Befesa S.A.

Good afternoon and welcome to the first quarter 2023 results conference call of BFESA. Good morning to all from the U.S. Thank you for attending this conference call. I am Rafael Pérez, Head of Strategy and Investor Relations of BFESA. Today, we have with us Javier Molina, Executive Chair of BFESA, Acierza Ronandía, CEO of BFESA, and Wolf Lehman, CFO of the company. Today, we're hosting this conference call from the recently-acquired seeing smelter facility in North Carolina, in the US, which is the reason this call is taking place at an unusual time. Javier Molina will start with an executive summary of the first quarter. After that, Asir will explain the business highlights of the period, covering steel dust and aluminum salts like recycling. We'll 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 webcasted live. You can find the link to the webcast and the first quarter results presentation on our website, www.efesa.com. Now, let me turn this call over to our chairman. Javier, please.

Javier Ramirez- 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 Bethesda had the opportunity to visit the smelting facility, which is the only one in the world producing zinc from recycled materials. As we have explained, the plan is still in ramp-up mode, and although during the first quarter the plan has not delivered positive earnings, we are confident that during the year the contribution of the plan will be positive. The first quarter of the year has been a challenging one for BFESA. Although revenue increased by 23% compared to the last year, driving by the integration of the smelter operations in North America, EBITDA was 50 million euros, which is stable compared to the previous quarter. but 18 percent down compared to the previous year. The main drivers for this decrease are higher SIN treatment charge, which has been settled at $274, representing an increase of 19 percent. Lower SIN prices, which are down 13 percent 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 coal prices, which have remained at the same high level than in the last quarter of last year. On the other hand, the aluminum business has performed very positively in the quarter, benefiting from strong margins and a decrease in the energy prices in Europe. As here, we'll explain the performance of the steel and aluminum businesses in more detail later. In this environment, our earnings outlook for the full year 2023 is between 200 to 230 million of EBITDA, representing a less 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 thin refining plant that we acquired on September 30, last year, and which is still in ramp-up mode. Our expansion in China continues to progress with the ramping up of the operation of the second Chinese plant in Henan. Plans in Jiangsu and Henan are operating and will contribute to earnings in this year. Now, Axel 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 cost, and lower volume. The strong performance of the aluminum 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 tons, mainly due to Turkey and the US. Compared to the previous quarter, volume of steel dust in the first quarter decreased by 8 percent. In Turkey, where we have a plan in the region, as you all know, two 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. 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 steel makers 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 ACR into BFESA 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 one contract, which volume we expect to recover over time. The refining facility, which we acquired last September, is also being integrated in BFESA. The plant is completed, fully commissioning, and it is still in rampant mode. The contribution in the first quarter of the year has been 2 million negatives, 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 Plan for the refurbishment to free up capacity and be able to capture future growth in the market. In China, the plant of Yanshu 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 EFESA 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 3,330 euros last year to 2,900 this quarter. The increase in the hedging price has not been enough to compensate the decrease in the LMEI prices. Inflation in general went up in the quarter across the steel dust business, in particular coal prices, which increased another 6% compared to the previous quarter, and more than 40% compared to the previous year, producing a negative impact of 5 million in the quarter. Coal price remained very high across all the region, 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 Prefesa. As a result of all the above, total EBITDA in the steel dust business has been 37 million euros 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 aluminum salt slag and secondary aluminum business. Our aluminum 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 tons of salt slag, representing a decrease of 6% compared to last year, driven by the temporary shutdown of the planning handoffer which was still under repair during the majority of the first quarter. The plan has been fully refurbished, commissioned, and the ramp-up has been completed. The plan is now back to operations. The production on secondary aluminum alloys in the first quarter was 44 million tons, an increase of 3% over the previous year. From the prices point of view, the aluminum price has decreased 12% in the quarter compared to last year, to 2,300 euros per ton. On the other hand, the strong metal margin of aluminum 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 aluminum business, we have achieved a total EBITDA of 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 coal prices partially upset by a strong performance of the aluminum business. Now, Wolf will explain the financials in more detail.

