5 Capital management

The aims of the capital management policy are:

The Company manages its capital structure and makes adjustments to it based on changes in economic circumstances. To maintain and adjust the capital structure, the Company can adopt various policies relating to the payment of dividends, the reimbursement of the issue premium, share repurchases, self-financing of investments, non-current borrowings, etc.

Capital structure is controlled using various ratios, such as the net financial debt/EBITDA ratio, understood to be the period necessary for the resources generated by the Company to cover the level of debt; or the gearing ratio, i.e. the relationship between the net financial debt and equity of the Company.

Net financial debt is taken to be the sum of current and non-current bank borrowings, plus bonds issued, less cash and cash equivalents. EBITDA reflects profit or loss from operations, less depreciation and amortisation, changes in operating provisions and allowances, and impairment losses recognised in the year.

The "net financial debt/EBITDA" ratio is 0.49x (2022: 0.35x), which is very satisfactory in our sector.

One of the Group's strategic pillars is the maintenance of its financial strength, which is defined as sustainable cash generation over time in order to utilise capital efficiently and generate shareholder value. Cash generation continues to be one of the primary objectives. In 2023, despite the lower results achieved by management to reduce the Group's working capital, particularly inventories, an operating cash flow of EUR 481 million was generated (2022: EUR 544 million). Working capital has been reduced this year by EUR 79 million (2022: increased by EUR 479 million due to strong business activity and higher raw material prices).

Following investment payments of EUR 175 million (2022: EUR 126 million), generated free cash flow amounted to EUR 307 million (2022: EUR 419 million).

In 2023, the Company invested EUR 150 million in shareholder remuneration, representing a payout of 66% (payout calculated as dividend paid/net profit attributable to the Group).

A cash payment of EUR 0.6 per share has been made in 2023. In accordance with Acerinox's Dividend Policy, the total shareholder remuneration is maintained, so that the reduction in the number of shares as a result of the last share buyback plan results in a higher payment per share. The Board of Directors of Acerinox, S.A., held on 20 December 2023, has agreed to propose to the Shareholders' Meeting the payment of a dividend of EUR 0.62 per share, i.e. an increase of 3.33% over the last approved dividend, of which EUR 0.31 gross per share were payable in cash on 26 January 2024.

During the year, Acerinox, S.A.'s share capital has been reduced, as approved by the Annual General Meeting held on 23 May 2023, through the amortisation of 10,388,974 treasury shares with a value of EUR 2,597 thousand. The purpose of this reduction of share capital is to increase the value of the shareholders' stake in the Company.

The Group's net financial debt decreased by EUR 99 million to EUR 341 million (2022: EUR 440 million).

The gearing ratio stood at 13.85%, a 25-year low.

Return on Capital Employed (ROCE) in 2023 was 13.34% (2022: 29.3%). The adjusted ROCE, without taking into account the asset impairment would be 17.9%, exceeding the Group's target of 15%, as explained in Note 8.1. ROCE is calculated by dividing the operating result (EBIT) in the consolidated statement of profit or loss by the capital employed, i.e. equity plus net financial debt.

As of 31 December 2023, the Acerinox Group had liquidity amounting to EUR 2,465 million. Of this, EUR 1,794 million corresponds to cash and cash equivalents and short-term deposits and EUR 672 million to available financing at various Group subsidiaries.

The Group continuously monitors the maturity profile of its financial debt in order to establish the longest possible annual maturities. As explained in both Notes 4.3 and 12.2.3, the Group has continued with the active management of its financing facilities by contracting, renewing and/or extending them.

At year-end, the Group's outstanding sustainable financing amounted to EUR 647.4 million. The majority of the Group's financing at 31 December 2023 corresponded to loans and private placements. Of these, almost 80% were due to mature in over a year. In addition, 70% of the Group's loans and private placements are at fixed interest rates (these figures include those loans closed at variable interest rates but hedged with an interest rate derivative).

4.6 Insurance

The geographical diversification of the Group's factories (with three integrated stainless-steel flat product manufacturing plants, one cold-rolling plant and three long product manufacturing plants) ensures that an accident would not affect more than one third of total stainless-steel production. This guarantees business continuity, while adequate coordination between the other factories mitigates the consequences of material damage to any of the facilities. The high-performance alloys division also has seven manufacturing plants, five in Germany and two in the United States, which also helps to reduce the consequences of an incident at one of them.

Sufficient coverage has been arranged for the Group's factories through material damage and loss-of-profit insurance policies, which account for over 66.67% of the Acerinox Group's insurance expenditure. Also, all assets under construction are covered by the insurance policies taken out by the respective suppliers as well as the global building and assembly policy.

The Group's adequate coverage of damages and loss of profit has enabled it to record an income in 2023 as a result of the incident at the Group's North American factory in 2022.

The Acerinox Group has also arranged general third-party liability, environmental, credit, transport, cyber-risks and group life and accident insurance policies to reduce its exposure to these various risks.

The Group also has a reinsurance company based in Luxembourg (Inox Re), which manages these risks by assuming a portion as self-insurance and accessing the reinsurance market directly.

NOTE 5 - SCOPE OF CONSOLIDATION

5.1 Business combinations

There were no business combinations in 2022 or 2023.

5.2 Changes in the scope of consolidation

There were no changes in the Group's scope of consolidation in either 2022 or 2023.

The Group is making the final arrangements for the liquidation of the trading company in Russia. The subsidiary currently has no activities and no employees. The share capital contributed by Acerinox, S.A. amounts to EUR 101 thousand. During the year, EUR 202 thousand were repatriated from this company to the parent company. The Group expects to complete all formalities before the first quarter of 2024.

5.3 Subsidiaries and associates

Subsidiaries

At 31 December 2023 and 2022, in addition to Acerinox, S.A., the scope of consolidation of the Acerinox Group included 55 fully consolidated subsidiaries.

The detail of investments in associates in 2023 is as follows:

^(*) Amounts are shown net of impairments

The activities of the Group companies are as follows:

The detail of investments in associates in 2022 is as follows:

^(*) Amounts are shown net of impairments

Associates

The detail of investments in associates in 2023 and 2022 is as follows:

The associates are entities which are scantly material for the Group, the ownership interests in which are measured at cost, as the Group is not involved in their management and therefore, does not have their financial statements. The entity Betinoks Paslanmaz Celik, A.S., based in Turkey, is in the process of liquidation. MOL Katalysatortechnik, GmbH, based in Germany, engages in the production and distribution of mineral and metal catalysts. On the other hand, Evidal Schmöle Verwaltungsgesellschaft GmbH manages the pension funds of one of the former manufacturing companies.

5.4 Capital increases and reductions

In 2023, as in 2022, the Group company Inoxplate, Lda, based in Portugal and wholly owned by the Portuguese company Acerol, Ltda, made a repayment of additional contributions to its parent company in the amount of EUR 500 thousand (2022: EUR 500 thousand).

5.5 Impairment losses on investments

At the end of each reporting period, the parent company performs impairment tests on those investments in Group companies for which there are indications of possible impairment, in order to verify whether the valuations of the respective companies exceed their recoverable amount.

Following the tests carried out during the year, as explained in Note 8.1, it was necessary to recognise impairment of the portfolio investment in Bahru Stainless Sdn. Bhd for EUR 96,553 thousand, in Columbus for EUR 22,200 thousand and in Acerinox Europa for EUR 67,245 thousand.

Also, in 2022, the Group recorded an impairment of the investment in Bahru Stainless Sdn. Bhd in the amount of EUR 197,197 thousand. On the other hand, there has been a reversal of the impairment recorded in previous years in the company Columbus Stainless Pty. Ltd. in the amount of EUR 58,291 thousand, as the recoverable value of the investment was higher than the impairment recorded at year-end.

These impairments or reversals do not have an impact on consolidated profit or loss as these companies are fully consolidated. A detailed breakdown of the analyses conducted is included in the notes to the parent's separate financial statements.

NOTE 6 - SEGMENT REPORTING

The Group is organised internally by operating segments, the strategic business units, which are made up of different products and services that are managed separately, so that Group management reviews internal reports for each of these segments at least monthly.

The operating segments presented by the Group, associated with the types of products it sells, are as follows:

Segment results, assets and liabilities include all items directly or indirectly attributable to a segment. There are no significant assets used jointly.

The "unallocated" segment includes the activities of the holding company that cannot be allocated to any of the specific operating segments. As described in Note 1, the main activity of the holding company, the parent company of the Acerinox Group, is to approve and oversee the strategic businesses. It also provides a range of corporate and advisory services in various areas and manages and administers the Group's financing, which is centralised through Acerinox, S.A.

The result of the "unallocated" segment reflects hardly any revenues as these, in the parent company, are always with Group companies and have therefore been eliminated in the consolidation process. The financial costs of this segment are the highest, due to the centralisation of financing mentioned above.

Revenue and all items reflected in the statement of profit or loss by segment are presented on a consolidated basis, i.e. after eliminating income and expenses from Group companies, except for sales between segments, which are reflected separately.

Inter-segment transfers and transactions are performed on an arm's length basis, under commercial terms and conditions that would be available for unrelated third parties.

A segment's performance is measured on the basis of its gross profit from operations and net profit before tax. The Group considers that this information is the most relevant when assessing the performance of the segment in relation to other comparables in the industry.

6.1 Operational segments

Segment results for the year ended 31 December 2023 are as follows:

(Amounts in thousands of euros)

Unallocated liabilities essentially comprise the financial debt, which is mainly centralised in the parent company.

The data for 2022 are as follows:

(Amounts in thousands of euros)

There are no significant items that have not been reflected in cash flows other than depreciation and amortisation and impairment.

6.2 Geographical segments

Revenue from geographical segments is presented on the basis of customer location. Segment assets are determined by the geographical location of those assets.

The data relating to geographical segments in 2023 is presented below:

(Amounts in thousands of euros)

The data for 2022 are as follows:

(Amounts in thousands of euros)

The Group sells its products in about 80 countries across the five continents. The Group's sales in each of the following countries exceeded 5% of total consolidated sales in 2023 and 2022: United States 40.47% (2022: 43.29%), Germany 13.85% (2022: 10.29%) and Spain 7.08% (2022: 7.24%). These sales also include the sales of the high-performance alloys segment.

No single transaction with an external customer exceeded 10% of the Consolidated Group's total revenue for 2023 or 2022.

