Elkem ASA

OSE:ELK

Earnings Call Analysis

Elkem Shows Resilience Despite Challenges

Elkem faced a challenging market in 2023, impacting its Q4 earnings with an 18% quarterly EBITDA increase to NOK 632 million, despite reduced sales prices and slowdowns due to maintenance and a smelter fire. Nevertheless, the company remained focused on improvements, particularly in Carbon Solutions, which achieved its highest EBITDA ever. Elkem has no plan for dividends due to the conditions, but aims to improve EBITDA by NOK 1.5 billion by 2024 and postpone certain investments. Though market headwinds persist in construction and automotive sectors, especially in China, there are signs of recovery as commodity prices for silicon and ferrosilicon began to rebound in late 2023, and the strict fiscal discipline is already showing positive effects.

Challenging Economic Conditions and Performance

Investors following the journey of Elkem have witnessed a challenging market across the board, with decreased demand and sales prices impacting the company's key areas. Still, signs of hope have emerged as Elkem's fourth quarter EBITDA increased by 18% compared to the previous quarter, reaching NOK 632 million. The Silicone division, despite tough market conditions, managed to report a positive EBITDA, demonstrating the initial success of internal improvements. However, the Silicon Products division faced a decline, partly due to a maintenance stop in Iceland and a fire at the Salten smelter, which collectively set back EBITDA by NOK 85 million. In stark contrast, Carbon Solutions delivered exceptionally well, achieving their highest EBITDA ever. Despite these bright spots, the overall difficult market scenario forced the board to suggest forgoing dividends for the year.

Commitment to Sustainability and Innovation

Celebrating its 120th anniversary, Elkem's essence remains entwined with its drive for innovation and sustainability. With an expansive R&D wing comprising over 600 researchers, the company continues its mission to support the green transition and adapt to digitalization trends. A renewed vow to slash CO2 emissions and an impressively high CO2 capture rate at the Rana plant underscore this ethos. Achievements like an iron silicon powder for 3D printed electrical motors, coupled with several prestigious ESG awards, underline Elkem's role in the sustainable energy production ecosystem. Additionally, securing agreements for mining expansion bolsters the company's resource foundation for future progress.

Strategic Investments and Financial Health

With a watchful eye on its financial health amid rising interest rates and market downturns, Elkem has initiated talks with lenders to ensure covenant compliance. On the market front, the construction and automotive segments, critical for Elkem, continue to struggle, especially in China and Silicones markets. However, the company is observing some rebound in demand and prices, leading to improved sales mix and disciplined production rates. Remarkably, even with revenue and profitability pressures in 2023, Elkem maintained its robust financing position and investment-grade rating. Though their debt leverage ratio increased to 2.5x EBITDA, they aim to scale it down between 1x to 2x, acknowledging that reaching this target could take time given market circumstances.

Hopes for Recovery Amidst Persisting Challenges

Elkem stands at a crossroads where cautious optimism blends with the reality of the tough market. Earnings per share dipped to minus NOK 0.73 for the quarter, but there's a glimmer of recovery as certain segments show improvement. The company's equity remains strong, despite the challenges of the market environment leading to a negative year-to-date EPS of NOK 0.11 per share and the board's decision against a dividend payout for 2023. Leveraging the lessons from a 4-year financial cycle, Elkem is positioning itself to adapt to market changes, with ambitions to match or exceed past financial targets and a commitment to increased CapEx on downstream specialization, reflecting a strategic pivot towards more stable EBITDA margins.

Preparing for a Strategic Shift and Market Outlook

With the markets giving mixed signals, Elkem's leadership is preparing for a shift. Capital expenditures, while maintaining competitive positioning and asset quality, may be reined in if the cost-cutting program and market conditions don't align with expectations. The anticipated revenue from expansion in China is optimistic but hinges heavily on market trends. Questions around the timing of earnings recovery remain, with the first quarter of 2024 expected to bear the brunt of seasonal impacts such as the Chinese New Year affecting sales. The company has no plans for divestment in emerging markets and remains focused on leveraging growth opportunities therein. Elkem's ultimate goal is to return to a position where it can resume dividend payments, aligning with its traditional financial strength.

