Ladies and gentlemen, thank you for standing by and welcome to Umicore Half Year 2019 Results. I would like to hand the call over to our first speaker, Mr. Mark Greenberg. Thank you. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to the presentation of Umicore's results for the first half of this year. I will cover our business and market developments as well as the outlook for the full year before handing over to Philip, who will take you through the financials. I will then wrap up before opening up the call to you for any at the highlights, my first comment is that we have faced a challenging environment. In the second half of last year, we saw the first time of a downturn in key industries and faltering consumer confidence with declining car sales as one of the most visible effects thereof.
These negative trends have either continued in the 1st part of this year or in some cases have gotten worse. In addition, as I explained at the end of April, certain more specific market factors have affected Umicore's growth trajectory rechargeable battery materials. Against this backdrop, our performance in the first half proved robust In Catalysis, we have substantially outperformed the automotive markets. In recycling, we have achieved a significant improvement in throughput rates in Opoken following the latest wave of investments. In Energy And Surface Technologies, The performance was below the record adapt to short term fluctuations in demand.
I would also like to point out that our cash flows have substantially improved and Philip will elaborate on this topic in a moment. Another highlight of the first half was the successful private debt placement of EUR 390,000,000 at historically low fixed interest rates and with maturities of up to 12 years. Despite the road bumps, which affect our growth trajectory in the short term, I convinced that the growth drivers which support our business are ever more relevant, and we remain committed to our long term growth strategy in clean mobility materials and recycling. So while we continue to deal with conditions, we are making new strides into strategy execution. For example, we are securing a significant portion of our future cobalt needs through the ongoing acquisition of Freeport Cobalt refinery and capital precursor activities in Finland and through a long term partnership with Glencore that guarantees access to sustainable cobalt supply.
As another example, we're expanding production capacity in Europe, China and India to support the growth in automotive catalysts. In rechargeable Battery Materials, continue the construction of the greenfield production site in Poland and will soon start the commissioning of the new site in China, with an adjusted schedule search and development. In terms of outlook for Catalysis, I do not see any concrete signs pointing to an immediate recovery in car sales. The factors that have caused the downturn in the automotive market since mid-twenty 18 are still very much present and continue to undermine consumer confidence. However, I expect the Umicore will continue to perform better than the automotive market as a result of our strong market position in gasoline applications, and the growing market penetration SCT expansions in Portland, China and India.
I also expect continued revenue growth in Precious Metals Chemistry, driven by increasing demand for unicorns, homogeneous catalysts and fuel cell catalysts. They also for energy and surface technologies confirms the trends that I described back in April, with previous projections of 100,000 tons of cathode material sales in 2019 175,000 tons of capacity at the end of 2021, now more likely to be achieved with a delay of 12 to 18 months. I expect a slowdown in the growth of EZs to continue in the near term as the subsea cuts, which were announced in China at the end of March, are now in full force and are likely to impact EV demand in the second half of the year. As announced in April, we have adopted the pace of addition of new production lines in China to align with the recent developments in demand. Results in the second half will also reflect higher depreciation charges and upfront costs related to our greenfield plants China and Poland as well as the impact of persisting low cobalt prices and the overhang of an ethically sourced cobalt.
On a positive note, the demand for cathode materials used in energy storage applications may pick up in Korea in the second half following the completion in June of the safety investigation, which has exonerated battery producers and their material suppliers. Despite the adverse market conditions, I expect overall sales volumes of cathode materials in the second half to grow both sequentially and compared to the levels of the same period last year. The latest wave of investments, which we carried out in Hoboken during the extended maintenance shutdown earlier this year, has improved the throughput rate of the plant, and by the end of the year, we expect to achieve a throughput rate corresponding to annualized volumes in definitely above the record volumes of 2018. The supply mix is expected to remain supportive in the second 2, and the same goes for certain precious metal prices. Unfortunately, second half results will be dented by about EUR 10,000,000 corresponding to the impact of the fire incident which occurred in Hoboken at the beginning of July.
The installations have been repaired in the meantime and the Hoboken plant is now back to normal operations. All in all, I expect full year recurring EBIT to be in the range of EUR 4.75 to EUR 525,000,000, which is fully in line with the guidance that I provided has effectively materialized or been confirmed in the meanwhile. This guidance assumes no material further deterioration in the macroeconomic context in the second half. As I also mentioned back in April, I expect full year recurring EBIT in Energy And Surface Technologies to be well below the record level of last year. And both in Catalysis and recycling, I expect it to grow year on year.
Let's now turn to the business review and comment on the main developments in each of the 3 business groups in the first half of the year. Starting in alphabetical order with Catalysis. Global car production in the first half declined by 6.7% year on year as trade tensions and a weakening economic outlook continued to weigh on consumer confidence directly affecting vehicle purchases. In China, car production was down 12% and the decline was exacerbated in the 2nd quarter by the destocking of China 5 compliant vehicles ahead of the early introduction of line of 6 standards in certain cities. In Europe, car production was down by more than 6% year on year, with diesel as expected, showing a larger decline of 13%.
Diesel car sales in the region now represents 36% of the market. In North America, car production declined by close to 4%. The recent news flow from Care Automotive Industry does not provide any indications of an imminent upturn imminent upturn in demand. Against this backdrop of a sharp contraction of the automotive market, we achieved a strong performance in Catalysis in the first half with revenues increasing by 1% year on year to EUR 717,000,000, recurring EBIT for the business group was similar to the first half 3% year on year. The Automotive Catalysts business, which currently generates about 90% of the business group revenues, benefited from market share gains in gasoline applications and an increased market penetration of gasoline particulate filters.
You will recall from the Capital Market based presentations in June of last year that we have been highly successful in winning new gasoline platforms, particular, those requiring particulate filters in Europe and China. And this is the most significant factor which enabled us to outperform the These market share gains would offset the negative impact on margins of the lower proportion of diesel cars in the European mix and I confirmed that we are gradually getting there. Also important to mention is that we recorded higher revenues in the heavy duty diesel segment In the light duty segment, Umicore's catalyst sales are well balanced from a geographical point of view with Asia currently accounting for 37 percent of our global sales volumes, Bureau accounting for 31% and the Americas for 32%. In Asia, I would like to highlight our very strong performance in China. While car production there declined by 12% year on year, we managed to grow sales volumes and revenues in the first half well above the levels of last year.
This was due to the market share gains which I referred to a moment ago as well as a supportive customer and platform mix. In Europe, we had strong sales of gasoline catalyst technologies, which mitigated the impact of lower light duty diesel sales. With gasoline applications now representing about Three quarters of our dry duty catalyst volumes in Europe, we are well positioned to benefit from the changes in engine mix in the region. The contribution from gasoline particulate filters is growing and the trend is set to continue as the market penetration of such filters increases. Production capacity is being expanded for gasoline catalysts and centers, in both Europe and China.
