Elkem ASA

OSE:ELK

Earnings Call Transcript 2021-Q4

[Odd-Geir Lyngstad]

Hello and Good morning, everyone. It's a pleasure welcoming you to Elkem's fourth quarter presentation and what has been another strong quarter for the group. My name is Odd-Geir Lyngstad and I'm responsible for Investor Relations in Elkem. With me today I have CEO, Helge Aasen; and CFO, Morten Viga. Helge Aasen will take us through business and market update and also go through the outlook for the first quarter 2022. Morten Viga will take us through the financials for the fourth quarter and the full year. We will take questions after the presentation.And with that, I give the word to you, Helge Aasen.

[Helge Aasen, Chief Executive Officer]

Thank you, Odd-Geir, and Good morning, everyone. It's truly a pleasure to present Elkem's results for the fourth quarter and full year 2021. This is our best quarterly result ever and also last year is our best annual result in the history of the company. In the fourth quarter we reached more than NOK 10 billion in operating income, this is an all-time high, and more than NOK 3 billion in EBITDA. We have been able to take full advantage of our strong cost and market positions across the business. The results are also a testament to the solid achievement from our entire global team. All divisions have delivered strong results and the fourth quarter was particularly driven by strong performance in Silicon Products. On the picture here, you can see a good example of our efforts within ESG. This is from November last year when our new energy recovery plant in Salten in Northern Norway was officially opened by the Prime Minister, Jonas Gahr Store.During the fourth quarter, Elkem has also obtained a BBB rating from Scope Ratings and this reflects our strong financial profile and solid market position. The Elkem Board has proposed a dividend of NOK 3 per share for last year, which takes into account our capital expenditure plans, financing requirements and also maintaining an appropriate strategic flexibility. Our global integrated business model has clearly been a differentiating factor of course in addition to strong markets last year. Securing access to competitive input factors has been key with all the supply chain challenges we have seen during the year. This includes captive quartz positions, long-term renewable energy contracts in a period with very high volatility in energy markets. We have been able to maintain very high regularity and quality in our operations also not very much affected by the pandemic.With our integrated silicones value chain, we also have a natural hedge on silicon metal. We are well positioned geographically and we have demonstrated operational excellence and scale. Finally, we are well positioned for growth also with the green shift. Digitalization and the rising global middle class are global megatrends important for Elkem and we are supplying materials into a very wide range of end user segments. This is ranging from electric vehicles, smartphones, construction, personal care, to mention some. Focus going forward is to maintain our good cost position while also reducing carbon emissions and pursuing selective growth opportunities. More than 7,000 Elkem employees have contributed to delivering an operating income approaching NOK 34 billion with an EBITDA margin of 23%. Elkem aims to be a leading global provider of advanced material solutions and ESG issues are key to us and our stakeholders.I already talked about the Salten energy recovery plant opening, but we have also significant untapped potential in realizing additional similar projects. We launched an ambitious climate strategy last year and aim to deliver CO2 reduction emissions -- or emission reductions in line with the Paris agreement. And these days we are also starting up a pilot plant in Canada where we are developing technology to produce a bio carbon pellet replacing fossil reduction materials with bio-based material. So this is in line with our climate road map towards net zero emissions by 2050. In addition to reducing our own emissions, we are also positioning ourselves to supply advanced material to the green transition and build new business in markets such as battery materials. The anode material development project is progressing very well and the main focus now is on continued process verification and product qualification with potential customers.Vianode represents cutting-edge technology and we are in advanced discussions with potential external investors and hope to be able to come back with some more news on this in the near future. We are also making very good progress with potential customers. Vianode is awaiting still clarifications related to framework conditions in Norway and potential support schemes and we expect an investment decision to be taken during first half this year. Now coming to markets. The automotive market is very important to Elkem. It represents close to 30% of total revenues and all our divisions are directly or indirectly exposed in this market. In the past 2 years, the automotive production has been well below pre-COVID levels. After a significant decline in 2020, we have seen a recovery in 2021, but the production is still hampered by constraints in supply chains like semiconductor chips. The market is expected to further recover in 2021.We foresee a 5% growth, but this is still to some extent hampered by supply chain constraints. It is positive that the sale of electrical vehicles is growing much faster. The sales almost doubled if you compare last year with 2020 and this is expected to continue and has a positive impact on Elkem as EVs on average consume 4x more silicone per vehicle than conventional combustion engine car. So a very attractive position and actually our largest single customer in silicones is an automotive company and into the EV segment. In silicones, specialty prices are increasing and we also now see commodity pricing in China normalizing. This clearly -- or let's say the silicones market in general is affected by high demand and strong growth in all regions. So we see the same pattern everywhere. Strong demand combined with levels in both third quarter and into fourth quarter, which is illustrated by the graph here on the slide on the right hand side, which shows the development in the DMC price in China.As Chinese energy curtailments were lifted during the quarter, silicon prices came down and commodity silicones prices also gradually normalized during the quarter. The market is still tight and prices remain at very attractive levels. And in early first quarter this year, we have again seen DMC prices climb above RMB 30,000 per tonne. Silicon and ferrosilicon are 2 of Elkem's other key markets. Also here we have seen very strong development and record prices in the fourth quarter. The reference price for silicon metal reached more than EUR8,000 during the quarter and in ferrosilicon, we saw a price level of above EUR4,000. The market leveled off and started to decline towards the end of the quarter, but we have -- but have remained at very high levels also into January this year. We continue to see good demand and despite the relatively -- and this is despite the relatively modest growth in automotive.We have a certain time lag in our contracts, which means that the high prices for silicon in the fourth quarter 2021 will be reflected in the earnings now moving into the first quarter 2022. Foundry alloys have a more stable pricing and it's not directly linked to the ferrosilicon prices. However, foundry alloys tend to follow the prices through the cycle. We have in the first quarter been able to achieve significant price increases in this area and due to good market conditions and high ferrosilicon prices and also higher input cost factors with other alloying elements. Then in our carbon business, increased steel production is a key driver and this market is mainly driven by the increased consumption of ferroalloys. Elkem is a market leader in this segment outside of China and is therefore very well positioned to benefit from good development in global steel production and consequently, higher ferroalloy consumption.Global steel production is growing, but the development in China has been weaker than in Europe and the U.S., which is attractive or positive for Elkem. We continue to see good development in this area although energy prices and raw material costs are increasing. So I think that sums up a very good quarter for Elkem and also very attractive prospects moving into first quarter.So with that, Morten Viga will take us through the financial report.

