Good morning. It's a pleasure welcoming you to Elkhem's Third Quarter Results Presentation. My name is Odjell Linkstar, and I'm responsible for Investor Relations. With me today, I have CEO, Michael Konig and CFO, Morten Vega. Michael Konig will first take us through a business update before Morten Vega will take us go through the financials.
Michael Konig will then wrap up this presentation with outlook for the Q4 before we open for Q and A from the audience. And with that short introduction, I will leave the word to CEO, Michael Kurnig.
Okay. Thanks a lot. Well, ladies and gentlemen, good morning and thank you very much for your interest in Erkheim's quarterly presentation today. I'd like to start with a summary on what we have seen during the Q3 and then we will go into some details. During the Q3 Alchem has managed to maintain very good operational performance.
That was important to us to demonstrate it even though weak markets have hampered the results and you see that on the bottom of this chart that overall we came in with a revenue of close to NOK 5,900,000,000 with an EBITDA margin of 9%. We have seen clear recovery in China, in particular in automotive but also in construction. And we have seen in the wake of that also silicones prices going up throughout the quarter in particular through the towards the end of the quarter. In Europe and in the Americas markets are still weak. That in particular impacts the sales of our specialties where prices keep up very stable, but volumes are down substantially.
We had already prior to the crisis started a productivity improvement program that has targeted annual savings of more than NOK350,000,000. That program is on track and we have even slightly increased the target for that. On environmental, social and governance with a new organization that focuses on improvements and driving those improvements throughout the organization. Already now we have more than 80% of our electricity consumption which comes from renewable energy. I will talk about our biocarbon strategy in the next chart a little bit more in detail.
I'd just like to mention here silicones contribute to greenhouse gas reductions in their applications. 9 times greater than the emissions that come from silicones production itself. Safety, we are having a good safety record also this year, a slight increase in our specific injury number. And we are focusing more including Board of Directors and Management on a dialogue around good and appropriate governance. I mentioned our biocarbon strategy already but I'd first like to spend a few sentences on the EU policy where there is a significant change.
The European Commission has decided on a 55% CO2 reduction target by 2,030, which is still subject to approval by the EU member states. That will trigger a change in the ETS trading system, But that change will not have consequences for Elkem. Our future compensation will remain flat at 75% like it is today. So this does not contain significant changes for Alchem, but our commitment to reduce CO2 is unchanged and that substantiates itself in our biocarbon strategy where we have a target to replace 40% of the fossil coal that we are currently using as reduction agent in our smelters by bio carbon coming from renewable sources. The project that we have started is a technology development that enables us to produce bio carbon for our smelters out of the waste of sawmills.
That is a project where we are currently building a pilot plant. We are investing 180 €1,000,000 NOK into a pilot plant in Canada in order to then later on scale up this project and create reliable and friendly supply of bio carbon for our plants. This is a project in which we will look for business partners because we believe that this technology has a future beyond just the supply of bio carbon to our production plants. But we go further than that. We do not only replace our own supply, we also want to actively contribute to the change in towards renewable energy.
That's why we are investing into a battery materials project, which is a very, very attractive ESG growth opportunity for the company. The demand for rechargeable lithium ion batteries mainly used in EVs but also in other applications is going to increase more than 10 times from today's level by 2,030. That's as I said mainly driven by EVs but there are a number of other interesting applications as well. Now we have technology, we have experience that enables us to produce graphite for battery anodes in a sustainable environmentally friendly and energy efficient way better than any other company can. That's why we are after investing into research, currently investing into a pilot plant which is under construction in Christiansand and will be operational by early 2021.
In the meantime, we are already preparing for a production plant and we have selected Heroya as the place where we will potentially build a production plant for battery materials made by Elkem. That investment decision is expected to be taken at some point in time during next year, meaning 2021. This is going to be a huge project and we believe it has huge growth opportunities. It will also be capital intensive. That's why we will open it and have opened this project for participation of other partners with other partners and we have appointed an investment bank as our partner to represent us in discussions with partners that would like to join us in this project, which again is one of the huge ESG growth opportunities that in an ideal way connect our capabilities, our products and the future market, which is growing very, very quickly.
