Elkem Asa Ord

Good morning and welcome to LKM's first quarter results presentation. My name is Oddgeir Lyngstad and I'm responsible for investor relations in LKM. With me this morning I have CEO Helge Aasen and CFO Morten Vigard to take us through a business update, the financial results for the first quarter and the outlook for the second quarter. After Helge and Morten's presentations, we will open for Q&A, both from the audience and from those participating on the webcast. And we'll start with the business update, so please Helge, the word is yours.

Thank you. Good morning everyone. As we talked about in our fourth quarter presentation, there were some signs of recovery towards the end of last year. And this is also now reflected in the results for the first quarter in this year, 2024. We are reporting improved profitability compared to the previous two quarters with an EBITDA of 721 million NOK. the silicones division continue to experience weak market conditions and this is as almost every year affected by the chinese new year demand for specialties has also been weak during this quarter actually in all main markets. And consequently, the silicones division reported negative EBITDA for the quarter. Silicon product is performing better than previous quarters due to higher commodity prices, both for silicon and ferro-silicon, mainly in Europe. In the carbon solutions, we have another good quarter despite lower sales volumes. So due to challenging market conditions, we will continue our focus on internal cost improvements and limit capital expenditure, which is also the main reason why we decided to exit our investment in Vinode during this quarter. Quickly on ESG, it remains an important focus area for us and we are proud of our achievements last year. The main highlights are listed here on the right-hand side. And as you can see, we received good feedback. We have strong ESG ratings from CDP, Ecovadis, and S&P. Our total CO2 emissions, then we're talking both scope 1, 2, and 3, were 8.3% lower in 2023 compared to the year before. In the first quarter, we received grants from Enova of 17 million. And together with Ferroglobe, we will continue the development in a joint carbon capture and storage project in Moirana here in Norway. If finally realized, this project will capture 95, or this technology will enable us to capture 95%. of CO2 from the two smelters. We are, as you probably know, located next door to each other in the Mojrano industrial park. And this will also include an energy recovery system. Elkem's production of silicon and ferrosilicon is already among the most environmentally friendly in the world. To further improve this position and avoid carbon leakage, the frame conditions are more important than ever before. We are totally dependent on access to renewable energy at competitive terms and CO2 compensation schemes in order to create a level playing field with producers, especially in China. but also other parts of the world. When it comes to safety, we're happy to see that our performance has improved versus previous years. In order to respond to challenging markets and low results, we have, as I already touched upon, group-wide measures on both capex reduction and EBITDA improvement. obvious reasons this is particularly focused in the silicones area and we're talking about sales and product values or product mix improvements fixed cost reductions a lot of focus on raw material cost and also streamlining operations and optimizing the production structure. The target is to improve EBITDA by 1.5 billion this year. In the first quarter, we realized approximately 200 million, and these improvements will have a full effect of about 0.8 billion. We are also reducing capex and obviously to avoid new large debt financing. The plan is to cut this by more than 2 billion compared to the previous year, which brings us down to a level of 3.2 billion. In the first quarter, investments amounted to 0.6 billion, which I think provides a good trajectory in order to reach our target of keeping reinvestments in the 80 to 90% of depreciation and amortization. When it comes to strategic investments, the focus is to complete already ongoing expansion projects in silicones and in carbon solutions. We will continue to invest in high-end specialty projects. And when the silicones expansion project are finalized later this year, we should be able to maintain investments at a relatively lower level going forward. In other words, no other big expansions in the pipe at the moment. So, we have these two large expansion projects in silicones, one in France and one in China. The project in China will be finalized in the second quarter, and in France we aim to finalize this in the third quarter. Commercial production in China will start already in May. and is estimated to reach a production volume of about 65,000 tons this year, which could generate an estimated revenue of about 1.5 billion. We are fully aware of the challenging market conditions with the weak demand situation, but despite this, we think both these projects make a lot of sense. they will improve the respective plants cost position and provide also higher quality xyloxane upstream intermediates to support our downstream operations or activities. The cost improvements will mainly be secured through lower energy and raw material consumption. And the new production line in China is expected to be on level with the lowest cost capacity in the silicones industry. Now turning to markets, electrical vehicles represent a very attractive growth potential because of the silicones or many areas of application of silicones in an electrical vehicle. This includes battery systems, cables, connectors, sealants, and safety and lighting systems. The sale of EVs, if we also include hybrids, increased by double digit numbers in all main markets in 2023. And China has now become by far the largest producer of electrical vehicles and reached a production volume of 9.4 million units last year. 8.4 million domestic sales, which represents a 36% increase compared to the year before. The