Befesa SA
XETRA:BFSA
Befesa SA
XETRA:BFSA
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Earnings Call Transcript
Other Earnings Calls
Hello, ladies and gentlemen, and welcome to the Befesa First Quarter 2023 Results Call. [Operator Instructions]
Let me now turn the floor over to your host, Rafael Perez, Head of Investor Relations and Strategy.
Good afternoon, and welcome to the First Quarter 2023 Results Conference Call of Befesa. Good morning to all of you joining from the U.S. Thank you for attending this conference call. 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.
Today, we are hosting this conference call from the recently acquired zinc smelter facility in North Carolina in the U.S., which is the reason this call is taking place at an initial time.
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. Wolf will review the financials in total and by business unit as well as cash flow and an update on our hedging program. Javier will close this presentation providing some thoughts about the outlook for 2023 and our 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-ed live. You can find the link to the webcast and the first quarter results presentation on our website, www.befesa.com.
Now let me turn this call over to our Chairman. Javier, please?
Thank you, Rafael. Good morning. As Rafael has explained, today, we are hosting this conference call from our zinc smelting facility in North Carolina in the U.S. Yesterday, we held the meeting of our Board here and all the Board of Directors of Befesa had the opportunity to see -- to visit the smelting facility, which is the only one in the world producing zinc from recycled materials.
As we have explained, the plant is still in ramp-up mode. And although during the first quarter, the plant has not delivered positive earnings, we are confident that during the year, the contribution of the plant will be positive. The first quarter of the year has been a challenging one for Befesa. Although revenue increased by 23% compared to the last year, driven by the integration of the smelter operations in North America, EBITDA was EUR 50 million, which is stable compared to the previous quarter, but 18% down compared to the previous year.
The main drivers for this decrease are: higher zinc treatment charge, which have been settled at $274, representing an increase of 19%; lower zinc prices, which are down 13% compared to the same period of last year; lower volume of steel dust, down 19%, driven mainly by the earthquake in Turkey as well as lower volume in North America as expected; as well as higher coke prices which have remained at the same high level than in the last quarter of last year.
On the other hand, the aluminium business has performed very positively in the quarter, benefiting from strong margins and a decrease in the energy prices in Europe. Asier will explain the performance of the steel and aluminium businesses in more detail later.
In this environment, our earnings outlook for the full year 2023 is between EUR 200 million to EUR 230 million of EBITDA, representing a 7% to a plus 7% compared to the previous year. I will provide more details about the outlook for the year at the end of the presentation.
From the strategic point of view, during the first quarter, we have continued the integration in the U.S. with the zinc refining plant that we acquired on September 30 last year, and which is still in ramp-up mode. Our expansion in China continued to progress with ramping up of the operation at the second Chinese plant in Henan. The two existing plants in Jiangsu and Henan are operating and will contribute to earnings in this year.
Now Asier will explain the business performance in more detail.
Thank you, Javier. I will provide an overview of the performance of the business during the first quarter of 2023. Overall, the first quarter has been a challenging quarter as explained by Javier, impacted by a combination of lower metal prices, high energy costs and lower volume. The strong performance of the aluminium business has partially compensated the weak performance of the steel dust business.
Starting with the Steel Dust Recycling. In the first quarter, total steel dust throughput was down by 19%, reaching 274,000 tonnes, mainly due to Turkey and the U.S. Compared to the previous quarter, volume of steel dust in the first quarter decreased by 8%. In Turkey, where we have a plant in the Iskenderun region, as you all know, 2 terrible earthquakes took place at the beginning of February. The impact of the earthquake in the region around the plant has been severe, and we are grateful that none of our employees and contractors were injured.
However, the humanitarian situation is dramatic with many people lives lost and many houses ruined. The full recovery of the area will take time, but there are now some industries coming back to work gradually. Among them some are steelmakers in the area. Although we have some volume decrease in the first quarter, the plant has been back to operations since March and we expect the plant to continue operating as normal for the rest of the year.
In the U.S., the integration of AZR into Befesa is developing well. As we already anticipated, volume of steel treated in the U.S. has been lower compared to the last year, driven by the loss of world contract with volume we expect to recover over time. The refining facility, which we acquired last September, is also being integrated in Befesa. The plant is completed, fully commissioning and it is still in ramp-up mode. Contribution in the first quarter of the year has been EUR 2 million negative, mainly due to the high inflation. Nevertheless, we expect a small positive contribution to EBITDA in the full year 2023.
