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

Good day, and welcome to Befesa S.A's First Half 2022 Interim Report Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Rafael Perez, Director of Investor Relations and Strategies. Please go ahead.

Good morning, and welcome to the First Half 2022 Results Conference Call of Befesa. I am Rafael Perez, Head of Strategy and Investor Relations of Befesa. Today we have with us Javier Molina, Executive Chair of Befesa; Asier Zarraonandia, recently named CEO of Befesa and Wolf Lehmann, CFO of the Company. Javier Molina will start with an executive summary of the first 6 months of the year. After that, Asier will explain the business highlights of the period, covering steel dust and aluminum salt slag recycling. Wolf will then review the financials in total and by business unit as well as cash flow as an update on our hedging program. Javier will close this presentation providing some thoughts about the outlook for the rest of the year, the new 5-year growth plan that we announced a few days ago as well as on ESG. Finally, we will open the line 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 under the first half results presentation on our website www.befesa.com. Now let me turn this call over to our Chairman, Javier, please?

Thanks, Rafael. Good morning to all of you. Before getting started with the results of the second quarter and the first semester, I would like to introduce to all of you Asier Zarraonandia, presently appointed CEO of Befesa. Some of you have already met him. Asier has been with Befesa for the last 20 years. Over this time he successfully developed and managed the steel dust recycling business, which represents around 80% of Befesa's EBITDA. He has played an incremental role in the recent development of the business in China and U.S.A. As CEO, he will be responsible for the day-to-day management across all Befesa's business. I'm completely sure that he will develop this new role with the same leadership he has shown to date. During the second quarter, we have continued the same growth path that we saw in the first quarter with 26% EBITDA growth year-on-year. Overall despite the challenging macroeconomic environment and the volatility in the commodity price, we have delivered, by the contribution of the American plants as well as high average metal prices, which have been offset by high inflation, especially in energy prices. Compared to the first quarter, the volume has been lower, mainly driven by maintenance shutdowns in our classic markets and to less extent to a lower contribution from China. Later Asier will review the business performance during the second quarter in more detail. We are living in a very challenging macroeconomic environment. On the one hand, the war in Ukraine is creating great instability in the global economy. In Europe, we are suffering an energy crisis in which security of supply of gas and normal energy price are not guaranteed. Furthermore China is imposing its zero COVID strategy, which is making very difficult to [ us position ] inside the company, producing a slowdown in the economic activity. This volatility is reflected in the business results of the first half of the year. And we see a lot of uncertainties for the second half of the year. Commodity prices have come down significantly in the last weeks from high levels, breaking the correlation between energy and metal prices that we saw in the first quarter and concerns about an economic recession in Europe are arising. I will comment about the outlook for the rest of the year and the new 5-year growth plan at the end of the presentation. Now Asier will explain the business performance in more detail.

Thank you, Javier. I will provide an overview of the performance of the business during the second quarter and the first half of the year. Overall the second quarter has been another good quarter with strong performance across the business, continuing the same path that we saw in the quarter 1. We have delivered a strong volume performance. And we have benefited from positive price dynamics in the second quarter, which has more than offset the high inflation we have experienced in the period. Starting with the steel dust recycling business; in the Q2, we have achieved 292,000 tonnes of throughput, up 83% compared to last year, mainly driven by the contribution from the U.S. supported by a strong performance in the rest of the markets. Similarly, to previous years compared to the Q1, the volume is lower due to annual planned maintenance shutdowns as well as lower contribution from China. In Q2, we have sold 110,000 tonnes of WOX, more than double compared to last year. Blended zinc price, considering the weighted average of LME and hedging, has increased 23% in the quarter. Although zinc price has come down significantly over the last weeks, the second quarter average price has been better than the Q1. These positive effects have been partially offset by higher inflation across the business in Q2, main in energy prices and more specifically in coal, totaling a negative impact of around EUR 13 million in the quarter. Total EBITDA in the steel dust business has been EUR 40 million in the Q2, up 23% compared to the previous year. In the U.S., the integration of AZR into Befesa is developing well across all fronts. The team is working well with the rest of the organization. And we are confident to capture the short-term synergies over this and next year. We have developed the daily action plan in order to capture all the synergies of the operational area mainly, but also in the general expenses and commercial fields. This year we will benefit from the full year of operation in the U.S., which will represent a significant EBITDA growth. In China, the zero COVID strategy that the Chinese government is implementing to fight against the still present COVID-19 pandemic is creating a very challenging environment to operate. At Jiangsu province, we have been operating the plant since the beginning of the year. The plant is technically operating well. And we have contracted more than 80% of the volume. However, the situation within the Q2 has been quite challenging, which required to stop and restart the plant constantly. Our second plant in the province of Henan is completed. And we are finishing the commissioning of the plant. We expect to start commercial operation in the coming months. We are starting to see some relief in the stringent measures, which make us be more optimistic for the coming months. In the traditional business of Befesa, we are achieving a strong volume supported by a strong [ ESS ] steel production from our customers. Moving now to our aluminum salt slag and secondary aluminum business. Our aluminum business has delivered a very strong quarter in a very challenging macroeconomic environment. During the second quarter, we have recycled 85,000 tonnes of salt slag, representing a 6% decrease compared with last year. The production of secondary aluminum alloys has been 42,000 tonnes, a decrease of 12% over the last year. The aluminum price has increased 28% in the period and general inflation has represented around EUR 6 million headwinds in the business. As a result, we have achieved EUR 16 million of EBITDA in this segment, which represents a 28% growth over last year. So all in all, another strong quarter in a challenging environment with a strong volume performance and positive price dynamics that had more than compensated the high inflation. Let me give a final word about China. As I mentioned earlier, the situation in the Q2 has been very challenging and difficult to operate. We are starting to see some relief in the measures, but very slow. Despite the short-term challenge in China, the opportunity to grow remains strong. The environmental authorities are committed to enforcing and fulfilling the environmental regulations with the steelmakers seeing recycling as a real solution. At the moment, we are working on several new projects to build a new plant that could materialize in the near future as soon as the negotiation with authorities and steelmakers reach to an agreement. Now Wolf will explain the financials in more detail.

