Umicore's (UMICF) CEO Marc Grynberg on 2016 Half Year Results - Transcript

| About: UMICORE SA (UMICF)
This article is now exclusive for PRO subscribers.

Umicore SA. (OTCPK:UMICF) 2016 Half Year Results July 29, 2016 4:30 AM ET

Executives

Marc Grynberg - Chief Executive Officer

Filip Platteeuw - Chief Financial Officer

Analysts

Mutlu Gundogan - ABN AMRO

Tony Jones - Redburn

Stephanie Bothwell - Bank of America Merill Lynch

Wim Hoste - KBC Securities

Peter Testa - One investments

Adam Collins - Liberum

Andrew Benson - Citigroup

Paul Walsh - Morgan Stanley

Stein Baumeister - ING

Massimo Bonselly - Equata

Marc Grynberg

Thank you, operation. Good morning everybody and welcome to the presentation of Umicore's results for the first half of this year. I will talk about the overall business evolution as well as the outlook for the full-year and then I will hand over to Filip who will cover the financials. I will then wrap up before handing the call over to you for any questions that you might have.

Before I proceed with the presentation itself, first I can draw your attention to the cover slide. This is a picture taken from a drone at the recent opening ceremony of our Automotive Catalysts production facility in Poland. The plant is now fully up and running and already contributing to the strong growth of the automotive catalysts business that I will comment on in a moment.

Let's look first at the overview, recurring EBIT was up 3% year-on-year, which considering the adverse metal price environment, we presented a solid performance overall. This reflected differing evolutions in the various business groups. Catalysts was the stand out performer with recurring EBIT up by almost 30% as a result of strong growth in Automotive Catalysts. In the other business groups of energy and surface technologies and recycling, the very positive market fundamentals and operating performance were over shed out by the weakness in metal prices.

In terms of investments, we continue to execute our growth strategy, with a focus on clean mobility and recycling and this was visible in our capital expenditures, which in the first half included investments in Hoboken as part of the capacity expansion program, the construction of the new Automotive Catalysts plant in Thailand and some capacity additions for rechargeable battery material.

Recently, we also announced a significant acceleration of our expansion in rechargeable battery materials for which production capacity will be tripled by the end of 2018. Another highlight of the first part was the sale of the Zinc Chemicals business to OpenGate Capital for slightly more than a €140 million, marking a major step in our strategic move to divest the zinc related activities.

Non-recurring elements amounted to €68 million and were mainly related to the fine imposed last month by the French Competition Authority. I would like to stress again that we dispute the allegations of the authority or the authority that we disagree with its finding and that we will appeal both the decision and the fine.

From a dividend perspective, the interim dividend announced to €0.60 and consistent with our dividend policy, represents half of the annual dividend which was declared for 2015.

Looking ahead, we also get positives. In Catalysis, we see the strong demand levels and the supportive product mix persisting in the Automotive Catalysts business. This will drive higher revenues and earnings for the business group on a full year basis. Looking ahead beyond 2016, a number of legislative steps have recently been taken that will create further growth potential in Europe and China in particular and this both very well for the business.

In Energy & Surface Technologies, we expect somewhat a higher full-year earnings than in 2015. This mainly reflect the continued growth in the rechargeable battery materials activity, particularly resulting from the surging demand from the automotive segment. The longer term prospect for et l'électrification continued to strengthen. As an example last week, most of you will have seen European Union strategy to promote low initial mobility with a strong accent on accelerating to transition to zero emission vehicles. This is yet another development that validates to strategic choices that we made years ago.

In Recycling, the fundamentals of the supply environment remain very solid. Now that we have completed the bulk of the investment and that raising capacity in Hoboken, production is starting to ramp up and we should see higher processed volumes this year. On top of this, we have seen some recovery in gold and silver prices recently and this should support huger earnings provided of course prices stay where they are today. It is worth bearing in mind though that prices for most other metals remain subdued at the best. So, on balance I expect to see full year recurring EBIT for 2016 in a range going from €345 million to €365 million.

The top end of this guidance reaches slightly above the upper end of the range that I provided back in April and of course as soon that metal prices continue to prevail at their current levels. For the sake of simplicity and comparability we have included the estimated Zinc Chemicals contribution for the full-year and we look at the numbers after the sale of the business has closed.

Let's now turn to the business review and comment on the evolution of the three business groups in the first half. In Catalysis we resisted strong revenue growth and an increase in returning EBIT of 27%. In catalyst for light duty vehicles, Umicore's revenue continue to grow faster than the car production levels globally and with an overall positive product mix. The growth was particularly pronounced in Europe as a result of the continuing production of Euro 6b compliant diesel platforms and the success of more efficient direct injection gasoline engines to which Umicore is well exposed.

