Ladies and gentlemen, welcome to Solvay's First Half Year 2020 Result Conference Call for analysts and investors. Solvay team, the floor is yours.
Good afternoon, and welcome to our second quarter 2020 earnings call. My name is Jodi Allen, Head of Investor Relations, and I'm joined virtually 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 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, Jodi, and hello, everyone. I hope you and your families are staying healthy during these continuing challenging times. 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 confinements over the coming months. The recent spikes in COVID cases in certain parts of the world have increased our numbers slightly. Today, we have 40 colleagues who are infected with COVID-19 and 176 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 focus 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 EUR 435 million in the first half 2020, compared to EUR 33 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 EUR 300 million to EUR 410 million. For 2020, I would like to share with you some important breakdown of the cost savings figures. In the first half of this year, we delivered EUR 170 million 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 impacts. Of this EUR 170 million, EUR 80 million are structural cost improvements, and EUR 90 million of the current cost savings relate to temporary measures.
Turning to the top line, first half sales were down 11% to EUR 4.6 billion, and second quarter sales were down 17% to EUR 2.2 billion versus quarter two 2019, with headwinds from aero, auto, oil and gas, and construction markets impacting volume 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 markets, 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 impairments. I will then close with a short update on our growth strategy, specifically our portfolio and investments. Before I dive into each market, I 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. Grew more than 5% in quarter two 2020 versus quarter two 2019. 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 these markets, 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 applications. In fact, what I'm saying, despite the fact that there are less vehicles being produced, we have more penetration of Solvay 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 relationships 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 extending 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 resource 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 batteries. 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 composites to defense programs helps us to offset some of that reduction.
In response to the aircraft production decline, the Composites business has been rigorously focused on their cost takeout to align their footprints to the new environment, and the team has been executing their plan flawlessly. To date, we are ahead of schedule. 60% 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 sub-sectors, including semiconductors, semiconductor consumables, and equipment displays and smart devices, and all of these use Solvay's materials. Solvay 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 H2O2 to meet the growing demand in the semiconductor industry.
We continue to grow with our Tier 1 semiconductor customers and are working on more new business opportunities to support 5G mobile electronics. Healthcare continues to be a resilient market for Solvay. As a reminder, our specialty polymers are a key ingredient 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-19. Our polymers are being used in ventilators, face masks, and other protective equipment, whose sales are expected to total EUR 20 million this year. Our recent investment late last year in polyethersulfone technology, or PESU, 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 consumer customers, and indeed, we recently rolled out a biosourced 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 24-hour germ protection and leaves an invisible barrier, which not only kills 99.9% 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, we 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 places like Panama, Peru, where production temporarily ceased.
We expect these headwinds to be short-lived as the fundamentals in the industry remain intact, 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 these multinationals. Our technologies, together with our digital tools and software, help them optimize their process and improve yield, creating measurable value. 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 through 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 trends during this volatile period. A testament to this is our ability to sustain solid EBITDA margin of 21.7% in the first half of 2020.
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. 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. Yeah, 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. This impacts production rates for several aircraft in the near term.
As Ilham indicated, the business was quick to develop a plan to permanently close two manufacturing facilities and to shift production to other, more efficient operations. As Ilham mentioned, we fast-tracked that plan. We brought forward the closure of our plant in Manchester, in the U.K., and only closed it a couple of weeks ago. 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 are on track to deliver EUR 22 million of cost savings this year, and we will be achieving the full run rate of EUR 60 million that we announced by the first quarter of 2021. 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 are confident that this sector will continue to grow across the short and the medium term. 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? Essentially, as Ilham 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. This was driven by the combination of our leadership position in key markets, new wins, and critically disciplined cost focus. For the first half, EBITDA in that segment declined 16%. In the second quarter was down 28% due to the volume reduction. Pricing remained stable overall. 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. 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 as 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 some of the effects 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 Coatis 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 Novecare, 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 6% 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 Novecare to maintain its EBITDA margin. 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. Aroma 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 EUR 400 million above last year's performance and was driven by a group-wide focus on cash with the second quarter coming in at EUR 233 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. That represents EUR 331 million of the improvements. 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 times of macro challenge that we're going through.
