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

Good day, and welcome to the Befesa S.A. 2022 Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Rafael Perez. Please go ahead, sir.

Good morning, and welcome to the first quarter 2022 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 Befesa. Javier Molina will start with an executive summary of the first quarter covering the main highlights of the period. Then Wolf will review the first quarter financials in total and by business unit as well as cash flow. Javier will close the presentation providing an update on our growth plans as well as the details of the guidance for 2022. 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 first quarter 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, everybody. The first quarter of 2022 has been another good quarter for Befesa. Despite the challenging macroeconomic environment of the -- and the volatility in the commodity price, we have delivered another record quarter, supported by strong volumes and high metal prices, which have more than offset the high inflation especially in energy prices in Europe. We are living in a very challenging macroeconomic environment. The war in Ukraine is creating great instability in the global economy. In Befesa, we don't have any direct operator, nor customers in Ukraine nor Russia. However, we are very concerned about the developing situation there. And the long-term consequence [indiscernible] today. International ban to the import of Russia in commodities like gold, steel, oil and gas is also putting pressure on European commodities and alternative sources of supply are being used. As a consequence of this, we are seeing great instability in the energy market in Europe, with prices of the electricity and natural gas achieving all-time high levels. This is also impacting the metal prices which are reaching as well all time high levels. Additionally, the global pandemic caused by the COVID-19 which started more than 2 years ago has not completely finished and is creating disruptions in the global supply chains across multiple industries. In China, the government is following its zero-COVID strategy which is creating a very challenging situation in the business as shutdowns are happening frequently. This is making very difficult to develop commercial activities with new customers as traveling around the country is heavily restricted. Also we are starting to see some temporary decrease in the deliveries of steel dust from our customers. We are monitoring the situation to see how it evolves over the coming weeks. These 2 factors, the war in Ukraine and the COVID situation in Asia are causing great uncertainty in the global economy. And concerns about a potential slowdown of the economy are starting to appear, which could eventually affect also the industries in the value chain of Befesa and ultimately our volumes in an economic crisis scenario. In Befesa, we are facing this challenging environment positively. And overall we are managing well all these difficulties across our businesses. Befesa today is a much more diversified business than 1 year ago, with a significant part of our earnings coming from market outside of Europe, mainly North America and Asia. Nevertheless, these challenges are making the management of the day-to-day business especially difficult. In this environment, during the first quarter of 2022, we have achieved a total EBITDA of EUR 61 million, which represent an increase of 25% over the same period of last year. The main driver for this earnings growth has been a combination of a strong increase in volume combined with positive metal price developments through the quarter. Volume of steel dust recycled increased by 86%, driven by the contribution of the U.S. operations and the start of the first plant in China as well and as a strong utilization in the rest of the markets where we operate, reaching nearly 90% of load factor. In the case of aluminum salt slag, the volume has decreased 16%, driven by pressure on the automotive industry in Europe. Average zinc price in the first quarter of this year was about EUR 3,300 per tonne, which represents an increase of more than 45% compared to the previous year. Similarly, average aluminum price in the first quarter was about EUR 2,600 per tonne, which is more than 50%. Regarding treatment charge for zinc, the benchmark has been settled at $230 per tonne, with a referring price of EUR 3,800 on escalators, which represents an increase of 45% year-on-year. The market environment in the main industries where we operate have also seen a high level of volatility in the activities during the first quarter, driven by the challenging macroeconomic environment. As such, the production of steel in Europe in the first quarter has decreased 4% compared to the first quarter of the previous year. While in North America it has remained almost flat and in China has decreased 10% in the period. Some of these industries in Europe continue to experience many challenges caused by the semiconductor situation as well as the war in Ukraine, which is creating reductions in the production of many auto companies. Car registrations in Europe were down by 12% during the first quarter with a sharp decrease of 20% in March compared to the previous year. The generation of cash in our company during the first quarter has been very strong, and this has enabled us to finish the quarter with a leverage of 2.1x. In China, the plant in Jiangsu has been working at a good capacity utilization during the first quarter. The plant is operating well. And we have signed contracts with steelmakers to secure the volume of raw material for this year. However, the zero-COVID strategy of the government is creating a challenging situation. And there is uncertainty about the development over the coming weeks and months. And we are starting to see a decrease in the deliveries of steel dust from customers as the transportation and logistics in the country are fairly impacted. We are monitoring the situation closely and see the result. In Henan, we have started the commissioning and ramp-up of the plant. And we expect to run commercial operations during the second half of the year. Although we are working on constructing the steel dust volume, again, the COVID situation is making this very challenging and may put some delay in the ramp-up of the plant. On the positive side, the governmental authorities are committed to enforcing and fulfilling the environmental regulations with the steelmakers seeing recycling as a real solution. In North America, the integration into Befesa is developing well across all fronts. The team is working well with the rest of the organization. And we can confirm that we will capture the synergies that we announced of $20 million over this and next year. We have developed a detailed action plan in order to capture all the synergies on the operational area mainly, but also in the general expenses and commercial fees. Regarding the outlook of this year 2022, despite the uncertainty in the global economy, we expect a strong growth driven by the volume contribution for the U.S. and China operation, supported by favorable metal price environment that will more than offset the high energy prices. Based on this, we expect full year 2022 EBITDA to be between EUR 220 million and EUR 270 million, which means between 11% to 35% of growth year-on-year. At the lower part of the guidance, we still expect to achieve at least double-digit growth while the high end of the guidance we'll deliver a strong growth of 35%. I will provide more details on the full year guidance later in the presentation. Now, Wolf Lehmann will explain the financials in more detail.

