Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Umicore Full Year 2018 Conference Call. At this time, all participants are in a listen only mode. I must advise you that this conference is being recorded today on Friday, the 8th February, 2019. I would now like to hand the conference over to your speaker today, CEO of Umicore, Mark Greenberg.
Please go ahead.
Thank you. Good morning, everyone, and welcome to the presentation of Umicore's performance for 2018. I will first make some comments on our strategy and give an overview of our major achievements and then hand over to Philip, who will talk you through the 2018 business performance and financials. I would then wrap up with some overall comments and outlook before handing the call over to you for any questions that you may have. Looking at the key figures of 2018, We produced a very strong overall performance with yet another set of record results.
Revenues were up by 17% year on year and recurring EBIT up by 29% to exceed EUR 500,000,000 as we indicated a year ago. We produce revenue and earnings growth across all three business groups and our return on capital employed in a period of intense investments has increased to 15.4% above our 15% targets. These results demonstrate that we have made the right strategic choices and that our investments are not only laying the foundations for long term growth, They are also initial 2020 target 2 years ahead of schedule, I'm confident that we are on track to deliver on our raised ambition by 2020 as planned, notwithstanding a less favorable macroeconomic environment in 2019. With this slide, I want to remind you of the ambitions that we defined in our Horizon 2020 strategy. Back in 2015, I said that by 2020, we would have a clear leadership in clean mobility materials and recycling.
That we would double the size of our business in terms of earnings while rebalancing the portfolio of activities. And that we would turn our pioneering approach to sustainability into a greater competitive edge. I am proud to say that we are 2 years ahead of schedule in achieving our strategic goals, which both rewarding and motivating for all of us at outlook has been confirmed and market trends have been evermore in our favor. 8 months ago, at our Capital Market Day, I commented that the faster the decline in light duty diesel, the better that would be for Umicore. Since then, that's trend has accelerated much more than anticipated.
At the same time, our technological edge in the light duty gasoline and battery materials segments has allowed us to win large EV platforms and new business for gasoline engines requiring particulate filters. We have also secured emerging fuel cell and battery recycling business, so confirming our unique ability to provide solutions for all of the future drivetrain technologies. Umicore has clearly become the premier materials technology company, enabling the transition to cleaner mobility. The recurring EBIT of EUR 514,000,000 in 2018 is above the original 2020 target of doubling the 2014 figure. Early last year when it became clear enough that we could reach this target already 2018, I also informed you that we had identified send over and above the original ambition, and I'm confident that we will capture this upside in 2020.
Our portfolio was very clearly rebalanced by We sold a number of businesses that did not directly contribute to the strategy of clean mobility materials and recycling, and thus typically has a lower growth profile. Our closed loop model is gaining traction, which goes to show the added value you cannot deal with the needs of the catalyst industry or fuel cells without closing the loop and without recycling all these powertrain elements when they reach end of life. For environmental reasons and because of the scarcity of the metals that are required for these technologies, Our closed loop model is the way to go. Without recycling, scarcity would be a limiting factor and a significant bottleneck to society's aspirations to cleaner mobility, especially in the field of rechargeable batteries. I am particularly proud that we are the 1st and only player in the market to be able to offer our rechargeable battery materials customers 35 materials from a clean and ethical supply chain.
As an example of our sustainable sourcing, our ACB compliance cobalt procurement framework is covered by 3rd party assurance. The fact that we're ahead of schedule did not come by sheer luck, while societal and technology trends support the choices we made several years ago, our achievements results from a consistent execution of the strategy, consistent execution of investments, For Catalysis, last year, this mainly involved the integration of the recent acquisitions from Haldotepso and full ownership of Umicore Ooredek in Korea. In 2019, the focus will be on the expansion in Europe, China and India, following major business wins. For Energy And Surface Technologies, we reached milestones ahead of schedule with the completion of the EUR 460,000,000 investment plan in China and Korea in a market where time is of the essence. In 2018, we also made a start on the EUR 660,000,000 investment plan for capital materials, on greenfield sites in both China and Poland together with a new process competency center in Belgium.
For recycling, the significant step was the completion of major environmental investments in the Hoboken plant which has immediately shown a significant reduction in emissions. Consistent execution and expansion of technology innovation roadmap. In 2018, we stepped up our R and D efforts and filed 75 new patent families up 56% on the previous year, while R and D spend increased by 12%. Our innovation roadmap spent the next 20 years and includes both product and both product and process technologies, in particular for rechargeable battery materials and battery recycling. Innovation path includes new cathode and allode materials to increase the performance of battery cells, with a focus on increasing energy density to improve driving ranges, while reducing charging times and optimizing cost per kilowatt hour.
Looking further ahead, we are also investigating solid state batteries, In Catalysis, the development of innovative materials for fuel cells is also gaining an importance. Consistent execution of the strategy also means the ability to attract new talent in competitive growth markets such as Korea and China, as well as in Belgium for or are in these division and for the recycling plant in Hoboken. Attracting and retaining talented and visionary employees is one of the major challenges which are driving and technology advanced industry faces in order to ensure continued innovation. I'm very proud of our people and consider the success we had in hiring so many skilled people as testimony to our relentless to make Umicore an attractive place to work and to promote Umicore as a sustainable employer. A philosophy around sustainability at Umicore is not only about minimizing our impact on the environment or on the communities surrounding our operations.
Our sustainability philosophy is about creating a positive impact on society. Having already reached our initial 2020 targets ahead of schedule, I'm confident that we are on track to capture in 2020 the upside earnings potential of some 35 percent to 45 percent over and above the original ambition levels notwithstanding a less favorable macroeconomic environment in 2019, impacting the automotive sector in particular. On this slide, I have detailed some of the factors that will influence performance in 2019. For Catalysis, the macroeconomic situation is clearly a key factor with the automotive industry showing a slowdown in sales since the second half of twenty eighteen, especially in other factors by the low resell value of the existing diesel fleet. Consumer choices and the pressure to curb emissions will determine how fast the engine mix will continue to evolve.
In China, new legislation has been brought forward by a few months in some municipalities. The impact thereof is expected to be limited though as the vast majority of car and truck models are not ready for the new standard due to supply chain bottlenecks. We will expand gasoline particulate filter production capacity during the year, to fulfill newly qualified volumes. Obviously, overall sales will depend on the macro environment, and it remains to be if and when consumer confidence will improve and bring buyers back to the dealerships in the various regions. For Energy And Surface Technologies, a significant number of new models of electrified vehicles are due to be launched in 2019, using Umicore materials.
Against this backdrop, we will bring new capacity on stream in China in the second half of the year, and this will support revenue growth. In Cobalt And Specialty Materials, We benefited in the first half of twenty eighteen from strong profitability due to particularly high levels of demand across most businesses, and to a benign cobalt pricing environment. We do not expect this to be repeated in 2019, due to a softer macro outlook and a significantly lower cobalt price, impacting revenues and margins COVID refining, recycling, and distribution activities. In recycling, we will combine the regular maintenance of the Hoboken smelter with optimization investments, and this will result in an extended shutdown of the plant in the first quarter of the year. Taking accounts of the impact of this shutdown, we expect process volumes to be roughly in line with the levels reached in 2018.
The supply mix is very much in line with that of last year. I will now hand over to Philip who will comment on the financial aspects.
Thank you, Mark, and good morning, everyone. The main message on this slide is that we delivered on our ambition to generate 18 as first voiced at the time of the capital raise in February of last year. Revenues increased 17 percent, but as importantly, earnings grew faster with recurring EBIT and EBITDA up 29% and 23%, respectively, resulting in higher margins. From our minority stake in Element 6 abrasives, which we report under corporate. Now while all three business groups continued are contributed to this growth.
