Umicore SA (UMI) Earnings Call Transcript & Summary

[Foreign Language]

Thank you very much, Thomas, and also a very warm welcome from my side. It's my pleasure to be here today at this general assembly. And I would like to use the opportunity before I go into the details of the 2021 business as well as then talk about 2022. Just to share with you my impressions of my first 6 months being with Umicore. Umicore truly, from my point of view, is a unique company. It is a unique company because it has an unmatched complementarity of businesses. We have businesses that are in the fields that matter today in the transformation of the industry, of the energy transformation in the material side that we see is getting more and more important, and it's a combination of businesses that is very much complementary. We have businesses that are mature, that deliver cash. We have businesses that grow, that need investment. So this, together with the strong focus on technology, that has been in the core of Umicore in the last 20 years and beyond makes it really unique. And there is a second one -- second thing that I have noticed, it has an absolute fantastic track record of transformation. And if you're a long-term shareholder of Umicore, you know that there is a history -- a long history of the company that has now been transformed into a materials technology company, and that's for sure is important to face these challenges ahead of us, the transformation challenges that require change, and Umicore is very well positioned, especially also because of its people that I find extremely knowledgeable, extremely passionable, but also with a special sense of purpose, and that's what we are doing at Umicore is not only to improve our business results. Obviously, this is high on the agenda, but it's also to contribute to the better of the planet. So let me now introduce to you our year 2021. The year 2021 was a record year for Umicore. It was a year of record results in turnover, in revenue, in earnings and also in cash flows. And this, I will show you a little bit more in detail, was based on, yes, a favorable precious metal or metal price environment, but also based on a strong foundation of the underlying performance of the businesses. It was as well a year to prepare Umicore for the next phase of its growth for the decade to come towards 2030. We have rolled out and announced our ESG strategy. Thomas will give more details about that in a minute. We have been preparing ourselves also on the security of supply side, securing long-term purchase agreement with things that are very rare today, nickel, lithium and other things, but not any kind of those materials, but sustainably sourced and CO2 minimized contracts. We also have been going a very long way on the green and clean energy. So we have closed several long-term PPAs to receive 100% CO2-free energy for our sites in Belgium, but also abroad, and we are continuing on this path. We have made certain changes to our Management Board. We have added an additional function, a Chief Strategy Officer that will help us to shape our strategy into the future. And altogether, we have started the strategic planning for 2030, something I will refer to later into this presentation. And another highlight that we have -- that we had and that I will detail later on is the announcement of an MOU with Volkswagen to form a joint venture on battery materials. So really a year of record results and preparation for the future. And now I will give you some more details on the financial side of things. Record results, our EBIT was up more than 80% for increase in revenues at more than 20%. So the margin have significantly increased. All of the 3 business groups and underlying businesses have contributed. It's the first time this year that we have also disclosed more in detail the effect of precious metal or precious metal price environment to this uplift. EUR 270 million are coming from that. But you can see that there is still a very significant portion that was enabled through the underlying strong operational performance of the businesses. But not only the profitability was high, also the cash flows were on a record level, close to EUR 1 billion free cash flow from operations were enabled. That obviously helped us to achieve very low net debt levels and improving our gearing ratio. In detail, the different businesses that we have, we start with our Catalysis business, where you have to -- you might know that we have the automotive catalyst, as the major business, but also fuel cell and precious metal chemistry. And here, we have been benefiting from a very strong increase in EBIT. You see over 100% increase in profitability versus the revenue up in -- of 24%. This was based on strong market share gains. We have been better than the competition in the automotive catalysis side in Europe and in China on the light duty, but especially also very happy on the heavy-duty diesel side, on the truck side, which, of course, will be the most longevity segment in terms of the combustion engines. And in China, we had even a boosting special effect that there was a change of legislation from China V emission legislation to China VI. And that -- there was kind of a last buy effect. Everybody was buying China V trucks, and we have been benefiting from that in an extraordinary way. Another very positive thing is to be seen in the result of the fuel cell activities. Fuel cell is the technology to produce electricity from hydrogen without emitting any CO2. And we are the world market leader of fuel cell catalysts. 