Tax cash out was lower by EUR 122 million in the first half due to the one-off tax gain that you recall of EUR 65 million associated with the additional voluntary pension contribution that we alluded to in the first quarter. We quickly adapted our capital expenditure plans and generated a cash benefit of EUR 61 million compared to last year. You can see that reduction makes a modest contribution to our cash flow improvements. We also made significant progress with our deleveraging plan this year. Net debt in the first half of this year is down EUR 1.75 billion, reflecting strong operational free cash flow, EUR 0.43 billion, and of course, the EUR 1.3 billion proceeds from the polyamide divestment. That said, you recall that we also made major contributions of EUR 460 million towards our pension obligations in France and in the U.S.
When we turn to pensions and restructuring environmental provisions, it's worth noting that operationally, we've delevered by EUR 60 million, but this is offset by an EUR 87 million increase in provisions for the additional restructuring plans announced both in the first quarter and the recent Composites restructuring plans. This is an accounting impact, and I'll come back to the cash consequences. Moving to slide number nine. As Ilham explained, we achieved EUR 170 million of gross savings in the first half of 2020, which more than offset inflation of EUR 37 million in the first half. About EUR 80 million 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 it includes labor cost. To date, we've saved EUR 36 million. Indirect spend. When we look transversely and look across our businesses, we managed to deliver EUR 32 million. This is structural and sustainable.
Productivity efficiencies is more of what we've been doing historically. That includes yield improvements. In the first half, these delivered EUR 12 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 EUR 90 million in savings, and they include actions like furloughs, salary freezes, but also, how can I say, a complete focus, very strong focus on all discretionary spending, which is a given in times like this. 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 totals EUR 1.46 billion as a result of the significant short-term effect of the COVID crisis, which triggered the reassessment.
Approximately EUR 1.2 billion of this relates to the former Cytec goodwill, predominantly the Composites 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 light weighting, 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.
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. For 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 healthcare, 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 books provide 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, 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 EUR 300 million in 2020, including EUR 150 million of structural cost reduction. Our focus on cash remains a top priority, we expect our free cash flow generation to be similar to the 2019 levels despite lower profits. Our expectations assume a resumption of EUR 25 million 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 EUR 600 million in 2020. 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 EUR 300 million when we first launched our plan in November to EUR 410 million during quarter one earning reserves. The EUR 150 million 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. 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 these first steps to contribute favorably towards simplifying Solvay's portfolio and creating more shareholder value.
Thank you very much for listening. I will now take your questions with Karim.
Thank you, Ilham and Karim. Before we start the Q&A process, can I kindly remind you to limit yourself to one question only to allow time for all participants. Now I'll hand you over to the moderator.
Ladies and gentlemen, we will now begin our Q&A session. If you wish to ask a question, please dial zero one on your telephone keypad, and you will enter on the queue. The first question comes from Martin Roediger 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 $1.5 billion write-down, also some other intangible assets being affected. Normally, D&A charges on an ongoing basis should be lower going forward. Maybe you can clarify that.
The question, Martin, is about the depreciation, right, and amortization.
Correct.
Impairment, right, Martin?
Yeah. The underlying depreciation, amortization.
Underlying. Yeah, I got it now. Karim, can you provide?
There was essentially a relatively modest amount of accelerated depreciation of spare parts. I think that's probably the only factor worth of note.
The run rate going forward?
Oh, this is not another run rate. This is very much COVID-related. When you face this over too many spare parts, essentially, we depreciate them and move on. No, I think there's no impact on the run rate of depreciation for Solvay based on this.
For Q3, we should look more to Q1 figure?
Yes.
Correct.
Correct.
Okay.
Absolutely.
Thank you, Martin.
The next question comes from Alex Stewart from Barclays. Sir, please go ahead.
Hello, good morning. I'm interested in your comment about the auto sector. With the trading statement on the 24th of June, 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, the increased penetration of polymers, but I can't see how that bridges the gap with car production down 45% in Q2. Could 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. Thank you.
Yeah, we couldn't hear you very well, Alex. I think the question, the line is that it's about the auto, right? Why we outperformed the auto market, right?
No, sorry. Let me ask the question again because that wasn't it.
Yeah, please.
You talked about auto sales being down 26% in the second quarter. I n your trading statements on the 24th of June, you said that several markets, including aerospace and auto, had revenues down 40%. 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. Thank you.
Let me start. Again, the guidance we gave in our trading update was indicating the market trends as we saw them. The figures you quote, the 26%, is Solvay's outperformance against that backdrop. The reasons for it, I'll turn to Ilham to give you a reminder of some of the key factors that helped us to outperform.
