Befesa S.A. (BFSA) Earnings Call Transcript

Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Befesa Second Quarter 2020 Earnings Presentation. [Operator Instructions] I would now like to turn the call over to Rafael Perez, Director of Investor Relations and Strategy. Please begin.

Good morning and welcome to the second quarter 2020 results conference call of Befesa. I am Rafael Perez, Head of Investor Relations of Befesa. Today, as usual, we have with us Javier Molina, CEO of Befesa; and Wolf Lehmann, CFO of Befesa. Javier Molina will start with an executive summary of the second quarter covering the main highlights of the period. Then Wolf will review the second quarter financials in total and by business units as well as cash flow, net debt and capital structure. Javier will close this presentation providing a more detailed outlook for the rest of 2020. Finally, we will open the lines for the Q&A session. Before getting started, let me remind you that you can find this conference call and the webcast being live on our website. Now let me turn this call over to our CEO. Javier, please?

Good morning and thank you for attending this conference call. As we expected, the second quarter has been a challenging one for Befesa as well as for the rest of the economy as a consequence of the COVID-19 pandemic. The main industries related to Befesa have seen during the second quarter significant reduction in the level of activity. As such, the production of steel has decreased 28% in Europe during this quarter compared to the previous year. Also, the sale of cars have decreased by 50%. In this challenging environment, we have been able to hang our plants at the capacity utilization of around 80% across all our businesses. In the steel dust segment, we have increased steel dust throughput by 5% year-on-year driven by the increased capacity in charge. On the other hand, on the salt slags segment, volumes have decreased by 15%, 1 5 percent, in the quarter, impacted mainly by a lower automotive activity. However, the main impact on the earnings of Befesa during the second quarter came through the metal prices, which has been affected as a consequence of the pandemic. As such, zinc LME average price decreased by 28% in the quarter. Zinc treatment charge increased [indiscernible] by $55 per tonne, as we commented in the previous conference call. Also, aluminum alloy prices were down 8% versus the previous year. And finally, zinc hedging price this year slightly lower than last year. As a result, the zinc price has decreased 13% in the quarter compared to last year. All this different price component account for more than 19% of the negative impact on EBITDA, which were partially compensated by the increase in steel dust volume. As a consequence, second quarter EBITDA has been EUR 22 million, which represents a decrease of 41% year-on-year, which is in line with our internal view as well as the market estimate. First half total EBITDA came at EUR 55 million, as expected, down 31% year-on-year. Later, I will provide more details on the outlook for the rest of the year. However, I would like to highlight that despite the uncertainty regarding the evolution of the COVID crisis during the second half of the year, we maintain and confirm the guidance that we provide for the total year with an EBITDA range between EUR 100 million and EUR 135 million. At the end of the second quarter, we have a strong liquidity of around EUR 185 million, considering EUR 107 million in cash as well as EUR 75 million revolving credit facility full year round. The high liquidity as well as our efficient long-term capital structure with no covenant and no maturities until July 2026, this adds comfort to navigate the current environment. Additionally, we have reviewed our dividend payment to adjust to the current environment where equity and cash preservation is a priority. As such, we have paid EUR 15 million ordinary dividend in July, equivalent to EUR 0.44 per share. On China, we continue the construction works of our 2 steel dust recycling plants in Jiangsu and Henan. Although the COVID crisis has caused a minor delay in the construction, we expect to have the first plant ready by the beginning of 2021 and the second after summer of this year. Now Wolf Lehmann will explain the financials in more details.

