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 the Befesa third quarter 2021 results presentation. [Operator Instructions] I would now like to turn the call over to Mr. Rafael Perez, Director of Investor Relations and Strategy. Please, sir, go ahead.

Good morning and welcome to the Third Quarter 2021 Results Conference Call of Befesa. I am Rafael Perez, Head of Strategy and Investor Relations of Befesa. And today, as usual, we have with us Javier Molina, CEO of Befesa; and Wolf Lehmann, CFO of the company. Javier will start with an executive summary covering the main highlights of the period, then Wolf will review the 9 months financials in total and by business unit as well as cash flow and an update on hedging. Javier will close this presentation providing an update on our growth projects as well as an outlook for the remainder of 2021. 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.

Thank you, Rafael. Good morning and thank you for attending this conference call. During the first 9 months of 2021, we have delivered the strongest result in the history of Befesa. Not only we have achieved strong financial results, but we have also made great developments in our growth strategy with the signing of the acquisition of American Zinc Recycling as well as the continuation of our growth plans in China. In the first 9 months of 2021, we have achieved EUR 137 million of EBITDA, which represents an increase of 62% compared to last year and 17% compared to 2019 pre-COVID levels. The main driver for this increase has been a favorable market price environment in the period with a recovery of the price of zinc and aluminum as well as favorable zinc treatment charge for 2021. LME zinc prices have continued to stay favorable during the 9-month period with an average of EUR 2,414, up 27% compared to last year. In the case of aluminum alloys, the average price during the 9 months has been EUR 1,978, up 47% compared to the same period of 2020. From the volume point of view, the volume of steel dust treated in the 9 months has increased by 12% compared to last year, driven by higher utilization as well as some contribution from the U.S. operations which we integrate at the end of August. In the aluminum business, the strong volume of secondary aluminum, up 15% in the period, has enabled us to achieve very good results in this division. These positive trends of metal prices and volumes have also continued in the third quarter, resulting [ in another ] strong quarter with a total EBITDA of EUR 43 million, representing an increase of 46% compared to the third quarter of last year. Although energy price have suffered an strong increase in the quarter, especially since September, in particular natural gas and electricity, this dynamic cannot be seen in isolation from the development of metal prices. While energy price have increased, the reality is that aluminum and zinc prices have also increased, minimizing the negative impact of energy price inflation in Befesa. The market environment in the main industries where we operate have shown different levels of activity during the quarter. On one hand, the production of steel in the third quarter has shown a strong performance with an increase of 24% in Europe and 29% in U.S. compared to the previous year. On the other hand, the automotive industry in Europe has suffered a slowdown in the quarter after an strong first semester of the year. As such, European car registration decreased 22% in the third quarter after an increase of 25% in the first semester. The production of cars is being affected by the crisis of the supply of microchips not only in Europe but worldwide. This is impacting the demand for secondary aluminum in Europe, which we are successfully partially compensating with an increase in export to Asian markets. The generation of cars -- of cash during the first 9 months of 2021 has been very strong, and this has enabled us to finish the semester with more than EUR 200 million of cash on hand and a leverage of 2.3x. During the third quarter, we have made great development in our growth strategy. As we announced last 16th of June, we signed the acquisition of 100% of American Zinc Recycling, the market leader in steel dust recycling in U.S. The transaction was successfully closed on August 17 and we are integrating part of the operations already in the third quarter. We are already taking the total control of the American operations. We have renamed the company to Befesa Zinc US. And we have appointed a new CEO for the U.S. operations who reports directly to Asier Zarraonandia, head of the steel dust recycling division. Our people will start traveling to the U.S. regularly from next weeks onwards when the restrictions on traveling have been removed. [ Additionally ], we are getting the opportunity of attractive zinc prices to hedge the U.S. volume of WOX, applying the same approach than the rest of the company. Wolf Lehmann will provide more details later. The U.S. business is performing as we expected, and we are confident that we will capture the synergies that the transaction will create over the next 18 to 24 months. Our growth plans in China continue as planned, with the construction of the plant in Jiangsu finished and starting commercial output. The feedback we are getting from the Chinese steel producers is very positive, and although the contribution of Chinese operation will not be material this year, we are very confident about the contribution for next year. Additionally, we also continue the construction works of our second plant in Henan, which we expect to be finished by the end of this year. Regarding the outlook for this year, 2021. As I said, we have reviewed the guidance incorporating the contribution of U.S. since September. As such, we expect to finish the year with an adjusted EBITDA around EUR 195 million. This represent a record year in the history of Befesa and an increase of 54% over the results achieved last year. And additionally, it is consistent with our previous communications, where we said that we will finish the year in the upper part of the guidance plus the contribution of U.S. Now Wolf Lehmann will explain the financials in more details.

