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

Welcome and thank you for joining the preliminary full year 2022 results of Befesa. [Operator Instructions] I would now like to turn the conference over to Rafael Perez, Investor Relations and Strategy Director. Please go ahead.

Good morning, and welcome to the preliminary full year 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, CEO of Befesa; and Wolf Lehmann, CFO of the company. Javier Molina will start with an executive summary of 2022. After that, Asier will explain the business highlights of the period, covering steel dust and Aluminium Salt Slags Recycling. Wolf will review the financials in total and by business unit as well as cash flow as an update on our hedging program. Javier will close the presentation providing some thoughts about the outlook for 2023, the new 5-year growth plan. Finally, we will open the line for the Q&A session. Before getting started, let me remind you that this conference call is being webcast live. You can find the link to the webcast and the preliminary full year results presentation on our website, www.befesa.com. Now let me turn this call over to our Chairman. Javier, please.

Thank you, Rafael. Good morning. In 2022, we have achieved record levels of revenue, EBITDA, net profit and operating cash flow, mainly guided by the positive contribution of the U.S. operations as well as higher metal prices, which have been partially compensated by much higher inflation. Despite these record results, 2022 has been a very challenging year for Befesa, impacted by very high general inflation, especially energy prices, weak economic environment and a difficult COVID situation in China. Until Q3, we were able to compensate all the inflation and increasing energy price with higher commodity prices. However, the last quarter of the year has been more challenging than what we originally expected. And as a result, we have closed the year with an adjusted EBITDA of EUR 215 million. The main reason for this result in the last quarter has been high energy prices, especially coke, which account for about 50% of the total energy costs in Befesa as well as lower steel price and weaker steel production in the markets where we operate. As a reference, steel production has decreased in the last quarter of 2022 by 18% in Europe, 24% in Turkey, 12% in South Korea and 11% in North America on a year-on-year basis. Our aluminium business has performed well and despite the high energy price, we have been able to transfer a big part of this increase to the market. As such, aluminium has delivered on a strong year in this challenging environment. Total revenues have been EUR 1.1 billion, up 38% compared to the previous year. Adjusted EBITDA has been at EUR 215 million, up 9% compared to 2021 and net profit EUR 106 million, up 6% equal to EUR 2.66 per share. In North America, the integration is progressing well and the execution is according to plan. We are working in the integration of the zinc refining business, which we acquired in September last year. As we explained, the zinc refining business provides Befesa with a strategic vertical integration opportunity in U.S., addressing the shortage of a smelting capacity in North American market. Furthermore, the refining facility is the only one of its kind in the world producing green zinc for 100% recycled raw materials. In China, the plant in Henan is completed. The planning and uncompleted is commissioned in December and we are ramping up operations. Today, we have 2 plants completed and ready to operate as soon as the market saw signs of recovery from COVID post Chinese New Year. Both Asier and I were able to travel to China last week for the first time in almost 3 years. We have the opportunity to meet with assistants and potential customer as well as local authorities in the province where we have operations. In Henan, we carry out the official opening ceremony of the plant with representatives of government. Also we signed the investment agreement with the government where the third plant will be located in the province of Guangdong as part of our 5-year growth plan. In the trip, we could see impression that the country is really opening and going back to a more normal post-COVID environment which make us be confident about the positive development of China. Today, we have the 2 plants in Jiangsu and Henan fully ready to operate in 2023. Although it is early to say how the year will progress, we are confident about the positive development. As explained at our Capital Markets Day, we're already executing our 5-year growth plan. We are working on the refurbishment of the U.S. plant in Palmerton as well as the third province in China at Guangdong. On dividend, we will propose a dividend of EUR 50 million for 2022 which is stable compared to the previous year and equivalent to EUR 1.25 per share, close to 50% of net profit. Finally, on the ESG side for our year, we have been able to reduce our lost time injury rate by 32% year-on-year to new lowest level. We are executing our CO2 reduction plan about we will provide more details in the next ESG report that we will publish in June. Now Asier will explain the business performance in more detail.

