Umicore SA (UMI) Earnings Call Transcript & Summary

Hello, and welcome to the Umicore Management Call. Please note this conference is being recorded [Operator Instructions]. I will now hand you over to your host, Mr. Miedreich, CEO; and Mr. Peferoen, CFO, to begin today's conference. Please go ahead.

Good morning, ladies and gentlemen. Thank you very much for joining our call here today. Here at a very early morning local time in Canada, Kingston, Ontario, Wannes and myself, will be happy to go through with you some key important news that we have shared yesterday evening. We would like to use the opportunity to -- of the yesterday's announcement if we can go to the Page 3. Of the yesterday's announcement around our groundbreaking for the North American battery materials facility here in Canada, as well as the announcements that we had on the long-term agreement with AESC to give you more granularity on those items, but also to update you on the overall status of execution of our 2030 rise strategy for battery materials. We think it is the right time now to look back on the progress that we have made in the plant, especially also on the order book that we have been able to build, but also on the consequent capacity ramp up and CapEx plan going forward. With all these data points on hand, we can now much more precisely implement and execute the plan. So it is, as I think, a good moment to share the conclusions out of this with you as well. So let's go to the next page, [indiscernible] first on the AESC contract. I'm very happy to share that Umicore and AESC have signed a pretty long 10-year agreement, whereby Umicore will supply a very high nickel and in r definition that is above 90% cathode-active material to AESC's North American battery factories as of 2026. This agreement represents a capacity of 50 gigawatt hours equivalent annual term volume by the end of the decade to be supply to AESC contracted customers like BMW Group in the region. And in the example for BMW, it will power the sixth generation of the BMW eDrive technology for the North American market. This agreement, with firm and secured commitments, will provide us with secure access to a very important part of the North American demand for EV battery materials. It also marks an important milestone for Umicore's decision to build North America's first integrated plant or precursor and cathode-active materials, carbon neutral from day 1 here very close to where we are today in Loyalist, Ontario, Canada. This contract is also a very good contribution to the further diversification of our order book in the customer type, technology and region. We will come to this a little later in this presentation. So let's go to the next page and talk more about the plant that we are about to build. So next to the long-term agreement announced with AESC. We also concluded an agreement on direct financial support from the federal government of Canada and the government of Ontario. Wannes will guide you -- guide all of us through the exact numbers and how they are contributing to the overall financial execution of our plant. But I think it is clear that this significant grant level is pretty strong support in our funding, equally together with the support for our Ionway JV in Poland that we have announced last week, we have now secured close to EUR 1 billion in nonrefundable grants, for the capacity expansions that we foresee in our strategy. Following this agreement, we can now confirm as well the start of execution of our combined CAM/pCAM plant in Ontario. This plant, as I have said, which will be carbon neutral right from the start, will be capable of producing both precursor and cathode-active materials and will be fully enabled for the most advanced, very high-nickel technologies. And on top of that, and we have discussed that before, the plant is capable to host also a next-generation CAM technologies like our HLM manganese rich. So the solid-state battery such as in sodium-ion. Thanks to the flexible manufacturing setup that we have already implemented in our plant in Nysa and will now repeat here in Canada. The engineering and permitting process is currently ongoing, and we plan to start construction later this year. The plant is expected with it to be commissioned at the end of 2025, with production ramping up as from 2026. The deliveries for the AESC contract will start from our Korean plant before the capacity in Canada will phase in, in the course of 2026. Both plans are planned to produce volumes for the full duration of the contract. And with this approach, we will be -- first of all, we would be flexible. But also we will be utilizing our existing capacities in the most efficient way. And as a very important site product, we can also derisk the ramp-up in Canada, and this is something that I can confirm our customers really appreciate to have this ability. Finally, this step marks also the creation of a truly global presence for the Umicore battery material business with now a local for local, sustainable supply chain in the 4 key world regions as it has been forseen in our strategy. So now after this highlights from yesterday, I wanted to move to Page 7 of the presentation. and give you now some more insights on the overall update of where we stand in terms of execution. So if we go to Page 7. Perfect. Let us dive a little bit -- dive a little bit deeper in our order book to start with. So the contract with AESC, as said, further contributing to the diversification of our customer's portfolio, both in region and customer type. We had formulated this, and if you remember, as an integral target of our strategy and it has worked out pretty well and proves as we think our value proposition that we have repeatedly said to the market, which is threefold. First of all, it's technology leadership. So translation of our technologies into energy density, durability, quality and cost competitiveness. It's our local for local approach with robust supply chains compliant with the individual regulatory and geopolitical circumstances, for example, the IRA here in North America, and it is our best-in-class CO2 performance, and that especially, I can tell you with BMW, they have played a very important role in selecting finally, Umicore for their North American electrification strategy. Let's go a little bit into more details of that order book. If you go to the next page, because not only the diversification of the order book is strong, also its size and quality. As you can see, our shift to high and very high nickel technologies has happened as planned with the very large majority of our order book now being based on this chemistry. The regional mix is developing from an Asia only setup of the past, into a very strong position in Europe and a significant exposure to the North American market with a good mix between different types of customers. About 1.5 years into the execution of our strategy, we have already secured contracts of 190 gigawatt hours equivalent CAM volumes in 2027 that are further ramping up to 270 gigawatt hours in 2030 with an average contract duration of 10 years. So with that reaching very well into the next decade and very strong protection mechanisms on volume, pricing and profitability that we had also talked about on previous occasions. The long-term nature of those contracts and the secured terms of the order book give us now a high degree of business predictability. And on this background, we can again confirm EBITDA margins of more than 25% for this business from 2026. So if we move from the order book to the execution as we head to the Slide 9. Just a second. Your system is a little bit slow because it's pretty early time yet in Canada. So the system hasn't woken up yet. But nevertheless, let's talk about the capacity expansion. So let us look now how this order book will be translated into the expansion of capacities. So with this order book now at a critical size and a good understanding of the consequence ramp-up curves, we have been able to substantially work on increased capacity. As you can see, we will close the year 2026 with the global operational capacity of 195 gigawatt hours, just slightly ahead of the 190 gigawatt hour order book in 2027. The majority of the capacity is needed to fulfill the current order book, also towards 2030, will be in place. At that time, it will further come online towards 2031. Wannes will give more details on the resulting CapEx profile in the following pages. An important enabling factor of this approach are our Asian facilities, where Korea can act as a versatile launching pad into North America and Europe. As the example of AESC proofs in this case, and the utilization of our Chinese capacities are benefiting from the local contracts that are now part of our order book. Through this quite positive development, we see a confirmation of our strategy to link capacity expansion, only to secure this value accretive contracts and to employ a modular future growth manufacturing setup that is ready to host the key battery technologies to come. And with that, I would now hand over to Wannes, on the next page, who will go through more details of the CapEx and funding equations.

