Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Umicore 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. I must advise you that this conference is being recorded today on Tuesday, 23rd April, 2019.
I'd now like to hand the conference over to your speaker today, Mark Greenberg. Please go ahead.
Thank you, and good morning, everyone. We announced earlier this morning some significant developments which has emerged or crystallized since we last spoke and which will be affecting our business in the near term. Given the material influence of these developments on the growth potential for this year and next, we have to communicate them as soon as possible. That's why we are providing a first earnings guidance for this year, a few days ahead of the AGM. The AGM being the occasion on which we have typically provided such guidance in the past.
The primary purpose of this conference call is to address any questions that you might have regarding the news that we released this morning, and I appreciate, therefore, that you are joining the call at such short notice. Before opening the floor to questions though, I will recap the key elements of this morning's announcements starting with the main developments in Energy And Surface Technologies and in particular in the rechargeable Battery Materials business. You will most likely recall that I said a year ago, at the time we announced the newest wave of capacity expansion that we projected to achieve sales of 100,000 metric tons of cathode materials in 2019 and to have a capacity of 175,000 metric tons by the end of 2021. It appears more probable now that we will reach these 2 milestones with a delay of approximately 12 to 18 months. This is due to a combination of 3 factors which have either emerged or crystallized in recent weeks.
In the first place, the context has become less favorable, and we observe a slowdown in the sales of EVs. In China, the largest EV market in the world, this slowdown is most pronounced and it is probably due to the change in the subsidy mechanism, which has just been decided by the Chinese authorities. The fading out of subsidies in China by 2020, 2021 is not a surprise, but the cuts for 2019 are deeper than expected. Their impact on easy demand is expected to be significant The impact of the subsidy cuts on the Ebers market segment is even more severe as the demand in this segment is almost exclusively driven by regional and national government support. Secondly, the start of production of 1 of the large EV platforms in China for which or materials are qualified has been postponed.
The 3rd factor relates to energy storage systems in Korea which had become the largest market for this application as a result of a strong government push to install new storage capacity for renewables. The installation of such systems has been halted following a series of safety incidents. Several fires broke out installed capacity in the course of 2018. And as new incidents occurred in 2019, The government decided to shut down publicly run systems and recommended private owners should do the same while the safety incidents were investigated. As a result, battery producers have now decided to stop the production of any new systems and the demand for The combination of these three factors, the slowdown in EV demand in China, both for passenger cars and e buses, the postponed launch of 1 of our large EV platforms in China and the absence of demand for energy storage systems in Korea, is reducing the demand for our NMC materials and explains the estimated delay of 12 to 18 months to attain the milestones of 175,000 metric tons.
Obviously, we are adjusting our additional capacity plan accordingly. In practice, the commissioning dates for the new sites in China and Poland are unchanged so that the first new lines will be commissioned around midyear in China and mid-twenty 20 in Poland. What will effectively change is the pace at which we will be adding new lines I would like to point by the wireless wins in cobalt price. This is particularly visible in the Cobalt And Specialty Materials business unit, where margins on cobalt refining, recycling and distribution activities are a function of cobalt price. You will recall that this proved a supportive factor in the first half of twenty eighteen at the time of very high cobble prices and turned against us in the second half of the year when the metal price started to decline.
Unfortunately, This impact became even bigger in the first quarter of 2019 as cobalt prices almost halved from the end of 2018. As customers bought more cobalt containing products than they needed when the cobalt prices were on the rise by fear of a shortage, and started to work off the excess inventories when prices were falling in the second half of last year and continued to do so in 2019. The impact on our sales of the customer's destocking is exacerbated by the ample availability of cheap cobalt units originating from artisanal mining operations, which enables several of our competitors to offer cobalt containing product at a significant discount. As you well know, Umicore has a strict policy of not buying any cobalt from artisanal operations, although these units these cobalt units are cheaper. This is because the working conditions in artisanal cobas mines in terms of safety and occupational health are in decent and very often these operations involve child labor.