Thank you, Asier. Please turn to Page 9, first half 2022 consolidated financial highlights. As mentioned by Javier, Befesa delivered 25% year-over-year EBITDA growth in the first half of 2022, with EUR 118 million adjusted EBITDA, up EUR 23.8 million year-over-year versus first half 2021 at EUR 94.1 million. Overall, our growth initiatives, including U.S. zinc are delivering results. And even in the current volatile environment, we are able to offset inflationary pressures, mainly energy, through higher prices. Briefing the main drivers of the year-over-year EUR 24 million EBITDA improvement in more detail. On volume; overall, approximately EUR 24 million net positive volume year-over-year impact; positive EUR 25 million from the higher steel dust throughput, including the positive contribution from the U.S. zinc operations. As minor negative EUR 1 million impact from lower aluminum volumes, mainly driven by the lower activity of the European automotive and aluminum industries. On price. The overall approximately EUR 36 million positive price year-over-year impact was about EUR 21 million from steel dust business and around EUR 14 million from our aluminum salt slags business. I will explain in more detail on the following pages. On cost/other, the approximately negative EUR 36 million lever reflects the higher inflation, primarily energy cost, which is in balance with the higher metal prices. In summary, adjusted EBITDA is at an all-time high of EUR 118 million with a high 21% adjusted EBITDA margin. Net profit increased by 10% year-over-year to EUR 50 million in the first half 2022 equal to EUR 1.25 earnings per share based on the full new post-U.S. acquisition, 40 million of outstanding shares. The EUR 1.25 earnings per share was slightly lower compared to the EUR 1.32 in the first half '21. Once the U.S. synergies are fully realized, earnings per share is expected to improve accordingly. We also improved our cash to a new high level of EUR 239 million and reduced our leverage further to 2.09x, which I'll explain later, together with net debt and net leverage performance on Page 12. Note, in the 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 10, the steel dust recycling services results. Steel Dust Recycling Services continued to perform strongly and delivered EUR 95 million adjusted EBITDA in the first half 2022, up EUR 25.8 million or 37.2% year-over-year. Overall, the Steel dust growth initiatives, including the U.S. operations are delivering results and we're able to offset inflationary pressures mainly energy through higher prices. The volume lever was positive by around EUR 25 million EBITDA year-over-year. As explained, this includes the positive contribution from U.S. operations. The net price lever was positive by about EUR 21 million year-over-year, with main price components being; 1, EUR 26 million higher zinc LME prices, up 49% year-over-year to EUR 3,510; 2, EUR 4 million positive higher zinc hedging prices, EUR 2,328 per tonne in first half '22 versus EUR 2,200 per tonne in first half '21. Third, EUR 9 million negative, driven by the latest higher zinc treatment charges, which were considered at $230 per tonne retroactively from January 1, 2022, versus $159 per tonne in 2021. Overall, the approximately EUR 21 million year-over-year impact from price lever offset the approximately negative EUR 21 million year-over-year impact from higher inflation, mainly energy costs captured under the cost/other lever. Going now to Page 11, the results of our aluminum salt slags recycling services segment. Aluminum salt slags recycling services delivered EUR 23.6 million EBITDA in first half 2022, slightly down by EUR 1.2 million or 4.8% year-over-year. The year-over-year EBITDA development was mainly impacted by the lower market activity in the European automotive and aluminum industries, higher energy prices, nevertheless, were offset entirely by the achieved higher prices. The volume lever was slightly negative by about EUR 1 million EBITDA effect. This was driven by about 12% lower salt slags and SPL treated as well as about 15% lower production of aluminum alloys, driven by the current lower European automotive and aluminum industry environment. Nevertheless, even under the current volatile market environment, we managed to run our plants overall at around 80% utilization. The price lever was positive, about EUR 40 million with aluminum alloy pre-metal