Good day, and welcome to the Umicore Half Year Results 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Greenberg, CEO. Please go ahead, sir.
Thank you. Good morning, everybody, and welcome to the presentation of Umicore's results for the first half of this year. I will cover developments in the business and the outlook for the full year before handing over to Philip, who will take you through the financials. I will then wrap up Looking first at the highlights, I can say that we produced a really strong performance in the first half with revenues up by 23% year on year, while recurring EBIT was up by 34% and the return on capital employed reached 16.6%. Revenues and earnings grew across all three segments with Energy And Surface Technologies generating the most pronounced increase, mainly as a result of the volume growth in rechargeable battery materials I will elaborate on We are continuing to execute which will entail the construction of 2 greenfields production sites for cathode materials, 1 in China, near the existing production facility and one in Poland to serve the fast emerging EV market in Europe.
We are also continuing to streamline our portfolio and divested the European activities of technical materials in January of this year. This divestment follows the sale of the Zinc Chemicals business unit at the end of 2016. And more recently, the sale of building products and the large area coating activity of thin film products, thereby completing the portfolio realignment announced in 2015. With this realignment, we have simplified the organization, which combined with selected acquisitions made in the past couple of years has sharpened our focus on clean mobility materials and recycling. One of the highlights of the first half was the highly successful placement of 22,400,000 new shares in February, whereby we raised close to EUR 900,000,000 of new equity, which will be utilized to fund our growth or ambitious growth projects.
From a cash return perspective, the interim dividend amounts to and consistently with our dividend policy represents half of the annual dividend, which was declared for the full year 2017. Looking ahead now, I expect full year recurring EBIT to be in the range of 1,000,000 to 1,000,000 which is fully in line with the guidance that prevail. As I also mentioned back in April, I expect the 3 business groups to contribute to the year on year growth in revenue and earnings with Energy And Surface Technologies accounting for the vast majority of the increase. In Catalysis, I expect the demand patterns that we observed in the first half of twenty eighteen to be broadly unchanged in the second half of the year, with a mix in Europe that should continue to favor gasoline engines. The second half should also see the introduction of new gasoline platforms that we have recently won And as a result, revenues are set to increase both compared to the second half of last year and on a sequential basis.
In Energy And Surface Technologies, I expect sequential revenue growth as demand for our cathode materials continues to increase and new production lines will be ramping up in our existing production sites in Korea and China. Market trends in dealer activities are expected to remain broadly unchanged in the second half of the year, although the revenue trends will be likely to reflect the usual seasonality. In Recycling, revenues in the second half are expected to be higher year on year as a result of the capacity ramp up in Hoboken and excluding the contribution in the second half of last year, of the technical materials activities in Europe, which have been sold in the meantime. The maintenance shutdown in Hoboken is expected to take place toward the end of the year. Let's now turn to the business review and comments on the main developments in each of the 3 business groups and recurring EBIT by 7%.
In Automotive Catalysts, the growth reflects a higher contribution from heavy duty diesel catalysts in Europe and China. It also includes the contribution of the heavy duty diesel and stationary emission catalyst activities acquired from Alto Topsoe at the end of last year, as well as one additional quarter of contribution from the Audek business whose consolidation started in the second quarter of 2017. Market trends in the Passenger Car segment were mixed in the period as the continued growth in Europe and China and the recovery in South America were offset to a large degree by a market slowdown in North America and Korea. Overall, car production grew by 1.7% year on year, and Umicore outpaced the market growth. In Europe, diesel engines have continued to lose ground against gasoline engines and their market share in the first percent well below the levels of a year ago.
Against this backdrop, we performed broadly in line with the market volume wise, while the revenue development did not match the volume growth due to the mix effects. As we explained during the Capital Market Day in June, Umicor will benefit from this changing mix in the medium and long term as we have stronger market positions in gasoline and electrified passenger cars than in diesel. In North America, the introduction of newly gained platforms improved our mix, and allowed us to outperform the market. In South America, we benefited from the sharp recovery of the Brazilian markets, Once again, we outperformed the market growth in China as a result of our strong positioning, both with Global And Domestic brands. We also continued to gain traction with Japanese auto producers globally, Overall, Umicore's sales in Asia progressed really well again despite subdued demand in Korea.
In the smaller precious metals chemistry activities, the revenue growth was driven by positive volume developments across applications. It is also worth noting that the integration of the metastasis Catanese business acquired from material in January of this year has started. On the next slide, we see in graphical form, the revenue and recurring EBIT developments, which I have just commented. Let's now look at developments in Energy And Surface Technologies where growth was outstanding Revenues increased by 63%, while recurring EBIT doubled from the levels of the first half of last year. Electrified vehicles continue to penetrate the market and the sales of full electric and plug in hybrid cars increased by some 60% year on year as anticipated, the growth was most pronounced in China and Europe.
I indicated on previous occasions that our successful market positioning across a broad range of customers and car models would allow us to capture a disproportionate share as fast as possible. The sales of Umicore's NMC cathode materials in the first half have confirmed that we are outpacing the market and that our investment decisions were fully justified and well timed. In terms of investments still, I would like to remind you that some additional production lines for cathode materials will be commissioned the second half of this as we announced earlier this year, we will build large greenfield production facilities in China and Poland to cope with the growing demand for our materials and the progression of these new investments has started. Emedic was also higher, both for Umicore's proprietary high energy LCO materials. You have been high in portable electronics, and 4 NMC cathode materials used in energy storage applications.