In Poland, the new production line started to come on stream in the second quarter, while the new production lines in China are to come on stream in the second half of this year as is the production capacity expansion in India to cater for the new Bharat 6 awards. Revenue growth in Precious Metals Chemistry was driven by stronger demand from the pharmaceutical and chemical industries for Umicore's homogeneous catalysts. This portfolio has recently been expanded by the purchase in July of intellectual property from Evonik covering metastasis and cross coupling catalysis. Revenues from fuel cell catalysts were also higher and Umicore is expanding its fuel cell catalyst production capacity in Korea to benefit from the growing uptake of fuel cell drivetrain technology. The new plans will be commissioned at the end of the year.
Mid- and longer term perspectives in Catalysis are product with tighter emission norms being introduced in several regions, both for light and heavy duty applications. The most significant impact of the new norms in terms of Catalysts market value uplift will be visible in China, Europe and India, over the next 2 years. Umicore is set to benefit from this tightening of emission norms, as well as from the increasing share of gasoline platforms in the mix and the growing importance of gasoline particulate filters. In addition, Umicore is well positioned to benefit from the growing uptake of fuel cell drivetrains and the new production capacity for fuel cell catalysts will help establish a strong foothold in this emerging technology segment. I'm now moving to Energy And Surface Technologies.
As I explained at the end of April, the growth in demand for cathode materials used in lithium ion rechargeable batteries, started to slow down in the first half of twenty nineteen for several reasons. China, in particular, sales of electric vehicles have continued to grow year on year, albeit at a slower pace than in the first half of twenty eighteen, and in absolute value have remained well below the levels of the second half of last year. At the end of March, the Chinese government announced a change in the subsidy mechanism for new energy vehicles with deeper denominated subsidy cuts on national level and removal of all regional subsidies making electric vehicles substantially more expensive in the context of an overall weak automotive demand in China. As the subsidy cuts took full effect at the end of June, there may have been some easy pre buying in June, and the full impact of the subsidy cuts on EV demand is likely to be seen in the second half of twenty nineteen. The new subsidy scheme is also likely to be less supportive of NMC materials for use in electric versus for short distance public transport.
The other application segments have also seen significant developments in the first half. In Korea, the largest market for energy storage, installation of new systems came to a complete stopped during the first half, following a series of safety incidents. The good news there is that the safety investigation was completed of the year. In portable electronics, global demand for high end device was subdued in the first half of the year, and sales of Umicore's high energy LCO cathode materials were lower. The reduction in demand was exacerbated by high inventory levels in the supply chain and by the price advantage that Umicore experiences compared to products containing analytically sourced cheap cobalt.
There are no signs of turnaround in the near term in this segment and we expect our customers to continue reducing their inventories. You will also recall from the discussion we had back in April, that Umicore's cobalt containing products are placed at a competitive disadvantage by the unestically sourced cheap cobalt units originating from artisanal mining, while the persisting low cobalt price has led to a reduction of the inflow of such cheap cobalt, the stock overhang is still affecting the market and pricing dynamics. Revenues for energy and surface technologies in the first half were down 7% year on year at 1,000,000, and recurring EBIT decreased by 16% to reach EUR 102,000,000, while the recurring EBITDA was down by 5%. This performance reflected the impact of lower metal prices, lower volumes of NMC cathode materials used in energy storage batteries and lower shipments of high energy as fuel cathode materials for portable electronics. Sales of cattle materials for automotive applications were flat.
The lower metal prices had a material impact on revenues in current EBIT as unicorns margins were reduced in the refining, recycling and distribution activities compared to the record high levels achieved in the first half of twenty eighteen. While it is difficult to accurately quantify the effect of the inflow of an ethical cobalt on volumes and margins, we estimate that the combination of low metal prices and unethical cobalt has had a negative impact on the recurring EBIT of the business group of about EUR 10,000,000 to EUR 15,000,000 compared to the first half of 2018. The downstream product and distribution activities in cobalt and specialty materials were also affected by lower cobalt prices and by customers destocking inventories that were acquired during the period of price increases. Similar to LCO, the sales of cobalt containing products of the business units were also affected by the competition from achieved cobalt units, units, which are analytically sourced from artisanal operations. Revenues for electroplating were slightly down, while those of electro optics materials were stable.
Despite short term fluctuations in demand, the underlying fundamentals supporting The electrification's trend remains strong. The regulatory push in China is continuing despite the deeper than anticipated subsidy cuts with other levers being applied, including sales tax exemptions and removal of registration plate limits. Similarly, in Europe, CO2 legislation and low emission credits 5 vehicles with average new to emission levels, again, having increased in 2018. At the same time, drivetrain electrification is confirmed as the main avenue to drastically reduce vehicle emissions and all automotive OEMs have started to roll out their electrification strategy or are stepping up their efforts in this respect. Also, the technology roadmap requires innovative materials and continues to offer ample room for differentiation.
This is driven to a very large extent by consumers' expectations of longer driving ranges, shorter charge, charging times, longer battery life and affordable car prices. While these demands make sense from a consumer experience point of view, their combination is complicated to be achieved. In addition, given the volumes of materials requirement for each individual EV platform, the ability to scale up fast and meet the highest quality standards with consistency remains another source of competitive distinction. Yumicore is well placed to meet such product and process requirements and our closed loop offering adds to our ability to create competitive distinction. Temicore is committed to enabling the transition to electrified mobility and is expanding production in China and Poland.
Alongside the organic investments, We also announced in May 2 important steps to expand our integrated and sustainable battery materials value chain. One of these steps is the agreement to acquire Freeport Cobalt, Freeport Cobalt's refinery and precursor production in Coca Cola, in Finland, Acquisition, which is expected to be completed by theendoftheyear, subject to customary closing conditions and regulatory approvals, will add state of the art refining and precursor capacity and will expand our talent pool. A further building block in Umicore's competitive battery materials supply chain in Europe is a partnership with Glencore with which guarantees cobalt supplies that are compliant with our sustainable procurement framework. As you know, Umicort has a strict policy of not buying any cobalt source from artisanal operation operations, which often involve child labor, and poor standards of health and safety. Both these initiatives fit perfectly into unicorns European cathode material supply chain.
In recycling, the availability of complex materials increased over the period, leading to a supportive supply mix. In particular, we saw an increased availability of end of life materials, both spent catalysts and electronics scrap. The higher availability of the latter is probably due in part to the friction enforcement by the Chinese government of the import ban on electronics scrap. The metal price environment was on balance also more favorable with higher prices for palladium and rhodium, more than offsetting lower prices for several other metals. Reciling recorded revenues of EUR 313,000,000 and a recurring EBIT of 7 6,000,000, both down 2% year on year owing to an extended scheduled shutdown of the Hoboken plant at the beginning of 2019.