Earnings Call Transcript 2023-Q4

[Odd-Geir Lyngstad, executive]

Hello and good morning. It's a pleasure welcoming you to Elkem's fourth quarter presentation. My name is Odd-Geir Lyngstad and I'm responsible for Investor Relations here in Elkem. With me today I have as usual CEO, Helge Aasen and CFO, Morten Viga. Helge Aasen will take us through the business update and outlook for the first quarter 2024. CFO, Morten Viga will take us through the financials for the fourth quarter and also some of the year for Elkem. We will open for questions from those present here in the audience and also those participating on the webcast after Helge and Morten's presentations. And with that, I give the word to CEO, Helge Aasen.

[Helge Aasen, executive]

Yes, thank you, Odd-Geir and good morning, everyone. So with today's presentation, we are about to conclude a challenging year. The macroeconomic sentiment has been weak and we have seen reduction in demand and sales prices in all Elkem's key markets. But there are some signs of improvement towards the end of the year. The EBITDA for the fourth quarter was NOK 632 million, which is up 18% from the previous quarter.Silicones reported a positive EBITDA in the quarter despite continued challenging market conditions. We have a very strong focus on internal improvements in the division and we now see that these measures are starting to take effect. The result for Silicon Products is down from the previous quarter mainly due to lower realized sales prices. In addition, the maintenance stop in Iceland and fire that we had at the Salten smelter have impacted the EBITDA negatively with approximately NOK 85 million.Carbon solutions delivered another very good quarter despite the lower sales volumes. Carbon is one of the bright spots I would say in 2023, as they delivered their best EBITDA ever, and which is actually quite remarkable given the market situation that we have had. This challenging market conditions in 2023 have impacted our results and earnings per share. And the board has concluded to recommend to the Annual General Meeting not to pay dividends for the year 2023.This year is also a year of celebration in Elkem. The company was established 120 years ago. It has grown from a Norwegian industrial start-up in 1904, founded by Sam Eyde, into today's position as one of the world's leading producers of advanced silicon-based materials. From the early start in 1904, R&D has been a key focus in Elkem. Of course, we are still proud of the Soderberg electrode, which was invented by Elkem more than 100 years ago. And it is still in use in today's smelting furnaces around the world and an important product for our carbon division. But even with a proud history, our focus is on the future.Today, Elkem has more than 600 researchers working to create solutions supporting the green transition, digitalization and other global megatrends. We have received several awards in the past year. We received two nominations in R&D World Magazine, the 2023 awards, one for lower carbon footprint and one for silicone elastomers as an excipient for drug delivery devices. And in January this year, we announced the new specialized iron silicon powder for 3D printing of components for electrical motors. And the picture on this slide indicates the first use case which was a 3D printing of motors for electrical scooters.So I talked about our foundation, 120 years ago. The idea at the time was to exploit renewable hydropower. And I think this is even more important today as it gives us one of the lowest CO2 footprints in the industry. Our target is to further reduce CO2 emissions, both Scope 1 and Scope 2 with 28%. That's the absolute reduction by 2031, and to reduce the carbon product footprint by 39%. This is challenging as we are starting from an already low level.In order to work towards net zero in by 2050, we have now completed the pilot run for carbon capture at the Rana plant and we were able to demonstrate very high capture rates of CO2 up to 95%. Elkem's products are key to support expansion of renewable energy production and electrification and the green transition require access to minerals.So, another good news. In December we were happy to announce that we have reached an agreement with reindeer district 7. I'm not going to try to pronounce it in Sami language but the expansion of the mineable reserve is very important for us and this is located in Tana in Northern Norway. As far as we know the largest quartzite mine, open-pit mine in the world.To further develop Elkem's position