[Morten Viga, Chief Financial Officer]

Thank you very much, Helge, and Good morning, everybody. It certainly is a pleasure to announce new record levels in Q4 concluding the best year ever in Elkem's history. And as Helge said, these very good results are of course very much due to excellent market conditions, but it's also a proof that our business model is very strong and delivers outstanding results. Total operating income for the quarter amounted to NOK 10.4 billion, which was all-time high, and it was NOK 1.6 billion higher than Q3 '21 and NOK 3.3 billion higher than Q4 in '20. And the main improvements come from silicon products, but also silicones and carbon solutions delivered very good improvements in operating revenue. And also in terms of EBITDA, we posted an all-time high result of NOK 3.1 billion and that represents an EBITDA margin of 29%. So NOK 3.1 billion is an improvement of NOK 900 million from Q3 and NOK 2.2 billion versus Q4 in 2020.And also here the main improvement comes from silicon products and it's particularly driven by higher prices for silicon and ferrosilicon, but it's also very much due to very good and stable operations and a very competitive cost level. The other 2 divisions had good development, but these divisions have also seen significant cost increases on raw materials. For silicones, this is particularly related to higher costs for silicon metal. But then please bear in mind, we are long as a company in silicon metal so in total this is good news for Elkem, but for silicones, this has hampered the results. For your benefit, we have as always included the main financial numbers on one sheet. As I said, the EBITDA is NOK 3.059 billion. This is a clean number. There is very little FX or other impacts into this number. We are also very happy to announce that our productivity improvement program, which really is a program designed to reduce long-term personnel costs and to reduce headcount.This program has been completed and we have overperformed with the results versus the original targets. So we have now achieved NOK 400 million in permanent long-term personnel cost reductions versus a target of NOK 350 million per year. Very challenging to perform such a program in the middle of a super cycle when the entire organization is really focused on maximizing sales and production. Other items consist of -- or amounts to minus NOK 85 million. The biggest item here is NOK 192 million minus in costs related to our Xinghuo silicone plant in China. We are performing a project, which aims to free up land and to enable further growth and development of that plant and in that connection, we have made an accrual for one-off costs. NOK 62 million amounts to -- or derives from embedded derivatives in power contracts and NOK 43 million is a reversed restructuring accrual related to the productivity improvement program. We have had lower one-off cost even though we had higher results from that program.Net finance income of NOK 28 million consists of minus NOK 40 million in ordinary interest expenses. That is lower than in previous quarter and it reflects the improved cash situation and the reduced net interest-bearing debt that we have seen through the year. And NOK 73 million amounts to unrealized currency gains on euro loans and intercompany loans to China. The tax cost for the quarter amounts to NOK 564 million, which represents an effective tax rate of 22% for the quarter and the effective tax rate for the entire year was 20%, very much in line with our guiding. Let's move on to the divisional results. For silicones, clearly the headline is strong Q4 result despite increasing raw material costs. Total operating income amounted to NOK 5.3 billion, that is up 34% from the fourth quarter last year and this is mainly driven by higher sales prices, but also a favorable mix development. We are selling more high margin specialized products and less low margin commodity products.The EBITDA amounted to NOK 1.3 billion. That's more than doubled the amount in the similar quarter in 2020 and it represents an EBITDA margin of 26%. This is also very much due to higher sales prices and a favorable mix. And as I said, we have seen higher raw material costs, particularly on silicon metal. That is of course a challenge for the Silicones division, but for Elkem as a group, this is really good news. And I think we will also see going forward that the benefit that we're having of being a fully integrated silicon and silicones company both in the Western world and in Asia Pacific, that will prove to be an even more important competitive advantage going forward. Sales volumes were strong, but somewhat weaker compared to the previous quarter due to a somewhat weaker construction market in China, that's more of a seasonality factor.For Silicon Products, we delivered also here all-time high results, NOK 4.7 billion in operating income. That's up 64% compared to the fourth quarter in 2020 and it's due to predominantly higher sales prices. We