Ladies and gentlemen, welcome to the Arkema Third Quarter 2018 Results Conference Call. I will now hand over to Mr. Thierry Le Hénaff, CEO. Sir, please go ahead.
Hello, everyone. Good morning. Welcome to this conference call. With me today are Marie-José Donsion, our CFO, and the IR team. As usual, we have posted on our website, in addition to the press release, a set of slides which details the third quarter performance. What I propose is first to comment this set of results, and then I will answer your questions together with Marie-José. As you have seen from the press release this morning, Arkema achieved this quarter really another very solid performance with an all-time high EBITDA in the third quarter at EUR 374 million and an adjusted net income up 18% year-on-year, which is quite significant. I would like to start this presentation by focusing on a few highlights. First, this quarter's EBITDA is up 5% year-on-year.
This is a very good performance, bearing in mind, I'm sure you bear in mind, that we were up against the excellent performance of Q3 last year when EBITDA grew 17%, and that we are operating in a high raw material cost environment. In this context of high raw materials, our specialty businesses resisted well at high levels, while our intermediate chemical businesses continued to benefit fully from this situation. As a result, our global performance is excellent, and we continue to demonstrate our progress and resilience in different types of environments as we have done since 2015. I'll remind you also, if I may, that we have delivered EBITDA growth for 16 quarters in a row. Secondly, EBITDA was up year-on-year in all three divisions, highlighting the quality and the diversity of our portfolio and our good geographic positioning.
With regards to the macroeconomic environment, which has been a talking point, including this morning, among investors, it remained, as you know, volatile and contrasted with different dynamics by end market and regions. Yes, September was a bit softer than expected, but October is normal. However, we have not noticed any significant slowdown in any specific end market and have continued to see good momentum in several markets such as oil and gas, electronics, batteries, or sports, reflecting our focus on innovation. Going forward, we will continue to remain attentive to the macro development and certainly, we'll continue to focus on what we do best, which is what we control. Lastly, I wanted to highlight the strong priority we gave to price increases during this quarter, is something we discussed over the summer, sometime to the detriment of volume growth.
In Q3, we continued to increase our selling prices to recoup higher raw material costs and have even intensified our actions, especially in our more downstream businesses. This resulted in a positive 6.6% price effect compared to 5.8% in Q2 and 5.4% in Q1. These efforts are bearing fruit and we are step by step restoring our unit margins. In the coming quarters, we continue our actions to recover the full impact of raw material cost inflation, which started for some of them back in 2016. I would also like to comment on a few figures. At 17.3%, EBITDA margin is close to last year, despite the impact of higher selling prices on this ratio. This good level reflects a combination of strong pricing policy, mix optimization, innovation, bolt-on acquisition, and of course, cost control.
The second point is a significant increase of 18% of our adjusted net income and adjusted EPS, which reflects higher EBITDA, stable DNA, and the benefit from lower taxes, in particular, in the U.S. With regard to cash, free cash flow amounted this quarter to EUR 227 million. We are pleased with this performance, achieving an environment of high raw material costs that impacted the level of both trade receivables and inventories. It enabled us to decrease materially our net debt to below EUR 1.2 billion. I'm sure you have made the math, as you can see, net debt is well under control at 0.8x EBITDA of the last 12 months. As usual, we work hard to deliver on the short term while continuing to invest for the long term and sow the seeds of our future growth.
Without commenting in too much detail on all our ongoing projects, I would like to focus on two examples of the small bolt-on acquisition we are doing in adhesives and which illustrate well our expansion strategy in industrial adhesives. With the acquisition of the industrial adhesives of Nitta-Gelatin, we strengthen our position in Japan to supply the growing market of packaging, transportation, and electronics. We have also completed a very promising acquisition in engineering adhesives with Afinitica, which has developed an innovative and patented production process to formulate high-performance instant adhesives with a broader number of applications compared to the traditional cyanoacrylate adhesives. This is a first step by Arkema in our ambition to build a solid position in engineering adhesives used especially in the electronics market. These two acquisitions will contribute to Bostik's long-term growth and profitability improvement.
I would also like to confirm that we are well on track with our major industrial projects that are due to start contributing from next year. This is notably the case of our PEKK plant in Alabama, our new 90,000 ton reactors in acrylics in Clear Lake in the U.S., as well as our Sartomer urethane resins expansion in China. As you can see, another busy quarter implementing and delivering on our strategy. I will now hand it over to Marie-José for the details of 3Q figures.