bulletin market prices showing a 30% year-over-year increase as well as better aluminum metal margins. Nevertheless the cost/other lever was around negative EUR 40 million EBITDA effect year-over-year was driven by the higher inflation energy cost trends with particular high gas prices in Europe, thus discounter balanced the progress in metal prices. Turning to Page 12. On the EBITDA to Cash Flow Bridge; starting with EUR 118 million adjusted EBITDA on the left and walking to the right. Working capital was up by about EUR 26 million year-over-year. The higher working capital consumption was very much driven by seasonality and timing impact, example given, increase in the sales and receivables. The majority of which is expected to reduce by the end of this year. Interest at EUR 12 million. As expected, interest paid in first half were up EUR 4 million higher year-over-year, mainly as a result of the higher gross debt from the acquisition and because the Term Loan B interest payments are made quarterly in 2022 versus biannually in 2021. Taxes at EUR 60 million also as expected, resulting in an operating cash flow of EUR 64 million in first half 2022. CapEx wise in the first half, we spent EUR 36.8 million regular maintenance CapEx including IT, operational excellence, synergies, funding in the U.S. and the recovery of our Hanover plant, expecting to get this back from insurance. EUR 20.8 million growth CapEx, mainly dedicated to our new plant at China. Together, total CapEx of EUR 57.8 million partially funded through approximately EUR 8 million China local loans from our Henan plant. After funding working capital, interest, taxes and CapEx, total cash flow amounted to a positive EUR 14.6 million in first half. Hence our cash on hand improved to EUR 239 million, a new high for Befesa, up from EUR 224 million at year-end. The cash on hand of EUR 239 million, together with our entirely undrawn EUR 75 million revolving credit line provides Befesa with a strong liquidity of about EUR 300 million. The EUR 225 million last 12 months rolling EBITDA incorporates rolling full 12 months of the U.S. operations on a pro forma basis. The EUR 471 million net debt was EUR 225 million in last 12 months adjusted EBITDA results in a 2.09 net leverage at second quarter closing, improving from 2.16 at year-end. Recognizing the positive trend, Moody's improved its outlook on Befesa to positive and affirmed the BA2 rating. Summarizing, Befesa is in the strongest financial shape ever with around a record EUR 239 million cash on hand, more than EUR 300 million liquidity and a leverage decreasing currently at 2.09. Turning to Page 13 on hedging. In first half 2022, we continued our hedging rigor and fully extended our zinc hedge book further up to and including January 2025. Thus with approximately 2.5 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 or around 152,000 tonnes per year. Overall considering the combined global hedge book, Europe, Korea and U.S. operations, the year 2022 is hedged at around EUR 2,350 per tonnes sold forward prices, the year 2023 at around EUR 2,450 per tonne and the year 2024 at around EUR 2,500 per tonne. Please note that these average hedging prices are based on FX forward assumptions of 1.07 in 2022 and 2023 and 1.10 in 2024 dollar to euro. At the current FX parity, average prices would be at slightly above EUR 2,400 per tonne in 2022, slightly above EUR 2,500 per tonne in '23 and slightly above EUR 2,600 per tonne in 2024, again, if you were assuming FX parameters. Summarizing the financial section before we turn to growth, 3 points: One, Befesa delivered in the first half 2022, the highest earnings in the history of the company at EUR 118 million adjusted EBITDA, up 25% over last year despite the current volatile market environment. Secondly, our financial backbone is strong. We fully extended our hedges out to January 2025. Our capital structure is efficient and long-term, cash on hand and liquidity are strong. We entered this challenging 2022 environment in the strongest shape we've ever been. Three, this financial backbone supports us well to, A, handle our growth format, our latest sustainable global growth plan; and B, maintain a stable dividend payout at the upper end of Befesa's dividend policy to share the success with our shareholders, just like 50% of net profit or EUR 50 million was distributed in July. Now back to Javier for an outlook on growth.

Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for the second part of the year as well as the new 5-year strategic growth plan. Despite all the volatility in the commodity prices and the concerns about the global economy for the second part of the year, we expect 2022 to be another growth year for Befesa, mainly driven by the volume growth contribution of America and a strong hedging, which will help us reduce volatility in the metal prices. These 2 drivers of earnings growth did offset the high general inflation, especially in energy prices. On the volume point of view, although there is a low visibility for the second part of the year, we expect growth on steel dust volume driven by a full year of consolidation of our operations in the U.S. after the acquisition of American Zinc Recycling. In Europe, there are general confidence about the economic situation during the second part of the year, caused by the uncertainty in the energy market and how that could affect the overall industry. Despite that, we are confident to achieve high levels of capacity utilization overall. However, even in a potential economic crisis scenario, we have proven in the past that our business is highly resilient. And even in situations where the steel production has decreased, we have been able to maintain high levels of utilizations and defend our margins. The integration of American Zinc Recycling into Befesa is developing well across all fronts. For the rest of the year, we expect a similar performance in our American operations compared to the first quarter -- to the first semester. In China, we are starting to see some relief in the COVID lockdown measures, which make us be more optimistic for the remaining months of the year. In the aluminum salt slags and secondary aluminum business, which is a purely European business, we also have low visibility for the second part of the year. The automotive industry continues to face a challenging situation in Europe and supply chain problems are added to the semiconductors shortage. Moving now to the price environment. As we are seeing the challenging macroeconomic environment and the concerns about the global economy are putting pressure on metal prices for zinc and aluminum. At the same time, energy price have experienced high volatility reaching very high levels. In this environment and given the high uncertainty existing, we expect volatility in the prices of commodities to continue for the rest of the year. Our hedging policy that Wolf has explained with around 70% of the volume of zinc hedged at good price will help us navigate this period of high volatility. In summary, although we see high levels of uncertainty, which is resulting in high volatility in commodity prices, in Befesa, we are facing this challenging environment with opportunities. Befesa today is a much more diversified business than 1 year ago with a significant part of our earnings coming from markets outside Europe, mainly North America and Asia and we are confident about the business model of Befesa. We entered this uncertain period with a very strong financial position, high liquidity, long-term capital structure and a very strong hedging book. Also, our business model is highly resilient and as we have shown many times in the past, operating in an industry with high barriers to enter and the ability to keep high levels of profitability and cash flows. As a result of this, even in a very pessimistic scenario, the impact on Befesa will be very limited. The second topic I would like to explain is the new growth plan that we announced a few days ago. Despite the short-term challenging situation we are facing, the energy transition is a reality. And we are taking action about this matter on 2 fronts. We are setting our own ESG goals and we are seeing growth opportunities. As you all know, the carbonization and electric vehicle trends are supporting the production of electric arc furnace steel and aluminum markets, which are our core businesses. The global steel industry is undergoing a major transformation to decarbonize its operation and meet carbon reduction targets for 2030 and 2050. Mini mill steel production consumes around 7x less CO2 per tonne versus primary basic oxygen furnace production, the blast furnace. This is driving large-scale investment in electric arc furnace production globally, which will substitute blast furnace production and will expand the customer and volume base Befesa's environmental services in our main markets like Europe and North America. This will naturally increase our natural market to provide the steel dust recycling services to these new plants. Similarly, the trends in the aluminum industry towards the decarbonization and the rapid increase on the production of electric vehicles are fueling increases demand for secondary aluminum and salt slags recycling in Europe, where Befesa plays a leading role. As you know, Befesa has forbidden the manufacturing of combustions engine cars from 2030 and automakers are taking actions to adapt its operations to that change. Average aluminum weight in car is going to move from 7% approx today to more than 30% in the coming years. That is going to produce more demand of secondary aluminum as well as recycling services of waste associated with aluminum industry, like salt slags. These growth opportunities in America and in Europe will be complemented by the already existing growth opportunity in China in our steel dust business, where we already have 2 plants. And we expect to be growing in new province as well as in existing ones. Despite the short-term challenge in China, the long-term growth opportunities remain intact. The market is already there and growing. The regulation by authorities is a reality. We are the first mover and we are working on several new projects that could materialize in the near future. So putting all of these growth opportunities together, we expect to invest around EUR 500 million over the next 4 years, which will represent the larger expansion program of Befesa after the acquisition in U.S. With this investment, we expect to achieve around double-digit earnings growth on average over the next 5 years between 2022 and 2027. The investment plan is well globally balanced between our 3 main regions: China, U.S. and Europe. We also believe that this is a low-risk plan from the [ security ] point of view as we are talking about growing our core businesses in our core markets. We can fund the entire plant with the cash in hand and the cash flow generated over the period, maintaining the leverage ratio below 2x. At the moment we are finalizing the growth plan. And we will present the details of this plan in the Capital Markets Day coming that we will celebrate in November. Finally, on ESG, the secondary material produced by Befesa's recycling process are a substitute for more carbon intensive process used to mine and process building raw materials. Using a lifecycle analysis approach, we evaluate the climate impact of our operations across our value chain. The conclusion of that analysis is that Befesa's operations avoids around 2.4 million tonnes of CO2 equivalent this year. We are also committing to a 20% CO2 emissions intensity reduction by 2030, supported by a roadmap to achieve the target, especially by green energy sourcing, electricity efficiency, process optimization and raw material substitution. Also we are aiming at net zero emission by 2050 provided that certain technologies currently under development become technical, viable and economically feasible. The Board of Befesa will start to discuss sustainability plans and progress on a regular basis in a new sustainability committee, which has been created comprising Directors of Befesa who have a strong experience in ESG, technology and energy transition. Befesa is clearly benefiting from global trends towards the [ heat ] of electrical arc steel production, waste reduction and increasing focus on environmental impact, which will provide long-term growth to Befesa in the future years. Thank you very much.

