Ladies and gentlemen, welcome to the Arkema Third Quarter 2019 Results Conference Call. I will now hand over to Marie
results conference call. I'm here together with Bear Cuisine and the investor relations team. And as usual, in addition to the press release, we have posted on our website, the slides which are detailed in the third quarter performance. So I propose to start with the macroeconomic context which remains fairly challenging. Geopolitical tensions are way on global demand.
Our customers corporate, on the low visibility environment are being cautious in the inventory management as well as in their investments. So of course, this has an impact on our business. In such a context, Arkema delivered a resilient set of financial indicators demonstrating 2 things, I believe, first, the strength of the business portfolio and second, the benefits of our transformation strategy. So if I start with the first item, so speaking of the strength of Akama's portfolio, this 3rd quarter results show different trends between specialties and intermediates. We have been since the beginning of the year, we have seen the increasingly strong performance of specialties and this trend accelerated in Q3.
Thanks to the impact of price increases, to the continuous work on product mix and a more favorable raw materials environments. So Bostik is a good example of that. Continuing on a strong momentum, recording EBITDA growth of 20% in the quarter and reaching an EBITDA margin of over 13%. So bear in mind, the performance in specialties is achieved in a downbeat volumes environment in technical polymers. As a certain end market such as transportation, consumer electronics and oil and gas are still seeing lower demand year on year.
Meanwhile, the intermediate businesses have a Fluorogases facing a significant decline. Suffering from the illegal HD imports into Europe, while, MMA, PMMA and acrylics, have delivered a solid performance. On the second point, which is the impact of our long term transformation strategy, we have Hamas delivering a solid performance in line with our expectations in quarter 3. In addition, we finalized the acquisitions of Proximity And Adhesives and the Lampson in Performance Additives. We successfully started the 50 percent expansion of our high performance polyamide12 powdered capacity in monoclonal in France, And we have announced the 50 percent capacity expansion of our High Performance Kynar Kvdf for the electric vehicle battery application at our Changshu plant in China.
So finally, on 14th October, we announced the project to divest our noncore functional polyolefins business, which is an intermediate activity and part of our PM and A business line.
For
an enterprise value of 1,000,000, so roughly a 10 times EBITDA. It was important for Akima in our employees to find the right partner and SK Global Chemical is an excellent strategic fit. As they will be able to leverage their existing assets to grow the business over long term. So those actions, all in all, contribute to our long term ambition for specialties to make up more than 80% of our sales by 2023. Just to give you an idea, if we include the pro form a contributions of, Alma, Proshimia, and Lansham.
And take into account the proposed divestment of functional polyolefins, we end up with a specialties making up for 70 4 percent of group sales in the 1st 9 months of 2019. So I now propose to take a closer look at some of our financial figures for the quarter 3, 2019. I'll start with sales. That's up 2.3% compared to last year at 1,000,000,000. So this includes, volumes rising 0.7%.
So we have growth of acrylic monomers in Asia and US. That was particularly dynamic, notably thanks to the startup of the new PLA reactor in Texas. Volumes in industrial specialties are 2.8% and thanks to strong performance in thiochemicals in particular. And meanwhile, we have high performance materials that recorded a 4.1 and volume decline impacted by the general economic context with weaker demand in certain end markets that are overshadowing the good momentum in high growth niche markets such as the batteries of 3 d printing for technical polymers. The price effect is a negative of 4.4% with a very contrasting factors at play.
On one hand, the high performance materials division benefited from a 3% increase, thanks to a positive product mix. And our strong pricing actions, especially at Bostik, with, on the other hand, Coating Solutions were impacted by lower propylene prices and Fluorogases by the very tough market conditions in Europe. The integration of our mass on first of July is the main driver behind the 3.9 percent perimeter effect. And finally, we have a positive 2% currency effect mainly reflecting a stronger U. S.
Dollar versus euro. EBITDA at 1,000,000 is 2.9% up on last year's level, which is a very strong performance in the current context. And the EBITDA margin at 17.4 percent remains resilient at a high level. Looking at the results by division, we have high performance materials EBITDA that rose 12 percent to 1,000,000. Together with the contribution of Alma's Bostik was the key driver for our EBITDA growth at a remarkably strong 20% as I mentioned.