A comparison to last year excludes the impact of the European Activities of the Technical Materials Business units, contributed to the results in January shutdown for 7 weeks at the beginning of the year, twice as long as regular maintenance shutdown. During which time we carried out a certain number of modifications to key equipment alongside usual maintenance operations. While the extended shutdown reduced the plant availability compared to last year. The latest wave of investments as resulted in an improvement of throughput rates, which mitigate the impact of the reduced availability on overall processed volumes. We also benefited from a favorable supply mix in the first half as well as higher prices for certain metals.
In Jewelry And Industrial Metals, revenues were slightly higher year on year, excluding again the impact of divested European activities of technical materials business units at the end of January 2018. The demand for performance catalysts and glass applications was strong, and the facility in China for equipment used in the production of security class was commissioned early this year and is now fully operational. Solution from precious metals management to recurring EBIT increased year on year, reflecting favorable trading conditions for certain precious metals. In the longer run, I see strong drivers behind the growth in recycling. As by definition, the scarcity of mineral resource economic growth.
Also, the public award is about the need for a much higher level of resource efficiency keeps increasing, which will support collection, reuse, and recycling initiatives. Umicore is very well positioned to capture growth as its recycling processes are highly efficient, both in terms of recovery yields and environmental and quality stand With this, I would like to give the floor to Philip to go through the financials.
Thank you, Mark, and good morning, everyone. Let's first slide recap some of the key financials and put them also to a historic perspective. Revenues were down 3% compared to the first half of twenty eighteen, which was a record semester in Umicore's history, and was supported by several tailwinds, in particular, in energy and service technologies. Compared to the second half of twenty eighteen, which towards the end of that year saw the first signs of market cautiousness. Revenues are up 3% sequentially.
This revenue base was insufficient to offset higher costs as we continue to prepare for growth in all our three business groups. Higher personnel costs on the back of recent recruitment and higher depreciation charges following the recent investments contributed to an 8% lower recurring EBIT year on year and a 5% decline on a sequential basis. Excluding the impact of high depreciation charges. The decrease in recurring EBITDA was less pronounced than in recurring EBIT, and was even flat compared to the second half of twenty eighteen. However, recurring ETA over the period did benefit from the effect of the introduction of a new lease standard IFRS 16 to the tune of EUR 7,000,000.
I will come back to that in a moment. As a consequence, operating margins in the first half of this year came down to last year's very strong levels. Still, despite the challenging market context, we managed to consolidate the margin step up from 2017 and prior years. The metric that was down most significantly was return on capital employed, amounting to 12.3%. This decrease was mostly driven by Energy And Surface Technologies.
And the reason for this overall decline in return on capital employed was not so much the lower recurring EBIT, but more the substantial increase in the average capital employed year on year as last year's substantial investment in both fixed assets and working capital are now included for a full year in return on capital employed calculation. To illustrate this, while capital employed year to date increased by about EUR 170,000,000 The increase in year on year average capital employed amounted to approximately EUR 750,000,000, which is an increase of close to 25%. In January, we had stated that we expected a significant improvement of our free operating cash flow compared to 2018, And that is of flats compared with December 2018 versus a EUR 335,000,000 increase in the same period of last year. And as a consequence, cash flows generated from operations tripled year on year to just over EUR 300,000,000 which is in excess of the levels generated in recent years as is visualized by the green line on the top chart CapEx over the period increased to EUR 241,000,000 and is concentrated on the strategic expansion projects. The first half year CapEx also included the spending linked to the investments, which were carried out during the extended maintenance shutdown in Hoboken.
Some 60% of total CapEx spend in energy and serve technologies, and the 2 greenfield projects obviously take up most of that amount. Discontinued into 2019 and accounted for EUR 17,000,000 over the period. Again, most of these assets are related to E And S D's R and D projects. Accounting for these combined investments, the free operating flow over the period amounted to EUR 50,000,000 compared to a negative cash flow of just above EUR 100,000,000 in the same period last year. As you can see plotted by the orange line on the lower chart.
For the full year 2019, we expect total CapEx to reach approximately EUR 600,000,000. And while activity levels and metal prices will obviously be a driving factor, we currently target to see in the second half of the year to stay substantially better than in the same period of last year. This next slide walks us through all cash flow items starting from the cash flow generated from operations of 1,000,000 and the free operating cash flow of EUR 50,000,000 that we just discussed. The combined cash out related to taxes paid and net interests amount to EUR 86 1000000 over the period, which is slightly less than last year. Increased full year dividend of 2019 resulted in a cash out of EUR 96 million in the first half.
At the back of the waterfall chart, you see the effect of adoption of the new IFRS 16 lease standard on our net financial debt, which is a modest million as we only use limited operating leases. This is a pure qualification impact without any cash effect and represents the amount of operating leases that move from up balance sheet commitments to on balance sheet financial debts. We also incorporated this into our net financial debt KPI. And the same million was also added to our capital employed diluted slightly the return on capital employed by 0.1%. Including this IFRS 16 effect, the net financial debt increased by just below 1,000,000 compared to the end of 20 18.
As illustrated on the next slide, the resulting net financial debt of slightly more than EUR 1,000,000,000 corresponds to approximately 1.5 times recurring EBITDA and 1.35 times the recurring EBITDA when using the average net debt over the period, and that's what's plotted on the chart, which confirms a strong capital structure that provides the funding headroom to execute strategy and remunerate our shareholders. As a reminder, we expect the acquisition of Freeport Cobalt's Cobalt refining and cathode cause activities to take place by theendofthisyear2019, subject to customary closing conditions, including regulatory approvals and this acquisition will be funded from Umicore's existing credit facilities. As an illustration of this, of EUR 390,000,000 of U. S. Private placement notes in June.
These long term notes with maturities of 7 ten 12 years come with a fixed interest rate. We expect these notes to be drawn down in September. The placement allows us to lock in historically low market interest rates and further diversified our investor base as we welcomed both repeat investors from our 20 17 placement as well as new investors. Displacement of EUR 390,000,000 will bring the current total of committed medium and long term debt facilities to close to 1,000,000,000 more than half of which is currently undrawn. As you can see from the chart, these facilities come with a well distributed maturities profile.
Finally, these amounts obviously exclude our significant shorter term funding lines. On my last slide, we summarize a number of accounting changes that were implemented over the reporting period. First, we adopted a new IFRS 16 standard, which I already commented on previous slides. And as a recap, while limited overall, the most significant impact from this is the increase in D and A charges and therefore, in recurring EBITDA of EUR 7,000,000 and the increase in net financial debt. Capital employed by EUR 37,000,000.
Secondly, we implemented the EPRIC 23 interpretation that specifies the methods to measure and account for uncertain income tax positions, and its impact was mostly accounted for through equity. Thirdly, we changed the evaluation principles related to what we call our permanently tied up mental inventories. Now since we adopted IFRS in 2003, we account all these metals as a separate inventory category as they are required to run the operations without business interruptions and as such, are permanently tied up and have an indefinite use. This is what is typically called base inventories or core inventories. Now until this year, we value these inventories using the low comparable lower to market, which meant that at each closing date, we compare their book value to their market value using the closed market price of these matters.
