Ladies and gentlemen, welcome to the Arkema's Q2 2020 results conference call. I will now hand the call over to Mr. Thierry Le Hénaff, Chairman and CEO. Sir, please go ahead.
Thank you very much. Good morning, everyone. Welcome to Arkema's Q2 2020 results conference call. With me today are Marie-José Donsion, our CFO, and the whole investor relations team. To support this conference call, we have posted on our website a set of slides which detail our second quarter performance. We will answer your questions at the end of the call. Overall, given the challenge of the current economic environment, we delivered a solid set of results in Q2. Really, I would like to thank all the Group's employees for their strong commitment and the quality of their work during this period. Our results and our cash generation clearly demonstrate a good level of resilience. My feeling is that we have resisted well relative to our industry peers. I will let you be the judge of that.
This confirms the merits of our ongoing strategy to increase the share of specialties in our portfolio and become a pure specialty materials player by 2024. As we all know, the second quarter was marked by the exceptional context of the COVID-19 pandemic. In these circumstances, the health and safety of our employees continues to be our utmost priority, and we have taken all the necessary steps to ensure a safe workplace environment. In April and May, in particular, economic activity was severely impacted by the lockdown measures implemented in many countries important for Arkema, affecting our customers across various sectors of the economy. We confirm these two months should be the low point of the year, and we started to see some improvement in June, driven by market segments linked to construction. This especially benefited Bostik.
I know some of you were expecting higher results for Adhesive in Q2, but you have to be aware that construction virtually stopped in April and May in countries with strict lockdown measures. For example, in France. This mechanically weighed heavily on our volumes and therefore EBITDA. By the way, in this environment, prices still end up well, so the decline in EBITDA is linked only to lower volumes. The great thing about construction-related adhesives is that when the rebound materializes, as it did in June in Europe and in the U.S., we immediately see the results in our earnings. Bostik EBITDA in June was nearly flat year-on-year after the two very difficult months in April and May.
In July, although we don't have the final numbers, we are tracking broadly in line with June, with construction on the same trend and industrial markets still mixed. Overall, so for this year, really, I'm convinced, so there is absolutely no worry there that Adhesive will prove to be one of the most resilient businesses in our portfolio, and I would say for the chemicals industry in general. Beyond the numbers, these past months have been very busy for us as we prepare for the medium and long term. It is a paradox, but this period has yielded many opportunities for innovation in the areas of batteries, hydrogen, composites, filtration, including for face masks. In all of those areas, Arkema has a lot to offer with its cutting-edge innovation.
In addition, the use of technology, which became a day-to-day tool when working from home or organizing virtual investor interactions, has allowed us to actually accelerate certain projects and partnerships with some customers. It is our conviction that some niche markets, like 3D printing, for example, where growth paused during the COVID crisis, will come back strongly and we'll be well-positioned to serve and work with our customers when growth returns, as in a sense, this difficult period actually reinforced the relationship we have with our customers. Furthermore, and it's very important, we finished the second quarter in a quite good shape. We have kept our financial flexibility intact.
We have reduced our debt significantly despite the difficulty of the environment, and this is important, as my sentiment is that in the next year or two, there will be many opportunities for a company like Arkema in terms of both organic and external growth in Specialty Materials. I will now comment on the second quarter's performance before letting Marie-José go through the financials in more detail. Just the following key points. First, while the Q2 EBITDA level reflects the strong impact of lockdown measures on the economy across many important countries for the Group, our balanced geographic footprint, diverse end market exposure, and also product innovation helped us weather the downturn. Sales were down 15%, 15.6% to be exact, and volumes around 12% in Q2, reflecting declines in the transportation, construction, and industrial market especially.
In particular, the abrupt decline in construction strongly impacted, as I said before, our Adhesive Solutions, specifically in April and May, before bouncing back in June thanks to the lifting of lockdown measures mechanically. Meanwhile, we continue to see solid demand in the food markets such as packaging, nutrition, in various niche applications such as medical and protective barriers and masks. In this context of lower volume, pricing remains firm in our Adhesive Solutions and Advanced Materials businesses, demonstrating the quality of our product portfolio and initiatives in 2019 to improve the product mix. Together with support from lower raw material and set measures, this helped our Specialty Materials EBITDA margin stay above 15%, which I would say is a good achievement in this context of double-digit volume declines.