Thank you, Asi. Please turn to page eight, the first quarter 2023 consolidated financial highlights. As mentioned by Javier, BFISA delivered an adjusted EBITDA of 50.1 million, approximately flat quarter over quarter, versus first quarter at 50.7 million. Nevertheless, down 11 million or 18% year over year, versus first quarter 22 at 61.1 million. Overall, on the year over year adjusted EBITDA walk, the 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 stronger aluminum prices, metal margins, and lower volumes, including Turkey's earthquake. Reviewing the main drivers of the year-over-year 11 million EBITDA development in more detail. On volume, overall approximately 4 million negative volume year-over-year impact. as explained by Asiye, mainly coming from the earthquake impacting operations in Turkey, the U.S. operations, and the Hannover plant ramping up in Q1, partially offset with higher secondary aluminum alloy volumes. On price, the overall approximately $4 million negative price year-over-year, it's about $9 million negative from the steel dust business, mainly due to lowers in prices, including the impact of the higher TC, and around $10 positive $5 million from the aluminum and salt slags business. I will explain in more detail on the following pages. On cost other, the approximately negative $3 million cost other lever reflects mainly the continued record high cook prices, partially offset with year-over-year lower gas and electricity prices. Total revenue increased by $60 million, or 23 percent year-over-year, plus $27 million, or 9 percent quarter-over-quarter. to 322 million in the first quarter of 2023, driven mainly by the U.S. operations. Cash stands at 143 million euros, which together with our entirely unused 75 million revolving credit line provides more than 200 million liquidity and net leverage at 2.8 times, 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 multi-year views for your reference. Turning to page 9, the steel dust recycling services results. Steel dust delivered 37 million EBITDA in the first quarter, approximately flat quarter-over-quarter, with its Q4 2022 at 37.6%. nevertheless down 17.8 million or 32% year-over-year. Overall, the year-over-year 18 million EBITDA development, negative development, was mainly impacted by lower zinc LME market prices, including unfavorable TC at $274 per ton, which is up 19% year-over-year. Continued record high coke prices, as you mentioned, up 6% quarter-over-quarter, or 41% year-over-year, and lower electric arc furnace steel dust volume. The volume lever was negative by around 3 million EBITDA year-over-year impact, as explained, mainly impacted by the earthquake impacting operations in Turkey and the U.S. operations. The net price level was negative by about 9 million euros year-over-year, with main price components being negative 10, lower zinc LME prices, Down 13 percent, or approximately 400 euros per ton, to around 2,900 euros per ton on average. Up two, higher zinc hedging prices, up 3 percent year-to-year, to around 2,350 euros per ton on average. And a negative two and a half, driven by the higher annual zinc treatment charge, which was set at $274 per ton versus $230 per ton last year. Further pressure came through the cost of the lever, with approximately 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 60 million, or 39% year-over-year, to 260 million euros, driven by the U.S. operations. Consequently, EBITDA, as a percent of sales, stands at 17%, 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 Asiye. Going now to page 10, the results of our aluminum salt slags recycling services segment. Aluminum Salt Lake delivered a record 13.8 million EBITDA in first quarter, up 82% or 6 million euros year over year, and up 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 half a million EBITDA effect, As explained by IC, this was primarily due to the ANOVA plan ramping up in the first quarter, which was partially offset by the higher secondary aluminum alloy volumes. The price level was positive, about $5 million, with aluminum alloy free metal bull market prices showing a negative 12 percent year-over-year, or 326 per ton decrease, which was more than compensated with strong aluminum metal margins. The cost of the lever with around 2 million EBITDA positive effect year-over-year was driven by the lower gas and electricity prices. EBITDA as a percent of sales in SOLFLEX remained strong at above 30 percent. Turning to page 11, the cash flow net depth and leverage results. On the EBITDA to cash flow bridge, starting with the 50.1 million adjusted EBITDA on the left and walking to the right. Working capital was up by about 28 million year-over-year, very much driven by the usual first quarter seasonality and timing impact. In addition, remaining approximately 10 million euros in final process insurance recovery proceeds for Hannover expected to be collected during the second quarter. Interest at 6.8 million as expected, with the first of the two biannual term loan B interest payments made in January. Taxes at $2.4 million, also as expected, resulting in an operating cash flow of $13 million in the first quarter. Normalized for the pending final Hannover fire insurance proceeds expected in the second quarter, the year-over-year performance was approximately stable. CapEx-wise, in the first quarter, we spent $27 million maintenance CapEx as well as capex related to the final recovery of our Hannover plant, approximately 9 million, where we expect the final 10 million