posted an EBITDA of NOK 1.65 billion. That represents an EBITDA margin of 35%, which is a very good number and this quarter's EBITDA is almost 400% higher than the corresponding quarter last year. And here also the main factors, very good market conditions, high prices, but also assets and an organization that are able to really capture the moment of opportunity and deliver good sales and good production performance. Carbon Solutions, also here high sales volumes, a very strong market. And as you may recall, Elkem is by far the #1 player in these segments, but we have seen higher raw material costs. Total operating income amounted to NOK 624 million, that's up 35% versus the fourth quarter last year. That's higher sales volumes, but also higher sales prices.Our EBITDA amounted to NOK 129 million representing an EBITDA margin of 21% and the EBITDA was an improvement by 22% from Q4 2020. We have, as I said, seen significantly higher raw material costs. We will be able and we are working on passing on that to customer contracts, but there is always a time lag on that, but we are seeing good results from that. And as Helge said, there is a very good underlying sentiment in Elkem's main market segments for Carbon Solutions products. We have very good earnings per share NOK 3.11 in Q4 and NOK 7.49 per share for the entire year of 2021 and this is of course significantly up from 2020 due to an extraordinary improvement in underlying results. And with very good profitability, we're also able to give a very attractive dividend. So the Board has decided to propose a dividend of NOK 3 per share, which represents 41% of net profit for 2021, and this is pretty much the midpoint of our dividend policy with a payout ratio between 30% to 50% of net profit.We have a rock solid balance sheet. Our equity amounted to almost NOK 20 billion as per year end and this was an improvement by NOK 7.2 billion during 2020. The increase is mainly explained by the share issue that we had in April last year, but also due to very good profit for the period of NOK 4.7 billion and other changes in equity of NOK 700 million. And the equity ratio also has improved and is very solid at 47%. We have further strengthened our financing position from already a very good position. Our net interest-bearing debt has been further reduced and is now NOK 4.8 billion as per year end. And in combination with a significant improvement in EBITDA, we now have a leverage ratio of 0.6x last 12 months EBITDA. So while this was a concern among some stakeholders 1 to 2 years ago, we are now in -- we now have a very low and robust leverage, which of course gives the necessary flexibility and financial capacity to further grow and develop the company.We have a very well-managed maturity profile on our external loans. The majority of our loans mature in 2023. As Helge said, we have now received an official credit rating from Scope with BBB, which puts us solidly into investment grade category. So we are working or planning now for a refinancing of the maturities coming towards the end of this year and next year and we believe that we are in a very good position to get the renewal at very favorable terms and conditions. You will note that we have some Chinese debt maturing this year. That's ordinary course of business in China with a lot of short-term financing, which is being rolled over on a regular basis and we do not see any risk at all in that respect. On investments, we have seen increasing investments towards the end of the year.Our cash flow for the year, however, was all-time high. Cash flow from operations NOK 4.1 billion. That's by far a new record and of course this is thanks to an excellent underlying profitability, but also very good results from the capital efficiency programs that we have been executing. We have had a very disciplined reinvestment strategy and we have also during the last couple of years made very good improvements in working capital management. The cash flow from operations in Q4 was more than NOK 700 million. Investments ex M&A for the quarter amounted to NOK 1.55 million in the fourth quarter. That's up compared to the similar quarter in 2020 mainly due to higher strategic investments. The reinvestments for the quarter amounted to NOK 675 million and total reinvestments for the year amounted to 91% of depreciation and amortization, which pretty much is in line with our financial target of 80% to 90%.Strategic investments have increased also in line with our communication and amounted now to NOK 879 million for the quarter and this is mainly related to the strategic growth projects in silicones, particularly the Xinghuo expansion project in China, which goes according to plan and which will be a very good project when completed. But also acquisition of a new organosilicons -- organo-functional silicones business in France that we previously have communicated.So with that, Helge, please take us through the outlook for the rest of the year or for the next quarter.

