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

Ladies and gentlemen, welcome to the First Quarter 2024 Results Conference Call of Befesa. I am George, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. This time, it's my pleasure to hand over to Rafael Perez. Please go ahead.

Good morning, and welcome to the First Quarter 2024 Results Conference Call of Befesa. I am Rafael Perez, CFO of Befesa. And today, we have with us Javier Molina, Executive Chair of Befesa; and Asier Zarraonandia, CEO of the company. Javier Molina will start with an executive summary of the first quarter. After that, Asier will explain the business highlights of the period covering Steel Dust and Aluminium Salt Slags Recycling. I will then review the financials with a focus on prices, cash flow, net debt and our hedging program. Asier will close this presentation providing an update on the outlook for 2024 as well as our growth plan over the next 5 years. Finally, we will open the lines for the Q&A session. Before getting started, let me remind you that this conference call is being webcasted live. You can find the link to the webcast and the first quarter 2024 results presentation on our website, www.befesa.com. Now let me turn this call over to our Chairman. Javier, please?

Thank you, Rafael. During the first quarter of the year, we have continued the quarter-on-quarter improvement that we have started in the third quarter of last year. The period has been characterized by solid volumes across all businesses and markets despite a challenging macroeconomic environment. From the commodity price point of view, the weak average price in the first quarter has been partially compensated with better hedging level combined with a decrease in the zinc treatment charges as we anticipated. Total revenues in the first quarter have been almost EUR 300 million and adjusted EBITDA EUR 49 million, which represents an increase of 7% compared to previous quarter, showing a positive quarter-on-quarter trend. Comparing with the same quarter of last year, the results have been negatively impacted by the strong decrease in the average zinc price in the period of 23%, resulting in a year-on-year decrease of 3%. Asier will explain later in more detail the performance of the steel and aluminum businesses during the first quarter. From the growth point of view, there are 3 main areas to watch, U.S., Europe and China. During this year, our focus will be pretty much on the U.S. on various fronts. On one hand, we are focused on the integration of the U.S. recycling operations to capture the operational synergies, which we expect to consolidate along the year and contribute to increased earnings. Regarding the zinc refining plant in North Carolina, we expect this year still to be a ramp-up year and to improve the performance gradually. The focus now is on reducing the cost base. Also in the U.S., we continued the refurbishment works of the plant in Palmerton, Pennsylvania, which will enable us to capture the growth that we are seeing in the U.S. on steel dust recycling over the next 2 years. In China, the first quarter has continued to suffer weak steel production from our customers. In this environment, regarding the third plant in the province of Guangdong, we continue to focus on getting steel dust supply agreements with local producers to have certainty of supply before starting the construction of the plant. In Europe, we are progressing on getting the permits and the commercial contracts for the expansion of the secondary aluminum plant in Bernburg, Germany. With regards to the outlook for the full year 2024, we expect solid growth of EBITDA in the range of EUR 195 million to EUR 235 million, which represents between 7% to 29% year-on-year growth compared to the 2023 level of EUR 182 million. Asier will provide more details about how we see the guidance range and the different moving parts that drive our view for the year. We continue to be very optimistic about the midterm outlook of Befesa over the coming year. We have a well-defined growth plan based on the strong market fundamentals like the decarbonization megatrend, which represents a great market opportunity in our steel dust and aluminum recycling businesses. We have a growth plan, which is well diversified across regions and markets, which provide us the flexibility to move at different speed depending on the dynamics that we see in each market. And as we explained in the past, we can module the speed of the investment depending on the different dynamics that we see in the different markets. As such, we are adapting the execution of our growth strategy to the current situation in China. Now, Asier will explain the business performances in more detail.

