Befesa S.A.

Good morning and welcome to the preliminary full year 2022 results conference call of BFESA. I am Rafael Perez, head of strategy and investor relations of BFESA. Today we have with us Javier Molina, executive chair of BFESA, Asier Zarranandia, CEO of BFESA, and Wolf Lehmann, CFO of the company. Javier Molina will start with an executive summary of 2022. After that, Asier will explain the business highlights of the period, covering steel dust and aluminum solid slag recycling. Walt will review the financials in total and by business unit, as well as cash flow as an update on our hedging program. Javier will close the presentation providing some thoughts about the outlook for 2023 and the new five-year growth plan. Finally, we will open the line for the Q&A session. Before getting started, let me remind you that this conference call is being webcasted live. You can find the link to the webcast and the preliminary full-year results presentation on our website, www.defesa.com. Now, let me turn this call over to our chairman. Javier, please.

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

Thank you, Javier. Good morning to all. I will provide an overview of the performance of the business during the fourth quarter and the fourth year of 2022. The fourth quarter has been a challenging quarter, as explained by Javier, impacted by high general inflation, high coal prices, weak steel production across all markets, and a difficult COVID situation in China. For the steel dust in the full year 22, total steel dust throughput was up by 35%, reaching 1,194,000 tons. driven by contribution of the recycling plants in the U.S. In the Q4, steel dust throughput has been up by 11% compared to Q3, driven by less maintenance shutdowns than in the Q3, as we used to remark. However, steel dust throughput in Q4 was slightly lower than expected and down by 8% compared to the last year, driven by lower steel production in the markets where we operate. In Turkey, where we have a plan in the Escaleron region. As you all know, two terrible earthquakes took place on the 6th of February. We are grateful that none of our employees and contractors were injured. However, the humanitarian situation is really dramatic, with many people's lives lost and many houses ruined, and with utility problems with effect to the less damaged houses and industries. The earthquake's impact on the region around the plant has been severe. The full recovery of the area will take time, but there are now some industries coming back to work gradually, among them some steam makers in that area. At the time of the earthquake, the plant was temporarily shut down for a scheduled maintenance work. An assessment shows that the plant has only received minor damages. We are now receiving dust at the premises and planning to restart the operation during March. From the price point of view, Brenda's steam price Considering the weighted average of the LME, our hedging has increased 15% in the full year. However, LME price decreased by 9% in the Q4 compared to the Q3. As such, plendency price in Q4 went up by 9%. These positive effects of volume and prices have been partially offset by high inflation across the business in the full year, mainly in energy prices, and more specifically, coke, which today represents about 50% of the total energy cost in Bethesda. As a result, total EBITDA in the steel dust business has been 169 million euros in the full year, up 14% compared to the previous year. However, in the Q4, EBITDA in the steel business has been down by 18% as a consequence of higher coal price and lower volume of steel dust. In the U.S., the integration of the ACR into BFESA is developing well across all fronts. The team is working well, and we are delivering the results that we expected. The refining facility, which we acquired last September, is also being integrated into BFESA. The plan is still in ramp-up mode, and we expect positive EBITDA contribution in 2023. Additionally, in the U.S., we are working on deficiency projects that will drive synergies to be captured in 2023. And at the same time, we have prepared the plan for the to free up capacity and be able to capture future growth in the market. In China, the Chinese government has completely changed its strategy to fight against COVID. Last year, we have been suffering from the zero COVID strategy, which created a very challenging environment to operate. Because of that, at Yanshu province, we have not been able to operate the plant properly in the Q4 as the COVID-19 made the Chinese economy to slow down, impacted the stealing production and our utilization rate. Our second plant in the province of Henan is completed and commissioning of the plant was finished in December last year. As Javier has explained it, we were in China last week for the first time after three years. We had the opportunity to meet with the team, the authorities, and customers, and we are optimistic about how the country is developing. In the traditional business of the FESA, we are achieving good volumes. Although Q4 has been a very weak quarter from the steel production point of view, driven mostly by our stocking effort, we have started Q1 seeing healthy levels of production through the markets, which will support our utilization levels. Moving now to our aluminum salt stack and secondary aluminum business, Our aluminum business has delivered another good quarter in a very challenging macroeconomic environment, which is quite remarkable. In the full year 2022, we have recycled 322,000 tons of salt slag, representing an 18% decrease compared to last year, driven by the temporary shutdown of the plant in Hanover, which under-repaid after the fire last year. Normalizing for this one-off operating effort, the volume of salted slag will be 7% up year-on-year. Within the Q4, the volume of salted slag has been down by 11% or up 3% on a normalized basis. The production of secondary aluminum alloys in the full year 22 has been 161,000 tons, a decrease of 14% over the last year, also impacted by the shutdown of the Hanover plant. The plant has been fully refurbished, and we are now in the ramping up of operations. From the prices point of view, the aluminum price has increased 15% in the year, although in the Q4, the price of aluminum has decreased by 8% compared to the previous year. The high inflation of energy has had a total impact of more than 26 million euros in the year, the majority of which we have been able to pass to our customers via increase of prices, collection fee, and median. As a result, In the aluminum business, we have achieved a total EBITDA of 46 million, down 6% compared to last year. In the Q4, total EBITDA has been 12 million, down 20% versus last year. So all in all, a very challenging quarter and end of the year impacted by market conditions and a challenging environment. Now, Walt will explain the financial in more detail.

