Good day and welcome to Befesa SA first half 2022 interim report conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Rafael Pérez, Director of Investor Relations and Strategy. Please go ahead.
Good morning and welcome to the first half 2022 results conference call of Befesa. I am Rafael Pérez, Head of Strategy and Investor Relations of Befesa. Today, we have with us Javier Molina, Executive Chair of Befesa. Asier Zarraonandia, recently named CEO of Befesa, and Wolf Lehmann, CFO of the company. Javier Molina Montes will start with an executive summary of the first six months of the year. After that, Asier will explain the business highlights of the period, covering Steel Dust, and Aluminium Salt Slag Recycling. Wolf will then 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 the rest of the year, the new five-year growth plan that we announced a few days ago, as well as an ESG.
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 to the first half results presentation on our website, www.befesa.com. Now, let me turn this call over to our chairman. Javier, please.
Thanks, Rafael. Good morning to all of you. Before getting started with the results of the second quarter and the first semester, I would like to introduce to all of you Asier Zarraonandia, recently appointed CEO of Befesa. Some of you have already met him. Asier has been with Befesa for the last 20 years. Over this time, he successfully developed and managed the Steel Dust Recycling business, which represents around 80% of Befesa's EBITDA. He has played an instrumental role in the recent development of the business in China and USA. As CEO, he will be responsible for the day-to-day management across all Befesa's business. I'm completely sure that he will develop this new role with the same leadership he has shown to date.
During the second quarter, we have continued the same growth path that we saw in the first quarter, with 26% EBITDA growth year-on-year. Overall, despite the challenging macroeconomic environment and the volatility in the commodity price, we have delivered by the contribution of the American plants, as well as high average metal prices, which have been offset by high inflation, especially in energy prices. Compared to the first quarter, the volume has been lower, mainly driven by maintenance shutdowns in our classic markets, and, to a lesser extent, a lower contribution from China. Later, Asier will review the business performance during the second quarter in more detail. We are living in a very challenging macroeconomic environment. On the one hand, the war in Ukraine is creating great instability in the global economy.
In Europe, we are suffering an energy crisis in which security of supply of gas and normal energy price are not guaranteed. Furthermore, China is imposing a zero-COVID strategy, which is making very difficult the transportation inside the country, producing an economic slowdown in the economic activity. This volatility is reflected in the business results on the first half of the year. We see a lot of uncertainties for the second half of the year. Commodity prices have come down significantly in the last weeks from high levels, breaking the correlation between energy and metal prices that we saw in the first quarter. Concerns about an economic recessions in Europe are arising. I will comment about the outlook for the rest of the year and the new five-year growth plan at the end of the presentation.
Now, Asier will explain the business performance in more detail.
Thank you, Javier. I will provide an overview of the performance of the business during the second quarter and the first half of the year. Overall, the second quarter has been another good quarter with a strong performance across the business, continuing the same path that we saw in the quarter one. We have delivered a strong volume performance, and we have benefited from positive price dynamics in the second quarter, which has more than offset the high inflation we have experienced in the period. Starting with the Steel Dust Recycling business. In the Q2, we have achieved 292,000 tons of throughput, up 83% compared to last year, mainly driven by the contribution from the U.S., supported by a strong performance in the rest of the markets.
Similarly, the two previous years, compared to the Q1, the volume is lower due to annual plant maintenance shutdowns, as well as lower contribution from China. In Q2, we have sold 110,000 tons of coke, more than double compared to last year. Blended tin price, considering the weighted average of LME and hedging has increased 23% in the quarter. Although tin price has come down significantly over the last weeks, the second quarter average price has been better than the Q1. This positive effect has been partially offset by higher inflation across the business in Q2, mainly in energy prices and more specifically in coke, totaling a negative impact of around EUR 13 million in the quarter. Total EBITDA in the steel dust business has been EUR 40 million in the Q2, up 23% compared to the previous year.
In the U.S., the integration of AZR into Befesa is developing well across all fronts. The team is working well with the rest of the organization, and we are confident to capture the short-term synergies over this and next year. We have developed the daily action plan in order to capture all the synergies of the operational area, mainly, but also in the general expenses and commercial fields. This year, we will benefit from the full year of operation in the U.S., which will represent a significant EBITDA growth. In China, the zero-COVID strategy that the Chinese government is implementing to fight against the still present COVID-19 pandemic is creating a very challenging environment to operate. In Jiangsu Province, we have been operating the plant since the beginning of the year.
The plant is technically operating well, and we have contracted more than 80% of the volume. However, the situation during the Q2 has been quite challenging, which required to stop and restart the plant constantly. Our second plant in the province of Henan is completed, and we are finishing the commissioning of the plant. We expect to start commercial operation in the coming months. We are starting to see some release in the strictest measures, which make us be more optimistic for the coming months. In the traditional business of Befesa, we are achieving strong volumes supported by a strong EAF steel production from our customers. Moving now to our Aluminium Salt Slag and secondary aluminium business. Our aluminium business has delivered a very strong quarter in a very challenging macroeconomic environment.