[Helge Aasen, Chief Executive Officer]

Thank you. The outlook is generally good for Elkem. We continue to see strong demand and our business model is providing a robust platform to handle volatility in market conditions. Going into 2022, the Silicones Division will benefit from price increases on specialty products and attractive price levels also in commodity markets. However, raw material prices especially silicon prices in Europe will impact margins. But if the high silicon prices are impacting silicones negatively, our Silicon Products Division will clearly benefit from the current market conditions. On top of that, the time lag in silicon contracts will have additional impact in first quarter this year. We will also benefit from significant price increases in foundry alloys and continued high prices in ferrosilicon to steel. Carbon solutions is our most stable division in terms of financial performance and it's also expected to deliver good results in first quarter based on strong steel and ferroalloy markets. So with that, Elkem should be off to a promising start for the new year and we have good visibility in first quarter and we are very confident about our performance.So that concludes today's presentation. We will now be happy to take questions from the audience.

[Odd-Geir Lyngstad]

Okay. Thank you, Helge. Thank you, Morten. As Helge said, we will open for questions. First give the opportunity to those present here in at Felix. So Morten, please?

[Morten Normann, Analyst of Materials]

With reference to your wording, significantly higher contract prices, what is significantly higher? In my opinion -- in my world, it's definitely more than 25%. That will be more in Elkem's...

[Helge Aasen, Chief Executive Officer]

Yes, it's even higher in my world.

[Morten Normann, Analyst of Materials]

And that proportion of, let's say, volume will be affected by these significant changing contract prices.

[Helge Aasen, Chief Executive Officer]

Do you want to comment on that, Morten?

[Morten Viga, Chief Financial Officer]

This particularly relates to silicon products and in that segment particularly silicon metal and on an average there is a 3 months' time lag. So if you look into the market reference prices for Q4, you will have a good proxy for our realized prices in Q1.

[Morten Normann, Analyst of Materials]

And are there any annual contracts that are renewed because if you compare the level 1 year ago to the prices end of last year, I mean prices now are 2x to 3x higher?

[Morten Viga, Chief Financial Officer]

It is a mix. Silicon metal prices, it is a mix of quarterly contracts, also some annual contracts with fixed prices, but most of the contracts are quarterly. Ferrosilicon prices follows pretty much the same pattern, but also here we have some contracts with shorter duration. And then we also have specialty or contracts within specialized segments like foundry alloys and microsilica with annual contracts and also here we have seen significant price increases.

[Morten Normann, Analyst of Materials]

I noticed that Wacker are trying to raise the prices by 30% at least officially. I mean are your price changes within silicones in the same area?

[Helge Aasen, Chief Executive Officer]

Yes, we are definitely trying to follow the rest of the market.

[Odd-Geir Lyngstad]

There doesn't seem to be any more questions from the audience. So we have some questions related to price and price development also from a few others like Kenneth Sivertsen, Truls Engene and Andreas, so I'll try to merge that into one. Kenneth also asked about the increasing contract prices for silicon products and how that will impact EBITDA from fourth to first quarter. And also when the next round of price negotiations is that will affect our profits. So maybe you can take.

[Helge Aasen, Chief Executive Officer]

I think we've touched on that already. I mean it's quarterly pricing typically in our commodity part of the business except in China where commodity silicones is even shorter duration, more on a monthly basis.