The other initiative that we are focusing on a lot is digitalization of Elkem. We believe that digitalization of business processes, of production processes, of sales processes is a very important driver for improvements and value creation. We have therefore established a digital office that is reporting directly to the CEO. And the goal really is to make Elkem a data driven company by implementing digital initiatives across the company. And we do that by focusing on 3 different areas.
First, we do concrete digital use cases that with their implementation generate value in a relatively short time frame. That's for example optimizing our value chain. That is a project around remote assistance in technology areas, but those are also real time systems in order to analyze raw material handling. So those are the concrete use cases. Then second, we have established a program where we build digital capabilities in the company in order to be better able to deal with digital use cases, to identify digital use cases and also generate acceptance for it.
And thirdly, we do portfolio management in order to secure that the resources that we have are being used in an optimal way to identify the most promising and most value generating digital use cases that we then implement through our digital office. We have done 2 very important strategic acquisitions over the last years, Polysil and Basel Chemie. Both strengthen our position in silicone specialties which is the strategic direction that we want to go and need to go. And both are located in Asia which is the by far fastest growing market for our products. Polyseal is a very solid platform located in South China focusing at LSR, HCR and also pressure sensitive adhesives.
The EBITDA performance of Polysil which was only closed after Q1 this year is above expectation in the 1st two quarters that it is with us and we are clearly seeing that also the integration process is going very well. Basel Chemie is a personal care company focused on skin care, sun care, color cosmetics located in South Korea. Very interesting portfolio also very good process on listing those products with international companies. We have some qualifications that are ongoing with large cosmetics companies. And we have created a new brand PureSil which gets very good traction in Asian markets but also in global markets and starts to win awards for its qualities and its properties.
If we look at markets in general, we see clear signs of recovery. Those signs, as I mentioned in my introduction, come very strong from China. Actually China seems to have moved into a post COVID area, where we see good growth, good support also from government subsidies, and in particular in automotive also something like a complete normalization of market. In the EU industrial production we also see signs of recovery. Also in automotive which is a very important market for us, but still we are 20% behind last year in terms of capacity and cars being built and that of course has an impact on our business as well.
China is promoting stronger than prior to the crisis electric vehicles And that's important for us because an electric vehicle contains much more of our materials, in particular silicones, than combustion engine cars. There are various subsidies for electric cars very scattered across the country in the big cities. Every big city has a scheme in order to promote electric cars and we believe that the penetration of electric cars will increase in particular in China but also in the Western world. And that penetration will accelerate, which in turn will be very good for our business, in particular our silicones business. And in the wake of that silicones prices have gone up in the Q3.
Again in particular in China where compared to the Q2 we have seen substantial price increases. There is a huge infrastructure subsidy program going on in China, which amounts to RMB50 1,000,000,000,000. We also going forward believe that demand in China will remain stable, even though when it comes to construction we are entering a low season. But fundamentally China seems to have recovered from the crisis and is now moving on and starting to show growth. In Europe and in the U.
S. We see a different picture. Also here we see signs of recovery, but that recovery is slow. Prices for specialties as mentioned remain stable, but volumes are still down. And of course there are some uncertainties related to the fact that over the last 2 weeks we have seen a second wave of corona virus infections where it's too early to say what the result of that second wave in terms of economic activity is going to be.
On silicon and ferrosilicon, also here we see signs of recovery. Prices have bottomed out and started to increase. That's to a large extent driven by the pickup in automotive, where then the demand for our materials also increases. Ferrosilicon also stabilization of prices driven by increased demand for steel. And in specialty products also some pick up again driven by automotive.
And you can see from the reference prices that we see in silicon clearly stabilization. In ferrosilicon we already see a slight uptick. And then last but not least on the markets on carbon, the recovery in steel also is driving demand for our carbon products. And that starts to help also in carbon and improve demand. With that, I would like to hand it to you, Morten, for the financial results.