Alex, it will be a bit of a rendezvous between you and us on explaining a bit why Solvay is special as a specialty company, and how we target whatever the market does, that we need to outperform our specialty markets. Obviously auto is part of it. It's mainly on Specialty Polymers. It's only down 26%, as I mentioned. Two things that I said. We are in automotive under-the-hood application. We're invisible. We replace metal, right, in auto, and basically the value proposition is to make the car lighter, at a lower total cost of ownership, decreasing the consumption of fuel and therefore emitting less CO2, again, at lower total cost of ownership. Those are things the auto OEMs, they just love it.
I gave you an example of the battery casing. We started with few auto platforms in Germany. Now we're extending in other models. Specialty Polymers, again, whatever does the market, they need to outperform the market. Obviously, you cannot defy gravity. We are winning new applications, creating a new market. I think that's important. The light in the tunnel. I'm sure you have LMC data. Obviously, they see some improvement between quarter two, three, and four. Less decline in quarter four. I remain optimist on auto between now and the end of the year.
The other piece I would like really to stress out is the batteries. I think when you talk about the electrification, the Green Deal, the EU stimulus, and you see member of state in the EU not only giving bonuses to consumers to scrap their cars and buy new ones, but even higher bonuses if they buy cleaner cars, either hybrid or electric. We like that. In an ICE car, internal combustion 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 20 kg. Again, whatever the market does, we can penetrate with our technologies. The batteries is a fabulous opportunity to really innovate. Then we talked about, obviously, recycling of the battery. I'll stop here.
Sorry, 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%. There's no indication that that's what 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.
Here we highlighted the Specialty Polymers part. Alex, there is the Special Chem part which is in catalysis. There the dynamics are different. You know that we are in China V and VI. You know that the regulations have been moving from China V to China VI, which has been normally positive for Solvay. However, due to COVID-19, China has actually pushed out a bit the China VI regulation to actually empty the stock of China V cars. That we've seen also some delays in our plans.
Okay. Thank you.
The next question comes from Mubasher Chaudhry from Citi. Please go ahead.
Hi. Thank you for taking my question. Just the one on free cash flows. Just wanted to get your thoughts on, first of all, cash tax. Even with the EUR 65 million benefit taken out, the cash tax payment has been a little bit low in the first half versus the P&L tax. I was just wondering whether there is a cash tax payment coming up in the second half. Related to cash flow as well, how do you see working capital trending in the second half of the year as current 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.
Okay, Mubasher. Great questions. 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. You're correct in identifying some of the elements. I'm going to start somewhere else. Remember since early last year, Ilham was very clear, he says, "We are going to really work on improving the quality," which meant also the phasing of our cash flow. 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 EUR 65 million that announced and described in Q1 associated with the additional pension fund contribution we made.
There's a couple of other points I want to 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. There's something around. It's high quality, and I'll come back to that second point on quality. There's an element of the quick wins are essentially behind us, bearing in mind we started off from a very strong platform already. 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 the second half. 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 EUR 20 million-EUR 30 million higher than the typical EUR 50 million-EUR 60 million a year you've seen from us historically. 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, et cetera, we will make sure we invest for our customers as and when it 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 in times of challenges like this, liquidity management is the biggest source of corporate distress. We have 11,000 customers. We're so focused on receivables management. I've never seen that in Solvay before, and it's paying off. That's why our overdues are just under 4.5% of all our receivables, and that's a record. I thought we set a record in December last year. We 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.
That's why we will invest, but we'll keep the discipline.
Thank you. Just to clarify on the tax part, do we expect any tax payments for the second half, or is the kind of low tax payments that you've seen in the first half is the kind of front-load that we should be thinking about? Thank you.
At this stage, nothing at all is anticipated in that regard. It's essentially the cash flow expectations are very much driven by the factors I've described.
Okay. Thank you very much. Much appreciated.
Thank you.
The next question comes from Mutlu Gundogan from ABN AMRO. Sir, please go ahead.
Yes. Good afternoon, everyone. My question is on cost savings. The gross amount amounted to EUR 170 million in the first half. You did EUR 50 million in Q1. What were the net savings in Q1 and Q2? Relating to Q2, how much of that was from furlough? Looking at your full year guidance of EUR 300 million of gross savings, how much of that will be net, and how much of furlough would you expect in Q3, Q4? Thank you.
I've already indicated that inflation was EUR 37 million in the first half. You can extrapolate that easily. EUR 300 million, you can deduct two times the EUR 37 million 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 got the negative impact on fixed costs from de-stocking, and our inventory levels are down. There are many other factors that have compensated for it. The key elements are those that we've mentioned, and you've correctly retained.