sale in China now accounts for around 60% of global sales. And Elkem entered the EV market in a quite early phase. And we have developed now a wide range of applications for electrical vehicles. So we think we are very well positioned to continue to participate in this growing EV market. And we have strong R&D capabilities to support that, both in China and in the western part of the world. A recent example which demonstrates this is that Elkem has entered into a partnership with Polestar, already a familiar brand here in Norway. So this will support their ambitious zero project. And Elkin will continue to research for zero emission silicon based products. And Polestar aims to create a climate neutral car by 2030. So as part of our commitment to sustainability, supplying the green transition, we are very happy to be part of this ambitious project. Now turning to energy. As I touched upon, stable and predictable frame conditions are extremely important to further develop Elkem as a supplier of critical raw materials. In the first quarter, we signed a new power contract here in Norway with a total volume of 220 gigawatt hours. per year in price area NO4. It's a nine-year contract, which will expire in 2035. And as you can see from the table here, we have a total gross consumption in Norway of around 3.6 terawatt hours per year. in a normal year. We are quite well positioned on long-term power contracts in Norway and have secured more than 85% of our normal power consumption until the end of 2027. After that, we have a gradually declining hedging ratio. But the hedging or coverage remains as high as 60% in 2030. Our longest lasting contract expires in 2035. So we are continuously evaluating market conditions for new long-term contracts. And we'll continue this hedging strategy. Our main markets are closely linked to GDP development. Important sectors such as automotive tend to fluctuate very closely with macroeconomic conditions. And there was a weak sentiment last year characterized by high inflation, interest rate hikes, and geopolitical uncertainty. These factors have significantly impacted Elkem's end markets and also our financial performance. So when we take a look at the most recent OECD update on macroeconomic outlook, we can sum up that the Euro area is expected to remain weak in terms of growth. China is also facing headwinds with lower real estate investments and lower inward foreign investment. And in the US, there has been a boost in demand following loosening up of fiscal policies and lower saving rates. So based on this, OECD has made an upward revision of their growth projections for the United States, but other regions are more or less unchanged. So the main challenges for near-term growth are slowing, global trade, trade disruptions in the Red Sea, geopolitical tensions, and risk of further energy price hikes. We would also like to give you some more details on the market development in China. The silicon metal production year to date in February was close to 600,000 tons, which was 22% higher than the same period in 2023. Silicones production was close to 360,000 tons, which is up 11% in the same period. And we think these numbers clearly indicate that there has been some demand recovery in China. But there's still overcapacity, both in silicon and silicones, and this is putting pressure on price development. The silicon spot prices continue to drop in March and have declined more than 10% since year end. DNC prices showed a promising development in early March after the Chinese New Year. but turned into a downward trend again late in the last month, in March. Activity in construction, which is an important demand driver, remains low. But in automotive, the development is more positive, which is also illustrated on the graph here on the right-hand side. Production in January and February was up 8% compared to the same period last year. Another positive sign is that China's manufacturing purchasing managers index registered a strong increase in March to reach the highest level in one year. So hopefully this could be a sign that the momentum is about to improve. Let's then take a closer look at specific markets. The silicones markets were generally weak in the first quarter and is still negatively impacted by low activity, as mentioned in construction, and also relatively weak automotive markets in the EU and US. Demand for most specialty grades remain on the low level, but there are some signs of recovery and we see an improved order situation in the second quarter. And as touched upon, the DMC prices increased after Chinese New Year, but turned into a downward trend again late March due to light spot trading combined with high operating rates and also new capacity coming on stream. Then moving on to the silicon and ferro-silicon markets, here we have seen a positive development and market prices for silicon and ferro-silicon have recovered in Europe despite relatively weak demand. The prices in the EU are up more than 30% from the bottom level in September last year. while ferro-silicon prices are up more than 15% compared with the situation in October last year. However, as mentioned, in China, silicon prices have declined somewhat during the first quarter based on weak sentiments and higher inventory levels. Silicon exports from Asia is still impacted by the rise in sea freight prices caused by the disruptions in the Red Sea. The market for carbon products is much smaller and we have no reference prices available here. The demand for carbon products is mainly driven by steel, ferroalloys and aluminium. Global steel production in the first quarter this year was in line with the first quarter last year. In Europe, the production was up 2% and stable in North America. The ferro-alloys production, however, has been on a relatively weak level. Overall, conditions are still stable, we would say. We see some signs of demand recovery or improvement in some specific markets. So with that, that sums up the business update, and I'll give the word to Morten, who will take you through the financials.

