Second quarter results 2019
Agenda
Helge Aasen, CEO Business update Outlook
Morten Viga, CFO Financial performance
Market downturn gives lower earnings
Generally weak market conditions, particularly in automotive and construction
- Additional US tariffs on Chinese imports implemented from 10 May triggered a rapid decline in the Chinese silicones market
- Maintenance stop and delayed start-up in Silicones France had a negative financial impact of MNOK 185 in the quarter
- Consequently, and as announced, the financial performance in the second quarter has been weaker than expected
- Total operating income was NOK 5,882 million in the second quarter, down 17% from a strong corresponding quarter last year
- EBITDA was NOK 647 million, down 67% from the second quarter 2018.
- Earnings per share was NOK 0.25 in the quarter and NOK 1.09 YTD
Environment, social and governance our key priorities
- Elkem has a zero harm philosophy
- For health and safety, the target is zero recordable injuries (H1 & H2)
- For environment, the strategy is to work towards our goal of zero emissions
- The total recordable injury rate as at 30 June 2019 was 2.8
- This represents 18 recordable injuries, including 2 defined as high severity
- Elkem has several ongoing projects to reduce the environmental footprint and strengthen the competitive position
- Construction started at the energy recovery project at Salten
- Furnace upgrades at Bremanger and Salten to give substantial reduction in NOx and fugitive emissions
- Increased share of biocarbon as redundant in smelting processes reduce fossil CO2 emissions
Total recordable injury rate
H1 – Number of lost time injuries per 1,000,000 working hours
H2 – Number of medical treatment and restricted work injuries per 1,000,000 working hours
Strategic priorities status update
- Construction of a pilot plant for synthetic anode graphite for batteries commencing in third quarter 2019. Commercial production expected from 2021/2022
- Elkem is strengthening its market position in the US to include basic silicones to meet growing North American demand
- Elkem Foundry Paraguay reaching milestone for sustainable production
- First plant to use 100% biocarbon sourced from local sustainable plantation
- 100% hydropower
- Still pursuing bolt-on acquisitions to enhance growth and specialisation
- Accelerated cost improvement programme on plan delivering MNOK 148 YTD 2019. Expect to realise full year target of MNOK 500
- Continued focus on product specialisation gradually moving the product portfolio towards higher end products with more stable margins
Competitive strengths
Well positioned to develop silicones market opportunities
Expanding silicones offering in the Americas
Facts Americas
- Market size > BUSD 4
- 27% of global market
- Growing at more than 4% per year
- High degree of specialisation
- High silicone spending per capita
Weatherproof solution for buildings
- Sealant applied to the joint of glass, metal, stone etc.
- Ensures air tightness, water tightness and other performance
- Needs to withstand thermal expansion, cold contraction etc.
EV batteries and cables uniquely positioned to develop and supply solutions
- Elkem will invest MNOK 65 in a pilot plant for battery graphite
- Leveraging leading research, graphite and production know-how, and sustainable production to supply growing European battery market
- Elkem shows consistent growth in silicones material for EV batteries and cables
- In 2018 revenues from batteries and EVs exceeded MEUR 30
- In 2019 this is expected to reach MEUR 50
- Ongoing development of silicon for batteries in close cooperation with partners and customers
- Already small commercial sales of silicon to anode, Silgrain used in thermal batteries for e.g. space missions
Carbon
Graphite for anodes – developing large scale industrial production to meet market growth
- 100 years experience as a supplier of carbon solutions
- High temperature process understanding
- Raw material know-how
- Sustainable green production at large scale
Silicones
Silicones for battery packs and EVs – protect and enhance performance
- Strong specialty positions in automotive
- Proven technologies
- Products tailor made to customer technology
Silicon
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
Operational improvements proceeding as planned
- The accelerated improvement programme was initiated early 2019 to counter weaker market conditions
- The target is to realise effects of MNOK 500 in 2019
- The programme is progressing according to plan and realised effects by end of 2Q-2019 amounted to MNOK 148
- Based on the weak market sentiment Elkem will further reinforce measures to reduce costs and improve working capital
Realised effects (MNOK)
Weak market conditions driven by automotive and construction
- Global car sales down YTD-2019
- The sharpest sales decline was in China, but also other markets are down
- Weak automotive markets impacts silicones (gaskets, hoses etc.), silicon metal (aluminium alloys) and ferrosilicon (steel alloys)
- However, higher sales of EVs provide a strong potential for Elkem due to the content of silicones in batteries and cables
- Construction in China has been weak, but real estate under construction is picking up based on stronger domestic incentives
- The activity in construction mainly affects silicones (sealants, adhesives and coatings) and ferrosilicon (steel, pipes etc.)