Thank you, Thierry Le Hénaff, and good morning, everyone. I'll start in fact with the sales bridge. As you can see, our sales are up 7.3% compared to last year. Scope effects is positive at 0.9%, which reflects the integration of our bolt-on acquisitions in Adhesives. Namely XL Brands and Nitta-Gelatin industrial adhesive in Japan. At constant exchange rate and scope, revenues are up 6.7% at EUR 2.2 billion, driven, as Thierry Le Hénaff mentioned, by a 6.6% price effect, which reflects the priority given to the continued actions to increase our selling prices and recover from the higher raw materials, especially in our more downstream businesses. Volumes are overall stable against last year's strong comparison base. This reflects the price over volume priority, I've just mentioned, as well as the impact of the regulations in fluorogases and customers' more cautious approach, if we can say, towards the end of September.
EBITDA reached EUR 374 million, which is an all-time high in a third quarter. It's up 5.4% against last year, which was itself a high performance. All three divisions are up, confirming the good resilience of specialty businesses and the very robust performance of intermediate chemicals. At 17.3% EBITDA margin, it's close to last year, reflecting the mechanical dilution on the rate resulting from the higher selling prices. Recurring operating income amounted to EUR 265 million, up 7.6% year-on-year. It includes a stable depreciation and amortization at EUR 109 million, and therefore the REBIT margin is stable at 12.2%. Non-recurring items relate mainly to depreciation and amortization of PPA for EUR 8 million. It corresponds, in fact, to the revaluation of assets carried out as part of the Bostik, Den Braven, and XL Brands acquisitions purchase price allocations.
We also booked EUR 8 million non-recurring expenses as part of the implementation of synergies in the Adhesives. Taxes are down on last year at EUR 49 million. Tax rate is therefore down year-on-year at 20% on recurring operating income. This reflects both the benefits from the U.S. tax reform and our geographical mix of results. Consequently, adjusted net income reached EUR 186 million, up 18% on last year, and delivering EUR 2.44 per share. Looking now at the performance of our three business divisions, High Performance Materials show sales up 2.4% on last year at constant scope and FX, with 1.9% price effect, reflecting our continuous actions to raise selling prices across the business. Volumes are up 0.5% compared to the high third quarter 2017 performance. Demand was for lighter materials, the demand as well in consumer goods was once again solid this quarter. Volumes were impacted by strong priority we gave to prices.
The 2% scope effect corresponds to the integration of our bolt-on acquisitions in Adhesives and in particular XL Brands, of course. With EUR 162 million EBITDA and 16.4% EBITDA margin, this division, High Performance Materials, confirmed their resilience in an environment of higher raw material costs, benefiting from the price increase policy that we've implemented, notably at Bostik. This performance reflects also the benefits from innovation in advanced materials, the smooth integration of our acquisitions in Adhesives, as well as the lower contribution for the third quarter from molecular sieves compared to last year. Regarding Industrial Specialties, sales are up 8.1% at constant scope and FX, with 11.4% price effect positive in all four business lines. Volumes are down 2.3% against last year on lower selling quotas in fluorogases in particular.
EBITDA is up 10.7% at EUR 165 million, with EBITDA margin at 25.5%. This performance is once again very robust and driven by the benefit from the F-Gas Regulation in Europe, a slight normalization in PMMA towards the end of the quarter, and the robust performance of both biochemicals and hydrogen peroxide. Finally, in Coating Solutions, sales are up 13.7% at constant scope and FX. Driven by price increases in the whole acrylic chain, resulting in a 10.2% price effect. Volumes are up 3.5%, mainly driven by solid demand in the U.S. and in Asia. EBITDA increased 4.8% versus last year at EUR 65 million, thanks to the continued gradual improvement of the monomer unit margins and in line with our assumptions. Downstream businesses have continued to be impacted this quarter by higher raw material costs, such as acrylic acid or MMA. Looking now at cash.
Arkema generated strong free cash flow of EUR 227 million this quarter. It reflects the good cash generation from operations, the seasonal decrease of working capital, also EUR 65 million, and EUR 142 million of CapEx. This CapEx level is higher year-on-year and in line with our investment plan. I remind you that for the full year, we expect CapEx, both recurring and exceptional, to amount to EUR 550 million. Working capital continues to be strictly managed, with a working capital on annualized sales ratio at 16.1%. This compares to 15.5% at end of September 2017 and 16.8% at end of September 2016. We are, let's say, in between the two.
