Earnings Call: Q2 2021

Jul 29, 2021

Ladies and gentlemen, welcome to Solvay's Q2 twenty twenty one Results Conference Call for Analysts and Investors. Solvay team, the floor is yours. Good afternoon, and welcome to our second quarter twenty twenty one earnings call. Excuse me. My name is Jody Allen, and I'm joined virtually by our CEO, Elan Qadri, and our CFO, Kareem Hajar. Today's call is being recorded and will be made available for replay on the Investor Relations section of our website. I would like to remind all participants that the presentation includes forward looking statements, which subject to risks and uncertainties. You may refer to the slides related to today's broadcast, which are available on our website. With that, I'll turn the call over to Elam. Thank you very much, Jody, and hello, everyone. I'll begin my remarks today as usual with health and safety overview shown on slide three. Today, we have 32 colleagues who are infected with COVID nineteen, down from a hundred twenty four since our last call. Yet, we remain very vigilant given the pickup in infection rate with the delta variant. At this time, we continue to maintain our remote working routine globally to ensure high levels of safety, though we are also slowly reopening some of our administrative sites in certain countries with appropriate safety measures in place. Our solidarity fund that many generous investors along with the management team helped to co fund has stepped in to support hundreds of families in the past month. We supported hospitals in the communities in which we operate in India, in Bulgaria, Italy, a few examples following following the recent COVID outbreak. The Fed earlier in the week announced €2,000,000 to support our communities in Europe and in China who had been touched by the dramatic flood earlier in the month. We are making sure they have what they need and are pleased to have the ability to support our communities in tough times. Moving to results, you may recall in our last results call, I talked about the three r's which are, you know, representing Solvay. One r for resilience, one r for recovery, and one r for reinvestment. We we learned through the crisis about the resilience of our businesses, and it has been a stress test, as you know, through the COVID nineteen crisis. And we see now during this recovery period the resilience of our people. I'm truly proud of them, and I'm truly proud of the team. They do an extraordinary job every day, and Solvay is becoming an even better company, an even stronger company thanks to their effort. Our team fully mobilized to take advantage of the recovery that is clearly underway. It is now visible in about 90% to 95% of our portfolio as you can see in our slide here and as demonstrated by the strong demand environment and supply growth across most businesses. No surprise, only civil aero, parts of oil and gas and a portion of soda ash remain challenged. Moving to Slide five, sales in Q2 were up 20% organically. In fact, June sales volume surpassed twenty nineteen level. The surge in demand is particularly strong for our specialty products used in automotive, electronics, and building markets. For example, sales grew 59% in automotive. This includes all businesses that sell to auto across company, including specialty polymers, special chem, silica, and few others. And indeed, I'm very excited to tell you today that specialty polymers sales were at an all time high this quarter. Another example, sales grew 23 in building and construction or sales grew 15% in electronics. From a geographic view, all regions contributed to the sales growth in the quarter with Europe up by 23%, North America up by 17%, Latin America up 54%, and Asia Pacific up by 12%. Yet, as you are all aware, many industries including ours are impacted by the ongoing logistic constraints. For Solvay, we estimate about €40,000,000 of missed sale or one and a half percent in sales constraint directly related to these issues. And you can imagine, we would have had an even stronger quarter had it not been for these constraints. Cost inflation headwinds in quarter two amounted to €50,000,000 compared to €15,000,000 in quarter one as expected. And it's clear to us now that the majority of the impact will be in the second half and more to come on that later. Our teams are working hard to offset the rising cost with price this quarter. As you know, there is a lag between cost and price in. By the way, we are using this as an opportunity to build a much stronger pricing culture in the company. Our pricing actions continue to be positive. I can assure you the businesses are highly focused on securing more. Moving to profit, we continue to deliver on our promises. Structural cost savings of €51,000,000 were achieved in quarter two, totaling 131,000,000 for the first half twenty twenty one. We remain on track to meet our €200,000,000 target for the year. So all these actions on pricing, on structural costs, and obviously, the volume growth all translated into an EBITDA of 602,000,000 in the quarter, supported our delivery of 47% EBITDA growth and improved our leading margin, actually sustained our quarter one EBITDA margin of 24.5%, which is a record. Moving to cash. This quarter marks the ninth consecutive quarter of positive free cash flow. We generated €135,000,000 in quarter two. And in the first half, we are 25% ahead of last year. I'm truly pleased that the focus and discipline we brought to Cash Management since 2019 is clearly paying dividends and having an impact, and we are therefore raising our guidance more on this later in the call. Finally, on Slide six, our focus continues to shift to reinvesting for the rebound to support future opportunities, And we continue our disciplined approach to capital allocation at the group level, which aligns directly with our growth strategy. We also continue to win new business and form new partnerships that will drive and accelerate future profitable growth in many of our core specialty markets. As you are all aware, it's estimated that 30% of auto production will be electric or hybrid vehicles by 2030. As a reminder, we set up a battery platform in the fall of twenty nineteen as part of our growth strategy, which has been growing exponentially for several quarters even during the peak of the crisis last year. Since then, we have been building partnerships with key manufacturers, with our clients and partners as we position ourselves as a total solutions provider. Our solutions focus on performance, safety, increasing power density, and range. As you may recall, sales to batteries have almost doubled since '19, and our sales into batteries in quarter two grew by 82% year on year. Market growth rate and our leadership position makes this a clear core growth area for Solvay. And many of you have been asking us during the road shows, what gives us our competitive advantage? So let me summarize for you the key elements. First, we have a manufacturing presence on three continents, which is highly valued by our