Umicore SA (UMI) Earnings Call Transcript & Summary

Good morning to all. Thank you for standing by, and welcome to Umicore's conference call. Please note that this conference call may be recorded today. [Operator Instructions] But now I'll turn over the conference to Marc Grynberg.

Thank you, Valeria, and good morning, everyone. Welcome to today's presentation. I will first comment on our performance in 2020 and the outlook for 2021 before reviewing the major achievements in each business group. I will then wrap up before handing the call over to you for any questions you may have. Before commenting on Umicore's performance, though, please allow me to say a few words about the process we have just launched to prepare my succession. In case you were concerned, I would like to reassure you that I'm physically fit and according to my entourage at least, mentally as well. One second, please, because we have a lot of background noise.

[Operator Instructions]

Thank you. Sorry. So I would like to say a few words about the succession process which has just been launched and the -- so when I took over as a CEO in 2008, my mandate was to bring Umicore to the next stage of development. Over the past 12 years, we have streamlined the portfolio of activities to create more focus. We have amplified research programs. We have accelerated growth investments. Together with my teams, we have transformed Umicore into a global leader in clean mobility materials and recycling with a market gap which is today 6 to 7x what it was back in 2008. We have now also successfully completed the execution of our Horizon 2020 growth strategy, and everything is in place for Umicore to keep thriving. We have talented teams, a promising technology pipeline. We have strong market positions and highly supportive mega trends, and we have strong financials to support our growth ambitions. So the Board and I felt this could be an auspicious moment to prepare for my succession, and I will be pleased to ensure a smooth transition in the future. Enough said about me. Let's review the highlights of 2020. The pandemic has dramatically redefined my agenda since the beginning of 2020 with a clear priority to protect to the best possible extent the health of all Umicore employees. The COVID outbreak has required the introduction of strict hygiene measures and medical protocols, and I have to say we've been quite successful in preventing the virus from spreading in our sites. We have also gone the extra mile to continue serving our customers globally, and I'm truly grateful to my 11,000 colleagues for their exceptional engagement during these challenging times. The pandemic and the resulting lockdown measures caused a huge downturn in the automotive industry, which is one of our main end markets. In Catalysis, we have seen extreme opposite movements during the year. In the spring, we were confronted with the closure by our customers of most car assembly lines. And in turn, we had to temporarily shut down most of our catalyst plants. In contrast, we saw a sharp recovery in demand, which started in China in the second quarter, took shape in other regions over the summer months and gathered pace through the fourth quarter. While the performance in Catalysis was impacted to a significant extent by these temporary shutdowns in the first half, we benefited in a disproportionate manner from the recovery in demand in the second half due to our leading positions in gasoline technologies, in particular, in China and Europe. In Energy & Surface Technologies, market demand was also severely affected by the pandemic. In addition, market conditions in the EV battery supply chain remained depressed due to the overcapacity in China and the presence of excess inventories. Excluding inventory effects, Umicore sales volumes of cathode materials for EVs grew broadly in line with the EV battery demand, which confirms Umicore's very strong position in the cathode materials space. In Recycling, we achieved a record performance. We nearly doubled earnings compared to 2019, with metal prices and strong trading conditions by far the largest contributors to the increase. Overall, Umicore achieved record earnings in 2020, and this goes to show the merits of our strategy, which builds on the complementarity of our activities. It also shows the resilience and agility of our teams in the face of unprecedented conditions. The good news really is that the patterns we observed in the second half of last year continue to support our business today, and I can already say that we are off to a very strong start in 2021. We should not get carried away, though, as the visibility on market demand remains extremely limited. The pandemic is unfortunately not yet behind us, and the experience of last year has shown that things can change very rapidly. If we assume for a moment that the pandemic gets gradually under control and will not cause more disruptions to the economy or to Umicore's operations in 2021, we should see again an acceleration in our growth trajectory, with all business groups contributing to the growth. In Catalysis, we expect to keep benefiting from our leading position in gasoline, in particular, in Europe and China, in an automotive market which, according to projections by industry experts, should keep recovering. In addition, we expect to benefit from the initial impact of the introduction of China 6 standards for heavy-duty diesel applications. And we should also benefit from the full year impact of cost improvements, which we carried out in 2020. In Energy & Surface Technologies, we see good market traction for cathode materials, and we project substantial growth in our sales volumes for EVs. This volume growth should allow us to resume earnings growth in 2021, in line with the current market consensus. And this, despite some EUR 50 million of additional fixed costs linked to our growth investments and with margins continuing to reflect pricing pressure. In Recycling, we expect moderate volume growth and a continued, very favorable supply mix. In addition, metal prices could once again boost our performance. You will have seen that certain metal price have continued to surge since the end of last year. And if metal prices were to stay at their current elevated levels throughout 2021, Recycling earnings would increase very significantly from the record levels of 2020. All in all, current trends do bode well. However, it is a bit too early in the year, and let's bear in mind that the degree of uncertainty remains high. Despite the pandemic or perhaps because of the pandemic, we have seen support for greener policies increasing, whether related to cleaner mobility or the need for a circular economy. This was evidenced, for instance, by the green recovery plan in Europe or by the step-up of the new electric -- new energy vehicles penetration targets in China. In other words, the regulatory drivers which underpin our growth strategy continue to get stronger. Against this backdrop, our motivation to maintain the strategic course of action is very high. In particular, we have pursued the construction of our cathode materials plant in Poland, and it will start production towards the end of the year. This additional capacity will come in timely to serve the growing demand for EVs in Europe and the growing needs of our customers. We have also