Thank you, Javier. I will now provide an overview of the performance of the business in Q1 2024. Overall, the results in the first quarter of 2024 saw a consistent quarter-on-quarter improvements in Q3 of the previous year. The improved volumes, the favorable decrease in zinc treatment charges, better zinc hedges, lower energy prices and synergies were offset by lower zinc LME prices. Turning to the Page 7, the consolidated results of Befesa. Befesa delivered an adjusted EBITDA of EUR 49 million in Q1, which represents a 7% quarter-on-quarter improvement compared to Q4 of 2023. But however, still down EUR 1.5 million or 3% year-on-year. Let me take you through the main drivers of the year-on-year EUR 1.5 million EBITDA development in more detail. On volume, overall, approximately EUR 5 million positive volume year-on-year impact mainly driven by a solid volume development in Europe, which is the market where we achieved the highest margin, Turkey and the U.S. Also some contribution from the aluminium salt slags business with the Hanover plant back into operation. On price, overall, approximately EUR 12 million negative price year-on-year impact, explained by lower zinc LME prices and lower aluminum metal margins. About EUR 7 million from the steel dust business and around EUR 5 million from the alu salt slags business. I will explain in more detail later. On cost/other, overall, approximately EUR 5 million positive impact, mainly driven by lower operating costs in our steel dust and aluminium salt slags business, mainly through lower coke, electricity and natural gas prices. Turning to the Page 8, the results on our steel dust business. The steel dust delivered EUR 36 million of adjusted EBITDA in Q1, which represents a 12% quarter-on-quarter improvement compared to the Q4 of 2023. However, down EUR 1 million or 3% year-on-year. Overall, the year-on-year EUR 1 billion decrease in EBITDA was mainly driven by the 26% decrease in zinc LME market prices. The EBITDA year-on-year impact from volume was positive by around EUR 3 million, as explained mainly due to the solid volumes in Europe, Turkey and the U.S. Total steel dust volumes increased by 6% year-on-year to 303,000 tons in Q1 2024, representing an average utilization of 71%. On price, overall negative EBITDA year-on-year impact of about EUR 7 million with the main price components being. EUR 17 million negative impact for lower zinc LME prices, down 23% or around EUR 660 per ton year-on-year to around EUR 2,256 per ton on average in Q1 2024. This negative EBITDA impact from lower zinc LME prices was partially compensated with two positive EBITDA impacts. Firstly, EUR 4 million positive impact from higher zinc hedging prices, around EUR 140 per ton higher year-on-year on average. Secondly, EUR 6 million positive impact from the favorable decrease on zinc TCs, which was set at $165 per ton for the year 2024 versus $274 per ton in 2023. On cost/other, Befesa's coke average price continued further normalization in Q1 of 2024 to levels below the 2022 average price, driving most of the EUR 4 million positive EBITDA impact. Moving now to Page 9 with the results of our Aluminium Salt Slags Recycling business. Aluminium salt slags delivered again a solid quarter with EUR 13 million EBITDA in Q1, which represents a 5% quarter-on-quarter improvement compared to Q4 of 2023. However, EUR 1 million or 8% lower year-on-year. The year-on-year EUR 1 million EBITDA development was mainly due to the higher volume and lower cost primarily through the lower energy prices, partially offset by lower aluminum metal margins. On volumes, overall positive EBITDA year-on-year impact of EUR 2 million. Our recycling volume of salt slags increased by 35% to 111,000 tons in Q1, primarily driven by the reception of operation of the Hanover plant in Q2 of 2023. Our secondary aluminum alloys production volumes increased by 2% to 44,000 tons in Q1. With these volumes, we operated our plant at a strong utilization rate of about 95% in salt slags and 87% in secondary aluminum on average. With regards to prices, overall negative EBITDA year-on-year impact of about EUR 5 million, mainly driven by pressured aluminum metal margin versus the previous year. Aluminum FMB prices were 1% down, approximately stable year-on-year at around EUR 2,277 per ton on average. The negative price effect was partially compensated with year-on-year lower operating cost, mainly through the lower gas and electricity prices. Turning to Page 10 on key volume drivers. From the market point of view, although at global level, steel production in Q1 of 2024 stayed flat compared with the same period of the previous year, it has some different results by geographies. In Europe, the steel production decreased 1%, although most of the decrease came from the BOS side of the production. EAF production in Europe continues at solid levels, supporting the strong utilization levels in our plants. In the U.S., the steel production in Q1 decreased by 2% stable year-on-year. However, our volumes were higher compared to those in Q1 of 2023. In China, total steel production was 2% down year-on-year. The production from our EAF steelmakers customers is still weak, driven by a low level of construction caused by the weak real estate China is suffering. As a result, our plant in Jiangsu ran at around 60% utilization and Henan at 30% utilization. Now Rafael will cover more details on zinc prices, hedging and cash flow.

Thank you, Asier. Moving on to Page 11. As mentioned by Asier and Javier and as we anticipated, treatment charges for zinc were settled earlier this month at $165 per ton for the full year 2024. This is around 40% or $109 per ton lower compared to the $274 per ton in 2023, and it is positively impacting our earnings in 2024. This reflects the situation in the zinc market where there is a deficit of zinc concentrates driven by the closure of mines of zinc over the last months. Regarding zinc LME prices after the significant decrease seen during the last year of more than 25% on average. In Q1 of 2024, the price environment for zinc continuing to be volatile, trading between $2,300 and $2,600 per ton, with an average of $2,450 per ton. During the past weeks of April, zinc LME met prices have rallied and rebounded strongly upon touching the C90 cost curve, which is the marginal cost of the producer and represents a clear floor of the zinc price. Turning to Page 12 on hedging. Befesa's hedging strategy remains unchanged and continues to be a key element of Befesa's business model, providing earnings visibility and predictability, lowering the impact from zinc price volatility and, therefore, improving the stability of earnings and cash flow throughout the economic cycle. Our zinc hedge book covers 60% to 70% of our zinc exposure up to and including July 2025. Therefore, we have 14 months of hedges in our books at increasing hedging average prices around EUR 2,500 per ton in this year 2024 and around EUR 2,650 per ton for the first half of 2025. We are closely monitoring the market in the recent rally to look for opportunities to extend our hedging book over the Q3 of 2025. Turning to Page 13. On Befesa's energy prices. The page shows the evolution of the 3 energy sources that we have in Befesa: coke, natural gas and electricity. With regard to coke price, the normalization that started in the second quarter of 2023 has continued further into Q1 of this year to levels below the 2022 average price, approximately 25% lower compared to the Q1 of last year. This has a positive impact on our steel dust operations. Despite these positive trends, however, the average coke price in Q1 2024 was still around 45% above the average levels from the year 2029 and 2021 -- 2019 and 2021. Asier will comment further on our view around coke prices for 2024 when he covers the outlook for the year. Regarding gas and electricity prices, both continue to decrease further in Q1 '24 to average levels of 21%. And we were, respectively, about 40% and 30% lower on a year-on-year basis. This had a positive impact on our Aluminium Salt Slags operations. Turning to Page 14, cash flow, net debt and leverage results. Our EBITDA to cash flow bridge, starting with EUR 49 million adjusted EBITDA on the left and working to the right. Working capital consumption was up to EUR 34 million, primarily driven by the usual first quarter seasonality and timing impact. We expect to recover most of the working capital outflows throughout the year as we have done in previous years. Taxes paid decreased by 95% to EUR 0.1 million in Q1 '24, driven by the lower profit before taxes compared to the previous year as well as seasonality in the payment of taxes, resulting in an operating cash flow of EUR 15 million Q1 '24, down 27% compared to last year. CapEx-wise, in Q1 '24, we have invested EUR 16 million in maintenance CapEx, including expenditures related to the operational excellence and synergies projects in the U.S. and growth CapEx amounted to EUR 3 million related to the refurbishing project of Palmerton in Pennsylvania. Overall, total CapEx of EUR 19 million in Q1 '24. Asier will comment further on the CapEx guidance for the full year '24 when he covers the outlook for the year. Interest paid increased by 38% to EUR 9 million in Q1. This was explained primarily by the year-on-year higher Euribor from 2.3% as an average in Q1 of 2023 to 3.9% applicable in Q1 '24. After funding working capital, taxes, CapEx and interest, total cash flow amounted to minus EUR 16 million in Q1 '24. Cash on hand starts at EUR 90 million, which together with our entirely undrawn EUR 75 million revolving credit line provides Befesa with over EUR 150 million of liquidity. The EUR 622 million of net debt with the EUR 180 million of LTM adjusted EBITDA results in a 3.45 net leverage at the Q1 closing. Our capital structure is long term and efficient with no covenants and no maturities until July 2026. Now, back to Asier on outlook and growth.