Thank you, Javier. Good morning to all. I will provide an overview of the performance of the business during the fourth quarter and the full year 2022. Overall, the fourth quarter has been a challenging quarter as explained by Javier, impacted by high general inflation, high coke prices, weaker steel production across all markets and a difficult COVID situation in China. For the steel dust, in the full year of '22, total steel dust throughput was up by 35%, reaching 1,194,000 tons, driven by contribution of the recycling plants in the U.S. In the Q4, steel dust throughput has been up by 11% compared to Q3, driven by less maintenance shutdowns than in the Q3 as we used to remark. However, steel dust throughput in Q4 was slightly lower than expected and down by 8% compared to the last year, driven by lower steel production in the markets where we operate. In Turkey, where we have a plant in Iskenderun region, as you all know, 2 terrible earthquakes took place on the 6th of February. We are grateful that none of our employees and contractors were injured. However, the humanitarian situation is really dramatic with many people lives lost and many houses ruined and with utility programs with affect to the less damages, houses and industries. The earthquakes impact of the region around the plant has been severe. A full recovery of the area will take time, but there are now some industry coming back to work gradually, among them some steelmakers in that area. At the time of the earthquake, the plant was temporarily shut down for a steel maintenance work and assessment saw that the plant has only received minor damages. We are now receiving dust at the premises and planning to restart the operation during March. From the price point of view, blended zinc price, considering the weighted average of the LME and hedging has increased 15% in the full year. However, LME price decreased by 9% in the Q4 compared to Q3. As such, blended zinc price in Q4 were up by 9%. These positive effects of volume and prices have been partially offset by higher inflation across the business in the full year, mainly in energy prices and more specifically, coke, which today represents about 50% of the total energy cost in Befesa. As a result, total EBITDA in the steel dust business has been EUR 169 million in the full year, up 14% compared to the previous year. However, in the Q4, EBITDA in the steel business has been down by 18% as a consequence of higher coke price and lower volume of steel dust. In the U.S., the integration of the assets are -- into Befesa is developing well across all projects. The team is working well and we are delivering the results that we expected. The refining facility, which we acquired last September is also being integrated into Befesa. The plant is still in ramp-up mode and we expect positive EBITDA contribution in 2023. Additionally, in the U.S., we are working on the efficiency projects that will drive synergies to be captured in 2023. And at the same time, we are preparing the Palmerton plant for the refurbishment to free up capacity and be able to capture the future growth in the market. In China, the Chinese government has completely changed its strategy to fight against COVID. Since Q4 last year, we have been suffering from the COVID strategy, which makes it a very challenging environment to operate. Because of that, at Jiangsu province, we have not been able to operate the plant properly in the Q4 as the COVID shutdown made the Chinese economy to a lockdown impacting the steel production and our utilization rate. Our second plant in the province of Henan is completed and commissioning of the plant was finished in December last year. As Javier has explained, we were in China last week for the first time after 3 years. We had the opportunity to meet with the team, the authorities and customers and we are optimistic about how the country is developing. In the traditional business of Befesa, we are achieving good volumes. Although Q4 has been a very weak quarter from the steel production point of view, driven mostly by our stocking efforts, we have started Q1 seeing healthy levels of production through the markets, which will support our utilization levels. Moving now to our Aluminium Salt Slags and Secondary Aluminium business. Our Aluminium business has delivered another good quarter in a very challenging macroeconomic environment, which is quite remarkable. In the full year 2022, we have recycled 322,000 tons of salt slag, representing a 18% decrease compared to last year, driven by the temporary shutdown of the plant in Hanover, which have been repaired after the fire last year. Normalizing for these one-off operating efforts, the volume of salt slag will be 7% up year-on-year. During the Q4, the volume of salt slag has been down by 11% or up 3% on a normalized basis. The production of Secondary Aluminium alloys in the full year '22 has been 161,000 tons, a decrease of 14% over last year, also impacted by the shutdown of the Hanover plant. The plant has been fully refurbishment and we are now in the ramping up of operations. From the prices point of view, the aluminium price has increased 15% in the year, although in the Q4, the price for aluminium has decreased by 8% compared to the previous year. The high inflation of energy has had a total impact of more than EUR 26 million in the year, the majority of which we have been able to pass to our customers via increase of prices, collection fee and [indiscernible]. As a result, in the aluminium business, we have achieved a total EBITDA of EUR 46 million, down 6% compared to last year. In the Q4, total EBITDA had been EUR 12 million, down 20% versus last year. So all in all, a very challenging quarter and end of the year impacted by market conditions and a challenging environment. Now Wolf will explain the financial in more detail.

