Ladies and gentlemen, welcome to Arkema's Q2 2018 Results Conference Call. I will now hand over to Thierry Le Hénaff, CEO. Sir, please go ahead.
Thank you very much. Good morning. Welcome to this conference call. With me today are Marie-José Donsion, our CFO, Thierry Lemonnier, and the IR team. As usual, we have posted on our website, in addition to the press release, a set of slides which detail the second quarter performance. I propose first to comment the set of results and then to answer your questions. As you have seen from the press release this morning, Arkema achieved another very strong performance with a record high EBITDA in the quarter at EUR 430 million and up 8% year-on-year. This % is even more important when we restate at constant exchange rate. The increase year-on-year becomes quite significant at 12.5%.
For the first time since our spin-off, we are very proud about it, EBITDA exceeded EUR 400 million in the quarter, this is the 15th consecutive quarter in which we deliver EBITDA growth. This remarkable and consistent performance, delivered quarter after quarter, confirms the strong momentum of the company, as well as the quality and balance of its portfolio of product lines with a combination of resilient and high value-added specialty businesses and a few intermediate chemical businesses delivering excellent returns as you know. Achieved in a volatile macro environment marked by a significant oil price rise and geopolitical tension in different parts of the world, these financial results underline the value of Arkema's long-term strategy, which aims at continuously reinforcing its profile through a three-dimension growth strategy, including innovation focused on sustainability, targeted industrial investments in higher growth regions, and bolt-on value-accretive acquisitions.
Looking now more specifically at the second quarter results, I would like to extract a few highlights from the press release. First of all, we have again delivered a strong sales growth with nearly 7% year-on-year growth at constant FX and scope of business. In the context of raising oil and raw materials, our ability to increase our prices was, of course, a major driver of this sales growth. Our pricing initiatives have started, as you know, in 2016 and have developed continuously over the past quarters, both in intermediate and specialty product lines, in order to pass through the higher raw material cost. For the whole group, much to our satisfaction, our pricing power in the second quarter was fully positive. Within the ongoing and significant inflation of input costs, we knew it will nevertheless take more time to fully restore the margins of our specialty businesses.
This is why we are glad to see that in this second quarter, our actions are paying off and our margin in our specialty businesses match overall the level of last year, as shown in the High Performance Materials division figures. Nevertheless, we have still some way to go, for example, in Adhesives, which is, as you know, the most downstream business of our businesses, to recover the full impact of raw material inflation which started in 2016 for some raw material. This remains still a priority for the coming quarters. Second point, on volume, we continue to deliver solid year-on-year growth in High Performance Materials.
If we take into account that volumes this quarter were, as you know, we mentioned it in the previous conf call, temporarily impacted by strike at the SNCF, the French National Railway Company, which took place during the second quarter and affected some of our production and supply in France. More important, over the first half of the year, which is more relevant, volumes in HPM were 4.4% up on last year. Indeed, we continue to benefit from our strong innovation drive in Advanced Materials for which we see strong demand and are really optimistic looking at the years to come. Demand for this solution is supported by structural trends with increasing needs for lighter materials, 3D printing, batteries, but also consumer goods, sports, electronics.
We should continue to see robust and consistent growth in this area over the coming years, supporting our significant organic investment plan for Advanced Materials presented at the Capital Markets Day last year. Volume growth in Coating Solutions was also high at 9.2% compared to the second quarter 2017, which you may remember, was affected to a certain extent by the maintenance turnaround at our Clear Lake in the U.S. Third point is EBITDA. At EUR 430 million, it is up 8% on last year, very strong baseline. This performance was achieved despite both the stronger euro, which represented an adverse EUR 18 million EBITDA oscillation impact and higher raw materials. Excluding the impact of currencies, EBITDA, as I mentioned at the beginning, would have increased by 12.6% against the 2Q last year. This excellent performance is driven by all three business divisions, which are each of them up year-on-year.
EBITDA margin level is quite pleasing at 18.9%, further progression on last year, 18.1%. This performance, as mentioned previously, certainly underlines a quite positive combination of pricing power, mix evolution, organic development, and cost control. Overall, and for most of the product line, this quarter demonstrates the strength of our portfolio and represents a lot of hard work and engagement for the 20,000 employees of Arkema. First point, and it's a very important point, is a very significant progression of our adjusted net income and adjusted EPS at +31%, which reflects both a higher EBITDA, stable D&A, a good control of financial expenses, and the benefit of a lower tax rate, combination of the new legislation in the U.S. and also our geographic mix.
Before handing it over to Marie-José, I would like to remind you quickly a few highlights of the first half of the year. You have all the details in the financial report, I will be brief. First, performance in the 1H is also quite up with an EBITDA 8% up on last year, an EBITDA margin at 18.3%, and adjusted EPS up 31% on last year. We can say that after a very good start to the year in Q1, Arkema fully confirmed the second quarter's full momentum. This performance supports our confidence to achieve another excellent year in 2018. This is why we decided to upgrade our guidance for the full year to reflect this confidence despite the uncertainties linked to the macro and geopolitical environment. I propose to come back to this perspective in my conclusion.