Umicor has been a front runner in implementing a sustainable procurement framework for cobalt together with some other players, we are promoting a more sustainable rechargeable battery value chain. For instance, through the global battery Alliance, which works under the auspices of the World Economic Forum. As a matter of fact, working in a responsible manner comes at a higher cost to Umicore, as we have to ensure that our entire supply chain and our own operations strictly meet tight standards My ambition, and this was explicitly stated as part of the Horizon 2020 objective, is to turn our sustainability approach into a competitive advantage that would be recognized by the customers either through a sustainability premium or through additional volumes. So I'm clearly disappointed that today, we're still penalized twice, firstly, by incurring higher costs. Secondly, by directly or indirectly missing out on volumes.
The cobalt price effect and the inflow of artisanal COBRA combined with the delay in the development of cathode material sales mean that recurring EBIT of energy and surface technologies in 2019 is expected to be well under the level achieved in 2018. This outlook also incorporates the effect of higher fixed costs, such as depreciation charges resulting from last year's investments, and the upfront costs for the greenfield size in Poland and China. Let me now turn to the Catalysis Business Group. As expected, the automotive market is proving to be challenging with global car production down by about 6% in the first quarter compared to a relatively strong Q1 last year. The slowdown is most visible in China and Europe with production dropping in the first quarter by 12% 5% respectively.
While there is still some uncertainty about the timing and extent of the recovery in demand, Umicore is set to benefit this year from the gradual introduction of gasoline platforms, which we have recently won and that require a particulate filter. We are expanding production capacity in Poland and China in order to meet this additional demand and the new production lines will be ready to operate in the 2nd part of the year as originally scheduled. In the smaller precious metals chemistry business unit, we continue to see growing demand for our compounds used in pharmaceutical applications and in chemical deposition. This unit is also building a fuel cell catalyst plant in Korea which will be commissioned at the end of this year. Overall, recurring EBIT for the Catalysis business group is expected to grow from last year's levels, slightly ahead of the consensus of the market.
In Recycling, we see a combination of positive factors supporting the business. Firstly, as we indicated earlier this year, the Hoboken plant underwent an extended shutdown in the first quarter during which we carried out regular maintenance work as well as technical modifications to the key equipment. The investments were successfully completed and will already benefit the performance of the plan this year. This should offset the volume impact caused by the longer than usual an availability of the plant. I would also like to point out that the facilities which have been damaged by the fire in September last year has been fully repaired and are now operating normally.
The second positive factor in recycling is an improvement in market conditions for certain grades of end of life materials. Finally, the business group should also benefit from higher PGM prices. Overall, it is expected that current EBIT for recycling would exceed that of last year ahead of the consensus of the market. Considering the developments in all three business groups, I expect recurring EBIT for the full year to be in a range of 4.75 to EUR 525,000,000 with Catalysis and recycling expected to grow over the levels achieved in 2018, the contribution of Energy And Surface Technologies is expected to be well below that of last year. This range reflects the uncertainty that prevails in the automotive market, the impact of fluctuating metal prices especially for those metals that cannot be hedged and the overall macroeconomic environment.
Clearly, the delay we see today in the realization of our growth plan in cathode materials is an unexpected setback The need for a transition to cleaner mobility remains, however, and we are fully committed to our strategy and leadership ambition in this domain. We will address the challenges along the road with determination, and I expect that we will achieve significant growth in revenue and recurring EBIT in 2020, albeit below the indications that I had previously given. The growth will predominantly come from the volume developments in cathode materials and the volume and value uplift in automotive catalysts as a result of the introduction of time emission norms in several regions. With this, I would now like to turn the call over to you for questions. To allow a maximum number And if you have a follow on question, please place your name again.
Ladies and gentlemen, Please stand by while we compile the Q and A queue. This will only take a couple of minutes. And if you need to And the first question today comes from the line of Charlie Webb from Morgan Stanley. Please go ahead.
Good morning, Mark. Thank you very much for setting up the call. It's just my one question. As we think about 2020, I remember previously that ramp up was kind of back end loaded when we kind of thought about how 2019 and then into 2020 given kind of the 12, 18 month delay to the EV sales, custodian sales opportunity, How do we look at 2020 in terms of is it more getting to that guidance range by 2021? Is that the right way to look at that now, or can you perhaps just help us understand how much growth we should kind of expect through into next year as that ramp up starts to come through?
Good morning, Charlie. I mean, given the, the, still the uncertainty between 12 18 month delay. I think your reading is probably correct indeed.
