Elkem Asa Ord

Good morning and welcome to Elkem's second quarter results presentation. My name is Objar Lyngstad and I'm responsible for investor relations in Elkem. In today's presentation, we'll go through the highlights for the second quarter and give you a market update with the outlook for the third quarter. CEO Helge Aasen will take us through this part of the presentation before CFO Morten Viga will present the financial results for the second quarter. We will open for Q&A after Helge and Morten's presentations. So with that, I will leave the word to CEO Helge Olsson.

Thank you, Odger. And good morning, everyone, following this presentation. We have navigated through... a relatively weak second quarter, and we've seen downward price pressure in several of Elkem's key markets. However, the operational performance has been good, and we've had generally high utilization rates due to good cost and market positions, very much supporting the financial result. The EBITDA for the second quarter ended at 803 million NOC, which gives a margin of 10% for the group. And silicones is included in this number. If you exclude silicones... which has been reclassified as assets held for sale. The operating income was 4.3 billion NOK with an EBITDA close to 547 million. And that results in a margin of 13%. The silicon products division result is impacted by weak demand and price pressure, especially coming from Chinese imports into the EU. Carbon Solutions is also this quarter delivering a strong performance, although the EBITDA was lower than what we've seen in preceding quarters. Earlier this week, we announced that the Norwegian Ministry of Climate and Environment has concluded in favor of Elken's complaint of unequal treatment in allocation of free emission quotas under the EU environmental trading system. The period we're talking about is the period from 2021 until 2025. Based on our understanding, the letter from the Norwegian ministry implies that we will receive approximately 1.3 million additional allowances for the period 21 to 25. This will not have any immediate accounting effect, but it is reassuring to see that we are granted fair and equal treatment compared with other industry players in the European Union. The strategic review to streamline the Elkem business portfolio is ongoing and progressing. We will provide a more detailed status update in the third quarter. So we'll come back to that in a relatively short time. Moving on to ESG performance. Our climate strategy is built on two main pillars, to reduce CO2 and other emissions and to supply the green transition with critical materials. Our aim is to reduce and ultimately remove fossil CO2 emissions from the manufacturing processes. Elkem supports the green transition through the supply of critical materials, and we work systematically to cut emissions and reduce waste throughout the entire value chain. Our efforts are well recognized by receiving top ratings from EcoVardis and the CDP. And in the second quarter, we also got another recognition from CDP, where Elkem now made it to their A-list, for supplier engagement during 2024. In June, Elkem was awarded 33 million NOK from Innovation Norway to pilot green products using recycled slag and silicon. So we're very excited to receive this support, which further supports our efforts in pioneering green technology in order to produce strategic materials essential for our modern day economy. And this particular project aims to reduce the carbon emissions in developing cement alternatives. So the binder in concrete, which will be cutting emissions with two thirds compared to the current industry standard. Then moving on to one of our most important cost factors, renewable power. Electricity is an important, very important ingredient in producing metals. Access to stable, clean electricity on competitive terms is obviously key to maintaining Alchem's low cost positions. We're continuously assessing market opportunities in order to secure further long-term contracts, and in the second quarter, we enter into a new contract with NTI, Nord-Trøndelag Energi Elektricitetsverk in Norwegian. This contract has a volume of 300 gigawatt hours per year, will be delivered in the price area NO4, and will play an important role in supporting operations at the Solten plant. The contract covers the period from 2028 to 2037. Last year, we secured contracts totaling 610 gigawatt hours per year in both NO3 and NO4 price areas, which has secured a robust coverage in Norway. And on the map here, we have shown the various price areas relevant to LKM. And the graph below illustrates the share of electricity consumption hedged for our Norwegian plants. So we think this hedging profile positions Elkem very favorably in the energy market and will create predictability and mitigate the risk associated with fluctuating energy prices. As mentioned, Elkem has strong market positions on this graph. slide here, we show a few recent examples of our positions in growth sectors worldwide. Our silicon-based materials are important for construction, energy, mobility, and smart cities, to mention some important areas. The recently opened Chenab Railway Bridge, it's the world's highest single arch rail bridge. It's built with the using Elkem's micro silica, that will ensure long-term durability in the concrete. So this is a milestone in India and highlights Elkem's growing role in sustainable global infrastructure development. Secondly, the Norwegian government recently announced that it's investing 1 billion NOK in establishing six national artificial intelligence centers, AI centers, to advance key sectors. We're now including energy, health, logistics and manufacturing. And here Elkem is a partner contributing industrial expertise to a more sustainable manufacturing. Thirdly, Germany has announced a package for increased defense spending and also a 500 billion Euro infrastructure fund As recently mentioned on the news, the NATO Alliance have also now committed to increase