Secondly, we have been active in further implementing our strategy. As you know, we have continued to make bolt-on acquisition in Adhesives, have integrated early January XL Brands in the U.S. Integration from my standpoint goes smoothly. They have delivered over the first semester a strong performance, which is promising for the future in the positive context of the U.S. construction market. We have also just announced this morning, you could see it, that we closed the acquisition of a neutral adhesive business in Japan. It represents only EUR 30 million additional sales, but it will be a nice complement to Bostik existing position in Japan. You can see that step by step, we develop Bostik not only organically but by bolt-on acquisition, as we were committed to. Several investment projects were also announced in the first semester in line with our long-term strategy.
We will expand our production capacities in Asia, in specialty polyamide 12, with the startup expected mid-2020, and also in France in specialty polyamide powders, with the startup expected earlier, which means next year. Those projects are part of our major investment plan in specialty polyamide and will help us support our customers' growth for new materials and solutions in sustainability. As you can see, quite a busy and positive quarter implementing and delivering on our strategy. I propose now to hand it over to Marie-José for the details of the second quarter figures. Marie-José, this is to you.
Okay. Thank you, Thierry, and good morning, everyone. It's my pleasure to be with you today on my first call on Arkema results. I'll take you through some additional details on the second quarter financials, starting with the sales bridge. Sales have been up 3% nominally, so including an adverse currency effect of -4% and a positive scope effect with the XL Brands integration. At constant foreign exchange scope, revenues were up 6.7% at EUR 2.3 billion, driven by a 5.8% price effect, reflecting our actions to increase selling prices as well as good market conditions in the Intermediates business. Volumes were up close to 1%, with higher volumes in High Performance Materials and Coating Solutions, offsetting lower volumes in Industrial Specialties and fluorogases in particular.
If we spend a minute on the rest of the P&L, I'd like to emphasize that at EUR 430 million, EBITDA is up 8% compared to an already strong second quarter last year, despite, as Thierry mentioned, the stronger euro. This increase is driven by strong demand in Advanced Materials, a smooth integration of bolt-on acquisitions in the Adhesives, a progressive pass-through of raw materials price increase, and the very good performance on all four business lines in Industrial Specialties. The EBITDA margin reached 18.9% compared to the 18.5% last year. The recurring operating income amounted to EUR 380 million, up 11% from last year, and it includes a stable depreciation and amortization amount of EUR 112 million, which leads basically to a recurring EBIT margin at 14%. As you know, Arkema records minimal exceptional items.
This quarter, they amounted to a bit less than EUR 10 million and relate mainly to the amortization of the revaluated assets coming from Bostik, Den Braven, and XL Brands acquisition. For XL Brands, actually, the allocation of the purchase price was finalized at the end of June. Which resulted into the booking of EUR 100 million of intangible and tangible assets, and in an annual EUR 8 million depreciation charge. The financial result is lower than last year, thanks to the refinancing that we achieved in 2017 at more favorable market conditions. Taxes are down as well on last year at EUR 64 million compared to EUR 82 million on the second quarter of 2017. The tax rate, including exceptional items, actually is at 21% on the recurring operating income, which is significantly lower than last year, where we were around 30%.
It mainly reflects the benefits from the tax reform, obviously in the U.S. Consequently, the net income is up 31% from last year at EUR 226 million, which is a bit below EUR 3 a share. I propose to look now at the performance of our three business divisions. If we look at High Performance Materials, the sales were up 4% on last year at constant scope and FX, with a 2.7% price effect, reflecting ongoing actions to raise the selling prices. Volumes were up 1.5%, driven by good demand and our innovation drive in Advanced Materials, and despite, as Thierry mentioned, some impact from the French National Railway Company, which affected some production in France. At EUR 277 million, EBITDA was up 2% on last year, reaching an all-time high in a quarter for this division.
This is a strong performance, taking into account the stronger euro and higher raw material costs, and it reflects a particular good demand in Advanced Materials and the smooth integration of XL Brands within Bostik. EBITDA margin is at 17.6% and is stable at a high level, with a growing benefit from our pricing actions to offset higher material costs, and notably, good results on the technical polymers. In Industrial Specialties now, sales were up 5% at constant scope and FX. The positive close to 11% price effect reflects the implementation of the F-gas regulation in Europe and continuing tight market conditions in the non-PMMAs. A strong position in biochemicals and favorable market conditions in China in hydrogen peroxide. Volumes are down 5.7% on lower selling quotas in fluorogases in Europe and in the U.S.
EBITDA of the division is up 18.2%, and EBITDA margin progressed further at 29%, both trends were supported by all of the four business lines of the division. On Coating Solutions, sales were up 14% at constant scope and FX. Volumes are up 9% on the second quarter of 2017, which was impacted by a maintenance turnaround in acrylic monomers in the United States. The positive 5% effect reflects ongoing actions to raise selling prices across the entire acrylic chain, notably to pass through the strong increase in propylene prices over the quarter. Results of the division are solid, with EBITDA up 6%. They are contrasted region by region, with performance very solid in the U.S. but still disappointing in China. Over the next quarters, unit margins in acrylic monomers should absorb higher propylene costs and gradually improve. Looking at cash flow, finally.
