Ladies and gentlemen, thank you for standing by and welcome to the Umicore Full Year 2019 Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer must advise you that this conference is being recorded today, Friday 7th February, 2020. And I would now like to hand the conference over to your speaker today, CEO, Mark Greenberg and CFO, Philippe Patejo. Please go ahead.
Thank you, Joanne. Good morning, everyone, and welcome to the presentation of Umicore's performance for 2019. I will first make some comments on our performance and outlook give an overview of our major achievements and then hand over to Philip, who will talk you through the 2019 financials. I will then wrap up before handing the call over to you for any questions that you may have. Despite the challenging market environment in 2019, particularly in the automotive sector, I'm proud to announce that we turned in a strong performance, while making significant strides in the execution of our growth strategy in all three major activities.
In Catalysis, we outperformed the car market by significant mileage as a result of market share gains in gasoline catalyst applications. This outperformance was most pronounced in China, the largest car market in the world, where we became the leading light duty catalyst provider. We also recorded strong growth in the demand for our fuel cell cat business. In Energy And Services Technologies, Our sales of cathode materials for electric vehicles grew in line with the market, although the 2 halves of the year were sharply contrast Sales were softer than the market in the first half and improved somewhat in the second half when the rest of the industry was down following the subsidy cuts in China. Results of the business group were affected by lower cobbled prices and the competition from an ethically sourced cheap cobalt from artisanal mining, as well as higher depreciation charges and upfront cost related to our greenfield investments.
In recycling, we posted a very strong performance. While we processed lower volumes in Hoboken due to the scheduled extended shutdown in the first half of the year and the firing in July, we optimized them the seed mix in order to offset the effect of the volume shortfall. The business group also benefited from favorable supply terms and higher precious metal prices. With our statement in April 2019, we were among the first players to identify that demand patterns for cathode materials were deteriorating in the Chinese EV market in particular. We were also amongst the first project no near term recovery in automotive demand in general.
The statements we made and the outlook we gave at the time have unfortunately proven to be accurate. As we communicated then, we expect to grow revenues and earnings in 2020 despite a deterioration in the macroeconomic environment globally, in particular, in the automotive market. It is also worth to point out that visibility is limited to date. The outbreak of the coronavirus is probably going to amplify the economic slowdown although it is much too early to estimate how much or for how long. Our growth outlook assumes today no protracted or material effect of the virus on economic in 2020.
In Catalysis, although market projections points to slightly declining or flat car production at best, we expect to benefit from our strong market position in gasoline catalyst applications and a higher penetration rate of gasoline particulate filters in Europe and China. Fuelcell catalyst production will ramp up our new plant in Korea and contribute to the growth. For Energy And Surface Technologies, we expect a higher sales of cathode materials for EV and a positive contribution from the acquisition of the Copola plant. We do not expect easy sales in China to show a material degree of recovery. Greenfield production sites, resulting in higher depreciation charges and substantially higher startup costs as well as increased recycling, the Hoboken smelter is expected of the expansion investments in 2019.
We expect the supply environment to remain favorable and that metal prices some of which were hedged in the course of 2019 will continue to provide tailwinds. Overall, I'm pleased to confirm a growth outlook for 2020, despite the adverse market trends that developed in 20 19 and continue to prevail today. We will continue to execute our growth strategy with determination, while keeping the agility to adjust our investment programs to take account of evolving market needs in the short term. Let's now turn to the There was a significant contraction in global car production in 2019. Actually, the strongest decline in car production since the 2008 recession.
The biggest reduction was observed in the world's largest car market, China, which contracted for the 2nd consecutive year. Diesel car production continued to decline in Europe and now accounts for 35% share of the European car market. On a positive note, more stringent vehicle emission standards have coming through effect in key regions and the market share of gasoline particulate filters increased in Europe and China now as expected. Unicorns strongly outperformed percent year on year as a result officers in China and Europe. We have now become the leading supplier of light duty catalysts in China, reflecting market share gains and a strong exposure to platforms, which has implemented China 6 norms ahead of the due date.
Precious Metals Chemistry also increased revenues year on year with growing sales in pharmaceutical and spike chemical locations as well as insurance health catalysts. Throughout 2019, we continued to invest in R&D supporting a transition to more demanding emission norms. Also, we expanded production capacity in China, Poland and India to cater for the growth fuel cells. Hydrogen fuel cells are gaining momentum as a clean mobility solution for light and heavy duty applications. And Umicore is well placed to benefit from a growing market penetration of this technology.
Let's now move to Energy And Surface Technologies, where the market context also became more challenging last year. The global ED market grew by less than 8% in 2019 compared to more than 60% in 20 team. It is also worth pointing out that 2019 was a year of 2 contrasting halves in the EV markets. While global EV sales continued to grow in the 1st half, albeit at a slower pace than in 20 18, EV sales decreased in the second half as expected due to an abrupt decline in EV sales in China following the cuts. In Consumer Electronics, there was also a slowdown in demand, which was caused by destocking across the value In the energy storage market in Korea, demand was very much down owing to safety incidents on certain installation Finally, cobalt prices were depressed to less than half twenty eighteen levels, and this was exacerbated by the inflow of cheap cobalt products originating from unethical sourcing.