The growth in the segment was also driven to a good degree by the Cobalt And Specialty Materials business unit where we achieved higher sales volumes across applications. We also benefited from favorable market conditions and a supportive pricing environment, in particular, in the refining, recycling and distribution activities. I would like to add that we have completed the upgrade and expansion of our cobalt refinery in all in Belgium and the facility was commissioned in June. Although its absolute revenue contribution is smaller, We also recorded good growth in the electroplating business, which saw strong demand for its innovative precious metals based electrolytes used in portable electronics. By contrast, the revenues of Electroptic materials decreased year on year due to subdued demand for substrates for use in space photovoltaics and LEDs.
So overall, a whopping performance in Energy And Surface Technologies, which contributed a little more than 40% to the group's recurring EBIT as we continue to reap We divested the European activities of the Technical Materials business unit in January of this year, which somewhat this distorts the year on year comparisons. On a like for like basis, revenues and recurring EBIT for the segment were up respectively by 5% 13%. Capacity ramp up in Hoboken gathered pace in the first half and as anticipated has started to produce a more visible contribution to the revenues and earnings of the segments. In addition, benefited from more favorable prices for certain pressures and secondary metals on average over the period although recent trends have become less supported. Supply mix remained largely unchanged, both for industrial byproducts and end of life materials, while we see continued pressure on commercial terms in certain supply segments.
In terms of environmental performance, I am pleased to report that the investment program that we announced at beginning of 2017 is proceeding while in Hoboken and is starting to show compelling results with a significant reduction of test emission. Revenues increased in Jewelry And Industrial Metals 2, driven by strong demand in the project business in particular for glass applications. In Precious Metals Management, we benefited from favorable trading conditions for most PGMs and higher demand for investment bars. The number of employees has increased slightly since the end of 2017, reflecting the organic growth in rechargable battery materials partly offset by the impact In terms of safety, we recorded a slight increase in the number of lost time accidents compared to the first half of twenty seventeen reflecting an unsatisfactory performance in Hoboken in the 2nd quarter. The severity rate by contrast was almost halved from last year's levels.
I will now pass the call over to Philip who will comment on the fine of aspects. Yes. Thank you, Mark, and good morning, everyone.
So let me start by reminding you that following the sale of the business unit building products and end of September 2017, no businesses are reported any longer under discontinued operations in 2018. Revenues for continued operations increased 23 percent year on year, as Mark has mentioned. This first slide highlights the growth in earnings, given that similarly to last year, our strong growth did not come at the expense of margins. Recurring EBIT and recurring EBITDA reached record levels and increased 34% and 26%, respectively. Corresponding to recurring EBIT margin of 15.2 percent and recurring EBITDA margin of 21.3 percent over the period.
It is worth mentioning that this increase in operating performance is also translated into a higher net result. With an increase in net profit of 28 percent or 18 percent in earnings per share terms as this letter number includes the effect of the recent capital increase on the number of shares. Adjusting for Technical Materials. All three business segments grew both top line and earnings. Energy And Surface Technology was, of course, by far, the largest contributor generating margins for this business group above the group's average.
The return on capital employed for the group remains above our 15% target and increased from the 2017 level to reach 16.6%, which is substantially above our effective cost of capital. Average capital employed or continued operations for the period increased from 28% year on year, which corresponds to close to EUR 700,000,000. This increase was driven by a combination of organic growth to Energy And Service Technologies. Nevertheless, this same business group was the main driver behind the accretion of the group's return on capital employed. Recycling remains a segment generating by far the largest return with a return on capital employed for the period of 34 percent, also well up from last year, thanks to high earnings and a lower capital employed base due to the divestments of the European Technical Materials business.
Catalysis saw its return on capital employed come down to just below the 15% hurdle due to the impact of recent acquisitions on its capital employed. Moving now to cash flows. For EUR 137,000,000 compared to EUR 257,000,000 in the same period of last year. Three quarters of this cash flow funded a substantial increase in our net working capital resulting from our strong business growth. This increase is by and large the result of high inventory values, as the increase in accounts receivable was funded by a similar increase in our accounts payable.
These higher inventories are the result of higher demand high raw material prices, including metals and new production capacity coming on stream. CapEx over the period amounted to just below EUR 200,000,000 and was driven mainly by our various expansion projects. And in particular, the growth in rechargable battery materials. Over two thirds of the cash spent on higher working capital and CapEx together is for the account of Energy And Surface Technologies. Texas paid for the period accounted for 71,000,000 which is in line with the amount of current tax charge.
And you will have seen from our press release that the recurring effective tax rate for the period amounted to 25.4%, which is similar to last year's rate. Net interest spades came in at EUR 17,000,000, which is higher than last year, given that our Sunshine Private loan was only issued in April of 2017, and that our U. S. Private placement loan was only drawn in December of last year. We spent EUR 109,000,000 on dividends and closed to EUR 100,000,000 on M And A.
The latter amount is the combination of the acquisition of the Metathesis Catalyst business of Nateria, and the increase of our stake in our Chinese cathode material production entity from 70% to 19% netted with the proceeds from the divestments of our European operations of technical materials. Finally, the other column mainly represents the $892,000,000 capital increase from last February that resulted in net proceeds of 8 $2,000,000 as well as some other remaining cash flow items. As a result, our net financial debt decreased from EUR 840,000,000 at the end of 2017 to EUR 429,000,000 at the end of June. Our CapEx spending of $198,000,000 over the period compares to 141,000,000 last year and reflects our strategic growth priorities, and particularly our ambition in the fields of chargeable battery materials as as already mentioned, close to 70% of this amount was spent in Energy And Surface Technologies. In Hoboken, the investments to further enhance the sites operational and environmental performance are starting to show their first benefits.