It's a positive at €41 million for the quarter. It reflects the good profit generation as well as the high working capital utilization, which actually comes from both the higher activity and is also linked to the usual seasonality at the end of June. It also includes actually higher CapEx, in line with our €550 million guidance for the recurring and exceptional CapEx over the year, as well as a €21 million loan granted to the employees as part of the share capital increase reserved for employees. Working capital continues to be strictly managed with a ratio of working capital on annual sales at 16.5%, versus the low point of 15.5% at end of June 2017, and also versus the 17.2% at the end of June 2016.
At EUR 1,372 million , net debt is slightly up compared to end of March, following the payment of the EUR 176 million dividends in May. Taking into account also the capital increase from employees of EUR 50 million and the share buyback of around EUR 20 million. Balance sheet remains very solid, with gearing well under control at 29%, and the net debt representing 0.9 times the last 12 months EBITDA. This concludes my comments, and I can now hand over to Thierry for the year concluding remarks.
Thank you, Marie-José. I propose now to comment the outlook for the full year. Taking into account the start of the year, we want to confirm our confidence for the rest of the year and decided to upgrade Arkema's initial objective, which was, as you know, was to increase EBITDA in 2018 compared to the excellent 2017 performance. I said earlier, the performance of the first half is very pleasing, and the current underlying conditions seem robust, even if volatile, and our duty is in this uncertain world, as you know and as everyone, to continue to monitor closely the macroeconomic and geopolitical development, as well as the volatility of both raw material costs and currencies. In this context, we'll continue to focus on what we control.
I mean, our internal drivers, including our strong innovation drive in Advanced Materials, the integration of bolt-on acquisitions in Adhesives, and a globally robust environment in our intermediate chemical businesses. With regard to raw material, we'll continue, as we have been doing in the recent quarters, to adapt our pricing policy, as I mentioned, at the beginning, to recover full impact of higher input cost. Taking into account all these elements and the ones that Marie-José and myself mentioned before on the first half of the year, we upgrade, as mentioned previously, our 2018 guidance, assuming a continuity in the current macroeconomic environment. We now expect a mid-single digit EBITDA growth compared to the excellent performance achieved in 2017.
I wanted to thank you for your attention. I also wanted to mention that it will be the last participation to a conf call of results by Thierry Lemonnier before his retirement at the end of the summer. I wanted to thank him strongly for his invaluable contribution over the past 12 years, his loyalty, his engagement, and what is key for a CFO, you know that very well, his reliability and financial skills. Most of you have been, since the spin-off, in contact with him at many occasions and have the opportunity to appreciate the strong competencies of Thierry. Now, we are ready, together with Marie-José Donsion and Thierry Lemonnier, to answer your question. Thank you for your attention again.
Ladies and gentlemen, if you wish to ask a question, please dial zero and one on your telephone keypad. The first question comes from Tom Wrigglesworth from Citi. Sir, please go ahead.
Good morning, Thierry and Marie-José. Thierry, congratulations on your retirement. A few questions. You're implying just 1.5% growth in the second half of EBITDA, 5% EBITDA growth for the full year 2018. Is it just conservatism around the declines in M&A that drive that step down in the growth rate in the second half versus the first half? That's my first question. Second question is on Coating Solutions. Obviously, good sales growth, but poor drop through to EBITDA. I think calculating looks like around just 10% drop through of that sales growth to EBITDA. Could you unpack that a little bit for me? Why wasn't there better operating leverage to the high volume growth in Coating Solutions? Thank you.
Okay. Thank you, Thomas. Thank you for your congrats also. With regard to the guidance for the year, first of all, I think you see a bit of a guidance. I think this shows first confidence. Confidence in our resilience. As you know, we compare to a very strong second semester last year, which was at EUR 90 million versus 2016. I'm sure most of you have forgotten, but at that time, we had many questions about the sustainability of this very high H2 2017. The message we give is that we are going to be slightly up with a very strong reference point. This is the first thing.
Secondly, if you look at what it would mean for the full year, especially if you integrate add-back impact of the FX, which was found on the first semester, it's a very strong growth for the full year-on-year. What we see first is really confidence, is resilience. The fact that we quantify in this uncertain world confirms this confidence. For us, it's really all positive, and it's also beneficial for you because you know that you can count on this level despite the fact that we compare to a very favorable 2H 2017. Once we have said that, as you know, as every year, we do our best. That is very important that you have a point on which you can really build for your own forecast.
It was important for us to quantify what we could count on for the full year. With regard to Coating Solutions, first of all, we have two parts in Coating Solutions. We have the upstream, as you know, and the downstream. Because of the propylene rise, which has been quite significant and following the oil price, which has gone strongly, our downstream, more or less, without giving all the little figures by business unit, our downstream has been rather stable in the second quarter versus last year, which means that the full increase of profitability, or nearly the full, has been coming from the upstream. If you look then on the upstream, which is the acrylics business unit, the EBITDA growth is double-digit. I know that for reasons that I don't fully understand, the consensus on this specific Coating Solutions was higher.