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

[Operator Instructions] We will now take a question from Oscar Val from JPMorgan.

Yes. I have 3 questions. The first one is just around looking at the second half and your full year guidance. In H1, you were able to broadly offset higher energy costs with raw material prices. In the second half, do you have a sense of how that will behave currently? Then, the second question is around China. Could you help us quantify what levels that China was running at in the model in terms of volume or throughput? And then the third question is, if we think about gas shortages in Europe potentially this winter, can you remind us where your exposure sits? Our understanding is, it's mostly secondary aluminum, but can you explain if you have any contingency plans if anything happens in Europe?

Thank you, Oscar. I will answer the first question regarding guidance. We confirmed the guidance that we provided this year between EUR 220 million and EUR 270 million, which means, between 11% to 35% of growth year-on-year. This range was driven by the high volatility in the market metal prices as well and the inflation, especially on the energy price and that we saw at the end of the first quarter and we are seeing today. At the moment, there is a high level of uncertainty across many areas. But we have still 5 months in front of us to complete the year. So it is very difficult to be more precise about this guidance. Well, anyway, and as of today, we are confident to finish the year with the guidance we provide. However, the uncertainty is very high. And we can also see the reduction in the steel dust production that could eventually have a negative impact on our margin volumes. But in summary, what we can say, as of today is that we're confirming the guidance that we provided at the end of the first quarter. Asier, do you want to answer?

Yes. Sure thing about China, well, Oscar, that we don't provide -- know moly dust from how many tonnes we are doing by regions. In the case of China, in the first quarter was well as planned for modeling purposes. The second quarter has been more or less strong half of that. And we do hope third quarter and fourth quarter probably come back to the normal policy online that we have in mind for this year. But again, as Javier is explaining all the time, it depends on how we hold the dynamics in China goes. There start to see that the second half is going to be better in terms of production, steel production and so. So if everything happens, we will be back on the normal production that we projected at the beginning of the year. And in the case of the gas shortage, well, of course, we can summarize that there is no a big direct impact in our business. You have to think that the gas consumption is coming mainly in the aluminum plant. We have just one plant in Germany, which looks like this -- will be potentially more affected than the ones in Spain. And well, let's see. But I think it's very, very limited impact because it's just 10% of our cost in those businesses, so the rest of the businesses not depending on the gas. So in this case, we don't see a very big guided impact in our cost portfolio. What I think is the impact that though this cash or this can affect to the industry in general, starting for the aluminum one or for the steelmaking and that will depends how the demand and how the -- again, the dynamics of the economy go during the second part of the year. And in that case, we could be affected by more for the volumes of that.

We will now take our next question from Sandeep Peety from Morgan Stanley.

This is Sandeep Peety from Morgan Stanley. I had 3 questions and I'll take one at a time. Firstly, on the CapEx; the company has already spent EUR 57 million during first half of the year versus guidance of EUR 55 million to EUR 65 million. So are you expecting minimum spend during second half of the year since you have maintained your guidance? And as part of that question, I noticed that maintenance CapEx as per Slide 33 in 2Q was EUR 27 million or annualizing at greater than EUR 100 million versus EUR 40 million to EUR 45 million guidance range. Can you please provide more clarity on the maintenance CapEx? And I'll take the other 2 questions after that.

Thank you very much, Sandeep. Let me explain the CapEx spend. So if you look at the balance sheet, CapEx spend in the first half was EUR 54 million, of which of that EUR 54 million on the balance sheet, roughly EUR 20 million was on growth, which is on China, yes. We don't expect much more spending on CapEx, on growth CapEx in China in this year, then, secondly, looking at the maintenance bucket. Maintenance, Sandeep, please remember its maintenance, IT, operational excellence, including synergies in the U.S. In that EUR 34 million, I think we have to normalize this approximately EUR 14 million, EUR 15 million of that is the Enova plant recovery, which is funded by insurance. So that's coming, so you need to normalize that out. So if you normalize that out, the, EUR 34 million maintenance is rather EUR 20 million in the first half. And that's very much in line with our guidance for the year of spending EUR 40 million to EUR 45 million in maintenance, IT, operational excellence. So on growth, the majority spend in the first half, that's around EUR 20 million. On maintenance and CapEx, you need to normalize the EUR 34 million, take EUR 14 million, EUR 15 million out for the Enova recovery. So that's back to EUR 20 million, which is very much in line with our guidance. Overall, it's probably fair to say for the year, we'll rather be at the upper end of our total guidance. We said EUR 60 million to EUR 65 million overall and that's where we'll probably be at the upper end of that. Hopefully, that helps, Sandeep?

Yes, yes, indeed. That was really helpful. So do you recover this amount from the insurance company next year?

No, in this year.

Okay. Okay. That's clear. Moving on maybe to the second question, steel does seemed to be -- this is regarding the steel dust operation, which seems to be experiencing significant cost pressures during 2Q. And I thought that the business was mostly exposed to spot prices, i.e., implying that most of your increase in the costs should have been reflected in 1Q. Can you please explain different moving parts there?