I think what is interesting, Mutlu, is out of the EUR 170 million, as explained with Karim, EUR 80 million is structural, and we follow the structural. Basically, almost 50% of the structural is restructuring plans, which we already shared with you our intent during the growth strategy. Obviously, the Composites material starting a bit in quarter two, right, to execute their restructuring plan, and 40% is indirect, the rest is productivity. The EUR 90 million temporary is mixed bag of T&E, travel ban, obviously, and many other things. The target, as we said, is EUR 300 million for the year, which is already a nice achievement as compared to our five-year target of EUR 410 million, which represents 35%.
Thank you very much. Just an add on. Why won't you just simply give the net number in the press release each time?
Inflation is a recurring part of the business. Fundamentally, it's about what is it that we can do. There are many different ways you could present the figures. I feel that focusing on what is within our control, and patience certainly is not, makes a lot of sense. The math are the math.
Yeah, it's a math.
We can count on us.
We can manage with you Mutlu, offline.
Yeah.
Yeah. No, just because other companies do it as well. Anyway, it's just a thought.
No, I hear you. Thank you.
Thank you.
Appreciate it.
The next question comes from Geoff Haire from UBS. Sir, please go ahead.
Hi, this is Geoff Haire from UBS. I just wanted to sort of ask too, if that's all right, just a confirmation question. The structural element of the EUR 300 million of cost savings for this year, is that additional fixed cost savings taken from the growth strategy or is that on top of the EUR 410 million ? 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.
Yeah, great question. Karim? Yeah.
To pick up on the costs. Maybe let me start by reminding you that when we announced our growth strategy, we indicated a EUR 300 million-EUR 350 million gross cost savings over five years. In the first quarter we said, "No, no, we're going to do a minimum of EUR 350 million." With the Composites restructuring we announced a few weeks ago, we raised the bar to EUR 410 million. Okay. The EUR 150 million, which is half the EUR 300 million 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.
Geoff, it's EUR 150 million talking the structural grow.
It's only structural.
Savings are structural, right?
Absolutely.
There is a lot of self-help going on this year. May not repeat, I hope, after the rebound happens. We all hope that we are going to enter into a more of growing mode than reinvestment. The EUR 150 million structural, that's the part you need to take into account against the EUR 410 million of savings. Make sense?
Yep. Thank you.
The next question comes from Laurent Favre from Exane BNP Paribas. Please go ahead.
Oh, yes. Good afternoon, everybody. My question is on CapEx that you just guided at EUR 600 million. 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? Thank you.
Thank you, Laurent. Hi. Listen, as I told you last time that we have frozen our volume capacity extension right in Green River in Wyoming, just because there is no need for additional capacity at the moment, right? That's what we've done with other capacity increase through the course of three crises. 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.
I believe the companies which are going to really win and emerge stronger are those who are going to prepare for the rebound. That's number one. We have invested EUR 25 million of growth projects, and we have our prioritization as a team. It's all centralized in the hands of Executive Committee and I, and we do an arbitrage for the best projects 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 terms of building a specialty company. Programs like EV, for example, electrification, and programs like the Actizone, which I discussed, I shared with you, and we fast-tracked it during the last three months, are just great examples of what this company has in the pipeline.
I must confess, we didn't share with you 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, bicarb and soda ash. Clearly, we're not going to invest in any business where there is spare capacity. That makes sense. Bicarb 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 you on this point is, we will invest to make sure we're there to grow with the market and our customers.
Okay, thank you. That's very clear.
Thank you.
The next question comes from [Laurence] 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 negotiating against yourselves, but can you get into your philosophy on disposals and then, of course, the flip side, bolt-on M&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, M&A is part of our portfolio management, right? 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? At the moment, we are really focused on, with no distraction, into delivering our growth strategy, the G.R.O.W., navigating through this crisis, and I'm very proud of our teams on what they deliver. We are really staying focused on this at the moment.
Yeah. For disposals?
For disposals, as I said, and I hope today has been a bit of a nice understanding for you because we were both talking as before with investors, right? Since I joined the company, I said there is no sacred cow, and we are reevaluating all our assets, whether we have the right owner or not. As I shared with you in my closing remarks, we are looking for monetizing some of the businesses. [audio distortion]
Let's pause.
Yeah. Can you still hear me, Laurence?
Yes. No issues on my side.