Okay. Thank you very much.
Thank you. And the next question comes from the line of Chetan Udeshi from JP Morgan. Please go ahead.
Yes, hi. Thanks. Good morning. You know, the mark on your comments on EV sales slowdown in China, and I'm just a bit surprised here because you've not seen any slowdown year to date? In fact, if anything, the sales data from China suggests that the EV sales have remained pretty strong so far before the subsidy cuts.
So maybe can you explain, is that specific to maybe the customers that you might be opposed to who might be seeing it because it doesn't seem the market in general is seeing or has seen significant slowdown in China as such. And maybe a small follow-up on same point. How is the sort of volume slowdown or the delayed rather impacting, if any, the pricing dynamics in your Catherine Matija Business? Thank you.
Good morning, Chaitan. So Depends how you look at the data in a way. If you look on a year over year basis, you indeed continue to see growth in global sales and in EV sales in China as well. However, since the, the the industry has added significant capacity throughout the value chain in the course of 2018 The sequential evolution is somewhat more telling. And, while the quarter on quarter sales are higher, indeed, globally, they represent about 1 third of what they were in the 2nd part of last year.
So the sequential drop is pretty brutal and is most pronounced in China. So I refer indeed to the sequential evolution with the industry having, build significant capacity to address markets that, in the course of last year, become significantly larger than the sales and the demands are today.
Thank you. The next question is from the line of Natalie Debrain from Degroof. Please go ahead.
Hi, good morning. Thank you for taking my question. I was just wondering, so you flagged pretty well actually the sequential evolution of EV demand and EU production in China, do you see a similar pattern for plug in hybrids, or do you see actually the trend a bit softer there? Like, the decline could be slower, I would say, in plug in hybrids, than in electric cars as such. And so what would be the impact for you?
I know that from a keto's material perspective, it's, of course, that's interesting, but then I'm also thinking from a catalyst's point of view this this might partly compensate. So how do you see the dynamic evolving there?
Good morning, Nathalie. So the when I've mentioned EVs, I refer to, not only full EVs, and I also included there as we typically do the plug in hybrid. So it's electrified vehicles. Today, we don't have the total data set in order to distinguish between EVs and plug in EVs in terms of evolution. And I can only say today that the overall market that is down.
Now looking at the Catalysis side of things, clearly, the automotive demand overall has been fairly, I would say depressed in the first was fairly depressed in the first quarter of this year with production down globally by more than 6%. And again, there, China being the most significant factor where production, if my numbers are correct, was down by some 12, 13%. So this indeed, by definition, has an impact on the catalyst activity, obviously.
Thank you. The next question is from the line of Jonas Orr from Redburn. Please go ahead.
Hi, there. Thank you for taking the question. It sort of feels like the delay to the EV platform is the large EV platform in China really the big incremental new news here. And I'm just wondering if you can sort of quantify how much of a impact that is having on the delay to the capacity? Is that the largest contributor?
And then sort of following directly on from that, is there any confidence you can give us that this won't happen to other very large EV platforms that you are reliant upon?
So, there are a number of new developments and not only the postponed launch of that platform, the lack of demand or the absence of demand for the energy storage market in Korea is another a material development for us. And the change in subsidy mechanism in China is the 3rd one that has and is likely to continue to have a material impact on the market, both for passenger cars and the e buses and E Buses being a subsegment where Umicore early in the game had been well, well positioned. So, it's the combination of these three factors that really explains the 12 to 18 month delay. And each one taking in isolation is material enough to be mentioned, but it's really the combination of the 3 that explains the delay.
Okay. I guess I was just referring to the fact that we knew the subsidy cut was coming or or the changes to the subsidy program were coming back in February when we last, when we last met. And that that perhaps off in a different way. Are there are there any other significantly large EV platforms at the same sort of magnitude on your order books that are at risk of being delayed as well?