Against the backdrop Against the backdrop of declining easy demand in the second half, we managed to grow our sales of NMC cathode materials, both sequentially and compared to the same period in 2018 as expected. For the full year, Umicore sales of NSG CCastled Materials for EVs grew in line with the EV market globally, or in other words, our market share has remained stable in this segment. As also expected, sales of LCO cathode materials for consumer electronics and NMCs for energy storage applications were lower year on year, and we have no indications of an imminent recovery of demand in these segments. The financial performance of the rechargeable Battery Materials business unit was also affected by higher depreciation charges and upfront costs related to our expansion investments in China and Poland as well as higher R and D costs. The cobalt and Specialty Materials business unit was severely impacted by the low cobalt price and low demand for end products as customers in several industries reduced excess inventories.
We also continued to face unfair competition from cheap and ethically sourced cobalt supplies, which have dented our sales volumes and margins for high cobalt containing products. You may recall that we indicated last year that the combined effect of lower cobalt price and the unfair competition from a netically sourced cobalt was estimated at 1,000,000 to 1,000,000 in the first half of last year compared to the first half of twenty eighteen. For the full year 2019, we estimate this impact approximately 1,000,000. While we were adjusting to shorten fluctuations in demand with the required agility, We made significant strides in the execution of our strategy, which should enable us to capture significant future growth. On the supply side, we concluded long term supply partnerships for sustainable cobalt, which Glencore and in January 2020 with CMOC.
We completed the acquisition of the Copilot Cobalt Refinery and precursor facility which together with the supply partnerships I've just mentioned strengthened our sustainable value chain. We started commissioning of greenfield plant in China and in construction of the new plant for cathode materials important. Downstream, we signed significant multi year sales agreements with leading easy battery producers, LG chem and Samsung SDI, for deliveries from our plans in Korea, China and Europe. Another milestone was the qualification for financial support for certain of our innovation programs, under the umbrella of the important projects of common European interests. Also known as Ipsade.
This umbrella was established by the European Union to provide a framework under which member states are authorized to provide financial support to projects, which aim at creating a sustainable and innovative battery value chain for EVs in Europe. Finally, I'm pleased to report that the global battery Alliance of which McGore as a founding member has now issued clear sustainability principle for the rechargeable battery industry. As next step, the alliance will develop a battery passport, which will trade the origins of materials and monitored them throughout the entire lifecycle of batteries. It's passports, which would act as a type of quality seal on global digit on a global digital platform should help eradicate unacceptable practices from a social or environmental viewpoint and establish a level playing field. And obviously, we will seek widespread support from car OEMs for its implementation.
In recycling, 2019 saw a supportive environment in terms of metal price, notably pressures and platinum group metals, especially in the second half. Umicore also experienced a favorable supply environment with increasing availability of complex secondary materials, such as spent automotive catalysts, And these tend to have higher metal loadings on average as a proportion in the mix of the spent catalyst for tighter norms such as EURO4 or Euro5 and equivalent norms in other regions in growing. Also, China's greensense policy resulted in higher availability of end of life materials such as printed circuit poles. Revenues of the recycling business group increased by 9% in 2019 to EUR 681,000,000 and EBIT by 40 percent to EUR 188,000,000, mainly due to the favorable supply mix and higher metal prices. In Hoboken, we successfully optimized the input mix in order to offset most of the shortfall caused by the extended scheduled maintenance in the first part of 2019 and the fire incident in July.
Revenues at Jewelry And Industrial Metals remained stable year on year, while the earnings contribution from precious methods management increased substantially due to favorable trading conditions in particular for PGM. While the multi year expansion program had at the Hoboken plant was completed in 2019, it investments continued and will continue in order to further improve the environmental performance of the plant. With this, I would now like to hand over to Philip to cover the financials.
Thanks, Mark, and good morning, everyone. This first slide recaps some of the key numbers for 2019. Revenues were up 3% compared to the record year 2018, and this despite the recession in our largest end market, the automotive sector. Revenues grew 7% in Catalysis and 9% in recycling, but were to a large extent offset by the headwinds faced in energy and surface technology. Recurring EBIT came in close to last year's record number.
Excluding the impact of high depreciation charges, recurring EBITDA grew 5%, which includes a EUR 17,000,000 increase due to the adoption of the new IFRS 16 lease standard. The recurring EBITDA margin for the group was stable with Our recurring net profit was down 5% due to higher financial charges and specifically interest payments. While still well above our cost of capital, return on capital employed came down to 12.6% driven almost entirely by Energy And Surface Technologies. Now from a group perspective, the reason for this decline was not lower recurring EBIT, but the substantial increase in the average capital employed year on year following the recent growth investments. The Copola assets acquired at the beginning of December 2019 are also included in the end of year capital employed for some EUR 200,000,000 without yet having contributed to earnings in 2019.
This next slide puts part of earnings delivery in recent years, reaching a new high and recurring EBITDA in 2019, and consolidating the margin up trends of recent years, again, despite the challenging market context. This is consistent with our ambition to target profitable growth. When calculating the compounded annual average growth rates since 20 18, we reached 11% for recurring EBIT and 10% for recurring EBITDA. Slide 19 illustrates that our 2019 performance was driven by a strong second half as group revenues and earnings recovered from a softer first half. 6 sequential and year on year second half growth rates for group revenues and recurring earnings are strong despite energy and service technologies feeling the falls on its second half earnings of the upfront cost headwinds related to the greenfield side investments in China and in Poland.