insurance proceeds in this quarter, in the second quarter. And related to the operational excellence synergies projects in the U.S., about 4 million, normalizing for Hannover recovery and use of operational excellence capex. Regular maintenance capex amount to roughly 40 million in the first quarter, as usual. Growth capex of 5 million, including the remaining expenditures for the Henan project. Overall total capex of about 32 million in the first quarter, normalized for 9 million Hannover spend to be refunded is circa 22 million to 23 million, times four equals the approximately 85 to 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 $90 million in the first quarter. Cash on hand stands at $143 million, which together with our entirely untrawn $75 million involving credit line provides Befesa with a strong liquidity of more than $200 million. The $572 million net debt with the $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 two years of hedges on the books. Our hedging strategy remains unchanged. Overall, considering the combined global hedge book, Europe, Korea, U.S. operations, The year 2023 is hedged at around 2,400 euros per ton or $2,650 per ton. The next year, the year 2024 at around 2,500 euros per ton or $2,750 per ton. And the first half of 2025 at around 2,650 euros per ton or $2,900 per ton, 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, three points. One, the FISA delivered in the first quarter 50 million adjusted EBITDA, stable with the fourth quarter 2022 results, although impacted by the lower zinc market prices, including the unfraveled 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 200 million liquidity. And three, the financial backbone supports us well to self-fund our growth roadmap 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 five-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, SIM price, and code 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 200 million to 230 million. Treatment charge for thin, as we expected, has been settled at $274 per ton, compared to the 230 level on the previous year. This will have a negative impact of around 10 million EBITDA in 2023. Thin 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 thin price in the first quarter has been around €2,900, compared to more than €3,000 300 last year, representing a decrease of 13%, and today is even lower. As such, we expect negative contribution for lower blended SIM prices, which include hedging, LME, and exchange rate. On energy, in the first quarter, we have seen historical high levels of CODE price across the markets where Bethesda operates. CODE represents more than 50% of the total energy cost in Bethesda. 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 the price will evolve during the year. In North America, the recently acquired simple planning plan 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 recently 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 evolve 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 plan in Henan is fully commissioned and in operation. Today we have two plans 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 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, the strong results of the first quarter make 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, driving by the restart of operations in the Hannover plant after the repair of the plant. Summarizing these dynamics into the outlook for the year. The lower end of the guidance range at 200 million EBITDA represent a decrease of 7% year-on-year. Although there are many moving parts, in this scenario, Bethesda would continue delivering an average run rate of around 50 million per quarter. Thin prices would remain around 2,800 to 2,900 euros for the rest of the year, and coke price would remain high. The recovery in the Chinese economy would 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 scenery would be delayed to the next year due to high inflation. and of the guidance range at 230 million EBITDA represent a growth of 7% year-on-year. In this scenario, BFESA would benefit from a gradual increase in earnings through the year. Gold prices are expected to decrease in the second part, and China momentum accelerates through the year. In this scenario, SIN price would improve in the second part of the year. The U.S. would deliver the expected synergies, and the thin smelter would also deliver positive earnings. Volume in the rest of the traditional markets of the FESA 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 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 a transition to electric vehicles, which are not going the right way and will drive market growth where we operate in our core businesses. The market growth opportunity is translated into a tangible plan consisting of nine 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 SIN 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 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 the 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 the Palmerton plant. The engineering and design are in process, and the request for quote with suppliers has started. The refurbishment will be carried out in 2023 and 2024. So, in summary, 2023 will be a transition year for Bethesda. 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 200 to 230 million range of EBITDA. We will navigate through these inflationary periods 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 NICNCO. 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.