partners. Second, we are leveraging our broad portfolio of battery solutions that is unmatched in the industry and meet key performance and safety criteria. Most of you, of course, know about our leading position in PVDF, which is used inside the cell, but this is not the only thing we give or we provide in in the batteries. We also supply other polymers, like electrolyte materials within the battery. These include lithium salts and other specialty additives within the special chem business, for example. We also provide thermoplastic polymers, which are used in battery cases that literally circle the battery. And we are even commercializing other technologies in our portfolio to add to our suite of battery offering. And customers are choosing us for all these reasons, and this is in addition to all other solutions we supply to the automotive industry at the service of light weighing along with electrification. Last quarter, I shared with you that we continue to invest in additional capacity. By quarter one twenty twenty two, we will have doubled our PVDF capacity in France and China, and we have even more significant expansion plans coming up, so stay tuned. In addition to our own generation five solid batteries development, and I remind you, we are commercializing now generation two, we're also investors in start ups like a company called Solid Power, which recently announced its plan to be listed on Nasdaq. We were amongst the founding investors and recently OEMs, including BMW, Ford, have joined us in what we think is an exciting opportunity. Solvay had been collaborating with this entity for several years, and this investment aligns very well with our innovation strategy. And as I mentioned, our value proposition goes beyond batteries, and automotive is one of the largest market for Solvay. As we shared in our growth strategy, light light weighing is the other key driver in auto, replacing metal with various polymers and therefore consuming less fuel, emitting less c o two, or greenhouse gas emission and enabling cleaner mobility. And we see this in our increased penetration of specialty polymers in under the hood application. Some examples there include coolant lines, water pumps, and various connectors, all of which require a high degree of performance, thermal properties at lower total cost of ownership. And we have a number of new wins in the second quarter as we turn our sales culture into a hunting culture. For example, I cannot share customer names, but I will share that in quarter two, we secured considerable new business. Therefore, and to support continued growth, we are, as I said, expanding not only PVDF capacity, but also our elastomers and sulfon polymers and PVDC capacity. Let me now move to electronics market, which is another exciting market. Sales to this market grew by 15% in the quarter, marking the second consecutive quarter of double digit sales in electronics. Demand strength in semiconductors used in fab equipment, which is boosted by five gs and display market where various polymer materials are widely used, prepared us in recent months. We're also continuing to expand our production of electronic grade h two zero two. I'm sure you have read about the amount of investment happening with fab manufacturers around $50,000,000,000 has already been amount by companies like Intel, Samsung, and TSMC. All of these are underway already. And this presents a significant growth opportunity for Solvay because we manufacture some of the poorest hydrogen peroxide available in the world. It's a critical specialty in the production of semiconductor chips as the complexity of computer chips and the miniaturization of the circuit in them increases the demand for high purity h two zero two growth. Last quarter, I told you about our h two zero two extension underway in China. Today, I'm pleased to share with you that we are also extending our production in Taiwan with a new gen venture that aims to serve the booming semiconductor industry in that country and region. We are finalizing the agreement in the coming weeks, and production will begin in 2023. And as we speak, we are also planning investments in both The US and EU, and we are finalizing those contracts now, And we look forward to sharing more in the coming months on each of these investments. So listen. This is these are just a few examples of new businesses that address some of our core technologies, areas of investment. And it's clear that we are expanding our share of wallet. We'll continue doing so, and we are winning. So now with that, Karim will review with you in more detail the group segments and financial performance. Karim? Thank you, Ilham. Good morning. Good good afternoon, everybody. Before I dive into the segments, you'll remember that we indicated last quarter that a full year EBITDA impact of scope and currency was estimated a €120,000,000 for the year. And you can see today that q two includes a €31,000,000 impact mainly from currencies and to scope reflecting the six business lines that were divested late in q one. I'll now start with an overview of the three business segments and as usual, we'll refer to figures on an organic basis, namely at constant scope and currency, which obviously eases comparisons. Starting with materials on slide number eight, sales in the second quarter were up 12% versus the quarter last year, q two last year. Sequentially, they were up 3% against the first quarter twenty twenty one driven by very strong performance in the specialty polymers business. As you heard from Ilham, sales in specialty polymers were up 20% in the second quarter reaching 536,000,000, a historic record. And this reflects increased demand in multiple markets including automotive, electronics, consumer goods, and medical equipment. By far, the greatest driver was automotive where we saw polymer sales increase 52% and that excludes batteries that all Yinham has already shared with you. Moving to composites, sales were only down 8% organically. Though you will recall that in the second quarter last year, we were only at the beginning of the steep declines that became very evident in the third quarter last year in particular. On a sequential basis, the good news is that sales are improving, albeit modestly, talking 4% against q one last year. And that follows a 13% sequential improvement in q one relative to q four twenty twenty. We're really encouraged and we welcome the recent increases in aircraft order books and the customer news on future rate increases on single aisle aircraft. In the meantime, the footprint optimization and the restructuring programs that we very quickly put into place, last year with three site closures, one in The UK, two in The US, these are these programs are all on track and they will support a rapid growth and profitability as demand picks up. To wrap up on materials, segment EBITDA increased 35% year on year. EBITDA margins improved 600 basis points primarily due to the high volumes that I've described in specialty polymers, also to sustain pricing as