defense spending to 5% of GDP annually on core defense requirements. This will happen gradually up until 2035. So this European Defense Industry Program will strengthen and secure critical supply chains. And we think Elkem is very well positioned as the key supplier of silicon and ferro-silicon, which are essential materials in advanced defense technologies. So having that position in these sectors will be a contributing factor to create value. and stronger financial results for Elkem in the time to come as these programs are being ramped up. Now let's move to the market update and the outlook. We frequently talk about automotive in these presentations. It is a very important sector for Elkem, driving demand for many of our products and materials. The sector remains weak. with the exception of China production in all major regions. Forecasted to decline this year compared with 2024. However, the outlook for next year seems a bit more positive and forecasts have been revised upwards recently. China's 2025 projection was recently lifted to 31.1 million units. driven by domestic incentives and rebound in exports. There is still much overcapacity, which continue to weigh on the market, especially in the EV segment. Forecasts across the Americas show regional differences. North America is upgraded, driven by tariff relief and production momentum, while South America we see a more modest development. An improvement in the automotive sector from next year is clearly a benefit for Elken. And now coming to a closer look at our markets and starting with silicon. Prices in both EU and China have been declining, which in fact is quite closely linked. At the end of June, the reference prices in the EU were reduced by around 20%, reflecting a declining spot trend in the quarter. And prices in the EU are now down to an unsustainable level. This decline has mainly been driven by Chinese imports following destocking. In China, silicon prices have continued to drop due to overcapacity and weak demand, especially in the polysilicon segment, which goes into solar. Here, prices are at historically low levels. And announced production cuts from large Chinese producers may improve the supply-demand balance going forward. There is also an ongoing safeguard investigation performed by the EU Commission regarding imports of silicon and ferro-silicon and other ferro-alloy materials. This is expected to be concluded during the third quarter. Should the outcome result in the safeguard measures be introduced, it would likely limit the price pressure from imports into the EU. which again will have a beneficial effect on Elkem's results. Also in the US, the silicon market has experienced some downward pressure. However, this seems now to have bottomed out. Moving on to ferrosilicon. Here we have many of the same drivers as in silicon metal. The market sentiment is characterized by sluggish demand. Prices are under downward pressure. In the EU, prices have declined due to trade diversion caused by higher import barriers in the US. This is because producers located in Brazil, Malaysia, and Kazakhstan have been hit by anti-dumping measures and now focus more on the EU market. U.S. prices increased in the second quarter. This was driven by the new anti-dumping and subsidy rates on the producers from these countries. In addition, the reciprocal import duties have provided some support. In China, prices have reached, as I mentioned, historic low levels. Steel mills have delayed their tenders and trading in the spot market has remained slow. The overcapacity in China is having a downward price pressure globally. And also for ferro-silicon, the ongoing safeguard investigation in the EU could limit the price pressure from imports when it's introduced. Then moving on to carbon products. This is a smaller area than silicon and ferrosilicon and there are no reference prices available in this market. Demand for carbon products varies across regions driven by steel, ferroalloys and aluminium production. Global steel production in the second quarter this year was down 2% compared to last year and Europe was down 2%, while in North America the production increased by 3%, again driven by tariffs. The challenging conditions in steel and ferroalloys continue, but Carbon Solutions has diverse geographical positions which will provide resilience and stability. Then moving on to silicones, also here we have a challenging market sentiment, mainly due to the overcapacity in China and reduced demand from large sectors like construction, textiles and chemicals. DMC prices in China, which we have been referring to for quite some time, are now down to 10,400 RMB per ton by the end of the second quarter, which also here is a historically low level. The price decline has been driven by lower raw material costs, such as the decline in silicon metal prices, as well as price dumping among domestic producers to reduce high inventory levels, destocking I mentioned previously. In the EU and the US, the demand for commodity silicones has been negatively impacted by changing tariff policies, but we would say in general the demand for specialty is holding up quite well. Then the outlook. We expect market conditions to remain challenging, but Elkem's financial performance is supported by strong cost and market positions. The silicon products division is experiencing challenging markets and deteriorating reference prices. But the division has leading cost positions, which helps offset the negative impact. We also have all furnaces in operation by the beginning of July. In carbon solutions, the division benefits from good cost and market positions. And it's geographically diverse business with a diverse customer portfolio, which will also continue to create stability. The silicones market is expected to remain stable, but at low levels. However, the current price level is not deemed to be sustainable in the longer term. So with that, I'll give the word to you, Morten, who will take us through the financials.