All key investment projects are on schedule and group CapEx is expected to accelerate in the second half of the year. You will recall that earlier we guided for a full year CapEx in the region of EUR 600,000,000. In addition to CapEx, we also spent 8% more on R And DES Technology Innovation remains a key differentiator for Umic There is no need to stress that following the capital increase earlier this year when we raised 10% new shares Our growth plan is built on a very solid foundation with a capital structure that provides us required flexibility to execute our strategy The ratio of net financial debt over recurring EBITDA at the end of June stood at 59%, and leaves ample room to accommodate future profitable growth. The most significant financial debt on Umicore's books consists of the EUR 690,000,000 of long term private debt raised last year and this had very attractive and fixed interest Additionally, our accelerating growth in Asia resulted in higher local debt funding in local currency. Finally, in the 1st 6 months, we counted for a small amount of nonrecurring items, totaling a net charge on EBIT level of EUR 6,000,000.
Restructuring charges of EUR 12,000,000, mainly covered a restructuring plan that we have in Brazil, and that provides for a gradual closure of our site in Guarulhos. These charges were partly offset by EUR 7,000,000 of income from other items, including the gain on and I hand back to you, Mike.
Thank you, Philip. Before turning to questions, I would like to wrap up the key messages from today's presentation. Umicore produced a strong performance in the first half with revenues up by 23% and recurring EBIT up by 34% year on year. We generated revenue and earnings growth across all three segments, with Energy And Surface Technologies showing the most pronounced growth. This was due mainly to the significant increase in sales of cathode materials for easy applications, combined with scale effects as we ramp up new capacity.
While we are starting to reap the benefits of our growth strategy, we are now accelerating the pace of expansion in rechargeable battery materials as demonstrated by the recent launch of a
EUR 660,000,000
investment program to add capacity for cathode materials in China and Europe, which are the largest and fastest growing easy markets. Earlier this year, we raised close to EUR 900,000,000 of fresh equity, which will be used to fund our ambitious growth plans The success of this equity placement may be seen as a vote of confidence from our shareholders in the strategy of Umicore and our ability to execute it consistently. Finally, I expect recurring EBIT for the full year to come in the range of EUR 5 10,000,000 to EUR 550,000,000, confirming the guidance I provided at the end of April. With this, I would
you.
You.
We can now take our first question from Charlie Webb from Morgan Stanley. Please go ahead. Your line is open.
Good morning, Mark. Good morning, Philip. Just a few from me. First one, just a point of clarification with your increased participation in the Chinese cathode entity moving that up to 90% ownership. Has that had a positive effect on its contribution to EST in the half year on year?
Or was that already fully consolidated? That's the first question. The second sorry, go on.
Yes, maybe I'll address the questions 1, but I want to make sure, that fresh in my mind. No, it has no impact because the results were already fully consolidated at 100% since we owned 70% already before the this transaction.
Perfect. Second question, just on, on, I guess, metal price environment, both, I guess, PGMs and specialty metals, but also nickel and cobalt refining. If we look kind of into the 2nd half sequentially, how should we be thinking about those dynamics? Have you done any hedging, what would you expect in terms of the contribution given some softening in pricing as we move into the
second half?
Mean, there are different consideration there because some of the metals that you mentioned are hedgeable and most of them are not So the secondary metals that we recover in Hoboken, as well as Cobalt and Rohium are non hedgeable. And so we have basically factored in our full year forecast range, the most recent prices that we have seen in the market, which we consider as the best indication of market value. When it comes to hedgeable metals, it is fair to say that by this time of the year, a large portion of the contracts for the 2nd part of the year are hedged already. And this has also been factored in the forecast range that we confirmed today.
And just a quick one, given your participation and kind of a leading player in in Cobalt refining, Given the strong demand, why have we seen such a kind of move down since April, in that given such strong demand for NMC Materials? Have you got any sense of what is driving that? Is it speculation? Is it what is it that's driving that move lower we've seen recently?
Yes, you know, Charlie, this is a market that doesn't offer the full transparency of a liquid paper market. So it is sometimes difficult to make out exactly what are the driving forces behind the sharp movements that we see. So some explanations could be that there are on the supply side, a certain number of announced capacity increases that are either coming on stream or due to come on stream, very soon now. And on the demand side, We have seen a little bit of overstocking in the 1st part of the year, at the time prices were increased and the consumers were not really sure about what direction the metal price was going we're concerned about further price raises. So it is not to be ruled out that today, there may be a little bit of inventory drawdown in the in some parts of the supply chain, which combined with the, I would say the announcements of on the supply side may explain some of the recent price movements.
But again, it is difficult to make out precisely what the reasons behind these movements are for the reasons I mentioned.
Sure. Understood. And then finally, just one on working capital, as you know, there's always a double edged sword on this one. So clearly, metal prices at Cobalt nickel have been much higher that's probably had a bigger effect on the working capital outflow as you ramp up your cathode production. How should we think about that for the rest of the year?
In terms of where that goes? Should we expect a further step up in working capital flows in the second half as you ramp up that facility? Or is there worse behind us, with some softening in pricing?