As announced during Q1 results in May, we have implemented significant cost-cutting measures across the organization to mitigate the impact of this crisis on our results. We reacted quickly, and those efforts are already visible in our Q2 numbers. I can confirm that we are well on track to deliver on goal to achieve EUR 50 million cost savings in 2020 relative to 2019. This is also true for the EUR 100 million reduction in capital expenditure related to our original plan of EUR 700 million, while largely preserving the pace of investment dedicated to our Polyamide 11 plant in Singapore. Cash generation was clearly a highlight of the quarter for Arkema. We generated a record level of free cash flow for the second quarter, even significantly better than last year, which was already quite high for the second quarter.
It was also true for the first half, up strongly year-on-year, as the decline in earnings was more than offset by tight control of working capital by the teams in the context of low activity levels and raw material decline. I would really like to once again thank our employees at Arkema for their hard work delivering these results, both in terms of working capital and fixed cost. This has not been easy, as you know, to achieve since our industry is mostly with continuous processes, so they can really be proud of this result. Finally, while we continue to remain more focused in managing the short term, we are also making progress towards our long-term goals and the implementation of 2024 strategy presented recently at the April Investor Day.
Having closed the acquisition of LIP in Adhesive in January, and by the way, LIP, it's a Danish company and is really delivering on expectation despite the COVID. Having closed this acquisition of LIP, we closed the divestment of our Functional Polyolefins business to SK in June. In the middle of the COVID, we closed this divestment. I think it was a good milestone for our group. Less than two weeks ago, we announced the acquisition, a small one, but important one, of Fixatti, which will strengthen Bostik global offering of hot melt adhesive solution. It means that we don't want to slow down the pace of bolt-on acquisition for Bostik. Fixatti is a great example of this strategy in adhesives. This company is quite profitable, offers significant synergy potential, both from a technology and market standpoint. Product ranges are very complementary with the one of Bostik.
Last but not least, as you now know, we appointed bank to support us in exploring the potential sale of our PMMA business as underlined at the CMD. We move forward not only on the short term, but also on the long term. On the organic project side, we started at the end of the Q1, the capacity expansion of our chemical plant in Kertih, Malaysia, as expected. In spite of the pandemic, we are very close to the authorities in Singapore. Singapore is a little bit complicated in terms of COVID. We started the first step of the construction of the bio-based Polyamide 11 project in Singapore. Together with important partnership announced with Nutrien, all these initiatives will certainly contribute to our ambition to become a pure Specialty Materials player by 2024.
Now I propose to turn over the call to our CFO, Marie-José, who will detail the Q2 financial performance.
Thank you, Thierry, and hello to everyone. I will start with the Q2 sales bridge. As you can see, revenues are down 15.6% compared to last year at EUR 1.9 billion. The 12% drop in volume, which Thierry already commented, is obviously the main driver for this decline. The price effect was close to -6% and is mainly linked to the lower propylene prices in the Coating Solutions segment, and more largely to the tough market conditions in the Intermediates. Prices in Adhesive Solutions and Advanced Materials were marginally down, demonstrating their resilience in the context of much lower volumes. In the quarter, we benefited from a nearly 3% perimeter effect, thanks to the successful integration of ArrMaz in Advanced Materials, Lambson in Coating Solutions, Prochimir and LIP in the Adhesive Solutions. It also includes, of course, the disposal of the Functional Polyolefins business on the month of June itself.
The currency effect is a slightly - 0.4%, mainly reflecting some weak Latin American currencies versus the EUR in the quarter. Quarter two EBITDA came out at EUR 286 million, down around 30% versus last year. The challenging market conditions in Intermediates and the lower volumes in Specialty Materials are the two concepts that really weighted on our earnings. A few positive factors helped mitigate this decline. Firstly, the quick implementation of fixed cost savings, which we announced in May. You should bear in mind that the cost savings are mainly transitory, as we expect them to return at the previous level as the level of activity picks up. Secondly, we benefited from our lower raw materials and some product mix improvements in our specialty businesses. Thirdly, the solid results of Performance Additives helped by ArrMaz and the resilience of its end markets like crop nutrition also supported the performance.
The EBITDA margin stands at 15% for the group. While Intermediates saw a significant margin contraction year-on-year, Coating Solutions and Advanced Materials showed good resilience. In Coating Solutions, our upstream/downstream integration served us well. Given the severity of the crisis, our EBITDA margin at 13.5%, I think held up really well. In Advanced Materials, our EBITDA margin was close to 20%, benefiting from a good product mix, lower raw materials, and cost reductions. The EBITDA margin of Adhesive Solutions was, I think, extensively commented by Thierry. It stands at 11% in quarter two. As mentioned, it was temporarily impacted by the strong decline of construction in the months of April and May in particular, and we expect a recovery from Q3 following a better month of June.
