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

Good morning. My name is Lydia, and I will be your conference operator today. At this time, I would like to welcome everyone to Befesa Third Quarter 2020 Earnings Presentation. [Operator Instructions] Thank you. I would now like to turn the call over to Rafael Perez, Director of Investor Relations and Strategy. Please, sir, go ahead.

Good morning, and welcome to the Third Quarter 2020 Results Conference Call of Befesa. I am Rafael Perez, Head of Strategy and Investor Relations of Befesa. Today, as usual, we have with us Javier Molina, CEO of Befesa; and Wolf Lehmann, CFO for the company. Javier Molina will start with an executive summary of the third quarter covering the main highlights of the period. Then Wolf will review the third quarter financials in total and by business as well as cash flow, net debt and capital structure. Javier will close this presentation providing a more detailed outlook for the remaining of 2020 as well as an update of our growth plans. 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 to the webcast and the Q3 results presentation on our website, www.befesa.com. Now let me turn this call over to our CEO. Javier, please.

Good morning, and thank you for attending this conference call. The third quarter has been, as we expected, better than the second quarter, showing what it could be the beginning of a gradual recovery towards the end of the year. In the third quarter, we have achieved an EBITDA of EUR 29 million, which is slightly better than the market expectations. Although this result is 21% lower than the previous year, it represents an increase of 35% compared to the second quarter, which was heavily affected by the COVID pandemic. The main driver for this increase quarter-on-quarter has been a recovery in the zinc and aluminum prices as well as the volume growth in steel dust and secondary aluminum. The main industries that affect our business have seen during the third quarter some degree of recovery in the level of activity. As such, the production with steel has decreased 14% in Europe in September and 17% during the quarter compared to the decrease of nearly 30% that we saw in the second quarter. Also, the sale of cars has decreased by 7% during the third quarter, with September being the first month in the year showing positive results with an increase of 3% compared to a 50% decrease in the second quarter. In this improvement but still challenging environment, we have been able to run our plants at a capacity utilization of around 80% across all our businesses. In the steel dust segment, we have decreased steel dust throughput by 6% during the quarter. On the Salt Slag segment, volumes have decreased by 9% in the quarter, impacted mainly by the lower automotive activity. Metal prices are still below the level of last year. However, they have recovered for the low levels achieved during the second quarter as a consequence of COVID. As such, average zinc LME has been EUR 1,997 per tonne, which is 5% lower than last year but 12% higher than the second quarter. In hedging price, this year are slightly lower than last year. As a result, our blended zinc price during the third quarter has been very similar to last year. Treatment charge for the full year, as we explained, is at $300 per tonne. And the combined effect of blended zinc price and treatment charge results in a negative impact of 3% for the quarter or 15% for the first 9 months. Aluminum oil price has been 3% lower than last year and 2% higher than the second quarter. During the first 9 months of the year, we have achieved EUR 85 million of EBITDA, which represents 28% lower than last year, primarily driven by lower metal prices. Based on these results and on our view about the last quarter, which we expect to be better than the third one, we can say that we will end the year in the middle of the guidance range that we provided for a full year EBITDA between EUR 100 million and EUR 155 million. Later, I will provide more details on the outlook for the rest of the year. The zinc price has suffered some volatility over the course of the year, caused by the COVID pandemic. This has moved from the $2,500 level at the start of the year down to $1,770 at the end of March and back in September, again, about $2,500. We have taken the opportunity of the recovered zinc price to extend our hedging book. Today, we are hedged until April 2022, around 65% to 70% of zinc volume output. Wolf Lehmann will explain later with more detail. At the end of the third quarter, we have continued to have strong liquidity of around EUR 183 million, considering EUR 108 million in cash as well as a EUR 75 million revolving credit facility fully undrawn. The high liquidity as well as our efficient long-term capital structure with no covenant, no maturities until July 2026 give us comfort to navigate the current environment. On China, we continue the construction course of our 2 steel dust recycling plants in Jiangsu and Henan. Although the COVID-19 crisis has caused some major delay in the construction, we expect to have the first plan ready during the first quarter and to carry out the coal commissioning towards the end of this quarter of 2021. The plant in Henan is expected to be finished after the summer of 2021. Finally, I would like to highlight that Befesa has been admitted to the global challenge index in September. We are very proud of this achievement, which is a recognition from the market of the contribution Befesa makes to a more sustainable world. Now Wolf Lehmann will explain the financials in more detail.