Good morning. Please turn to Page 6, the 9 months 2021 consolidated financial highlights. As explained by Javier, Befesa delivered strong earnings growth year-over-year with EUR 136.8 million adjusted EBITDA in the first 9 months of 2021, up 62% versus the same period of 2020; also well above the pre-pandemic levels, up 17% or EUR 20 million versus 9 months of 2019. The main drivers of the year-over-year EUR 52 million EBITDA improvement are mainly price as well as volume driven. The overall EUR 50 million positive price impact has mainly the following 4 components: one, EUR 19 million since the reference zinc treatment charges settled favorably at $159 per tonne versus $300 in 2020. Second, EUR 18 million from higher zinc LME prices at average of EUR 2,414 per tonne, up 27% year-over-year. Three, a negative EUR 5 million due to lower zinc hedging prices partially offset the zinc LME price increase. And number four, EUR 19 million higher aluminum alloy free Metal Bulletin prices which averaged at EUR 1,978 per tonne, up 47% year-over-year; as well as better aluminum metal margins year-over-year. Looking at the volume lever, which was also positive by around EUR 6 million year-over-year. One, EUR 5 million since the electric arc furnace dust throughput was higher year-over-year, plus a positive contribution from the acquired U.S. operations delivering as expected. Please note we have consolidated approximately 6 weeks in the third quarter financials, which both drivers partially offset the impact from Stainless. Number two, EUR 1 million positive from higher secondary alloys, partially offset by lower salt slags and spent pot lining volume due to the U.K. plant closure at year-end 2020. Overall good volume performance with overall solid plant utilizations at pre-pandemic levels, steel dust at above 80% aluminum, salt slags and spent pot lining at or above 90%. The approximately EUR 3 million negative cost, another lever, reflects the higher inflation and energy cost trends, the China expansion costs, partially offset by operational excellence. On a third quarter stand-alone view, we continued to deliver strong earnings growth with third quarter adjusted EBITDA at EUR 42.7 million, up 46% or EUR 13 million year-over-year, also growing 15% compared to third quarter 2019 pre pandemic. The third quarter EBITDA is normalized 48 million of onetime American Zinc Recycling acquisition-related costs. In summary. Befesa delivered solid pre-pandemic plant utilization levels and benefited from a strong and favorable market price environment in the first 9 months of 2021, which enabled us to deliver our all-time-high 9 months adjusted EBITDA of EUR 137 million at a strong 24% adjusted EBITDA margin. Net profit was up EUR 30 million or 96% year-over-year, basically doubled to EUR 61.5 million in the first 9 months, equal to EUR 1.69 earnings per share based on weighted average number of shares of 36.4 million in the first 9 months of 2021. We also improved cash on hand to a new high of EUR 201 million, which I will explain later together with the net debt and leverage performance on Page 9. As always, please note in the appendix of this presentation we'll find various financial and operational data tables with quarterly, annual and multiyear views for your reference. Now turning to Page 7, the Steel Dust Recycling Services results. Steel Dust Recycling Services continued to perform at strong earnings levels and achieved EUR 102.7 million adjusted EBITDA in 9 months, up EUR 34 million or 49% year-over-year as well as 12% up or EUR 11 million up versus 9 months 2019, clearly demonstrating the recovery to and above pre-pandemic levels. The corresponding adjusted EBITDA margin amounted to 34%. The net price lever was positive by EUR 29 million year-over-year. The volume lever was also positive by approximately EUR 5 million EBITDA year-over-year impact. As explained, the higher electric arc furnace dust throughput year-over-year and the positive contribution from U.S. operations were partially offset by lower Stainless operations. The cost, other lever had a minor EUR 0.5 million year-over-year impact, where the higher inflation, including energy and China expansion costs, were mainly offset by operational excellence and other. Looking at selected operational metrics on the lower part of the page. Volume for electric arc furnace steel dust throughput increased by 12% year-over-year to 563,000 tonnes, mainly driven by the contribution from the acquired U.S. recycling plants but also by the better performance of existing operations year-over-year. Overall plants utilization continued at solid pre-pandemic levels of around 81% of the extended approximately 1,555 tonnes (sic) [ 1,555,300 tonnes ] installed annual recycling capacity, which includes approximately 620,000 tonnes annual capacity contributed by the acquired U.S. recycling assets. Taking a more detailed look at prices at the bottom of Page 7. One, the zinc LME market prices continue at high levels and averaged EUR 2,414 per tonne in 9 months, up 27% year-over-year. Second, our zinc hedging prices in 9 months were lower year-over-year on average, 2,170 tonnes -- EUR 2,170 per tonne in 9 months '21 versus EUR 2,232 per tonne in 9 months '20. As well as compared to the strong LME spot prices in 9 months 2021, they were slightly below. Combined, the resulting zinc blended price came in at EUR 2,241 per tonne, up EUR 152 per tonne or 7% year-over-year. Correspondingly, the positive EBITDA effect from the higher zinc LME market prices of gross positive EUR 18 million was partially offset by a negative EUR 5 million due to the hedges, resulting net in a positive around EUR 30 million EBITDA effect. In addition, as explained, the zinc referenced treatment charge favorably impacted our 9 months EBITDA by circa EUR 19 million year-over-year. As you know, treatment charge were settled at $159 per tonne for 2021. Overall, Steel Dust Recycling Services delivered a very strong EUR 103 million adjusted EBITDA in 9 months with a high 34% EBITDA margin and solid plant utilization at around 81%. Going now to Page 8, the results of our aluminum salt slags recycling services segment. Aluminum salt slags recycling services delivered EUR 34.1 million EBITDA in 9 months, a new high level, up EUR 16 million year-over-year and almost doubling earnings year-over-year; compared to the same period of 2019, also up 38% or EUR 9 million, clearly demonstrating the recovery well above pre-pandemic levels. The EBITDA increase was primarily driven by the price lever, with aluminum alloy free Metal Bulletin market prices showing a 47% year-over-year increase, as well as better aluminum metal margins, which combined drove a positive net circa EUR 19 million EBITDA effect year-over-year. The volume lever was slightly positive by EUR 1 million EBITDA effect year-over-year, overall higher secondary aluminum alloy partially offset by lower salt slag volumes due to the U.K. plant closure at year-end 2020. The cost, other lever, about EUR 3 million EBITDA effect year-on-year, was driven by the higher inflation, energy cost trends. Overall, aluminum salt slags recycling services delivered the highest 9 months EBITDA on record at EUR 34 million, benefiting from the strong base metal price environment which more than offset the high inflation and energy cost trends, by far. Plant utilization continued at strong pre-pandemic levels at 90% or above. Turning to Page 9, the cash flow, net debt and leverage results. On the EBITDA-to-total cash flow bridge, starting with EUR 136.8 million adjusted EBITDA on the left and walking to the right. Working capital and other was up by EUR 35 million year-over-year. Included in the EUR 35 million is the EUR 8 million onetime AZR acquisition cost adjustment; also EUR 10 million working capital from the acquired AZR, American Zinc Recycling, operations. The EUR 17 million remaining is mainly driven by higher receivables driven by higher sales. Also, just like in previous years seasonality-wise, working capital is expected to further improve in fourth quarter versus third quarter, driven by seasonality. Interests are mostly already paid for the full year with the 2 biannual payments in January and July. Taxes of EUR 13 million, also as expected. Resulting in an operating cash flow of EUR 73.9 million for the 9 months, up EUR 36 million year-over-year, close to double versus the EUR 37.8 million at 9 months last year. In 9 months, we spent maintenance CapEx of approximately EUR 22 million plus growth CapEx of approximately EUR 35 million, for a combined EUR 57 million total CapEx partially funded through approximately EUR 22 million China local loans for our 2 plants at Jiangsu and Henan. Also as you know, on the 17th of August 2021, Befesa successfully completed the acquisition of 100% of American Zinc Recycling's, AZR's, recycling assets for a purchase price of $450 million; and a minority stake in its zinc refining business for $10 million. The AZR acquisition has been financed through a capital increase of new ordinary shares from the existing authorized capital and a term loan B add-on of EUR 100 million. The EUR 330.6 million of net funds raised through the accelerated equity offering got reflected already in our second quarter cash flow. The EUR 100 million term loan B add-on got reflected in our balance sheet at third quarter close. On dividend, we distributed EUR 46.8 million in July. So after funding, working capital, interests, taxes, CapEx, the AZR acquisition and also the EUR 47 million dividend, total cash flow amounted to positive EUR 26.8 million in the first 9 months. Together with the EUR 19.3 million cash and cash equivalents incorporated from AZR, our cash on hand improved to EUR 200.7 million at third quarter closing, a new high for Befesa, up from EUR 155 million at year-end 2020. The cash on hand of EUR 201 million, together with our entirely undrawn EUR 75 million revolving credit line, provides Befesa with a strong liquidity of more than EUR 275 million. This is supporting Befesa's credit ratings signed by Moody's at Ba2 and Standard & Poor's at BB+, both unchanged from June. Net debt increased to EUR 482 million versus EUR 394 million at year-end 2020 mainly due to the EUR 100 million term loan B add-on to partially fund the AZR acquisition, which got reflected in our balance sheet at third quarter closing; as well as some China local loans. The EUR 207 million last-12-months rolling EBITDA incorporates full 12 months rolling for the U.S. operations and is adjusted only for the 8 month -- EUR 8 million onetime AZR acquisition-related costs. The EUR 482 million net debt, with EUR 207 million last-12-months adjusted EBITDA, results in a 2.33x net leverage at third quarter closing, improving from 3.31x at third quarter 2020 year-over-year and 3.1x at year-end 2020. Including synergies, leverage is even lower rather around 2.2x, for debt covenant reporting purposes. We continue to be compliant with all the covenants and have no applicable covenants. The capital structure remains unchanged and long-term [ all set to ] July 2026, and we cannot be charged more than 2% interest. Furthermore, we made good progress on hedging, which we review on the next page. Turning to Page 10, on hedging. In third quarter 2021, we continued our hedging rigor and extended our zinc hedge book further up to and including October 2024 for the non-U.S. operations. [ That's ] with approximately 3 years of hedges on the books. The acquired zinc U.S. operations came with a hedge book in place up to and including the first quarter of 2023 at hedging prices around $2,500 per tonne for the remaining of 2021 and around $2,750 per tonne for the full year 2022 and first quarter '23. Following the closing of the acquisition and under Befesa's competitive hedging program, we extended the hedges for the U.S. operations up to and including April 2024, locking in 15,000 tonnes of zinc equivalent output per quarter at approximately $2,950. We continue to work on extending the hedge book for the U.S. operations to be fully synchronized with the hedging of Befesa's European and Asian operations up to October '24. Overall, considering the combined global hedge book, Europe, Korea and U.S. operations, the year 2021 is hedged at around EUR 2,150 per tonne sold-forward prices, the year 2022 at around EUR 2,250 per tonne, the year '23 as well as the first 3 quarters of '24 at around EUR 2,350 per tonne. As always, the hedging provides Befesa with improved pricing, earnings and cash flow visibility to allow to fund our growth initiatives organically. Our hedging strategy remains unchanged. First, we hedge 1 to 3 years. Second, we target 60% to 75% of our global zinc equivalent volume. And third, Befesa provides no collateral. The risk is transferred entirely to our hedging partners. Referring to 9 months, the lower left section on Page 10. In 9 months 2021, our zinc hedges were locked in at approximately EUR 2,170 per tonne on average. [ It's a low bar ] compared to the strong zinc LME spot prices which averaged around EUR 2,414 per tonne over the same period. Overall, the zinc blended price in 9 months averaged EUR 2,241 per tonne, up 7% or EUR 152 per tonne year-over-year. Summarizing the financial section before we turn to the growth and outlook, 3 points. Number one, Befesa delivered in 9 months 2021 the highest earnings in the history of the company at EUR 137 (sic) [ EUR 137 million ] EBITDA, up 62% over last year, which translated into very strong developments in terms of operating cash flows, cash and leverage. Secondly, our financial backbone is strong. We extended our hedges out to April and October 2024. Our capital structure is efficient [ and long term ], resulting in stable and strong liquidity. And three, based on this strong backbone, we funded our expansion in China, even during the challenging pandemic, full speed. In China, we are progressing on target; and entered in the U.S. market through the acquisition of AZR. We have achieved record financial results. And even more important is the strategic progress in China and the U.S., setting us up for even more accelerated growth going forward. Back to Javier, who will provide you the latest on our China expansion, our zinc U.S. operations and the outlook for the year.

Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for this year. 2021 has been an exciting year for Befesa and truly an important milestone in the development of the company. We expect to achieve record financial results with an annual EBITDA around EUR 195 million. We are entering in a new market like the U.S. and at the same time completing the construction and starting operations of our first 2 electric arc furnace steel dust recycling plants at Jiangsu and Henan in China. Regarding the full year EBITDA, as explained, we expect to finish around EUR 195 million. This considers the upper part of the guidance previously provided; and additionally, 4 months of our U.S. operations, which will provide around 10 million of EBITDA, in line with the pro forma that we provided when we explained the acquisition of American Zinc Recycling. As such, we expect the last quarter of the year to be the strongest one with an EBITDA around EUR 58 million. Volume in steel dust, secondary aluminum and salt slags are expected to remain strong for the rest of the year, supported by strong underlying industries. Despite the current environment dominated by higher energy prices, we are confident in achieving the right guidance. As previously explained, the high energy prices are also related with high aluminum and zinc prices, which we expect to have a net positive effect in this year, continuing the trend seen in the first 9 months of the year. For 2022, we are currently in the middle of the budgeting process, and we are considering different scenarios and [ sensitivities ] regarding metal prices and energy, inflation. We have to be prudent and see how energy price evolve over the coming months. As you know, we will provide 2022 guidance when treatment charge of zinc has been settled in the industry around April next year. In the U.S., everything is developing as expected. We will consolidate about 4 months of operations in 2021 after the signing of the acquisition. As explained, we have taken full control of the operations. And we are implementing an integration plan covering all areas of the organization, with a focus on starting to capture the short-term synergies in the next 18 to 24 months. In China, at Jiangsu province, we have complete the construction of the plant and we have finished the hot commissioning of this plant. After that, we are starting with trial production, for which we have already secured steel dust volume from customers. Based on the positive feedback from steelmakers, we are confident to get a high capacity utilization in Jiangsu already for next year of at least 70% or 80%. Our second plant in the province of Henan is also on schedule, with construction due to be complete by the end of 2021; and ramp-up, including commissioning, scheduled during the first semester of 2022. Moving to the market environment. We have seen over the first 9 months of the year a continued recovery of the steel production in Europe. And we expect the current levels of steel production to be maintained throughout this 2021, which will represent an strong production. Regarding the automotive industry in Europe, we will see how this develops over the final 2 months of the year, especially with regards to the microchip situation. Cash flow generation is expected to be very strong for the full year, and we expect to end the year with a leverage ratio of around 2.2x. Finally, on ESG, I would like to stress [ once ] again that we are doing a lot of efforts to make sure that the markets understand how Befesa is part of the circular economy and contribute with its business to environmental protection by recycling more than 2 million tonnes of hazardous residues annually and producing more than 1.5 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.