Thank you very much, Helge, and good morning, everybody. So I'm pleased to go through the results for the second quarter in more detail. Elkem's operating income for the quarter was close to 8 billion NOK, which was down 6% compared to the second quarter last year. Silicon products and carbon solutions had a decline in operating income due to challenging markets, basically lower prices. The markets have also been challenging for silicones, but this division saw a modest increase in operating income compared to the second quarter last year due to improved sales volume. LTIMS reported EBITDA for the second quarter was 0.8 billion NOC. Silicon products and carbon solutions reported somewhat lower EBITDA compared to the second quarter for 2024. but this was partly offset by Slicons. The reported group EBITDA margin was 10%, which was below our long-term target of 15% to 20% EBITDA margin. However, as Helge said, with sales prices in key markets reaching historical low levels, I think it's fair to say that Elkem's EBITDA is supported by our strong cost positions, which in many respects is much better than our competitors. There were no particular one-offs affecting the EBITDA in the second quarter. As usual, we provide an overview of some of the main financial numbers and key ratios. I will certainly not go into detail on all of them, but it is important to note that the silicones division has been reclassified as the discontinued operations and assets held for sale. In this presentation, we mainly focus on the financial figures, which include silicones. However, the regular financial statements, including the profit and loss statements, reflects LKM's results, excluding silicones. In the table to the right, you can see comparable figures for Elkem with and without silicones. Including silicones, the group EBTA amounted to 803 million NOK. There was only a minor impact of minus 2 million NOK on derivatives in segment other in this quarter. Other items amounted to 74 million NOC. The main items were gains on power and currency derivatives of 165 million NOC, currency losses of 71 million NOC, and restructuring expenses of minus 20 million NOC. The net finance expenses were minus 488 million NOC, These main items were net interest expenses of minus 150 million NOC, currency losses of 317 million NOC, mainly related to translation effects on external loans, where the effect is weaker NOC versus euro. The reported tax cost was positive this quarter with 19 million NOC, And this includes the recognition of deferred tax assets of 49 million NOC in relation to Elkim's acquisition of RAC Solar last year. We would also like to mention that Elkim has succeeded in a tax appeal in Norway, which will result in a reimbursement and positive cash effect of plus 205 million NOC in Q3 this year. And this number includes interest on the claim, which has a positive P&L impact of 24 million NOC. So let's then have a look at the divisions and start with the silicon products division. The division's results was clearly impacted by the weak commodity markets. The division reported total operating income of 3.55 billion NOC. That is down 13% from the second quarter last year, and this is mainly explained by lower sales prices. The EBITDA amounted to $345 million, which is down 54% from the second quarter last year, and the EBITDA margin was 10% for the quarter. The lower EBITDA is mainly explained by lower prices, which you have seen from the price graphs presented by Helge. The ferrosilicon market has been particularly weak this quarter, while the other segments, particularly foundry alloys, were holding up better based on our strong market positions. We have also seen some negative sales mix effects due to lower demand for high purity ferrosilicon, among others, which normally gives higher margins. The demand is clearly generally weak, but Elkem, due to our leading cost position, we are able to maintain a high capacity utilization. And this is clearly explained by strong cost positions and high quality product offerings. The carbon solutions division has presented yet another quarter with stable results in a challenging market sentiment. The total operating income amounted to 854 million NOC, which is down 15% from the second quarter last year. The lower operating income is a clear indication of the challenging market conditions, where both sales volumes and sales prices have been under pressure. But still, the EBITDA is at 242 million NOC, which is a reduction from last year, but also which represent an EBTA margin of 28%, which we believe is a very good margin given the very difficult market sentiment. The lower EBTA is mainly then explained by lower sales volumes, lower sales prices, and somewhat higher raw material costs. Sales volume is quite stable when you look at or compare with the past quarters as volume continue to be affected by very weak market sentiment in steel production in the EU. As mentioned, the silicones division is under strategic review. In the second quarter, the division delivered improved EBITDA, exceeding both the corresponding quarter last year and the first quarter this year, and that's good. The division delivered total operating income of almost 3.9 billion nok, which was up 3% from the second quarter last year. The EBITDA amounted to 247 million nok, And that