The penetration of Euro 6b platforms is pretty much complete now and therefore you should expect the growth rate in Europe to normalize in the coming period. In China, Umicore continued to outperform a fast growing market. In the past, the evolution of all sales in China has been highly correlated to the success of global OEMs as emission norms get tighter at a fairly rapid phase now, we see leading domestic brands increasingly adopting our latest emission control technologies. For this reason they are starting to make up a more significant portion of the overall growth in Umicore's catalysts sales.

As the Chinese market continues to grow in volume and complexity, we will need to keep adding production capacity and technical capabilities in the region. With the investments that we recently completed in China, we should be able to do so as and when needed and for a relatively limited incremental cost. In the heavy-duty segment, the business is now fully ramped up and overall demand was higher particularly in Europe. In terms of investments, we completed the expansion of our testing lab close to Detroit in US and the construction of the new catalysts plant in Thailand is nearing completion with commissioning schedule for the third quarter of this year.

Let's now look at the evolution in energy and surface technologies. Although revenues and recurring EBIT were down 3% and 8% respectively, this mask the underlying positive evolution of the rechargeable battery materials business units. The performance here was very good with particularly strong growth coming from the sales of NMC capital materials for use in the automotive segment. Demand is accelerated at the pace that is even higher than we anticipated back at the time of more capital market date less than a year ago. In the coming weeks we will bring on-stream some extra capacity in China that will help us cater for the increased demand in the short term.

In the longer run, the fast growing demand for ore materials require an acceleration of our investment program and as we recently announced we will spend some €160 million to triple production capacity in South Korea and China by the end of 2018. In Europe business units we have a mixed picture. The main reason for the overall lower performance of the segment was the effect of lower cobalt and nickel prices on the revenues and margins of the cobalt and specialty materials activities.

In electroplating, the business units continue to perform very well with higher revenues recorded in both decorative and industrial segments. In electro-optic materials, revenues was stable and the overall performance benefited from recent productivity improvements. And in thin film materials, revenues were lower due to lower order levels and product premiums. In recycling revenues and earnings were down by 6% and 20% respectively. This was predominately the result of lower metal prices. As I mentioned in the outlook section, there has been some recovery in gold and silver prices in recent weeks and we have taken advantage of this recovery to lock in a limited portion of ore price exposure to these two metals for the coming two years. For the other metals, prices remain very much depressed now.

In precious metals refining, the underlying picture remains very positive. Processed volumes were slightly higher in the first half compared to 2015 and as I mentioned earlier, now that the bulk of the expansion investments has been completed, production is ramping up and this should enable us to grow volume in a more visible manner in the coming months. In addition, the supply mix remains supportive. But again this was an anemic metal price environment in the first half and this was the case for the three main baskets of metals that are relevant to us; gold and silver, PGMs and specialty metals.

In the other business units of the segment, we saw lower demand in the platinum engineered materials and technical materials activities were to be count metal market led to a lower contribution from precious metals management. Revenues in jewelry and industrial metals were stable with higher volumes compensating the effects of lower metal prices. The contribution from discontinued operation was higher and this was due to a large extend to changes in depreciation because of high price tide. The performance of the building products activities improved somewhat year-on-year due mainly to an improved product mix. And this more than offset the lower revenues in the chemicals where the positive evolution in sales volumes contracted with the negative effect of a lower zinc price on recycling margins.

Looking at the safety performance, you will have seen from this morning's release that unfortunately there was a fatality at one of our plants in Brazil in May. This was a result of a human error and the investigation has shown that there were no failings in terms of processes or procedures. Having said that, we are making every efforts to improve our performance and obviously ensure that such an error cannot be repeated. Total number of employees has come down slightly with growth and automotive catalysis and rechargeable battery materials being offset by reductions in some other business units. With this, I would like now to pass the call over to Filip who will comment on the financial aspects.

Filip Platteeuw

Thank you, Marc. And good morning to everyone. Now Marc already commented on the main earnings drivers and I would like to highlight the resilience of our financial performance in the first six months of this year. Most metals that are relevant to our earnings, show substantial decline in price between the first half of last year and the first half of this year. Now in the past, such material moves would have meaningfully reduce our overall group performance. This year in contrast, shown a profitable growth across several businesses and automotive catalysis and rechargeable battery materials in particular managed to fully upset this headwind, resulting in stable group revenues and margins.

Our return on capital employees for the period is at 14.6%, just below the 15% target we set for ourselves and well above our funding cost. Our recurring net earnings was lower year-on-year due to a lower financial result which last year benefited from significant forex tailwind. Our recurring tax charge was stable year-on-year corresponding to recurring effective tax rate of 25.6%. Operating cash flow continued this upward trend that started in 2014 but is down to bed through an exceptionally strong first half of 2015. Our operational working capital increased 22 million over the period, following the growth in our product businesses.