Depreciation and amortization reached EUR 142 million, which is slightly up year-on-year as a result of the start-up of production units and the integration of acquisitions. The recurring EBIT came out at EUR 144 million. Non-recurring items were a positive, EUR 92 million in the quarter. They basically include a roughly a EUR 240 million gain from the sale of the Functional Polyolefins and around EUR 150 million of various items. Assets write-down, PPE amortization, restructuring, and acquisition charges. Financial expenses stand at EUR 22 million, which is lower than last year, thanks mainly to two factors. First, the redemption of our EUR 480 million bond in April, which carried a coupon of 3.85%, and that we refinanced actually last year with a EUR 500 million bond at a coupon of 0.75%.
The second effect is the lower interest rates in the U.S., which we benefit from actually in the portion of debt that we swap into US dollars. The tax rate at the end of the first half stands at around 22% of recurring EBIT. It should be a good proxy actually for the year. Consequently, the quarter two adjusted net income amounted to EUR 90 million, which corresponds to close to EUR 1.2 share. Moving on to the cash flow net debt. As mentioned by Thierry, our quarter two free cash flow amounts to EUR 288 million, establishing a new record for Arkema in a second quarter. This performance reflects the good work to tightly manage the working capital. The working capital ratio on an annualized sales basis stands at 16.5% versus 16% last year.
The free cash flow figure also includes a EUR 55 million tax saving related to the use of tax losses in France. Total capital expenditure was stable quarter-over-quarter at EUR 123 million. We reiterate that the total recurring and exceptional capital expenditure should amount to around EUR 600 million this year. Net debt reached EUR 2.1 billion at the end of June, including EUR 1 billion of hybrid bonds. This represents a decrease of nearly EUR 350 million relative to net debt of close to EUR 2.5 billion at end of March. Coming mainly from the inflow related to the sale of the Functional Polyolefins business, the strong free cash flow generation over the period, and integrating the payment of the dividend in May, which amounted to EUR 168 million.
Please remember that we temporarily carry a EUR 300 million hybrid bond in duplicate since we took advantage of the favorable market conditions last January to issue EUR 300 million of hybrid bonds at a yearly coupon of 1.5% in advance of our initial EUR 300 million hybrid bond maturing next October at a 4.75% interest rate. As a conclusion, our balance sheet remains extremely solid. As net debt, including hybrid bonds, represents 1.7x the last 12 months' EBITDA. We also remain comfortable with our liquidity level, which stands at EUR 1.8 billion at the end of June. As you may have seen in the press release this morning, we also renewed our revolving credit facility for EUR 1 billion with an initial term of three years and the possibility to extend further two years.
I thank you for your attention, and I will now hand over to Thierry for the outlook.
Thank you, Marie-José, for this analysis. What can we say on the outlook? First of all, based on the initial lifting of lockdown measures in some important countries for the group, we estimate that demand should improve gradually in the second half of the year, in the continuity of June, while remaining obviously below last year's levels. The pace and strength of each recovery are still uncertain, depending on the evolution of the health crisis, and will continue to vary greatly between end market and geographies. Undoubtedly, we will have to live with the uncertainty around COVID for the foreseeable future. Barring a second wave, however, the improvement we saw in June should be confirmed over the coming months.
We hope activity and construction will consolidate at June's level. We are seeing light at the end of the tunnel in decorative paints with higher volumes, thanks to strong customer intimacy and innovation. With regard to industrial market activity, from our standpoint, should improve gradually, but will be more uneven, especially as we are further down the supply chain or the value chain. We hope to see an improvement a bit later in the year. As a result, at this stage, we estimate that in the third quarter, sales at constant scope and fixed rate will decline by around 10%, which would be a clear improvement compared to the roughly 20% decline in Q2. In this context, we focus on what we can control. We'll continue to focus on this element, which are at our end.
In particular, our costs, capital expenditure, working capital, in order to maintain a strong level of liquidity. As we said earlier, we are quite confident to deliver this EUR 50 million of fixed cost saving in 2020 relative to 2019. By the way, in Q2, just on Q2, we were more than half of these savings already. Also, we are on track to reduce our CapEx by EUR 100 million relative to our initial plans. We will, however, preserve completely our innovation efforts on Specialty Materials to meet our customers' numerous technological and sustainable development challenges. Thanks to those initiatives, following a robust performance in Q2, given the external context, which led to an even stronger balance sheet, we remain very confident that we will emerge stronger from this crisis, drawing on our balanced geographic exposure, diversified end market, and preserved financial flexibility.
I thank you very much for your attention, and together with Marie-José, we are now ready to answer any of your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press zero one on your telephone keypad. We have one first question from Mr. Martin Roediger from Kepler Cheuvreux. Sir, go ahead.