Thank you, Asier. Please turn to Page 8, the full year 2022 consolidated financial highlights. As mentioned by Javier, Befesa delivered a record adjusted EBITDA of EUR 214.6 million, up EUR 17 million or 9% year-over-year versus full year 2021 at EUR 197.6 million. Please note that not on an adjusted, but on a reported basis, EBITDA was higher and amounted to EUR 234.9 million, plus 24% year-over-year, largely attributable to the positive accounting effect from the U.S. zinc refining acquisition, which we normalized for when showing adjusted EBITDA. Overall, on the year-over-year adjusted EBITDA walk, the EUR 17 million improvement was mainly driven by our U.S. zinc operations contributing during the full year for the first time in 2022. Downward pressure was due to unfavorable zinc treatment charges, TC and energy inflation, which offset the benefits of year-over-year higher base metal prices. Reviewing the main drivers of the year-over-year EUR 17 million EBITDA improvement in more detail. On volume, overall, approximately EUR 23 million net positive volume year-over-year impact, as explained by Asier, mainly coming from the contribution of the U.S. zinc operations. On price, the overall approximately EUR 39 million positive price year-over-year impact was about 1/3 or EUR 12 million from steel dust business and 2/3 or around EUR 27 million from our aluminium salt slag business. I will explain in more detail on the following pages. On cost other, the approximately EUR 45 million cost other lever reflects mainly the higher inflation, primarily energy costs, which offset the year-over-year higher metal prices. In summary, adjusted EBITDA is at an all-time high of EUR 215 million with a solid 19% adjusted EBITDA margin even during these high inflationary times and while the U.S. zinc integration is ongoing. Total revenue increased by EUR 314 million or 38% year-over-year to EUR 1.136 billion, a new record level, compared to adjusted EBITDA increase of 9%. Consequently, EBITDA as a percent of sales stands at 19% versus 24% last year. The percent profitability decrease is mainly driven as explained by the record high inflation of around EUR 45 million as well as the unfavorable zinc treatment charge increase by around EUR 16 million. Net profit increased by EUR 6.5 million or 6.5% year-over-year to EUR 106.2 million in full year 2022, also a new record and equal to EUR 2.66 earnings per share. Cash stands at EUR 162 million and net leverage increased to 2.56, which I will explain later, together with net debt and net leverage performance on Page 11. This is after self-funding over EUR 50 million for the U.S. zinc refining asset and related acquisition costs. Please note, as always, in the appendix of this presentation, you will find as -- various financial and operational data tables with quarterly annual and multiyear views for your reference. Turning to Page 9, the Steel Dust Recycling Services results. Steel Dust Recycling Services continued to perform strongly and delivered EUR 169 million adjusted EBITDA in full year 2022, up EUR 20 million or 14% year-over-year. Overall, the EUR 20 million year-over-year EBITDA improvement was mainly driven by the U.S. zinc operations contributing for the full year in 2022. Downward pressure was due to unfavorable zinc treatment charges and energy inflation, which offsets the benefits of year-over-year higher base metal prices. The volume lever was positive by around EUR 28 million EBITDA year-over-year impact, as explained, mainly driven by the contribution from the U.S. operations for the full year. The net price lever was positive by about EUR 12 million with main price components being positive EUR 23 million, higher zinc LME prices, which were up 30% year-over-year to around EUR 3,300 per tonne on average, also positive EUR 5 million higher zinc hedging prices, up 11% year-over-year to around EUR 2,380 per tonne on average in the full year '22. Negative EUR 16 million, driven by the higher annual zinc treatment charges, which was set at $230 per tonne versus $159 per tonne in the prior year. Overall, the approximately EUR 12 million year-over-year positive impact from the price lever was offset by approximately EUR 20 million year-over-year negative impact from the higher inflation, mainly energy cost captured under the cost other lever. Revenue in the Steel Dust Recycling business increased by EUR 275 million or 60% year-over-year to EUR 730 million compared to adjusted EBITDA increase by 14% year-over-year. Consequently, EBITDA as a percent of sales stands at 23% versus 33% last year. The percent profitability decrease is mainly driven, as explained, by the record high inflation of around EUR 20 million, the unfavorable zinc TC increase by around EUR 16 million, as well as the zinc refining acquisition contributing to sales, but not yet for EBITDA in the fourth quarter. Going now to Page 10. The results of our Aluminium Salt Slags Recycling Services segment. Aluminium Salt Slags Recycling Services delivered a strong EUR 46 million adjusted EBITDA in full year '22. This was down EUR 2.8 million year-over-year when compared to the all-time high of EUR 48.8 million EBITDA reached in 2021. The year-over-year EBITDA development was mainly impacted by the lower market activity in the European automotive and aluminium industries. The higher energy prices were successfully offset by the achieved higher metal prices. The volume level was down by about EUR 5 million EBITDA year-over-year. As explained by Asier, this was primarily due to the Hanover plant being out of operation for the full year. The price lever was positive, about EUR 27 million with aluminium alloy Free Metal Bulletin market prices showing a 15% year-over-year improvement or a full EUR 327 per tonne increase as well as better aluminium metal margins. The cost other lever was around EUR 25 million, a negative impact year-over-year was driven by the higher inflation, energy cost trends with particularly high gas prices in Europe, thus offsetting most of the progress in price. Turning to Page 11, the cash flow, net debt and leverage results. On the EBITDA to cash flow bridge, starting with EUR 214.6 million adjusted EBITDA on the left and walking to the right. Working capital was up by about EUR 34 million year-over-year. The higher working capital consumption was very much to fund growth, including adjusted items related to the U.S. zinc refining acquisition. In addition, after collecting the majority of the Hanover insurance coverage, there are approximately EUR 10 million expected to be collected during first half '23. Interest at EUR 21.2 million, as expected, which equals to approximately 3% of the EUR 711 million gross debt at year-end 2022. Taxes at EUR 21.9 million, also as expected, which equals to approximately 17% of the EUR 130 million gross profit achieved in 2022, resulting in an operating cash flow of EUR 137.3 million in full year 2022, up 16% year-over-year, also a new record. The operating cash flow to EBITDA ratio amounts to approximately 65%, in line with the strong last 3 years average ratio. CapEx-wise, in the year 2022, we spent EUR 79.6 million regular maintenance CapEx as well as CapEx related to operational excellence, synergy projects in the U.S. and through the recovery of our Hanover plant where we partially got already and are getting the money back from the insurance. Normalizing for Hanover recovery and U.S. operational excellence CapEx, the regular maintenance CapEx amounts to roughly EUR 40 million in the year. Growth CapEx of EUR 71.8 million, including the majority or EUR 70 million -- $47 million for the acquisition of the U.S. zinc refining operations as well as our new plant at Henan in China. Dividends, EUR 50 million or EUR 1.25 per share were distributed in July, equal to 50% of net profit of the prior year 2021, as promised. As mentioned by Javier, Befesa is proposing a stable EUR 50 million dividend, EUR 1.25 per share, again for 2023, equal again to approximately 50% of net profit. Total cash flow amounted to negative EUR 62 million and cash on hand stands at EUR 162 million. Normalizing for over EUR 50 million to self-fund the U.S. zinc refining acquisition and related costs and about EUR 10 million of Hanover insurance in process, we ended the year with a balanced cash flow, a cash on hand of EUR 162 million, together with our entirely undrawn EUR 75 million revolving credit line provides Befesa with a strong liquidity of about EUR 230 million. The EUR 549 million net debt with the EUR 250 million adjusted EBITDA results in a 2.56x net leverage at year-end closing, again, after self-funding U.S. zinc refining acquisition. Turning to Page 12 on hedging. Our zinc hedge book is up to and including July 2025, approximately 2.5 years of hedges on the books. Our hedging strategy remains unchanged. Overall, considering the combined global hedge book, Europe, Korea and U.S. operations, the year 2022 was hedged at EUR 2,379 per tonne on average. The year 2023 is at around EUR 2,450 per tonne or $2,650 per tonne. The next year thereafter, the year 2024 at around EUR 2,550 per tonne or $2,750 per tonne. And the first half of 2025 is at around EUR 2,650 per tonne or $2,900 per tonne sold forward prices. We used an updated and estimated FX dollar to euro of $1.08 for 2023 and 2024 and around $1.10 for 2025. Summarizing the financial section before we turn to the growth, 3 points. One, Befesa delivered in 2022 record financial results with more than EUR 1.1 billion revenue and EUR 250 million adjusted EBITDA, above EUR 100 million net profit as well as about EUR 137 million operating cash flow, all on record levels despite the current volatile market environment. 2, our financial backbone is strong. Our hedge book covers up to and including July 2025. Our capital structure is efficient and long-term. After self-funding around EUR 50 million for the zinc refining acquisition in the U.S. and related costs, liquidity is more than EUR 230 million. And 3, this financial background supports us well to self-fund our growth road map, our latest sustainable global growth plan. Now back to Javier on growth and ESG.

Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for the 2023 as well as the new 5-year growth plan. 2022 was clearly a very challenging year in which we managed to achieve solid growth of 9%. For the next years, the growth plan that we announced at our Capital Markets Day is a strong plan and we are very confident about the execution and the delivery of the results we announced. With regards to 2023, as you know, we'll provide guidance once the treatment charge has been settled around end of March. However, I would like to comment the following. We expect 2023 to be another challenging year and we expect volatility. However, we see a solid floor in the result achieved in 2022. Actually, we are already in March and I can confirm that the first 2 months of the year have been better than the last quarter of 2022, which make us confident for the rest of the year. [indiscernible] hedging will clearly be a positive impact into 2023 as the hedging level for this year is higher than the one for the last year. We expect a positive impact of between EUR 12 million to EUR 20 million contributions from hedging depending on the FX euro-dollar. Treatment charge for zinc on the other hand is likely that will go up from the current $230 level. Remember that every $10 of change in the treatment charge has an impact of around EUR 2.5 million on our EBITDA. We expect this to be a negative impact in 2023. In North America, the recently acquired zinc refining plant would also contribute positively to earnings growth. Additionally, we have synergies coming from the [ AZR ] acquisition, which will actually materialize in this year. In China, we are optimistic that it is still very uncertain how the country will open after the strong lockdown they have suffered. Now we expect to see a gradual recovery and to have more visibility. However, it is difficult to know exactly what is going to happen in China. We expect to have volatility in Q1 and hopefully start to see increased levels of steel dust deliveries in the second quarter. We have 2 plants completed and fully ready to operate as soon as the market recovers. Overall, we expect positive contribution from China in the range of high single to low double digit in EBITDA. In the Aluminium Salt Slag and Secondary Aluminium business, which is a purely European business, despite that automotive industry continues to face a challenging situation in Europe, in 2022, we managed to achieve a strong result and pass through the energy increase to our customers. For 2023, we expect volume of salt slag to increase, driven by the restart of operations in our Hanover plant, after the repair in the plant. In the aluminium business, we expect similar volumes than last year. And finally, commodity price for metal and energy are a question mark for 2023. We expect volatility in the price of commodities to continue driven by instability at the macro level and uncertainties in the overall economy. Our hedging policy with around 70% of the volume of zinc hedged at good price will help us navigate this period of high volatility. Average zinc price in 2022 was EUR 3,300, up 30% compared to the previous year. This price is very high and we will see if it is remaining at this level for 2023. We also expect energy price to remain volatile. And at this moment, it is a question mark whether it will be a positive or negative impact in 2023. Finally, on future growth, as we explained at the Capital Markets Day, despite the short-term challenging situation we are facing, we have a strong growth plan to invest around EUR 400 million over the next 5 years to grow earnings at a high rate. This growth plan is based on global megatrends like decarbonization and a transition to electric vehicles, which are not going to go away and will drive market growth where we operate in our core businesses. This is translated into a tangible plan consisting of 7 projects across the 3 main markets we operate: Europe, North America and China, which will be funded organically with our own resources. The first of this project was the acquisition of the zinc refining asset, which we already executed in September last year. The next 2 projects we are already working on are the refurbishment of the plant in Palmerton in U.S.A. and the third plant in China. In China, in February, we signed the investment agreement with the local authorities in the province of Guangdong. We have identified the land lot to build a new plant and we are preparing the basic engineering of the plant at the same time that we have started negotiations with the local steelmakers. In North America, we have already started the refurbishment of the Palmerton plant. The engineering and design is in process and the request for quote with the price has started. They will carry out in 2023 and '24. In summary, in 2022, we achieved record EBITDA in a challenging environment. We expect 2023 to remain challenging. However, we will see a strong floor in the 2022 earnings level. And as I said before, the start of the year have been promising. We will navigate through this inflationary period successfully like we have done in the past. We are executing our growth plan that will deliver high growth over the coming years. We will keep our dividend policy of distributing circa of 50% of the net income and we are executing our ESG strategy to reduce our emissions by 2030 and 2050. Thank you very much.

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

[Operator Instructions] The first question is from the line of Michael Hoffman with Stifel.

I realize and I appreciate that you gave guidance at the end of March. Just directionally, do you expect to produce more profit, greater than EUR 214 million in 2023 than you did in 2022?