During the second quarter, we have recycled 85,000 tons of salt slag, representing a 6% decrease compared to last year. The production of secondary aluminium alloys has been 42,000 tons, a decrease of 12% over the last year. The aluminium price has increased 28% in the period, and general inflation has represented around EUR 6 million headwinds in the business. As a result, we have achieved EUR 16 million of EBITDA in this segment, which represent a 28% growth over last year. All in all, another strong quarter in a challenging environment with a strong volume performance and positive price dynamics that have more than compensated the high inflation. Let me give a final word about China. As I mentioned, the situation in the Q2 has been very challenging and difficult to operate.
We are starting to see some relief in the measures, but very slow. Despite the short-term challenge in China, the opportunity to grow remains strong. The environmental authorities are committed to enforcing and fulfilling the environmental regulations, with the steel makers seeing recycling as a real solution. At the moment, we are working on several new projects to build a new plant that could materialize in the near future as soon as the negotiation with authorities and steel makers reach to an agreement. Now, Wolf Lehmann will explain the financials in more detail.
Thank you, Asier. Please turn to page 9, first half 2022 consolidated financial highlights. As mentioned by Javier, Befesa delivered 25% year-over-year EBITDA growth in the first half of 2022, with EUR 118 million adjusted EBITDA, up EUR 23.8 million year-over-year versus first half 2021 at EUR 94.1 million. Overall, our growth initiatives, including U.S. Zinc, are delivering results. Even in the current volatile environment, we are able to offset inflationary pressures, mainly energy, through higher prices. Reviewing the main drivers of the year-over-year EUR 24 million EBITDA improvement in more detail. On volume, overall, approximately EUR 24 million net positive volume year-over-year impact. + EUR 25 million from the higher steel dust throughput, including the positive contribution from the U.S. Zinc operations.
A -EUR 1 million impact from lower aluminium volumes, mainly driven by the lower activity of the European automotive and aluminium industries. On price, the overall approximately EUR 36 million positive price year-over-year impact was about EUR 21 million from Steel Dust business and around EUR 14 million from our Aluminium Salt Slag business. I will explain more in more detail on the following pages. On other costs, the approximately - EUR 36 million impact reflects the higher inflation, primarily energy cost, which is in balance with the higher metal prices. In summary, adjusted EBITDA is at an all-time high of EUR 118 million, with a high 21% adjusted EBITDA margin. Net profit increased by 10% year-over-year to EUR 50 million in the first half of 2022, equal to EUR 1.25 earnings per share based on the full new post U.S. acquisition, 40 million of outstanding shares.
The EUR 1.25 earnings per share was slightly lower compared to the EUR 1.32 in the first half 2021. Once the U.S. synergies are fully realized, earnings per share is expected to improve accordingly. We also improved our cash to a new high level of EUR 239 million and reduced our leverage further to 2.09 x, which I explain later together with net debt and net leverage performance on page 12. Note, in the appendix, as always, of this presentation, you will find various financial and operational data tables with quarterly, annual and multi-year views for your reference. Turning to page 10, the Steel Dust Recycling Services results. Steel Dust Recycling Services continued to perform strongly and delivered EUR 95 million adjusted EBITDA in the first half 2022, up EUR 25.8 million or 37.2% year-over-year.
Overall, the Steel Dust growth initiatives, including the U.S. operations, are delivering results, and we're able to offset inflationary pressures, mainly energy, through higher prices. The volume lever was positive by around EUR 25 million EBITDA year-over-year. As explained, this includes the positive contribution from the U.S. operations. The net price level was positive by about EUR 21 million year-over-year, with main price components being, one, EUR 26 million higher zinc LME prices, up 49% year-over-year to EUR 3,510 . Two, EUR 4 million positive higher zinc hedging prices, EUR 2,328 per ton in first half 2022 versus EUR 2,200 per ton in first half 2021.
EUR 9 million negative, driven by the latest higher zinc treatment charges, which were considered at $230 per ton, retroactively from 1st of January 2022, versus $159 per ton in 2021. Overall, the approximately EUR 21 million year-over-year impact from price lever offset the approximately - EUR 21 million year-over-year impact from higher inflation, mainly energy costs, captured under the cost other lever. Going now to page 11, the results of our Aluminium Salt Slags Recycling Services segment. Aluminium Salt Slags Recycling Services delivered EUR 23.6 million EBITDA in first half 2022, slightly down by EUR 1.2 million or 4.8% year-over-year. The year-over-year EBITDA development was mainly impacted by the lower market activity in the European automotive and aluminium industries.
Higher energy prices, nevertheless, were offset entirely by the achieved higher prices. The volume lever was slightly negative by about EUR 1 million EBITDA effect. This was driven by about 12% lower salt slags and SPL treated, as well as about 15% lower production of aluminium alloys, driven by the current lower European automotive and aluminium industry environment. Nevertheless, even under the current volatile market environment, we managed to run our plants overall at around 80% utilization. The price lever was positive, about EUR 14 million, with aluminium alloy pre-Metal Bulletin market prices showing a 30% year-over-year increase, as well as better aluminium metal margins. Nevertheless, the cost other lever, with around - EUR 14 million EBITDA effect year-over-year, was driven by the higher inflation energy cost trends, with particularly high gas prices in Europe, thus this counterbalanced the progress in metal prices. Turning to page 12.