was also better than the second quarter last year. And with the exception of Q4 last year, this was the best quarter since Q3 2022. Higher operating income was explained by higher sales volumes, but this was partly countered by lower commodity sales prices. The division has clearly improved its cost position. after major upgrading investments and continuous improvement work, both in France and in China. And this has been reflected in higher sales and improved margins in the commodity segments. The major investments in China and in France have now been fully completed, and the capacity is almost fully ramped up. And this has clearly had a positive impact on the operational performance and financial performance in the quarter. Sales volume was up 22% for the second quarter or compared to the second quarter last year, mainly in the Asia-Pacific region. Let's now take a closer look at some of the key financial ratios of Elkem. The earnings per share EPS was negative in the second quarter with minus 0.49 NOC per share and that brings the EPS year to date to minus 0.82 NOC per share. We are of course not satisfied with this and we are working on further cost reductions and internal improvements to mitigate the situation. The EPS was also this quarter negatively impacted by the losses from the silicones division, which is under strategic review. And if you exclude silicones from the calculations, the EPS for the second quarter would have been minus 0.16, and we would have seen a slightly positive EPS year to date. The balance sheet is very solid. Total equity amounts to 24 billion oka per the end of second quarter, which gives a stable equity ratio of around 50%. Elkem's financing position remains very robust and stable, and it is our clear focus to keep a strong liquidity position and a smooth maturity profile on our debt also going forward. Net interest during debt was 11.4 billion NOK by the end of Q2, and this is up 0.4 billion NOK from the previous quarter, but this is mainly due to translation effects. a weaker NOC versus Euro, where most of our loans are denominated. As you can see from the graph to the right, Elkem has low upcoming installments in 2025. Based on the last 12 months EBITDA, the debt leverage ratio was 2.8 times. This is slightly higher than the previous quarter. The target is clearly to bring the leverage back back to the financial target between one to two times EBITDA. But clearly the leverage is sensitive to the EBITDA development, which is currently impacted by very weak market conditions. By the end of Q2, LKM's interest cover ratio improved to 6.2 times from 5.6 times in Q1. And this means that we are well above the covenant level in our loan agreement, which is minimum four times. Total cash flow from operations amounted to 308 million NOK in the second quarter this year. This is slightly down from the second quarter last year, mainly explained by lower underlying profitability, lower EBITDA. If you exclude silicones from the calculation, the cash flow from operations would have been slightly better at 323 million for the quarter. As already mentioned, the markets are fundamentally weak, and LKM will clearly continue to focus on a very disciplined capital spending as long as the weak market conditions prevail. In the second quarter, total investments were down to 464 million NOC. Reinvestments amounted to 401 million NOC, which equals 65% of depreciations. And strategic investments were only 64 million NOC, as all main investment projects were completed last year. So let me ramp up. this presentation by summarizing the main headlines and takeaways for the quarter. First of all, the markets are still characterized by uncertainty and geopolitical volatility. And this clearly means that LKM will continue to focus on cash generation and very disciplined capital spending. When it comes to the divisions, silicon products continue to face low demand, but we are very well positioned due to strong cost and market positions. The division runs at the full capacity utilization by the start of the third quarter, and this is also our ambition going forward. Carbon solution is also benefiting from good cost positions and very strong market positions in addition to a very global and diverse business model from a geographical perspective. And this provides stability in earnings. Silicones is, as I mentioned, clearly benefiting from improved cost positions in China and France. Trade tensions are clearly negatively affecting the business, but our broad geographical footprint also here provide attractive opportunities going forward. And as mentioned, the Norwegian Ministry of Climate and Environment made a decision in favor of Elkem when it comes to CO2 allowances. And this will secure equal treatment with other competitors in the EU. And it will reduce the need to buy CO2 quotas in the years going forward. And as such, this is very important for Alchem's competitiveness, which will be strengthened. The silicones strategic review is ongoing and with a target to conclude before year end. And as mentioned by Helge, we will provide a status update during the third quarter. But right now, it's not possible to give any detailed comments on the process. So that summarizes the presentation. And I'm now happy to hand the word back to Helge for Q&As. Thank you. Thank you.

