Befesa S.A. (BFSA.DE) Earnings Call Transcript & Summary

Good morning, and welcome to the first half of 2025 results conference call of Befesa. I am Rafael Perez, CFO of Befesa. And this morning, I'm joined by our Group CEO, Asier Zarraonandia. Asier will start with an executive summary of the period, and then he will cover the business highlights of the steel dust as well as aluminum salt slag recycling business. I will then review the first half financials by business and cover the evolution of commodity prices, hedging program and finally, cash flow, net debt leverage and capital allocation. Asier will close the presentation, providing an update of the outlook for the rest of 2025 and an update on our growth plan. Finally, we will open the lines for the Q&A session. Before getting started, let me remind you that this conference call is being webcasted live. You can find the link of the webcast of the first half 2025 results presentation on our website, www.befesa.com. Now let me turn this call over to our CEO. Asier, please.

Thank you, Javier. Good morning, all. Moving to Page 5 of the business highlights. Befesa has delivered solid first half results despite lower volumes due to annual maintenance activities, which demonstrate the resilience of our business model. Total adjusted EBITDA in this half has been EUR 112 million, up 9% compared to the same period last year, reflecting a solid performance driven mainly by favorable tailment charges and zinc hedging, partially offset by lower volume caused by annual maintenance stoppage across several plants as well as compressed aluminum metal margin. EBITDA margin has significantly improved to 19% in Q2 '25 versus 16% in the second quarter of 2024. Financial leverage has reduced to 2.7x in June 2025 compared to 3.4x in June 2024. Net income and EPS increased strongly by 100% year-on-year, reflecting improved profitability. In steel dust, we delivered a strong EBITDA performance in this first half, driven more lower synthesis and $80 per ton higher zinc spot prices as well as lower coal prices, partially offset by lower volume. Our secondary aluminum business remains being impacted by a challenging business environment with a weak automotive market in Europe. Palmerton revamping continues as planned with the second kiln already hot commissioned in July 2025. I will elaborate on later all these aspects. Regarding the outlook for the full year 2025, we confirm our EBITDA guidance in the range of $240 million to $265 million, driven by higher volumes in the second half of the year. We will continue with our prudent capital allocation with a focus on reducing the financial leverage and growth CapEx on ongoing approved CapEx projects of Palmerton and Bernburg. On the balance sheet, we are targeting a financial leverage ratio below 2.5x by the end of 2025. I will comment on the outlook in more detail at the end. Moving on to Page 6, business highlights for the steel dust business. Europe steel production continued at 5-year low level in H1, caused by weak end market demand. Despite this, in the second quarter, daily steel dust deliveries from our EAF steel customers continued in line with 2024 average at good levels. The average load factor in the half stood at 85% in Europe, driven as explained by annual maintenance and repair shutdowns in large assets. In the U.S., in the steel dust recycling business, average utilization was also impacted by maintenance shutdowns. However, new EAF steel supply contracts will start delivering in H2 after some start-up delay. In Palmerton, the 2 new kilns are already commissioning and will be operational through the second part of the year since July 2025. On the zinc refining plant and the cost reduction measures to improve asset profitability are delivering as expected. In Asia, volumes in Turkey has been impacted by the general annual maintenance shutdown on the year in the second quarter, operating the rest of the period at regular levels. Load factor in Korea has been up to 75% in first half of the year, supported by increased domestic deliveries and strong operational execution. And finally, China remains subdued at low utilization and breakeven earnings. Moving on to Page 7. Business highlights for the aluminum salt slag recycling business. On salt slag, we have delivered solid volume, which has resulted in a very high-capacity utilization of the plants at an average of 92%, pretty much in line with previous quarters. On the other hand, the metal margin of our secondary Aluminum segment continues to be compressed, driven by a very weak European automotive industry, which is affecting the demand for secondary aluminum, combined with challenging access to aluminum scrap. The situation has been very challenging for the last quarters, and we have little visibility into the rest of the year. Now Rafael will explain the financials in more detail.