Thank you, Mathias, and good morning, everyone. When we take into account the latest view on CapEx density and funding support, total net capital expenditures for the group are reduced and are expected to amount to EUR 3.8 billion from '22 to '26. Net capital expenditures include the CapEx after deduction of the awarded non-refundable capital grants, and also include the equity contribution from Umicore to joint ventures. For instance, Ionway the JV with Volkswagen's PowerCo. For the group, the net CapEx run rate will be around EUR 800 million a year until 2027. Next to the execution of the currently committed order book, this CapEx envelope leaves room for additional highly selected customer programs in Umicore battery materials. The lower needs for net CapEx are driven by, on the one hand enhanced capital density, offsetting the overall cost inflation, and on the other hand, to reduce funding needs. When considering CapEx density, we are not only ensuring that investments are backed up by secured and value-creating commercial contracts, we're also facing the capacity build up closely with the contractually committed volume ramp-up to optimize capacity utilization. Additionally, the ramp-up of these new customer contracts will be supported by the existing land capacities in the APAC region, improving the capacity utilization. The capacity in China has proven to be an asset in securing and supporting contracts with Chinese battery [ OEMs ], while the capacity in Korea will serve as an export [ turf ] for European and North America -- or North American customers during their initial volume ramp-up. Finally, we have started developing an integrated supply chain that is from refining to cathode materials that is more asset light. This means that we will combine focused investments with strategic collaborations throughout the upstream value chain. The approach of improving CapEx utilization and CapEx density enables us to largely offset adverse impacts from cost inflation. Now next to reducing the CapEx needs, we have also been able to reduce the funding needs successfully. Over the past 12 months, we secured higher-than-anticipated firm longer simple brands, and we have built up a good confidence level that the investments in our joint venture can be partly funded through non-recon spend. Now moving to next slide. Here I would like to review the funding strategy to support the group's growth in Umicore battery materials. So over the past year, we successfully demonstrated different funding levers for the group, including a solid free operating cash flow generation, ESG-linked debt placement, the co-funding model with partners, a JV with a strategic partner and significant nonrefundable government grants. The group has a strong balance sheet, with an expected net debt leverage of about 1.4x adjusted EBITDA by the end of this year, and we see an opportunity to raise more debt, while continuing to apply a strong financial discipline in order to remain what we call investment grade that is net debt leverage, not exceeding the 2.5x threshold throughout the plan. Before handing back to Mathias, I would like to conclude that when we consider the improved CapEx density and reduce funding needs and combine this with a strong financial position and discipline and the confirmed trending levers, the group had a clear ability to finance and invest. Thank you.