pursued the ramp-up of our fuel cell catalyst production in Korea and the expansion of catalyst production capacity in China for both light- and heavy-duty applications. In Recycling, the focus of our investments in the short and midterm is to keep improving the environmental and safety performance of the Hoboken plant. Finally, we have continued to increase our research and development efforts in clean mobility materials and in recycling, both in terms of product and process technologies. At the same time, of course, I believe that we have responded most effectively to the challenges caused by the pandemic outbreak. As I mentioned in my introduction, the priority is to keep everyone at Umicore healthy. And I would like once again to thank our medical staff for having ensured safe working conditions, and I would like to thank all colleagues at Umicore for having swiftly adopted the required precautions. Let's now turn to the business review. The slide which we project now recaps the key figures for 2020. These are commented in full detail in our press release, so I propose to turn immediately to Catalysis. The automotive market was severely hit by the COVID outbreak, and global car production contracted by 18% in 2020. The graphs show the market development month by month against 2019, and you can clearly see how deep the production cuts were in the first half across regions. The graphs also showed that the recovery started earlier and was most pronounced in China. Against this backdrop of an 18% market contraction, Umicore has shown tremendous resilience, and our revenues in Catalysis decreased by only 7%. This outperformance is due to our leading market positions, which allowed us to benefit in a disproportionate manner from the market recovery in the second half in China and in Europe in particular. You may recall that I mentioned a year ago that Umicore had become the leading supplier of light-duty catalysts in China, and the benefits thereof are increasingly visible. In Europe, we continue to benefit from the decline of diesel car sales in the mix. Turning now to EVs. We see that the battery demand expressed in gigawatt hours, which, by the way, is the relevant metric to look at for battery materials suppliers, grew by 17% in 2020. This market growth was driven by increasing demand in Europe where the new CO2 regulations are supporting a faster penetration of electrified vehicles. The number of new EV models being launched in the region or which are in the pipeline is truly impressive. It is also worth noting that plug-in hybrids remain very popular in Europe, where they make up half of EV sales. In China, battery demand remained subdued during the better part of 2020 and saw an improvement at the end of the year only. After years of strong growth and a doubling of battery demand for EVs in 2018, the market in China has more or less stagnated in 2019 and '20 unlike anticipated. Umicore's sales volumes of cathode materials for EV grew broadly in line with the market despite a somewhat unfavorable platform mix. This performance was supported by strong demand in Europe, where we doubled our sales volumes in 2020, albeit from a small base. In contrast, with the growth in EV applications, cathode materials demand for energy storage systems and portable electronics was very low. Margins in Energy & Surface Technologies were affected by the underutilization of our cathode materials capacity in China and pricing pressure as well as higher fixed costs following recent and ongoing expansion programs. Our Recycling activities did benefit in 2020 from an exceptionally supportive metal price environment, especially for platinum group metals. You can see on the graph that rhodium and palladium price had a great run in 2020 despite lower demand from the automotive industry in the first part of the year. New and more stringent emission norms do require higher PGM loadings, and the shift from diesel to gasoline is somewhat exacerbating the tension for rhodium and palladium. We also observed that the new supply sources for PGM can hardly keep up with the higher market demand, and the recovery of automotive demand has pushed prices to new highs. For the same reasons, price volatility was extremely high in 2020, which has resulted in a remarkably high contribution from more trading activity. Finally, demand for gold and silver investment products has remained very high, probably due in part to the crisis context as these metals continue to be seen by investors as a safe haven. I would also like to point out that metal prices are even higher today and in certain cases, much higher than the average prices of 2020. And these metal prices constituted the largest factor behind the increase in revenues and earnings in Recycling in 2020. We also performed well volume-wise despite the operating constraints aimed at preventing the virus from entering or spreading in our sites. Finally, the precious metals management unit benefited from high price volatility and generated exceptionally high earnings. After the -- and continuing to talk about the -- to speak about the Recycling activity but now focusing a little bit more on the environmental performance of the Hoboken plant. And after the unexpected increase in lead in blood readings of the children living close to the recycling plant in Hoboken in July 2020, the recent October tests showed a clear reduction in the levels with an average lead, again, below the norm of 5 micrograms per deciliter of blood, so which is very good news. The root cause analysis of the increase showed a combination of external factors such as the exceptional weather conditions and the increased exposure due to the COVID-19 lockdown measures. We have taken additional measures to return to the positive trend of recent years such as extra cleaning inside and outside of the plant, redesigning storage of raw materials and upgrading ventilation systems. In addition to these measures, and although the root cause investigation has shown no major source of lead emissions in the plant, Umicore has booked a EUR 50 million provision to cover costs related to an offer which we made to buy houses closest to the plant in order to create a green zone and thereby increase the distance between the residential area and the site. All of this in consultation with the authorities and the residents, of course. Before opening the line to your questions, I would like to recap the key messages of this morning's release and presentation. I will not rehash, however, how the COVID-19 outbreak has complicated our lives and affected the global economy. I am simply happy that the precautions we have taken early enough have proven very effective at protecting the health of my colleagues at Umicore. I'm proud that we have equally well managed to keep serving our customers and that we have generated our best ever financial performance, and I expect an even better performance across businesses in 2021. Proud also to have maintained the strategic course of action and successfully demonstrated the merits of our Horizon 2020 strategy. Everything is now in place for the company to keep thriving, and the Board and I felt this would be an auspicious moment to start preparing for my succession. With this, I would like to open the floor to your questions, and I hand over the call back to our moderator, Valeria.

