Second quarter results 2020
Agenda
Business update By CEO Michael Koenig
Financial performance By CFO Morten Viga
Outlook By CEO Michael Koenig
Strong competitive position demonstrated in weak markets
- Elkem had high capacity utilisation and good sales volumes in the second quarter despite very challenging market conditions
- EBITDA was NOK 644 million in the second quarter 2020, including a one-off gain of NOK 61 million from an arbitration case in Silicon Materials
- The Silicon Materials division and Foundry Products division are merged into Silicon Products with effect from 1 July 2020
- The productivity improvement programme with targeted annual savings of more than NOK 350 million, proceeds ahead of plan
- Elkem signed a new loan facility of NOK 2,000 million on 16 July to secure refinancing of loan maturities in 2021. The loan facility has a tenor of 3 years
- Market outlook is still characterised by high level of uncertainty due to the economic impact of Covid-19 and related government measures
Environment, Social and Governance A key priority
83 % share of renewables of 2019 total electricity consumption
Elkem is certified as a Nasdaq ESG Transparency Partner
Human rights; conduct impact assessment and update policy
Ambition best practice policy standard for whistleblower programme and community involvement
Fossil CO2 emissions in Norway reduced by 18% by use of biocarbon Ambition 40% biocarbon by 2030
NOx emissions down 13% since 2015 Ambition 10% reduction in 2020
Adherence to Norwegian Code of Practice for Corporate Governance
Employees' commitment to Code of Conduct and Anti-bribery/corruption policy up from 70% to 100% in 2019 Ambition maintain 100%
Biocarbon strategy for environmental sustainability
- The production of silicon and ferrosilicon require use of carbon materials
- Carbon is used as a reducing agent in the smelting process to remove oxygen from the quartz, resulting in CO2 emissions
- The strategy is to reduce the use of fossil coal to reach sustainability goals
- Elkem has developed new breakthrough technology for production of sustainable biocarbon
- The technology combines utilisation of low cost raw materials with high yield conversion processes
- Elkem has now decided to invest approx. MNOK 180 to establish a pilot plant in Canada for industrial verification of the product and the production process
- The project will receive government support reducing Elkem's net investment to MNOK 60
Elkem will search for business partners to realise full scale industrial production
Covid-19 impacting global markets
- Elkem has generally strong sales volumes in the second quarter despite weak market conditions impacted by Covid-19
- In the third quarter, capacity utilisation will on average be reduced to around 90% across all divisions due to maintenance and weak demand. However, Elkem's capacity utilisation will remain above industry average
- Sales prices are generally low, however Elkem is benefitting from excellent costs positions
- Construction is weak in Europe but China shows continued growth, although at lower rates than before Covid-19
- The automotive market is still weak in Europe and the US, but sales in China seem to pick up quickly
Automotive – units sold (million)
Productivity improvement programme ahead of plan
- The Productivity Improvement Programme was launched in 2020 with an identified potential of more than MNOK 350 in annual improvements
- Permanent savings related to personnel costs
- The programme will be finalised by the end of 2021
- The programme addresses all divisions, as well as the corporate functions. The aim is to improve Elkem's profitability to fund future growth and specialisation in line with long-term strategy
- A restructuring provision of MNOK 200 was booked in the first quarter 2020
- By end of second quarter the annual run rate was MNOK 88, which was ahead of plan. The main effects are expected in 2021
- The merger between Silicon Materials and Foundry Products is expected to enable further cost reductions
Savings run rate by end of 2Q-2020 NOK million (MNOK)
New corporate structure improving operational excellence
- With effect from 1 July, Elkem has gone from four to three business divisions
- Elkem is changing the corporate structure by merging the Silicon Materials and Foundry Products into Silicon Products
- The merger will improve and sharpen the commercial focus and further improve operational excellence
- Marketing and sales resources gathered into dedicated teams for the commodity and speciality portfolios