Somewhat contrary to the permanent nature of these inventories. In case the market price was lower than the book value, recognized a noncash impairment charge and reported it as nonrecurring operating P and L item. A subsequent to what price recovery resulted in a reversal of such impairments reported as an income item also through nonrecurring EBIT. Now none of these impairment moves have any cash impact nor do they have any relevance to the underlying operating or commercial performance. In the past, these impairments were limited in size, the most significant one since 2010, for example, was a net impairment of EUR 26,000,000 that took place in 2015.
And what has changed in recent years is that the step change in battery materials resulted in significant increase in these permanently tied up metal inventories is triggering excessive nonrecurring earnings volatility due in particular to the recent spectacular volatility in the cobalt price. Because of the fast erosion of the cobalt price in recent months, applying the local principal to the permanently tied up cobalt purchased in 2018 would have triggered a noncash and nonrecurring impairment of some EUR 150,000,000 end of June 2018. Now in order to avoid such material nonrecurring earnings volatility, now and in the future, Yumiko,
with the agreement
of its auditor, decided to apply as from 2019 IAS 16 and IAS 30 6 valuation principles on all of its currently tied up mental inventory. This implies that these factories will be included in the annual impairment of the unit for which they are used by valuing that unit's expected future cash flows, which is better aligned to the permanent nature of these inventories. To avoid any misunderstanding, these change only relate to the permanently tied up metal batteries has no impact whatsoever on Umicore's cash flows or on its current or future operating and commercial performance or sales marches. Finally, to put matters in expected, the total book value of Umicore's currently tied up metal inventories end of June amounted to EUR807,000,000, which is half its market value of EUR 1,600,000,000 when applying the June closing market prices. This concludes the somewhat technical section, but we felt it was important to elaborate on these accounting changes.
And I kindly refer also to the notes in the press release for more details. And when this slide in my section, the nonrecurring items in the first half of the year amounted to a net operating costs of 1,000,000. With that, I'll hand back to Mark for the wrap up.
Thank you, Philip. Before opening the floor to your questions, let me wrap up the main messages from today's presentation. Let me start by emphasizing that the first half performance and the full year outlook are both fully consistent with the messages I gave at the end of April. The market environment has developed very much in line with the views we had back then, which allows me to confirm the outlook for the group overall and for the Business Group. The outlook is positive for Catalysis And Recycling, while in Energy And Services Technologies, the slowdown in the slowdown in the pace of EV growth justifies the adjustments of our investment plans.
Our performance in the first half proved robust and our cash flows have substantially improved. I would also like to emphasize that the drivers behind our growth transit strategy in clean mobility materials and recycling are structurally sound and confirmed. We therefore maintain the strategic course of action while continuing to demonstrate we have the agility to handle temporary adverse conditions. I have consistently told you that our growth projects would not be linear and that we should not get carried away when there is an acceleration nor panic when there is a slowdown. I'm leading Umicore in a manner that enables the to pursue its long term growth investments, our economic cycle.
Today is no exception, and it is rewarding that our robust performance and strong balance sheet enable me to pursue this business philosophy. With this, I would now like to open the floor to your questions. As usual, I would ask you to raise one question at a time.
Thank you. You. Our first question comes from the line of Wim Hoste from KBC Securities.
Question I would like to raise is on the competitive dynamics in the automotive capital space. In light of the weak demand currently, is there any change in pricing power that you have? Can you maybe update on the awards that you might have won recently? Is there any progress there in light of the the weak overall demand curve, please?
Good morning, Wim. Actually, the market and pricing dynamics are exactly the same as what I described at the end of April. There is no change in the overall market environment, as I explained. I expect actually the subsidy cuts to take their full effect in the second half of the year in terms of EV demand in China. I see no changes in terms of, demand patterns in the other regions either.
And actually, the competitive dynamics are very much stable since we last spoke. And this goes also for the the pricing dynamics. In terms of qualification programs, there has been nothing significant to report between April and now, although we continue to be involved in quite a number of qualification programs, obviously.
Thank you. Our next question comes from the line of Charlie Webb from Morgan Stanley.
Morning, Mark, morning, Philip. Maybe just kind of following on for that, we've kind of seen, obviously nothing's changed since April, but year on year, both versus first half and the second half margins are down a fair bit in Energy And Surface Technologies. So perhaps you can just help us and you obviously flagged some of the full effects of the subsidies will continue to come through in the second half. So perhaps you can just help us understand margin progression from here, should we expect given the higher volumes you're expecting in the second half sequentially that margin should tick up? Or should we, are we, do we expect margins to be more flattish or even with the subsidy effect coming in to be expected to be trending lower?
Just some sort of steer around the progress and direction of travel would, I think, be helpful. Obviously, you've given it on the volume side, just also on the kind of margin side would be helpful.
Good morning, Charlie. So, actually, no, I would not expect the margins to be higher in the second half of the year, because the, there are a number of factors which will be reflected in the cost base, the higher depreciation charges startup costs for the new sites, for instance, also expect continuing pressure from the low cobalt price and the overhang of an ethical cobalt that is actually affecting our ability to place high cobalt containing product in the market. So these factors will be there in the second half of the year. And points to, no increased possibility, of margins in the, in the second half. And the up the uplift in volumes will not be of an amplitude that would offset up these, these factors.
Not quite yet because indeed, as I mentioned earlier in this, you also are pointing out, I do not expect the market to be buoyant in terms of volumes in the, for the remainder of the year.
Our next question comes from the line of Gunther Zechmann from Bernstein. Your line is now open. You can now ask your question.
Hi, good morning, both. My question is on the outlook it's you confirmed it, but clearly we're a few months further down the line. So what's changed in terms of you're not narrowing that guidance range since April, where has the uncertainty increased since then?
Good morning, Gunther. So, indeed, in the past, we've had the the tradition or the practice, I don't know how to call it, of narrowing down the guidance at this time of the year. And, except on few occasions when the visibility was not warranting such an exercise. And in this case, clearly, The visibility is of such a nature that it doesn't warrant an narrowing down of the of the guidance. I bet you have seen the recent news flow from the automotive sector.
I don't think that This is a very encouraging news flow and it's a news flow that also confirms the limited visibility that most players that are exposed directly or indirectly to the automotive sector have. And the visibility is indeed pretty limited. Yes.
So the reduced visibility, just to be clear, in Catalysis, not in E and ST. Is that fair?
It's indeed to a large extent in Catalysis, and typical other factors are related to to prices, like metal prices, macroeconomic conditions, etcetera. But I would say the main uncertainty today, in terms of volumes relates to, what the car industry will do second half of the year.