Energy And Service Technologies accounted for most of it, already representing half the group's recurring EBIT in 20 18. These high operating results translated into a 22% increase in recurring net profit and a 12% increase in recurring earnings per share, which takes into account dilution effect from the new shares issued as part of last year's capital raising. Consistently with our policy of distributing a stable and growing dividend, we will propose across annual dividend 2018 of EUR 0.75 per share. Finally, return on capital employed rose to 15.4% as our businesses continue to create substantial shareholder value, even in a period of intensive growth investments. The next slide illustrates the consistent earnings and margin increase delivered since 2014, which is our reference year for our Horizon 2020 strategy.
This happened despite the divestment of 4 business units in recent years. In less than 5 years, recurring EBIT doubled and our earnings distribution became more balanced with Energy And Surface Technologies, in 2018, overtaking Catalysis to become Umicore's largest business group in terms of earnings, capital employed, and headcount. Compared to the baseline of 2014, returns have increased substantially and now applied to a much larger capital employed base resulting in significant value creation. As in 2017, we ceded in 2018, Umicore's 15% return on capital employed targets, generating returns for all three business groups, well in excess of our cost of capital. Recycling remains a premium return business due to its unique business model and service offering.
The increased ROCE for recycling in 2018 includes the effects of the divestment of Technical Materials European Operations. Returnal capital employed for energy and surface technologies was well up and overtook that of Catalysis, despite the 50% in in its average capital employed year on year. This underlines that our investments are generating returns almost immediately. Return on capital employed for Catalysis includes some anticipated temporary dilution effect owing to recent acquisitions that have yet to deliver their full synergy potential. Detail, and starting with Catalysis.
In Catalysis, revenues increased by 9%, while return EBIT and EBITDA increased by percent, respectively. In automotive catalysts, growth was driven by the heavy duty diesel business and a higher demand for gasoline catalysts for passenger cars. In heavy duty diesel, the acquisition from how the Tubbser contributed and broadened Umicore's technological footprint. The passenger car segment, Umicore's higher gasoline sales more than offsets the fast decline in diesel car sales in Europe. There was a slowdown in the automotive sector in the second half of the year, particularly in China where consumer confidence seemed to be affected by trade tensions and in Europe where the transition to tighter emission legislation caused some certification delays.
Against the backdrop of a rising proportion of gasoline in the car mix, Umicore has won the largest share of new gasoline platforms requiring particular filters in Europe and in China that will come to market in the coming years. Growth in Precious Metals Chemistry was driven by higher sales of active pharmaceutical ingredients and products used in chemical metal deposition applications, as well as by increasing demand for Umicore's fuel cell catalysts. While still modest in size today, The fuel cell market uptake has become visible and Umicore is committed to this clean mobility technology. We are well positioned through close collaboration agreements with leading OEMs. In Energy And Surface Technologies, revenues increased by 44% and recurring EBIT and EBITDA by 82% and 63% respectively.
Step change growth in Rechargeable Battery Materials was based on strong demand for NMC cathode materials for transportation applications, and a swift term bulk of the new capacity in China and Korea. We also had high year on year demand for LCO used in high end portable app electronics and for NMC materials used in energy storage applications. Earnings benefited from scale effects associated with the newly commissioned capacity. As the next expansion phase consists of sizable greenfield expansions, 2019 will see higher upfront costs and is not expected to see a repeat of such scale effects. Growth in Cobalt and Specialty Materials in 20 18 was driven by strong volumes and a supportive price environment in the first half of the year.
These tailwinds gradually subsided in the second half, exacerbated by an accelerated decline in the cobalt price, At least headwinds are not expected to recur in 2019. The activity level in battery recycling increased as more OEMs confirm their interest in a closed loop approach resulting in newly secured recycling contracts. Finally, electro optic materials showed slightly lower revenues, while revenues in electroplating was stable. This next slide illustrates that we are on track to deliver our ambitious EUR 1,100,000,000 CapEx expansion strategy for rechargable battery materials. The initial expansions in China and Korea totaling EUR 460,000,000 of CapEx and as announced in April 2016 seen and in May 2017 followed an accelerated schedule.
The ramp up is logic completed, allowing for the 2018 scale effect that I mentioned here. The next investment wave announced in February of last year was initiated and will trigger significant upfront costs in 2019. Construction is underway on the greenfield side in Jiangmen in China, with start of production expected in the second half of twenty nineteen. Engineering work is ongoing for the greenfield site in Nissan and Poland, and construction is due to start in the spring with the commissioning expected mid-twenty 20. And we're also in the final engineering phase for the Process Competence Center in Olum, Belgium.
Moving now to recycling. Excluding the impact from the sale of the European operations of Technical Materials, Recycling revenues increased by 6% and recurring EBIT by 12% on a like for like basis. Revenues increased for precious metals refining, thanks to higher processed volumes in Hoboken, despite the fire incident that occurred in September. Metal prices were, on average, somewhat more supportive, while commercial conditions in some segments continue to be impacted by competitive pressure. The mix remained broadly unchanged year on metals and they were higher for Precious Metals Management.
At a strong revenues and earnings growth in 2018, we results from focused and sustained investments, which are embedded in our Horizon 2020 strategy. These investments continued and increased in 2018. Capital expenditure amounted to 407 1,000,000 for the full year, which compares to EUR 198,000,000 in the 1st 6 months of the year. Two thirds of this amount was taken up by Energy And Surface Technologies, and in particular, by the capacity expansions, in Korea and China for rechargeable battery materials. For 2019, we expect a further increase in capital expenditures compared to 2018.
The increase in cash net working capital seen in the 1st 6 months of 2018 continued into the second half, reaching EUR 707,000,000 for the full year. Again, more than 2 thirds of this amount, close to EUR 500,000,000, was for the account of Energy And Service Technologies, driven by the volume growth in cathode materials, and the need to fill the pipelines for newly commissioned production lines. These effects were exacerbated by substantial year on year increase in the Cash working capital in Recycling in 2018 reflects a temporary increase in inventories caused by the fire incident in Hoboken. Out of this EUR 707,000,000 of working capital increase, the growth in inventories accounted for EUR 764,000,000, while the net receivables actually decreased by EUR 57,000,000 as trade payables outgrew receivables. Needless to say that initiatives are on the way to optimize working capital, especially in the expanding battery materials value chain.
The waterfall chart on the next slide shows a roughly stable net financial debt year on year ending to 2018 with EUR 861,000,000. And this implies that the new capital raise in February of last year funded the net cash flow needs of 2018. The strong growth across flow used to fund the increase in net working capital and part of the CapEx. Free operating cash flows are expected to be substantially better in euros and net interest to EUR 32,000,000 and Umicore paid close to EUR 200,000,000 of dividends in 2018, of which 175,000,000 to its shareholders and the remaining EUR 20,000,000 to minorities. Net buybacks amounted to EUR 79,000,000, while the net cash outflow related to acquisitions and divestments amounted to just under EUR 100,000,000.
1 of the highlights of 2018 in terms of our funding structure was successful capital increase in February, raising 10 percent new equity. The net financial debt of end 2018 corresponds to very solid credit ratios maintain us comfortably within the investment grade territory. Our net financial debt over recurring EBITDA amounts to 1.2x and our gearing ratio to 24%. 80% of net debt consists of fixed rate, medium and long term lows, leading our substantial committed syndicated back loans, largely undrawn. Umicore's strong balance sheet and operating Cash flow leaves ample funding headroom to continue to execute the strategy in 2019 without the need for additional capital.
