Ladies and gentlemen, welcome to Arkema's Q1 2018 Results Conference Call. I will now hand over to Thierry Lemonnier, CFO. Sir, please go ahead.
Thank you. Good morning, everybody, and welcome to this conference call. With me today is the IR team. As usual, we have posted on our website, in addition to the press release, a set of slides which details the first quarter performance that I am pleased to present to you today. As you have seen from the press release this morning, Arkema started the year very well with an EBITDA at EUR 383 million, up 8% against a very good performance of the first quarter of last year. This is the highest EBITDA and the highest EBITDA margin ever delivered in the first quarter. Before looking at the results in more detail, I would like to highlight a few key points. First, we have managed to far more than offset the negative FX impact resulting from the significantly stronger euro and have delivered an excellent performance.
Excluding the impact of currencies, EBITDA would have increased by 15% against the very strong performance of last year, and even more taking into account the transactional effect. It's a combination of the ongoing positive internal momentum and a few drivers specific to the first quarter, such as the strong contribution from specialty molecular sieves. The second is the very good 7.3% sales growth year-on-year at constant scope of business and FX. This is supported by prices up 5.4%, reflecting our actions to increase our selling prices in our downstream specialty businesses in order to offset higher raw material costs. Price effect also reflects a continuing positive environment in both fluorogases and in MMA/PMMA. The third point is the 33% progression of our adjusted net income and adjusted EPS, which reflects both the higher EBITDA and the lower tax rate.
Finally, excluding the impact of the acquisition of XL Brands in early January, net debt is stable compared to the end of last year. This is a very solid performance given the usual seasonality of the working capital during the first quarter, which mechanically results in a cash outflow. Since the beginning of the year, we also continued to actively implement our strategy to step up the development of our specialties. In adhesives, we closed the acquisition of XL Brands, a leader in soft flooring in the U.S., at the very beginning of the quarter. After a quarter within Arkema, the integration and development of this business are going well, and XL Brands had a very good and promising start of the year. In technical polymers, we announced a 25% global production capacities increase for Polyamide 12 in Changshu in China.
We also announced a few days ago the start-up ahead of schedule of a 20% capacity increase in PVDF in the U.S., only one year after a similar expansion was started in China. All these developments will enable us to support the strong demand from our customers in these regions for these higher value-added solutions for markets such as new energies, water filtration, consumer goods, and automotive. In composites, we signed a partnership with Hexcel, a leader in composites for aeronautics, to develop thermoplastic composite solutions for aerospace using our expertise in PEKK together with Hexcel ones. A joint R&D laboratory will be set up in France as part of this partnership. As you can see, another busy quarter implementing and delivering on our strategy. Now let's look in more detail to the first quarter performance.
At constant exchange rate and business scope, sales were 7.3% up at EUR 2.2 billion, with a 5.4% price effect and 1.9% volume effect, supported by High Performance Materials with a strong quarter in specialty molecular sieves. Currency effect at -6.6% mainly reflects a stronger euro versus the U.S. dollar. The small net scope effect corresponds to the integration of XL Brands and CMP within Bostik and the divestment of the Oxo Alcohols business. At EUR 383 million, the 7.9% growth in EBITDA was driven by the High Performance Materials and industrial specialty segments and was achieved despite a stronger euro versus the U.S. dollar with a negative EUR 26 million impact for translation only. On top of that, we estimate that the negative transaction effect, which mostly affects advanced materials, could add one-third to this figure. EBITDA margin stood at 17.6%, up 110 basis points year-on-year.
Recurring operating income amounted to EUR 277 million, up 13.5% on last year. It includes EUR 106 million depreciation and amortization, EUR 5 million below last year level, benefiting from a positive currency effect. EBIT margin is also significantly up at 12.8%. Operating income increased to EUR 265 million. It includes EUR 4 million non-recurring charges corresponding mainly to restructuring expenses. EUR 8 million of depreciation and amortization related to the revaluation of assets carried out as part of the Bostik and Den Braven purchase price allocations. Financial result stood at minus EUR 23 million, EUR 2 million lower than last year as a result of the refinancing achieved in 2017 at more favorable market conditions. As mentioned, taxes are down on last year at minus EUR 52 million compared to minus EUR 66 million in the first quarter of 2017.