On the EBITDA to cash flow bridge, starting with EUR 118 million adjusted EBITDA on the left and walking to the right. Working capital was up by about EUR 26 million year-over-year. The higher working capital consumption was very much driven by seasonality and timing impact. For example, the increase in the sales and receivables, the majority of which is expected to reduce by the end of this year. Interest at EUR 12 million. As expected, interest paid in first half were up EUR 4 million higher year-over-year, mainly as a result of the higher gross debt from the acquisition and because the Term Loan B interest payments are made quarterly in 2022 versus biannually in 2021. Taxes at EUR 60 million, also as expected, resulting in an operating cash flow of EUR 64 million in first half 2022.
CapEx-wise, in the first half, we spent EUR 36.8 million regular maintenance CapEx, including IT, operational excellence, synergies funding in the U.S., and the recovery of our Hanover plant, expecting to get this back from insurance. EUR 20.8 million growth CapEx, mainly dedicated to our new plant at Henan. Together, total CapEx of EUR 57.8 million, partially funded through approximately EUR 8 million China local loans from our Henan plant. After funding working capital, interest, taxes, and CapEx, total cash flow amounted to positive EUR 14.6 million in first half. Hence, our cash on hand improved to EUR 239 million, a new high for Befesa, up from EUR 224 million at year-end.
The cash on hand of EUR 239 million, together with our entirely undrawn EUR 75 million revolving credit line, provides Befesa with a strong liquidity of above EUR 300 million. The EUR 225 million last 12 months rolling EBITDA incorporates rolling full 12 months of the U.S. operations on a pro forma basis. The EUR 471 million net debt with EUR 225 million last 12 months adjusted EBITDA results in a 2.09 net leverage at second quarter closing, improving from 2.16 at year-end. Recognizing the positive trend, Moody's improved its outlook on Befesa to positive and affirmed the Ba2 rating.
Summarizing, Befesa is in the strongest financial shape ever, with around a record EUR 239 million cash on hand, more than EUR 300 million liquidity, and a leverage decreasing currently at 2.09. Turning to page 13 on hedging. In first half 2022, we continued our hedging rigor and fully extended our zinc hedge book further up to and including January 2025, thus with approximately 2.5 years of hedges on the books. Befesa's current hedging volume run rate is to hedge around 38,000 tons of zinc output per quarter or around 152,000 tons per year. Overall, considering the combined global hedge book, Europe, Korea, and U.S. operations, the year 2022 is hedged at around EUR 2,350 per ton sold forward prices.
The year 2023 at around EUR 2,450 per ton, and the year 2024 at around EUR 2,500 per ton. Please note that these average hedging prices are based on FX forward assumptions of 1.07 USD in 2022 and 2023, and 1.10 USD in 2024 dollar to euro. At the current FX parity, average prices would be at slightly above EUR 2,400 per ton in 2022, slightly above EUR 2,500 in 2023, and slightly above EUR 2,600 per ton in 2024, again, if you were assuming FX parity. Summarizing the financial section before we turn to growth, three points.
One, Befesa delivered in the first half 2022, the highest earnings in the history of the company at EUR 118 million adjusted EBIT, up 25% over last year, despite the current volatile market environment. Secondly, our financial backbone is strong. We fully extended our hedges out to January 2025. Our capital structure is efficient and long-term. Cash on hand and liquidity are strong. We entered this challenging 2022 environment in the strongest shape we've ever been. Three, this financial backbone supports us well to, A, fund our growth partner, our latest sustainable global growth plan, and B, maintain a stable dividend payout at the upper end of Befesa's dividend policy to share the success with our shareholders. Just like 50% of net profit or EUR 50 million was distributed in July.
Now back to Javier on outlook and growth.
Thanks, Wolf. I would like to finish the call providing some more details and thoughts on the outlook for the second part of the year, as well as the new five-year strategic growth plan. Despite all the volatility in the commodity prices and the concerns about the global economy for the second part of the year, we expect 2022 to be another growth year for Befesa, mainly driven by the volume growth contribution of American and a strong hedging, which will help us reduce volatility in the metal prices. These two drivers of earnings growth to offset the high general inflation, especially in energy prices.
From the volume point of view, although there is a low visibility for the second part of the year, we expect growth on a steel dust volume driven by a full year of consolidation of our operation in the U.S. after the acquisition of American Zinc Recycling. In Europe, there are general concerns about the economic situation during the second part of the year caused by the uncertainty in the energy market and how that could affect the overall industry. Despite that, we are confident to achieve high levels of capacity utilization overall. However, even in a potential economic crisis scenario, we have proven in the past that our business is highly resilient. Even in situations where the steel production has decreased, we have been able to maintain high levels of utilizations and defend our margins.
The integration of American Zinc Recycling into Befesa is developing well across all fronts. For the rest of the year, we expect a similar performance in our American operations compared to the first quarter, to the first semester. In China, we are starting to see some release in the COVID lockdown measures, which make us be more optimistic for the remaining months of the year. In the aluminium salt slag and secondary aluminium business, which is a purely European business, we also have low visibility for the second part of the year. The automotive industry continues to face a challenging situation in Europe, and supply chain problems are added to the semiconductor shortage. Moving now to the price environment. As we are seeing, the challenging macroeconomic environment and the concerns about the global economy are putting pressure on metal prices for zinc and aluminium.