Really, when I look at the performance, when I look at also what was the read that we have seen in the chemical business, I think it's quite a decent performance for Coating Solutions. It's true that because of the propylene you have on the ratio of margin some dilution. As you know, propylene pricing up, the ratio between the margin and the sales is a bit below last year. Overall, I think it's a good performance. From a regional standpoint, a little bit of contrast, where U.S. is quite solid, Europe is not far from mid-cycle, and China, Asia is still disappointing. It's just a question of sequence, and there will be a point where Asia, for acrylic, will join the club of the mid-cycle. I still believe that we have, in the midterm, scope for continued recovery in Coating Solutions.
Just one follow-up, Thierry. Can you confirm that you are assuming a bit of some softening in MMA in the second half? Is that included in the guidance now?
We still believe, for the time being, we put that already in 2016. We have been wrong, and I think it's good news. We know that already, a part, it's certainly more than half of the new capacities has been commercialized. We are still enjoying currently, watertight condition in MMA, PMMA. Okay? I think it shows that it will remain a good business even if, to answer your question precisely, we still assume that in the course of the second semester there will be some normalization. Okay?
Great.
It seems to be in the guidance.
Okay, excellent. Thank you very much.
Thank you. You’re welcome.
Thank you. The next question comes from Christian Faitz, Kepler Cheuvreux . Sir, please go ahead.
Yes, good morning. Thanks for taking my couple of questions. First of all, how do you see the acrylic markets in Europe heading into Q3? Some of your peers that operate in similar markets are flagging softer demand from coating players. Do you share this view, especially on the coating side? Second of all, in Beaumont, is the maintenance turnaround concluded, i.e., there’s no impact for Q3? Third, obviously, Thierry, also the best for your post-Arkema time.
Thank you for your comment, Christian. Thank you for cheering me. Regarding the acrylic in Europe, we don’t expect any softening. There will be the seasonality and usual seasonality of coating in the second semester, which is lower than in first semester, but it is true every year. We don’t see any specific element which would show some weakness in the second semester if I put apart the seasonality versus the first semester. I would even say that in the first quarter, as you know, the weather was not very favorable for a good coating business. It was the case in Europe and U.S. With regard to Europe, no, we see continuity, there will be the seasonality, as you know, which is happening every year. Beyond this usual seasonality, we don’t see any discontinuity.
I don't know if I answer your question. We don't see any new elements that would change our mind. With regard to Beaumont, no, I think the turnover is behind us. We have large turnover every year in the company, depending on which business unit. What we try to mention to you are really the one which are really outstanding. As you could see for the months to come, we have not mentioned any specific ones. Okay, but Beaumont, to answer specifically your question, is behind us.
Okay, great. Thanks, Thierry. Again, to the other Thierry, all the best for your retirement.
Thank you, Christian.
Thank you. The next question comes from Alex Stewart, Barclays. Please go ahead.
Hi, guys. Thierry, congratulations again. I've got four questions, but they're all very straightforward, I hope. Firstly, the Opteon XP40 distribution agreement you have with Chemours, could you indicate whether you've fed that to dilute margins next year, I imagine? Secondly, could you just quantify the impact on both volumes and earnings, the French rail strikes, particularly in High Performance Materials? Third, if you could possibly give some idea of what the transactional currency impact was in the second quarter. I think you said it was about EUR 10 million in the first quarter, so I'd be interested to know what that was in Q2. Finally, there's been some news that your joint venture plant, your clear joint venture plant in China, was down at the beginning of July. Could you give any indication of whether that had an impact on the Q2 results?
Whether you expect it to have a material impact on Q3. Sorry for the slightly long list of questions.
Sorry, on the Q2 and Q3 was relating to?
There was some news that your joint venture, the two acrylic or three acrylic lines in China were offline at the beginning of July, unexpectedly. If you could just confirm whether that was the case and whether it had an impact on Q2 and what the impact on Q3 might be.
Okay. With regard to [Pinu] as you know, we don't disclose any contract. We've never done that for any contract, and we'll not do it for this one. I think it's a good contract. It's a part of our strategy, as you know, to get position on HFO. In fluorogas, there are current and we have a partnership. This one, I think we believe it's a right and good move, but we don't disclose the volume and margin. With regard to the French railway impact, we maintain the EUR 10 million impact. I would say that most of it is in HPM. Okay. With regard to the transactional impact on the second quarter, we are 18, in terms of translation, which means that transactional, you could take, Sophie once said.
Sophie agrees with me, you don't see it, but it's about EUR 5 million, to say something, okay, which is mostly in HPM. To take back the last two questions, when you look at the performance of HPM, where we were happy to maintain the 7.6% EBITDA margin, you have to take into account that we have three things. We have most of the French railway impact. We have the translation and transactional impact, and we have also to manage increase of raw material. With regard to our plant in China, I think for maintenance purpose, there has been one line which has been still, which happened regularly, in order to maintain. As you know, this plant is working not full capacity because we have three lines, so we manage it with our partner most of the time with two, 2.5 lines. This was a technical shutdown.
There has been absolutely no impact in 2Q on the performance of Acrylic Solutions. I'm back on the previous question of Thomas. At the end, if you look purely at acrylics worldwide, it has been a very good growth compared to previous year.
That's great. Could I just loop back into the French rail strike issue? You guided to EUR 10 million back in April, which is very helpful. I suspect also there was an impact on volumes as well. Do you have any idea what the volume growth may have been in the second quarter without those strikes? That'd be great. Thank you.