Thank you, Asier. Moving on to Page 9, the financial results for the steel dust segment. Steel dust delivered EUR 96 million of adjusted EBITDA in H1, which represents 19% year-on-year improvement compared to the same period of 2024. EBITDA margin improved from 20% to 25% in the period, mainly driven by better price environment. The EUR 50 million EBITDA improvement has been driven by the following factors. The year-on-year impact from volume reflected a decrease in total plant utilization from 70% to 64% on a global basis, driven by annual maintenance shutdowns in some of our main assets. Utilization will recover in the second part of the year, driven by no major maintenance stoppages at large assets, high EAF dust inventory levels across all markets and the increase in deliveries in U.S.A. from new contracts started in August. On price, strong positive EBITDA year-on-year impact of around EUR 23 million, with the 3 main price components being EUR 1 million of positive EBITDA impact from higher LME prices, up 4% year-on-year in U.S. dollars; EUR 13 million positive impact from higher zinc hedging prices, up 6% year-on-year. And thirdly, EUR 9 million positive impact from lower zinc treatment charges, which was set at $80 per ton for the full year 2025 versus $165 in 2024. On cost and other, the general inflation cost was offset with the cost cutting from the zinc refining in the U.S. as the cost reduction plan is delivering the expected results and improving profitability gradually. Moving on to Page 10, financial results of our Aluminum segment. Aluminum salt slag delivered EUR 18 million of EBITDA in the first half of 2025, which represents an 18% year-on-year decrease compared to the EUR 22 million in the same period of 2024. The year-on-year EUR 4 million negative EBITDA development was mainly due to lower aluminum metal margin and higher energy prices. On volumes, overall neutral EBITDA year-on-year impact during the first half. Our recycled volumes of salt slag and the production of secondary alum remained pretty much in line with the previous year. With these volumes, we operated our plants at a strong utilization rate of about 92% in salt slag and 78% in secondary aluminum, on average. With regard to prices, overall negative EBITDA year-on-year impact of about EUR 2 million, mainly driven by pressure aluminum metal margins versus the previous year. This compression in the aluminum metal margin is caused by 2 factors. On the one hand, there is a scarcity of aluminum scrap in the European market, driven by lower overall industrial activity as well as higher exports of alu scrap away from Europe. And secondly, by a weak automotive industry in Europe, which impacts demand of secondary alu from automakers. The aluminum FMB price increased by 4%, averaging EUR 2,420 per ton, which partially offset the metal margin compression. On costs and others, increased pressure from higher operating and energy-related expenses, mainly through higher prices of electricity as well as natural gas. Moving on to Page 11, zinc price and treatment charges. Regarding zinc LME prices during the first half of 2025, zinc has been traded with some volatility over the marginal cost of the IP. Trading sideways in the range of $2,520 and $2,960 per ton. The average H1 zinc LME price has been $2,740 per ton, which is 4% above the same period last year average, being the average of the second quarter of 2025, $2,640 per ton compared to $2,840 per ton in the first quarter. On the right-hand side of the slide on treatment charges, nothing new. In 2025, treatment charges for zinc were set in April at $80 per ton for the full year compared to $165 of last year, marking an all-time low record level. This reduction is driving earnings significantly in 2025. Turning to Page 12, hedging. Our hedging book covers until the beginning of 2027. Close to 17 months of hedges in our books at increasing hedging average prices of EUR 2,640 in 2025 and EUR 2,655 for next year. This level of hedging represents an all-time high level of hedging for Befesa and will provide around EUR 20 million of incremental EBITDA in 2025. We continue to monitor the market to close volumes for the remaining of 2027. Now turning to Page 13, Befesa energy prices. The page shows the evolution of the 3 energy sources that we have in Befesa, coke, natural gas and electricity. With regard to coke price, which today represents around 55% of the total energy bill, the normalization that started in the second quarter of 2023 continues throughout 2024 and the first half of 2025. Average coke price in the second quarter has been around EUR 163 per ton, which is 7% lower than the same period in the 2024 year. Regarding electricity, which today accounts for around 30% of the total energy expense, prices have resumed the downward trend observed until the second half of 2024, with the charge declined to EUR 89. In the first half, electricity prices have been 8% higher than last year. Gas prices experienced a slight decrease in the second quarter. However, in the first half, it was 25% higher than last year. Turning to Page 14, cash flow results. Operating cash flow in the first half reached EUR 64 million, which represents a decrease of 8% compared to last year, driven by the positive tax effect that we enjoyed last year. On the EBITDA to cash flow bridge, starting with EUR 112 million of adjusted EBITDA and to the left, working capital consumption amounted to EUR 36 million in the first half of the year, remaining stable from the same period of last year. As in previous year, H1 working capital was significantly impacted by seasonality and will be reduced over the course of the second half of the year. Taxes paid in the first half of 2025 came in at EUR 12 million as a result of final tax settlement of previous year in comparison with EUR 3 million collected in the first half of last year, resulting in an operating cash flow of EUR 64 million. On CapEx, in the first half of the year, we have invested EUR 21 million in regular maintenance CapEx, EUR 16 million in growth CapEx related to the refurbishment of the Palmerton plant in Pennsylvania and Bernburg expansion in Germany. In summary, total CapEx of EUR 37 million in the quarter. For the full year, we expect total CapEx to be between EUR 80 million to EUR 90 million. Total interest paid amounted to EUR 19 million and total bank borrowings amounted to EUR 60 million in the first half of 2025, reaching EUR 34 million with no other minor items. For 2025, the AGM approved in June to pay a dividend of EUR 25 million in July, equivalent to EUR 0.63 per share or 50% of the net income. In summary, final cash flow amounted to minus EUR 6 million in the first half. Cash on hand stood at EUR 97 million, which together with the EUR 100 million undrawn revolving credit line provides Befesa with almost EUR 200 million of liquidity. Gross debt at the end of June stood at EUR 698 million, and net debt stood at EUR 601 million compared to EUR 646 million in the same quarter of the last period, resulting in a net leverage of 2.7x at closing of the quarter, a strong improvement compared to 3.4x at June in 2024. Turning to Page 15, debt structure and leverage. Following the refinancing back in July 2024 and the repricing in March this year, Befesa today has a strong long-term capital structure with optimized financing costs. We will continue reducing the leverage throughout 2025 to keep it between 2x and 2.5x by the end of the year and going forward. To do so, we will prioritize the growth CapEx on these projects that will deliver immediate cash flow upon completion like the approved projects of Palmerton and Bernburg and other market opportunities that could appear. Also, we will keep the annual regular maintenance CapEx around EUR 40 million to EUR 45 million in the coming years. On dividend, we are committed to maintain our dividend policy to pay between 40% to 50% of the net income to shareholders as a dividend. Now back to Asier on outlook and growth.