The graphs on this next slide show that we significantly improved our free operating cash flow compared to 2018 as previously guided. Our cash flow from operations reached EUR 549,000,000 compared with EUR 92,000,000 in 2018. On working capital, ended the year with an This number reflects a more substantial increase in the working capital needs of Catalysis, driven by the inflation in PGM prices. This increase was partly offset by a decrease in working capital in recycling that included the release of some inventories built up in Hoboken following the recent fire incidents. Now in view of the sharp VGM price spike seen since the start of 2020, The net working capital in Catalysis is expected to further increase significantly if, obviously, current prices prevail.
I can assure you that managing our working capital remains a top priority for our teams in 2020. Obviously, metal price fluctuations will remain always the dominant driver. CapEx over the period increased to EUR 553,000,000 and is still concentrated on our strategic expansion projects. Some 60% of total CapEx was spent in Energy And Surface Technologies, and the 2 greenfield projects obviously took up most of that amount. CapEx in 2019 also included the investments carried out during the extended maintenance shutdown in Obboggan and the expansion investment in Korea for fuel cell catalysts.
For 2020, we would, at this stage, guide towards a CapEx level of the same order as in 2019 or maybe slightly higher, but we will obviously continue to adjust and align our plans as much as possible to the market reality. The recent trends of gradually increasing capitalized development expenses also continued into 2019 and accounted for EUR 35,000,000 over the period. Again, most of these assets are related to R&D Projects in Energy And Surface Technologies. Accounting for these investments, the free operating cash flow over the period amounted to a net cash out of EUR 39,000,000 compared to a negative cash flow of EUR 4.96 1,000,000 in 2018. As you can see, plotted by the blue line on the lower chart.
This next slide walks us through all cash flow items, starting from the operating cash flow we just discussed. The combined cash out related to taxes paid and net interests amount to EUR 127000000 over the period which is less than last year as high interest charges were more than offset by lower cash taxes The increased dividend in 2018 amounted to a cash out of EUR 186 1,000,000. Finally, a key use of cash in 2019 was the acquisition of the Popular operations for EUR 188,000,000 on a cash free basis. At the back of the bridge chart, you can see the accounting effect of the adoption of the new IFRS 16 lease standards on a net financial debt, which is a modest EUR 46,000,000 as we only use limited operating leases. As shown in the next slide, the increase in our net debt to EUR 582,000,000 over the year brings us to slightly more than EUR 1,400,000,000 of net debt at the end of 2019, which corresponds to 1.9 times recurring EBITDA.
This includes the new EUR 390,000,000 long term U. S. Private placement debt that was drawn in September. Maintaining sufficient funding headroom to execute our growth strategy and remunerate our shareholders, it's obviously a key priority. At Slide 23, actually recaps this flexibility with some numbers related to our current medium and long term committed facilities and their comfortable maturity profile.
These facilities are complemented by substantial additional sources of funding, including commercial paper programs and backlog. Finally, a word on nonrecurring items, which had an impact of EUR 30,000,000 on EBIT and EUR 24,000,000 on net profit. And almost entirely due to a few restructuring initiatives, in particular the closure of one U. S. Site, of the business unit Cobalt And Specialty Materials as we continue to optimize our footprint when to maintain value creation.
This concludes my section and I'll hand back over to you, Mark.
Thank you, Philip. Before opening the line to your questions, I would like to recap the key messages of this morning's call. I'm proud of our performance in 2019, which
was close
to the record levels of 2018, against the backdrop of a declining automotive market and a slowdown in EV demand. While we are adjusting with agility short term fluctuations in demand, I'm confident that our long term strategy to be a leader in clean mobility materials and cycling will result in further growth for Umicore. We have taken several major steps in 2019 strengthen our position and prepare us well to capture significant future growth, and we will continue to execute the strategy with determination. We will also continue to address the issues that challenge our industry including our unwavering stance on supply of raw materials. Finally, I'm pleased to confirm that we expect to grow revenues and earnings in 2020 despite the adverse market trends that developed in the course of 2019 and continue to prevail today.
With this, I would to raise a question. And if you have a follow-up question, please place your name in the queue.
First question comes from the line of William Post from KBC Securities. Please go ahead. Your line is now open.
Yes, thank you. Good morning, everybody. Question is on the wording of the guidance on the kettle to volumes. That was changed from a tonnage to a gigawatts hour perspective. I had, in my mind, that there was roughly a 2 to 1 rule of thumb to be used.
So to be very precise, the guidance you give now, the 60 gigawatts a hour by mid-twenty 21 and 100s by mid-twenty 23. Does that fully align with the earlier guidance but then going towards an 18 months delay versus, yeah, the initial plans. Is that how we should treat this guidance?
Good morning, Wim. Yes, indeed, you're correct. The guidance is fully in line with the previous guidance, which was expressed in terms of tonnages We decided to move away from tonnages and align with the industry practice of speaking of gigawatt hours which is what the car producers and the battery cell producers are using as a reference to, when they talk about their own capacity or requirements. And yes, it's fully in line, the, the targets that the targets and projections that were expressed some time ago in metric tons corresponds to considering the mix that we use at the time to do this estimate. Corresponds to what we're expressing now as 60100 gigawatts hours, respectively.
And what gives you then, what's the reason then for now mentioning that you will be moving more towards the 18 month delay instead of the 12 month? Is it market development in China? Is it other reasons? Can you elaborate on that?