Our mid and long term ambition for this business remains, of course, as strong as ever. As for Advanced Materials, there is a resisted well in spite of the weakness seen in some of its end markets. EBITDA of the Specialty Industrial Specialties division is lower relative to last year at 1,000,000, marked by, a very different trends by business line. Fluorogases results were heavily impacted by lower prices, linked as mentioned earlier to a high legal ad HFC imports in Europe, Wakes MMA PMMA resisted well. Thanks to the quality of its innovation and the lower raw material costs.
I think it's fair to say also Saia Chemicals performance remains solid in the continuity of the first half. All in all, the division's EBITDA margin remains close to last year's high levels, indeed. Coting Solutions EBITDA is up around 8 percent to EUR 70,000,000 with a 80 bps increase in EBITDA margin to 13.1%. Thanks to improving unit margins in downstream activities mainly. Just to mention on the impact of the Emelda store on the KLX facilities that in the end was limited to a few $1,000,000.
Depreciation and amortization reached 1,000,000, so up 26,000,000 year on year. As a result of a number of, phenomena, so IFRS 16, of course, the startup of several production units the integration of our maths and the negative exchange rate impact. Recurring operating income amounted to 1,000,000, and our rebate margin was at 11.3%. Nonrecurring items totaled 1,000,000 and include a PPM authorization, some restructuring expenses, etcetera, drops and acquisition costs of our maths namely. Financial results stands at EUR 29,000,000, including an interest rate impact coming from the partial swaps of our net debt into U.
S. Dollars. Yesterday, the tax rate including exceptional items is at around 20% of the recurring operating income. And consequently, quarter 3 adjusted net income amounts to EUR 166,000,000, which corresponds to roughly EUR 2.2 per share. So moving on to cash flow and net debt.
Free cash flow is once again very good at 1,000,000. Mainly reflecting the group's solid operational performance and a decrease in working capital linked to the business seasonality. At 16.4%, the working capital ratio on annualized sales is comparable to last year's level. Total capital expenditure amounts to EUR148,000,000 in the quarter. And we can confirm our assumption of around EUR 610,000,000 for the full year.
So including both our 5.5 recurring CapEx as well as the exceptional CapEx project, Net debt reached 1,000,000,000 at the end of September. This includes a close to EUR 600,000,000 cash outflow into the payment of Amaz acquisition and that of the remaining stake in Sankey we bought from our partner, Jerome. As well as 1,000,000 for share buybacks. Our balance sheet is very solid as the net debt represents one point two times the last 12 months EBITDA. To conclude my remarks, a quick word on the outlook.
Our assumption is that the macroeconomic environment is going to remain challenging with ongoing cautious customer behavior. We will, however, continue to focus on our internal momentum and on the execution of our long term strategy. And we therefore confirm our ambition to achieve this year and EBITDA comparable with the 2018 record level. What does it mean for quarter 4? We actually expect to deliver an EBITDA for quarter 4 broadly in line with last year's Q4 level This takes into account a strong decline in Fluorogases, given the high base of comparisons we had last year, and the high legal HSE imports in Europe that are continuing to weigh significantly on prices.
Specialty businesses should, however, continue to record solid growth, boosted notably by Bostik's positive dynamic. The contribution of acquisitions and improving unit margins in Performance Coatings. Of course, this the contribution of specialties versus intermediate should be more favorable relative to last year And this is a really positive point for Akima. It demonstrates we are on the right track implementing our transformation strategy and a step by step, improving the company's resilience. So this concludes my comments.
I thank you for your attention, and I'm now happy to answer your questions.
The first question comes from Martin Rudiger from Kepler Cheuvreux. Sir, please go ahead.
I have a few questions. First is on Bostik. I see this 20 percent EBITDA increase, and of course, it's partly supported by a low comparison base. But what was the primary reason for that increase was that price hikes or was it lower raw material costs year over year? And in that context, can you quantify the mix effect on the 200 basis points margin improvement?
Because I remember that you have given up some business because that was low profitable, and therefore, that that was also certainly supportive for your profitability? And secondly, on the tax rate, rather low again in Q3, what is your full year tax rate? Is that 20%? And should we expect that also go forward after 2019? And final question is on the acrylic asset, you mentioned solid performance in Q3.
