Earnings Call: Q2 2020

Jul 29, 2020

Ladies and gentlemen, welcome to Solvay's First Half Year twenty twenty Results Conference Call for Analyst and Investor. Solvay team, the floor is yours. Good afternoon, and welcome to our second quarter twenty twenty earnings call. My name is Jody Allen, Head of Investor Relations, and I'm joined virtually by our CEO, Ilham Qadri and our CFO, Karim 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 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, Jody, and hello, everyone. I hope you and your families are staying healthy during this continuing challenging time. At Solvay, health, safety and security of employees remain our number one priority. We continue to have 10,000 employees or 42% of our human capital working in a virtual capacity, and we will take a cautious and progressive approach to the confinement over the coming months. The recent spikes in COVID cases in certain parts of the world have increased our numbers slightly. Today, have forty colleagues who are infected with COVID nineteen and one hundred seventy six employees in quarantine. We wish our colleagues a quick and complete recovery, and we will continue to take a disciplined approach to managing the safety of our employees. As I mentioned to you in May, Solvay's businesses began to witness the significant impact from the COVID pandemic in the second quarter following our solid first quarter results. We quickly adapted our organization to manage through the short term challenges and focused our priorities on managing costs while driving cash generation. I'm pleased to inform you that the fruits of our labor are paying off. Slide three summarizes the results. We delivered a record free cash flow to shareholders of EUR435 million in the first half twenty twenty compared to EUR33 million in the first half last year. As all of our businesses remained unwavering in their focus on cash generation. This marks the fifth consecutive quarter of strong and positive free cash flow. The majority of this improvement, 75% in fact, was due mainly to the enforcement of working capital discipline. Karim will share more on these financial details in a few minutes. In addition, we continue to focus on our self help measures and have made significant progress executing our cost saving program we shared in November as part of the growth strategy. Since that time, we increased and accelerated our delivery in light of this crisis from €300,000,000 to €410,000,000 For 2020, I would like to share with you some important breakdown of the cost savings figure. In the first half of this year, we delivered €170,000,000 in gross savings for the group. This is a record, and it enabled us to mitigate a portion of the steep drop in volume due to COVID impact. Of this €170,000,000, €80,000,000 are structural cost improvements and EUR 90,000,000 of the current cost savings relate to temporary measures. Turning to the top line, first half sales were down 11% to EUR 4,600,000,000.0, and second quarter sales were down 17% to €2,200,000,000 versus quarter two twenty nineteen, with headwinds from aero, auto, oil and gas and construction markets impacting volumes since April. Thanks to our diversified portfolio, other markets were resilient, such as healthcare, agro food, home and personal care, and electronics. In fact, Solvay has outperformed the general market in certain areas. We welcome these results considering the unprecedented times we are all facing. In fact, I would like to share with you a bit more about what makes Solvay special, more about why we are regarded as technology leaders by many of our customers. I will start to share more on our performance by region, and market and of course our new customer wins, while Karim will explain the performance by segment, business units and financial details, including cash and cost performance and impairment. I will then close with a short update on our growth strategy, specifically our portfolio and investments. Before I dive into each market, want to share some insights on the regional performance. Our sales in China, in particular, are back to pre COVID levels and have grown sequentially by more than 20% from quarter one to quarter two and grew more than 5% in quarter two twenty twenty versus quarter two twenty nineteen. Asia Pacific region, excluding China, is slightly down versus quarter two last year. All other regions remain down versus last year and versus quarter one. Let me now dive into some of our key markets, representing about 50% of our sales, and I invite you to turn to Slide four. In auto market estimates indicate global production was about 45% lower in quarter two. As you know, this is an important market for Solvay, representing about 14% of the group sales on an annual basis. Our specialty polymers business, in particular, supplies many high performance polymers to this market, and its sales to auto in quarter two were down 26% in comparison, demonstrating the continuing replacement of metal with polymers. We have further evidence of this penetration through new business awards into the demanding under the hood application. So in fact, what I'm saying despite the fact that there are less vehicles being produced, we have more penetration of solvent materials in each car produced. This led to our outperformance of the general market and will continue to position us well when growth resumes. We also continue to make good progress winning new business in EV and hybrid vehicles. For example, we recently expanded our relationship with a large European OEM who will use one of our next generation polymer technologies in battery containers for hybrid vehicles. This award comes after commercializing similar technologies on other auto platforms, and the customer is now expanding usage on new hybrid models, further evidence on the continuing penetration of polymers into auto. As a reminder, batteries are a key growth platform for Solvay we launched in quarter two last year. I am also proud to announce that we are in advanced discussions with Veolia, a global leader in resources management and specializing in the design and provision of water, waste and energy management solutions, which contribute to the sustainable development of communities and industry. Together with Veolia, our plan is to create a circular economy consortium to address the end of life of lithium ion battery. We look forward to sharing more details with you in the near future. Moving to aero. We are performing in line with the market, though we saw significantly lower commercial aircraft production in the second quarter. The civil sector represents about 7% of the group sales. Our leadership position supplying composite to defense programs helps us to offset some of that reduction. In response to the aircraft production decline, the composite business has been rigorously focused on their cost cost takeout to align their footprint to the new environment, and the team has been executing their plan flawlessly. To date, we are ahead of schedule. 