Thank you very much, Mikael, and good morning, everybody. So let's start with the group numbers, and they are clearly hampered by very weak markets outside China. The good thing is that we now see a recovery towards the end of Q3. Let's start with the operating income, which came in at NOK 5 point 9 billion. That's in line with the previous quarter, but it's up NOK3 €50,000,000 versus the same quarter last year.
And the main uptick is in silicones. Our EBITDA came in at NOK512 1,000,000. That represents an EBITDA margin of 9%. And €512,000,000 is a reduction of €130,000,000 compared to last year. The main negative deviations from silicones and silicon products, while carbon solutions have managed to improve profitability in this very weak market situation.
For your benefit, we have, as always, included a summary of the main P and L and balance sheet numbers. Just a short a few comments to the numbers. On other items where there is minus SEK18 million, it's mainly consisting of negative currency effects of SEK7 1,000,000 from working capital items and net negative effects of SEK8 1,000,000 related to fair value changes and embedded derivatives of power contracts. The net financial items amounted to minus NOK150 million. That's higher than a normal number.
It's mainly explained by the normal net interest expenses of minus NOK57 1,000,000, but then there are also currency losses of €89,000,000 due to translation effects on external loans in euro. This is, of course, due to the weakening NOK. Tax costs are minus NOK 23,000,000 even though the net profit is negative, mainly caused by unrealized currency effects. The net tax cost in Q3 were mainly related to countries where we have taxable profit like Norway, Iceland, Canada, while tax losses carried forward were not capitalized in other countries. If we look at the silicones numbers, we came in with operating income of NOK3.2 billion.
That is marginally up from previous quarter and is also 10% up versus the same quarter last year. And the increased operating income is explained by very good sales volume but also of the integration of Polysil. The EBITDA amounted to NOK 363 1,000,000 representing an EBITDA margin of 11%, but the EBITDA was down 18% compared to last year. And this is mainly explained by lower sales prices and particularly by a less attractive mix. We have been selling less specialties in Europe and in the U.
S. Following the COVID-nineteen crisis, and we've had to compensate by selling more low margin, low price core products. But all in all, sales volumes are up compared to Q3 last year due to good demand, particularly in China and very good operational excellence. On silicon products, our operating income came in at NOK2.almost NOK2.7 billion. This is in line with both the previous quarter and also with the Q3 last year.
We have higher volumes, but these are offset by lower sales prices compared to last year. Our EBITDA was very low, NOK 124,000,000, representing an EBITDA margin of 5%. And this was also down 25% from last year, which also was a pretty bad quarter. The result was clearly negatively impacted by low sales prices and also here low sales volume on specialty products, particularly towards automotive following the COVID-nineteen crisis. And also here, we have tried to compensate by selling more standard commodity products but at very low prices.
I should also mention that we've had some production stops in our biggest silicon plant in Salk, Norway. We've had a full upgrading of 1 plant, and we've also had a production stop related to tie in of the new energy recovery facility that we're building. And these elements amount to a financial impact of minus NOK35 million for the quarter. The sales volume in total was up compared to Q3 last year. But as I said, the increase mainly consists of standard grade ferrosilicon and also partly silicon at very low prices.
While we are not pleased with silicon products profitability, we are very pleased and proud of the Carbon Solutions results. We have an operating income of NOK452 million. That's in line with previous quarter, and it's 5% higher than Q3 last year. It's somewhat higher sales volume, and it's also favorable currency effects. Our EBITDA is NOK111 million, representing an EBITDA margin of 25%.
This is explained by higher sales volume, a favorable currency, but also excellent operational performance and good cost improvements. The sales volume was higher than last quarter, even though the main markets towards steel remain very weak, particularly in Europe, but also in North America. So if we look at the group, our earnings per share was negative for the quarter, NOK0.18 per share. As I said, this is very much due to non realized currency impacts with a weaker NOK. The total equity amounted to NOK12.7 billion as per end of Q3.