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

Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for the 2023, as well as the new five-year growth plan. 2022 was clearly a very challenging year in which we managed to achieve solid growth of 9%. For the next years, the growth plan that we announced at our Capital Market Day is a strong plan, and we are very confident about the execution and the delivery of the results we announced. With regards to 2023, as you know, we provide guidance once the treatment charge has been settled around end of March. However, I would like to comment the following. We expect 2023 to be another challenging year and we expect volatility. However, we see a solid floor in the result achieved in 2022. Actually, we are already in March, and I can confirm that the first two months of the year have been better than the last quarter of 2022, which makes us confident for the rest of the year. Impact hedging will clearly be a positive impact into 2023. At the hedging level for this year, it's higher than the one for the last year. We expect a positive impact of between 12 to 20 million contributions from hedging, depending on the FX euro dollar. Treatment charge for zinc, on the other hand, is likely that will go up from the current $230 level. Remember that every $10 of change in the treatment charge has an impact of around 2.5 million on our EBITDA. We expect this to be a negative impact in 2023. In North America, the recently acquired seed refining plant will also contribute positively to earnings growth. Additionally, we have scenarios coming from the acquisition, which will partially materialize in this year. In China, we are optimistic that it is still very uncertain how the country will open after the strong lockdown they have suffered. Now we expect to see a gradual recovery and to have more visibility. However, it is difficult to know exactly what is going to happen in China. We expect to have volatility in Q1 and hopefully start to see increased levels of steel dust deliveries in the second quarter. We have two plans completed and fully ready to operate as soon as the market recovers. Overall, we expect positive contribution from China in the range of high single to low double digit EBITDA. In the aluminum solid slag and secondary aluminum business, which is a purely European business, despite the automotive industry continues to face a challenging situation in Europe, in 2022, we managed to achieve a strong result and pass through the energy increase to our customers. For 2023, we expect volume of solid slag to increase, driving by the restart of operations in our Hanover plant. after the repel in the plant. In the aluminum business, we expect similar volumes than last year. And finally, commodity price for metal and energy are a question mark for 2023. We expect volatility in the price of commodities to continue driving by instability at the macro level and uncertainties in the overall economy. Our hedging policy with around 70% of the volume of zinc H at good price will help us navigate this period of high volatility. Average zinc price in 2022 was 3,300, up 30% compared to the previous year. This price is very high and we will see if it is remain at this level for 2023. We also expect energy price to remain volatile, and at this moment it is a question mark whether it will be a positive or negative impact in 2023. Finally, on future growth, as we explained at the Capital Market Day, despite the short-term challenging situation we are facing, we have a strong growth plan to invest around 400 million euros over the next five years to grow earnings at a high rate. This growth plan is based on global megatrends like decarbonization and transition to electric vehicles, which are not going to away and will drive market growth where we operate in our core businesses. This is translated into a tangible plan consisting of seven projects across the three main markets we operate, Europe, North America, and China, which will be funded organically with our own resources. The first of these projects was the acquisition of the seal refining asset, which we already executed in September last year. The next two projects we are already working on are the refurbishment of the plant in Palmerton, in the USA, and the third plant in China. In China, in February, we signed the investment agreement with the local authorities in the province of Guangdong. We have identified the land plot to build the new plan, and we are preparing the basic engineering of the plan at the same time that we have started negotiations with the local steelmakers. In North America, we have already started the refurbishment of the parliament-run plan. The engineering and design is in process, and the request for quote with the price has started. They will carry out in 2023 and 2024. In summary, In 2022, we achieved record EBITDA in a challenging environment. We expect 2023 to remain challenging. However, we will see a strong floor in the 2022 earnings level. And as I said before, the start of the year has been promising. We will navigate through this inflationary period successfully like we have done in the past. We are executing our growth plan that will deliver high growth over the coming years. We will keep our dividend policy of distributing circa of 50% of the net income. And we are executing our ESG strategy to reduce our emissions by 2030 and 2050. Thank you very much.