50% of the restructuring plans are completed, and we have already closed one of the two intended facilities. As you know, electronics is a market that includes a diverse group of subsectors, including semiconductors, semiconductor consumables, and equipment displays and smart devices, and all of these use, you know, solvent materials. Solvase sales to this market have been resilient through the crisis as we supply a number of specialty materials from specialty polymers and special chem businesses. As a reminder, we invested in a plant in China to produce an electronic grade h two zero two to meet the growing demand in the semiconductor industry. We continue to grow with our tier one semiconductor customers and are working on more new business opportunities to support five g mobile electronics. Healthcare continues to be a resilient market for Solvay. As a reminder, our specialty polymers are key ingredients for a number of applications, including hemodialysis, pharma packaging and medical devices. We are enjoying good growth in each of these segments. In addition, our technologies are being requested in new markets in response to COVID-nineteen. Our polymers are being used in ventilators, face masks, and other protective equipment whose sales are expected to total €20,000,000 this year. Our recent investment late last year in fully eater tool phone technology or T2 in Asia is helping to support this growth, and we are thankful that our solutions are helping to protect people during such times. In many respects, Solvay's growth in healthcare has outperformed, reflecting our broad portfolio of technologies and the value we bring to our customers. Home and Personal Care grew modestly in the first half, reflecting our strength in hygiene and cleaning related products. We also have an exciting innovation pipeline and continue to invest in big bets in this market. This business has been innovating more bio friendly solutions at the request of our large customer consumer customers, and indeed, we recently rolled out a BioSource polymer that offers hair and personal care manufacturers a full range of conditioning and texturizing features. In addition to that, I am particularly excited about the proprietary patented new technology we have just launched, which offers a twenty four hour germ protection and leads an invisible barrier, which not only kills ninety nine point nine percent of germs, but continues working after it has dried. This innovation combines superior cleaning performance with long lasting antimicrobial technology while maintaining a shining surface, a very unique solution protecting consumers. We had been working on this opportunity long before the start of COVID, but in fact, we have accelerated our efforts since then, and it could not come at a better time for consumers. We will update you more as we are in the early stages of product launch, but based on strong preliminary interest from top B2B, B2B2C FMCG companies and customers, expect this to be a commercial success. Finally, I will now turn to mining, where we saw the downturn particularly in copper production in line with market dynamics. Many of the copper mines are in place like Panama, Peru, where production temporarily ceased. We expect these headwinds to be short lived as the fundamentals in the industry remain intact, and Solvay's technology leadership continues to be recognized across the industry. In fact, we just extended our contract for the next three years with our number one mining customer. Solvay earned the business despite lower prices offered from competitors. It's a great example of our winning business model and the hands on technical support Solvay brings to this multinational. Our technologies, together with our digital tools and software, help them optimize their process and improve yield, creating measurable value. So these are just a few examples of why Solvay is recognized in many markets we serve for having the right technologies and innovation capabilities. This is why customers call us first when they have a problem to solve. To take this advantage one step further, we have recently launched a group wide initiative of our frontline redesigning the way we work with and service our customers. This includes the appointment of executive account managers for the group's 20 top accounts, new sales incentive programs to drive top line growth, leveraging CRM, digital tools, and investing in our people to a new Solvay Sales Academy with a full virtual and offline curriculum, which we will launch in September. I am confident that reinventing the frontline competencies and processes together with our market leadership position will differentiate us even more against competition while improving our future profitability. To wrap up the quarterly overview, the significant volume decline led to EBITDA down 29.5% in the second quarter. While we cannot define the full magnitude of the demand shift that began in April, we quickly and efficiently mitigated part of the impact with the cost measures and pricing strength during this volatile period. A testament to this is our ability to sustain solid EBITDA margin of 21.7% in the first half of twenty twenty. With that, I will turn it over to Karim. Karim? Thanks, Ilham. Good morning, good afternoon as well actually, everybody. I'll start with an overview of the three business segments, and I will refer to figures as usual on an organic basis, meaning constant scope and currency. I'll start with Materials that you can see on Slide number five, where net sales in the first half of the year were down 11%, driven by volume declines that began in April. In the second quarter, specifically, sales were down sorry, just find my key point. So yes, in the second quarter, sales were down 19% in that segment as a result of lower demand mainly related to aero and auto. Starting with composites, it's widely understood and accepted that the crisis is significantly impacting air travel and this impacts production rates for several aircraft in the near term. As Ilham indicated, the business was quick to develop a plan to permit the coast to manufacturing facilities and to shift production to other more efficient operations. Also, as Hilda mentioned, we fast tracked that plan. We brought forward the closure of our plant in Manchester in The UK and only closed it a couple of weeks ago. And we're focused on expediting the closure