Yes. Thank you, Wannes, for those highlights. And let me now summarize our messages from today. So our clear message is that now, we have the ability to go from a plan into execution mode. We have secured contracts, long-term contracts with significant safeguarding mechanisms that are locking in our returns for the future. Our order book has a critical mass, so that we can now focus on execution, maximizing capacity utilization and operational efficiency. In doing so, we can rely on our more than 20 years experience in building capacities around CAM and pCAM in a very large scale, and also we have found a very good way through our modular technologies to not only be future-proof, but also derisk the ramp-up because we can apply a multiplication of existing footprints into the world, like we have first time done now in Nysa, now going into North America. And again, we wanted to highlight our commitment to financial discipline and in return on investments. So what was the plan 1.5 years ago is now a reality and we're putting this reality now into action in the next coming months and years. If you want to have more details on how we do that, I would also end my conclusions here with an invitation again. You might have heard that on November 8 and 9, we are hosting a battery material day or date, I have to say, at our plant in Nysa, in Poland, where we will, on the one hand, walk you through our innovation portfolio and technology agenda, everything around the HLM technology, where we are in solid batteries and how we look into future advanced technologies like sodium-ion, but also, which I think is also a highlighted goal into a plant tour that we have been pretty strict on not to show too many people, but we think it's a very eye-opening if you enter our facility in Nysa. And have a look to this modular approach that I've been talking about. So I just want to repeat, we will, unfortunately, not be able to broadcast the plant visit in any way. So if you would like to have a chance to see the insights of what we think is one of the most advanced 10 manufacturing places in the world, we kindly invite you to join us. Wannes and myself and the UBM, the Umicore Battery Materials Management Team will be also on site to discuss with you more details of our strategy forward and our technology road map. So thank you very much. Let's now go into Q&A. Please understand if maybe today, we keep the Q&A a little bit shorter than usual due to the very advanced time. So it's either very late or very early here, we have not decided yet. And yes, happy to discuss any questions with you. Thank you very much.

[Operator Instructions] We will take our first question from Ranulf Orr from Citi.