40% market share in this fast-growing market. We have been able to add new customers to our list of customers last year, especially in China, which, especially in China in the heavy-duty segment, which will be the prime segment, where fuel cell technology will be applied. And it is a business that is also in 2021 was already a profitable business, so not only investment into the future, already more and more contributing to the Group results. The next business group to cover is our E&ST business group, so Energy & Surface Technologies with, of course, the most prominent business unit of rechargeable battery materials. Also here, the EBIT was up significantly, and also a good increase in revenues with a strong contribution from our Cobalt and Specialty Materials business. So for our battery material business, cathodes volumes were well up. In Europe, we have been growing very successfully with the market, so we have been keeping our strong market position. We are not satisfied with our performance in China, though, because here, we have been not able to grow with the market, and this has to do with our program and customer mix portfolio, as well as the battery chemistry mix. LFP is one word to mention there in China. And as I said, CSM, Cobalt and Special Materials had a very strong 2021, as the post-COVID recovery of the end markets helped to push forward the results. In the battery material business, one important thing is growth, growth because the battery sector in transportation, in mobility is strongly expanding. So capacities are needed all around the world. And we are measuring these capacities in production output in gigawatt hours of storage of energy. And as you can see in 2021, our capacity was 65 gigawatt hours, mostly concentrated in Korea and to a certain portion as well in China. And you see that our ambition is to nearly double this capacity towards 2024. Including then the European footprint, where you might know that we have launched our plant in Nysa in Poland was commissioned last year and is now close to be operational in the middle of this year to produce cathode materials. It's the largest installation, and the only real mass production installation in Europe for cathode materials, which is very positive. And you have to mention that in this equation, there is not yet included the capacities that would come from our joint venture to be closed with Volkswagen and as well not a potential expansion in North America that we are currently investigating are not included in these figures. It is a flexible production concept that we have there to be able to cater with our production lines to all kind of chemistries in the nickel type chemistries, in the cathode material market. So we expect that in 2024, we will have up to 75% of this capacity being on what's called the high nickel chemistry, still with 25% of other concentrations. I mentioned already the joint venture with Volkswagen, which was a key step in 2021 for us. It's not a joint venture that we have closed. We have signed an MOU that we are targeting to finalize a joint venture agreement within this year to build cathode materials. So the content of the joint venture is cathode material. It is a major step for us because it will secure a significant portion of the European battery material market for us, Volkswagen being the largest car manufacturer in Europe and also the most prominent one in terms of electrification. Together, we will go into a joint venture. If we can look to the future, that means we have secured a large portion of that. And also for Umicore, this will have an economy of scale effect for our other operations that will benefit from a dilution of fixed cost. It's valorizing our technology. So important to mention is that it's a manufacturing joint venture. Umicore will keep the intellectual properties, and we'll valorize that towards this joint venture. It's also an opportunity with a strong partner like Volkswagen that is very big and has a lot of buying power on the upstream market to jointly source raw materials and to combine the very in-depth know-how of Umicore in the sector with Volkswagen, and we both expect benefits out of that. And, of course, what's quite obvious, it is sharing the investment. So sharing the load. If 2 partners do something together, it will be a less financial burden and with that less risk for Umicore. And also a good thing at the end is that battery recycling, which will be the next step of the recycling world. The intention is to include this at one point in time in this joint venture. Finally, our recycling business group, also a very strong year. EBIT up close to 60% for revenue of over 30% -- increase of over 30%, and that was driven by 3 main things in our precious metal recycling activity. Of course, the extraordinary metal price environment was one reason of it. Secondly, there were excellent supply conditions. So we have been able to secure very metal-dense recycling in feeds, but also a very strong operational performance, being able to materialize the necessary yields in the production to come up with these good results. But also the other business units, jewelry and industrial metals and precious metals management have largely contributed to that performance. And with that, we have been closing a very successful year 2021. Now the question is, this year of 2021 is the start into a new strategy, where ESG plays a major role. And with that, I'm handing back to our Chairman to give you an insight on that.

