CREATING VALUE THROUGH OPERATIONAL EXCELLENCE, GROWTH AND SPECIALISATION
ELKEM CAPITAL MARKETS DAY 20 NOVEMBER 2018
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 is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance.
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
- Financial targets
Morten Viga, CFO
Elkem More than 110 years of history as a technology provider
Founded in 1904 by Sam Eyde Listed on Oslo stock exchange since March 2018
Elkem's evolution
A leader within silicon-based advanced materials
Elkem - Four strong business areas
Elkem's strategy
Key priority: Continue transition into a specialty chemicals company
- Enhance growth
- Stable margins
- Reduce cyclicality
- Leverage platform (synergies)
- Leverage technologies to enhance specialisation
- Solidify local presence and market positions
- Access to complementary and next generation technologies
Building blocks of continued profitable growth
- Grow Silicones
- Increase specialisation
- Develop new materials serving fast-growing end markets (e.g. batteries)
- Leverage production and low cost heritage
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
- Financial targets
Morten Viga, CFO
Silicones - our largest business area
Silicones are everywhere
LIQUID SILICONES SOLID SILICONES
Liquid silicones (fluids) are invisible to the end customer and greatly improve the performance of the substrate while being a small part of the total product
Solid silicones (elastomers) are used as materials. When cured, they become solid materials for various applications. They are substitute to most plastics when performance and durability is needed
Elkem | one of few fully integrated producers
UPSTREAM SILOXANE PRODUCTION DOWNSTREAM SILICONES PRODUCTION MCS Siloxane Roussillon 200 Ktpa 100 Ktpa Xinghuo 500 Ktpa 250 Ktpa Silicon metal Yongdeng, Salten, Thamshavn Core prod. Fluids Elastomers EU/Americas 37% 30% 33% China 70% 30% • Core products • Construction • Textile & Leather • Airbag coating • Healthcare • Sealing & Bonding (EV, electronics…) • Rubber • Home & Personal Care • Release Coating • Chemicals Core products Volume specialties Value specialties
Sustainable value creation
Capital intensity
Attractive market fundamentals for Silicones…
GLOBAL MEGATRENDS CREATE SPECIFIC NEEDS
• Electrical vehicles – products such as batteries and cables
Ageing and growing population
… and Elkem has strong market positions
GLOBAL SILOXANE PRODUCTION (2016A)
Top 5 producers represent appx. 67%
CONSOLIDATED INDUSTRY STRUCTURE
- Increasing consolidation
- Chinese growth is sustainable with higher added value markets
- High barriers to entry on specialties
- More captive use of upstream from all players
Integrated producers = blue
Strong growth potential both by product and geography
Silicones demand by geography (BUSD)
Strategy to specialise within each clusters to deliver high & stable EBITDA
When to specialise & how?
SILOXANE CAN BE EITHER SOLD AS INTERMEDIATE OR TRANSFORMED AND SOLD DOWNSTREAM
Specialising: the example of Silicones for Electrical Vehicles
LEVERAGING MARKET POSITIONS WITH TECHNOLOGY EXPERTISE AND GEOGRAPHICAL REACH
Sealing and bondings for EV batteries
Rubber for high performance electrical cables in EV
We master Foam and RTV 2 technology
5 - 11 kg of silicones in EV car of which 2/3 in the battery pack
40 KT of siloxane at high value in 2020 - expected to grow to 200 KT in 2030
Tomorrow's applications are being prepared now
BOTH IN EUROPE & CHINA 3D PRINTING
IMPLANTS
ROBOTICS
Value creation through growth and specialisation
- Outlook for specialty silicones looks promising & growth continues
- Value through specialisation with company sharing of expertise & captive use of available upstream capacity
- Attractive positions in a growing markets and in China
- Strong demand driven by (electrification of transportation, better care, more wealth and digitalisation)
- Industry fundamentals remaining positive
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
- Financial targets
Morten Viga, CFO
Introduction
- Overview and main growth drivers in Chinese silicone market
- Industry structure and market dynamics
- Elkem's market position