Thanks, Rafael. Moving now to guidance for 2024 on Page 17. As Javier explained, for 2024, we expect solid earnings growth driven by a combination of various items. The impact of some of them is certain and well known, while the impact of other items is not so clear. Let me take you through all of them. Firstly, on treatment charges. As explained before, the lower TC of $165 for 2024 compared to $274 last year will deliver around EUR 25 million of positive incremental EBITDA. Secondly, on hedging. As explained by Rafael, the hedging level for 2024 is higher than last year. This will deliver around EUR 12 million of incremental EBITDA compared to last year. Number three, on energy and in particular, coke prices. As explained earlier, coke price is moving in the right direction and continues to normalize further. We still see different trends across the markets where we operate. In Europe, the reduction of coke price is higher than in the U.S. But overall, we are expecting a reduction on average coke prices of around 20% for the Group in the year. This will deliver earnings growth in 2024 of around EUR 10 million. Number four is the U.S., where we have to differentiate the 2 businesses we operate in the region, the recycling plants and the zinc refining plant. As we have explained, we expect some continued capturing the operational synergies and the recycling plant during '24, which are being materialized along the year and will deliver positive earnings contribution compared to last year. Also in the U.S., the zinc refining plant is still in ramp-up mode and we expect 2024 to be a year of turnaround and ramp up. In the past, the focus has been on improving the quality of the final product and increase the utilization on rate of the plant. Today, the focus is on cost reduction to improve the profitability. However, the reduction on treatment charges, together with the lower premiums in the zinc market will partially offset the improvement on the recycling business. Number five is China. In general, we expect 2024 to be a better year than 2023. Although we do not expect a recovery on the overall Chinese economy, especially in the real estate sector, we expect to increase the capacity optimization step by step of the 2 plants that we are operating today. We are working on expanding the customer base to other provinces. In Henan, we are targeting around 40% utilization, again, driven by expanding our customer base. The main headwind we expect to suffer in 2024 is coming from general inflation and in particular from increased salaries in Europe and the U.S. We expect an overall impact from inflation in the range of EUR 10 million to EUR 15 million in the full year. Finally, there is a question mark about metal prices for zinc and aluminum. Regarding zinc prices, it is always difficult to estimate, especially in the current environment in which high volatility dominates. As we have explained on many occasions, we clearly see a solid floor at the current levels of around [ $2,300 ]. However, in order to see an increase in the price level, we need to see an improvement in the overall macroeconomic situation where China plays a relevant role. Average zinc price in full year 2023 was $2,650 per ton. During the Q1 of 2024, the average zinc price has been $2,450. This is around $200 per ton lower than the average of last year. The weak zinc price is primarily driven by the weak global economy outlook, especially in China. Over the last days, we have seen a rally in the zinc price, which has pushed the price to the $2,800 per ton level. Regarding aluminum price and aluminum metal margin, we have seen a margin compression in the first quarter, which is something that we expected and which might continue during the rest of the year. Finally, from the volume point of view, we expect overall solid volumes in Europe in a steel dust and aluminium salt slags as well as solid volumes in the U.S. In summary, and considering all factors, we expect solid growth for 2024 in the range of 7% to nearly 30%, which will be translated into a full year adjusted EBITDA range of EUR 195 million to EUR 235 million. The midpoint of the guidance range is [ EUR 215 million ], which represents 18% EBITDA increase year-on-year. The lower end of the guidance represents a quite negative scenario in which zinc price continued at Q1 average of $2,450 per ton for the rest of the year. Chinese operations remain weak at breakeven levels. Coke price recovering happens at a slow pace and aluminum metal margins continued depressed for the interior year. On the other hand, the upper level of the earnings guidance consider zinc price increases to the level of $2,600, $2,700 per ton for the rest of the year. China started to deliver positive contribution as the year progresses and the coke price continues reducing to the levels of Q1 2022. We expect the positive momentum to accelerate as the year moves on and continue the quarter-on-quarter improvement that we are seeing since Q3 last year. Moving now to growth on Page 18. Regarding our midterm outlook, we remain very optimistic. We have a well-defined 5 years plan, which is based on a strong market fundamentals like the decarbonization megatrend. Decarbonization will drive EAF steel production in the key markets where Befesa operates, which will make steel dust production to grow in the coming years. Similarly, the electric vehicle trend will drive the demand of aluminum in Europe and the U.S. in the coming years as the automotive industry looks for lightweight solutions. Our growth plan is well diversified across regions and markets, which provides the flexibility to move from different speed depending on the development that we see in each market. In the current challenging environment, we are conscious about the capital expenditures, and we are adapting the CapEx to the dynamics that we've seen in the market. We have a well-defined growth plan in Europe, China and the U.S. to capture the growth opportunities that we are seeing in the market. The first part of the investment plan focuses on the U.S. with the refurbishment of the Palmerton plant, which has already started with the demolition work of 1 of the 2 kilns at the signing of the EPC contract. As explained in the past, the refurbishment of the Palmerton plant consists of the grade of the 2 kilns in the plant, one at the time in order to capture the growth that North American market is going to experience in '25 and beyond. The first phase of the project will be completed in the second part of 2024, while the second phase will be completed by the first part of 2025. The second focus of the investment plan is China, where we are developing a third plant in the province of Guangdong. The current situation in China characterized by a weak economic environment and weaker steel production makes us more cautious and adaptable to the situation of the country. The focus now is on securing the steel dust volume from our customers before start deploying capital in London. Despite the current challenging market environment, China has all the ingredients for Befesa to run profitable operations. The penetration of EAF is clearly increasing, they are implementing a strong environmental regulation, and we believe that the first mover advantage is essential. In Europe, with regards to the station of the secondary aluminum production capacity in the 16 plants of Bernburg in Germany, we are moving forward with the permit authorization and commercial contracts with customers. This project is in line with expected growth of the demand for aluminum in Europe, in Europe that we are seeing driven by the electrical vehicle penetration. Light weight solution are required to reduce emission and as a result, the aluminum content in cars will increase. Thank you very much.