Additionally, in the U.S., we are working on the operational efficiency projects that will drive synergies to be captured during the second half of the year. At the same time, we are preparing the Palmerton plant for the refurbishment to free up capacity and be able to capture future growth in the market.
In China, the plant of Jiangsu has been operating at a low capacity utilization during the first quarter. Our second plant in the province of Henan is completed and commissioning of the plant is finished. The plant is operating now. Our view is that China is gradually recovering from COVID. And we are optimistic about how the country will develop over the coming months as we see higher levels of deliveries from our customers.
In the traditional business of Befesa like Europe, we are achieving good levels of utilization and volume has been very stable in the period. From the prices point of view, LME prices decreased by 13% in the period from EUR 3,330 last year to EUR 2,900 this quarter. The increase in the hedging price has not been enough to compensate the decrease in the LME prices.
Inflation in general went up in the quarter across the Steel Dust business, in particular, coke prices, which increased another 6% compared to the previous quarter and more than 40% compared to the previous year, producing a negative impact of EUR 5 million in the quarter. Coke price remained very high across all the regions at historical high levels, and so far we have not seen a decrease in the price like we have seen in other energy commodities like electricity or natural gas.
Coke today represents more than 50% of the total energy cost in Befesa. As a result of all the above, total EBITDA in the Steel Dust business has been EUR 37 million in the first quarter of the year, down 32% compared to the previous year and flat if we compare to the previous quarter.
Moving now to our Aluminium Salt Slags and Secondary Aluminium business. Our aluminium business has delivered another very good quarter in a still challenging macroeconomic environment. During the first quarter of the year, we have recycled 82,000 tonnes of salt slag representing a decrease of 6% compared to last year, driven by the temporary shutdown of the plant in Hanover, which was still under repair during the majority of the first quarter. The plant has been fully refurbished, commissioned and the ramp-up has been completed. The plant is now back to operations.
The production on Secondary Aluminium alloys in the first quarter was 44 million tonnes, an increase of 3% over the previous year. From the prices point of view, aluminium price has decreased 12% in the quarter compared to last year to EUR 2,300 per tonne. On the other hand, the strong metal margin of aluminium has represented an important increase compared to last year. The high prices of energy that we suffered last year in Europe for electricity and natural gas have reduced significantly during the first quarter of the year, representing a positive impact on the business. As a result, in the aluminium business, we have achieved a total EBITDA of EUR 14 million, up 82% compared to last year.
So all in all, a very challenging quarter in Steel Dust impacted by lower metal prices and high coke prices, partially offset by a strong performance of the aluminium business.
Now Wolf will explain the financials in more detail.
Thank you, Asier. Please turn to Page 8, the first quarter 2023 consolidated financial highlights. As mentioned by Javier, Befesa delivered an adjusted EBITDA of EUR 50.1 million, approximately flat quarter-over-quarter versus first quarter at EUR 50.7 million. Nevertheless, down EUR 11 million or 18% year-over-year versus first quarter '22 at EUR 61.1 million.
Overall, on the year-over-year adjusted EBITDA walk, the EUR 11 million development was mainly negatively impacted by the lower zinc LME market prices, including the unfavorable zinc treatment charges, up 19% partially offset with strong aluminium prices, metal margins and lower volumes, including Turkish earthquake.
Reviewing the main drivers of the year-over-year EUR 11 million EBITDA development in more detail.
On volume. Overall, approximately EUR 4 million negative volume year-over-year impact as explained by Asier, mainly coming from the earthquake impacting operations in Turkey, the U.S. operations and the Hanover plant ramping up in Q1, partially offset with higher Secondary Aluminium alloy volumes.
On price. The overall approximately EUR 4 million negative price year-over-year, it's about EUR 9 million negative from the Steel Dust business, mainly due to lower zinc prices, including the impact of the higher TC and around positive EUR 5 million from the Aluminium Salt Slags business. I will explain in more detail on the following pages.
On cost/other, the approximately negative EUR 3 million cost/other lever reflects mainly the continued record high coke prices, partially offset with year-over-year lower gas and electricity prices.
Total revenue increased by EUR 60 million or 23% year-over-year, plus EUR 27 million or 9% quarter-over-quarter to EUR 322 million in the first quarter of 2023, driven mainly by the U.S. operations. Cash stands at EUR 143 million, which, together with our entirely unused EUR 75 million revolving credit line, provides more than EUR 200 million liquidity and net leverage at 2.8x, which I will explain later, together with the net debt and leverage performance on Page 11.