Three questions for me, please. So the first is on the new customer contract, can you give us a bit of background into that? Why you selected them? How many other options there were? Just looking at market shares for them as a cell assembler today and they look relatively small in the global context? Second question, please, can you provide some details around the guardrails as you particularly take-or-pay details for the agreement? And then thirdly, just on what sort of final size you anticipate for the U.S. facility? You talk about 35 gigawatt hours, the customer contract reaching 50. You have the VW MOU and maybe other customers to come as well. So that would be my three.

Yes. Thank you very much, very early question. So to give you a little bit background first on the -- on AESC. AESC is a Japanese battery maker that has, in the past couple of -- it's actually -- they are in business quite a long time, and we visited them in Japan. They have, as we think one of the most efficient battery manufacturing setups with very low scrap rates and a very high quality over the last, I think, 15 years with the -- in operation almost 15 years. They have been very successful in the last years to get business from many key customers. They have deals with Mercedes, with Renault, with BMW in this case, but as well the Japanese OEMs, Honda, Nissan and others. And they do have that success because they have proven, like maybe many others -- not yet that they can produce high-quality batteries in large scale. Now in the specific case of BMW, and we had a very good exchange between all of us here. The 3 parties here unites one conviction, and this is the conviction of the true CO2-free battery at the end of the day. AESC is part of a bigger group that is coming from clean energy from wind energy as well and has that in mind from day 1. Umicore that our signature KPI, so to say, the CO2 neutrality. And BMW also has a very strong emphasis on CO2 neutrality of their car. So that's what has fitted very well together. So for us, AESC is a very good partner into North America because they are very advanced in terms of technology. And with our very high nickel cathode-active material that fits pretty well together. So very happy with this contract. Now I cannot give you all of the details of this contract, but I can reassure you that the guardrails that we have talked about that is valid for our complete order book is including the complete order book, if that helps you. So take-or-pay contracts, inflation clauses, everything around fixed pricing and the duration of the contract is 10 years. So it's pretty long. So you could see that this contract is fitting very well into our thresholds that we have put ourselves here. Third question, to give you more clarity on how that is intended to be produced. So we will we will quantify 2 plants for that business. So our plant in Korea and our plants, obviously, in North America, that has 2 benefits. First of all, we can derisk the ramp-up, so we will start the first deliveries from our Korean plant, which, of course, is already existing. So has it need to be built. And with that, has a pretty low risk of starting up. But the majority of the volume, 35 gigawatt hours will then be produced in the first installment that we have now in our loyalist facility. Now over the course of the contract, that gives, of course, a lot of flexibility to also absorb further volume growth potentially in our Canadian -- sorry, in our Korean facility and to react on all kind of change that we have here and our customers are very happy that we can offer this dual modes going forward. And side effect, a positive side effect is that our capacity utilization is significantly also improved by that.

We will take our next question from Geoff Haire from UBS.

I've just got 2. First of all, I just wanted to check the new CapEx number you've given of EUR 800 million a year, roughly EUR 4 billion. Is that in comparison to the EUR 5 billion total CapEx that you gave last June at the -- on a strategy update or is it of the growth CapEx of EUR 4 billion? I seem to remember you had EUR 5 billion in total, EUR 1 billion was from maintenance and then EUR 4 billion was for growth. So if you could just confirm that. And then in terms of the contract that you signed with AECS, are you OEM neutral within that and that you just provide them with cathode material and then they decide, which OEM to provide that to?

Yes, little bit. Maybe you can take the first one, Wannes. And I will take the second.

Yes. Yes. So looking at the CapEx. So now we talk about net CapEx, indeed, about EUR 800 million a year. And the reason why we talk about this, because we have a better view on some of these elements that support the CapEx, being the funding. So being the grants that have been awarded, which are significant and also the nonrecourse part. So yes, that's -- I would look at it.

Yes. And the second part is contractual year. We have -- this is business with AESC that we have. So it's in principle, independent of the end customer, who is behind. In practice, you have seen that also in parallel, there was an announcement made yesterday from BMW, and we have also mentioned it in our press release, and a large share of that contract is going into the BMW vehicles in North America, but there are also other customers that have not yet been disclosed that are in line with that. But yes, and that's also part of the -- what I would say, portfolio diversification that this is a business with a cell maker. But as you know, and as we have said before, the OEMs are very much leaning into also the selective of the battery materials, also on the R&D and development side. So it's a good mix of both. But yes, it's in principle an OEM open contracts.