in the green transition, frame conditions are more important than ever. So it will be totally dependent on access to renewable energy at competitive terms and CO2 compensation schemes to create a level playing field and of course avoid carbon leakage. We're also happy to see that our efforts are being recognized by a number of leading ESG rating agencies. As you can see on the right-hand side here. We just received the results from CDP for 2023 and we are very proud to announce that Elkem was awarded A on Forest and A- on Climate and Water. This means that we have improved our score and was rated among the top performers. The result also I think clearly demonstrates a strong commitment in Elkem organization.Now back to the fire at the Salten plant. This happened in December. It started in the raw material distribution or feeding system. Here we have all the raw materials that goes into a smelting furnace and among those is carbon materials, which act as a reductant in the process. This caused extensive damage to the equipment distributing raw materials into the furnaces. Fortunately, the damages were not equally severe to all parts of the building and we have now been able to make temporary repairs to the feeding system to one furnace which was restarted on January 29. The remaining two furnaces are still out and we'll have to come back to when the production can resume for this but we are aiming to start the second furnace within a few weeks. The third one will take longer.Elkem has adequate insurance cover for property damage and business interruption and we are working closely obviously with the insurance companies to limit the consequences as much as possible. We have made comments throughout 2023 about challenging market conditions every quarter. The macroeconomic sentiment has been weak, characterized by high inflation, increasing interest rates, slow recovery in China, and markets have also been impacted by Chinese exporters attracting buyers through discount pricing.Geopolitical uncertainties has also been part of the picture particularly the impact from the war in Ukraine. This sentiment has resulted in weak demand, negative sales price development in our main markets. And as mentioned in connection with the third quarter presentation, DMC prices in China reached a 10-year low in August of last year. In the third quarter silicone and ferrosilicon prices in the EU had fallen by approximately 60% compared with year end 2021.We now see some signs of recovery although we cannot be very precise on how quick and how strong this recovery will be. But we have seen silicones, the DMC price in China up 14% from the trough in August of last year. This is mainly driven by improved discipline on the supply side. Demand is still -- has still not picked up in any significant way. In EU silicon metal prices in January are up more than 25% compared with the lowest point in September of last year. It's also widely expected that interest rates will come down in 2024 as inflation comes down in the EU and in the U.S., and these factors should gradually improve our market conditions.So in order to respond to these challenging conditions and lower results, we have implemented the group-wide measures to reduce CapEx and improve EBITDA particularly in the Silicones division. These measures are focused on sales and product value improvements. Very much looking at product mix, reducing raw material costs, obviously, by sourcing cheaper raw materials and also a lot of focus on operational improvements and streamlining the capacity utilization.As part of this improvement process, we have announced the transfer of the Silicones manufacturing activities that we have currently in Lubeck in Germany, two other existing Elkem sites in Europe. Customers in Germany will continue to be served by the local sales organization. And yes, as you can see on the graph, we have a quite ambitious goal of improving EBITDA by NOK 1.5 billion during 2024. The plan is also to reduce or postpone strategic investments by more than SEK 2 billion. We will maintain reinvestments at the 80% to 90% of depreciation level, which is in line with our financial targets.And when it comes to strategic investments, the focus is to complete already ongoing projects in silicones and carbon solutions, and we will continue investing in some high-end specialty projects, but at a very moderate pace. So we have two large ongoing expansion projects in silicones, one in France and another one in China. Both projects will be finalized this year and are according