- Specialisation footprint in China
Chinese silicone market
The world's biggest silicones market with strong growth potential
CAPACITY SIZE
- China is the biggest silicone supply center in the world
- Siloxane production in China is expected to reach 1.1 million mt in 2018
- This amounts to approx. 55% of global supply
|
ACTUAL SUPPLY |
MARKET SHARE |
| REGION |
(Kt) |
(%) |
| CHINA |
1,126 |
55% |
| APEC |
238 |
12% |
| NA |
248 |
12% |
| EUROPE |
424 |
21% |
| GLOBAL SUPPLY |
2,037 |
|
Source: Freedonia Source: Freedonia
DEMAND AND GROWTH
- Strong demand development in China based on economic growth
- Economic growth keeps the good momentum until 2021
- Silicone demand growth is even stronger with 7.4% CAGR
2018 OVERVIEW GLOBAL SUPPLY OVERVIEW ANNUAL GROWTH ESTIMATES
| YEAR |
GDP % |
SILICONE DEMAND
CAGR % |
| 2015 |
6.9% |
7.4% |
| 2016 |
6.7% |
7.4% |
| 2017 |
6.9% |
7.4% |
2018E –
2023E |
6.6% |
7.4% |
Global megatrends also create demand growth in China
NUMEROUS MEGATRENDS…
Sustainability Energy demand growth Rapid urbanisation Increased standard of living Ageing and growing population Digitalisation Higher income drives demand for personal care products such as hair and skin care China has a particular focus on renewable energy such as wind and solar to reduce air pollution The 2nd child policy in China encourages silicone infant care application China has a strong focus on electrical vehicles to improve air quality in big cities Still much construction where prefabricated buildings, smart city with airport, railway and subway drive demand for silicones in cables, sealing etc. Automobile Consumer goods Energy Personal care Construction
….IMPACTING CHINA SILICONES APPLICATION
… INCREASE THE GROWTH POTENTIAL FOR SILICONES IN CHINA
Growth supported by a wide range of end-user segments
… and economic growth drives the increasing demand per capita
Source: Freedonia
Industry structure – a mix of international and local players
13 MAIN PLAYERS IN CHINA
- 4 international integrated players
- Elkem has the leading position with 18% market share
- Dow + Wacker have a JV in east of China
- Momentive has a JV with Wynca in east of China
- 9 pure Chinese players, only 1 manufacturer, Wynca with relative integrated technology
SHARE OF SUPPLY VOLUME
Supply and demand – still a commodity market …
… but the outlook is still relatively good
ANNOUNCED CAPACITY ADDITIONS 2020 – 2022
- Hoshine 100Kt siloxane, estimated by 2020
- Wynca 100Kt siloxane, estimated by 2021
- Xingfa 60Kt siloxane, estimated by 2021
- Hoshine 100Kt siloxane, estimated by 2022
REDISTRIBUTION OF TRADE FLOWS
Competitive landscape
ELKEM HAS A STRONG PLATFORM FOR FURTHER SPECIALISATION
| Upstream |
|
|
|
|
| Fumed silica |
|
|
|
|
Room
temperature
vulcanized
rubber |
|
|
|
|
Heat
temperature
vulcanized
rubber |
|
|
|
|
Functional
oil |
|
|
|
|
Liquid
silicone
rubber |
|
|
|
|
Integrated producers
UPSTREAM
- Elkem is market leader
- Upstream with operation excellence
DOWNSTREAM
- Fully integrated technology
- Strong specialization platform to extend silicone value chain
Silicones widely used in China markets
ELKEM HAS MARKET LEADING POSITIONS IN ALL SEGMENTS
| End-markets |
Products |
Customers & Partners |
| Textile & Leathers |
▪
No.1 Market Share
▪
Textile pilling treatment |
|
| Transportation |
▪
No. 1 Market Share
▪
Cable & Wire |
|
| Construction |
▪
No.1 Market Share
▪
Sealant |
|
| Consumer goods |
▪
No. 2 Market Share
▪
Infant care |
|
Health and
personal care |
▪
No. 3 Market Share
▪
Personal care |
|
| Electric & Electronics |
▪
No. 1 Market Share
▪
Water proof mobile |
|
| Chemicals |
▪
No. 1 Market share
▪
Formulators |
|
Specialisation at work in China | Silicones for release liner
LEVERAGING COMPETITIVE SOURCING BY TECHNOLOGY EXPERTISE, FACILITY STRENGTH AND GEOGRAPHICAL REACH
| Release |
2011 |
2013 |
2016 |
|
|
coatings for
labels |
•
R&D
▪
Transfer release
coating technology |
•
Production
▪
Set up special
intermediates facility in |
•
Commercial
▪
Professional local team for
market survey |
|
|
Pressure
sensitive
adhesives for
electronics |
from France to China |
▪
Xinghuo
▪
Set up customised
production unit in
Shanghai |
|
|
|
|