Yes, Charlie. Well, as you of integrated in your question that will partly depend on the metal prices. If I would have to give you a guidance, I mean, you have And metal prices being an unknown, you have obviously increased, capacity coming on stream in battery materials. So will mean that we'll have a continued increase of inventories. I want to highlight again that it's really talking about inventories here as we need to, in a way, prime.
New lines that come on stream. So I would say I we do expect because of that reason, further increase in working capital. I would hope and think not to the extent that we've seen in the first half year. You mentioned that some of the metals have been trending down recently, but ultimately, it will partly depend also on the evolution of the metal prices in the second half.
Okay. So I suggest, we move to the next person raising questions. Thank you very much guys.
Thank you. We can now take our next question from Vim Host from KBC Securities. Please go ahead. Your line is open.
Yes. Good morning. I have two questions, please. So on recycling both of them, there is still the phrase in the press release about commercial pressure for some segments. That was already also mentioned at the time of the full year 2017 results released.
And I think then it was indicated that you kind of hoped it would be temporary although it was at that point also clear that it would not immediately reverse. So maybe can you, yeah, offer a bit of additional insights about the maybe temporary nature you now consider for, for that commercial pressure? That is the first question. And the second one is on the hedge book update maybe for 2019. Have you recently locked in additional volumes for certain metals and for 2019 already?
Good morning, Wim. So I mean, there is nothing new really in terms of competitive pressure on prices in certain supply segments or certain segments in a way. And I would still qualify, this pressure as a temporary nature. The markets are changing over time. Now whether that changes on a quarterly basis, a half yearly basis, annual basis, it's really difficult to make out now.
But still, the experience shows that these effects are temporary in nature and with your ability to flex the mix of the raw material supply to a certain extent Indeed, we can sometimes mitigate these, this type of pressure, better than that than at other times. But again, I can only repeat what we said when we published the full year 2017 results. Is that I see these movements as a temporary nature.
Second question, nothing really material to mention on the hedge book. We do have some hedges in place for next year, but really we didn't make any material changes and as mentioned in the previous. So the metal prices that have moved most are really in the say, unhedgeable, metals. So nothing to mention specifically on that one.
Thank you. We can now take our next question from Tom Wrigglesworth from Citi. Please go ahead. Your line is open.
Good morning. Thanks for your presentation. Two questions. The first is on, ramp costs that may be going through both in the working capital. You've alluded to it, but I was wondering if you could try to dimensionalize the working the ramp up costs that are impacting working capital, but also maybe running through the P and L as well.
And the second question, on the Catalysis business, could you elaborate a little bit on the kind of on the margin evolution there, down year on year? Could you talk a little bit to the kind of the mix effects that are taking place that have driven that margin development?
Good morning, Tom. So, I assume that's your first question relates to the ramp of cost in rechargeable battery materials where we're adding a production capacity. Is that right?
Please, yes.
Okay. So, the, indeed, it is important to remind you and the audience that the ramp up of costs is not linear. And actually the ramp up of and the additional production capacity is not linear either. So we mentioned in the press release that we were starting to benefit from scale effects, in rechargeable battery materials as we ramped up new capacity. In the second part of the year, we will add capacity and we will also continue with the preparation work to build the new greenfield site, which means that the we will actually add more fixed costs we'll start to add more fixed costs in the 2nd part of this year than we have so far.
So, that's why it is important not to trapolate too much on a linear basis, the kind of margin growth that we have seen in energy and surface technologies. In Catalysis, I would like to clarify that the main impact on margins that you see segment level results from the acquisition of how the of certain activities of how the tops at the end of 2017. So these were not at the same level of margin and return on capital employed as the existing activities in Catalysis. So that explains the slight dilution in margin. So it's not so much an effect of the product mix.
It is more an effect of these acquisitions. Which we will now integrate further and will deliver benefits, more benefits in the future. On the mix side, I think we have explained that there is a mix effect in the European business of automotive catalysts where the market share of diesel engines has continued to decrease. So that creates short term headwinds because the revenues and the margins on these capabilities are somewhat higher than for gasoline engines. In the long term, and the medium and long term, it is important though to note that, as we mentioned back in June, that Unico will benefit from this change in the engine mix as we are better positioned in gasoline configurations and in electrified drivetrains as well.
Now take our next question from mitralu Sundargan from ABN AMRO. Please go ahead. Your line is open.
Yes, thank you very much. Good morning, Mark, good morning, Philip. A couple of questions. First, on Energy And Surface technologies. You said it yourself, the margin is up significantly year on year.
Can you tell us what the biggest drivers are behind that margin pension? And do you think that this is a sustainable level or actually is there even upside further?
Okay. So, there are a number of drivers, behind the margin expansion. 1 and 1 of the largest if not the largest is the volume growth in cathode materials for rechargeable batteries as we have added capacity and the demand is very strong, for easy, for the fast growing easy market. So that is one second, factor, as I mentioned a moment ago, is that we're starting to benefit from scale effects are coming from that new capacity, although you have to bear in mind that this should not be extrapolated because the ramp up of costs is not linear. And as we will continue with the preparation of investment into greenfield sites, the ramp of costs will increase in the second half of this year.
