UMICORE SA ORD NEW (OTCPK:UMICF) Full-Year 2017 Earnings Conference Call February 9, 2017 3:30 AM ET
Marc Grynberg - CEO
Filip Platteeuw - CFO
Wim Hoste - KBC Securities
Mutlu Gundogan - ABN AMRO
Chetan Udeshi - JP Morgan
Peter Olofsen - Kepler Cheuvreux
Charlie Webb - Morgan Stanley
Raghav Bardalai - Exane
Sebastian Bray - Berenberg
Geoff Haire - UBS
Adam Collins - Liberum
Jean-Baptiste Rolland - Bank of America Merrill Lynch
Mathew Hampshire-Waugh - Credit Suisse
Massimo Bonisoli - Equita
Good day, and welcome to the Umicore Full-Year Results 2017 Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marc Grynberg, CEO. Please go ahead.
Thank you, and good morning, everyone, and welcome to the Umicore conference call. As you will have undoubtedly seen from the announcements that we made yesterday, we have quite a lot of ground to cover this morning. Alongside the review of the record performance of last year, we will address the very exciting developments that will be shaping Umicore over the next few years.
I refer more specifically to the acceleration of growth, which has driven by the strong demand for battery materials used in electrified vehicles and by the unique position of Umicore in this segment. This acceleration will already show significant benefits this year and the successful execution of our horizon 2020 strategy, which we launched in 2015, has in the meantime unlocked even more profitable growth potential in battery materials in particular.
In order to meet the fast-growing customer demand for these materials, we will invest an additional €660 million to expand capacity in China and establish production in Europe. I will elaborate in a moment on the accelerating growth and the upside potential that we now see for 2020. Allow me to start though with today's breaking news, which is the successful placement yesterday evening of 22.4 million new shares. The offering was rapidly and considerably oversubscribed and the transaction was completed at a price of €39.80, which represents a slight discount of less than 3% compared to the closing price of yesterday before we launched the offering.
It was really pleasing to see that, despite a challenging climate in the global equity markets, we managed to raise close to €900 million in approximately two hours' time. I think that as a clear vote of confidence from the investor community in our strategy and positioning. The additional equity that we have just raised will add to the balance sheet strength and will provide us with even more ammunition to fund the very fast organic growth, and at the same time, pursue potential acquisitions, electively of course acquisitions that could strengthen our current portfolio.
Let me now go back to the record performance of last year, the outlook for this year, and the new investments in battery materials, which will make our growth profile even steeper. We recorded strong growth in 2017 with revenues from continued operations increasing by 16% and recurring EBIT by 24% from the levels of 2016.
This was due to a very large extent to the outstanding growth in Energy & Surface Technologies, which benefited from the gradual ramp-up of new production capacity for cathode materials. The Catalysis and Recycling segment also contributed to the overall growth in revenues and earnings. It is also worth pointing out that the return on capital employed improved somewhat and is now above our target of 15%, thereby confirming the growth is not being pursued to the detriment of margins.
We also made significant strides with the reshaping of the group. We have completed the portfolio realignment that was announced in 2015. We divested the Building Products business, the large area coating activity Thin Film Products, and more recently, we sold the European operations of Technical Materials. At the same time, we completed selected acquisitions that would strengthen our position in Catalysis and in Energy & Surface Technologies. We acquired the heavy duty and stationery mission control catalyst activities of Haldor Topsoe, the metathesis catalyst business of Materia. We acquired the remaining interest in the South Korean automotive catalyst maker, Ordeg, of which we have now full ownership and we also acquired Eurotungstene in France.
This portfolio realignment has simplified the organization and sharpened the focus on the strategic growth priorities in clean mobility materials and recycling. As a result of the improvement in earnings in 2017, and considering the strong perspectives for the future, the board will propose to the shareholders to approve a dividend of €0.70 per share in respect of the full-year 2017, of which €0.0325 where paid out as an interim dividend in August of last year.
Turning now to this year, I can confirm that the execution of the Horizon 2020 strategy is ahead of schedule. This reflects positive market trends across applications in rechargeable batteries and our ability to respond fast to such a development. We have indeed been able to add somewhat more capacity than originally planned as part of the €460 million investment program that we initiated in 2016 and to ramp it up fast. The continued growth in the catalysis and recycling segments complete the positive picture. As a result, while it is still very early days, I can already say that we anticipate to approach already in 2018, the Horizon 2020 target of doubling the recurring EBIT to a level of €500 million. This outlook assumes of course no major change in the macro environment.
Building on this momentum, we are following ahead and we'll invest in additional €660 million to accelerate and amplify or expansion in cathode materials, and thereby increase the gap with competition. The new investment program will start this year and be completed in 2020. It includes the construction of a greenfield facility in China very close to our existing operation in Jiangmen in the Guangdong province with the first production line coming on stream at the end of 2019.
The program also entails the construction of a cathode materials plant in Europe. Final site selection should be done in the course of this year and we should be starting production in Europe in the course of 2020. In both locations, we will use the latest version of our proprietary process technologies, which allows us to produce a broad range of product technologies to meet the specific performance requirements of each platform or customer. Combination of the €460 million investment currently in execution in South Korea and China, and the new investment program of €660 million in China and Europe, should enable us to sell at least 175,000 tons of cathode materials in 2021, including a sizeable proportion of higher nickel containing grades.
The shorter run, considering projected market growth, combined with all the business and the fast ramp-up of new capacity, our sales of cathode materials should reach 100,000 tons in 2019. The new investment comes in response to growing demand for our materials for use in electrified vehicles. This is in part due to fast market growth as most automotive OEMs are rolling out their electrification strategies. This trend is most pronounced in China, where emission norms are playing out in combination with the effect of quota for new energy vehicles and a compelling subsidy mechanism for both passenger cars and buses.
Electrification is also making significant inroads in Europe and the introduction of tighter CO2 norms in 2021 will exacerbate this effect. Alongside the EV markets, we see significant growth in the energy storage segment and increasing demand for our high energy density materials used in the higher portable electronics segments. Our current view of the market size implies significantly higher market demand than the view, we had some two years ago at the time of our Capital Markets Day. In addition to the share market evolution, we continued to win automotive customers and platforms while facing higher demand for the existing platforms.
These developments outline really well the strength of our technology portfolio and production capabilities in all application field where product performance and quality constitute significant differentiators, whether it is in automotive, energy storage or high-end portable electronics applications.