- Streamlining organisation to ensure operational efficiency and leverage on synergies across all plants worldwide
- The changes will be reflected in the segments for Elkem's financial reporting from the third quarter 2020
- In addition, Digital Office, Battery Materials and BioCarbon have been established as new special focus areas directly reporting to the CEO
Elkem's divisions
Frederic Jacquin SVP Silicones
Inge Grubben-Stromnes SVP Silicon Products
Luiz Simao SVP Carbon Solutions
Strategically positioned in the Chinese silicones market
- Elkem has leading positions in the Chinese silicones market
- China has more than 50% of the world's production of silicones
- The Chinese market is expect to grow by more than 7% per year
- The strategy is to develop the silicones business area along two axis; specialisation and low cost
- Elkem is uniquely positioned to develop specialised product positions in China
- Elkem is a market leader with access to global R&D resources
- Acquisition of Polysil and Basel provide access to new technology
- Chinese market very competitive
- More upstream capacity added in China
- Strong cost position important for overall value creation
NEW PRODUCT LAUNCHES
PuresilTM
- Elkem recently made the acquisition of Basel Chemie, a company which has developed a comprehensive range of high-quality silicones for cosmetics
- The Puresil™ Elastomer gel series is specially designed for skin, hair, sun care, and color cosmetics to enable formulators to unleash their creativity
AMSilTM for 3D printing
- AMSil™ is our new series of customised silicones especially designed for use by Additive Manufacturing / 3D Printing
- AMSil consists of series for use in industrial applications and restricted medical applications respectively
Robust financial position strengthened with new loan facility
Elkem's financing position is robust with a strong liquidity position and well distributed maturity profile
- The financial markets are however volatile and Elkem has therefore decided to address the loan maturities in 2021 well ahead of final maturity dates
- Norwegian bond loan of MNOK 1,750 and Schuldschein of MEUR 29 mature in December 2021
- Elkem signed a new loan facilities agreement on 16 July of MNOK 2,000 which can be used to refinance bonds and Schuldschein upon maturity
- The new loan facility has a tenor of 3 years
- Financial covenants and other conditions are in line with Elkem's existing loan agreements
Group results stable in weak markets
- Good operational performance and sales secure stable results in challenging markets
- One-off of NOK 61 million from arbitration settlement included in 2Q-2020
- Financial items and other items negatively impacted by currency changes
- Equity and leverage ratios negatively impacted by dividend payment and closing of Polysil acquisition
MNOK 5,879 MNOK 644 11 %
Total operating income EBITDA EBITDA margin
%
Silicones low visibility, but China is picking up
- The global silicones market is negatively impacted by the Covid-19 situation
- Automotive and construction are generally weak
- Consumer products are generally holding up well
- DMC prices in China were at low levels, but recovered towards the end of second quarter
- Higher silicones prices in China were primarily due to increased demand mainly driven by the government's CNY 50 trillion new infrastructure policy
- Silicones customers indicate limited visibility going forward as time and pace of recovery is highly uncertain
DMC reference price China (CNY/mt)
Silicon weak market development
- CRU EU reference prices for silicon were holding up for most of 2Q-2020
- However, reference prices were lagging the underlying market development
- The delayed impact was reflected in a clear downturn in reference prices at the end of the quarter
- The demand from end-user segments have been mixed in the second quarter
- Aluminium has been down due to weakness in automotive
- Chemicals have been negatively impacted by Covid-19
- Electronics/solar grade polysilicon has been holding up well
CRU silicon 99 price EU (EUR/mt)
Ferrosilicon low demand driving prices down
- Market prices for ferrosilicon (FeSi) have dropped significantly in the second quarter
- Weak ferrosilicon demand impacted by low steel consumption, which has been largely driven by weakness in automotive and construction
- Low European price level for ferrosilicon limits the incentives for imports, lowering the risk for a further price decline
Carbon lower demand, but stable prices
- Lower demand for electrodes and carbon material due to weakness in automotive and construction markets