Thank you, Javier. We will now open the line for your questions.

[Operator Instructions] The first question comes from Jack O'Brien from [ Goldman Sachs ].

I've got 3. I'll take them one at a time, if that's possible. The first is just on the energy backdrop. Obviously you mentioned that Befesa has some natural hedges through the zinc and aluminum price, but clearly it's front of mind at the moment with most investors. And as I understand it, you have -- energy makes up roughly 20% of operating costs, so on a sort of annual basis, that could equate to over EUR 100 million. For the third quarter and perhaps into the back end of this year, how should we be thinking about the sort of sequential move there in the energy costs that Befesa will be facing? That's the first question.

Okay, thanks. Well, this is a hot topic, as you can imagine. And we are thinking a lot about that. This year, frankly speaking, we have been able to offset, let's say, totally the energy increased impact in our P&L. And based on that, we will be able to finish the year in the upper part of the guidance that we provided at the beginning of the year. It's true that the positive impact of the metal prices started before than the -- that -- or before than the impact of the increase of the energy costs, but all in all we have been able to compensate both these. If you analyze the rally of the energy costs but you compare with the rally of the metal price, there is a -- let's say, a great correlation. Thinking in the next year is something very difficult to forecast. We don't know -- we know now the energy price for the 2022, the [ future's card ], but we don't know if that will be the real price for the full year. The same is -- the same happen with the metal prices, so it's difficult to forecast this correlation. Any case, my -- our feeling is that, in a big part, the energy price will be able to offset the increase of the energy costs, at least in our case.

