Befesa S A : Informe Anual 2023

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Befesa Annual Report 2023

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Befesa is the global leader in providing regulatedcritical environmental recycling services to the steel and aluminium industries in key European, Asian and North American markets. Befesa isa vital part of the circular economy, providing sustainable solutions to its customers.

SWEDEN

FRANCE

SPAIN

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Steel Dust

Aluminium Salt Slags

Both

For more than three decades, Befesa has been part of the circular economy and has continuously demonstrated a strong commitment to recycling.

Close proximity to major customers

Befesa's recycling plants are positioned in attractive markets that are strategically located across Europe, Asia and the US.

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Befesa Annual Report 2023

Letter from the Executive Chair and the CEO

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DEAR SHAREHOLDERS,

After the year 2022 in which we achieved record results, 2023 has been a very challenging year for Befesa as we faced a combination of several adverse external factors on the commodity side of the business as well as a difficult situation in China.

Nevertheless, despite these challenges, Befesa has been able to deliver solid results with resilient earnings and strong cashflow which has enabled us to fulfil all our commitments, pay a dividend to our shareholders and fund the growth plan during the year. Once again, this demonstrates the strength of our business model based on the circular economy.

From the macroeconomic point of view, 2023 has been characterised by persistently high inflation levels across the world, which has had an impact on the economic growth, as well as a very weak economy in China, especially in the real estate and construction industries. This has significantly affected commodity prices and, in the particular case of Befesa, zinc prices.

The global production of crude steel stayed flat compared to 2022. In Europe, however, steel production decreased by the second year by 7%, driven by a weak economy, especially in Germany. In the other main markets of Befesa, China and the US, steel production stayed flat at similar levels compared to 2022. China continued to be the largest producer of steel worldwide, with more than 50% of the total global production in 2023, despite zero increase in 2023.

However, in 2023, the passenger car market grew at double digits compared to 2022, which marked the lowest level since 1993.

During 2023 we have dedicated a lot of focus to the integration of the US operations to capture the operational synergies in the steel dust recycling business as well as the stabilisation of the zinc-refining plant in North Carolina, which is improving its performance gradually with higher utilisation rates. The focus now is on reducing the cost base, which will drive profitability further.

Also in the US, we have continued with the refurbishment works of the plant in Palmerton, Pennsylvania, which will enable us to capture the growth in the steel dust recycling market that we are seeing in the US over the next two years.

In China, 2023 has been characterised by a serious real estate crisis, which has had an impact on the construction industry in the country, with a negative effect on the level of steel production from our customers which continues to be weak. This had affected the utilisation of our plants in Jiangsu and Henan in 2023.

In this environment, we are adapting our approach to the construction of the third plant in the province of Guangdong. The focus right now is on getting the steel dust supply agreements with local producers to have certainty of supply before starting the construction of the plant.

With regards to the outlook for 2024, overall, we expect to return to the growth path as the external pressures that we faced in 2023 revert in 2024. As such, we expect solid earnings growth driven by a normalisation of some commodity prices as well as operational improvements.

We are very optimistic about the mid-term outlook. Our well-defined growth plan, is based on strong market fundamentals like the decarbonisation megatrend, which represents a great market opportunity in our steel dust and aluminium recycling businesses.

Decarbonisation is one of the most important matters of our time and clearly brings great opportunities for Befesa. Most of the companies around the world are making strong commitments to reducing their CO₂ footprint. As the steel industry looks to decarbonise its operations, it needs to move to production technologies that are less CO₂-intensive. Electric arc furnaces (EAF) produces seven times less CO₂ per tonne of steel compared to the basic oxygen furnace (BOF).

Similarly, the decarbonisation trend is driving the transition to electric vehicles (EVs), which requires higher aluminium content per car to achieve lightweight targets. This will drive higher aluminium demand in Europe and increase the need for salt slags recycling capacity.

We have a strong growth plan to invest between €400 million and €450 million over the next years to achieve high-rate earnings growth. This is a similar scale to our investment over the past five years.

With this capex plan, we are targeting earnings growth in the range of €125-€155 million of incremental Adjusted EBITDA from the 2022 baseline: €215 million.

The plan is globally well-balanced, with investment split in approximately equal thirds between Asia/China the US and Europe.

Our target is to organically fund 100% of the plan with our own resources, with no capital increase required. At the same time, we expect to keep the leverage targeting at around 2.5x, and to maintain our dividend policy of distributing 40%-50% of net profit per year. The growth plan is fully modular and is 100% in our control.

As of today, we see a strong US steel market which will grow over the next two years, and we are moving fast to capture that growth opportunity by focusing on increasing the capacity of our plant in Pennsylvania.

Moreover, as explained earlier, in China, we are monitoring the development of the real estate industry while we work on securing the steel dust volume in the third plant.

As we explained in the past, we can module the speed of the investments depending on the different dynamics that we see in the various markets. As a result, we are adapting the execution of our growth strategy to the current situation in China.

€1,181m

REVENUE IN 2023 (€1,136M IN 2022)

€182m

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The 2023 year has been a very challenging one for Befesa as we faced a combination of several adverse external factors on the commodity side of the business as well as a difficult situation in China. Going into 2024, we expect to return to the growth path as the external pressures that we faced in 2023 revert in 2024. As a result, we expect solid earnings growth driven by a normalisation of some commodity prices as well as operational improvements.

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As a vital part of the circular economy, we are very committed to making a strong contribution to creating a more sustainable world.

Our business strategy is fully aligned with our ESG strategy and is rooted in an increased contribution to the circular economy as we deploy our business model in new markets and geographies.

The secondary materials created by Befesa's recycling processes are a substitute for more carbon-intensive processes used to mine and process virgin raw materials.

We are working towards our commitment to reduce 20% GHG emissions intensity by 2030, supported by a realistic roadmap to achieve this target. Notably, this plan revolves around green energy sourcing, electricityefficiency,processoptimisation and raw material substitution.

On dividend, we are proposing a dividend payment of €0.73 per share, which represents a 50% payout over the net income of 2023, consistent with our dividend policy.

Finally, we would like to give a special thanks to all the team of Befesa, for their efforts, commitment and contribution, which continues to be a key asset in the Company.

If we step back and look at Befesa with perspective, considering normalised average commodity prices, at the time of the IPO back in 2017, Befesa was a company that generated around €150 million mid-cycle EBITDA, being present then in Europe mainly and with some operations in Turkey and Korea.

Today, Befesa has a strong presence in Europe, North America and China, which are three strong growth markets in the core business that we operate,

steel dust recycling and aluminium salt slags recycling services, and we generate an average Adjusted EBITDA of around €200-€210 million per year.

Our ambition is to grow Befesa over the coming years to generate between €300 million and €350 million mid- cycle EBITDA.

Yours sincerely,

Javier Molina

Executive Chair