The first question comes from Michael Hoffman .

Thank you very much. Sorry, lost my voice at Waste Expo. Again, I may have misunderstood, so I'm just asking for clarification. Do you expect the U.S. to be profitable overall, or was it the comment that the smelter wasn't a contribution? I misunderstood.

I think he's going to answer the question, Michael.

Yes, Michael. We are in the final part of the ramp up, or the commissioning, I don't know what to say. It's a complex plant, and it's on delay in the reduction of the final cost, but I think that it's 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 of the BDA level for the plant. Yes, this is the idea.

So overall, Morris America is profitable, and then the smelter could 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 – 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. Regarding North America, as you have 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 signals 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 two things first first to recover some customers that will that 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 increase volumes 24 25 and then we need some more times first to get all the synergy 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 clearly a growth market for us for all the reasons I explained. And then Asia, except China, is quite stable. We will see recovery, especially in Turkey, 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. 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. That means that 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 repeated, 2023 is a transition year. We have some headwinds in front of us, especially cold price, treatment charge, and lowers in price. But we expect that we feel confident and positive that all our markets will evolve in a positive manner during this year and the followings.

Okay, and thank you. 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, despite the challenge?

Yes, Michael. We are proposing to distribute, just like last year, 50 million Euros, or 1.25 Euro per share. And that's what we're proposing to the ADM.

Okay. Thank you very much. Thank you, Michael. Thank you, Michael.

The next question comes from Amit Laoti, Citi.

Hi. Thanks for taking my question. 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? Any thoughts around that?

Okay. Thank you for the question. Well, We used to repeat every quarter. We don't provide the BDA level by regions for, you know, 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 like we are talking about U.S. I think it could be enough.

The hedging... Hedging, yeah. So hedging, we hedge zinc, and we're not yet hedging coal, 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 the correlation between the coke that we use in the operation, like peck coke, meth coke, or even anthracite, do not follow the thermal coke that is normally, which is in the hedging site. So no sense to that. The other thing that... We have to have an idea about the headwind of the coke. Normally, we use in the range of 270,000 to 280,000 tons of coke every year. The current average price of those kinds of coke that we are using is in the range of 248, 250 euros per ton. In 2021, that was not the best year, that was 137, and even in 22 was 110 as an average. So that means that 100 euros, which we are sure that it will come back to the normal prices of this level of 100, means that the headwind of the COG price is just in the range of 30 million, 28, 30 million euros per year. So this is the real reason why we are now facing the guidance that we are putting, but normalizing the cold price, we should be in the range of $30 million up in both parts of the guidance. So yes, that could be a good idea to hedge the cold price. Not possible, basically, but no correlation, and in any case, it's not now the correct time. I think we have to wait for the volatility of the cold price to get down and stay at the same level that it was in the past.

Okay, very helpful. Thank you.

And the next question comes from Lasse Steuben Berenberg. Please go ahead.

Hi, good afternoon. Just a quick follow-up. I think you just answered it, but when we spoke last in March for the four-year results, you kind of said, the 2022 adjusted EBITDA was, you know, 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 30 million? Or is it, you know, China being, you know, a bit slower in recovering than you perhaps expected? That would be the first question. And the second question is, could you maybe comment on, you know, 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. Thank you.

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 this has been said finally. Prices are down. Coke prices are now showing reductions. 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 result of last year with a medium turn of the guidance. So basically, I think that the message is that. I think it's a period, as Javier explained, of a transitional year with a lot of headwinds, everything moving parts, and so on. This is why we think that this is more probably realistic guidance that we are doing now. This is the idea. Oh, regarding the second question. Well, in Europe in particular, the production of steel in the first quarters has increased has been down 10%, but it's showing signs of recovery because it's higher than the last quarter of 2022. What 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 generally 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 said, 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 take 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 stoppage 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, you know, 14 million of EBITDA. Is that, you know, everything seems very favourable there at the moment. You know, what's sort of a comfortable, is that a comfortable run rate or a run rate you feel comfortable with for the remainder of the year? Or is that 14 million sort of, you know, as good as it gets for aluminium?

Well, I would love to answer yes, but it will depend as well on the evolution of the prices of aluminum at the global margin of the business. It has been very, very good, and I think it's following the trend of the aluminum businesses in general, premium aluminum 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 multiply by four the aluminum in the first quarter. So we have to be a little bit more conservative there. But in any case, we do hope a really good year in the aluminum business.

Right. Thank you very much.

So the next question comes from Muma, your friend Goldman Sachs.

Hi. Thanks for the presentation. My question is on energy costs in the aluminum 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 helping Coca-Cola right now given high prices, but wondering why not natural gas? Thank you.

Thank you very much for the question. We can tell you the idea, but it's difficult. All the gas prices are going to do the evolution, especially in Europe, where we are located in the aluminum business. Yes, you are right that the first part of the, or the first Q has shown a big decrease, a decrease considering 22 prices. Where is it going to stay the whole year? difficult question. We would like to say that at least on that level, but there are many voices saying that it's going to be back on increase because pressing from China in the recovery, or they say that it's going to be nowhere 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 quarters in the aluminum 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. I think in any case it's something that we can more or less manage.

And then, Umar, I think we had the discussion before on hedging, natural gas prices, electricity, or even the question on cocaine. It's exactly as he says. We're coming out of or still in the middle of the European energy crisis. Yes, gas and electricity prices have moderated and are further down. The question is what's the new normalcy? Because they're still higher than what they were two 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. Thank you.

Thanks for that.

And there's one question coming in from Anis Zagaya, OdoBHF. Please go ahead.

