Earnings call transcript: Elkem faces challenges in Q2 2025

Elkem ASA's second-quarter earnings call revealed a challenging period, with a decline in operating income and a negative earnings per share (EPS). The company's stock reflected these challenges, dropping 9.58% to a recent price of 22.28 NOK. According to InvestingPro's coverage of 1,400+ stocks, featuring expert analysis and actionable intelligence.

Executive Commentary

Martin, a financial executive, emphasized that "the current prices are not sustainable, and there will be an adjustment upwards," reflecting optimism about future price corrections. Helge, a company executive, reiterated the company's commitment to sustainability: "Our aim is to reduce and ultimately remove fossil CO2 emissions from the manufacturing processes."

Risks and Challenges

• Overcapacity in the Chinese silicones market could continue to pressure prices.
• Weak global demand in the automotive sector, except in China, could affect sales.
• High debt leverage ratio poses financial risks.
• Continued decline in global steel production may impact demand for Elkem's products.
• Potential delays in implementing EU safeguard measures could affect pricing strategies.

Q&A

During the earnings call, analysts questioned the sustainability of current silicon prices and the company's plans for portfolio restructuring. Elkem's management indicated no immediate plans for major restructuring but highlighted their strategy to maintain high capacity utilization and focus on internal improvements to mitigate current challenges.

Full transcript - Elkem ASA (ELK) Q2 2025:

Helge, Company Presenter/Executive, Elkem: Treatment in allocation of free emission quotas under the EU environmental trading system. And this the period we're talking about is the period from 2021 until 2025. Based on our understanding, the letter from the Norwegian ministry implies that we will receive approximately SEK 1,300,000.0 additional allowances for the period of 2021 to 2025. This will not have any immediate accounting effect, but it is reassuring to see that we are granted fair and equal treatment compared with other industry players in the European Union. The strategic review to streamline the El Chem business portfolio is ongoing and progressing.

We will provide a more detailed status update in the third quarter. So we'll come back to that in a relatively short time. Moving on to ESG performance. Our climate strategy is built on two main pillars to reduce CO2 and other emissions and to supply green materials. I'm sorry, to supply the green transition with critical materials.

Our aim is to reduce and ultimately remove fossil CO2 emissions from the manufacturing processes. Elkem supports the green transition through the supply of critical materials and we work systematically to cut emissions and reduce waste throughout the entire value chain. Our efforts are recognized well recognized by receiving top ratings from EcoVadis and the CDP. And in the second quarter, we also got another recognition from CDP where Elkem now made it to their A list for supplier engagement during 2024. In June, Elkem was awarded million from Innovation Norway to pilot green products using recycled slag and silicon.

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So we're very excited to receive this support, which further supports our efforts in pioneering green technology in order to produce strategic materials essential for our modern day economy. And this particular project aims to reduce the carbon emissions in developing cement alternatives, so the binder in concrete, which will be cutting emissions with two thirds compared to the current industry standard. Then moving on to one of our most important cost factors, renewable power. Electricity is an important very important ingredient in producing metals. Access to stable, clean electricity on competitive terms is obviously key to maintaining Helckem's low cost positions.

We're continuously assessing market opportunities in order to secure further long term contracts. And in the second quarter, we entered into a new contract with NTE, Nortrend Lag Energy Electricity Zwark in Norwegian. This contract has a volume of 300 gigawatt hours per year, will be delivered in the price area NO4 and will play an important role in supporting operations at the Salton plant. The contract covers the period from 2028 to 02/1937. Last year, we secured contracts totaling six ten gigawatt hours per year in both NO3 and NO4 price areas, which has secured a robust coverage in Norway.

And on the map here, you show the we have shown the various price areas relevant to Elcam. And the graph below illustrates the share of electricity consumption hedged for our Norwegian plants. So we think this hedging profile positions Elkem very favorably in the energy market and will create predictability and mitigate the risk associated with fluctuating energy prices. As mentioned, Helcam has strong market positions. On this slide here, we show a few recent examples of our positions in growth sectors worldwide.