Thank you, Asier. We will now open the lines for the Q&A session.

[Operator Instructions] Our first question comes from Sandeep Peety with Morgan Stanley.

I have a few questions. I'll take one at time. Firstly, is it possible to know how much contribution you have [ baked ] in for China plants and U.S. synergies at the top end of the guidance range?

Thank you, Sandeep. Well, you always try those things, but we cannot give a real number as basically, there are a lot of uncertainties. But basically, you have in the model, what is the contribution for both sides. So the risk at this is limited to the normal contribution of the China plant and as well the U.S. as well.

I think just to recall what we said in the past, in the upper side of the guidance, we're talking about China contribution of between EUR 6 million to EUR 7 million, okay, which is basically running Jiangsu at around 90% utilization and Henan at around breakeven, Sandeep. And then operational efficiency and synergies in the U.S., we talk about EUR 9 million to EUR 10 million.

Okay. [Technical Difficulty]

Yes. And that will be on the upper side of the guidance. Yes.

Okay. Okay. Very clear. And then one question is on growth CapEx. How much is attributable to the refurbishment at Palmerton? And what sort of CapEx are you baking in for Guangdong and the European operations in 2024?

Well, regarding the growth CapEx, as we have included in the presentation for the full year, we have a view of around [ EUR 120 million to EUR 140 million ] as a total CapEx. Out of that, maintenance is between [ EUR 35 million to EUR 45 million ], okay? And therefore, you will have a growth of between [ 80% to 90% ], okay? How much is that? That will be depending on the evolution of the year. Obviously, for Palmerton, I think we have assigned this year between EUR 30 million to EUR 40 million, okay, that will be to complete the plan. And then the remaining will be spread between Guangdong and the aluminum project in Europe in Bernburg, okay? Let's see -- I mean, one of the things that we have always explained Sandeep, and it's important that the understanding is that we can module the growth and the capital deployment depending on the evolution of the year, depending on the dynamics in the market, okay, managing the growth opportunities captured together with the balance sheet management, especially on leverage, okay?

Okay. That's clear. And then is there a rationale to approve Bernburg expansion, which is expected to have lower returns compared to your other growth projects in the pipeline?

No, no. I mean, basically, I think that we are asking for more or less the same return on the other project. So this is in line that we expect to have from the rest of the projects, Sandeep.

Okay, okay. And finally, if I can, is it possible to provide building blocks for 2Q, 2024 EBITDA expectations quarter-on-quarter, especially, what are your expectations for, again, China plants and U.S. synergies and benefits from the lower coke prices?

Well, basically, this is a difficulty now. I think that what clearly we do expect is to increase every quarter-on-quarter. This is what we can expect for all the reasons we have explained it, but it's difficult to quantify today. But depending on this basically in China and U.S. delivery. So what we can say in a positive view, I think that we have no doubt that it's going to improve every quarter.

Our next question comes from Michael Hoffman with Stifel.

Can we talk a little bit about the expectation. You were positive, but a little bit vague about the contribution you thought from the U.S. I thought we had $20 million of incremental synergy coming in 2024. Is that still the plan, but now just can I clarify on that?

Yes. Thank you, Michael. Well, $20 million was the magic amount that we talked when we did the acquisition. So part of those has been already taken in the last years. And now I think that could be in the remaining in the area of something around $10 million, as Rafael explained it. It could be more if the things come better, but it's in that range basically. However, and it's true that the finding plan should contribute at least with some positive or at least neutral results. But this year, it's going to be a little bit difficult because the developer of the zinc market in terms of premium for the zinc, especially high grades and so on. So in particular, in this business, we are going to have some headwinds. That's why -- it's not very easy to us to say what is going to be the U.S. contribution during the year, but will be in that range. I mean, not -- it's not going to kill us, about the $10 million, get it or not get it. That could be in the range. We are still think that it's going to be a positive contribution, talking about synergies and so.

Okay. And so that does leave us with at the midpoint of positive contribution from the U.S. It's not I misunderstood your comments that there was no incremental contribution year-over-year in the U.S.

Yes, more or less like that. This is the case.

Midpoint about $10 million?

Midpoint about even less than $10 million.

Okay. All right. That's helpful. And then if the real estate market just never gets better in China, sadly, can the cross-province selling and movement of electric arc furnace test, get the utilization to your targets? Is there enough volume to move around in the markets that you could get Jiangsu to 90 and Henan into the 60s or better?