Note, as always, in the appendix of this presentation, you will find, as usual, 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 delivered EUR 37 million EBITDA in the first quarter, approximately flat quarter-over-quarter versus Q4 2022 at EUR 37.6 million, nevertheless, down EUR 17.8 million or 32% year-over-year. Overall, the year-over-year EUR 18 million EBITDA development -- negative development was mainly impacted by lower zinc LME market prices, including unfavorable TC at $274 per tonne, which is up 19% year-over-year; continued record high coke prices, as Asier mentioned, up 6% quarter-over-quarter or 41% year-over-year and lower Electric Arc Furnace Steel Dust spots.
The volume lever was negative by around EUR 3 million EBITDA year-over-year as explained mainly impacted by the earthquake impacting operations in Turkey and U.S. operations. The net price lever was negative by about EUR 9 million year-over-year with main price components being negative 10%; lower zinc LME prices, down 13% or approximately EUR 400 per tonne to around EUR 2,900 per tonne on average; up 2% higher zinc hedging prices, up 3% year-over-year to around EUR 2,350 per tonne on average; and a negative 2.5% driven by the higher annual zinc treatment charge, which was set at $274 per tonne versus $230 per tonne last year.
Further pressure came through the cost/other lever with approximately EUR 5 million year-over-year, impact mainly due to the continued record high coke prices as explained, up 41% year-over-year.
Revenue in the Steel Dust Recycling business increased by EUR 60 million or 39% year-over-year to EUR 260 million, driven by the U.S. operations. Consequently, EBITDA as a percent of sales stands at 17% versus 35% last year. The year-over-year profitability decrease is mainly driven, as explained by the lower zinc market prices, including the unfavorable zinc TC increase, record high coke inflation as well as the zinc refining acquisition contributing to sales, but not yet to EBITDA in first quarter as explained by Asier.
Going now to Page 10, the results of our Aluminium Salt Slags Recycling Services segment. Aluminium Salt Slags delivered a record EUR 13.8 million EBITDA in first quarter, up 82% or EUR 6 million year-over-year and up EUR 2 million quarter-over-quarter. The year-over-year $6 million EBITDA improvement was mainly due to strong metal margins with lower gas and electricity prices. The volume lever was slightly down by about EUR 0.5 million EBITDA effect. As explained by Asier, this was primarily due to the Hanover plant ramping up in the first quarter, which was partially offset by the higher Secondary Aluminium alloy volumes.
The price level was positive about EUR 5 million with aluminium alloy Free Metal Bulletin market price is showing a negative 12% year-over-year or $326 per tonne decrease, which was more than compensated with strong aluminium metal margins.
The cost/other lever was around EUR 2 million EBITDA positive effect year-over-year, was driven by the lower gas and electricity prices. EBITDA as a percent of sales in Salt Slags remained strong at above 30%.
Turning to Page 11. The cash flow, net debt and leverage results. On the EBITDA to cash flow bridge, starting with the EUR 50.1 million adjusted EBITDA on the left and walking to the right. Working capital was up by about EUR 28 million year-over-year, very much driven by the usual first quarter seasonality and timing impact. In addition, remaining approximately EUR 10 million in final process insurance recovery proceeds for Hanover expected to be collected during the second quarter. Interest at EUR 6.8 million, as expected, with the first of the 2 biannual Term Loan B interest payments made in January. Taxes at EUR 2.4 million, also as expected, resulting in an operating cash flow of EUR 13 million in the first quarter.
Normalized for the pending final Hanover fire insurance proceeds expected in the second quarter, the year-over-year performance was approximately stable. CapEx-wise, in the first quarter, we spent EUR 27 million maintenance CapEx as well as CapEx related to the final recovery of our Hanover plant, approximately EUR 9 million, where we expect the final EUR 10 million insurance proceeds in this quarter in the second quarter.
And related to the operational excellence synergies projects in the U.S., about EUR 4 million, normalizing for Hanover recovery and U.S. operational excellence CapEx, regular maintenance CapEx amount to roughly EUR 40 million in the first quarter, as usual. Growth CapEx of EUR 5 million, including the remaining expenditures for the Henan project.
Overall, total CapEx of about EUR 32 million in the first quarter normalized for EUR 9 million. Hanover spend to be refunded is circa EUR 22 million to EUR 23 million times 4 equals the approximately EUR 85 million to EUR 95 million CapEx guidance, which we'll talk later about for the full year '23.