Our silicon based materials are important for construction, energy, mobility and smart cities to mention some important areas. The recently opened Chennai Railway Bridge, it's the world's highest single arch rail bridge. It's built with using Elkem's micro silica to ensure long term durability in concrete. So this is a milestone in India and highlights Elkem's growing role in sustainable global infrastructure development. Secondly, the Norwegian government recently announced that it's investing NOK 1,000,000,000 in establishing six national artificial intelligence centers, AI centers to advance key sectors.

We're now including energy, health, logistics and manufacturing. And here El Chem is a partner contributing industrial expertise to a more sustainable manufacturing. Thirdly, Germany has announced a package for increased defense spending and also a EUR 500,000,000,000 infrastructure fund. As recently mentioned on the news, the NATO Alliance have also now committed to increase defense spending to 5% of GDP annually on core defense requirements. This will happen gradually up until 02/1935.

So this European defense industry program will strengthen and secure critical supply chains. And we think Elkem is very well positioned as a key supplier of silicon and ferrosilicon, which are essential materials in advanced defense technologies. So having that position in these sectors will be a contributing factor to create value and stronger financial results for Elkem in time to come as these programs are being ramped up. Now let's move to the market update and the outlook. We frequently talk about automotive in these presentations.

It is a very important sector for Elcan driving demand for many of our products and materials. The sector remains weak with the exception of China production in all major regions were forecasted to decline this year compared with 2024. However, the outlook for next year seems a bit more positive and forecasts have been revised upwards recently. China's 2025 projection is was recently lifted to 31,100,000 units driven by the domestic incentives and rebound in exports. There is still much overcapacity, which continue to weigh on the market, especially in the EV segment.

Forecasts across The Americas show regional differences. North America is upgraded driven by tariff relief and production momentum, while South America sees we see a more modest development. An improvement in the automotive sector from next year is clearly a benefit for El Chem. And now coming to our closer look to our at our markets and starting with silicon. Prices in both EU and China have been declining, which in fact is quite closely linked.

At the June, the reference prices in The EU were reduced by around 20%, reflecting a declining spot trend in the quarter. And prices in The EU are now down to an unsustainable level. This decline has mainly been driven by Chinese imports following destocking. In China, silicon prices have continued to drop due to overcapacity and weak demand, especially in the polysilicon segment, which goes into solar. Here prices are at historically low levels and announced production cuts from large Chinese producers may improve the supply demand balance going forward.

There is also an ongoing safeguard investigation in by performed by the EU Commission regarding imports of silicon and ferrosilicon and other ferroalloy materials. This is expected to be concluded during the third quarter. Should the outcome result in the safeguard measures be introduced, it would likely limit the price pressure from imports into the EU, which again will have a beneficial effect on on Elkem's results. Also in The US, the silicon market has experienced some downward pressure. However, this seems now to have bottomed out.

Moving on to ferrosilicon. Here we have many of the same drivers as in silicon metal. The market sentiment is characterized by sluggish demand. Prices are under downward pressure. In The EU, prices have declined due to trade diversion caused by higher import barriers in The EU I'm sorry, in The U.

S. This is because producers like located in Brazil, Malaysia and Kazakhstan have been hit by anti dumping measures and now focus more on the EU market. U. S. Prices increased in the second quarter.

This was driven by the new anti dumping and subsidy rates on the producers from these countries. In addition, the reciprocal import duties have provided some support. In China, prices have reached, as I mentioned, historic low levels, steel mills have delayed their tenders and trading in the spot market has remained slow. The overcapacity in China is having a downward price pressure globally. And also for ferrosilicon, the ongoing safeguard investigation in The EU could limit the price pressure from imports when it's introduced.

Then moving on to carbon products, this is a smaller area than silicon and ferrosilicon and there are no reference prices available in this market. Demand for carbon products varies across regions driven by steel, ferroalloys and aluminum production. Global steel production in the second quarter this year was down two percent compared to last year and Europe was down 2%, while in North America, the production increased by 3%, again driven by tariffs. The challenging condition in steel and ferroalloys continue, but Carbon Solutions has diverse geographical positions, which will provide resilience and stability. Then moving on to silicones, also here we have a challenging market sentiment, mainly due to the overcapacity in China and reduced demand from large sectors like construction, textiles and chemicals.