Well, we said 12 to 18 months because that was the range, which meant that every point in the range was a distinct possibility. As I mentioned a while ago, we see no sign of EV recovery, an EV demand recovery in China for now and do not expect that to happen before 2021, bearing in mind that the subsidy scheme was supposed to be phased out in 2021 and in China anyway.
Okay, that's very clear. Thank you very much.
Thank you. Your next question comes from the line of Charlie Webb from Morgan Stanley. Please go ahead.
In E and ST, just looking at the sequential decline, H2 on H1 perhaps you can help us understand the various moving parts. I obviously I see higher D and A, but it's not enough to kind of offset some of the other declines clearly ongoing. So if you could just help us understand the margins progression H2 on H1 and then perhaps what we should think about as we think about 2020 for the margins for E and ST?
Good morning, Charlie. So It's difficult to extrapolate from short term fluctuations and from short term situations clearly. The margins reflect the fact that we are incurring much higher costs, given the higher E and A charges. That's one, the upfront costs related to the construction of our greenfield side, the increased R and D costs, the growing startup costs for the new capacity and qualification costs of the new lines. That's one key aspect.
One key aspect is the key aspect in explaining the change in the margin profile. The way I look at it is because it's difficult to, I would say, to compare quarterly or half yearly, margin evolution. The way I look at it is, overall, we're showing despite the difficult market context, which I explained a while ago already, in particular, in China, with the overcapacity that exist in that leading EU region. I look at our margins, EBIT margins of some 14% and EBITDA margin of some 20% in, depressed market context as being market leading margins. And there, as far as we have seen, this is best in class performance in terms of margin.
And this is a perspective that I would offer for you to look at the margin evolution.
Okay. Sorry, just trying to understand as we think about next year, given kind of ongoing investment and everything else, it would be would it be right to expect that some of these costs continue? Or would you say will D and A step up again, R and D will continue to be a cost startup costs will ongoing, but this is kind of the margin for now as we think into next year. Is fair or would you expect some of these things to roll off? I mean, clearly, D and A will go up again, I guess, but in terms of startup costs, perhaps
I'm not going to be very specific on the margin expectation because it's too early to provide any quantitative guidance for any of businesses. That being said, as we wrote in the, in the press release that was issued this morning, we expect cost to increase indeed because of the higher D and A charges resulting from recent investments and continuing investments in our greenfield production side, continuing increases in start up costs and R and D costs. And at the same time, we expect no significant change or recovery or improvement in the market conditions. So these are the 2 dimensions that I can offer to guide you in your margin estimates.
Thank you. Your next question comes from the line of Runoff Orr from Redburn. Please go ahead. Your line is now open.
Mark, I was just wondering if
you could clarify, your quotes on the outlook statement in page 1, referring to adjusting investments to take account of evolving market needs. Is that just reference to the update back in April or is there other ongoing adjustments being made? And then really I wanted to ask about DST growth in 2021 sorry, in 2020. It seems like there'll be very limited new capacity coming online. So should we expect growth in line with that?
Or do you have the ability to drive asset utilization higher And, yes, thank you, Nick. Yes. Thanks.
Yes. Good morning, Ranos. And the the outlook statement regarding the evolving needs indeed referred to, what we sent back in April of last year. And was an illustration of the kind of adjustment that may be required if market needs are changing one way or another in this. So there is no other conclusion that is being made with this statement.
And Yes, the sorry, the for the second part of your question, The, the growth, the volume growth that we refer to for ELSD is mostly going to come from capacity additions. I do not expect considering also the constant evolution in the product mix that efficiencies will drive major changes in the volumes in the short run. So it's capacity driven. Okay. Thank you.
Thank you. Your next question comes from the line of Ms. Luh Gudogan from ABN AMRO. Please go ahead. Your line is now open.
Yes. Good morning, everyone. Mark, can you talk about EBITDA and E and ST being down half year and half year? Despite EV cathodes being up, was that your expectation already at the H1 results in 2nd July?
Yes. Maybe I'll take it indeed, Muuto. So you're referring to a lower EBITDA margin in the
second half. Is that your question?
Not so much to margin, but just the absolute EBITDA. I mean, the fact that it was down, was that expected?
Yes. I mean, I think we already highlighted in the July call that we would be facing a cost increase indeed, so apart from D And A, obviously, workers. We're talking about EBITDA here. But indeed, the start up costs from the, the greenfield site is now starting to really come through and has been coming the second half because we now have obviously also the European operations and the preparations for the site coming through. So, yes, that was, I think, in line with what we had mentioned in, in July.
No, I mean, the R and D costs, etcetera, we also had visibility on that and that will indeed also continue.
I mean, there's no business that fell short of your expectations. That's actually what I'm trying to get at.
No, given the market context, no, Absolutely. And I would also say because if you look at the question on margins, obviously, we're comparing here with 20 18 and the market context is totally different. If you compare the margins with the margins we had in in previous years, you will see that they are, pretty good, especially given the market circumstances we have to place in 2019.
All right. I mean, and just a follow-up question on this, because if you look at the wording on either the in the H1 press release and also now it's similar in the sense that yes, we expect volume growth, but there will be additional costs And then eventually what you reported was a decline sequentially in EBITDA. So just would this mean that we're also going to see a decline in EBITDA in 2020? Or I mean, you don't say a lot about E and S T in terms of absolute earnings in 2020. Can you help us a little bit there?
I think it's a bit too
early, Mutlu, and to go beyond what we've said on 2020.