Hello. Good morning.
Hello, Martin.
Just a few questions from my side. Marie-José, you said you had some windfall profits, i.e., raw material prices eased more than selling prices. Can you quantify them? The second question is on potential reimbursements from governments for full-time work or furloughs. Can you also quantify them? Finally, can you provide us with an update on your intended disposal of your MMA/PMMA business? Thank you.
Sorry, Martin, I did not understand your first question. I'm looking at Marie-José and to Beatrice.
Is it the impact of raw materials you are asking for?
Yeah. Actually, the delta between low raw material costs and lower selling prices.
Passed on low raw material costs, but obviously the raw material costs eased even more than your 6% price decline.
Okay. On the first question, it's part of the whole equation, we don't quantify each of the elements. I would say that on the Intermediate part, more or less, we could say that pricing and raw material are more or less in line. Even I would say that some pricing in Fluorogases, for example, but also in MMA, have declined more than raw material, because by nature of these businesses of Intermediate, okay, they are more cyclical. This is why we put them separately. They are more subject to supply-demand, and demand is significantly lower in Q2, so pricing was affected beyond raw material decline. With regard to Specialty Materials, I would say that we gained a little. We not quantify precisely, but we gain a little between pricing and raw material because as you could see on Specialty Materials, our pricing has been quite stable.
We confirm the specialty nature of these businesses. They are not in supply/demand mode, but really in terms of application value. We benefited from a raw material decline, knowing that between the oil price and what we buy, there is a long chain, you have not a direct correlation, and you need six months about to get the impact down on the P&L. We got a little bit of positive because of raw material, especially the Advanced Materials and in Adhesive Solutions. With regard to the potential reimbursement, I will talk mostly for French, where the system is clear in place. As we said, we have decided not to use any aid from the state, for what they call partial unemployment. This means that we don't expect anything. This is really Arkema own cost structure.
It was clearly said even externally, because we consider that we have a solid balance sheet, and we prefer to leave that to other companies. With regard to the question.
PMMA.
PMMA. As we mentioned, and we don't want to comment more, but we said it already clearly. We didn't wait so long after the Capital Markets Day, but despite the COVID, to initiate exploring the potential sale of PMMA, and we have appointed a bank, as we said, so this is known by everybody. As I mentioned, I think at a recent conference, we are not going to comment every week or every month where we are in the process, as the process of exploring this potential sale was launched. We'll tell you when things are becoming far more concrete, but be a bit patient because we are in the midst still in the COVID period and even if we try to do it in a rather speedy way, it takes more time than in a normal period.
Thank you.
You're welcome.
Thank you, sir. Next question is from Mr. Matthew Yates from Bank of America. Sir, go ahead.
Hello, Matthew.
Hey. Good morning, everyone. Matthew.
Good morning.
Couple of questions, please. The first one is on adhesives. Forgive me, I'm not really sure how to eloquently ask this, but you had a very good start to the year with profit growth in Q1, and then obviously things fell off a bit of a cliff in April and May, and you're talking about a nice improvement through June and July, which I guess is consistent with what we've heard from the coating players as well. Are you able to be a little bit more explicit in terms of absolute profit expectation for Q3, or at least directionally year-on-year, for the adhesives business? The second question maybe comes back to this idea around raw materials. You're talking about group sales being down 10% in Q3. I wondered if you could just disaggregate that into volume versus price. Thank you.
Okay. With regard to adhesives, thank you for underlining the fact that based on the momentum that we have implemented in adhesives since several years, we started the year very strong. Then we had this cliff coming mechanically. There was nothing to do. I would say even more strongly, maybe it's a paradox on the construction business. This means that in the countries where we are, I will give you a few names. You can, for example, France, South Europe, Philippines, India, there was nearly a stop of two months, which were April and May, of the sales. This means mostly our construction and when we say construction, it's construction and do it yourself and consumer. Three-fourths construction and one-fourth do it yourself, the whole being 50% of the whole Arkema.
We had a complete stop because we are selling through distributors and people were not at home. Which means that in April and May, on construction, on certain countries, it was -90% of sales. Despite of that, we generated a decent profit in mostly, but significantly below last year, purely mechanical. What has happened, and this is the beauty of adhesives, the big difference with many chemical business, and you're an expert in chemicals, Jerome, is that, as soon as the lockdown was lifted, mechanically, we came back, and it's rare in the chemical industry. We are not talking about to wait one year, two years, three years.