M&A investment amounted to EUR 27 million on the third quarter, mainly relating to the acquisitions in the adhesives that Thierry mentioned, as well as the creation of a joint venture with Barrday in thermoplastic composites for the oil and gas market. Net debt decreased significantly during Q3 to EUR 1.1 billion. It represents 0.8 times the last 12 months EBITDA and a 24% gearing. As you can see, we continue to drive a strong balance sheet. That concludes my comments, and I can hand over back to Thierry.
Thank you, Marie-José. I propose now to comment on the outlook for the full year before answering your questions. As you have seen this morning in our press release, taking into account these elements and the first nine months of the year, we fully confirm our 2018 guidance we communicated early August. Targeting, as you know, a mid-single-digit EBITDA growth, meaning around 5% growth compared to the excellent performance achieved in 2017. We are really in full continuity with what we said over the summer. As said earlier, today's economic environment remains globally volatile and will certainly, as everyone, remain attentive, monitoring both macroeconomic and geopolitical developments. More importantly, we continue to focus on what we control. I mean, our internal actions, more specifically our new business development through innovations, integration of bolt-on acquisition, our cash generations, implementation of large CapEx expansions in the U.S. and Asia.
As emphasized earlier, we will also continue to implement our pricing policy to recover raw material inflation. To wrap up these introductory comments, we posted another very solid set of results this quarter, further demonstrating our resilience in a volatile and contracted environment. We confirm our full-year guidance and are confident to achieve it. Finally, we continue to actively invest for long-term growth with our CapEx program, innovation efforts, and bolt-on acquisition. That concludes my comments, and I thank you really for your attention, and we are now ready, together with Marie-José Donsion, to answer any of your questions.
Ladies and gentlemen, if you wish to ask a question, you may press zero one on your telephone keypad. We have one question from Mr. Martin Roediger from Kepler Cheuvreux. Sir, please go ahead.
Thank you. [Foreign language], good morning, Thierry, Marie-José, Sophie, Ari. Three questions I have. First of all, on High Performance Materials, you gave priority to prices rather than volumes. Is the problem the duration of the contracts which hold you back in passing on increased raw materials to customers, or is it the competition you have in High Performance Materials? Staying with High Performance Materials, this is my second question, can you talk about the individual end markets, and I mean not only consumer goods, which performs quite well, but also other end markets such as construction, automotive, or other industries? Finally, a minor question. This is on the PPA-related amortization charges, which were quite low at EUR 8 million in Q3. But it should be normally EUR 12 million because of EUR 10 million coming from Bostik and EUR 2 million from Den Braven.
What do I miss here that PPA is now lower than it should be? Thanks.
Okay. I will start with the first two, and then Marie-José will handle that which is more specific. Okay. On the HPM, no, it's not a matter of long-term contract or competition. We are talking about specialty products. The more you go downstream, the more your customer expects a stability of price. It takes with the magnitude, which was exceptional, of the oil price increase over two years, which was simply doubled. Okay. Just that it takes time. As you know, you have a strong experience in chemicals. When you talk about intermediate products like acrylic acid, maybe it's a paradox, but it goes fast. When you talk about specialty products, because of the nature of this product, which are highly valued, your products, which are more stable in price, it takes more time to reflect very high increase of raw materials. There is nothing particular.
I think the case for all specialty chemical company. It's difficult at the same time to chase volume, knowing that Arkema has never been aggressive in terms of market share. We always prefer a profitable growth than just the top-line growth. We decided, in the course of this year, really to make sure that we were, because you cannot wait, compensating the raw material into our pricing, including for very downstream specialties. Because in specialties you have, let's say, product like Polyamide 11, we have already done the job. The limit is more the production capacity and adhesive, which is even more downstream, where it takes more time. There is nothing new. It's a phenomena I've always found in a chemical. I think we are on good track.
At the end, what counts is you're in a high raw material environment, your ability to be resilient, and this is what we clearly demonstrated. I think it's really, frankly speaking, it's more positive news than anything else. On the end markets. In fact, because your question is reflecting the question we had during our roadshow, which is, what about automotive? What about China? What about construction, et cetera? It started one month ago, we try to answer the best way possible by looking at our figures and what we see inside Arkema. Clearly, we don't see any clear trend. It's clear that the world is volatile, certainly cautious because of all this geopolitical tension and this volatility in raw material. At the end, we cannot identify if it is your question, one end market, which would really decline or whatever.