Okay. Because you are rather explicit on the 2 other segments, so but not on E and S. D.
No, I think you're asking a specific question on EBITDA in 2020 and that I think goes beyond where we want to go, and I think it goes beyond the outlook statement we've made, yes.
Understood. Thank you very much.
Thank you. Your next question comes from the line of Peter Olofsen from Kepler Cheuvreux. Please go ahead. Your line is now open.
Good morning, Mark and Philippe. I wanted to ask all your efforts related to batteries, but outside of cathodes. So first on battery recycling. I know volumes are still a few years out there considering the time it will take for engineering, construction, etcetera. What would be the timeline in terms of decision making around the potential industrial skill, battery recycling plan, could be that potentially later this year, we get more news on this.
And could you also provide an update on your efforts around Nodes Are you already generating some revenues there? What's the progress there?
Better. So, no, I do not expect that we'll reach a decision point this year regarding the scaling up of our natural recycling activities. I still expect that we will need to be onstream with the industrial scale facilities in the second part of the decade. And indeed, there is quite a bit of a time, like, that you have incorporated, I guess, that you have factored in your question, I guess, as I've typically said that we need 2 years to engineer, 2 years to build, 2 years to ramp up. So we still have a bit of time ahead of us and we're working on the subject to figure out how to best, how and where to best scale up.
So but likely, most likely not reaching a decision point this year. And then in terms of the add ons, yes, we do have revenues from commercial sales for certain applications these are, however, pretty small at this stage, and not of an of the nature, not of a size, that can move the needle in the ANST segment as of yet. And the development assets do continue, of course, to broaden the technology. And the potential application.
But this is an area where we may see more significant CapEx in the coming years or is that likely to be the case?
If we are, I would say, extremely successful from a technical and commercial point of view, yes, that would be the logical outcome. However, given the amount of development work that has yet to be done from a technical and commercial point of view. I think it's too early to be more specific on this one and to be, I would say 100 percent affirmative on this one.
Thank you. Your next question comes from the line of Mubasher Chaudhry from Citi. Please go ahead. Your line is now open.
Just one quick one and a follow-up. Would you say that the drop in margins is entirely cost related within E and ST? Or is there a price portion to it as well? And then on a longer term basis, how would you prioritize between kind of market share and margin for E and S doing forward?
So good morning, Mubasher. So, the main effects, that we have the margins are cost related. As we mentioned earlier, Alvar indicated earlier, Sorry, the second part.
And then the second part was just because you talk about retaining more share. And I'm just trying to think about how that evolves going forward. Are you given the choice between market share and margins? How would you prioritize between the 2?
Yes. Thank you for repeating the question. I missed it in the first place. The, our priority is and has always been to optimize returns. And, we are not obsessed.
We're not driven by shares. But it's in a way, it's too easy to win market share if you sacrifice, prices and margins. And this cannot objective. An objective is to make this growth business a sustainable growth business with acceptable return so that we can continue to generate the means of that are required to further invest. So whether we're talking about E and ST Catalysis or recycling of the, common one of the common denominators is that will always prioritize margins and returns over market shares
Thank you. And your next question comes from the line of Natuzzi Abun from Degroof Petercam. Please go ahead. Your line is now open.
Hi, good morning. Thanks for taking my question. I'm sorry, I'm going to come back on the NST again because I just want to make sure I understand correctly the building blocks. Because you flagged the higher costs that's pretty clear. The D and A, we factor that in.
But then you mentioned in the press release, a substantial impact from the lower cobalt prices and the sorting of electrical cobalt. Okay, you mentioned that was a 1,000,000 impact about that over the full year. But I'm wondering, does that include the impact on your LCO business? And if so, could you maybe help us quantify that? And also for the ESS business that the current so last year.
So that's for the first part. I'm going to have the second question.
That's Nathalie. Let me maybe out with this one, if you, I'll be.
All right.
And good morning, first of all. The, yes, this impact $25,000,000 estimated impact of $25,000,000 includes the impact on LCO. LCO is one of these high cobalt containing product which is facing very significant competition from products containing an FH cobalt. So this is one of the issues that I flagged, last year. Indeed, And on top of that, it's also worth to remind everybody that sales were also down because of a, of excess inventories across the value chain.
And we saw a general movement in the industry to reduce these excess inventories in particular, towards the end of 19.
Okay. And for the ESS business, is there any chance that you can give us an order of magnitude of the impact it had on the 2019 numbers?
No, we're not going to detail that much, what I can confirm, which compared to what I said last year is that the impact is material enough to be, to be mentioned
All right. And then maybe if I may, and then I'm going to stop just wanted to have a bit of an update of your hedging strategy, especially for recycling. So I just wanted to have a bit of an idea of the portion of metals, exposure of 2020 that is already hedged?
Yes. So in the, in the press release, what we written is that we have locked in more than half of our both twenty twenty and twenty twenty one exposure for gold and palladium. So that's a significant portion. And then also significant parts of our 2020 exposure for platinum. Now here's significant versus more than half, it means that significance or the platinum portion somewhat less hedged than palladium and gold.