Given this quantum leap in capital materials and the continued growth in the catalysis and recycling segment, I now see an upside potential of some 35% to 45% compared to the original Horizon 2020 target, while maintaining the 15%-plus ROCE target. We intend to elaborate on this upside potential during the next edition of the Capital Market Days, which will take place in South Korea in June this year.
Having commented on the growth acceleration, I would now like to review last year's performance of our businesses before handing over to Filip, who will comment on the financials.
In Catalysis, revenue grew by 8% year-on-year and recurring EBIT by 9%, driven to a large extent by the consolidation of Ordeg in Korea since April. In the absence of any major changes in emission norms in 2017, we saw growing demand for our heavy duty catalysts in Europe and in China, while the demand for light duty catalysts was somewhat below the market evolution. This was mainly due to lower demand from Korean car manufacturers and an unfavorable customer mix in North America. In addition, the market mix itself was less favorable and diesel engines lost some market share in Europe.
In live 3D applications, we have successfully positioned ourselves in the emerging segment of gasoline particulate filters, both in Europe and China, and this will support the growth over the next few years. Also we project significant growth in China and India as a result of market expansion, combined with the introduction of tighter norms, and we have therefore recently decided to substantially increase production capacity in both countries. The new production mines are set to come on stream at the end of 2019.
In Precious Metals Chemistry, revenues grew across the board, with a promising in organometallics and significant business wins in homogeneous catalysts used in pharmaceutical and life science application.
In Energy & Surface Technologies, revenues grew by 46% year-on-year and recurring EBIT by a whopping 72% with strong performance across businesses. Obviously the volume growth in capital materials was the largest growth driver and the swift ramp up of new capacity has supported the volume growth in the second part of the year, while delivering the first scale effects. We also recorded significant growth in Cobalt & Specialty Materials, driven by strong demand across product lines, as well as favorable market conditions.
Revenues also grew in Electroplating and Thin Film Products and it were stable Electro-Optic Materials. Alongside the large investments in cathode materials, we are also expanding and upgrading our Belgium refining and recycling capacities for cobalt and nickel containing materials, and these investments will come on stream in the course of 2018.
In Recycling, revenues grew by 1% year-on-year and recurring EBIT by 2%. In Hoboken, we processed the higher volumes and this positive effect was offset by less favorable commercial turns in certain supply segments. The benefits of the gradual capacity ramp-up should be somewhat more pronounced in 2018 even in the absence of an improvement in commercial conditions.
You may recall that we decided a year ago to accelerate the execution of environmental investments following an incident that led to excessive dust emissions. It is worth pointing out today that we are making excellent progress on that front and thus emissions have already been brought down considerably.
In the other business units on the recycling segment, the performance was mixed with subdued demand in Jewellery and Industrial Metals; stable revenues in Technical Materials and a slightly higher contribution from the Platinum Engineered Materials and Precious Metals management activities.
On the people front, safety performance improved although not sufficiently. We had a 10% improvement in accident frequency, and a more significant reduction of the accident severity rates by 25% compared to 2016. We are continuing to work hard at making bigger strides to make Umicore an accident-free workplace. The number of employees decreased from 2016 levels as a consequence of the divestments, partly offset by recruitments in line with our organic growth profile and the recent acquisitions.
And at this point, I'm turning to Filip, who will comment on the financials before I wrap up the main messages of the day.
Thanks, Marc, and good morning, everyone. So as you saw from our numbers, we increased our revenues significantly in 2017. But equally important is that growth did not come at the expense of margins. As on average, our revenues became more profitable compared to last year, resulting in an increase of our group margins.
Following the sale of Building Products at the end of September 2017, no businesses remain any longer under discontinued operations. Revenues in continued operations increased 16% year-on-year, recurring EBIT and recurring EBITDA grew faster with 24% and 18%, respectively. Recurring EBIT for continuous operations amounts to €398 million compared to the high end of our guidance of €385 million, which means that revenues, recurring EBIT and EBITDA, all came in at record levels.
The return on capital employed for the Group moved about our 15% objective and with 15.1% is substantially above our effective cost of capital. Average capital employed for continued operations increased by some €390 million year-on-year, driven by a combination of organic growth and acquisitions. Some 70% of this increase was accountable to Energy & Surface Technologies. Nevertheless, this segment was also the main driver behind the Group return on capital employed accretion. Recycling remains the business group generating by far the largest returns with a gross sales for the year close to 26%.
You will have noted that in our updated Horizon 2020 guidance, we reiterated our ambition to stay above 15% return for the Group. The operating cash flow generated by full Group reached €516 million corresponding to a 15% increase for continued operations. Still last year's combination of strong organic growth and a number of acquisitions has increased our net financial debt from a low level at the start of 2017.
In total, we spent close to €700 million of cash on organic growth, mainly in the form of €365 million of CapEx and €284 million of higher net working capital. As was to be expected, Energy & Surface Technologies account for the bulk of this amount. The increase in net working capital was driven by a combination of higher volumes, higher pricing and the increasing needs for raw materials for the ongoing capacity expansions.
A few of our growth outlook for 2018 and the planned capacity expansions, we expect a further increase in net working capital in 2018. In addition to this organic growth spending, we've cashed out some €211 million on acquisitions, partly offset by divestment proceeds. On the waterfall graph, these elements are included in the other label.
The increase in financial debt over the year, including the new long-term private placements, translated into a higher net interest cash out. Our cash tax charge of €73 million was in line with last year. You will have seen that our recurring effective tax rate increased to 25.7% and we currently anticipate to stay close to this level for the coming years.
Our CapEx spending of €365 million in 2017 reflects the strategic growth priorities, and in particular, our ambition in the field of rechargeable battery materials, as over 60% of this amount was spent in Energy & Surface Technologies. Compared to the €141 million Group CapEx over first half of the year, it shows the acceleration linked to the capacity expansion projects. In Catalysis and Recycling, CapEx was roughly stable year-on-year, including the newly announced additional expansion in capital materials, we currently expect Group CapEx in 2018 to exceed €600 million.
And obviously technology innovation remains a key differentiator to us, and last year we stepped up our R&D efforts and this will continue to be the case in battery materials in particular. We spent the equivalent of 6% of our revenues on R&D in 2017 corresponding to an increase of 14% year-on-year. And it's perhaps worth remembering that we directly expense over 90% of this spending through the P&L.