Just checking if someone is still on the call. Sorry. What I'm saying, Laurence , is that we are looking now and exploring strategic options to monetize some of our businesses right within the Solutions segment, which we don't consider as a core. As I said, we are not forced sellers. If and only if we find valuations that are compelling, align with our expectations, we will do that, and we will go for it. Right? 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 Yates from Bank of America. Sir, please go ahead.
Hi, everyone.
Hi.
I just wanted to ask a question about 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?
Yeah, 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. The reality is that we lacked top-line growth in the past decade, as you nicely told me during our one-to-one discussions. I think the only way in my experience to do that, specifically for specialty companies, is to drive more hunting mindsets. We need to have more hunters than farmers in the company. What we are doing, we launched Solvay Sales Academy.
It's a big event for us, where we're going to build a curriculum from a seed junior sales manager to a sales field account manager to a regional manager or key account manager for top key account clients of the company. 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 going to reinforce it. It was not reinforced top-down. It's going to be mandatory to drive a bit visibility and great visibility at my level and ExCom level about the pipeline, et cetera. We started doing that. We're going to reinvest in the front line.
We want to have people who understand more even the value proposition, and deliver it because, at the end of the day, we are not selling commodities most of the time. We are selling actually, as I said, in also lower total cost of ownership with a sustainability profile. Really, you need a high technology mindset and bring the value proposition to your customer, show the money you are going to save or bring to the table, and share the value created with them, to not leave a value on the table. I think we are doing all of this. Changing incentive, I have a simple mantra is that you hit the pocket, you hit the behaviors.
Today, the incentives are extremely not homogeneous across the company because we have had very decentralized model. By January 1st, 2021, we will be changing the incentives to drive performance, more hunting spirit. Ownership mentality.
Back online, Jodi.
Yes. It's Jodi.
Okay. One more. Go ahead.
Yes. We have a new question from Chetan Udeshi from JPMorgan. Please go ahead.
Yeah, hi. Just a couple of questions. First question was just on the operational leverage in second quarter from volume decline. If I just take into account, forgetting about gross net savings, if I just look at the OpEx in the P&L, it's come down by EUR 62 million. The prices are up, raw materials probably are down. The implied drop-through from volume decline seems like more than 50% 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'll be different, whether it'll be the same?
The second question was just, at 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 raw 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 0.3 billion had we not offset and mitigated.
I mentioned the fact that we have a pretty good pricing power that's been sustained, that's a few tens . Clearly the 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, our fundamental belief, I'm going to say it this way, our fundamental belief is that our job is to ensure that we variabilize any fixed costs and preserve our margins. We can't do it in one quarter. We certainly will do it over a strategic period.
As we recover, I expect margins to expand again, fundamentally. I can't really quantify quarter by quarter 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.
I think we have demonstrated, Chetan , now adaptability and flexibility. We implemented following the company for the first time probably at a large scale like we did in May, right? 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--
Practically, yeah.
EUR 60 million of savings with EUR 30 million of investment. That's a great job done by our teams. The volumes will be probably still down in quarter three because we have a comp against quarter three last year with 737 MAX. 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 + 1.7% for this semester as compared to last semester. This is a domestic Chinese sale, and we believe that if it continues without a second wave, we will have much to do in China as well.
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. All of this will continue. 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?
There'll be time for one final question.
Yeah. Alex from Barclays.
Yes. The last question comes from Alex Stewart from Barclays. Sir, please go ahead.
Hello again. You'll be pleased to know it's a very simple question. The EUR 600 million 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 million for the year. Can you confirm whether that EUR 600 million is CapEx as it appears on the cash flow statement or CapEx including the lease payment? Thank you.
It includes the lease payment.
Yes. Yes, Alex.
It represents a EUR 200 million odd reduction compared to last year.
It includes the lease--
Okay, it's about EUR 500 million of capital expenditure out of the cash from investing line.
Say it again, Alex.
Your lease payments are about EUR 100 million, and they come out, I think, of your financing cash flow.
Yeah. The EUR 600 million including leasing, and it's cash. It's this year.
Okay.
This is an upfront cost.
Yeah.
Thank you so much.
Thank you.
On CapEx, by the way, just to close with this, obviously, you've seen us, right? 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 a high look on the IRR and returns. We are, as we speak, zero-based budgeting our CapEx across the company. We have an ongoing process where we are looking at all our spending in the company by asset, by business unit, and zero-based budgeting. We will share with you more in the next quarter.
With that, I think we should close by now. I wish you all and your families a safe and restful summer. 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. Thank you, Mrs. Ilham Kadri and Mr. Karim Hajjar.