Finally, in 2018, we accounted for nonrecurring items totaling a net charge on EBIT level of EUR 14,000,000. Restructuring charges accounted also for EUR 14,000,000 and mainly covered the restructuring plan in Brazil that will result in in the closure of our industrial activities in Guarulhos and transferred to our Americana site. These restructuring charges were partly offset by income from other items, including the gain on the sale of the European operations of Technical Materials. In 2018, we also recognized EUR 6,000,000 of noncash impairments on permanently tied up inventories, mostly the result of the lining cobalt price. Since the 31st December, closing date, the cobalt price continued to substantially decrease, which is a headwind for certain refining and recycling operations into 2019.
And with this, I'd like to hand back over to Thank
you, Philip. Before turning to questions, I would like to wrap up with some concluding remarks from today's presentation. We have reached the ambitions that we had set ourselves as part of the Horizon 2020 strategic plan 2 years ahead of schedule which goes to show that our strategic choices and recent investments are paying off. The long term fundamentals of our business and our growth prospects are exciting, notwithstanding current challenges in the macroeconomic environment, which impact the automotive sector in Ateckelur. We remain on track to capture the upside potential of some 35% to 45% to the original Horizon 2020 ambitions, while maintaining the 15% ROCE target at group level.
We will make further progress this year in the execution of our growth strategy. However, EBIT growth in 2019 will be tampered by the present subdued demand in the automotive and consumer electronic sectors combined with increased depreciation charges, R and D efforts and start up costs as well as the timing of new capacity. As I have mentioned on many occasions, though, we run the in a way that allows us to pursue our strategic investments and long term research programs regardless of short term fluctuations in the macro environment while consistently delivering strong returns to shareholders. While acknowledging that 2019 may be challenging, in terms of the macroeconomic environment in the automotive market, I can confirm that we see unprecedented mid to long term value growth in automotive catalysts as tighter emission nodes are introduced in several regions as explained last year during our Capital Market Days. With our leading position in new gasoline technologies and our improved position in heavy duty diesel, we are well positioned to outgrow and I see rapidly growing demand.
Our broad portfolio of the highest quality and mostly customized cathode materials combined with an unrivaled capability to scale up and a pioneering approach to ensure a sustainable supply put us in bold position to capture a products and end of life products. At the same time, we have already laid the foundations for significant growth in the longer run with an innovation roadmap that spans the next 20 years in rechargeable battery materials and the first tangible and promising set for fuel cell technology. Not forgetting the value growth in automotive catalysts, combustion engines need to become ever cleaner, and of course, the recycling of spent lithium ion batteries without which electrification cannot be successful in the long term. On this note, I would now
And the first question comes from the line of Charlie Webb at Morgan Stanley.
2 from my side. Just first, Philip, for you, on the cash flow, as we look in, you obviously talk about material improvements 2019, perhaps you can understand how much you think you can reduce the working capital outflows in 2019? And also what our expectation should be for CapEx? CapEx obviously in 'eighteen was just probably below consensus expectations. Is it just that we carry that forward into 'nineteen?
The CapEx will be meaningfully higher you could just help on that one. And then second question, just on EST margins and then kind of direction of travel and again, how we should be thinking about that in 19. As you pointed out, cobalt prices obviously have continued to fall in January in the start of the year. We have quite sizable Seacups being proposed or rumoured in China, and we're seeing, I guess, increasing ramp up in competitive capacity in Korea and in China. So maybe just helping us understand both kind of the near term profile of EST margins as we move into 'nineteen and then almost as well perhaps also longer term?
That'd be great. Thank you.
Okay. Charlie, good morning. On the first question, and I will take it from, let's say, the helicopter view of the operating cash flow. Indeed, the expectation that what we're working to is to have a substantial improvement in the free operating cash flow of 2019. First take, CapEx.
So CapEx in 2018 came out a bit lower than what we initially guided. And that's really a cutoff effect related to mostly to STs. So that means that indeed, you will have part of a flow over into 2019. Secondly, we did move the extended shutdown in Hoboken 2019. And then thirdly, we will have the substantial greenfield expansions in China and in Poland, which will really kick in also in terms of CapEx this year and especially in the second half of the year.
So that is what is behind the guidance to have an increase in our CapEx in 2019 compared to 2018. I think as we go along in the year, we'll probably be able to refine that a bit more, but definitely an increase for the that I mentioned. Working capital, I think it's maybe worthwhile to go back to the increase that we had, the substantial increase that we had in 2018. As I tried to explain, if you look at the, the composition of that increase, it was really in inventories. Had an important increase in receivables and in payables as well.
And I would for us, it's really turnover that is relevant when you look at working capital. And I turned over increased by more than close to EUR 2,500,000,000. And obviously, metal prices play a key role in So working capital increased because of an increase in inventory. First, the volume, the strong volume growth in rechargeable battery materials. Secondly, the fact that we increased a lot of capacity in these new lines, well, you need to kind of build them with with base stock.
And thirdly then, and this should not be underestimated a substantial increase in the average price of cobalt, which is a key raw material in E and ST. I mean, the cobalt price on average year on year went up by 30 plus percent. So what does 19 is that, I would say on a stable basis, we are working very hard to optimize that working capital that we currently have in our operation you can imagine as you start up lines, you increase, capacity by such an extent that your, I mean, optimization is, unfortunately, not the the priority. So we're working a lot to optimize our working capital from that perspective. Secondly, the cobalt price has come down quite substantially, certainly compared to the average of 2018.
So that will help us. And thirdly, as we mentioned, the increase in And recycling is really a temporary one related to the buyer, so that should work itself out of the working capital in 2019. So that's why overall, we do expect to make substantial improvements on the working capital, I would say, on a stable basis. Then obviously, we will have the, new capacity coming on board in the second half that will again require some additional working capital.
Just on the inventories, obviously this kind of struck at the end of the year on the balance sheet. So it was a lower cobalt price at the end of the year, versus, obviously, the start of the year. Even, I guess, year on year at the end of the year. So how does that work exactly? Because obviously, already seen a lot of that metal price movement into the end of the year and your LC working capital outflows are still pretty significant.
So just trying to understand how that changes as we move into next year.
You do have a delay effect in certain inventories. You work with an average price. So there's some delay effect on the metal price, metal price or cobalt price. So that should take some time to filter through the system. And then obviously, the base stock that we invested in the capacity, is not moving with the cobalt price, that is that is base stock, that's what we call the permanently tied up inventories.
And that basically has the price which, well, at which you buy it. And since we extended a lot of the capacity in 2018, it means that you, in a way, have a reflection of the average co price of that year.
Okay. Thank you. Okay.
So let me now address the, your second question about the, E and ST margins. And first of all, because you mentioned the massive capacity additions or competitive capacity additions in Korea and China, let me first set the scene correctly there. There is no massive capacity addition in Korea. 1 and secondly, in China, there is a capacity addition, and Umicore is one of the players that is adding most capacity today. And in Europe, you know that the picture, that Umicore will be the first player to have a capital your capacity, in the region, starting in 2020.
Now coming back to that competitive situation, I would also like to remind you because that's important when we talk about margin and margin evolution that most of the products that we make and that we sell are highly customized products. For very specific platform requirements on which we're qualified or qualifying. And so the fact that others may be adding capacity at the same time, we are, although it's not at the same pace, doesn't necessarily mean that this has a significant impact on margins. Then, coming to practical aspects of the margin evolution in 2019, There are a few factors that have to be born in mind, and they were, I think, mentioned during the presentation, That one is the fact that, the scale effects, that we had anticipated have been achieved in 2018 following the ramp up of brownfield capacity expansions. While now we are in the process of building greenfield capacity in China and starting a greenfield project in Europe, which means that from a timing point of view, you will indeed have in the course of this year in particular in the 1st part of this year more startup costs and upfront costs related to these greenfield project, while the ramp up in China will start in the 2nd part of the year and in Europe in the 2nd part of 20 20.