At the same time, energy prices are experiencing high volatility, reaching very high levels. In this environment, given the high uncertainty existing, we expect volatility in the prices of commodities to continue for the rest of the year. Our hedging policy that Wolf has explained, with around 70% of the volume of zinc hedged at good prices, will help us navigate this period of high volatility. In summary, although we see high levels of uncertainty, which is resulting in high volatility in commodity prices, in Befesa, we are facing this challenging environment with optimism. Befesa today is a much more diversified business than one year ago, with a significant part of our earnings coming from markets outside Europe, mainly North America and Asia, and we are confident about the business model of Befesa.
We enter this uncertain period with a very strong financial position, high liquidity, long-term capital structure, and a very strong hedging book. Also, our business model is highly resilient, as we have shown many times in the past, operating in a niche industry with high barriers to enter and the ability to keep high levels of profitability and cash flows. As a result of this, even in a very pessimistic scenario, the impact on Befesa will be very limited. The second topic I would like to explain is the new growth plan that we announced a few days ago. Despite the short-term challenging situation we are facing, the energy transition is a reality, and we are taking action about this matter on two fronts. We are setting our own ESG goals, and we are seeing growth opportunities.
As you all know, the carbonization and electric vehicle trends are supporting the production of electric arc furnace steel and aluminium markets, which are our core businesses. The global steel industry is undergoing a major transformation to decarbonize its operation and meet carbon reduction targets for 2030 and 2060. Mini mill steel production consumes around seven times less CO2 per ton versus primary basic oxygen furnace production, the blast furnace. This is driving large scale investment in electric arc furnace production globally, which will substitute blast furnace production and will expand the customer and volume base of Befesa's environmental services in our main market, like Europe and North America. This will naturally increase our natural market to provide the steel dust recycling service to these new plants.
Similarly, the trends in the aluminium industry towards decarbonization and the rapid increase in the production of electric vehicles are fueling increased demand for secondary aluminium and salt slag recycling in Europe, where Befesa plays a leading role. As you know, the EU has forbidden the manufacturing of combustion engine cars from 2030, and automakers are taking action to adapt their operations to that change. Average aluminium weight in cars is going to move from 7% approx today to more than 30% in the coming years. That is going to produce more demand of secondary aluminium, as well as recycling services of waste associated with the aluminium industry, like salt slag.
These growth opportunities in America and in Europe will be complemented by the already existing growth opportunity in China in our Steel Dust business, where we already have two plants, and we expect to be growing in new provinces as well as in existing ones. Despite the short-term challenge in China, the long-term growth opportunities remain intact. The market is already there and growing. The regulation by authorities is a reality. We are the first mover, and we are working on several new projects that could materialize in the near future. Putting all these growth opportunities together, we expect to invest around EUR 500 million over the next four years, which will represent the largest expansion program of Befesa after the acquisition in U.S.
With this investment, we expect to achieve around double-digit earnings growth on average over the next five years, between 2022 and 2027. The investment plan is well globally balanced between our three main regions, China, U.S., and Europe. We also believe that this is a low-risk plan from the execution point of view, as we are talking about growing our core businesses in our core markets. We can fund the entire plan with the cash in hand and the cash flow generated over the period, maintaining the leverage ratio below 2x.
At the moment, we are finalizing the growth plan, and we will present the details of this plan in a Capital Markets Day that we will celebrate in November. Finally, on ESG, the secondary materials produced by Befesa's recycling process are a substitute for more carbon-intensive processes used to mine and process virgin raw materials. Using a life cycle analysis approach, we evaluate the climate impact of our operations across our value chain. The conclusion of that analysis is that Befesa's operations avoid around 2.4 million tons of CO2 equivalent each year. We are also committing to a 20% CO2 emissions intensity reduction by 2030, supported by a roadmap to achieve the target, especially by green energy sourcing, electricity efficiency, process optimization, and raw material substitution.
Also, we are aiming at net zero emission by 2050, provided that certain technologies currently under development become technical, viable, and economically feasible. The board of Befesa will start to discuss sustainability plans and progress on a regular basis in a new sustainability committee, which has been created comprising directors of Befesa who have strong experience in ESG, technology, and energy transition. Befesa is clearly benefiting from global trends toward the shift of electric arc furnace steel production, waste reduction, and increasing focus on environmental impact, which will provide long-term growth to Befesa in the future years. Thank you very much.
Thank you, Javier. We will now open the line for your questions.
Ladies and gentlemen, if you would like to ask a question, you can do so now by pressing star one on your telephones. That's star one if you'd like to ask a question. We will now take a question from Oscar Val from J.P. Morgan. Please go ahead.
Yes. Good morning, Javier, Wolf, Asier. I have three questions. The first one is just around looking at the second half, and your full year guidance. In H1, you're able to broadly offset higher energy costs with raw material prices. In the second half, do you have a sense of how that will behave currently? Then the second question is around China. Could you help us quantify what levels that China was running at in the model in terms of volume or throughput? And then the third question is, if we think about gas shortages in Europe, potentially this winter, can you remind us where your exposure sits? Our understanding is it's mostly secondary aluminium, but can you explain if you have any contingency plans if anything happens in Europe? Thank you.