of the second site in Tulsa in Oklahoma in The U. S. By the first quarter of next year. As a result, we're on track to deliver EUR 22,000,000 of cost savings this year and we will be achieving the full run rate of EUR 60,000,000 that we announced by the first quarter of twenty twenty one. Turning to the defense sector, a historic strength of ours as you recall. Sales were stable in the quarter and we continue to work with our customers on new defense programs. We're confident that this sector will continue to grow across the short and the medium term and this will bring resilience and will help to offset some of the midterm civil program headwinds. Turning to Specialty Polymers, sales down only 9% in Q2. Why do I say only? Because essentially as Ylham already outlined, we outperformed on certain markets despite the softer demand mainly in auto and construction. The business was able to maintain its high EBITDA margin and this was driven by the combination of our leadership position in key markets, new wins and particularly disciplined cost focus. For the first half, EBITDA in that segment declined 16% and in the second quarter was down 28% due to the volume reduction, whereas pricing was remained stable overall. And this helped to preserve our EBITDA margins at 25% in the second quarter. Moving to the Chemicals segment on Slide number six, first half sales were down 11%, second quarter sales were down 11%, primarily related to volumes and offset partly by price. Starting with soda ash, sales down 17% in the second quarter. As you know, the largest markets for soda ash are glass used in construction, glass for containers, and these were impacted by the closures of restaurants and hotels, just to cite one example. Despite these demand challenges, soda ash pricing was resilient, thanks to our annual contract structures and our strong customer relationships. Yet the bicarbonate products continued to grow solidly for healthcare and for food applications. Soda ash continues to deliver on the demanding, challenging ambitious cost programs supporting strong delivery of their cash targets for the year, which as you know is a key metric for every business in that segment. Switching gears to peroxides, sales down 13% in Q2, mainly related to lower demand for HPPO in auto and in construction markets. This decline was partially offset by growing demand and supportive pricing for H2O2 and sodium percarbonate used in disinfectants and in detergents which are sold to the home care markets. The business has been successful with its cost containment program and it helped to alleviate through the effect of lower volumes. Overall, the Chemical segment EBITDA declined 30% in the second quarter due mainly to the lower volumes of which nearly half actually occurred in our Coates and in our Silica businesses. Every business in that segment worked resolutely on fixed cost containment and reductions, and this offset a large part of the impact and helped protect segment margins of 25% in the quarter. The Solutions segment, which you can see on Slide number seven, delivered sales that were down 10% in the first half, down 14% in the second quarter due to volumes, whereas pricing was stable overall. I'll start with Nof Care, where I'm really pleased to share that the business saw growth in Home and Personal Care and in agro markets, whereas the coatings markets proved resilient. Growth in those markets offset about 60% of the significant decline in demand in oil and gas and in total contained the sales decline to 16% in the second quarter. On the plus side, the oil and gas turnaround plan has essentially been delivered now and the wider focus on cost control and lower input costs enabled North Care to maintain its EBITDA margin. And you remember this is not the first time we managed to deliver that result. Sales in Technology Solutions were down 18% in the quarter due to lower demand in the copper mining market, which was affected by lockdown measures in certain countries. The alumina market on the other hand was not as impacted by lockdown measures and our sales in this market grew by 27% in the quarter. Aerober performance again performed very well, growing sales by 14% in the second quarter and outperforming the general food industry. The main driver is the demand for our natural vanillin technology, where we have very strong leadership positions. We continue to move the industry to natural vanillin and are working with key consumer players. Overall, the Solutions segment EBITDA was down 26% in the second quarter, reflecting the speed with which the businesses adapted matched production levels with demand. EBITDA margin was 16% in the second quarter. I'm now going to turn to cash on Slide eight. The strong free cash flow performance in the first half was almost million above last year's performance and was driven by a group wide focus on cash with the second quarter coming in at EUR233 million. The primary driver of that strong first half performance is the ongoing focus on working capital that we've consistently demonstrated for over a year now. And that represents CHF331 million of the improvement. We quickly adapted production and inventory levels to demand patterns, But also, we're particularly pleased that our razor sharp focus on receivables has led us to set new records in terms of reduced overdue levels. It's really critical in terms of macro challenge that we're going through. Tax cash out was lowered by 122,000,000 in the first half due to the one off tax gain that you recall of EUR 65,000,000 associated with the additional voluntary pension contributions that we alluded to in the first quarter. Finally, we quickly adapted our capital expenditure plans and generated a cash benefit of EUR 61,000,000 compared to last year. And you can see that reduction makes a modest contribution to our cash flow improvement. We also made significant progress with our deleveraging plan this year. Net debt in the first half of this year is down EUR0.75 billion, reflecting strong operational free cash flow EUR0.43 billion and of course, the EUR 1,300,000,000.0 proceeds from the polyamide divestment. That said, you recall that we also made major contributions of $460,000,000 towards our pension obligations in France and in The U. S. When we turn to pensions and restructuring and environmental provisions, it's worth noting that operationally, we've delevered by €60,000,000 but this is offset by an €87,000,000 increase in provisions for the additional restructuring plans we announced both in the first quarter and the recent composite restructuring plans. This is an accounting impact. And I'll come back to the cash consequences. Moving to Slide number nine. As Yenam explained, we