Thank you very much, Helge, and good morning, everybody. So as you highlighted, we have seen an improvement in EBITDA in Q1 compared to the previous two quarters. That is clearly good. We see some signs of recovery, but still I would describe the markets as rather challenging. Total operating revenue for the quarter was close to 8 billion NOK, which was in line with the previous quarters, but down from the corresponding quarter last year. All divisions reported lower operating revenue this quarter compared to the first quarter in 2023. And this is explained by lower sales prices and in most cases, lower sales volumes. EBITDA amounted to 721 million NOK for the quarter, and this gives an EBITDA margin of 9%. There are no particular one-off effects in the quarter, but in silicon products, we have recognized a share of the expected insurance compensation related to the fire in our Salton plant up in Northern Norway. And this is based on conservative assumptions, basically compensating for the loss in revenues. And we do not consider that this has a material impact on the results. This slide gives an overview of some of the main financial numbers and key ratios. As always, I will not go into detail on all of them, but to briefly comment on some important numbers. As I said, EBITDA 721 million NOC, which then gives an EBITDA margin of 9%. This number includes a loss of 39 million NOC on the currency hedging program. And this is a result of weaker NOC towards Euro and US dollar. Other items amounted to minus 198 million NOC. And this also partly explains the weak earnings per share in the quarter. This item mainly consists on non-cash losses on power and currency derivatives of 217 million NOK and restructuring expenses, which is again partly offset by currency gains on working capital items of plus 32 million NOK. And the loss of 217 million NOC, as I said, is mainly due to changes in the fair value of these derivatives, particularly a power contract in the western part of Norway. We also have restructuring costs of 13 million NOC related to our biocarbon project in Canada. Net income was minus 38 million NOK, where net interest expenses amounted to minus 186 million NOK. But this was largely offset by positive currency translation effects on group loans, which amounted to 153 million NOK. And other financial expenses amounted to minus 5 million NOK. The tax costs for the quarter amounted to minus 103 million NOK. We have positive results in silicon products and carbon solutions, and hence we are in tax positions in most countries in those divisions. But we have negative results in silicones, but these are not capitalized as deferred tax assets. So let's then take a look at the results for Elkem's divisions. And as always, we start with silicones. Now, after a positive EBTA in Q4 last year, the silicones division delivered a negative EBTA this quarter of minus 103 million NOC. Now, the underlying results development clearly indicate that the result was hampered by seasonal effects due to Chinese New Year, as we alluded to during our Q4 presentation. Total operating income amounted to 3.34 billion NOK for the quarter, which was down 19% from the first quarter last year. And the reduction is explained by lower sales prices and lower sales volumes, both as a result of weak market conditions. The result is clearly disappointing and not at all in line with our targets, but it comes as a consequence of continued challenging market conditions, both in Asia Pacific, China, but also in the Western world. Specialty sales, where the prices hold up quite nicely, was low on volumes, both in Europe, US and China. And in addition, we have seen rather low commodity sales prices in China due to slow demand and also overcapacity. However, we are working on a wide number of improvement initiatives and the lower sales volumes and lower commodity prices have been partly countered by lower operating costs. But production in both France and in China have been deliberately reduced due to the demand situation. And this has had a negative impact on the average production cost and on the cost of goods sold. The average utilization rate for LKM's assets in silicones in Q1 was around 65%. So that is also a clear indication of the reduced utilization. Then let's move to silicon products. And here we had operating income of 4 billion NOC for the quarter. That was also down 20% from the first quarter last year. And this is mainly explained by lower sales prices for the commodity segments in silicon and ferro-silicon. EBITDA amounted to 677 million NOC in the quarter, which represents an EBITDA margin of 17%. The reduction from first quarter last year was mainly explained by lower sales prices, but this has partly been countered by lower costs. And also here we have a big number of improvement projects ongoing. Both the silicon and ferrosilicon segments suffer from lower prices, but the specialty segments, foundry alloys and materials, continue to deliver strong results also in the first quarter. As I mentioned, we do expect to get the