- Segments for consumer goods, luxury linked products and agrochemicals are less impacted
- Elkem has long-term agreements with renowned multi-national cosmetics companies
- Consumer goods account for approx. 30% of the Silicones division's sales
Growth rates automotive
Source LMC Automotive
Growth rates for real estate in China
Silicones additional US tariffs triggering decline
- Additional US tariffs triggered another steep decline in DMC prices in China
- All silicones from China to the US are taxed 28%
- In addition, many other products containing silicones are affected
- The tariffs have created increased uncertainty and Chinese downstream customers temporarily halted orders in May and June
- Demand is picking up in July, but at low prices
- Also, the Chinese market is generally impacted by seasonal weakness in construction in June and July due to wet season
- Speciality products show stable price development, but volumes are negatively impacted by weakness in e.g. automotive
- Underlying demand development still considered robust supported by megatrends
DMC reference price China (RMB/mt)
Silicon still weak market sentiment
Market prices declined further in second quarter from already low levels
- Positive demand development from solar and electronics
- Chemical segments (silicone) is rather stable but somewhat impacted by US/China trade tensions
- Aluminium is very challenging, primarily driven by weakness in automotive
CRU silicon 99 price EU (EUR/mt)
Ferrosilicon weak markets
- Continued market price decline in the second quarter
- Prices negatively impacted by low EU steel market and high ferrosilicon imports
- Indications of lower EU ferrosilicon imports from Brazil and Malaysia towards the end of the second quarter
- Weak market sentiment with downward trend in industrial production and weak automotive sales
Carbon stable markets
- Stable prices and volumes based on generally high metals production
- Production curtailments could impact sales volumes going forward
CRU ferrosilicon 75 price EU (EUR/mt)
Elkem group earnings down due to weak market conditions
Total operating income
‒ down from record levels in the corresponding quarter last year
EBITDA
‒ reduced considerably compared to second quarter last year
‒ due to weaker market conditions, especially for silicones in China
Elkem group strong balance sheet
- Other items MNOK 25
- Main item was a positive value change of power contracts MNOK 39 explained by favourable power price changes in the quarter, partly offset by negative operating currency effects
- Net financial items MNOK -108
- Net interest expenses of MNOK 54 which include leasing effects (IFRS 16)
- Currency loss of MNOK 49 mainly related to group receivables in CNY
- Tax MNOK -58
- Tax rate of 28%, primarily affected by weak results in France. The production problems have resulted in a loss before tax in the quarter. In accordance with group policy, tax losses are not capitalised. Tax rate expected to be lower in coming quarters
Consolidated key figures
| (NOK million, except where specified) |
2Q 2019 |
2Q 2018 |
YTD 2019 |
YTD 2018 |
FY 2018 |
| Total operating income |
5,882 |
7,121 |
11,889 |
13,572 |
25,887 |
| EBITDA |
647 |
1,971 |
1,499 |
3,424 |
5,793 |
| EBIT |
300 |
1,655 |
815 |
2,805 |
4,522 |
| Other items |
25 |
-153 |
176 |
-355 |
-380 |
| Net financial items |
-108 |
-78 |
-135 |
-197 |
-327 |
| Profit (loss) before income tax |
210 |
1,423 |
850 |
2,252 |
3,792 |
| Tax |
-58 |
-90 |
-201 |
-190 |
-425 |
(1)
Profit (loss) for the period |
143 |
1,327 |
633 |
2,049 |
3,337 |
| Key ratios |
|
|
|
|
|
| EPS (NOK per share) |
0.25 |
2.28 |
1.09 |
3.53 |
5.74 |
| Equity ratio (%) |
44% |
44% |
44% |
44% |
44% |
(2)
Net interest bearing debt (NIBD) |
5,110 |
4,458 |
5,110 |
4,458 |
3,264 |
| Leverage ratio |
1.3 |
0.8 |
1.3 |
0.8 |
0.6 |
| Reinvestments % of D&A |
87% |
94% |
71% |
77% |
84% |
| ROCE (annualised) (%) |
7% |
42% |
10% |
36% |
28% |
(1) Owners of the parent's share of profit (loss) (2) Excluding non-current restricted deposits and interest-bearing financial assets
Silicones impacted by US tariffs and production problems
- Total operating income down 28% from second quarter last year
- EBITDA of MNOK 333, down 75% from a record level last year
- Lower operating income and EBITDA were mainly explained by lower sales prices. Sales prices in China declined steeply in second quarter following additional US tariffs. Prices for core products have declined also outside China
- Prices for specialties remain stable, but volumes were down due to weakness in e.g. automotive and production problems in France
- The Roussillon plant in France had a delayed start up after the announced maintenance stop in April/May. The total loss related to maintenance stop and subsequent late start up amounted to MNOK 185
Total operating income
NOK million
EBITDA and margin
Silicon Materials low prices and slow demand recovery
Total operating income down by 8% compared to second quarter last year
- EBITDA down 48% compared to second quarter last year
- Lower operating income and EBITDA mainly explained by lower sales prices
- Raw material prices trending lower, mainly coal and graphite. Limited effect in second quarter, but positive effects expected from third quarter and onwards
- The Bremanger plant, producing high purity silicon (Silgrain), will have a major furnace upgrade in the third quarter (ref. page 4)
Total operating income
NOK million
EBITDA and margin
Foundry Products lower prices and reduced sales of specialties
- Total operating income down by 8% from second quarter last year
- EBITDA down 69% due to lower ferrosilicon prices and lower speciality sales volumes
- Prices for specialty products (FSM and inoculants) remain stable but volumes are significantly down due to weakness in automotive. Markets also impacted by US/China trade tensions
- One furnace at Iceland temporarily idled from mid-June.
