Befesa S.A.

Good morning, and welcome to the third quarter 2024 results conference call of Befesa. I am Rafael Perez, CFO of Befesa. This morning, I am joined by a group CEO, Asier Zaronandia. Asier will start with an executive summary of the period, and then he will cover the business highlights for the steel dust, as well as aluminum salt slag recycling businesses. I will then review the financials by business. I will cover the evolution of commodity prices, our hedging program, and finally cash flow and net debt. Asir will close this presentation provided an update on the outlook for the rest of 2024, how we see 2025, and an update on our growth plan. Finally, we will open the lines for the Q&A session. Before getting started, let me remind you that this conference call is being webcasted live. You can find the link to the webcast and the third quarter 2024 results presentation on our website, www.defesa.com. Now, let me turn this call over to our CEO. Asir, please.

Thank you, Rafael. Moving to page five of the business highlights. The FESA has delivered a strong third quarter despite the challenging macroeconomic environment, which demonstrates the resiliency of our business model. Total adjusted BDA in the third quarter has been 49 million euros, up 16% compared to the previous year, reflecting a strong year-on-year performance. For the nine-month period, adjusted VDA reached 152 million euros, an increase of 11% compared to last year. Operating cash flows has increased by nearly 40% so far in the year, mainly driven by a strong cash conversion. On the performance in the third quarter, I would like to highlight the solid steel dust volume that we have recycled in our two main markets, Europe and the U.S. despite the challenge that the steel sector is suffering. I would also like to highlight the strong performance of our salt slag recycling business, driven by the Hannover plan back to full operations and a strong volume received from our customers. On the other hand, our secondary aluminum business has been impacted by a challenging automotive industry in Europe, characterized by weak demand and production of cars. I will elaborate later all these aspects. On outlook, we expect full year 2024 adjusted the BDA to be between 210 and 215 million euros within the previous guidance range that we provided in July of 205 to 235 million, which represents a growth of 15% to 18% year-on-year. We also expect leverage to be reduced from the current levels down to around three times by the end of the year. For 2025, although it's still early to provide guidance, we are expecting a strong double-digit VDA growth and leverage to be reduced to around 2.5 by the end of the year. We are adjusting our business plan and capital allocation to focus on reducing the leverage and invest in ongoing approved expansion projects. As such, the expansion plan in China is stopped due to the current market conditions. Our growth capex will focus on the refurbishment of Palmerton and the expansion of Bermuda, both low-risk projects from the execution, technology, and commercial point of view. Moving on to page six. Overall, our steel dust recycling business has delivered strong results in Europe and the U.S., which has been partially upset by the operation in the seam refining plant in the U.S. In Europe, the steel sector is going through a challenging period with the steel production in Europe at the five years low level clearly impacted by the weak demand. Despite this challenging environment, we are getting a strong level of deliveries from our EAF steel customers, and we continue to run our plants at a very high capacity utilization, around 90 percent. Looking ahead for Q4, we have EAF volume, which will secure strong utilization of the plants across most of the markets. In the U.S., we must differentiate between the recycling and the refining businesses. In the steel dust recycling business, we are running the plants at around 70% utilization, similar to previous quarters. The measures that we have been taking and best practices that we have been applying to improve the recycling operation are on track and delivering good results. achieving higher EBITDA per ton. The refining plan is in the final stage of the ramp-up and turnaround process, with a strong focus on cost reduction. This year, the unfavorable combination of low TCs and low premiums for the special high-grade zinc is putting a special pressure on this business production, double-digit negative contribution in the full year 2024. In our ASEAN operation, the steel dust volume was impacted by a strike in our TARQIS plant during the third quarter. The strike is over, and we have secured strong volumes for the Q4. In China, the two plants continue running at similar utilization levels than H1, impacted by a weak economy in general and very low EAF steel production. Moving on to page seven. business highlights for the aluminum salt slag recycling business. In the aluminum business, we have delivered overall strong salt slag recycling performance, which has been partially offset by weak secondary aluminum metal margin. On salt slag, the strong volume has resulted in a very high capacity utilization of the plants of around 90 percent, driven by the Hanover plant in Germany back to operation at full capacity. This strong operating result has been partially offset by lower FBM aluminum price. In our secondary aluminum segment, the main challenge has been the weak European automotive industry, which is affecting the demand for secondary aluminum. This is putting a lot of pressure in the aluminum metal margin, which is suffering compression compared to the levels of last year, causing the weak demand of secondary aluminum coupled with difficult effects to aluminum scrap in the market. This, coupled with the scheduled planned maintenance shutdowns, impacted volumes during the quarter. Now, Rafa will explain the financial in more detail.

