Ladies and gentlemen, welcome to Solvay's 2020 Results Conference Call for Analysts and Investors. Solvay team, the floor is yours.
Good afternoon, and welcome to our fourth quarter 2020 earnings call. My name is Jodi Allen, I'm the Head of Investor Relations, and I'm joined virtually today by our CEO, Ilham Kadri, and our CFO, Karim Hajjar. 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 this presentation includes forward-looking statements, which are 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 Ilham.
Thank you, Jodi, and hello, everyone. I hope you are all staying healthy in this continuing challenging environment. As you know, health, safety, and security of our employees remain our number one priority. Consistent with our desire to keep our people safe, we continue to have 10,000 people working remotely, maintaining the safety measures that we put in place nearly one year ago. Let me give you a brief update on our COVID status. Today, we have 78 colleagues who are infected with COVID-19, about 40% down versus last month, and 88 employees in quarantine, and we wish them all a prompt recovery. While I am on the subject of safety, I am pleased to share that we concluded 2020 with no fatalities and no irreversible injuries. This marks three consecutive years without a fatality, something extremely important to us.
Moving to the full year results, the crisis presented some challenging headwinds this past year. Yet our portfolio was fairly resilient, with sales down by 10% on an organic basis for the full year. If you exclude our most challenged markets of civil aerospace and oil and gas, sales were down by 5% for the year, thanks to resilient markets, including healthcare, home and personal care, consumer goods, and agro. We provided a view of our key markets and recent trends on slide four, and Karim will share more color when he reviews business performance. In the fourth quarter, sales improved in a number of key markets, driven by strong demand in auto and electronics, driving group sales up by 5% sequentially versus the third quarter.
Regionally, fourth quarter sales in China were up by 5%, while Europe was down by 2% and the U.S. down by 10% year-on-year. I'm truly proud of our teams because they stayed the course in the face of the challenging macro and maintained an unrelenting focus on the areas within our control, including costs, cash, and of course, our customers. In each of these areas, we can recognize great results today. On cost, we delivered EUR 330 million of savings in 2020. Of this amount, EUR 175 million were structural savings, of which EUR 156 million are fixed costs. That's more than 1/2 of the original midterm commitments we made weeks before the crisis began. You may remember 15 short months ago, we committed to EUR 300 million cost reduction.
We raised that to EUR 410 million in mid-2020, and today's announcement of an additional restructuring plan impacting a further 500 functional support roles takes the new cumulative commitment to EUR 500 million by 2024. The decisive cost action we delivered in 2020, together with pricing power, allowed us to contain the EBITDA decline to in 2020, though more importantly, we achieved a 22% EBITDA margin. Our cash delivery is equally noteworthy. We laid the groundwork for this back in 2019 with a new incentive structure, clear programs, and a disciplined process, and we used the crisis to accelerate our delivery. If you would have asked me a year ago if we were capable of delivering almost EUR 1 billion in cash in 2020, I would not have thought it was possible.
The Solvay team did it, and I'd like to congratulate all of our employees for this record achievement at such a critical time. Moving to slide six, we continue to win with our customers by developing new innovations that address their challenges and unmet needs. Much of this work is directly aligned to our sustainability efforts, and we are very proud of our success with many key partners. I'd like, for the sake of time, to highlight just a few of them today. First, together with Bridgestone, a key customer of our Silica business, and together with ARLANXEO, we co-developed a new tire platform called TECHSYN, which has 30% better wear efficiency and reduces rolling resistance by 6%. This not only reduces CO2 emissions but also extends the life of tires.
We are very proud of this partnership and innovation, developed in only 24 months, around 1/2 the typical innovation cycle of three to five years. The second customer news I'll highlight comes from Henkel, a key customer of Novecare's home and personal care business who launched new products based on two of Solvay's recent innovations. You may remember Actizone, our brand-new hygiene and cleaning technology, which we launched this year, or 2020, that protects surfaces against viruses, including COVID-19, and is unique as it lasts for 24 hours. Another one, Rhodasurf, our new bio-based surfactants, which is 100% renewable and part of a newly launched liquid laundry detergent by Henkel. It brings them a sustainable innovation, which reduces CO2 emissions by 20%.
The last one, I'll highlight a new partnership with Vertical Aerospace, which you may have seen in the news, where we are developing composite structures for air taxis. They will be electrically powered, therefore there is zero emissions, and will have its first test flights later this year. This is really cool to be at the frontline of innovation. Our innovation pipeline is becoming more aligned with our growth strategic trends, including lightweighting, electrification, bio-friendly chemicals, and resources efficiency. To be clear, this will not only support the planet but also the bottom line. These sustainable driven innovations are what customers are asking for and what will create value for both Solvay and our customers. Which brings me to the One Planet program, which is an integral part of our strategy launched one year ago.
Here, in only our first full year of a 10-year plan, we have also made very good progress in 2020 despite facing an unprecedented crisis. I'd like to highlight a few points in reference to slide seven. Our sustainability metrics are embedded into our operational and strategic decision-making, and progress impacts 10% of our short-term incentive for the group. You may have heard me saying you impact behaviors when you impact the pockets. It's about walking the talk and being coherent. As you have seen, we have highlighted our progress against 10 metrics. While progress is broad and deep, in the interest of time, I will only cover our carbon emissions. Reducing our carbon emissions is a top priority for Solvay, and if you may remember, we joined the Paris Agreement in February 2020.
In October 2020, you may remember that we have committed to set science-based targets for Scope 3 and have begun working with customers and engaged already with more than 500 suppliers in quarter four 2020. You can see that we have progressed by 20% in 2020 versus our baseline 2018. About 60% of the improvement results from the reduction in activity levels due to COVID, and 40% is structural and reflects the impact of our projects. We launched 27 emission reduction projects since 2018 baseline. Delivering on them represents an annual reduction of 1.8 million tons of CO2 per annum. To give you an idea, this is the equivalent of taking one million cars off the road. 18 of these projects were already operational in 2020, and the remaining nine projects will be implemented within the next three years.