Recurring earnings per share increased 14% year-on-year to €1.22 per share. The 17% increase in recurring operating result was somewhat offset by higher financial and tax charges. In few of our strong performance in 2017, the board will propose the shareholders a dividend of €0.70 a share compared to last year's €0.65. This 8% increase reflects the confidence in the execution of our strategic plan and our continued commitment to return cash to our shareholders notwithstanding important organic growth investments.
2017 we accounted for non-recurring items amounting to a charge of €46 million on EBIT level and €42 million on net earnings. Some two-thirds of this amount are linked to the divestments and the related restructurings, including a €13 million capital loss on the sale of Building Products, corresponding to accumulated depreciation for this unit, which under IFRS 5 was no longer recognized in P&L as of the second half of 2015.
Other contributors include impairments on Nyrstar's shares of €7 million and some €7 million of additional environmental provisions. The €840 million net financial debt at the end of 2017 includes €690 million of long-term European and US private debt placements, the US portion of which was only drawn in December. Increase in net financial debt in 2017 moved this away from the very low leverage ratios of the last years. The end of year net financial debt of recurring EBITDA ratio of 1.4x reflects that our capital structure remains solid and we expect to be able to execute our ambitious growth plan while maintaining an investment-grade status.
The €892 million gross proceeds from the newly issued shares will provide us with additional financial flexibility in the exhumation of our strategic plan and allow us to pursue acquisitions and partnerships that would further strengthen our offering in re-mobility materials and in recycling.
This concludes my comments, and I hand bank over to you, Marc.
Thank you, Filip. Before turning to questions, I would like to recap the key messages of today's call. Umicore achieved record performance in 2017, driven mainly by fast growth in energy and surface technologies. Excluding discontinued operations, revenues were up by 16% while recurring EBIT increased by 24% from the levels of 2016.
The return on capital employed increased to 15.1% which goes to show the growth is not being achieved to the detriment of margins. Furthermore, the execution of the strategic plan is ahead of schedule and if we assume no major changes in the macro environment, I can already say that we should be approaching already in 2018, the Horizon 2020 target of doubling recurring EBIT to a level of €500 million.
Considering the strong results in 2017, and the promising prospect, the board will propose to the shareholders to approve an increase of the dividend to a level of €0.70 per share in respect of the full-year 2017. From a strategic point of view, Umicore is making a quantum leap in cathode materials with an investment program of €660 million to expand capacity in China and establish production in Europe. These investments comes in response to the combined effect of business wins and projected market growth and confirms the strength of Umicore's technology offering.
With this significant acceleration of growth, I now see an upside potential of some 35% to 45% compared to the original Horizon 2020 targets that we presented back in 2015, while maintaining the targets of return on capital employed exceeding 15%. Against this exciting backdrop, we decided to raise new equity to fund our super-fast growth. I'm convinced that there will be a premium for those technology players capable of acting quickly and decisively in our fast evolving space. And with this equity raise, we will have the ammunition readily available to cease the best opportunities.
Obviously, I'm delighted that we managed to raise close to €900 million of equity at only a very slight discount and this against a backdrop of challenging equity markets. I take this as a clear vote of confidence from our investors in the strategy and positioning of Umicore and I would like to thank them for that.
With this, I would now like to open the floor to your questions.
Thank you. [Operator Instructions]. We will now take the first question from Wim Hoste from KBC Securities. Please go ahead.
Yes, good morning. Wim Hoste, KBC Securities. I have two questions on rechargeable battery materials please, and congratulations with the impressive announcements of yesterday evening on that. Some further clarification please on maybe the order book. I think in the previous announcements of additional investments, it was said that it was fully backed by orders. Is this also the case now or do you feel you have to be ready for market growth that has not yet translated into orders? So that's the first question. The second one is, it seems that you advanced the €460 million CapEx program that was announced earlier. Can you maybe share with us what kind of portion of the investments have already turned to operational by now and what is the schedule to be expected for 2018 with this respect? These are my questions. Thank you.
Thank you, Wim. Let me start with the order book. A big portion of our sales will be in automotives, and in automotive, you get business awards. When you qualify for a platform, you get the award for that platform. And then the way plan for capacity is combination of having received the business award and making some assumptions together with our customers about how the platform itself will sell in the market. There is no volume guarantee.
The only guarantee that we have is that we have been awarded the platform and that it is ours. Then have to make these assumptions on volumes. And what I can say is that with very diversified portfolio of platforms and customers that we have, a little bit to the situation in automotive catalyst, we have a pretty good view on what we will need to deliver in the next few years. So yes, the degree of confidence about the sales and the high-capacity and continuing high capacity utilization is very high.
Commenting on the ongoing investment program of €460 million, I can say that the most significant part of the capacity addition coming from that investment is set to come on stream in the course of this year with a, I would say higher weight to be placed on the second part of this year.
Okay, clear. Thank you.
Thank you. We will now take next question from Mutlu Gundogan from ABN AMRO. Please go ahead.
Yes, good morning, Marc. Good morning, Filip. A couple of questions. So the first is on the capital increase. One of the reasons you mentioned is that it provides more financial flexibility to pursue potential acquisitions. So can you tell me what the reasoning here is? What areas are you interested in? Second question is on the investment in NMC. This should bring your capacity 170,000 kilo tons by 2021. Can you tell me how that compares to the six-fold increase you already announced? Is it a doubling - any numbers on that would be appreciated. And then finally on the Energy & Surface Technology segment. I'm a little bit surprised to see the FDA margin down 90 bps half-year on half-year, despite a lower payment to BASF, the higher NMC volumes and the higher cobalt price throughout the year. So can you tell me why this is? Thanks.
Let me start with the last question, which is in a way the just want to answer. Quarterly or half yearly movements in margins are not so, I would say, easy for us to comment on because there is no - we're looking at longer term trends and we don't see a 90 bps change in such a short period of time as either an indication of what margins will be in the future or any other specific things. This is - I think the margins are at very healthy levels and to grow will continue to be at very good - very strong margins and strong returns. And I'm not looking so much at these short-term fluctuations in margins I have to say.
Continuing to take your questions in reverse order, let me first clarify that the 175,000 tonnes of cathode materials that we announced are not NMC. It's not NMC capacity. It's total cathode materials capacity. So of course it will include a vast majority of NMC grade and it also includes some of the other projects like the high energy density LC, who then goes into portable electronics and which is also a growing application for us as the quality of the product and the performance of the products that we are making is making a difference in the marketplace.