- Raw material prices trending down but limited effect in second quarter
Total operating income
NOK million
EBITDA and margin
Carbon stable earnings
- Total operating income up 8% from second quarter last year
- EBITDA up 8% to MNOK 86 from the corresponding quarter last year
- Stable sales volumes have provided stable operating income and EBITDA
Total operating income
NOK million
EBITDA and margin
Elkem group strong equity, but lower EPS
- Earnings per share (EPS)
- EPS amounted to NOK 0.25 in the second quarter
- EPS YTD 2019 was NOK 1.09
- Total equity amounted to BNOK 12.6 as at 30 June 2019
- Equity ratio of 44%
- Equity down by BNOK 1.1 from 31 December 2018 due to dividend payment of BNOK 1.5, which was offset by profit for the period
Earnings per share (NOK)
Elkem group low leverage
- Net interest bearing debt (NIBD) of BNOK 5.1 as at 30 June 2019
- NIBD has increased by BNOK 1.8 from 31.12.2018 mainly due to dividend payment of BNOK 1.5 and recognition of lease liabilities BNOK 0.4 in accordance with IFRS 16
- Leverage ratio of 1.3x based on LTM EBITDA of BNOK 3.9
- Debt maturity profile has improved following refinancing in China
- Remaining debt maturities in 2019 mainly consist of local Chinese bank facilities, which will be covered by new facilities not yet drawn
Net interest-bearing debt (NIBD) MNOK
MNOK
Elkem group good cash flow, investments according to plan
- Cash flow from operations(1) was MNOK 645 in the second quarter, down from the corresponding quarter last year due to lower operating profit
-
Lower operating profit has been partly offset by positive working capital movements. 2Q-2019 included a positive change in working capital, of which MNOK 250 was explained by a new non-recourse factoring agreement
-
Investments amounted to MNOK 479 which was according to plan
- Reinvestments of MNOK 301 in the second quarter, amounting to 87% of depreciations
- Strategic investments of MNOK 179, primarily Silicones specialisation projects, furnace upgrades for Silicon Materials and upgrade/expansion projects for Carbon
Investments MNOK
(1) Cash flow from operations is according to Elkem management definition and includes reinvestments
Outlook for the third quarter
A continued weak market sentiment creates uncertainty going forward
- Silicones demand is expected to pick-up seasonally in China
- Silicon metal demand is expected to remain weak, primarily in the aluminium segment. There are signs of a recovery, but the impact is expected to be modest in the third quarter
- Ferrosilicon markets are expected to remain weak. Foundry alloys prices are stable but sales volumes are expected to remain low
- Carbon expected to remain stable, but potential metal production curtailments create downside risk regarding sales volumes
- The accelerated improvement programme develops according to plan and further measures will be implemented to counter the weak market sentiment
- On this basis the third quarter EBITDA is expected to be in line with second quarter
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
- 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 360
- USD net cash flow approx. MUSD 120
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
Currency development
• The average NOK rates were weaker in 2Q-2019 compared to 2Q-2018
• Compared to 2Q-2018, the NOK is 2% weaker against EUR, 8% weaker against USD and 1% weaker against CNY
Other financial sensitivities
POWER
- Electric power is a key input factor in Elkem's production. Total consumption for the group was 6.2 TWh in 2018. 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 contracts which are not included in the hedging portfolio is booked in Other items
SALES PRICES