But so it means that indeed for, especially for 2020 and part of 2021 for gold and palladium, we have already a good portion of hedges in place more than half of our exposure, which obviously means that it caps in a way part of the upside that you see in the recent price spike specifically for palladium, obviously, because these hedges have been entered into I would say, during the course of 2019. And you know, the strategy is really to create visibility at a, an attractive level What I would just to finish on the hedges say is that on volume because that's also a metal that has been increasing a lot in 2019 and especially recently there, we have no hedges. So because rhodium cannot be hedged not a paper market. So for palladium, more than half hedged as well for gold, for rhodium, no hedges. And then we have a few additional hedges for other metals, but those are less significant.
Your next question comes from the line of Alex Stewart from Barclays. Please go ahead. Your line is now open.
Hello, good morning. I have a technical question. If you build a new asset and it takes you 2 years build the assets and then ramp it up in year 3. At what point is the cash you've invested to the cash or on your balance sheet to get allocated to the divisions? And at what point do you start depreciating the asset and do you depreciate it immediately when ramps up, if you could give us some sense of how the accounting works would be extremely helpful?
Yes, so the depreciation starts when the commissioning, so when we use the asset that's the simplest way to put it. So once we are really commissioning and commissioning when really, I would say, operational commissioning, then we start to, to depreciate the assets. So So what you see in terms of D And A and decrease in D And A in 2019 is really still are related to the investments we've done in recent years and partly the Chinese plan for part of the And then so the European plants, that increase, you will actually see mostly as of 2021, but obviously the Chinese plant will continue to depreciate it in 2020.
And just on the invested capital portion, at what point do you make the asset live rather than work in progress?
I'm not sure. I understand that question. Could you could you specify what your
Yes, sorry. Let me be clear. Let's say you build an asset with 1,000,000. And after 2 years, you've spent 1,000,000 of that, but the asset is clearly not operational. Do you put the 1,000,000 of cash that you've spent into the invested capital within the EFT division?
Yes, absolutely. So that's why you see the increase in capital employed. Yes.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Geoff Haire from UBS. Please go ahead. Your line is now open.
Good morning. Mark and Philip, I just have 2 very quick questions. First of all, can you give us some idea of what benefit the Konkola asset will have either in sales or EBIT in 2020 for ESMT? Given obviously if we think well, you sold it as you've gone through this year with contracts with the Glencore. And also just more on NMC cathodes in general.
I noticed that BMW has signed a contract with Samsung to buy NCA cathodes from their battery systems from them. But obviously this is I think the first time somebody's moved into NMC that's not Tesla or NCA, it's not Tesla. Is this something that you're seeing with other OEMs that they're looking MCA or even other battery systems
as well?
Jeff. So let me start with the second part of your question. Yes, we see a number of, bad makers and our makers testing a number of chemistries. Now as far as we are concerned, this doesn't make a lot of difference because high nickel NMCs or MCAs are the same many of technology, of product technologies. And so it doesn't this is not a departure, from a, from their strategy to go to a higher nickel composition in any ways.
On the Coca Cola contribution, we're not going to quantify that, nor in terms of revenue nor terms of bottom line impact.
Could I just come back on the first point point you made on NCA? Does that mean that then your capacity could make NCA or NMC because of the same family?
Absolutely. High nickel and LC or NCA, we do make them on the same equipment indeed.
Your next question comes from the line of Sebastian Bray from Berenberg. Please go ahead. Your line is now open.
Good morning, and thank you for taking my questions. I would have 2. The first is a simple one. Wirt total volumes of see produced up flat or down during the year 2019 across all applications? The second one is on margins.
There was a 370 basis point EBIT margin decline between H1 of 2019 and H2 Now it's about 1,000,000 of additional depreciation. It looks as if there's an additional 1,000,000 of cobalt related issues and that leaves about 140 basis points of unexplained change. Is any of this due to price deflation in NMC?
Good morning, Sebastian. So regarding the first part of your question, I would say that volumes were on a full year basis across applications, so roughly in line with the growth in EVs, offsetting the the shortfalls in electronics and energy storage segments. And regarding the second part of your question, I would turn to, I think it's
the same question on the margin effect an E and ST and repeat what Mark already said is that the main effect, that you see in the second is, is on cost.
Sorry, just to clarify, Mark, when you say in line, does it mean in line with in line with the wider EV market for the total NNC volumes produced at Umicore in 2019?
No, we compare things that are comparable So we compare NMC volumes to the EV industry in the EV market and not to the total, cathode market. So, our sales to the EV applications grew in line with the market. And the total sales volumes were roughly line with those of 2018.
You. Your next question comes from the line of Chetan Udeshi from JP Morgan. Please go ahead. Your line is now open.
Just a few questions. Just back on the NST margin, you guys have talked about the main impact coming from cost. But my question is where do I see that cost? Because if I'm looking at the R and D for E and ST, it's essentially flat versus first half. And if I look at the overall OpEx line in the P and L, it doesn't seem like we've seen a major jump in full year 2019 versus a full year 2020 sorry, 2018.
So I was just trying to see where are those fixed costs coming through in which line that would be the question in P and L. 2nd I had was more just trying to distinguish between what are temporary effects just now, maybe fixed costs increased ramp up costs and market slowdown versus what might have changed structurally in the last 12 to 18 months. So, Mark, maybe can you throw some light on if anything has changed structurally that we start questioning whether your NST as a business can make say 15% returns over the next 3, 4 years, assuming the market recovers. And maybe related question is the the major contracts that you guys announced at Samsung And LT, does that have the pricing visibility that gives you confidence that that is in line with the return aspirations that you have in the business? Because one of the key concerns in the investor base is maybe we know the volumes, but we don't know the pricing of those contracts.