30% Market Share with 60MUSD Revenue |
|
|
|
|
Well positioned for profitable growth in an emerging market
• Geographical advantage AND MARKET LEADER
- The most demanding and the fastest growing silicone market in the world
- Elkem has the highest market share for silicones in China
• Sustainable growth WITH SPECIALISATION STRATEGY
- Reduce exposure to commodities and develop specialty intermediates by leveraging the global R&D capability and competence
- Convert special intermediates to value specialities with local customisation and professional marketing/development organisation
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
- Financial targets
Morten Viga, CFO
Elkem's history in China
- Up to 22 years manufacturing, M&S, R&D experience in China
- Extensive experience gained from Elkem Silicone Shanghai and Elkem Carbon China's development:
- Specialised products
Office
- Staff, productivity, profitability, EHS standard, organisation development
- Acquisition of Xinghuo and Yongdeng plants
Integration of Xinghuo and Yongdeng is increasing operational excellence
- Xinghuo and Yongdeng formally acquired by Elkem in 2018
- Before that Elkem has provided long standing support
- In Yongdeng Elkem has had the plant manager from 2012 and two furnaces were upgraded to Elkem standard
- In Xinghuo Elkem has participated strongly and contributed to the capacity expansion and ramp up phase in 2015 - 2016
- Key objectives
- Productivity improvements
- Cost savings
- Quality and EHS improvements
Xinghuo | Operational improvements achieved to date
- Siloxane production cost reduced by 11% in H12018
- Quality claims from customers (CCR) reduced by 33%
- 19 debottleneck projects and technical upgrades
- EBS implementation(*) for improving equipment reliability
Yongdeng | Operational improvements achieved to date
- High grade microsilica increased from 28% to 55% in H1 2018 and Si metal qualification rate increased from 98.35% to 99.27%
- Cost road map programmes completed with estimated cost savings of around 44 MRMB/year
- Strong support from technical and operational resources from silicon plants in Norway, EBS implementation
Improvements achieved through systematic work
- Strong and action/result oriented leadership
- Technical debottleneck/upgrade projects
- Synergies/supports among group resources
- EBS introduction and implementation
SUCCESS FACTORS EBS IMPLEMENTATION
Further improvement potential ahead
- Xinghuo: Upstream cost competitiveness and downstream products development
- Yongdeng: Cost competitiveness
- Both sites:
- EBS and innovation
- Developing people
- It's a long and continuous process
- Recent two major preventive maintenance stops at Xinghuo and Yongdeng will improve efficiency further
Cross cultural aspects
CULTURAL DIFFERENCES
- Management and leadership: systematic vs firefighting; Involvement from organisation vs top down approach
- Mindset: Conflict management (face) and networking (guanxi)
- Communication and motivation: Big obstacle when communication is not clear and positive
- Mutual respect and trust is essential for cross cultural cooperation
Establishing a common platform for profitable growth across geographies
- Elkem has a unique position with long experience, international management and market growth potentials in China and support from Chinese majority shareholder
- Integration has created synergies and improved operating results
- Systematic EBS approach has enabled the creation of common working procedures and culture
- Develop local competence to strengthen global competitiveness
- Building the Elkem culture based on a common set of values
Elkem's Core Values:
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
- Financial targets
Morten Viga, CFO
Elkem battery solutions | Meeting today's challenges. Ready for tomorrow's opportunities
Graphite for anodes – developing large scale industrial production to meet market growth
- Proprietary graphitization process
- Raw material know-how
- Sustainable green production at large scale
- Opportunities for rapid ramp-up to meet growing demand
Silicon for tomorrow's anodes – leveraging best in class silicon know-how