Thank you for that, Martin. We have received quite a few questions on the webcast. I'll first start to ask if there are any questions here by people in the audience. And if there are not, let's go on to questions from the webcast, on the webcast. There are quite a few questions on results and pricing, so I'll try to structure them in a way that makes sense. The first one is maybe a bit difficult to answer, but I think, Morten, you are the right person to take it. If we can provide some colors on the second quarter and on a month-by-month basis and how June compared to May, for instance. I guess the idea is to get some idea on the trajectory on the results. and also how the order book for July and August would be.

No, as you know, we don't provide financial reporting on a monthly basis. We do it on a quarterly basis, but I can say that there are no big differences within the quarter. As to the order book for the third quarter, It looks pretty good. There is always a seasonality factor, particularly in Europe, but also in North America due to summer vacation. And that will clearly also most likely have an impact this year. Underlying, we see a price pressure in the market, but we don't see any major changes in the order book.

And then there is a question, or quite a few questions related to pricing. If we can give some color on what is driving the low prices in silicon metal in China, and where we see price levels for 26 and beyond.

I mentioned a few words on that in my update as well, but... I think weaker demand and also significant overcapacity in China is really the headline. And the weaker demand, as mentioned, is coming from very reduced demand, especially from the solar sector and the polysilicon. silicon going into polysilicon. And with relatively reduced export opportunities compared to previously, especially now with the new tariffs implemented in the US, obviously Europe is a target market for export and that's putting additional pressure on Europe. And we know that there is a destocking effect here as well because these prices are not sustainable, neither in China.

I can add that we of course we follow this market very closely since we are a sizable silicon metal producer in China and we also buy quite big volumes of silicon metal from other competitors and clearly we have seen extremely low prices to a large extent below cash costs of many producers so this is not sustainable. And lately we have seen a slight improvement in prices, even though there is a fundamental over capacity.

Related to that, we have a question if it's our impression that prices on silicon have now reached the bottom and also if we can comment on spread between silicon and aluminium prices. And lastly, how we see the increased infrastructure spending in Europe and how that could impact the silicon division. Three questions in a row.