End of June, we also recognized the payable related due to 69 million fine imposed by the French Competition Authority in related to the activities of building products in France. This fine is expected to be paid in the third quarter of this year. Net effects on our net working capital including this one off payable amounts to a 47 million decreased over the period. In the first six months of the year, we spent 86 million on CapEx projects mainly in the fields of clean mobility and recycling. These include some auxiliary investments in Hoboken, a new plant in Thailand for Automotive Catalysis and continuing capacity expansions in rechargeable battery materials.

CapEx spending is seen to accelerate in the second half of the year, as we currently expect a full-year CapEx spending above the 240 million euro number of last year. Group R&D expenditure increased year-on-year reaching 5.8% of revenues over the period and continues to be focused on our strategic growth units in all three segments.

The waterfall chart on Slide 16, shows a slightly lower net financial debt moving from 321 million at the end of 2015 to just below 300 million end of June. Our operating cash flow more than covered our growth expenditures, stable cash tax outs compared to last year and the final payments of our full year 2015 dividends which we increased by 20% versus the year before as you will recall. This way we distributed close to the full free cash flow after interest and taxes back to our shareholders.

Our capital structure remains very healthy as reflected by our leverage ratios and our average weighted net interest rate increased slightly to 1.8% as we took on somewhat higher proportion of funding in high interest regions in response to our growth opportunities. Finally, non-recurring items had a negative impact of 68 million of EBIT and 70 million on net results. The bulk of this amount relates to the 69 million fine imposed by the French Competition Authorities in relation to the building product activities in France. As mentioned, related cash out is expected for the third quarter of the year. A reversal of fast impairments on permanently tied up inventories and some 7 million of restructuring costs explained the remainder. Now with this I hand over back to Marc.

Marc Grynberg

Thank you, Filip. Before turning to questions I would like to wrap up the key messages from today's results publication. We have had a solid first half with revenues up slightly and recurring EBIT up by 3%. The outstanding performance of the Automotive Catalysts business was complemented by strong growth in rechargeable battery materials and this more than offset the negative impact of lower metal prices in the recycling activities across the group. We have continued to lay the foundations for medium and longer term growth, a number of investments have been completed and have come on stream in the first part of this year while other investment projects such as the tripling of capacity in rechargeable battery materials are now underway.

Finally, should metal prices persist at their current levels, I now anticipate that full-year recurring EBIT would be in a range from €345 million to €365 million with the top end of the new guidance reaching slightly above the range that I provided back in April.

With this I would now like to open the call to questions and like in the previous conference call, I would kindly ask you to only raise one question at a time and if you have follow-on questions, I would kindly ask you to put your name in the queue again so that we allow everyone to raise their questions. Thank you and let's now turn to the Q&A.

Question-and-Answer Session

Operator

Certainly, thank you. [Operator Instructions] We will now take our first question which comes from Mutlu Gundogan of ABN AMRO. Please go ahead.

Mutlu Gundogan

Yes. Good morning everyone. One question it is. It's about the hedges. Can you tell us what you mean when you say that you hedged a limited proportion of contracts. A percentage will be nice or a decent indication. Then relating to this, Gryn also explained what have you on the gold and silver price is. I mean, why have you only hedged the limited proportion of gold and silver, because I would have expected that you would not hedge it all if you're bullish or to hedge a larger proportion if you are thus.

Filip Platteeuw

Good morning, Mutlu. So, percentage we will not provide, I think its price would be given in terms of guidance with its limited limit amount compared to our overall exposure. Maybe it's good to remind why do we do the hedges. We do the hedges mainly because it provides us a visibility at an attractive level. That's also the reasoning that we followed when we entered into hedges in previous periods. And so, to give an outlook in terms of gold and silver prices, I think is obviously very difficult because these are two metals exactly that are influenced by not just economic factors but more by non-economic factors.

That's also the reason why you see that. The only two metals that actually have increased well the other metals are still very much subdued. So, we will not venture into giving enough to get to has to say that the levels of which we have handed into hedges, provide us with a good profitability for our business and provide us with first I would say level of visibility in terms of future earnings.

Mutlu Gundogan

Okay, thank you.

Operator

Thank you. And we'll move to our next question which comes from Tony Jones of Redburn. Please go ahead.

Tony Jones

Good morning Marc, Filip. I have a question on Catalysis. Did you talk about your visibility on demand, so how long can you see into second half, perhaps into '17? And perhaps you could also give me some colour on why the margin increased so strongly. I think it's up nearly 200 basis points in this period. Is there anything nonrecurring in that or is that all about cost control? Thank you.

Marc Grynberg

Good morning, Tony. The visibility that we have in Catalysis is actually we have typically three months of very accurate visibility because that's the result of the call-ups from the customers. And beyond three months we are working with forecast production, forecast from the customers that they are adjusting regularly in sanction of how their modules are offsetting in the market.