Please turn to Page 5, the third quarter 2020 highlights. As Javier mentioned and explained, the third quarter of 2020 has been as expected, and the quarter-over-quarter recovery is on track. Three items I would like to highlight. One, volume and plant utilization is resilient and around 80%; two, metal market prices are still below last year but have improved quarter-over-quarter, more importantly, we have our strong hedge book; three, as a result, cash and liquidity are, as usual, a strong point at Befesa, which allows us even during this period of the COVID pandemic to go full speed ahead on our expansion in China. Turning to Page 6, the consolidated key financials. In third quarter, consolidated revenue remained approximately flat year-over-year at EUR 145 million. The lower metal prices and demand due to COVID-19 was approximately offset with positive effects from efficiencies and favorable hedges. Referring to EBITDA, the lower part of Page 6. In Q3, we reached EUR 29.3 million of EBITDA, as expected, down EUR 7.7 million EBITDA year-over-year. Nevertheless, the quarter-over-quarter recovery is on track. Second quarter was at EUR 22 million, now third quarter at EUR 29 million. That is up EUR 8 million quarter-over-quarter or 35%. For the third quarter, main EBITDA variance drivers year-over-year are as follows. Let's start with prices, EUR 1.5 million from lower zinc LME prices and EUR 0.3 million from lower aluminum free metal bulletin prices; EUR 2.4 million due to the unfavorable zinc treatment charges, which, combined, is EUR 4.2 million pressure from metal prices. Next, let's review the main volume year-over-year impact on EBITDA: EUR 4 million from lower volumes in steel dust recycling services, mainly COVID-driven; similarly, EUR 1.2 million due to the lower salt slag and spent pot lining volumes. This was partially offset by EUR 0.8 million from positive volume and efficiency effects in the secondary aluminum business; also EUR 1.8 million due to our hedge book, which helps and is in the money, helping to offset some of the pressures on earnings. Again, overall EBITDA down EUR 7.7 million, driven partially by lower metal prices as well as lower demand due to COVID-19. On the other hand, again, our quarter-over-quarter recovery is on track and worth mentioning again. EBITDA improved from EUR 22 million in Q2 to EUR 29 million in Q3, and we expect fourth quarter to be better than third quarter again. EBITDA percent profitability improved from 18% in the second quarter to 20% in the third quarter. Our quarter-over-quarter recovery is on track. Going now to Page 7, the results of our steel dust recycling services segment. Q3 2020 revenue decreased by EUR 6 million or 7% to EUR 82 million, primarily driven by the price pressure in zinc LME, TC and the lower volumes impacted by COVID-19 constraints, as explained, partially offset by the favorable zinc hedges in place. Third quarter EBITDA year-over-year decreased by EUR 6 million to EUR 24 million. The main drivers of the EUR 6 million EBITDA year-over-year decrease are mainly 3 factors: one, EUR 4 million from lower steel dust recycling services volumes due to COVID-19-impacted demand; two, EUR 3.9 million combined price decrease from zinc LME and treatment charges, which were partially offset by; three, EUR 1.8 million favorable zinc hedging prices. Notably, the zinc LME decrease was offset by the favorable hedging, thus resulting in an overall positive effect on zinc blended or effective prices. Quarter-over-quarter, third quarter EBITDA recovered and is up by 30% or EUR 5.6 million to EUR 24.4 million over second quarter 2020 at EUR 90 million. As the price pressure falls straight through to EBITDA, the EBITDA as a percent of revenue decreased to 30% in third quarter but improved versus second quarter at 25% EBITDA percent. The quarter-over-quarter recovery is on track as mentioned earlier. On the right-hand side of Slide 7, we show details on plant utilizations and prices. On capacity utilization, we continue to run at resilient utilization levels even during the challenging COVID-19 time. Overall, our steel dust recycling plants have been running at average load factors of 81% year-to-date and 77% third quarter. Of the latest since they are installed, annual capacity of 825,000 tonnes. Third quarter steel dust throughput is 161,000 tonnes, 6% down year-over-year due to COVID-19 constraints. Year-to-date, electric arc furnace dust throughput is still up 3% year-over-year due to the expansion of Turkey. Referring zinc prices. On average, zinc spot prices were down in third quarter year-over-year by 5%, and including treatment charges, 11%. Nevertheless, we continue to see a recovery away from the lows experienced in March of below $1,900 to around $2, 400 to $2,500 in the last weeks of September and October. We are monitoring this price recovery closely. In addition on zinc prices, you can see how our hedging approach pays off. In third quarter, LME was down 5%. But blended prices, thus including our hedges, which are in the money, are even slightly up by 0.5%. Overall, for our steel dust recycling services segment, very much as expected. Our plant utilization is resilient. Also, our hedging rigor pays off and stabilizes earnings. Turning to Page 8, the results of our aluminum salt slags recycling services segment. Q3 revenue improved by 5.4% or EUR 3.3 million year-over-year to EUR 64 million, mainly driven by 3 factors: number one, higher secondary aluminum alloy volumes, up 14% or 5,400 tonnes year-over-year, driven by the automotive sector recovery and furnace upgrade at the Barcelona plant. This was partially offset by number two, lower salt slag and spent pot lining volumes down 9% or 11,000 tonnes year-over-year, mainly affected by COVID-19, which reduced demand from end-use sectors; number three, 3% year-over-year lower prices for aluminum alloy, averaging at around EUR 1,312 per tonne in third quarter. Referring prices, nevertheless, we have started to see a recovery away from the last 10-year trough experience in June of below EUR 1,200 per tonne, and the aluminum alloy free metal bulletin prices are currently back at pre-COVID-19 levels of around EUR 1,500 per tonne in the last weeks of September and October. Third quarter EBITDA was slightly down EUR 0.3 million or 5% year-over-year to EUR 5.7 million. Secondary aluminum subsegment, the gray bars, was up EUR 1.1 million year-over-year to roughly EUR 3 million in the third quarter. Main drivers are EUR 0.7 million from the combined positive volume and efficiency effects in secondary aluminum and EUR 0.4 million positive from improved metal margins. The salt slag subsegment, the orange bars, are down EUR 1.5 million year-over-year to EUR 2.6 million in third quarter, mainly explained by EUR 1.2 million from lower salt slag volumes affected by COVID-19, as explained, and a negative EUR 0.3 million from lower aluminum alloy average prices. Yet again, the quarter-over-quarter recovery is on track. Third quarter EBITDA improved by 58% or EUR 2.1 million over second quarter 2020 at EUR 3.6 million, underlining the recovery trend. On the right-hand side of Page 8, we show plant utilization and prices. Salt slags and spent pot lining volume and utilization levels continued at resilient 80% on average in third quarter. In secondary aluminum, volumes improved driven by the automotive sector recovery and furnace upgrade at our Barcelona plant. Market prices are still below last year. Aluminum alloy free metal bulletin prices in third quarter averaged at EUR 1,312 per tonne of aluminum alloy, which is down 3% year-over-year. Nevertheless, again, aluminum alloy FMB prices recovered from the trough in third quarter, and especially in the last weeks, are currently trading at pre-COVID-19 levels of above EUR 1,500 per tonne. Overall, third quarter has improved over second quarter for the aluminum salt slags recycling services segment. And just like for steel dust recycling segment, the quarter-over-quarter results have improved. Turning to Page 9. On the left-hand side, net debt, cash, capital structure. We closed third quarter with a strong and stable EUR 183 million liquidity readily available. Two components: number one, EUR 108 million of cash on hand, even after paying EUR 15 million dividend distributed in July and while funding China expansion; secondly, a EUR 75 million set and ready to go and highly undrawn revolving credit facility. Referring to our capital structure, no changes. It is long term, efficient at 2% interest and no maturities, no covenants. On the right-hand side of Page 9, the total all-in cash flow after funding working capital, taxes, interest, CapEx investments and also the EUR 15 million dividend was a negative EUR 18 million year-to-date. Looking at selected elements. Working capital has already improved versus second quarter, as expected, also just like in previous years. It's expected to further improve in fourth quarter versus third quarter, driven by seasonality. Interest are mostly already paid for the full year with the usual twice a year, January and July payments. On CapEx, year-to-date, we have spent EUR 39 million: EUR 16 million on maintenance and EUR 23 million on growth, mainly China. We expect to spend approximately EUR 60 million total CapEx for the full year: approximately EUR 20 million on maintenance for the full year and approximately EUR 40 million on growth, mainly China. All in, at third quarter, we achieved a solid cash in the bank of EUR 108 million. The operating cash flow for the first 9 months in 2020 is EUR 38 million positive operating cash flow despite a challenging COVID-19 environment. The last 12 months, LTM, period stands at EUR 93 million operating cash flow. Summarizing, 3 key elements: one, high liquidity to long-term and efficient capital structure as well as, three, our strong hedge book. Those 3 elements form the backbone of the phases financials and serve us well, very well, to weather the COVID-19 pandemic impact. This allows us to continue to go full speed ahead on our growth expansion in China. Turning to Page 10. During third quarter, zinc hedges were further extended up to and including April 2022. Hedges on the books for 2022 are at 1 -- EUR 2,150 per tonne sold forward prices. The hedging provides Befesa with improved pricing, earnings and cash flow visibility to allow to fund our growth initiatives. Zinc spot prices have been gradually recovering from the levels below $1,900 seen in March and April, especially pressured by COVID-19 to around $2,100 to $2,200 per tonne in June and July and further to $2,400 to $2,500 per tonne level seen in August, September and last week of October. Summarizing the financial section before we turn to the growth road map, 3 points. First, our quarter-over-quarter recovery is on track. Second quarter was below at EUR 22 million. In third quarter, we delivered EUR 29 million, and we expect fourth quarter results to be better than third. Second, we extended our hedges out to April 2022. Our capital structure is efficient and long term, resulting in stable and strong liquidity. Third, this allows us to fund our expansion in China even during this pandemic. Turning to Page 11, our midterm growth road map. Quite frankly, no changes. We stayed the course on our strategy and growth road map. In the graph, you see, level one, hedging already explained on the prior page; level two, organic growth completed last year on time and on budget and delivering in 2020 and '21, including Turkey, Korea washing and the aluminum furnace upgrades; level three, China, as mentioned by Javier as well as shown on Pages 12 to 14, where we show the latest progress in construction and pictures. We are on track and looking forward to start offering our market-leading steel dust recycling services to the Chinese market from 2021 onwards. We target to get out of this COVID-19 crisis with a stronger portfolio versus when we entered. Now back to Javier, who will cover outlook and closing remarks.