First of all, again, on the subsidy cuts, what is the, the factor of the surprise is not indeed that there is a subsidy cut because we new and the market knew that the subsidies were going to be gradually phased out by 2021, by 2020, 2021, what came as a surprise was how deep the cuts, the cuts were both at the national and regional levels and their impact on the market is probably in a way aggravated by the fact that these deeper than expected cuts happen at the moment where the overall automotive demand in the region is quite weak. Now I would like also to remind everyone that startup production and volumes are never guaranteed. So, what we know is, is for which platforms were qualified and we have quite a number of relatively large platforms indeed in the portfolio. This being said, startup production and the same is valid in automotive catalysts by the way, start of production and volumes are never guaranteed.
Thank you. And the next question is from the line of Geoff Haire from UBS. Please go ahead. Good morning,
Mark. I was just wondering if you could help us stand, what impact the change in guidance and also the delay and the ramp up of the NMC production capacity will have on cash flow? Particularly with regards to working capital, but any other lines that has an impact on the cash flow, please?
Good morning, Jeff. I will hand over to Philip to answer that question.
Good morning, Jeff. So on the cash flow front, we today would repeat what we said in terms of guidance back in February, which is that a free operating cash flow, we expect a significant improvement versus what we've seen in 20 and maybe to walk you through that calculation. So if we take, we start from the top in recurring EBITDA, I mean, EBIT range you've heard today that we put to the market in terms of depreciation to add to that. I would guide today and it's still early obviously in the year, but I would guide to a depreciation charge of something, a bit above $230,000,000. So you This compares to 207 of last year.
So you'll see that obviously, given the historic investments in especially investments in battery materials last year that we have a material increase in depreciation charges. So that's for EBITDA. And then on CapEx, the CapEx guidance for this year and this includes the timing effects that Mark talked about terms of battery materials of the guide to something like $600,000,000 of CapEx for this year. That includes some carryover from last year. As you may recall, we mentioned that in the February call as well And then the delta is working capital.
So in there, I would say it's a bit too early in year, but we definitely would repeat the guidance that free operating cash flow this year should be significantly better than what we've seen last year. Update that as we get to the half year results. But Philip, just in terms of working capital, Could I just come back on that? You obviously, if you're delaying the line extensions in China, particularly, you obviously don't have to fill those lines, but then at the same time, you've got capacity that is currently operational, which is building is making NMC capacity. So we're just trying to understand what's happening to the inventories within that then.
Yes, that is, I mean, that is one of the factors, Jeff, that will indeed play into working capital, but there are other factors, there's timing factors, there's So timing effects like on cables versus receivables. So again, today, we would repeat that guidance February, which is for a better free operating cash flow, and we'll, we'll give you an update, in the half year numbers.
Okay. Thank you.
Thank you. And the next question is from the line of Sebastian Bray from Berenberg.
Good morning, and thank you for taking my question. I'd just like to focus on the dynamic versus competitors within the market for cathode. So I think briefly a reference was made to some competitors having cheaper products with, otherwise sourced cobalt. I just want to understand, is the volume ramp up delay due to customers cancelling orders or platform delays? Or is it because, in and what could be described as a market where people have added capacity, people are pricing their cathodes more, aggressively than beforehand.
And I'm thinking in particular of the internal production of some of the battery names at LG Chemical at All that have recently ramped up. Thank you.
Good morning, Sebastian. So there are many, many elements in your question that need to be addressed first of all, let me clarify that the impact from, discounted cobalt containing products on the back of artisanal cobalt of cheap artisanal cobalt. Is really affecting the high cobalt containing grades. So that's very much the case across the product line of cobalt and specialty materials. Plus in its refining and recycling and distribution activities.
When it comes to cathode materials, this has a mostly an effect on the high level containing grapes. That is, for instance, the lithium cobalt. So it has more impact on the electronics demand than elsewhere. This being said, there may be also some indirect effects because I cannot exclude that given the large number of supply chains, through which this artist will go about finding its way to end products that some of that is ending up in cathode materials, in NMC cathode materials for automotive applications. And while the pricing effect there may be somewhat less of a factor relative to the price of a car compared to other high quality container applications, it means that, those who work in a responsible manner like Umicore and a number of others may be missing out on volumes that are going to, to players that have no troubles at all.
So that is difficult to quantify and and that's why, I mentioned direct and indirect effects from that type of competing materials. Now, clearly, we do address the in house of production. I mean, this has been a factor and continues to be a factor in the supplier landscape, in the supply landscape of cathode materials. And I think it is a fact that some of the production to meet a certain portion of their demand. So that is not a new factor that was highlighted a number of times in the past.