We have included a map of the projects on slide eight to give you an idea of the magnitude of our scope, and I'm pleased to confirm that the COVID crisis did not derail us nor detract us from our commitment to One Planet. In fact, we came a long way. Also, at the risk of stating the obvious, I also wish to emphasize that our investments generate adequate economic returns whilst also de-risking the operations in a strategic sense. Going forward, we continue to advocate for uniform global corporate reporting standards with respect to ESG matters. This year, we are taking two additional steps. Our 2020 annual integrated report, to be published on April 1st. We not only continue to align with the Global Reporting Initiative, or GRI, but also will map to the relevant SASB metrics as part of our 2020 annual report. We will not stop there.
We piloted and signed on as part of 67 companies globally and agreed to disclose new elements consistent with the World Economic Forum or IBC non-financial disclosures, and I invite you to take the time to review these in due course. Now Karim will review in more detail the group segments and financial performance. Karim?
Thank you, Ilham. Good morning. Good afternoon, everyone. I'll start with an overview of the three business segments. I'll refer to figures as usual on an organic basis, by which I mean constant scope, constant currency. Starting with materials that you see on slide number nine, the facts are that net sales in the fourth quarter increased by 2.3% versus the third quarter of this year, driven by strong demand in the automotive industry. Specialty Polymers year-on-year sales turned positive for the first time since the start of the crisis. Sequentially, they improved by 8% against the third quarter. Strong demand from the auto sector drove that improvement. This sector, you remember, represents 14%, one four, of group sales. Our polymer sales into the broader auto market in 2020 were down 9% for the year, outperforming the general market decline of around 16%.
In particular, sales into EV batteries increased by 50% in the fourth quarter 2020 compared to the prior year, and we expect demand to remain strong given the latest industry projections for electric vehicles. In fact, we have invested in a PVDF line in Tavaux in France, and full production is already on stream as of Jan this year, 2021. We also have another new line coming on stream in China in the first quarter of 2022. Together, this will more than double our capacity and will help us to meet significant demand growth in batteries. Solvay's polymer sales also outperformed other major markets, including healthcare and smart devices. Sales of PEEK, P-E-E-K, specifically, have remained resilient during the crisis, with fourth quarter sales up 4.4%. Full year sales across all markets up by double digits, thanks to further penetrations of polymers and some share gain.
In short, you can see that we continue to outgrow markets in a few instances. You probably won't be surprised that sales of composites in the fourth quarter dropped 10% versus the third quarter as we reached a low point in civil aircraft demand. Whereas sales into the defense sector continued to grow, and in fact, are up by double digits versus the fourth quarter of 2019. Sales into civil aero represents 5% of group sales in 2020. This is clearly down on the prior year. The business is on track with the closure of its second facility, part of its ongoing manufacturing footprint strategy. I'm pleased to share the news that the annual run rate of cost savings related to these actions will reach EUR 70 million as of 2021 this year, EUR 10 million higher than originally anticipated.
Also, the composites business is taking yet another step to deepen, to accelerate its manufacturing efficiency and to improve returns further in alignment with our customers, and it recently announced plans to close a third site in the U.S. in Orange County, California, which will happen in the second quarter of 2022. These closures will concentrate production on fewer, more efficient assets, and it will help us to improve service levels to our customers whilst increasing productivity. Wrapping up materials, segment EBITDA in the fourth quarter was down 11.4% organically and 18.7% for the year, with full-year EBITDA margins at 26.4% thanks to sustained pricing and robust cost reduction actions. This achievement reflects timely, decisive corrective actions in the face of unprecedented decline in civil aero volumes in 2020. Turning to the chemical segment on slide 10.
Fourth quarter sales were flat versus Q4 2019 as demand improved in every business. Sales in Soda Ash, which represents 16% of group sales and about 1/2 the segment, increased by 2.7% sequentially against the third quarter of 2020 as demand for flat glass used in construction increased, whereas demand for container glass used in the hospitality sector remained weak. Soda Ash contracts for the 2021 period have concluded, and you have likely seen publicly available data such as IHS, which gives you a good proxy of what to expect for the industry. Against that backdrop, you can assume that Solvay will again seek to outperform by effectively executing against the cost reduction program, building on our historic track record, which actually speaks for itself.
Our focus will remain on cash generation, on maintaining our leading market position, as well as driving our energy transition plan. Turning to Peroxides, sales are up 4% in the fourth quarter compared to the third quarter, reflecting demand improvement for HPPO, mainly driven by a strong polyol market based on consumer goods construction and an improving auto sector. Sales in Silica increased sequentially by 11%, showing the robust auto market demand, where our technology is used in high-efficiency tires. The business outperformed the broader market, thanks again to innovation and to our global footprint, as well as to our strengthened position with our key strategic customers. Coatis sales increased by 11%, with a strong rebound in the fourth quarter in Latin America, and in particular reflecting growing demand for our innovative Augeo biodegradable and renewable material. In the past two years, the business has optimized its costs.
It has focused on its sustainable technologies. In fact, we've just doubled production capacity less than two years after the product launch, thanks to one thing: strong customer demand. Overall, the Chemical segment EBITDA rose sequentially by 4.3% in the fourth quarter as a result of the stepped-up demand that I've described across all those businesses. Full-year EBITDA was, however, down 9.4%, and margins were held at 27.7%, reflecting pricing and the cost initiatives that helped to offset some of the volume declines. Turning to Solutions segment on Slide 11. Fourth quarter sales showed significant sequential improvement against Q3, up 7.6%, driven by strong demand again in auto, electronics, which represents 14% and 7% of group sales respectively. Starting with Novecare, Q4 sales were up modestly in home and personal care, coatings, and agro markets, and they were up double digits year-on-year.