Thanks, Wolf. I would like to finish the call providing more details on the outlook for the rest of the year. As I said earlier, we expect the full year EBITDA to be in the middle part of the guidance of EUR 100 million to EUR 135 million that we provided in the first quarter. This is based on our expectation to achieve in the last quarter, better results than in the 3 quarters, which would mean that we will continue the path of moderate recovery from the low level we achieved in the second quarter. On the volume of steel dust, we expect to continue the pathway recovery on the production of electric arc furnace steel that we have seen in the third quarter, which will drive capacity utilization up during the final quarter of the year. On the other hand, we don't have any maintenance shutdown during this quarter. Over the last quarters, we have been able to confirm that the electric arc furnace steel production is much more resilient than the blast and furnace steel, which favors Befesa as we only serve the secondary steel makers. During the third quarter, the glass furnace steel production has decreased in Germany 20%, while the electric arc furnaces production has decreased only 5%, which confirms our theory. On the aluminum business, the automotive industry in Europe is also showing some size signs of slight recovery, and September has been the first month in the year with positive car sales compared to the previous year. We expect this to continue into the last quarter and support secondary aluminum as well as salt slag volume. This recovery in Europe should be supported by a strong demand from second aluminum alloys in Asia, a market we are serving to compensate part of the lower demand in Europe. In general, we expect the smooth recovery seen in the market to continue into the end of the year, although we have to be cautious given the increasing part of the pandemic in recent days, which could affect the economy with more lockdowns. From the price point of view, we believe that the current levels of zinc price around $2,400 to $2,500 represent a more sustainable level than the $2,000 level. We have taken the opportunity of the recovery on the zinc price to extend our hedging book, and we continue to monitor the market to further extend our hedging to be consistent with our approach. Even though we currently enjoy a comfortable and healthy liquidity, we keep on ensuring that any decision we make takes liquidity into consideration. We have reduced maintenance investments, and we are keeping our growth plan in China, which will deliver attractive returns for our shareholders. We have recently closed the financing of 50% of the investment of the first plant in China with local debt, which also will contribute to preserve liquidity. On China, we expect to carry out the cold commissioning of the plant in Jiangsu during the first quarter of next year and started with pilot batches from the potential steel maker customer already in the second quarter. The plan in Henan will follow the same plan scheduled just around 6 months after Jiangsu. And finally, I would like to highlight that we are doing a lot of efforts to make sure that the market understand how Befesa is part of the circular economy and contribute with this business through environmental protection by recycling more than 1.5 million tonnes of hazardous residues annually and producing more than 1.2 million tonnes of new materials, reducing the consumption of natural resources. This has been the backbone of the business since the company started more than 3 decades ago. Thank you very much.