This is slightly down from or in line with year end 2019. And equity ratio remains quite stable at 40%. On the debt side, we have seen an increase in the debt level, primarily related to investments. So the net interest bearing debt as per the end of quarter of Q3 amounted to NOK8.6 billion. And this gives a leverage ratio of NOK3.8 billion based on the last 12 months EBITDA of SEK2.3 billion.
So we have had an increase in the leverage ratio as we have guided on, and this is clearly a combination primarily of lower EBITDA following very weak market conditions, but also an expected increase in net interest bearing debt. We have focused on the leverage clearly. However, we are very comfortable with the situation we have a very robust debt financing with a very well distributed debt maturity profile. The short term maturities in 2020 mainly consists of local working capital financing in China, which is constantly being rolled over. That's the nature of such finance schemes, and we don't see any problems in that.
We have a rather sizable bond maturity towards the end of next year. We have also then signed a new loan facility of NOK2 billion in July this year to provide a very good flexibility in terms of deciding how and when we want to refinance next year's bond maturity. On cash flow, the cash flow from operations were clearly impacted by low underlying EBITDA, but also by the reinvestments and the working capital. So our cash flow came in at NOK182 1,000,000. That was a bit down from Q2, but that was a significant improvement versus Q1 this year.
The investments ex M and A amounted to NOK454 1,000,000 in Q3. Reinvestments were €269,000,000 in the quarter, amounting to 65% of depreciation and amortization. That's a bit lower than our long term financial target. We are trying to optimize reinvestments where it's possible without compromising on long term preventive maintenance. Our strategic investments amounted to NOK 185 1,000,000.
It primarily relates to Silicones projects, among others, the new R and D center Lyon, France. And then we have also had NOK240 1,000,000 NOK in deferred settlement for the policy acquisition that was closed earlier this year. And Michael, please take us through the outlook.
Yes, Martin. Thanks a lot. Then let me summarize what we have seen and also try to give a bit of an outlook for the Q4. So we see signs of recovery, in particular in China where it is very pronounced but also in Europe and the Americas. But overall markets are still characterized by very significant uncertainty.
And as I mentioned during my presentation, that uncertainty has increased in the last 1, 2 weeks due to the increase of the infection rates in particular in Europe. In Elkem we are focusing on countering the weak market conditions with every measure that we can take internally. We are accelerating cost reductions and we've talked a little bit about that. We are optimizing our investments and we have quite successfully leveraged on our strong competitive positions in the market and with regarding to our product costs. So all our plants have worked in regular operation during the Q3 and that's very different to a lot of other participants in this industry.
And as Morten has alluded to, we have a very robust financial structure. In China everything that we can see and forecast right now, demand will remain stable. We will enter the low season, but that is to be expected and that will potentially have an impact on price development. Outside of China we see signs of recovery with as I mentioned some uncertainty. Looking at silicon and ferrosilicon we believe that prices have leveled out.
We have seen an increase already and that will potentially continue also into the Q4. Our market for carbon products is expected to remain stable. Here we will have a maintenance stop in Brazil during the Q4 which will reduce Elkem sales. With that I would like to thank you very much for your attention and hand it back to Otger. Thank you very much.
Okay. Thank you, Mikael and Martin. We will now open for questions. So first, we have a few people present here in the audience. So I would like to give them the chance first to ask any questions.
Yes, Daniel? No. You can say it and I will repeat. Sorry, I need to repeat so that we get it on the webcast. And the question was about the Polysil acquisition and the improved EBITDA that we have seen, if that is revenue or only more cost synergies?
It is actually a combination of both. Polysil as such is a very, very good, very stable business that has managed through the crisis in China very well and has seen very good business in the second and in the third quarter. So it's really in itself a very good business that is performing up to expectation. We have also made more progress in the integration or faster progress in integration than we thought and that has also helped with some cost synergies. Do you want to add anything?
No, I
think that's a very good summary.
The question was if that we have seen some improvement towards the end of Q3 and if we will see an improved product mix also in the Q4.