NOTE 7 - INTANGIBLE ASSETS

The detail of the main classes of intangible assets and of the changes therein is as follows:

(Amounts in thousands of euros)

The amortisation charge for the year is included under "depreciation and amortisation charge" in the consolidated statement of profit or loss.

At 31 December 2023, the Group had entered into agreements to acquire intangible assets amounting to EUR 433 thousand (2022: EUR 791 thousand).

Research and development expenditure

Due to the nature of its activity and as stated in its mission, the Acerinox Group considers research, development and innovation to be strategic in nature. R&D&I projects are focused on three main areas: development of new products, improving processes to further improve quality, productivity and costs, and adapting processes to new technologies and sustainability through projects that contribute to the circular economy, decarbonisation and waste recycling. With the incorporation of VDM Metals into the Acerinox Group, efforts were combined to leverage available resources jointly in line with the company's overall purpose and strategy of fostering sustainable innovation. The high-performance alloys division focuses its R&D&I activities mainly on the development of tailor-made products in collaboration with its customers. This includes the development of new materials, as well as the identification of alloys with high performance potential and the optimisation of key properties in those established in the market that can be classified for other applications. Most of the projects are carried out in collaboration with customers and research institutes which take part in the projects. The Group is improving the adaptability of the R&D&I departments by creating joint work structures and more agile and flexible processes. In 2023, collaboration in R&D tasks among the various units of the Group has strengthened, leading to enhanced synergies in generating knowledge and adding value to our products.

VDM is the leading patent holder in the high-performance alloys sector with 53 patents.

Certain research and development expenses incurred by the Group do not meet the criteria for capitalisation and are therefore expensed as incurred, according to their nature. The total research, development and technological innovation (R&D&I) expenses recorded directly as expenses for the year and charged to the Group's income statement stood at EUR 17,652 thousand (2022: EUR 16,516 thousand).

The high-performance alloys division does, however, capitalise costs relating to R&D&I projects in which the research findings are used to produce new products and processes, or to significantly improve existing products and processes, provided that the product or process proves to be technically and commercially feasible, the Group has the resources required to complete the development programme and it is considered that they will generate future cash flows that will enable their recovery. The total R&D&I expenditure capitalised in the year amounts to EUR 1,029 thousand, relating to 8 projects (2022: EUR 1,454 thousand, relating to 5 projects). VDM has 23 employees working on 89 R&D&I projects.

Customer portfolio

The allocation in 2020 of the purchase price of the VDM Group to the net assets and liabilities identified led to the identification of new intangible assets, arising from the valuation of the customer portfolio.

It is standard industry practice to recognise both relationships with customers and the backlog as two of the most important intangible assets arising from a business combination. Both assets were valued jointly in the purchase price allocation process. The estimated fair value at the acquisition date was EUR 29,200 thousand.

Goodwill

At 31 December 2023, goodwill in the amount of EUR 51,064 thousand reflected mainly the amount arising from the business combination performed in 2020 as a result of the acquisition of the VDM Metals Group (EUR 49,829 thousand). The goodwill was allocated to the VDM's subgroup cash-generating unit (CGU) which, as a whole, belongs to the highperformance alloys segment.

7.1 Impairment of goodwill

The Group estimates the recoverable amount of goodwill on an annual basis, or more frequently where indications of possible impairment are identified. Accordingly, goodwill is allocated to each of the cash-generating units (CGUs) of the company to which the economic benefits of the business combination synergies are expected to flow.

The recoverable amount of a CGU is determined on the basis of the calculation of its value in use. These calculations use cash flow projections based on five-year financial budgets approved by management. Cash flows beyond this five-year period are extrapolated using the estimated growth rates indicated below. The terminal value is calculated by taking into consideration average amounts calculated on the basis of figures achieved in the past and also in the budgeted period, which enables bull and bear cycles to be standardised.

VDM

The goodwill resulting from the acquisition of the VDM Group in 2020, amounting to EUR 49,829 thousand, has been allocated to the cash-generating unit (CGU) of the VDM subgroup, which belongs as a whole to the high-performance alloys segment.

The Group prepares annual five-year budgets. The estimated sales and production volumes rely on current capacities determined by existing machinery and equipment, approved investment projects, and considerations of anticipated future demand and market prices. These estimates are verified against projections provided by independent industry experts, including SMR (Steel Metals and Market Research). Management determines production costs by taking into account the current situation, the efficiency plans implemented and future price developments. Raw materials are estimated at constant prices.

The discount rates used are pre-tax values and reflect specific risks relating to the relevant segments. Other significant assumptions such as raw material prices are tied to the most recent values recorded in the pertinent markets.

With a sales volume exceeding 40 thousand tonnes in 2023 (2022: 43 thousand tonnes), VDM Metals continued to be the leading global manufacturer of nickel alloys.

In the 2023 financial year, the high-performance alloys market sustained strong performance with high demand and prices. This led to improved margins compared to the previous year, during which VDM achieved record profits. Additionally, the margins exceeded the estimates from the previous year, validating the goodwill recorded. The VDM Group achieved a new record result this year. The consolidated profit of the high-performance alloys division for the year amounted to EUR 73 million (70% higher than the previous year).

Market performance this year has varied from sector to sector. The oil and gas and chemical process industries have experienced ongoing growth. The automotive sector has maintained levels comparable to those of 2022, while the energy sector has seen significant declines, albeit with prospects for recovery ahead. In the aerospace sector, demand is increasingly oriented towards China, in many cases exceeding the capacity of the supply chain.

The Group has revised its five-year estimates to adapt them to new market circumstances, price levels and approved investment plans.

The Group is confident that the flows to perpetuity will materialise, mainly in terms of its use of production capacity and margins, using a perpetuity growth rate (g) of 2.2% in line with expected long-term inflation for the main markets in which VDM operates.

The key assumptions used to calculate the value in use were as follows:

^(*) Five-year budgeted average EBIT margin. EBIT is defined as profit or loss from operations and expressed as a margin or percentage of revenue.
^(**) Rate used to extrapolate cash flows beyond the budgeted period.
^{(*** )} Discount rate: weighted average cost of capital (WACC).

The discount rate (WACC or weighted average cost of capital) was calculated on the basis of the interest rates of the German sovereign debt (twenty-year treasury bond) and a capital structure, market risk premiums and ratios of similar companies.

With respect to the terminal value, adjustments were performed to obtain flows to perpetuity, depreciation and amortisation were matched to the investments and changes in working capital were also calculated based on average amounts, deemed consistent in the long term, increased by the growth rate (g). The EBIT margin projected to perpetuity does not differ from that achieved by VDM in previous years.

Another assumption is the price of raw materials, particularly nickel, which is set when drawing up the budget. This is extrapolated and remains constant during the period of analysis.

Due to the uncertain environment clouding the markets in which VDM operates, the Group analysed the probability of occurrence of the key assumptions, adjusting the estimated budgets, as well as those of the terminal year, to normalised values that take into account the results obtained in the past. The residual value determined by the tests represents 60.3% of the total recoverable amount (2022: 63.9%).

The impairment test performed on 31 December 2023 showed a recoverable amount of EUR 1,198,380 thousand (2022: EUR 881,180 thousand), higher than the carrying amount, EUR 1,003,342 thousand (2022: EUR 814,257 thousand) by EUR 195,038 thousand (2022: EUR 66,923 thousand). Consequently, it is not necessary to recognise any impairment losses on goodwill.

To achieve an impairment of the carrying amount, the discount rate (WACC) would have to be increased by 20.3% to 11.1% (2022: 9.0%), while maintaining the growth rate (g). The planned average EBIT margin would have to be reduced by 20.4% to 7.7% (2022: 3.9%), with the other two assumptions remaining unchanged.

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

The detail of the various items of property, plant and equipment and of the changes therein in 2023 and 2022 is shown in the following table:

(Amounts in thousands of euros)

The depreciation charge for the year is included under "depreciation and amortisation charge" in the consolidated statement of profit or loss.

The difference between the depreciation and amortisation charge included in the consolidated statement of profit or loss and consolidated statement of cash flows and the sum of the amounts charged reflected in the tables relating to property, plant and equipment, intangible assets, investment property and right-of-use assets is mainly due to the hyperinflation adjustments made to all the profit or loss items of the Argentine entity, which, in the case of the depreciation and amortisation charge, amount to EUR 24 thousand (2022: EUR 28 thousand).

Any impairment of property, plant and equipment and goodwill is included under a separate, specific heading in the consolidated statement of profit or loss.

Investments

The investments made in 2023 in both property, plant and equipment and intangible assets amounted to EUR 174,785 thousand. These investments include both the acquisition and installation of new equipment and recurrent maintenance expenditure investments. In many cases, these are investments aimed at improving efficiency and productivity, but they are also strategic in nature and committed to sustainability, as they entail a reduction in energy consumption. In the case of Acerinox Europa, the total amount of investments (including maintenance) is EUR 39 million, related to improvements and extensions made to several production lines. The investments made by the company North American Stainless amount to EUR 73.9 million, of which EUR 21 million correspond to the investment plan approved at the beginning of this year, and EUR 27 million to recurring investments in maintenance. At Columbus Stainless, investments for the year amounted to EUR 21.2 million. Finally, the VDM Group invested EUR 27.2 million in the year.

In January 2023, the Board of Directors of Acerinox, S.A. approved an investment of USD 244 million in the North American Stainless Group company, which will allow it to increase its production capacity by 200,000 tonnes (20% more) and thus strengthen its position in the market with higher added value products. NAS will have a new cold rolling mill, and will revamp its annealing and pickling lines. It also plans to enlarge the steelworks, along with other equipment.

In addition, in December 2023, the Board of Directors approved a EUR 67 million investment plan for the high-performance alloys division at the German plants in Unna, Altena and Werdohl, which will enable a gradual increase in production capacity for precision strip, bars, and wires, as well as sales by 15%. The planned investments include the expansion of three remelting furnaces, the upgrade of an annealing and pickling line, an additional defect detection line for bars and an atomiser for the production of stainless-steel powder and high-performance alloys for additive manufacturing.