Please turn to Page 5, the second quarter 2020 highlights. As Javier mentioned and explained, the second quarter of 2020 has been as expected from an operational, financial liquidity and progress in China point of view. Please again note that 90% of the earnings decrease is driven by the continued unfavorable price environment in zinc treatment charges and aluminum due to COVID-19. I will elaborate more on this further on. Turning to Page 6, the consolidated key financials. In second quarter, consolidated revenue was down by 28% or EUR 48 million year-over-year to EUR 122 million. On the positive side, one main factor: electric arc furnace steel dust throughput increased 5%, mainly driven by Turkey in 2020 back in operation with a higher expanded capacity. On the other side, this positive effect was offset mainly by 3 items: first, lower aluminum salt slags and spent pot lining volumes recycled mainly due to the COVID-19-related restrictions, which have decreased demand from main end-use sectors such as automotive as well as scheduled regular maintenance downtimes at our German salt slags recycling plant. Second, lower metal market prices in the wake of COVID-19 on all fronts. Zinc LME average prices were down 28% year-over-year. Zinc treatment charges up unfavorable by $55 per tonne to reference finally settled at $300 per tonne. Zinc LME and treatment charges combined represent a 37 year-over-year price decrease in second quarter. Also, aluminum alloy, free metal bulletin prices were down 8% year-over-year, and all trailing at the lowest price levels over the last 10 years. Third, on the price side, our hedging approach works and is clearly beneficial. Still zinc hedging prices in second quarter were approximately EUR 90 per tonne lower compared to last year, resulting in a 13% decrease in zinc blended prices. Thus on the revenue side, our operational progress in growth was offset by the COVID-19-related metal price pressures. Referring to EBITDA, the lower part of Page 6. In Q2, we reached EUR 21.7 million of EBITDA, very much as expected, down EUR 15.3 million EBITDA year-over-year, and all in, net-net price driven. The main price year-over-year headwinds in second quarter were: first, EUR 9 million due to lower metal prices, 8 of the 9 based on zinc LME and 1 of the 9 based on aluminum free metal bulletin. Second, EUR 2.5 million due to the unfavorable zinc treatment charges. Third, EUR 2 million due to slightly lower zinc hedging prices, totaling EUR 14 million pressure from metal prices. Main operational year-over-year impact came from: positive EUR 2 million from steel dust volume increase, which was offset by a negative EUR 2 million to EUR 3 million due to lower aluminum salt slags volumes. In summary, again, EBITDA down year-over-year EUR 15 million primarily or EUR 14 million driven by depressed metal prices due to COVID-19. Finally, on second quarter consolidated net profit. This was onetime impacted by 2 extraordinary items, which about offset each other. First, EUR 11.8 million from the impairment review, which required a write-down of the U.K. salt slags plant operations, which was mostly offset by EUR 11.2 million from the successful debt repricing earlier in the year and related accounting for financial instruments per IFRS 9. Combined, a net -- a minor impact on a profit of EUR 0.7 million on consolidated net profit. Please note, we explain more details about these extraordinary items in Notes 5 and 17 of the consolidated financial statements, including adjusting EBIT for the U.K. plant impairment. Going now to Page 7. The results of our Steel Dust Recycling Services segment. Q2 2020 revenue decreased by EUR 18 million or 19% to EUR 74 million, primarily driven by the price pressure in zinc LME, treatment charges and the minor hedge price reduction as explained, partially offset by higher electric arc furnace due to due throughput plus 5% year-over-year driven by Turkey capacity expansion. Q2 EBITDA year-over-year decreased by EUR 9 million to EUR 19 million. The main drivers of the EUR 9 million EBITDA year-over-year decreases are EUR 12 million, combined price decreases from LME, treatment charge and minor hedging price reduction, partially offset by a positive 2 driven by higher electric arc furnace throughput as explained. As the price pressure falls straight through to EBITDA, the EBITDA as a percent of revenue decreased to 25% in second quarter. On the right-hand side of Slide 7, we show details on plant utilization and prices. On capacity utilization, we continue to run at resilient utilization levels even during this challenging COVID-19 times. We are pleased with the operational progress at the expanded plant in Turkey and continue to see high utilization levels in Europe and Korea. Overall, at our steel dust recycling plant, have been running at average load factors of 83% in the first half and 76% in Q2 of the expanded latest installed annual recycling capacity of 825,000 tonnes. The zinc prices decrease, as we already discussed earlier. Clearly, on average, prices are down in second quarter year-over-year by 28%, and including treatment charge even 37%. Nevertheless, at least we see a recovery away from the lows experienced in March of below $1,900 per tonne to around $2,100 to $2,200 per tonne in the last weeks of June and July. We are monitoring this price recovery closely. Overall, for our Steel Dust Recycling Service segment, very much as expected. Again, the operational progress in Turkey is delivering, but continues to be offset by the price headwinds in the wake of COVID-19 pandemic. Turning to Page 8, the results of our Aluminum Salt Slags Recycling Services segment. Q2 