well obviously a significant cost especially in the company's business. Turning to chemicals on slide number nine. Second quarter sales in the segment were up 31 with all businesses all businesses contributing to that growth. Soda ash continued to improve, sales up 10% in the quarter driven by higher volumes slightly offset by lower prices. As a reminder, last year, Solvay chose to preserve pricing, at the expense of some volumes, and that strategy has proved its worth over time. It creates value. Now the business is starting to capture that volume again. We see continuing recovery in building and in automotive markets which support growth in flat glass, whereas demand for container glass which is used in hospitality, restaurant, catering industry remained soft which understandable in the circumstances. Sales in the bicarbonate product line, and remember, that's about a quarter of the soda ash business. They were up 4% and they reached record levels due to strong demand for our Solvair technology, which is used in flue gas treatments in The US to clean air. Bauxite sales were up 17% with a recovery across all regions. Market conditions remained strong in HPPO and that drove top line growth. If you recall, this is used to produce polyurethane foam for industries including automotive and building. So this progress reflects the clear rebound we're seeing in those markets. Strength in this market overcame the continued softness in pulp and paper, which is associated with the declining graphic paper market. Our silica business had yet another strong quarter with sales growth of 70%. Yep. 70%. Thanks to strong demand for replacement tires and to the benefits of market share gains that we've announced in our past as well. The penetration of our new sustainable mobility solutions are driving increasing demand and it's further reinforcing our position as the innovative market leader. The Coatis business in Latin America is continuing its record run with sales almost double q two last year. And that showcases how our leading regional position benefits us in a favorable market conditions. We also benefited from strong performance in the Rusby Neil joint venture. Thanks to continued strong demand in the face of tight local supply, which is boosting pricing for PVC. Looking ahead, however, we remain cautious and we do expect market conditions to rebalance and therefore for performance to moderate somewhat for both Aquatics and Ruzini businesses. Overall, the EBITDA of the chemical segment was up 49%, thanks to the growth in each business. EBITDA margins were 30.4%. That's 510 basis points higher than q two last year. Moving to slide 10, I'll review the solutions segment and a segment that delivered sales growth of 19% organically in the quarter. Beginning with North Care, sales were up 21% driven by double digit growth in coatings and industrial products, which as you're aware are used in auto and in building as well as construction markets. Permanent personal care and agro were slightly down versus last year mainly because of supply chain and logistic challenges, whereas oil and gas remained stable. In agro, in particular, we formed a new partnership to supply our specialty ingredients for a new sustainable product line that will be launched this quarter. The special chem business delivered sales growth of 33%, reflecting the rebound in the automotive and electronic sector Sectors, I should say. Sorry. That said, although demand in auto remained strong in the quarter, we are starting to see some impact from the chip chip shortages. As Ilham mentioned, growth continues in electronics driven mainly by semiconductors and by capacitors. Technology solutions technology solutions sales grew 17% in the quarter. That growth continues to be supported by high demand for copper also propelled by the electrification trend. We are gaining market share with existing customers. We're also gaining a high share of new mine openings. Other product lines, which include phosphorus, specialty, and additives are also supporting the growth. In aroma, sales were down 5% in the quarter relative to the record level that we recorded in q two twenty twenty. The Vanillin business using food, flavors, and fragrances remained strong. Wrapping up solutions, the segment delivered EBITDA organic growth of 42% against q two twenty twenty, and that reflects the strong, the continued recovery across most markets. Focus cost reduction measures have also supported EBITDA margins, which amount to 18.5%. That's a 250 basis point improvement over q two last year. Now I'll provide you with an overview of the structural cost savings, which you can see on slide 11. Progress continued with structural cost savings in the second quarter of €51,000,000, bringing the half year total to 131. There are three main areas of delivery in the second quarter. One, restructuring. Reductions in labor costs contributed to to contributed €22,000,000 in the quarter. Indirect cost reductions were 24,000,000. And indirect cost reductions, I'll remind you, really begins to really shows the way the results from the zero based budgeting, approach has been in place for a while now, and they're really delivering very, very strong results. That's really encouraging. Productivity efficiencies at our sites continue to yield good results with 5,000,000 in the quarter. Now as a reminder, we previously raised our full year structural cost reduction expectations from 150,000,000 to 200,000,000. Our performance in q two is on track for the 200,000,000 that we've indicated. Indeed, we're also taking steps to reinvest with these cost savings in order to accelerate, further accelerate the group's transformation in matters such as digital, for example. Cumulative cost reductions, if we take a step back and look at it over 2020 and 2021, are expected to be around €375,000,000, which is around 200,000,000 more of sorry. 200,000,000 net of all fixed cost inflation And that further sustains our leading EBITDA margins. In overall terms, strong top line growth combined with continued cost reduction delivery and that supported an EBITDA achievement of 602,000,000, which is a 47% organic increase against q two twenty twenty. It's also worth noting that EBITDA for the first half of the year was around 5% stronger than in 2019. And that's despite the fact that sales were down 2% over that same period. Furthermore, EBITDA margins of 24.5% in the first half of twenty twenty one, which is cost leading, that is 280 basis points higher than in the first half of twenty nineteen. Now I'm gonna turn to cash and invite you to turn to slide number 12. We continue to focus on further improving our cash management. Free cash flow of 135,000,000 in q two and 417,000,000 in the first half of the year. Now as Hila mentioned, this is 25% higher than the first half of twenty twenty on an equivalent basis by which I mean, we exclude scope, currency, and one time elements. The one time elements affect particularly the 78,000,000 in one off tax impacts in q one last year. What drove