Thank you, Rafa. So moving on to the Page 17 on outlook. Looking at the full year view, we confirm our EBITDA guidance in the range of EUR 240 million to EUR 265 million despite lower volume phases in the first half of the year. This is mainly driven by higher volumes in the second half of the year and reflects our continued confidence in the company's operational and financial trajectory. While we recognize that the political and economical environment has become less predictable due to the uncertainty that trade tariffs are creating, we expect limited direct impact in our business in the short term, and we see the long-term drivers of the business as intact. Today, Befesa is self-sufficient in each of the regions where we operate due to a strong local for local footprint. In steel dust, we expect to improve capacity utilization significantly in the second half of the year despite current challenging steel industry globally. This is underpinned by high levels of raw material inventory across all markets driven by strong deliveries while we perform annual maintenance shutdowns. In the U.S.A., we expect higher EAF steel dust volume driven by volume from new contracts starting in August, September after some delays of our customers' start-up. In our aluminum business, we expect stable salt slag volume compared to 2024. However, as already explained, in secondary aluminum, we expect the challenging market in secondary aluminum to continue, driven by metal margin compression caused by aluminum scrap scarcity in Europe and a weak demand from auto sector. The steel refining plant in the U.S., cost reduction measures are delivering as expected and we expect to continue this way. On energy prices, we expect a slightly lower overall coke prices for the group in 2025. However, as seen already in this quarter, we are expecting natural gas and electricity prices in Europe to be higher than 2024. On zinc prices, we expect to continue to see volatility driven by global macroeconomic and geopolitical uncertainty. The marginal cost of the producers in IP is around $2,500 level, acting as a floor on the price of zinc. On business plan and capital allocation to focus on reducing the leverage and invest in ongoing approved expansion projects. As such, the expansion plan in China is stopped due to the current market conditions. Our growth CapEx will focus on finishing the refurbishment of Palmerton and expansion of Bernburg, both low-risk projects from the execution, technology and commercial point of view. Moving on to Page 18, the financial guidance. As I have just mentioned, we confirm the guidance provided for 2025. This will be achieved by -- through increased utilization driven by a higher volume of EAF dust across all markets, along with currently favorable market conditions, low treatment charges, supportive hedging price, declining comp price, et cetera. As such, we expect full year 2025 EBITDA to be between EUR 240 million and EUR 265 million, which represents between 13% and 24% growth year-on-year. Total CapEx in the year will be lower than what we expected between EUR 80 million to EUR 90 million with around EUR 45 million on regular maintenance and the remaining on growth. Net leverage will be below 2.5x by the end of the year, and EPS is expected to be higher than 2x, representing an increase of at least 57% in the year. Moving on to Page 19 on Palmerton. The revamping of the Palmerton plant in Pennsylvania is moving on well, on time and on budget. The 2 kilns are operational since July 2025. This will enable Befesa to improve profitability levels and to capture the anticipated increase in electric arc furnace steel dust volumes in the U.S. market for '25, '26 and beyond. Moving on to Page 20 on Bernburg. With regards of the expansion of the secondary aluminum production capacity in the 16 plant in Bernburg in Germany, we are moving forward with the permits, authorizations and commercial contracts with customers. This project is linked to the demand for recycled aluminum, and we are getting from existing Befesa customers in Europe. We expect to start investing in the plant during the second half of the year. In summary, our growth plan is flexible, and we are adapting to the current circumstances, balancing leverage and CapEx, which will result in better growth and financial profile over the year '25 and the next years. Thank you very much.

