Elkem ASA

OSE:ELK

Earnings Call Transcript 2019-Q4

[Odd-Geir Lyngstad]

Good morning, everyone. It's a pleasure welcoming you to Elkem's fourth quarter presentation. My name is Odd-Geir Lyngstad, I'm responsible for Investor Relations in Elkem. With me I have CEO, Michael Koenig; and CFO, Morten Viga, to take us through business update, financials and outlook. As usual, we will take the questions after the presentations. And with that, I'll leave the word to Michael Koenig.

[Michael Koenig, Chief Executive Officer]

Odd-Geir, thanks a lot, and good morning, everybody. I'm very pleased to be here to talk for the first time as CEO about quarterly results, the fourth quarter results to be more specific. It will not be a big surprise to you that Q4 was a very difficult quarter, again, after also a not-easy Q3, the whole year of 2019 was impacted by very weak market conditions worldwide but also by some negative operational impacts and issues that we were battling with. In Q4, revenues just shy of NOK 5.6 billion and an EBITDA of only NOK 517 million that clearly is a disappointment, but it fits into the expectations that we were having for the year, again, looking at the very difficult and very negative market sentiment that we were facing. We have worked against it quite strongly with a very ambitious cost and working capital program that has been quite successful, and I will talk about this later in the presentation. But that was, of course, not enough to really mitigate the negative impact that we were having, again, from the adverse conditions in the markets and also from our own operations. That led us to earnings per share of NOK 0.03 in the quarter and NOK 1.47 year-to-date. The Board has yesterday proposed a dividend of NOK 0.6 per share, and that would represent a payout ratio of 41%. Where we have really delivered in the fourth quarter was on strategy. We have signed the acquisition of Polysil, and we did that on the -- not the very last day, but almost the last day of the year, on December 30. This is a key building block for our strategy towards specialization and at the same time, also a key building block to increase and improve our footprint in China, which is the fastest-growing market for our silicon project, and it ties into the Basel acquisition that has been done earlier last year. So on strategy, we've really delivered in 2019. Before I continue, I would like to make you aware, if my voice sounds a little bit strange, that's not my normal voice. I'm somewhat impacted by the weather here in Oslo. Next time you hear me presenting, you will hear a clearer and stronger voice. On ESG, Elkem has a very strong position due to its favorable location in Norway due to hydropower as a carbon-neutral source. We have worked very hard on implementing a zero-harm policy to our employees, and that also reflects into how we deal with the challenges we are currently facing in China, looking at the virus outbreak that we are having there. We have a good, solid strategy towards zero emissions over the years to come, and we have been given the EcoVadis Gold performance rating for the 2019 CSR Assessment. So I think that is something to be proud of as a company. You've seen before that we look at 3 building blocks, how we think we need to and want to build Elkem into an even more successful and stronger company. That's operational efficiencies and synergies where Elkem traditionally is very strong despite some challenges we had in 2019. Specialization, value chain optimization, that's where we are working on quite hard, and we have made some progress in 2019. And then organic growth and acquisitions, and for both, you would see examples today. I mentioned Polysil already, and you will see an example for organic growth that illustrates what we do in order to deliver on that building block. So let me drill in a little bit on the Polysil acquisition. It's a company in South China in Zhongshan. It gives us access to advanced technologies particularly in liquid silicone rubber, where Elkem Silicones currently is not active in. And it significantly expands our portfolio of technologies and gives us a fantastic customer base that we can work with. It also uses materials that we are upstream producing in our production hub in Xinghuo and by that makes some of the commodity materials that we are currently producing and selling to the market, captive, and we transfer them into specialized products. The