[Operator Instructions]

Sorry, I've been jumping around on different companies this morning. If it's not too personal or anything, I just -- why is it that you're stepping down now, Marc?

Well, as I've mentioned, the -- I have carried out a very profound transformation of the company over the past 12-plus years. It's actually almost 13 years now that I took over as CEO. I have, together with my teams, transformed the company into a clear leader in clean technology materials and recycling with very strong market positions, with a great innovation pipeline, with great teams, dedicated and talented teams around the globe. And we're ready to take the next step. And so the Board and I felt that the completion of our Horizon 2020 strategic plan was a good moment to pass the baton to somebody, to the next CEO to bring the company yet to the next stage of development. And I see that as an auspicious moment because I'm really proud of what I've been able to achieve with my teams at Umicore, bearing in mind that I took over in 2008 during a pretty severe financial crisis at the time of the Lehman collapse and that we have gone through a number of different crises, then we had the 2011 financial crisis, then the COVID crisis last year. But despite all of this crisis, what remains is that we have managed to put a different imprint on the company, shape a different strategy with a clear focus on the high-growth, high-tech businesses, as I mentioned, in clean mobility, in electrified vehicles, in recycling and maintain the strategic course of action through thick and thin and multiplied the value of the company by a factor of approximately 7 in 12 years' time. So I think it's probably an auspicious moment to consider such a movement.

[Operator Instructions] We have a question from [ Greenfield ], [ Michael ].

Just a quick question on the pricing pressure that you're seeing in China due to the existing Chinese capacity -- overcapacity, sorry. I just wanted to get a little bit deeper on that and understand exactly where you're seeing that. I cover the cobalt market and -- for Fastmarkets, and we are seeing the whole cobalt product complex improve significantly in terms of pricing and good demand for those materials. So I just wanted to get a little bit more deeper onto that and see what exactly in the [ course ] you're seeing that, please.

Actually, I can confirm your observations. We see demand picking up in China. And unlike in Europe, it started much later in 2020. We saw good traction for EVs in Europe throughout 2020, while in China, the market started only to recover towards the very end of 2020. But the trend is indeed pretty favorable in that respect, and so I would definitely share your observations about the cobalt demand picking up. This being said, in China, very significant capacity was built starting in 2018 on the back of, I would say, very optimistic projections of continued growth. Growth at 50-plus percent per annum was projected until -- I would say, back in 2018 for 2019, '20, '21, et cetera. And unfortunately, this has not -- this growth has not materialized. The market had a downturn in China in 2019 and has stagnated ever since. And in the meantime, the capacity that had been built in anticipation of continued fast growth has been unutilized, and it will take probably another couple of years for that excess capacity to be -- to actually be -- to be fully utilized and to be out of the way. So that's our observations today. And that's why in our space, the cathode materials space, we continue to see pricing pressure in that market.

[Operator Instructions] We will move to the question from [ Mike Dero ].

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Sorry?

[Foreign Language]

[Foreign Language]

[Foreign Language]

Our next question is coming from Dalila Ouerghi.

My name is Dalila Ouerghi, and I work for Fastmarkets. I cover the lithium sector. I was wondering what's your view on the lithium prices? What's your outlook for this? And does it fit this price increase in your company strategy?

So a little bit similar to the question which was raised on cobalt. I think the lithium price is naturally reacting to the recovery in demand from the battery industry, the EV battery industry. And in particular, we see very good traction for EVs in Europe. So that's a natural, I would say, evolution. The lithium price has had ups and downs in the past few years. It was moving up very quickly in 2017, '18 when the market was growing extremely fast and especially in China. And then it dropped almost like a stone with the downturn of EV demand in China in 2019, 2020. And now it's following again the EV trend and recovering pretty swiftly. For us, lithium price is a pass-through to our customers. So in a way, it is not so much influencing our margins and -- because we pass through the price to our customers, whether it's low or high. And yes, I would expect that if the current trends -- demand trends in the EV space continue to be favorable that, yes, there may be a sustained, I would say, support for lithium prices and that fundamentals may continue to look good.