Thank you, Asir. Moving on to page nine, financial results of our steel dust segment. Steel dust delivered 122 million euros of adjusted EBITDA in the third month of the year, which represents 9% year-on-year improvement compared to 2023. Subsequently, EBITDA margin has improved from 17% to 20% in the period. The 20 million EBITDA improvement has been driven by the following factors. The year-on-year impact from volume was flat, mainly due to slightly higher volumes in Europe and the U.S., compensated with lower volumes in Asia, as explained by ASEER. Total plant utilization was around 70%, similar to last year. On price, overall positive EBITDA year-on-year impact of about 27 million euros, with the main price components being 3 million euros negative impact from lower SIN LME prices, down 3% in euros. This negative EBITDA impact from lower SIN LME prices was compensated with two positive EBITDA impacts. Firstly, 11 million euros positive impact from higher SIN hedging prices. 97 euros per ton higher year-on-year on average. Secondly, 19 million euros positive EBITDA from the favorable decrease in SIN treatment charges, which was set at $165 per ton in year 2024 versus $274 per ton in 23. On cost orders, Befesa's COG average price continued further normalization in the nine-month period of 2024, to levels below the 2022 average price, driving positive EBITDA impact. Operational improvements in the U.S. recycling operations also have delivered positive EBITDA contribution as well in the period. All these positive impacts have been partially offset by inflation and other effects, mainly attributable to the negative contribution from the same refining operations in the U.S., which is going through a turnaround plan as I see it explained. with a strong focus on cost reduction and a double-digit negative contribution in the full year 2024. Moving on to page 10, financial results of our aluminum segment. Aluminum sold at Slack delivered 31 million euros of EBITDA in the nine-month period, which represents a 14% year-on-year decrease compared to the 36 million euros achieved in 2023. The year-on-year 5 million euro negative EBITDA development was mainly due to the lower aluminum metal margin, partially offset by lower energy prices. On volumes, overall slightly positive EBITDA year-on-year impact. Our recycled aluminum solid slag increased by 23% to 318,000 tons in the period, driven by the resumption of operations in the Hanover plant in the middle of 2023. Our secondary aluminum alloys production volumes increased by 2% to 128,000 tons. With these volumes, we operated our plants at a strong capacity utilization rate of about 90% in solid slag and 84% in secondary aluminum on average. With regard to prices, overall negative EBITDA year-on-year impact of about 9 million euros, mainly driven by the pressure aluminum metal margins versus the previous year. caused by a weak automotive industry in Europe, as explained by ASEER. Aluminum F&B prices were 6% up, with an average of around 2,327 euros per ton on average. The negative price effect was partially compensated with year-on-year lower operating costs, mainly through lower energy prices. Moving on to page 11, SIM prices and treatment charges. Regarding SIM prices LME, During the third quarter, SIN has been trading with some volatility over the marginal cost C90, trading sideways in the range of $2,300 to $3,100 per ton. Average Q3 SIN price LME has been $2,780 per ton. And for the nine-month period, average has been $2,690 per ton, which is slightly below last year's average. On treatment charges, nothing new. As we already mentioned, treatment charges for the zinc were settled in April at $165 per ton for the full year. This is around 40% or $109 per ton lower compared to the $274 in 2023, and it is positively impacting our results. As a reference, spot treatment charges in the market are trading on the negative zone, which very rarely happens. This shows the currently supply-demand dynamics in the ZIN market, characterized by reduced supply on ZIN concentrates, which is making spot treatment charges to be negative. If this dynamic continues, annual treatment charges for next year, 2025, should remain at a low level. Turning to page 12 on hedging, we have taken the opportunity of the volatility in the ZIN price seen over the last months to extend our hedging book further beyond the first half of 2026. The first half of 2026 is fully hedged, and the second half is hedged close to 50% of the volume. With this extension, our seen hedge book covers close to 24 months of hedges in our books at increasing hedging average prices of 2,650 euros per