It's definitely at an unsustainable level. So that in itself will not go on for a very long time. And then we talked about the safeguard measures, which we believe will come into play at least during this quarter. It's not clear yet exactly how. or when, but the signal is that this is coming, so that will have a positive effect for that market. The spread between silicon and aluminium, I'm not sure if I understood that question.

No, there is quite often a leak because aluminium is an important market, but I guess that's the thinking.

No, I think if we look at the history, we have seen a relatively... stronger development of aluminium prices compared to silicon prices and I think that is also an indication that we will see an improvement in silicon and ferro-silicon prices just because today's prices are not sustainable. If you ask us when will this turn up again, of course we do not have a good answer to that, but the current prices are not sustainable and there will be an adjustment upwards.

So the focus for us now is, as you also talked about, Morten, in your presentation, we keep a strong focus on cost improvements. That's a never-ending part of this business. And the second very important part is to maintain very high capacity utilization, which will ensure that you actually can take advantage of your efficient production. And that looks quite good, actually.

Looking at the current profitability in silicon products and the persistence of capacity, the question is if we see any room for further cost cuts and also portfolio adjustments.

further cost cuts there's always room and we are continuing to have a strong focus on that when it comes to capacity optimization if that was the question or did you say yeah if there aren't

further room for cost improvements in silicon products and also if we see any room for portfolio adjustments, which I guess is changing either products or milk plant closures.

In the context of product mix, we're always having very strong focus on optimizing that and also allocating products at various plants to optimize the whole system. But beyond that, there are no clear or there are no intentions of doing anything in particular.

Given the current EBITDA levels in carbon and silicon products, the question is what are net interest rate and debt level we are comfortable with after the potential sale of the silicones division?

No, as we previously have communicated, When we have a conclusion and we have specific news on the strategic review, we will clearly provide more information about, let's say, the future strategy of Elkem, including also revised financial KPI targets. So I will not go into details on that right now. Clearly, the leverage ratio currently is very much impacted by extraordinary low prices and extraordinary low EBITDA.

And when we touch upon the strategic review, we have said that we will provide the status update during third quarter. And the question is if that means during the quarter or at 3Q reporting, which is in October.

Well, I think it will be before, but at the latest, of course, during the quarterly presentation.

There have been talks in China recently about industrial consolidation and capping production output in the polysilicon market. And the question is if we have heard similar actions. Here it says silicon market, but I guess it also could apply to silicones.

No, we know that there are, of course... Typically, or particularly, polysilicon experiencing a very tough time in China these days due to high overcapacity. There is a consolidation ongoing. We believe that also the long-term trend in other industries in China will be more consolidation, including in silicones and also further down in the value chain. But of course, this will normally take time.

There is also a question on capacity in silicones. We say that this is close to being fully ramped up or being all ramped up. And the question is what our operating rates are and what the level was in the second quarter.

We are running full capacity utilization in Asia Pacific and somewhat reduced in EMEA and Americas.

Anything to add?

No, that's partly due to the fact that the markets are still weak and we have not, let's say, fully ramped up the new capacity that we have built in France. But we have the target to increase capacity utilization in the Western value chain.

I think we take one last question, and I'm not sure if we have any insight into that. But the question is, do we see cash cost for the marginal producers in China now on the silicon and the DMC side?

Well, it's a difficult question to give a very precise answer, but I think we can safely say that cash cost is above the current price levels.

So I think I give the last chance to people in the audience to see if there are any last questions, and there seems to be one.

Yes, hello, Thiel van Visserman from Avian Emerald Bank. I was wondering if you see any threats or opportunities in potential new trade agreements that the EU might agree on. For example, if there were anything to happen with India, is that something you can comment on?

I think the biggest uncertainty right now is what will happen towards the US market. In India, we have relatively low exposure in terms of import and export. We do manufacturing in India, but that's for the Indian market.