In 2022, the investments made amounted to EUR 153,892 thousand, which include both the acquisition and installation of new equipment and recurrent investments in maintenance. As for Acerinox Europa, the total investment amount, including maintenance, reached EUR 52.7 million. The capitalisation of the major repairs conducted during the year at the steelworks and hot rolling mill, the construction of the slag storage building, and the installation of the new CS-6 cutting line were notable among these investments. The investments made by the company North American Stainless amounted to EUR 43.9 million, destined to the maintenance of existing equipment, updating of the AP1, new slitting line SL-5 and the replacement of equipment damaged in the steelworks incident and replacement of wiring. At Columbus Stainless, investments for the year amounted to EUR 19.8 million, with the installation of oxygen and nitrogen storage tanks and investments in plant maintenance being particularly noteworthy. Finally, the VDM Group invested EUR 27.8 million over the year for production growth, product quality improvement, safety, environment and the maintenance of existing equipment.

Property, plant and equipment in the course of construction

The detail of the investments classified under this heading is as follows:

(Amounts in thousands of euros)

Of the total amount recognised under this heading, EUR 25,082 thousand at Acerinox Europa (2022: EUR 21,316) and EUR 57,447 thousand at the US company North American Stainless, as a result of the new investment plan (2022: EUR 25,354 thousand), EUR 10,524 thousand at Roldan, EUR 12,812 thousand at Columbus (2022: EUR 10,648 thousand) and EUR 19,032 thousand in VDM (2022: 9,495 thousand), are noteworthy.

The total amount of transfers carried out from fixed assets in progress to completed in this year amounts to EUR 46,087 thousand, which include EUR 17,397 of Acerinox Europa for a new cutting line and improvements completed in several lines. In the case of North American Stainless, the transfers amounted to EUR 21,368 thousand corresponding, among others, to a bridge crane, improvements in the hot rolling annealing furnace (2022: EUR 54,327 thousand, mainly corresponding to the upgrade of the AP1).

Property, plant and equipment located outside Spain

The detail of the property, plant and equipment, including investment property, located outside Spain is as follows:

(Amounts in thousands of euros)

Changes in estimates

As explained in Note 3, the Group periodically reviews estimated useful lives based on the valuations conducted by experts from the appropriate entity.

No useful lives were written down in the Group during the year.

In 2022, the Group company Columbus Stainless reviewed the useful lives of items whose useful life was about to end, extending it in those cases where the items were still in use. The technological improvements and maintenance plans performed on an ongoing basis by the company led the projected useful lives to be lengthened, since the company considered that it would continue to obtain cash flows from the use of these assets. The carrying amount of the assets whose useful lives were estimated in that fiscal year amounted to EUR 932 thousand, while the impact on income from the reduction of depreciation was EUR 60 thousand.

The Group proceeded with accounting of the change in estimate prospectively, as stipulated in IAS 8.

Guarantees

None of the Group's assets had been pledged to secure bank borrowings at 31 December 2023 or 2022.

Obligations and commitments

At 31 December 2023, the Group had entered into agreements to acquire new equipment and facilities for EUR 140,189 thousand, among which the following stand out: EUR 97,592 thousand relating to the investments made by North American Stainless as a result of the approved investment plan, EUR 19,828 thousand by Acerinox Europa, EUR 9,880 thousand corresponding to Columbus and EUR 11,152 thousand to the VDM Group.

At 31 December 2022, the Group had entered into agreements to acquire new equipment and facilities for EUR 59,254 thousand, among which the following stand out: EUR 16,543 thousand relating to the investments made by Acerinox Europa, EUR 17,387 thousand by North American Stainless, EUR 9,800 thousand corresponding to Columbus and EUR 11,254 thousand to the VDM Group.

Capitalisation of borrowing costs

Borrowing costs of EUR 60 thousand relating to Columbus Stainless were capitalised in 2023 (2022: EUR 14 thousand, also relating to the same Group company). The capitalisation rate in 2023 was 10.26% (2022: 7.46%).

Disposals of property, plant and equipment

Losses on the sale or retirement of property, plant and equipment recognised under "other operating income" in the consolidated statement of profit or loss for 2023 amount to EUR 2,719 thousand (2022: EUR 1,987 thousand), which mostly correspond to the removal of fixed assets from the Group's warehouses, either because they are obsolete or because they have been used for maintenance work. Last year, the assets damaged at the North American Stainless Group company as a result of the incident at the steelworks were also written off.

The gain on the sale or retirement of property, plant and equipment recognised in the 2023 statement of profit or loss under "other operating income" amounts to EUR 824 thousand, mainly corresponding to the sale of a warehouse in Lisbon owned by one of the Group's marketing entities (2022: EUR 1,837 thousand corresponding to the sale of a warehouse in the Spanish company Inoxcenter, classified as investment property).

Environment

The items of property, plant and equipment the purpose of which is to minimise environmental impact and protect and improve the environment at 31 December 2023 and 2022 were as follows:

(Amounts in thousands of euros)

In 2023, the Group received an environmental grant of EUR 24,612 thousand mostly related to offsetting the costs of indirect greenhouse gas emissions. In 2022, EUR 9,879 thousand were received for the same concept. Both grants were recognised as income in the year under "other operating income".

In 2023, the Group incurred ordinary environmental expenses of EUR 119,069 thousand (2022: EUR 148,240 thousand).

Property, plant and equipment not used in operations

Group property, plant and equipment not used in operations includes an industrial building which is classified as investment property. The detail and valuations of this property are broken down in Note 9.

Other disclosures

There were no legal proceedings, attachments or similar measures that could affect items of property, plant or equipment at 31 December 2023 or 2022.

The Group companies have taken out several insurance policies to cover the risks to which their property, plant and equipment are subject. It is considered that these policies sufficiently cover such risks.

8.1 Impairment losses

As established in IAS 36, and as mentioned in the accounting policies (Note 2.11), at each reporting date the Group assesses whether there is any indication that its assets might have become impaired. The value of an asset is impaired when its carrying amount exceeds its recoverable amount. The Group considers that indications of impairment exist when there is/are a significant decrease in the value of the asset, significant changes in the legal, economic or technological environment that could affect the measurement of assets, obsolescence or physical impairment, idle assets, low returns on assets, discontinuation or restructuring plans, repeated losses at the entity or substantial deviation from the estimates made. That is to say, to assess indications of impairment, both external sources of information (technological changes, significant fluctuations in market interest rates, market value of the assets) and internal sources of information (evidence of obsolescence, sustained losses at the entity, substantial deviation from estimates, etc.) are taken into account.

Property, plant and equipment and intangible assets represent 28% of the Group's total assets. When examining individual segments, the high-performance alloys division accounts for 16.9% of the Group's total assets, while the stainless steels division represents 83.1%, with 77.3% attributed to the factories within that division. The remaining 5.8% was accounted for by the rest of the Group's 33 subsidiaries, mainly trading companies:

Since individual assets do not generate cash inflows independently, as the whole production process needs to be completed, impairment is not estimated on an individual basis but by allocating the assets to cash-generating units. In the case of factories, the smallest cash-generating units that can be considered encompass each factory as a whole.

The year 2023 was again marked by geopolitical tensions and supply chain problems. The Gaza-Israel conflict, alongside the ongoing Russia-Ukraine dispute, added to regional tensions. Furthermore, as the year drew to a close, disturbances in the Red Sea caused trade route disruptions, resulting in cargo being rerouted from the Suez Canal to longer alternative routes with higher costs.

The stainless division had a slow year following the inventory adjustment phase that started in the second half of 2022. Production continued the downward trend that was already evident in the fourth quarter of 2022.

The low demand throughout the year and the reduction in inventories meant that all plants in the stainless-steel division had to adjust their production to market conditions.

There were significant adjustments in all production countries with the exception of China and Indonesia, whose surpluses generated led to higher price pressure on the markets.

The market for high-performance alloys, on which Acerinox is focusing part of its strategy with a renewed commitment to higher value-added products, performed satisfactorily, maintaining its strength, solid demand and good prospects. Demand remained stable throughout the year, while production activity was slightly lower than in the record year of 2022 (-7% in steel production).

Amid the uncertain conditions and challenges in the European and Asian stainless-steel markets, there are signs of a negative impacts in the Group's plants. These include Bahru Stainless in Malaysia, the Columbus plant in South Africa and Acerinox Europa, Roldan and Inoxfil in Spain.

Bahru Stainless, Sdn. Bhd

Bahru Stainless, Sdn. Bhd was incorporated in 2008 and is located in Johor, Malaysia. Initially intended as a comprehensive stainless-steel flat product manufacturing facility, the rise in producers in the region prompted the Group to suspend the investments scheduled for future phases. It currently has two annealing and pickling lines and two cold-rolling lines.

The persistent overcapacity in the Chinese market over the past decade, along with the resulting price pressures from producers in this region on the international and Asian markets, has created a substantial price gap compared to the European and, above all, American markets for several years. China and Indonesia currently account for almost 70% of the world's stainless-steel production.

The various Southeast Asian countries and Asian countries in general, as well as Europe, have reacted to Chinese overcapacity by applying anti-dumping or protectionist measures in their local markets.

During the year, the Asian market continued to suffer from aggressive pricing policies by major competitors in China and Indonesia.

In this context, and given the lack of prospects for this market, the Group is in the process of making strategic considerations about the future of Bahru Stainless, and does not rule out cessation of activity at this plant, and a time horizon of two years has been set to realise some of the alternatives currently under discussion.

Given this situation of uncertainty, the Group has again requested the support of an independent expert for the determination of the recoverable amount at 31 December 2023.

In previous years, estimates of recoverable value were made by an independent expert by calculating fair value less costs to sell and under the perspective of a market participant and considering a finite life (until 2046).

Given the new backdrop, the valuation method has been reconsidered to adapt it to the new circumstances and the latest management decisions. Thus, the value in use is the one that best reflects this situation.

For the determination of the value in use, a short-term scenario with a 2-year budget (2024-2025) and a residual value at the end of the period. The estimated budgets consider a gradual closure of the lines in the period considered. This scenario is the main assumption in the valuation conducted, where the discount rate for this two-year period is not significant. Estimated average EBIT over the two-year period is -4.1%.

For measurement purposes, a residual value of the lines has been considered in the terminal value, as well as the necessary decommissioning costs. In view of the scenario considered reasonable in this context, no value was recognised for tax credits and tax concessions, as these would be lost in the scenario under consideration.

In this scenario, the independent expert's valuation of Bahru results in zero value, so the Group has impaired all assets, including intangible assets and property, plant, and equipment, except for land and the residual value of machinery. The impairment recognised amounts to EUR 156,207 thousand. In turn, in view of this new situation, a decommissioning provision amounting to EUR 6,871 thousand has been recognised, recognising in turn an increase in the value of the assets.