purchase price will be up to RMB 941 million. That depends on an earn-out with the current ownership, where there is -- where there are variable elements that depend on predefined criteria of performance in the first 24 months after closing. The operating revenue in 2019 of Polysil was RMB 630 million with an EBITDA margin of 18%. We are currently in the regulatory approval process for this project, and we expect to be able to close it by the end of the first quarter 2020. That was the acquisition project that I think is demonstrating how we move forward with strategy. Next, I would like to introduce an organic growth project that ties into the same direction of specializing our products. We have decided and the Board has supported that decision to enter the market of long-term implants in -- with medical silicones. That is a market which is highly specialized with a very low -- with very low competitive pressure because it takes quite a significant time to qualify materials. It requires an ultra high-purity silicone that meets the special requirements from the medical markets. We are currently investing into a clean room in the U.S. in order to meet the required certifications. We are able to produce samples of that material, and they get appreciated by customers quite a lot. We have the first development contracts that we have agreed upon with customers. So this is a longer-term development. We will see the first business in 2 to 3 years from now, but we already now have contracts with customer, and it ties into a very, very large market of more than USD 1 billion. And I find it a very good example of how Elkem moves towards specialty products that use captive materials from upstream and then increase the margin generation by further transforming it into better and highly specialized products. And this is visualizing the way we look at it. You see the siloxane as our upstream building block for all silicones, then you see the core products. This is the type of materials that we sell to the market, and that is very much commodity-driven market. But then you also have various type of specialties, volume specialties, value specialties, where you increase the value of the molecule, and then by that, generates a higher margin. So that's on strategy, and that's where we have delivered. I talked about the challenges that we were facing for -- from various reasons, so we worked hard on a cost improvement program. We have initiated that already early 2019 because we were seeing that markets are getting weaker, and the target was to realize cost savings of NOK 500 million. And we have managed to actually to exceed that, and we came up to almost NOK 600 million in relative sustainable savings that came out of this program. That was a fantastic effort of the whole organization worldwide in all plants, in all organizations have -- we've been working on that and realized the NOK 600 million savings. Of course, we will continue that, and we will need to continue that. We anyway have this focus on operational improvements, but we will also see that markets this year will be challenging as well, and this is a program that will not stop -- most likely, never stop. Just a very quick glimpse into the divisions. I think I will make that fairly short because it comes again in the numbers that Morten will present afterwards. On silicones, we have seen stability but unfortunately, on a fairly low price level, and you see that on the chart, which is up there. That also seems to continue, at least as much as we could see that in January. So there is stability, but the stability is on a relatively low level, and we will then, in this year, need to see how the start-up, in particular, in China is after the Lunar New Year. In silicon, silicon materials, we see a slight trend of increasing prices. They have been at a historic low. We now see that there is some beginning market consolidation and a slight increase in pricing. That's probably even clearer in ferrosilicon, where production curtailments in competitors now start to trigger some price increase. EU steel production is very weak. The automotive industry worldwide is still in a crisis that, of course, has an impact on ferrosilicon. But again, the pricing situation seems to improve. We have a weak market outlook on carbon but at a price level that is unchanged to what we have seen before. With that, Morten, if I may hand it over to you. Thank you very much.