Where do we stand right now in terms of profitability? Is it closer to mid cycle conditions or to low cycle conditions? Thanks.
I'll take them in order. So regarding Bostik, so we had the we had this this conversation actually for some time now. What I've seen, Vostik is obviously the strong effect of in terms of margin recovery, versus last year of the price actions that were conducted earlier on the year. And clearly, you know, as we published in the first quarter or even in the first half, you already could see, in fact, let's say, progressively a 100 basis points recovery of the margin, 150 basis points. Recovery in the margin in the first half.
And in fact, if you remember where last year, it was a continued erosion of the profitability of Bostik, since we were facing the flag in transferring the raw material price increase to the end customer. So this year, I would say this price actions clearly have, paid out. So it's clearly definitely pricing. As well as mix because as you could see, we, we had some pruning. It's that regarding some of the applications we have in the portfolio of our disease business, which was weighed on the volumes that we had on the first half.
You can see entire situation in the in the second half is actually much more under control, and volumes impact at Bostik are actually just slightly, slightly negative. So I would say price and mix clearly have an effect. The fact that we have raw material context, which is changed in 2019 and is, clearly, more benefiting to, to the business is obvious. Because as you know, we are slow when raw materials go up. We are also slow when raw materials go down.
But it's fair to say that, despite volumes, you know, not being, extremely buoyant, we resist extremely well in terms of pricing actions that we conducted earlier on the year. And clearly, they're holding up very well. So definitely, this continues to pay as we progress in the year. And as in fact, the gap compared to the margin of last year, increases further. So I definitely, expect, you know, the margin level that we have reached now, which is over 13%.
To be a resilient one. Not to mention to continue to improve further. In terms of tax rate. So we have actually a guidance, which I think is around 20%, 21% effective tax rate for the group. This is a mix of geographies, as you know.
We have actually a quite good situation in France since we have accumulated sources that we can apply obviously to some of our profits. So, this has an impact on the average tax rate of the company. But I definitely confirm. We are in line with the guidance and I don't expect a significant change of that guidance as we go into next year. Concerning acrylic acid, I'd say, we are still in this midcycle plus in U.
S, midcycleminers in Europe, and, low caller level in Asia. I'd say we start seeing some pressure. It's on the margins of the upstream that, of course, clearly benefit to the downstream. So right now, clearly, this Coating Solutions segment is actually performing really well. Now that is, of see, tensions in the market.
And therefore, we are, obviously, monitoring, monitoring this into Q4. At this point, I am not seeing a changing trend as we enter into, you know, we are finishing now October. So no major change in trend. Thank you. Thank you, Martin.
The next question comes from Alexander from Morgan Stanley. Madam, please go ahead.
It was just on Fluorogases and the illegal imports into Europe. It obviously seems to be impacting prices quite significantly. So can I just confirm you're talking about a sequential decline as well into Q4? And also what is it going to take in terms of regulation enforcement for this market to improve?
So Regarding Fluorogases, you are correct. In fact, if you remember, the performance of this business line last year, we had an exceptional contribution which was kind of, you know, out of the season because normally the high season for Fluorogases tends to be Q2. To some extent, a bit of Q3. And in fact, last year, we had an exceptionally good, high volume contribution on Fluorogases in quarter 4. And this year, definitely, if I continue on the trend we've seen for the since the start of the year and into Q3, I therefore expect an additional, I mean, an increase, decrease of the Fluorogas impact on the performance of the group.
Yes. So correct, it's kind of sequential. And in terms of actions from the EU, I'd say it's still at an early stage. I mean, I think there is now an awareness in the public of the situation. We went through a phase of denial first of the situation.
I think all the actors of the markets have been pretty vocal on the phenomena. And now basically it's for Europe to, to actually put some discipline at, at its borders. So no no, I I do not anticipate right now, a recovery or any change in the situation short term.
Thank you. The next question comes from Alex Stewart from Barclays. Sir, please go ahead.
Hello. Good morning. Could you talk a little bit about the volumes in Thiochem where they're coming from, whether that's improved and a bit of context on that. And then in the same breath, perhaps, update us on your new Cyochem capacity in Asia, how the construction is going when you're expecting it to sell further forwardings, that kind of thing will be great. Thank you.