revenues were down EUR 31 million or 39% year-over-year to EUR 49 million, mainly driven by 2 items. Firstly, the low volumes in both subsegments. Salt slags and spent pot lining volumes down 15% year-over-year. Secondary aluminum alloy volumes down 32% year-over-year, mainly affected by COVID-19-related restrictions, which reduced production levels and demand from end-use sectors, especially from automotive. Secondly, the 8% lower prices for aluminum alloy, currently still depressed at around EUR 1,200 to EUR 1,250 per tonne and at the lowest level over the last 10 years. Q2 EBITDA was down EUR 6 million year-over-year to EUR 4 million. Secondary aluminum subsegment, the gray bars, was down EUR 3.5 million year-over-year to roughly EUR 1 million in Q2. Main drivers are: EUR 1 million negative from lower secondary aluminum alloy volumes affected by COVID-19, as explained; EUR 1 million from lower aluminum alloy average prices; and EUR 1 million from reduced metal margins. The salt slags subsegment, the orange bars, down EUR 2.7 million year-over-year to EUR 3 million in Q2, mainly explained by EUR 1 million negative from lower aluminum alloy average prices and EUR 2 million from lower salt slags volumes affected by COVID-19, as explained. On the right-hand side of Page 8, we show plant utilization and prices. Salt slags and spent pot lining volume and utilization levels continued at a resilient 80% on average in second quarter. On the other hand, in secondary aluminum, volumes were especially hit by COVID-19-related restrictions, which lowered demand from end-use sectors, especially automotive, as explained. Market prices, on the other hand, decreased, alu alloy free metal prices in second quarter averaged EUR 1,282 per tonne of aluminum alloy, down 8% year-over-year. As mentioned, currently at the lowest price levels over the last 10 years. Overall, a challenging second quarter for the Aluminum Salt Slags Recycling Services segment, with COVID-19 further pressuring aluminum prices to 10-year low levels and lowering demand, especially in the automotive sector. Turning to Page 9. On the left-hand side, net debt, cash, capital structure. We closed second quarter with a continued strong level of liquidity of approximately EUR 185 million, readily available EUR 107 million of cash on hand and EUR 75 million entirely undrawn revolving credit facility. Our capital structure is strong as explained at our last call. It is the strongest one that it's ever had. It is a simple Term Loan B fixed until July 2026, so another 6 years to go. No maturities and no covenants applying. We repriced in February and reduced the interest rate to an attractive 2%. On the right-hand side of Page 9, the total cash flow after funding working capital, taxes, interest and CapEx investment was a negative EUR 19 million in first half. Working capital was temporarily impacted by EUR 24 million, mainly due to receivables more back-end loaded in second quarter versus year-end '19 as well as EUR 10 million less factoring and confirm. Furthermore, a lower payable balance with COVID-19-related decreased operations. Taxes and interests are as expected from midway through the year. On CapEx, as explained in our last call, we plan to spend EUR 70 million total CapEx for the full year, of which EUR 20 million are for maintenance and EUR 50 million on growth, primarily China. Halfway through the year, we are on track having spent EUR 31 million, EUR 11 million on maintenance and EUR 20 million on gross, mainly China. All in, resulting in solid cash in the bank of EUR 107 million. The operating cash flow during Q1 was a positive EUR 8 million; in Q2, a positive EUR 3 million, amounting to EUR 11 million positive operating cash flow in first half, also in a very challenging COVID-19 environment. Consequently, the last 12-month period stands at EUR 65 million operating cash flow. Summarizing the high liquidity, strong and long-term capital structure as well as our hedging book forms the backbone of Befesa's financials and serves us very well to weather the COVID-19 pandemic period. Turning to Page 10. Our hedging approach and book are the same as during our last update. We are hedged up to and including October 2021. Zinc spot prices have been gradually recurring from levels below $1,900 per tonne seen in March and April, pressured by COVID-19 to around $2,100 to $2,200 per tonne over the weeks in June and July. In the blue box, we quantified approximately how much our hedges, the 104,000 tonnes of zinc we sold forward up to October 2021 at fixed prices are in the money against the Q2 average spot price of EUR 1,780 per tonne or about $1,960 per tonne. This represents EUR 46 million of value or buffer in profit and cash over the next quarters to come. Overall, our hedging book continues to reduce our earnings variability and allows us to plan our cash flows better to ensure we can fund our growth initiatives. Turning to Page 11, our mid-term growth road map. Upfront, it is important to understand that also during this COVID-19 pandemic, we stay the course on our strategic and growth road map. As we continue to execute our initiatives, we target to get out of this COVID-19 crisis with a stronger portfolio versus when we entered. In the graph, level 1 hedging, I already explained on the prior page. Level 2, organic growth completed last year on time and on budget and delivering in 2020, including Turkey, Korea washing, and alu furnace upgrades. Level 3, China, as mentioned by Javier, as well as shown on Pages 12 to 15, where we show the latest progress in construction in pictures, we are on track. Now back to Javier who will cover outlook and closing remarks.