Very difficult to relate precisely. What I can say is that, if you look at the first semester for HPM, which is one way to look at it, you are 4.4%, okay? With 7% in the first quarter, and in the second quarter, 1.5%. You have two elements which are specific. One was the molecular sieves, which as we mentioned, was at seasonality. With strong seasonality in the first quarter and no seasonality in the second one. What is important is to look at the full semester, and then you have the strike. I would say, so if you assume that the 4.5% for the first semester is more relevant than the 1.5% of the Q2, you could assume that the three points, is coming, mostly from the strike, something like that. To give you an idea. Okay?
It's not accountability, it will give you an idea. Okay? 1.5% is less relevant than the 4% of the semester.
That's really helpful. Thank you so much.
Thank you. To the next question from Emmanuel Matot. Please go ahead.
Hello to the team. Congrats for your Q2 figures. Several questions from me, please, Thierry. First, do you think there are some risks for you regarding the trade war between U.S. and China? Do you have maybe some production tools between those two regions in terms of raw materials or final products? Could that change your CapEx projects? What's your latest view about that? Second, could you come back on the situation in acrylic in China? You are talking about a development in Q2, if I'm right, you remain confident for the near future. What will drive up unit margin in China in the coming quarters? Maybe also a question on fluorogases. Do you expect high market conditions to remain in the coming years?
If I'm looking to the level of margin, you reach on fluorogases, sometimes I'm thinking about what happened a few years ago, I want to feel confident about that. Is that the case for you also? My last question for Marie-Josée maybe, what is your annual tax rate assumption for 2018? Thank you.
On the first one, Emmanuel, thank you first for your congratulations. On the trade war, first of all, the impact is not material for us at this point. We are looking carefully at what is happening. We have a few polymers which are impacted from U.S. to China and China to U.S., it's limited. I don't think hopefully it's a long-term. I cannot imagine, we don't know, you don't know, it's a long-term issue, we'll see. At least for the timing, what we are doing is that we, as you know, for most of our product lines, we are now global with production in Europe, in Asia and in U.S. We are reorganizing our production by grades, by SKUs, in order to make sure to minimize this impact.
At the end, otherwise, we would have mentioned it more precisely, it's not material for us, we are watching carefully. Hopefully, this kind of measures, which are not good for the chemical industry as a whole, I'm sure our peers are saying the same as we are saying, will stop. We have no yearly effect. It's quite limited for the time being. We are not at all thinking of changing our CapEx strategy, whatever. I think all these things are very volatile. It can change tomorrow. New things can happen. What we try to do in terms of CapEx or footprint is really to be balanced, this is really the core of the strategy that we have expressed at the Capital Markets Day and confirmed in the recent months.
With regard to the situation in acrylics, as you know, we try to give you some granularity. What we are seeing in acrylics is, compared to what we thought at the end of last year, we are in a situation where we are not so far from the mid-cycle. The margin percentage is a bit misleading because you, as I mentioned before, you have the increase of the price, which dilutes the margin. We have a situation where we are a little bit above mid-cycle in the U.S., in a solid market. We are in Europe, not so far from mid-cycle, despite the fact that you have some restart, for example, from BASF, et cetera. It's a situation all in all U.S. plus Europe, which is really consistent with what we thought.
We are late in China, where the market is quick changing, and China is more volatile also. Sometimes it's in your advantage, and we have it in certain product lines. Sometimes it's disadvantage. What we still think, we don't say it's necessarily near future, but what is clear is that mid-term, even if we are disappointed by the situation currently in China, in acrylics, we think that mid-term, we maintain what we think, is that step by step, there will be some recovery in China to count in, I don't know if it is a couple of years, but in mid-cycle in acrylics in China. Overall, for the acrylics, because we are three region, we have different positions, different end markets for our acrylic acid.
We think that this year we should not be far from our assumption that we had at the beginning of the year or at the end of last year, which was to be at mid-cycle, so we should be close to mid-cycle. We still think that there is scope for improvement in the coming years. Gradually coming really at mid-cycle and going beyond in the years to come. Okay. We have to be maybe a bit more patient than expected, but it's a good product line, growing with contrast depending on which region. It's part of the game. I think we have a family with different region, different business units. For us it's okay because we don't want necessarily all our product line to be at peak. I think we should take it as an upside and positive point.
With regard to fluorogases, first of all, as we have mentioned several times in the past three years, our split of profitability with fluorogases coming both from legislation, new business development, and the evolution of the market itself, is far more solid than it was a few years ago, because we have a profitability which is far more split, balanced between North America, Europe and Asia. In the old time, it was very dependent on one product in China and two products in the U.S. Now we are dependent on far more products and in far more regions. From this standpoint, we confirm what we said when we started the year 2018, is that because we look at the intermediate chemicals as a whole. You have about 30% of Arkema, which is made of more intermediate chemicals versus a specialty part. It's fluorogas, PMMA, MMA, and acrylics.
We try to manage a sort of stability, we can count on it for this year and the coming year on these more intermediate chemicals. This is what is happening with a family of three different business units with different momentum. With some normalization coming in MMAP, MMA at a certain point, but still remaining at a good level. On the other side, we saw a scope for recovery, further recovery in acrylic acid and in the middle fluorogas, for which we manage a sort of stability for the coming years. This is where we are, and we confirm what we said. Now I propose to have Marie-José answering for the.