DMC prices in China, which we have been referring to for quite some time are now down to RMB 10,400 per tonne by the end of the second quarter, which also here is a historically low level. The price decline has been driven by lower raw material costs such as the decline in silicon metal prices, as well as price dumping among domestic producers to reduce high inventory levels and destocking I mentioned previously. In The EU and The U. S, the demand for commodity silicones has been negatively impacted by changing tariff policies, but we would say in general, the demand for specialty is holding up quite well. Then the outlook, we expect market conditions to remain challenging, but Elkem's financial performance is supported by strong cost and market positions.

The Silicon Products division is experiencing challenging markets and deteriorating reference prices, but the division has a leading cost positions, which helps offset the negative impact. We also have all furnaces in operation by the July. In Carbon Solutions, the division benefits from good cost and market positions and is geographically diverse business with a diverse customer portfolio, which will also continue to create stability. The silicones market is expected to remain stable, but at low levels. However, the current price level is not deemed to be sustainable in the longer term.

So with that, I'll give the word to Juhmotten, who will take us through the financials.

Martin, Financial Executive, Elkem: Thank you very much, Helge, and good morning, everybody. So I'm pleased to go through the results for the second quarter in more detail. Elkem's operating income for the quarter was close to 8,000,000,000, which was down 6% compared to the second quarter last year. Silicon Products and Carbon Solutions had a decline in operating income due to challenging markets, basically lower prices. The markets have also been challenging for silicones, but this division saw a modest increase in operating income compared to the second quarter last year due to improved sales volume.

Elkem's reported EBITDA for the second quarter was 800,000,000.0. Silicon Products and Carbon Solutions reported somewhat lower EBITDA compared to the second quarter for 2024, but this was partly offset by silicones. The reported group EBITDA margin was 10%, which was below our long term target of 15% to 20% EBITDA margin. However, as Helge said, with sales prices in key markets reaching historical low levels, I think it's fair to say that LKM's EBITDA is supported by our strong cost positions, which in many respects is much better than our competitors. There were no particular one offs affecting the EBITDA in the second quarter.

As usual, we provide an overview of some of the main financial numbers and key ratios. I will certainly not go into detail on all of them, but it is important to note that the Silicones division has been reclassified as the discontinued operations and assets held for sale. In this presentation, we mainly focus on the financial figures, which include silicones. However, the regular financial statements, including the profit and loss statements, reflects Elkem's results excluding silicones. In the table to the right, you can see comparable figures for Elkem with and without silicones.

Including silicones, the group EBITDA amounted to NOK $8.00 3,000,000. There was only a minor impact of minus NOK 2,000,000 on derivatives in segment Other in this quarter. Other items amounted to NOK 74,000,000. The main items were gains on power and currency derivatives of NOK 165,000,000, currency losses on of NOK 71,000,000 and restructuring expenses of minus NOK 20,000,000. The net finance expenses were minus NOK $488,000,000.

These main items were net interest expenses of minus NOK 150,000,000 currency losses of $317,000,000, mainly related to translation effects on external loans, where the effect is weaker NOK versus Europe. The reported tax cost was positive this quarter with 19,000,000. And this includes a recognition of deferred tax assets of NOK 49,000,000 in relation to Alkheim's acquisition of REC Solar last year. We would also like to mention that Elkem has succeeded in a tax appeal in Norway, which will result in a reimbursement and positive cash effect of plus NOK $2.00 5,000,000 in Q3 this year. And this number includes interest on the claim, which has a positive P and L impact of NOK 24,000,000.

So let's then have a look at the divisions and start with the Silicon Products division. The division's results was clearly impacted by the weak commodity markets. The division reported total operating income of 3,550,000,000.00. That is down 13% from the second quarter last year, and this is mainly explained by lower sales prices. The EBITDA amounted to NOK $345,000,000, which is down 54% from the second quarter last year, and the EBITDA margin was 10% for the quarter.

The lower EBITDA is mainly explained by lower prices, which you have seen from the price graphs presented by Helgen. The ferrosilicon market has been particularly weak this quarter, while the other segments, particularly foundry alloys, were holding up better based on our strong market positions. We have also seen some negative sales mix effects due to lower demand for high purity ferrosilicon, among others, which normally gives higher margins. The demand is clearly generally weak. But Elkem, due to our leading cost position, we are able to maintain a high capacity utilization.