Speaking of Agro, the business which represents about 13% of group sales, we recently just completed an agreement to purchase a seed coating product line, which is a small bolt-on acquisition with revenues of about EUR 30 million. This acquisition represents a natural extension to our bio-based agro solutions within the Novecare business, and it will enable us to generate compelling innovation synergies. The Special Chem business had an excellent fourth quarter with sequential sales growth of 19% versus Q3, driven by the rebound in auto together with share gain in China, as well as strong demand in electronics. In Technology Solutions, Q4 sales increased 6% sequentially as the mining industry, which represents 4% of group sales, is beginning to recover, driven by the demand for copper and further supported by price.
Having said that, some key mining customers remain impacted by COVID and are not yet fully operational as I speak today. In Aroma, performance was slightly down versus Q3 following significant volume increases, maintaining the strong momentum of the first nine months. Given the exceptionally strong customer demand for our natural vanillin from the food and flavor industry, the Aroma business has decided to expand its production of natural vanillin. In fact, we're doubling capacity for the second time since 2017. The additional capacity will become operational by the end of 2021. By the way, this is a prime example of what is referred to as circular economy. Solvay's natural product is derived from rice bran oil, and this is used to produce natural vanillin.
Overall, the Solutions segment EBITDA was down 2.8% versus Q4 2019 and 11.8% for the full year, with EBITDA margins relatively stable at 17.1%, reflecting disciplined cost management. It further demonstrates the resilience of this segment despite the major headwinds in oil and gas that we've seen throughout 2020. It also shows the growth that is being achieved thanks to our innovation. Moving to costs, which we detail on slide number 12. You can see that we have made significant progress against our targets in 2020. We have delivered EUR 332 million in savings for the year, which more than offset inflation of EUR 75 million. Temporary cost savings totaled EUR 157 million in 2020. These will not repeat in 2021. Our structural savings were EUR 175 million, of which EUR 156 million are fixed costs, EUR 19 million variable costs. Those cost savings fall into the three categories that hopefully you're familiar with.
One, restructuring. This is the largest contributor and essentially comprises labor cost reductions representing about EUR 90 million or about 1/2 the structural savings that we've delivered. Indirect spend represents about 35% of the savings, around EUR 60 million, involves many actions and initiatives. Too many examples to cite, for example, we use recycled containers. We standardize packaging across a number of our businesses, the drive continues. Of course, we continue to drive productivity efficiencies, including yield improvements in several businesses. Such as in Specialty Polymers, in Soda Ash, in Novecare. That represents about 15% of the structural savings at around EUR 25 million. The strength of this delivery actually brings to life the notion that there is no such thing as fixed costs, that indeed all costs can be variabilized. The only legitimate question we ask ourselves is, how fast will it take to variabilize costs?
That's how we tackle them. I will now turn my review to how the group's performance has evolved overall. By way of general context, look at our portfolio. It has delivered value during the crisis. I say that because 60%, six-zero of our portfolio proved resilient. I'm reflecting here markets such as healthcare, home and personal care, consumer goods, food, agro. About 25% of the portfolio is related to markets where we see a progressive recovery underway. By that, I include auto and mining. The remaining 15% will take a bit longer. We're talking markets here such as aero and oil and gas. Based on current economic forecasts, we currently expect our portfolio to be back to 2019 levels in 2022. I now invite you to turn to slide 13.
By way of context, many of you told us that you really valued the previous EBITDA bridges that showed the evolution of volumes, costs. You asked us to reconsider putting them back in, to reinstate them. Even though very few companies actually do that, we listened to you. We have decided to bring back those EBITDA bridges as a supplement on an annual basis. What you can see from this view is how it all comes together. Volumes were down EUR 568 million, in large part due to civil aero, oil and gas, and about 1/2 a year of reduced demand in auto. Net pricing up EUR 50 million, in many ways reflecting the premium value-added nature of many of our technologies in the market. Total cost savings, EUR 175 million structural, EUR 157 million temporary. Less EUR 32 million in relation to other factors, many other factors, such as destocking impacts.
Less, of course, inflation of EUR 71 million, for a net positive effect in 2020 of EUR 228 million. This performance evidences both the quality of our portfolio and the strength of our delivery in 2020, notwithstanding the very significant volume headwinds. I'll turn now to slide 14 and talk about cash. EUR 161 million is the cash we generated in the fourth quarter, bringing the total for the year to a record EUR 963 million. That's about 60% more than 2019. The improvement in performance can be summarized as follows. First, we took decisive steps, as you know, as you've seen, as the crisis unfolded, to adapt our investments, to accelerate and deepen our cost reductions, and to strengthen our working capital discipline.
To start off with, our cost mitigation contained the EBITDA drop to EUR 377 million, although this drop was more than offset by lower cash taxes of EUR 144 million, by reduced working capital of EUR 190 million, and by lower CapEx of EUR 215 million. Against that, we also invested EUR 31 million more into restructuring charges in 2020 relative to 2019 to reach a total of EUR 90 million, nine-zero. That's more than you've seen historically. You'll also recall us saying that we've been optimizing our debt and working to deleverage our pensions in the last two years. Indeed, we've deployed EUR 0.6 billion of funds towards our pension schemes, and we actually plan to do a further EUR 0.2 billion in the next 12 to 24 months. We indicated to you that these steps help to both de-risk our balance sheet and to improve our cash flow.
The facts before you today actually demonstrate that. In 2020, our pension cash service costs were EUR 77 million lower than in 2019. Our financial charges were EUR 27 million lower than in 2019. The good news is that we will have further reductions to look forward to in 2021. That said, and without detracting in any way from the strength of that cash flow delivery, we also indicated during the year that we had a number of non-repeats 1x items. In that context, we have around EUR 140 million of structural improvements in relation to working capital. In Q4, we were surprised that a few customers even prepared invoices to us to the tune of EUR 40 million. Now, this will obviously reverse in 2021. You'll recall we had around EUR 80 million in relation to taxes early in 2020. These 1x elements come to EUR 260 million.