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

The first question is from the line of Michael E. Hoffman with Stifa. Your question, please.

Michael E. Thank you very much, Javier, to take the questions. I realize and I appreciate that you give guidance at the end of March. Just directionally, do you expect to produce more profit greater than $214 million in 2023 than you did in 2022?

Michael, thanks for the question. Well, as you know, we provide guidance once we know the treatment chart that will be in the first quarter earnings presentation in April. But as I said during the speech, we see a solid floor in the results of 2022. So we could say that that will be the lower part of the range we are going to provide to the markets in April. And the upper range will depend, let me say, basically on four things. Basically, treatment charge, think price evolution, energy price evolution, especially coke, which, as you know, affects 50% is 50% of the total energy cost of Bethesda, and China evolution. So all in all, we will have a range between 200 and 15 in the lower part, and let's wait until April to define the upper part of the range.

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

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

The next question is from the line of Ingo Schache with BNP. Your question, please.

Thanks for taking the question. The first one would be on what you call the promising start into the year. I'm just wondering whether you could give us a bit more color on which KPIs you were happy with in January, February performance. I guess ink prices were high, so you can absolutely imagine that EBITDA is in January, February. But did you also see, let's say, volume growth or recovery from the Q4 levels for steel dust throughputs in Europe, for example? And maybe you can also comment a bit on the evolution of co-price inflation. We've seen a very strong spike of co-prices. in the recent weeks. I would be curious to understand a bit better when exactly the inflation will hit you, whether it's already included in what you said in February, or whether there's a big spike of incremental co-inflation in Q2, or whether you can actually sit it out because it seems to be a temporary phenomenon that you might have enough inventories to not have to buy at these very high prices in recent weeks.

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

Any comment from the side on the timing of the last round of co-inflation or we can have to buy it for the stock prices?

Again, Ingo, the line is not very good.

Okay, so sorry for that. I was just wondering on the recent spike in Coke prices that you've seen in February, whether these will impact you already in the first quarter, on the second quarter, or whether you would be able to not buy at the current elevated stock prices.

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

Perfect. Thanks very much.

The next question is from the line of Zadip Piti with Morgan Stanley. Your question, please.

Hey, hi, good morning. This is Zadip Piti from Morgan Stanley. And thank you for taking my questions. I have a couple of them. So firstly, are there any learnings from first two China plants that you are implementing while constructing the third plant? And the second question is more around, so European steel mills will require much more scrap as they plan to decarbonize their operations, given they will construct more EF, which will be based on scrap and DRI. And this would imply that scrap generated in Europe will stay locally. Do you think this will impact availability and quality of scrap in China in future? Thank you.

Regarding the first part of the question, I think the most important learning that we have got from our first plan that we have been operating, as you know, in a very difficult situation during all the 2022 year is that China is, let me say, it is a normal country. We have operated the plant as we do in any other geography. We don't see difference with the way we operate not only the plant, but the business in North America, Europe, or China. The steelmakers are normal steelmakers. The logistics runs very well. we are able to sell all the wasps we produce in the internal market at competitive prices, prices very similar to the one we get in the LME, following the same price. Financial conditions are okay. We have been able to finance 50% of our investment through local ones without a mother company warranty. So at the end, we feel that we operate the plan as intended. I think this is for me the most relevant message we can send to you. What's happening is that 2022 has been extremely difficult, but has been because the COVID restructure that we have suffering two things. On the one hand, receiving less It's still less than contracted, not less than expected than contracted because the potassium was below the normal levels. And second, because we have been obliged to shut down the plant several times because of the cover restriction. And the second question, I'll share with you.