to plan.In China, the project is mechanically complete and the commercial production is expected to start in April. The new line is expected to reach a production volume of 65,000 tons in 2024, which could generate a potential revenue increase of about NOK 1.5 billion. In France, the project completion is expected in October. And this will -- both these projects will continue to improve both plants' cost positions, obviously.This will mainly be secured through lower energy and raw material consumption. The new production line in China is expected to be on level with the lowest cost capacity in the industry. And going forward, these expansions will also provide additional high-quality siloxane or feedstock for a further downstream products and specialization. Included in the CapEx plan this year, we have also not very capital intensive.So coming to our financing position, ending up in a distressed situation. And others in our loan agreements, these are equity ratio, which must exceed 30% and interest cover ratio, which must be equal or exceed 4x EBITDA. The interest rate hikes in 2023, combined with the market downturn and reduced EBITDA gives a risk that the interest cover ratio could drop below the threshold for 4x. We have, therefore, initiated a waiver process with the lenders, and this is expected to be concluded by the end of the first quarter. So we'll have to come back on that.Now to the market situation. As mentioned initially, we are continuing to face challenging end market conditions, especially in construction and automotive segments, which are important markets for Elkem. In China, the statistics show a continued decline in investments in real estate development. This situation has a negative impact on various sectors, including the silicones markets.The construction market in China is expected to remain challenging. The government is going to improve their incentive schemes, and this will most likely have a positive impact as real estate is a very important sector in China. The automotive production in Europe and North America, which are our main markets for silicon and ferrosilicon. There we have seen some pickup in production, but levels are still not back to the pre-COVID levels. The weak sentiment that you have seen in construction and automotive is impacting the Silicones markets. Demand is weak. It's resulting in lower sales volumes and a decline in commodity prices. But there are some signs of improvement. And although demand for specialties in the EU and the U.S. remains low, we have seen some improvements in the fourth quarter, resulting in a better sales mix.In China, there are signs that producers are becoming more disciplined and they are taking measures to counter unsustainable low-price levels. And in the fourth quarter, we estimate that operating rates have been reduced to around 74%, and we have also seen some new upstream projects being canceled. The DMC price increased by approximately 6% on average compared to the third quarter and then mainly driven by this more disciplined behavior on the supply side.Then coming to silicon and ferrosilicon markets. Also here, we have had quite challenging conditions in the EU, where we have most of our sales. There are, however, clear signs now that commodity prices have bottomed out. As you can see here on the graph, the prices for silicon and ferrosilicon started to recover in the fourth quarter last year. But the underlying trend is stronger than what is reflected in the monthly average prices. And this has also continued now into 2024, especially for silicon metal.In China, the silicon prices were stable in the fourth quarter last year, but showed an increasing trend towards the end of the quarter, partly due to rising energy costs. We have also seen that silicon exports from Asia have been impacted by rising sea freight prices caused by the recent disruptions in the Red Sea. The market for carbon products varies a lot by region and is driven by steel, ferroalloys and aluminum. There are no reference prices in this market and most producers are regionally based.In the fourth quarter, the global steel production was estimated down about 3% compared to the previous quarter. In North America, production was estimated down 4%. In China, down 8%, while estimates indicate a stable level in Europe. This means that there is a continued slow demand for carbon products due to the weak steel and metal markets.So that concludes my part. And with this, I'll give the word to our CFO, Morten Viga, who will take us through the financials.