Okay. And perhaps a follow-up just flipping it around to more on the demand side. In terms of your sales volumes of WOX, have you seen any impacts from reduced activity at zinc smelters?

Not really. We have read the announcement of [ Trafigura ] and Glencore. And as you can imagine, we entered in contact with our customers. And they -- the answer we have got is that they will maintain their forecasted volumes for the full year. I don't know if they are going to reduce really their production, but -- and if it is the case, that will be reduced in the -- on the [ side ] of the mine concentrates, not on the -- on our products.

Understood. And second question: Clearly, as a group, you've got very exciting plans in China. Just trying to understand based on your sort of initial discussions with customers and initial explorations. Obviously it sounds like you've got -- you're expecting strong utilization into 2022. In terms of the zinc content of the steel dusts, have you got any further ideas or clues on -- as to how that might sort of play out versus your more traditional business -- your existing [ business ], I should say?

Well, again it's something which is difficult to forecast because one thing is that -- to know the zinc content of the samples you take from customers, and a different thing is to really evaluating a -- in a long period the zinc content on [ the dust ]. As you can imagine, the dust is waste for the customers, so they don't know exactly which will be the zinc content in the dust. Any case, as of today and based on the samples and on the first trial we are doing, we expect to have an acceptable zinc content similar to the ones we get in other geographies like South Korea, for example, but slightly smaller than the ones we get in Europe, but to confirm that figure exactly, we need more time.

Okay. And just final question, on AZR. Now that the acquisition is completed and you have the keys, so to speak, do you remain firmly confident in achieving the cost synergies target and improving the utilization, now that you actually own the business?

[indiscernible]. We have complete the -- we are in the middle of the process of the integration, which has been a very complex process, especially because the travel restrictions. Hopefully, from November 8, we will be able to travel to the U.S. And we will start to confirm everything, but in regarding the -- your 2 questions, we are very confident that we will get the expected synergies in the 18 to 24 period that we are thinking about. And after the 1.5 months of being owners of the company, we can confirm that we expect to get the figure. And regarding the second part, the -- to increase the utilization capacity, the answer is again yes. We will improve the utilization, but it's something that is -- as you can imagine, cannot happen in a very short period of time. We need time to do that. And probably we are not going to see any effects in 2022. We will start to see the increase of utilization in 2023 and '24.

Your next question comes from Oscar Val Mas from JPMorgan.

Yes. Javier and Wolf, a couple of questions from me. The first one is in your release you talk about scheduled plant overhauls in the U.S. and a [ mismatch ] between throughput and WOX. Can you just remind us of what that impact was in Q3 and how -- and if there are any scheduled plant overhauls in the next year? That's the first question. My second question is a question that we've asked in the past that's around how utilization in steel dust is going in Turkey and South Korea versus Europe. So are you improving utilization in Turkey and South Korea? And my third question is just on secondary aluminum. Given you are exporting to Asian markets, how should we think about the impacts there on margins? And how much lower margins are your exports in secondary aluminum?

Great. Oscar, I think, in terms of the scheduled shutdowns, we have a set schedule of maintenance overhauls for all our plants, one of which also happened in the third quarter for the U.S. operations. And yes, when you have that -- so there was more WOX produced than finally sold. And this is how we manage the overhauls. I think part of -- you saw that working capital went up, when you compared the second quarter to third quarter. And part of that in the tune of 5 million to 10 million or so was in inventory, which as I mentioned in the call that's usually part of the seasonality when you look at our usual third quarters. And then in the fourth quarter, we believe they're down again and improve working capital. And we expect to do the same in the fourth quarter, so nothing unusual.

Okay, great...

Okay, Oscar, regarding your second question, the utilization rate in Turkey and South Korea, nothing special. We are running both geographies at very high load factors in our plants. The load factors are slightly below the European operations'. The reason is that, Europe, it's a totally consolidated market with more than 30 years of maturity. And Turkey and South Korea are modern markets, but anyway, we are running our plants at very high and stable utilization rates on the average of the load factors of the whole company. And regarding your third question then: Yes, it's true that we are in the last month. Fortunately, we are doing a strong export to Asia. Basically I can -- what I can say is that the margins we are achieving in the -- our second aluminum division are basically the same in the exporting sales than the -- than in the internal sales. There is -- today, there is a premium in the prices in the Asian market that offset totally or near totally the logistics costs to export the aluminum to this country -- to those countries.

The next question comes from Michael Hoffman from Stifel.

Can we take the revised guidance and just parse a little bit how to think about how the original legacy Befesa EUR 165 million, EUR 190 million reflects in the new EUR 195 million versus the addition of Befesa USA?

Okay, thank you, Michael, for the question. Our original guidance was EUR 165 million to EUR 190 million. We have said and we confirm that we will finish in the upper part of the guidance, and then we will have the contribution from the U.S. operations. In starting for the U.S. operations, the forecast that we provided when we analyzed the acquisition was that the -- without consider the pro forma of the impacts of the [ poor ] hedging they have, the EBITDA contribution of U.S. for this year would be around EUR 30 million, EUR 32 million. And this is what we are going to achieve. I think we can confirm that. So taking account that we are talking about 4 months, we expect around EUR 10 million from the U.S. operations. That means that in the classic business we will finish, let's say, around EUR 185 million, something like that, in the -- as expected, in the upper part of the range. Probably without the rally of the energy prices, we could have finished slightly [ above ] that, but all in all we feel very happy to be able to confirm the guidance that we provide at the beginning of the year.