Coming back now to the heart of your question about the capacity. It is becoming difficult for us to continue to comment on doubling or where are we versus the six-fold increase because actually the investment phase is because of the acceleration are starting to overlap. So let's please allow me to step away from this approach of talking about multiplying or doubling capacity. Sufficed to say that if you take the combined investments of €460 million and €660 million, this is by and large what will bring us to the 175,000 tonnes of capacity at least taking into account of point that we didn't start from zero and that we're building on some existing capacity.
Now let me go to your questions about the use of the capital raising proceeds and the area that we may be targeting from an M&A point of view. Now clearly we're in a phase of super-fast growth and while we could fan-on the organic growth on the basis - on the back of our balance sheet alone, we decided to build some more flexibility and generate some more ammunition such that we could act very quickly in the marketplace and react and add to the investments if necessary depending on how successful we are with qualifications. And at the same time, we need to be able to act very quickly if acquisition opportunities present themselves and for which additional funding maybe required.
Now what do we have in mind or in the back of our minds when we speak about acquisitions, it's not about diversification. It's really acquisition that would strengthen the existing portfolio of activities or portfolio of technologies in clean mobility materials or in recycling. And you will have seen in recent times that we acquired quite a bit of IP through M&A deals and this will continue or may continue to be the case in the future. That we acquired also the emission control catalyst activities of Haldor Topsoe to strengthen our portfolio in emission control technologies, especially in the run up to the introduction of China 6 norms and the huge effect that this will have on our catalyst business.
So I think this is a good illustration of the type of deals that we may be pursuing going forward.
Okay. Thank you very much.
Thank you. We will now take next question from Chetan Udeshi from JP Morgan. Please go ahead.
Hi. Thanks for letting me on. So just few questions. Every time you see this inflection in some new market, there is always potential that customers could be ordering more than they actually need just to have sort of a backup of supply. So when you've done your analysis, Marc and Filip, have you guys taken some sort of a risk-weighted approach here in terms of taking into account all of the forecast that you can - you might be getting from customers in terms of building new capacity for that? And second question is in terms of tracking the competitive landscape, have you seen any material change now or in your recent platform bidding versus say the situation six or nine months ago?
Good morning, Chetan, and let me start with the first questions. Yes, we do make our own assumptions based on the customers forecast and we have, I would say, some models based on the experience that we have and projected market data from other external sources and our customers to try and figure out at best how to project the demand. This being said, the reality today in the automotive supply chain for electrified vehicles is that the orders tend not to be overstated and that the lead times for the customers are fairly young because the supply chain has yet to shape up in order to meet the surging demand.
So we're not very much at risk of overstated orders but still the answer is that yes, we have models in place to try and fine-tune the customers forecasts in that respect.
Talking about the competitive landscape. No, I don't see major changes in the competitive landscape. I can only repeat what I mentioned on previous occasions is that it takes time for technologies and new entrants to get qualified in this marketplace and in this environment and that is not changing. So I think that as I mentioned previously and as we also stated in the press release, we are in a position to accelerate our growth to grow faster than the market to take advantage of our early mover position and to somewhat increase the gap with our competitors because indeed it takes time for them to get qualified.
I'm not pretending that they are not successful. I will not be. I'm just saying that it takes time and that we have a clear advantage in that respect.
Maybe if I can have one follow-up quick short one is your last, the recent announcement on capacity expansion that you announced actually last evening, would you say it's more of a reflection of you guys winning more share than in the past, or do you think the market itself in terms of EV penetration is sort of trending up higher than what many would have thought maybe six to nine months back?
Chetan, it's really a combination of the two effects. So we see both.
Okay, thank you.
Thank you. We will now take the next question from Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Good morning, gentlemen. Maybe first starting with recycling. You mentioned lower commercial terms in the second half. Could you maybe shed some lights in which segments or for which type of supplies you were seeing this less favorable terms. And then could you maybe update us on any hedging that you have in place in recycling? And if current metal prices and currency rates were to prevail, how would that affect the outlook for recycling for 2018? And then maybe two follow-ups on battery materials. First of all, could you maybe break out Europe, what proportion that will represent of the CapEx or the capacity? And then secondly, given the size of rechargeable battery materials and its very prominent role in the overall equity story, would you consider to report separately on that business?
Good morning, Peter. I have to say I missed the - not the last question but the question before last.
Yes, on the investments, how much of that will be allocated to Europe and can you give me insights on the CapEx or the capacity that will be allocated to Europe?
Okay. Thank you. So no, I'm not going to break that down in detail, and what I can say at this stage is that significant majority of the €660 million investment will be in China, where we will continue to expand quite considerably and a minority of that amount will be dedicated to establishing a first production facility in Europe. That's the level of detail or lack of detail that we prefer to go into at this point in time.
And continuing on that subject, no, we do not intent to report the RBM, the rechargeable materials business unit separately for a number of reasons. And the most significant reasons is that that activity is very closely intertwined with other activities within the Energy & Surface Technology segment and it makes sense to continue to consider those as a fully-fledged segment. And I'm referring very specifically to the Cobalt & Specialty Materials business unit, which is the other large activity within that segment. These two businesses have a lot in common in terms of supply and some of the production of intermediate products and precursors, etc. So it wouldn't make a lot of sense from the business point of view, nor from a practical point of view to separate them up.
I would comment on the commercial terms in the Recycling segment, and then hand it over to Filip to address the other questions. So the segments where we saw increased competitive pressure in the second part of last year - actually it's nothing really new or surprising. It's a continuation of trends that had been initiated in the past but in certain grades of electronic scrap for instance or certain types of spent automotive catalysts. And in addition, we see a little bit of competitive pressure in one or two sub-segments of industrial byproducts. And then I will hand over to Filip.
Good morning, Peter. So on the hedges, really the hedge position has not really changed compared to what we told you on the end of June situation, so we did had a few minor hedges. But so not really anything material to mention. And as we said then, we have some hedges for precious metals and for some base metals running into 2018 and broadly 2019. So really no changes.
On the potential impacts based on prevailing currency and metal prices, so it's clear that the current forex environment is a headwind for us. On the metal side, there may be some upside but if you take both together at the current situation would be a net headwind for us in terms of earnings and obviously is included in the guidance we've given you.