achieved EUR 170,000,000 of gross savings in the first half of twenty twenty, which more than offset inflation of EUR 37,000,000 in the first half. About €80,000,000 of that saving was structural actions that we accelerated and deepened, and they fall into three categories. One, restructuring. This is the largest impact and includes labor cost. To date, we've saved 36,000,000 Indirect spend, when we look transversely and look across our businesses, we managed to deliver EUR32 million. This is structural and sustainable. Productivity efficiencies is more of what we've been doing historically and includes yield improvements. In the first half, these delivered EUR12 million. We also took significant temporary actions to manage through the steep and sudden changes in demand. The total of these actions to date is €90,000,000 in savings, and they include actions like furloughs, salary freezes, but also a complete, like I say, a complete focus, very strong focus on all discretionary spending, which is a given in times like this. And obviously, any discretionary spending has been essentially very, very low during the lockdown period. Finally, last month, as you will have noticed, we announced a non cash impairment, which totaled EUR1.46 billion as a result of the significant short term effect of the COVID crisis, which triggered the reassessment. Approximately EUR1.2 billion of this relates to the former Cytec goodwill, predominantly the competitive business and the balance consists of oil and gas and some other intangible assets, all of which are fully detailed in the notes to our financial report that were published today. While the pandemic is certainly impacting our performance in certain markets in the near term, we consider the fundamental long term attractiveness of our composite materials and our technology solutions to remain unchanged, driven by strong demand for lightweighting, electrification and resource efficiency that we believe is here to stay. We continue to pursue new business opportunities in composites and following this difficult period, we estimate the return to double digit growth over the midterm in part due to our self help measures. And with that, I'll hand you back to Ilham. Thank you, Karim. I'll now share some comments on the outlook for the remainder of 2020 and an update on the growth strategy. As you would expect, the nature and timing of the rebound will be specific to each individual key market. Some markets such as civil aero and oil and gas are expected to continue to experience headwinds similar to current levels, whereas auto and construction markets are more likely to improve gradually toward year end. Other markets, including health care, agro food, personal care and electronics are expected to demonstrate continued resilience. Against that backdrop, we fully expect to maintain our leadership position. As you know, order book provides limited forward visibility and the uncertainties associated with the various market recoveries make it difficult to provide reliable forecasts. That said, we expect a continuation of weak demand trends from Q2 into the third quarter with a modest improvement in quarter four. Notwithstanding these uncertainties, we are certain of one thing, and that is our determination and focus on cost measures and on self help measures. At this stage, we anticipate that cost reduction will total around €300,000,000 in 2020, including €150,000,000 of structural cost reduction. In addition, our focus on cash remains a top priority, and we expect our free cash flow generation to be similar to the 2019 levels despite lower profits. Our expectations assume a resumption of €25,000,000 in investments for a selected number of value creating projects to meet the needs of customers as they rebound. This implies a total CapEx of around €600,000,000 in 2020. So before we take your questions, I'd like to share with you a few updates in reference to our growth strategy. First, on our cost targets. We increased cost savings targets, as you know, from a minimum of €300,000,000 when we first launched our plan in November to €410,000,000 during quarter one earning results. So the €150,000,000 of structural cost reduction we are forecasting for this year will represent 35% of that commitment, further illustrating our determination to accelerate the group's transformation. Second, an integral element of our strategy is our commitment to sustainability. You may remember we launched our ambitious goals in February, solving key environmental and societal challenges through science and innovation. Together with our customers, this is a critical part of our plan. We will be hosting an ESG webinar in October. We will share with you the date, and we will share more about these plans in the near future, and I hope you will join us. Finally, during our strategic review, we said we had opportunities to optimize certain businesses. We also stated that the review of our portfolio is a continuous process and that we will always test whether we are the right owner for every business, and we will ensure that we are not leaving value on the table. In the past year, we have taken concrete steps to enhance and drive operational improvements in certain businesses that we do not consider to be core. And I'm pleased that our operational actions have yielded strong results. We have therefore launched processes to explore strategic options to monetize some businesses predominantly within the solutions segment. If and only if we find valuation to be sufficiently compelling, our intention is to complete these in the next year or so. We expect this first step to contribute favorably towards simplifying Solvay's portfolio and creating more shareholder value. Thank you very much for listening, and I will now take your questions with Karim. Thank you, Elam and Karim. Before we start the Q and A process, can I kindly remind you to limit yourself to one question only to allow time for all participants? And now I'll hand you over to the moderator. The first question comes from Martin Goediger from Kepler Cheuvreux. Sir, please go ahead. Hello. Good afternoon, Ilham, Karim. I limit it to one question. It's the underlying depreciation and amortization charge, which was quite high in Q2, much higher than in Q1. Can you help me to understand what was the reason for that? And is that the right run rate going forward? I doubt that because I think that you had in the €1,500,000,000 write down also some other intangible assets being affected. So normally, D and A charges on an ongoing basis should be lower going forward. Maybe you can clarify that. So the question, Martin, is about the depreciation, right, and amortization our impairment, Martin? Yes, the