Thank you, Mathias. [Foreign Language]

Thank you very much, Thomas. We start with the Q1 2022 business update. And as we all know, the year 2022 did not start as we had expected it to start. The last 2 years were characterized by the COVID pandemia that has had several impacts to the world, but also to the business environment in which we have been operating. And we have been -- I mean everybody has expected that there is an improvement now in the year '22 in terms of volatility. Now what we have seen on top last year was the microchip crisis. So the global shortage on microchip availability for the automotive industry, which is a very big end market of our products. And this microchip shortage is not over in 2022. So another factor of volatility that we have to cater for. Then, of course, the tragedy that is currently happening in the Ukraine, which is a very, very sad event in history, but also it is adding additional volatility to the automotive industry. You might know that the automotive supply chain has been relying or is relying significantly on the Ukraine for certain parts to be produced, especially everything related to manual labor, cable wire harnesses for cars, for example, which on top of the chip crisis is another volatility aspect. And then, you see the resurgence of COVID in China, again, in Shanghai and now potentially also in, in Beijing that doesn't make this predictability easier. So having a good anticipation and resilience is key also going into this year. Having said that, for the Q1 performance, we have recorded, again, a strong performance across all of its business groups in the first quarter in a volatile market context, as I said, despite also rising cost inflation. The Catalysis Business Group delivered a strong performance in the first quarter, albeit -- and as anticipated, below a very strong first quarter last year and against an increasingly challenging backdrop, as I had just laid out. The car production has been negatively impacted by supply disruptions caused by ongoing semiconductor shortage, the conflict in Ukraine and more recently, strict COVID lockdowns in major Chinese cities. We outperformed the car market, benefiting from our strong market position and customer exposure, a little bit also like last year, in gasoline catalyst applications. In the heavy-duty segment, our volumes declined in the Chinese market. As anticipated, the special effect, the heavy-duty China 5 last buy that happened -- didn't happen again. And that's why the heavy-duty diesel production in the region significantly slowed down after the strong China 5 activity in the first quarter of last year. A solid start to the year also for the business units of fuel cell and stationary catalysts and precious metal chemistries, as well as high PGM prices further contributed to the strong performance of the first quarter. In Energy & Surface Technologies, rechargeable battery materials performed in line with expectations with higher sales volumes of electric vehicle NMC cathode materials for the European market. Umicore's volume in China continued to suffer from an unfavorable platform and customer mix also as expected. Having said that, Umicore is accelerating its customer diversification and platform exposure and has recently entered a strategic partnership with ACC for the supply of next-generation, high nickel cathodes material in Europe with first commercial volumes expected in 2024. Maybe a short word to that. ACC is also a joint venture in itself. It is a combination of Stellantis together with Mercedes and the TotalEnergies company from France that have created ACC to be a battery maker to supply the batteries for the electrification of those -- of those companies. And we have announced this yesterday, this long-term partnership that we have closed and the long-term supply agreement. It is a very good addition to have those customers on top of the ones that we have and will have through the future joint venture with -- with Volkswagen. The Cobalt and Specialty Materials business unit continues to benefit from high activity levels in key end markets and inventory buildup of customers in the context of rising nickel and cobalt prices. As anticipated, the performance in metal deposition solutions remained somewhat below the strong first quarter of last year, while electrooptical materials recorded a stable performance year-over-year. The recycling business group recorded a strong first quarter performance, albeit below the exceptional performance in the first quarter last year, while the impact of precious metal prices remained high in the first quarter. It was below last year's first quarter effect, also taking into account the existing metal hedges. In Precious Metals Refining, the supply environment of PGM rich material was somewhat less favorable at -- in the context of a volatile environment. Collectors tend to hold on to scrap material longer. Additionally, logistic disruptions due to the ongoing geopolitical crisis impacted international transport and cost and erratic supply of various materials. The less favorable metal price environment meant also that the contribution from Precious Metal Management remained below the level of the first quarter last year. Jewelry and Industrial Metals benefited from the strong demand for gold and silver investment bars, as they remain seen a safe haven investment in an uncertain macroeconomic and geopolitical context. So a good start into the year. Now the big question, of course, is how does this continue? What is our outlook for 2022? And as we have said, the circumstances are such that the predictability of this 2022 outlook are as good as the assumptions that you take with all of the volatilities around. Nevertheless, we have been putting this into the following analysis of 2022 outlook. Based on the first quarter performance and current metal prices, we confirm our outlook for another strong performance in 2022, slightly above the current consensus expectations. This outlook includes a cost inflation headwind, which is currently estimated at approximately EUR 150 million for the full year, excluding offsetting measures such as pricing. If current metal -- precious metal prices were to prevail for the remainder of the year, 2022 earnings, including the effect of strategic hedging, are expected to include an approximate EUR 270 million precious metal price uplift versus 2020, which was our reference similar to the uplift in 2021. Catalysis business group is expected to continue to benefit from its strong market position in gasoline catalyst applications as well as from the further ramp-up of its fuel cell activity despite today's limited visibility due to supply chain disruptions for automotive customers. Adjusted EBIT is expected to be somewhat below the record levels of 2021. Through the absence of tailwinds that benefited the businesses in the first half of last year, for example, what I mentioned earlier on the China 5 heavy duty. In Energy & Surface Technologies, we expect to grow revenues and earnings in rechargeable battery materials versus 2021 based on a stronger-than-anticipated performance of cobalt and specialty materials, with the cobalt and nickel chemicals and related distribution activities further benefiting from strong demand at favorable conditions. Adjusted EBIT of Energy & Surface Technologies is now expected to show a slightly higher year-on-year uplift versus what was anticipated at the time of the publication of our 2021 results. It is anticipated that the tightness in PGM rich supply I talked earlier for the Q1 situation will ease over the coming months, which should allow the business unit precious metal refining to benefit again from a supportive supply mix in combination with robust volumes, assuming precious metal prices were to prevail throughout the year, it is expected that the business group recycling will deliver another strong performance in 2022, albeit not at the record levels achieved in 2021. This outlook assumes there are no further significant disruptions to the economy or our operations from geopolitical developments, the pandemic or supply chain constraint. We await more clarity on the current market uncertainties, and in particular, in relation to the developments of the conflict in Ukraine and the resurgence of COVID in certain countries before providing a more detailed 2022 earnings guidance for the Group. Given today's volatile market context and in the interest of our customers, we are prioritizing security of supply over working capital optimization, resulting in temporary working capital in the form of inventories. Moreover, we currently anticipate a significant increase in working capital in 2022 compared to the level of end of '21 due to a combination of high precious metals and battery material metals price levels in view thereof and also taking into account higher year-on-year CapEx spending, Umicore anticipates a material increase in its net financial debt compared to the low level end of '21, notwithstanding continued strong operational cash flows before working capital. So this was the year of 2021, the first quarter 2022 and an outlook into the still volatile year of 2022. Now in the next minutes, I wanted to give you some more insights and information about our 2030 strategy, as well as how we are planning to communicate this to the market. And for that, I would, first of all, ask the teaser to start. [Presentation]