Michael, thanks for the question. Well, as you know, we will provide guidance once we know the treatment charge that will be in the first quarter earnings presentation in April. But as I said in the -- during the speech, we see a solid floor in the results of 2022. So we could say that that will be the lower part of the range we are going to provide to the market in April. And the upper range will depend -- let me say, basically of 4 things, basically, treatment charge, zinc price evolution, energy price evolution, especially coke which, as you know, affects 50%-ish, 50% of the total energy cost of Befesa and China evolution. So all in all, we will have a range between EUR 215 million in the lower part. And let's wait to April to define the upper part of the range.

That helps directionally. I appreciate that. And then Wolf, what is your expectation for capital spending in 2023?

Yes. Michael, thank you very much. Well, we'll define it further. But regular maintenance, IT, productivity spend is somewhere in the tune of EUR 40 million to EUR 50 million as usual, including the new operations. And then growth comes on top. And in growth this year, we are preparing in China, the third plant -- the third province, but there's not much broad spending. And then it is -- and Palmerton and the U.S.A., the refurbishment is the focus in this year that comes on top. So let's wait, but we don't expect to spend more than EUR 100 million of CapEx in this year, certainly not lower, probably more in the range of, I would say, EUR 40 million to EUR 50 million regular maintenance CapEx and then maybe EUR 40 million or so on growth, but not more. And we'll fine-tune that.

The next question is from the line of Ingo Schachel with BNP.

And the first one would be on what you call the promising start into the year. Just wondering whether you could give us a bit more color on which KPIs you were happy with the January, February performance. I guess zinc price were higher. So I can absolutely imagine that EBITDA is [indiscernible] in January, February, but did you also see the same volume growth or recovery from the Q4 level for steel dust throughput in Europe, for example? And maybe you can also comment a bit on the evolution of coke price inflation. We've seen a very strong spike of coke prices in the recent weeks. I would be curious to understand a bit better when exactly the inflation will hit you whether it's already included in what you said in February or whether there's sort of a big spike for incremental coke inflation in Q2 or whether you can actually sit it out because it seems to be a temporary phenomenon that you might have enough inventories to not have to buy at these very high prices in recent weeks?

Ingo, thank you for the question. Always long as well and this one is going to be longer than the answer. I mean the info regarding January and February will come obviously in the Q1, I mean, the specific results. And so what we can say today is that deliveries of that are higher than in November or December in all the geographies. This is, for us, the key issue that it is -- well, we have now the numbers even in February. So that's why I think that is very, very strategic figures to be provided today is not possible. But I think that I can say that the deliveries are higher. And the energy cost in the aluminium is getting down, so it's supporting good margins. And yes, it's true that still the coke prices are not getting down. So it's better to have a little bit more view to -- as Javier say, to see what the energy prices, especially in coke is going to happen during the next months. But yes, for us, it was a big -- as we have explained, the Q4 in terms of steel production, deliveries at the plant and so was the challenge because the steelmakers will slow down the production and activity. And well, the uncertainty was to see how the new year is coming and we can basically confirm that they are coming better, not in the full production, as you probably recall from steel players reporting, but I think it's better and this is a very good sign now that we are going to keep a level of production above the level of 2022.

And any comment on the timing of the, I would say, last coke's inflation or you can -- have to buy at current spot prices?

Again, Ingo, the line is not very good.

Okay. So sorry for that. I was just wondering on the recent spike in coke prices that you've seen in February, whether these will impact you already in the first quarter, on the second quarter or whether you would be able to [indiscernible] spot prices?

Got it now. Sorry, Ingo. Yes, the coke prices are -- is not the start to get down, but at least are stable prices similar to the last part of Q4 of 2022. So we only hope that the coke prices get down in one moment of the year because it's basically the only raw material or commodity that is still rising in the fixed level. And all the rest of the things are at least getting some decrease. Here it's not happened, but we do hope that it's going to happen during the, I don't know, Q2 or something like that.

The next question is from the line of Sandeep Peety with Morgan Stanley.

This is Sandeep Peety from Morgan Stanley. I have a couple of them. So firstly, are there any learnings from first 2 China plants that you are implementing while constructing the third plant? And the second question is more around -- so European steel mills will require much more scrap as they plan to decarbonize their operations given that we'll construct more EAF which will be based on scrap and DRI. And this would imply that scrap generated in Europe will stay locally. Do you think this will impact availability and quality of scrap in China in future?

Okay. Regarding the first part of the question, I think the most important learning that we have got from our first plant that we have been operating, as you know, in a very difficult situation during all the 2022 year is that China is -- and let me say, it is a normal country. We have operated the plant as we do in any other geography. We don't see a difference with the way we operate the -- not only the plant, but the business in North America, Europe or China. The steelmakers are normal steelmakers. The logistics runs very well. We have -- we are able to sell all the growth we produce in the internal market at competitive prices very similar to the one we get in the LME following the steel price. Financial conditions are okay. We have been able to finance 50% of our investment through local ones without bank -- company warranty. So at the end, we are -- we feel that we operate the plant as in any other geography. Again, I think this is, for me, the most relevant message we have sent to you. What's happened is that 2022 has been extremely difficult, but has been because the COVID restriction that we have suffered in 2 things. On the one hand, receiving less steel dust than contracted, less than stated than contracted because the production was below the normal levels. And second, because we have been obliged to shut down the plant several times because of the COVID restriction. And the second question, Asier, do you want to...