So these timing effects in terms of when the upfront costs, when the costs are being incurred and when the ramp up and the scale effects are being achieved, has to be born in mind. This being said, I'm very pleased with the level of margins that we achieved in, in E And ST. And, again, with the notable exception of the cobalt price impact, on the cathode materials side, we are doing well because our products are highly customized and to meet specific requirements of given platforms.
Okay. So just to clarify, because of that greenfield effect, we should see some margin dilution, versus H2, 18. Is that fair?
We'll comment on more quantify guidance as usual comes at the end of April.
Your next question comes from the line of Mutlu Gundogan at ABN AMRO. If you could please ask your question.
Yes. Good morning, everyone. The first question is on the Energy And Surface Technologies segment. Can you explain to me why your IFRS revenues were up 83 percent half year on half year, but your own definition of revenues So excluding Metals was down 2%, half half year. If we just can go through the questions 1 by 1, I think that's probably easiest.
Mudlow, I suggest that we get back with that offline separately because we need to, to figure out the information.
So
can you raise, in the meantime, your second question?
Sure. So, I am trying to understand the ramp up of the various expansion way. So I would appreciate if you could provide a little bit of detail. When you actually started with wave 1 and when you finished it, And then also for wave 2, I'd like to know when you started to add capacity and what percentage is completed because I thought that you would still have some debottlenecking to do in 2019, but then looking at Slide 23, it seems that you have finished that ahead of schedule. So some details on capacity and where we stand for wave 1 and wave 2, please?
Okay. So let me clarify that. The first big investment program of $460,000,000 that was announced partly in 20 18 and partly in 2017 was indeed completed on an accelerated schedule, at the end of 2018. And that means that one that the volume ramp up was effectively achieved in the course of 20 18, especially in the second half and the scale effect, we're coming at that point in time as well. That leaves very little room for further additions in the course of the first half of twenty nineteen for addition in terms of volumes, I mean.
While we build the new greenfield site. This is indeed slightly earlier than or this is earlier than we had announced in terms of the completion of that first wave. And we had to accelerate the investments because of how the demand for our materials was progressing in the course of these investment program. So this is rather good news. And indeed, this means that in the first half of this year, you will see, limited, if any, volume growth in that respect coming from new lines.
The way I understand it initially was that wave 1 was a tripling and then wave 2 was a doubling on top of the tripled capacity. So I was on the understanding that wave 2, that that was bigger and therefore, and that started later in 2018. So I understand that you're not adding any nameplate capacity, but the lines you added for wave 2 since they are much bigger and you start to add them maybe in the second half of the year, shouldn't you see growth effects of that moving into 2019?
Actually, the main difference between because I guess just to clarify, for the audience, I assume that what you mean by wave 1 and wave 2 is the breakdown of the 1,000,000.
Yes, yes.
1,000,000 launched in 2016. And $300,000,000 launched program, and indeed had to be executed on an accelerated schedule Now the difference between the first one and the second one was mainly that the, was the because in terms of orders and sizes was the fact was the inclusion of a greenfield project, that that explains that the greenfield was in Korea, that we had to spend more money than in the way that was announced in the first place. But as I mentioned, a moment ago, that the merged program and so I'll be no longer in the future refer to wave 1, 23 because that's impossible to track along these lines. I mean, this process, a couple of investments were emerging to 1 big program. And I would like to indeed confirm that that program was completed in the course of last year in the second part of last year on an accelerated schedule.
Therefore, you have seen in 2018, both the volume ramp and the scale effects of that.
Okay. Okay. That does indeed change the story. Then on maybe I can I don't know if I still can call it wave 3? So the greenfield project that you're starting at the end of this year in China you tell us how much capacity of that wave 3 you'll be adding in 2019?
How substantial is that?
It's, typically, you know, I do not quantify these additions because that information is quite from a competitive point of view, I can say that this is, again, a fairly material capacity that will start to come on stream in the 2nd part of this year. And maybe if I may From a practical point of view, I would like to leave room for all participants to raise questions. So I would ask, you're not your President Dimutlu, but all these participants to limit the number of questions in the first instance and to place their names back in the queue if they have follow on questions. And I appreciate your understanding for that.
Okay. I have one more question, but I'll leave it here, then I'll get back in the queue.
And your next question comes from the line of Wim Host at KBC Securities.
Yes. Good morning, gentlemen. Two questions then from my side, please. On Recycling, there was still be mentioning that there was in some segments, commercial pressure or competitive pressure. I think in the past, it was was hinted that you expected could be it could be temporary.
And so first question is, do you think that competitive pressure will be there for for the entirety of 2019 as well? And can you maybe offer a bit more clarity on what exactly and what segments this concerns about? And second question is, we've seen some precious metal prices, for example, gold doing relatively well recently. Can you maybe update us whether there are any hedges being taken additionally and how your hedge book is looking like for 2019? These are my questions.
Good morning, Wim. So, let me first address the question about the competitive pressure. I think the good news is that it seems that things have stabilized at this stage. And indeed, I believe that the effects are temporary now. As I mentioned on previous occasions, it is difficult for us to make out.
How long temporary can be. And the fact that there seems to be a stabilization is probably pointing to, in a good direction. And we'll see in the course of the year how things develop. And The competitive pressure is, on it has historically been or historically in recent years been on some of the end of life product segments and moving to some of the industrial byproducts And that picture is largely unchanged, I would say. Precious metal prices, the basket is still relatively mixed the precious metals prices or the metal prices were somewhat supportive in the course of last year in recycling business.
And with a combination of, I would say, precious metals and specialty metals or secondary metal prices moving on balance in the right direction. If I look at the current situation, it's, again, a mixed picture, for the time being with a limited number of precious metals prices, behaving really well like palladium, increasing palladium prices, increasing rhodium prices, staying at a relatively high level. On the other side, you have negative effects from platinum, which continues to be under some pressure. And we continue to see a mixed picture in terms of the secondary metals. All in all, If I look at the current metal prices, I would say that and if they stay more or less where they are today, I would say that the baskets could prove a slight tailwind for 2019.
We haven't created
any hedges recently?
I was just going to say, we haven't any material hedges compared to what we discussed previously. So we still have some hedges for 2019. Precious metals and some, some base metals, but nothing material so far.
Your next question comes from
Hi, good morning, everyone. Thanks for slotting me in. On the free cash flow point, can I just follow-up? Mark, I think your comment, can you just clarify was that on operating cash flow on free cash flow for 2019? And following up on that, can I just qualitatively ask know you don't guide quantitatively, but do you see free cash to be positive in 2019 already or is that more likely to only happen in 2020?
I'll start with this one. I've got a follow-up on to that as well.
Yes. So it's Philip here. So the comments were made related to free operating cash flow, okay, for 2019. So definitely in increase sorry, a better free operating cash flow in 2019 compared to 2018. That's what we expect I think it's too early to give specific guidance in terms of where that may end in an absolute number.
So we'll try to guide you as the year progresses on that.
Right. Okay. So no quantitative guidance at this point. Fine. On the EST margin then, can I ask what's very strong in H2?
Can you just breakout how much if any of that was price, also mix contribution from the cathode material. And I think, I think it was Marky, you said don't extrapolate the margins when we were talking half a year ago. And improved. So is that just that guidance just been lifted to a higher level? We should not extrapolate mark to market from here.
Or do you see other than the greenfield investments? Any reason for that to come to pre H2 levels?
So, the reason I mentioned do not extrapolate is because I'm always very cautious with quarterly or healthy figures. And mean, our business and our investments are meant for many, many years. And, it's And you always have some temporary effects, but extrapolation is always risky from short term data. The main effect in H2 2018, as I alluded to before, is related is coming from the scale effects of the ramp up of the brownfield expansion, that we quite substantial capacity coming on stream and being ramped up in the second part of last year. As part of our expansion program and this generated quite, I mean, the best part of the, the scale of sorry, the margin impact.