Just a month after, in June, we are already not in sales, but in profitability, close to the 2019 level in June. What we plan for, even if I don't want to guide, but what we have in mind for Q3 and certainly Q4, so for the second part of the year, which means for Adhesive to be quite close to the 2019 level, at which level exactly is too volatile, to be more precise. It shows you that despite quite a challenging macro, which stays challenging, in the Adhesive with the momentum, with the nature of these businesses, where you have many levels to improve your position, including some on raw material, very quickly, you go back to levels which are close to 2019.
Absolutely, as I mentioned, no worry on Adhesive, even if I recognize that April and May were maybe lower than maybe some would have expected, but it's purely linked to people not being in the streets, shops being shut down. If I take one to finish on the Adhesive story, we bought LIP, this small Danish flooring and construction chemicals company. They are in Denmark. They serve mostly the Nordic countries. In Nordic, the lockdown was very limited and LIP profitability was above last year. You can see the beauty of this Adhesive business in this kind of environment. With regards to raw material, I don't want to guide precisely on what will be the minus 10% between volume price, but clearly pricing will be rather close to what we get in, I would say, Q2.
By difference, you can assume what would be the organic volumes, I would say, Matthew. Okay?
That's very helpful. Thank you, guys.
Thank you, sir. Next question is from Mr. Emmanuel Matot from Oddo. Sir, go ahead.
Hello. Good morning, Thierry and Marie-José.
Good morning, Emmanuel.
Three questions for me. Do you confirm that for this year, we should not have the same usual negative seasonality in your results between H1 and H2? Looking to Q3, with a 10% organic sales decline, you should have a level of sales in absolute value, similar or slightly up compared to the EUR 1.9 billion in Q2. It tends to be encouraging for the EBITDA in Q3 compared to Q2. That's the first part of my questions. Regarding illegal imports on Fluorogases in Europe, do you expect any more negative impact in H2 or everything now is over? Overall, during the last 12 months, how much EBITDA you lost from that situation on Fluorogases, and do you think it can reverse one day? My last question is about your balance sheet.
Do you think you may have some goodwill at risk in your balance sheet due to the COVID-19? Could it lead to some non-cash impairments following the deterioration in economic performance? Thank you very much.
Okay. I will let the last question to Marie-José, but you will see that it's very limited. With regard to the first one, I will not answer in detail. First of all, we remain overall cautious about the environment as we say. Clearly, you know that traditionally, we are 55, 45 in terms of split of EBITDA, which is your question between H1 and H2. Our feeling is that this split between the two will be more balanced than it was in the past because of the nature of the COVID-19, of April and May. Your point is right. I will not quantify because we accepted to give, let's say, an estimate of what could be the sales evolution, but not of the EBITDA for the full year. We prefer to let you make the math.
To your question, yes, we believe it could be more balanced. I don't say balanced, but more balanced between H1 and H2. With regard to the Fluorogases, and take also into account the scope effect. Don't forget that we will lose. It will mitigate your answer, but we lose Functional Polyolefins on the second part of the year, and ArrMaz was already there last year.
When you compare the performance of the two semesters, there are two elements that you had not in the H1, is that Functional Polyolefins disposal, and ArrMaz was already there last year. Once we've said that, in terms of top line, as you could see, like for like, this is why we decided to give you a -10% at constant scope and fixed rate, we compare -10% compared to the -20% of the Q2, which confirm that on the momentum of June, we see a net improvement, quite significant improvement in the sales development between the two quarters. Hopefully, I answer your question. With regard to Fluorogases, yes, illegal import, I would say it was a story last year up until end of May.
In comparison, for us, the situation is not improving as such, but in comparison with the base of last year, you add the negative impact up until end of May last year. What does it mean for Fluorogases? I would say you are more in a normalized situation of more cyclical business in a macro environment which is tough. Plus the COVID, which means that you have two effects. One, which is supply demand. For example, in Asia, the results are quite challenging in power Fluorogases and also in Europe, while it's more resilient in the U.S. The second thing is that people, because of the lockdown, which is lifting but not fully lifted by far, they are not, for example, in the U.S., they are not in the office.
They use far less air conditioning than they were using last year. You have plus the automotive. You have still macro elements which are going in the wrong direction, including in the second semester. To answer specifically to your question on the legal import, this negative year-on-year base in Europe is certainly disappearing progressively. Will it reverse, which is the last part of your question? It's too early to say. Clearly, this year we are doing no reverse. Maybe you will start to have reverse next year, depending on how effective of the pressure which is put by the European Commission and the state to get rid of this completely crazy situation. Our best case is that you have no reverse, I would say, to be cautious. Hopefully, next year you could have some start of reversal.
I prefer to take this issue step by step.
How much you lost overall from that situation on your EBITDA for Fluorogases?