Now, as you look ahead to 2021, it's important to also take into account that foreign exchange developments, the anticipated completion of divestments that are currently in the pipeline, will also account for a further EUR 50 million in cash that won't be with us in 2021 as we monetize the value of those businesses. What does that mean? It means that as you look at 2021 cash flow, whilst I would love to be able to tell you that the EUR 963 million is sustainable, the reality is that we're going to have to be patient for that because the normalized reference free cash flow for 2020 is nearest to EUR 650 million because of the reasons I've explained. This is what I've suggested is the relevant level against which to consider free cash flow going forward into 2021.
With that, I'll hand you back to Ilham to review our outlook and some closing remarks.
Thank you, Karim. Now a few words regarding our portfolio. We began 2020 closing the sales of the polyamide business, if you may remember, end of January 2020. Since then, we began taking steps to prune our portfolio, and to date, we have signed six agreements to divest different non-core business lines, four of which will close in the coming weeks, and the balance will close in Q2. In total, this divestment represents about EUR 50 million of EBITDA. Today, we are taking a next step in our strategy by organizing the Soda Ash business unit into a separate and fully controlled legal structure. This step is in line with its business mandates of optimizing cash flow generation and returns and will further reinforce internal financial and operational transparency and accountability while increasing future strategic portfolio flexibility. Moving to our outlook for 2021 on slide 15.
We continue to remain confident in the areas within our control. I explained earlier that we raised our strategic cost targets to EUR 500 million by 2024, and you know that we've delivered EUR 175 million already, we are well on the way. In 2021, we estimate delivery of an additional EUR 150 million in 2021, reflecting both the full-year effects of last year action and new measures, and will more than offset fixed cost inflation of around EUR 75 million. When you look forward at 2021, you will remember that 2020 EBITDA of EUR 1,945 includes EUR 157 million of temporary cost savings, as Karim shared with you earlier. Moving to business performance, it's clear the momentum from the fourth quarter is continuing into the first quarter this year. We see that most strongly in businesses supplying the automotive and electronics sectors.
Yet whilst we are close to our customers, visibility beyond quarter one is limited, and uncertainty remains on the continuing impact of COVID on our businesses. Further, as many other companies have expressed, we too are experiencing logistics and raw material supply issues that are challenging our ability to meet orders. Further, we have experienced some operational outages in relation to the extreme weather in the United States of America. Accordingly, and taking all these factors into account, we estimate first quarter EBITDA between EUR 520 million and EUR 550 million. We will provide you with a better view of the full year once market visibility improves. On free cash flow, as Karim already explained, some positives in our 2020 free cash flow won't repeat in 2021 as expected. When we also factor FX and scope effects, it implies a normalized reference 2020 free cash flow of around EUR 650 million.
Turning to 2021, we expect to increase our CapEx investments between EUR 700 million-EUR 750 million and to invest around EUR 150 million in restructuring costs as we accelerate the transformation. The investment, the CapEx investment will focus on our growth platforms, including batteries and hydrogen. We will have the benefit of the de-leveraging of pensions and debts, which we started back when I joined the company in 2019 and will contribute an additional EUR 90 million of improvement relative to 2020. To summarize, we expect to deliver free cash flow of between EUR 600 million and EUR 650 million. Finally, we recommended a stable dividend of EUR 3.75 per share. Before we begin Q&A, I just want to share that in a few days, it will be my two-year anniversary leading Solvay. What a ride it has been. We've accomplished a lot in this period. We united the organization around a common purpose.
We launched our growth strategy, including our One Planet sustainability roadmap. We accelerated our delivery on cost and cash in the midst of a crisis. We focused innovation around three key platforms, batteries, composites, and hydrogen, with multi-billion size addressable markets. We started our journey to transform and simplify the company. Indeed, if I were to summarize what we've done and what we will continue to do, it is that we will continue to be resolutely focused on value creation whilst leveraging fully on our values. In fact, we are making more changes at the top of the organization as we speak. We are reducing an organizational layer that will further simplify the structure and combining 17 distinct functions into seven, which will drive accountability and improve decision-making. These changes are the natural next steps as we seek to embed and advance the simplification that is already underway.
I am sure this year will also have its share of challenges as we emerge from the crisis. Our team has demonstrated our ability to manage through these near-term headwinds while continuing our transformation. Our high-quality portfolio, coupled with our financial flexibility and structural improvements, will enable us to emerge leaner, stronger, and well-positioned to unleash our full potential. Thank you very much for listening. Karim and I will now address your questions. Back to you, operator.
Thank you. We now ask your questions. If you have a question, please press O one on your telephone keypad.
May I kindly ask that you limit yourselves to two questions per person so that we can give everyone a turn today. Thank you.
Thank you, ladies and gentlemen. If you have a question, please press O one and please limit yourself to two questions. The first question comes from Virginie Boucher-Ferte from Deutsche Bank. Please go ahead.
Yeah. Good afternoon. Thank you. Can you hear me?
Yes.
Yeah. Okay.
Good afternoon.
Yeah. Thanks. I've got two questions. The first one is on disposals. Far the discussion has been centered around businesses that have a negative impact on the company, whether it's margins, returns, or the environmental footprint of the group. However, there are some assets in the portfolio, such as Aroma Performance and Novecare for HPC, that have been performing well recently and could attract high multiples well above the group. Given that they're not as core as other businesses and they're not getting the valuation that they deserve, wouldn't it be a good time to think about selling these assets? More generally, what's your thought process with regards to these assets? My second question is around the use of cash and deleveraging. Based on my calculation, you should end up with a leverage ratio below 2x in 2021.
That's not even assuming additional disposals proceeds, which could potentially materially lower the ratio. I'm assuming that a large acquisition is not on the agenda currently. Would you consider buying back shares at some point in the interim period? I think you got the approval to do so at the last AGM. Thank you.
Yeah. Thank you. Is that Virginie? Yeah.
Yes. That's Virginie.