On the annual tax rate, actually, as you know, we've guided on a 23% tax rate for the year-end. We are currently a bit below, so we are still working on some assumptions and basically the impact of the taxes also in France. So far, basically, we don't see the need to change the guidance for the end. We will keep you updated as we progress on that work. Fair enough, the current level seems to be clearly supporting this type of rate for the year-end.
Okay, thank you. Maybe what is the euro-dollar parity you are using for your new EBITDA guidance for 2018?
In fact, we are very close to what we said at the beginning of the year, which was 120 average. If you take the first half and you combine with the current level for the second half, it gives you more or less 120. I think no real difference of our previous guidance, if it is your question.
Makes sense. Okay, thank you very much.
That is with the second half, which is a bit better than the first half.
For sure.
At least from the first quarter, because it has a big difference for the first quarter.
That's helpful. Thank you.
You're welcome.
Thank you. The next question comes from Patrick Lambert, Raymond James. Sir, please go ahead.
Hi, good morning, everybody. Thank you for taking my question. Congratulations to both Thierry and Marie-José. Two questions from me, they're pretty much related to the bridge of EBITDA in both High Performance Materials and Industrial Specialties. In HPM, it's basically trying to understand a bit better the stability of the margins between Adhesives and technical polymers. If I look at my underlying numbers, basically we still have a sort of 50 basis point dilution on margins in Adhesives. Is that the correct assumption in the Q2 numbers? That's for HPM, a bit more clarity on the moves of margins inside the division. In Industrial Specialties, it's just to confirm the broad-based movements in the EBITDA, 32 million plus versus Q2 2017.
That EBITDA bridge is broad-based, meaning that it is not just driven by PMMA, MMA, and fluorogas, but also, as I think you mentioned, that it is more than that. Thank you.
Thank you, Patrick. As you know, I will not dig into your model. I am pretty certain in that comment, detail by detail. What I could say is, first of all, on the EBITDA of HPM, it is quite a resilient performance. It is important to sustain it because it is not the case of all specialty chemical business. I think for us, it is a stable 17.6% performance, which is a combination between plastic and Advanced Materials in the context of negative FX and the context of negative raw materials and with the impact of the French work. You have to take that into account, which means that the underlying performance, even if we do not communicate it, is quite good. Once we have said that, appreciating this resilience, it is clear that mostly because of the raw material is lagging a little bit below last year in percentage.
The good thing is that we start to see now margin percentage will compare to at the end of the semester, at the end of last year, which means we start to see really the impact of price increase, knowing that this price increase, especially in Adhesives for certain raw materials, started in 2016, and that our target is not only to be year-on-year comparable in the second semester, but to go beyond that and to recoup or to recover also what we got in 2016. I am sure you have understood the full mechanics. Overall, Bostik has suffered a little bit, but I think, as I mentioned, we are pleased to see that we are getting closer to last year step by step, and that it is also very important, a sequential rise between Q2 and Q1. Bostik margin has improved from 1Q to Q2.
The EBITDA of Advanced Materials, which is HPM, if you took out Bostik, is quite sustained. It is a very good performance coming from our product mix, innovation ability, our pricing power. Many good news on that. With regard to Industrial Specialties, you are right to say that it is not just driven by PMMA, MMA, and fluorogas. It is really the four business units which are contributing with an operating EBITDA. This means also Thiochemicals and H2O2. I would like to mention again, you all know this, that Industrial Specialties is not only intermediates. We have two business units which are intermediates and two which are belonging to the specialty world, Thiochemicals and H2O2, and which have demonstrated over the past 10 years very resilient performances.
Thank you, Geoff.
Thank you. The next question comes from Geoff Haire, UBS. Please go ahead.
Good morning. Most of my questions have been asked. I just have one final question to ask. On working capital, clearly, we've seen a big move up in receivables and inventories in the half year. I just wondered if you could give us some idea of what levers you've got to recover that in the second half of the year.
Okay. Two things on. First of all, we are confident to recover, also to see a reverse trend in the second half. We really think we'll be consistent with, as you know, our long-term ambition of a 35% conversion rate. When we have said that, you have two elements. You have the usual seasonality that we have every year that you did not see last year for once. It was the end of year, I think, in the past five years that you did not see the seasonality. The reason that was last year is that we took down the working capital percentage from 17.2% to 15.5%. Because of that, you have one positive one-off when you go to a lower rate. We said last year it was a bit low. If we take that out, really we are like every year.
We have the seasonality of the working capital because we have far higher sales in the middle of the year compared to the start of the year, This will reverse in the second part of the year like every year. The second thing, which is not specific to this year, is that you have a huge increase in selling price. You like your pricing power, but you have it also in the receivables and in the stock. This is mechanical. There is nothing you can do about that except not passing price increase, but This is certainly not what we will do. You have that, and this obviously will keep it up until the end of the year because raw material will continue to stay high. So you have it on the stock, you have it on the receivables, you have it on the payables.
Frankly speaking, no, there is any concern or whatever on that. It is purely mechanical effect of the usual seasonality, The second thing is mechanical effect of the pricing on sales price and raw material increase.