underlying depreciation and amortization. Underlying, yes, I got it now. Karim, can you provide the There was essentially a relatively modest amount of depreciation accelerated depreciation of spare parts. I think that's probably the only factor worth of note. The run rate going forward? This is not a run rate. This is very much COVID related. When you face this over too many spare parts, essentially, we depreciate, then we move on. So no, I think there's no impact on the run rate depreciation for Solvay based for Q3, we should look more to Q1 figure? Yes. Correct. Correct. Okay. Absolutely. Thank you, Martin. The next question comes from Alex Stolt from Barclays. Sir, please go ahead. Hello, good morning. I'm interested in your comments about the auto sector because with the trading statement on the June 24, you talked about auto and aerospace and construction and several other markets being down 40% in the second quarter, and then it was only down 26%. You mentioned there's one possible reason that increased penetration of polymers, but I can't see how that bridges the gap with car production down 45% in Q2. So can you perhaps explain why the actual result in the second quarter was so different to what you had indicated back in June would be incredibly useful? Yes. We couldn't hear you very well, Alex. But I think the question the line is that is about the auto, right, and why we outperformed the auto market, right? No, sorry. Sorry, let me ask the question again because that was it. Yes, please. Talked about auto sales being down 26% in the second quarter. But in your trading statement in the June 24, you said that several markets, including aerospace and auto, had revenues down 40%. So you had previously talked about down 40%, you delivered down 26%. I'm interested why there's such a divergence in the last month. You could possibly explain that. Let me start. So again, the guidance we gave in our trading update was indicating the market trends as we saw them. The figures you could, the 26%, is Solvay's outperformance against that backdrop. And the reason for it, I'll turn it to Ilham to give you a reminder of some of the key factors that helped us to outperform. Yeah. So Alex, we it will be a bit of a rendezvous between you and us on explaining a bit how why Solvay is special as a specialty company and how we target whatever the market there that we need to outperform our specialty markets. And obviously, auto is one is part of it. So it's mainly on specialty polymer. It's only down 26%, as I mentioned. Two things that I said, you know, we are in automotive under the hood application where invisible, we replace metal, right, in auto. And basically, the value proposition is to make the car lighter, the at a lower total cost of ownership, decreasing the consumption of fuel and therefore, emitting less CO2, again, at lower total cost of ownership. And those are things the auto OEMs, they just love it, right? And I gave you an example of the battery casing. We started with few auto platforms in Germany, and now we're expanding in other models. So specialty polymers, again, whatever does the market, they need to outperform the market. Obviously, you cannot defy gravity, but we are winning new applications, creating a new market. So I think that's important. Now the light in the tunnel, and I'm sure you have LMC data, obviously, they see some improvement between quarter two, three and '4, right? So less decline in quarter four, and I remain optimistic on also between now and the end of the year. The other piece I would like to really to stress out is the batteries. Right? And I think when you talk about, you know, the electrification, the green deal, the EU stimulus, and you see member of states in the EU not only giving bonuses to consumers to scrub their cars and and buy new ones, but even higher bonuses if they buy cleaner cars, right, either hybrid or electric. We like that. In an ICE car, internal convention engine, they can use up to six kilo of our top technological polymers. If you go to EV, they use up to nine kilo. And if you go to hybrid, they use up to 12 kilo. So again, whatever the market does, we can penetrate with our technologies. And the batteries is a fabulous opportunity to really innovate. And then we talked about, obviously, recycling of the battery. So I'll stop here. But Tore, just to be very clear on this. In your trading statement, you said businesses related to oil and gas, automotive and aerospace were the most significantly impacted with revenues down 40%. So there's no indication that, that's where the market was down. You said the revenues related to auto is down 40%. I don't want to unnecessarily push this point, but there is clearly a divergence between what you had talked about in June and what you reported. And I'm just trying to understand why that was. Yes. So here, we highlighted the specialty polymer part. Yes, Alex. There is the special chem part, which is in Catalysis, right? And there, the dynamics are different. You know that we are in China five and six. You know that the regulations have been moving from China five to China six, which has been normally positive for Solvay. However, due to COVID nineteen, China has actually pushed out a bit the Chinese six, you know, yeah, regulation to actually empty the stock of China five cars. So that we've seen also some delays in our plan. Okay. Thank you. The next question comes from Mubasher Sheldon from Citi. Please go ahead. Hi, thank you for taking my question. Just the one on free cash flows and just wanted to get your thoughts on, first of all, tax. Even with the kind of the CHF65 million benefit taken out, the cash tax payment has been a little bit low in the first half versus a P and L tax. So I was just wondering whether there is a cash tax payment coming up in the second half. And then related to cash flow as well, how do you see working capital trending in the second half of the year as business revenues pick up a little bit more? Should we be expecting an outflow for the full year? Or should it be flat for the full year? Thank you. Mubasher, great questions. So I'm going to reframe your question, make sure I've understood it, which is why is the cash flow forecast we're indicating essentially low in the second half compared to the first half. And you're correct in identifying some of the elements. But I'm going to start somewhere else. Remember, early last year, and I was very, very pleased that we are going to really work on improving the quality, which meant also the phasing of our cash flow, and you've seen that being delivered. Therefore, the past is not an indicator of the future. You're right in saying that there was a high