compensation from the insurance companies for the fire at the Salton plant. and we are recognizing a part of that expected compensation in line with the EIFRS accounting rules, but this is on a conservative basis. Going forward, the division continued to experience weak demand from key sectors as silicones, aluminium and steel. But we're trying to mitigate the negative effects of that by accelerated improvement initiatives. Carbon Solutions continued to deliver very strong EBITDA margins despite weak markets and also lower sales volumes. So the operating income for Q1 was 834 million NOK, which was down 25% versus first quarter in 23. The EBITDA was 249 million NOK, which also was down 33% compared to the first quarter last year. And this reduction is mainly explained by lower sales volumes and also somewhat lower sales prices. But we also have a significant reduction in raw material costs. And also here we have several productivity and cost improvements ongoing, which then has yielded an EBITDA margin of 30% for the quarter, which is a very strong result given the weak market conditions. Sales volume is clearly down compared to the corresponding quarter last year, mainly due to the weak Faroe Alloys markets. Let's then look at some of Elkem's key financial ratios. The EPS earnings per shares ended at the minus of 0.69 NOC for the quarter. This was in line with the previous quarters despite higher EBITDA this quarter. But as I said, we have negative effects from non-cash accounting effects, including the effect on some of our power contracts. The balance sheet is very solid and total equity amounted to almost 25 billion NOK by the end of the quarter, which gives an equity ratio of 49%. The equity and the equity ratio have increased slightly in the first quarter, mainly explained by currency translation effects recognized through other comprehensive income. Our financing position remains very robust and stable. But given the challenging market conditions and also margins under pressure, we have a clear focus to make sure that our financing position remains solid. The net interest bearing debt now amounts to 10.2 billion NOK by the end of Q1, which was up 700 million NOK compared to the previous quarter. And this is partly explained by currency translation effects as the NOC remains weak and weaker towards Euro and the CNY, where we have a big portion of our debt. Based on last 12 months EBITDA, the debt leverage ratio amounts to 3.5 at the end of the quarter. The target is clearly to bring this debt leverage down to our long-term target of between one to two times EBITDA. We are confident that our initiatives to improve margins and reduce cost will help us reach this target. But clearly also realistically, it will take some time to get down to that target level. Our financing and maturity profile is very good with low upcoming installments. The maturities in China shown on this graph, it basically consists of working capital financing, which is regularly rolled over and where we see no refinancing risk. In the first quarter, we have successfully concluded the covenant waiver process with the various lenders, and the interest cover covenant has been reduced from four to three times for all quarters in 2024. And by the end of Q1, our actual interest cover ratio was 4.2, which was above the previous, the original covenant level. So let's look at our cash flow generation, which is also a high focus area. And our cash flow from operations amounted to almost 760 million NOK for the quarter, which was up by approximately 120 million NOK from the corresponding quarter last year. And this is mainly explained by further improvements in working capital, where we have a very strict follow-up to make sure that we have an excellent capital efficiency. In the first quarter, we have managed then to reduce the working capital by another 300 million NOK. And in addition to that, we're also having a strict control and prioritization on our CAPEX projects. And as Helge said, one of our targets this year is to reduce overall CAPEX spending by 2 billion NOC compared to 2023. Reinvestments and strategic investments, excluding M&A activities, ended at 600 million in Q124, and this is well in line with our plans to reduce the overall CapEx program by 2 billion NOC this year. The year-over-year investments amounted to almost 300 million NOC, which was quite low, only 49% of depreciation and amortization. Our target is still to keep reinvestments at 80 to 90 percent of depreciation. So that's the level that you should expect going forward. The strategic investments amounted to 318 million NOK, mainly related to our two big silicones expansion projects in France and China. Now, these projects will be completed now in Q2 and Q3. And when we have completed these projects, then our strategic CAPEX commitments are very moderate. So we are able to keep strategic CAPEX at the low level if that is needed and if that is wanted. So we have a good flexibility going forward. So with that, I hand the word back to Helge to take us through the outlook.