Okay, that's very helpful. And just to be clear: The EUR 30 million to EUR 32 million from U.S.A., the annualized number, you assume that is the right way to think about '22, all things considered currently.

It's too early to tell.

Can you repeat the question, Michael, to be sure that [ it wasn't lost? I mean ]...

Yes, yes. Sorry. I apologize for the confusion. You gave us an annualized rate for Befesa U.S.A. of EUR 30 million to EUR 32 million potential contribution. Is -- does that improve going into '22 based on improving hedges and utilization? Or is that a good number for '22 as well...

Okay. Well, in -- well, we are now in the middle of the budgeting process, Michael. One thing is what we have analyzed during the due diligence. We -- I have to say that we did a very deep due diligence. And we are not discovering any surprise, nor positive or negative, which is important, but well, a different thing is to prepare our first budget. We will -- for next year, we will have in the negative side a decrease in the production levels. We -- it's something that we knew during the due diligence process. And now we are accounting the -- all the amounts we have for the full year. And on the positive side, we will have a much better hedging because the hedging you -- we have in U.S. for 2022 is much better, is at a normal-condition hedging. So that will produce, say, an impact of -- I don't know exactly that, around 50 million, something like that. And on top of that, we are putting in place a lot of new ideas, changes, et cetera that will have an effect as well in the P&L. So the starting point would be the EUR 30 million, EUR 32 million; less the -- some decrease in production; plus some improvement in hedging conditions; plus the new, let's say, actions that we can put in place and will have some effect in the next year P&L.

Okay. And then there's been a lot of turmoil and discussion about things that are going on in China, rolling blackouts, the like, but not the least of which is the discussion about their magnesium production and, well, impacts that it could have on European aluminum production. Are you all comfortable, given your export market opportunity, that no matter what happens with the ongoing issues around magnesium production out of China, that won't impact your own aluminum business?

Frankly speaking, we are very confident about the evolution of our business in China no matter what's happening with the macro situation in the country. I think, no matter China grew at 6% or 3%, they will be -- they will produce a huge amount of steel. And only -- without any growth with the production of steel dust that we know they are producing today in Jiangsu and Henan, we will be able to get the volumes we are talking about. So my concern about the macroeconomic situation, I mean, China is more taking into account the effect that this could have in the global economy and in the price of the commodities and et cetera, et cetera, more than in -- the effect that this decrease or a slow growth can have directly in the production of steel in the country.

Yes, and well, that's fine. I was more concerned about your overall aluminum business. I mean China has reduced magnesium production by 50%, which the media is saying that -- if Germany doesn't successfully negotiate something about that, that you can shut the auto production down in Germany by the end of November because of the lack of magnesium to make aluminum. I'm -- I was asking about your aluminum business too...

We -- yes, okay. Sorry for my -- I'm -- I didn't understood -- understand properly. Well, we'd -- about magnesium, we know more or less the same than you guys. I know that this -- that could be a problem, but again if this is -- at the end of the day this is a big issue, will be a big issue not only for Befesa. It will be a big issue especially for the whole automotive industry worldwide. So we -- well, it could affect Befesa because we are at the end of the value chain, but it will affect more basically to the automotive industry. So I think it's -- it could be something very challenging and -- but I'm sure that the automotive industry, the European authorities must try to solve in any way or other.

Yes.

Okay?

Okay, yes.

The next question comes from Olivier Calvet from [ Kepler Cheuvreux ].

Yes. Javier, Wolf and Rafael, I would have a few questions left. First one, on the aluminum segment, could you give us a sense of how much impact you see on a gross basis in the segment and maybe break that down between salt slags and secondary aluminum from the higher energy prices, please?

Okay. In the -- our alu segment we have a clear impact in the energy prices, but until now, I mean, as we have -- trying to explain during the presentation, we have been able to offset totally with the metal prices, in that case, with aluminum prices. As you know, in the production of primary aluminum, about 90% of the cost is energy, so I am totally convinced that, if we see growth in the energy price, we will, you will see a high correlation in the aluminum prices, more than in any other metal probably. We have had opportunities, yes, recently to close energy price for the full year, but our idea is that we will -- that only we can -- we will be able to hedge the aluminum price in the same way because we are totally confident that we will see a high correlation between the energy prices and in -- the aluminum prices. It's something that we cannot forecast, but this is what we thought about it. And the best example is this year. In 2021, despite the strong rally of the energy price, we will do record incomes and earnings in our aluminum division...

Yes, yes, no, that's fair, but I just was wondering on the -- we saw in Q3 a EUR 3 million adverse impact from the higher energy prices, but this is offset by some of the efficiency measures that you took. So I'm just wondering if you could give us some color on what is the gross impact that you saw in Q3 from those higher energy prices.

I don't have these figures exactly in my mind. What I can confirm is that we have offset totally the energy price impacts with the metal price impact, okay?

Yes.

Okay, okay, yes -- sorry. So second question, also on the aluminum segment. I was just also wondering about the magnesium sort of situation. Can you explain again, can you detail again, what is your exposure here? Is there any way to alleviate the supply concerns? Or yes, anything, any color here would be quite helpful.

Frankly speaking, for us it's really very difficult to provide some color on that. We don't have a direct exposure to the -- to magnesium. It's an indirect, yes, exposure because the problem will be that difficult to do the aluminum alloys. Everybody have -- is in the same situation because we are -- everyone is starting to learn magnesium oxidizing in 3 months. And apparently, yes, after -- it's difficult to have more than 3 months of storage. And we are in the same situation than everybody, but we don't have any special solution to solve this problem that could happen in the future.