Our next question comes from
the line of Ronolf Orr from Redburn.
I'm just wondering if you could help us understand the progression in Catalysis a little bit better going forward, I understand the rate of platform launches, for instance, with your GPS should increase in H2 this year. Can you help us think about, the phasing of new platform launches with your new higher value technology on them over the next sort of 12 to 18 months, please? Thanks.
Good morning, Ronald. So what I would say in this respect is that the number of launches and the impact of launches in 2020 will be higher than in 20 18. So we have an additional uptick in the second half of the year compared to the first half and a more significant, more visible effect still to come in 2020, both in Europe and in China.
Okay. And could you help with the phasing of all of that through the first and the second half of the year next year?
That's a little bit too early for me to with that level of granularity, we'll I'll do that in due course, definitely.
Thank you. Our next question comes from the line of Madhu Gondogan from ABN AMRO. You can now ask your question. Your line is now open.
Yes, good morning, everyone. A question on rechargeable battery materials. You're guiding for higher volumes in cathode materials in the second half. Can you just split where that increase in volumes coming from? Are those capacity expansions?
Is that the recovery in Korean energy storage system? So any color will be helpful.
Good morning, Mutlu. So, to be clear, it's not coming from, LCO for a high end electronics where as I mentioned during the presentation, I do not expect an upturn in demand. So it's going to be, a combination of automotive and possibly ESS demand where the business is may pick up again in the second part of the year. And indeed supported by the, the start of the new plant in China.
Okay. And can I just add to this, you were rather negative on China? So when you say combination of automotive, that means automotive outside of China, just to confirm that?
The automatic overall.
Right.
At this stage. Yes.
Okay. Thank you.
Thank you. Our next question comes from the line of Geoff Haire from UBS. Your line is now open. You can now ask your question.
Good morning. Just have one question. On the market share gains you've made, in gasoline particulate filters. How much further are those market share gains that can be pushed from where we are at the moment?
Good morning, Jeff. Yeah, that's a tricky question, I have to say. The, as I mentioned, part of the previous answer, there will be a more visible effect with more platform launches in the course of next year. So it implies that you haven't seen yet the full impact of the market share gains.
But maybe another way of asking it, are there more platforms that you're working on that you can be certified on? Or have you now got to the end of all of the platforms that need to be need to have the particular filters on them?
So, thank you for the clarification. Now we're definitely continuing to work on future platforms. That's on the qualification for future programs. This being said, for which the jury's been out, obviously. This being said, things are pretty much, I would say 6 for the next 3 years or so, 3 plus years.
So any new win would not be would not have an impact before, let's say, 2022, 2023, more likely 2023. Okay. Thank you. So sorry if I may add to that to be complete or more complete with the response. Of course, the effects of these recent platform wins will depend on how the mix diesel versus gasoline will continue to evolve in the European region in China.
It's pretty straightforward. It's gasoline market. But in Europe, the influence of the mix is definitely one of the important parameters in that equation.
Okay, thanks.
Our next question comes from the line of Peter Casa from One Investments. Your line is now open. You can now ask your question.
Hi. Thank you. Another question from Fred on Energy And Service Tech. Just to try to understand some of the margin influences from things that you have been mentioning as we look into H2 in 2020, You talk about the impact competing against unethical cobalt. And I was wondering the extent to which that has a margin impact as you proceed forward in time?
And maybe if you could also give some sense as to how the impact of the capacity uplift will influence, is this compared to the volume of production uplift?
Good morning, Peter. So, as I mentioned during the first part of the call, it is difficult to give, an accurate quantity of the impact of unethical cobalt, on our results. We estimate that the combination of unethical cobalt and the low metal prices and the low metal price have a more direct arithmetic effect on our refining, recycling and distribution margins. The combination number was about EUR 10,000,000 to EUR 15,000,000 in the 1st part of the year. Compared to the first half of twenty eighteen.
If prices stay where they are today, we're likely to see again a substantial impact in the second half of the year compared to the second half of twenty eighteen. The, the thing that has changed, from, recently from and would be a slight difference maybe not from a quantified effect, but from a qualitative perception is that, the inflow of fresh unethical supply has decreased because with the lower cobalt prices, there are less figures, active on that, on that gray market in Congo. This being said, because demand for end products is subdued or remains subdued. There is still an overhang, stock overhang of these cheap unethical units. On the market and they continue to affect or share ability of competing and placing and selling our own high cobalt containing our products.
I would expect that the margin impact will continue to be there. So It is difficult to give you a precise answer because it's a these unethical cobalt units affect both our volumes and our margins. On the margin side, we know that there has been a significant price differential between these cobalt units and I would say sustainable cobalt in the 1st part of the year, with the stock overhang It is likely that these units will continue to be offered at a discount. That's one aspect. And the other aspect, which is even more difficult to quantify is actually, how much we're missing out in terms of volumes because of that type of competition.
So I'm sorry for a complicated answer, but this is, what I can offer today as a response.
Okay. Thank you. And then maybe the impact of capacity costs versus volume uplift, just try to understand the sequencing as you look H2 and into 2020?
Yes, sorry. I have omitted that second part of your of your question. So, clearly the, what I or clearly, not clearly, because I haven't said it before, What I expect is that the impact of the cost increases that I described earlier depreciation charges, and the, startup costs, the impact of metal price and unethical cobalt, etcetera, will be higher than the volume uplift effects in the second half of this year.
But as you stretch into 2020?
No, it's too early to comment on 2020 because I think you will have probably a different picture in terms of volume versus costs development and possibly some better leverage effects in that than was the case this year.
Okay. No, thank you for the helpful answer. Thank you.
Thank you. Our next question comes from the line of Adam Collins
Good morning. I had a question on UPMR. Firstly, have you taken out any precious metal price hedges in the period? And then on sort of market color, you've commented on the fact that there were tailwinds from stricter enforcement of China e scrap regulations. Is that becoming a meaningful market for you?
And I wonder if you could just talk around that. And then, again, on China, I think you alluded to in the past, some increased competition in complex refining residues in China as some local place had built a small capability. I wonder if you can talk about, whether that's been a factor?
Good morning, Adam. The answer to the first part of your question is yes, we have taken some additional hedges, in the course of the first half, relating to our precious metal to exposure to certain precious metal prices for 2019, 20202021. So we have, you know, the work in line with our hedging policy. I think an advantage of historically high prices at levels where we can secure attractive margins, to hedge into locking a significant portion, a very conportion of the exposure for 2019, close to half of the exposure for 2020 and the first chunk of the exposure for 2021. Obviously, the criteria that I've mentioned of, directly high prices and attractive margins palladium and rhodium, palladium, sorry, is standing out in terms of, new hedges rhodium cannot be hedged, unfortunately.