You have some which are more positive, some which are more negative. At the end, it's more about volatility than any significant decline of any market. You were mentioning the automotive, which is only 6% of the Arkema sales. Automotive, by the way, is a paradox, but we are in fact likely positive in the Q3. I think it depends on the positioning of each one. On construction, yes, it's clear that European construction was a bit negative. Is that a longer-term trend? We don't know. I'm always cautious to extrapolate. What I can say is that there has been more volatility in September. October is back to normal.
We see what's going on, but for the time being, we don't see any market really significantly declining, at least when we look at the sales of Arkema, which is, as you know, quite diversified, and we have not significant position on every market. Okay. On PPA, I will ask Marie-José to answer.
Okay. In fact, the purchase price allocation is mainly allocated to intangibles versus tangibles. Basically, we depreciate as we progress. We just have a finishing depreciating some of the items. The amount is lower than last year due to that reason. The EUR 8 million is something you can count on for the future.
Thank you.
Thank you, Patrick. Other questions?
Yes, we have another question from Tom Wrigglesworth from Citi.
Good morning, everyone.
Go ahead.
Good morning. Thanks, Thierry. Thanks, Marie-José. Three questions, if I may. Just looking at the drop-through, if I look at the organic growth side, the price and volume effects in the second quarter kind of led to about EUR 30 million of incremental EBIT. We only saw a similar level of growth at the top line, but only around EUR 20 million of incremental EBITDA. Sorry, I should correct myself. Could you help on why is that? Especially as it's very price heavy, it seems strange that there's not a better drop-through coming through from the growth opportunity that is there. Secondly, in High Performance Materials, what do you think the underlying growth rate was for the business, noting that your volumes were 0.5? And thirdly, just on M&A, there have been announcements by ICIS-
Sorry, Thomas, you can ask again the second question because you go very fast. We try to get what you are saying and asking.
Sure.
If you want to have clear questions, we need to have the time.
Sure
to digest your questions. Okay, thank you.
On the second question, what was the underlying growth rate in the High Performance Materials markets, noting that you prioritized price over volume? What do you think the underlying growth rate was in the third quarter? How should we think about that for the fourth quarter? A final question, if I may, around the SAMAC plant for M&A seems to have been on and off a lot over the last couple of months, according to ICIS. I was wondering if you could confirm whether that plant is fully operational and what your expectations are for its contribution into the market into 2019.
First, with regard to the results and we compare also with other industry for the third quarter. First, we are very proud of our results. I don't know if we believe it will compare to last year, which was really a record. We should not forget that. We increased our net result by 18% compared to that. Maybe not everything is perfect, but it shows that our portfolio is a very good quality. It's clear. We have mentioned it since the beginning of the year, even before starting the year, when you have tension on raw materials and raw material are increasing, when you have this kind of geopolitical tension, it's a better environment for more intermediate products than it is for specialty.
The name of the game for us this year was, at the same time, to take advantage of that to grow our Industrial Specialties profitability, notably, and our intermediate business profitability. To demonstrate, which you were expecting, because we got many question about the past year, about the resilience of HPM, to demonstrate that HPM, whatever was the environment, was able to resist well. This is what we have demonstrated this year, even in the Q3. We see all your question, we saw your question during the road shows, where you have yourself worries about the macro environment. The answer of Arkema is to say, "Look at it." End of July, early August, we have said we would deliver for the second part of the year so much. We are fully on track with that without any question.
At the end, some part of the market are demanding. We have volatility, but I think that Arkema is behaving well in this environment. Maybe we could have what you call a better drop-through or whatever, but the result is really very good, very strong, very resilient, and where maybe you don't have so much visibility on the environment, but on Arkema result, you can have visibility. We took the bet. You know it's always a challenge to give you a very precise guidance for the year early August. We are delivering. I don't answer in detail your question, but I think some things that hopefully you should, if I may, appreciate. Again, we compare to a level of profitability of last year, which was quite good.
With regard to HPM, with regards what is the underlying growth, which is your second question, is very difficult to know, especially on a quarter. It's a business which theoretically can grow at a GDP plus. As you know, we have some limitation on certain product line like PA11. For us, we are little bit below the market, but we manage very well the price and the mix, which means that the EBITDA is able to grow over years quite well. It's clear that in the current environment. Don't just look at Arkema, look at everybody. Certainly, you have some, because of this customer cautiousness into the macro environment and geopolitical tensions, you have some adjustment of stock, certainly somewhere.