On the negative side, in second half of twenty eighteen, we started to see the the reverse effect of what we had in the first half, would be the cobalt price declining and the, the refining cobalt refining recycling and distribution margins, being actually impacted by the reduction in cobalt price.
So would you say in your judgment? Is it fair to see the full year number for 2018 then as a through cycle margin for that division?
Well, I think it's, we're still in the middle of very, very significant investments and expansion programs. And so I would not yet comment on that. Suffice to say that the margins are good and the fundamentals in terms of demand and in terms of differentiation are pretty supportive.
Okay. Thank you.
Your next question comes from the line of Ranov Ah at Redburn.
Hi, thanks. I just have 2 quick number questions and then maybe just a broader question after that. The firstly is Can you help us understand the magnitude of the additional D and A and OpEx costs for 2019? And the lag impact of the cobalt price, on the CMS earnings?
Yes. So on D And A, I would guide today at D And A level for 20 of something like EUR 240,000,000, EUR 250,000,000. So we at EUR 207,000,000, I believe, in 20 18. So obviously an increase because you have the, I would say, a timing effect from the past CapEx and then a new CapEx coming forward. So my best guidance today would be to 40 to 50 for, for the year.
The rest of the operating cost, I think we typically don't give specific guidance, but as we Mark and I have both mentioned, we have higher R and D costs. We have higher startup costs, costs related to the preparation of the greenfield site. So you should expect to, to see an increase in these, what I would call, one off expansion costs. Flowing through the P and L. On the cobalt price, so the cobalt price impact on P and L on margins is really on The CSM business mostly, it's on recycling, refining distribution activities, whether the margin is related to to a certain extent to the cobalt price.
And so as we've seen, the continued decline in the cobalt price in say an accelerated decline to the cobalt price since the end of 2018, that will impact, indeed, the margins for that's part of the E and ST business, and that's obviously taken into account in our guidance.
Great. Thank you. If possible, I just wanted to ask as well. If you can just talk a little bit more broadly about your R and D and innovation program, clearly, there has been some rapid advancements in the capability of your, emerging markets, competitors perhaps faster than people previously anticipated. So where do you see your technology offering going over the next couple of years?
And how are you hoping to stay ahead of this?
Well, let me, maybe go back to what we explained during the Capital Market Day and and expand on that. Clearly, if we look at the rechargeable battery materials, segment, we have a broad offering. And actually, we have the broadest offering of highly customized cathode materials for the electric vehicle applications. And this continues to be a very significant area of focus in terms of research programs for the short, mid and long term. And actually, the the offering of our customers, of our car and battery customers continues to expand.
There is an increased demand for even more customized projects because they are, our customers are also willing to distinguish it themselves from a competitive point of view. So this is a clear direction in the market and one of the, very significant competitive advantages of umicore that we described in the past is the ability not only to develop highly customized products for very specific form requirements, it is also our unique ability to scale up fast, despite the complexity that the diversity of materials brings in terms of production requirements and production capabilities. So our, I would say, research programs continue to be characterized by a synchronized combination of a product and process development programs in order to meet these requirements from the customers and these increasing levels of customization of the materials. We're also continuing to, develop offering of, composite andode materials. And we see the first signs of of traction for that technology.
And as I mentioned, or as I explained in the past, typically, new products in this area are tested on applications other than automotive in the first place. So it may take several years before we see demand from electrified vehicle applications. And in the meantime, the progress is promising, and the research efforts are ongoing. If you look at our innovation roadmap, we also continue to look at the next generation of battery materials and in that respect are very much engaged in research programs and collaboration efforts with other players and research institutes, institutes to to test solid state batteries and the material requirements for solid state batteries. So this is definitely an avenue that is that is being pursued.
So this gives us an idea that as we mentioned during the Capital Markets Day or research or technology, innovation roadmap spend the next 10 to 20 years and not just the next 10 to 20 months.
Your next question comes from the line of Peter Olofsen at Kepler Cheuvreux. Please ask your question.
I have two questions around the Automotive Catalyst business.
On
the one hand, you have been very successful in winning new business new gasoline platforms, but on the other hand, there's the ongoing decline in diesel market share. If we were to assume a stable global car production in 2019, you think you can grow your automotive catalyst business in 2019, considering the mix and market share developments and also related to this business, with the inclusion of the gasoline particular filters, is that going to affect the mix and hence the margins in this business?
Good morning, Peter. I think it's too early to provide quantified guidance about the growth in 20 19. I think it's we're quite pleased with the way things are unfolding and especially are very high success rate in 2018 in the latter part of 2018 in winning the new gasoline particulate filter business particular in Europe and in China, which are the largest markets for this new application. And indeed, the mix is changing rapidly. I mean, we have seen diesel continuing to lose ground, especially in the European market in the course of 2018.
If my numbers are right, on average, diesel was 38 percent of the European markets for the full year and was down to, well below that level in the last quarter of 2018. Pointing to some acceleration in the trends that we had identified earlier and commented about. Now, clearly, diesel comes at higher revenues and and overall margins than other applications. And so the in the short run, the mix effect is a headwind, to the catalyst industry and definitely, to UVcore as well. And That's why I mentioned in the past that you have to look at the engine mix evolution as providing a support to Umicore in the midterm because our position in gasoline is stronger than our position in light duty diesel applications.
And that position in gasoline has even been strengthened in the 2nd part of last year following the wins that I referred to. So it's too early to tell how 2019 will unfold. I mean, there are still quite some uncertainties. If you read the new flow from the automotive industry these days. So I think it's too early to tell.
But the mix, in my opinion, will continue to evolve in same direction as it has in the course of 2018.
Okay. Maybe a quick follow-up on recycling where the profitability in the second half was a bit lower. I understand volumes may have been impacted a bit by the fire. But how about electricity costs? It seems that these have increased a bit in Belgium.
So could you maybe quantify the headwind you faced there in H2 compared with H1? And how do you see these costs developing in 2019?
Peter, not to really quantify the impact, but it's clear to say that indeed, electricity prices in Belgium for, I would say, specific reasons, unfortunately, have increased in 2018. And so that was one of the headwinds for Evoqua now, I wouldn't want to overplay it as such because we use other energy sources of energy than electricity, but Lee, it was one of the headwinds we had in 2018. And for 2019, We'll have to see what the electricity market in Belgium does, as you know, for a number of specific reasons. It can be quite volatile, but so definitely in 2018, it was a headwind, but not to be overstated. I think the other factors that you mentioned, like the impact of the fire was, was one of the more material drivers behind the trend that you described.
Okay. Thank you.
Your next question comes from the line of Alex Stewart at Barclays. Could please ask your question.
Hi, there. Thanks for the presentation. I've got a very quick question. Can I just confirm at the beginning of the call that you said your the market share gains in European Gasoline Assets offset decline in diesel revenues? Is that what you said?
Yes, indeed, the, I would say from a from the in the short term, it's not a perfect offset, I would say, but in the midterm, it is more than an offset. Because we have to take into account the timing of the ramp of, of the new gasoline particulate filter business, which does not necessarily coincide with the speed at which diesel is running ground. So there may be a slight disconnect in terms of timing, but overall, yes, the your understanding is correct. So you haven't quite offset that yet, but you expect to do so? Yes.
Okay. Thank you.
Your next question comes from the line of Chetan Udeshi at JP Morgan.
Hi, good morning. Just a couple of questions. Firstly, correct me if I'm wrong, but when you announced a big CapEx program for Cator, the rule of thumb was that the working capital will grow. If you spend say $1,200,000,000 CapEx, your working capital should grow maybe in similar rate or maybe you can correct that because it seems at the moment, the working capital actually is growing faster than the CapEx. And so I just wanted to understand how should we see that dynamic going forward?