Okay, thank you.
Thank you. We will now take the next question from Charlie Webb from Morgan Stanley. Please go ahead.
Good morning, Marc. Good morning, Filip. Just a few from me. First off, just bridging to the €500 million for 2018, the €100 million delta you're talking about. Perhaps you can give us a bit more granularity as to how we get that bridge taking into the account the FX headwinds you just mentioned. I don't know, maybe you can touch on what's the acquisitions will contribute and then by division a sense of where the growth is going to be coming from? First question there. And then secondly, on the 605 kilo tonnes of cathode material that you expect to buy in 2022, perhaps you can - at least for the automotive side of that, give us a sense of how many EV or maybe just gigawatt hour capacity that corresponds to get that kind of raised level of demand. That would be question number two. And then question three, just on D&A. As obviously D&A in ASP [ph] we should probably expect to step up again in '18. How should we think about that? What are your depreciation terms for the divisions? If you could remind us, that would be helpful just so we can get that right. Thank you.
Good morning, Charlie. Let me start with the bridge and to the outlook 2018. I can say that the majority of the growth is going to come from the super-fast growth in Energy & Surface Technologies. And as I mentioned earlier, a big chunk of the capacity addition from the investment program of €460 million that we initiated in 2016 is going to take place in 2018 with a significant part of that being taking place in the second part of the year. So that's the majority of the growth.
Next to that, we expect to have somewhat more growth in Catalysis and in Recycling than was the case in 2017, and this will complete the bridge between 2017 and 2018. And indeed this is despite the headwind that Filip mentioned, talking about the net effect of currency moves and metal prices. Coming back to the capacity expansion, let me first correct that it is - we're speaking of 175,000 tons in 2021, not 2022.
Sorry, it was just on the slide you put up for the cathode material market by 2022, I guess, one of the early slides you put up just what assumptions is that based on?
So the slide that you're referring to is talking about the market, not our capacity.
Understood. I'm trying to understand your assumptions on the market.
Yeah, it's difficult to firstly say exactly how many gigawatt hours this is corresponding to because this will depend on the final product mix that will be produced at that point in time. And then regarding the D&A, I would hand over to Filip.
Yes, we're not going to give specific guidance obviously for segment for D&A but what you can clearly see is indeed there is an increase in D&A that follows the acceleration in CapEx. In 2017, we were close to €190 million D&A for the Group. You can expect that if you are including this new investment and capacity expansions that by, let's say the end of the decade, we'll be coming closer to the €300 million than the €200 million because of this acceleration, which is pretty tough in terms of earnings obviously, which is why we give guidance for recurring EBIT and return on capital employed actually. You have that increase also in the objectives, so in terms of EBITDA and cash flows, it would be a bit easier. So close to €300 million end of the decade.
In terms of specifically what we do for RBM and for the new expansions, I wouldn't want to detail that. It's just that we have the normal useful life kind of assessments like we do for any businesses. We don't apply any specific principles for this investments or for RBM in general. What I would say is that if you look at the line that we have been investing in RBM in the past, they are also running. So in terms of technological obsolesce, the risk is actually very low. And so D&A is one aspect but really the use of these lines is another.
So nothing specific to mention. But clearly an increase in D&A to be expected for the Group following the acceleration in CapEx towards something like I would say closer to €300 million by the end of the decade.
Okay, thanks. Maybe just quickly follow-up on the second question. What is your battery penetration expectation for 2021 or 2022, or number of EVs in terms of your forecast and how does that changed perhaps versus six to 12 months I guess?
Charlie, I don't have the number on the top of my head, so I would come back to that when we meet next week and then of course the idea was to provide a more elaborate update during the Capital Markets Day. But let me say by the time we meet next week I can already provide you with some more color on that subject.
Okay, perfect. Thank you very much guys.
Thank you. We will now take the next question from Raghav Bardalai from Exane. Please go ahead.
Hi, good morning. It's Raghav from Exane BNP. Just one quick question left please. You talked about the increasing need for raw materials given the increasing input capacity and I wondered sort of what level of visibility you have on the raw material side for this new plant primarily cobalt, how big is the risk on the supply chain. You can't respond to meet the sort of accelerating trend in demand? And linked to that, do you see battery recycling being able to contribute faster than expected to meet sort of this growing issue? Thanks.
Good morning, Raghav, and let me indeed comment on this quite important and critical subject of raw materials. And we are pretty well equipped I would say to deal with that because we have been in the market for quite a while. And unlike some of our competitors, we have - we do have in-house refining and recycling capabilities, which gives us the possibility to source very different types of raw materials that we then refine ourselves into the grades or the chemical grades that we need for battery material production.
This being said, this will continue to be a hot topic for everyone in the industry because it takes a little bit of time for the supply chain and the raw material supply chain to shape up and cope with the fastest surging demand. We are one step ahead I believe of many because we have been able to source long-term and short-term and commit to certain raw material off-take because of our also the commitments that we have with our own customers to produce the materials. So we are in a pretty good shape in that respect and we continue to work on a number of projects to source additional quantities of the required raw materials.
Now the good news on the cobalt front is that while there was a lot of concerns or announcements about a very tight market in 2017, the most recent announcements are about the significant expansion of production capacities, which should indeed provide some more oxygen for the mid-term in that respect. In terms of the battery recycling activity, in the long run, it will be essential to source a significant portion of the raw materials from the in-house recycling capabilities and we will want to be positioned early in the game in order to benefit from our technological capabilities in that respect.
It will be essential because if the growth continues at the pace that we see today beyond 2025, the need for additional quantities of raw materials was cannot be addressed only by primary production. It will have to be complemented by an effective collection and recycling chain in order to have the raw material that are required.
This been said, we're still quite some way away from the battery recycling activity reaching very large industrial scale because the availability of sell batteries today is still very limited. The cars, the electric vehicles have to be sold and they have to hit the road and then have to run their course for eight, nine, 10 or 12 years before the batteries comes for - become available for recycling. So it will take a bit of time and I would probably today stick to the statements that I made a while ago that it's going to be a mid-2020 opportunity for us. It's going to be a big opportunity and probably the next big thing in terms of the recycling development but it's going to be more like mid-2020s than eminent.
Got it. Thank you very much.
Thank you. We will now take the next question from Sebastian Bray from Berenberg. Please go ahead.