Tax rate, excluding exceptional items, is at 21% of recurring operating income, significantly lower than last year, and notably reflecting the benefits from the tax reform in the United States. Consequently, adjusted net income is at 33% on last year at EUR 195 million. That is EUR 2.57 per share. Let's now go through the performance of our three businesses division. Sales in High Performance Materials amounted to EUR 998 million, 6.9% up on last year at constant exchange rate and business scope. Volumes are up 7.3%, driven notably by the large number of projects carried out over the first quarter in specialty molecular sieves, as well as the ongoing benefits from innovation. Price effect is globally stable for the division. Excluding molecular sieves, price effect was at around 2.5%. It reflects action to increase selling prices, which we will continue to implement in the coming months.
The 1.5% scope effect reflects integration of XL Brands within Bostik. Finally, currency effect was negative at 6.1%. At EUR 176 million, EBITDA was up 6% on last year, despite stronger euro and higher raw material cost. It reflects a strong contribution from molecular sieves and integration of XL Brands within Bostik, the overall good performance of other businesses driven by innovation. For the second quarter, we expect the performance of Advanced Materials to be impacted by national strikes at the French Railway Company, which affect the transportation by train of certain products and raw materials, thus the operation of certain sites, mainly in Advanced Materials. EBITDA margins stood at 17.6%, up on last year. Let's now move to Industrial Specialties.
At constant exchange rate and business scope, sales were 9.6% up year-over-year, supported by a 13.6% positive price effect on continuing high prices in fluorogases in Europe and Asia, as well as tight market conditions in MMA. Volumes were down 4% compared to last year. This mainly results from the anticipated lower quotas in fluorogases. Currency effect was negative at 7%. EBITDA of the division was 15.7% up year-over-year at EUR 162 million, EBITDA margin stood at 24.5%, confirming the excellent performance of the division across its different business lines with year-over-year EBITDA growth in each of the four business lines. In Coating Solutions, sales were 5.2% up year-over-year at constant exchange rate and business scope at EUR 507 million, driven by a 6% price effect, which reflects ongoing actions to raise selling prices across the entire acrylic chain.
Volumes were 0.8% down versus the high basis of comparison in the first quarter of 2017, which benefited from some restocking effect in the context of rising raw materials. Weather conditions in Europe and the U.S. also impacted negatively volumes this quarter, especially in coating related businesses. The -1.5% scope effect results from the divestment of the Oxo Alcohols business. Currency effect was negative 7.2%. As expected, EBITDA was at EUR 66 million, down on the high basis of comparison of the first quarter of last year, when acrylic unit margin in China temporarily reached peak levels. For the rest of the year, margins are expected to improve overall compared to last year, in line with our initial assumptions. At 13%, EBITDA margin resisted well in the first quarter. A few words now on cash flow and net debt.
Free cash flow was nearly balanced at -EUR 25 million up on last year. This is a very solid performance, taking into account the usual seasonality of working capital at the beginning of the year. Working capital ratio on annualized sales is slightly down at 15.3% versus 15.6% in the first quarter of last year. This is another good achievement by our teams. Consequently, excluding M&A, net debt was globally stable versus the end of 2017, taking into account the EUR 164 million cash out for the acquisition of XL Brands. Net debt stood at EUR 1.2 billion with the gearing slightly up at 27%. I will now comment some elements of the outlook which are mentioned in the press release. On macroeconomic environment, market conditions are in the continuity with the start of the year with a stronger euro and higher raw material cost.
As usual, beyond the economic context, we will continue to focus on what we control, which is our internal momentum and more specifically, innovation in advanced materials and the integration of XL Brands within Bostik. We will also continue our operational excellence program as well as our actions to further increase selling prices. Finally, we expect market conditions in our more intermediate businesses to remain overall robust. Taking into account the strong start of the year and our confidence for the rest of the year, Arkema confirms its objective to increase EBITDA in 2018 compared to the excellent 2017 performance. I thank you very much for your attention. I am now ready to answer your questions.
Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad. The first question comes from Martin Roediger, Kepler Cheuvreux. Sir, please go ahead.
Yeah, thanks. Hello, Thierry. I wish you all the best for the future. I have three questions. Firstly, on High Performance Materials and here in particular about the phasing effect in specialty molecular sieves. There was a large number of projects carried out in Q1 which drove volumes up. What is your view regarding such projects in the next three quarters of 2018? Staying with High Performance Materials and here switching now to pricing effects. You say that selling prices were up by 2.5% in the segment if we exclude molecular sieves, but including the dilute factor from molecular sieves, selling prices at HPM were down by 0.4%. If I make the math, then molecular sieves pricing must have collapsed. Can you explain that? The third question is on Industrial Specialties. Regarding EBITDA, you forecast robust perspective moving forward.