the 25% in improvements in cash flow? Well, firstly, from a pure operational standpoint, what do we see? We see top line growth which funded an increase in working capital. And what I'll highlight is working capital would have increased by around a quarter of a billion euros had we not made further structural improvements. But we have made these improvements. And you can see that evidence when you look at our working capital to sales intensity, which went from 16.3% in q two, 2020 sorry. In in both q two twenty twenty and in q two twenty nineteen, so it's flat at 16.3. And today, we're we're at 13.7%. That's a very clear indicator of the improvement. Where does it come from? Well, we've given you examples in the past. I'm gonna update you. Receivables, 8,000 customers always over a billion euros. Overdues are key. They improved from around 6% in q two twenty nineteen to around two percent today. And in fact, it's systematically around the level of 2%, which is really good. We've also continued to make progress renegotiating credits with key suppliers and that has improved our average DPOs, days payable outstanding to fifty two days and that compares to fifty days this time last year. And in fact, it compares to forty four days in 2019. So all the programs we launched when we announced the growth strategy are delivering and you can see on the bottom line. If I turn to CapEx, we are a bit behind. We, we expected to spend about 25 to 30,000,000 more than we did. Now as you know, we have a target for the year of around 700 to €750,000,000. So what happened, very simply, was we experienced some delays in the first half due to a variety of challenges including raw material shortages, for example, steel, some COVID restrictions. You remember the, the weather conditions in The US had a bit of a impact, but mostly supply chain and logistic issues also had an impact on our key suppliers of equipment, for example. Now we clearly expect a spending acceleration in the second half as we have many exciting and important projects on the horizon. Several of them were mentioned by Ilham earlier, and there will be more announcements to come. The benefits from our continued deleveraging of the balance sheet also supports the significant improvement in our cash generation. Indeed, pension and financial charges were 34,000,000 lower than in the first half of twenty twenty, and that reflects these these efforts. Against that, you've seen that we're delivering strong cost reductions in relation to, restructuring actions. While restructuring costs, the cash out has, increased by 22,000,000 in the first half of this year compared to the first half of twenty twenty. And you know that the paybacks are really attractive because they are at around two years or less. Another clear indicator is a significant improvement in our free cash flow conversion, which I will remind you was 26% at the beginning of twenty nineteen, and we're now trending towards 32% based on our upgraded guidance for 2021. Finally, a word on our net debt. Globally, the level of debt at the June is stable compared to the level of debt at the end of twenty twenty. But the strong cash flow that I've described in the first half and the inflows that relate to the six divestments I've described funded both the dividend payments of €388,000,000 and it funded €102,000,000 voluntary contribution to our pension obligations in the first quarter of the year. Talking of pensions, our voluntary contributions since, the fourth quarter of twenty nineteen totaled €768,000,000. As of the end of q two twenty twenty one, pension liabilities amounted to €1,700,000,000. That's €1,000,000,000 below the level at the beginning of twenty nineteen. And there's more. We're actually planning another 300,000,000 in additional contributions to pension schemes in the next twelve months. To say differently, the quality of our portfolio, our class leading profitability is coinciding with sustained focus on cash generation on deleveraging and also on optimizing our liability management. And these together are supporting our strong credit rating, which are stable at triple b and at b double a two at S and P and Moody's respectively. And with that, I'll hand you back to Ilham, who provides our outlook for the remainder of the year. Ilham? Thank you, Karim. I'll now comment on our outlook for the full year shown on Slide 13. Based on our stronger than expected results for the second quarter and our continued strength in order books heading into the third quarter, we see solid demand continuing. What has become clearer, however, is that the increasing variable costs related to raw materials and logistics will play more of a factor in the second half as they may materialize before the full benefit of our pricing actions become visible. So our prior estimate for annual inflationary cost was between $1.50 and €200,000,000, if you may remember. We now see that escalating to between 200 to €2,250,000,000 for the full year. To date, we have absorbed about €65,000,000 in the first half, So headwinds here will increase. Our businesses have done a good job mitigating the headwinds, and we continue to raise prices in the market to offset as much as possible. As you know, there are often lags which which average about three to five months, and this is what we will be experiencing in the second half. On supply chain and logistic bottlenecks, they are likely to continue, and we have mobilized by establishing a dedicated multifunctional team to address these matters on a case by case basis and support our businesses, our customers, and engage actively with our suppliers. In addition, there is still a degree of uncertainty, as you know, with the COVID variants and its effects on parts of the world as we emerge from the crisis. Now taking all these factors into consideration, we remain confident in our ability to continue to drive organic growth through new business and make more progress on pricing. Our upgraded full year EBITDA guidance is now in a range between EUR 2,200,000,000.0 and EUR 2,300,000,000.0, representing 20% to 25% growth on an organic basis against 2020 and around 4% against 2019. We also expect to continue to deliver on free cash flow. And now we estimate generating around €750,000,000 for the full year. This is a 100,000,000 more than we guided last quarter and 40% more than the equivalent figure in 2019 while continuing to invest in the exciting growth program we shared earlier. As Karim mentioned, this would represent a cash conversion of around 32%. This is higher than our strategic commitment. So now I've seen in our bottom line results and in our margins, we are emerging stronger from the crisis, and we will continue to focus on transforming to a simpler, leaner, and more specialized organization focused on profitable top line growth. So with that, Karim and I will be happy to take your questions now. So we will now move to the Q and A, and I would kindly ask that you can limit yourself to one question per person please, just so that we can