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

Thank you.

The next question is from the line of Jamie Escribano with Banco Santander. Your question, please.

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

Good morning, Jaime. You didn't listen to the outlook of the production because we have not put on the table.

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

And even by regions. No, what you expect is to slightly grow of the volumes. 2023 is a kind of transition year that we have to catch up the steel production increase, expecting in 2024 in the U.S. and 2025 onwards in Europe. So we don't know how 2023 is going to be a very, very different year than 2022. This is the main idea that we can pass today. Slightly growth, perhaps, because we wait for that because China will definitely handle more of us. This is what we have in mind. So, yes, we will hope to have an increase of volumes. Not very remarkable, but I think that is going to be driven by China increases. I think that is what we can say. Second part, Javier wants to answer.

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

Thank you.

The next question is from the line of Lasse Stubben with Berenberg. Your question, please.

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

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

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

Thanks for the question, but this is really a difficult question. We don't have the crystal ball. Anyway, what we have seen in the last quarter and what we have seen in the first two months of the year is that electricity and gas prices are going down and are below the levels we got last year. But on the other hand, on Coke, the prices are still at a very high level, at the peak we got in the third quarter of 2022. Well, as you know, Coke represents pretty close to 50% of the total energy cost for Bethesda and for us. I would say we have two question marks. What is going to happen with the electricity and especially gas price evolution? Probably you guys will have your own view. We feel that we are enjoying a positive momentum right now, but we are not totally sure if this will stay for the full year. And second, and for us internally, the main question mark is if Coke will follow the trend of the gas and electricity price as happened in the past. We feel that will happen, but what we are seeing today is that there is a resistance in the COP price to follow the price of the gas and electricity.

Okay, understood. Thank you. Thank you.

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

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

Thank you, Cameron. Regarding the code, the kind of concept we are implementing in the last year and a half, like that is normally the shorter term that we can. I mean, it is, we say the spot basis, but in this field, it's not like the typical utilities like gas or electricity that you can buy monthly basis. Here, you have to have two, three months for delivering, talking with the brokers or the dealers of the coal. So I would say that is the view that is not, we have not, as Javier explained it before, not a real view, make tasks to run in the shorter level of timing. So, let's say a spot basis and understanding what is the spot basis in coal.

With regards to the aluminium... Thanks, Cameron. Regarding your second question, yes, it's true that our second aluminium business has a smaller margin than the rest of the business. It's not the case that the solids lack business, as you can see in the presentation. In 2022, for example, we got better margins than in our steel-dust recycling business. But regarding the secondary aluminum business, the only project we have including our growth plan is the increase of the – increase the capacity, expand the capacity of our Bermuda Plan. Our Bermuda Plan has been a very profitable business. We invest in the plan 30 million euros, more or less. Out of that figure, 10 million were subsidies. And we are getting more than 6 million of a bid per year. So the payback of the plan has been really around three years. And this is what we expect for the expansion of the plan, again, to get an excellent payback. And on the other hand, we'll support the growth of our solid-slag business. And as I told before, it's around 30% of the business. So all in all, I think it deserves to keep this small amount of capital that we are going to invest in this business.

Very clear. Thanks very much.

Okay. Thanks, Cameron.

The next question is from the line of Oscar Velmas with JP Morgan. Your question, please.

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

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

That's very useful. Thanks, Asya.