After funding working capital, interest, taxes and CapEx, total cash flow amounted to negative EUR 19 million in the first quarter. Cash on hand stands at EUR 143 million, which together with our entirely undrawn EUR 75 million revolving credit line provides Befesa with a strong liquidity of more than EUR 200 million.
The EUR 572 million net debt with EUR 204 million last 12 months adjusted EBITDA results in a 2.81 net leverage at Q1 closing.
Turning to Page 12 on hedging. Our zinc hedge book is up to and including July 2025, thus approximately 2 years of hedges on the books. Our hedging strategy remains unchanged. Overall, considering the combined global hedge book, Europe, Korea, U.S. operation, the year 2023 is hedged at around EUR 2,400 per tonne or $2,650 per tonne. The next year, the year 2024 at around EUR 2,500 per tonne or $2,750 per tonne. And the first half of 2025 at around EUR 2,650 per tonne or $2,900 per tonne sold forward prices. Here, we used an updated and estimated foreign exchange dollar to euro of 1.10 for 2023, '24 and '25.
Summarizing the financial section before we turn to the outlook and growth, 3 points. One, Befesa delivered in the first quarter EUR 50 million adjusted EBITDA, stable with the fourth quarter 2022 results, also impacted by the lower zinc market prices, including the unfavorable zinc TC and the record high coke prices. Secondly, our financial backbone is strong. Our hedge book covers up to and including July 2025. Our capital structure is efficient and long term with more than EUR 200 million liquidity. And three, the financial backbone supports us well to self-fund our growth road map over the next years.
Now back to Javier on outlook growth and ESG.
Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for the year 2023 as well as the new 5-year growth plan.
As we have explained during the call, the first quarter was a challenging quarter with many drivers putting downward pressure on the business like treatment charge, zinc price and coke price. In general, as we already explained in the previous call, we expected 2023 to be another challenging year and we expect volatility. As a result, we expect the full year 2023 EBITDA between EUR 200 million to EUR 230 million. Treatment charge for zinc, as we expected, has been settled at $274 per tonne compared to the $230 level on the previous year. This will have a negative impact of around EUR 10 million EBITDA in 2023.
Zinc price hedging will clearly be a positive impact this year, as the hedging level for 2023 is higher than the 2022 level as Wolf has explained. However, LME price and exchange rates are less favorable than last year. Average price -- average zinc price in the first quarter has been around EUR 2,900 compared to more than EUR 3,300 last year, representing a decrease of 13% and today is even lower. As such, we expect negative contribution from lower blended zinc prices, which include hedging, LME and exchange rate.
On energy, in the first quarter, we have seen historical high levels of coke price across the markets where Befesa operates. Coke represents more than 50% of the total energy cost in Befesa. And today, we have a long-term contract in place, which means that we are exposed to the spot price. It is difficult to anticipate how coke price will evolve during the year. In North America, the recently acquired zinc refining plant is still in ramp-up mode. And although the contribution in the first quarter of the year has been negative, we expect a small positive contribution to earnings growth in 2023.
Additionally, in the recycling plants, we have some operational synergies coming from the recent acquisition, which will partially materialize in the second part of this year.
In China, we want to be optimistic, but it is still very uncertain how the country will open [ and able ] during the year. We are seeing a gradual recovery during the first part of the year. In the first quarter, the volume of Steel Dust processes has been low. However, we are confident and we are starting to see increased levels of Steel Dust deliveries in the second quarter.
The second plant in Henan is fully commissioned and in operation. Today, we have 2 plants complete, commissioned and in operation, which will increase the utilization as soon as the market recovers. Overall, we expect positive contribution from China in the range of high single-digit EBITDA.
In the Aluminium Salt Slags and Secondary Aluminium business, which is a purely European business, despite the automotive industry continues to face a challenging situation in Europe, the strong result of the first quarter makes us be optimistic for the rest of the year. The business is clearly benefiting from a decrease in the energy prices in Europe on natural gas and electricity. We expect a stronger volume in 2023 compared to the previous year, driven by the restart of operations in the Hanover plant after the repair of the plant.
Summarizing these dynamics into the outlook for the year. The lower end of the guidance range at EUR 200 million EBITDA represent a decrease of 7% year-on-year. Although there are many moving parts in this scenario, Befesa would continue delivering an average run rate of around EUR 50 million per quarter. Zinc prices would remain around EUR 2,800, EUR 2,900 for the rest of the year, and coke price would remain high. The recovery in the Chinese economy will be delayed, which is related into a small contribution for our operations in China. In North America, the contribution of the smelter would not be material and synergy could be delayed to the next year due to high inflation.