Yes. Well, as we said before, our steel dust business like any other industrial realization subject to the inflation across many areas. It is well diversified from the geographical point of view with about 1/3 of operation in Europe, U.S. and Asia. And the main energy cost in the business is Coke, which price has significantly increased in the Q2, driven by the overall inflation. In the Q1, however, we still have some contracts rolling over from last year, so we did not see the impact of coke price increase so high. However, in Q2, we have suffered this increase of price. This is mainly the main reason about the higher inflation cost in the -- between the quarters.

And final question, I appreciate the fact that you would provide more details on the EUR 500 million investment plan as part of the CMD. But I wanted to understand how the company plans to fund the investment? And what sort of flexibility you have in a scenario of further slowdown in the economy from here?

Okay. As I said before, we will -- we are planning to celebrate an Investor Day that will be, by the way, our first Investor Day since we did our IPO in probably in the first part of November. And then we will provide more details about our 5-year growth plan. But regarding the funding, we have a very clear view about it. We will fund this growth plan. And really, with our -- the cash we have on hand plus the cash flow that we are going to generate during the period. And that is an interesting and important point I would like to highlight. We will start the execution of this long-term plan with a leverage ratio around 2x. But when we finish the execution of the plan, 5 years later, our leverage ratio even in a pessimist scenario will be below 1x. So summarizing, we will -- we are planning to fund the growth plan with our cash and cash flow.

Okay. And then regarding the flexibility; is there any flexibility to have like in a scenario where the economy goes in the recession, you have the flexibility?

Fortunately -- we have flexibility. We have -- we are a company with a lot of flexibility. And we will adapt the plan to the market situation for sure. There are some parts of the plan. Probably we will start with the U.S. operations, where the impact of the crisis is less important than in other parts of the world. But for sure, we will add the execution of the plan to the market.

We will now take our next question from [ Ingal Santos ] from Paribas Exane.

Congratulations to Asier on the new role. I have 3 questions as well. And the first one would be a follow-up on the cost inflation. I think you discussed gas and coke and coal. Can you also remind us on electricity, what's your typical contract mix looks like, whether there's a cost increase in contract reset should be expected more next year or whether you see cost inflation in that area more imminently? And maybe also comment a bit on how you see collection fees evolving in Europe in that regards. Of course, lots of moving parts and higher zinc prices, higher input costs and price increases everywhere. So is it also an area where you might be able to demand slightly higher collection fees for next year? Or is that not really an option to pass through the high input costs?

Thank you very much for the congrats and for the question. Well, yes, electricity is one of the calls that we have. You know that is not -- once again, we are not very -- well, we consumed energy, but not high consumers in our main activity. But it's true as well that the energy is under inflection pressure, but well depending on the geography we talk about. I mean, this is basically euro where is facing that, so once again, affecting partially to us. How we are dealing this now is simply we are going on a spot basis because the contract that we have in the past, like a typical 1-year contract also when it has been over. We are now waiting the evolution of the prices we are dealing with this. We don't know the evolution. As Javier has explained, we have to live with this and try to, as you say, we are yet trying to increase the collection fees with -- based on the cost we have, yes, it's a possibility. The wage of our profit and loss is what it is. But mainly we try to pass the fixed costs and those things to the steelmakers. But it's true that the pressure on prices is coming in the high price for the metals until up to now. And this is what is really offsetting the high energy costs, including the electricity. What is going to happen in the next months? It's a good question. And if I will have the answer probably I will not talking here, right? So let's see. But we are repeating the idea that we -- even in this challenged period, we can navigate well.

Okay. And then I would also like to ask you about the 5-year plan. Of course, we get more details in November. But just to understand a bit the potential that you're seeing in Europe specifically. I think there are a few areas which are clear. Salt slags fairly clear, I guess, also the de-carbonization, raw material substitution, possibility is, I think, also fairly clear. Can you give us a rough indication what you see in steel dust recycling in terms of capacity addition potential in Europe? And if you see potential whether it's rather expansion of your existing locations or whether you would also consider building a complete new greenfield location close to some of the, let's say, start-up green steel mills? And how much visibility you need to really make an investment decision in that scale because I think it's fairly clear where the EAS capacity is going to be added in Europe. But of course, you might still need a few years to get a bit more contractual visibility on this actually happening? And I'd also appreciate a quick comment on whether you think there are green steel mills, whether you see any differences in terms of the quality of steel dust and also probability for you if you were to consider adding capacity or sourcing more dust from really hydrogen-based GRI source that EAS on the green field side?