Does this mean the tight market situation in MMA, PMMA will stay in the next couple of months and there is no normalization in the market ahead? What do you mean with robust perspective? Thanks.
Okay, Martin. Good morning. Okay, I will try to answer your three questions. As regards to the molecular sieves business. As you know, this business has some specificities which are related to the fact that it's an activity which is not linear. Depending on the calendar of projects and replacements of molecular sieve, year-on-year, we may have some differences between the quarters. Globally, we expect and we are confident in 2018 to deliver a strong performance in TMS comparable to the one that we had in 2017. The difference is that between 2017 and 2018, the calendar is very different. In 2017, the sales were relatively well spread over the fourth quarter of the year. While this year it will be more concentrated on the first quarter. That's the only specificity. It's an element that you have to take into account.
It doesn't mean that we have any worries around this business. We have a clear view on the outlook related to the replacement schedule of existing equipment. It's just the specificity of this activity which make the calendar different from one year to the other. That's all the part of the question. The second is about the price effect. In fact, due to the way that we are calculating the price effect, when you have a big change, especially in volumes, which is the case in molecular sieve, and when you calculate the price effect, you are basing your calculation on the volume of the preceding year. Since the preceding year volumes were significantly lower, you have a mix effect, which is significant on molecular sieve.
You have a very important positive volume effect and a negative price effect, which is just the reflex of the difference between the mix during the two years, which is, I agree, a little bit difficult to identify in our figures. Globally, the contribution during the first quarter for TMS has been more important than last year. When you look separately to volumes and price, you have two different effects, a large positive volume effect, and a large negative price effect. It's related to the mechanism which is applied to compute both effects. For IS and MMA, the first comment I will make is that it's important to have in mind that the good performance of Industrial Specialty during the quarter is not only related to MMA, PMMA. The four business lines performed very well.
As far as MMA is concerned, we are still expecting some normalization during the year. It will probably not happen yet during the second quarter, but during the second half of the year, probably, and it is the assumption that we've made at the beginning of the year. So far, we have not changed this assumption. If we were wrong, it could be an upside, but we have no reason to believe that there will not be some normalization with the addition of new capacities in Saudi Arabia.
Thank you.
Thank you, Martin.
Thank you. The next question comes from Alex Stewart from Barclays. Sir, please go ahead.
Hi. Good morning, Thierry. Thanks for taking my call. My question, I think at the time you announced the acquisition, you gave the revenue contribution from CMP, and you gave the implied EBITDA contribution from XL, but you didn't give enough to calculate the implied margin. Could you possibly tell us whether either XL or CMP were dilutive or accretive to the High Performance Materials margin in the first quarter?
Okay, Alex Stewart. The contribution of XL and CMP, XL being far larger than CMP, is in line with our expectation and based on the figure that we provided at the time of the acquisition, we are absolutely in line. There is no bad surprise there. The contribution is positive and is in line with what we expected. In term of margin, also, it's at a level at which we expected it to be, and it's accretive. In terms of contribution, as regard to the global EBITDA of HPM, it's relatively small, so the impact is very limited.
It is accretive to margin.
Yeah. Yes, absolutely.
Thank you very much.
Thank you. The next question comes from Thomas Wrigglesworth from Citi. Please go ahead.
Good morning, Thierry. Thanks for taking my questions, if I may. Firstly, on Coating Solutions, you note 6% price increase. Is there any differentiation between, say, the acrylic monomer business embedded in that and coating resins? Could you give us just a bit of a market update as to where you are, noting that prices are now starting to move higher in that chain? Secondly, if I may, we talked about negative 4% volumes, including the fluorogases. What would have volumes been if you took out fluorogases? Obviously, as we start this, we're starting to see obviously the impact of HFC fade out. What's the expected volume impact that we should think about from rolling forwards both for 2018 and also into 2020, if you have a guide for that? Thank you.
Okay, Thomas. I will try to answer to your two questions. As regard to acrylics, the price globally reflects the higher selling prices with differences of market conditions between the different geographic area. As I said earlier, last year, we had a very strong basis of comparisons in China, which was related to the fact that for specific reasons, we had a high margin, which was significantly higher than what we expected. Now we are back to a more normal situation. Even if there are some difference between the geographic areas, we remain confident that market condition will continue to improve for the upstream part of the segment. For the resin part, obviously the challenge is to continue to pass price increase to customers.