quality but a non repeat of the EUR65 million that I announced and described in Q1 associated with the additional pension fund conversion we made. But there's a couple of other points I wanna highlight. One, you will recognize that we've been really working hard on structurally driving working capital to a different level. One cannot continue to drive such structural change quarter in, quarter out. So there's something around. It's high quality, and I'll come back to that second point on quality. But there's an element of the quick wins that are essentially behind us, bearing in mind we started off from a very strong platform already. But by far, the biggest factor behind all of this is the fact that second half profits are expected to be lower than the first half. Remember, Q1 is essentially flat against last year. That won't be the case in second half. But also, we've announced restructuring plans in Q1. We've announced a further restructuring plan with composites. We will be accelerating, therefore paying cash restructuring costs. That will essentially mean our cash spend this year will likely be a good €20 €30,000,000 higher than the typical €56,000,000 a year you've seen from us historically. And that really completes the answer on the phasing on the cash. Clearly, if we can generate more cash, we will. Now going back to the level of working capital, etcetera, you know, we will make sure we invest for our customers as the rebound happens. That is far more important to maintain our leadership position and be there for our customers. That said, as I look at the working capital, I'm going to share with you one or two operational KPIs that we look at. Take inventories. Our ability to maintain inventories at 15.1% of sales, which is lower than last year, lower than the first quarter despite the rapid decline in Q2, to my mind, is very strong, and our challenge and our absolute resolve is to maintain that. The second point, receivables. I mentioned to you that, you know, in times of challenge like this, liquidity management is the biggest source of of corporate distress. We have 11,000 customers. We're so focused on receivables management. I've never seen that it's over before, and it's paying off. That's why our overdue are just under four and a half percent of all our receivables, and that's a record. And I thought we set a record in December. Were at 4.9. Again, can we sustain it? It's not a walk in the park. We'll absolutely continue to focus on that systemic sustainable performance. And that's why, you know, we will invest, but we'll keep the discipline. Thank you. Just clarify on the tax part. Do we expect any tax payments for the second half? Or is kind of low tax payments that you've seen in the first half is the kind of run rate that we should be thinking about? Thank you. At this stage, nothing at all is anticipated in that regard. Essentially, the cash flow expectations are very much driven by the factors I've described. Okay. Thank you very much. Much appreciated. The next question comes from Mudloo Keneghan from ABN AMRO. Sir, please go ahead. Yes. Good afternoon, everyone. My question is on cost savings. So the gross amount amounted to €170,000,000 in the first half. You did €50,000,000 in Q1. What were the net savings in Q1 and Q2? And then relating to Q2, how much of that was from furlough? And then looking at your full year guidance of €300,000,000 of gross savings, how much of that will be net? And how much of furlough would you expect in Q3, Q4? Thank you. So I've already indicated that inflation was EUR37 million in the first half. You can extrapolate that easily. So 300,000,000 you can deduct two times the €37,000,000 I mentioned, and you get to a net figure. There are many other factors that impacted the cost. We've highlighted the key aspect. For example, you've got the negative impact on fixed cost from destocking, and our stock levels are our inventory levels are down. But there are many other factors that have compensated for it. So the key elements are those that we've mentioned and you've correctly retained. And I think what is interesting, Modlou, is out of the EUR170 million, as explained with Karim, EUR80 million is structural, and we follow the structural. Basically, almost 50% of the structural is restructuring plan, which we already shared with you our intent during the growth strategy. And obviously, the composite materials starting a bit in quarter two, right, to execute their restructuring plan. And 40% is indirect directed productivity. And the €90,000,000 temporary is mixed back of T and E, travel ban, obviously, and many other things. And the target, as we say, is €300,000,000 for the year, which is already a nice achievement as compared to our five year target of €400,000,000 which represents 35%. Thank you very much. I mean, just an add on, I mean, why won't you just simply give the net number in the press release each time? Because inflation is a recurring part of the And fundamentally, it's about what is that we can do. I mean, are many different ways you could present the figures. I think focusing on what is within our control in patients thirteen years not Mhmm. Makes a lot of sense, and the math are the math. And we can yeah. It's a math. So we can We can counter that. With your model offline. Yes. No, I mean, just because other companies do it as well. So anyway, it's just a thought. The next question comes from Geoff from This is Geoff Haire from UBS. UBS. I just wanted to of ask two, if that's all right, just a confirmation question. The structural element of the $300,000,000 of cost savings for this year, is that additional fixed cost savings taken from the growth strategy? Is that on top of the $410,000,000 And then secondly, I was wondering if you could talk a little bit about how the sales for the group or the volumes for the group progressed through the quarter and what they look like in July, please? Great question. Can you pick up the So maybe I'm going to start by reminding you that when we announced our growth strategy, we indicated a EUR 300,000,000 to EUR $250,000,000 gross cost savings over five years. In the first quarter, we said that I know we're going to do a minimum of EUR $350,000,000. And with the composites restructuring we announced a few weeks ago, we raised about $410,000,000 Okay? So the €150,000,000 which is half the €300,000,000 for this year represents about 35% of that five year commitment. We said at the time we're going to front load our efforts, and clearly this crisis has helped to deepen and accelerate that pace of progress beyond anything we were imagining at the time. So Jeff, it's 150. We are taking the structural growth, saving our structure, right? There