[Morten Viga, Chief Financial Officer]

Thank you, Michael, and good morning, everybody. So let's start with the main financial numbers. And as Michael rightfully said, the results for the quarter are hampered by weak markets. Total operating income was NOK 5.6 billion. That was in line with Q3 this year, but it was down 9% versus Q4 '18. And it's basically in all 4 divisions, where weaker market conditions have had a negative impact on the top line. Our EBITDA came in at NOK 517 million, representing 9% EBITDA margin. And this was significantly lower than the corresponding number for Q4 '18. The negative variation is also here basically explained by negative market development, demand development in all 4 divisions, in addition to some operational problems, one-off items that I will come back to and particularly, in silicones and in the Foundry Products division. As always, we have included some key numbers from our quarterly financial results. Just making a few comments. Other items, minus NOK 16 million. That is a positive value change in some of our commodity power contracts and the embedded derivatives, and that is also then offset by negative currency effects on working capitals. Net financial items, minus NOK 79 million, consists of net interest expenses of NOK 53 million. That's in line with our guidance of approximately NOK 50 million per quarter. And in addition to that, there are currency losses of NOK 26 million. Then we will -- we have posted positive tax costs for the quarter, which is quite extraordinary. 2 reasons for that: first of all, the net profit for the quarter was very low; and secondly, due to this extraordinarily low net profit, there has also been some adjustments to the tax accruals that were made in the previous quarter, so that we end out with a correct tax cost for the year in total. If we look at the silicones' numbers, the result was clearly impacted by both lower prices and also extraordinary start-up costs after Chinese national holiday early October that we previously announced, and that cost us NOK 60 million. So the total operating income was NOK 2.8 billion. That was 3% down from the same quarter last year, and this is mainly due to lower sales prices in China and particularly on core products. I should also say that the market sentiment has been challenging, still uncertainty and still negative impact from the trade tension between China and the U.S. and also a particularly weak market towards automotive, both in China but also in Europe and North America. Silicon materials delivered an improved result versus Q3 this year. The total operating income came in at NOK 1.6 billion, which was marginally down versus fourth quarter in '18. And this was mainly due to lower sales prices and also slightly lower sales volume. But versus Q3, we've had an improvement in EBITDA and the Q4 EBITDA came in at NOK 159 million, 10% EBITDA margin. That is certainly not a great EBITDA margin, but versus competitors, this is a pretty good number. And we demonstrate very good cost positions among -- above all our Norwegian smelters. Foundry Products clearly had a very difficult quarter. Total operating income came in at NOK 1 billion, that was down 15% from Q4 '18. Lower -- the negative development is mainly explained by lower sales prices, generally weaker market sentiment. And particularly, automotive is also here a major challenge, although we see now clear signs of recovery into Q1 '20. The EBITDA came in at a very low level, NOK 16 million, representing a 2% EBITDA margin, and the EBITDA was then significantly 86% lower than Q4 '18. As I said, low sales prices, weak market sentiment, but we have also had operational issues, particularly in Iceland and Bjolvefossen. In Iceland, there has been some equipment failure. In Bjolvefossen, we took a proactive decision to idle one of the furnaces and do a full upgrading, realigning of the furnace, while the market was in a weak situation. And that is clearly a good decision to take out equipment for upgrading in a weak market sentiment, but it cost us some EBITDA during Q4 this year. Carbon, a stable business with very strong market positions. But also here, we have clearly seen the impact from a generally weaker market sentiment, almost through all sectors that we are exposed to. So total operating income was NOK 461 million, that was down 12% from Q4 '18. And EBITDA was NOK 71 million, representing 15% EBITDA margin, which also was 13% down from the corresponding quarter last year. And the reason here is clearly weaker market sentiment. Operational excellence has been generally very stable and good. So if we look at the group, as I said, we came out with a very low net profit. Earnings per share was almost 0 for the fourth quarter. Earnings per share for 2019 was NOK 1.47. And as Michael said, we have proposed a dividend of NOK 0.60 per share, representing 40% -- 41% payout ratio, which is right in the middle of our target or our dividend policy of 30% to 50% of net profit. We have a very solid capital structure, a very solid balance sheet and the equity ratio as per year-end was 45%. Our net interest-bearing debt has increased somewhat through the year and is now at NOK 5.7 billion as per the end of 2019. And the somewhat increase in net interest-bearing debt, but the rather significant decrease in EBITDA has then caused an increase in the leverage ratio, and we're currently at 2.2. We believe that, that will be temporarily further increased due to the dividend that will be paid out later this year and also due to the acquisition of Polysil. But we are certainly working on improving the leverage profile, and we also have a very rock-solid debt financing with a very healthy repayment plan. Our cash flow generation has been, on average, very good through the year, good cash conversion. We have applied a disciplined CapEx program, and we have also had focus on improving working capital, where we have improved performance significantly through 2019. And the working capital as a percentage of operating revenue was down at 16% as per year-end, which is a very good number in this industry. Total investments for the quarter amounted to NOK 920 million. Reinvestments were NOK 522 million. And for the year in total, we ended up at 80% of depreciation and amortization, which is spot on our internal target and also our guidance. Our strategic investments for the quarter was almost NOK 400 million, and this is focused on specialization and particularly in silicones. So we are, among other, now building a new worldwide R&D hub in Lyon to support our specialization strategy for silicones. The strategic investments for the year in total ended up at NOK 963 million, which also is in line with our guiding. Then maybe you, Michael, will take us through the last slide on the outlook.

