Ladies and gentlemen, thank you for standing by, and welcome to the Umicore announcement of the partnership with LG Chem conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday the 24th of September, 2019. I would now like to hand the conference over to our speaker today, CEO Marc Grynberg. Thank you. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to this conference call. As you know, Umicore has a tradition not to disclose customer names or actually any details about commercial contracts. In a limited number of cases, though, we depart from the tradition and of course, there needs to be enough good reasons to do so. As a matter of introduction to this call, I thought it would be appropriate to explain very briefly why we are communicating about this non-exclusive agreement with LG Chem. Firstly, this agreement is the first of its kind in the industry in several respects. It's the first multi-year agreement of such a magnitude and with volume commitment, which creates predictability along the supply chain to EV manufacturers. It's the first agreement to support global EV platforms with exactly the same products to be supplied in three different regions.
This agreement goes to show that our unique global positioning is a competitive differentiator. It's the first agreement to encompass material supply, IP rights, and in the future, recycling, which goes to show that the business is driven by technology and that our closed loop model is gradually gaining traction. The agreement also confirms that leading battery manufacturers, which have in-house cathode materials capabilities, will continue to rely on the technologies from material specialists. In this respect, I would like to read the announcement or a very short section of the announcement that LG Chem released very early this morning, Asian time, where they say that Umicore has the world's best technology in the nickel, cobalt, and manganese cathode materials industry, which LG Chem has adopted for EV batteries. I think this is quite telling.
Obviously, we only communicate about commercial agreements when both parties to the agreement deem it appropriate to communicate. In this particular case, we wanted to confirm that the fundamentals behind electrification are intact, that EV demand is clearly taking off, with Europe becoming a key EV region. Both parties felt it was also important to signal or confirm that this business is, and remains, a technology business where scale and global capabilities are key. While the agreement with LG Chem fits in the growth trajectory, which we have shared with you previously, it is exciting news and represents a key milestone in the consistent and successful execution of our long-term growth strategy. With this, I would like to now open the floor to your questions.
As usual, and also for the benefit of the limited amount of time that we have, I would ask you to limit yourself to one question at a time. If you have follow-on questions, please place your name again in the queue. Thank you.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We already have a couple of questions, sir, on the queue. Our first question comes from the line of Wim Hoste from KBC Securities. Your line is open. Kindly ask your question.
Yes. Good morning, everybody. Wim Hoste, KBC Securities. My question is about the timeframe of this contract. It mentions several years. Can you offer a little bit more precision about how many years this is, more or less? Is this roughly five years? Is this longer? Shorter? Can you offer any additional clarity on that? Thank you.
Good morning, Wim. What I can say, that it's the typical average duration of a platform.
Okay. Understood. Thank you.
Thank you. Our next question comes from the line of Ranulf Orr from Redburn. Your line is now open. Please ask your question. If your line is on mute, sir, can we unmute?
Sorry. Apologies. Thanks for the question. I was just wondering, does this agreement cover all of your supply with LG Chem? Could there be additional volumes to them in the future alongside this? Thank you.
Ranulf, good morning. This agreement covers the vast majority of our supplies to LG Chem for the coming several years. Of course, as I mentioned, as a response to the previous question, for the duration of the platform for which the product is qualified. There is a bit of upside that has been incorporated in the contract. There is a possibility for upside in case the demand proves to be higher, the market demand proves to be higher than what was anticipated, and it does not cover our other supplies to LG Chem, which may be for other applications than automotive, like in energy storage or in portable electronics. This is a purely automotive platform for NMC automotive platform.
Great. Thank you very much.
Thank you. Next question comes from the line of Mutlu Gundogan from ABN AMRO. Your line is now open. You can ask your question.
Yes. Good morning. Congratulations on the contract there, Marc. I understand that this is a take-or-pay contract. Can you tell us how the price of this contract compares to the volumes you sold in the last few years?
Good morning, Mutlu. Yes, your understanding is correct. There is a volume commitment, firm volume commitment, which is also one of the reasons we wanted to signal that there is a change happening in the industry because EV manufacturers and their supply chains need more predictability in order to develop the capacities in particular. Indeed, it is a take-or-pay contract. Unfortunately, I'm not at liberty to disclose details about the pricing. Suffice to say at this point in time that it is a pricing that was agreeable to both parties, obviously.
All right. Thank you.
Thank you. Next question comes from the line of Tom Wrigglesworth from Citi. Your line is now open.
Morning. Thanks for the opportunity to ask a question. Does LG Chem agree that it won't invest in further upstream capacity while this agreement's in place? Yeah. That's my question.