So, provide us with fairly good degree of visibility, I would say, for the second half. Now, coming to the margins, there are no one up in there and it's not really a matter of cost control. Although cost control is of course a feature in every business that we operate. The reality that margins have improved for a couple of main reasons. One is that we have ramped up a number of recent investments and on operating at a very high degree of capacity utilization, which means that this creates operating leverage.

That's one, and secondly, as we mentioned in the press release, our product mix has been very supportive to the margins. So, these are the two main elements that explain the margin uplift in Catalysis.

Tony Jones

Thank you. Can I just pass or assume that sustainable into second half, so nothing is really going to change. You're operating at structurally higher margins.

Marc Grynberg

Yeah. I think this is a reasonable assumption to make, indeed.

Tony Jones

Thanks, Marc. That's great.

Operator

Thank you. We'll not take our next question which goes from Stephanie Bothwell or Bank of America Merill Lynch.

Stephanie Bothwell

Yes, thanks. Good morning and thanks for taking the question. My question is on capital allocation, specifically on M&A. you're gearing is obviously is relatively low, even factoring in the investments which you have committed to. Therefore I was hoping that you could perhaps give this some color in terms of the criteria and the hurdles which you will look at before engaging in any M&A, and decide with the acquisition perhaps you were so comfortable with. And also whether or not it will have to be complimentary to your existing business lines or whether you consider adding a fourth leg to your existing business? Thanks.

Marc Grynberg

Good morning, Stephanie. And let me indeed remind you of the acquisition criteria that we are using and has been using for a while. First of all, we're looking for a strategic and competency sit with our business, I think that's relatively obvious and most corporates would probably tell you the same. And obviously, acquisitions and that's important to bear in mind, in the case of Umicore are continued to be optional because we have a number of organic growth programs and very significant organic growth potential. And these are none optional and acquisitions indeed can compliment or could compliment nicely or organic growth and provided they fit with all strategy, they fit with all competences, they fit with all sustainability driven business model and approach and leadership and of course provided they meet a certain number of financial criteria.

One of them is that through an acquisition, we aim at EVA creation and the value creations of earning more than the cost of capital in the medium term. So, we would typically give ourselves two to three years to at least reach that threshold of earning at least the cost of capital. And what we would seek in the default term, which is less of a demanding hurdle considering today's funding cost would be earnings acquisition. So, this in a nutshell would be I would say how would look at acquisitions and again considering that these are an option to compliment our organic growth. And whether we would be looking at I think a fourth leg or not, I think would go too much into detail today and I don't think it's necessary to comment on that now.

Stephanie Bothwell

Okay, thank you.

Operator

Thank you. And now take our next question which comes from Wim Hoste of KBC Securities.

Wim Hoste

Yes, good Morning, everybody. A question regarding rechargeable battery materials and the legislative over regulatory framework in China and also in the US with regards to the ITC case and the setting of a hearing date. Can you be maybe walk us to your reasoning behind those two elements? Yeah, thank you.

Marc Grynberg

Good Morning, Wim. Regarding the ITC case, I think there is not much to be set beyond that hearing. We'll likely take place at the end of September and that decision is expected towards mid-October. More than that, we cannot say today. And I'm not sure I understand what you mean by the regulatory environment in China, can you specify your question?

Wim Hoste

Well, with regards to the list of qualified battery produces and yeah some of the larger non-Chinese companies not being on that list for a while now. So, do you see that does it treads, do you expect them to come on at least very sooner, what’s your view on that?

Marc Grynberg

Well, it's difficult for me to comment on the last part of your question which I think these two companies that you allude to would be better positioned to address. If I to say that for us the demand continues to grow fast in China and in other region, but in China in particular. Because at the end of the day, we supply a large number of battery manufacturers including significant Chinese players in the industry and including players that are on the list of approved suppliers by the Chinese authorities. So, I would like to say this stage that it doesn't change very much our view on how the market is going to develop going forward and what a core position in that market is going to be.

Wim Hoste

Okay, understood. Thank you.

Operator

Thank you. We will now take our next question from Peter Testa of One investments. Please go ahead.

Peter Testa

Hi and thank you, it's related to recycling. Can you just help us understand that you're going to the ramp up process into the operation now the capacity at Hoboken. To what extend there has been cost one and to the extend which now having the most flexible capacity should see a mix benefit next to just to help us understand the transition through that ramp up please?

Marc Grynberg

Yes Peter, let me elaborate made on that actually we have a significant wave of investment in the first part of this year to complete the expansion program and there is a little bit of investment to be done in the second part of the year in the auxiliary equipment and considering that we had a shutdown in the first part of the year. The volume increase year-on-year following the investment has been relatively limited due to the share availability of the facility and considering the downtime that we had in the first part of the year. With the ramp up considering to gradually take into effect, we should see a more visible and more pronounced volume uplift in the second part of the year so comparing age 2 16 to age 2 2015 and overall this should lead to a higher volume for the full year compared to 2015 and of course obviously that effect will be even more pronounced going into next year.