Thanks, Wolf. I would like to finish the call providing more details on the outlook for the rest of the year. As I said earlier, we maintained the guidance of EUR 100 million to EUR 135 million of EBITDA for the total year. Second quarter came as we expected at EUR 22 million, which we expect to be the weakest quarter of the year, driven by low volume as well as weak metal prices. On the volume side, we have brought forward most of the annual maintenance shutdowns that were scheduled for summer and autumn. This decision, together with the stock of raw material that we have in each of the plants will [Audio Gap] capacity utilization up in the second half of the year. The level of deliveries of steel dust that we are receiving from our steelmaker customers have significantly decreased during the second quarter. However, already in July, we are starting to see indication of a slight recovery in the production levels. On the metal price side, the combination of high zinc treatment charge with low LME zinc price is putting pressure on the less efficient zinc mine. And over the last few weeks, we are seeing the announcement of zinc miners operation being shut down. This has made LME zinc prices to slightly recover since the lower level achieved during the month of March in the mid of the COVID crisis. This also reaffirms our thoughts about the zinc price flow. On the aluminum business, the weak situation of the automotive industry in Europe is affecting the demand for secondary aluminum as well as the production of salt slag. Although we are starting to see a slight recovery in this quarter, in the third quarter, there is still a lot of uncertainty about the development of the auto industry during the second half of the year. This combination of volume and price indicates to us that the third quarter should be better than the second one. However, there is still a lot of uncertainty about how the fourth quarter will evolve which will depend on the evolution of the pandemic. I would like to highlight that in Befesa, we serve the part of the steel industry that is more stable and resilient, which is the electric arc furnace steel producers. In many crises at past -- in the past, this way to produce steel has demonstrated to be more stable and resilient than blast furnace producers. As an example, during the first half of this year, the total steel production in Germany has decreased 16%. However, this decrease has been different between electric furnace. While blast furnace zinc production has decreased 19%, electric arc has decreased only 8% in the period. This again proves the resiliency of our business model. Even though we currently enjoy a comfortable and healthy liquidity, as Wolf explained, we keep on ensuring that any decision we make takes liquidity into consideration. We have reduced maintenance investment by 20%, and we are keeping our growth plans in China, which will deliver attractive return for our shareholders. We have recently closed the financing of 50% of the investments of the first plant in China with the local disk debt, which also will contribute to process our liquidity. Finally, I would like to highlight that during the second quarter, we published our new sustainability report, which explained in more detail why Befesa is a great example of circular economy. One of the main levers that will drive the recovery of the global economy from the current sanitary crisis is sustainable development. And one of the pillars on which sustainable development might be based on is the circular economy. Befesa is part of the circular economy and contributes with its business to environment protection, recycling more than 1.5 million tonnes of hazardous residues annually, producing more than 1.2 million tonnes of new materials, reducing the consumption of natural resources. This has been the backbone of the business when the company started more than 3 decades ago. The circular economy not only reduced the generation of waste, but also avoids the spectrum of new resources from the herd, avoiding the great environmental and financial costs that this produced. A transition to a circular economy represents a great opportunity to exit this crisis. Thank you very much.