The higher end of the guidance range at EUR 230 million EBITDA represent a growth of 7% year-on-year. In this scenario, Befesa would benefit from a gradual increase in earnings through the year. Coke prices are expected to decrease in the second part, and China momentum accelerates through the year. In these scenario, zinc price would improve in the second part of the year.
The U.S. will deliver the expected synergies and the zinc smelter would also deliver positive earnings. Volume in the rest of the traditional markets of Befesa will remain similar to the last year.
Finally, on future growth, as we explained at the Capital Market Day, we celebrated in London last quarter, 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. The market growth opportunity is translated into a tangible plan consisting of 9 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 at the refurbishment of the plant in Palmerton in North America and the third plant in China. In China, in February, we signed the investment agreement with the local authorities in the new province of Guangdong. We have identified the landlord to build a new plant, and we are preparing the basic engineering of the plant, while we have started negotiations with the local steelmakers.
In North America, we have already started the refurbishment of Palmerton plant. The engineering and designing are in process and the request for quote with the price has started. The refurbishment will be carried out to 2023 and 2024.
So in summary, 2023 will be a transition year for Befesa. The first quarter was challenging, and we expect the rest of the year to remain so. We expect, as I have said, 2023 to be in the EUR 200 million to EUR 230 million range of EBITDA. We will navigate through this inflationary period successfully like we have done in the past, and we are executing our growth plan that will deliver higher growth over the coming years. We will keep our dividend policy of distributing between 40% to 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 now open the lines for your questions.
[Operator Instructions] The first question comes from Michael Hoffman, Stifel.
Sorry, lost my voice at Waste Expo. Javier, can I -- I must misunderstood, so I'm just asking for a clarification. Do you expect the U.S. to be profitable overall? Or was it the comment that the smelter was in the contribution? I misunderstood.
Asier is going to answer the question, Michael.
Yes, Michael. I think it's a -- we are in the final part of the ramp-up or the commissioning of, what to say, I said, complex plant. And it's some delay in the reduction of the final cost, but I think that is changing and the second part of the year is going to be able to overpass the losses of the first quarter and then with a small positive contribution at the EBITDA level for the plant. Yes, this is the idea.
So overall, North America is profitable and then the smelter would be incremental to that. I just want to be clear.
Right, right.
Absolutely.
Okay, okay, okay. That's what I thought. I kind of misunderstood that. I just want to clarify that. And then when we are watching your business from a macro standpoint, what should we be watching at this point by geography? Is it overall industrial production in China and watch that trend? Or is it a consumer spend? And then in Europe, are we only really focusing on the auto industry at this juncture and seeing what turn they're making? How do we think about the things that move you from the low end to the high end that drive demand that helps improve fundamentals?
Well, it's a very good, but difficult question. Let's analyze by geographies. We see Europe quite stable, frankly speaking. We don't see big changes in our main market during the year. We -- regarding North America, Asier has explained before, our recycling business is as well stable. The market is quite stable with all the investment plan of the Biden administration. We see very positive signs in the short and medium term. That's why we are investing in some new projects in North America.
And well, what we need is time for 2 things. First, to recover some customers that will -- that the company lost before our entry, as all of you know. And we are doing a good job in that sense. So we are confident and positive that we will increase volumes '24, '25. And then we need some more time, first, to get all the synergies we can get in our recycling business, doing all the changes in the processes, et cetera, that we are executing right now. And then we need some more time, as Asier has explained, to finish the ramp-up in the smelting business.
So I feel that North America is a clearly growth market for us for all the reasons I'm explaining. And then Asia except China is quite stable, which we will see recovery in -- especially in Türkiye after the terrible earthquake. South Korea is a very stable market. And then we have China. Well, in China, we are very optimistic. Even in the short term, we are still seeing the recovery of the market. Even the global figures of the Chinese economy are very positive, and everybody is talking about recovery.
We are not seeing still a total recovery of our deliveries. So that means that we are -- we expect some improvement in the deliveries from our customers. But clearly, China will be a growth market. So overall, we feel positive. As I have to repeat, 2023 is a transition year, we have some headwinds in front of us, especially coke price, treatment charge and lower zinc price. But we expect that our -- we feel confident and positive that our -- all our markets will evolve in a positive manner during this year and the following.
Okay. One last one. Philosophically, given this challenging year, would you expect the dividend -- the forward dividend to still be flat on a euro basis that you'll seek to try and at least do that regardless -- despite the challenge?