You grow less than the GDP, you have something below for the time being, which will certainly have a little bit of correction, it will come back. As I mentioned, October was quite okay. I think, the underlying growth rate in HPM is still GDP plus. After that, for Arkema, depending on which line, some we are over supplied, we manage the mix and not the volume, but the pricing. Some others, we grow at this rate, like PVDF. For the current environment, if I took not for the year, but really for Q3 and Q4, it is clear that you have a little bit of disturb linked to this cautiousness that you see in the environment. Which we fully manage because, again, I come back to our results, which are quite good and quite resilient.
On the SAMAC MMA, it's always difficult to comment about other players. I think the operations are ramping up, certainly, I will not say everything is on the market, but a major part is on the market. Exactly what is difficult to know, you have to trust ICIS and maybe they know exactly. What is clear is that, as we mentioned and we told you early in advance, we start to see some normalization that we will get in the Q4 gradual normalization. We still think that this business will stay at a good level, but not at the peak it has been for a couple of years. On the other side, we encourage you to look, when you look at Arkema, at the combination of our three intermediate businesses, fluorogases, acrylics, and MMA/PMMA.
We believe that, especially when you look at MMA/PMMA and acrylic, I think one can offset the other. This is the idea, for the time being, we demonstrate that. No specific concern for Arkema. MMA will still be at a good level, but there will be some influence, clearly, of this new capacity, knowing that for us it's temporary and it's manageable.
Thierry, thank you very much.
You're welcome.
We have another question from Madame Georgina Herramevez from Goldman Sachs. Madame, please go ahead.
Yes, hello.
Hi. Good morning, Thierry. Good morning, Marie-Josée. I've got two questions. The first is on volumes. Noticing that you are basically flat in volumes in the third quarter, I was wondering if you can give us how to think about volumes for next year. I guess bearing in mind your volume constraints and assuming that you need to continue prioritizing pricing to offset rising input costs, does that mean we could even expect some negative volume growth in the coming quarters? Maybe you can remind us what capacity expansion we should expect to see and the timing of that next year. My second question is on acrylic acid. Can you just talk through the market dynamics you're seeing in each of the regions? Are you still seeing improvements across North America and Europe, and also in China?
At what stage, like in what time frame, would you expect market conditions to return to reinvestment level? Thank you.
With regard to volume, for next year, as you know, we start to comment next year in March of next year every year. We'll not change our habit, we have no specific concern with regard to volume. We believe that at the end, when we see price and volume, we have been wise enough, you can look at the past year to manage well the combination to make sure that we deliver the EBITDA that we want. We adapt permanently to the market conditions. Maybe the oil price will decrease next year, you don't know. I think it is difficult to predict that. It depends really on the oil policy, and we are a very flexible company, as you know. We try to adapt to market conditions.
We'll see for next year, it's early to say what should be our right policy. What is clear, it's an important point that you have mentioned, I think we have very wise and attractive expansion that will go through next year and the years following. You will start next year with a PEKK plant. You will get the acrylic acid in Clear Lake also, which is a good addition. You have Sartomer starting, especially with electronics and 3D market in China also in the spring of next year. We have a slide in our presentations where, not on this one, but on the summer one, where we show our CapEx in the U.S. and Asia, some of them will start in 2019.
I think we should have a decent growth in 2019, it's too early to precise, because once again, it will depend on which policy we follow, depending on what is the evolution of the oil price. What is clear is that in this world of high raw material, we have a priority, which is really to recover fully our raw material input. I think we have done a good job this year on that. With regard to the acrylic acid, if I look region by region, I would say you have U.S., where you are above mid-cycle now. Quite okay. Europe is around mid-cycle, little bit below. Not far, it should continue to improve. China, it's at the bottom, which is why we were able, I'm sure you have seen that in the press release.
We were able to seize this quite good opportunity for a modest price to buy the remaining part of our Sunke joint venture. Clearly, it's the right time. This intermediate product, you make the best deal when you buy them in low conditions. If I look forward, we still think that we go sooner than later to normalized conditions. If, following your question, normalized condition, reinvestment point, I don't know. Because, in fact, I think the reinvestment point is higher now, significantly higher than it was in the old time. Certainly, you need more than mid-cycle condition to justify a reinvestment. We believe that with the base of Arkema, it's quite competitive in terms of investment cost per ton that we have today. We are in quite well position to benefit from the progressive gradual improvement of the acrylic acid unit margin.