Than you very much, Javier. We will now open the lines for your questions.

[Operator Instructions] Your first question comes from Ingo Schachel from Commerzbank.

My first question would be on your cost base and collection fee or all earnings drivers, excluding metal prices for next year. I think we all make up our own expectations regarding metal prices and treatment charges. But I was wondering, I think this year, you've seen a very good progression of costs if you adjust for metal prices. Just wanted to understand whether you think that's sustainable into next year or whether you think that if metal prices improve or treatment charges go down, clients will also push you to lower collection fees or you might have to pay a bit more in terms of the labor costs and so on. So just wanted to understand the other strength factors that you're seeing or whether we should expect it rather stable and make our focus regarding volume and metal prices.

Thanks, Ingo. For next year, we don't expect big change in the collection fee layering our cost basis. We think that we'll be very stable in the year. We don't see any signs to get the change in these details. Regarding zinc price, well, let's see what's happening. But I would like to do some comments on the treatment charge. We expect good reduction in the treatment charge for next year. Today, we are at levels of $300 per tonne. The signs in the market shows that next year should be around or below $250 per tonne. That will mean a significant reduction for the Befesa cost, okay? Thank you.

Yes. That's very clear. And maybe one question on the -- again, on the market environment in Europe. I think one of your global Mexican competitors has made an acquisition in Europe. Just wanted to understand if you already have a perspective on what your ultimate plans are, whether you think they're just going to operate this one plant or whether they're interested in more. And if so, whether you would at all consider selling selective plants that you have in Europe to a competitor to accelerate your growth in emerging markets or whether you think for your European footprint is set in stone.