Good morning, and thank you for taking my questions. Could I ask firstly on the capital intensity of this cathode expansion. Am I right in saying that there is potentially an over 30% reduction with this new announcement to €660 million relative to the €460 million previously announced in the amount of CapEx that you have to spend, let's say get one kilo tone of NMC, and if there has been such reduction, how exactly has this been achieved? My second question touches on cobalt supply. If this facility comes online as planned to get 175 kilo tonnes, my - as a rough guess, I think it may cause a conduit for over 20% of the world's cobalt supply. And I just want to get a closer idea of how much certainty there is around, let's say, being unable to source enough cobalt. And my final question is on auto catalyst. One of your competitors I think it's Johnson Matthey has been talking about substantial market share gains in European auto catalyst. Are you going to lose from your view share particularly in diesel cars in 2018? Thank you.
Good morning, Sebastian. Let me start with the CapEx intensity. No, it is more or less in line with the previous investment. It can be slightly different taking into account some of the scale effects as we roll out the new investments. But it's not significantly - it's not materially different. What I would like to point out is that our CapEx intensity is materially lower than that of any competitors and that's because we are using a proprietary unique technology and process actually to produce different grades of cathode materials in a fairly versatile and very effective manner. So that's where I see a material difference.
Talking about cobalt supply, the reality is indeed that we are today already one of the largest consumers of cobalt in the world and with a growth in next few years, we'll continue to be so. And yes, clearly we have sufficient confidence that we will be able to source these raw materials in due time and due quantity and quality and there was sufficient confidence that this is the case to support the decision to move ahead with the investments. And I think the fact that we are qualified on so many platforms gives us the confidence that the materials in a way will be coming to us to a large extent.
And then on the automotive catalyst question, yes, we see some changes in relative positions in the market with Johnson Matthey gaining some ground on the diesel side. How much - I mean, I wouldn't dare to quantify as they have been daring to do. And on the other side, I would like to point out that we are winning market share on the gasoline side of things, and in particular in the emerging segment of particulate - gasoline particulate sensors, which is going to be a very significant addition to the revenue and margin potential in the next few years in particular in Europe and in China.
So on balance, I am not dissatisfied with the mixed evolution I should say. And as I mentioned earlier, we had discussions about the future engine mix and where diesel was going, and I continue to believe that the diesel has a significant role to play in future engine line up and in order to minimize the CO2 emissions. But this being said, as I mentioned before, Umicore tends to benefit overtime from a decline in diesel market share versus gasoline and electrified drive trains.
Thank you for that. If I could just ask one quick follow-up again related to cobalt supply. If I look at it from the demand side, I think there is reference within the press release to Cellcore, which I assume is NMC 811 or even higher nickel. Could you perhaps give an indication of how much of this capacity is mid-grade, i.e. 622 NMC or thereabouts and how much is high grade i.e., 811, and if you are currently selling higher grades or will sell 811 NMC? Thank you.
Actually Cellcore is the brand name for all of our cathode materials, so it's not just one grade. So to clarify this point. And no, I'm not going to breakdown the - into the different grades and sufficed to say that we're selling a broad variety of grades today and that the projection that we have communicated includes a sizable portion of high nickel containing grades in line with where we see the market demand evolving and the platforms evolving going forward.
Thank you very much.
Thank you. We will now take the next question from Ronald Orr [ph] from Redburn. Please go ahead.
Hi. Thanks for the questions. Just two from me. Firstly, cathode materials. How does your visibility on price compared to volumes? Though OEMs don't promise volumes, do they promise a price per ton or how does that work? And secondly, in terms of market share for NMC, by the time you are fully ramped up in 2021, what market share do you expect to have by tonnage? Thank you.
I'm afraid I'm going to disappoint you on both questions, because I don't want to go into any kind of details about the commercial agreements and pricing.
Okay, so do you have any visibility though or is that [indiscernible].
I was going to get there. So I can only say that we have sufficient visibility to be confident with the outlook statement that we made yesterday about the short and the medium-term indeed. And secondly, I'm not commenting on market share because we don't have a policy to do that, nor a policy to drive the business towards extension of market shares. I have to say that side of the business is and scale is really important in this type of industry because scale effects are important and because you need to be able to afford significant cost of research development startup and ramp up and qualification of products and production lines.
But I'm not market-share driven. I see that the market share has been the result of our successful positioning in the markets both from a technical performance point of view and production quality point of view. I believe that - I think it's becoming clear that we will be one of the significant leading players in that industry. But I'm not willing to put a figure on that in terms of market share.
Great. Thank you very much and apologies for cutting you off.
Thank you. We will now take the next question from Geoff Haire from UBS. Please go ahead.
Hi, good morning. I just wanted to ask a couple of quick questions. First of all, when you look at the platforms that you bid for in terms of electric vehicles, do you bid for every platform that's out there, or are you more selective and what is the criteria if you are more selective? Secondly, the chart on page 8 of the presentations so the market view for cathode materials, can you just tell us who's view that is and what it would look like if we looked at it from 2017. I'm assuming that the uplift would be smaller than what you have there? Those are my two questions? Thank you.
Sorry, Geoff, I missed part of the second question. Would you mind repeating it?
Yes, sure. The chart on Page 8 of the presentation, so the cathode materials market 2018 view, whose view is that? There is no source on it, and I just wondered what it would look like if we started in 2017 rather than 2015?
Okay, so let me start with the first question, because I need a little bit of help from my team to address the second question. So there is a certain degree of selectivity in bidding for platforms indeed because from, I would say early contacts with customers and the relationships and technical work on sampling of I would say large-scale level, we know whether our projects are fitting better one platform or another. And so clearly we are focusing on those platforms where our products are making a clear difference in terms of product performance and where the scale is significant because we focus on really on moving onto these mainstream application and the mainstream platforms.
So there is a degree of selectivity. This being said, it's not like we are discarding a significant number of platform opportunities. That's not the case. But we know fairly early in the game whether our products and technologies are fit for certain application requirements indeed. Now if you would allow me, I will revert a bit later on the second question, and if I'm not able to do that during the call, we will provide an answer on that question early next week when we meet in London.
Okay, I just have one follow-up. One follow-up question. The EBIT guidance you've given for 2020, the uplift, is that risk-adjusted or is that just the number you think you're going to get?
Well, that's the best you have today. I can only say that if I'm sticking out my neck while it's still early days because that's the best you have today. I cannot say more on less than that.