[Morten Viga, executive]

Thank you very much, Helge, and good morning, everybody. As you alluded to, the fourth quarter reflect weak underlying markets and one-off effects. But as you also said, we clearly see signs of improvement, and we would particularly highlight the fact that Silicones is back in positive territory on an EBITDA basis. The results are not great at all, but it's a significant improvement.Carbon Solutions continued to deliver good results, a very good results, while Silicon Products was weaker this quarter as expected compared to the previous quarter. The result for the fourth quarter was weaker than the very strong levels that we saw in 2022. But revenue and EBITDA are both up compared to the third quarter of '23. The operating income amounted to NOK 8.4 billion in fourth quarter. That was down, as I said, from Q4 '22, mainly due to significantly lower sales prices and also lower sales volume. Compared to the third quarter for '23, the revenue was up 7%.The EBITDA for the quarter was NOK 632 million, and this gives an EBITDA margin of 7%. Now if we take into consideration the one-off effects that we had on related to curtailment in Iceland and the fire, an idle production in Salten, which amounts to NOK 85 million for the quarter, the underlying EBITDA margin was 9%.On this slide, we have, as usual, included the main financial numbers and ratios. I will not go through them in detail, but comment upon some important topics. As mentioned, the EBITDA amounted to NOK 632 million, giving an EBITDA margin of 7%. The EBITDA includes losses of NOK 85 million on our currency hedging program, which is reported in the segment, other. Other items was plus NOK 84 million, mainly consisting of gains on power and currency derivatives of NOK 165 million, and this was partly offset by currency losses on working capital items of NOK 33 million and restructuring expenses in Silicones of NOK 43 million.The gain of NOK 165 million was mainly due to changes in the fair value of the interest element in the derivatives on Norwegian power contracts and fair value changes that do not meet the hedge criteria in IFRS. Very technical accounting effects, but we have to handle it according to IFRS. The restructuring cost, as I said, relates to mining programs in and severance costs in Silicones in the U.S. and in Europe.Net finance income was minus NOK 261 million. This consists of normal interest expenses of NOK 170 million and negative currency translation effects on group loans of NOK 89 million. The year tax costs were minus NOK 90 million in the fourth quarter, and this is a very high number, given that there was a very low underlying profit. But just like the third quarter, there is an imbalance in the earnings. We had positive results in most countries, but this was more than offset by the negative results in France and in China, predominantly in Silicones, where the losses are not capitalized as the deferred tax asset.So let's have a look at the divisional results, and we are encouraged by the fact that the Silicones division is back in black EBITDA numbers for the quarter. Total operating income was NOK 3.5 billion. That was down 16% from the fourth quarter in '22. And the reduction was explained both by lower sales prices, but also by lower sales volume, predominantly due to weak demand. The EBITDA was plus NOK 68 million. That was up from a negative EBITDA in the fourth quarter in '22.The result is clearly below our ambitions for the division, but it's still encouraging to see that the very comprehensive improvement programs that we have put in place and that we are putting in place, are starting to give positive effects because the markets are or were still challenging and they're also still challenging into the new year. The improved EBITDA is explained by lower raw material cost and efficiency improvements and improved sales mix, higher mix sales specialties, which was partly offset by lower commodity sales prices. The sales volume for this quarter was slightly higher than the preceding quarter, but the main problem is, as I said, weak demand in several segments.Let's then move to the Silicon Products division. This division had total operating income of NOK 4.4 billion for the quarter, that was down 22% from the fourth quarter in '22. And the reduction of operating income was mainly explained by lower sales prices. The EBITDA for the quarter amounted to NOK 401 million, which represents an EBITDA margin of 9%. This is clearly lower than Q4 in 2022, and it's mainly explained by lower sales prices for silicon and ferrosilicon and also somewhat negative sales volumes for specialties and negative mix development. This is partly offset by lower raw material cost and also lower operating cost due to our continuous improvement programs.The maintenance stop that we announced last quarter at Iceland and the fire in Salten, the plant idle, early December, had a negative EBITDA impact of NOK 85 million for the quarter. So if you exclude that then the underlying EBITDA margin was around 11%. The demand was still weak in the fourth quarter in most of the segments.The Carbon Solutions division, it continues to deliver very solid results, high EBITDA margins and we're very pleased and proud to announce that they had the best-ever result in a very, very challenging market situation. I think that's a clear, clear proof of the quality of that organization and of the business model. The operating income for Q4 was NOK 924 million, 12% down from the fourth quarter in 2022, mainly due to lower volumes. The EBITDA was NOK 247 million which is down 20% from the fourth last year. And as I said, this is also mainly due to lower sales volume.There