Thank you, Javier. Please turn to Page 6, our first quarter 2022 consolidated financial highlights. As explained by Javier, Befesa delivered record earnings in first quarter 2022 with EUR 61.1 million EBITDA, up 25.1% or EUR 12.2 million year-over-year versus first quarter last year at EUR 48.8 million. Overall, our growth initiatives are delivering results. And even in this volatile environment, we're able to offset inflationary pressures, mainly energy through higher price. Reviewing the main drivers of the year-over-year EUR 12 million EBITDA improvement in more detail. On volume, overall, approximately EUR 13 million net positive volume impact, EUR 14 million positive from the higher steel dust recycling throughput including the positive contribution from the acquired U.S. zinc operations as well as our China operations. A minor EUR 1 million negative impact from lower secondary aluminum alloys, salt slags and SPL volumes, mainly driven by the current market volatility impacting the European aluminum industry. On price, the overall EUR 16 million positive year-over-year impact with about EUR 12 million from steel dust and around EUR 4 million from our aluminum salt slags. I will explain in more detail on the following pages. On cost/other, about EUR 16 million negative in the cost/other level reflects the higher inflation, primarily energy cost, resulting from the current energy price volatility, which is in balance with higher prices. In summary, adjusted EBITDA is at our all-time high of EUR 61 million and a strong 23% adjusted EBITDA margin. Net profit increased by about 9% year-over-year to EUR 27 million in first quarter 2022 equal to EUR 0.67 earnings per share based on the full new post-U.S. acquisition 40 million shares outstanding. We also improved our cash to a new high level of EUR 237 million and reduced our leverage further to 2.13x leverage. I'll explain more on Page 9. Note in this appendix, as always, of this presentation, you will find various financial and operational data tables with quarterly, annual and multiyear views for your reference. Turning to Page 7. The steel dust recycling services results. Steel dust recycling services continued to perform strongly and delivered EUR 54.8 million adjusted EBITDA in the first quarter 2022, up EUR 18.3 million or 50.1% year-over-year, representing the highest quarterly EBITDA on record. The corresponding adjusted EBITDA margin amounted to a strong 35%. Overall, the steel dust growth initiatives are delivering results. And even in this volatile environment, we are able to more than offset inflationary pressures, mainly energy, through higher prices. The volume level was positive by around EUR 14 million year-over-year impact. As explained, this includes the positive contribution from the U.S. operations, the acquired AZR business in China. The net price level was positive by around EUR 12 million year-over-year with main price components being EUR 12 million higher zinc LME prices, up 46% year-over-year to EUR 3,337 per tonne, EUR 4 million positive, higher zinc hedging prices, EUR 2,286 per tonne in the first quarter '22 versus EUR 2,201 per tonne in the first quarter in the previous year. This was partially offset by a negative impact of EUR 4 million, driven by the latest higher zinc treatment charges, which were considered at $230 per tonne retroactively from the 1st of January of this year versus $159 per tonne in the prior year. Overall, the EUR 12 million year-over-year impact from the price lever more than offset the approximately EUR 8 million year-over-year impact from the higher inflation, mainly energy costs captured under the cost/other lever. Looking at selected operational metrics on the lower part of the Page 7. Volume for electric arc furnace steel dust throughput increased by 86% or 156,000 tonne year-over-year to 337,000 tonnes, including the contribution from the acquired U.S. recycling plant as well as throughput at our first China plant in Jiangsu. Overall, plant utilization continued at strong pre-pandemic levels of 88% of the extended 1,555,000 tonnes installed annual recycling capacity, which includes approximately 620,000 annual capacity contributed by the acquired U.S. recycling assets as well as the first 110,000 tonne at our first plant at China. Summarizing. A, growth initiatives are delivering; and B, higher prices are more than offsetting inflationary pressures. Steel dust recycling services is delivering record results. Going now to Page 8, the results of our Aluminum Salt Slags Recycling Services segment. Aluminum Salt Slags Recycling Services delivered EUR 7.6 million EBITDA in first quarter 2022, down EUR 4.7 million or 38.2% year-over-year. The year-over-year EBITDA development was mainly impacted by the current market/volume, energy and base metal price volatility. Please remember that our aluminum salt slags recycling operations are 100% European focused. The volume lever was negative by about EUR 1 million EBITDA effect