[Morten Viga, Chief Financial Officer]

So the answer is that you -- particularly for silicon metal, you have a good indication of contract prices in Q1 if you look at the Q4 reference market prices. In ferrosilicon, it's a bit shorter time lag.

[Odd-Geir Lyngstad]

And also Andreas Bertheussen is asking some similar if there will be any benefits for the price hike after the first quarter.

[Morten Viga, Chief Financial Officer]

Yes, definitely as I said, particularly in our specialty segments in both Silicon Products but also in Silicones. The normal contract structure is to have annual contracts and we have certainly taken the window of opportunity now to increase prices for 2022 and the market has responded nicely to that initiative. So there will definitely be an impact beyond Q1.

[Odd-Geir Lyngstad]

From [ Luka Soliminic ], we have a question related to volumes in Silicon Products. The question is if we can expect firm volumes in first and second quarter in Silicon Products taking into consideration that there is a 20% to 25% capacity cut in primary aluminum production. So if the cut in aluminum will then impact our sales volumes?

[Helge Aasen, Chief Executive Officer]

We don't see that effect. We are sold out basically. So no expectation on volume reductions.

[Odd-Geir Lyngstad]

From Charlie Webb in Morgan Stanley, we also have some questions more related to the full year because he says that looking at the first half and probably a more challenging second half at least compared to the first half, if you think that we can deliver a flat EBITDA for 2022 when compared to 2021.

[Morten Viga, Chief Financial Officer]

Well, we gave outlook for Q1 and I think we have given a very clear message on that and we have good visibility on Q1. I should also say that we believe that we are very well positioned towards the rest of the year and we have entered into contracts with also a very attractive level for the rest of the year. But I think we should not be more specific than that on financial guiding.

[Odd-Geir Lyngstad]

So I guess that is also related to the second quarter question 2, if you think that what is the stable mid-cycle EBITDA level for Elkem and our divisions. And if you can help understand the over earnings right now.

[Morten Viga, Chief Financial Officer]

I think we have definitely communicated a long-term EBITDA target of 15% to 20% through the cycle. That may sound very low now and with our ambition now for at least the short and midterm future is higher than that. But if you're talking about, let's say, a long-term target, that is still a good proxy and of course we're also working on being at the upper part of that corridor.

[Odd-Geir Lyngstad]

And then lastly, there are some looking for CapEx guidance. Truls Engene in SEB is looking for CapEx guidance for '22 to '24 and Charlie Webb is also asking about the same. Please help us understand the CapEx expectations for 2022 and if we expect 2022 to be a peak year or if that will be another high CapEx year in 2023?

[Morten Viga, Chief Financial Officer]

Let's split that into sections and start with the reinvestments. Those investments follow very long-term programs with very high degree of predictability. It is absolutely critical for us to maintain the best possible standard or technical condition on our assets while maintaining a disciplined reinvestment policy. So we have said that reinvestment should be between 80% to 90% of depreciation and amortization and that represents approximately NOK 1.6 billion. Of course strategic growth investments are much more volatile in their nature. It of course depends on the specific projects and opportunities, et cetera, et cetera. It is well known that we are carrying out now a very interesting portfolio of strategic growth projects. The biggest one of course being our silicones expansion project in China, which has a total cost frame of NOK 3.8 billion. So that is approximately NOK 1 billion to NOK 1.2 billion per year and we also have a big portfolio or a significant portfolio of other growth projects, primarily downstream, in silicones. So we will still be very disciplined on strategic projects, but clearly also the financial capacity that we now have also enables good and interesting growth projects going forward.

[Odd-Geir Lyngstad]

We have a more specific question related to the Xinghuo CapEx. How much is remaining and what will be the impact in 2022?

[Morten Viga, Chief Financial Officer]

Yes. As I said, this is to be completed in early 2024 and you can count on between NOK 1 billion and NOK 1.2 billion per year.

[Odd-Geir Lyngstad]

And the last question is related to spot prices for silicon, ferrosilicon and silicones during the rest of the year. What are our expectations versus current price level?

[Helge Aasen, Chief Executive Officer]

I think that's a difficult question to give predictions on. I would look at energy markets as an indicator on what's happening.

[Odd-Geir Lyngstad]

Good. That concludes the questions we have received on the web. Any further questions from the audience here? If not, that concludes the presentation. So thank you very much, Helge and thank you very much, Morten and thank you very much for participating.

[Helge Aasen, Chief Executive Officer]

Thank you.

[Morten Viga, Chief Financial Officer]

Thank you.