We don't comment specifically the result. You have all an estimate of Fluorogases with all the elements we have given you over the past three years. Frankly speaking, I'm sure you can have something which is very precise on that. I rely on you to make your own math, but you will not be far.
Okay.
It was not small. The good thing is that we got it. You swallow the bullet, so now we have a base which is far more sustainable. If I put aside the macro challenges linked to the COVID. Now I will hand it over to Marie-José.
Regarding balance sheet and impairment risk. You saw, in fact, we have frankly had very limited impairments in the current environment compared to, let's say, the overall impact we see around us. You have in the financial accounts, actually, the sensitivity to EBITDA variance as well as the sensitivity to a weighted average cost of capital. What I can say is that, compared to last year, the main change in assumption has been the change in WACC in Asia, which we had at 8.5%, and we increased that 9%, actually, to perform the impairment test for the semester. The sensitivity that we flag in the account is potentially over the Asia Acrylics cash generating unit, where we will obviously monitor the evolution of the WACC. There is some residual goodwill there. I would say the risk is limited as I see it right now.
You should not have anything major coming through the second half.
I think to confirm what Marie-José is saying, we had question in the past about our acquisition strategy. We are very proud of what we have achieved in terms of acquisition, because they have started to be quite compared to the base that we bought a few years ago, even in the COVID situation. You take Arkema, and Arkema's results are in line with last year. How many businesses? There's a lot you can discuss Adhesive, but even this year, there will be a significant year-over-year when we bought from Total. LIP is positive. Prochimir, okay, suffering from automotive, but it's temporary and it's very small. XL Brands has been quite resilient. Frankly speaking, I think we have been very cautious in our acquisition strategy. We have made sure that we have strong synergies, they're high-quality businesses.
They are diversified in terms of end market. You see that in this, what Marie-José is saying. I think the few impairments we have are not even into acquisition, but to some very small pieces and very specific, because we did this analysis very accurately, but very small sum of things and nothing at all to our acquisition strategy.
Yeah, that's correct. Actually, when you look at the accounts of last year, you see the sensitivity test on EBITDA variance was made with a -10% volatility on EBITDA. We actually extended the sensitivity test in the accounts of the semester with a -25% sensitivity to a variation of EBITDA. This would lead to no additional impairments. That's why I say I'm confident with the numbers we end up with end of June.
The company is, as I said at the beginning, from a more general standpoint, is really exiting the second quarter really in good shape, with very strong balance sheet, no concern about quality of the, let's say, valuation of the assets. It's quite a good position to be. Even if the macro environment remain challenging, I think there will be opportunities for company like us, as I mentioned, just because of this strong balance sheet and because we can really rely on the acquisitions that we have been making in the recent years to take us at a higher level in the coming years. We feel comfortable on this part, and it's a good message to tell you.
Thank you. That's useful.
Thank you, sir. Next question is from Mr. Mubasher Chaudhry from Citi. Sir, please go ahead.
Hi. Thank you for taking my questions. Hi, Marie-José. Hi, Thierry. Just on the Fluorogases, I wanted to get your thoughts on this investment with Nutrien, where 50% of its product is for emissive HFC. I just wanted to get your thoughts around investing in effectively banned or going to be banned products, and how that fits with your ESG metrics. Secondly, on shareholder returns and M&A opportunities, how are you thinking about capital allocation going forward? If a large strategic opportunity was to come by, like the size of ArrMaz, is that something that you would execute on? Having announced potential buybacks, would those take precedence? Just wanted to get your thoughts on capital allocation priorities. Thank you.
Okay. With regard to Nutrien, I think it's a very good investment for different reasons. The first one, you mentioned ESG. Thank you for that. You know that the traditional way of getting HF, which is a main raw material for When you say fluoro, it's fluorogas, but also fluoropolymers, all our specialty fluorochemicals. The traditional method is to start from the mineral, so from the mining, and in terms of energy, it's quite consuming. The beauty of this investment, which is an investment in common with a very good company, which is Nutrien, is that we use a by-product and to transform it directly into HF. It's really the perfect process to get HFs. The second thing is that we have never been comfortable on the HF long-term cost competitiveness, starting from mining, especially in Europe and U.S.
There has been a lot of tension, despite of this current COVID crisis, I believe that the tension can stay for a while because of the environmental constraints which are put on the mining. With this, we will be quite competitive. It will serve twofold. The first one is the fluoropolymer, which, as you know, it's a fantastic product line of Arkema, standing in a high-performance polymer product line, and will not only secure, but make sure that we are competitive long term. It's one. With some side application also in electronics, for example, 5G, on which we can use this HF. We are very comfortable on this part. On top of that, you know that we are exploring different options for emissive fluorogas. It's a positive to the extent that it will make them even more competitive.