Yes, Michael. We are proposing to distribute just like last year, EUR 50 million or EUR 1.25 per share. And that's what we're proposing to the AGM.
The next question comes from Amit Lahoti, Citi.
Could you provide a breakdown of EBITDA contribution from U.S. operations and the rest? And how do you see the path to profitability, especially in terms of timing in the U.S. operations? And second one is on hedging. Is the company able to hedge coke prices and reduce volatility there? Like any thoughts around that?
Okay. Thank you for the question. Well, as we used to repeat every quarter, we don't provide the EBITDA level by regions. The reason besides that is always the comparison with the competitors and so on, so it's too much information. So sorry for that, but I think it's that. I think it's a general guideline that we are talking about U.S., I think it could be an offer. And the hedging, Wolf?
Yes. So hedging, we hedge zinc and we're not yet hedging coke and are absolutely it also would be difficult to do. As such, we're sticking to hedging zinc, as explained very rigorously, but not coke.
No, no, the coke issue is that -- well, the correlation between the coke that we use in the operation like pet coke, met coke or even anthracite do not follow the thermal coke that is normally which is in the hedging side. So no sense to that.
The other thing that we have -- to have an idea about the headwind of the coke is like normally, we use in the range of 270,000 to 280,000 tonnes of coke every year. The current average price of those kind of coals that we are using is in the range of EUR 248, EUR 250 per tonne. In 2021, that was not the best year that was EUR 137 and even in '22 was EUR 110 as an average. So that means that EUR 100, which we are sure that it will come back to the normal prices of this level of EUR 100 means that the headwind of the coke price is just in Befesa in the range of EUR 30 million -- EUR 28 million, EUR 30 million per year.
So this is the real reason why we are now facing the guidance that we are putting. But normalizing the coke price, we should be in the range of EUR 30 million up in both part of the guidance. So yes, that could be a good idea to hedge the coke price, not possible basically for no correlation. And in any case, it's not now the current time. I think we have to wait that the volatility of the coal price get down and stay at the same level that it was in the past.
And the next question comes from Lasse Stueben, Berenberg.
Just a quick follow-up. I think you just answered it, but when we spoke last in March for the full year results, you kind of said the 2022 adjusted EBITDA was the floor that you saw for '23. I'm trying to figure out what's changed since then. Is it the coke price, which you just sort of alluded to the EUR 30 million? Or is it China being a bit slower in recovering than you have expected? That would be the first question.
And the second question is, could you maybe comment on European steel production and how that impacted utilization in Q1 because it was down again quarter-on-quarter. So it'd be interesting just to hear how that's developed versus Q4 last year.
Well, thank you for the question. Probably yes, we were waiting for that question about the floor and so on. Well, the reality is that this is something that is alive and TC has been set. Finally, prices are down. Coke prices are now slowing reduction. So all together has made us to put the range that we are putting here. In reality, there are not a big difference in the floor or the result of last year with the medium term of the guidance. So basically, I think that the message is that, I think, is a period, as Javier explained, of transitional year with a lot of headwinds, everything moving parts and so on. So this is why we think that this is more probably realistic guidance that we are doing now. This is the idea.
Regarding the second question. Well, in Europe, in particular, the production of steel in the first quarter has been down 10%, but is showing signs of recovery because it's higher than the last quarter of 2022. How we see? Well, obviously, we have not the crystal ball here to see the steel production. But what we see every day is the deliveries that are coming to the plants. And in the case of the European steel production, what we see is that the starting of the year, January was a little bit lower than we expected after coming from the normal December Christmas standstill of the steelmakers. But now end of February, March, they are recovering normal rates. And nowadays, second quarter, we see that they are in the normal recovery rate. So well, I think that the production could be, as Javier say, stable in Europe and in the range than normal place. So we don't see a big problem there.
Okay. So we should see utilization rates and Steel Dust Recycling pick up again as we move into Q2 and Q3. Is that correct?
That's correct, considering always, don't forget, please, the yearly standstill that we used to do during normally second quarter and third quarter. But in general, yes, we don't hope extraordinary stoppages for the plant. So I think that is going to be normal.
Okay. Great. And just one more, if I may, and then I'll jump back into the queue. You already mentioned the really strong quarter in the aluminium business, EUR 14 million of EBITDA, is that -- everything seems very favorable there at the moment. What sort of a comfortable -- is that a comfortable run rate or a run rate you feel comfortable with the remainder of the year? Or is that EUR 14 million sort of as good as it gets for aluminium?