Good morning. The answer is no. There is no such agreement because there is no need for such an agreement. As I've mentioned on several occasions in the past, there will be coexistence and continued coexistence of in-house and external supply players, which like LG Chem, do have in-house capabilities. We're not substituting in-house capabilities. We understand that LG Chem and some other players will continue to increase capacity and at the same time will continue to rely on growing capacities and capabilities from third-party suppliers just to make sure they have access to the best technologies and the best capabilities around the globe. I would like to highlight once again that one of the specificities of this contract is that it's a contract that covers global supplies from the main EV regions, being Korea, China, and Europe, of exactly the same products for the same platforms.
This global aspect is quite relevant when it comes to assessing the coexistence of in-house and external supplies.
Thank you, Marc.
Thank you. Next question comes from the line of Adam Collins, Liberum. Your line is now open.
Good morning, Marc, and congratulations again. I wanted to ask about the comments about cross-licensing that were made in the statement. What IP does LG Chem have that might be of interest to you? Just a point of clarification in terms of the comments that came out overnight from LG Chem. I saw a press report that suggested that LG Chem was saying that roughly half of the long-term production volume will be supplied by your European factory. Could you just clarify if that's the case?
Yes. Good morning, Adam. Indeed, actually more than half of the volume will be supplied out of Europe. Indeed. You may recall that what I said a while ago, that there was no reason for us to adjust the timing of our investment plan in Europe when we said that we're pushing out some line additions in China. This is indeed very correct. More than half of the volumes will be supplied out of Europe. The cross licensing agreement, I'm not going to enter into the details of the patents that are covered on each side. I would like to say, and to also reiterate at this stage that, for both parties, it represents a strengthening of the IP portfolio. The IP portfolio is extremely important to provide players with the required freedom to operate.
What it will also do is strengthen the ability of both players to defend the IP against some certain competitors.
Okay. Thank you.
Thank you. Next question from the line of Nathalie Van den Haute from Degroof Petercam.
Hi. Good morning. Thanks for taking my question. If I can just come back to your comment that there is upside incorporated in the contract. If demand is higher than initially you expected, is it like you have to set aside part of your capacity to actually meet that potential upside, or how does it work?
Good morning, Nathalie. That's actually as a matter of capacity planning. You may also recall, or that what I explained earlier is that we work with multiple customers, multiple platforms, such that statistically speaking, we have better probabilities to have the highest utilization rates. When one model does better than planned, it makes up for another not doing as well as forecast. This is a kind of flexibility that we will continue to use in order to cater for possible upside on this contract. You will also recall from my previous statement, we're trying to plan for capacity in a way not to end up with excess capacity indeed. That will continue to be, I would say, a day-to-day operational focus is how we manage capacity, how we accommodate the required flexibility.
It's not going to be trivial, but that's definitely something that is part of our plans.
Okay.
Thank you. Next question comes from the line of Gunther Zechmann from Bernstein.
Hi, good morning. Can you explain a bit how the ramp will look like on the volume side over the duration of the platform, and also on the price? Is that a fixed price over the duration, or what are the flexibilities or pricing during that time, please?
Let me start with the second part of your question. The price has been negotiated for the duration of the agreement, indeed. Whether it's fixed or not, I'm not going to disclose, but I mean, fixed or moving during the duration of the contract, I'm not going to disclose, but it's predetermined. The ramp will be pretty quick, indeed because the demand for EVs is moving pretty rapidly. A lot of work has been done in the past several months with LG Chem to prepare for the line and for the qualification and to prepare for a fast ramp-up. It's going to be pretty fast.
Thanks.
Thank you. Next question comes from the line of Jean-Baptiste Rolland. Your line is now open.
Good morning, Marc, and thank you for answering the questions. I'm trying to understand, could you explain why you haven't raised or accelerated your targets on the 175 kilotons of cathodes? Does that mean that you had any spare capacity or any capacity that was not fully committed at that stage? Thank you.
Good morning, Jean-Baptiste. No, actually, we don't have spare capacity or uncommitted capacity, this is where we have used the flexibility or the modularity that I referred to earlier by pushing out some line additions in China and not changing the investment schedule for Poland. Clearly, this announcement today fits in the growth trajectory that we had explained earlier, with the 175,000 tons of capacity to be reached initially planned by end of 2021, and now with 12 to 18 months today. We're still in sync with these comments. No, there is no reason for us to change that. There was clearly a need to maintain the project in Poland, to maintain the schedule or the timeline for the project in Poland, because as I explained earlier, more than half of the volumes over time will be supplied out of that plant.