And the third effect, that is to be the 3rd driver and not the last is actually the strong demand that we have seen across non battery applications in the Energy And Surface Technologies segment, whether it for the industries that are served by the Cobalt And Specialty Materials business unit or in electroplating. We have seen strong, demand and volume growth across these applications. And last but not least, as also we mentioned a moment ago, we benefited from a favorable, prices particular, in the recycling, refining and distribution activities. And again, considering the recent trends that we have seen in certain prices such as the cobalt price, this margin expansion should not be extrapolated necessarily to the second half the year nor in the longer term. So when it comes to, the question about how sustainable that is, I think you have to to consider these various elements, that means that the margin evolution is is not and it's not going to be linear.
Understood. And then, sticking to energy and surface technologies, The returns obviously because of the higher margin returns also look very, very positive development. Just wondering, what is the drag in capital employed from the investments that you're doing in rechargeable battery materials? So would you be able to split out the capital employed that at the moment or in H1 was not contributing to revenues and was not creating in the earnings?
No, I think that's not something that we would want to do because I think it's It would be an endless exercise in a way because the capacity expansion will continue And so I don't think this is something that we could draw any conclusions from And suffice to say that we're quite happy with the kind of return on capital employed that we have in that segment despite the very significant CapEx program that we are going through.
Okay. That's unfortunate. So maybe then on Catalysis, I mean, the guidance is clear. Just wondering, in terms of the second half do you mean that revenues will increase also excluding acquisitions?
We're not breaking that down. So I think if I say that the revenues will increase in Catalysis both on a year on year basis and sequentially.
Okay. Okay. And then my final questions final question on recycling. So in the second half, will the voice be higher compared to the first half? So what I'm wondering is which effect will be bigger?
Is it the ramp up that you will be doing or is the shut down towards the end of the year?
Yes. I mean, the exact timing of the year, the shutdown is not yet firm. And so that will depend a little bit on the exact start date of the shutdown. But if theory no, the shutdown effects cannot be compensated by the ramp up. And that's why we mentioned explicitly in the communication this morning that we were banking on a year on year increase and did not mention a sequential increase.
Understood. Understood. So there is a chance that the shutdown will be part 2018, part 2019.
It's a bit too early to tell, in a way we'll see. Yes. Just I would like you to add one EBITDA perspective on your earlier questions about the Dragon capital employed. When I said that we're quite happy with the return on capital employed that we have in the segment considering the very heavy investment program, think it's a bit of a unique situation that we have of being able to generate such returns in a business that is growing that fast and requires so much capacity addition at the same time. So that's what I really meant with that statement.
Yes. I agree and that's also why I asked the question because if we would clean for the investment, it would tell us what the underlying returns are of your business, but I guess you don't want to share that with us.
I mean, I don't disagree with you, Mutlu. But considering the fact that we do not see a near term and of the growth, And therefore, we see a continued investment requirements to actually to keep pace with the growth in the market. That's the reason why we don't want to go there.
Yes. Okay. Okay. Thank you.
We can now take our next question from Sebastian Bray from Berenberg.
So I would have 2 please. The first is on the extent of capacity expansion within Cobalt Refining. Is or DEG the only facility where this is done or could we expect some incremental volume increase moving into 2019 2020? Is, aren't there any further plans to expand Cobalt beyond what it already has been expanded by? And I suspect there won't be a percentage number you can me for this, but what has been the magnitude of the expansion?
The second question is more a strategic one. It looks as if you recall likely on a net basis because of its investments in batteries be free cash flow negative for the foreseeable future? Why continue paying a dividend if this is the case?
So, Sebastian, can we clarify your first question? Because you talked about cobalt refining and at let me find what's mistaken, you mentioned Ordek, which is a cash I'm not
sorry Ordek. I think it's the sorry, if it's the name of the facility? Is it in Belgium when you do the Cobalt Refinery?
I'm so sorry. I dislocated in Oregon, in Belgium. No problem. I just wanted to make sure that I would answer the question properly. So the capacity addition in COBART Refining in Belgium is relatively modest in size, in a way, and because of yeah, the it was, to a large extent, an upgrade program with some expansion of capacity.
So that is not of a size that is likely to change completely the face of the business. And indeed, as you had anticipated, we're not quantifying these effects in tonnages or in percentage terms. Yes. And then your second question, on the dividend side, on the dividend policy. I would not necessarily infer that we're going to be cash flow negative.
For the foreseeable future. We're cash flow negative. We're going to be cash flow negative this year. And indeed, we have now initiated a large additional investment program. Please bear in mind that our recycling activities or catalyst activities and many of our E and ST cat activities too are starting or are continuing to generate quite a bit of cash flows.
And the evolution of our results, I believe, warrants, the continuation of our dividend policy. And indeed, we can afford to maintain a large and ambitious CapEx plan at the same time as a very significant R And D year programs and dividend payments and some returns to the shareholders at the same time. So I don't see a conflict in terms of capital allocation between these three elements for the foreseeable future.
Thank you very much.
Thank you. We can now take our next question from Ranos Orr from Redburn. Please go ahead.
Good morning. Thanks for taking the questions. The first one is just on your, guidance in EST. I think previously you'd said growth would be more pronounced in H2. And now you're saying I think revenue should be higher.
This suggests, in fact, the percentage growth could be a lot lower in to than in H1. So I was just wondering if you could explain what's changed there. Thank you.
Yes, I think nothing has changed. The reality is that nothing is linear. And I think it's important to keep that in mind, for every business at every point in time. So linear extrapolation, doesn't work and has never worked in, in, in our business. And I don't think it works much better in many other businesses outside of Umicore.
That's the only. That's how you should read that.
So just to confirm, you're not you're no longer expecting growth in the second half to be higher than the first half?