I think it's definitely too early to say that. And you have seen from my summary from what Morten has said, there is high uncertainty in the market going forward. What we have seen towards the end is increased prices. That's not necessarily and has an impact on mix, but it lifts up profitability. Whether we really then also see an impact on mix in Q4, I would not want to speculate on it right now.
Okay. Then we have some questions that have come on the webcast. I will group a couple of questions here that we have received. Thuls Engene is asking from SAB is asking what is the current DMC spot price? And Thomas Wiggleworth in Citi has a similar question asking how the October prices and margins for silicones compare to Q3 'twenty?
So the current DMC spot price is at 19,400 RMB per tonne. And it has just recently increased to that level. So that's really last week it was still lower. How that compares with last week, I need to look to more last year, I need to look
to No. Yes. I wouldn't comment upon October numbers. We're now talking about Q3. But obviously, we have seen a good price recovery towards the end of Q3, and that has continued into October.
Then there is also very similar questions from Thurls Engen in SEB and Thomas Wriggleworth in Citibank. What are your forecast for market balance in silicones markets for 2021 to 2023? And Thomas in Citibank has a similar question. Have you seen the poor conditions drive any cancellations in China?
Well, we expect balanced markets in silicones for the years to come. And on that judgment, nothing has changed. We have not seen any cancellations in China or any changes in investment plans in China, at least nothing that would have been announced. Whether underlying plans are being postponed is hard for us to judge your comment.
Then another question from Terrence Engen, SEB. How is the development in demand from the automotive industry? I guess it refers to Aechem's numbers.
Yes, I think I've mentioned part of that during my presentation already. We see strong demand in China from the automotive industry back to pre crisis levels. And we see an increase in demand in Europe and in the Americas, but not yet at the level of pre crisis.
And then also a question from Tull Seng in SEB. How much will 4th quarter sales in carbon be reduced due to maintenance stop, the stop in Brazil that we referred to?
We're having a maintenance stop of approximately 1 month in our 2nd biggest entity, that's Carbon Brazil. I wouldn't it's not a major reduction in sales revenue. I guess it's less than 10%.
Then we have also 2 questions that I would like to group. It's from Andreas Barthesen in Kepler asking, can you offer some color on how you see mix of specialties in silicones and silicon products develop from Q3 to Q4? And Nav Rayyan is also asking kind of a similar question. Can you give us some more color on the outlook for Q4 regarding
product mix as much as we can say it, let me phrase it like this. We see an uptick in automotive, also in Europe and in the Americas. And automotive attracts quite a percentage on specialties. So that would at least be a hint towards a somewhat better mix towards specialties. Yeah.
But fundamentally I think I would need to repeat. It's too early to really talk about mix and to give any prediction on that unless you would have
a No, I agree. Look to the automotive sector. Clearly, automotive has been very weak, both in Q2 and in Q3. And that is a major reason why we have seen quite low results. If there is an uptick in
Eivind, I think in DNB is asking what is the positive EBITDA impact for Q4 and Q1 2021 if market prices remain at current level? So if you have the current level, how much would that improve the EBITDA?
I guess we would not like to give more specific guidance than we already have done. We do appreciate the price increase that we have seen, particularly in China on DMC. We know that historically, DMC prices or commodity grade prices in China have been quite volatile. So I wouldn't be too firm on further development on that. We also do appreciate the price recovery that we have seen on upstream silicon metal and ferrosilicon in Europe, which were coming from very low and unsustainable low levels.
And that is clearly helping also our margins. I wouldn't like to be more specific than that.
We have received a few more questions, but I think they have been dealt with. It's related to maintenance in carbon. It's related to sales mix in silicones and silicon, and it's also related to improved auto demand. But I think we have covered those quite well. So hopefully, any more questions from the ones present here in the audience?
It doesn't seem to be that. So then I would like to thank all of you. That concludes Elkem's presentations for the Q3. So thank you very much for your interest and thank you. Have a nice day.
Thank you very much.