And this is clearly explained by strong cost positions and high quality product offerings. The Carbon Solutions division has presented yet another quarter with stable results in a challenging market sentiment. The total operating income amounted to NOK $854,000,000, which is down 15% from the second quarter last year. The lower operating income is a clear indication of the challenging market conditions where both sales volumes and sales prices have been under pressure. But still, the EBITDA is at $242,000,000, which is a reduction from last year, but also which represent an EBITDA margin of 28%, which we believe is a very good margin given the very difficult market sentiment.

The lower EBITDA is mainly then explained by lower sales volumes, lower sales prices and somewhat higher raw material costs. Sales volume is quite stable when you look at or compare with the past quarters as volume continued to be affected by very weak market sentiment in steel production in The EU. As mentioned, the Silicones division is under strategic review. In the second quarter, the division delivered improved EBITDA, exceeding both the corresponding quarter last year and the first quarter this year, and that's good. The division delivered total operating income of almost 3,900,000,000.0, which was up 3% from the second quarter last year.

The EBITDA amounted to NOK $247,000,000, and that was also better than the second quarter last year. And with the exception of Q4 last year, this was the best quarter since Q3 twenty twenty two. Higher operating income was explained by higher sales volumes, but this was partly countered by lower commodity sales prices. The division has clearly improved its cost position after major upgrading investments and continuous improvement work both in France and in China. And this has been reflected in higher sales and improved margins in the commodity segments.

The major investments in China and in France have now been fully completed, and the capacity is almost fully ramped up. And this has clearly had a positive impact on the operational performance and financial performance in the quarter. Sales volume was up 22% for the second quarter or compared to the second quarter of last year, mainly in the Asia Pacific region. Let's now take a closer look at some of the key financial ratios of Elkem. The earnings per share EPS was negative in the second quarter with minus 0.49 per share.

And that brings the EPS year to date to minus NOK 0.82 per share. We are, of course, not satisfied with this, and we are working on further cost reductions internal improvements to mitigate the situation. The EPS was also this quarter negatively impacted by the losses from the Silicones division, which is under strategic review. And if you exclude silicones from the calculations, the EPS for the second quarter would have been minus SEK 0.16, and we would have seen a slightly positive EPS year to date. The balance sheet is very solid.

Total equity amounts to NOK 24,000,000,000 as per the end of second quarter, which gives a stable equity ratio of around 50%. Elkem's financing position remains very robust and stable, and it is our clear focus to keep a strong liquidity position and a smooth maturity profile on our debt also going forward. Net interest bearing debt was 11,400,000,000.0 by the end of Q2, and this is up 400,000,000.0 from the previous quarter, but this is mainly due to translation effects, a weaker NOK versus euro, where most of our loans are denominated. As you can see from the graph to the right, Elkem has low upcoming installments in 2025. Based on the last twelve months EBITDA, the debt leverage ratio was 2.8x.

This is slightly higher than the previous quarter. The target is clearly to bring the leverage back to the financial target between one to 2x EBITDA. But clearly, the leverage is sensitive to the EBITDA development, which is currently impacted by very weak market conditions. By the end of Q2, LKM's interest cover ratio improved to 6.2x from 5.6x in Q1, and this means that we are well above the covenant level in our loan agreement, which is minimum 4x. Total cash flow from operations amounted to NOK $3.00 8,000,000 in the second quarter this year.

This is slightly down from the second quarter last year, mainly explained by lower underlying profitability, lower EBITDA. If you exclude silicones from the calculation, the cash flow from operations would have been slightly better at $323,000,000 for the quarter. As already mentioned, the markets are fundamentally weak, and Elkem will clearly continue to focus on a very disciplined capital spending as long as the weak market conditions prevail. In the second quarter, total investments were down to NOK $464,000,000. Reinvestments amounted to NOK $4.00 1,000,000, which equals 65% of depreciations.

And strategic investments were only 64,000,000 as all main investment projects were completed last year. So let me ramp up this presentation by summarizing the main headlines and takeaways for the quarter. First of all, the markets are still characterized by uncertainty and geopolitical volatility. And this clearly means that LKM will continue to focus on cash generation and very disciplined capital spending. When it comes to the divisions, Silicon Products continues to face low demand, but we are very well positioned due to strong cost and market positions.