[Michael Koenig, Chief Executive Officer]

Yes. Thanks a lot, Morten. Outlook for the first quarter. I think I should start with saying that this is a quarter which is characterized by a fairly high degree of uncertainty. The major uncertainty is coming from the situation in China, where it is just too early to assess what the impact of that, in general, on the economy, but also on the economics of our company is going to be. We, for sure, see a delayed start-up of whole industry value chains after the Lunar New Year. And it is, at this stage, unclear how big that impact is going to be. We see that logistic chains are disrupted. We see that customer shipments are difficult even if we can produce, so the impact of that is too early to assess. And we should be clear that there is a high degree of uncertainty that stems from the coronavirus outbreak and the other uncertainties that are around the trade tensions and all of that are almost being marginalized against this uncertainty. During the fourth quarter, we have seen prices stabilizing and in some areas, slightly recovering. Silicone prices have not increased but also stabilized, so that's a good sign. And we see that trend continuing, at least outside of Asia. In Asia itself, again, it is impossible right now to assess price trends or even price level. In the silicones market, we have a situation in which specialties remained stable as expected from specialty markets. But there is clearly still a lot of price pressure on commodities. And also here, we would see how that develops after the industry in China has restarted. Demand for silicon metal has normalized, so there were some destocking effects. Those have leveled out in ferrosilicon and also in foundry alloys. We still feel the weakness in steel and in automotive. For carbon, demand outlook is more or less in line with preceding quarters. So that's the outlook for the quarter. Thank you very much. And Odd-Geir, if you take it over.

[Odd-Geir Lyngstad]

Okay. Thank you very much, Michael and Morten. We will now open for questions from the audience and from those participating on the webcast. We're starting with the people here in the audience. Andreas?

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. A few questions, if I may. So first of all, can you kind of comment on -- have you restarted the Xinghuo facility? Or is that under evaluation after the Chinese lunar holiday?

[Michael Koenig, Chief Executive Officer]

We are restarting this week. To what extent what we can produce, we will see after the week is over. Xinghuo consists of several lines, so it's not so easy to say it's running or not running, but there is some production happening.

[Andreas Bertheussen, Equity Research Analyst]

Okay. So kind of a gradual ramp looking at the market? Yes?

[Michael Koenig, Chief Executive Officer]

Yes.

[Andreas Bertheussen, Equity Research Analyst]

You commented earlier that you expected to run full utilization on your smelters going into 2020. Silicon metal, ferrosilicon, is that still the base case? Or has it changed?

[Michael Koenig, Chief Executive Officer]

That's still the base case, yes.

[Andreas Bertheussen, Equity Research Analyst]

And on the siloxane potential expansion, I believe, starting 2020, you were going to comment on whether or not you will go through with an expansion on siloxane. Have you made any progress on that decision? Any updated time line?

[Michael Koenig, Chief Executive Officer]

We will update you once there is anything to report. Right now, there is nothing new to say about it.

[Andreas Bertheussen, Equity Research Analyst]

Okay. Because it's still under consideration?

[Michael Koenig, Chief Executive Officer]

Yes.

[Andreas Bertheussen, Equity Research Analyst]

And the level of strategic investments in 2020, will that be in the kind of the same vicinity as we've seen in 2019?

[Michael Koenig, Chief Executive Officer]

Do you want to answer that?

[Morten Viga, Chief Financial Officer]

We will carefully evaluate that level. That's, of course, depending on the opportunities. We know that we have already taken on one big acquisition that will be paid out in -- well, mostly in 2020. And then we will also, let's say, look at further opportunities in that field and also carefully consider, let's say, the program for organic investments.

[Andreas Bertheussen, Equity Research Analyst]

Okay. So we could potentially be looking at more M&A in 2020 as well?

[Morten Viga, Chief Financial Officer]

Our priority #1 now is to deliver on the 2 that we have done, but we're always looking for interesting options.