Maybe to make the story short, I think there is upside in acrylics, which again, should compensate what we could lose in the MMA, altogether, we should more or less neutralize.
Sorry, Thierry, can I just ask a follow-up on the acrylic acid, you buying out the rest of the share in the Sunke joint venture. Can you just talk about the strategy behind that? It seems a little bit at odds with growing the specialty part of the portfolio.
Yeah. It's really opportunistic. I think you have seen our debt, we have no issue. I think our strategy is still to increase significantly the specialty part, we have the financial flexibility to do that. You look at the big CapEx projects, they are in the specialty. Each time we make a bolt-on acquisition with this exception, we are in specialty, there is no doubt about that. Here, just that for really a very modest price, we are able to have the full site, which means that we are far more flexible to manage our capacity and for the long term to do what we want to do. I think it's really the right move. Economically, you make the math, it's very easy.
If you take a Chinese margin mid-cycle, we are not in mid-cycle and it will take a few years, you need a little bit of patience. If you take mid-cycle, which is a way to measure it, the investment will mean two times the EBITDA. It's quite reasonable. It's more opportunity than strategic. At the end, it was really the right move, and it would have been a pity not to catch the opportunity. We did. It changes nothing about our long-term strategy, which is to deliver this increase of share of specialty in the whole Arkema portfolio. We have still in mind that we are 30/70 intermediate and specialty, and the 70% of specialty, we want to take it above 80% as soon as possible. Nothing has changed.
Thank you.
Okay. Thank you, everyone.
We have the next question from Mr. Patrick Lambert from Raymond James. Sir, please go ahead.
Good morning. Thanks for taking my few questions. Just the first one, going back to Sunke. Can you remind us exactly what will be the impact on reported numbers? I think, now, post, of course, the acquisition, I think the 480 kilotons will be fully consolidated. If you could go a bit more in details of what will be the big difference between today and tomorrow in terms of reporting. First question. Second question, always coming back on the HPM margins and basically the split between technical polymers and adhesives in particular. Is it fair to say that most of the drop of the EBITDA margin, the 50 basis points versus last year, is mostly due to adhesives margin, meaning that the technical polymers did maintain their high level we've seen so far? Finally, a quick one on China in particular.
Could you comment on Arkema China, how has it been developing in Q3 in terms of key end use? Thank you. That's it.
Okay. Thank you, Patrick. I will start with China. It's easy. It doesn't mean the other ones are not easy, but China is even easier. China has been a good Q3 for Arkema. We have continued to develop well. As you know, our focus on China is mostly on specialty high-value products. We still see a good momentum. I know there are questions about automotive, but we are not a big supplier of automotive in China. There are questions about construction, but we are not directly such a big supplier in construction. We are more focused on mega trends and also on air conditioning through fluorogas, which is doing well in China. Overall, we have quite a diversified portfolio in China, and our profitability in Q3 was quite okay.
I know that some have some specific queries on China, but for the time being at the level of Arkema, we still see an okay situation, and we see a normal momentum. We have not any specific concerns, recognizing that China is by definition volatile, that you can have some weakness here and there on this end market. At the end, this is one of the strengths of Arkema. We are positioned on different end markets, and we manage well our Chinese position. With regard to Sunke, to start with your first question. Today, we consolidate in joint operations, so at 50%, and we consolidate 100% from the closing. Which take a certain number of months. When it's closed, we consolidate 100%. Okay? For the time being, profitability is low, as you know, but this is also why we have this opportunity.
Clearly, when it will be a mid-cycle condition, it will be quite a good impact on Arkema, but it should be a bit patient. With regard to High Performance Materials margin, don't forget that we increase prices step by step every quarter, and that by definition, for the new sell margin in absolute terms, you have a dilution because the pricing is higher. You have a little bit of that. Secondly, as you remember, we commented that for molecular sieves, which is high margin, the full year would be stronger. That with a strong positioning on the first quarter. By difference, the second, third, and fourth quarter are low in molecular sieve. It has also an impact compared to last year on the third-quarter margin.
It's a little bit specific, but it's a sum of, as usual, of different impacts. The third one is with regard to Bostik actually. We now finally compare to last year in terms of margin percentage. We have caught up-
Okay
with margin. It's not so much adhesive, it's more the first two points. Overall, we resist well. I think it's the soft quarter and seasonality a little bit weaker compared to the Q2. We are 16.4% versus 16.9%. We resist well.