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

[Operator Instructions] The first question comes from Ingo Schachel from Commerzbank.

My first question would be on the situation of your French competitor and partner Recylex. I was just wondering now that they seem to have filed for insolvency of their German subsidiaries and CO protective proceeding. And I guess I would be interested in 3 aspects. First of all, what does this procedure mean for the competitive landscape in Germany if something like Harz-Metall, which was out of business which customers just said that [indiscernible] and you could benefit from that, what you see in other dynamics? I would also be interested in the aspect on M&A opportunities for you. I think a few years ago or a decade ago, you quite opportunistically bought the aluminum recycling business out of insolvency. I think if something like [indiscernible] recycling now insolvent, whichever consider the option to maybe also recycle other metals than aluminum and steel dust? And maybe just as a quick confirmation, whether you could tell us there's no impact on your partnership with them in your French Recylex plants?

Okay. Thanks, Ingo. Well, as you have explained, the situation of Recylex is well known. Let me explain the different aspects in -- or effects in Befesa. Regarding the competition situation in Europe, and especially in Germany, what we're seeing right now is somebody will take care of hard metal. So in our opinion, the plant will continue operating. So we don't see any relevant change in the competitive situation in Europe in the steel dust recycling. Regarding the possible M&A opportunity, well, as you can imagine, we have analyzed deeply the hard metal opportunity. But frankly speaking, we are still on the process -- frankly speaking, we don't see that we are a real candidate because from a market point of view, we have a very strong position in Europe and anything that will be enough for the competition... Regarding the possibility to enter in other metal, something that we -- our strategy is very clear and well defined. While we have the opportunity to grow into -- in new geographies in our current business, that this is a steel dust recycling and salt slag recycling, we will be totally focused in that. So we are not considering at least in the short term the possibility to entering the recycling of the -- of other metals. And I don't know. The third -- I don't know if you have asked something more?

Yes, about France, whether any impact on your cooperation within France?

No. We don't think so. We don't think so. At the end of the day, as you know, Recylex is part of -- is participated by Glencore group. So we see that -- we feel that we have a very stable partner in our operations in France.

Okay. And maybe just on your steel dust throughput volumes. I think they were, I think, pretty strong, even if you strip out the effect from the tonnage that you had in the Turkey, it looks like your European and Korean volumes were only down quite moderately. I was just wondering on the third quarter, I guess, everyone is expecting steel production recover by maybe 10% or so. In such a scenario, would you also expect your European and Korean volume to recover by a similar magnitude? Are there other factors to keep in mind, for example, that you've worked off a lot of inventory so that even if electric arc furnace steel production recovers by, say, 10% in the third quarter, you would rather see stable volumes in Europe and in Korea?

Well, I can explain what has happened in the past more than what is going to happen in the future because we never know. But I can give you -- provide you some figures about the second quarter. For example, the steel production in Europe dropped by 28%, while our deliveries dropped only by 21%. We have said many times that we are more resilient than the industry, and this is -- because we serve -- as I have tried to explain during the presentation, we serve the electric arc furnace producers that are doing much better than the total industry. So in that sense, we feel that -- as you said, there is an improvement in the production of steel in the third quarter. We will enjoy this recovery at least in the same proportion.

The next question comes from Michael Hoffman from Stifel.

I'm going to sort of do them one at a time. Could we talk about what your thoughts are about Turkey ramping up, and therefore, the utilization moving from mid-70s back in towards the 80s in steel dust going into the second half, if, in fact, steel production continues to slow gradual improvement?