During the first quarter, volumes were affected by weather conditions, which were not very favorable, neither in the U.S. nor in Europe. Otherwise, globally, the situation is improving according to what we expected.
Just sorry, Thierry.
Yes.
Just on that, do you have any gauge of if, whether it had been normal? Is there any sense you could give us for quantifying the kind of that weather impact in the quarter?
It's difficult to quantify. We can expect some recovery in the second quarter, which is because of the seasonality of these activities, traditionally the strongest quarter of the year. Probably we could recover some volume during the second quarter in coating resins. We have to be cautious about the specific market of decorative paint, with paint which is not very good. All in all, it's difficult to say. We can expect some compensation during the second quarter. It's difficult to quantify.
Sure.
For fluorogases, we remain confident and positive on the outlook for the coming quarter and even beyond the 3 remaining quarters of 2018. In terms of volumes, obviously, we have to take into account the impact of the reduction of the quota. In terms of price, market conditions are pretty good and due to this situation, we are in the situation now, which is much better balanced between the U.S. and the rest of the world. We don't expect this situation to change. We expect a strong Q2 because of the seasonality of fluorogases and a weaker H2, once again because of the seasonality. We are positive, and we benefit from the mix of our portfolio of products in fluorogases, benefited from it during the first quarter, and will continue for the coming quarters. We are positive on fluorogases.
Okay. Thank you very much, Thierry. Very clear.
Thank you, Thomas.
Thank you. The next question comes from Charlie Webb from Morgan Stanley. Please go ahead.
Morning, Thierry. Just a couple from me. Just circling back to the intermediates discussion. At the end of last year, you had talked about positive acrylics, fluorogases, largely stable year-on-year through this year versus last year, then MMA, PMMA normalizing and I guess slightly down year-on-year. Given fluorogases continues to be net positive pricing over volume declines and acrylics, you still have confidence that continues to get better this year. MMA, PMMA still starts very strong. You're thinking Q2, you're going to see continuations in that theme. Does that not seem very conservative right now? First question. Then second question, just on, I guess, health in the demand globally, how is China right now as we move into Q2? Has demand picked up? And likewise, in the U.S. post that cold weather you talked about, are you seeing demand improving?
Okay, Charlie, two questions. As regard to the intermediate businesses, it's too early in the year to change anything around our estimates for the global performance of the three activities. Fluorogases, we said that we expected the performance to be stable to slightly up on last year high performance. I agree with you that the first quarter shows a very positive sign, but it's really too early to extrapolate the global performance for the full year, even if, as I said, we are pretty confident about the environment and the performance of fluorogases. As I said also for PMMA, as long as we have not really seen what could be the impact of the normalization, it's difficult to change our view on this specific subject. For acrylic acid, we are expecting, as I said, the normalization and to be back at mid-cycle conditions somewhere in 2018.
Globally, at this stage of the year, I will not change the general outlook. We will see at the end of Q2, because then we will have behind us a quarter which is traditionally strong for fluorogases, and I hope that we will have some clearer view on what could be the impact of the new Saudi capacity in MMA on the market. At this stage, I will not change. Is it conservative? Too early to say. We will update you at the end of the second quarter. For China, as far as our products are concerned, after a relatively slow start of the demand after the Chinese New Year, we are at the level at which we expect it to be. There is no negative signs.
Obviously, there are many questions around what could be the consequences of the duty that could be imposed on imports from the U.S., but for the time being, it's more theoretical than. In any case, it will be very limited for our activity. Globally, no, we have no signs of slowing down. We have a steady level of performance and a level of demand which is at the level at which we expected it to be.
Perfect. Then maybe just one last quick question on raw material inflation. What are the key raw materials, especially in HPM, that you're seeing notable inflation that you're obviously having to make the price adjustments for? Are there any or is it quite broad-based?
First, it's a broad-based basis, within this broad basis, we have some specific situation where the supply is extremely tight and price increase goes beyond what we could expect from just the raw material price increase. You see that in other activities in the chemical chain. It's a very specific situation in which we have price increase, which are amplified by the specific supply situation. It takes a little bit longer to pass the price increase because they are very significant. If you look at the price increase of oil first, it's already significant. If you add to that the impact of the specific tight supply situation, it's more than that. It takes a little bit longer to pass the price increase because we have to pass it to our customer, who has to pass it to its customer.