Peter Testa

Okay, and can you help us understand how having the extra more flexible capacity can help you manage on mix and did extend to which may also be able to manage either margin network constructive things like that?

Marc Grynberg

Indeed, the philosophy that which we run the business is the same in the way with the expanded capacity or before and that is that we maximize via the margins and that means that considering the various supportive supply environments. We continue to be in the position despite the extra available capacity. We will continue to be in a position of turning down the less attractive seed materials for the plants. So that's very significant elements for us. I mentioned when we launched the investment project to expand capacity that we're banking on a growing market for complex secondary materials and this is proving to be a valid assumption today, so we see a very supportive supply environment in terms of availabilities which enables this to optimize the mix and support via the margins. And this is one of the reasons we continue to have a strong showing in that division despite the relatively severe impact of lower metal prices.

Peter testa

That's great, thank you very much.

Operator

Thank you. We will take our next question from Adam Collins of Liberum. Please go ahead.

Adam Collins

Yes. Good morning. Another question on the recycling division business conditions, are you able to give us an idea what the split of smelted volume, what's in the first half between the complex industrial residues in the end of life materials and then could you speak also more generally about how the terms of the new business compared to the existing base? You said that it continues to be industrial material that you’re talking, but a general comment about what pricing and what the capital in terms of relative to the existing price and then just finally in the press release you talk about a negative first half outcome for the pressures metal management side because of low metal prices that seemingly is being an improvement in volatility for both PGMs particularly going so, could you just talk about why hasn't had a positive impact? I had imagine that I would be the key driver behind PMM profits?

Marc Grynberg

Good Morning Adam, so let me start with the mix of the increase volumes are mainly coming from industrial by projects and in line with the assumption that we had made and communicated at the time we initiated the capacity expansion project. And in terms of, I would say commercial terms as pricing in other words the conditions are relatively stable to what we saw just prior to the year expansion investments. So that means that we have actually a fairly good combination of mix in terms of both availability and pricing, so the expansion of volumes not coming to the detriment of prices. In terms of the precious metals management contribution yes it was indeed lower than the year ago and it is within the right volatility has an influence on the trading results to a certain extent and at the same time the overall price level has also very important influence on the margins that we made there. And the later was obviously predominating compared to the volatility effects.

Adam Collins

Right, understood. But prices have improved lately so I guess that will be a positive drive going to the second half.

Marc Grynberg

Yes, although I would say, there remain a fairly subdued and but could be in the little bit of a supporting factor going into the second half absolutely.

Adam Collins

Fine, okay. Just finally Marc on the point about the mix not being much different so the new business versus the old, of course at the moment you are only having conversations with customers about a smallish proportion of the new volume that you will need to fill overtime. To what extent is your experience now in relation to the new business secured meaning that you are more optimistic about the terms that will govern the entire volume once you fully ramp around 2019, are you more optimistic about the entirety of the new capacity coming on stream in terms of the terms of trade?

Marc Grynberg

Yes, that's an important point in the event. It's I would like to clarify that my view is reflecting actually the discussions that are on going to in relation to securing the 2017 volumes more than the spot situation today which as you rightly pointed out is relatively small in terms of incremental volumes.

Adam Collins

Okay. Thank you.

Operator

Thank you. We will take our next question from Andrew Benson of Citigroup. Please go ahead.

Andrew Benson

So thanks very much. I have got a few questions but I will just stick to one now. The Bloomberg news reported that you submitted a bid for [indiscernible] confirmed they are seeking to divest. Can you just sort of confirm the accuracy of that report by Bloomberg?

Marc Grynberg

Andrew, as you may know we are never commenting on market rumors. And we never commenting on M&A project as a matter of fact and tradition and as a matter of low as well. So no I am not going to answer that question and like I have never answered such questions in the past.

Andrew Benson

Okay. Thanks I will get back in the queue. Thanks.

Operator

Thank you. We will our next question from Paul Walsh of Morgan Stanley. Please go ahead.

Paul Walsh

Yes thanks very much. Morning Mar, morning Philip. My question just relates to some of the movements down the P&L in the first half of the year. I noticed P&L was down about 6 million year-on-year in the first half is the first half run rate the correct run rate for the full year i.e., down on year-on-year and as we move further down the P&L can you just help me reconcile EBIT was up at 3% I think it was year-on-year and recurring earnings were down I think sort of 14% -15% so some interest items unlike tax rate can you just help me understand how that's going to progress for the year as well? Thank you.

Marc Grynberg

Yes, good morning Paul. So on the DNA there is still an effect in the first half a year from [indiscernible] as you may recall last year as of the second half of the year we had to follow to discontinue operation which means that we stopped basically depreciating the zinc units and so we still had the precisions in the first half of the year from that so it you compare the first half of this year which has no depreciation for the zinc units compared to the first half of last year which still had DNA that explains part of the differential next to obviously the effect that we have depreciation because we continue to invest. The impact of the [indiscernible] is about 9 million Euros.