Well, in Turkey, we are running that basically as expected. The production of steel in the country is suffering like in the rest of the world. In the first -- in the second quarter, the production currently has dropped 17%. And our feeling is that we will see similar levels in the second part of the year. Taking account the tariffs from U.S., et cetera, we don't see a strong recovery in Turkey in the second part of the year. So based -- all in all, we are running the plan as expected, and I think we will finish utilization levels around 70% in the whole year.

This is in Turkey. So the blended average would be about 75 to 80 then for the remainder of the year?

You mean in the whole company?

Yes, for steel dust.

For steel dust, yes, obviously, even if slightly better than that. We have finished this first 6 months around -- near 80%, and we expect to get better levels in the second part of the year. What's happened, Michael, is that we don't have -- we have some visibility for the third quarter. And clearly, the third quarter will be better, at least slightly better than the second one, and we have a big uncertainty about the last quarter. We don't know if the last quarter is going to be again, depending on the pandemic and if we're entering in Europe lockdown period, a very weak quarter as the second one, or on contrary, we can see a strong recovery and be again a strong quarter like in the previous year. We don't know that. We saw -- our customers don't know that. That's why we are only confirming the wide range we provided as guidance at the beginning of the year.

Okay. Fair enough. And then given that auto production has come back online, and while I get the second quarter had a meaningful impact on new car sales, the rate of production going into the second half would suggest pretty good demand for both steel and aluminum. What's your view of that being...

Well, Michael, it's really a difficult question. I would like to be able to answer properly. We have -- what we have seen in the second half of the year has been a very weak situation in the automotive industry. 50% production -- car registration decreased. In our view, in June, the automotive plants in Europe were running at 50% of capacity. We see -- we are seeing some recovery in July. And this month, we feel that the levels of activity they have are more in the range of 70%. For July and August will be more or less in this range, but we don't know what is going to happen later on. We hope to see a strong recovery because all the government stimulus that the automotive is actually receiving will support this recovery, but we need to confirm. Let's see what's happened.

The next question comes from Sylvia Barker from JPMorgan.

Some of the questions have been answered, but if I can just double check. You mentioned one kind of number around steel volumes in Europe, but could you maybe just spell out again the volume trends in Q2 in steel by region as I couldn't quite catch that? And then secondly, just on the guidance. So I guess the lower end of the range was implying some very kind of sharp -- very sharp reduction, very kind of dramatic price action as well. So do you think that, that end of the range is still plausible? It doesn't seem like it is. Just wondering whether you were considering kind of moving the range up at all. And then finally on cash flow. Could you maybe talk about any of the government kind of deferral schemes? Obviously, a lot of companies have been using the VAT security deferrals. Just wondering whether there was any impact on your working capital in the first half.

Thank you, Sylvia. Well, regarding the production per plant, it's an information that is very sensible. We don't like to enter in this detail because we manage the company as a whole. Sometimes we -- the -- our logistics and the raw material to different plans depending on the market situation, et cetera. So I would like -- I think it's better for us don't enter in this kind of detail because I feel they could confuse our view of the analysts and all the investors. I think that the message is that we have finished the first part of the year at a strong 80% of load factor. And hopeful that third quarter will be better, and let's see what happened in the last quarter. And this is the same answer for the guidance. First half, we finished at EUR 55 million. Second quarter, we finished at EUR 22 million. I said that third quarter will be slightly better than the second quarter, but it's not going to be a strong quarter. So let's say that we finished around EUR 26 million, EUR 27 million. So we will have finished probably the first 9 months about EUR 80 million -- EUR 80 million, EUR 80-something million. So the question mark is what is going to happen in the last quarter? If we have again a weak quarter like the second, for example, we will be in the low part of the range. But if the recovery comes, and we have a strong quarter, we will be in the -- around the middle part of the range. Clearly, to be in the upper part of the range, taking account the situation we are in today, will be very difficult. It will be quite impossible because we should need to be a very strong recovery starting immediately. And probably, this is not the case. Wolf, don't you mind to answer the question about cash flow?