Yes. Hi, thank you for taking my questions. I have two. The first one is regarding Coke. We've seen a quite strong decrease in Coke 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 the upper end point of the guidance. What are your underlying expectations for the zinc prices and Coke prices? Thank you.

It's very difficult to understand you, and there is a lot of noise in your phone. Yes, hello. 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 cooking 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? Thank you.

Now, yes, thank you very much for the question. Regarding the first question, As I said before, I think it's our coke, the coke that we use, pet coke, is not following the same correlation of the normal thermal coke which is used in the power plants or whatever, which is normally the thing that you are watching that is decreasing. But in the reality, in our case, there are not decreasing signals. So we are... We are on a spot basis, basically, but a spot means at least two or three months for the organization of the deliveries of the quantities to the plants. And we don't see signs of a 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 two quarters. Probably this is the idea. So I would like to say the contrary, but we are not watching signals to decrease. Legando, look, Javier, do you want to? Yes.

Regarding the second question, to be in the upper part of the guidance depends on several factors, not all the same prices. It depends on same prices, evolution, cold price evolution, and the performance of our business basically in China and in North America. If you want to be more precise regarding the SIN prices, to be in the upper part, we should expect better prices than 3,000 euros per ton. But it's more a combination of all the different factors, but only which will be the SIN price. Okay, thank you.

Thank you very much.

Thank you.

Thank you.

The next question comes from Jaime Escribano, Banco Santander.

Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. Jaime Escribano, Banco Santander. How is the supply according to the internal information you have? Is there new capacity coming into the market that can suggest lower prices at some point? Why is suddenly the demand of this particular coke more expensive than in the past? Just for us to better understand this market, which seems to be a little bit of a local market, niche market in its 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%. 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? Thank you very much.

Jaime, very complex questions as always, but we'll try to address something. The Coke price or the Coke market that you are asking for guidance of those is quite complicated. As a kind of summary, depending where you are talking about, the pet Coke is basically coming from oil refineries and depends on the situation of this business. Depends as well where we use these because sometimes they are residual coke and we cannot use in every country. Depends on the viability of these. As I say, the drivers are different probably than the others. The others, the met coke is more connecting with the steelmakers production of the blast furnaces and so on and the issue of the energy prices and so. The anthracite as well has another variables and in particular in Europe is following what it was in coming from Russia, Ukraine, and obviously the area 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 if the energy prices in general are coming down, the coal price will come down. And it's just a matter of the raw materials in general, sulfuric acid and other raw materials has been high. and all of them are showing signals of being reduced because the volatility is there, and we think that will come as well to the Coke sooner or later. What we don't see is now, because we are in May, we don't see signals that that's going to happen probably in 2023 or at least at the end of 2023. 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, there are, you know, They can play with quantities. They can play, I don't know, the timings of delivery. There are many factors. But the fact is that it's true that everything is going down. So this should be or we think that it's going to be down because always has been volatility in the market, not so high like today. In the past, the volatility of the gold prices were in the range of up and down per year 20%. And this was not killing our business. But in this case, we are talking about volatilities of 100% or more than 100%. So that's why the headwinds that we are having, as explained before, is in the range of 30 millions 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 one of the drivers, but the summarizing is that the gold 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, and 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. The effect of the Coke price in the first quarter has been more than $5 million, so with $5 million more, the margin would be pretty close to the normal margin. Regarding the long-term margin of the company, taking into account that we have acquired a new business with a a different bid-to-margin approach. At the end, you need to consider that the revenues contribution of our smelting plant net will be around $200 million, and we are talking about a business which, once the ramp-up is finished, should have a margin between 5 to 10 percent. It's something like our secondary aluminum business. So now Bethesda is a different element. Our sales will be higher. We will be more a company with around 1.5 billion sales. And our portfolio is composed by two businesses with an EBITDA margin between 5% to 10%, which the cementing business and the secondary aluminum business, and two businesses, steel dust recycling and solid dust recycling, with EBITDA margins around or above 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 above 20%. Okay?

Okay. Thank you very much. Thank you, Jaime. Thank you.

And the next question comes from Heinrich Mitter, Permira Credit.

Hi, guys. Thanks for the presentation. I'm quite new to the company, so I just wanted to ask a clarification question. On slide 9, you showed the EBITDA bridge for steel dust recycling, so I can understand sort of the dynamics there. But I wanted to just drill down for 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 melting sales are influencing the increase of the sales, definitely.

Okay, and am I understanding it correctly that that is EBITDA negative? which is why you're sort of not seeing 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.

Thank you very much.

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 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 to all of you, and have a good day.