Thank you. We will now take the next question from Adam Collins from Liberum. Please go ahead.
Yeah, hello. Good morning. I had a couple left. So the first one is on the battery side. It was interesting to hear you say that you're quite positive about the outlook for high energy LCO where you have a strong competitive position. That might seem some more paradoxical given the steep escalation in cobalt cost for this year from what is a very cobalt-intense product. I wonder if you could talk a little bit about the drivers there? And then the second question is around the recycling area. I wondered if you could talk a little bit about your anticipated production ramp in the next, say, year or two? And then just to allow one potential concern, you talked about a commercial deterioration in end of life materials as has been ongoing trends in [indiscernible] catalyst. Could you just confirm that in the core business, the complex mining messages commercial conditions are more robust and there is no risk that as you expand volumes in that area, there will be some commerce impairments?
Good morning, Adam. So let me first comment high energy LCO and the demand drivers that we see there. Well, it is, to a large extent, driven by product performance and product quality and quality consistency and you have seen a number of incidence in the last few years with certain of these high-end portable applications and you continue to see a number of issues being raised by consumers about the performance or the reliability or durability of certain of these applications and this is translating and we see that very clearly. This is translating into a flight to quality, quality products, best quality products, best purity, best performance and this is supporting our business in a very significant manner even if the overall market demand is not growing at the same pace as we are.
So that's one. On the recycling side, indeed we see different types of evolutions in terms of commercial in terms of depending on the supply of sub segments. I've mentioned a few trends that we see in [indiscernible] catalyst which are not huge. In the industrial byproducts, by and large the conditions remain somewhat more robust and a little bit less volatile except in one or two sub-segments which are not the largest ones, but have a certain impact that we see today, albeit probably very temporary so.
And in terms of ramp, we see a more pronounced impacts of the ramp up of the capacity this year than in the course of 2017, and the reason I mentioned in the release or in the presentation now assuming or even in the absence of improvement in the commercial terms was only meant to single out the fact that the volume ramp that would be quite visible this year even if we don't have a change in the commercial conditions. I'm not saying that there will not be an improvement in commercial conditions. Just wanted to point out the effect of the ramp.
Okay, thank you. Just on that subject, could you help us understand what the mentions [ph] profile is this year compared to last year?
Subject to verification, if my recollection is correct, we will have one maintenance shutdown in the second part of the year and in the second half of the year. And since there are quite a few investments that are being carried out at that point in time, it may be, I would say, somewhat long shutdown not just the regular maintenance but a little bit more than that. But it's going to take place in the second half of the year.
Okay, thanks, Marc.
Thank you. We will now take next question from Jean-Baptiste Rolland from Bank of America Merrill Lynch. Please go ahead.
Good morning, Marc. Good morning, Filip. Three questions for me please. Number one, please could you highlight how you see European demand for NMC cathodes growing versus Asia over the next five years, and perhaps could you elaborate on how you see your authorities supporting the value chain in Europe? Secondly, you previously mentioned that the qualification time for cathodes remained fairly lengthy. It sounds however that lead times to get these cathodes qualified has quite diminished within the last three years. Could you confirm this is not a trend that you're seeing on your cathode products? And then lastly, on Haldor Topsoe you're likely aiming to get market share in HTG specifically in China and Asia, as these are the regions that are getting rule regulations forward. Is there any comments that you could share with us with regards to how competition is developing in those countries please?
Good morning, Jean-Baptiste. Let me comment on the European demand for capital materials over the next five years. Actually as we mentioned on previous occasions, we see Asia is continuing to be the main growth driver in terms of demand for the foreseeable future. And China alone, we believe could account for as much as 40% of the demand in the next five, seven or eight years, considering the penetration profile of new energy vehicles in that country alone.
Europe will probably, as we see today and as we estimated today I should say, will probably come second to China and possibly over the next five years account for something between 20% and 30% of overall demand worldwide. We see a new acceleration in Europe in that respect, driven by the tightening of emission norms and in particular the upcoming introduction of very tight CO2 limitations in 2021. So that's a little bit the picture. It's I would say a rough picture only that we can give because we can see a lot of viable parts and moving parts in that demand picture today.
And as you alluded to, there is emerging support from European authorities to establish a fully fledged battery value chain in Europe and how and when these support measures will take shape is still work in progress, so it will take still a little bit of time for the European Commission and the member states to figure out how to best achieve that goal of establishing such a battery industry in this region. And I'm pretty positive about the initiative and the fact that the commission and the members take have figured out how important it would be for European industry for European economy and for our technology position in the world to have this type of initiative and to promote this type of industry.
So let's give it some more time to figure it out. And sufficed to say that there is a positive movement in that respect and we will be more than happy to participate in that initiative, that type of initiative.
Now coming back to the other to your second question about qualification times, I've seen and read about that on a few occasions and I wonder where this is coming from. We don't see that. This is not just the automotive reality that qualification times are getting short or shorter. The certification process are lengthy and demanding in the automotive industry, and I don't see global manufacturers global car manufacturers making or taking any shortcuts there. So I'm not sure where this is coming from again, but I'm not in a position to validate that there is a shortening of qualification factors or qualification times.
In terms of the acquisition of the heavy duty and stationary activities from Haldor Topsoe, yes, this will add to more positioning and offering in heavy duty clearly and in China in particular. And I think it's still early to comment on how the market is shaping up and we believe that we are going to have a meaningful share of the very vast Chinese HTT market once it has moved to China 6 emission norms and that is set to start early in the next decade.
Okay, thank you.
Thank you. We will now take the next question from Mathew Hampshire-Waugh from Credit Suisse. Please go ahead.
Hi there. Thank you for taking my questions. The first is just following on from that technology split question. Realize you don't want to spit out the ratios, the different high and low nickel compounds. But can you give us an idea of whether the production facilities are able to switch between producing high nickel and producing NMC111? My second question is just can you give us an idea of what the underlying growth was in catalysts, if we exclude the JV consolidation for 2017? And the last question is just in terms of the new 2020 targets, can you give us an idea if is there any assumption for contribution from M&A in there and can you give us an idea of what you think the free cash flow generation profile for the Group is going to look over the next sort of five years? Thank you.