As the assets are fully impaired, except for the aforementioned values, the Group does not expect any future changes in valuations and therefore no sensitivity analysis is required. Only in the event of changed circumstances would the Group be able to reverse part of the recorded impairment, as set out in the policy in Note 2.11.

In 2022, an asset impairment of EUR 203,905 thousand was recorded. Impairment accumulated at year-end amounted to EUR 489,435 thousand.

Acerinox Europa, S.A.U.

Acerinox Europa was incorporated in 2011 as a result of the spin-off of the manufacturing activity of Acerinox, S.A., and its main assets are the facilities located in Campo de Gibraltar. The Acerinox Europa factory, inaugurated in 1970, was the first integral stainless-steel factory in the world. The knowledge and experience gained during its design and execution played a pivotal role in the establishment of other factories within the Group. It is the leading stainless-steel producer in the Spanish market.

The integrated flat product plant has steelmaking, hot rolling and cold-rolling facilities and has a theoretical installed steelmaking capacity of one million tonnes in steelmaking and 660,000 tonnes of cold rolling. It manufactures flat stainless-steel products in various types of steel, formats, thicknesses and finishes.

Acerinox Europa is strategically located on the Strait of Gibraltar and has access to the Atlantic and the Mediterranean as well as its own seaport. The company supplies flat products all over the world, with a focus on the European continent, as well as semifinished products to other plants within the Group's production network, primarily to the Acerinox Group's long products plant in Spain (Roldan). Despite being the Group's first and oldest factory, the plant remains at the forefront by ensuring that its production lines are upgraded with the latest advances in order to remain competitive.

Acerinox Europa is the market leader in Spain with a market share of around 50% and 10% in Europe.

This year, the adjustment of stocks in the supply chain has led to a fall in apparent consumption in Europe of around 20%. The main correction, with declines of more than 50%, was in imports, which were mainly destined for the distribution market, while demand from end consumers remained more stable.

The reduction in imports this year is due to the collapse of prices on the European market, as well as the safeguard and trade defence measures in force, and the positive impact of the opening of new anti-circumvention investigations into Indonesian re-rolled material in Taiwan, Vietnam and Turkey.

The complicated situation of the European markets caused by the fall in demand and in prices, and the high energy costs, have led to signs of deterioration in this financial year. In the face of this uncertainty, the management team requested a valuation by an independent expert, who determined the recoverable amount of the assets based on their value in use.

For this purpose, the Group has updated the five-year results forecasts based on the new circumstances and taking into account the future strategic plans approved by the management, which have been designed with the aim of improving the results of Acerinox Europa, the main component of the Spanish fiscal Group, redirecting a greater part of its sales towards end customers and towards products with higher added value.

The Board of Directors of Acerinox has approved the Acerinox Europa strategic plan for the next 2 financial years 2024-2025.

In terms of demand, 2023 was the worst year in terms of sales since the creation of Acerinox Europa in 2011, due to the high stock levels in the distribution chain, which have led to a drop in sales to manufacturers, forcing the application of Temporary Layoff Plans (ERTEs) at the Algeciras factory on a recurring basis for several months of this year. Low prices have also forced the Group to forego orders due to the inability to achieve minimum contribution margins. By 2024 and with inventories in the supply chain very low, the Group expects to reach sales levels somewhat above 2022 (second worst year in history, only surpassed by 2023) and to return to more stable volumes, in line with historical pre-pandemic levels, from 2025 onwards, thanks to the strategic plans adopted by the company. From 2026, SMR (Steel Metals and Market Research) demand estimates have been considered, which estimate moderate increases of 1.7% on average for the following 3 years.

On the price side, estimates are based on external sources, which foresee slight increases in both 2024 and 2025, from the lowest historical levels ever seen in 2023. Prices remain constant from 2026 onwards.

For supply prices, forward price curves for both electricity and gas are considered. All other costs take into account increases in consumer price indices.

The Group took into account all these circumstances and the adjustments to the macroeconomic forecasts in preparing the five-year budgets.

The budgets have been prepared taking into account the following: demand estimates, raw material and selling prices, exchange rates, consumer price increases, energy costs estimates and the Company's strategy itself.

The independent expert has reviewed this initial budget provided by the company. It has taken into account the future sales scenarios and expectations, stressing gross margin to align with historical values improved by the company's strategy.

To determine the value in use of the assets, both the estimate of future cash flows that the entity expects to obtain from the assets and the discount rate, i.e. the weighted average cost of capital (WACC), were taken in account.

The key assumptions used to calculate the value in use were as follows:

^(*) Five-year budgeted average EBIT margin. EBIT is defined as profit or loss from operations and expressed as a margin or percentage of revenue.
^(**) Rate used to extrapolate cash flows beyond the budgeted period.
^(***) Discount rate: weighted average cost of capital (WACC).

The discount rate was determined by considering a normalised 20-year German bond as the benchmark. Likewise, a market risk premium for Spain, historical betas, a leverage structure and cost of debt in line with market assumptions have been considered.

A normalisation exercise has been conducted in relation to the terminal value to achieve a perpetuity cash flow that is expected to remain stable in the long term, increased by the growth rate (g). The growth rate (g) was estimated on the basis of expected long-term inflation. The residual value considered in the test represents 79% of the total recoverable amount.

The impairment test conducted at 31 December 2023 shows an excess of the recoverable amount (EUR 1,049,174 thousand) over the carrying amount (EUR 849,966 thousand) of EUR 199,208 thousand. Consequently, no impairment is recorded.

A sensitivity analysis under different scenarios shows that the discount rate (WACC) would have to be increased by 17% to 10.8% to start generating impairment, with the other assumptions remaining unchanged. Regarding the growth rate (g) would have to be brought to zero, and the WACC would have to be increased by 1% in order to start achieving an impairment of the carrying amount.

In order to achieve impairment, the planned average EBIT margin would have to be reduced by 16% to an average value of 4.1% during the projected period, with the other two assumptions remaining unchanged.

Columbus Stainless Pty. Ltd.

Columbus Stainless, Middelburg (South Africa), is the only integrated stainless-steel factory in Africa. It is the main supplier of both the domestic market and the various consumer areas of the continent, in which it is the leader. The Columbus factory, the most technologically advanced in the industry, is equipped with the most efficient machinery and has a considerable competitive advantage due to its location, not just for the distribution of finished goods but also because of its proximity to sources of raw materials, particularly ferrochrome.

Columbus manufactures both flat stainless steel and carbon steel products. Faced with the difficult market situation in both Europe and Asia in recent years, Columbus achieved a milestone with the manufacture of carbon steel using technology designed to produce stainless steel. After the closure of one of the local carbon steel production plants, part of this market was left unsupplied and had to be covered by imports. Columbus took advantage of this situation to win orders and serve this niche. In this way, the company was able to partially compensate for the difficulties in the stainless-steel market, reduce its dependence on exports and increase its steel production, thereby diluting fixed costs.

The Columbus factory has also been affected this year by low levels of demand, which has forced it to close the factory for a few weeks during the year to balance production and reduce stock levels. At Columbus, sales in the local market accounted for 65% of total sales. The diversification towards carbon steel accounted for 36% of total steel production this year.

Exports have been affected by the inclusion of South African steel imports in Europe's safeguard measures since June 2022.

This year, stainless-steel sales in the local market decreased by 7% compared to the previous year; carbon steel sales remained in line with the previous year, while exports decreased by 29%

The company's continuous improvement initiatives in line with the Group's excellence plans have boosted productivity and efficiency, leading to cost improvements. This has enabled Columbus to maintain a highly competitive cost structure.

Sales prices, as in other markets, have suffered a continuous deterioration this year.

With respect to the five-year budgets, the estimated sales and production volumes are based on current capacities using existing machines and equipment, and take into account the evolution of both future demand and prices, with respect to the company's product mix, as estimated by independent industry experts. Management determines production costs by taking into account the current situation, the efficiency plans implemented and future price developments.

Demand estimates were based on SMR (Steel & Metals Market Research).

The discount rates used are pre-tax values and reflect specific risks relating to the relevant segments. Other significant assumptions such as exchange rates and raw material prices are tied to the most recent values recorded in the pertinent markets.

The Group is confident that the flows to perpetuity will materialise, mainly in terms of its use of production capacity and margins. They were calculated using growth rates estimated on the basis of the expected long-term inflation rate.

The key assumptions used to calculate the value in use were as follows:

^(*) Five-year budgeted average EBIT margin. EBIT is defined as operating income and expressed as a margin or percentage of revenue.
^(**) Rate used to extrapolate cash flows beyond the budgeted period.
^(***) Discount rate: weighted average cost of capital (WACC).

The average EBIT margin indicated for this financial year has been reached in the past, and in 2022 (10.9%) it was 1.9 times higher.

The discount rate (WACC or weighted average cost of capital) was calculated on the basis of the interest rates of the South African sovereign debt (ten-year swap of the South African rand) and the main markets where it is active, and a capital structure, market risk premiums and ratios of similar companies. The reference currency in this connection was the South African rand, since all the cash flows are estimated in this currency.

With respect to the terminal value, adjustments were performed to obtain flows to perpetuity, depreciation and amortisation were matched to the investments and changes in working capital were also calculated based on average amounts, deemed consistent in the long term, increased by the growth rate (g). The growth rate (g), like the discount rate, is estimated on the basis of the South African rand and calculated in accordance with the expected long-term inflation in that currency. At terminal value, the EBIT margin considered is lower than the average of the explicit budgeting period.

Other assumptions are the ZAR/EUR exchange rate (20.35 ZAR/EUR) and the price of raw materials (USD 16,000/t), which are established when drawing up the budget. Both are extrapolated and kept constant during the period of analysis.

Due to the uncertain environment clouding the markets in which Columbus operates, the Group analysed the probability of occurrence of the key assumptions, adjusting the estimated budgets, as well as those of the terminal year, to normalised values that mainly take into account the results obtained in the past, in addition to the company's new production mix. The residual value considered in the test represents 48% of the total recoverable amount.

The impairment test conducted at 31 December 2023 shows an excess of the recoverable amount (EUR 353,379 thousand) over the carrying amount (EUR 271,962 thousand) of EUR 81,417 thousand, accordingly, no impairment was necessary (there were no indications of impairment the previous year).