is a lot of self help going on this year. May not repeat, I hope, the rebound happens. So and we all hope that we are going to enter into a more of growing more than reinvestment. So the 150,000,000 structure, that's the part you need to take into account against the EUR $410,000,000 of savings. Makes sense? Yes. The next question comes from Laurent Favre from Exane Please BNP go ahead. Yes. Good afternoon, everybody. My question is on CapEx that you just guided at 600,000,000 I was wondering if you could give us a bit of an update on your investments in bicarbonate and soda ash. Can you invest just on the bicarb side? Or have you had to push both, I guess, sides of the investment away? When do you think you will be able to be up online if you're not spending on those projects this year? Yes. Thank you, Laurent. Well, listen, as I told you last time that we have chosen our volume capacity expansion right in Green River in Wyoming just because there is no need for additional capacity at the moment, right? So that's what we've done with other, you know, capacity increase through the quarter three crisis. Now as you can see, we are a company who is looking at the short term with an eye on the long term. I call it having an eye on the microscope and the telescope. As we've seen that our free cash flow has reached record, we feel comfortable and confident that we are going to hit a free cash flow for the year equal to last year number. As soon as we can, we will reinvest to emerge stronger. Because I believe the companies which are gonna really win and emerge stronger are those who are gonna prepare for the rebound. That's number one. So we have invested €25,000,000 of growth projects, and we have our prioritization as a as a team. It's all centralized in in in the hands of executive committee and I, and we do an arbitrage for the best project with the highest IRR, which are strategic to the growth agenda. Number two, we also look at what needs to happen from really disruptive technologies in term of, you know, building a specialty company. And programs like EV, for example, electrification, programs like the active zone, which I discussed, you know, I shared with you, and we fast track it during the last three months. A just great example of what this company has in the pipeline. And I must confess we didn't share with you more and more of this, and we will do more in the near future sharing our innovation pipeline right with you. Karim? Maybe as a general point, you mentioned a couple of businesses, bike car and soda ash. Clearly, we're not going to invest in any business where there is spare capacity. That makes sense. Bikar is one of our really good growing, resilient businesses. I'm not going to confirm nor deny what we're going to do specifically. What I can say to Ilham's point is we will invest to make sure we're there to grow with the markets and our customers. Okay. Thank you. That's very clear. Thank you. The next question comes from Maurice Alexander from Jefferies. Sir, please go ahead. Good morning. Could you discuss your philosophy? I don't want to get into sort of specifics that where you'd be like negotiating against yourselves, but can you get into your philosophy on disposals and then of course, the flip side, bolt on M and A, how you think about valuation, return on capital, how you sort of decide when a business is suitable to be moved to someone else's hands? Well, listen, I mean, and A is part of our portfolio management, right? And I always say that we have an eye open. There is no transformative acquisitions at the moment on our table. Or I would consider, first of all, we need to manage the crisis and go through it. If there are bolt on technologies which can support the core and reinforce it or extend it, we will consider that, right? But at the moment, we are really focused on with no distraction into delivering our growth strategy, the GDR and the O, navigating through this crisis, and I'm very proud of our teams and what they deliver, And we are really staying focused on this at the moment. And for disposals? For disposals, as I've shared, and I hope today has been a bit of Within yeah. Can you hear can you still hear me, Maurice? Yes. No, I've had no Just issues on my checking if someone is still on the call, sorry. So what I'm saying, Maurice, is that we are still looking we are looking now an experienced strategic option to monetize some of our businesses right within the Solutions segment, which we don't consider as a core. But as I said, we are not for sellers if and only if we find valuations that are compelling and aligned with our expectations, we will do that and we will go for it, right? So these are the first steps in our way to look at simplification and strengthening the core businesses. Thank you. The next question comes from Matthew Heggs from Bank of America. Sir, please go ahead. Hi, everyone. Just I wanted about to ask a some of the restructuring you're doing around the sales force you alluded to in your prepared remarks. You talked about changing some of the incentives, introducing some account managers. Could you maybe just flesh that out a little bit, what you're changing and what you're expecting the uplift on top line to be going forward? Yes. It's a great question. Thank you, Matthew. Well, listen, at the end of the day, I know that in order to unleash the potential of Solvay, not only we're going to do the right job in terms of managing customer cash and cost, and you've seen us in action very decisive and agile during the crisis. But the reality is that we we lacked top line growth in the past decade that you nicely, you know, told me during our one to one discussions. And I think the only way in my experience to do that, specifically for specialty company, is to drive more hunting mindset. And we need to have more hunters than farmers in the company. So what we are doing, we launched, you know, a Solvay Sales Academy. It's a big, big event for us where we're gonna build the curriculum from a field junior sales manager to sales field, you know, account manager to regional manager or key account manager for top key account clients of the company. And the way we're going to do it is, first of all, on assessing the competencies we have, driving the CRM, the client relationship manager tool, which, by the way, good news at Solvay, we have it. We have it across company, so we are gonna reinforce it. It was not reinforced top down. It's gonna be mandatory to drive a bit, you know, visibility and great visibility at my level and ExCom level about the pipeline, etcetera. So we started, you know, doing that. We're gonna reinvest in the front line. We want to have people who understand more even