Well, I would like to ask yes, but to answer yes. But it will depend as well on the evolution of the prices of aluminium at the global margin of the business. It has been very, very good. And I think it's following the trend of the aluminium businesses in general, premium aluminium and so on. But we don't know if this can be possible to keep the whole year at this level. We do hope to have a very good year, but probably not multiplied by 4 the aluminium in the first quarter. So we had to be a little bit more conservative there. But in any case, we do hope a really good year in the aluminium business.
So the next question comes from Moomal Irfan, Goldman Sachs.
My question is on energy costs in the aluminium business. When gas prices increased last year, the business was significantly impacted. So going into winter this year, how are you thinking of managing your natural gas exposure in case prices increase again? I understand why you aren't hedging. Coking coal right now given high prices, but wondering why not natural gas?
Thank you very much for the question. And we can tell you the idea, but it's difficult how the gas prices are going to evolve -- do the evolution, especially in Europe. We are located in the aluminium business. Yes, you are right that the first part of the -- or the first Q has shown a big decrease or decrease considering '22 prices.
Where it's going to stay the whole year? Difficult question. We would like to say that at least at that level, but there are many voices saying that is going to be back on increase because pressing from China recovery, other they say that it's going to be lower because it's stable and the warehouses in Europe are supporting not so high dependence from the Russian, many ideas. We cannot answer exactly what is happening. But I think we would like to see those prices the rest of the year. That's why in the previous answer of the question, we are telling that we are not sure that we can repeat the third quarter in the aluminium business like this year. But in any case, we do hope positive evolution of the business based on those things. So if the gas prices increase, well, we probably have to play with the margin as well and pass through to customers as we did in 2022. So I think in any case, it's something that we can more or less manage.
And then, Moomal, I think we had the discussion before on hedging, natural gas prices, electricity or even the question on coking is exactly as Asier says, we're coming out of or still in the middle of the European energy prices. Yes, gas and electricity prices have moderated or further down. The question is what's the new normal because they're still higher than what they were 2 years ago. So that's what we're monitoring. And then we'll make the right decision. But for now, we have not yet put any hedges on the books.
So at the moment, there seem to be no further questions. [Operator Instructions]
And there is one question coming in from Anis Zgaya, ODDO BHF.
Yes. I have 2. The first one is regarding coke. We've seen a quite strong decrease in coking coal prices in China, Australia and India in the recent weeks. Is this something you start seeing in your outsourcing of coke in your different markets? And my second question is on our guidance on the upper endpoint of the guidance. What are your underlying expectations for the zinc prices and coke prices?
It's very difficult to understand you, Anis. There is a lot of noise in your phone.
Yes, could you hear me now?
Yes, let's try.
Yes. The first one is regarding coke. So we've seen quite strong decrease, I said, in coking price in China, in Australia, in India in the recent weeks. Is this something you start seeing in your outsourcing of coke in your different markets? And my second one is on the upper end point of the guidance. What are your underlying expectations for zinc prices and coke prices for the upper end point of guidance?
Now, yes. Thank you very much for the question. Regarding the first question, as I said before, I think it's our coke -- that the coke that we use, pet coke is not following the same correlation of the normal thermal coke, which is used in the thermal plants or whatever, which is normally the things that you are watching that is decreasing.
But in the reality in our case, they are not decreasing signs. So we are on a spot basis, basically, but spot means at least 2, 3 months for the organization of the deliveries of the quantities to the plant. We don't see signs of decrease of the prices now. And we probably hope that this is not going to happen perhaps at the end of the year, but not in the next 2 quarters. Probably this is the idea. So I would like to say the contrary, but we are not watching signs to decrease.
Regarding the outlook, Javier do you want to...
Yes. Regarding the second question, to be in the upper part of the guidance depends on several factors, not only zinc prices, it's depending on zinc prices, evolution, coke price evolution and the performance of our business basically in China and in North America. If you want to be more precise regarding the zinc prices, to be in the upper part, we should expect better prices than EUR 3,000 per tonne. But it's more a combination of all the different factors, but then only which will be the zinc price.
Next question comes from Jaime Escribano, Banco Santander.
So a couple of questions from my side. Regarding coke prices, maybe you can help us to understand what needs to happen to see lower coke prices, and I explain myself, what is driving the demand of this kind of material? How is the supply according to the internal information you have? Is there a new capacity coming into the market that can suggest lower prices at some point? Why is suddenly the demand of this particular coke and more expensive than in the past? And yes, just for us to better understand this market, which seems to be a little bit of a local niche market in each region.