Thank you, Asier. We will open the lines for your questions.[ id"-1" name="Operator" /> [Operator Instructions] Our first question comes from Fabian Piasta, Jefferies.

Congratulations, a very solid print in that environment. I got 2 questions, if I may. On the U.S. ramp. So when you say that you're going to start ramping in August, of the initial envisaged volume that should come in incrementally, how much is going to be shifted into 2026 and how much incremental is in 2025? The second question is on price drivers in the second half for zinc. Is that mainly global demand? I mean your hedging prices [Technical Difficulty]?

Fabian, thank you for your question. We got your first question on the volume on the U.S., but the line was cutting in your second question. Do you mind to repeat it, please?

Yes. So no problem. Where do you see the price drivers for zinc in the second half? Is that more global demand? Or how do you think pricing is going to evolve?

Right. Thank you very much for the questions. Well, yes, answering that. I think in the U.S., it's true that we are having some delays in the production of the new customers. And now there is confirmation that in August, September, they will come to start to deliver the dust. It's true as well that we had to see which is the level of production during the start-up period that they are going to have. In terms of annualized volumes for those new contracts, it will be in the range of 30,000 to 40,000 tons. And for the second part of this year, perhaps is in the range of 10,000 to 15,000 still to be confirmed. This is more or less what we are managing. With regards to the zinc price, it's a good question, but very difficult for us to answer as well. I mean we have seen that July is a little bit better than it was during the second quarter, and we'll see if they remains there. No many changes in the global demand, no many changes in China to push those kinds of metals base metal, difficult to say. But all the research and all the world experts are telling that the average for the year should be in the range of $2,700 something. So in theory, should be at those levels, I think that is something that we manage. [ id"-1" name="Operator" /> The next question comes from Lasse Stueben, Berenberg.

I just wanted to ask if you could give an update on the smelter. You mentioned you were kind of on track with the cost reductions, but just to get some more color on how that's progressing also given the treatment charge is negative for the smelter. And then the second point is looking at Q2 in isolation, it seems like alu salt slags was a bit better again, at least better than what I had anticipated. So can you just help us flesh out what the second half looks like, just given European autos is still very challenging. So any color here would be great.

Thank you for the questions. I don't know what the second one was a little bit lower, but I think that you're asking for the salt slag evolution for the second part of the year. In regarding with the first plant, we have to confirm that the smelting in Mooresboro in U.S. is doing well. It's doing as planned. So we are getting the reduction of the cost that we were implementing. And we are in line to see a reduction of EUR 15 million or so during the whole year as expected. Treatment charge is affecting. But in that case, once the year has started, at the end of the day, it's an internal process. Whatever is decreasing in the smelting is increasing in the recycling part in the U.S. So for us, it has not a big effect in the U.S. perspective. So we are focused on the reduction of the cost in this EUR 15 million, so above those EUR 15 million. And then confirming that we are really doing a nice job and getting what was the target. Regarding the salt slag, well, and the aluminum business, as we say, the salt slag is going to be basically running -- well, we have in August, one stoppage, but it's every year the same period. And we do hope that it's going to be at the same level of very high production level of 92%, 93%. And again, secondary aluminum is going to be more challenging. So we're going to hope to be better than the first half in this case. The challenging period remains. I don't know if that was the question. [ id"-1" name="Operator" /> The next question comes from Adahna Ekoku, Morgan Stanley.