address as many people as possible today. Moderator, please proceed. Yes, thank you. Ladies and gentlemen, we will now start our Q and A a question, please press 01 on your telephone keypad so that you can enter the queue. After you're announced, please ask your question. And once again, please press 01 on your telephone keypad if you wish to ask a question. We already have a question from Mubashir Soldri from Citi. Please go ahead. Hi. Thank you for taking my questions or questions. Sorry. I'll stick to the one. I think you've been talking about the fact that you're switching more towards spot volumes in soda ash. Could you provide us with an updated split of your spot versus contracted volumes as it sounds today? And and can you talk about whether this is likely to have an impact on your customer relationships going forward when you want to switch back towards contracted volumes? Some comments on on the strategy there would be helpful. Thank you. Yeah. Hi, Mubasher. Do you want to take it, Karim, and I follow? Yeah. We can add. No. Sure. Go ahead. I mean, spot markets clearly are very, very supportive. Pricing is really increasing. But as you know, our frameworks with our customers means that we contract annual in advance. We're about 90% contracted. Typically, we're in the 80 to 90% range. So that means we do stand to benefit incrementally in the second half of the year from the spot prices that we see today. More importantly, what we welcome is the fact this is very, very conducive for the annual negotiation discussions that will kick in the full final quarter of year, which from a strategic standpoint is incredibly important as well to us. Ilan? Yeah. And and, Mubasher, great question. I think this is my you know, I've been in the job for two years and a half. And and, you know, last year already, we we practice the same tactic, which is, you know, we we like contracts. And, obviously, at the fall, we we do, as Karim said, the 8020 rule. So more than 90%, we had a bit less this year. And, frankly, when we saw, the pressure on pricing already in the for last year and even before facing an inflationary environment, we let go some volume at low margins, right, to our to our competitors. And we were, you know, waiting to see more favorable environment. And what happened this year is exactly what happened actually during the crisis is that the market started to be a bit tighter, more spot volume obviously were available, specifically the seaborne and also, you know, the the North American players started increasing prices. So we took back volume, right, at a higher prices and higher margin than what we would have, you know, done or contracted last year. So, all in all, our long strategic relationship with our customers, right, we do that, and we honor our pricing. And I think Soda Ash is doing a great job not only in their annual negotiation is taking, you know, advantage of favorable, intra region, good flow and and, obviously, even the Chinese player, you know, game plan, which have changed and and margins have been so squeezed that they needed to act on them. So all of this is favorable for us, and we're taking advantage, from that as we speak. Thank you very much. Very helpful. We have another question from Matthew Yates from Bank of America. The floor is yours. Hi. Good afternoon, everyone. You mentioned the significant jump up in raw material costs. Can you just elaborate a little bit across the business, where would you advise us that you might see the most acute margin squeeze in Q3 on that pricing lag? And maybe a bit more fundamentally, you're doing 30% margins in the Materials business at a pretty low point in the composite cycle. I guess, as part of that, it means that your Polymers are probably more of the mix at the moment. But given the structural cost savings you've made, where do you think divisional margins are going to settle out for Materials in two or three years' time once composites are back at a more normalized level of revenue? Thanks. Yeah. Great question, indeed. And and as you know, composite material, you know, have gone through, you know, an interesting time, but they are exiting as a as a better business. Yeah. You're right, and your observation is good. Actually, I'm happy with what I see, specifically in the in the material side. I told you guys that, you know, our our segment materials is our crown jewel, and we'll we'll bring it from good to great. Composite material has an annual pricing and, you know, long term, you know, deals because of the structure of the businesses with aerospace. This is formula based. So by the way, if the raw material increases like epoxy or carbon fiber, it takes this anywhere between three to five months, right, to apply the pricing. So this is part of the game. Yet, you know, they are actually doing the right job. Okay. For the h one, our pricing net pricing, if I take pricing minus the variable cost, it's more or less breakeven, right, for specialty polymers specifically. That's okay. They can do better, and they are doing better. We have a unique situation in many technologies, in many, you know, businesses. And as we speak, they are executing the prices increase versus, you know, the raw material inflation we are seeing, and we're getting smarter and smarter about the availability of raw material. And not only raw material, by the way, the logistics as well are are are, you know, also increasing and we are air freighting. We more than doubled our air freight cost to our customers' right to not set that down. So yeah. I mean, outside pricing and we always hone on our pricing, we are having a conversation with our customers, and this is happening as we speak. And, frankly, the the question will be at the four this year about preparing 2022. Right? So in term of raw material in general, just to give you an idea, the increases we've seen are coming from crude oil, right, followed by mineral and biochemicals and natural gas. So those are the big categories. Right? And about three fourth of our variable cost comes from energy and raw material. Logistics and packaging is about one fourth. And as I mentioned in my, you know, speaking and, you know, recent remark or speaking remarks, in h one, we have seen €65,000,000 of that inflation. And, obviously, we we have raised, the cost increase to $202,150 for the year, implying that the h two cost inflation will be anywhere around $1.35, $1.85. So, yeah, the the the it is what it is. Everybody is facing that, and this increase in cost estimate is also making us, you know, to actively, fight for our margin. Our margin, by the way, have never been, that high, 24.5% for the whole group. You you may remember in the old recent days, 22% margin was great margin for Solvay and historically, actually above our peers. We'll continue fighting for for protecting our margins. And on margin expansion, yeah, it's about the value proposition and how unique it is. And as we speak, we are pushing a new pricing culture in the company, and doing things, you know, we've never