So no worries, we didn't want to have the countdown fully finished before continuing. It was just to show this is the time that is now available still to -- between today and the 22nd of June, where we will have our Capital Market Day in London, where we will propose and present our strategy for 2030. And what you have seen in this very short clip was also some mentioning of Horizon 2020, which was the last big strategic plan that was presented. And we did it because Umicore has actually a very strong track record in identifying and benefiting from megatrends. And these megatrends are transformed in strategies that are successfully delivered with a continuity in the group strategy for the last 20 years. And based on this, in fact, it helped to build a company of Umicore today that is positioned very well, and as I personally think very uniquely in the industry. It is uniquely positioned versus the challenges ahead because of also some of the things I've said in the beginning, but also through its product portfolio that has exactly the right things that are addressed electrification, scarce of materials, high technology to solve the problems of the future. We think that we, in a privileged starting point versus other companies to be a true net beneficiary from the transformation that is in front of us, the transformation towards electrification in the mobility industry, the transformation into high-tech materials in many industries, surrounded by the meta theme of closed loop and recycling that we are representing like probably no other company. And in the CMD, we will be presenting the strategy going forward. We will disclose our plan towards 2030 for our businesses and what important building blocks and pillars, we think are necessary to put into the ground to enable the next transformation of Umicore into the next century. With that, I'm handing back to Thomas on governance.

Yes. Thank you. [Foreign Language]

Good afternoon. My name is Alison Henwood, and I'm pleased to be making this virtual introduction and to share a little about -- bit about myself. I'm finishing a nearly 30-year career at Shell and embarking on a portfolio career. Last September, I joined the Board of Spectris plc, global supplier of precision instrumentation, test equipment and software and a constituent of the FTSE 250. And since 2016, I've been [ in that ] and also Chair of the Audit and Risk Committee of the U.K. Hydrographic Office, which is a trading body of the U.K.'s Ministry of Defense. I have a PhD in Earth Sciences from the University of Cambridge, Treasury, and CMA accounting qualifications. For the last 5 years, I've been the global finance lead for Shell's Trading and Supply division, which is one of its largest divisions. This business also has significant infrastructure and logistics, the terminals, depots, pipelines and sometimes ships that we use to deliver the supply part of the mandate. JVs are also an important strategic element and part of the portfolio here, too. Throughout my executive career, I've had a range of leadership experiences, particularly in the finance space, managing and leading global teams and in an earlier role, responsible for -- globally responsible for key finance processes that were optimized and standardized in the network of in-house shared service centers. My hands on finance experience is broad and diverse, CapEx, JVs, corporate finance, trading, risk management. Shell is very clear on its ESG and carbon reduction ambitions. And in the last few years, in particular, these have played an increasing part in my role. This is an important part of my motivation of wishing to join Umicore. My international experience is current and strong. For the last 10 years, my roles have had global accountability. They include established businesses in developed countries, developed markets, such as the U.S. and Europe, but also businesses that are being built, particularly in emerging markets, including India and China. Thank you for listening, and for your consideration.