Clearly, some of the impact into second half of last year was more temporary. So maybe will that directionally change in terms of how fast this ramp ups? Or should we actually see more stabilization rather than further increase. That's number one question. And number 2 is on this impairment loss for cobalt inventories that I must that's part of your Cobalt and Specialty Materials business and not cathode through sort of in the cathode business.
But just in terms of the recognition of that impairment loss in nonrecurring item because when the prices are rising, that really has a tailwind in the recurring EBIT. So when the prices are falling, why is that impairment in non recurring?
Let me take this the last question first. So the so the first one was the rule of thumb in the second one. Yes, with the cobalt. So the cobalt impact actually you see not just in cobalt specialty materials, but also in rechargeable battery materials. So they go in both, in both business units And I would say everything we mentioned in terms of if I can call it the base stock related to the capacity expansion is actually in Rechargeable Battery Materials.
So It is in E and ST, clearly and in both, both things. Now why do we put the impairment in nonrecurring because that's what we've always done because it's only the impairment related to what we call permanently tied up inventory. So it's basically stock which we have, which is going to stay there, because it's intrinsically related to the operations of, of the business, it's non cash, as well. So it's kind of an accounting rule we've always followed, and that's why we've done it this time. Well.
You should see at the stock. And the only way to in a way to release that stock is to stop producing I can call it that way. So that's why as a permanent, characteristics, and that's why we consider it as non recurring and always have done. So it's not something that we've done specifically now. The rule of thumb in terms of working capital versus CapEx, we would repeat that.
So that is still a valid one. The only caveat and it's a big caveat is indeed, prices of metals. And in this case, specifically in cobalt, cobalt being a very important raw material for the, the cathode materials And I mean, I would like to invite you to look at the cobalt price graph over the last 2 years. You see that we've, we've had a lot of volatility And so that obviously impacts this rule of thumb. So I would stick with that rule of thumb at what you could call, I mean, it's a dangerous word, normalized metal prices, but let a more historic metal prices.
Well, certainly in 2018, we've seen a spike in cobalt prices, and that's why our working capital versus our CapEx and that ratio in 2018 indeed has moved. Yes.
I would add into what Filipus just said, Chetan, I would also invite you to look at, how the rule of thumb works over a longer period of time. Because there may be cut off effects as well. And I think it's always, as I mentioned on another subject, it's always difficult to extrapolate from, half year or 1 year results. If you look at, working capital develops over a longer period of time relative to CapEx. I think it's a more reliable way of looking Thanks.
Can you just remind the rule of thumb? Is it working capital growing as somewhere half of the CapEx or what is the rule of thumb? Okay. Thanks. Thank you.
Your next question comes from the line of Natalie De Bruinat, Degroof Petercam. Please ask your question.
Hi, good morning. Thank you for taking my questions. Actually most of them have been answered, but if I may, I would like to come back to Catalysis and particularly to heavy duty? Because you mentioned in the comment in the press release that you see an contribution from the heavy duty diesel catalyst activity. I know that it's not the biggest contributor, of course, but I would like to have a bit of an of whole material it is becoming today and what's the upside would be with China 6, because there are discussions to actually bring the implementation forward to July 2019, I understand.
But you said that basically supply chain is not ready. So the impact will be limited. So I was wondering how that would play out and how material the business is now becoming. And then the second question would be on also a business that is still close more, but I'm curious to know about what the potential could be, it's fuel cells. So what would be the contribution today?
I would expect that very low, but where it can go with the current capacity that you are building?
Good morning, Nathalie. Let me start with the heavy duty diesel questions. And I would say that, today is still considering our position relative to competitors in that space. That the contribution is still relatively small compared to that of light duty application in the portfolio of Umicore, but it's growing and it's grown also in the course of 2018, a result of the integration of the activities acquired, about a slightly over a year ago the Halter Topso. And that explains to a large extent the increased contribution of HDD in the course of 2018, plus in addition to that, some progress at the other for the other project is that we produce there.
China 6 and, will be a big plus in terms of volume and value growth for Umicore as we had also indicated and even We had also described the impact of China 6, from a value point of view, during the Capital Market Day. And so that is confirmed. And we are in full preparation to serve that market to capture the significant share of that upside. And indeed, there are talks of there are attempts to bring China fixed forward for light duty and heavy duty to bring that forward to July 2019. Actually, the original declaration was to bring it forward to January 2019.
Has proven, impossible to achieve in practice. So now the new target is July, which seems still a big stretch, considering the readiness, not only of the supply chain, but also the readiness of the truck and car OEMs themselves. So that's why what we see today is that the impact of that move is going to be very limited in 2019 and it doesn't, change our view of this potential of China 6 starting in 2020. Coming to fuel cells, that's a very interesting story. That we have, that we have actually spent the better part of the last 20 years developing a unique fuel cell catalyst technologies, because we had this belief that fuel cell would So a certain point in time, be demanded for a certain applications.
We didn't know exactly when. And actually the good news is that now we see the first signs of that application taking off, with significant efforts in a number of regions, like in in Germany, in Korea, and China to develop the infrastructure that will be required in order to distribute the hydrogen and significant efforts by certain OEMs and by authorities in certain regions in order to promote the fuel cell technology, not only for passenger cars, it's quite also it's also quite interestingly. A good drivetrain technology for heavy duty applications, and we see demand picking up for that. It's still small numbers because we're talking about prototype fleet coming to the roads now and the next few years, but it's moving along nicely and should be profitable for Umicore in the very short run, I would say. We announced in December that would expand capacity in Korea to serve new platform wins and with a wrap up the course of 2020.
And that's approximately the time frame in which I see, Umicore starting to have a positive contribution from these longstanding development efforts. Still small, but I would say very promising and could, in the next several years, scale up nicely for us.
Your next question comes from the line of Jean Baptiste Rolland at Bank of America. If you could please ask your question.
Good morning, Mark. Good morning, Phillip. I just have two quick questions for you. With regard to the 3rd wave of capacity additions in Energy And Surface Technologies. I just wanted to know if, this is something that you aim to implement on an accelerated schedule as well as you did in, for the previous, for the first two waves of capacity additions or at least if you in terms of the greenfield, the greenfield that you're going to add, you plan to add it at a similar pace as the greenfield of that you had in Korea.
And then another quick one on the margins in EST. I understand that. 2019 is sort of remains a question mark or at least that you're not guiding upward or downward on the margin. But just on the trajectory going forward. What do you see as a margin potential for that business?
And I'm wondering if you see you believe that could exceed on a sustainable basis, the margins in recycling?
Good morning, Jean Baptiste. So first, in terms of acceleration, the speed at which we're building the greenfield in China and we'll be building in Poland can hardly be higher. So I don't see room for acceleration. China is the construction is running at full speed. With the start of commissioning around midyear this year.
2019. And it's important to give you an idea. I mean, we will we are in the first we're still in the final phases, sorry, of the engineering work, with construction due to start in the spring of this year and commissioning due to start in mid-twenty 20. So faster than that is probably unreal in terms of expectation. This is the most accelerated schedule that we could come up with and there is no room for further generation.
This is very fast and meets the requirements of the market, which is, of the market, which is, of course, most in the most important factor. Of course, we need to be ready in time when the platforms of our customers come on stream. In terms of margins, indeed, it is too early to comment on the margins in the short term for 2019. As far as the longer term trajectory is concerned, as I mentioned previously, I see strong fundamentals supporting the margins because of the degree of customization that we bring to the customers and the pace at which demand is progressing. So I'm positive about the margin evolution.