Yes. I think as well, I will not say that never is going to recover the real estate business in China. It's a matter of time for sure. And all of us know that is going to happen. The question is when. And we are in the last results conferences and the meetings that we're having with you that we are repeating this. Now we are not the only one telling that. It's some reports from big houses is telling that there is a real crisis here. But coming to your idea, yes, we do still expect that the new customers coming for other provinces compensate. But at the end, it depends as well of the level of production in all in the provinces where we are and the other provinces, running at 40%, 50% capacity as they are now. Well, at the end is putting the things a little bit more difficult. But as we say in the explanation, we are still positive on China. Well, we are repeating this idea every time, but the recovery will come soon or later, and it's a matter of time. So we are positive in China, and we'll see how much of the recovery of how much, in other words, of the increase of steel dust production job, steel makers there they can. Other topic, which is on the table is like there is still the BOF to EAF transaction in China. And as well, they are starting to export more steel. So they have some tools as well to increase capacity. So let's see. I think that it's true that we are probably in the lower level of the cycle in the steel production in China, but sooner than later, the recovery will be then and we gradually will move to these ratios like you said.

Okay. And then am I correct in thinking about at the midpoint, the EUR 215 million or we approximate EUR 35 million to EUR 40 million comes from aluminum and then EUR 175 million to EUR 180 million comes from steel. Is that about the way to think about it for the year?

Around EUR 45 million from aluminum, Mike and the rest from the steel, that is all the idea.

So EUR 45 million from aluminum and then the rest would be steel at the midpoint. Okay.

So EUR 170 million.

Would you consider using the capital markets to get your leverage down?

It's something that we are not considering at the moment, Michael. And obviously, our leverage is above our target which is below 3 times and pointing towards 2.5 times. You need to consider that we are going through a heavy investment period. And we also have some commodity headwinds, which are the main drivers for the higher leverage. Let's see how the year evolves, we can manage the CapEx, as we explained before, but our target is clearly 3 times or below for the year-end. But we will not consider raising equity for reducing the leverage. We believe this is just a temporary situation.

Our next question comes from Juan Rodriguez with Kepler Cheuvreux.

I have 2 questions, if I may. The first one is on the positive medium-term outlook that you've signaled, but how should we see it? Because given by the current market dynamics, this should be more back-end to re-enter at the time? And in light with this, how do you see the consensus expectations for 2025 at EUR 259 million, if I'm not mistaken. That would be my first question.

Honestly, we are still very focused on the 2024 to make it happen that 2025 is a little bit far. Well, the trends continue and everything is going. So 2025 should be -- well, I would say, better, but we don't know yet. It depends on the evolution, especially of the commodity prices, right? So very early to say now about 2025, sorry.

Okay. Fair enough. The second is on decarbonization implementation of what you're seeing or steel producers in the EU is still in pace or has it been slowing down in our view.

Well, I think it's in phase and all the announcements are there, and we know we're being close to the field, like Arcelor is announcing and going further in Germany and France and in Spain with the changing [indiscernible] is going, [indiscernible] is going, which is clearly as well if there is some more time that we are expecting 3 years ago, 2 years ago when we announced the plan. So with some delays we see in Europe, the megatrend of the trend is going there, no doubt. And yes, perhaps is 1 year or 2 a little bit behind the idea. But we see that this is -- you cannot stop this. They are going to happen, and it's happening. That's it.

And the last one is on a quick one on the guidance for '24. What are your expected production levels for this year, in average?

In terms of production level probably is going to be the same level that we are showing in the Q1 in the range of 71% or 70% something, which is good for our current situation in the whole market could be a good reference in the steel business and the same for the alu and salt slags. We don't see any major changes. Some changes perhaps due to the maintenance standstill, but at the end of the day, as an average, I think it's a good reference the level of 70%, 72%.

Our next question comes from Lasse Stueben with Berenberg.

Just a question on the 2024 guidance. Just to get some additional color. So the lower end, I guess, is taking your Q1 run rate essentially is what you've done. But if we look at some of the EBITDA bridge components, it gets pretty difficult to get to that lower end without assuming some very bearish assumptions on the base metals prices and what happens in China. So I just wonder, is the bottom end as bearish as it looks on paper. And maybe you can just give some color on how you see the progression or the improvement in EBITDA through the year and what that implies for sort of where you feel like you sit within the 2024 guidance.

Thank you, Lasse. I mean -- yes, I said that [indiscernible] seems negative providing all the boxes that we are paying that are turning to positive. Yes, I think it's a negative. But I think that with the last year's development of the fins and with your political situation everywhere, nobody knows what is going to happen and could happen with the commodities and so on. So that's why we have to cover this part of the range. But I agree with you that probably is negative. And the view, especially now with the zinc prices at the level that we have currently depends it remains or not, but I think that could be really positive. The reading for us is everything that we were telling that that's going to be positive is becoming and delivering positive. So we see the trend very, very positive step for the zinc prices in the first quarter. So the rest of the things are good. Well, with 2 issues about, as we say, U.S. and China, but the contribution of those packets are not so high. So yes, I think that the view that we have for the 2024 is confirming the view that we have a couple of months ago. It is positive. It's going to happen that we are going to show on strong volumes, and we see basically is above 10%, above solid 2-digit growth, very clear on track.

And then one question just on China. You said [indiscernible] Jiangsu was at about 60% in Q1. But that probably makes it quite difficult to get to the 90% you're referring to. Is the -- just to be clear, is the 90% meant to be representative for the whole year or is it just towards the end of the year?

We still think that in the case of Jiangsu, we are not going to be far from that because in the Q1 because the Chinese New Year season with the stoppage of the production and so will come in. So we did basically contemplate that it's going to be in the Q1 a little bit lower. But we see that it's gradually increasing. And what I can say is we are not going to be very far from the 90%. We don't get to 90% as expected at the last part of the last year, could be 70%, 80% or something like that. And it still within like that. But of course, will depend if this lander or not, that's going to have an effect. But we are not negative. I think that it was expected to have a little bit lower Q1 because of that because the normal season of the holidays in steel production and our plant as well was considered in the guidance.