- Ability to tailor make silicon powders
- Opportunities for rapid ramp-up when demand materializes
- Attractive cost position based on Silgrain
- Sustainable green production at large scale
Carbon Silicon Silicones
Silicones for battery packs and EVs – protect and enhance performance
- Products tailor made to customer technology
- Deliveries of other products to EVs (electrical cable insulation)
Electrification of transportation drives strong growth in demand
- 22-30% of new light vehicles in 2030 assumed to be EVs
- Electrical buses growing significantly, especially in China
- Pace of fast growing markets tend to be underestimated
- Demand for active anode materials such as graphite likely to grow more than 10x
Li-ion battery , average demand forecast (GWh)
Demand by segment (GWh)
Elkem in the battery value chain
Elkem providing the solution for today's and tomorrow's anodes
• Graphite
- Proven and established technology
- Stable long term performance
- Opportunities to mix in other materials (such as silicon)
- Limited upside
• Silicon
- Theoretical capacity 10x higher than graphite solution to improve energy density
- Improved charge and discharging rate
- Improved charging at low temperature
- Reduced risk of over heating
- Focusing on solving the fundamental issues related to expansion and contraction reducing battery lifetime
Elkem battery solutions | Status and plans by division
Carbon Silicon Silicones
Potential revenues impact of battery strategy
▪ Silicon:
- Timing of commercialisation uncertain, but significant growth expected when technological challenges are resolved
▪ Carbon:
- Sale of industrial volumes assumed from 2021
▪ Silicones:
- Established position with more than 30 MEUR sales in 2018
Elkem has a unique position – today and tomorrow
The Li-ion battery market offers a significant growth opportunity for Elkem
Western supply chains must be
US
developed to serve battery production in Europe and the
Elkem is uniquely positioned to supply solutions to the battery industry meeting today's challenges and tomorrow's opportunities combining graphite, silicon and silicones
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
• Financial targets
Morten Viga, CFO
Foundry Products | A highly specialised division
Foundry Division | A proven business model for stable prices and high margins
High quality, branded specialty products
Global coverage combined with customer intimacy
Technical expert service on site
R&D, innovation and local customer service laboratories
Foundry Division | Our Specialty Products
REVENUE &
PRODUCT
MARGINS |
|
APPLICATION |
END PRODUCTS |
60.000 t
INOCULANTS |
BNOK 1.1
≥
20% EBITDA |
Grey iron and ductile iron castings
Lighter, stronger and easy to
machine castings |
|
94.000 t
NODULARIZERS |
BNOK 1.5
≥
20% EBITDA |
Ductile iron castings
Lighter, stronger and temperature
resistant castings |
|
- Specialty products are the basis for stable and profitable growth globally
- Consistently high quality materials allow customers low addition rates of our materials
- We investigate casting defects and consult customers to reduce scrap rates by using our materials optimally
- Thus we create significantly more value for our customers and we can obtain a fair share of it
Creating value in the customers' production process
- Metal treatment ' makes or breaks' the final product
- Most important part of the process: while only a small part of the total cost base, it has a high impact on quality therefore
- Customers are very loyal. They do not change the alloy supplier easily
- By understanding the customer process from raw materials to the finished castings, we show how best casting results can be achieved at minimum cost
Total cost base composition
Global environmental programmes pull for Elkem specialties
Global coverage and untapped potential in fast growing markets
- Elkem is the global market leader
- Increasing focus on emerging markets
- China, India, other Asian markets and South America
- Well positioned to meet growing demands
- Consolidated market top 5 suppliers serve 54% of the global market
- Increased production capacity from 10.000 to 30.000 in China