Okay. Thank you very much.
Thank you, Geoff.
Thank you. The next question comes from Georgina Iwamoto, Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone. I've got two questions. The first one is on your outlook for fluorogases. Maybe you feel like you've half-answered this question already, given your comments on trade wars and fluorogases profitability outlook. I was just wondering if your outlook for stable earnings from fluorogases takes into account the risk of rising raw material prices because of the trade wars. We've seen commentary from fluorspar producers highlighting strong pricing for this raw material, which maybe that could be expected to continue given the ongoing tariff disputes between the U.S. and China. The second question, very simply, the volume impact from French rail strikes, whilst difficult to quantify, do you think you can recoup that over the course of the year, or is that just lost volumes? Thanks.
On the second question, no, it's lost volumes. I think as you know, we are on, if you see, polyamide. I think we are as you know, we manage well our pricing power. No, I think it has the impact on the second quarter. We gave you very precisely the impact, and now it belongs to the past, but it happened, and it's lost volume. On the first one, on raw material effect on the fluorogases, which is a different question compared to what we had before. You could say it's on fluorogas and fluoropolymer also, which belong to HPM. I think it's a matter of pricing power. No, I think it's well integrated. I will check, but I'm not sure that the trade war will have an impact so much on the fluorspar, because the fluorspar is pretty much by region.
There are some movements that could impact. Sometimes, the fact that the fluorspar is more tight is, for certain of our guests, positive news. You have at the end, if it's not because the raw material are increasing, that is negative for the downstream. To make the story short, we think that it's well integrated and that we should have compared to last year, and because the second semester we compare to last year, which was a very strong semester, we should be in the same kind of magnitude. Okay.
Thanks very much. Thank you.
Thank you, Georgina.
Thank you. Ladies and gentlemen, let me remind you that if you wish to ask a question, you can press zero and one on your telephone keypad. The next question comes from Peter Clark, Societe Generale. Please go ahead.
Yes, good morning. Thierry knows I've asked this a lot, a bit like a broken record. As it's your last call, I'll ask it again in a different way. The Industrial Specialties margin now at 29%, I realize that Q2's above trend, but we've said that a lot. You're now 1,000 basis points above the top end of that normalized guidance you give. I've heard your comments on this, quite clearly, you're in a very different place to when you set that guidance, particularly in fluorogases, but also, I guess, fine chemicals has been beefed up. I'm just wondering, assuming there is no global recession in the next few years, is that guidance or that normalized range pretty much redundant, which I presume it is? Then just a second clarification on the Bostik margin and what Patrick was asking.
Were you alluding to the fact that the margin is now sort of stabilizing and should be up as we go forward from here in terms of the raw material issue? Those are the two questions. Thank you.
Okay. On the first one, I think we said already a lot. First of all, we gave a guidance for the full year. We said that we would be resilient on the second semester versus the last year second semester, which I remember exactly the question the second semester where everybody was saying, "Do you think it will be sustainable? What is going to happen in 2018?" Et cetera. What we are doing is that we confirm that we are comfortable to manage a sort of stability in the second edge compared to second edge last year. Beyond that, don't forget that when you talk about 29%, the fluorogas or even some other part of Industrial Specialties, their best quarter is by far the second quarter. The second semester is completely different in terms of margins. There is a clear seasonality which happen every year.
You have to take that into account. Now it's clear that it was Capital Markets Day a long time ago. We gave some guidance in a different world and the fluorogas, you had not the F-gas in Europe, for example. It was completely different world. We get some guidance for Industrial Specialties long-term. We did not review them at the Capital Markets Day last year. It's clear that we do now better structurally in Industrial Specialties than we were doing in the past. It's obvious. We have done a lot on the business. The world is different. It's not only true for us, but also for other company. No, I think we have been very clear. I think we have answered many question on fluorogas.
I think what we said, This is why we define the three intermediate products which represent 30% of Arkema, including fluorogas, MMA, PMMA, and, again, acrylic acid, acrylic stream. We say with this, the three that we manage as a sort of a small family inside Arkema. We try to manage the stability. We have had this message now since a couple of years, I think we have delivered well, I think we should all appreciate that. It's certainly more volatile than the rest of the portfolio, if you look at the evolution of the portfolio step by step, because you are looking yourself in static, which means today. If you look at what it was a long time ago, what it is today, what it could be in the long term, we continue to increase significantly the part of specialty.
We have many good news to announce. Some resilience of this more volatile business, plus an ever-evolving portfolio. I think we are on the right track. With regard to the Bostik margin. Yes, in fact, hopefully in the coming quarters, years, the Bostik margin will continue to improve. It's part of our plan. It's not only coming from the recovery of raw material, it's also coming from the fact that we are making a certain acquisition with high synergy. We have still the synergy of Den Braven, a big part of them to finalize. We have the synergy of XL Brands, which are stepping up. We have many elements. We still need a scope for improvement of margin at Bostik. It takes time, but we knew it would take time.
At the end, it's already a very good business case, from what we got when we bought from Total. It's moving up, and margin will continue to move up. Not brutally, because this is the adhesive world, but it will continue to move up. In the coming years.
Okay. Thank you and best regards again to Thierry.
Thank you, Peter.