However, a sensitivity analysis has been carried out, which concludes that the discount rate (WACC) would have to be increased by 21.8% to 15.9%, and the perpetual growth rate (g) would have to be equal to zero to start generating impairment. The planned average EBIT margin would have to be reduced by 65.6% (up to 2.0%) to start generating impairment.

Roldan, S.A.

Roldan is the eldest industrial facility of the Acerinox Group and one of the three manufacture plants for long product production. Roldan is located in Ponferrada (Leon, Spain) and produces angles, bars and wire rod in various types of steel and finishes. Part of its production is sent to Inoxfil, located in Igualada (Barcelona, Spain).

Roldan uses as raw material for the production of long products, the billet supplied by the Group's plant in Palmones, Acerinox Europa, S.A.U.

The long product manufactured in this plant is supplied to both the internal market and to international customers, and its stainless steels are present in some of the most iconic international projects.

Apparent consumption of the long product in Europe in 2023 fell by 20%. The factories have operated at significantly lower production levels than in previous years, with volumes falling below the break-even point. As a result, the Roldan factory has had to implement the Temporary Layoff Plan on multiple occasions.

The decline in prices throughout the year was primarily driven by imports reaching nearly 40%, while the decrease in raw material costs had a considerable effect on the company's annual performance. Since the beginning of the year, prices have been falling steadily, reaching a cumulative decline of 35% in December. The pressure on the market has also reduced the number of orders quoted with alloy surcharges compared to the effective prices mostly quoted by Asian suppliers.

Similar to stainless-steel flat products, demand has also been consistently low all year due to overstocking within the supply chain. Inventory levels have started to correct in the coming months, so 2024 is expected to see a substantial improvement in production, sales and prices, but not yet to 2022 levels.

The five-year budget and key variables used follow the same guidelines stated for Acerinox Europa, duly contextualised in the stainless-steel long products market.

The recoverable amount of the assets was determined in accordance with their value in use.

To determine the value in use of the assets, the estimate of future cash flows that the entity expects to obtain from the assets and the discount rate, i.e. the weighted average cost of capital (WACC), were taken in account.

The key assumptions used in the value in use calculations are the same as those described for Acerinox Europa with the exception of the budgeted average EBIT margin which in the case of Roldan has been 4.9%.

The terminal value represents 58% of the total recoverable amount. At terminal value, the EBIT margin considered is lower than the average of the explicit budgeting period.

The impairment test performed as of 31 December 2023 reveals an excess of the recoverable amount (EUR 92,787 thousand) over the carrying amount (EUR 57,485 thousand) of EUR 35,302 thousand, so that no impairment of the Company's assets is required.

However, a sensitivity analysis has been carried out, which concludes that the discount rate (WACC) would have to be increased by 56.8% to 14.5%, and the perpetual growth rate (g) would have to be equal to zero to start generating impairment. The planned average EBIT margin would have to be reduced by 33.5% (up to 3.2%) to start generating impairment.

Inoxfil, S.A.

Inoxfil, S.A. is one of the Group's two long product plants in Spain and engages in the manufacture of stainless-steel wire. Located in Igualada (Barcelona, Spain), this company is 100% owned by the Group company Roldan, S.A. Inoxfil receives wire rod mainly from Roldan, but also from other third-party suppliers, which is used as raw material to complete its production process and obtain wire. This is therefore the final production link in a network starting when Roldan receives the billet from Acerinox Europa, this being the only Group plant with a melting shop in Spain.

The long product manufactured by this plant is supplied both to the domestic market and to international customers.

The five-year budget and key variables used follow the same guidelines stated for Acerinox Europa, duly contextualised in the stainless-steel long products market.

The recoverable amount of the assets was determined in accordance with their value in use.

To determine the value in use of the assets, the estimate of future cash flows that the entity expects to obtain from the assets and the discount rate, i.e. the weighted average cost of capital (WACC), were taken in account.

As in the case of Roldan, the key assumptions used in the value in use calculations are the same as those described for Acerinox Europa with the exception of the budgeted average EBIT margin which in the case of Inoxfil has been 5.3%.

The terminal value represents 54% of the total recoverable amount. At terminal value, the EBIT margin considered is lower than the average of the explicit budgeting period.

The impairment test performed as of 31 December 2023 reveals an excess of the recoverable amount (EUR 16,278 thousand) over the carrying amount (EUR 11,063 thousand) of EUR 5,215 thousand, so that no impairment of the Company's assets is required.

However, a sensitivity analysis has been carried out, which concludes that the discount rate (WACC) would have to be increased by 52.4% to 14.1%, and the perpetual growth rate (g) would have to be equal to zero to start generating impairment. The planned average EBIT margin would have to be reduced by 31.2% (up to 3.6%) to start generating impairment.

Impairment analyses conducted in 2022

The Acerinox Group obtained the best results in its history in 2022 despite the complexity of the market, geopolitical uncertainty and high energy costs, especially in Europe. The improvement in activity in 2021 continued in the first half of 2022. In the second half of the year, however, activity was affected by the large quantities of imported material, which led to an increase in inventories at stockists and thus to a decline in apparent consumption.

EBITDA of EUR 1,276 million was achieved in a complex environment. These include, among others, the instability generated by the geopolitical situation with Russia's invasion of Ukraine, cost inflation, especially energy prices in Europe, supply chain problems, the collapse of nickel prices on the London Metal Exchange (LME) in March and incidents that occurred in some of the Group's factories.

In this context of uncertainty, there were signs of deterioration in the Group's factories in Bahru Stainless, and in Acerinox Europa.

In the case of Bahru, an estimation of the recoverable amount (based on fair value less costs of disposal) was carried out in the context of an impairment test analysis from the perspective of a market participant, taking into account the existing scenario of uncertainty. The valuation was carried out by an independent expert. As a result of the analysis an impairment of EUR 203,905 thousand was recorded.

For Acerinox Europa, the determination of the recoverable value was based on calculating its value in use. In this regard, the impairment test conducted at 31 December 2022 showed an excess of the recoverable amount (EUR 1,091,106 thousand) over the carrying amount (EUR 912,260 thousand) of EUR 178,846 thousand. Consequently, no impairment was recorded.

NOTE 9 - INVESTMENT PROPERTY

"Investment property" includes Group-owned buildings not occupied by the Group which are held to earn returns, either through rental or through capital appreciation and subsequent disposal of the buildings.

At the end of 2022 and 2023, the Group only has one industrial building in Italy classified as investment property. This industrial building was used for commercial activities and is currently leased to third parties. In addition, a few square metres at Acerinox's headquarters are also included as investment property.

The detail of the changes in investment property in 2023 and 2022 is as follows:

(Amounts in thousands of euros)

No changes have taken place in this year.

In 2022, certain floors of the Group's head offices in Spain were reclassified from investment property to property, plant and equipment, as they were used by the Group itself and were no longer available for lease. Meanwhile, one of the buildings classified in this category, located in Spain, was sold with a net carrying amount of EUR 201 thousand. The proceeds from this sale amounted to EUR 1,443 thousand.

Total income from the lease of warehouses amounted to EUR 351 thousand in 2023 (2022: EUR 310 thousand). The associated operating expenses, including repair and maintenance expenses, amounted to EUR 101 thousand (2022: EUR 67 thousand).

The market value of all the investment property exceeded the carrying amount thereof and amounted to EUR 11,706 thousand at 31 December 2023 (2022: EUR 11,656 thousand). This valuation takes into account observable market variables such as offers and prices per square metre of premises available in the geographical area of the Group's investment property and, therefore, the determination of fair value is classified within the LEVEL 2 hierarchy in accordance with the policy established in Note 2.12.5.

NOTE 10 - RIGHT-OF-USE ASSETS (LEASES)

The detail of the right-of use assets, measured in accordance with the present value of future lease payments, and of the changes therein this financial year is as follows:

(Amounts in thousands of euros)

The borrowing costs on the lease liabilities recognised by the Group at 31 December 2023 amounted to EUR 508 thousand (2022: EUR 328 thousand).

The interest rate used is the interest rate implicit in the lease, or the lessee's incremental borrowing rate if the former is not practicable to determine.

Lease expenses for low value assets, short-term leases or contracts that do not qualify as leases in accordance with IFRS 16 and which are shown as "operating expenses" in the income statement amount to EUR 18,097 thousand (2022: EUR 15,735 thousand).

The term of the Group's leases and the amount of the payments remaining as of 31 December 2023 are as follows:

(Amounts in thousands of euros)

Of the total amount of future lease payments, EUR 4,367 thousand correspond to the short term and EUR 14,456 thousand to the long term (2022: EUR 4,785 thousand corresponding to the short term and EUR 10,657 thousand to the long term).

The amount of the leases exceeding ten years relates mainly to a plot of land that the Group company Inoxcenter, S.L.U. has leased to the consortium of the Barcelona free trade zone, on which the Group has constructed an industrial building owned by it.

At 31 December 2023, the balance of the lease liabilities was EUR 18,823 thousand, most of which were recognised under "other non-current financial liabilities" (2022: EUR 15,442 thousand).

NOTE 11 - INVENTORIES

The detail of "inventories" in the consolidated statement of financial position as at 31 December is as follows:

(Amounts in thousands of euros)

The lower activity this year and the decrease in raw material prices have led to a decrease in inventories.

"Raw materials and other supplies" includes EUR 54,736 thousand relating to the measurement of the emission allowances held by the Group at 2023 year-end (2022: EUR 44,233 thousand).

The changes in finished goods and work in progress in the year, according to the consolidated statements of financial position as at 31 December 2023 and 2022, shown above, differ from the figures recognised in the respective consolidated statements of profit or loss as a result of translation differences.

The cost of goods sold was calculated in accordance with the policy defined in Note 2.13 and amounted to EUR 5,704 million in 2023 (2022: EUR 6,981 million).

At the close of 2023, the Group recognised an adjustment of EUR 64,630 thousand in order to measure its inventories at net realisable value where this was lower than cost. An adjustment of EUR 97,618 thousand was recognised in 2022.

Obligations and commitments

At 31 December 2023, the Consolidated Group had commitments to purchase raw materials amounting to EUR 240,579 thousand (2022: EUR 271,850 thousand). At the same date, there are no firm sales commitments, but there are formalised orders, for which the Group anticipates no circumstances that would prevent their delivery within the agreed deadlines.

The Group does not have any inventories with a cycle exceeding one year and, therefore, no borrowing costs were capitalised in this connection.