Paul Walsh

9 million and in just on that zinc business, so before you asked the second part of my question but in your guidance your EBIT guidance what was the contribution you were receiving for discontinued items?

Marc Grynberg

We don't specify the contribution per segment variable so it's important to know that the overall guidance includes the full year contribution of the discontinued operations.

Paul Walsh

Okay. On the sort of delta on earning versus the delta on EBIT it would be helpful for me just to understand that from recurring perspective?

Marc Grynberg

So thank you for the question because I saw some note this morning referring to taxes. Actually tax is not the explanation because if you look at the tax charge I am talking recurring now if you look at the tax charge that is basically stable year-on-year and absolute number will increase in terms of the tax rate effective tax rate with overall tax charges relatively stable it's really -- come and its related to ForEx related matters within the financial income we have some obviously important ForEx movements between different currencies last year and this year and last year it was an important I would say tailwind while this year it's a negative and the difference between one and two and indeed quite important and an important part of that is related to inter group dividend payments which also can have ForEx results aspect and typically those dividends are paid first half of the year which means that we have quite differential so it's explained by the finance aspect in the context.

Paul Walsh

Understood. Thanks very much.

Operator

Thank you. We will take follow-up question from Mutlu Gundogan of ABN AMRO. Please go ahead.

Mutlu Gundogan

Yes thank you. A quick question on HDD. I know you don't want to talk about margins in lot of details but just can you tell us where we stand compare to the former business. So the light duty business where do we stand in terms of profitability? Are they comparable at the moments or you are almost ramped up or is this still a significant benefit to gain?

Marc Grynberg

Mutlu suffice to say that the business is fully ramped up and so the margins are where they were supposed to be and when we made investment for that business we have the full contribution to full benefit from the revenues and the operating leverage considering the fact that it's fully ramped up.

Mutlu Gundogan

Okay. Thank you.

Operator

Thank you. We will our next question from Tony Jones of Redburn Partners. Please go ahead.

Tony Jones

Morning. My follow up is on recycling, sorry about that I am going back to the volume growth in the phasing so hope I can do the slide your capital market stay where I think it split the 40% growth up into three years just wanted to check whether that still applies. Thank you.

Marc Grynberg

Tony, sorry the line was not so there was a bit of background noise. So I hope I understood your question well. You wanted to know if the three year ramp up that we had indicated was still valid? Is that right?

Tony Jones

Yes. I think ahead three years of growth I am confused about the timing and whether that still applies and whether we just use that phasing from now.

Marc Grynberg

No indeed that's – that assumption is indeed correct. It's small at three year ramp up to arrive at full capacity utilization. This being said I would like also to you to bear in mind that we are more focused or I should say obsessed by the margin optimization then by the volume maximization. So if trade off at certain point in time to be made they will always be in favor of margin optimization and mix optimization. I don't expect these trades off to have to be made because the supply is relatively abundant, that I just wanted to clarify that we focus on mix quality and margin optimization.

Tony Jones

Thank you. Perhaps just a quick follow-up for Filip there. How do we think about how you will account for any added costs?

Marc Grynberg

Which added cost?

Filip Platteeuw

Which added cost are you referring to?

Tony Jones

For the expansion, is there any added depreciation or any cost impact at all or is it just going to purely be volume operational gearing?

Filip Platteeuw

Yeah. If you refer to any kind of exceptional accounting treatment or anything know, it's I mean, the costs R&D, operating costs and R&D, in the numbers that you see, there's nothing specifically I would say to mention on that.

Marc Grynberg

And by definition, issuing that a 100 million in the plant, you will have extra depreciation, that's given. Now, let me also remind you that Tony, that what we said a few years ago when we initiated the project is that it would create more leverage effects and whether utilization of the existing infrastructure overall. So, this should lead to some costs unit cost improvements over time.

Tony Jones

Thank you, very much.

Operator

Thank you. We'll now take our next question from Stein Baumeister. Please go ahead, of ING.

Stein Baumeister

Good morning and thanks for taking my question. And you said the impact of lower cobalt and nickel price is somewhat masked the overall performance in Energy & Surface technology. Could you give us some more information on the revenue and earnings splits between the different business units and in particular to the contribution of rechargeable battery materials? Thank you.

Marc Grynberg

Good morning, Stein and welcome to the call, for your first call in your new capacity. The nickel and cobalt price impact was fairly significant. You have seen nickel going to very low prices and prices seemed to have stabilized now. But in the has more than overshadowed the good performance in the other units, and in particular the strong volume growth in rechargeable materials.