[ Ingal ], you are killing our Investor Day, probably better than the answer seriously speaking. As I told before, our -- we are planning a 5-year growth plan in a very well-balanced way. So we are considering investments in our 3 main markets. And we are thinking in, let's say, a balanced investment in the 3 markets. I mean China, North America and in Europe. Why is that, in China, because we have a growth opportunity, a clear growth opportunity in front of us that you know very well? And in North America and in Europe and especially in Europe, you have and the answer is basically in your question. There is a clear trend of de-carbonization for 2 reasons. And I will answer that. I will say that the growth will come probably in all our core businesses. In the size of the steel dust recycling business because as you probably know, all the big European steelmakers are doing announcement about shutdowns of blast furnace and replacement by electric arc furnace. That means that there will be a clear growth opportunity in Europe in that side. Let's see later. And we are working and thinking of that. We will be in the same locations or in new locations. This is part of the work we are doing right now. And on the other side, the electric vehicles trend, which is another clear trend, will support the growth of the aluminum production in Europe. We have data from different car producers and -- but the grade of the aluminum in the electric vehicles will grow from less than 10% today to more than 30% in the electric vehicles; so that means a very important growth in the aluminum side that will permit for sure the possibility to improve our business in the second aluminum and the salt slag recycling. I will ask you to be patient to wait until the probably second week of November, where we will be able to provide some more details about our growth plan.

No, I just definitely wait and be patient for that one, looking forward to it. But just quickly on the funding question, which was raised earlier. Just to clarify, when you talked about uncertainties and, of course, macroeconomic volatility that's still out there. Can you clarify what maybe on a quarterly basis to the execution of the plan would be maximum net debt to EBITDA, you would want to see as your comfort level on a say, short-term basis throughout the next 5 years?

Well, I told before, we are now working on that. But in the first projections we are running, we don't want to grow the leverage ratio we have in front of us. So we are not thinking clearly not in the worst cases to be above 2.5x leverage ratio. And probably we will be able to be below that figure.

We will now take our next question Anis Zgaya from ODDO BHF.

I have 2 remaining questions and my first one is on capacity utilization in Q2, which was lower than Q2 last year. And I understand it's related to maintenance stuff. So could you please give us the impact, what was the impact on EBITDA in Q2? And what should we expect for capacity utilization in Q3? And my second question is regarding energy costs. Many corporates are finding PPAs or normal PPAs. So are you planning to sign PPAs for electricity to reduce energy costs and to further reduce your carbon footprint?

Well, regarding the capacity, yes, it's normally and traditionally, and this year is not an exception. Our maintenance all over the geographies shutdowns of the plants are coming in the Q2 and as well in the Q3. So I mean it's going to happen as well that some plants are going to be stopped in Q3, so probably the volume is not going to be as high as Q1 maybe in the Q3, more similar probably to the Q1 too. Back on this, Q4 probably is going to be a full quarter with all the plants running at very high capacity. So this is normally the trend over the last year, and this year, is not a change neither. So this more or less is the guidance about the tonnage for Q3 and Q4. With regards to the PPAs and of course, we are studying this. And we are analyzing this. But we are waiting for the good moment to sign those things because normally, it's not very well done if you sign the highest prices period when you sign those things. But yes, we are actively searching for that.

Let me add something about that. As you -- as we have in our sustainability report, we presented a CO2 reduction plan that considered the use of bidding energy. So we are -- as Javier said, we are thinking and even talking with utilities about that. And the Europe, where that is possible, which is basically Europe and U.S., more than in other geographies. And at the same time, this is another important point. We're analyzing a study. This is probably from our process. That could be an interesting that can substitute the current resources in a very nice percentage. It's something that we will be able to inform to the market in the coming months.

We will now take our next question from Michael Hoffman from Stifel.

I'd like to focus on guidance in understanding sort of what the flection is around the model. So the original guidance at midpoint EUR 245 million EBITDA, I had an assumption that there were approximately EUR 40 million coming from the U.S., somewhere between EUR 6 million and EUR 8 million from China. That would leave us sort of about EUR 155 million from Europe and then you had something in the mid-40s from the aluminum side of the business model. How does that look today for the rest of the year? Are we still about EUR 40 million in the U.S., China is maybe less, Europe is less because of coke prices and aluminum still in the low 40s. Is that the way to think about it?

Michael, it is -- you have done a very precise guidance that is -- for us, it's extremely difficult to do that right now because it will depend on the energy cost implied for the whole year and the commodity prices, which today, we have a big uncertainty. Your figures are not far from the reality. Probably, as Asier just explained is too optimistic in China because the third part we have, let me say, lost the first part of the year in China with all the permanent shutdown and opening and closing the plants. So I think slightly optimist. And in the rest will depend on the evolution of basically metal prices, energy prices and volumes. As I said, we confirm our guidance. But for us, -- for us, it's difficult to consider the guidance and imagine to precise if we are going to be slightly above or below that figure, no?

If we -- I'm assuming most of the pressure is coming out of the legacy business because of the energy extraordinary energy inflation that's happening in Europe related to Russia-Ukraine as opposed to inflation -- the pace of inflation in the rest of the world. Is that an accurate way to think about it that I got to look at the legacy, so the U.S. is actually okay, and this is really about Europe?

Yes. One more time, I think Europe is the most affected basically for the gas, for the war and how this is going to affect. Well we don't know, but we can wait nothing really good. The inflation, yes, is affected to the rest of the cost, transport, coke and other raw material needed. So this is more in a worldwide view. So it's affecting our business in general. For example, that goes and the logistics issue. Again, how is it going to be the evolution of those costs during the next year? Each of us, we hear and you guys have the -- your own ideas. And if we invite another 5 guys, they have another 5 ideas. Very big uncertainty and for modeling or whatever, well, many cases to do. I mean -- but it's very difficult for us to give more details because obviously, we don't know.