Excellent. Thank you.
Yeah. Thank you.
We have another question from Emmanuel Matot. Sir, please go ahead.
Emmanuel Matot from Oddo. Good morning, Thierry, Marie-Josée.
Good morning, Emmanuel.
The relation team. Several questions from me, please. First, what will be the position of Arkema in China following the deal with Zhuhai? Would you have leadership position? Which right type of market share? What needs China to go back to mid-cycle condition, and how long it would take, according to you?
Sorry, the second question is what? Sorry.
It's about China on acrylic acid. What needs that market to go back to mid-cycle conditions, and how long it could take according to you?
Yeah.
Can we go back also on High Performance Materials? If raw materials prices are stabilizing, could you quantify the level of EBITDA margin you should be in a position to recover in the next 12 months in that division? That would be helpful. Maybe a word, Thierry, on M&A. You still have some acquisitions to do to reach your 2020 target. Would you say you are well on track or maybe late due to lots of competition from private equities? Thank you.
Okay, Emmanuel. In China, we must be among the first two in acrylic acid, I would say. Certainly number 2, more number 2 than number 1. Let's say number 2 to say something. It's always difficult to know exactly in China. It's less transparent than the other region. What needs this market to go to mid-cycle condition? Just time. There has not been any new announcement for many years in China. The one which has come recently, but it's for I think 2023, something like that, which is a BASF big one. We have time. The market is growing at 5% a year, 6% a year regularly. I think just a matter of time. How much time is very difficult to know. We have known that in the U.S.
When we were in 2009, 2010, where the market was depressed, it came very high very quickly. It's not scientific, but I think it's a matter of a couple of years, I would say. A couple of years should allow. There will still be volatility. China, by definition, is more volatile than the rest of the world. As I say, a couple of years, a bit more, but I think it will go to mid-cycle condition. You will see that because we invested at a very low cost, we'll be in quite a good position. With regard to M&A, I don't know if we are on track or if we are not on track. I think we are pushing, we are looking at really level 5. As you know, you don't need a lot to do what you need to do.
We are not concerned about that. We find our opportunities. We are studying regularly, but it's clear, and you know us, we are very selective. We want to deliver value through our acquisition. It has been our reputation. We'll continue to do so. It's clear that because multiple are a bit high these days, you have to be selective. You have to buy where you believe there are strong synergies. This is what we'll be doing. We prefer to take more time and make good deals than the other way. I would not say that we are late. I think we are on the right track.
Okay. Maybe a word on High Performance Materials, how long it will take to recover.
Oh, yes, okay
EBITDA margin from the raw materials price increase we have seen before.
I think that it depends what your price will be for next year again. Let's say that raw material are stabilizing now or you still up until mid-next year, I would say.
Yeah. What will this level of EBITDA margin you should be able to recover if prices are stabilizing regarding raw materials?
I think where we have lost is just adhesive. It's not on the rest of HPM. We have recovered already. Okay? So it's only adhesive. And on adhesive, as I mentioned, we lost a bit more than one point. I said that last time in the conf call. So let's say that you have a bit more than one point to gain back on adhesives. Okay? And it should be done for mid-next year at the latest.
Okay. That's very clear. Thank you, Thierry.
You're welcome.
We have another question from Mr. Alex Stewart from Barclays. Sir, please go ahead.
Hey, good morning.
Good morning.
Thanks to all. The Sunke acquisition is extremely good value. You now have a quite material net long position in acrylic acid and acrylics. Does the acquisition of this 240,000 tons expedite your plans to cover that long position either through downstream coatings or perhaps through adhesives? Are you happy given the point in the cycle to stay net long? Any ideas of how your plans might change around that would be very helpful. Thank you.
It's a good question. The answer is that we don't change our target. It's just, as you know, it's a mid-long-term target. Maybe it's a paradox, but okay, we get more capacity, but we have more flexibility to do what we want to do with the capacity, if you see what I mean. The fact that now we are the only owner makes us more flexible in terms of what we can do mid-long term. It doesn't change our plan. Again, it's an opportunity it would have been a pity to miss. Thank you for saying that it's a good value. I think it's a good value investment and that it doesn't change. We still want to be more balanced between the upstream of acrylic and the downstream.
Our strategy is really more on clearly downstream on high-value performance coating, which I believe is part of the D&A of Arkema.
