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 CEO & Chairman’s review

Umicore Chairman, Thomas Leysen and CEO, Marc Grynberg look back on 2014 and take stock of the challenges and opportunities in 2015 and beyond.

The business context in 2014 remained challenging for Umicore. This was mainly due the effects of lower metal prices and currency headwinds. Overall economic growth in many regions of the world was also anaemic, leading to a continued lull in industrial demand. In this context, we successfully managed to stabilize revenues and were even able to secure revenue growth in a large number of businesses. Although cost control measures supported the performance of several business units the overall impact of the external factors – particularly the less supportive metal price environment – meant that we generated a recurring EBIT that was 10% below the level of 2013 and corresponding to a return on capital employed of 12.2%.

Although the Recycling units felt, as expected, the bulk of the impact of the metal price headwinds, they were able to generate a very high return on capital employed of 40%, well ahead of any industry peer. The other three segments grew their earnings. In Catalysis, recurring EBIT was up 13%, driven by the ramp-up of Heavy Duty Diesel catalysts which started in the second half of the year and higher sales of catalysts for passenger cars. Energy Materials continued its recovery with all units performing better than in 2013 and together generating 59% higher earnings, including the contribution of recently acquired businesses. Most units in Performance Materials also increased their earnings, helped by the difficult but necessary cost reduction efforts initiated in recent years. Including a stronger contribution of our Element Six Abrasives joint venture, Performance Materials grew recurring EBIT 12%.

2014 was another important year in the execution of our Vision 2015 strategy. We successfully completed the first major phase of the Hoboken capacity expansion and are confident that we will be able to complete the remaining major investments in the coming year.  We also completed or announced major growth initiatives in the Automotive Catalyst activities and the new plant in India came on-stream at the end of the year with new facilities expected to start up in Poland and Korea in 2015. We also announced an investment in a new plant in Thailand to cater for the burgeoning demand in the South East Asian market. The growth in Rechargeable Battery Materials continues to be supported by an almost continuous stream of capacity and capability enhancements, particularly in South Korea and China.  In 2014 our organic growth initiatives were nicely complemented by external growth in Energy Materials as we welcomed new colleagues through the acquisitions of Todini & Co and CP Chemicals. Our solid balance sheet can continue to accommodate further sizeable expansion both through organic growth and through acquisitions and we will continue to seek deals where these can generate obvious value for Umicore and our shareholders. Given the financial strength of the Group these deals could range from the potentially transformative to smaller complementary acquisitions for individual business units.

This financial strength also ensured that we were able to balance a continued high level of growth investments with a substantial level of cash returns to our shareholders in 2014. In total share buybacks and dividend payments amounted to € 187 million, which was close to the level of 2013 and represented more than 40% of the cashflow from operations. We also cancelled eight million of our treasury shares back in September. Umicore’s Board will propose a stable full year dividend of €1.00 a share for approval by shareholders in April which, based on recurring 2014 EPS of € 1.79 per share, would correspond to a payout ratio of 56%.

In terms of sustainability performance, although we made some further progress, this was overshadowed by the loss of two colleagues in an accident in Olen, Belgium in January 2014. We are determined to reduce the risk of such an accident ever happening again at Umicore. With this in mind, we made a strong and immediate commitment to address process safety in a more systematic way through the company. In the course of 2014 a project team engaged with all business units and visited over 20 sites to increase awareness of process safety and stimulate the exchange of best practices. These are now being shared across sites and business units and consolidated in practical guidance notes to facilitate their implementation. Beyond the effects of the accident in Olen, the safety performance was not satsfactory with accident frequency increasing slightly yearon- year. While this evolution is not positive, there were enough encouraging signs that a breakthrough is within reach. In 2014, for example, seven business units were able to operate for the full year with no lost-time accidents and more sites than ever before were able to operate with no lost-time accidents during the entire year.

On the environmental front, we made further reductions to our CO2 emissions compared to the baseline year and by the end of 2014 had reached a level that goes beyond the Vision 2015 targets that we set back in 2010. Although the impact of metal emissions to air fell further in 2014, a flood-related incident at our Hoboken plant meant that the impact of metal emissions to water were up significantly. We remain confident, however, that the remedial actions that have been put into place will enable us to reach our metal emission to water reduction objective by the end of 2015.

In terms of people development and employee satisfaction the results of our People Survey gave us a good barometer of progress from the results of the previous survey in 2010. Although, on average, the scores were slightly lower compared to those of the previous survey, this was the case for almost all companies in the reference group, with the effects of the economic downturn having a broad impact on employee satisfaction in most sectors. We did, however, note a steady performance or an improvement in around one third of the categories and, more importantly, recorded results that were above the Chemical Industry Norm and which significantly closed the gap with organizations which are considered to have the highest performance in all sectors. Our efforts in the area of employee health continued to pay off in 2014, particularly in terms of workplace exposure to metals.

Looking forward to 2015, we are seeing positive signs for the evolution of our financial performance. In the outlook that we provided in February we indicated that 2014 was likely to have been a trough year for Umicore and that overall profitability should be higher for Umicore in 2015. We are starting to see the benefits of recent growth investments, as well as the impact of cost-reduction measures. In 2015 we anticipate a higher contribution from the Catalysis and the Energy Materials business groups. In Catalysis, the improvements should come from the ramp up of heavy-duty diesel catalyst production in Europe and China and further growth in demand for emission abatement for light-duty vehicles across regions. In Energy Materials, revenues and profitability are set to increase further reflecting the contribution of recently acquired activities as well as growing demand across business units. We should bear in mind, however, that the global economy remains in a state of flux. The uncertainties prevailing in the Eurozone and the impact of shifting monetary policy on emerging market growth are just two elements that are casting a cloud over what is a broader story of gradual recovery.

In 2015 we will be fine-tuning Umicore’s strategic approach to ensure the best platform for success in the coming years. At the beginning of 2015 we already outlined our plans to realign the portfolio of activities to sharpen the growth focus of Umicore and create for four of our business units the best conditions for a successful further development. For the two zinc business units, Zinc Chemicals and Building Products, this entails that we will be looking at divestment options. In Thin Film Products and Electro-Optic Materials, we should consider strategic partnerships and alliances in order to enable the units to gain critical mass and increase their market presence. We hope to be able to implement these portfolio realignments by the end of 2016. As we pursue this process, we will be guided by the quality and the merits of each project and the timing will remain, of course, subject to the right opportunities presenting themselves and the presence of the right market conditions.

We would like to take this opportunity to extend our thanks and appreciation to our employees for their commitment in 2014, to our shareholders for their continued support and to our customers, suppliers and other business partners for their continued loyalty to Umicore.