Yeah. Hi, Virginie. Thank you for your questions. Well, listen, you may remember, Virginie, when I joined the company, and I think by now you know me, in 2019, I said that there is no sacred cow, right? There will be no stone unturned. I spend much quality time with the team, including crafting the growth strategy right around different distinct mandates by global business units and by segment to ensure that we differentiate the business mandates, the strategic mandates, and we ask each business to act accordingly and reach its full potential. Since then, you've seen that almost two billion EV have been out. Obviously, there was the big chunk of polyamide, which I inherited with, but it was not a done deal in 2019 because we were asked to find a second buyer, right? We closed it successfully in January 2020.
Since then, obviously, we have been busy behind the curtain, and today we have a total divestiture of six, which represent EUR 300 million of sales, more or less EUR 50 million of EBITDA bottom line. As I told you in my prepared remarks, we are going to close it in the first half of 2021, and some of them actually in the coming weeks, right? We will continue to look for ways to simplify the portfolio. Obviously, on the M&A side, and we'll go to the use of cash, we entertain bolt-on acquisitions. Today, we've announced that we purchased a bolt-on seed coating technology. It's a natural extension to our portfolio and supports the bio-based sustainable agro businesses of Novecare, right? Again, this is a small bolt-on technology. On the use of cash, I think you've seen us already. Cash is king.
When I joined the company in 2019, I said it publicly, I was not happy with the generation of cash, neither the total amount, but also the quality phasing of it. I invite you to look since quarter one 2019, when we had the negative cash flow. We had the seven consecutive positive free cash flow, including structurally improving it across the board, in all GBUs, by the way, global business units. We use our cash actually to deleverage the balance sheets, a total of EUR 1.8 billion, right, Karim? Between deleveraging the debt, but also, we funded EUR 6 million in pension, which has been historically a nail in the shoe of Solvay. I'm very proud of the team and what they have been doing in 2019 and 2020, actually giving us more flexibility and decreasing the pension expenses. On acquisition, listen, we are really busy.
I think there is much we can do. Prioritization is important. The allocation of resources is in the top of my agenda. You may remember that one of the first thing I've done is to change the allocation and resources from a fully decentralized to bring it to the hands of the executive committee members and I, right? I think this is why what we are paid for is to allocate the limited, they are not unlimited, available resources to the best available opportunities, creating shareholder value in the company. We have hard talks. We look at business case. Solvay One Planet is part of those. Yeah, we will continue as part of our corporate M&A to look at the value of bringing more bolts on technologies and so on. More on.
Maybe just one other additional comment around your comment around leverage being 2x.
Yeah.
You're absolutely spot on. I can see how we can get to the math, but I encourage you to also add in pensions. Whilst they were going down from EUR 2.8 billion last year to EUR 2.2 billion, this is still a significant factor to take into account. I'm not saying you're wrong. Absolutely, you're correct. I just go beyond, and our financial firepower, let's say, is going to continue to increase as we generate that cash, and it creates more optionality, which is good.
Okay. Thanks for that.
Thank you.
Thank you. Virginie?
Thank you. Next question from Chetan Udeshi from J.P. Morgan. Please go ahead.
Yeah. Hi. Just one question. First question I had was just looking at Q4. It feels like sequentially the sales were up, whereas the EBITDA was down. Can you maybe help us understand why that was the case? The second question was, actually, there are two sub-questions within that. In terms of strategic flexibility on Soda Ash business, have you had any informal or formal sort of discussions with any of the interested parties so far? Is that the process which you are just starting in terms of considering the strategic aspects of that business? Associated question is, can you remind us how much of your Soda Ash business sales or earnings are from the U.S. versus Europe, on an annualized basis? Thank you.
Okay. Hi, Chetan. Nice to hear you. Karim, you want to take?
I'll take the Q4, Q3 sequential.
You take the sequential.
You're absolutely right, Chetan, in highlighting that and spotting it. Two factors I'd like to highlight. One is that Q3 benefited from much stronger temporary cost savings, so in Q3 compared to Q4. As that diminishes, that has a sequential impact of around EUR 10 million. There's also impacts of phasing nature into the variable remuneration of another EUR 10 million-EUR 15 million. If you take those two factors together, it explains what may facially look like a deterioration of the operating leverage, which isn't really the case fundamentally.
Back to me? Yeah.
Yeah.
On soda ash, I think we mention it, Chetan. We're taking steps to organize It's a technical carve-out. It's a legal carve-out like I have done in my career before into separate and fully controlled legal structure. All the options are open and nothing has been neither decided, beyond initiating the carve-out process. Let me be clear there. What was the other question from Chetan?
Can you perhaps repeat your question, please, Chetan, on the geographic split.
He was talking about the geographic split.
Yeah. Just how much of the Soda Ash sales or earnings are distributed, or what is the distribution between your U.S. footprint and European footprint in terms of sales and earnings?
Naturally is around 40%.
Normally we don't share that, but we have 11 production sites around the world, three R&I centers in Europe, North America, and Asia. We don't disclose more, but indeed we have the natural part in the U.S. It's a global supply chain. You know that in Europe, the sensitivity has been much now driven by the changes in energy and switch away from coal. We did it already for two plants, Bernburg, Rheinberg, since I joined the company. We're negotiating Dombasle in France, and there is another one in Spain underway. That's happening in the Soda Ash footprints, but it's a global supply chain network, right? Regardless where we bring the products from.
Thank you.
Thank you.
Back to you.
Thank you. Next question from Wim Hoste from KBC Securities.
Yes, good afternoon. I have a couple of questions also. First one is, can you discuss the outlook for the composites business? A little bit the phasing per quarter on 2021. I know, I think, Boeing will be with the 737 MAX, that is gradually going to ramp up. Might be the single biggest element that will change in the course of the year. Any thoughts on how we should see business developing there in the course of this year would be helpful. Then the second question is a bit more general. How do you look at inflationary impacts from energy or raw materials for your business? Any quantification or thoughts around that would also be helpful. Thank you.
Who's on the phone? Sorry.
That was Wim Hoste from KBC.
Yeah.
Wim.