So we'll round off this with an outlook for the coming second quarter. We have seen some signs of recovery in the first quarter, but we would like to point out that there is still significant uncertainty. Demand for silicones in Europe and the US show some signs of improvement. There is also an improvement in demand in China, but we think price development will be hampered by the overcapacity. Our expansion project in China will come on stream this quarter, but we don't expect any any significant financial impact in that startup period. Silicon products is expected to benefit from commodity price increases for silicon and ferro silicon, which we have seen a clear trend during the first quarter. And this is partly connected with the lag in contract pricing. Stable conditions are still expected in carbon solutions with some signs of demand improvement in some of their markets. So I think this concludes our presentation today and I'll hand it back to Odger who will take us through the Q&A session.

Very good. Thank you, Helge. Then we get into Q&A. And first, I would like to ask if there is anyone in the audience that would like to ask any questions. We have one, yes. We have a microphone, so maybe you can get that.

For our guest audience?

Yes, I'm Magnus Rasmussen, SEP. A question on your expansion project in China. Given the current DMC prices, what kind of EBITDA effect, let's say DMC prices are stable a year from now, what kind of EBITDA effect do you expect from that expansion?

Well, we are in a ramp-up. period, so I think I'll let Morten try to very quickly do some on top of the head calculation.

Yeah, I can certainly do that. So if we start with a ramp up plan, we're starting now in Q2. But it's a very complicated production line, so it will take some time to have it fully ramped up. We expect to have it more or less fully ramped up towards the end of the year. So you should see some financial effects on from from q4 and onwards and then basically a full effect from from from q1 next year of course the ebda effect will depend on the market conditions on the sales prices so i should be a bit humble about being too too too firm on that but what we have said is that we will have a significantly lower production cost on this new line approximately 20 versus the existing production line And we will also have a better chemical quality on the intermediate products, which will support our specialization strategy.

But you will have positive margins even in the market where the DMC price is at 14,000, for example?

From that new production line? Yeah, definitely, yes.

And more broadly on the silicones market in China, we've seen obviously a lot of new capacity coming online through 2022 and 2023. What do you see in 2024, 2025, 2026?

Well, if you look at the cost curve in China, I think it's likely that we'll see some consolidation efforts in China. There are about 10 producers today, and about half of them are probably not performing very well at the moment. I mean, nobody's performing well, but I think that's going to happen. Of course, we'll pay close attention to that. this overcapacity situation will continue and it will also very much be dependent on what happens globally on supply demand because China traditionally in many areas have overcapacity and the effects also in the Chinese market is depending on the export opportunities or possibilities. So I think I would also pay very much attention to the global supply demand balance.

Okay, then we have some questions related to the EBTA improvement program where we realized the 200 million in the first quarter and the question is if we can elaborate more specifically on where we see those effects and where they're coming from.

Yeah, as we have communicated, we have implemented a wide range of improvement programs across all the three divisions and also corporate support functions. Of course, the major part is in silicones and that's where it's also mostly needed. It goes on a wide area or a wide number of areas. typically productivity improvement lower cost on support services increasing sales of of specialty products upgrade of byproducts etc etc and year to date we then have implemented actions that has an annual effect of 800 million knock where 200 million NOC is realized in Q1. So we are convinced that we will deliver on the 1.5 billion NOC and maybe also higher, and that's also clearly needed given the current market situation.