The division runs at the full capacity utilization by the start of the third quarter, and this is also our ambition going forward. Carbon Solution is also benefiting from good cost positions and very strong market positions in addition to a very global and diverse business model from a geographical perspective. And this provides stability in earnings. Silicones is, as I mentioned, clearly benefiting from improved cost positions in China and France. Trade tensions are clearly negatively affecting the business, but our broad geographical footprint also here provide attractive opportunities going forward.

And as mentioned, the Norwegian Ministry of Climate and Environment made a decision in favor of Elkem when it comes to CO2 allowances. And this will secure equal treatment with other competitors in the EU, and it will reduce the need to buy CO2 quotas in the years going forward. And as such, this is very important for Elkem's competitiveness, which will be strengthened. The silicones strategic review is ongoing and with a target to conclude before year end. And as mentioned by Helge, we will provide a status update during the third quarter.

But right now, it's not possible to give any detailed comments on the process. So that summarizes the presentation, and I'm now happy to hand the word back to Odger for Q and As. Thank you.

Odger, Moderator/Host, Elkem: Thank you for that, Martin. We have received quite a few questions on the webcast. I'll first start to ask if there are any questions here by people in the audience. And if there are not, let's go on to questions from the webcast on the webcast. There are quite a few questions on results and pricing.

So I'll try to structure them in a way that makes sense. The first one is maybe a bit difficult to answer, but I think, Morten, you are the right person to take it. If we can provide some colors on the second quarter and on a month by month basis And how June compared to May, for instance? I guess the idea is to get some idea on the trajectory on the results. And also how the order book for July and August would be?

Martin, Financial Executive, Elkem: No. As you know, we don't provide financial reporting on a monthly basis. We do it on a quarterly basis. But I can say that there are no big differences within the quarter. As to the order book for the third quarter, it looks pretty good.

There is always a seasonality factor in particularly in Europe, but also in North America due to summer vacation. And that will clearly also most likely have an impact this year. But underlying, we see a price pressure in the market, but we don't see any major changes in the order book.

Odger, Moderator/Host, Elkem: And then there is a question or quite a few questions related to pricing. If you can give some color on what is driving the low prices in silicon metal in China and where we see price levels for 2026 and beyond?

Helge, Company Presenter/Executive, Elkem: Yes, I mentioned a few words on that in my update as well. But I think weaker demand and also significant overcapacity in China is really the headline. And the weaker demand, as mentioned, is coming from very reduced demand from especially from the solar sector and the polysilicon, silicon going into polysilicon. And with relatively reduced export opportunities compared to previously, especially now with the new tariffs implemented in The U. S.

Obviously, is a target market for export and that's putting additional pressure on Europe. And there must we know that there is a destocking effect here as well because these prices are not sustainable, neither in China.

Martin, Financial Executive, Elkem: I can add that we of course, we follow this market very closely since we are a sizable silicon metal producer in China, and we also buy quite big volumes of silicon metal from other competitors. And clearly, we have seen extremely low prices to a large extent below cash costs of many producers. So this is not sustainable. And lately, we have seen a slight improvement in prices even though there is a fundamental lower capacity.

Odger, Moderator/Host, Elkem: Related to that, we have a question if it's our impression that prices on silicon have now reached the bottom. And also if you can comment on spread between silicon and aluminum prices? And lastly, if we how we see the increased infrastructure spending in Europe and how that could impact the silicons or the silicon division? Three questions.

Helge, Company Presenter/Executive, Elkem: Yes. It's definitely at unsustainable level and I think so that in itself will not go on for a very long time. And then we talked about the safeguard measures, which we believe will come into play at least during this quarter, not clear yet exactly how or when, but the signal is that this is coming. So that will have a positive effect for that market. The spread between silicon and aluminum, I'm not sure if I understood that question.

Odger, Moderator/Host, Elkem: No. There is quite often a leak because aluminum is an important market, but I guess that's the thinking.

Martin, Financial Executive, Elkem: No. I think if we look at the history, we have seen a relatively stronger development of aluminum prices compared to silicon prices. And I think that is also an indication that we will see an improvement in silicon and ferrosilicon prices just because today's prices are not sustainable. If you ask us when will this turn up again, of course, we do not have a good answer to that. But the current prices are not sustainable, and there will be an adjustment upwards.