year-over-year. This was driven by 16% lower salt slags and spent pot lining treated as well as 18% lower production of aluminum alloys, driven by the current lower European aluminum industry environment. Nevertheless, even under the current volatile market environment, we managed to run our plants overall at around 80% utilization. The price level was positive, about EUR 4 million with aluminum alloy free Metal Bulletin market prices showing a 33% year-over-year increase as well as better aluminum metal margins. Nevertheless, the cost/other lever was around EUR 8 million EBITDA effect year-over-year was driven by the higher inflation energy cost trends with particularly high gas prices in Europe. As a result, in this first quarter, the inflation was higher than the achieved metal price increase in the aluminum business. Turning to Page 9, the cash flow, net debt and leverage results. On the EBITDA to total cash flow bridge; starting with EUR 61.1 million adjusted EBITDA on the left and walking to the right. Working capital was up by EUR 23.5 million year-over-year, very much driven by the usual first quarter seasonality and timing impact. The fourth quarter last year was front-end loaded with a strong first month, October, and the first quarter this year, more back-end loaded with a strong third month, March, as usual. Interests at EUR 7.3 million, as expected, with the first of the 2 biannual terms of the interest payments made in January. Taxes at EUR 4.6 million also as expected, resulting in an operating cash flow of EUR 25.7 million in the first quarter 2022. CapEx wise, in the first quarter, we spent EUR 9.4 million on regular maintenance, productivity, including the U.S. compliance CapEx in line with our annual guidance of EUR 40 million to EUR 45 million and EUR 16.4 million growth CapEx, mainly dedicated to our plant at Henan, which is now completed and currently commissioned. Together, total CapEx of EUR 25.8 million partially funded through approximately EUR 13 million China local loans for our Henan plant. After funding working capital, interests, taxes and CapEx, total cash flow amounted to positive EUR 13 million in first quarter. Hence, our cash on hand improved to EUR 237 million, a new high for Befesa, up from EUR 224 million at year-end '21. The cash on hand of EUR 237 million together with our entirely undrawn EUR 75 million revolving credit line provides Befesa with a strong liquidity of above EUR 300 million. The EUR 222.6 million last 12 months rolling EBITDA incorporates full 12 months rolling months of the U.S. operations on a pro forma basis. The EUR 473.5 million net debt with the EUR 222.6 million last 12 months adjusted EBITDA results in a 2.13 net leverage at Q1 closing, improving from 2.16 at year-end '21. Turning to Page 10 on hedging. In first quarter 2022, we continued our hedging rigor and extended our zinc hedge book further up to and including January 2025, thus with approximately 3 years of hedges on the books. Befesa's current hedging volume run rate is to hedge around 38,000 tonnes of zinc output per quarter, around 152,000 tonnes per year. Overall, considering the combined global hedge book, Europe, Korea, U.S. operations, the year 2022 is hedged at around EUR 2,275 per tonne sold forward prices, the year 2023 at around EUR 2,375 per tonne and the year 2024 at around EUR 2,425 per tonne. Please note that there is an approximately EUR 40 million earnings or EBITDA growth already locked in, in the hedge book. 2021 last year at approximately EUR 2,150 per tonne and 2024 at approximately EUR 2,425 per tonne is a EUR 275 per tonne difference. Multiply with our approximately 150,000 tonne hedging run rate is more than EUR 40 million higher price and earnings growth locked in over the next year. The hedging approach remains entirely unchanged. We hedged 1 to 3 years out. We target 60% to 75% of our zinc equivalent volume and Befesa provides no collateral. The risk is entirely transferred to our hedging price. Referring to our zinc blended prices, the lower left section on Page 10. Overall, the zinc blended prices in first quarter '22 averaged EUR 2,533 per tonne, up 13% or EUR 296 per tonne year-over-year. Summarizing the financial section before we turn to the growth and outlook, 3 points: One, Befesa delivered in the first quarter '22 the highest quarterly earnings in the history of the company at EUR 61 million adjusted EBITDA, up 25% over last year despite the current volatile market environment. Two, our financial backbone is strong. We extended our hedges out to January 2025. Our capital structure is efficient and long term, resulting in a stable and strong liquidity. We entered this challenging 2022 environment in the strongest shape we've ever been. Three, this strong backbone serves us really well; A, to fund growth in China and the U.S. and B, maintain a stable dividend payout at the upper end of Befesa's dividend payout ratio to share the success with our shareholders. Now back to Javier.

Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for this year. As I said before, 2022 will be another year of strong growth for Befesa, driven by a strong volume growth from contribution of the U.S. and China and supported by a favorable metal price environment that will more than offset the high energy prices. From a volume point of view, despite the instability in the markets, we expect a strong growth on the steel dust volume, driving by a full year of consolidation of our operation in North America as well as the start of the operation of the 2 plants in China. In North America, as I explained, the integration of AZR into Befesa is developing well across all fronts. This year, we will benefit from the full year of operations, which will represent a significant EBITDA growth, driven by better prices and the contribution of part of the synergies. This will be partially offset by the slightly lower volume of steel dust compared to the previous year, which will recover over the next years. In China, at Jiangsu Province, we have been operating the plants since the beginning of the year. And despite all the difficulties that the zero-COVID strategy of the Chinese government is implementing, we continue to expect a high plant capacity utilization between 80% to 90% for the full year. However, given the current challenging situation in China, we want to be prudent about the overall outlook for the year in China. Our second plant in Henan is developing as planned. The construction is completed. And we have started the commissioning of the plant. We expect to start commercial operations during the summer and run the plant at a good utilization until the end of the year. As explained, the COVID is creating a challenging situation, which is too soon to quantify at the moment and which may delay the ramp-up of the plant. In the traditional business of Befesa, we expect similar dust volume than in the previous year. So all in all, we expect a strong growth and strong volume growth on steel dust recycling. From the market point of view, we expect that the volume of our steel dust business will be supported by a strong electric arc furnace steel production industry in Europe, USA and China. We expect the current level of the steel production to be maintained throughout the rates of 2022. In the aluminum solid slags and secondary business, for the full year, we expect similar volume than last year, despite the challenging situation that the auto industry is suffering in Europe. However, if the problems of the semiconductor shortage is not fixed and supply chain's problem with oil components continues, we may continue to see pressure on the volumes for the rest of the year. Moving now to the price environment. As we are seeing the challenging macroeconomic environment and higher energy prices are driving up metal prices for steel and aluminum. We believe that as long as energy price will stay high, so will metal price as well. There are 2 more factors on the price side that affect earnings, 1 positive, which is hedging and 1 negative, which is treatment charge. On hedging, the level of price of the hedge for this year 2022 is EUR 125 higher than last year. On the other hand, the benchmark treatment charge for zinc has been settled at EUR 230 per tonne. This increase of 45% is negative for Befesa and will partially offset Befesa's zinc hedging price as well as higher zinc LME price during the year. We expect inflation to remain high for the most of the year, especially on energy prices in Europe for natural gas and LXPs. This will increase our cost base, especially in our aluminum business, where around 30% of the cost is energy. Additionally, we also expect transportation cost to increase in the year as a consequence of inflation. Based on this, we expect full year 2022 EBITDA to be between EUR 220 million and EUR 270 million, which means between 11% to 35% of growth year-on-year. The wide range of the guidance is driven by the high volatility in the markets, volumes, metal prices as well as inflation, especially in the energy prices. At the lower part of the guidance, we still expect to achieve at least double-digit growth of 11%. This scenario considers a slowdown in the global economic through 2022 as a consequence of a prolonged challenging macroeconomic environment that would impact the main industries where we operate, creating supply chain disruptions and decreases in production in the steel and automotive industries combined with high energy prices. On the other hand, at the high end of the guidance, we will deliver a strong growth of around 35% on EBITDA. This external considered a strong volume throughout the year, supported by high metal prices in line with the ones we are seeing right now. In this scenario, we expect moderate impact from energy prices and inflation and a strong performance on the underlying industries that impact Befesa, like steel production and automotive translated in high capacity utilization of our plants for the year. I would like to remark that this current conditions are maintained during the year, we will aim up in the higher part of the guidance. We expect total CapEx in the year to be around EUR 55 million to EUR 65 million, including regular maintenance and growth. On dividend, we will continue to carefully manage dividend stability. For 2022, we want to propose a dividend distribution of EUR 50 million or EUR 1.25 per share, which would basically mean distributing 50% of the net profit of last year. This will result in unexpected leverage between 1.75x and 2x by the end of the year. Finally, on ESG, in Befesa, we are very proud to have actively contributed to the circular economy for more than 3 decades by recycling more hazardous residues for our customers year-after-year. We produce more valuable new materials and prevent the structures or region resources as we keep delivering attractive returns for our shareholders. In the next ESG report, which will be published during the second quarter of this year, we will include a detailed chapter about climate change and how Befesa is committed to it. Befesa clearly avoids CO2 emissions being an alternative to mining finished resources from the herd. Nevertheless, we are going further by defining a plan to reduce our CO2 emissions by 20% by 2030 with the vision of achieving net zero by 2050. Thank you.