Okay. Good question, Ingo. We think that Europe is a total and absolute stable market. Well, we have seen a change of property in a small German plant. But in our opinion, this is not going to affect -- or this is not going to change the framework of the market. This plant has its own customers around the plant. And as you know, Europe is a very stable market with the main plant in the middle of the most relevant areas in terms of steel production. We have our Spanish plant, which is in the middle of the vast country and collect all the steel dust in Spain and Portugal. The same happen with our plant in north of France or the same happen with the plant in the north of Italy. So frankly speaking, I don't see that this M&A deal in this small German plant through the Mexican people is going to change the face of the European market at all.

Okay. That's very clear. Maybe a quick last one to Wolf regarding the dividends because last time, I think we spoke about this in detail. You explained that as a very cash flow-driven decision. I think you were referencing EUR 100 million of cash you wanted to have after the second dividend payment. So I guess earnings were quite strong in the first 9 months. Cash flow, not yet or at least suggesting that if you follow the EUR 100 million calculation, you would only pay out, let's say, half of what you paid out earlier this year. Is it maybe a too mechanical thought? And maybe because earnings are good and things are looking better for next year, you'd say a bit more than this EUR 100 million number would suggest?

Ingo, thank you very much. Good question. Quite frankly, as we said in our Annual General Meeting in June, we will make the decision about the additional dividend in November. After the third quarter results publication, a decision has not been taken yet. As such, within the next few weeks, we'll make the decision. Many of the points you mentioned are correct. As you know, we have a dividend policy that tries to balance 3 aspects: dividend stability over the years, ensure that all key growth initiatives are funded and also manage the leverage at a moderate level. So we are -- as promised, we are carefully reading these aspects. Also, we will finish the year in the middle of the guidance range, and liquidity remains strong. We should be prudent, especially given the current environment with COVID, which is worsening across Europe with further lockdowns. But again, as promised, we will make that decision about the additional dividend in November over the next few weeks.

The next question comes from Michael Hoffman from Stifel.

Just to be clear on the guidance outlook, if we take the midpoint, that means you're talking about approximately 33 million of EBITDA, adjusted EBITDA in the fourth quarter. Is that -- I just want to make sure we're on the same page.

Yes. Thanks for the question, Michael. We cannot precise exactly which will be the lead. We are at the end thinking only October. But our view is that second quarter will -- last quarter will be better than the third one, which was 29 Portugal, better than above 30. And depending how the quarter evolves, depending how strong is the pandemic, we will be close to 35. So in line with what you have commented.

And at that point, can we think about that as an annualized rate? And sort of that sets the basis for how to think about 2021? So we're somewhere around 135 million, 140 million next year.

We are working right now in the preparation of the budget for next year. It's probably too soon to answer this question. But for next year, we have 70% to -- 65% to 70% of the zinc price hedge. So from the zinc price view, we are more or less covered. The big doubt will be in terms of volume. And today, it's difficult to forecast what will be the steel production and the aluminium production of the industry wide next year. It will depend, in our opinion, very much about the evolution of the pandemic. And on the other hand, we have 2 positive things. One is treatment charge that we expect to be better, clearly better than this year, and we will have our -- at least 1 plant in China at least for the half year running normally. So let's wait, Michael, please, to the first quarter of next year to have a better view of the guidance for the total year.

Yes. Okay. Fair enough. And then at what point will hopefully you start incorporating China capacity in your hedging strategy?

Well, it's something that we are reading a lot about hedging in China. Probably, we are going to sell our books in China. And in China has its own rules. For example, there is a Shanghai metal exchange market, similar to the London one, which has a certain correlation, but it's not exactly the same. I would say that probably in 2021 will be very soon to start hedging in China for 2 reasons. To start hedging, we need to stabilize totally our production; and second, because we need to learn more about the hedging in Chinese market.

The next question comes from Oscar Val from JPMorgan.

Hope everyone is doing well. Two questions from my side. The first one on utilization rates, could you maybe talk about how that 77% has been through the quarter or what the exit rate was? And I think Turkey was a bit of a drag in Q2. Has Turkey improved in Q3? And then the second question is the usual question on China. How are the negotiations with your customers going? And maybe if we think about next year and the plant ramping up in Q2, should we expect it to kind of be fully ramped up in Q2? Or how long will it take for the volumes to kind of ramp up in China next year?