I'm not saying that. I'm just saying that I would avoid linear extrapolation in terms of the pace of growth.
Okay. Sure. And then my other question is just wondering around any market update you might give at Q3 sort of similar to what you provided at the AGM in Q1 Would there be anything similar around that time?
Well, if there is anything specific or new to be reported, then we would do that. If there is no, nothing significant or, no deviation at all from what we are saying now, we will probably not come up with an update. That's all.
Thank you. We can now take our next question from Natalie Saruman from Citigroup, Petercam. Please go ahead.
Hi, good morning. Well, basically all my questions have been answered, but we'd just like to get some clarification from your side. With regard to the expansion program in rechargeable battery materials. So you announced that tripling of capacity initially, if I correctly, it has been commissioned at the end of last year and now it's starting to contribute. Can we assume that it's fully contributed in the first half of this year or not?
And then finally, where are you with regard to that 6 fold increase in capacity? Can we assume that it will be fully commissioned by the end of this year?
Nathalie, it has become difficult to establish a clear distinction between several investment wave. And I would therefore, for sure, to get you back towards the, the statements that we made earlier this year in terms of capacity projection for next year and capacity projection for 2021. So what we said is that by 2021, we should reach at least 175,000 tons of cathode materials capacity. So And that, next year, in 2019, for the full year, we would expect, to reach 100,000 tons of sales of capital materials. So I think that's a better proxy, then trying to reconcile, what is happening now with the waves in which we have announced the capital expenditure programs.
Suffice to say also that we are very on track in terms of adding capacity. And, we are continuing to add the capacity in the existing sites in Korea and in China in the 2nd part of this year, while at the same time preparing for the year construction of the greenfield sites in China and in Europe.
All right. Okay. Fair enough. I was just trying to get some clarity on that one. But if I can follow-up on that.
Have you seen in the market, major expansion programs coming from I mean, other NMC players, we have seen announcements from, who was it, LG or these guys, looking at joint ventures to launch new capacities. Have you seen major, major plants coming in?
Actually, since, since we commented on that at the end of April and also in June during the Capital Market Day, there hasn't been anything major, actually happening in the market in terms of new capacity additions.
All right. Okay. Thank you.
Thank you. We can now take our next question from Adam Collins from Liberum.
Said. I haven't guided down. I haven't set the message changes.
Hello, Mr. Pauls. Can you hear us?
Yes, hi. Yes, sorry about that. I had three questions, please. Firstly, could you give us some sense of what the impact on revenues and profits was from ForEx? Secondly, in relation to, how do topso, are you in a position to give us any sense of what the contribution to revenues was from HT.
And, could you just clarify something? I think I heard at the CMD which is that very roughly HT doubles your revenues in HTD. And then finally, just some guidance on the drivers to the working capital increase. Are you in a position to help us understand To what extent that was about investments in relation to the capacity additions and how much was related to the impact of higher metal prices
Yes, I can maybe start with the ForEx 1. So, good morning, Adam. Good morning. For us, ForEx was a headwind, clearly, as you've seen in other companies, euro companies. So for us, ForEx, we didn't talk about it because of the type of growth rates that you see, but ForEx for us in the period, we'll certainly, a headwind yes, so that, I mean, without it, our results would have been higher.
Quantifying, I wouldn't want to do, but you've seen that in other companies, quite substantial. So for us, it was also meaningful. Maybe I'll take the working capital. 1, I mean, I It's going to be very difficult to provide you any more details and to try and split it up between the investments and the prices, because in a way they they both go together. So suffice to say that it's really a combination of actually 3 factors, I would say, you have the investments or the new lines coming on stream, you need to fill these lines, first of all, with inventory and then you obviously have the invoice is coming from them.
But that, again, we see that receivables and payables are quite imbalance. Secondly, metal prices, everything that flows through. And then thirdly, also a good demand. Mark mentioned that also in the RBM Businesses. We have a firm demand also with a good pricing environment and that is also included in the net working capital increase of energy and service technology.
So it's not only, RPM based, but it's really a mix of the and to split them out, honestly, would be it's not easy and we would prefer not to do that.
Let me address your other questions, Adam. So No, we're not going to give a breakdown of, of the, revenue contribution from, from a housing top serve. But what I can clarify though is that, the acquisition of their heavy duty T diesel Catalysts business is by far not doubling our revenue base in heavy duty diesel. So is a smaller addition, to the HDD franchise of Umicore. And Umicore was a much larger, much larger player HDD than how the top serve to start with.
Thank you. We can now take our next question from geoff Harris from UBS. Please go ahead.
Good morning, Mark and fellow. This is Geoff Haire from UBS. Just wanted to ask a couple of questions. First of all, on the Energy And Surface Technology I was surprised given the capacity uplift you've seen, the depreciation was the same in, the first half of this year. As it was last year, so 1,000,000.
And will that do you expect that to change as we move into the second half and into 'nineteen as you bring that capacity on? And could you help us understand where the depreciation could get to for the E and ST business? Also could you just comment on, obviously, you had exit disposal in recycling. You had growth both in sales and profit, but was all of that done the ramp up of capacity that you have done of the new capacity? And then finally, just coming back to the working capital again.
Given that the capacity buildup you see in NMC in a flat metal price environment, I'm assuming that we should be modeling fairly large increases in working capital every year because of the the ramp up you're going to see in that new capacity or is that the wrong way to look at it?