Thank you, Oscar. I will answer the first question regarding guidance. We confirm the guidance that we provided this year between EUR 220 million and EUR 270 million, which means between 11% - 35% of growth year-on-year. This wide range was driven by the high volatility in the markets, metal prices, as well as in the inflation, especially on the energy price, and that we saw at the end of the first quarter and we are seeing today. At the moment, there is a high level of uncertainty across many areas, but we have still five months in front of us to complete the year.
It is very difficult to be more precise about this guidance. As of today, we are confident to finish the year with the guidance we provide. However, the uncertainty is very high, and we can also see reduction in the steel dust production that could eventually have a negative impact on our volume. In summary, what we can say as of today is that we confirm the guidance that we provided at the end of the first quarter. Asier you want to answer?
Okay. Yes. Sure thing about China. You know, Oscar, that we don't provide normally dust from or how many tons we are doing by regions. In the case of China, in the first quarter was as planned for modeling purposes.
The second quarter has been more or less, you know, half of that. We do hope third quarter and fourth quarter probably come back to the normal production line that we have in mind for this year. Again, as Javier is explaining all the time, it depends on how the dynamics in China go, no? I start to see that the second half is gonna be, you know, better in terms of production, steel production and so. If everything happens, we will be back on the normal production that we projected at the beginning of the year. In the case of the gas shortage, well, of course, we can summarize that there is no big direct impact in our business.
You have to think that the gas consumption is coming mainly in the aluminium plants. We have just one plant in Germany, which looks like it will be potentially more affected than the ones in Spain. Well, let's see. I think it's very limited impact because it's just 10% of our cost in those business. The rest of the business are not depending on the gas. In this case, we don't see a very big direct impact in our cost portfolio. Another thing is the indirect impact that how this gas shortage can affect to the industry in general, starting for the aluminium one or for the steel making. That will depend how the demand and how the dynamics of the economy go during the second part of the year.
In that case, we could be affected by more for the volumes of that.
Great. That was very useful. Thank you very much.
Thank you. We will now take our next question from Sandeep Peety from Morgan Stanley. Please go ahead.
Hey, good morning. This is Sandeep Peety from Morgan Stanley. I had three questions, and I'll take one at a time. Firstly, on the CapEx, the company has already spent EUR 57 million during first half of the year versus guidance of EUR 55-EUR 65 million. Are you expecting minimum spend during second half of the year, since you have maintained your guidance? As part of that question, I noticed that maintenance CapEx as per slide 33 in 2Q was EUR 27 million, or annualizing at greater than EUR 100 million versus EUR 40-EUR 45 million guidance range. Can you please provide more clarity on the maintenance CapEx? I'll take the other two questions after that. Thanks.
Sure. Please.
Thank you very much, Sandeep. Let me explain the CapEx spend. If you look at the balance sheet, CapEx spend in the first half was EUR 54 million, of which, of that EUR 54 million on the balance sheet, roughly EUR 20 million was on growth, which is on China. Yeah. We don't expect much more spending on CapEx, on growth CapEx in China, in this year. Secondly, looking at the maintenance bucket. Maintenance, Sandeep, please remember, it's maintenance, IT, operational excellence, including synergies in the U.S. In that EUR 34 million, I think we have to normalize this. Approximately EUR 14-15 million of that is the Hanover plant recovery, which is funded by insurance. That's coming, so you need to normalize that out.
If you normalize that out, the EUR 34 million maintenance is rather EUR 20 million in the first half. That's very much in line with our guidance for the year of spending EUR 40 million-EUR 45 million in maintenance, IT, operational excellence. Yeah. On growth, the majority is spent in the first half. That's around EUR 20 million. On maintenance and CapEx, you need to normalize the EUR 34 million, take EUR 14.5 million out for the Hanover recovery. That's back to EUR 20 million, which is very much in line with our guidance. Overall, it's probably fair to say for the year, we'll rather be at the upper end of our total guidance. We said EUR 60 million-EUR 65 million overall, and that's where we'll probably be at the upper end of that. Hopefully that helps, Sandeep.
Yes, yes, indeed. That was really helpful. Do you recover this amount from the insurance company next year?
No, in this year.
Okay, that's clear. Moving on maybe to the second question. This is regarding the Steel Dust operation, which seems to be experiencing significant cost pressures during 2Q. I thought that the business was mostly exposed to spot prices. Are you implying that most of your increase in the cost should have been reflected in 1Q? Can you please explain different moving parts there? Thank you.
Yes. Yeah, well, as we said before, we're still that business like any other industrial business, target to the inflation across many areas. It is well diversified from the geographical point of view, with about 1/3 of operation in Europe, U.S., and Asia. The main energy cost in the business is coke, whose price has significantly increased in the Q2, driven by the overall inflation. In the Q1, however, we still have some contracts rolling over from last year, so we did not see the impact of coke price increase so high. However, in Q2, we have suffered this increase of price. This is mainly the main reason about the higher inflation cost in between the quarters.
Okay. Thank you. Final question. I appreciate the fact that you would provide more details on the EUR 500 million investment plan as part of the CMD, but I wanted to understand how the company plans to fund the investment and what sort of flexibility you have in a scenario of further slowdown in the economy from here.