Yes, I think it's for the -- as Javier say, the learnings are that probably we are going to do in Guangdong the next kilns. I think that we are going to operate the same way and we have minor learnings from the construction and the other thing is that we are going to try to put in place long-term contracts before to run the plant. This is basically the planning in Guangdong. With respect to the second question about the scrap availability in the future in Europe, well, I think it's still early to say the scrap production or the scrap regulation in Europe is growing little by little with the GDP and probably there are going to be more availability. What is true is that there is a switch from blast furnace production to the EAF electrical furnace production. And it's true as well that BOF, although the use of the iron ore, they use 10%, 15% of scrap as well to refine and to do the refining and so on. So switching from one to the other, probably the good thing is that this scrap is going to go to the mini mills. In any case and as always, we try to explain is that those projects are based on DRI because they want to produce DRI coming from hydrogen and so on and then mixing DRI and scrap in the new facilities to be built. At least the theoretical or the plan, the big guys like Arcelor, Salzgitter, voestalpine, they are having. But in our case, what we can do is even the level of zinc contained in the task of the new projects are lower than in the current ones, imagine, at the end of the day, what is clear is that we can mix with the current steel dust that we are receiving. And then at the end of the day, what is going to happen is going to be more zinc to be collected in the area. I do hope that, yes, as you are right, the scrap is probably -- will be available, quantity enough to support the increase and could affect to the exports of scrap that the European Union is doing out of the territory [ Kubi ]. But I think it's like starting to be developed little by little, probably this world is going to have all of that [indiscernible]. But I think that it could be enough. It's not a matter to pass to some blast furnaces to electrical or mini mills for full scrap usage, it's not the case. So they are not going to need so much scrap like to affect [indiscernible] to the market. This is our view today.

The next question is from the line of Jaime Escribano with Banco Santander.

A couple of questions from my side. The first one, I didn't get the steel dust volume outlook for 2023. Maybe if you can repeat it for group sales. And maybe you can break down by geographies. How do you see steel dust volume evolving in each of your regions? And also a question regarding margins at salt slags which was quite high in 2022. It was around 35% in the first half, around 25% in the second half, probably if I'm not wrong because of the insurance collection from Hanover. The question would be, how should we think about the margin in salt slags normalized margin for 2023?

You didn't listen the outlook of steel dust production because we have not put on the table. I think...

No, but qualitatively, I think Javier mentioned if the volumes you see it growing or not, but maybe qualitatively you can tell us.

Even by volumes, no, we do expect it to slightly grow of the volumes. '23 is a kind of transition year that we have to catch up the steel production increase expected in '24 in U.S. and '25 onwards in Europe. So we don't know how '23 is going to be a very, very different year than the '22. This is the main idea that we can pass today. Slightly grow perhaps because we wait for that because China will definitely bundle more back. This is what we have in mind. So yes, we will hope to have increase of volumes, not very, very remarkable, but I think that is going to be driven by China increases. I think that is what we can say. Second part, Javier wants to answer that.

Yes. Regarding second question, yes, you are right. We have enjoyed a strong margin in salt slag during 2022 and that's been because we have -- we got some loss of profit from the insurance company and then -- but we have less revenue because we didn't sell the quantities. Anyway, we -- in our salt slag business, we have been able to pass through the market the increasing energy price we are suffering. And so we expect a very solid EBITDA margin and EBITDA contribution for the year -- next year. We'll be slightly below the one we have got last year, but with better volumes. So at the end, we expect a solid 2023 year in salt slag.

The next question is from the line of Lasse Stueben with Berenberg.

Just a question again on growth CapEx for this year. I mean your number kind of implies that there won't be too much coming from the 5-year plan. I guess you said Palmerton will be the focus this year. Can you just remind us sort of will we see any CapEx already for Guangdong this year? And how much we should be attributing to the Palmerton facility for 2023?

Yes. So 2023, you're correct. So you know that U.S. zinc refining acquisition is done, Henan is done and Hanover for the fire recovery is done, yes. So the focus is on our regular maintenance, IT, et cetera, program, which is EUR 40 million to EUR 50 million. And then you're right, on the growth side, growth and the productivity, SGGP programs, the focus is on the U.S. Palmerton refurbishment. And again, I would put there maximum EUR 40 million in the growth bucket and that's a combination of the Palmerton refurbishment, the record U.S. productivity programs and then maybe some very initial spend on design that, as Javier and Asier mentioned. The land acquisition because we already signed the land acquisition in the third province of China. Yes. But again, I would say, if it's the regular maintenance, EUR 40 million to EUR 50 million and up to EUR 40 million growth is around EUR 90-ish million. And then put that in perspective, if you go back to our Capital Markets Day, there we said that the initial years, we have a balanced cash flow. Where are we right now? Our operating cash flow run rate is somewhere around EUR 140 million, yes. Last year, 2022 was EUR 137 million operating cash flow. So call it somewhere around EUR 140 million. The only 2 things we need to fund from that is dividend and CapEx. Dividend, we said already, we were proposing EUR 50 million. So you take the EUR 140 million minus EUR 50 million dividend, EUR 90 million left. And that EUR 90 million is available to spend on CapEx, as explained. So I think that fits to also what we highlighted during the Capital Markets Day in November.

That's super helpful detail. And the second question, I realize I'm probably jumping the gun a bit in terms of 2023 guidance. But can you give us sort of how are you thinking about energy costs for this year? I remember sort of 2021 was about EUR 50 million, I guess, 2022 with coke prices in Q4, which probably somewhere, I don't know, a touch above EUR 100 million. How do you see that for this year? What's your kind of working assumption given where the prices have gone over the past 6 to 8 weeks? Any insights would be really useful.