The Group companies have taken out several insurance policies to cover the risks to which their inventories are subject. It is considered that these policies sufficiently cover such risks.

11.1 Emission allowances

The Group recognises emission allowances as inventories.

On 13 July 2021, an agreement was approved determining the final free allocation of greenhouse gas emission allowances to Spanish entities subject to the allowance trading system for the period 2021-2025. Phase IV of the European Union Emissions Trading Scheme covers the years 2021-2030 and is divided into two allocation periods 2021-2025 and 2026-2030.

The yearly distribution of the allowances allocated to the Spanish Group companies is detailed below:

The VDM Metals Group entity also holds CO ₂ emission allowances. The allocations obtained by VDM free of charge fall short of the plants' requirements, and it is therefore necessary to acquire allowances on the market. The Company recognises the allowances acquired at acquisition cost and for no consideration under "grants". In view of the significant price increase and future forecasts, the Group decided in 2022 to acquire 100% of the rights that it expects to use until 2023, thus hedging against price fluctuations. This purchase was made at very competitive prices and well below quotations in 2023. During the year, the Group has systematically monitored price changes and taken advantage of opportunities to meet its consumption needs for the year ahead. VDM currently has sufficient allowances to cover its 2024 needs.

The changes in emission allowances in 2023 and 2022 were as follows:

As shown in the table, the Group has sufficient surplus rights to cover its long-term needs, so no provision needs to be recorded.

288,939 CO ₂ emission allowances were used in 2023, and these allowances will be surrendered to the public authorities in 2024 (2022: 306,680, surrendered in 2023). The Group has not sold its surplus allowances.

The expense for the year in respect of CO ₂ emissions totalled EUR 14,427 thousand in 2023 (2022: EUR 12,699 thousand) and is included under "other operating expenses". This expense is equal to the value allocated to the allowances used in the year, which is the market value of these allowances when allocated.

Disposals for the year related to CO ₂ emission allowances used in the previous year audited and approved by an independent expert.

Greenhouse gas emissions are verified each year by an ISO 14064-accredited external body. In addition, both Acerinox Europa and VDM are included in the EU Emissions Trading System (EU ETS).

During this year, CO ₂ allowance prices have remained stable at the levels reached in 2022. The increase in the price of allowances last year, from an average price of EUR 25/allowance in 2021 to EUR 80 at the end of 2022, had little impact on the Group as the Spanish plants have sufficient allowances allocated to cover their needs. As described in the accounting policy in Note 2.13.1, any increase in the price of rights allocated free of charge will be offset by grant income, thus not affecting the Group's income statement. There were no significant variations this year.

The Group does not trade in CO ₂ emission allowances; it merely acquires those required for internal use, as necessary. The Group does not hold any futures contracts for the acquisition of emission allowances.

There are no significant contingencies for emission-related fines.

NOTE 12 - FINANCIAL INSTRUMENTS

12.1 General considerations

A financial instrument is a contract that gives rise to a financial asset at one company and, simultaneously, a financial liability or an equity instrument at another. The Group recognises a financial instrument in its consolidated statement of financial position when it becomes party to the contract or legal transaction.

12.2 Categories of financial assets and liabilities

At year-end the Group's financial assets were as follows: (Amounts in thousands of euros)

At year-end the Group's financial liabilities were as follows:

(Amounts in thousands of euros)

12.2.1 Financial assets at amortised cost

The detail of the financial assets measured at amortised cost at 31 December is as follows:

(Amounts in thousands of euros)

The amount recognised as tax receivables from Public Administrations relates mainly to VAT settlements.

During the year, variations have not been significant, as activity levels have remained similar to those of the last quarter of the previous year.

As explained in the accounting policies, the Group measures accounts receivable at their transaction price, provided that they do not have a significant financial component, they are expected to be received in the short-term and the effect of not discounting the cash flows is not material. The Group does not have any non-current balances receivable.

Write-downs of uncollectible debts relate in full to trade receivables. The changes therein were as follows:

(Amounts in thousands of euros)

Changes in the balance of valuation adjustments are included under "other operating expenses" on the statement of profit and loss.

No interest was earned on impaired financial assets in 2023 or 2022.

No valuation adjustments were recognised for uncollectible receivables from related parties in 2023 or 2022.

At 31 December 2023, certain Group companies had receivables amounting to EUR 297,025 thousand factored on a nonrecourse basis to banks in exchange for cash (2022: EUR 329,327 thousand). The factored amounts were derecognised as they met the conditions specified in IFRS 9 regarding the transfer of risks and rewards.

Note 12.2.3 includes a detail of the Group's factoring lines.

12.2.2 Trade and other payables

The detail of "trade and other payables" in the consolidated statements of financial position as at 31 December 2023 and 2022 is as follows:

(Amounts in thousands of euros)

Most of the amount included under tax and social security payables relates to amounts payable for VAT settlements and personal income tax withholdings. EUR 4,565 thousand relate to social security payables (2022: EUR 4,131 thousand).

As with customers, the decrease in suppliers and service creditors is mainly due to lower activity this year, lower raw material prices and lower payment terms for suppliers in the area of high-performance alloys due to the diversification of suppliers, which eliminates dependence on raw material sources from Russia.

With regard to the average payment period, as established in Law 18/2022 of 29 September on the establishment and growth of companies the Group breaks down below the average payment period for suppliers, the volume of money and the number of invoices paid in a period lower than the maximum established in the regulations on late payments, as well as the percentage of these invoices in the total number of invoices and in the total amount of money paid to their suppliers for the Group's Spanish companies included in the scope of consolidation.

The following table includes the average payment period to domestic and foreign suppliers of the Spanish companies that form part of the Acerinox Group, after deducting payments made to Group companies:

Details of the volume and number of invoices paid are as follows:

The table includes, the same as above, the payments made to any supplier, whether domestic or foreign, and excludes Group companies.

12.2.3 Bank borrowings and bonds issued

The detail of the financial debt line items in the consolidated statements of financial position as at 31 December 2023 and 2022, including both bank borrowings and bonds issued by the Group in the year, is as follows:

(Amounts in thousands of euros)

There is currently a private placement of EUR 75 million performed by Deutsche Bank AG, London Branch in July 2014, which has a term of ten years.

The detail of the maturity of the outstanding debt at 31 December 2023 is as follows:

(Amounts in thousands of euros)

The 2022 figures were as follows:

(Amounts in thousands of euros)

The breakdown of the debt by currency is as follows:

(Amounts in thousands of euros)

The breakdown of the debt by interest rate is as follows:

(Amounts in thousands of euros)

Fixed-rate debt solely includes borrowings originally arranged at fixed rates (bank loans and private placements) and does not include borrowings for which interest rates have been fixed by arranging derivatives.

There are swap contracts to hedge the interest rate for EUR 430 million of the variable rate debt (Note 12.2.6).

The fair value of fixed-rate bank borrowings and private placements was EUR 665,523 thousand at 31 December 2023, and their carrying amount was EUR 650,865 thousand. The fair value of these borrowings at 31 December 2022 amounted to EUR 702,010 thousand (carrying amount of EUR 733,160 thousand).

For the determination of fair value, the Group has taken into account observable market variables such as interest rate curves, the term of the loans, etc., so the determination of fair value is classified within the LEVEL 2 hierarchy in accordance with the policy established in Note 2.12.5.

The interest rates of the floating-rate loans are reviewed at least once a year.

The weighted average cost of the financing instruments in euros (including interest rate hedges) at the end of 2023 was 2.77% for a total of EUR 1,916 million, 7.37% for USD 135.3 million of financing and 11% for ZAR 1,976 million of financing. In 2022, the cost of the loans (including the interest rate hedges) in euros was 1.69% for an amount of EUR 1,870 million, 6.30% for USD 46.5 million and 9.34% for ZAR 1,358 million of financing.

At 31 December 2023, accrued interest payable on bank borrowings amounted to EUR 11,081 thousand (2022: EUR 6,164 thousand). In addition, accrued interest payable on bonds issued amounted to EUR 1,634 thousand at 2023 year-end (2022 year-end: EUR 1,634 thousand).

The total borrowing costs calculated using the effective interest rate on long-term loans at amortised cost amounted to EUR 871 thousand (2022: EUR 1,465 thousand).

At 31 December 2023, the Acerinox Group had arranged bank financing facilities and private placements amounting to EUR 2,807 million (31 December 2022: EUR 2,786 million), in addition to approved non-recourse factoring facilities amounting to EUR 530 million (31 December 2022: EUR 480 million). The amount drawn down on financing facilities at 31 December 2023 amounted to EUR 2,135 million (31 December 2022: EUR 1,989 million) and EUR 297 million on factoring facilities (31 December 2022: 329 million).

Certain Group companies have arranged reverse factoring facilities with various banks to manage payments to suppliers. Trade payables payment of which is managed by the banks are recognised under "trade and other payables" until the related obligation is discharged or cancelled or expires. The Group uses reverse factoring solely as a payment instrument, but offers its suppliers the possibility of obtaining financing through such instruments. As far as the Acerinox Group is concerned, invoices are paid when they fall due. In some specific cases, where an extension of the payment term has been agreed with the financial company, the debt is classified as other financial liabilities. In this financial year, the Group did not reclassify any amounts as there was no extension of payments (2022: EUR 13,113 thousand).

Main financing transactions undertaken in the year

The most significant financing transactions in 2023 were as follows:

Regarding debt renegotiations, the Group assessed the significance of the modifications made to determine whether they were substantially different, in accordance with the criteria established in the accounting policy defined in Note 2.12.3, and, where appropriate, determine whether to recognise the effects of certain of the new agreements as an extinguishment and the simultaneous recognition of a new loan. No debt refinancing took place during the year. In 2022, the amount of fees and commissions recognised in income in this connection amounted to EUR 557 thousand.

The most noteworthy financing transactions in 2022 were as follows:

The Acerinox Group has satisfactorily met the repayment schedules for its borrowings.