Hi, Wim. Well, listen-
Hi
I'll take the aerospace; Karim will talk about the energy cost and the raw material. Listen, the civil aviation represents today, or 2020, 5% of our top line. The defense part is very resilient, as I told you many times during the earning calls, doing very well and source even for innovation. On the civil aviation, this is obviously the hardest hit, across the portfolio with oil and gas. We acted decisively. You've seen us last year, we've already announced 20% headcount reduction, and two closure of manufacturing assets, the least efficient in our industrial portfolio and footprint. We closed Manchester in July. Tulsa is underway and will be completed on time. A week ago, or a few weeks ago, we announced internally, but now it's public, a third asset in the U.S., obviously moving the volumes which are not lost to other plants.
You've seen us really, and again, the least efficient plants out first. The team has done really a good job in very tough environment to really mitigate the top line decline and variabilize the cost as much as possible, and actually use it as a way to improve the ROIC, the return on capital employed of this business. On the outlook, Wim, remember, there is a large parking lot, I would call it, of MAX planes. The Boeing likely to deliver 150 737 MAX this year. The rest, they're phased over several years, as we are hearing, but they are restarting the production. We will not really see the impact yet in 2021, as which will take time to deplete the inventory.
IATA, you follow their numbers, assume domestic traffic back at 2019 levels only in 2023, which is likely to be a proxy for the single-aisle demand. Obviously, Wim, the vaccine rollout would also influence how quickly people will return to travel by air. That, nobody knows, and we shall see between now and the end of the year. International traffic, in general, we believe, doesn't recover until 2023, 2025 in the best case, which would translate into a weaker expectation. We've done what we had to do, and we will continue, which is managing costs, the cash situation, et cetera. We believe that in quarter four, we reach the bottom in composite materials. I salute my team, by the way, and our team, because they've done a tremendous job into really accelerating the restructuring plans.
On commodity price, clearly, we're seeing a lot of cost inflation, Wim, as you understand. We don't disclose specifically how much it is. What I can tell you is that around 55%-60% is formula-driven, that enables us to maintain our margins in an inflationary cost environment. For the rest, we clearly see margin expansion or compression, and we try hard to maintain our margins as well. Fundamentally, we are pretty well-protected across most of our key businesses in that regard. Those that are most protected, for example, from a formula point of view, is Silica, [quartz is two points]. Others are typically in the 50%-60% range as well.
Okay, understand. Thank you.
I'm not expecting anything major beyond that at this stage.
Okay. Thank you.
Thank you.
Thank you. Next question from Laurence Alexander from Jefferies. Please go ahead.
Good morning. How much do you see as the stranded cost if Soda Ash were to separate? Secondly, could you update us on your thinking around the pace of U.S. PFAS regulatory change? I guess my impression is there's about 100 chemicals out of the 4,500 that are most under scrutiny at Solvay. Have you done a kind of a screening of your exposures to make sure you're completely out of the production of those?
Thank you. You start.
On your first question, you're talking about what kind of cost?
Stranded costs. Yeah.
Okay. That's an interesting question, but doesn't in any way relate or refer to a carve-out where we don't see any stranded costs. Our focus is to ensure that we focus, concentrate resources to maximize the value. That's really all I have to say at this point.
A carve-out, having done one in my career, this is where you stand up a company and fully independent business unit. Obviously, there will be cost traveling between the corporation and the newly separated and fully controlled legal structure. It's too early to say. We are starting it of March 1st , obviously, it's something which is going to last at least a year. We'll tell you more when we have internalized the exercise. On PFAS, we know this is an issue for the entire industry. For us, actually, the PFAS story in the U.S. is actually one that showcase our innovation, let me tell you how. I remind you, probably the background, that Solvay has never manufactured or participated to firefighting foams or manufactured PFA, PFOA, PFOS. We completely phase out the use of these chemicals in advance of any legal requirements.
We obviously continue to look at non-fluorosurfactants or fluorosurfactant-free technologies. Since I joined the company, I challenged our teams really to look at how we can move away from fluorosurfactant-containing products. Since the PFNA, PFOA exit in 2013, we were using a limited number of compounds as a replacement. As we speak, we have innovated with fluorosurfactant-free technologies, which we sampled to our customers in January last year already. They had been testing them, qualifying them. This was one of my top priorities since joining the company, to ensure we develop these technologies, and we are ahead of the curve. This new non-fluorosurfactant technologies will be in full production at our West Deptford facility by mid-2021. We are in discussion with the authorities in actually two or three weeks to accelerate the change to these innovations.
Thank you.
Thank you. Next question from Jaideep Pandya from On Field. Please go ahead.
Thank you. First question is on Soda Ash. I don't know how easy this is for you, but can you just give us some color on, out of the 10 million tons of CO2 Scope 1, Scope 2 that you have, how much is Soda Ash? I found a presentation back in the day where you sort of said 1 million ton of Soda Ash is 1 million ton of CO2 in Europe as per the Solvay process. If you can just confirm that. The second question is really just around your cash flow. Assuming everything goes well and you separate this business and this business is running great, the new Solvay, if I may use that term, can you actually pay the EUR 400 million dividend from this cash flow outside of Soda Ash?
I.e., can current Solvay pay its shareholders a EUR 400 million dividend without Soda Ash's cash flow? Thank you.
This is Jaideep, right?
Jaideep, yeah.
Yeah. Hi. Well, listen, on Soda Ash, again, we are not announcing the sell or the spin-off of Soda Ash today, right? We're taking steps again to organize this business unit into a separate and fully controlled legal structure. I know you probably want to know more, but again, I repeat myself, all the options are open and nothing has been decided beyond initiating the carve-out process. Let's take it one by one. What was the second question? Because I couldn't hear very well.
It was predominantly around our capacity to sell in that scenario, soda ash, and maintain our dividend cover, essentially.
Well, again, it's premature. We're not talking about selling it now. When I look at the portfolio, and I told you in 2019 when I joined the company, the free cash flow equation was extremely important. Above and beyond the chemicals businesses, which are cash cows and generation free cash flow. By the way, we've been tasking them with the strategic mandate to do more and better. Across the board, the free cash flow generation has improved in the company. Not only the total free cash flow, as you could see two years in a row, but also its phasing and the quality of its phasing, including in the material segments and in the solution segments. This is not only targeting the one and only chemicals, right? That's important.