Well, this is Rafael. But this is really a difficult question. We don't have the crystal ball. Anyway, what we have seen in the last quarter and what we have seen in the first 2 months of the year is that electricity and gas price are going down and are below the levels we got last year. But on the other hand, on coke, the prices are still at a very high level at the maximum -- at the peak we got in the third quarter of 2020 through '22. Well, as you know, coke represents pretty close 50% of the total energy cost for Befesa. For us, I would say we have 2 question marks. Let's -- what is going to happen with the electricity and especially gas price evolution probably you guys will have your -- our view. We feel that we are enjoying a positive momentum right now, but we are not totally curious this will stay for the full year. And second and for us, internally, the main question mark is if coke will follow the trend of the gas and electricity price as happened in the past. We feel that that will happen. But well, what we are seeing today is that there is a resistance in the coke price to follow the price of the gas and electricity.

The next question is from the line of Cameron Needham with Bank of America.

Just 2 quick questions from me. Firstly, just picking up on some of the comments on things like energy and coking coal, could you just remind us what's the sort of contracting in place there if prices do come up? Is there a bit of a temptation to sign something longer term to give you protection on your energy costs? And then second question, just on the aluminium business unit, typically much lower margin in the steel dust recycling unit. Why continue to spend a material portion of your growth CapEx on that business unit?

Regarding the coke -- kind of contract we are implementing in the last 1.5 years or even like that is normally the shorter term that we can. I mean it is a -- we say the spot basis. But in this field, like the typical utilities like gas, electricity that you can buy in monthly basis, here, you have to have 2, 3 months for delivering -- talking with the brokers or the dealers of the coke. So I would say that is the view that if not -- we have not, as Javier explained before, not a real view, make us to run in the short-term level of timing. So I would say, a spot basis and understanding what is the spot basis in coke. With regards to the aluminium...

Regarding your second question, yes, it's true that our Secondary Aluminium business has a smaller margin than the rest of the business. If it's not the case, the salt slag business that are -- as you can see in the presentation, in 2022, for example, we have -- we got better margins than in our steel dust recycling business. But regarding the Secondary Aluminium business, the only project we have including our growth plan is the increase of the -- the capacity -- expand the capacity of our Bernburg plant. Our Bernburg plant has been a very profitable business. We invest in the plant EUR 30 million, more or less. Out of that figure, EUR 10 million were subsidies. And we are getting more than EUR 6 million of EBITDA per year. So the payback of the plant has been really around 3 years. And this is what we expect for the expansion of the plant, again, to get an excellent payback. And on the other hand, we'll support the growth of our salt slag business there and as I told before, it's around 30% EBITDA margin business. So all in all, I think it deserves to keep this a small amount of CapEx that we are going to invest in this business.

The next question is from the line of Oscar Val Mas with JPMorgan.

Just 2 quick questions from my side. The first one, going to the U.S., the Palmerton refurbishment. Just to be clear, even though that plant is being shut for 2 years, do you expect any volume impact? Or can you shift the volumes to the other plants in the U.S.? And then the second question is going back to China. You talked about high-single-digit, low-double-digit contribution next year. Is that -- does that imply about 50% utilization? And how do we see that between H1 and H2? So how much do you expect in H1 versus H2?

I mean, regarding U.S. Palmerton, I think that -- yes, just a little bit what to understand. We have already basically the capacity we want to have in U.S. even to capture the increase of the market that we hold in the next year. But the fact is that we were deciding what is better is to derive -- to get the efficiencies that we have seen that because they are working, there were many possibilities like to build a new plant, like to build a new kiln or whatever. But finally, we decided to get the refurbishment of the current installation with Palmerton. That means not a proper increase of capacity because the bills of the work or the investment we are going to do more than that. We are going to increase capacity in a minor amount of around 20,000 to 30,000 tons of capacity. But the thing is that we want to capture the 200,000 tons that we estimate that we can capture in the U.S. market in '24 or '25 onwards with a proper technology to capture with all the synergies and to better -- to increase the margins in the U.S. So it's a combination of the capture of the increased capacities coming from the market and we have to be ready to capture in the best way. This is the idea of the funnel from the investment. Regarding with China, it's a difficult question to put numbers on the table, especially H1 and H2. We are running now the plants after the Chinese New Year. And what I have here or we have clear is that it's going to be definitely much higher than quantities that we are going to treat in 2023 rather than '22 where we ran just with 1 kiln and was more or less 50% of capacity. Here, we are thinking, yes, roughly 70% to 80% capacity in Jiangsu and Henan probably is in the 50%, 60%, something like that, you can consider and could be increased. We probably could be -- or could put more color on the next conference call when we have running 3 months because now it's very recently, the Chinese country is waking up from the Spring Festival in basically in February. So we are having just the view of 1 month and we have to confirm that what we are receiving is going to be in place for time. So yes, I think it's difficult for me to differentiate H1 and H2. But in general, we do hope there's going to be an increase for sure of quantities that we are going to treat in China.

The next question is from the line of Moomal Irfan with Goldman Sachs.

Just following up on China, you previously mentioned that 80% of the volumes were already contracted for the first plant. What about the Henan plant? Are those contracted as well? And also if you can comment on what the situation is like on ground currently, what are the biggest bottlenecks that you're seeing? And my second question is that at spot prices, do you see commodity prices offsetting the cost inflation from higher coking coal given gas prices have come off significantly?