Good morning, George. So on the D and A depreciation, I mean, if I look at the full full growth. We're at 6 1st months of the year at 103. So that is stand up compared to last year. It means that for the full year, you should be looking at something like 200 plus of depreciation charge.
And indeed, it will increase going forward. To split up the segment, it really depends on when your commission lines You've seen that in terms of CapEx, the first half was, was a high number, but compared to the full year forecast was relatively modest we see an acceleration in the second half, which also means that you will have some acceleration, although modest still this year, I think, but you will have an acceleration and also depreciations as you start to depreciate those new lines. So I would say indeed, an increase in DNA and the first half was relatively moderate, but that will gradually increase over the next this. And then, the networking capital, the modeling side. So I think we've given you different drivers if you split them out as you increase capacity as you add new lines Indeed, there's a mechanical aspect that you increase your inventories.
Obviously, we work towards, again, in terms of receivable payables keep the buttons there. Take note of the fact that the other elements, metal prices you say, okay, that's your assumption. And then you have the growth in the non battery businesses want to repeat that again. We, NST has seen a nice performance also in the non RBM businesses. And there, obviously, demand is linked to working capital.
So if you model that, you model RPM, but you should also take an assumption then on the CSM. What I would maybe say on working capital, if you track the working capital with the turnover, because again, when you take the driver of, for Umicore, it's not so much revenues, it's a turnover that includes all the pass through metals. If you track that metric, which we obviously do very closely, you will see that the metric actually is pretty stable. Compared to what we've seen, for example, the end of last year. So but an increase in working capital linked to the new lines being added in, in RBM from an inventory point of view.
And then you you take your assumption, I would say, for metal prices and for the other non IBM businesses.
Thank you. And the question I had on recycling?
Can you repeat the question, please, just
Yes.
So you said excluding the disposals, you said you had a 5% top line growth in recycling and a 13% growth in EBIT. I just wondered, is that all due to the ramp up of the new capacity that you're currently doing for this year?
It is mostly, a result of the ramp up of capacity taking into account that the the pricing was, as I mentioned, there was pricing pressure. So that on the commercial side, this was less favorable, but volume wise, yes, has been a significant effect from the ramp up as anticipated. And, next to that, We also had the Evude uplift, in our revenues in the Jewelry And Industrial Metals business to a lesser extent in precious metals management.
Okay, thank you. Can I just follow-up on that? Have you got more than percent of the new capacity ramps up? Or is there more to come than we've seen this half in the next half?
As I mentioned on the previous occasion, this is a gradual process, so that's, continuing to, indeed, to, to take place. And so nothing different from what I've mentioned on previous occasions in that respect. So things are very much on track.
We can now take our next question from Chetan Lizzie from JP Morgan.
Yeah, hi, thanks. Just a few questions. Maybe wanted to Just to clarify, on comments previously on no, don't assume a linear progression in terms of margin, Mark, are you suggesting then that we should be expecting EST margin in the second half to be lower than in first half? Or are you suggesting that the pace of year on year in increase should be not assumed as same as what we saw in first half. That's the first question.
And second question, maybe the answer is probably no, but I just sort of checking again. Can you give us some sort of a rough steer on what is the sort of tailwind you might have seen from just higher Cobalt nickel or pricing in the ST just to understand what is the underlying improvements excluding those businesses so that we can take that out of the equation and just focus on the the core bit within EST in terms of just leverage. And last question is just on metal pricing in general coming down, some of that may be hit by you guys, but how much of that can be offset by, say, the currency turning more favorable as well? So what is the sort of a net delta between the two Thank you.
Chetan, I will leave the third question to Philip. Because this is the most complicated question, correct question, and I would be, at odds dealing with it. The joking aside, let me address the first question on the non linearity of margins. What I really meant indeed was to caution you against the extrapolating the growth rates, in margin. So it's really the margin expansion that should not be extrapolated.
That's, that's important indeed. And I hope that clarifies the matter. In terms of, the impact of cobalt and nickel prices on margins and on the bottom line, no, this is not something that we want to separate out of, the rest because we believe this is, a full part of the underlying business model and margin model of Umicore, as you know, recycling and refining are supporting activities are supporting the the downstream product businesses, whether it's, in a rechargeable battery materials where we promote a closed loop or in other applications served by the segment. So I don't think it would be, the right thing to do to separate that out and, and we typically don't do that. I think it's important indeed to note that there was a positive impact of, of higher cobalt prices in the 1st part of the year.
And that the extent of, of that effect may not be the same in the second part of the year, obviously, as prices has started to trend down, again, recently. And then I will hand over to Philip for the year. Question on metals and currency.
Yes. My answer may sound simplistic compared to the complexity of the question because I either we don't know, obviously, what I would say is that typically these metals tend to move more quickly than Forex moves. That's one thing. And the second element, I would put into the equation. If you look at the metals we're talking about, we mentioned a few.
They're not really having a very strong correlation with, for example, with the euro dollar. So they moved because of supply demand, equations and market sentiment more than on Forex Evolution. So I would expect that the changes in metal prices in these metals are can be higher than the changes you would expect in Forex. But for the rest, guess is as good as ours in terms of what the ForEx, currency rates will do in the second half.
Yes. Actually, if I may add, the complexity of the question is because we're dealing with approximately 20 metals within the group on the refining and recycling side. With the minority of them being hedgeable and a majority not hedgeable, and we're dealing with, let's say, practically 10 major currencies, in the group. So the number of and the currencies, and the metals typically do not move in sync. I mean, the metal movements are not in sync.