It's a chain, it takes a little bit longer. Globally, we are successful in implementing these price adjustments.
Understood. Thank you very much. Good luck in retirement.
Thank you.
Thank you. The next question comes from Emmanuel Matot from Oddo BHF. Sir, please go ahead.
Good morning, Thierry. Several questions from me, please. First, in 2017, your EBITDA growth was +17%, the same figure each quarter from Q1 to Q4. You achieved this time an EBITDA growth of +8% in Q1 2018. Do you think that trend is well representative of what you should achieve on a full year basis? Do we have to expect more volatility in the next three quarters? My second question is about the strike in France at SNCF. You mentioned an impact in Q2. Will it be just for High Performance Materials, or could it also address other businesses? Could it be significant if those strikes are running until the end of the quarter? My last question is about the Forex impact. Minus EUR 26 million in Q1 for translation.
Could you help us also on transaction, if you remind us how it works at the group level? Thank you very much.
Okay, Emmanuel. First, on the EBITDA growth, it's a nice try, we have never indicated that we expected EBITDA to grow by 17% in 2018. You will recall that our guidance is that our objective is to make EBITDA grow over the year. We didn't indicate any quantified target. Difficult to answer to your question. The 8% growth of the first quarter was driven by different factors, you have to take into account the very negative Forex impact, I will come back on that. No, I cannot guarantee to you today that we will have 8% growth per quarter, which will mean 8% growth for EBITDA for 2018. We will probably, as usual, give you more detailed information when we will publish our second quarter result. At the end of the first quarter, we remain more qualitative than quantified.
Don't forget that during this first quarter, we benefited from the calendar of molecular sieves sales. I will move to the strike point later on. I will switch directly to the FX exposure because obviously it has a significant impact on EBITDA. You will remember that we indicated that we estimate the conversion effect of the U.S. dollar-euro rate evolution at EUR 50 million on EBITDA for a 10% variation of the exchange rate. We were above that during the first quarter. On top of the U.S. dollar, you have also other currencies, and the EUR 26 million only relate to the conversion effect. The transaction effect is much more difficult to evaluate. It's related to the fact that we are exporting products from the Eurozone, and obviously, depending on the rate, the competitiveness could be affected, which is the case right now, and it mostly affect HPM.
Within HPM, I would say even specialty polyamides because of our monomer production base in France. You know that on the longer term, we are working on reducing this exposure through the investment of a new platform in Asia. For the time being This is the area where we are the most exposed to this competitiveness effect. Globally, we indicated that we estimate this impact to be at around one third of the conversion effect. It's not an exact figure, but I think that it is close to the actual impact, but mostly concentrated on the HPM and specialty polymers business. Which by the way, is significantly lower than what it was 10 years ago, where at the time, because we had much more exports coming from France to the other parts of the world.
Our exposure to the competitiveness and transaction effect was estimated at 50% of the conversion effect. For the strike, in fact, the impact of the strike is related to two elements, the transportation of finished goods, but also the transportation of certain raw materials. Because of the reduction of the availability of the supply of certain raw material, we have to reduce the operating rate of certain of our units. Those are the units which are working under continuous processes, which means that they are not running at the optimum, which has a significant impact on the yield and the margin of those activities.
Even if it's a little bit early to give a precise figure, we estimate that it could be comparable to maintenance turnaround in terms of EBITDA impact, which means probably a large maintenance turnaround, which mean probably a little bit above EUR 10 million. It does not affect our general guidance for the year, but clearly for the second quarter and more specifically for HPM, strikes will have a negative impact because of this effect.
Okay, that's clear. Thanks for this answer and all the best, Thierry, for the future, of course.
Thank you, Emmanuel.
Thank you.
Thank you.
The next question comes from Geoff Haire from UBS. Sir, please go ahead.
All my questions have been asked. Thank you very much.
Good morning, Geoff.
Thank you. The next question comes from Patrick Lambert, Raymond James. Please go ahead.
Hi, good morning here, the whole team. Congratulations, Thierry, for this future. I think just one, two questions regarding HPM. Actually, the margins development, basically. If you could help us put some colors on margin development in both adhesives, Bostik and the others, and the other parts of HPM. It seems that technical polymers must have done pretty well to get to the 17.6% EBITDA margin. Second, related to that is, a lot of companies in construction of chemicals have, of course, mentioned U.S. and Europe disruption of weather. Is that the same for the adhesives business of Arkema? Also, do you see that coming back into Q2 in terms of, maybe not catching up from Q1, but solid start of Q2 in terms of construction-exposed business. Thank you.