We gain on many different elements, and I think it's a very good investment. On capital allocation, I think I will not rephrase what we say very clearly at the Capital Markets Day. Capital allocation, as you know, it's a very important but long-term element of our strategy. It was very clear on the Capital Markets Day between what we want to spend in M&A, what we want to spend in return to shareholder with this dividend policy, which is a growing one. With, and it's different with the past, what more space for share buyback in opportunistic way. I would say that currently in the middle of the COVID crisis, we have a strong balance sheet, but we are still a level of debt, which is a 1.7x EBITDA.
I don't think the topic, and you can see it with all our listed groups, it's not so much a share buyback. The topic is really to continue to be very solid, very resilient, to make sure that when the COVID is behind us, we are in perfect shape to benefit from opportunities of the market. This is what we are doing. Clearly, our capital allocation strategy is very clear, defined on the Capital Markets Day. As for M&A, this is what we intend to do.
Thank you very much.
You're welcome.
Thank you, sir. Next question is from Mr. Daniel Chung from Redburn. Please go ahead.
Hey, Thierry, Marie-José. Just two questions from my end.
Hello.
I might have missed it at the beginning, but in terms of your communication on the gradual improvement in 2H, so with the visibility you have and from your order book, could you put this into context for July's activity? It'd be really useful to infer what the run rate of July volumes are versus June. My second question is on the various moving parts in 2H. Has coronavirus or the demand outlook changed the sort of startup timeline for expansion in PA12 and PVDF? Thanks.
Sorry, the line is very bad. I would like you to repeat just in one minute what they have understood of the question and which.
Yeah.
How it's going to drive activity this year.
Okay.
The last is, does it have an influence, the current context, on the timeline of the CapEx?
Okay. Thank you. Marie-José has a very good ear. I am impressed. This is why we are a team. Marie-José is making the question, I'm making the answer.
Yeah. Thanks.
As I mentioned, for us, so July is nearly finished, but we have not the final numbers yet. I would say July is in continuity with less days, because June was a long month, we should not forget. I would say like for like, July is in continuity of June. What is better is still better, what is still challenging in terms of end market is still challenging, the same for the countries. We are in continuity of June. Basically, our guidance, let's say our estimate of this -10% sales for the Q3 reflects this continuity with June. This is why you have a significant improvement of the -20% organic sales at constant scope and fixed rate between Q3 and Q2. This is because, in fact, we plan a continuity with June. We confirm that.
With regard to the schedule, if it is your question on the PVDF development and Polyamide 11, we maintain the timing. We have, in fact, if you move forward, you have at the end of the year, let's say, it can be only next year. In the current context, it's not a matter of one month or two months. We have the PVDF. Batteries have been a little bit stable on the first semester because of the crisis, they will, I'm sure, on the second part of the year, start again their growth. This PVDF investment was mostly for battery, it's still valid. Will it be end of the year or in next year? We'll see, it's very close to our original schedule. We have some investment on the PA12 downstream polymers compounding in China also for the Q3, which should be on time.
With regard to the Polyamide 11, as I mentioned, we have tried to protect really the Singapore development. In fact, it's not because of us cutting CapEx that it will delay, it will be because of the COVID in Singapore. I must say that the Singapore government has been very, very helpful for us. We are so far in our planning, quite close to what we announced already around the mid-2023. We are on target. It's a matter of a couple of months for each of the investment, but we are on target. Does it answer your questions?
Yeah, it does. Thank you very much.
You're welcome.
Thank you, sir. Next question is from Mr. Geoff Haire from UBS. Sir, please go ahead.
Hello?
We have our next question from Mr. Andreas Heine from MainFirst. Sir, please go ahead.
Yes, please. Only very small questions left. Could you highlight a little bit more the regional trend in the progression from June to July? Is that also in continuity, or do you see different trends by region? That's the first question. Coming to your sales decline of 10% in the third quarter. Quite some operational leverage, which is usually the case if you have a very strong sales decline as it was in the second quarter. Is it fair to assume that this operational leverage is much less than in the third quarter, where the volume decline is also much less? This is the second question, and the third one, a small one on Fluorogases. Coming back to these illegal imports from China.
My understanding is that that happens only at the very end of the life cycle of the product, and then you have a change to the next generation and a pickup of sales of more innovative products. When is that going to happen so that really the next generation gives them, let's say, a push-up in earnings again? Thanks.