done in in the past in understanding the value creation for our customers. And I talked to the team, wherever we create value, we need to share the value created with our customer and not leave it on the table. So you can count on us to just do that. Thanks a lot. Thank you. Our next question comes from Sebastian Bray, Berenberg. Please go ahead. Yes. Hello. Good afternoon and thank you for taking my question. It's on the pension liability. Once the additional $300,000,000 has been paid into the pension over the next twelve months, what will annual cash out be? And does this effectively draw a line under the additional voluntary contributions or would you look to reduce this further beyond the additional $300,000,000 payment? Thank you. Batman, thanks for raising that question. You know, look, you're absolutely right. It's an important question. I'm gonna give you one fact and one, estimate. The historic fact is that in 2019, the cash pension cost was of the order of €213,000,000. The estimate going forward, rightly taking into account what we've done and what we're planning, will take that to an equivalent of around 80,000,000 plus or minus 5 to 10, let's say, for the mid to long term. At least as far as I can see, it's five to ten years from now, we're talking of around eighty. In essence, about a €130,000,000 sustainable improvement annually. That's what we're targeting. Now will there be more beyond that? Honestly, no. I think then we may also have a few opportunistic moves by nothing of any significance. So which is why we're also focused in parallel on optimizing our liability management. So for example, replacing a hybrid last year that was cost a high coupon of 5.1%, 15 and half percent. All of that's also paying dividend that we said in bottom line already. And that's part of the journey as we continue to deliver. Thanks. That is helpful. Thank you. We have another question from Shaitan Yudhishee from JPMorgan. Please go ahead. Yeah. Hi. Thank you. A couple of questions. Firstly, I'm just looking at the cash flow. It seems the total proceeds from the divestments in first half were close to a €100,000,000. If I'm not wrong, I think the total EBITDA from divestments was 50. So it implies that, you know, these were sold at very low multiple. I'm just confirming whether is the math correct or am I getting something wrong? That's first. And the second question was more around the free cash flow guidance upgrade. Is that just a function of, you know, EBITDA upgrade flowing through to free cash flow? Or is there are there any changes in any of the assumptions on free cash flow? Because I would have thought with higher earnings, maybe the working capital would have gone up more than what's previously thought. So just any color on that would be useful. So couple things on that. I'll start with your second, question on the free cash flow upgrade. It really reflects two things. One, it reflects the profit upgrade. Absolutely. That's the fundamentally, the biggest driver. But the other thing also reflects the fact that our working capital management is really, really tight. I don't expect a lot more, but we will continue with the level that we've, we've achieved. That really listen. There's nothing at all of any one time or anything else. It's a very, very clean set of sustainable numbers that we're dragging here. To your first point on that 100,000,000, the math is not wrong, but it's not complete. By which, I mean, there are certain arrangements in place where there are some deferred proceeds, deferred consideration, contingent certain delivery, and we're confident that we'll get those all those earn outs. Of course, know. I mean, I keep it simple. Earn outs. So no. And the multiples are actually pretty attractive. And the other thing is we've also transferred about €50,000,000 because you're not looking at cash. Look at the enterprise value. So our provisions, pensions, environmental also go down by €50,000,000. So if you look at multiples, you need to factor that in as well, of course. That's that's clear. And if I come back to free cash flow, I think, Ilham, you said the the free cash flow guidance for 2020 already imply a conversion about your strategic plan that you announced in 2019. I mean, the question is, is this a stable run rate or is this maybe a a phasing issue that we we eventually have to go to 30? 33 is not necessarily something that may be, let's say, a structural number. What I'm trying to get to is is 30% still a target or really the the run rate today justifies that the aim should be better than 30% eventually? I get it, Chetan. Believe me. I get your question. And, normally, I don't like, you know, to change strategic, you know, KPIs in the middle of, of the year. Now definitely, guys, and and you heard me. From day one, I told you that cash is it has been always important in my management playbook. This company, and that's why I'm truly proud of our team. Free cash flow is important to me, in in good times and in the best times. And what happened last year is that, frankly, whatever we told you in at the fall twenty nineteen as part of the growth strategy has been accelerated, and we gained probably two years thanks to COVID nineteen crisis where we accelerated our reforms. And, Chetan, I will probably, you know, deviate from my principles and first time I do it in my career. This is this is gonna be sustainable above 30% going forward. Obviously, we had some temporary abnormal savings in the past years, etcetera. I challenged the team this year to to turn the temporary infrastructure. They are doing a fabulous job, and we are accelerating our programs, including, you know, the way to structure our company to better serve our strategy. And, obviously, we wanna also, you know, invest in growth. And you've seen, the listing, although it's selective and and we'll do it with discipline of capital and capital deployment, we have some very cool, exciting, you know, growth projects where we are investing in and we are, as as we speak, negotiating the final terms of the contract and we'll come back to you in the coming months. So, yeah, the plan is to be sustainable, in the north of 30% going forward. Very clear. Thank you. We have another question from Jeff Hare from UBS. Please go ahead. Oh, good afternoon. Just one question. Just coming back to the of Business and particularly the Aerospace business within it. From memory, I think whenever you acquired the SciTech business, were over indexed towards Boeing versus Airbus. Is that still the same or has that balanced out now? I can take it, Karim. Yep. Yeah. I mean, we are still I mean, obviously, we had a long historical relationship, you know, with Boeing, but, you know, we are also present at Airbus, specifically in in the narrow, you know, bodies and the single aisle where we have highly penetrated. You know? And as as we speak, you know, I'm really you know, I'm I'm excited, but what I what I see, what I hear, you know, we've done what we have to do in term of, you know, turning around the