I've got 2 questions just on your investments. So first, on the 2025 CapEx, what's driven the slight reduction in your guidance here to EUR 80 million to EUR 90 million? And second, when do you expect to provide an update on any of the future growth options, say, the salt slag expansions or Recytech 2?

Thank you, Adahna, for the questions. Well, the reduction on the CapEx guidance is just the realizing of the timing of the investments. In this case, particular case is coming basically for the Bernburg plant that the permits has taken more time than it was expected. So probably there are going to be those EUR 10 million of salt coming to the next year. And in the case of the Palmerton, the part of -- the 2 kilns are already running, but we have still pending to change some filter for new ones, which are under election and there are something that is coming to '26. Anyway, the general idea is to keep '26 as well in the same level. So basically, it's that. Regarding the new projects in line, I mean, I would say that we have the projects in line. As you probably know, the new kiln in Europe and salt slag in Poland, basically are the next bigger or big project that we have. And that is -- I can confirm -- we can confirm that both of them are in the pipeline. But in the case of the steel dust new kiln, we need a little bit more confirmation of the project that the steelmakers are doing in Europe. And basically, I think that probably in '26, we will have more view on that because there are projects, as you know, Arcelor and others that are coming. So when we have more view about the situation, we will start up the project, but we are doing some works like some basic engineering and so on. Salt slags the same. With the automotive market like that, it's not prudent to say when. But I think that if we have more visibility during '26, we could confirm when we are going to start the project, well, to invest massively. In any case, our commitment, as you know, is to keep the leverage and to keep the kind of managing the total EUR 100 million or so during the '26 or '27 years as well. [ id"-1" name="Operator" /> The next question comes from Jorge Gonzalez, Hauck Aufhauser.

I am wondering if you can give us a little bit more detail on the growth and the contribution from steel dust in the second quarter alone. The delta looks quite positive in the second quarter. So I was wondering if this is only because the mix bringing more Europe, as you mentioned that the electric arc furnace volumes were flat despite the decline in the steel mills in Europe? Or if there is any other cost for this second quarter to show such a good profitability despite the much lower year-on-year volumes.

Basically, you answered the question, Jorge, thank you for the question. And yes, it's the case. The mix of the geographies where we are running in the second quarter are well the higher one. At the end of the year, probably it's going to be more flattish when all the geographies go in. You remember when we talked that the first quarter, we anticipate some major large stoppages in Europe. And that means that in the second quarter, Europe has been running higher rates. Instead of U.S., we have stopped some kilns in the second quarter, anticipating for the third Q. So yes, probably the mix, although we have better margins in general because the treatment charges and the evolution that we are talking about, yes, basically, it's the mix.

And please allow me another question on regards to the smelting asset in North America. Can you give us -- or can you comment on the progress on the cost savings targeted for the year? Do you have a calculation of how are you doing in that front? And maybe how the current trends in terms of the U.S. dollar and the price of the zinc and the prepayment charges are impacting the profitability of the asset?

Yes, Jorge, I think I have already told before to another question. But yes, I can confirm that we are delivering the expected savings. As you remember, it was in the range of EUR 15 million to EUR 17 million, and we are on the way to get this with everything that we planned that coming. Regarding the TCs, once again, I think questioning U.S. TC is a little bit internal thing because we get lower TC in the smelting, but we are getting the increase of the TC in the recycling. So at the end, the effect is you can accommodate whatever of the 2 places. So it's not an issue for us. And we are more interested in getting the reduction of the EUR 15 million to EUR 20 million and then going to the level of breakeven, probably we know with those TCs. But at the end of the day, as I say, it is not an internal matter there. Zinc prices, well, at the end for the half has been more or less as expected, and we will see what is coming next. Obviously, better zinc prices help to the smelting and to all of the business in general for the unhedged part. [ id"-1" name="Operator" /> Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to CFO, Rafael Perez, for closing remarks.

Thank you all for your questions. You can also contact the Investor Relations team of Befesa for any further clarification. We will now conclude the conference call and the Q&A session. Let me remind you that you can find the dial-in and the webcast to access the recording of this conference call in our website, www.befesa.com. Thank you very much to all of you, and have a good day. [ id"-1" name="Operator" /> Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.