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

[Operator Instructions] We have our first question from Mr. Sandeep Peety at Morgan Stanley.

I have 3 questions. I'll take one at a time. Firstly, how much EBITDA was generated from the U.S. and China in Q1? And what has baked been in your guidance? And can you clarify if China plant is fully exposed to spot prices? That's the first question.

Thank you very much. Well, we are not going to provide EBITDA by regions. You should understand that we managed our business in a global basis. So we move raw material from one region to other, et cetera, et cetera. So we prefer to provide only information on a global basis anyway. I can confirm that the generation of EBITDA in U.S. has been strong and positive, in line with our -- or even better with our expectations. In China, we are -- the Jiangsu plant start operations in January, at the end of December. So that has been the first quarter of operations. I can confirm that we are achieving positive results. But let me highlight that managing of the plant during this first quarter has been extremely difficult by the -- because of the COVID restrictions. We are really very happy with our Chinese operations. We are fulfilling our expectation in the construction side, in the relation with our customers and the support we are getting from the Chinese authorities. Frankly speaking, the only problem we are facing is the COVID and the way that the Chinese authorities are managing the COVID. These are creating big problems in the daily operations. But well, we hope that, that will be only a temporary situation. And later on, we will be able to restart on normal operations. Your second question, please?

Yes. So -- and just one more question on that or clarification. And can you clarify if China plant is fully exposed to spot zinc prices?

Yes, yes. Our hedging philosophy is to hedge between 65% to 70% of our global production again. So it's our first year of operations in China. We are learning about the -- China is a different market. They don't follow LME prices. They use Shanghai. They have their own price system in Shanghai, which has a very good correlation with the LME, but it's not a perfect correlation. And at the same time, we are starting to conversation with the local banks to implement our hedging policy. But we are not in hurry to do that because at the end, we manage the -- our businesses, as I said before in a global basis. And what we are doing is to increment the proportion of seeing that we are hedging in other geographies. So at the end, as Wolf explained before, we get around or near 70% of our total production.

Okay. And the second question, so in the U.S. operations, can you please let us know out of the EUR 20 million targeted synergies in the next 2 years, how much has been achieved so far during Q1?

That is a very difficult question. It's to achieve synergies is an ongoing process. As you can imagine, most of the process are -- or the synergies are process improvement. So it's a process that we have started some months ago. And we are -- and every day, we start to see the progress. I think the important point is that I can confirm that we are going to achieve without any doubt, the EUR 20 million between this year and next year. Likely, the proportion will not be 50-50 because we need time to get all the synergies. So this year, we will achieve between 30% to 40% and then the rest in -- will be achieved in the next year. But to define -- to measure the synergies in a monthly basis is really difficult.

Okay. That's very clear. And the last question on secondary aluminum. That operation seems to be the hardest hit from energy cost. So if we assume that spot energy costs remain for the entire year, what sort of profitability are you expecting from the operation?

Okay. As you can see in the presentation that we have published in the steel dust recycling business, we have been able to save 100% and to increase our profitability. And -- but this is not the case in the secondary aluminum business. Let me remark that we are able to do -- we have been able to do that basically in the salt slags recycling business, but not in the secondary aluminum. So at the end, we have been the first quarter below our expectations. And if the energy prices remains at the very, very high level we have today, we will be at the end of the year below the -- our budgeted figures, which is very important to understand that this business represents already around 20% of our earnings. And all in all and taking in account that in the steel dust recycling business, we will more than offset the energy cost inflation. So the overall view will be positive anyway.

Our next question comes from Jaime Escribano of Banco Santander.

So my questions are the following: regarding the steel dust volumes, could you give us more or less or have an idea how has Europe, Turkey and Korea performed just -- or to have kind of like-for-like to understand how the business is performing there? And also, I wanted to ask you regarding steel dust also there is a 31% conversion from still dust to WOX. I would like to understand what is driving this, if it's -- American in recycling and China maybe converting at a lower rate than Europe, Turkey or Korea? Or if there is anything if there is anything else. And regarding aluminum volumes, maybe to understand the decline of around 18%; is it related to the auto industry fundamentally? And then, regarding depreciation, which is growing around 81% to EUR 17 million, I understand this is because of the new acquisitions. But it looks high if you look to the sales contribution, the volumes contribution of the new businesses in China and in the U.S. But just to understand if there is anything else on that?

Okay. Thank you, Jaime. A lot of questions. I don't know and we are going to remember all of them, but please start. The first one, the steel dust volumes in the classic, in our classic markets. Well, the performance has been very, very positive. Basically slightly above the 2021 figures for the first quarter, so strong figures. And we had very high utilization factors in the 3 geographies in the 3, let's say, classic geographies, Europe, Turkey and South Korea. Frankly speaking, we are not seeing problems in the supply of steel dust in our classics markets. And we start -- perhaps the year started with some doubts about that. But now we can confirm that the production of steel from our customer is being strong and positive. So we don't -- we have had a very good quarter. And we expect to have a very good quarter as well. The second question was related to the proportion in the convention of...

Yes, I can take that one, Jaime. So I think what you're referring to Jaime is if I go to Page 7 on the steel dust recycling page. If you look at electric arc furnace throughput, we're up 86%. And if you look at WOX oxide, we're up 55%. So it's nothing unusual. We have just built some inventory. This is just to do with a couple of containers that are still in the harbor and haven't fully made the wells oxide cut off which you have every now and then in the quarters, but nothing special. We continue to be entirely sold out on wells oxide, so it's purely timing. And I can also take the depreciation amortization question and then hand it back to Javier. On depreciation and amortization, exactly as you described, it's the contribution of the U.S. that is now in our numbers and also those plans come with some depreciation and amortization.

And the last question, I think, was related with the volume in secondary aluminum. And yes, the reason of the decrease we have had in the first quarter figure has been because the problems in the automotive industry in Europe. Related first with the microchips shortage; and second, with some other supply problems with other companies of the industrial related with the war in Ukraine. And that has been the reason to -- we have seen, let's say, weak automotive market in Europe and weak automotive market in Asia as well.