With regard to the regional trend, yes, it's also continuity in regional trends. You have still many questions which regard to region, which are linked to the lockdown and the development of the COVID. If you take, for example, the U.S., we assume a continuity in Q3 versus June, because when I discuss with my team, clearly you don't see any significant improvement in the sanitary situation in the U.S., even you see some deterioration. Once said that, it's maybe a paradox. U.S. is not more hit from an economical standpoint than Europe, which means that the sanitary situation in Europe seems to be more under control. At the end, in terms of economic impact, it's quite comparable. With regard to Southeast Asia, which was one of our elements of concern.
There, the lockdown takes time to be lifted, we don't see any significant difference between June and Q3. I would say, China is back to normal levels. The only weakness in China is coming from their export. It's more, I would say, for me, it's more an end market dynamic, which is changing from April, May to June to Q3 than a regional dynamic, which finally is more stable. With regard to your question on the sales decline in the third quarter. First of all, when we say - 10%, it's obvious for everybody that constant scope and fixed rate. I will not reiterate that. With regard to the fixed cost, clearly, in April and May, we have been quite aggressive on the fixed cost base because of the low sales our team have done a fantastic job.
Which means that in Q3, since we assume in organic sales, half decline compared to what we got in Q2, in terms of fixed cost, we not gain as much in Q3 than we gain in Q2. We cannot have a certain level of recovery of sales and continuing to cut costs as much. If you take, for example, one example, which is Bostik. Bostik in April and May, they have really cut costs like hell in construction, marketing, et cetera. In June, they started back to put cost again. Overall on the quarter, they were significantly below last year. In Q3, they will be a little bit below, but not far from last year, but the results will be close to last year. You see, we try to be clever in the way we manage cost.
Overall on the year, we confirm the - EUR 50 million net compared to last year. As I mentioned, the majority of it was already on one. More than half was already on one single quarter, which was Q2. Q3 will be below last year, but not with the same dimension as we had in Q2. Is that clear? With regard to chloralkali, I would not spend too much time on the call on chloralkali while our strategy is really to develop, as you know, specialty material. We have to be reasonable in our speak of time. You are true to say that it will take more time than people were expecting. Next generation will be a key point, and certainly one day we will update you on where we are. We have cards to play on the new generation.
Illegal is still a factor in Europe. Illegal import is still a factor because of the prices of the quotas, and we have been hit. Fortunately, to come back on the question of Emmanuel, is that next year, is that second part of next year? At a certain point, we should have some reverse. Not full reverse because of what you say, that we move more to a new generation, but we should have some reverse of what we lost. We should help a little bit. For the time being, I would say on the second semester, the Fluorogas topic is not HFO, is not illegal, it's really simply the macro additives. We are back in the normal world on Fluorogases. With the macro, which is, as for any Intermediate, working against their performance.
I would like to, because we come to the end of the conference really, to re-underline the fact that you can see the fact to split Specialty Materials and Intermediates was quite important because you can see the behavior of each of the platform compared to last year. Clearly, we are more resilient in Specialty Materials, which is logic but had to be proven again. The company is quite in good form from a balance sheet standpoint. Again, there will be opportunities, not necessarily in the next months, but in the coming 18 months, just because of the opportunity which will be given by this COVID period if we are able to emerge stronger. I think it will be the case for Arkema, even if the COVID, for the time being, is not yet behind us. There are still some cautiousness linked to this COVID.
Other last question, maybe the last of the last, and then if you agree, we will end the conference.
We have one last question from Mr. Laurent Favre from Exane. Sir, go ahead.
Oh, thank you very much for squeezing me in. Good morning, all. Thierry, my question is regarding the dividend cut for 2019. I think when you announced it, you talked about giving back that cut in terms of consideration either through dividends or buybacks. As you've demonstrated resilience in Q2, and you sound a bit more optimistic on Q3. I'm just wondering if you have early thoughts on the timing and mechanism of how this payment could be. Thank you.
It's a good question, and we have not forgotten what we said, which means that, let's say, the difference of dividend will be returned back to shareholders when, I would say, the macroeconomy will come back to normal. I don't think we can consider today that it has come back to normal, even if we did a fantastic job in terms of cash flow. We have the space for balance sheet. Our shareholder will have to be a little bit more patient. In fact, we do exactly what we said. Once things come back to normal, which is not yet the case, we all know that, we're committed to return back this decrease of dividend compared to the initial dividend we proposed, which was growing. We have still that in mind, but give us a little bit of a time until the situation is becoming normalized again.
It's on our roadmap without any ambiguity.
Excellent. Thank you.
Thank you to all for all your questions. I wish you a good summer, and if any further questions, don't hesitate to contact Beatrice and the team, and they will certainly be ready to answer to you. Thank you very much.
Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.