has also been a reduction in sales prices, but this has largely been compensated by lower raw material cost and improved efficiency and productivity in our plants. The EBITDA margin amounted to 27% for the quarter. Sales volume as generally low in the fourth quarter mainly due to weak markets. The major part of this business is related to steel markets. And as you know, steel in the western [ world ] has been quite challenging.So, let's then have a look at some of Elkem's key financial ratios. Earnings per share ended at minus NOK 0.73 for the quarter and that was in line with the previous quarter, and it certainly reflects the very challenging market conditions. And the year-to-date earnings per share amounts to almost 0, NOK 0.11 per share. And due to the low EPS for the year, the board has proposed not to pay any dividends for 2023.The balance sheet is as previously very solid. Total equity amounted to NOK 24.5 billion and this gives an equity ratio as per year-end of 48%. The reduction in equity ratio during the year is mainly explained by the very generous dividend of NOK 3.9 billion that was paid in May of last year. As Helge said, in December 2023, scope from this BBB issue rating of Elkem ASA and changed the outlook from stable to negative. We believe that the affirmed investment grade rating, it reflects Elkem's very sound financial policy, our strong cost position, our global business model and our favorable integrated business model in the silicon and silicones industry.The change in outlook clearly reflects a general deterioration in revenue and profitability in 2023 and of course, the prospects of a prolonged economic slowdown in many markets. But having said that, Elkem's financing position, it remains robust and stable. The net-interest-bearing debt amounted to NOK 9.5 billion at year end which is up from the previous quarter. And this is explained by payment of Norwegian packs based on very solid earnings in 2022. And as I said please also remember that the main increase in net-interest-bearing debt in the year is mainly explained by the dividend paid last May. Based on last 12 months EBITDA, the debt leverage ratio was 2.5 by the end of Q4.The target is clearly to bring down the debt leverage ratio to 1x to 2x EBITDA. However, given the current market situation, I think we need to be realistic and expect that that will take some time to get down to that level. But as we have said, we have already taken a lot of initiatives and we will implement further initiatives to strengthen profitability and that will eventually take down the leverage ratio. Our maturity profile is very good with low upcoming installments. It mainly consists of short-term working capital financing in China, which by nature is being regularly rolled over and we see no refinancing risk.Cash flow from operations amounted to NOK 805 million for the quarter. This is down from the corresponding quarter last year, but in line with previous quarters this year. We have a high focus on working capital improvement, and this is paying off. And we saw a reduction in the quarter.The fourth quarter, investment including M&A ended up at NOK 1.5 billion. Reinvestments were quite high, NOK 699 million, which represents 170% of depreciation and amortization. Somewhat higher than our long-term target to be within 80% to 90% of depreciation and amortization. But a portion of this, a major portion of this is due to accelerated maintenance where we do utilize the week market window and take out capacity to upgrade facilities. For the year in total, reinvestments ended up at 102% of depreciation, also somewhat higher than target. This is also predominantly explained by accelerated maintenance, particularly in Silicon Products.The strategic investments for the quarter amounted to NOK 799 million, and this mainly related to the Silicones expansion projects and improvement projects in France and China that Helge referred to. And these projects will be finalized this year. And of course, then the -- that's a ongoing commitment since strategic CapEx will be significantly lower.So, now that we have completed 2023, I think it's also appropriate to summarize Elkem's performance this year and also put it into a bit of longer perspective. We do get a lot of questions what is a normal financial performance of Elkem. I know that's a good question. It's difficult to answer given all the market and profitability volatility, but we're trying to illustrate this with key financial numbers during the last 4-year business cycle. As Helge said, we saw prices really bottoming out last autumn Q3, and we see that the market conditions have improved somewhat towards the end of Q4 and also now, not strongly but still on a positive trend into Q1 this year.Even though 2023 has been a weak year, I think this graph shows that we have basically been delivering on our financial targets during this 4-year business cycle. And that's clearly also our ambition to do that going forward and hopefully also to further improve that. The EBITDA margin during this cycle was 18%, which is well within the long-term target range of 15% to 20%. The leverage ratio is, as I said, it's sensitive to EBITDA and therefore we've seen quite a significant volatility. But on average, the ratio has been 1.6x last 12 months EBITDA, and that's also right in the middle of the long-term target of 1 to 2x.So we believe that the performance during the last 4 years has been according or even better than the financial targets that we set out 5 years ago. And clearly, our intention is to further improve from that level going forward.So with that, I would like to hand the word back to you, Helge, to take us through the outlook.