Okay, Patrick. Good morning. For the question around the margin for HPM is concerned, don't forget that in the 17.6% EBITDA margin that you were mentioning, you have obviously the impact of the molecular sieves. Obviously, which brings the figure up as compared to the other businesses which are affected by the raw material price increase in term of gross margin. We are still lagging behind the adjustment of the selling price to the raw material by on average three months, which means that year-on-year, gross margin have been still under pressure during the first quarter.
If I look at adhesives-- Sorry.
Yes.
Is it in line with the end of last year in terms of margins?
Well, We have not provided the figure.
Yeah
for the last quarter, which is that it's more or less in the market conditions are in the continuity of the end of the year. The difference is mostly between this year and the first quarter of last year. It will probably continue during the second quarter and start to ease as from the third quarter. As far as the construction market is concerned, yes, as other chemical companies, we have been affected by the weather conditions in the U.S. and in Europe. It's generally speaking, mostly in the coating and construction businesses. For adhesives, it has been relatively limited. It's more sensitive on Coating Solutions and to a lesser extent, to certain application within technical polymers.
Looking at Q2, are we back on track?
On Q2, I will make the same comment that I have made about fluorogases. Q2 is obviously, because of the traditional seasonality, the strongest quarter for many, most would say, for our product line. Yes, it will be a key quarter and we can expect some compensation with, as I said, when I was commenting the performance of Coating Solutions, with certain cautiousness around the decorative paint market.
Okay. Thank you, Thierry.
Thank you, Patrick.
Thank you. The next question comes from Peter Clark, Societe Generale. Please go ahead.
Yes. Good morning, Thierry, and everyone. Hi. Thank you. I've got a couple of questions. I just want clarification first. I think you were suggesting on Bostik, yes, the margins down year-on-year because of the raw materials, but you expect catch up for the full year. I'm just wondering if we could say that for all the downstream businesses under pressure, including the resins in Coating Solutions, that the margin can catch up with the second half and then be pretty similar year-on-year, if not above. Something I asked six months ago, and I know clearly PMMA, MMA is going to normalize, and clearly the normalized margin is well below what you've been reporting.
The 17%-19%, I'm right in remembering, was set when fluorogases was recovering or certainly near the trough, and that did fully recover when there might have been a little skepticism about it back then. Perhaps just a little comment on that guidance. I'm sure you're not going to tell me much. Finally, just a clarification, I might have missed this as well. On the tax, obviously, the 21% that you saw underlying in the first quarter, your guidance, I seem to remember, for the full year is 23%. Just want to check on that. Thank you.
Okay, Peter. As far as margins are concerned for the specialty businesses, yes, we expect for all of them some improvement during the second part of the year and to continue to be under some pressure during the first half of the year. Which means after Q1, we expect it to continue in Q2 because, as I said, the pass-through of raw material price increase is progressive, it will be the same for all the other businesses. For the second question around the intermediate business, I will make the same comment as the one that I did earlier. It's a little bit early to adjust, if necessary, our global guidance because the visibility on PMMA impact of the new capacities remains limited. We are confident that we should maintain performance for the three businesses which are part of the intermediate businesses stable year-on-year.
We will see later on when we will have more visibility and after the second quarter for fluorogases, if some more information could be provided around this guidance. For the tax rate, you're right. Your figures are right. We have guided on a 23% rate for the year. It's always difficult to extrapolate a tax rate for a quarter on the full year. With the improvement of the performance of fluorogases in Europe, we can expect also some additional taxes coming from fluorogases in Europe. For the time being, I think that the 23% remains an adequate indication for the year.
Brilliant. Thanks as ever, Thierry. All the best. Cheers.
Thank you, Peter.
Thank you. The next question comes from Chetan Udeshi, J.P. Morgan. Please go ahead.
Yeah. Hi, thanks. Just couple of quick ones. On first one in HPM, can you just give us some sort of sense of what is the volume growth, excluding the impact from phasing impact in the molecular sieves? And number two question was on fluorogases. Given the price increases that we've seen in the legacy refrigerant gases market, do you see a tipping point anytime soon where those gases become so expensive that people move to newer generation HFO refrigerant gases where you don't have an exposure at the moment, at least? Thanks.