Okay. And then just on Henan, I mean it looks like it's going to be another tricky year. I'm just wondering kind of if we're looking over the next 2 to 3 years, I mean, what are you expecting? And when do you think you need to see a meaningful improvement in Henan to then what are the options going forward? I mean because I guess you don't want to run this plant at 60%, 70% utilization for the foreseeable future. So I'm just wondering how you're thinking about the Henan operations in terms of could you bring in the local partners, a JV or something like that?

We don't contemplate many changes because we track and we see very close to the operations that this is possible to grow them. We are getting every time more contacts with the steelmakers for these provinces for the rest of the provinces of around. So we see that it's a gradual increase. If we get this year, 60% is like in the case of Jiangsu, is gradually. So we have to see that it's going to be better the rest of the year. For the next years, same, it's going to be gradually increasing. You have to remember as well that Jiangsu took 1 year to get a 60%, 70% level because you have to change the normal life of the people there, which they were -- they are basically delivering the best, well, I don't know where. But at the end, the little by little, they go to the normal way, and we are moving there. We don't see the need to do very drastic decisions there and move forward. Well, taking a little bit more time. But as I say, China is very well. It's a very huge market that we should stay. And I'm sure that we are not in China, all of you are going to ask why we are not. So basically, we see that the Chinese real estate market is going to be recovered and even affecting to Henan as well the level of production and so. So no drastic measures. It's just, well, getting a little bit more time. But of course, it's not going to affect a lot to our profit and loss account. It's something that we can support. And as we say, we do still think that China is the current place to be.

Okay, understood. And then one brief one on the hedge book. You mentioned it already. It looks a bit light versus historic levels. Is this just tactical because of the recent rally or is there sort of -- has something changed structurally in the way you're thinking about the hedge book?

No. The hedging policy has not changed. Lasse. We continue -- I mean this is something that we have been using for the last almost 20 years, and it's very consistent. Obviously, we need to use the increases in the zinc price to extend the hedging book. Over the last week, we're having contact with all the hedging providers and we have locked in some volumes for Korea, but not something meaningful, but we are getting close. We are getting close today. We are 14 months ahead of us fully covered within our policy, and we will continue to monitor the market. At the moment that there is an opportunity, we will definitely grab it as we have done in the past at the right price.

Our next question comes from Jaime Escribano with Banco Santander.

So a few questions from my side. Could you elaborate a little bit more on the zinc smelter expectation? You mentioned that if I understood well that the margin that you are doing there is lower, just to know what could be the contribution of last year, if I recall well, it was something like minus EUR 7 million. How should we think about the zinc smelter this year? Second question would be on the salt slags, which Q1 came very strong. I don't know if there is a little bit of one-off there, but just if you can elaborate on that one as well. And finally, a question on dividends. So with the higher CapEx and the guidance that you provided, do you have any idea on how the dividend is going to be? Are you going to cut it a little bit or how should we think about that as well?

Well, the first one is a little bit confused to me. I don't think we have said that the last year was less 7%. What we are telling all the time is that these assets would be in the range of EUR 5 million to EUR 20 million. EBITDA contribution, EUR 20 million when this is going well and EUR 5 million when they basically get the ramp-up period and going like that. Well, it is something that we are always discussing with you. I mean it's an asset that this contribution in the whole Befesa probably with drivers different. It's not worth a lot to stop there and to explain the main driver. But it's true that this year, we are still in the low level of this range could be difficult to get a cruise speed because there are many things affecting to the business like especially the TCs that is good for the business in general, but for some works that we are acquiring for third parties is obviously more expensive. The premiums for the zinc metal in U.S. are down. So it's putting the things more difficult to get this level of EUR 5 million to EUR 20 million. Where we are going to be, will depend. That's why it's something that is open. But for sure, we are in U.S., very, very happy finally because the synergies for the kilns, for the Cycling business is going very well this finally. And I want to -- with the other is going to be, I'm sure, the positive contribution during the year, right? The Salt Slags, well, business is performing very well, very strong. I think that is helping by solid volumes, especially coming from Hanover, no one-offs. I think that is like the trend that was shown in the Q4 and going forward. And I think that it's very solid and very probably we expect very stable business in the Salt Slags. And we anticipate a what we intend and we are contemplated in the guidance and everywhere is to keep the same 40% to 50% dividend payout with our results. This is not a change of that, depending on the figure we finally get, but 50% is a good reference for the dividends payment.

Our next question comes from Jorge Gonzalez with Hauck & Aufhauser.

I have in fact a couple of questions for my colleague question on the guidance. So the first one will be around the positive effect of the lower treatment charges. Before the room also impressed now that it was going down to EUR 167 million, EUR 165 million, if I was not wrong, the consensus was already in EUR 225 million EBITDA. So taking into consideration the midpoint of the guidance that you are offering EUR 215 million, I was wondering how do you see our estimates, the estimates of the analysts? Where do you think we are maybe too optimistic, taking into account current market conditions. It is just the market price for zinc or if there are or if it is more related to our assumptions regarding the coke price or the margins in aluminum. So when do you see the higher assent to the numbers that maybe make this difference with the consensus at this point that will be interesting to see your view on this. And then regarding the hedges for the zinc price, I have noticed that in the first quarter, is in my numbers, maybe I'm wrong, the hedge price for zinc that you have in the first quarter was around EUR 2,600 instead of EUR 2,700. That is the number for the year. So I was wondering if you can confirm if this is correct and you're expecting the hedges to improve the contribution or to add a more positive contribution in the rest of the year or how is your view on that now on the contribution of the hedges to the year.