Thank you, Oscar. Regarding your first question on utilization rates, 77%. Well, it has been a normal and good utilization rate. In the case of the steel business, the main points in the -- regarding the utilization rate has been that we have -- if you analyze what has happened year-over-year, the steel production in Europe went down 9%, and we went down only 6%. And if you compare quarter-on-quarter, we have grown our utilization rates 3%. On top of that, we have had, in the third quarter, the maintenance shutdown of our Bilbao plant, which is one of the most important plants in terms of production. So nothing special. Quite good utilization rates. And we can say and confirm the utilization rate in the last quarter will be much better than in the third quarter, so -- and will be quite a normal production quarter.... Turkey? Yes. In Turkey, Turkey, as you know, it's a very particular market. It's the only market where we pay for the whole material and probably the most competitive market in the steel dust world. In any case, Q3 will be better than Q2, and Q4 will be better than Q3. So we will finish the year critical close, 70,000 tonnes of steel dust production, which were more or less pretty close to our expectation for the year. And then China, well, this is a good question and a big question, which is the situation right now. We are in a permanent contract, especially in Jiangsu where we are going to start the production first with all our future customers. As I have explained many times, we are not talking with 1,000 people or with 100 people. We are talking with 15, 20 big steelmakers. And we have conversations and all of them. What's happening is that we are -- it's difficult in China to sign agreements before to have the construction totally finished. The position of the steelmaker is, "Hey guys, finish the construction, start operations, let's do the trials, and then we'll give the moment to sign long-term contracts." So based on that, we expect to start to do the coal commissioning during February, March. So to start operations basically after the Chinese New Year at the end of March or beginning of April. And probably this quarter, the second quarter of the year will be a batch quarter. We will do trial with all the customers, et cetera. And we expect to start normal operations in the second part of the year in the third quarter.

The next question comes from Benjamin Pfannes-Varrow from Berenberg.

Most of mine have been taken already, actually, but maybe just a follow-up on the progress in South Korea. I think we haven't touched on that yet. Perhaps you could shed some light on the capacity utilization there has progressed and maybe what you see into Q4.

Thanks, Benjamin. Well, South Korea, as you know, we have to deal with a total capacity production of around 200,000 tonnes. 60% of the production in South Korea is from the internal market, and 40% are imports from all the countries in the region. The summary is that in the internal production, we are doing quite well with very good level, very good levels of delivery. The internal market is recovering quite well, and we've been positive. On the other hand, in the imports from the neighbor countries, we have some logistic problems and some delivery issue. So we expect to finish the year around 180,000 tonnes or on that figure instead to achieve the [ 200,000 ] tonnes forecasted for the full year. But again, summarizing, a strong internal market and some more difficult in the imports on the labor countries.

And I noticed just a point on Q3 that the wax sold declined versus Q2. Could you shed some light on this development?

Can you repeat again? I didn't understand very well the question on development.

Sure. So the wax sold in the third quarter was lower over the second quarter of this year. Is there any particular reason to that or any link to the...

Not any particular reason. We follow more the flow to -- than the works through the sales. The works, sometimes, we account the gross sales in the moment we serve to the customer. And sometimes, you can have at the end of the quarter the working in a vessel in a harbor, and that makes the difference. Nothing special to comment.

Okay. And in terms of stockpiles of steel dust in cases, maybe a further dip in volumes in light of COVID, do you still have sufficient stockpiles there across the group?

Not really. We glean our inventories of steel dust, basically in the second quarter, and we have practically all our deliveries in the third quarter. Now in the last quarter of the year, if the activity in the steel industry follow the recovery, we will start to create the inventory, but this is not the situation today.

Okay. And the last question just on guidance at the midpoint, does that also point to the free cash flow guidance as well?

Absolutely. Yes, yes, yes.

The next question comes from Jaime Escribano from Banco Santander.

A couple of questions from my side. The first one is regarding the division. The margin in Q3 was EBITDA margin of around 16% versus Q2, 19%. Could you give us a little bit more color on the dynamics because the volumes were higher and the aluminum average price was also higher. Just for better understanding.

Okay. In the salt slag division, we have suffered a slight reduction of margin as we are commenting. In terms -- and you have said that the volume were better than -- and the price better, but it is not what I have in my mind, Jaime. I think that we have better volumes in the second -- in our division in second quarter of the year than in the third quarter. The reason was, again, following the answer of the question of Benjamin, the inventories in the second quarter, the deliveries were poor but we have the opportunity to clean our inventories. In the third quarter, we didn't have inventory, so we have list only the deliveries we have received during the quarter. On the other hand, the prices in the third quarter, there is -- in the aluminum prices, we have the delay of 1 month to apply the aluminum prices. So effectively, the prices in the third quarter has been more than the second quarter. The good point is that last quarter is being a strong quarter in the salt slag division. We are having strong deliveries based on 2 reasons on the recovery of -- basically on the recovery of the automotive European production and second to the export to the Asian automotive industry. And we have seen as well as Wolf as explaining during his explanation, there has been a strong recovery of the aluminum prices that we will enjoy in this quarter. So I expect to have a very good last quarter in the salt slag division.

Okay. Yes, you were right. Sorry, it was my fault. The volume was slightly lower in Q3. And yes, the second question is regarding the hedging because in the first half, the average hedging in 2021 was EUR 2,200 per tonne, and now it's EUR 2,130. Is this because you have done more hedges in 2021 at lower prices? Or why is the decline?

Wolf, do you want to answer?