Okay, fair enough. Then I was just wondering, moving on to the steel dust segment. What's the EBITDA contribution you will expect for next year in China based on the 2 kilns, if you can give us a...

Well, we are in -- it's -- perhaps we are in the middle of the budgeting process, but today it's especially difficult because this year probably we will have more question marks than in other years. Let's see. We have local -- some local question mark which is to try to forecast which will be the zinc content we will have on average at the end of the year, which is today difficult to forecast, as I explained in one of -- answering one of the previous questions. Second, we will -- we have a very important question mark which is what is going to happen with the TCs, treatment charge. I am starting to read something about that. Some people say that we will see an increase of $10 to $15 per tonne. Some other people are talking about 30. Difficult to say today. And that's why, Olivier, we don't want to provide a guidance until April, more or less. Then on top of that, we will have zinc price, et cetera. That's why we are talking and considering full utilization of one of our plants. We are thinking in an EBITDA range between, let's say, EUR 8 million, EUR 9 million to EUR 14 million per plant. On top of that, we hope to run the Jiangsu plant in the full year at a high load factor of at least, let's say, 80%. And we are thinking to run the Henan plant half year, more or less; at a -- again at a high utilization rate, in that case 70% or something like that. So based on that, you can try to make the calculations.

Yes, okay. And I just wanted to follow up on this: You were talking about the treatment charge. Do you expect that the treatment charge to be applied in China is the domestic treatment charge; or the benchmark, let's say, ex -- [ world, like, ex ] China treatment charge?

We think we will have -- what we expect is to have the -- at the end of the day, the same treatment charge in all the geographies, no matter that in China they use more the spot price, but the conversation we are having with the smelter in China is that to -- we are talking about annual treatment charge for all the contracts.

Okay, that's great. Okay, yes. Then let me just check -- that's been answered, but so on the -- yes, on WOX shipments in Europe -- I mean you evoked it. I just wanted to follow up on the earlier question. Can you help us understand why smelters would maybe -- or why your WOX shipments would not be as impacted by smelters' production cuts as other -- or as zinc mines? Is it -- does it have to do with the fact that you do this -- I mean, that WOX is a powder or is stable, high zinc content? Or does this have to do with the fact that some lines have shipment issues?

Yes. I think this is -- Olivier, I think this is the reason. Our -- as we have explained many times, our -- the combination between zinc concentrates and our WOX is very interesting for -- I mean, for industrial, for technical reasons. And what I can confirm is that, despite the shutdown announcement that they have -- that some smelters have done, they have confirmed to Befesa that they will sell 100% of our production without any [ problem ]. And their reason is that they can be -- they like our product and it's -- our product is very beneficial for the -- for industrial [ reasons ]...

Okay, that's great news. And then the last one would be on your feed. So could you give us maybe an update on where you are here in Europe as well as in [ kiln 1 ] in China? Are you seeing an impact of the EAF production cuts that we've seen? Are you -- where are you in terms of storage? Are you seeing a drawdown of the storage? Or is storage remaining roughly level? I think I have in mind a level of 1 to 2 months of feed is what you typically talk about, yes. Could you give us an update on both China, in [ kiln 1 ]; and Europe?

In Europe especially, the production levels of the steel industry have been really very strong. We have seen an increase of 20 -- 25% or something like that in the third quarter. And based on that, we -- during the shutdown of 2020, we finished with our stocks and -- but we are yet again the normal stock of around 1 month [ or something like that ], that we used to have. And on the other hand, we are -- the levels of deliveries we are receiving are really very high. So what we can forecast for Europe in the first quarter is that we are not going to have any problem of production and we will run our plants at very high utilization rates. And this is -- in China, well, in China the knowledge of the market we have is -- as you can imagine, is smaller than the one we have in Europe, but what we have in front of us is a huge production of steel. So the problem is that -- to be able to close good contracts with the different producers, to choose the steel dust with the best quality of zinc, et cetera, et cetera, but we don't have any problem of quantities, let's say.

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

Just a few more from me as well, please. Firstly, just to clarify on the Jiangsu plant. So you mentioned hot commissioning has finished there. So did I understand correctly that you have started commercial operations at the plant? Or what's the status at the current time?

Just to be precise -- I don't know if we have explained. It's something that we have learned during the process. In China -- and this is different than what we have seen in Europe. When you do -- in Europe, when you do the hot commissioning and the plant -- you don't know when really when the hot commissioning finish and then the commercial operations start. It's a process. In China you do the hot commissioning. Then you need to stop the plant to call the -- let's say, to call the [indiscernible] the environmental authorities give a new review and give you the final -- a very final permit. And look. It's exactly in the moment we are. We have finished the hot commissioning. We are now stopped, waiting to get the final permit that we expect to get in the next days. So we expect November and December to start commercial operations.

Okay, understood. Is there any risk to not receiving that permit or...

No, not really, [ any, any, any ]. It's just tick it in the box. And they -- we have, let's say, [ suffered ] many different reviews, [ visits ], et cetera; and everything is okay, not concerns about it.

Okay, understood. And looking into next year for Jiangsu, maybe just to dig a little bit into what gives you confidence to hit that utilization. [ And I think ] you mentioned 70% to 80% utilization, so can we assume that that's contracted to some extent?