[Morten Normann, Analyst of Materials]

Morten Normann, Carnegie. A few questions on Polysil. Can you give some more flavors on competitors, the margin? I mean quite modest margin if you compare to Wacker, for instance. And I also noticed that NOK 116 million now are somewhat higher than you first hinted at. The result in 2016, would you regard it as a clean result? Or are there other factors behind that, that might be not -- that will not be repeated in 2020? And finally, what is the depreciation in Polysil?

[Michael Koenig, Chief Executive Officer]

Maybe I start, and then you'll continue. So on the EBITDA margin of 18% that you say looks sort of small, that's a stand-alone EBITDA. And the synergies for us are very significant because of the raw material integration, but also because we can use those technologies also outside of China. And that is the driver for this acquisition. I think I should also say that we have seen a clear uptick in the profitability throughout the year. So if you would look at a last 12 months or at a last 6 months, it looks slightly different. So that is an acquisition which will build really a cornerstone of our specialization strategy. So if you want to...

[Morten Viga, Chief Financial Officer]

Yes, the EBITDA and the EBITDA margin that we have posted, you should regard that as a normal margin for the company. There are no specific one-offs. As Michael said, the value of the acquisition is really that the company fits perfectly into our specialization growth strategy, and we will be able to get synergies with our upstream position. And we will also be able to utilize this technology and market position to roll that out also in other markets.

[Michael Koenig, Chief Executive Officer]

I should have said -- I didn't comment on the competitors. This is an area in which Wacker and Shin-Etsu are very strong and in which we traditionally were lacking technology. So we are now entering that territory.

[Morten Normann, Analyst of Materials]

And depreciation?

[Morten Viga, Chief Financial Officer]

I don't have the details right here. I can comment you on depreciation for Polysil.

[Odd-Geir Lyngstad]

Further questions? We can take one question from the webcast. It's from [ Talia Nielson ]. Any comments on weak Norwegian krone?

[Morten Viga, Chief Financial Officer]

Clearly, a weak NOK is beneficial for the cost competitive or less of our Norwegian smelters, and we will be enjoying that if the trend continues. We do have hedging programs in place, so there is always a time-lag effect, 3 to 12 months. How the NOK is going to develop going forward, I will not speculate on that.

[Odd-Geir Lyngstad]

We also have a question from Martin Melbye. Depreciations rose in fourth quarter to NOK 418 million. But is this the new normal? And why has it increased?

[Morten Viga, Chief Financial Officer]

Well, this is the new normal. We are investing in our existing plants. And of course, by doing that, also, the depreciation will increase. Next year, we will also get policy linked to the portfolio, so there will also be an increase in depreciation from that business entity. But that is, of course, not dramatic.

[Odd-Geir Lyngstad]

Then we have a question from [ Etienne Iglesias ], hope I pronounced it correctly. What's the Elkem Group ambition in terms of CO2 emission? Does the group have a clear CO2 target reduction for the coming years?

[Michael Koenig, Chief Executive Officer]

So first of all, we have historically invested quite significantly into CO2 footprint reduction. I would just like to mention the energy recovery systems that we have installed at most of our smelters. The last project is a NOK 1 billion project in Salten, where we recover a lot, the majority of the energy. So we have a strong track record of investing into reducing our CO2 footprint, in addition to the fact that we have renewable energy sources, at least in our facilities in Norway, in Iceland and in Canada. So the track record is good and the ambition going forward, if that's possible at all, I would say, is even stronger. The ambition is strong, but the voice is not so strong, my apologies. We have a clear path to further reduce our carbon footprint with the vision to become carbon-neutral. I think we've talked about our project to increase the percentage of biocarbon in our smelters. That is a very important contributor to further reducing our carbon footprint and a number of smaller projects that also aim at reducing our footprint. So I don't think it's too ambitious to say that we are already and will, even more, be in our industry the leader on moving towards carbon neutrality.

[Odd-Geir Lyngstad]

Any further questions from the audience? Doesn't seem to be, and we have no further questions on the webcast. So last chance?Okay. Then I would like to thank all of you for participating.