The detail of the changes in non-current bank borrowings, not including bond issues, is as follows:

(Amounts in thousands of euros)

The reconciliation of the changes in non-current and current borrowings to the consolidated statement of cash flows is as follows:

The detail of income from borrowings recognised in the consolidated statement of cash flows is as follows:

(Amounts in thousands of euros)

The breakdown of the debt repayments recognised in the consolidated statement of cash flows is as follows:

(Amounts in thousands of euros)

Non-current borrowings subject to achievement of ratios

Currently, no loan agreement entered into by the Acerinox Group contains covenants linked to ratios related to the Group's results. The contracts subject to covenants are generally related to own funds, either of the consolidated group or own funds of the borrower and are detailed below:

a) Acerinox, S.A.:

The EUR 260 million loan novated in the first half of 2022 with Caixabank and the two loans of EUR 80 million each signed with BBVA and ICO in the first half of 2020 for the acquisition of VDM are subject to compliance with the financial ratios relating to the maintenance of minimum equity levels at the consolidated level.

In addition to these three loans, there are three other financing contracts conditional on compliance with covenants also referring to the maintenance of minimum levels of own funds at consolidated level. The loan arranged in March 2017 and novated in December 2021 with Banca March for EUR 50 million and assigned to a Securitisation Fund upon arrangement, the loan arranged with the European Investment Bank ("EIB") in December 2017 for EUR 70 million and the loan arranged in March 2018 with the Instituto de Crédito Oficial ("ICO") for EUR 100 million. This type of covenant is standard market practice in financing with these maturities, as the loan arranged with Banca March had an initial term of seven years, the EIB loan of ten years and the ICO loan of eight years.

b) Columbus Stainless (PTY) LTD:

Additionally, the Group company Columbus Stainless has structured financing (a Borrowing Base Facility) which is also subject to the achievement of a covenant relating to the maintenance of minimum equity levels at that Company. This financing facility is recognised under "bank borrowings" in the consolidated statement of financial position at the amount drawn down. At 31 December 2023, the amount drawn down from this financing amounts to ZAR 1,976 million (around EUR 97 million at the exchange rate of 31 December 2023). At 2022 year-end, ZAR 1,358 million had been drawn down from this credit facility.

c) VDM Group:

Finally, it should be noted that the eight bilateral financing facilities signed by VDM (both the long-term loan with IKB and the seven financing lines signed with HSBC, Banco Santander, Caixabank, Deutsche Bank, Helaba, Unicredit and BBVA) are subject to compliance with minimum equity ratios and a ratio of net financial debt to working capital.

At 2023 year-end (as in 2022), Acerinox, S.A., Columbus Stainless (PTY) Ltd. and the VDM Group had achieved all the covenants required under the aforementioned agreements with a considerable margin.

12.2.4 Fair value measurement

As established in the accounting policies, the Group measures the following assets at fair value: financial assets classified at fair value through other comprehensive income and derivative financial instruments.

Financial instruments recognised at fair value are classified, based on the valuation inputs, in the following hierarchies:

The Group's position at 31 December 2023 and 2022 was as follows:

(Amounts in thousands of euros)

No financial assets or financial liabilities measured at fair value were transferred between levels.

In the case of Level 2 financial instruments, the Group uses generally accepted valuation techniques that take into account spot and future exchange rates at the measurement date, forward interest rates, interest rate spreads and credit risk of both the Group and its counterparty, i.e. the financial institutions with which it operates. In determining the fair values of commodity future contracts quoted on the LME (London Metal Exchange), the Group takes into account the difference between the future prices quoted on the LME for the commodity at the contracted maturity date and the future price set in each contract.

12.2.5 Financial assets at fair value through other comprehensive income

This section includes the shares that the Group does not intend to sell and that it had designated in this category on initial recognition.

The value of financial assets at fair value through other comprehensive income at year-end amounted to EUR 381 thousand (31 December 2022: EUR 394 thousand).

The Group has classified in this category its 8.48% minority shareholding in the company Fortia Energía, S.L., whose corporate purpose is the acquisition of electricity on behalf of its shareholders. This investment enables the Group's Spanish factories to obtain more competitive electricity prices. The investment is measured at acquisition cost, as there are insufficient data to measure it at fair value. The Group has no control over this entity. The acquisition cost of the investment was EUR 276 thousand. The Group does not consider that there are any indications of impairment in this connection.

This category also includes the investment made by Columbus, Pty. Ltd in the entity Nimawize Pty Ltd. Columbus acquired a 20% stake in 2020 in compliance with the requirements of the Broad-Based Black Economic Empowerment (B-BBEE Act 53 of 2023). Columbus does not exercise any control over this entity.

On 7 July 2022, the Group sold its shares in the listed Japanese company Nippon Steel & Sumitomo Metal Corporation for EUR 10,157 thousand. Acerinox, S.A. held 747,346 shares in this company, which represented a scantly significant percentage of ownership in the Japanese Group. The shares, prior to their sale, were valued at fair value. As they are classified as assets at fair value through other comprehensive income, the gains on their sale amounting to EUR 1,070 thousand were classified through equity. The revaluation, recognised in other comprehensive income until its sale, amounted to EUR -572 thousand.

12.2.6 Derivative financial instruments

As detailed in Note 4, in relation to market risk, the Group is essentially exposed to the following three types of risk in the course of its business activities: foreign currency risk, interest rate risk and raw material price risk. The Group uses derivative financial instruments to hedge its exposure to certain risks.

The Group classifies derivative financial instruments that do not qualify for hedge accounting in the category of assets and liabilities measured at fair value through profit or loss. Those that qualify as hedging instruments are classified as hedging derivatives and are accounted for by applying the accounting policy defined in Note 2.12.4.

The detail of the derivative financial instruments, classified by category, is as follows:

(Amounts in thousands of euros)

The following table provides a breakdown of the Group's derivative financial instruments at 31 December 2023 and 2022 by type of hedged risk:

(Amounts in thousands of euros)

Foreign currency risk

The Group operates in a large number of countries and bills customers in various currencies, depending on the country where it is billing. It therefore arranges certain financial instruments to hedge cash flow risks arising from the settlement of balances in foreign currencies. The transactions arranged consist mainly of foreign currency purchase and sale forward contracts.

The Group uses derivative financial instruments to hedge most of its commercial and financial transactions performed in currencies other than the functional currency of each country.

The Company's business model is to hedge foreign currency risk through the use of derivative financial instruments and there is an economic relationship between the hedged item and the hedging instrument. The Group classifies most of its foreign exchange insurance contracts in the category of financial instruments at fair value through profit or loss.

Using these instruments ensures that any fluctuation in exchange rates that could affect assets or liabilities denominated in foreign currency would be offset by a change of the same amount in the derivative arranged. Changes in the derivative are recognised in profit or loss, offsetting any changes that occur in foreign currency monetary items. As these derivatives do not qualify as cash flow hedging instruments for accounting purposes, the revaluation of these derivatives is recorded in the consolidated statement of profit or loss "revaluation of financial instruments at fair value".

At 31 December 2023, the effect on profit or loss of measuring these derivatives at market value was positive, amounting to EUR 317 thousand (2022: EUR -3,141 thousand). The positive exchange differences of the Group in the year amounted to EUR 2,273 thousand (2022: loss of EUR -4,624 thousand). The differences between the two amounts are mainly due to the interest rate differences between the currencies involved in the exchange rate insurance taken out and the differences between the insurance taken out and the monetary items in foreign currency.

At 31 December 2023, all the currency forwards covered mainly receivables (assets) and payables (liabilities) and related to both commercial and financing transactions between Group companies. At 31 December 2023, the fair value of the Group's currency forwards totalled EUR -2,702 thousand (2022: EUR -7,230 thousand), of which EUR 4,361 thousand were recognised under assets (2022: EUR 5,331 thousand) and EUR 7,063 thousand under liabilities (2022: EUR 12,561 thousand). None of those currency forwards were accounted for as hedges at the end of 2023 or 2022. In 2023, EUR -159 thousand were transferred from the consolidated statement of comprehensive income to profit or loss for the year (2022: EUR -165 thousand).

The vast majority of the Group's foreign currency purchase and sale forward contracts have a term of less than one year.

At 31 December 2023, the Group had used contracts for foreign currency transactions amounting to EUR 563 million for foreign currency sales and EUR 281 million for foreign currency purchases. At 31 December 2022, EUR 479 million were used for foreign currency sales and EUR 335 million for foreign currency purchases. The detail of these foreign currency forward contracts, by currency, is as follows:

(Amounts in thousands)

At 31 December 2023 and 2022, there were no bank borrowings in currencies other than the functional currency and, therefore, the Group no longer has any derivative financial instruments to hedge exposure to foreign currency risk or interest rate risk.

Interest rate risk

The Group enters into interest rate derivatives to hedge floating rate cash flows from debt instruments. As Acerinox's risk management strategy allows for the exchange of hedging instruments and hedged items to meet corporate financing needs, the Group has documented the effectiveness of hedging through the contracted financial instruments so that they can be qualified for accounting purposes as cash flow hedging instruments through the designation of generic hedging relationships.

The swaps entered into by the Group as at 31 December 2023 are as follows:

The average interest rate of euro-denominated financing hedged by an interest rate hedging derivative, totalling EUR 430 million at year-end, was 1.70% (2022: 1.72%). The credit spread on these borrowings is included in both cases.

By the end of 2023 and 2022 there is no interest rate hedge in a currency other than the euro.

As explained in Note 4.1.2, during 2023 the Group has not entered into any new swap transactions.

In 2022, the Group entered into an interest rate derivative with Caixabank for a total amount of EUR 260 million and a final maturity date of 2027 to hedge the highly probable future cash flows related to the floating interest rate and any change in this interest rate that may occur before the maturity date. In addition, three interest rate swaps were cancelled, following the novation of the loan signed in 2020 with Caixabank for EUR 80 million and final maturity in 2025 and the cancellation of the two loans signed with Bankia and Caixabank for a total amount of EUR 160 million and EUR 50 million, respectively. Given that the Group's hedging policy is through the designation of generic hedges, the amount accumulated in equity due to the cancellation of the derivatives and the contracting of the new derivative did not have any impact on the income statement.

The detail at 31 December 2022 was as follows:

The fair value of the interest rate swaps was based on the market value of equivalent derivative financial instruments at the reporting date and amounted to EUR 21,358 thousand (31 December 2022: EUR 34,305 thousand). These amounts are recognised in the Group's consolidated statement of financial position under the following line items:

The Group assesses whether outstanding hedging relationships meet the effectiveness requirements both at the date of designation and at year-end. At 31 December 2023 and 2022, all outstanding interest rate derivatives arranged qualified as cash flow hedging instruments and, therefore, the unrealised gains and losses in the amount of EUR -3,821 thousand, on their measurement at fair value were recognised in the consolidated statement of comprehensive income (2022: EUR 35,184 thousand). The Group has documented the effectiveness of the derivatives arranged to be recognised as hedging instruments, as detailed in Note 2.12.4. The financial instruments considered to be hedges were not ineffective at any point in 2023 or 2022.