Listen, we'll talk to you later and we'll give you a bit more information when we will complete the carve-out, the first target is to give us more strategic flexibility, right? We will advise you if you have more information in the future.
Maybe just two other quick comments on the CO2 intensity.
Can I just ask very quickly?
Yeah, CO2.
Sorry, Jaideep. Go ahead, Jaideep, and I'll come back. Go on.
No, please.
Go ahead.
Please continue.
Well, I was just going to say that soda ash represents just over 60% of the group's CO2 emissions.
Yeah.
This is an annual report, and you'll get an update when we publish the 2020 annual report as well.
And-
Clearly, we are continuing to work on reducing that, as we've highlighted quite prominently as well.
And the 27 projects, Jaideep, on the CO2 emission of the.
That's great. Thank you so much.
Yeah, is touching the Soda Ash portfolio primarily. You may remember as part of Solvay One Planet that we have announced that we are abandoning coal, which is a primary energy used in the Soda Ash global business unit since 160 years. We started again in two plants, and we continue our conversion to biomass and waste.
Yeah. Maybe one final comment. You talked about cash and dividend. Let me give you a different answer, which is we will never put the group's investment credit rating at risk in anything that we do. This is a very clear red line for Solvay, just to state perhaps the obvious.
Thank you.
Thanks a lot, and well done on all the ESG stuff as well.
Thank you. Thank you very much.
Thank you. Next question from Lisa De Neve from Morgan Stanley. Please go ahead.
Hi, good afternoon. Congratulations with the good results. Two questions from me. First and foremost, how should we think about the EUR 157 million of temporary cost savings achieved in 2020? How much do you think will unwind in 2021? Are there some sticky elements? Are some of these elements actually included now in the up structural cost savings targets? That's the first question. Two, you were so kind to share 2021 CapEx guidance with us. Could you share some more details on sort of midterm CapEx spend, in which levels do you see that, and where that growth CapEx element will be directed towards? Thank you.
Thank you. Great questions. Karim, do you want to start?
Lisa, probably I'll start with both questions.
Yeah.
The first question is, how do you look at the EUR 157? An easy way to do it is to take the EUR 1.945 and deduct that EUR 157 that is absolutely, by definition, temporary. Does it mean that we're getting our foot off the pedal? Absolutely not, which is why we've also clarified that we'll be committing to delivering another EUR 150 million this year over and above the EUR 175 million structural delivered in 2020. If you take the combination of both, it comes to EUR 325. Simple math. It's more than what we announced when we delivered the EUR 300 in November 2019, and it's over 60% of the new, higher EUR 500 million target. That's really what we're looking at. Clearly, if we can do better because people are traveling less, we're teleworking, yeah, we'll find a few more.
Fundamentally, we've really, like I said, batten down the hatches, really nailed things down in our internal plans and ways of working. That's probably the most helpful way to describe it. Your second question related to.
It was on CapEx, I can take it.
CapEx, okay.
Here, in 2021, Lisa, we are planning, as you said, EUR 700 million-EUR 750 million of CapEx, and we are redirecting the CapEx towards growth platforms. You may remember in 2019 when we launched our growth strategy, we've been very bold, and we told you that we are going to redirect not only CapEx but also resources, including human capital, towards growth initiatives, be it in the materials segment or other growth initiatives. You've seen us since then launching three platforms, namely the EV batteries, the thermoplastic composites, and the new one, the hydrogen. There is much we need to reinvest in those growth platforms. We're using digitalization, by the way, to improve the efficiency. We hired recently a chief digital officer. We are investing in digital in Industry 4.0.
What's in there for CapEx is that sometimes, and often actually, when we do digitalization, we can debottleneck and increase capacity in our assets with very low CapEx. Ultimately, I want zero CapEx and squeeze the lemon and extract any pound of products with the digitalization and better efficiency. On the look forward, you were asking beyond 2021? Too early to tell you, but we'll give it to you at one point of time. Listen, we are working on what I call the zero-based budgeting on maintenance. We're an industrial company. We have a large industrial footprint. It's legacies from the different businesses. There are two things you have to do.
Ensure that what's concerning maintenance, and half of our CapEx can go to maintenance, is zero-based budgets, that you leverage the scale of Solvay as a company in procurement of services, of spare parts, of everything, doing more with less. That's number one, this is very important, we believe we can save a lot of money there and reinvest it in actually building capacity and debottlenecking. The second is really improving our industrial footprint. Lisa, you've seen us closing three manufacturing assets in less than a year in composite material. Obviously, we couldn't defy gravity, the crisis in aerospace has been accelerating our plan. Frankly, we would have done it, just probably over time longer if the crisis was not there. And then, obviously, we want to expand for growth projects.
Without saying it publicly, but by now you know it, we've been investing in our PVDF membrane technologies last year during the crisis. We are so happy actually because there is a new line in Tavaux in France, which started in January 2021, just a month ago. We are, as we speak, investing in China, and the new line will come on stream in Q1 2022. In less than two years, we will be doubling our global capacity in PVDF. Karim said it on Aroma. We doubled the capacity for the second time, and we will be sold out soon. We are industrializing our Aquivion hydrogen membrane technology for fuel cells. Our customers have already validated and qualified this membrane, so now we are building a semi-commercial pilot, et cetera.
I think it's a nice exercise for an industrial company with our age and complexity to really look at the allocation of resources inside your CapEx portfolio, do more with less, challenge and restructure the industrial footprint and remove the low-ROIC assets, and then invest for growth and double down there.
Thank you so much. Very helpful.
Thank you.
Thank you. Next question from Laurent Favre for Exane BNP Paribas. Please go ahead.