- Acquisition in the fast growing Indian market to become market leader
- New Elkem plant in Paraguay with best access to the large Brazilian market
Doubled sales of specialties 2015-2018 in important growth markets
ELKEM FOUNDRY SALES IN MNOK
THE KEY GROWTH DRIVERS: INNOVATION, QUALITY AND LOCAL PRESENCE
- High quality products based on innovation and product development
- New production plants in India, China and Paraguay
- Customer proximity is a key selling point
- Strong local technical and commercial sales organisation
Capturing growth opportunities in foundry alloys in key markets
Strong opportunities to grow specialty business
Capture market share and grow with strong segment development by focusing on key growth areas
ELKEM FOUNDRY SALES IN MNOK GROWING MARKET SHARES IN TARGET MARKETS
* forecast based on 2018 average prices
Stable, high margins and further growth in emerging markets
- Global environmental programmes will be a key growth driver for Elkem's specialty products
- Speciality products ensure stable market shares and high margins in mature markets
- Innovation, quality and local presence drives growth in emerging markets
- Global market leader with identified growth potential and production capacity to meet future demand
• Creating value through operational excellence, growth and specialisation
Helge Aasen, CEO
- The world of silicones Frédéric Jacquin, SVP Silicones
- China vast country with vast opportunities Sandy Chen, Director Xinghuo Silicones
- Elkem strong Chinese experience Helge Aasen, CEO, and Chen Xi, Senior Advisor
- Batteries growth potential across product lines Inge Grubben-Strømnes, SVP Carbon
- Value creation through specialisation in Foundry Products Roland Hennigfeld, VP Sales & Marketing
• Financial targets Morten Viga, CFO
Elkem's strategy
Key priority: Continue transition into a specialty chemicals company
- Enhance growth
- Stable margins
- Reduce cyclicality
- Leverage platform (synergies)
- Leverage technologies to enhance specialisation
- Solidify local presence and market positions
- Access to complementary and next generation technologies
Building blocks of continued profitable growth
- Grow Silicones
- Increase specialisation
- Develop new materials serving fast-growing end markets (e.g. batteries)
- Leverage production and low cost heritage
Financial objective – shareholder value through growth and dividend
Financial targets
| Target metric |
Targets |
Comment |
| Revenue growth |
5 –
10% |
Grow faster than market through specialisation, organic growth
and acquisitions |
| EBITDA margin (%) |
15 –
20% |
Target average margin through the economic cycle |
| Reinvestments % of D&A |
80 –
90% |
Ensure appropriate and disciplined capital allocation following
long-term plans |
| Debt leverage ratio |
1.0x –
2.0x |
Ensure efficient and robust capital structure |
| Dividend target |
30 –
50%
of net income |
Stable and predictable over time |
REVENUE GROWTH
Continue organic growth and possible bolt on acquisitions
HISTORICAL TRACK RECORD
- Capacity increase Xinghuo
- From 152kMT in 2016 to 218kMT 3Q-18-LTM
- Favourable prices increases well positioned in attractive markets
- Capacity creep across all divisions
- Selected M&A projects
- Rana (2016) and Foundry India (2017)
- Organic growth projects
-
Carbon Malaysia (2016), Foundry Paraguay (2017) and Foundry China (2018)
-
Number 1 position in China Silicones basis for Asia growth strategy
- Further capacity expansion in Xinghuo under evaluation, decision early 2019
- Possible M&A projects
- Priority no. 1 bolt on acquisitions in Silicones. Target downstream specialty companies, capitalising on Elkem's strong upstream position
- Organic growth projects
- Potential silicon capacity increase in Rana
- Debottlenecking projects across the divisions
EBITDA MARGIN
Stabilise EBITDA margin at attractive level through continued specialisation
HISTORICAL TRACK RECORD
REINVESTMENTS % OF D&A
Well invested assets reduce need for extensive capex
HISTORICAL TRACK RECORD
DEBT LEVERAGE RATIO (NIBD/LTM EBITDA)
Pursuing growth in a disciplined manner
HISTORICAL TRACK RECORD
Financial objective – shareholder value through growth and dividend
DELIVERING YOUR POTENTIAL