Good morning, Matthew. I will let Filip answer the question about the cash flow profile. On the technology split and the various grades, I can confirm that all production lines have a high degree of versatility and can produce a high number of different grades with different compositions and nickel count. And so that's a bit of a unique situation I believe in the industry. I don't have a clear picture of how versatile the production processes of our competitors are. But as far as I understand it from my own engineering teams or process, it's pretty big in that respect. So there is a high degree of versatility in terms of production capability.
The growth in automotive catalyst, if we exclude the consolidation effects of Ordeg since April as we mentioned in the press release somewhat below the market growth and that was due to the subdued performance of some of the platforms our customers that we [indiscernible], in particular the Korean manufacturers which experienced pretty challenging year last year in China and in some other parts of the world and because of the unfavorable platform of customer mix in North America.
Then about your question - regarding your question concerning the 2020 updated target and the upside potential. We have not incorporated in that acquisitions beyond those that have recently been completed and will start contributing very soon.
Then I will hand over to Filip for the cash flow.
And on the cash flows, I would limit it maybe in the first instance 2018 in the voice over we said that for next year what the EBITDA guidance more or less is, so we guided for €500 million 2018. So if you add about €200 million of D&A, you had €700 million of EBITDA. We've guided for more than €600 million of CapEx and working capital is a bit too early but clearly again an increase, I would say, meaningful increase in working capital because of the underlying growth.
So from that you can deduct an indeed for next year - sorry, for 2018 will be negative in terms of free cash flow. For the years thereafter, it's a bit too early to tell. But certainly the investment levels will remain high as you've guided from all our indications. And with the growth comes working capital as well, and that will be offset by the fact that also our EBITDA will obviously also continue to grow as we've guided for implicitly I would say in our updated 2020 guidance for recurring EBIT and the fact that I told you that by the end of the decade D&A should be closer to €300 million. But it's a bit too early to give that far out guidance of free cash flow. But certainly for this year we will have significant negative free cash flow because of all the expansions and the overlap in terms of the projects in most specifically.
That's very helpful. Thank you both.
Thank you. We will now take the next question from Massimo Bonisoli from Equita. Please go ahead.
Good morning, Marc and Filip. Two quick question last. The first for Marc, back to the question of ramp-up. What are the main challenges or risk for the plant you will build in Europe in comparison to the new plant in China considering the early stage of establishment of supply chain in the region? And the second for Filip, back to the free cash flow. Thank you for the guidance for CapEx for 2018. Do you have any indication for the level of CapEx for '19, '20 just for the housekeeping of the model?
Good morning, Massimo. The challenges for establishing production in Europe are not so different than what we had in other regions in a way. We have a lot of experience right now and all the aspects that have to be covered in order to establish such production that is related to permitting, procuring the equipment, doing the engineering work, doing the commissioning and ramp up. So I don't see very different challenges because the plant would be located rather than - would be located in Europe rather than other regions. And the experience that we've recently had with the creation of our production facility for automotive catalysts in whole was extremely positive in that respect because we managed to act with quite a lot of speed and effectiveness in order to bring the facility on stream very quickly and actually a little bit ahead of schedule.
And now I will hand over to Filip for the cash flow.
Good morning. So for the years thereafter, again it's a bit too earlier say to give specific guidance. But for your model you can assume that we will continue to be at a high level of CapEx. I would expect not to be at the level of 2018 because again we have this overlap this year of the different investment waves and capacity expansion waves. But for your model assume something, which is still relatively close to the €600 million, not as much as 2018. So the messages that we will continue to invest in our expansion for the next years and these amounts will be significantly higher than what we've seen in recent years.
Provide more guidance as we get later into the year and the plan.
Thank you again.
Thank you. We will now take the last question from Mutlu Gundogan from ABN AMRO. Please go ahead.
It is very nice. Thank you. Question on the associates in your energy segment. Just wondering how much of those associates eventually work for you? So what I'm actually getting at is to what extent are the volumes that run through your associates which are mainly in corporate refining if I'm not mistaken end up with you. So that's the first question. And then secondly, is there a possibility to acquire those associates? Then the third question is getting to recycling on the volumes. You're saying that process volumes are higher this year. Can you give us an idea how much higher they were? And then finally, can you repeat what you said on dust emissions and what impact did it have on the financials? Thank you.
Okay, Mutlu, let me comment on the first and the last question. And I mean the second question. Okay, so on the associates, there is a high degree of integration between the two associates and the battery materials activities of Umicore because they produce some of the ingredients and precursors that are required for battery materials. So there is a high degree of integration between this and the Umicore controlled activities clearly.
And then on the dust-related question. The effect on the financials is mostly through the investments. As I mentioned early last year when we had the discussion initially, we are - we have - we actually initiated last year a €25 billion investment program to address these emissions. And so we continue to invest - it's not a one-off but there is a continued investment in the plant in order to continue to significant investments in the plant in order to bring those risks of emissions to the lowest possible level, so the effect on the financials will be through increased depreciation in away and I don't see any other impacts to be mentioned if you are talking about the financial consequences of that.
And on the recycling volumes, I would not say anything different than what I said earlier, the ramp up is going to be somewhat more pronounced in 2018 and more visible in 2018 than it was in 2017 from a volume point of view and from a bottom line point of view as a result of that.
Right. Maybe a quick follow-up on the associates, is there a possibility in the contract terms to buy out the other partner? And then secondly on the dust emissions, I wondered whether that had a negative impact in terms of utilization whether you were because of that you could produce the volumes that you could do theoretically?
On the second question, directly not. Indirectly you could indeed say that because of the large investments that had to be made in order to address these emissions. These are pretty substantial I would say modifications to the flow sheets that we are carrying out because of that, yes, that has some impact on the shutdown time, the maintenance shutdown in order for us to have the little bit capacity to do these - to carry on this changes. But there is no real direct investment in terms of capacity - availability of effective capacity.
Now coming back to the associates, I wouldn't necessarily say that there is a desire to buy them out. We're very happy with the current configuration where we are a minority shareholder in these associates and have a high degree of - having a high degree of operational integration from a supplier relationship point of view.
Okay, that's very helpful, Marc. Thank you.
Okay, so this concludes the Q&A for today. Clearly I assume that you will have a follow-up questions and that you will address those to the Investor Relations team. And of course Filip and I and our Investor Relations colleague will be on the road in the next few days, and we'll have the chance to meet many, if not, most of you and continue this dialog. So I look forward to that. And in the meantime I would like to thank you for your active participation to the call today and wish you a pleasant end of the week. Bye-bye for now and talk to you soon.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.