the value proposition deliver it because, you know, at the end of the day, we are not selling commodities most of the time. We are selling actually, as I said, in auto lower total cost of ownership, business sustainability profile. You know, really, I mean, you need a high technology mindset and bring the value proposition to your customer, show the money, you know, you are gonna save or bring to the table and share the value created right with them to not leave a value on the table. So I think we are doing all of this. And changing incentives, I have a simple, you know, mentoring that you hit the pocket, you hit the behaviors. Today, the the incentives are extremely, you know, not homogeneous across the company because we have had very decentralized model. So by 01/01/2021, we will be changing the incentives to drive performance, more hands in spirit, and ownership mentality? Back on line, Jodi. Yes. It's Jodi. K. One more. Go ahead. Yes. We have a new question from Jatun Odaishi from JPMorgan. Just a couple of questions. Just first question was just on the operational leverage in second quarter from volume decline because if I just take into account, forgetting about gross net savings, if I just look at the OpEx in the P and L, it's come down by €62,000,000 The prices are up. Raw materials probably are down. The implied drop through from volume decline seems like more than 15% in second quarter. Can you maybe just help us understand how to think about that drop through in the second half of this year, whether it will be different, whether it will be same? And the second question was just, I mean, this point, I know the visibility is low, but do you expect third quarter EBITDA to be at least better than second quarter? Okay. In terms of your first question, in broad terms, if you look at the sales evolution across our segments, you ought to quickly come to an understanding that EBITDA will have fallen by EUR 300,000,000.0 had we not offset and mitigated. Against that, I mentioned the fact that we have a pretty good pricing power that's been sustained. That's a few tens. And then clearly, cost savings, net of inflation, that essentially gives you a good indicator, but bear in mind that first quarter was clearly much more resilient, and the second quarter is the biggest factor that shows that first half performance. Going forward, essentially, you know, our our fundamental belief, I'm gonna say it this way, our fundamental belief is that our job is to ensure that we variabilize any fixed costs and preserve our margins. You can't do it in one quarter. We certainly will do it over a strategic period. So as we recover, I expect margins to expand again fundamentally. But I can't really quantify quote by quote whether what that is likely to be. It very much depends on your assumptions as to the nature and shape of the rebound and its timing. And I think we have demonstrated, Jason, now adaptability and flexibility. Know, I mean, we implemented following the company for the first time probably at a large scale like we did in May, right? So and we are using we are adapting the internal activity, be it in production, in research, in innovation, technical service, whatever, to the customer demand. At the end of the day, our compass is the customer. And that's what drives our needs, and we follow the order books at a daily level, right? On the improvements, again, I remain optimistic on auto. We have one third of our businesses. They show really great resilience. Composites, for example, we are driving very fast, as you can see our restructuring program. We will reach a run rate by the end of the year, right, in term of the €60,000,000 of savings with €30,000,000 of investment. So that's a great job done by our teams. And the volumes will be probably still down in quarter three because we have a comp against quarter three last year with seven thirty seven MAX. But going forward, the bottom will be behind us, and we foresee a slight improvement in quarter four. China is also positive to us. You've seen our number, 20% increase between the first quarter, the second one. In H1, actually, China for us, we scored in sales plus 1.7% for this semester as compared to last semester. So this is a domestic Chinese sales. And we believe that if it continues without the second wave, we will have much to do in China as well. And then, you know, you you have all these innovative programs, the Green Deal, the investments in Europe on electrification, cleaner mobility, all of this hygiene and cleaning is becoming even more important. So all of this will continue. And then the working capital, you've seen it from day one, I've said last year, cash is king. We have now a disciplined approach to working capital, as Karim said, from inventories receivables. And we will continue doing so, right? It will time for one final question. Alex from Barclays. The last question comes from Alacerd from Barclays. Again, you'll be pleased to know it's a very simple question. The €600,000,000 CapEx guidance you talk about for 2020, in your second quarter release, you define CapEx as including IFRS 16 lease payments, which are about EUR 100,000,000 for the year. You confirm whether that EUR 600,000,000 is CapEx as it appears on the cash flow statement or CapEx including the lease payments? It includes the lease payments. Yes, Alex. It includes So it represents a EUR 200,000,000 of the reduction compared to last year. It includes So lease it's about EUR 500,000,000 of capital expenditure out of the cash and investing line. I'm sorry? Sorry, So your lease payments were about €100,000,000 and they come out, I think, your financing cash flow. Yes. The 600,000,000 including leasing and it's cash. And it's this year. This is an up cost. And on CapEx, by the way, just to close with this, obviously, you've seen us, right? So we know our intent is not to cut anything to the bone. We have an eye on 2020, an eye on 2021 and beyond. We will reinvest where it makes sense, right, selectively with high look on the IRR and returns. And we are, as we speak, zero based budgets in our CapEx across the company. So we have an ongoing process where we are looking at all our spending in the company by assets, by business units and zero based budgets. So we will share with you more in the next quarter. So with that, I think we should close by now. So I wish you all and your families a safe and restful summer. So thank you very much. Thank you. Thanks, everyone. If you would like to follow-up with any other questions, the Investor Relations team is available for you after the call. Thank you very much. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect. And thank you, Mrs. Elam Khadri and Mr. Karim Alja.