Can I just follow-up then on the CapEx question? So just to be clear, you had said at the Capital Markets Day last year, you had said EUR 5 billion in total CapEx. You're now saying [ EUR 3.88 billion ] according to the press release. Is that how we should see this?

Yes, that is correct. So if you look at the net CapEx, the gross CapEx minus the secured grants, and also adding what we need to contribute to the JV from an equity point. And this is a good proxy looking at the funding needs going forward. So that's why we talked about the net CapEx, and that's where we see a net CapEx of about EUR 800 million. A year on average or 3.8 in that period.

Okay. And then sorry, just a follow on. Sorry, I should have asked this the first time. Does that now mean that you no long -- you still expect to be cash flow negative through the period up to '26? Or have you changed that assumption as well?

No, that assumption still holds. I mean, first of all, it's important to look at this free operating cash flow. And from a free operating cash flow, looking at catalysis, looking at recycling, on the one hand, generating the strong cash flows. On the other hand, the investment is going into rechargeable battery materials. The overall free operating cash flows on average will be positive. It will be slightly around 0, that's the [ unsteadiness ]. But then looking at the free cash flow, indeed, until '26, as you said, those will be named.

We will take our next question from Shalin Kapadia from JPMorgan.

So I have a few. First question is I wanted to ask if how much of your planned capacity until 2026 is backed by customer contracts? Secondly, I wanted to ask, I saw that you mentioned that the CapEx run rate is around EUR 800 million until 2027. So I wanted to confirm if it is before considering all the general subsidies? Or is it after that? And if you have any comments on 3Q trading, then that would be great.

Okay. Very good. So let me take the first question. So the question was, if I repeated if -- what is the ratio of secured customer contracts until 2026? So you can make it in that following way. When we talk about our order book for 2027, we talk about 190 gigawatt hours, and that are the contracts. So when we're entering the year of 2027, we will -- for the year of 2027, we will produce this 190 gigawatt hours, at a capacity that will be at 195 exiting. That's -- so the year of 2026 will be a little bit lower than that, but the ramp-up is going forward. And what is very important to mention again is that for all of the investment that we're doing to expand the capacities, we have a 100% coverage with contracts. So the data that would be between our order book and our free capacity would only come from the existing, if you want the legacy capacity that we have.

And then moving to CapEx and the definition of CapEx. So looking at net CapEx, that is indeed after deducting the non-refundable capital grants. So it's non-refundable and awarded capital grants. And then looking at comments on Q3, that's something we cannot entertain. I think looking at the guidance we gave earlier, that still holds.

We will take our next question from Riya Kotecha from Bank of America.

I have 3 questions, please. My first one is on the EBITDA margin. Can you clarify that, that's for RBM or for the group level? Can you walk us through the moving parts of the margin to raise 25% compared to 20% EBITDA? And on to the Capital Markets Day, what has changed that's allowed you to revise this? Is it the price side or the cost side of the contracts? Second just on the CapEx density. So if I take the AESC contracts, compared to the EUR 3.8 billion CapEx figure you've announced, it looks like the AESC contract has a 3x higher CapEx density versus EUR 3.8 billion for 400 gigawatt hour. What explains that difference? Is all of the EUR 3.8 billion going to be spent towards RBM? Or is that a different figure, just for the cathodes. And then my third question is on the AESC contract. So what volume is going to start up from 2026 onwards versus that 50 gigawatt hour? What proportion of your North American plant, that's a 35 gigawatt hour is secured in the near term? And then can you give us any color on the nature of the contracts? Is that take-or-pay volume wise? And what's the pricing structure like?

Wannes, why don't you start?