Okay. First on HPM, without TMS, the volume growth would have been limited with positive volume effect. Don't forget that our priority in HPM is not on volumes, it's on margin. It's a mix of the two, and it's always a complex mix to optimize both volumes and margins in an environment where prices are going significantly up. To answer to your question, yes, the volume effect is positive without TMS, but limited. For fluorogases, the risk of seeing more rapidly new generation of gases replacing the old one is relatively limited because the price difference still exists. What it means only is that the price will not continue to rise indefinitely for the phased-out gases, but they will continue to remain high.
If even the assumption that it could be in competition, you have many applications to replace or to adapt the equipment, it's not that easy. No, we have no specific concern around this risk.
Okay, thank you very much.
Thank you.
Thank you. The next question comes from Jaideep Pandya, Schroders. Please go ahead.
Hi. Hello?
Hello, Jaideep.
Hello.
Yes.
Thierry, hello. Your retirement forced me to press star one, thanks a lot for all the times and really appreciate all your clarity and communication and everything. One question really, because I have to ask something to you before you leave. Could you give us some update on the project you guys are contemplating in the U.S. on thiochemicals with Novus?
Well, okay. Jaideep, thank you first. On thiochemicals, no, I have no specific comment to make around Novus. You know that we have certain thoughts about an extension of capacity together with Novus, but it's at a relatively early stage of the discussion, so it's a little bit early to discuss that. It's something on which we are working together with Novus.
Okay. Thanks a lot. Wish you very well for the future.
Thank you, Jaideep. Thank you very much.
Thank you. The next question comes from Martin Evans, HSBC. Please go ahead.
Thanks very much. Again, I'd like to echo that, Thierry, good luck with the future, and congratulations. Just one question on raw materials. I'm just trying to get my head around your references to it, because they're not hugely specific in terms of which product streams have hurt you. Are your internal budgets assuming that we're at the top or at the peak of the current squeeze, and that essentially your budgets will be in place by passing through the current negotiated selling price increases? In other words, is the second quarter going to be the worst period for you? Is there a slight risk to the second half that both the inflation continues and you begin to meet a little bit of resistance at the other end for accepting these inflationary price rises? Thanks.
Good morning, Martin. Good to hear you. Well, you see the question is difficult to answer. In the present environment, the answer is that, yes, we expect, as I said, still the second quarter to be under some pressure because of the raw material price increase and to see the situation ease progressively as from the second quarter. Obviously, this is based on different elements, one of them being the fact that certain new capacities will be put on stream for certain intermediate raw material for us.
Obviously, if the price of oil was to go up to 100, just to give a figure, during the second part of the year, we will have to face the same situation as the one that we are facing each time the price of raw material is moving upwards or downwards, which is a lag time between the price increase and the selling price adjustments. In the present environment, we have no reason to consider a disruption of the environment. Yes, I confirm that the second quarter will continue to be under pressure, and that it should ease as from the third quarter.
Thanks very much. Just a very quick technical question, just back on Molecular Sieves, where you do refer to, amongst other things, ongoing benefits from innovation in these products. Can you just maybe give us an example of that? These are obviously historically very mature chemical processes. What's the sort of innovation or the increased demand that you're seeing for Molecular Sieves? Thanks.
Yeah. Okay. It's difficult to give a precise answer to such questions. We have different innovation underway for HPM in, as you know, in water treatment, lightweight materials that will continue to drive the progression, it's difficult to be more specific at this stage.
Thanks very much.
Thank you, Martin.
Thank you. The last question comes from Daniel Buchta, MainFirst. Please go ahead.
Yes, thank you very much. Just one quick question remaining on fluorogases. Here you mentioned the pricing environment also is favorable in Asia. I think in 2017, in particular, you have benefited from several environmental outages, I would say, in China. Can you say a bit more how that situation is evolving now, and whether you expect these sites basically will be shut permanently? Because I think your comments on fluorogases were quite positive. That would be very helpful. Thank you very much.
Okay, Daniel. Well, okay, we are not providing a precise detail by geographical area. What is for sure in China is that globally, the environment in terms of regulatory control is much more stringent than what it was in the past. That means that for certain producers, investments are required to continue to run their business, and it helps to ease a little bit the supply in fluorogases. Obviously, it's important for us to have better market conditions in Asia. What explains most of the progression of fluorogases is coming from Europe.
Great. Thank you very much. Of course, enjoy the time.
Thank you.
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