Unfortunately, I cannot give you more details. We do not disclose the breakdown by business units and if I to say that the growth in rechargeable battery materials was high enough for us to qualify as very strong continuing growth.

Stein Baumeister

Okay. Thank you, very much.

Operator

Thank you. We'll now take our next question from Massimo Bonselly [ph] of Equata [ph]. Please go ahead.

Massimo Bonselly

Good morning, Marc and Filip. Could you just give us some color on, some general comment on the pricing environment for rechargeable battery materials for the automotive industry? Considering that one of the key challenge of the industry is the reduction of battery cost.

Marc Grynberg

Good morning, Massimo. It's an environment with, I mean, like in any other automotive business. We are you are supposed to contribute off the road map and the technology road map of your customer. And technology road map in this case means that you contribute to improving the energy density of the entire battery systems, such that the cost can have either a longer range or get for a similar range can have a lower cost per kilowatt hour. So, that's clear and on the cost side, cost road map is also part of how the qualification works in the automotive industry. And clearly that the purpose is to make up for typical cost downs by volume effect, scale effects, productivity improvements, etcetera.

And at a certain point in time, clearly you should expect that prices will indeed have, will reflect these typical price downs or cost downs in the automotive industry. And that the margins will in a visible manner show this scales of presence.

Massimo Bonselly

Okay, thank you.

Operator

Thank you. We'll now move to our next question. Is the follow up question from Peter Testa of One Investment. Please go ahead.

Peter Testa

Hi. It's just a sure question on capacity increases. Can you just help us understand how much of the capacity steps up the catalyst business and how much the shorter term expansion in Chinese automotive battery capacity steps up back capacity please?

Marc Grynberg

Yes Peter, actually I’m not going to quantify that with the figures, suffice to say that the capacity that we will add in the second part of this year will be relatively small compared to the existing capacity today so that’s part of our on-growing capacity additions, while the program that we announced a couple of months ago will triple the undocumented of our business units so that’s – it’s a completely different order of expansion I would say, if you compare the ongoing line additions to what we’ll do by 2018.

Peter Testa

Okay. But this expansion of existing facility is to make cost of demand, right? Rather than new facilities, yes, okay. And that tag capacity that you’re stepping up in catalyst how much that steps up the Asian capacity on catalyst?

Marc Grynberg

Well, that’s the plant will be stepped in terms of our capacity addition because we’ve no presence so far in Southeast, no production presence so far in Southeast Asia, while the capacity additions that are referred for China will be gradual and will be in sync with the market evolution in the country.

Peter Testa

Okay. And if I could just ask on specialty metals can you just help us understand whether on a sequential basis the specialty metals prices are roughly similar, are they still trending down and maybe the same on your realized prices on the cobalt, nickel and the energy business?

Marc Grynberg

Yes. The answer to that question Peter is that in both cases we see some degree of stabilization at the low level that you have seen recently. So I don’t want to draw definitive conclusions based on that observations today, but it looks like prices may have bottomed out.

Peter Testa

Okay, that’s very helpful, thank you.

Marc Grynberg

Maybe I should say we do hope that they have bottomed out and that there is a little bit of upside potentials that today suffice to say that they’re stable, they’ve stabilized.

Peter Testa

Very good, thank you.

Operator

Thank you. We’ll now move to another follow up question from Andrew Benson of Citi, please go ahead.

Andrew Benson

Yes, thanks very much again. Just want to ask about the GDIs you referred to it has being at a factor indeed in the catalyst business, can you give us much information as you feel you can without any competitive issue in terms of penetration and currently where it is going to go, where you judge your market share is and how you think that might evolve and perhaps judge some, perhaps financial dimension as well if you can please?

Marc Grynberg

Andrew the GDI is our interesting development for us and for the catalyst industry in general because the GDI engines are typically more complicated to address in terms of treating the royal missions. And so that means that GDI engines typically commence a more complicated to more sophisticated catalyst system and at some premium to conventional engines today. The good news is that in the longer run these GDI engines will also very likely require a particular filter because as we indicated in the past it is now proven and admitted also by the industry that GDI engines and it’s very fine particulars mater that is not visible but that is harmful and that still too will be required to remove these harmful particle emissions and moving into let’s say towards the end of the decade you will see more and more of these GDI platforms requiring a filter in addition to the current catalyst systems. So the development looks very promising and clearly where there is complexity we believe that there we’ve a very competitive product offering and technology offering to our customers and that’s why we mentioned that we’re well exposed to these platforms and it’s been good for the short term mix and will be even better moving I’d say into, I think that centers towards the end of the decade.

Andrew Benson

Especially any sense of your market share and where that roughly going to be in-line with…?

Marc Grynberg

It's an emerging segment, so I don't think it would be rather than to come until tricks properly. It's probably or too early, but I don't see any reason to believe that we would have a fundamentally different position than in other applications.

Andrew Benson

Thanks very much.