business, exiting three sites, which are which were the lowest return on capital employed without losing the volume, and we did it, you know, in in the middle of our crisis. As you know as well, you know, it it takes a long time to gain new share in aero, but, you know, we have exciting innovations and not only in the thermostats, composite, traditional sci tech innovations, but we are also now and that's the the idea of having material together. And I'm not sure I announced it publicly, but specialty polymers and composites are merging as those two businesses. So they have one president as we speak. This is new from April 1. And why I did that is to force and to accelerate those exciting innovation, either specialty polymer in aerospace or thermoplastic composites, which I remind you is the best combination of specialty polymers and thermostat composites and bring in, you know, recyclable circular polymers to the aerospace industry, which both Boeing and and and Airbus, they love. We're also growing in defense, right, which is really a great business for us and not only it's a good business, but it's a source of innovation. So all in all, I think, really happy with what I'm hearing. We we are more optimistic. Although in our numbers, we see a recovery by, you know, yeah, 2023 to the level back of 2019 in built rate that, you know, very encouraged to see deliveries of seven three seven max, one zero five delivered year to date. And there are some estimates out there of 240 deliveries in the year, so this is depleting, you know, the stock and the inventory. It's around 400. So it's gonna probably accelerate, you know, the seven three seven max. And Boeing estimate now is reaching 31 per month production in early twenty twenty two. Okay? This is what they are saying. And Airbus production, we are in a 03/20, will increase from current level of 40 per month to 45 per month beginning in q four twenty twenty one. It's also good for us, and the a 03/20 estimated 64 per month by q two. So all in all, you know, very happy with all of this. It's gonna take time. We did what we have to do with with the decisiveness. I'm very proud of the composite team. And, frankly, those numbers, to put it in perspective, is even more remarkable. As you may remember, 2019 was the best composite year, EBITDA composite year in that history. So when we compare, you know, our numbers now to 2019 and I was freshly landing in this company, right, the team delivered in 2019 in composite record years. So it gives all the dimension of the of the achievements and the record achievements we are announcing today. Thank you for the question. Thank you. We have another question from J. D. Pandya from Onfuture Research. Please go ahead. Thanks a lot. Just wanted to understand your carbon strategy sort of with regards to soda ash and, you know, once soda ash is sort of gone. You've been, obviously, you guys are masters of, you know, managing carbon, and you've been buying carbon since it started, really. So you you're still you've said in numerous calls, you've been still buying carbon. So do you are you doing this because you wanna sort of ring fence your carbon deficit in soda ash? Obviously, you're trying to reduce it organically as well, the deficit. And then when we think about sort of life of solvent aside from soda ash, how do we see the deficit, and and what sort of price are you guys planning the next ten years forward? Because, obviously, we are around the the price that you guys have in annual report around 50 for the time being. So if you can give any color on that. Thanks a lot. Yeah. Thank you for the question. Well, listen, you know, 60% of our emissions are are more or less coming from soda ash historically. Right? You know that the rest is 40 from the other businesses. When I joined the company and I did my due diligence on the different businesses prior to issuing with the team and and sharing with you the the the growth strategy, obviously, I looked at the carbon pricing, and you're completely right. I think it's the times of fraud even where they were mastering carbon and probably saved the company. Now, you know, we we keep what is good, what works very well. And you're right, hedging on carbon. What we can hedge, we cannot hedge everything. We did that, and we are probably had just 100% of what is is eligible to hedge in between now and 2025, and we started hedging post 2025. The team is doing it extremely well, I must say, better than any any, you know, mandate I had in my career, and that's what we've done. Number two, when I joined the company, I think it was one of my first policies changes in the company, first week or March 2019 after the incentive on free cash flow, we changed the internal carbon pricing to 50. And at that time, we were a bit accused. I mean, or or we debated internally that we were a bit tougher because carbon prices were around 20 ish. But, you know, we could see the direction of travel, and we implied $50.50 euro per ton internally, which frankly now looking back, it was one of the best decisions we've made in quarter two twenty nineteen because it helped us to make the hedging, protect our competitiveness, and do what it takes, which is now a competitive advantage. So c o two is is a tangible part of soda ash cost structure to protect our contribution margin, which allow us to secure the long term investments and continue to serve our customers on the state as much as possible due to emission price movements and allocation over the coming years, and and that's why hedging is there. Today, the 50 is probably gonna know be north. We are debating that in the company. By the way, we're stressed that in the 50 or 75, you know, euro a ton in our STM. So our sustainable portfolio management, we stress that to 75. So the question is not 50 or not, is are we gonna go to 75 and a 100? And that's what we believe we should be doing. Now as you know, Europe is is is going to the green deal, then the 55, you know, fit, you know, policies published and the ETS and CBEM policies going on. In all of this, you know, at the end of the day, we have a clear strategy, sustainability strategy called Solvay One Planet. You remember that in February, we joined the Paris Agreement in October, the SDTI. We told you that we are gonna exit coal, and we have shown you not by now that in the Rhinebach in Germany, we had the first case where we are exiting coal, using biomass. So those are wood chips recycled and wasted at a high IRR. So it's higher than WACC. And with the support, obviously, of of the authorities leading to the lowest greenhouse gas emission anything plant in the world, including versus natural. I love this because it's not an anecdote anymore. And what I ask for the Ash team is to build an energy transition program. By the way, they are part of the 28 projects we have for the company. You know, today, we have more or less 1,800,000 ton of c o two already in execution to be to to be to be to exit. Right? It's about 1,000,000 car off the road every year, which we