The currency moves are not So the number of permutations that you may have, is huge and it's indeed difficult to make out whether one of the effects will offset the other one. We can hope that statistically speaking, because we're dealing with a large number of currencies and a large number of metals. This will be the case. But that is not, that is not certain.
Thank you. We can now take our next question from Gunther Zitzman from Bernstein. Please go ahead.
Hi, good morning, everyone. Can I just follow-up on the margin evolution in your Catalysis business? You flagged the impact on margins from the other top serve business. Is that something that you'd expect to be above divisional average margin once you harvest the synergies from that deal? And secondly, on that, can you give a timeframe when you'd expect earn your cost of capital on that acquisition?
Thank you.
Clearly, we're more I mean, we're more looking at, indeed, the return on capital employed than the EBITDA or EBITDA margins when we make acquisitions. And indeed, we expect to have improvements over time. In margins resulting from the synergy effects, which are going to be to a large extent, revenue synergy effects. Resulting from the combination of the 2 portfolios of technologies. And it is while it is difficult to give an exact timeline, typically, I can say that, we look at acquisitions that are immediately earnings accretive and value accretive.
So over and above the cost of capital in the medium term being a timeframe of, let's say, 3 years. This is the typical time frame that we have in mind when making such acquisitions.
And color types would fall within that as well. Just to be clear.
This is indeed, I mean, again, this is there may be, I mean, give or take a few months. Indeed, this is the kind of time frame that that would apply to that acquisition, like it would to other cases.
Thank you. We can now take our final question from Mutlu Gudogan from ABN AMRO. Please go ahead. Yes,
thank you. Just a few follow-up questions. First, on the guidance, just wondering why you have not provided a more narrow range as you have done in earlier years. I have a few more small questions. You'll ask them 1 by 1, Mark.
Yes, let me maybe address this one first. And for some reason, I had anticipated that question. So and I checked, and it depends on how you look at it, because in absolute euros, you're right. The guidance that we provided in prior years at this time of the year would be somewhat narrower, let's say, by possibly EUR 10,000,000. Now in terms of in relative terms, So in percentages, this range is narrower than any range we have provided in the past, at the time of the half year results, It is down to 7% of the, of the earnings.
So while in the past, it was closer to 8 of 10% of the earnings. So it depends on how you look at it. I believe that given the size of Umicore today and the size of the earnings that this range is now right up in relative terms.
Okay. Kind of maybe comment on that one because historically, obviously, your earnings were much more dependent on recycling which could be more volatile. And as you progress throughout the year towards the end of the year, you've got more visibility with your hedges. So I always thought that the narrowing of the guidance is mainly tied to that. Now in Catalysis and especially in rechargeable battery materials, which having a bigger weight within the company these days, don't you have more visibility than in recycling?
So should that allow you a more narrow guidance?
I think there is no general rule, Mutlu, and we are factoring in a large number of parameters when defining the, the guidance range. And it is difficult to give you a more size answer to that question. There are so many parameters that play that I believe that the range at this point in time is is quite narrow and quite precise.
Okay. 2nd question is on the Chinese Kethos entity, where you've increased your stake. Can you talk a little bit about that? So Was that already possible? Did something change?
How did the pricing come about? A bit more color would be appreciated.
No, the timing of that transaction is clearly related to the fact that a significant injection of capital is required to build the greenfield site in China. And it is easier to do and more appropriate to do that in a configuration where we have a much higher stake in the company. So speed is of the essence, in this type of investment programs and in this type of market environment. And So this transaction will allow us to gain speed in executing the next step of expansion.
Understood. Understood. And then a few nittygritty questions. It's on the associate line. So both the associates in energy and surface technology as well as element 6 abrasive was down year on year.
Now I thought that the associates line in energies was mainly tied to Cobalt and nickel. So I would have expected that to well in the first half. And then with Element 6, I thought most of that business related to the oil price, so we would have expected a higher result year on year, but both are down. Can you talk about what is why that hasn't happened?
On the first, elements. So there is no nothing particular to mention in terms of the the, associates in energy and surface technologies. There is nothing particular to report in that respect. But if I don't know if you want
to I mean, I don't forget that this is typically the net result that is taken into account. So it's not necessarily reflecting also the operation performance or nothing really specific. And on Element 6, I mean, we've given you some color in, in the press release. Clearly, the oil and gas business was down quite typically compared to last year. And part of the reason for that was some stocking, by, by customers that clearly happened towards the end of last year.
So they are suffering from that. And that has for us, even though the Almond 6s is, is, let's say, not a strategic interest that we have. It does make an important difference in our P and L because, their net result was down pretty significantly compared to last
Yes. Okay. Okay. Thanks very much.
Thank you. That will conclude our Q and today. I'd like to turn the call back over to the gentleman for any closing or additional remarks.
Okay. No, thank you very much for, attending this morning's conference call and for your questions. And as usual, we will be available to address follow on questions. However, in that respect, I would like to ask you to bear with us and to also understand that our investor relations team is working with half of the usual staff today. So if it takes a bit longer to answer your following questions than usual, do not read anything else between the lines.
It's just that the staffing is not as it was in the previous period. For a temporary period of time. So Evelyn will be back with us in early September. So if you would please keep that in the back of your mind, that would be highly appreciated. And with that, I would like to close the call today.
And again, thank you for your participation. And talk to you soon. Bye bye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.