And the second question is more in the long run. So the margins of this company in the last few years group level has been at around 23% to 24% in Q1, obviously have gone down to 15.6%. And I wonder how much is because of this temporary high coke price? And what other moving parts like geographical mix or maybe lower margin in the U.S. or China are diluting the margin? And how do you see these margins recovering in the long run? So to be more precise, my question is what needs to happen to see margins again of 23%, 24%? Is this something doable in the mid-run?
Many complex questions as always, but well, we'll try to address something. But the coke price or the coke market that you are asking for guidance, although is quite complicated. There are a kind of summary is that depending what you are talking about, the pet coke is basically coming from oil refineries and depends on the situation of this business. It depends as well where we use this because sometimes there are residual coke and we cannot use in every country, depends on the availability of these, as I say, the drivers are different probably than the others.
The other, the met coke is more connecting with the -- as production of the blast furnaces and so on and undervaluation of the energy prices. And so the anthracite as well has another variables and in particular in Europe is following what it was coming from Russia, Ukraine and, obviously, the idea is now under pressure still. So there are many factors. I think it's very difficult for us to summarize what happened there. The question here is that one can think that the energy prices in general are coming down, the coal price will come down. And it's a matter of the raw materials in general, sulphuric acid and other raw materials that has been high. And all of them are showing signs of being reduced because the volatility is there. And we think that, that will come as well to the coke soon or later.
What we don't see is now because we are in the -- in April and May, we don't see signs that, that's going to happen probably in '23 or at least at the end of '23. This is a summary. But it's difficult for us to explain all the drivers that can happen to that. And there are traders in the middle. They are -- that can play with the quantities, they can play, I don't know, the timing of delivery. There are many factors. But the fact is that it's true that everything is going down. So this should be -- we think that it's going to be down because always has been a volatility in that market, not so high like today. In the past, the volatility of the coal prices were in the range of up and down per year 20%, and this was not killing our business. But in our -- in this case, we are talking about volatilities of 100 to more than 100%.
So that's why the headwind that we are having, as I explained before, is in the range EUR 30 million per year, which is affecting to the margin as well, and now Javier is going to answer the second question. So all in all, difficult to answer what are the drivers, but the summarizing is that the coke price is going to be down for sure, question mark is when. And this is something that we don't see immediately, but we see in medium term. This is the idea.
Okay, Jaime, regarding your second question, if we normalize the last year first quarter, EBITDA margin in the steel business was 35%. And in this year, normalizing, taking out the revenues coming from the smelter and the EBITDA contribution of the smelter, this margin has been 28%. So there is a difference of 7%. This difference of 7% is basically because the combination of high coke price and high treatment charge. And if you -- the effect of the coke price in the first quarter has been more than EUR 5 million. So with EUR 5 million more the margin will be pretty close to the normal margin.
And regarding the long-term margin of the company, taking into account that we have acquired a new business with a different EBITDA margin approach. At the end, you need to consider that the revenues contribution of our smelting plants net will be around EUR 200 million. And we are talking about a business, which -- once the ramp-up is finished, should have a margin between 5% to 10%. It's something like our Secondary Aluminium business.
So in the -- now Befesa is a different element. Our sales will be higher. We will be more in -- a company with around EUR 1.5 billion sales and our portfolio is composed by 2 businesses with an EBITDA margin between 5% to 10%, which is the smelter business and the Secondary Aluminium business. And 2 businesses, Steel Dust Recycling and Salt Slags Recycling with EBITDA margins around of about 30%. So all in all, my view is that we will be more in a company that with EBITDA margin in a normal situation close to 20% than about 20%, okay?
And the next question comes from Jainesh Mehta, Permira Credit.
I'm quite new to the company. So I just wanted to ask a clarification question. On Slide 9, you show the EBITDA bridge for Steel Dust Recycling. So I can understand sort of the dynamics there. But I wanted to just drill down the Steel Dust Recycling on what drove the revenue increase. Was this the acquisition you did in the U.S.? And is this sort of expansion in the U.S. that's driving the revenue increase? I just wasn't clear on the disconnect between revenue and EBITDA.
Yes, exactly this. The business of the smelting sales are influencing the increase of the sales, definitely.
Okay. And that -- am I understanding it correctly that, that is EBITDA negative, which is why you should have not seen that come through on EBITDA?
Temporarily, this is the reason. Yes, in the first quarter, the contribution has been negative, so this has affected the margin, clearly.
So as there are no further questions at this point, I'd like to hand back to Rafael Perez.
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 to all of you, and have a good day.