Regarding the first question about the range of the lower comparing with the consensus and so, well, I will not say that is a matter to be too much positive or not. It's depending on how you guys or all of you take all the boxes and all the items affected to our profit and loss account. It's true that the zinc price is one of the main drivers, and it depends on the average you take, you can move one part of the other. For me, the EUR 227 million or EUR 225 million EBITDA level is in the range that we see there. So it depends how you move the different boxes, you can be there or not. Imagine what price of coal you are considering, what price of rest of energy inflection, again, let's say. It's true that it is TC now, and that's why we are providing the results is now fixed, which is traditionally was one of the main driver of uncertainty, providing that the zinc price is always there, and we have the hedge to compensate to offset. And now out of the TC, there are many other things that we discovered in the last 2 years because the world developed about the energy prices and so that is affecting as well. So altogether, it's a little bit more different, more difficult story to compare what we are telling to what you guys are considering your models. In our view, which is no doubt is that Q1 is coming very positive, better than even expected out of the zinc price developer that is not on our hands. And again, we see that very positive development during the rest of the year. Well, out of the things that could be not in our hands, like in the same price or other prices of the commodities, but really, what we see is that all we can manage on all the things that we said is positive. It does lands in EUR 225 million or EUR 215 million or EUR 217 will depend on many things that is becoming in the business. But again, the positive growth is -- we have no doubt there that we are going to get. About the hedging, I think Rafael can add.

Yes. Basically, we disclosed the hedging on the -- I think it's #12 on the slide deck. For this year, the average price is EUR 2,500 in terms of euros. I don't know whether you have that confusion between the euros or dollars in terms of dollars, it's around $2,750 for the first quarter. The average is slightly below this level. This is the average for the year because the hedging book is composed by many, many small orders, but these are the numbers.

I was working on those numbers. So basically, the answer is yes, you have better hedges for the rest of the year or slightly better hedges.

Very slightly. The average for the year will be around $2,500 per ton, which should deliver around EUR 12 million as a contribution in terms of EBITDA for the full year.

Okay. Understood. And allow me, please, a last one, a follow-up on the guidance. So in Q4, if I remember well, you mentioned that you were even expecting utilization levels in China to reach something around 70% or 60% to 70%. I was wondering if this is still the case for the guidance at midpoint or you are a little bit more conservative at the midpoint of the guidance.

No. As I said before with the last question, we see that this was contemplated that is a gradual increase, mainly because Q1 is coming with the stoppage for the Chinese New Year, and it was contemplated. So we still see that the trend is going to be growing to which level we'll see, but I think that will not be very far from the level that we explained in the Q4. Perhaps we don't reach 90% in Jiangsu, could be 80%, could be 70%. And in Henan, we don't reach 60% could be 50%, it will be 40%, right? But this is one of the uncertainties to put the range of the delivery of the year. But in any case, it was gradually idea. I mean it's not like coming in just onetime. So we see that little by little improvement, but we will see how it's coming finally.

Our next question comes from Zgaya Anis with ODDO.

So I have one question on the guidance and on the low point of the guidance, the EUR 195 million. At this point, it could be achieved without any improvement in EBITDA for the next quarter, so even with the same level as the first quarter. While you say that you are confident on improvement quarter-on-quarter. So why are you so cautious on this level on the guidance and on the low point of guidance, especially given the zinc price recent rebound.

Yes. Well, it looks like we are negative, we're talking about the low part of the range, but I think that is, as we explained before in another question, it is probably negative view if we stayed there. But that means that, yes, it's like repeat Q1 for 3 times more in the year. We don't see this really, but we have to cover the low part of the range, as we said because you can never know what is going to happen. So in one part, we have to put the low end and this is a very negative view that everything is repeating. When we say negative, it is positive because we are growing and we're increasing the situation, but that will mean that the zinc price is going to stay as an average for the whole year in EUR 2,450 as an example. Well, nobody of us know what happened, but it doesn't look like it's going to happen like that, especially because, as you say, the zinc prices today are higher. So this is like that means that China, yes, as I say, we expect gradually recover and but does it happen. We expect no contribution for the -- all the things that we have done, even the coke is better, but it's not going further that we see. So well, I would say that it's not for me, it will be disappointed to be in the low end of the range, but we had to cover that position as well. Otherwise, all the items that we cannot manage come against us and with the volatility and with all the problems the world is facing in the last year, never say never. But really, we don't see this as a negative part that we are positive with developed a step with the zinc price. The rest of the things are going in the right direction. So we do expect a very positive year for 2024, growing from 2023. So we are very optimistic with the half or the midpoint of the guidance. That could be a reference always in the guidance. And then hopefully, we move towards the higher part. This is the idea. But we are positive with the situation. Again, we can manage. And basically, it is a very positive develop of the things that we were telling.

Our next question comes from Christoph Blieffert with BNP Paribas.

You are telling us that you are pretty positive on the year, but your guidance does not reflect us at all. So let's do the last. Let's take the one, EUR 82 million adjusted EBITDA as of last year. Let's add EUR 25 million of treatment charge that you already have in your books, so it's locked in. You are telling us EUR 12 million of positive hedging that you have in your books and you are telling us for longer your expectation on the coke price going down. Coke prices are going down. So let's take EUR 10 million. Let's be conservative on your cost inflation and let's take the EUR 50 million. And you are telling us for longer about your synergies coming in, let's take EUR 10 million, this brings us to EUR 225 million. Then you are telling us if zinc prices are on $2,450, let's assume this gets reality. This is a negative EBITDA impact of some EUR 50 million. This brings me to EUR 210 million of adjusted EBITDA for this year. The lower end of your guidance is EUR 195 million. So what is the EUR 15 million difference for? Where do you have concerns? What is the problem?