There is no paper market for that. And we have taken also some additional hedges gold. Let me now move to the market dynamics relating to China. And Indeed, there is a significant development, and actually the green fence the import ban on certain waste categories, of which, electronics scrub is not a new, a really new thing. I mean, It was introduced in China a couple of years ago.
And we're actually starting now to see the true effects of the strict enforcement of that green fence in China. And I mean, it's been publicized in the media about a certain number of waste categories with plastic being high in the agenda for many, many industrial players. And actually, we see a similar effect, although it's been less advertised for e Scrub. So the amount of, of e scrap, that is either staying in the region in Europe, generated in Europe and staying in Europe, or arriving in Europe from other regions because we have a very competitive escrub recyclers in the region, that volume has increased to a significant extent. And we believe this is in part a direct effect of the strict enforcement of the, of the green fence.
And the way I see it is that this is a structural effect, and so we should continue to benefit from the trends of growing volume of this crop being generated and being available in Europe for recycling. And then, to address the last part of your question, you're right. We indicated a while ago that there was increased competition for certain type of industrial complex residues in China. And there, the market dynamic dynamics have not changed for now. So when I referred in the press release or in the presentation about the improvement in availability of certain complex materials.
It was not relating to that part of the story. Thank
you. Our next question comes from the line of Natalie De Bruin from Degroof Petercam. Your line is now open. You can now ask your question.
Hi, good morning. Thank you for taking my question. Actually, I will switch to, battery materials again. Because you mentioned that pricing dynamics in competitive environment, especially in China, remained more or less stable as compared to what you mentioned in April. Now I'm wondering long term what should we look at because we see quite a lot of battery manufacturers now starting to internalize part of their kyzyl production.
Do you expect this to put some, I would say, pressure on prices for external suppliers, how do you see that, I mean, in the short term future or in the, let's say, in the coming years?
Good morning, Nathalie. I think this is not really a new trend. As I have mentioned on previous occasions, The Korean battery producers have had in house production like forever since the, they started up there, lithium ion battery business. And, so they have developed over the past 25 years or so, significant expertise and capabilities and capacities in, in cathode materials. And so I see as far as the current, our current customers are concerned, this as a continuation of a long term trend.
And as I mentioned on previous occasions, I do not expect the in sourcing, to, actually, dent our growth trajectory because there will continue to be a certain level of balance between in house supplies and external purchases. It is quite important for all battery players to have access to the best technologies and therefore, their openness to look at other materials than what they have developed in house. What is more recent, indeed, is the fact that that there is quite a bit of insourcing possibly happening in China with one of the players. And again, the market, in the long term, the market growth and the requirements are such that this is not going to be a major issue for us. And this is not something that we had not factored in our growth projections early on.
Okay. So just to make sure that I got that correctly. So I got that in South Korea, that is not new, I read that LGS is going for 35% in house sourcing versus 20% or something. But then in China, Like you say, it's a bit different. And that specific players is also coming into Europe because they're supply chain, do you expect that also to happen in Europe?
It remains to be seen. I think their plans for Europe are still relatively vague in terms of scope. And I think we have our hands full already today with what we need to do to be ready in Europe and to deliver to our existing customers for existing business, when the plan comes on stream at the end of next year. So, not a concern, and I think the plans of, and I think you refer probably to be the plans of CXCL to invest in Germany.
That's correct.
These plans are fairly vague in terms of scope and remains to be seen. We'll see. And please bear in mind that And I don't want to point fingers to anyone or to accuse anyone of anything, but bear in mind that, we're building a sustainable and clean battery materials and integrated battery materials value chain in Europe. And I hope that that will continue to be a competitive differentiator for all our customers and potential customers in this region.
All right. Thank you. Thank
you. Our next question comes from the line of Sebastian Bray for Berenberg.
I just have one, again, on Energy And Surface Tech. The global EV market seems to have still been mid double digit percentage in H1, any because of volumes in NMC decline during this period, Mark, you've alluded to the role of the cope or role of ethical cobalt sourcing, but if you look at the average price, the difference would my guess be about 2% to 2.5% between ethical and non ethical as in terms of the whole cathode costs. Is this to say that, are you being displaced if you are being displaced in China, Etau? Because purely on cost Or is there still a quality difference at the lower end of the market? Where are you losing these volumes and is it purely cost or is there still differentiation on quality?
Good morning, Sebastian. First of all, I would actually not extrapolate from short term fluctuations. I have never done that. And as you know, I've also encouraged you to refrain from situations whether these are positive or negative. These short term fluctuations are not necessarily meaningful for the to assess the long term's perspective and profitability of the business and they will continue to be there and difficult to interpret.
Please bear in mind also that the, the competitive disadvantage, can say to unethical cobalt, as I've mentioned, back in April and confirmed now relates to the high cobalt containing products. So mainly the LCO and the products that are marked it by cobalt and specialty materials. So it's not really an NMC scoring. And I had an impression from, the number that you mentioned that your calculation of the price differentials related to NMC. So that's not really the case in NMC.
So that's all I would offer at this stage. And And again, I would not infer too much from short term fluctuations. That would be my main message.
All right. Thank you.
Thank you. Our next question comes from the line of Jean Baptiste Groeland. Your line is now open. You can now ask your question.
Good morning, Marcie, good morning, Philippe, and thank you for taking my question. I just have this one on working capital. I think you're station worth is now for stable working capital, and previous for 2019 versus previously you guided for working capital inflow this year, following the drop in cobalt price, if my memory is correct. Can you elaborate on what's changed on that side, please?
Yes, good morning. Nothing really changed because what we said in, in February, there's that way we expected a substantial increase in the free operating cash flow compared to last year. And last year, obviously, as you'll recall, it was really distorted by this 700,000,000 increase of working capital, which was split between the first half and the second half. So it hasn't changed what we say for this year. So the first half of the year would work very hard in all the business groups to manage working capital as good as we can.
Have a flat performance compared to the end of last year. There's a number of, as always, impacts into that. You mentioned the cobalt price that is about 1 PGMs, we work a lot with PGEM, PGEM prices have increased quite substantially. So the mix of the total, including also the changes that we had in in recycling lead to a flat working capital performance, I mean, a slight inflow of about CHF 10,000,000 since December. And the guidance we provide to you the remainder of the year is that we expect it to stay flat basically because we say working capital flat between now and the end of the year.
For the full year, a flat working capital compared to a cash outflow last year of 7 So I mean, obviously, if we can do better, we will certainly do that. But, as mentioned, indeed, cobalt price is 1, again, part of the inventories related to what I discussed on permanently metal inventories actually does not move with the price. Then you have PGM prices. So there's a mix of factors. What I can say is we manage it as good as we can.
It's a top priority within group and guidance for this year is flat. So it means that in terms of free operating cash flow, I think you have the different elements, if you take the CapEx guidance for the year about EUR 600,000,000, you take your view on the EBITDA, on the top cash flow, and you take a flat net working cash flow, you see that we will have a very substantial increase in terms of the free cash flow compared to last year.