Sure, I'll answer that. Thank you, Jaime. Yes, the last hedges that we put on the books, it was a set of hedges. If you remember, the third quarter of 2021 was not yet entirely hedged. When I say entirely hedged, I mean we do 92,400 tonnes per year or 7,700 tonnes per month. So there were still some residual hedges to complete, which we put on the books. Also, Jaime, the entire fourth quarter of 2021 was put on the books. And on top of that, then the first 4 months of 2022 were put on the books. Those additional hedges obviously changed the average hedge price. And on top of that, we always say we have the majority of our hedges in euros and a smaller portion is in Korean won. And so there, we also update on a regular basis to reflect the latest exchange rate, euro to Korean won. Overall, nevertheless, we're very, very pleased with the hedge book because if you look at the first quarter '22, that is EUR 2,150 per tonne. If you convert that at the forward exchange rate of euro to dollar of, let's say, 1.2, you get to $2,560 per tonne. And this is, as Javier explained, this is a good level of zinc price and also fits very well our thought about where the marginal cost is to reduce a tonne or thing. We see -- we saw that in the first half. The market prices were well below that and were not sustainable. And the zinc prices have now recovered to more sustainable levels, as Javier mentioned, and our hedges reflect that, too. So those are good and sustainable zinc prices and hedge levels in on the books.

The next question comes from Olivier Calvet from Kepler Cheuvreux.

I'll ask my questions one by one. Could you just come back to the German [indiscernible] plant in more details? I know -- I think I understand that you had operating issues. Do you think that this is something that your Mexican competitor will be busy with for the next few half a year or a year?

We don't have -- thanks for the question. We don't have a direct information. The rumors in the market are that our Mexican friends will be very busy with these issues for probably a good part of 2021. But anyway, we have had the opportunity to buy this plant, but we didn't analyze the deal basically for 2 reasons. On one hand, all this environmental administrative issues are on the plant; and second because our market share in the European market is so strong that we thought that we could have even competition problems if we try to do the acquisition. But again, our conclusion is that this acquisition is not going to change the structure of the steel dust European market.

Yes. Sure. Makes sense. Second question would be on China. I was just wondering, so could you confirm or just give us information if there is activity in terms of competitors entering the market so far? As well as another question on China, just when are you going to accumulate the steel dust from surrounding mini mills next year?

Okay. The first part of the question, competition in China. We are -- we know that there are probably 2 local people doing some kind of activities in the steel dust business, are 2 companies that we know well. We have good relationship with them. They are not doing any significant investment in that sense. They are preparing some old plants and old equipments to do some kind of activity. Regarding -- and that will be probably the main competitors who we'll have in China at least in the next months. We are not seeing any foreign competitor yet. We know, for example, that the Mexican have some -- have visited the country. But in our opinion, they are not preparing any investment in, at least in the next future. And then regarding when are we going to start to collect steel dust, we need to finish totally the construction of the plant. In that sense, the Chinese authorities are very strict. And we will have -- we will -- once we finish the -- totally the construction of the plant and we get the final permit from the environmental authorities, we could get the permit to start to collect. So that will happen at the end of the first quarter of 2021. For legal reasons, we cannot start before that.

Okay. Understood. And then I was just wondering if you could -- you talked about the secular economy. Your 2025 target is to recycle over 2 million tonnes of hazardous materials. I'm just wondering if you could remind us what's the timing for -- or the key, let's say, trigger for you to decide on exercising the option to build the extra kilns you could build in your 2 plants in China?

Okay. This is a very, very good question, very good question. Well, we -- our initial idea, perhaps, let's say, before the pandemic was once we start normal operations in the first line in the Jiangsu plant, we could then take the decision to build the second kiln in Jiangsu. That would happen, let's say, third quarter of 2021. Well, now we need -- I think we need to do a second analysis. Let's see the consequence of the pandemic. Let's see how is the situation mid-2021, and we will then take the decision. But perhaps the decision can suffer some delay in improvising from mid-2021 to the end of 2021.

Okay, okay. Understood. And could you comment on the evolution, if any, of your collection fees in salt slags and steel dust? Anything being renegotiated there?

Nothing special. There is a bit -- a very stable situation in both business, steel dust and salt slags. We don't expect any big change in the collection fee for 2021 in both business.

Okay. And then final one, just hedges. I mean we obviously saw that the hedges were extended, but the situation hasn't changed from what you did in September. So I was just wondering, is there any reasons? I mean we see the zinc price right now, at least in USD, a pretty nice level, where you did not extend hedges further in 2022. Is there any, let's say, guidance that you could give us in terms of the USD-euro exchange rate that may offset some of the positive momentum for the zinc price that you see?

No, not at all. We -- our strategy regarding hedging remain exactly the same. We have our -- and what we can say is that we are monitoring the market. We have -- we are not in a hurry to extend the hedge because we -- now we have, again, 18 months in front of hodge hedge, which is a good period of time for us. We feel comfortable with that figure. But I can confirm that we are monitoring the market every day, and we will take the opportunities to do this extension. Don't worry about it.

The next question comes from Michael Hoffman from Stifel.