When we are referring to the contracts in China is for the both plants and we have in place contract in Jiangsu plant and we have in place contract in Henan plant. As Javier explained and we explained during the speech, the contract normally is the whole production of that has to be delivered to the third plant in this case. And the fact -- the case is that you have an estimation in view of the production they estimate to have normally on a yearly basis. The question here is that because of COVID restrictions, the progress in '22, they were not fulfilling the quantities we estimate. Now we are starting to get the normal or the contract opportunities and that's why I answered before to Cameron -- or to Oscar, sorry, that the -- well, we hope that we're going to have more percentage of the production capacity of the company based on the contract we have. But it's in the case of both plants. In Henan plant, we are having contracts in the Henan province as well and we are having contracts in the surrounding areas and we need some more permits to move from one province to the other. So it's going to take a little bit more time. That's why we hope that solve all those issues during the next months and running at a good level. Obviously, as Javier is explaining, we don't know how it's going to happen in China to develop the full year. If the steel production is going to go full production or whatever with the recovery, this is uncertain. But what we are watching, what we are realizing now in February and again, it's very early, but it's going to be better than '22 for sure. We will see or we need more time to see how much is better or how much is the result. But definitely, we see like that. In the case of Guangdong, while we have this in place, we want to have those kind of contracts even before the construction of the company or the plant in the previous cases where at the same time [indiscernible], some of them are coming after the construction. Here, we have the chance to deal with very big players with a good zinc containing in the dust because they are using scrap in the area. So what we hope for Guangdong is to sign this letter of intent agreements or whatever or even the contracts to have secured that even before the plant is erected. This is what we intend to put in place. And anyway, it will be the same kind of contract with a tentative production and the full production to be delivered to Befesa. So the kind of the framework of the contract is the same.

Okay. And Moomal, regarding the third question, I understood that is a -- which could be the effect in the commodity price of the coke -- the high coke prices. Well, let's see, there is a clear correlation, not perfect, but good correlation between commodity price and energy prices. For me, it's hard to see that the coke price doesn't follow the trend of the rest of the energy price. So sooner or later could be in our opinion, is a matter of some -- of the timing of some delay, but sooner than later, we will see coke price following the energy price. And if the things goes normally, we should see a good correlation between commodity prices and zinc price and energy price.

The next question is from the line of Ingo Schachel with BNP.

Just wanted to follow up with 2 quick housekeeping questions on the zinc refining and/or other adjustment impact. So first of all, in the steel dust recycling EBITDA adjustments, can you quantify how much of the EBITDA adjustment does not relate to the zinc refining situation? And maybe also remind us on cash flow, when we look at the initial guidance of EUR 40 million at the lower end and the outcome that we've seen now what the, let's say, non-operational factors were, I guess, EUR 50 million zinc refining is a little bit of Hanover, but maybe you can remind us what the right bridges to be in the EUR 40 million and the EUR 60 million?

We have -- sorry, we have the same problem with the line as before. So it's very difficult to catch you entirely. I get the first part of the question about adjustment, okay. Well, the physical, as we explained in September as well is the part with the [ treatment ] of the accountancy, but it's net of the normal adjusted for the costs and other one-off adjustment that we have in the other proper operation as well with the insurance recovery for Hanover and it's a mixture of many things for positive and negative. The main one is obviously the [indiscernible] reference for accountancy value of the company.

And Ingo, just in 2 weeks, we will publish -- or 3 weeks, we will publish our annual report and you will have the note with all the explanation in the financial notes.

And we are not sure as the next question -- the other question, sorry.

I think it was really on the Hanover impact in the cash flow and let's say, how the Hanover insurance cash flow that is in the EUR 60 million negative cash flow differs from what you had expected in the initial EUR 40 million guidance?

Yes. Okay. In terms of the cash flow walk, if you go to the page, you see that the work starts with the EUR 215 million EBITDA and then you see about EUR 34 million negative impact in working capital, yes. Now when you look at that, half of that is traditional working capital to fund growth. The other half really of that EUR 34 million, about EUR 10 million is really Hanover still to be collected. We expect to collect -- the majority of Hanover fire recovery is already collected in 2022. There's about EUR 10 million that's pending, which we expect to collect in the first half of this year, yes. And then the other 1 quarter is onetime cost of acquiring zinc refining, which is, as always, that is onetime and has to be adjusted out, yes. Hopefully, that helps.

The next question is from the line of Jaime Escribano with Banco Santander.

Just a final question from my side. I know you are not providing guidance, but just for the sake of all being on the same page in terms of expectations. When you see the Bloomberg consensus at EUR 250 million EBITDA, how do you feel about this number? Is this ambitious? Is this something that could be close to the upper part of the potential guidance or asking in a different way, what needs to happen in order to meet this magnitude of EBITDA in terms of zinc prices, volumes, well, all the main moving parts that you mentioned, what needs to happen to be closer to this number? I think this would be helpful.

Again, you speak in -- give us 1.5 months more than we need to answer properly the question because it's not we are going to enter in any speculation. We have said and we maintain the message that the closing of the EBITDA of 2022 is for us and we see that as a solid floor for 2023. So we have a lower -- it would be the lower part of the range. And then there are several variables that influence the upper part of the range. Again, treatment charge, we don't know yet how much will be the increase. Seeing price erosion, we need to get more comfort in that point. Coke price, which is affecting a lot and as I said during the Q&A, we expect coke price following the rest of the energy prices, but let's see how long it takes to see that and finally, China evolution. So are -- still many variables open. In 1.5 months, we will have much better visibility and we will be able to provide guidance as we have done every year.

There are no further questions, and I hand back to Rafael Perez for closing comments.

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. Bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.