Our next question comes from the line of Chitung Umteshii from JP Morgan. Your line is now open. You can now ask your question.
Yes, thanks. I you had one question on E and ST again on battery materials, which is clearly the market perception on the the lock in, Umicore and some of the other external cathode suppliers have in terms of IP versus versus the internal battery, just the internal cathode arms of OEMs or even the new Chinese entrants have essentially changed to the extent that people feel the IP is not as much as was thought previously. In that regard, have you guys internally changed any of your roadmap planning on how are you going to be competing in the market in the future? Or is that is consistent with what you've done in the past. That's one question.
Second question, I was just wanting to understand this counting change on metal impairment? And because if I read the lease, it says based on the old methodology, there was a possible impairment charge of $158,000,000, which is massive. But what is besides just changing the accounting policy, what is the best way to think about the risk on earnings from the volatility that we've seen in the cobalt prices in the future?
Okay. I will, good morning, Chetan. I will let Philip answer the second question in a moment. And First of all, regarding your question about the, the market dynamics, our strategy and the way we deal with the changing possibly changing landscape. Let me say that, from a long term perspective, there is no change to the course of strategic to the strategic course of action, sorry, because the, the drivers behind electrification are intact the materials requirements and technology requirements will be massive.
And I think it's important to point out that technology is going to be will continue to be a differentiator, for a number of reasons. One of them is that I've mentioned already in the part that, if you look at the, consumer's expectations. First of all, the first wave of electrification is driven to a large extent by regulations. But if you want to have a broader adoption of EV, you need to meet, you need to provide the consumers and the drivers with a positive experience, which means that we need to achieve longer driving ranges, shorter charging times. We need to have longer battery lives and we need to have affordable prices.
Now each one of these of these objectives taken in isolation can be achieved relatively easily, not totally not very easily, but relatively Now the problem is that they tend to be, incompatible with each other, which means that the combination of those is extremely difficult to achieve and requires a lot of technology improvements in terms materials properties, new materials, new designs. And this is where we are playing, indeed. Secondly, if you look at the, the volumes, the materials that are and will be required in the future, These are massive. And the, when you know how the automotive industry works, you can figure out that one needs to have the ability to, go fast from pilot and prototype scale to mass production. You need to be able to scale it fast and, quite importantly.
So you need to be able to provide a highly consistent quality in mass production, which is not a walk in the park. Considering the level of sophistication of these products. So long term drivers are strong, and that's why we maintain the strategic course of action. Now you're absolutely right in asking whether we are adjusting the practical course of action. And there, the answer is yes.
Because there are short term fluctuations in demand because there are, possibly new entrants because there are different dynamics at different times in the business development cycle. And so yes, we have to be agile. We have, for instance, quite quickly been able to adjust the schedule for the addition of new lines in one of our major investment projects. We are, of course, intensifying or continuing to intensify our research and development work and qualification work of new technologies with the customers, this is extremely important in order to be able to maintain the longer term strategic course of action. So there is indeed quite a degree of adjustment that is required in the short and medium term from a tactical point of view in all operational and material respects indeed.
Yes. And your second question, Shustad, good morning, on the inventories to get straight to your question, is there any impact or what is the impact on margins on performance? There is none. So this has nothing to do this has no events on the commercial margins, operational performance, or even on the cash flows. The only fact that this inventory has had is actually last year.
It's when we acquired a substantial amount of cobalt to be put in these new these new lines, and that cobalt will stay there. And the impact of that you saw in the increase, a substantial increase in working capital last year. So for the rest, there is no impact whatsoever, what we want to avoid We've always had this category that, again, is kind of you can almost see it as a as kind of a PPNE. It stays in the plant dis inventory. We've always valued that with the low comp principle.
In the past, we never had any impacts, but now given the magnitude of the cobalt we bought last year, and the substantial, obviously, decline in the cobalt price. We have this noncash nonrecurring impairment charge we would have to take. And actually if the cobalt price would go up again in the future, we would have to reverse that. So it would be a nonrecurring income items, so to avoid that and also actually better reflect the principle of this inventory category we changed the accounting standards. But so it has no impact whatsoever on margins on operating performance.
It's there in the plant. Unfortunately, we bought it at a high price compared to the current price. And that's the only impact of the cash impact, and that was in the working capital last year.
Our next question comes from the line of Ramnulf Orr from Redburn. You can now ask your question.
Hi. Thank you for taking my second question. It is on RBM again, I'm afraid. I'd just like to understand the progression of the business with the, the automotive customers better. Can you give us an indication of how your sales with those customers progressed in the first half, with that in line with market?
And on your volume growth assumptions for the second half, is that predicated on a return of delayed XEV platform that you called out in April? Or is there other underlying sort of support for that that offsets the subsidy revisions in
lease. And I mentioned during my preliminary comments, automotive, cattle materials sales for automotive applications were flat in the 1st year on year. And the uplisting cathode materials that we expect in the second half of the year as I mentioned earlier, it's partly, automotive and partly the possible pickup in ESS demand. And coming back to the more specific part of your question regarding the large CV platform in China that we mentioned was postponed, when we had the discussion back in April, it is not part of that forecast for the second half in terms of lift.
Okay. Are you able to just help us understand why, you grew below market rate for the EVs in the first half? And then just a second follow-up, will
the can you repeat question why?
Well, why did you grow below, EV market rate in the first half of the year?
Again, I think that, there have been times where we grew much faster than the market. There are times where we grew, slower than the market. And any extrapolation from a short term, from such short term shifts is extremely difficult to make. And, for me, what matters most is the underlying are the underlying trends and well we qualify for new programs and how so I don't think that's, there is a very meaningful answer to give. I mean, typically do not have answers regarding short term fluctuations.
And I do not extrapolate from those.
Okay, fine. Thank you. And then the XEV platform, does that is there optional upside on that in the second half of the year? Or expecting that in 2020 now?
I would be positively surprised if there was good news in the second half of the year. Against the context of a challenging context probably for EVs in the 2nd part of the year in China. As I expect the, as I mentioned earlier, the full effect of the subsidy cuts to be visible in the second half.
Okay. Thank you. Appreciate it.
Thank you. Our next question comes from the line of Martin Evans from HSBC. Line is now open. You can now ask your question.
Yes, thanks. Just a question, again, back on battery or in fact your customers, the battery cell makers and any sort of changes you're perceiving in the technology that's being particularly given recent movements, I guess, in the price of Cobalt. I'm thinking, for example, of NMC 811, which has been discussed at length as being or was relatively popular. Have you seen any sort of movements in that direction? And to some extent, does it really matter for you, which particular combination of metals the battery cell makers prefer?
Will start by addressing the second part of your question. No, it doesn't matter. And we have all the capabilities. We have all the products, technologies, our processes, versatile. So we produce actually what the customers need, and wants the most.