Well, basically, what we are considering is the base of EUR 182 million, which is a lot of insight, right? So the boxes are clear to us and not, but it depends what the coal price finally gets the EUR 10 million depends on the base that you get. Well, the hedge is there, the TC is there. But well, the production could be higher or lower. The zinc prices depending on the average finally price and so on. If you do numbers many times, you will get a situation where you are right, EUR 295 million or yes, that's why we are telling that we see more in the mid level rather than in the negative point. So I'd agree with you that if you get the boxes that we are showing is delivered into the range of the midpoint that is what we see. But it's a midpoint of the range, and we have to cover the other. Otherwise, we have to explain to the market changing all the time, the range and in a commodity business like ours, no matter that we are very well hedged in a big portion affects. So again, we have to cover the range, but we are not concerned especially nothing and basically, what we need to deliver is the boxes that you have put in there. And yes, with the question more about the same price that you take, don't forget that should be as well the average to get average of EUR 2,600, EUR 2,700, the 9 next months should be very, very high about that because they have to cover the $2,450. So it depends your variables. But yes, all the roads come to Rome and basically, yes, the midpoint could be a good reference or a little bit higher, hopefully. This is the case, Christoph.

And then on your hedge exposure for 2024. How many tonnes of single exposure are hedged.

We don't disclose that amount, Christoph, but on average, as we always explain, is between 60% to 70% of the total volume that we expect for the year. And that also goes into the first half of 2025.

How much of zinc exposure is for 2025?

The same between 60% to 70% until July 2025.

What has driven the increase in the CapEx for 2024 versus previous communication?

Well, basically, as we said, we -- there are 2 items. On maintenance CapEx, we are clearly reducing the annual expenditure to EUR 35 million to EUR 45 million levels. And then in terms of growth, what we have provided is an initial guidance, and we will manage throughout the year, okay? There are 3 main items that we are managing at the moment. One is Palmerton, which is a secure investment, and we are going to invest here, because we are halfway through. We have the project in Guangdong, that will depend on how we move forward with securing the volumes and the agreements with the customers, okay? Asier is traveling to China in the next couple of weeks to have a big meeting with the steel producers there. And then the other one is euro, okay. In Duisburg which is a low-risk profit because the plant is already operating for the last 10 years, delivering high EBITDA and high profitability. We're also having conversations with our customers. That is in the back of the growth of the aluminum demand in Europe driven by EVs, and that is a clear project in a great location in Germany. So when you put all those together, you will achieve the guidance. But I think let's see how we move forward with these 3 projects, okay? We will provide more communication throughout the year.

Has there been any significant cost overrun in your Palmerton plant?

No. I think we already anticipated some inflation in the CapEx, and that was already considered in the numbers that we provided. So no cost overruns on that end.

Is there any delay in the timing? In previous calls, you have said Q3 this year, Q1 2025 as major milestones? Is it still valid or is it something which should be considered?

Basically, what we are doing there is we are putting 2 brand new kilns in the plan. The first one will be ready by the end of this year, so second half of this year. The second one will be ready first half of next year, okay? So that is on time. And yes, no, I mean we stick to the plan that we mentioned previously.

Our next question is the follow-up from Jaime Escribano by Santander.

Just a quick one because I think we didn't ask about the zinc price, $2,800 per ton big surge in the last couple of weeks. Just to know if you have any insight from the reports you read or the information you have, what is driving this. What was the significant increase in the zinc price?

Jaime, always you have some questions that are special. Yes, if I will know this, probably I'm not sitting here explaining to you the Befesa results, right? That's the first thing. Now, honestly, and seriously, in my opinion, in our opinion, there is not a lot of rationale about this value, but that used to happen in these markets. And that's why we don't know what is going to happen the rest of the year. For us, one of the drivers for the zinc pricing and demand will be normally the Chinese demand because it's half of everything. But if it is going to be sustainable around the whole year or not, hopefully, but I don't know really. I mean at the same that you report that we read and everything, no really, really fundamental precise, but well, it is what it is. And anyway, I do prefer this level, right? This is something that I have here. I don't know you, Jaime.

No, I was asking just to -- yes, I know the visibility is very tough on zinc prices. But definitely, I mean, $2,800 looks a very good level. And I just wanted to understand if you had any insight on whether this is sustainable or whatever.

For me, it's true that the level of $2,400 of the first cut is quite a strange as well because it's close to the 390 that once again is sowing that when you add a lot of time there or 1 month or 2 months, then suddenly get up because probably mining is suffering there, and they are starting to announce stoppage and so what happens in the first Q. So probably I don't know if $2,800 is the level, that obviously is a good level for us to operate. Now the best because we hope when Chinese demand get up, should be moving up. But we are very small in this business, but I think that the fundamentals are normally like that. So I think it's a level that could be maintenance or not, we'll see. But definitely, it's better than the first Q, but the whole first Q was an average of $2,450. That for me is lower as well. So we will see. And all of us in the call, all of us in the home, you can have your ideas and you modelize whatever you think is going to happen.

Our last question is the follow-up from Zgaya Anis with ODDO.

So I have a quick question on hedging. I'm just wondering if is it possible to hedge the rest of the year '24? And if yes, why don't you do it? And my last question is on the stock price on the share price today, it took minus 9%. And how do you see the current share price? And are you considering any share buyback program?

Anis, on hedging, basically, we already hedged. As I explained, we are fully hedged until July 2025 at the volume, which is the average volume that we always hedge between 60% to 70%. So that is in our books. So we are not looking for hedging any more tonnages in this year. But the focus at the moment is on hedging second half of 2025, if and when we will get the right price, okay? As I said in my interaction, we are getting very close to there. And as soon as we get there, we will make the extension of the hedges, okay? And then on the share price, well, what can I tell you it's very frustrating for us, but it is what it is. We are not considering any share buyback. Obviously, we are managing CapEx, which is what we have to do to deliver the higher value to our shareholders, grabbing the opportunities and delivering the returns and managing the leverage, okay, which as we explained during the call, we want to be at around 3 times or even below targeting 2.5 times, okay? So we are not considering share buybacks at this moment in time.

Ladies and gentlemen, this was our last question.

Thank you all for your questions. You can now contact the Investor Relations team as 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 at our website, www.befesa.com. Thank you very much, and have a good day.

Ladies and gentlemen, the conference is now over. Thank you for the Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.