Okay. So, Chetan, let me jump immediately to the second part of your question because we have already answered a number of times the question about the margin evolution, and we're not going to go into more details, anyways. So no, the market context has not changed, indeed, compared to, that's it's not, I mean, today, the market context is still context of subdued demand mostly because of the low demand levels in the Chinese EV space And as I mentioned on previous occasions, subsidy cuts ahead of schedule, which took place in the course of last year as caused a significant decline in easy demand. In China and has had a significant impact on the demand patterns globally because China is the largest market for EVs globally. And we don't see any change in the market context today.
It's a context where indeed there is over capacity in China, not elsewhere because capacity mostly concentrated in China nowadays and has yet to be built in Europe. And, no, there is no change compared to the previous comments, whether it's in terms of, of, I would say, market shares, positioning, qualification, pricing mechanisms because the market context is exactly the same as when we spoke last time. And I was going to come to comment on the pricing and the pricing aspiration or whether the aspirations or return aspirations can be met with the the pricing of specific contracts because these contractual terms are not to be commented on down, not to be shared publicly. So I think it's that's too sensitive from a commercial point of view a competitive point of view, to go there. Again, suffice to say that market conditions are what they are considering the overcapacity in China, which I expect to last in 20 20, as has been the case in 2019.
And, how much can extrapolate from that today is difficult to say.
Okay. Maybe just a separate question. How would you say your win rate has been maybe in the last 6 to 9 months in general for the new projects?
I'm sorry, I would have to be relatively impolite, but I have to give other people a chance to raise a question and we're starting to run out of time So we'll have to follow-up with you separately offline. I'm sorry for that.
Thank you. Your next question comes from the line from Georgina, Iwamoto from Goldman Sachs. Please go ahead. Your line is now open.
Hi, good morning, Mark. Good morning, Philip. Thanks for taking my questions. I was wondering if you could give us some insight into what drove the strength in Catalysis in the second half of twenty nineteen? And if those drivers you expect to continue in 2020, And then I'm going to come back on the EST margin, but from a kind of different standpoint.
All else equal, so same market conditions, you'd be comfortable with market forecasts for a big recovery in the divisional margin in 2021 or 2022 when the greenfield sites are ramped up. Is that a fair statement?
Let me start with the cash this question. What drove the, significant outperformance in the second half of the year was, or very strong record in, in China. We had outstanding, performance in China that in particular due to the fact that we were extremely well exposed to automotive platforms that moved to the China 6 norms in the course of 2019 1 year ahead of the due date. So that's a significant uplift to our position and to our revenues in 2019. And, of course, we'll continue to benefit from our strong in gasoline applications and in particular filters in the course of 2020.
But the uplift from the early adoption of China 6 norms cannot be repeated by definition, for the same platforms in the course of twenty 20. And, on E And STs, 20 No, I think it's really too early to comment on 2021 2022, will get there in due course.
Okay, thanks.
Thank you. Your next question comes from the line of Charles Bentley from Credit Suisse. Please go ahead. Your line is now open.
Specifically on Europe for EST next year, can you indicate the amount of production that's kind of directed to Europe for 2020? And then can you give any indication of whether those platforms are single or mal or dual source or multiple source or whatever? And then just finally, Just on the kind of 60 gigawatt hour target by mid-twenty 21, can I just ask how much of that is dependent China kind of returning to growth? I guess the question would be that whilst you might have a delay to the withdrawal of such these that might happen in the first half and maybe that impacts demand. So I guess it's just a question of how important China is to that target?
Good morning, Charles. So the, again, we do not expect Chinese demand to recover in 2020. That's a confirmation of, what I said last year, we don't see any reason to change our views there. There is no sign of a turnaround in 2020. So the in a way, the 60 gigawatt hours and the 100 gigawatt hours, projections we have mentioned are not dependent on a recovery of Chinese demand in 2020.
And clearly, China will continue to be a significant market for us. So yes, this is part of the 61100 gigawatt hours, projects concerning Europe, we're not going to quantify how much production is coming on stream in the course of 2020. It's as I mentioned on the previous occasion, just to provide the high level guidance, in the, in the, the midterm we're going to have significant capacity, in Europe and China today, Korea and China are the largest, production sites and markets for us. And Europe is going to catch up over time.
Sure. Sorry. Can I just check on that?
Maybe it's also worth reminding you that we're starting production in Europe the end of 2020. So, the main effect will be visible in the course of 21.
Sure. Thanks, Mark. I was just sorry, I was asking more sales in Europe as in like as a percentage of your sales, how important is Europe as a market versus, versus China in 2020? And then the platforms that you're selling on in Europe that are, yeah, whether they're dual source or multi source? Or single source?
Thanks.
Yes, whether they are single source or dual source, we have a mix, of situations and whether it's in Europe, China or Korea is the same and we have quite a number of global platforms as well. So we have reasonable mix of a single sourcing and multiple sourcing platforms in our portfolio. And Europe is, is actually, today, by definition, still, smaller than other markets, for us, because the share of easy sales, in Europe relative to the rest of the world is around 20 25%, 25%. So by definition, this is a proportion that is meant to grow, in the future as Europe is moving this year, actually, to tighter emissions and see quite a number of launches of new models. So our sales will grow in our sales to European for European models will grow, sorry, quite substantially in the years to come.
And the proportion of Europe in our portfolio will grow in the years to come. Thanks, Mark.