- Uncertain development due to Covid-19 impact on global industry production
CRU ferrosilicon 75 price EU (EUR/mt)
Elkem group stable operating income and EBITDA
Total operating income
‒ Operating income up 2% compared to 2Q-2019
‒ Increase driven by Silicones and Silicon Materials
EBITDA
‒ In line with 2Q-2019
‒ Lower result in Silicones offset by Silicon Materials and Carbon
Elkem group currency losses in financial items and other items
- Other items MNOK -107
- Positive fair value changes in commodity contracts MNOK 60 more than offset by negative value changes in embedded derivatives in power contracts MNOK -51 and negative currency effects MNOK -120, mainly consisting of translation effects on bank deposits and working capital
- Net financial items MNOK -93
- Mainly explained by net interest expenses MNOK -53 and foreign exchange losses of MNOK -34 due to translation effects on inter-company loans in CNY
- Tax MNOK -16
- Low tax expenses of MNOK -16 due to low profit
Consolidated key figures
| (NOK million, except where specified) |
2Q 2020 |
2Q 2019 |
YTD 2020 |
YTD 2019 |
FY 2019 |
| Total operating income |
5,879 |
5,736 |
11,677 |
11,569 |
22,668 |
| EBITDA |
644 |
647 |
1,234 |
1,499 |
2,656 |
| EBIT |
212 |
300 |
409 |
815 |
1,189 |
| Other items |
-107 |
25 |
22 |
176 |
195 |
| Net financial items |
-93 |
-108 |
-26 |
-135 |
-239 |
| Profit (loss) before income tax |
16 |
210 |
380 |
850 |
1,134 |
| Tax |
-16 |
-58 |
-119 |
-201 |
-237 |
(1)
Profit (loss) for the period |
-13 |
143 |
238 |
633 |
855 |
| Key ratios |
|
|
|
|
|
| EPS (NOK per share) |
-0.02 |
0.25 |
0.41 |
1.09 |
1.47 |
| Equity ratio (%) |
39 % |
44 % |
39 % |
44 % |
45 % |
(2)
Net interest bearing debt (NIBD) |
8,122 |
5,110 |
8,122 |
5,110 |
5,722 |
| Leverage ratio |
3.4 |
1.3 |
3.4 |
1.3 |
2.2 |
| Reinvestments % of D&A |
72 % |
87 % |
68 % |
71 % |
80 % |
| ROCE (annualised) (%) |
4 % |
7 % |
4 % |
10 % |
7 % |
(1) Owners of the parent's share of profit (loss) (2) Excluding non-current restricted deposits and interest-bearing financial assets
Silicones high volumes but low prices
- Total operating income of MNOK 3,106, up 11% from second quarter last year
- Increased operating income mainly explained by higher sales volumes and the consolidation of Polysil, partly offset by lower prices
- EBITDA of MNOK 217, down 35% from second quarter last year
- Lower EBITDA was mainly explained by lower sales prices in China
- In addition, the EBITDA was negatively impacted by low sales of specialties due to weak markets, particularly automotive
- Polysil was consolidated from April and has made positive contribution to the EBITDA
Total operating income
NOK million
EBITDA and margin
NOK million and %
Silicon Materials strong result supported by one-off
- Total operating income of MNOK 1,842, up 15% compared to second quarter 2019
- Higher operating income explained by higher prices and positive currency impact
- EBITDA of MNOK 303, up 87% compared to second quarter last year
- Mainly explained by higher sales prices and positive currency impact
- One-off gain of NOK 61 million from settlement of arbitration case due to breach of contract by customer
Total operating income
EBITDA and margin
NOK million and %
NOK million
Foundry Products weak steel and automotive markets
- Total operating income of MNOK 944, down 21% from second quarter last year
- Explained by lower sales volumes for both specialty alloys and ferrosilicon
- EBITDA of MNOK 80, in line with corresponding quarter last year
- Lower sales volumes compensated by positive cost development, mainly lower operating costs
Total operating income
NOK million
EBITDA and margin
NOK million and %
Carbon another strong quarter
- Total operating income MNOK 480, in line with corresponding quarter last year
- Better pricing and favourable currency compensating for lower sales volumes
- EBITDA MNOK 119, up 38% from second quarter last year
- Improved EBITDA mainly explained by improved product mix and lower operating cost
Total operating income
NOK million
EBITDA and margin
NOK million and %
20 Second quarter results 2020
Elkem group lower EPS, equity ratio affected by currency
- Earnings per share (EPS)
- EPS amounted to NOK -0.02 in the second quarter
- Negatively impacted by losses in other items and foreign exchange losses in financial items
- Total equity amounted to BNOK 12,8 as at 30 June, slightly down from year-end 2019
- Equity ratio of 39%
- Lower equity ratio explained by dividend payment and increased value of total assets due to currency translation effects
Earnings per share (EPS)
NOK per share
Equity ratio
In %