size, we we price, and we know how to do them, and we're still collecting more projects. So Sudha Ash is part of those. We are negotiating Domval as we speak. I started personally traveling again, and I stopped by Domval. It was my first visit after my lockdown and my second shot of vaccine, and they are preparing the switch and the exit of coal. And I know that soda ash team and our president is also negotiating in Torrella Vega in in in Spain. So, yeah, it's just part of Solvay One Planet, and we are executing flawlessly. Thanks a lot. Well, the very simple comments which hope you will have complete your understanding, JD, which is this. Look at Solvay Solarash business. Factually, you'll find that we're far and away the most consistently profitable soda ash operator globally. That is, I believe, on the record and publicly verifiable. Secondly, the fact that we've hedged forward into the midterm also means that we're shielded from the cost that you see in the market. The fact that spot yesterday was 52.85 doesn't matter. The fact if I look forward at the December 21 contract, we see €53.30 also doesn't matter why because we are well hedged. But like Kiram says, we're taking the action strategically to improve our resilience. So, no, c o two is not a factor. Thanks a lot. We are taking our last question from Lisa Deneve, Morgan Stanley. Please go ahead. Yeah. Good afternoon, Hazel. You mentioned your EBITDA guidance supported by a strong order book, and you also mentioned 40,000,000 of lost sales due to supply chain challenges. So just to understand a little bit the dynamics here, are these 40,000,000 of sales lost or just delayed? And also, can you share us with us an overall training update on organic growth as we move into the second half, especially given the strength of these organic growth rates we we see experienced and you delivered? And if I can sneak in a second quick question, can you share or give us an idea within your competence business what the narrow body versus wide body split is within commercial aircraft exposure? Thank you. Thank you. Thank you, Lisa. I think it's Lisa. Right? Yeah. Well, listen. The mid the mid sales I mean, if you mainly to logistic constraint, right, in quarter two, everybody is struggling these days, and and the situation is the following. We've seen, frankly, unprecedented in my career. We have port congestions, container shortages, and low bid rates, as you know, for ships are closing. A large capacity shortage and rapidly increasing spot prices. Right? So what we call the FCL, the overseas container transport market is at its highest point in history. And key indicators, frankly, personally I mean, I may be wrong. It's not it's there there will be no major break through expected before 2022 on this tightness. So we need to live with that. Now how we do it? So the 40,000,000 yeah. I mean, some of it is gonna travel to quarter two, but some of it as well may actually disappear. So what? Because customers may not be waiting and if, you know, supplier has a better access to non congested port, they may actually pick up the goods and and bid. So, actually, the the the the interesting question, Lisa, is what we are doing about that. And I asked to put, you know, a war room in place. I was told not to say war room, so it's task force, you know, in in in in in place to secure transportation capacity in the market. Right? And and and this is multifunctional team. We have, you know, logistics experts. We have our procurement team. We have, you know, our suppliers supporting us. And, you know, they can change arrival port. They can go with the raw material from, you know, country to another because it's easier to do. They change. They find container. They change departure port. They find alternative. So they find solutions by, you know, by by finding by helping, you know, the GBUs. And this is across the board. They are, you know it's it's, you know, it's double digits or multiple digits, you know, people working hard to help the businesses. And, frankly, I am personally engaging with the c suite with my executive committee. I'm not talking only to to to customers and and investors, obviously. We are talking and picking the phone and talking to, you know, shipping companies and leaders to support us, and we are trying to build, you know, strategic relationship because this this may be structuring in the future, including between regions. So, you know, on what was the other question? And by the way I just general trading update. In Sorry. Sorry. Say it again, please. Sorry. General trading updates because you cited a very strong order book. Yeah. I mean, we we we continue, you know, seeing I mean, there is general optimism from global economy. I mean, thanks to the massive savings accumulated and and currently important investments and trade growth going on despite those supply chain, you know, constraint. You know, we see very solid, you know, order book, right, and and solid demand for our solutions and products which continue in June and July. So, yeah, this is not changing a lot. Markets include automotive, electronics, building and construction will continue to play positively. Although, as you know, the ship shortage could cause some turbulences. There is around 2,200,000 units according, I believe, to LMC or someone like that, you know, traveling between 2021 and 2022 is not gonna impact us a lot, you know, so it's baked in our guidance. But also, you know, the chip shortage and the booming electronics and semiconductors is supporting our e h two zero two, right, thirty five h two zero two, which is really booming. Asia, double digit. China, you know, the numbers probably softening a bit, but, you know, we have a good presence and our our you know, we are building our strategy in China as we speak. So it's a great area and opportunity for us. What was another question from Lisa? No? Wonder whether you could share how much is the difference between narrow body versus wide body within composite commercial aircraft? Oh, yeah. Historically yeah. It was $50.50, Liza. Now, you know, due to the MAX, you know, former issues, you know, and COVID, otherwise, it will weigh more in single aisle, as you know, which is expected, of course, to grow more as the rate increases. Right, Lisa? So I'm I'm I'm very excited actually with single aisle, what's happening because we we have a better representation in it. The the composite conscious is lower than in the wide bodies. So we like them in the future, but, obviously, you know, with the max, former issues and the COVID, the the fifty fifty, but it's gonna weigh differently when max issues will be behind us. Makes sense? Okay. Thank you. Thank you very much. So I think we've reached the end of our questions. So thank you very much everyone for your participation today. And as always, the investor relations team is here to answer any additional questions today. So thank you so much and enjoy the rest of your summer. Thank you, dear speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.