Okay. And one final question if I may, regarding CapEx. You guided maintenance CapEx of between EUR 40 million to EUR 45 million if I am not wrong. I just want to understand if this is the maintenance CapEx that we should model in following years? Or is this just for 2022, and then it will go down or up or just to understand that.

Good question, Jaime. I think in this year, EUR 40 million, EUR 45 million that is correct. Maintenance and maintenance, remember, Jaime, in a broader sense. So that includes productivity, compliance, et cetera. So if you want to be conservative EUR 40 million to EUR 45 million is a good estimate. Obviously, what's also included in this year is what Javier mentioned, our funding the U.S. synergies. So -- but to be conservative, EUR 40 million to EUR 45 million is good, is a good estimate.

Yes. I would say to -- I would add to what Wolf has said that once we have, let's say, renew our plants in U.S. to our standard levels, perhaps we can reduce slightly the figure. But for the -- as Wolf said, for the following years, it's a good figure.

Our next question comes from Juan Rodriguez of Kepler.

I have 2 on my side, if I may. The first is on the EBITDA to net income bridge. More specifically, can you help us walk through the DNA the financial cost and the tax changes, so that would be the first one. And the second one is on the guidance bridge. More specifically, you signaled that if things remain within the current conditions, you will reach the top of the range. But if we extrapolate Q1 performance, we will reach at the middle. So can you explain the difference here?

Let me start with the guidance question. Yes. I have said that if the current condition remains for the full year, we will finish in the very upper part of the guidance. And if you multiply the first quarter by 4, we'll be in the middle of the range. The main difference is related with the steel prices. The steel prices on average in the first quarter has been at the levels of EUR 3,300, sorry. And today, we are around EUR 4,000. So this -- a strong difference of EUR 700 per tonne or $700 per tonne at the end, as we can explain clearly the difference. Okay?

Great. And then, if you want, let me try, hopefully, I'll answer the right question here. But in the first quarter 2022, if you start with adjusted EBITDA, we had EUR 61.1 million adjusted EBITDA. And the reported EBITDA was EUR 59.9 million. There was only a minor EUR 1 million roughly adjustment for still acquisition-related costs. Depreciation and amortization EUR 17 million, again, that's up from first quarter last year, first quarter last year was roughly EUR 9.5 million. This is because now the U.S. plants are part of our operations. So you have the corresponding higher depreciation and amortization, which gets you to an adjusted EBIT of around EUR 44 million, reported EBIT of roughly EUR 43 million. And then, you have approximately EUR 6.9 million of financing costs, which remember now the gross debt has increased compared to last year by roughly EUR 100 million because part of funding the acquisition in the U.S. was to extend or amend our Terminal B by EUR 100 million and then also slightly higher China local loans. And then, corporate income tax, nothing special, roughly EUR 7.5 million. And well, that's part of the regular EBITDA to net income and EBIT loss, nothing unusual in there, I would say.

Our next question comes from Anis Zgaya of ODDO BHF. [Operator Instructions] We'll take our next question from Mr. Michael Hoffman of Stifel.

Could we talk about the guidance below the mid and the high and frame it against how you report your EBITDA by segment. What's the expectation across electric arc furnace dust low, mid, high and then the aluminum business is collectively low, mid, high to get your guidance range.

Michael, a difficult question because it's difficult to fix because there are many variables which are affecting the guideline. It's not -- on one side, we have first 2 different business steel dust and aluminum and salt slags at the end of the day, with different trends. And then, the volumes on the different businesses can be different. On the other -- on the second, we have, let's say, inflation cost, which we don't know how we continue, which will be during the rest of the year. Third, we have commodity prices that -- and then we have again think other prices. And again, we have all the uncertainty, which has been created by 2 more factors; the war in Europe in the begum of Ukraine and the COVID situation in China. So in the low -- in the very low part of the range, we have forecast, let me say a very pessimistic scenario, where we expect volume decrease clearly because there won't because the COVID in China sector with high energy prices and not very optimistic price evolution in the commodity side. On the very high part of the range, we are not forecasting problems in volume. So we -- that means that we would expect high volumes and so high utilization rates in all the regions and high commodity prices in-line with the prices we are having today. And well, in the middle, there are many different possibilities. I don't know if I have in...

Let me tease this out a little bit. So at the high end, you mentioned that if we're at EUR 4,000 that alone would get us to the high end because the zinc business would take us there. And I don't need anything -- what I'm -- I think I'm hearing, I don't need anything to get better in secondary aluminum. Secondary aluminum could stay kind of where it is, salt slags stay where it is, but the high end would be driven by $4,000. At the middle, I'm assuming it's $3,300 and the same assumptions for the aluminum business is they don't have to get better. The low end, everything goes down. The commodity price comes down and probably aluminum gets worse. Is that the right way to think about it?

Yes, I think so. This is a good -- is going to think about it. It's a very high part, okay, you have explained very well.