Okay. As I said before, we are planning to celebrate an Investor Day, that will be, by the way, our first Investor Day since we did our IPO, in probably in the 1st, part of November. We will provide more details about our five-year growth plan. Regarding the funding, we have a very clear view about it. We will fund this growth plan entirely with the cash we have on hand, plus the cash flows that we are going to generate during the period. That is an interesting and important point I would like to highlight. We will start the execution of this long-term plan with a leverage ratio around 2x.
When we finish the execution of the plan five years later, our leverage ratio, even in a pessimistic scenario, will be below 1x. Summarizing, we are planning to fund the growth plan with our cash and cash flow.
Okay. In regard to the flexibility, is there any flexibility to have, like in a scenario where the economy goes into recession, do you have flexibility?
For sure, we have flexibility. We are a company with a lot of flexibility, and we will adapt the plan to the market situation for sure. There are some parts of the plan, probably we will start with the U.S. operations, where the impact of the crisis is less important than in other parts of the world. For sure, we will adapt the execution of the plan to the market.
Thank you so much.
Thank you.
Thank you. We will now take our next question from Ingo Schachel from Paribas . Please go ahead.
Oh, yeah, thanks for taking my questions and congratulations to Asier on the new role. I have three questions as well. The first one would be a follow-up on cost inflation. I think you discussed gas and coke and coal. Can you also remind us on electricity, what your typical contract mix looks like, whether there's a you know, cost increase in contract rates to be expected more next year, or whether you see cost inflation in that area more imminently? Maybe also comment a bit on how you see collection fees evolving in Europe in that regard. Of course, lots of moving parts and higher zinc prices, higher input costs, and yeah, price increases everywhere.
Is it also an area where you might be able to demand slightly higher collection fees for next year, or is it not really an option to pass through the high input costs?
Thanks, Ingo. Thank you very much for the congrats and for the question. Well, yeah, electricity is one of the goals that we have. You know. Once again, we are not very high. Well, we consume a lot energy, but not high consumers in our main activity. It's true as well that the energies are under inflation pressure, but well, depending on the geography we talk about. I mean, this is basically Europe where it's facing that. Once again, affecting so partially to us.
How we are dealing with this now is simply we are going on a spot basis because the contract that we have in the past, like a typical one-year contract or so, when it has been, you know, over, we are now waiting for the evolution of the prices, how we are dealing with the spot. We don't know the evolution, as Javier has explained, and well, we have to live with this and try to, as you say, trying to increase the collection fees with, based on the cost we have. Yes, it's a possibility. The weight of our profit and loss is what it is, but mainly we try to pass the fees cost and those things to the steel makers.
It's true that the pressure on prices is coming from the high price for the metals up until now. This is what is really upsetting the high energy costs, including the electricity. What is gonna happen in the next months? It's a good question, if I will have the answer, probably I will not talking here, right? We'll see. We are repeating the idea that we, even in this challenging period, we can navigate well.
Okay. Then I would also like to ask you about the five-year plan. Of course, we'll get more details in November, but just to understand a bit, the potential that you're seeing in Europe specifically. I think there are a few areas which are clear. Salt slag is fairly clear, I guess. Also the decarbonization, raw material substitution, possibility is, I think, also fairly clear. Can you give us a rough indication what you see in Steel Dust Recycling in terms of capacity addition potential in Europe?
If you see potential, whether it's rather expansion of your existing locations or whether you would also consider building complete new greenfield location close to some of the, let's say, start-up green steel mills, and how much visibility you need to really make an investment decision in that scale. Because I think it's fairly clear where the EAF capacity is going to be added in Europe. But of course, you might still need a few years to get a bit more contractual visibility on this actually happening.
I'd also appreciate a quick comment on whether you think those green steel mills, whether you see any differences in terms of the quality of steel dust and also, yeah, processability for you, if you were to consider adding capacity or sourcing more dust from, yeah, really hydrogen based DRI sourced EAFs on the green steel side?
Ingo , you are killing our Investor Day. You know probably better than us the answer. Seriously speaking, as I told before in our, we are planning a five-year growth plan in a very well-balanced way. We are considering investment in our three main markets, and we are thinking in, let's say, balanced investment in the three markets. I mean, China, North America, and in Europe. Why is that? In China, because we have a clear growth opportunity in front of us that you know very well. In North America and in Europe, and especially in Europe, you have the answer is basically in your question. There is a clear trend of decarbonization for two reasons.
That will, I will answer that. I will say that the growth will come probably in all our core businesses. In the side of the Steel Dust Recycling business, because as you probably know, all the big European steel makers are doing announcement about shutdowns of blast furnace and replacement by electric arc furnace. That means that there will be a clear growth opportunity in Europe in that side. Let's see later on, we are working and thinking of that. We will be in the same locations or in new locations. This is part of the work we are doing right now.
On the other side, the electric vehicles trend, which is another clear trend, will support the growth of the aluminium production in Europe. We have data from different car producers and but the weight of the aluminium in the electric vehicles will grow from less than 10% today to more than 30% in the electric vehicles. That means a very important growth in the aluminium side that will permit for sure the possibility to improve our business in the secondary aluminium and the salt slag recycling.
I will ask you to be patient to wait until the probably second week of November, where we will be able to provide some more details about our growth plan.