Operator

Thank you. We’ll now move to our another follow up question from Mutlu Gundogan. Please go ahead. Your line is open.

Mutlu Gundogan

Yes. It's a difficult name. question on what you just said about recycling ramp up, so at the capital marks there you present the slide with 40% growth over the three years, which is a roughly I think 15% a year, I mean now in H1 you did hardly any volume growth, so my first question relating, do we still expect to 15% for 2016 i.e., 30% in the second half or should we expect high growth than the 15% in 2017 or 2018?

Marc Grynberg

Mutlu, if my reflection is correct, I have not given a 15% per annum growth forecast that's probably the result of some modeling by external observers and suffice to say that the three-year ramp up remains valid and this being said you should expect that it is not linear and cannot be linear given the timing of the shutdowns in the investments. And as I mentioned earlier doing the call, the ramp up in volume point of view will be somewhat more visible and more pronouncing the second part of the year and will continue through next year.

Mutlu Gundogan

Okay, okay, will you allow me a follow up question?

Marc Grynberg

Yes. Go ahead.

Mutlu Gundogan

Thank you very much, it's a question about rechargeable battery materials, I know you know want to go too much into detail, you talk about strong growth, I mean, historically that meant only volume growth, just wondering about the pricing at the moment given that the market is very tight, I mean our price?

Marc Grynberg

No, I meant revenue growth clearly. We're talking about strong revenue growth, not just volume, but of course the revenue growth is driven mostly by the strong demand and therefore by the volumes.

Operator

I think Mutlu's line may have discontinued for some reason, not to sure why? We'll move to the next question, which is from Jeff Herr of UBS. Please go ahead.

Jeff Herr

Good Morning, Just wanted to ask quick question, on the recycling business the new capacity that you have, do you expect that the margins and returns will be the same as the overcapacity that you have given the outlet that you have in the market?

Marc Grynberg

Good Morning Jeff, so that you may recall from previous presentations and discussions that we said that the margins and the mix may not be exactly the same because we're targeting mostly the industrial by products supply segments more than the end of life products and that's simply because of harder to sub-segments are growing naturally in terms of availability. And secondly, we mentioned that the capacity expansion investments would also result in better, I would say leverage effects and scale effect thereby reducing the processing cost per unit. So it's difficult to say how the two elements will combine and will converge in terms of margins suffice to say that for the time being we're pretty positive in terms of supply, availability, margin potential, and obviously the productivity elements that they are referred to. We will show up per gradually as we ramp up the capacity utilization.

Jeff Herr

Okay, thank you.

Operator

Thank you, we'll now take our final question from Junior Cuigniez of Degroof Petercam. Please go ahead.

Junior Cuigniez

Thanks another difficult name. Hi everybody. Can you compare your growth scenario for the electrification of the car versus last year's capital market there, I remember back then that in your 20-20 guidance, it was based on a very conservative scenario for the automotive electrification, why you also presented to us a more domestic picture? Can you may be shut some light and how you see this market developer versus your views of last year, thank you.

Marc Grynberg

Good morning Junior, yes I would also like in this context to refer to the discussion we have at the time we announced the tripping of the capacity a couple of months ago and where we clearly research the fact that the more optimistic scenario was becoming more of a base case for us indeed and that was the main change compared to the assumption that the work discussed with you at the time of the capital market's day back in September. So between September and the earlier part of this year we've seen an acceleration in the markets driven to a large extent, to a certain extent by the acceleration of this trend in China in particular by the acceleration of the electrification of some of the fleets in a number of regions and again predominantly in China and by the fact that our business has been pretty successful and getting qualified for a number of these upcoming platforms. So yes, overall, we are now working on the basis of the more optimistic scenario that we presented back at the time.

Junior Cuigniez

Thanks, maybe this is a follow up if I may, your view between Q1 and Q2 hasn’t altered I suppose?

Marc Grynberg

Sorry, can you repeat that Junior.

Junior Cuigniez

The view between the first quarter of the year and today hasn't altered on electrification?

Marc Grynberg

No indeed, the view has as not changed compared to what we communicated at the time of the announcement of the tripping of capacity that's right.

Junior Cuigniez

All right, thank you.

Operator

Thank you. That will included today's Q&A session, I would now like to turn the call back to Mr. Grynberg for any additional or closing remarks.

Marc Grynberg

Thank you and I would like to thank everyone for your participation to this morning's conference call and as usual if you have follow-on questions and I am sure several of you will have follow-on questions, please feel free to contact to our Investor Relations team who will be available to address your questions and of course I look forward together with Investor Relations colleague to meet with several of you in the coming days and elaborate on some of the subjects we touched upon today. So with this I would like to wish you a very pleasant day and wish you already a pleasant weekend and will talk you soon. Bye, bye.

Operator

Thank you that will complete today's conference call, thank you for your participation ladies and gentlemen.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!