But this being said, it doesn't mean that there is so much room for margin expansion we can grow the business at the speed at which we grow the business while maintaining the margins and the returns, I mean, this would be an amazing source of value creation, for unicorn. So I think that's, that would be the kind of achievements that I would be delighted with.
Okay, very clear. Thank you.
Your next question comes from the line of Adam Collins at Liberum. If you could please ask your question.
I had a couple of high level ones, remaining. So first of all, Mark, you talked, on the call, and it's also in the statement that you're confident of meeting the 2020 profit expectations that you set last February, which at midpoint equates to around GBP 700,000,000 of recurring EBIT for continuing operations. Would you be able to say whether you would be confident of that being achieved if current auto market conditions and similar metal prices prevailed does it depend on any significant improvement in underlying trading conditions? And then the second question is around the recycling activity. I think it's fair to say that when you announced the 40% processing capacity addition, in 2016.
There was an expectation that that volume would be filled to some extent by now. You never gave a commitment in terms of future volumes, but, most of us expected a degree of volume growth. Here we are in 2019 with no expectation of material volume growth compared to that 2016 level, Could you just talk a little bit about whether there has been some deterioration in your expected underlying market conditions for business, or has it all been down to the fact that there's been some operational difficulties, which will eventually be resolved?
Good morning, Adam. Let me start with the second question and clarify or confirm first of all that 2018 volumes were materially above 2016. So the ramp up is making very good progress. And actually, the on a full calendar year basis, we expect indeed 2019 to be roughly in line with 2018. However, this is taking into account the fact that we will have an extended shutdown the course of the 1st part of 2019 because we have decided to, combine the regular maintenance work with a wave of, in investment programs in order to, further improve the capabilities of the plan.
Which means that on a calendar basis, the availability of the smelter for the full year will be limited because of the standard shutdown. And therefore, there is limited room to increase the volumes. However, if we look at the ramp rate by the end of 2019 on an annualized basis, we will have mid a further significant progress compared to 2018. So, it takes a bit of time indeed, and I'm confident that we will continue to make significant progress and things are running quite well. I've not revise my ambitions in that respect and the market conditions continue to be supportive of the capacity in please.
Coming to the your first question about the underlying trading conditions, in relation to the upside potential that we identified over and above the original Horizon 2020 targets. I have to say that metal prices, I would say, are more or less in line to slightly supportive compared the time at which we defined these, sorry, at the time, we identified that upside potential And so a consideration of the current metal prices would probably be okay in that respect. In terms of the total demand, I would make a distinction between 2 factors. One is that the trend in terms of mix is supportive in the sense that we see an acceleration in the decline of diesel. And as you know, we are stronger in gasoline, especially now with the wins in gasoline particulate filters This is going to be supportive.
The electrification trend continues to be in our favor as well. With new models due to the introduced, in the course of 'nineteen and 'twenty and continuing, but also use Umicore wheels and support the view that I expressed about the upside potential. So in terms of trends and value drivers, clearly the underlying fundamentals continue to be very supportive. On the volume side, if we have indeed a attracted, slowdown. I think we'll remain we will need to see what the effects that could be on your overall car volumes because while value is important, of course, in achieving the raised ambitions, volumes are not unimportant either.
And remains to be seen. And I would indeed, it would be easier if we had some recovery in auto demand, especially in the China in the very important Chinese market.
Your next question comes from the line of Sebastian Bray at Berenberg.
Hello, good morning, and thank you for taking my questions. I would have 2 please. The first is, you're one of the largest cobalt refiners in the world. It's the collapsing prices seems to have taken the market by surprise. Why is this?
Is it purely supply driven or is it because cobalt reduction, cobalt content reduction in batteries is proceeding faster than expected? Or is it because people have just dumped inventory on the market? That's my first question. My second and apologies, I think I've asked a variance of this once before. You had about an outflow of 1,000,000 for dividends in each over course of FY 2018.
And I suspect by the time that you come back to Capital Markets, if you continue with the current policy, you probably would have paid out and equivalent amount to the capital raise or maybe slightly below, does the decision to increase the dividend modestly year on year have any, is there any read across potentially to when the group turns free cash flow positive? And could you perhaps give any guidance on this Thank you.
Good morning Sebastian. So, let me address the question about the cobalt market, and I will then hand over to Philip for the, your second question. It's difficult to make out because you we don't have, we don't have, I mean, detailed statistics about the the cobalt market that would indicate where the inventories are, across the value chains of the various industries. My take, on the cobalt price decline is that there has been substantial supply additions, both from well established industrial players that have bring new capacity on stream and continue to bring new capacity on stream that have brought sorry new capacity on stream. And secondly, there's been a massive inflow of artisanally mined cobalt, following the price spike.
So that has actually boosted the that artisanal activity levels and created an inflow of cheap unethical and unsustainable units in the market that have been utilized by many players in the value chain as you know, Umicore has a very strict policy of not touching any of these cobalt sources, not using any of these artisanally mined cobalt units. But these have made it to the market and have based overwhelmed the market and have had must have had a significant impact on the price. Now the other thing that has happened and that we have seen time and again in minor metals industries is that when cobalt price increased, the effect was exacerbated by the fact that there was I would say there were panic moves across the value chain and with the players starting to fear protracted shortages, and buying more than necessary, which means also that the downturn is for for obvious reasons being exacerbated by the fact that inventories went too high at the time of the spike. And there has seen quite a level of inventory drawing of dragged down inventories in the second part of the year. The other effect that is, that is happening is cobalt the is the drifting of cobalt in some, cathode materials for automotive applications, drifting and replaced substitution by nickel to increase the driving range.
We've seen some of that in the course of 2018 And there is a trend, as we explained earlier, to increase the energy density by increasing nickel. However, we also see that the trend is not going as fast as some people thought it would make a lot of safety concerns materializing, there has been quite a number of safety incidents with high nickel compositions, across and that has So I'm not sure how the that is playing out in terms of cobalt market. I would believe that supply effect and the inventory effect that I mentioned previously were the prime factors explaining, first of all, the spike of the first half and secondly, the brutal downturn in the second part of the year. And then, Philip, on the dividend, please.
Okay. Good morning, Sebastian. So on the dividend, what we followed was our dividend policy, which is to go for a stable to gradually increasing dividend And in a year where our net profit increased by 22% 12% on EPS basis, it I think to follow that policy and to increase the dividend is, is kind of a logic. You're right to say that it's, It's a relatively small increase because we don't target a specific yield or we don't target a specific payout. It's really striking a balance between, on the one hand, committing to cash return to shareholders even in a period of high investments.
And again, the decision to pay a dividend or amount of increased dividend is really not related our cash flows. I mean, we have you've seen that from our balance sheet, a very strong balance sheet. So whether we increase it a bit or not, is really not related to the dividend decision. We're following, our strategy. We have part of the investor base that appreciates the dividend.
We have part of the investment base that maybe indeed would prefer that we that we invest money in our growth. We try to strike a balance. Again, we are investing a lot in the growth because we consider that is the best way to create value for our shareholders, but we can do that while at the same time maintaining our dividend policy. So there's not really a direct link between both. Yes, please.
Thank you very much. Just to summarize, there's no chance of this policy being changed in the foreseeable future?
I mean, at today's, capital structure, which is, seen very solid and gives this, a lot of headroom to implement our strategy. That's not on your agenda.
And the next question comes from the line of Geoff Haire at UBS.
Good morning, everybody. My questions have already been asked. Thank you.
The next question comes from the line
Hi, everyone. Thanks for taking my question. It's just a clarification question actually on one of the cash lines. So adjustments for non cash transactions about SEK 350,000,000. Now historically, that's been roundabout equal to depreciation, but this year, there's an additional SEK 150,000,000 on top I'm assuming it's something to do with mark to market of metals and timing of cash flows, but could you just explain what the adjustment is and whether or not it becomes a cash outflow in 2019, please?