Thank you.
Thank you. Next question from Sebastian Bray from Berenberg.
Good morning, and thank you for answering my question. I just would have one on the scope of IP collaboration. You mentioned that the length of the life of a platform is the length of the contract, and my guess is that's 5 to 8 years. What happens to the IP transfer after this contract is done? Are both parties still free to use the other's IP, or is there an expiration date to the licenses as they are awarded? Thank you.
Good morning, Sebastian. The IP agreement is not exclusively tied to the platform and the platform life that is actually underlying the supply part of the agreement. It survives that platform, and as I mentioned earlier, it's important for the other parties to strengthen their portfolio, to have the freedom to operate, and to be able to defend their IP in the market.
If I may phrase that differently, would LG Chem be able to use Umicore technology to produce its own cathodes post the end of this agreement?
No, because the agreement, again, covers product recipes, product IP, fundamental product IP, but does not cover the process know-how and the process IP that Umicore possesses and which is absolutely fundamental in making the product and giving the product the right properties and quality.
Many thanks.
Thank you. Next question comes from the line of Chetan Udeshi from JPMorgan. Your line is now open.
Thank you. Just one question. I don't know, Marc, if you can give this color, but of course, you're not giving us the actual duration of the volume contract. Is there a way you can quantify how much of these volumes in a single year during the peak volume ramp-up of this contract cover the total capacity that you guys might have planned for next three to five years? How much of your total capacity is taken up by this single contract itself? Some number there would be useful. The second question is, given the size of this contract, I think historically, I remember in the past, you guys have talked about China being the site where you will have the biggest capacity post the ongoing expansion. Do you think maybe that changes in three to five years?
I know maybe Europe becomes a bigger part of your sort of expansion drive going forward overall or part of your capacity share in cathodes.
Good morning, Chetan Udeshi. No, unfortunately, I cannot disclose the percentage of our capacities or future capacities that the contract represents, so I cannot be very helpful there. I can only say that this is a big contract, obviously. China will be, for the foreseeable, our largest production country and where we will have the largest capacity. For reasons that were explained in the past, there is no change to that perspective in the short term or the foreseeable future. This being said, I expect very fast growth in Europe in the coming years, driven by a tightening CO2 legislation and a clear electrification roadmap of most OEMs selling cars in Europe. I expect that Europe will become a very significant market for Umicore in the medium term, indeed. It's too early to say if and when Europe will overtake China in terms of our EV presence.
I can only say that I expect very strong and very significant growth in this region indeed.
Thank you.
Thank you. Next question comes from the line of Geoff Haire from UBS. Your line is now open.
Good morning, and thank you for the opportunity to ask some questions. Just wanted to ask, does this agreement limit, in your opinion, your ability to supply other battery pack producers or OEMs for that matter?
Good morning, Geoff. No, it does not. The contract, as I mentioned in my introductory remarks, is non-exclusive. It doesn't infringe on our ability or doesn't decrease our ability or nor willingness to work with a large number of battery manufacturers and car OEMs in terms of technology development, in terms of product qualifications, and in terms of supply, and as well as in terms of closed loop. It is a key milestone in the execution of our strategy, and it is not the only one.
Just to clarify, you have other contracts that are similar to this that you haven't told us?
As I mentioned indeed earlier, in some cases, there is a common willingness to announce contracts, and this is rather the exception than the norm in our business.
Okay. Thank you.
Thank you. Next question comes from the line of Ranulf Orr from Redburn.
Hi. Thanks for taking the second question. I was just wondering if there was anything specific to your relationship with LG Chem that allowed you to announce this type of deal. To ask it another way, is there any reason why we shouldn't see more of these types of long-term volume commitment deals being announced between you and other cell producers or even automotive OEMs? Thanks.
Ranulf, I cannot indeed rule out further announcements in the future. Clearly, we have a number of customers with very strong and longstanding ties from a technical point of view and commercial point of view in the different regions, both on the sides of battery manufacturers and car OEMs. I expect that in the future, as the market will need more predictability in order to develop the supply chains, that this will become a possibility indeed.
Great. Thank you.
Thank you. The next question comes from the line of Martin Evans from HSBC.
Yeah, thanks. Again, it's just back to the location being in Poland. What's happening, Marc, at the Korean capacity sites that we saw last year? Are those operations running at full capacity, which is why you've chosen that most of the volumes, as you say, for this agreement will be coming out of Poland? Thanks.