Elkem group higher net debt due to acquisition
Net interest bearing debt (NIBD) amounted to BNOK 8.1 as at 30 June 2020
Net interest-bearing debt (NIBD)
NOK billion
Maturity profile
NOK billion
Elkem group cash flow impacted by working capital
- Cash flow from operations(1) was MNOK 363 in the second quarter, down from the corresponding quarter last year
- 2Q-2019 contained a significant reduction of working capital
- Investments ex. M&A amounted to MNOK 499 in the second quarter 2020
- Reinvestments was MNOK 307 in the quarter, amounting to 72% of D&A
- Strategic investments of MNOK 192, primarily Silicones R&D centre and other specialisation projects, furnace upgrades for Silicon Materials biocarbon project in Foundry Products and the Carbon battery project
- Total investments in the second quarter included MNOK 792 for acquisition of subsidiaries in connection with the closing of Polysil
Cash flow from operations
NOK million
(1) Cash flow from operations is according to Elkem management definition and includes reinvestments
Outlook for the third quarter
Markets characterised by low visibility due to Covid-19 effects
- Elkem's competitive position is strong, based on good cost positions, diversified product and geographic positions and robust financial structure
- Silicones demand in China is good, driven by government incentives, but sales prices may be volatile. Silicones demand outside of China is weak, negatively impacting the sales of specialty products
- Silicon and ferrosilicon prices substantially down, based on weak demand from automotive and construction
- Lower industrial activity also expected to reduce demand for Carbon materials
Important notice
Any statement, estimate or projection included in this presentation (or upon which any of the conclusions contained herein are based) with respect to anticipated future performance (including, without limitation, any statement, estimate or projection with respect to the condition (financial or otherwise), prospects, business strategy, plans or objectives of the company and/or any of its affiliates) may prove not to be correct.
No representation or warranty is given as to the completeness or accuracy of any forward-looking statement contained in this presentation or the accuracy of any of the underlying assumptions. Nothing contained herein shall constitute any representation or warranty as to the future performance of the company, any financial instrument, credit, currency rate or other market or economic measure.
Information about past performance given in this presentation should not be relied upon as, and is not, an indication of future performance.
Appendix
Currency sensitivity
Currency development
- The cash flow is exposed to operating income and costs in different currencies. The main currencies are EUR and USD
- EUR net cash flow approx. MEUR 350
- USD net cash flow approx. MUSD 100
- Current cash flow hedging programme
- 90% hedging of net cash flows occurring within 0-3 months
- 45% hedging of forecasted net cash flows within 4-12 months
-
Before hedging activities, a 10% strengthening or weakening of NOK versus all other currencies would have an EBITDA effect of approx. MNOK 600 over the coming 12 months
-
Compared to 1Q-2020, the Norwegian krone closed 2Q-2020 stronger against major currencies
- Compared to 2Q-2019, the NOK was 13% weaker against EUR, 16% weaker against USD and 12% weaker against CNY
Other financial sensitivities
- Electric power is a key input factor in Elkem's production. Total consumption for the group was 6.0 TWh in 2019. Near term exposure to spot power prices is limited
- Norway, hedging programme mainly consisting of long-term contracts covering 80% of the power consumption for the current and next year
- Outside Norway, power prices are mostly based on long term contracts or regulated power tariffs
- Elkem applies hedge accounting for most of its power contracts. Fair value changes of financial contracts which are not included in the hedging portfolio are booked in Other items
POWER SALES PRICES
- Changes in sales prices could significantly affect operating income and EBITDA
- 1% margin change for silicones products is expected to affect result by MNOK 120 per year
- 10% price change on silicon metal is expected to affect result by approx. MNOK 120 per year(1)
- 10% price change on ferrosilicon is expected to affect result by approx. MNOK 130 per year(2)
(1) Cost absorption effects are assumed for both silicon metal and silicones. Neutral effect
(2) Sensitivities for ferrosilicon include 35% raw materials cost absorption
Value chains