Thank you. The next question comes from Martin Evans, HSBC. Please go ahead.
Yes. Thank you very much. Again, congratulations and very best wishes to Thierry. Happy memories, Thierry, of road shows with you in the early years, particularly in the U.S. Good luck in the future. The question, just sort of up to date really, is acquisitions, I guess, to the other Thierry. Essentially, there's no mention of them particularly, either on the call or on the slides. There was a period when I think you were certainly being asked about further acquisitions and broadening the portfolio, and you seem quite responsive to that debate, and there isn't now. Are you more conservative, or are you happier possibly with the current portfolio, apart from obviously opportunistic add-ons, if and when they were to appear?
In other words, do you now feel that you largely have the structure of the group right and that you don't therefore need to be too ambitious in terms of a large deal? The balance sheet would allow you to buy something quite large, but I sense maybe you're sort of stepping back from that a little bit. Thanks.
I don't know how to answer your question. I think we have a very solid strategy, which is very clear, which is more of a bolt-on and medium-size acquisition. I think this is what we disclosed at the Capital Markets Day in 2017. I think our base strategy is clear. Once we have said that, you know us. I think you have followed the company yourself since the beginning, since the spin-off. I think at each period of the life of the company, we believe we take decisions which make more sense. Some we have announced, some which we have thought about later. We'll see. We believe that we have a good portfolio. It's very important to continue to drive acquisition in Adhesives. Not necessarily big one. Adhesives, you can create a lot of value, but small to medium size.
For Materials, it's more an issue of availability. I think we are completely open. A lot of skills are there also across downstream. No, I think we are very consistent with what we say. As you know, we have financial flexibility. This is not because we have them that we need to use them. I think it depends on opportunities. I think what is clear is that we know we can deliver the strategy that we have presented in the Capital Markets Day. It's under our control. Once we accept that, if at a certain point next year, in the coming years, we have other ideas, we will implement them. I think we believe that at least what you know from our strategy is already a good value creation strategy. It's a good base on which you can count.
After that, if we can add to that some more disruptive ideas because they come, we will not be shy. You know us. Our strategy currently is quite clear.
Good. Thanks very much.
Thank you, Martin.
Thank you.
Thank you, Martin.
The last question comes from Antoine Bregeau, Exane. Sir, please go ahead.
Yes, good morning. It's actually Laurent Favre from Exane. Morning, all, and Thierry, good luck for your tennis playing career. Thierry, my question is on M&A. You talked about the family of the, let's say, more cyclical businesses. No one wants to say that they've got an ugly child. I was wondering if you could talk about the, I guess, strategic reasoning around the family and whether you would consider a disposal, not just to finance an acquisition, but just to make the portfolio a bit more simple to follow, and also to benefit from the current good conditions in terms of M&A for disposal multiples.
No, I think I will also use the same as Martin. I think we have the base strategy. You say the portfolio is not more complex than many of our peers. I'm not sure. It's less complex than it was in the old time. It's far better than it was in the old time. It's a permanent evolution. As I mentioned to Martin, we have never been shy of having a disruptive strategy. I think for the time being, we have a strategy which is really based on a good portfolio, which is really delivering quarter after quarter, year after year. I think you appreciate that in chemicals, it's quite balanced. We have also financial flexibility. We have a strong track record of changing portfolio. I think things can evolve. We are not shy of anything. There is no taboo in the company.
For the time being, let's say that we have the best strategy, which is again, the one we presented at the Capital Markets Day. It's difficult, Laurent, to tell you more. I'm not sure you expect more, but sufficient by answer, I would say.
Regarding, can you maybe update us to maybe outside of the family of those cyclical businesses, can you maybe update us on your target to dispose of EUR 700 million of sales? I think we have about half of that left. Is this, I guess, at a lower priority in terms of your strategic agenda than it used to be?
I think what I suppose the question, I think, when I got it was a year ago, after a period where I got it every quarter. I remember my answer at that time was to say that, in terms of sales, it was certainly about half, but in terms of profitability and enterprise value, because in fact we saw businesses with higher profitability than we expected at the time, and we were about at three-quarters. For me, let's say that we are not far, okay? We will have no difficulty to do better in the next two years. For us, it's not an issue. It's not that it is not a priority, it's still a priority, but timing is very important. There are many parameters which are at stake, but we are completely confident to do more at the end of the day.
It's not an issue.
Okay. Thank you. That's very clear.
Thank you. We currently have no further questions. Ladies and gentlemen, let me kindly remind you that if you would like to ask a question, you may now press zero one on your telephone keypad.
Sorry, just a final comment on what Laurent said about what you call the family of cyclical, which is more cyclical or intermediate. When you put the three together, and I think facts are facts, and you can apply it to every company. When we look at the resilience in very bad world since four years with these businesses, I think it's certainly individually more volatile than the rest of the portfolio. It's considered to be intermediate with certain level of volatility. It can be again, volatile, but all together, they have shown certainly a better resilience but each of them separately and the combination has been quite good in the past years.
Thank you. We currently have no further questions.
Okay. I would like to thank you all for your question. I would like to wish you a nice summer and if you have any further questions, don't hesitate, as usual, to call Sophie to answer you. Thank you very much. Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.