Okay. Thank you, Alex. So, so this business is really is really enjoying a good momentum. So the main drivers for this activity, I'd say it's twofold. We are roughly fifty sense of the business is, geared toward the methionine application.
And in that context, we actually supply, our partners CJ in Asia. And our partner Novus in the U. S. So we are actually a good partner for nonintegrated methionine in tails. And we've seen actually a good, a good, level of demand in this market I would say, as usual, you know, it's a demand that grows typically, 5%, 6% a year.
So this is basically confirmed this year definitely. The second point is disaccurization regulations evolution in the world. And we are we actually deliver a product that help desulfurize the, the oil and, and as these regulations become more stringent, So we also actually, as enjoyed, an increase in demand on that area too. Classically oil and gas in terms of end market for thiochemicals is more kind of, you know, of 2%, 1%, 2% growth year on year. And in fact, this trend has a bit benefited from the evolution of the regulations and therefore has also contributed to to additional volumes for thiochemicals.
So I think it's a good momentum for us to come up with additional capacity in Malaysia. As you know, we are actually doubling the capacity of our plants there. The CapEx is actually progressing well. It's almost complete. We actually target mechanical completion by end of this year.
And the start of production, early 2020. At this point, I still confirm this schedule.
Can I just follow-up on that? Because the 3rd quarter volume in Industrial Specialties was 3% positive. Power Chemicals is about the quarter of the division. So it implies it was probably a high single digit growth in Cyochemicals volumes. Was that evenly split between the desulfurization and the cat sands and the methionine or is it more heavily weighted towards the desulfurization?
Any sort of sense of where the growth comes from would be really useful?
No, at same time, it's still the highest contributor. In terms of growth for this business, definitely. We have also an application, which is a gas which is also as performed also extremely well in this business line. So we said that the impact for your products has been in a high demand level across the business.
The next question comes from Mubasher from Citi. Please go ahead.
Thank you. Hi, Marie Jose. Just two quick questions. What's the cash inflow expected from the polyolefin deal. Just trying to figure out the net debt impact there.
And then on the Fluorogases, just you still think you can be between the previous guidance of 20172018 on sales? Do you think it'll be edging towards the lower end of 2017.
Thank you, Mubasher. So on the polyolexins disposal, as you know, we've given a total a total amount of the transaction. Actually, I've I've confessed kind of multiple in my in my speech just before. It's it was actually a pretty amortized asset So you will see, in fact, in our publication end of this year, we will have in our balance sheet, the amount of acetyl for sale that will be actually extremely visible. So in total, I'd say it's a yes, it's a significant gain on the transaction.
With, let's say, an average tax amount of EUR 50,000,000. So probably assuming something let's say, not far from a €600,000,000 contribution on cash is not totally crazy.
Thank you.
I think, we have in fact mentioned we were the trend of 2017, contribution. I would now say we are probably, below that level. If I look at this year, So clearly, we are on the baseline, which is now more modest than what we had at at the time in 2017. We're still probably more resilient from that point on.
Perfect. Thank you.
Thank you.
The next question comes from Mahan Fabre from Exane BNP Paribas. Please go ahead.
Hi, good morning. Maybe it's Laurent Favre. Two questions, please. The first one, trying to reconcile your comments on the Q4 guidance for flat EBITDA and the guidance for the full year. Am I right to assume that functional polyurethanes will be in discontinued operations.
And therefore, we're losing that EBITDA on a year on year basis. And then the second question, on HPN, And based on what you said on adhesive at 20%, it seems that Advanced Materials was not down. And I'm wondering why is it that Amaz is also growing EBITDA year on year? Or are there some exceptional factors that are helping Advanced Materials EBITDA only on year basis? Thank you.
Thank you, Laurent. So Regarding the populations, disposal, in fact, the only phenomena impacting our accounts for year end are this reclassification in the balance sheet of assets held for sale. There will be no reclassification in the P and L. So at reviewing with our auditor. Basically, it's not a business line in full.
It's not a segment in full. And therefore, there is no change basically the contribution of the polyolefins in the P and L of this year and of next year till the time we dispose of it. So no impact coming from this announcement on the P and L side. Regarding the adhesives progression and the advanced materials progression in terms of margin, as we mentioned, in fact, Advanced Materials, despite they have this tough situation on the volume side on some of the end markets, They still enjoy some positives on some other markets. So the mix is actually holding well.