Okay, great. No, I definitely wait and be patient for that one. Looking forward to it. Just quickly on the funding question just raised earlier, just to clarify when we spoke about uncertainties and of course, macroeconomic volatility that's still out there. Can you clarify what maybe on a quarterly basis throughout the execution of the plan, what would be your maximum net debt EBITDA that you would want to see as your comfort level on a, let's say, short-term basis throughout the next five years?
Well, I told before, we are now working on that, but in the first projections we are running, we don't want to grow the leverage ratio we have in front of us. We are not thinking, clearly not, in the worst cases to be above 2.5 x leverage ratio. Probably we will be able to be below that figure.
Okay, thanks very much. Interesting plan, and looking forward to the event in November.
We will now take our next question from Anais Zgaya, from ODDO BHF. Please go ahead.
Yeah, thank you. Thank you very much. Good morning, gentlemen, and thank you for taking my questions. I have two remaining questions. My first one is on capacity utilization in Q2, which was lower than Q2 last year. I understand it's related to maintenance stops. So, could you please give us the impact? What was the impact on EBITDA in Q2, and what should we expect for capacity utilization in Q3? My second question is regarding energy costs. Many corporates are signing PPAs or renewable PPAs. So are you planning to sign PPAs for electricity to reduce energy costs and to further reduce your carbon footprint? Thank you for taking my question.
Thank you for the question, Anais. Well, regarding the capacity, yes, it's normally and traditionally, and this year is not an exception. Our maintenance all over the geographies shutdowns of the plants are coming in the Q2 and as well in the Q3. I mean, it's gonna happen as well. Then some plants are gonna be stopping Q3, so probably the volume is not gonna be as high as the Q1 in the Q3, more similar probably to the Q1, Q2. Back on this Q4 probably is gonna be full quarter with all the plants running a very high capacity. This is normally the trend over the last year, and this year is not changed.
This more or less is the guidance about the tonnages for Q3 and Q4. With regards to the PPAs and, I mean, of course, we are studying this, and we are analyzing this, but we are waiting for the good moment to sign those things because normally it's not very well done if you sign at the highest prices period when you sign those things. Yes, we are actively searching for that.
Let me add something about that. As we have in our sustainability report, we presented a CO2 reduction plan that considered the use of green energy. We are, as Asier said, we are thinking and even talking with utilities about that.
In the geographies that where that is possible, which is basically Europe and U.S. more than in other geographies. At the same time, and this is another important point, we are analyzing and studying each recovery from our process that could be interesting that can substitute the current energy sources in a very nice percentage. It's something that we will be able to inform to the market in the coming months.
Thank you. Thank you very much.
Thank you. We will now take our next question from Michael Hoffman from Stifel. Please go ahead.
Thank you very much for taking the questions this morning. I'd like to focus on guidance and understanding sort of what the flex is around the model. At the original guidance at midpoint EUR 245 EBITDA, I had an assumption that there was approximately EUR 40 million coming from the U.S., somewhere between EUR 6 million and EUR 8 million from China. That would leave you sort of about EUR 155 millions from Europe, and then you had something in the mid-40s from the aluminium side of the business model. How does that look today for the rest of the year? Are we still about EUR 40 million in the U.S., China's maybe less, Europe's less 'cause of coke prices and aluminium still in the low 40s? Is that the way to think about it?
Michael, it is you have done a very precise guidance that is for us it is extremely difficult to do that right now because it will depend on the energy cost inflation for the whole year, and the commodity prices, which today we have a big uncertainty. Your fears are not far from the reality. Probably, as Asier has explained, it is too optimistic in China because the first part we have lost, let me say, the first part of the year in China with all the pandemic shutdown and opening and closing the plants. I think it is slightly optimistic. I mean, the risk will depend on the evolution of basically metal prices, energy prices, and volume.
As I said, we confirm our guidance, but for us, it's difficult to confirm the guidance. Imagine to precisely we are going to be slightly above or below the figures, no?
Fair enough. If we can, I'm assuming most of the pressure is coming out of the legacy business because of the extraordinary energy inflation that's happening in Europe related to Russia/Ukraine, as opposed to the pace of inflation in the rest of the world. Is that an accurate way to think about it, that I gotta look at the legacy? The U.S. is actually okay, and this is really about Europe.
Yes. One more time, I think Europe is the most affected basically for the gas, for the war and how this is gonna affect. Well, we don't know, but we can wait. Nothing really good. The inflation, yes, it's affecting to the rest of the cost, transport, coke, another raw material needed. So this is more in a worldwide view, so it's affecting our business in general. For example, the cost and the logistic issue, no? Again, how it's gonna be the evolution of those costs during the next year. Each of us here and you guys have your own ideas. If we invite another five guys, they have another five ideas. Very big uncertainty and for modeling or whatever, well, many cases to do.
I mean, it's very difficult for us to give more details because obviously we don't know.
Fair enough. I guess the last piece trying to dig at that since this, you know, and all of us are asking questions, it always comes down to our ability to model your business. If the current conditions that exist in July persist for the rest of the year, are you below the midpoint of EUR 245 million?
Again, if the current conditions of very high energy prices today, lower metal prices, et cetera, probably we will be below the midpoint, as you said. We will be more in the lower part of the range.