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

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

Thank you very much for the question. When we are referring to the contracts in China, it's for the both plans. And we have in place contracts in Jansu plan and we have in place contracts in Henan plan. As Javier explained it and we explained it in the speech, the contract normally is the whole production of that has to be delivered to the PESA plan in this case. And the case is that you have an estimation in view of the production they estimate to have normally or yearly basis. The question here is that because the COVID restrictions, the problems in 2022, they were not fulfilling the quantity we estimate. Now we are starting to get the normal or the contracted tonnages, and that's why I answered before to Oscar, sorry, that what we hope that they're going to have more presentation of the production capacity of the company based on the contract we have. But it's in the case of both plants. In Henan plant, We are having contracts in the Hainan province as well, and we are having contracts in the surrounding areas, and we need some more permits to move from one province to the other, so it's going to take a little bit more time. That's why we hope that they solve all those issues during the next months and run in a good level. Obviously, as Javier is explaining, we don't know how it's going to happen in China or develop the full year if the steel production is going to go full production or whatever with the recovery. This is the uncertain, but what we are watching, what we are realizing now in February, and again, it's very early, but it's going to be better than 22 for sure. We will see or we need more time to see how much is better or how much is the result. But definitely we feel like that. In the case of Wandon, what we have is in place, we want to have those kind of contracts even before the construction of the company. or the plant. In the previous cases where at the same time, some of them are coming after the construction, here we have the chance to deal with very big players with a good sink containing in the dust because they are using the scrap in the area. So what we hope for Guangdong is to sign this letter of intent agreements or whatever, or even the contracts to have secured the dust even before the plant is erected. This is what we intent to put in place and anyway will be the same kind of contract with the tentative production and the full production to be delivered to Mephesa. So the kind of the framework of the contract is the same.

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

Thanks a lot for your answers. That's helpful.

The next question is from the line of Ingo Schacher with BNB. Your question, please.

Thank you. Just wanted to follow up with two quick housekeeping questions on the zinc refining and other adjustment impacts. So first of all, in the steel dust recycling EBITDA adjustments, can you quantify how much of the EBITDA adjustment does not relate to the zinc refining situation in And maybe also remind us on cash flow when we look at the initial guidance of $40 million at the lower end and the outcome that we've seen now. What the non-operational sectors were, I guess $50 million zinc refining and then a bit of Hanover. But maybe you can remind us what the right bridge is between the $40 and the $60.

Ingo, sorry, we have the same problem with the line that before, so it's very difficult to catch you entirely. I get the first part of the question about the adjustment. Well, the typical, as we explained in September as well, is the bandwidth requirement of the accountancy, but it's net of the normal adjustment of all the costs, another one-off adjustment that we have for the proper operation, as well with the insurance recovery for Hanover, and it's a mixture of many things. for positive and negative. The main one is obviously the badwill and is the reference for accountancy value of the company.

And Ingo, just in two weeks, we will publish, or three weeks, we will publish our annual report. And there you will have the note with all the explanations in the financial notes.

We are not sure about the next question, the other question, sorry.

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

Yeah, okay. In terms of the cash flow walk, if you go to the page, you see that the walk starts with the 250 million EBITDA and then you see about 34 million EBITDA negative impact in working capital. Now, when you look at that, half of that is traditional working capital to fund growth. The other half, really, of that $34 million, about $10 million is really an offer still to be collected. The majority of Hannover fire recovery is already collected in 2022. There's about 10 million that's pending, which we expect to collect in the first half of this year. And then the other one quarter is one-time cost of acquiring zinc refining, which has, as always, that is one time and has to be adjusted out. Hopefully that helps.

Yes, it does. Thank you.

Great.

The next question is from the line of Jami Escribano with Bank of Santander. Your question, please.

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

Again, Jaime, thanks for the question. Give us one month and a half more than we need to answer properly the question because it's not we are going to enter in any speculation. We have said and we maintain the message that The closing of the bid of 2022 is for us, and we see that as a solid floor for 2023. So we have a lower, it would be the lower part of the range. And then there are several variables that influence the upper part of the range. Again, treatment charge, we don't know yet how much will be the increase. Think price evolution, we need to get more conforming in that point. Coat price, which is affecting a lot. And as I said during the Q&A, we expect coat price following the rest of the energy prices. But let's see how long it takes to see that. And finally, China evolution. So are still many variables open? In one month and a half, we will have much better visibility and we will be able to provide the guidance as we have done every year.

Okay, thank you very much.

Thank you, Jaime.

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

Thank you all for your questions. You can also contact the Investor Relations Team of EFESA 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.efesa.com. Thank you very much. Bye.