Good morning, Martin. No, that's not the reason why we chose that most of the volumes would come out of Poland. We are actually aligning our production to the customer's needs. As I mentioned, we're talking about global platforms. It is important to produce in the region where the end market is going to be. Part of it is Korea, part of it is China. The big chunk of the volume covers the European market from a battery cell production point of view and from an EV end market point of view. It's really in alignment with the needs of the customer more than anything else.
Okay, thanks.
Thank you. Another question comes from the line of Mutlu Gundogan, ABN AMRO.
Yes. I'm here again. Can you explain this remark? I assume that there are currently EV models out there that contain a battery from LG Chem that has a cathode from Umicore. How does this contract change from the existing situation?
This contract relates to new platforms, Mutlu. As I mentioned earlier, global platforms that have very specific requirements in terms of the cathode material and in terms of the location of production. It's new. It doesn't overlap with the current things that Umicore, the current supply that Umicore has to LG. Some of which will be platforms that reach, or are soon to reach end of life. This is a natural evolution of the business.
Sure. I'm just wondering to what extent is it possible that Umicore alone will still pitch for new EV models and you might, for certain models, you might team up with different battery producers. Could it be possible that you will compete with your own partnership?
Yes, this is possible because, as I think explained on previous occasions, there may be overlaps between supply chains, and we will indeed continue to work with LG Chem and with others in pitching for new platforms, new EV platforms. I cannot totally rule out that we may be pitching through different angles and through different, I would say, supply partnerships for the same platform.
That's clear.
That's a possibility.
Okay. Thank you, Marc.
Thank you. Another question from Jean-Baptiste Rolland.
On my previous question, does this agreement suggest that you have made significant progress in silicon anodes? When you first presented at your CMD over a year ago, it sounded like it was at a research stage, and you mentioned that it seemed really like to be one of the avenues worth exploring to the bottleneck energy density in the cell for the new battery. Are you still in development stage, or have you reached any form of commercialization stage on this product? Thank you.
Jean-Baptiste, when it comes to silicon anodes, we are in commercial stage for non-automotive applications. When it comes to automotive applications, we're still at the development stage. Which means that the silicon anode development is not really part of this agreement with LG Chem. I see that as a longer-term option for the automotive application.
Thank you.
Thank you. Another from Geoff Haire, UBS.
Hi. Just following up on my last question. When you go and tender for business with other OEMs or Samsung or SKI, how would you assure that LG doesn't get to see what you're working on for other companies and therefore allay some of their concerns that you have a partnership with one of their major competitors as a battery pack manufacturer?
Sorry, Geoff. I did not really understand the question.
If you're in partnership with LG Chem currently in both IP and supplying them, if you're then going to bid for contracts with other battery pack manufacturers. How will you assure them that what you're working on for them doesn't get seen by LG? Obviously that would be a major concern that one of their major competitors will see what they're doing.
No, clearly. Similar to what we're doing in catalyst, first of all, we have very strict procedures and processes in place to segregate the development work that is done jointly with our OEMs or with battery OEMs from one another. This is, I would say, well established industry practice, both in the catalyst business and in the battery materials business. On top of that, I would like to repeat what I said on previous occasions, is that there is a significant trend to customization and most of the work that we do in the context of such partnerships and development is ending up in exclusive products or products that are tailor-made for a given platform and indeed, that are not shareable with others.
Okay. Thank you.
Thank you. We will now take our last question. That comes from the line of Martin Evans. Your line is now open.
Yeah. Thanks. There have been a lot of headlines in the last few weeks and months about Tesla choosing, among others, LG Chem for some battery supply to their Gigafactory and so on. Would it be a simplistic assumption, but a correct assumption, to assume therefore that some of your cathode materials that are going to LG Chem will end up in the Tesla? Thanks.
Martin, unfortunately, I'm not allowed to mention where the products would be going. I'm sorry, I cannot answer that question. I'm not allowed to answer that question.
Okay, fair enough.
Thank you. No further questions. Please continue, sir.
Okay, I would like now to thank you very much for your participation at relatively short notice to this conference call this morning. Again, as I mentioned in my introductory remarks, while this announcement fits perfectly in the growth trajectory that we had announced and communicated earlier and shared with you on previous occasions. This is a key milestone and very important news for Umicore and the confirmation that we are continuing to consistently execute our growth strategy in battery materials. With this, I would like to close the call and invite you, as usual, to reach out to our investor relations and media relations teams if you have follow-on questions. Thank you and have a great day. Bye-bye.