Yes. Good morning, Mathew. So I'm afraid I will bore you a bit with a technical answer because you, I mean, your assumption is right. It has to do with, with market to market. So in a nutshell, the about $350,000,000 of noncash items that you see on the cash flow table, So the 207 is related to our recurring D and A.
And then we have a number of noncash items, which are not just operational, but also things like the impairment charges that are related to, to the restructuring in Brazil, for example. So you have that in there as well. You have some noncash items related to share based payment. The bulk of the difference indeed is related to mark to market effects. And again, cobalt price is, I would say, the main impact here.
To simplify it, we have, as you may know, transactional hedging principle in the sense that we do not want in our product businesses, metal price fluctuations to have an effect on our margins. So that means that once we sell something, we also hatch it physically. And in the case of cobalt, it is a physical hedge. And that means that when you have a cutoff point like a closing date, You indeed calculate on your hedges, you calculate what the mark to market is. And given the fact that the cobalt price has been very volatile over that period It means that we had substantial mark to market effects, which you basically recognize on the cash flow table to make a difference between the P and L effect, where the P and L effect is basically 0 because you hedged.
And the cash flow impact, and that is indeed what you see there. And so that could indeed result in the cash out then in 2019, but taking into account that's obviously sleep. By that time, you will have new hedges and the business continues. So it's very difficult to predict, what that will do also depending on the evolution of the cobalt price. But indeed, it's related to mark to market effects on on the inventories on cobalt.
We have a follow-up question from the line of Charlie Webb at Morgan Stanley. If you could please ask your question.
Thanks guys. Just two short ones. First on the Hoboken shutdown. Can you remind us, how many weeks that usually is? I think in the past, it's been around 4 weeks you've had to take the plant down, just is there anything different this time or is that the right kind of ballpark figure to think about?
And then just second, just on kind of what's going on in China with the subsidy changes, currently new contracts being why for EV platforms. Are you still seeing single sourcing for cathode materials or is it now moving more towards the dual sourcing set up, in China? And how has that subsidy, I guess, significant subsidy cuts that are kind of posed over the next couple of years, 2020 implied that there'll be no subsidies. How is that playing out in discussions for new contracts? That'd be helpful.
So, Charlie, first on the Hoboken shutdown, we do not communicate on the number of the length, the duration of the shutdown. And it's material enough for it to be mentioned and highlighted in the, in our communication dates a material in terms of availability, of the smelter, and therefore, the impact on the total volume development for the year. Talking about the, the developments in China, We'll see what the subsidy regime will be when the decisions are made and or understanding that these decisions are going to be made after Chinese New Year. As typically at the same timing as the usual timing. So that will be known in a probably in a few weeks' time what the impact is on 20 seen.
The indications that we have or the rumors, I should say, are that, there could be a somewhat more, significant reduction than initially programmed in the overall rate subsidy for 2019. And indeed, it's going to be phased out by 2020 anyways. But the phasing, maybe somewhat changed compared to the initial phasing. The biggest change though that I see and that we could expect is the fact that the rules on energy density are likely going to be relaxed. And that is a direct consequence EBITDA is confirmed of the many safety incidents that have occurred with a very high energy density Materials.
So the likely if that is confirmed, the likely impact is that there will be a swing back probably to what we have presented at the sweet spot in terms of chemical compositions with the high nickel, but not the highest nickel compositions. So that's something that could be expected. In terms of sourcing, there is no general rule in China nor elsewhere in the world in terms of in terms of single or dual sourcing. It depends on the capabilities of the various players in each region. And So we don't see major changes compared to what the OEMs have been doing so far.
Thank you very much.
Our next question comes from the line of Mutlu Gundogan at ABN AMRO. Please ask your question.
Yes, thank you. A few more questions. Mark, last year, you said that you expected to reach 100,000 tons of sales of cathode materials in 2019. Is that still your expectation?
Sorry to interrupt you. I only have time to take one question, one follow on question.
Then what it is?
We have to be selective.
Yes, sure. So do you still expect to get to 100,000 tons of capacity or sales of cathode materials in 2019?
Yes. I have no reason to change what I said a year ago or more than a year ago. In terms of how our business is developing and how the capacity is being added.
Okay. Thank you.
And the next question comes from the line of runoff all at Redburn.
Hi, thanks for the follow-up. Just to help us understand the volume progression in the cathode materials in the first half of 2019. Can you give us an indication of what the nameplate capacity change was between the end of the first half in 2018 and the end of the second half?
No. Unfortunately, I cannot help you, Ronald, with this one because we're not, again, for competitive reasons, we're not quantifying these capacity additions, know the steps in between the projects I'm sorry about that. Okay.
Could I try one you might be able to answer? It's just on how the operating costs in recycling, ex all the metal price impact have changed over the last couple of years sort of on a per ton basis?
In recycling?
Yes.
Well, as I've mentioned, metal prices have been a, a slight tailwind, in 'eighteen, and we expect I do not expect because I don't know what metal prices will look like in, for the rest of 'nineteen, but the current metal prices could be a slight tailwind in 2019 as well. And on the cost side, you have pluses and minuses. Of course, the fact that we are scaling up and ramping up new capacity as a positive effect in terms of cost in the processing cost per ton. On the other side, we have a certain cost inflation that we have to deal with. Philip mentioned the energy prices, the other reagents prices are moving in that, in the same direction.
And labor costs are increasing as well as we are in a fairly tight labor market. Indeed.
And the next question comes from the line of Peter Olafsson Kepler Cheuvreux. Please ask your question.
Yes, thanks for allowing a follow-up. It's on battery materials actually on the metal price exposure. This has been a pass through for you, and I think was typically the battery maker that was carrying the risk, although some of the Koreans have talked about the OEMs taking more and more of that risk. But with some of your competitors and potential competitors announcing capacity expansions, and going after a new business, is there a risk that OEMs and battery makers Eventually, we want the material suppliers to take on the material price risk.
I mean, I would see that as a totally unrealistic expectation. And at least in the case of Umicore, this is not going to happen because it is simply not, not realistic. It doesn't work. The model has to be a pass through model. And at the end of the day, the consumer, you and I, in other words, have to pay for the products that they buy.
It's not the value chain that pays for the products that we buy. So it would be totally illogical to have somebody in the value chain, paying for what the customers at the end of the day are not willing to pay. That doesn't work in any business. Will not work in that one either.
Okay. That's a very clear answer. Thank you.
Your last question comes from the line of Chetan Udeshi at JP Morgan. Please ask your question.
Yes, hi. Thanks. Just a quick clarification is So when you say 100,000 tons, just in 2020, is that the run rate for all year or is that something you plan to achieve during 2020 at some point, not necessarily for the whole year. That would be just a clarification on that.
So, as I mentioned, Chetan, I don't see a reason to change what I said earlier. And so the other statements that were made when was it a year ago, more than a year ago are still valid. So we're in good shape to make a significant progress. Of course, the product mix is changing a bit and may have some influence on, on total capacity and sales. So we have to, give or take a few percentage points, but we are on track.
Thank you. So with that, I would like to thank you for participating in the call, this morning. And There were a lot of questions, and I'm sure there will be many more, follow on questions that we could not take this morning. And of course, we will address them in the coming hours and days. Through our investor relations teams.
And we will meet also in the next few days, in the face to face meetings and have a chance to continue to comment on the performance of 2018 and the perspectives for the longer term for Umicore. So with that, I would like to close the call today. And thank you, and wish you already a nice weekend.
That does conclude the conference for today. Thank you for participating. You may all disconnect.