[Helge Aasen, executive]

Yes, thank you, Morten. So when it comes to the outlook for the first quarter, we will continue to see challenging market conditions and we will therefore continue to focus on extraordinary EBITDA improvements to try to mitigate and counter this situation. Silicones markets are expected to remain challenging in the first quarter and will also be impacted by the Chinese New Year in February. The demand in China is expected to improve but then on the other hand, overcapacity is still going to be an issue, which is keeping sales prices under pressure. Specialty volumes could improve as we believe that destocking now has come to an end.Silicon products, we will see some effects of rising market prices for silicon and ferrosilicon. This is partly offset by somewhat lower prices on specialties. We expect limited negative EBITDA impact from the delayed startup in Iceland and the stop at Salten. We also expect slow market conditions for Carbon Solutions, but Elkem will continue to benefit from the strong market positions in this division.So with that, we have come to the end of this presentation. I'll hand it back to Odd-Geir, who will take us and lead the Q&A session.

[Odd-Geir Lyngstad, executive]

The first question, how much of the Norwegian NOK 1.5 billion savings target has already been delivered in the fourth quarter, if any?

[Morten Viga, executive]

What we said was that we would deliver NOK 1.5 billion improvement 2024 versus 2023. So you shouldn't expect that too much of that to happen in 2023. What I can say is that we are on track, and we're confident that we will deliver and hopefully also overperform in 2024.

[Odd-Geir Lyngstad, executive]

In more kind of related to the accounts and the question to the accounts. There was a material increase in depreciation and amortization, and there was also an impairment loss of NOK 91 million in the quarter. The question is if you can provide some more insight into that increase from the last quarter.

[Morten Viga, executive]

I can do that. It's mainly related to our Silicones plant in Xinghuo. As you know, we are building now a brand-new production line, upgrading very much of the infrastructure with this expansion project that cost NOK 3.8 billion. Now then we also phase out some old equipment that is then being written off. And then in addition, there is also some minor write-offs related to the fire that we had in Salten. But of course, that will also be a basis for an insurance claim. So those are the main issues.

[Odd-Geir Lyngstad, executive]

Very good. Then we get -- you touched upon that in your presentation, Morten, that it's difficult to say what the mid-cycle earnings are, but we have a question on where we see the mid-cycle earnings in Silicones and silicon products and when we think that we can get there given the current supply demand outlook.

[Morten Viga, executive]

Yes, I can start. As we have said, our long-term EBITDA margin target is to be within 15% to 20%. That basically applies to all 3 divisions. Now we are constantly significantly above that for Carbon Solutions. I believe we will be that also in the future due to some very, very strong market positions and superior technology. We also believe that we have some of the same qualities in silicon products, and we have demonstrated that to have on average EBITDA margin significantly above 15% to 20%. That's also the target going forward.Silicones is clearly more demanding. You can see that from our numbers. And you can see that also from other competitors' numbers. But also here, the long-term target is to be back to the 15% to 20% EBITDA margin territory. When will that happen? I should be careful, it's, of course, dependent on the market development and normalization, both of sales prices and demand volume, particularly on specialty segments. And of course, it's also dependent on our ability to deliver the -- all the improvement actions that we have initiated. But we are confident that we will see an improvement.

[Helge Aasen, executive]

And I could also add that a lot of CapEx in the previous period [indiscernible] have been targeted at upgrading in the Silicones area and also upstream expansions and a few acquisitions that we have previously talked about. In the next coming period, we will see more and more CapEx being channeled towards downstream specialization. And I think this is not going to change the average, let's say, EBITDA margin, but it will stabilize it.

[Odd-Geir Lyngstad, executive]

We have received a follow-up question on Sinha and the expansion of Silicones in China, where we have said that we expect a potential revenue of NOK 1.5 billion from that expansion in 2024. And the question is if we also dare to give an estimate on the EBITDA from that expansion?

[Helge Aasen, executive]

You've said something about that before but --

[Morten Viga, executive]

Yes. That is, of course, very dependent on the market development, on the price development. And of course, here we should be humble. But I can repeat what we said when we launched this project, we said that the new production line with full capacity utilization yield and EBITDA margin of 35% at least, and that was in a situation where there was an average margin of 15%. So that is still a very good proxy that this production line at full capacity when fully ramped up, it will yield an extra EBITDA margin of 20%. And then, of course, market conditions will decide upon what is the underlying margin level.

[Odd-Geir Lyngstad, executive]

We have also received a follow-up question on the savings program of NOK 1.5 billion. How much of that could be seen in the first and second quarter or will it be very much back-end loaded?

[Morten Viga, executive]

We are working on this right now. Clearly, it's our ambition to implement as much as early as possible. And we will see impact already from Q1 and certainly also from Q2. I cannot guarantee you that it will be, let's say, a perfect linear improvement. But certainly, there will be sizable improvements already in Q1. It's not like that everything will come in Q4, not at all.

[Odd-Geir Lyngstad, executive]

Then in the fourth quarter, we had some improvement in Silicones. The question is if you expect continued mix improvements as specialties recover. And also, if you could comment on customer inventory levels and destocking effects that we see.