In 2023, EUR -12,175 thousand were transferred from the consolidated statement of comprehensive income to profit or loss for the year, reducing borrowing costs (2022: EUR 2,494 thousand). Combined with the EUR -159 thousand arising from the foreign currency hedges referred to in the previous section and the EUR -20,068 thousand from the raw material derivatives, the amount totalled EUR -32,402 thousand and was included in the consolidated statement of comprehensive income. In 2022, the transfer amount from comprehensive income related to interest rate hedges would need to include EUR -165 thousand from currency hedges and EUR -4,105 thousand from raw material derivatives. This totals EUR -1,776 thousand in the consolidated statement of comprehensive income for 2022.

Risk of changes in raw material prices

As detailed in Note 4.1.3, high-performance alloys have a high metal content and are mainly composed of nickel, but they also contain other metals that are listed on the London Metal Exchange (LME). The Group, and mainly this division within it, is exposed to the risk of raw material price volatility, since it is unable to pass these fluctuations on to the customers through the selling price. For this reason, it uses derivative financial instruments to guarantee set prices for its customers and ensure that those prices are aligned with its costs, thus maintaining margins. The financial instruments used are based on arranging futures contracts on the prices listed on the LME.

The Group documents the hedging relationships and has a model that guarantees the effectiveness of the hedges.

The detail of the nominal values of the purchase and sale futures contracts arranged by the Group at year-end and the fair value measurement thereof is as follows:

(Amounts in thousands of euros)

All the assets and liabilities arising from derivative financial instruments in this category are current, except for the EUR 9 thousand included as non-current financial assets in the consolidated statement of financial position and EUR 1,309 thousand recorded as non-current liabilities (2022: EUR 286 thousand).

At year-end all financial instruments contracted to hedge this risk meet the conditions to be considered as cash flow hedging instruments. As of 31 December 2022, of the total financial instruments contracted to hedge this risk, EUR 20,353 thousand met the conditions to be considered as cash flow hedging instruments and EUR 4 thousand were recorded at fair value through profit or loss as they are instruments contracted prior to the start of the documentation of the hedging relationships. As of 31 December 2023, unrealised gains and losses arising from the valuation at fair value and charged to the consolidated statement of comprehensive income amount to EUR -7,829 thousand. The amount transferred from the consolidated statement of comprehensive income to the profit for the year for these hedges is EUR -20,068 thousand (in 2022, the unrealised gains and losses from fair value measurement recognised in the consolidated statement of comprehensive income amounted to EUR 20,316 thousand and the amount transferred from the consolidated statement of comprehensive income to the profit for the year for these hedges was EUR -4,105 thousand).

NOTE 13 - CASH AND CASH EQUIVALENTS

The detail of "inventories" in the consolidated statement of financial position as at 31 December is as follows:

(Amounts in thousands of euros)

The Group made cash placements mainly in both US dollars and South African rand. The effective interest rate on the shortterm bank deposits in 2023 was 5.51% for the dollar (2022: 4.53%) and 8.15% for the rand (2022: 6.5%). The average term of the placements is between one day and three months, and they have been deposited at banks of recognised financial solvency.

All cash and cash equivalents are held in current accounts or current deposits, and there were no restricted cash balances at year-end.

NOTE 14 - EQUITY

14.1 Subscribed capital, issue premium and treasury shares

The detail of the changes in the shares outstanding in 2023 and 2022 is as follows:

a) Share capital

The parent's share capital solely comprises ordinary shares. All these shares carry the same rights and there are no bylaw restrictions on their transfer.

At the cut-off date the share capital consisted of 249,335,371 ordinary shares of EUR 0.25 nominal value each, yielding capital of EUR 62,334 thousand (259,724,345 ordinary shares at 31 December 2022 and a capital amount of 64,931). The shares have been fully subscribed and paid.

All the Company's shares are listed on the Madrid and Barcelona stock exchanges.

During the year, Acerinox, S.A.'s share capital has been reduced, as approved by the Annual General Meeting held on 23 May 2023, through the amortisation of 10,388,974 treasury shares with a value of EUR 2,597 thousand. The purpose of this reduction of share capital is to increase the value of the shareholders' stake in the Company.

As regards 2022, the Board of Directors of Acerinox, S.A. held on 30 June 2022, on the basis of the authorisation granted by the Annual General Meeting of Acerinox, S.A. held on 16 June, resolved to execute the resolution to reduce share capital, reducing it by EUR 2,706 thousand through the redemption of 10,821,848 treasury shares.

At 31 December 2023, the only shareholder with a stake of 10% or more in the share capital of Acerinox, S.A. is Corporación Financiera Alba, S.A. with 19.29% (2022: 18.52%).

b) Issue premium

The issue premium amounted to EUR 268 thousand both in 2023 and 2022 and has the same restrictions and may be used for the same purposes as the voluntary reserves of the parent, including its conversion into share capital.

No issue premium distributions were made this year or last year.

c) Treasury shares

At year-end, treasury shares amounted to 106,790 with a value of EUR 1,055 thousand (31 December 2022: 10,392,827 treasury shares with a value of EUR 90,728 thousand).

The Board of Directors meeting on 27 July 2022, in view of the Company's financial strength, cash generation prospects and the low level of the share price, agreed to initiate a new 4% share buy-back programme. This programme fulfilled the Company's commitment to redeem the shares that were issued in the years when scrip dividends were made.

The terms of the buy-back programme were as follows:

On 26 October 2022, the Company completed the acquisition of 10,388,974 shares included in the second approved buy-back programme. The disbursement made by the Group in connection with this programme amounted to EUR 90,685 thousand.

The Annual General Meeting held on 23 May 2023 approved the reduction of Acerinox, S.A.'s share capital by EUR 2,597 thousand, through the retirement of 10,388,974 treasury shares. The purpose of this reduction of share capital through the redemption of treasury shares is to increase the value of the shareholders' stake in the Company. This capital reduction was carried out in August this year.

During the year, 213 thousand treasury shares were acquired to cover the Multi-Year Remuneration Plans for Group executives for an amount of EUR 2,084 thousand. In addition, 110,563 treasury shares were delivered to Company's executives as a result of the completion of the Third Cycle of the First Multi-Year Remuneration Plan. In this way, treasury shares totalling EUR 1,072 thousand were derecognised. The difference between the equity instruments recorded in accordance with the valuation made at the beginning of the plan and the treasury shares delivered has been recorded against reserves of the parent company in the amount of EUR -769 thousand.

With regard to 2022, the Board of Directors of Acerinox, S.A., at its meeting held on 16 December 2021, also approved a share buyback plan of up to 4% of the share capital. The maximum investment approved was EUR 150 million and the maximum number of shares to be acquired could not exceed 10,821,848, representing 4% of the Company's capital, at the time of approval.

During the year, in addition to those mentioned above, 9,986,487 shares were acquired for an amount of EUR 114,875 thousand in connection with this buy-back programme (835,361 shares for an amount of EUR 9,418 thousand had been acquired the previous year). As explained in the section on share capital, all shares corresponding to this buy-back programme were redeemed in 2022 for an amount of EUR 124,294 thousand. Effective 30 August 2022, 10,821,848 shares of Acerinox, S.A. were delisted from trading on the Madrid and Barcelona Stock Exchanges.

In June 2022, 109.378 treasury shares were delivered to Group executives as a result of the completion of the second cycle of the First Multi-Year Remuneration Plan. Treasury shares totalling EUR 1,234 thousand were derecognised. The difference between the equity instruments recorded in accordance with the valuation made at the beginning of the plan and the treasury shares delivered were recorded against reserves of the parent company in the amount of EUR -810 thousand.

Also, last year, 40,000 treasury shares amounting to EUR 419 thousand were acquired to cover the multi-year remuneration plans for Group executives.

14.2 Dividends paid

The Board of Directors of Acerinox S.A., held on 20 December 2023, has agreed to propose to the Shareholders' Meeting the payment of a dividend of EUR 0.62 per share, i.e. an increase of 3.33% over the last approved dividend, of which EUR 0.31 gross per share has been payable in cash to each of the existing and outstanding shares of the Company entitled to receive such dividend on 26 January 2024 through the depositary entities participating in the "Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal" (IBERCLEAR).

In accordance with Acerinox's Dividend Policy approved on 20 December 2022, the total shareholder remuneration is maintained, so that the reduction in the number of shares as a result of the last share buyback plan results in a higher payment per share.

The provisional accounting statement prepared by the directors in accordance with Article 277 of the Spanish Corporate Enterprises Act, which shows the liquidity status for the payment of the interim dividend, is as follows:

The Annual General Meeting held on 23 May 2023 resolved to distribute a dividend of EUR 0.60 per share. The amount of the dividend distribution was the aggregate result of the sum of the following amounts:

The amount paid amounted to EUR 149,562 thousand.

The Annual General Meeting held on 16 June 2022 approved the distribution of a dividend of EUR 0.5 per share, which was paid on 5 July 2022. The amount paid amounted to EUR 129,850 thousand.

14.3 Reserves

a) Retained earnings in reserves

"Retained earnings in reserves" includes consolidated profit or loss for the year and reserves of fully consolidated companies and of the parent, other than those mentioned below.

The detail of the reserves by Company is included in Note 14.5.

There are no restrictions on the transfer of funds by any Group company in the form of dividends, except for the non-distributable reserves required by the applicable legislation. At 31 December 2023, the Group had EUR 40,141 thousand in reserves and retained earnings subject to restrictions (31 December 2022: EUR 39,733 thousand)

The parent's legal reserve, which is included under "retained earnings in reserves" in the consolidated statement of changes in equity, was recognised in compliance with Article 274 of the Spanish Corporate Enterprises Act, which establishes that 10% of profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of share capital. Acerinox S.A has already recorded this reserve for an amount equivalent to 20% of the share capital, amounting in both periods to EUR 13,527 thousand.

The legal reserve is not distributable to shareholders and can only be used to offset losses, in the event that sufficient other reserves are not available for this purpose, in which case the reserve must be replenished with future profits.

b) Property, plant and equipment revaluation reserve