Okay. I have to ask about the growth, and I look forward to the November. Just to think about it, Europe's about 50% EAF. It's going to something in the 70s. Is that sort of the plan? The U.S. is in the 70s. How much more does it improve? Then China's got a lot of improvement. Is that, you know, that's the way to think about how to allocate the EUR 500 million is sort of where those percentages move?
Well, as Javier said, it's gonna be well-diversified in the basically three areas, and that means mainly 1/3 or whatever, you know, is a good reference. As you say, we will explain more in November.
Okay.
And then last-
I think.
Oh, go ahead, Wolf.
Yeah, sorry, Javier. Sorry. Just, you had mentioned Europe going from 50%-70% electric arc furnace steel production. Now, currently Europe is at 40% and going to 50%, and many investments of new EAFs already announced in the market. And yes, we will capture that growth in Europe.
Okay. Last one. On the cost side of EUR 36 million, the whole company for the first half and EUR 19 million in the second quarter, how much was foreign exchange in those two numbers, given that the euro changed a lot?
Yeah, that was not a material impact there. No.
Okay. It's really just true cost. Okay. That's what I wanted to understand.
Yep.
Thank you very much.
Thank you, Michael.
Thank you, Michael.
Thank you. We will now take our next question from Lasse Stüben from Berenberg. Please go ahead.
Hi. Good morning. Just two or maybe three follow-ups from me. I just wanna touch on the aluminium business briefly. This was much improved versus Q1. Just looking at, you know, prices were down slightly, volumes also slightly down. Can you maybe just explain some of the dynamics? I guess a lot of it came from the metal spread. If you could just explain the different dynamics there versus what happened in Q1, that would be helpful. Then maybe also on the steel side, are you seeing any weakness in the steel industry currently in Europe, you know, off the back of recessionary fears, higher energy costs, and how that feeds through into your business?
Maybe just the final one, are you able to quantify the increase in the coke price versus Q1? If you have any more color there, that would be helpful. Thank you.
Thank you, Lasse. Well, regarding the aluminium, we like to approach the aluminium for the whole semester. I think it's a better reference than the quarter by quarter. The reason behind is that the quarter one was mainly affecting as well for rollover of contracts coming from the previous year, which affect to the margins. I mean, the typical quantities that at the end of the year could not be provided, and then we provide the first part of the year. The dynamics is better to have the view of the first semester with these kind of margins and prices are what are more probably close to the real situation of the business.
In terms of the steel weakness and evolutions of the steel production, especially in Europe, as you're asking for, well, will depend. I mean, the same as we are discussing for the guidance and for what is gonna happen in the second half. Yes, they are intensive in energy, especially in electricity and how this is gonna evolve. The evolution of those prices are gonna affect them and the demand situation because the rumors or ideas of recession is gonna affect for sure them. But it's true as well that the steel prices are again offsetting the energy prices for them. It's the same as us, that if the metal prices come up again and offset the cost, well, the demand, we'll see if there's gonna be a very great drop or not.
Well, all in all, we don't know, I mean, how it's gonna be affected, and this is one of the points for the uncertainty, how the steel production is gonna come in the second. Very difficult for us to quantify. Regarding the coke prices, sorry, I forgot this. Regarding the coke price for the second quarter, with the first quarter, I think that we quantify a 15% increase or so, quarter-over-quarter. Again, we'll see what is coming in the next months. On the other hand, if the demand is slowed down, probably the prices should slow down as well. Once again, our estimations are, we don't know what's gonna happen.
Okay. Understood. Thanks very much.
Thank you. We will now take our next question from Julien Batteau from Pascal Advisers. Please go ahead.
Yeah. Hello, gentlemen. Thanks for squeezing me on. I have a question. I don't know if you will—if I will be able to give you my thoughts. It's about the sequential development in EBITDA in Steel Dust. I struggle to understand the outcome since both volume and pricing was better in Q2 compared to Q1 and much better, I mean, +7% and +10% in price. The additional inflation impact was EUR 13 million based on the bridge you give. I struggle to understand how we ended up at EUR 40 million compared to EUR 55 million. Is that something I'm missing in terms of impact from Hanover or something else? That would be my first question.
The second question would be about the double-digit earnings growth you talk about in the plan. Is that EBITDA or is it net profit? Thanks.
Julien, I apologize, but the line is going in and out. It was really hard to understand your question. Can you please send us the question and I'll try my best to answer it as quick as possible. We only understood something about the second part of the question in terms of double-digit growth of our new five-year plan, but probably even, you know, maybe better to send us the question by email.
Regarding the second part, I didn't understand, like Wolf, the first part of the question. Sorry about that. The second part, I think you are asking if the double digit is regarding EBITDA or net profit. Today, we are working at the EBITDA levels. We will develop further the net income line. Today we are thinking at EBITDA level.
Okay. Yeah. Thanks. I'll send the question.
Okay. Thank you very much.
Thank you. There are no further questions in the queue at this time. I will turn the call back to your host.
Thank you all for your questions. You can also contact the investor relations teams of Befesa for any further clarification. We will now conclude the conference call and the Q&A session. Let me remind you that you can find the webcast and the dial-in details to access the recording of this conference on our website, www.befesa.com. Thank you very much and have a good day.
Thank you.
Ladies and gentlemen, that will conclude today's call. You may now disconnect.