I realize I'm asking you to do a little bit of crystal ball, but how do you think Europe will react this time given the resurgence versus the first time. Will we get whole industry shutdowns? Or at this time, it will be much more focused, more rifle shot as opposed to a shot gun in the reaction to parts of the economy being turned on or off?

Okay. This is a very difficult question because we don't have the crystal ball to see what's going to happen. But we -- our expectation is that this second wave, this second lockdown will be less strong than the first one, perhaps it's what we hope. But anyway, what we have seen, especially -- remember, we have compared many times the 2008, '09 crisis with this one. In 2008 crisis, the decrease in the production of steel worldwide, in Europe, it was 30%. In that case, we are more in figures of in 18 -- 15%. So we cannot compare the dip of both crises. And frankly speaking, we expect that this second wave, the production will stay -- will remain at better levels than in the first wave. But at the end of the day, we need to confirm that expectation.

Okay. And then following up on an answer to a question earlier. I'm a little confused. The China plant move is all about China wanting to recycle more of the electric arc furnace test, and they're increasing more electric arc furnace capacity as a percentage of total. And their steel production is at virtually back to pre-COVID levels. So what has you concerned that you're pausing your thoughts about the timing of a second kiln?

I wanted -- in answering the question about the timing of the second kiln, I only wanted to be prudent. As you said, the big trends of the Chinese market remains very, very positive. We are -- what we are seeing is that the Chinese steel production is moving from blast furnace to electrical furnace as expected. So China, the steel dust market in China will grow clearly. The only thing that -- is that we are in the middle of a big crisis. And for example, we -- anybody from Befesa has seen the possibility to travel to China during this year. This week, we are sending a team to help in the ramp-up of the Jiangsu plant, and they will need to do a 14-day quarantine in a medical hotel in China. So we are living difficult times worldwide, and that's why I wanted only to be prudent. No worry that our approach to China remains exactly the same that it was before the pandemic. We are totally confident about the evolution of the Chinese steel dust market, and we feel that we have a great opportunity in front of us. But for sure, we will try to do our best to take the opportunity of this -- to take advantage of this opportunity. So answering a specific question about the timing, perhaps it would be prudent to delay the [indiscernible] some month. That's all.

Okay. All right. So the market conditions still support why you should do it. It's just being...

Without any doubt.

The next question comes from Toby Hunston from Sculptor Capital.

The first one was just on the personnel cost base. It's been up kind of 4%, 5% in the first half of the year. And then Q3 seems to have jumped a bit more of 15%, 16%. So I was just looking for a bit more color as to what's driving that.

Wolf, do you want to answer this question, please?

No particular drivers, Toby. Let me look it up, and maybe we can get back to you. Nothing in particular stands out. We follow everywhere the statutory rules around salary increases, et cetera. Our personnel is stable. So maybe send us the question and we can look it up.

Sure. Okay. And then just a clarification on the CapEx guidance of EUR 70 million for the year. So far, you spent EUR 40 million. So are you still expecting to spend EUR 30 million in Q4 on CapEx?

Good question, Toby. So in -- when I commented on the net debt cash flow, et cetera, I already mentioned that we expect to spend EUR 60 million, not EUR 70 million anymore. Yes. So, so far, we spent around about EUR 39 million, call it, EUR 40 million, yes. And for the remainder of the year, we're going to spend another EUR 20 million in the fourth quarter to come in overall for the year at EUR 60 million. And the split is EUR 20 million on maintenance and EUR 40 million of the EUR 60 million is on growth, and the majority of that EUR 40 million on growth is in China.

The next question comes from Julien Batteau from Pascal Advisers.

Yes. Two really quick ones for me. The first one on the impact from the maintenance shutdown. Is that included in the negative volume impact on Q3 on the EUR 4 million that you mentioned? And the second question is on the maintenance CapEx, EUR 20 million for this year. Can you keep it as low as this for next year? Or should it go back to normal, EUR 25 million level?

Thanks, Julien. Yes, the maintenance shutdown of the EBITDA line is included in the figures of Q3. And on top of that, in the Q3, we have suffered the full performance of our stainless steel plant. We have had some supply issues for cost reasons. The production of stainless steel in Europe has declined. And based on that, we have had less volume to fit our stainless steel plant. So those have been the main reason to justify the 70% -- the figures in the third quarter. And regarding maintenance CapEx, well, again, we are in the middle of our budget period. And I think taking account the uncertainties we are facing in the market, we should be as prudent as possible regarding CapEx -- maintenance CapEx for next year. I think for us, will be difficult to keep the figures at the same level than this year, but we will try our best to don't increase so much, any case.

Thank you. Ladies and gentlemen, there are no further questions in the conference call. I will now give back the floor to our speakers. Thank you.

Thank you all for your questions. You can also contact the Investor Relations team of Befesa for any further clarifications or questions. We will now conclude the conference call and the Q&A session. Let me remind you that you can find the webcast and the dial-in details to access the recording of this conference call in our website, www.befesa.com. Thank you very much.

Thank you.