It sounds like your partner will have sold their half for less than the build cost, which is unusual. They must have been very desperate to move out of acrylic acid. Is there anything you can comment on regarding their incentives and their motives?
As you know, I will not comment on the spirit of partner. What is clear is that it's a matter of opportunity also for them where they can reinvest their money, where they prefer to work with their money. I think it's a time where we have combination of two things. It's low condition for the acrylic acid, clearly. The second thing for them, it's certainly an opportunity to reinvest their money in places where they believe it makes more value for them with their strategies. That's all. Okay.
Okay. I suspected you weren't going to comment, thank you very much anyway.
You're welcome.
We have another question from Mr. Peter Clark from Societe Generale. Sir, please go ahead.
Yes. Good morning, everyone. I've still got one or two, I think.
Sure.
Just effectively on the volume growth, you're emphasizing obviously price over volume in this environment. On Bostik, Thierry, if I'm playing with the numbers, it doesn't look like you've got much volume again. I'm just wondering how much bottom slicing is going on, if there's significant bottom slicing going on in that business as you focus more on the price there. Obviously I saw the announcement about the price increase you were trying to push through. Then on the pricing side, moving into Industrial Specialties and the fluorogases. Judging by the numbers, it looks like that was the strongest surge you saw in pricing. I know there's the F-Gas effect as well, perhaps on mix. Just if you could comment on the pricing situation you saw in the third quarter on the fluorogases. Thank you.
Okay. I start with the last point and I finish with the first one. Obviously, Industrial Specialties, our strategy seems to work well. When you look at the evolution of the EBITDA +11% in the world of today, margin going from 25.1% to 25.5%. I think we are in quite good shape. Clearly you have some places where we cannot grow by definition, which is the fluorogas, but also the MMA where you cannot say, yes, we are very happy the MMA is at a peak and expect that people have more volume to grow. I think one goes with the other. I think that it's clear that we have limitation in volume in the Industrial Specialties. One point being what you mentioned, which is the F-Gas in the fluorogas. At the end, our strategy is right, looking at the numbers.
With regard to HPM, I think Bostik is like the rest of HPM. I think growth is limited by the fact that we decided to put even more emphasis on pricing. You have seen that on other companies which are positioned in the value chain like, I don't know, for example, on paint companies, they have done the same. I think it's important at a certain point to recover the high raw material, and it was the right moment to do it, and we plan to do it again. Up until now, we have fully recovered. Okay, Peter, what I propose is you take maybe the last two questions, if I may.
Yeah, that's fine. Thank you.
We have one last question from Mr. David Simons from JP Morgan. Sir, please go ahead.
Hi, this is actually Chetan Udeshi from JP Morgan. Just one or two questions. Hi. On technical polymers, can you give us some rough sense of how, which are the key end markets that we should think about in terms of exposure of that business? That's number 1 question. The second question was, on fluorogases, where, if I look at your pie chart that you give, it does suggest that there was a big acceleration in growth in that business in Q3 to almost 20% sales growth versus first half, which was probably low to mid-single digit growth. Can you comment on the reason for such a big acceleration in Q3 given that customers were actually talking about the base refrigerant prices coming down year-over-year? Thank you.
With regard to technical polymers, it's very diversified in terms of end market. Just to give you a few names. Technical polymer, again, for everyone, it's Polyamide 11, Polyamide 12, Pebax, and PVDF, mostly. Plus some other high-value polymer. These are the big ones. We supply a lot of end market, consumer electronic, sport shoes, optical, packaging, cosmetics, automotive, oil and gas. It's very diversified. Growth is mostly driven by innovation. You have sensitivity to GDP by definition. Typically GDP plus business, and this is where we invest a lot in terms of new capacity because we have been, in fact, caught by our success. On certain product line like PA 11, we are nearly oversold, so we manage the mix. Overall, these are the key end market.
I think long term it will continue to grow significantly for Arkema following our expansion. With regard to fluorogases, I was surprised by your comment because we are really in the continuity of the previous quarter, so we don't see any acceleration. It's a volatile market when you look at region by region and product by product. Each company can have different comments depending on where they are positioned. With regard to Arkema, I would say that we don't see any discontinuity compared to what it has been. If you have question about the math and the numbers, don't hesitate to call Sophie. She will give you the exact answer. We don't see this acceleration. We see more stability.
Thank you.
Okay. What I propose now is just to close. I would like to thank you very much for your attention. I think we have covered a lot of ground together. Again, we are confident to deliver our full-year guidance. Thank you again. Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.