ton in 2025 and 2026. This level of hedging represents an all-time high level of hedging for BFESA and will provide around 20 to 25 million euros of incremental EBITDA in 2025, regardless of what happens with the SIN price. We continue to monitor the market closing volumes for the remaining 2026. Our hedging strategy remains unchanged and continues to be a key element of BFESA's business model, providing earnings visibility and predictability, lowering the impact from SIN price volatility. Turning to page 13 on Bethesda's energy prices. The page shows the evolution of the three energy sources that we have in Bethesda, coal, natural gas, and electricity. With regards to coal price, which today represents around 60% of the total energy bill, the normalization that started in the second quarter of 2023 is continuing throughout 2024 to levels below 2022 average. average caulk price in the nine-month period is 25% lower compared to the same period of last year. This had a positive impact on our steel dust operations, as explained earlier in the bridge. Despite this positive trend, however, the average caulk price so far in 2024 is still around 30% above the average levels from years 19 and 21. Regarding electricity, which today accounts for around 25 percent of the total energy expense, prices increased in Q3 by around 18 percent over the previous quarter, although it remains at low levels since 2019. Gas prices stayed in line with the previous quarter, stable around the average level of 2021. Turning to page 14, the cash flow results. On the EBITDA to total cash flow bridge, starting with 152 million euros of adjusted EBITDA on the left and working to the right. Working capital consumption was up by about 37 million euros, in line with previous quarters, primarily driven by the usual first quarter seasonality and timing impact without cash consumption in the third quarter. We expect to recover most of the working capital outflow in Q4, as we have done in previous years. Taxes received in the nine-month period came in at 4 million euros as a result of our final tax assessment of previous years, resulting in an operating cash flow of 118 million euros, up 39% compared to last year. CapEx-wise, in the first nine months of the year, we have invested 42 million euros in maintenance CapEx, 23 million euros in growth CapEx, mainly related to the refurbishing of the Palmerton plant in Pennsylvania, and 40 million in the 50% stake acquisition in Resitec. In summary, overall total capex have been 105 million euros for the first nine months of the year. For the full year, we expect to invest a total capex of around 120, of which 45 million would be maintenance and 75 for growth, including Resitec. Interest paid increased by 41% to 29 million euros in the nine-month period, mainly driven by the year-on-year higher EU reward, from 2.3 in 2023 to 4% applicable in 2024. Finally, a total dividend of 29 million euros, equivalent to 73 cents per share, was paid to shareholders in the third quarter. After funding working capital, interest, taxes, CAPEX, and acquisition of Recitec and dividends, total cash flow in the first nine months amounted to minus 21 million euros. Cash on hand stood at 86 million euros, which together with the 100 million euros and drawn revolving credit line provides Befesa with 186 million euros of liquidity. Gross debt at the end of the third quarter decreased to 785 748 million euros compared to the end of the second quarter. Net debt at Q3 closing stood at 662 million euros compared to the previous quarter. LTN EBITDA increased to 197 million euros at the end of the third quarter, resulting in a net leverage of 3.36 at the end of the third quarter. Turning to page 15, debt destruction leverage. The new financing, together with our consistent hedging policy and cash flow generation profile, provides the strong financial backbone upon which we base the future growth of the FESA, with a strong focus on capital allocation discipline and leverage management. We clearly have the target to reduce the leverage ratio from the current 3.4 to around 2 to 2.5 times. At the end of this year, we expect leverage to be around 3 times. To do so, we will focus the growth capex on these projects that will deliver immediate cash flows upon completion, like Resitec and the approved projects of Palmerton and Benburg. Also, we will keep the maintenance capex around 40 to 45 million euros over the coming years. As a result, total capex going forward will not be higher than 100 million euros per year, until leverage is reduced to our target of two to two and a half times. factors here on outlook and growth.