And therefore, the margin levels and the pricing levels are also holding, holding well in the quarter. And let's say it seems the start of the year. So right now, the contribution of Advanced Materials remains extremely good and extremely resilient. I also confirm Arman's performance is a very sound. In fact, it's a significant increase compared to that performance last year quarter on quarter.
It's fully in line with, even slightly better in I've done the business plan we had on them. So clearly, the momentum at our mass is robust.
Okay, thank you.
Thank you.
The next question comes from Geoff Air from UBS. Sir, please go ahead.
Good morning. Just had two quick questions. First of all, just I wonder if you could comment on the organic growth of Bostik. When I look at your peers, it would appear that organic growth is negative for them. Is that the case for Bostik, where you could split out price and volume?
And then just going back to Fire Chemicals, If you're supply, do you just supply Novus and CJ on the methionine side or are there other players you supply as well? Because I'm conscious that there is no volume growth for Novus and CJ at least it's been announced. So I'm just wondering where a lot of the new capacity in Asia will go.
So, regarding the organic growth at Bostik, I'd say putting together the volume evolution and the, price impact. It's probably a breakeven or slightly positive, I'd say. And looking into a thiochemicals, I confirm on the methionine, the main customers we have are the ones you have mentioned. I have good volumes, selling to them. So this is, what what I can say at this point.
So could I just come back on that, Bennett? If you're doubling the capacity of the Asian, fire chemicals, and CJ and there was haven't announced any new capacity in defining. Where is the additional capacity going Is that going into the desulfurization of oil or other end markets?
No, actually, right now, we have, we have, doubled the capacity at the request of CJ And therefore, this new capacity is mainly going to CJ, who has actually already completed their, their expansion at the site.
So
they're waiting for us to start basically, delivering them. Right now we have, to try to anticipate this trend, we have, transferred some of the material from Europe to Asia as well. But yes, it's fully devoted to this end market and to this partner.
The next question comes from Martin Evans from HSBC. Sir please go ahead.
Just looking at this third quarter below the EBITDA line, there's a lot of negative indicators, obviously, read it down, the margin was down, net income was down, EPS was down for the quarter, although I admit it was against a strong quarter last year. But given your comments on the sort of year end outlook with with customers managing their balance sheets, the fluoro, CAM situation and what we're hearing generally. I'm just struggling a little bit now to see why or how you'll be able to grow next year, versus certainly the current consensus despite the acquisition contributions coming in because these, as I say, below the EBITDA line, the indicators are looking quite quite naked too. Thanks.
I'm a bit confused actually by your comment. So, as we mentioned, actually, when we have this EBITDA, which is comparable to last year, you perfectly know, it actually includes the IFRS 16 impact. It includes the acquisition. It includes some positive forex effect as well. So I don't think it takes anybody, by surprise.
In terms of let's say, the other line, as I said, tax is extremely in line with the guidance that we've given that 20 percent effective tax rate. In terms of financial expenses, we've had this refinancing of the hybrid bond that we did in the first half, in light of the positive financial markets securing actually $400,000,000 with a gain of a 2% rate compared to our initial, hybrid lines. So I mean, everything is the consequence of the actions that, that you, conduct. Regarding next year, so as you know, it's a kind of early to, to already commence on 2020. At this point, the macroeconomic that probably everyone assumes in the markets are not too different from the ones we see.
In the current year. And in such a context, what you are seeing is I a very good resilience of the performance of the group. Now, we will have the full effect of the acquisitions that we have done like, I would say, any other company in the in our sector or let's say in the market. So we can remove all the positives and see everything in negative all in all, definitely, I think it's a very solid performance in such adverse conditions.
Thanks. And just a second, quick follow-up on your definition of specialty because you have used it, a lot through the call and more recently as well. Do you have whether it be a margin or return on invested capital, did you have a target definition of specialty returns. If, as you now say, 70% to 80% of the portfolio is specialty versus commodity, how do you see that definition?