Maybe we should also mention that we're closing down an operation in Germany and moving production to Italy and Spain in order to optimize or streamline capacity utilization.

And then the next question is that we have a tax cost despite the negative earnings per share, and that we're not capitalizing on the deferred tax assets in China. And the question is if this is temporary for this quarter, if we cannot offset positive and negative taxes, and also if there is no scheme for having deferred tax assets in China.

Yeah, now this is in line with previous practice. We have applied a conservative accounting practice also in this area, so we have not had any deferred accounting treatment in China on tax costs, and that follows than the previous practice. while we are in tax position and then we have tax costs in most of our carbon solutions and silicon products locations.

Very good and then we have a question regarding the insurance settlement at Salton and if you can specify and go into a bit more detail on that.

I can give a description on the case as such. As you know, we had a major fire in Salton on the 10th of December last year. Luckily, no personal injuries, but quite significant property damage. We had to stop production on all three furnaces for a while. We have restarted the first furnace. We hope to restart the second furnace quite soon, while it will still take some time before we restart the third furnace. Now, we have very good insurance coverage schemes in place, so we expect to get a good compensation for actual losses. Basically two elements, it's the property damage and it's the business interruption. The duration of the business interruption is still not clear because we don't know when we're able to restart and hence also the expected compensation is not clear. But we're having a very good dialogue with the insurance companies and we're doing whatever we can to restart the plant as soon as possible in a safe manner. but still some uncertainty about timing and also on the actual insurance compensation.

And then we have a question related to the result in the first quarter for silicones because it looks like the volumes were flat compared to first quarter and also DMC prices quite similar and we should expect the contribution from the cost savings program so why did we end up with a weaker EBTA versus fourth quarter?

Well, as I said, we expect to get even more effects from the EBITDA improvement programmes as we deliver a bigger part of the programme from Q2 and onwards. We clearly also had a seasonality effect in Q1 in silicones. That's normal in China due to the Spring Festival where a big portion of our customer sites stopped production and stopped demand. And in a downturn cycle like this year, that was probably an even bigger impact than in a more normalized macroeconomic situation.

And then a question related to the newly proposed CO2 compensation scheme which requires that 40 percent of the compensation is to be used for carbon emission reducing investments and the question is if we will be able to fulfill this requirement and get a full share of the of the scheme?

Yeah, I can comment on that. The detailed criteria are still not clear, but based on what we hear from the Norwegian Industry Association, who is conducting those discussions with the government, we should be able to take full advantage of that scheme and have sufficient projects that can fall into the category of the 40% criteria. And this will also not be impacting other incentive schemes related to climate or energy efficiency improvements etc. So I'm quite positive to this and it will create more predictability on a scheme that really has been up for annual revision. So I am confident that this will now remain, even though a change in government will not immediately put the whole scheme again up for discussion.

And then we have a question related to YNO. Then if you can say something more about why we decided to exit our investment there.

Yeah, I can say a few words about that. We started that project in 2016 based on... on a technology actually developed during our solar project previously and invited the partners to participate. And I think given the scale of this industry and the amount of investments, it's been very clear for us that this would be more and more a financial position rather than a new, let's say, core business for Elkem. So given the overall situation, we found an opportunity to exit now and focus on what we regard as core business, obviously impacted by the overall financial situation.

Thank you. Then there are no more questions here on the web. So if there are no additional questions, there is one question from the audience. There is a microphone, so please.

Just a question regarding that you've entered new energy contracts. Is that a sign that you're happy with the level, or is it just a normal execution of securing?

No, I think the answer is yes. On both, yeah.

I guess we clearly see that particularly in northern and central Norway, where we have the majority of our Norwegian plants, it still offers a very competitive price level on electric power. And we take the opportunity on a regular basis to renew our portfolio of hedging contracts in Norway. And of course, needless to say, this happens at price levels which we find very competitive. And as such, it strengthens the long-term competitiveness and predictability of our Norwegian silicon products assets, and that's good.

Okay, thank you very much. That concludes our presentation today. So with that, we thank you for your participation, both the ones here in the audience and those participating on the webcast. Thank you very much. Thank you.