I guess the last piece trying to dig at that since all of us are asking questions at all it comes down to our ability to model your business if the current conditions that exist in July persist for the rest of the year, are you below the midpoint of EUR 245 million?

Again, if the current convictions of today, very high energy prices, lower metal prices, et cetera, probably we will be below the midpoint, as you said. We will be more in the lower part of the range.

Okay. I have to ask about the growth and I look forward to the November. Just to think about it, Europe is about 50% EAF. It's going to something in the 70s. Is that sort of a plan? The U.S. is in the 70s? How much more does it improve? And then China has got a lot of improvement. Is that -- that's the way to think about how to allocate the EUR 500 million is sort of where those percentages move?

Well, as Javier said, it's going to be well diversified in basically 3 areas and that means mainly 1/3 or whatever. It's a good reference. But as you say, we will explain more in November.

And Mike, just you had mentioned Europe going from 50% to 70% electric arc furnace steel production. Now currently, Europe is at 40% and going to 50% and many, many investments of new ERFs already announced in the market. And yes, we will capture the growth in Europe.

Okay. And then last one on the cost side of EUR 36 million. The whole company for the first half and EUR 19 million in the second quarter, how much was foreign exchange in those 2 numbers given that euro changed a lot?

Yes, but that was not a material impact there.

We will now take our next question from Lasse Stueben from Berenberg.

Just 2 or maybe 3 follow-ups from me. I just wanted to touch on the aluminum business briefly. This was much improved versus Q1. But just looking at prices were down slightly, volumes also slightly down. So can you maybe just explain some of the dynamics? I guess a lot of it came from the metal spread. But if you could just explain the different dynamics there versus what happened in Q1 that would be helpful. And then, maybe also on the steel side. Are you seeing any weakness in the steel industry currently in Europe off the back of recessionary fears, higher energy costs and how that feeds through into your business? And maybe just the final one. Are you able to quantify the increase in the coke price versus Q1? If you have any more color there, that would be helpful.

Thank you, Lasse. Well, regarding the aluminum, we like to approach the aluminum for the whole semester. I think it's a better reference than the quarter-by-quarter. The reason behind is that the quarter 1 was mainly affecting as well for rollover of contracts coming from the previous year, which affects to the margins. I mean the typical quantities that at the end of the year could not be provided and then we provide the first part of the year. The dynamics is better to have the view of the first semester with this kind of margins and prices are well more probably close to the real situation of the business. In terms of the steel weakness and evolutions of the steel production, especially in Europe as you are asking for, well, it depend. I mean the same that we are discussing for the guidance and for what is going to happen in the second half. Yes, they are intensive in energy, especially in electricity and how this is going to be the evolution of those prices are going to affect them and the demand situation because the rumors, so ideas and recession it's going to affect for sure then. But it's true as well that the steel prices are again offsetting the energy prices for them is the fact that that if the metal prices come up again and offset the cost, well, the demand we'll see is there going to be a very good drop or not. Well, all in all, we don't know. I mean, how it's going to be affected. And this is one of the points for the uncertainty. All the steel production is going to come in the second, so very difficult for us to quantify. And regarding the coal prices -- sorry, I forgot this. And regarding the coal price for the second quarter with the first quarter, I think that the -- quantify in a 15% increase also quarter-over-quarter. And again, we'll see what is coming in the next months. And on the other hand, if the demand is a slowdown, probably the prices will super slow down as well. But once again, our estimations so we don't know how it's going to happen.

We will now take our next question from Julien Batteau from Pascal Advisers.

I have a question. I don't know if you will -- if I would be able to give you my thoughts. It's about the sequential development in EBITDA in status. I struggle to understand the outcome. Since both volume and pricing was better in Q2 compared to Q1 and much better, I mean, plus 7% in price. The additional inflation impact was EUR 13 million based on the bridge you gave. So I struggle to understand how we ended up at EUR 40 million compared to EUR 55 million. So is that something I'm missing in terms of impact from an over or something else? So that would be my first question. And the second question would be about the double-digit earnings growth you talked about in the plan. Is that EBITDA? Or is it net profit?

Julien, I apologize, but the line is going in and out. It was really hard to understand your question. Can you please send us the question? I'll try my best to answer as quick as possible. We only understood something about the second part of the question in terms of double-digit growth of the -- our new 5-year plan, but probably even maybe better to send us the question by e-mail.

Regarding the second part, I didn't understand like what was the first part of the question, sorry, that. The second part, I think you were asking if the double-digit in regarding EBITDA or net profit, and today, we are working at EBITDA levels. We will develop further the net income line. But today, we are thinking at EBITDA level.

There are no further questions in the queue at this time. I will turn the call back to your host.

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

Ladies and gentlemen, that will conclude today's call. You may now all disconnect.