Okay. That helps a lot. And then, could you help us a little bit with the cadence of the business? Historically, yours maintenance done in 2 and 3Q and I get a little bit of a dip in the activity, assuming prices are stable, given where the zinc prices, I'm assuming we're on a cadence where 2Q clearly is set up already to be better than 1Q. If everything stays right where it is right now, I'm going to have a better 2Q than I did 1Q?

Well, it -- that will depend on the -- this year, perhaps it's more difficult than the normal year because we have to consider the volumes. The volumes will be affected by the different shutdown in the plants. Now with all the geographies and all the plants we have, all the quarters will be more stable than in the past, where the concentration of shutdowns in Europe was higher now with -- in the current situation, we will have more stability. And then, this is one item that will affect the stability. Volumes affected by the shutdown and then by the production levels in the industry and then prices as you can imagine. So I hope that, that second quarter would be better than the first quarter because we are enjoying a better price situation. And we are having strong volumes and let's see what happen in the following quarters.

Okay. And then I appreciate why we wouldn't segment by country. Just so we understand what your expectation for the run rate given this is the full -- first full year of U.S. Are you still expecting the business to ramp to about EUR 40 million without getting too specific about commodity prices and things like that, that's sort of what you've framed it as last year coming into this year, is that still about the way to think about it, it's about EUR 40 million?

I think it's a good estimation for the full year. In the first quarter, I can confirm that we have been even better than these figures because -- but well, let's see what's happen in the full year with the shutdowns, volumes, prices, et cetera. And for us, it's difficult to provide this segmentation. I understand you would prefer to get this information. But we run our business on a global basis and to entering this segmentation will create a lot of problem for us and would provide a lot of information to our competitors.

Yes. Fair enough. But it would just -- because it's the first full year, I was just trying to understand the scale of the lift versus partially owned in '21, and that's that helps, framing it around EUR 40 helped, okay. And then if the Russian Ukrainian situation doesn't find a resolution, what part of the world do you think makes up the difference for like steel production that's being subjected to sanctions and what have you? Where do you think that incremental activity comes from to make up for their 30-some million tonnes that gets exported?

Well, I do know that you have seen the information we have provided about the production of steel in the first quarter of the year. What we have seen has been a stable market in U.S. a decrease of around 4% in Europe that I don't know, Rafael, do we have the figures of Turkey. I think it has been slightly negative as well, slightly negative as well, a 10% decrease in China. So at the end, the only market that has been able to maintain their levels has been the North America. The rest of the world is suffering some decrease in the production of the first quarter. Well, let's see what's happen in the following months because I don't know that this has been only affected by the Ukrainian war or there are other different reasons to justify or to explain this situation. Frankly speaking, what we can say is that despite the reduction in the different markets, we are not suffering any problems of supply of raw material. We are -- we have been able to get all the raw material we need. We don't have still the split between arc furnace and electric arc furnace production. But for me, I wouldn't be surprised if the decrease in the electrical arc furnace is much lower than in the total steel production.

And then last one for me. The China availability of dust, is that an issue of being able to move it from A to B to get to you or it's not being produced because of forced shutdowns?

Well, the reason is the COVID, totally COVID restrictions, Michael. Last Friday in our weekly committee with our Chinese people, the information we got about the COVID, the way they are managing COVID is amazing. Even in the same province, in the same province, for example, in Jiangsu, if you move from a municipality to other municipality, you need to do a quarantine of 3 days. So at the end of the day, the transportation of goods is impossible. So we have been -- last week, we shut-down our work plant because we cannot transport. We cannot get raw material, we cannot sell WOX. So today, I can say that Shanghai and the province around Shanghai are practically closed lockdown and that is the reason.

But that again -- a couple more industry, no?

Yes. No, I get that. So -- but the important message is it's not a supply issue. If you just can't get it moved from A to B because of the restrictions.

The dust is there. It's just getting your hands on it. Okay. That's what I just needed to understand.

Our last question comes from Lasse Stueben of Berenberg.

So just one final question for me. I wanted to follow up just on that China point. I mean, based on sort of your comments that you also said in your -- and sort of your initial presentation that you still expect very high levels of utilization in your Jiangsu facility. So I'm just wondering what gives you that confidence given the difficulties in the logistics you just described, it would be good to just get some additional comfort on that comment earlier.