Thank you for squeezing me in. Ilham or Karim, when you talked about Q1, you mentioned a series of headwinds, and in terms of the positives, autos and electronics. I was wondering if you could tell us a little bit more about the areas where you are seeing that improvement in electronics and in particular, in Rare Earths. Can you talk about the impact there of the headlines we're seeing? I just remember that, I guess 10 years ago when we had the first headlines or the last headlines on Rare Earths, it was a driver of meaningful EBITDA growth for Solvay, I think with FIFO accounting. I was wondering if this is happening again. Thank you.
Thank you, Laurent. Would you like to start with the cost, right, in Q1 logistics.
Sure.
Rare Earths?
Sure. A few things. One is supply chain is impacting operations at a number of different levels. This is not new news. I think we hear the news from many other.
Sorry, Karim.
Yes.
Sorry. I was actually more focused on the positives, as I think you've already talked quite a bit about the negatives, and I know it's quite late already, but just thinking about electronics, and my question was really on how much of an improvement you're seeing, if you can dimensionalize that and in particular talk about Rare Earths. Thank you.
Okay.
I can take it, frankly. Laurent, listen, we ended up quarter four with a stronger order book, you've seen the improvement sequentially. We entered quarter one with very strong order books, both in automotive and electronics. I cannot deny that some of it is probably rebuilding the inventory, specifically in the automotive side. How much? We don't know, we shall see by quarter two. I spare you time on some logistics problems here and there and surcharges which we are pushing with our customers and will defend our margins, plus the weather storm in the U.S. with some few force majeure, et cetera. We have given you a guidance, we feel very comfortable with our quarter one bottom line. On the Rare Earths, it's probably a different story, there is lots of geopolitical potential issues which can likely impact Rare Earths business.
First of all, we don't operate in magnets. There are different Rare Earths. There is the light and the heavy one. Our main business, and you remember it well, is mixed oxide Rare Earths, sold primarily for automotive catalysts and to the semiconductor industry. This is a sort of chemical mechanical polishing. We have separation capabilities only in France, La Rochelle, which we use as a base for our most downstream, I would say, products. We don't have upstream integration, meaning that our separation units relies on concentrated third parties, and as of today, we are not active in the business of Rare Earths magnets, as I said. We would need to develop or acquire capabilities to move in this direction, and this is not in the agenda.
All in all, we buy in China for Chinese, in China for China, and for European and the French separation unit, we buy from Australia. This is not impacting us. Does it answer your question, Laurent?
Yes. There's no FIFO impact, so where you may have a book gain impacting Q1 positively from the fact that your contracts, what you're buying, prices may not have moved as much as what we're seeing.
Nothing of any significance at all.
Yeah.
Excellent.
We know it's buzzing and nothing yet confirmed, and we'll share with you if it's the case.
Jodi, I have the stop watch, I believe. Go ahead.
Yes. I know we're running a bit over, we'll make time for two more. If you could each ask one question, we'll go to two more people.
Thank you. Next question from Sebastian Bray from Berenberg. Please go ahead.
Good afternoon, thank you for taking my questions. I just have one on Coatis. Given the magnitude of the depreciation of the BRL over the last few quarters, I was a bit surprised to see full year sales for this business only down by 12% and quite a nice sequential increase into Q4. Given that this is one of the businesses which could arguably be potentially up for divestment at some stage, has something been done there to hedge out the FX exposure or reduce its volatility based on the BRL? Has something changed on an underlying basis in the operating performance? Thank you.
Thank you, Sebastian, I'll take that. One is, I don't know why people might say that. I think I heard the word divestment in the same question, I wouldn't. On the foreign exchange and the BRL, fundamentally, what we do is merely apply the group-wide policy of hedging our net transactional exposure to the tune of approximately 80% on a nine-month rolling basis. Nothing in particular has happened beyond that on that business. What you see therefore reflects the momentum of the business there, which I've already alluded to.
Our teams, and I want to salute them if they are listening, have done a great job. We have a strong leadership position in Latin America. I think Karim in his prepared remarks as well talked about Augeo, Sebastian, this is 100% renewable raw material, which is sold out, by the way, being used in different markets, including fragrances and others. Yeah, the team is really doing well into extracting the value they create with the customers as well for Solvay. Thank you.
Thank you for taking my question.
Thank you. Next question from Mubasher Chaudhry from Citi. Please go ahead.
Hi. Thank you for squeezing me in. Just the one, I guess. When you talk about the Soda Ash division being put into a separate legal structure, did this come out as a part of the initial strategic review, or has something changed since then to make this happen? I'm just interested in the timing of the announcement as to why it wasn't done at the initial strategic review. Then looking forward, you talk about the various different options available, and you'll give us a bit more information when those become clear. Could you just give us some thoughts on the timing as to when we should expect that? That'd be really helpful.
Okay. Is that Mubasher?
Yeah.
Hi, Mubasher.
Yes, it is. Hi.
Well, listen, you remember I joined the company in March 2019, at the fall, just shy of nine months, we delivered the growth strategy, right? To ensure that we are very transparent with the market as soon as we start with something. Actually, 2020, despite the crisis, have shown that our growth strategy is more than ever valid. That's number one. We went very quickly. As we continue fine-tuning, clarifying our intent, we'll come to you guys, and we share with a high level of transparency like we did in our cost saving. We start with EUR 300; we are now at EUR 0.5 billion . We have a plan, and we declare and we inform the street when the plan is there, and we know that we are going after.
On this one, the Soda Ash and the carve-out, we would have done it earlier, beginning of 2020. We were ready. The crisis called COVID-19 of a lifetime came in, and we believed that we had to focus on the crisis, right? Look at the microscope. In the telescope, we knew that we wanted to start the carve-out. It's materiality to the market, so legally, we are obliged, and we do so to inform the market about such a carve-out. That's how it happened. Thank you for the question.
Thank you.
Thank you all so much. We really appreciate your great questions today, and we recognize there's still some people that we did not get to. We invite you to please contact the Investor Relations team, and we're happy to address remaining questions.
Thank you very much.
Thank you, everyone.
Bye.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.