So, basically, the specialty characteristics that that we define is when you have actually a leading position in a market with limited limited number of players in specific products or applications, definitely a solid contribution. Not necessarily only on EBITDA, but definitely on EBIT level. So as you know, Bostik and Advanced Materials are very different EBITDA profiles, but they also have very different capital expenditure intensity. In them. When you look at the net contribution, they are actually both not too different and not and therefore, fulfill these characteristics of a specialty contribution in our portfolio.
In terms of return on average capital employed, basically, we were last year at 15%. Of course, when you have this growth strategy, you start first having CapEx and then the contribution of those assets only come up let's say, by the time you finish the construction and even you finish the ramp up of the asset, so, this has a natural dilutive effect on the return on capital employed that, that you will see, going forward, yet you know, the minimum we've fixed is that we expect, Arkema to continue delivering over 10% return on all employed and the businesses that we have in the portfolio, we support that. Thank you.
The next question comes from captain Odeshi from JPMorgan. Please go ahead.
Yeah. Yeah. Probably, I don't know if you is it paid?
He left the the Q And A session.
Okay.
So for the moment, we have no further question. Ladies and gentlemen, I would like to remind you So we have a question from Ketan Odeshi from JPMorgan. Please go ahead.
Can you hear me now?
Yes.
Yeah. Sorry. I don't know what happened because I was on the call, but The question I had was can you remind us of the new projects with start up in 2020 and how much they contribute in the current environment because if I look at your HPM volumes, they are still down 4 or 5%. So, I'm just wondering whether you would be able to ramp up all the 2020 projects as planned at this point given the current macro backdrop? And the second question would be on industrial specialties, do you have a sense on whether Fluorogases probably have Baktoum now?
Or do you think we could have some additional headwind next year just given the exit run rate on pricing could be lower than lower than the average for this year as a whole? Thank you.
Thank you, Ketan. The new project for 2020. I think I've mentioned a few, actually, initially. So of course, the exceptional projects that you may see is the biochemical capacity. In, in Malaysia.
And then, will we have, polyamide 12 let's say, 25% increase in capacity in China. We have the start of our Japanese operation in the adhesives for industrial adhesives in Japan, So so top of my head, this is what I would, would fair, then you will have the full year effect, let's say, of some of the contributions that we had this year, of course, since the acquisitions were mainly, John, let's say, towards the end of the year, so you would have the full year from us, the full year of 10 K. Obviously, approaching me and and Lanceol. You have the reactor of Clear Lake that, started in the summer this year. So we you enjoy a full year, volume, next year, same for our Sarkomak capacity in, in non China, China.
So again, it's a combination of things that most of them have actually started or will start pretty early in 2020. Regarding industrial, the fuel gases, and then we've mentioned the performance this year and contribution that is now, let's say, at a level, which is below the 2017 level. I'm not again, I'm not expecting anything major in terms of changing trends. So right now, I'm assuming something not too dissimilar to this year.
The next question comes from Matthew Ace from Bank of America. Sir, please go ahead.
Hey, good morning. Thank you for taking the question. I wanted to ask about the dividend. I guess, we're getting to the time of year where the board begin to think about that. Given in this call, you've emphasized how the portfolio has changed to become now north of 70% specialty.
And you've shown the balance sheet of just over one turn of trading leverage. Are you thinking about a more fundamental review of the dividend policy or do you still quite a rich deal pipeline to deploy the capital into?
So we've actually not fully completed. As you know, ambition of, of, in terms of M And A growth. So we've done some operations this year, actually both sides buying and selling, we obviously still need to close some of those transactions. But definitely, I I I would still see, a kind of, you know, bolt on volumes of acquisitions continuing to feed the, external growth in our portfolio. So at this point, what we said is that clearly, we are in a trend where we progressively grow the dividend payment.
As you know, the payout ratio is still pretty modest. So we will continue probably doing that, as we go into, as we go into next year. Of course, this is subject to, upcoming discussions at the board.
Understood. Many thanks.
We have
no other questions the moment. We we don't have any further question.
So I'll probably conclude then, this call. Thank you very much for for attending. As, as you've seen, and I think it's, it's, a good set of numbers for this quarter in a in a challenging environment. I think again, it, it reflects the robustness of the portfolio and the and the trend of transformation of the portfolio paying out in terms of the resilience of the, of the results. So, again, looking forward to to see you in the coming conferences or let's say in the coming meetings we'll have together.
Thank you very much and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You