Thank you. At this stage, we'll take 3 last questions. And your next question comes from the line of Jean Baptiste Roland. Please go ahead. Your line is now open.
Good morning, Mark, and good morning, Philippe. When you talk about profit growth this year, it sounds that it's going to be entirely driven by recycling and probably on the back of metal prices that you have been able to hedge. I just wanted to confirm that. And then I'm slightly surprised that the main impacts from Europe in EST is not coming before 2021 since OEMs are ramping up production of EVs as of now and presumably a number of suppliers in the market have already started to see a good start from current trading. Is that that you're not seeing material orders or is that you that you prefer staying prudent and maybe assume that there is no guarantee that the OEMs will actually manage to have commercial with their sorry, commercial success with their, with their easy launches this year?
Thank you.
Good morning, Jean Baptiste. Thank you for raising that question because it gives me a chance to clarify my previous statement. I was referring to our European production. Starting in, at the end of this year, and it impacts being visible in 20 21, I was not referring to, or sales ending up in the European models. So that's, that's, I think, an important distinction no, we are extremely well positioned on models across the world, including in Europe.
And there is no I would say no issue of, position the borrower growth in line with the market. In that respect, I was just referring to our new production. And, I'm not going to go into more granularity in terms of the outlook statement also and the fact that, for obvious reasons, visibility is quite limited today for any business in any industry and for global businesses and especially for, companies with significant exposure in, in China. I don't think it would
earnings, but that's okay to go into.
Can I just ask a quick follow-up on trying to understand whether you're actually as of now exporting cathodes from South Korea into Europe? In order to supply OEMs? Or is that something maybe if you can't specify whether that's something that you're doing at the moment? I'm just trying to understand if that's something that you would be doing if you had if you had the if you had demand from OEMs in Europe
Let's put it this way. We have quite a number of our materials, quite a volume of our materials ending up in European cars. And whether this is through direct sales in Europe or sales to our customers in Asia who themselves sell in Europe, I'm not going to detail. That's going to be a combination of both.
Thank you. Your next question comes from the line of Cindy Mehta from ING. Please go ahead. Your line is now open.
Yes, good morning. So a question on CapEx where argue in terms of the CapEx budget of all the battery expansion? And is 2020 the final year of heavy CapEx in E and ST following up on that, can you comment on leverage in 2020? Do you see net debt to EBITDA up? And if so, to what extent?
So maybe I'll take that on CapEx. I mean, if you look at the growth prospects in this business, it's fair to say that CapEx will remain, high in this business for the foreseeable future. So it's not like there was a tailing off to be expected that's just a consequence of the unique growth opportunity that we see for 2020. My voice over, I gave you a bit of guidance. So for 2019, we're at 500 and 50, if I around it.
So, what I've said is, I mean, again, it's early days, but probably somewhere similar or maybe a bit higher. With the caveats and that's related then to, I would say, the general statement on visibility in all of our markets that obviously we were adjust that if we need to based on the market context. But that's the kind of number. So yes, I continue high investment in 2020, driven mostly not only, but mostly by E and ST and certainly the European greenfield plant is a key aspect into that. So you don't see an easing of CapEx in 2021?
Well, obviously, I mean, it's too early, but I'm just referring to the growth opportunity in this market. So if you only take the greenfield sites, then clearly, the Chinese side and the Polish side, that will be commissioning end of 2020. So that CapEx obviously will fall away. So that's more a question than of the future growth of the market in the next few years. That was only referred to.
I was not giving specific guys on 2021, but I'd say it's a logical consequence of the growth opportunities in this market more than any case. And the second question now I forgot, would you mind? I had the leverage. So it's, again, I think it's early days to give specific guidance, but I would say the building blocks, you, you, hope we gave you a bit of, guidance on the EBITDA, you make your own assumption, based on our outlook statements, the CapEx we've just covered. The working capital, as always, metal prices will play a very key role.
That's the determining factor for Umicore. So it's too late to give an indication. The only thing I would like to highlight as put in the voice over is that given the spike and PGM prices that we've seen in January and in beginning of February that, that will have an important impact working capital in Catalysis. We already had an impact in, in 2019, towards the second half and towards the end of the year. But if you look at the BGM prices, where they are today, you can expect at least the same impact in 2020.
Obviously, assuming that metal prices will prevail at the current efforts. But so Catalysis is something to highlight related to metal prices. The rest of the units is too early to give an indication.
Okay. Thank you.
Thank you. And our final question comes from the line of Jadeep Pandia Millennium.
Just a simple question really is, you've announced 2 contracts with LG and Samsung in the current plan that you have given us today 60 gigawatts and whatever 100 plus gigawatts. Is there any room for more contract announcements or are you done basically?
Actually, good morning, Jardeep. And, though these were, the contracts that both parties, in each case, want to be advertised. And Clearly, we have multiple customers, and while our Korean customers are very large customers of ours, our portfolio broader than that. And the projections of capacity include other customers in the mix as well.
Okay. Thank you.
Okay. So, thank you. And I realize that we haven't had the time to address all of your questions. So I'm sure that there will be many follow-up questions. And of course, as usual, we will, our Investor Relations team will be, available to address your, follow on questions.
And also, we will meet in the next few days and have a chance to continue the discussion about the performance of Umicore. And with this, I would like to thank you for your participation in the call today and wish you already a nice weekend. Thank you, and bye bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.