And Of course, if, one of the reasons I suspect, for these cell makers to use in house production is also to internalize the margin that is being made otherwise. On cathode materials. So I think your assumption is correct that this has an effect.
Thank you. And the next question is from the line of Charlie Webb from Morgan Stanley.
Thanks. Yes, just circling me around, just actually following up on that last question, and probably more in particular in China. Have you seen any change in behavior from both, I guess, sell OEMs in terms of the price pressure they're putting on the supply chain? Given these subsidy cuts and or in terms of kind of, I guess, cathode competitors in terms of their behavior as they try to get more tonnes into the market given the kind of softer demand environment. Have you seen much change there in terms of, I guess, pricing margin discussion maybe not so much from yourself, but maybe from the competitors, being forced upon them perhaps by the area.
And have you seen any change there, or is it kind of largely the same as it was last year?
Yes, Charlie, the answer to your question is that we indeed see some increased price pressure in the market dynamics because of the fact that the overall context has changed for now with the demand being on the low side. We the absence of demand for certain ESS applications with the absence of demand to a large extent for ebusiness with the lower production of EVs for now. So by definition, as the industry overall has developed the capacity to meet the higher demand that we saw in the second part of last year. The pricing dynamics are indeed somewhat affected by the overall context that's right.
Thank you. The next question is from the line of Peter Testa from One Investments. Please go ahead.
Hi, thank you. I was wondering if you could help understand on the safety issues in Korea, the extent to which those may be around cathode materials or other materials? And whether if there are safety issues, how your dialogue with automotive customers have extended around that topic as to as a separate product? Hi, Peter. So the investigation is still ongoing and The so actually it's the Cat, the energy storage market in Korea has grown substantially over the past few years, as I mentioned, during the call, as a result of a very strong government push to install very significant storage capacity for renewable electricity.
And that is a market where NMC Materials have been utilized. So that's an NMC market and where a Umicoreb has had, directly a strong presence. So the that's why we mentioned the impact. What has happened is that the number of files have have broken out in the course of last year. And while these were investigated, the fact that a certain number of new fires occurred in the 1st part of this year has encourage the government to, shut down some of the public to run energy storage facilities and to encourage private owners to do the same.
We're not talking about residential units. We're talking about industrial scale units that are being utilized by utilities. And grid operators, that produce or distribute renewable electricity. And, the, and as a result of that end of the investigation ongoing, the battery producers have now decided to also stop production of new systems. The investigation is still ongoing.
So I think it's a bit too early to figure out what it may mean in terms of market development for the future. Thank you.
And the next question comes from the line of Jonas Orr from Redburn. Please go ahead.
Hi, thanks for taking the second question. Just could you please clarify on the delay to the new capacity. Is it that you are delaying the rate at which you are building the capacity or really more to a delay to the rate at which it is turned on once it is already built. And therefore, is there any scope for a reacceleration if market conditions can improve or conversely, should we slow our CapEx forecast and estimates over the next couple of years by spread them out over a further 12 to 18 months? Thanks.
Randall, as I mentioned during the call, so we continue to build the 2 greenfield sites, so that they will be ready for commissioning in China by the middle of this year and in Poland around the middle of next year. So what is really changing will be the pace at which we will build, we will install new lines once the sites are in operation. So it's a it's really the reducing the pace at which we will be adding new lines after commissioning and start of production of these 2 greenfield sites. Philip has indicated some CapEx guidance for this year that also incorporates the carryover effects from the large investments of last year. I think it's too early to provide the guidance longer, longer term.
Now is there a scope for reacceleration That's, will deal if the demand recovers faster than we now anticipate, we'll have to deal with that with the highest degree of agility, but it's fair to say that it will not be easy to re accelerate.
And there are no further questions at this time. Please continue.
Okay. So, then, I would like again to thank you for joining the call at short notice. And and I will close the call now. And obviously, and of course, as usual, if you have the following questions, please feel free to reach out to our investor relations team here at Umicore. So thank you and wish you a nice day and talk to you soon.
Bye bye now.
Thank you, ladies and gentlemen. That does conclude the conference for today. You may all disconnect.