And, the the metal ratios are not really important for us in that respect. Plus, I would like you to repeat that there are dozens of grades. It's not just 811 versus 622 versus is 532. There are dozens of different grades that the products are to a large extent, custom made for individual customers and for individual platforms. And more generally, I would like to repeat what I said a while ago is that the, the move to high nickel, more than 80% nickel, has been more advertised than it's been taking place in practice.
And so you should take, all these announcements about the 811 introduction with a pinch of salt, because in practice, it goes the phase that we had indicated in the past, which is much slower than what is being advertised. And clearly, the the fact that the collar price has come down from the the peak in mid-twenty 18 to, I would say, the current levels has somewhat reduced the pressure on the fast migration, to high nickel. Secondly, there been a certain number of safety incidents in a number of places with high nickel batteries that have also created a degree of, of, a caution with these technologies. So it's going at a there is a clearly a migration to higher nickel chemistries. And this goes at a, at a controlled pace.
There is no, I would say, overnight
Thank you. Our next question comes from the line of Mutlu Gandogan from ABN AMRO. Your line is now open. You can now ask your question.
Yes, just a few questions, Mark. On recycling, you mentioned the increased availability of e scrap. Can you just update us on the split of the process for you, you said, the part that is coming from the Metals And Mining Industry versus recyclables such as e scrap or the spent catalyst and then talking about Automotive And Industrial. So that is the the first question. And then the second question is on still on recycling.
I mean, there was a fire in July, so early this month. There was a fire in, what is it, September last year. And I think we've seen several fires where incidents in the last few years. Do you know what is causing that? And is there anything you can do about it?
And then finally, your returns as a group have come down significantly in the last 12 months. And especially Energy And Surface Technologies is the lowest while you are investing the most in that business. And I know you mentioned about the long term strategy, but just wondering, how long are you willing to invest in a business that is pulling down returns for the group.
Okay. So, these are a lot of questions and actually we'll have to stop very soon. So, we're taking a limited number of questions still. So end of life, materials versus industrial byproducts. Volume wise, the ratio is, I would say, still around what we said in the past, the 20% to 25%.
And in terms of revenues, the contribution from the end of life products like electronics, scrap, spend catalyst, industrial and automotive catalysts, was about 1 third of revenues. So, that is not fundamentally or not substantially different in terms of volumes than in the past, but the growth in revenues and in value has been quite substantial in the end of life products. Yeah, the fires, I mean, we have Unfortunately, we had 2 fires in, with an interval of, a few months only. I don't want to give the impression that this is, I would say, a chronic disease that we had because we have had only 2, I would say, over the past 25 years since we started the recycling plant. So it's, 1st of all, it's unfortunate that we have any such incident.
And of course, it is unfortunate that we had 2 in a row in such a short period of time. They are completely unrelated. The fire that we had in in, in on July 3, was a mechanical failure of a piece of equipment And while the fire that we had in, in September of last year was due to unforeseen chemical reaction in one part of the plant. So of course, we're taking all measures to prevent and to these sorts of incidents from happening. And we're learning when there is an incident, we're learning from the incident to make sure it doesn't repeat.
And so we're, I'm hoping that we are not doing much necessary to the off again for the next 25 years without such incidents. And in terms of returns, Clearly, the return is somewhat less than the target we have for the group of 15%. It is somewhat less than what we had last year. We had the record results and returns last year. And clearly, we will continue to invest in the long term growth potential of the company in clean mobility materials.
So that's not only battery materials, it's also in Catalysis And of course, in recycling. And so in that respect, because the drivers are so strong and the potential is so strong, I'm not concerned about having a somewhat lower return for a certain period of time.
Okay. Thank you.
Thank you. Our next question comes from the line of Geoff Harry from UBS. Your line is now open.
Just wanted to ask a question about the accounting changes inventories. I'm not an accountant, so I apologize if this is a stupid question.
But I was wondering if you
could just help us understand if you applied the accounting standards to 2018, what would the change of working capital have been under the accounting the change in accounting that you have now on a pro form a like for like basis?
Yes, I'll jump the same because the change in working capital is cash. Impact. So again, there's no the accounting change have no impact. Do not change the cash flows in any way not the future cash flow. So basically, we have bought a substantial amount of cobalt last year to fill the new lines the plans of, of energy and surface technologies and with the expansion.
We bought that cobalt at an expensive price, given seen the price profile of cobalt last year. So that was a cash out. So that was a substantial as we in the a substantial part of the million of net working capital increase last year.
And
that's it. So basic change, if we would have applied what we are doing now last year, it would have had no impact, whatsoever on the cash flows. And ranges on 2019 have no impact whatsoever.
So can we expect then that you'll have to by Cobalt in the market to fill the Chinese plant at the end of this in the second half of this year as well. And that's included in your working capital forecast that you've given?
It's based on what we bought last year. We we take in that end. Yes.
So, I realize that there are still a lot of questions that you have However, it's getting a little bit short of time. So unfortunately, I can only take one more question And I would then suggest that the following questions after the last one should be raised after the call with our Investor Relations team. So I'll take one more question and then we will have to close the call.
Thank you. For our last question, it will be coming from the line of Peter Testa from One Investments. Your line is open. You can now ask your question.
These. I was wondering if you could just help us understand your flexibility on capacity management in light of your comment on uncertainty in the auto market and also taking account of the extra capacity coming on in Poland and China and maybe to the extent to which you've used some flexibility also in H1 to manage the good result. Thank you.
Peter, we have some flexibility in the sense that we are, in a growth mode and the we can actually pace the addition of new production lines, according to the short term and mid term market developments. This being said, the there is one area of our investment programs where we have less flexibility and that's relating to the infrastructure that we need. So We're building greenfield sites. So we need the site to be, to be in place with all the utilities, peripheral equipment you name it. And it's only the addition of the effective addition of lines that can be modulated to meet, a close as possible, the as closely as possible, the market demand.
So there is some flexibility, but it's not like we can puts everything on hold and wait for, I would say, different developments. There are certain route investments at cost and cost, which we need to continue to incur.
Okay. And the extent to which you also used some flexibility in H1, or was that really covered by the strong growth in ramping up?
The, the flexibility relates mostly to the addition of new lines and the sites in China that will open in the summer of this year. So it's not so much relating to the investments of Actually, it has an impact on the investments we did in the in H1, but doesn't have a lot of impact on didn't have an impact on the existing capacity. Okay. With this and again, with my apologies, I have to close the call and I realize that There is there are quite a number of, follow on questions that we will be happy to take in a moment, and our Investor Relations team will be available to address your questions And we will also have a chance to continue the discussions over the next couple of days. The team, Philip and myself and investor relations colleagues will be in London in the next couple of days to pursue the discussions and we look forward to that.
With that, I would like to thank you for joining the call this morning and we'll to you soon. Bye bye now.
Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.