Helge, Company Presenter/Executive, Elkem: So the focus for us now is, as you also talked about, Morten, in your presentation, we keep a strong focus on cost improvements. That's a never ending part of this business. And the second very important part is to maintain very high capacity utilization, which will ensure that you actually can take advantage of your efficient production. So and that looks quite good actually.

Odger, Moderator/Host, Elkem: Looking at the current profitability in silicon products and the persistent overcapacity, the question is if we see any room for further cost cuts and also portfolio adjustments.

Helge, Company Presenter/Executive, Elkem: Further cost cuts, there's always room and we are continuing to have a strong focus on that. When it comes to capacity optimization, if that was the question? Or did you say

Odger, Moderator/Host, Elkem: Yes. If there are further room for cost improvements in silicon products and also if we see any room for portfolio adjustments, which I guess is changing either products or yes, new plant closures. Yes, portfolio

Helge, Company Presenter/Executive, Elkem: adjustment in the context of product mix, we're always having very strong focus on optimizing that and also allocating products at various plants to optimize the whole system. But beyond that, there are no clear or there are no intentions of doing anything in particular.

Odger, Moderator/Host, Elkem: Given the current EBITDA levels in carbon and silicon products, the question is what are net interest bearing debt level we are comfortable with after the potential sale of a silicones division?

Martin, Financial Executive, Elkem: No. As we previously have communicated, when we have a conclusion and we have specific news on the strategic review, we will clearly provide more information about, let's say, the future strategy of Welchem, including also revised financial KPI targets. So I will not go into details on that right now. Clearly, the leverage ratio currently is very much impacted by extraordinary low prices and extraordinary low EBITDA.

Odger, Moderator/Host, Elkem: And when we touch upon the strategic review, we have said that we will provide the status update during third quarter. And the question is if that means during the quarter or at 3Q reporting, which is in October?

Helge, Company Presenter/Executive, Elkem: Well, I think it will be before, but at the latest, of course, during the quarterly presentation.

Odger, Moderator/Host, Elkem: There have been talks in China recently about industrial consolidation and capping production output in the polysilicon market. And the question is if we have heard similar actions. Here it says silicon market, but I guess it also could apply to silicones.

Martin, Financial Executive, Elkem: No, we know that there, of course, typically or particularly polysilicon experiencing a very tough time in China these days due to high overcapacity. There is a consolidation ongoing. We believe that also the long term trend in other industries in China will be more consolidation, including in silicones and also further down or in the value chain. But of course, this will normally take time.

Odger, Moderator/Host, Elkem: There is also a question on capacity in silicones. We say that this is close to being fully ramped up or being all ramped up. And the question is what our operating rates are and what the level was in the second quarter?

Helge, Company Presenter/Executive, Elkem: We are running full capacity utilization in Asia Pacific and somewhat reduced in EMEA and Americas.

Martin, Financial Executive, Elkem: Anything to add? No, that's partly due to the fact that the markets are still weak and we have not, let's say, fully ramped up the new capacity that we have built in France. But we have the target to increase capacity utilization in the Western value chain.

Odger, Moderator/Host, Elkem: I think we take one last question and I'm not sure if we have any insight into that, but the question is where we see cash cost for the marginal producers in China now on the silicon and the DMC side?

Helge, Company Presenter/Executive, Elkem: Well, it's a difficult question to give a very precise answer, but I think we can say if we say that cash cost is above the current price levels.

Odger, Moderator/Host, Elkem: So I think I give the last chance to people in the audience here if there are any last questions, and there seem to be one.

Tjot van Wisserman, Analyst, ABN AMRO Bank: Tjot van Wisserman from ABN AMRO Bank. I was wondering if you see any threats or opportunities in potential new trade agreements that the EU might agree on, for example, if there were anything to happen with India. Is that something you can comment on?

Helge, Company Presenter/Executive, Elkem: I think our biggest uncertainty right now is what will happen towards The U. S. Market. And India, we are relatively we have relatively low exposure in terms of import and export. We do manufacturing in India, but that's for the Indian market.

Odger, Moderator/Host, Elkem: Okay. I think that concludes today's presentation. So I will then wrap up by wishing you all a very nice summer. Thank you. Thank you.

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