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Okay. I will ask my question in English, so it's easier for the CEO to understand. It will not be perfect English, but I will try to explain. I have a question on the battery business. You are building a new plant in Poland, and you said that it's close to completion. Although -- and the European Union has now decided to help some of your future customers with subsidies. I don't know how much. Have you received any subsidies or not yet? Are you part of the deal? Of course, it will help your customers and it will keep the market more locally. That's one point. Your plant in Poland will have in the beginning a problem of filling up the capacity. How do you see that evolving? And now I think with the second new deal, I think some of the analysts will reformulate their forecast or their provisions because some have been a bit negative, I think.

Thank you very much. First of all, thank you for the English questions. It was very good English actually. So regarding the subsidies, and it's connect a little bit -- 2 questions are connected. Yes, of course, we are always trying to benefit from subsidies. Now when we say the plant is finished, we have to say that the first wave that we installed there is 20 gigawatt hours. That's how we measure it. And, of course, what we want to do, the space that we have available, the plot, the land can host up to an extension to 200 gigawatt hours. So, of course, it is our duty in the governance of the company for all of these expansions with customers alone, we will continue to try to get those subsidies as they are available for us. And we have to see how we can also transfer this into the joint venture that we will be going to do with Volkswagen. Now the question of how to fill the capacity. Actually also here, we are going a step by step approach. So the first wave of installed capacity, we have announced this deal with ACC, which was very positively taken by the market and also by the press. And we are currently -- I cannot yet tell you the names, but we are in process of what we call advanced qualifications, meaning a very far away -- far ahead in the process of getting additional projects and customers into our plant in Poland. So that's the one thing how to fill the plant. And then, of course, we are able and we will make a step by step decision on future investments based on the contracts that we will close. And this will give us the securitization and the risk management that the capital that we spend will also be utilized by contracts.

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If there's a follow-up?

Yes. Another small point. Some of the analysts, and that is before the good news of this week said that your current share price, and that was last week, was for 50%, taking into consideration the battery business, although the contribution to the EBIT is very small, I think it's 15% or 17%. Of course, that will evolve, but how do you see that? Are they too negative you think or what is your view?

I think maybe, first of all, it's not for us to comment on the views of individual analysts. They have their views and some are -- have made calculations, others make other calculations. I think the -- it is clear in general terms that our battery business is yet -- not yet at its full maturity, but that is also what we were -- what was just said, that people have -- some people have high hopes for it, others are a little bit more wait and see and we want first to see the results. So there's a mix of attitudes, and I think we cannot really comment on the share price. I think we try to give the facts as we can disclose them. And it is clear that the battery business is a business that will grow, that will develop, that we are -- have a good starting position there. And some people are more ready to anticipate the results and others are more critical. And yes, that is a mix, and that is why share prices move as well because people have different opinions and some want to buy and some want to sell. Yes.

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Yes. In fact, it's a very good suggestion. And we have -- and the -- also the automotive industry had in the last years already established the habit to employ Ukrainian very high-scale labor force in Czech Republic and in Poland because there was a scarcity of labor. And actually, we are also doing that right now. So we have -- because we are a big employer in Poland, in Nowa Ruda for our automotive catalyst activities and in Nysa for the battery material gigafactory, we are engaging centrally, but also from our local plants there to support refugees coming from the Ukraine. And we also are trying to -- first of all, we are doing that on the level of education and the children that are coming, but also for workforce and labor to offer work. Now, of course, we have to take into account that the majority of the refugees are not the male population of [ Uruguay ] because they are locked in. But nevertheless, we have started that already, and we have -- we are welcoming Ukrainian labor, especially the type of activities we have, the agenda is not relevant. So it's not a hard -- harsh environment like we have in Hoboken. So, short answer to your question, yes, it's a very good question, and we're actively pursuing that idea to offer work for Ukrainian refugees.

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[Foreign Language] Thank you very much, and see you next year. Thank you.