We -- our confidence is very high, Benjamin. I mean I said 70% to 80% just to be prudent. We have the possibility to contract full utilization for the plant. On the other hand, we should -- we must be prudent. We are starting operations. And we preferred to contract only, let's say, 80%, something like that, just to have some room to improve; and to solve problems, technical problems, I mean, of the first year, et cetera. We are now -- we have signed some contracts that -- we have signed some MOUs, memorandum of understanding. And once we get the final permit, we will be in a position to sign the contract, but we -- today we are very confident that we will be able to feed the plant totally.

Okay, understood. And does -- that level of confidence, would that influence your decision as well to hedge volumes potentially into next year? Or is that something you wait to do until you run the plant...

Hedging in China is not only a matter of confidence in the volumes, which is one of the reasons, but at the same time it's we are learning about the hedging market in the country. We are discovering that we cannot use the same [ counter-partners ] that we have in the rest of the world. We -- and so we need to follow the [ Shanghai ] metal exchange or the London Metal Exchange. So we need some time to be able to do a good hedge in China. What we are trying to do, as Wolf comment just previously, is to get our -- let's say, 55% on average of hedging level considering globally and not only China. It's globally. Probably that means that we will increase the volumes in U.S. or in other [ Europe piece ] to offset the volume we are not hedging directly in China.

Okay, understood. Just moving on to energy... [Technical Difficulty]

Benjamin? We have lost the communication.

Operator?

Yes. Benjamin's line just drop out. Let me give the floor to Mr. Jaime Escribano from Banco Santander for the next question.

Okay.

Thank you.

So 2 questions from my side. The first one is more of a broad, big picture question. So with the greenfields in China, American Zinc Recycling potential synergies and the overall legacy business, how do you see the EBITDA trending in -- towards 2022 and 2023? And of course, I'm not asking a commitment in terms of guidance, but maybe on a pro forma basis where do you see the EBITDA trending in the next couple of years is...

Well, clearly we see a growing trend, no matter about that. And I think we will see in the next year clearly double-digit growth. Then to be more precise, please, we -- I think we should wait until April, yes. I mean, in April, I think we will have a much better view regarding different topics. Not only -- normally we wait to get -- to know that -- the TCs, which is a key because, every year, this figure is more important for us as we are increasing our production level. So the impact of the TCs, positive or negative, is higher, but this year, I hope to -- that in April we will have a much better view on the energy prices. Today, there is, well, a bit -- it's very difficult to forecast what -- which will be the energy price for the full year. I think to use the current prices for the full year is too pessimistic, but on the other hand, to say which will be or which could be the average energy price is it's really difficult. So trying to summarize: Clearly positive trend, clearly double-digit trend. I mean, just to be more precise, we need to -- some more time.

Okay, okay, that's one. And my second question is regarding potential M&A or greenfield opportunities. Is there anything out there that could be of your interest in terms of M&A; and also in terms of greenfield, new plants in China, also not only in steel dust but also maybe in salt slags or aluminum or in other countries...

What we can -- I mean what I can say is -- today is that in the M&A side, as in -- as always, we are monitoring what's happening in the world, in our activities. And if we -- there will be any opportunity in front of us, we will try to take the opportunity but nothing special on the top of the table today. And clearly the big opportunities have been done in the past. And regarding greenfield projects, we are -- well, we are working both in the steel dust business to -- as we have commented many times. We don't -- we would like to build more than 2 plants in China. And we are working both in the province we are present today and in new areas in China. And during 2022, we hope we will be able to say something about that in -- but probably more, I mean, in the second part of the year than in the first part. I mean, aluminum, we are working and we are trying to -- and we are looking for opportunities. The pandemic and the restriction to travel to the country are making it extremely difficult. To develop new opportunities without the possibility to be there to talk with the people, talk with authorities is very difficult, but anyway, we are trying to -- we are keeping alive some, let's say, ideas or projects in China in the aluminum side.

We have recovered Benjamin's line.

Yes. Sorry for that. I lost connection. I just had a follow-up on energy costs into next year. I'm not sure if this was answered already, but are there any potential hedges or existing hedges already on the books for next year in terms of energy costs?

Frankly speaking, today, it's very difficult to do it, Benjamin, because taking into account the prices we have today, even if we will get some discount, the price, the hedge price, will be really, really very high. So we are not considering this possibility today. I'm not an expert in energy, but my -- I expect that, in some moment during the 2022, we will see a serious decrease on the energy price.

Okay, but we can assume then it's full spot exposure basically on energy. So there's no existing hedges but -- yes, okay.

Yes.

Yes, yes.

And second, related to that topic. Are there any kind of positive levers that you can pull, other than the obvious commodity prices, to offset inflation into next year? So with regards to operational excellence or other kind of pass-throughs maybe with the collection fee or things like this.

Well, in the case of the salt slags business, we will have some possibility to improve our collection fees to offset at least partially the energy's -- energy cost increase. And on top of that, we have a better hedging in 2022 than in 2021, as you know; commodity prices; and as you said, our operational excellence that -- where we are now in the budget process of, I mean, again. And we will get something from that in that sense.

Okay. And finally, just a clarification point on the guidance for '21. Can you let us know the adjustments in there so that we can quantify the total adjustments on the full year number?

I...

The only adjustment we are including is that our...

8 million for -- this is purely onetime acquisition costs for the lawyers, investment banking fees, et cetera. Other than that, no.

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 clarification. 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.