I'd like to comment for the question. We just started the year, well, first of all, I would like to highlight that we have secured raw material of around 100,000 tonnes of steel dust to feed the Jiangsu plant, so full capacity. And we have started the year at a very high low factor because the flow of the raw material was going without any problem, et cetera. We are starting to face in the problems in basically in March. March has been after the New Year break when we started the problem. And that has been the reason to don't achieve quite full utilization of the plant because we started at that level. And now let's see. Now as I have said before, before the plant is shut down, we expect that, that will be only a question of days or maximum weeks. But as you can imagine, it's something that is totally out of our control. We cannot do anything. And on the other hand, we don't know which will be the decisions of the Chinese authorities. We hope that the situation will not be very long back. But frankly speaking, we don't know. It's the only problem. I would like to highlight again that we feel, I would say, extremely positive with our Chinese operations. The construction of the plants, even during the difficult period of the COVID has been very good. We have finished the plant basically on time with only small deviations on time because the COVID back and nothing dramatic. We have been able to secure or to sign contract with the steelmakers in the regions. We are having a strong support from the regulation and from the Chinese authorities that clearly are managing in a very serious way the environmental aspect. And so that is extremely positive for us because that, at the end, a strict application of the marital regulation is good for the, let's say, serious players, and we are a very serious one. So we are -- the only problem we are facing in China is the COVID. And for us it has been a surprise, the way that the Chinese authorities are managing, especially this second wave of the COVID, let's see how it evolves. But all in all, in summary, we think that -- we feel very positive with our Chinese operation. And with our Chinese future, we have -- the problem is that now we cannot travel. And without travel, without the possibility to travel, it is difficult to develop new projects. But we have in our portfolio in China several new opportunities in other areas et cetera. So all in all, a positive view.

Okay, great. So I guess is it fair to assume that -- I mean, given how regional the lockdowns are at the moment for the time being that it doesn't really impact your mid to longer-term ambitions with respect to other plants in other provinces, right?

At the moment, we feel we still are very positive with our Chinese operations and with the future in China.

Okay, great. And then one final one; I mean do you -- I know this has been asked previously in other calls. But do you have any idea after sort of the first 3 to 4 months of the quality of the steel dust in China? Or is it still a bit too early to say?

Well, we are running a lot about it. What we see in China is perhaps more variation between one customers and other. Now we have -- we do have dust with more than 30% -- 37% it's in content, which is very positive for us. But we have -- we find as well that with less than 15%. So we think that with more time and the time will support an improvement in the quality of the dust because today, some electrical arc furnace steelmakers are not using 100% scrap, but they will use clearly in the future. So today, the quality is -- the average figures we are achieving are okay, but below the European levels. But we feel positive that in the medium term, the quality of the Chinese that will improve a lot.

And our final question comes from Anis Zgaya of ODDO.

So sorry, I had the problem with my mic last time. So I have a question about the secondary aluminum business, which I think is the main disappointment of the Q1 results. The impact of the cost of energy was much stronger than expected, at least much stronger than I expected in the quarter. I thought that it would be more than compensated by the strong rise in prices as prices are correlated to energy prices, and it was not the case. Why it was not the case there? And secondly, there's also a significant volume impact during the quarter. Just to be sure on your guidance, when you talk about uncertainty linked to volumes, are you pointing specifically to this business? And my second question is on steel dust. And as far as steel dust is concerned, when you cover 80% of the planned zinc volumes, I just want to know what could happen if you are not able to meet the volumes you are supposed to deliver because of lower volumes of steel dust? Do you have to pay any compensation to your clients just to know? And my third one is in merchant exposure in China. And so, I wasn't able to hear the exact number. I think it was 70%. That's all for me.

First, the energy cost is very high in -- especially in Europe, this -- when we talk about energy price inflation, we are talking expect a European issue and this has not the case in North America or neighbors in South Korea or in China or the affecting those -- has been clearly much more smaller than Europe. The problem is basically a European progress. And then what's happened with our secondary aluminum business in comparison, for example, with our steel dust business. First 100% of our operations are in Europe and the weight of the energy in the total cost of the aluminum business is higher than the steel dust business. That's why the impact of the high energy costs in Europe had impacted more in our other division than in the steel division. Regarding -- in the guidance, well, in the range, we are providing -- we are considering this high energy costs in Europe for our aluminum business. And as we answered in one of the previous questions of your -- one of your colleagues, if we -- if steel prices stay at the level we are having today, we will be able to be in the upper part of the range, even with this high energy impact in the aluminum business. Okay. And the second question, I think is if we have -- we could have problems of penalties, et cetera, in our steel dust business, not at all. We are not going to have any problem of productions. The only -- the only problem we could have is that if we get less volume of raw material I mean of steel dust. But that will not be our problem, that will be a problem of our -- of the steelmakers. So we will be clearly able to treat 100% of the still dust, so we don't -- we will not face any progress regarding that at that point. And the third question was on China. Can you repeat the question, I don't remember very well.

It was about the merchant exposure to spot prices in China, I wasn't able to hear the number.

Okay. No, in China, we have 100% exposure. But this is -- for us is not -- we don't manage -- I have said several times during the presentation that we managed the problem, the company on a global basis and especially specifically in the hedging area, we hedge -- we manage the company thinking the global company, not thinking region by region. So what we want is to hedge around 70% of the total volume we produced. No matter at the end, we are not -- for example, we are not hedging any tonnes in Turkey because the weakness of the Turkish lira. And this year, we are not to hedge in China because it's our first year of operation there. But we are increasing volume in the rest of the geographies to achieve an average of 70%.

Thank you, sir. I'd like now to pass the call back to Mr. Rafael. Please go ahead, sir.

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 on our website, www.befesa.com. Thank you very much and have a good day.

Thank you, everyone. This concludes today's conference. You may now disconnect.