[Helge Aasen, executive]

Yes, I think as I also mentioned in my presentation, the Q1 result will be impacted. The Chinese New Year does have an effect on sales. I think we have to take that into account. We will see some improvement in specialties. I think the commodity market is still very uncertain. A lot of that depends on what happens when business picks up in March after the Chinese New Year is finished. So yes, I would be cautious to think that Q1 would include a significant improvement in Silicones, some improvement.

[Odd-Geir Lyngstad, executive]

Then a question regarding CapEx. The CapEx budget for '24 is higher than the annualized run rate EBITDA in the fourth quarter. So the question is how much room do we have to reduce strategic CapEx spending if earnings does not pick up. And also, the cost-cutting program does not -- and if the cost-cutting program does not yield the desired effects.

[Morten Viga, executive]

Yes. I think what we have said is that we will reduce CapEx in '24 versus '23 by at least NOK 2 billion, and that is still a clear commitment. The strategic CapEx will be reduced mainly due to the fact that we are now completing the very capital-intensive upgrading projects that we're having in France and China. The remaining CapEx in Silicones is predominantly related to profitable specialty projects, can be somewhat further reduced but not to a large extent. We're also carrying out an expansion project in Carbon Solutions in Brazil. That's a very, very profitable project.Of course, we can also trim down reinvestment levels, but that's something that we don't want to do because it is an extremely important part of our competitiveness to have top-notch technical conditions of our assets. That's really prerequisite for having best-in-class productivity and product quality. So I don't think we will compromise on that. But there is some flexibility, but you should not at all expect, let's say, a significant reduction beyond the NOK 2 billion reduction that we already have communicated.

[Helge Aasen, executive]

I think I'd like to add that there's always flexibility to cut maintenance or reinvestments, but it will come back and bite us pretty soon if we do fall into that trap. So I will definitely not try to go there.

[Odd-Geir Lyngstad, executive]

And then we get into more questions really for market outlook. And the first question is what -- how is the market outlook for silicon in 2024?

[Helge Aasen, executive]

I think what we are facing or seeing now is very much supply driven. We haven't really seen a significant pickup in demand. Europe is our biggest market. There's a lot of curtailed capacity. And also, Chinese energy prices have been on the rise, and that is having an impact. China pretty much acts as a swing producer in the European market. So to expect that things will take off again, there are no signs of that. But we've seen a very prolonged destocking unusually long. If we look at previous downcycles, I think that's partly explained by the fact that in many industrial chains, there was a lot of buildup of, let's say, emergency stock after a very bad experience during the pandemic and that took longer than normal to reduce that. So yes, any other comments?

[Morten Viga, executive]

No, I think that's a good comment.

[Odd-Geir Lyngstad, executive]

And to sum up, there is a question how the first quarter 24 will be differing from the fourth quarter. We have touched up on some of that already, but maybe you want to sum up?

[Helge Aasen, executive]

I think it's a mixed picture of some positive signals. Also, we are cautious because we don't really see a very significant demand improvement. But it seems like the industry is out of destocking, I mean, in all the different areas that Elkem is operating. And we are very well positioned to participate when things start improving. But I think that, yes, I don't want to say more about that for Q1.

[Morten Viga, executive]

No, I think that's a good summary. We clearly see positive signs, and we see that the trend is finally going upwards again, and we are cautiously optimistic about also the near and midterm future. But we should also bear in mind that usually there is a negative seasonality in Silicones due to the spring festival that starts next week in China, and that takes away significant demand during February.

[Odd-Geir Lyngstad, executive]

There was no dividend payment for 2023, but will there be dividends in the years to come?

[Helge Aasen, executive]

That is our clear target.

[Odd-Geir Lyngstad, executive]

And also the final question is if Elkem will be looking to divest revenue, it's -- I'm a little bit uncertain if it means the revenue that we have in emerging markets like India and other countries, but divestments. Yes. So I think we can answer it in general, yeah --

[Helge Aasen, executive]

No, absolutely not. We have no plans of divesting in India or definitely on the contrary. Very interesting growth market.

[Odd-Geir Lyngstad, executive]

Then I would like to thank all of you for participating, both here in the audience and also on the webcast. And thank you, Helge and Morten for the presentation. Thanks.

[Helge Aasen, executive]

Thank you.

[Morten Viga, executive]

Thank you.