Ladies and gentlemen, welcome to the Arkema Results Conference Call. I will now hand over to Mr. Thierry Le Hénaff, CEO. Sir, please go ahead.
Thank you. Good morning, everyone. Welcome to our Q3 2021 Results Conference Call. With me today are Marie-José Donsion, our CFO, and the investor relations team. As usual, you can download the set of slides used during this webcast from our website. Together with Marie-José Donsion, we'll be happy to answer your question at the end of the presentation. Before commenting Q3 results, I would like to quickly come back on our new brand territory unveiled earlier this week. It's the second time we have made such a change since the creation of Arkema.
With our new identity, innovative material for a sustainable world, we are positioning our Specialty Materials at the heart of our ambition to play a leading role in addressing the world's major challenges, in line with the strategy we announced last year, and placing our expertise of material science at the core. The timing of this new identity is good, as Arkema delivered a set of excellent results in the third quarter, building on our strong dynamics in the beginning of the year. Our teams can be proud of what they have accomplished, and I feel that quarter after quarter, we are reaping the fruit of our strategy towards innovative and high-performance materials. Over the past few years, we have accelerated Arkema's repositioning on structural growth markets, and we have significantly strengthened our unique Specialty Materials platform around our three pillars of Adhesive Solutions, Advanced Materials, and Coating Solutions.
We have done this through acquisition, cutting-edge innovation, and high return CapEx, and I expect Arkema to continue to benefit from this strategy over the coming quarters and years, thanks to the many exciting projects on the way, which will enable us to fully capture the significant growth opportunities from megatrends. As you read, in Q3, we achieved an EBITDA of EUR 474 million, up 54% year-on-year, despite a negative scope effect of over EUR 30 million. EBITDA margin reached a record level for a third quarter at 19.8%, so let's say 20%, above the Q3 2019 pre-COVID level of 17.4%. We are very pleased with the quality of our results.
Firstly, all of our Specialty Materials segment contributed nicely, with overall solid underlying volume growth in most of our markets, driven by accelerating demand for sustainable solution, while noting some exceptions in a small number of markets like automotive, oil and gas, and paper. In parallel, our volumes were impacted by the lack of availability of certain material. It's not new to you. COVID-related lockdown in parts of Southeast Asia, like Malaysia, and a softer environment in China due to authorities' measures to limit energy consumption. In this context, volumes for the group are up more than 5% compared to last year, thanks especially to strong demand in high-performance polymers and Coating Solutions in market like batteries, consumer goods, eco-friendly paints, 3D printing, and electronics.
In adhesives, underlying demand remains strong in construction and structural adhesive for industrial application, but we estimate that raw material shortages had a negative impact, estimated at 5%-6% on volume for adhesive, which is not insignificant. Indeed, our Q3 performance was achieved in a more difficult operational context, marked by rising raw material shortages, logistical constraints in Asia and in the U.S., and of course, higher input costs. As you can see from the significant price effect in Q3, and while it is true that we benefit from tight market condition in the acrylic chain, our Specialty Materials once again demonstrated robust pricing power in the face of accelerating higher raw materials, energy, and transportation costs.
As in Q2, thanks to our pricing actions, we managed to completely offset this negative impact at group level, including in our most on-stream businesses like adhesives, high-performance polymer, and coating resins and additives, which is really, I think, a remarkable achievement in this context. We expect to see further increases in input costs in Q4, so our pricing action will continue, and the net pricing impact should again be at least neutral in Q4 for the group. Our Specialty Materials EBITDA reached EUR 421 million, +35% against the Q3 2019 pre-COVID level. Specialty's EBITDA margin was at 20% thanks to the strong performance of high-performance polymer and Coating Solutions, while Bostik's margin came in at 14% despite the mechanical dilutive effect of price increases of around one point.
In spite of the headwinds of further input cost increases and the impact on volumes of raw material availability in Q4, we are maintaining Bostik's 14% EBITDA margin target for the full year. Frankly speaking, this will be a good performance for Bostik, really underlining its resilience, as this kind of environment is particularly challenging for businesses like adhesive. As you know, they are formulated products using a wide range of different raw material. If there is just one of the components missing, we cannot make the product, and we lose the sales and margin. Intermediates also recorded better-than-expected results, as the negative scope effect linked to the PMMA disposal was more than offset, thanks to favorable market conditions in Asian acrylics and fluorogases in the US.
Our Specialty Materials, which now represent nearly 90% of our sales, are truly geared toward eco-friendly solutions in high-growth applications. They are driven by global mega-trends and help address the challenges of climate change, resource scarcity, urbanization, and new technologies, among others. From our five innovation platforms, aligned with the challenges we expect to generate additional sales of EUR 100 million by 2024 and EUR 1 billion by 2030 versus 2019. These targets will be reviewed when we publish full-year results, and our feeling is that we'll be able to upgrade them, given the current dynamic of new business development and positive outlook. We'll also try to give you more insight as regards this target. As you can see in slide seven to nine, there are multiple exciting examples of Arkema's innovative solutions addressing key challenges the world is facing.
In clean mobility, we are seeing a true acceleration in batteries, and for us, it is not just PVDF, but the whole battery ecosystem, including, for example, PA11 used in casing and cooling lines, as well as tomorrow's Bostik thermally conducive adhesive solution. If we look ahead, Arkema will also have a big part to play in hydrogen vehicles, where our high-performance PA11 as a composite for the tank casing or as a liner inside the tank, allows at the same time to resist to very high pressure and reduce weight. In addition, our Elium composite are very promising for the tanks and also in terms of lightweighting for the chassis. When we look at living comfort and home efficiency, we have really a wide range of eco-friendly solution over the three specialty segments.
Examples include bio-based and low VOC decorative paint, nontoxic adhesive and sealant from Bostik, cool roofs painting with Kynar Aquatec, which allows to reduce temperature inside the building. Consumer goods is also an area where the acceleration of demand for product with higher performance, better environmental footprint, and recyclability, as well as improved design, is most pronounced. We have a huge, for example, and well-recognized presence in performance sports shoes with Rilsan and Pebax, including 100% recycling offering. I could name also consumer electronics with Sartomer solutions in 5G, also bio-based, 3D printing glasses frame. Clearly, the strength of our innovation and our best-in-class technological and application knowhow is instrumental in our ability to capture all these opportunities. Beyond this, the third quarter was also very eventful as regards our transformation and 2024 ambition.
We were, as you know, very excited about the acquisition of Ashland Performance Adhesives. Beyond the more significant M&A movement, we continue to work on the repositioning of our portfolio, and we have announced the divestment of our epoxides business to Cargill at a good multiple. I won't update you with more specific elements, but we are still progressing on the strategic review of the emissive fluorogases. We are making a further progress on the two major CapEx, which are directed towards sustainability with the Singapore bio-factory, and also the Nutrien HF investment in the U.S. Finally, on the cash allocation front, we are on track to finalize, by the end of November, the EUR 300 million share buyback program launched in May after the divestment of PMMA.
Most of those shares will be canceled, as you know, by next January. In short, another very positive quarter. As you can see, a number of areas of satisfaction. We are very pleased, both from a financial and qualitative viewpoint, despite an operational environment which is very demanding for the teams and will likely remain so in the near future. As you'll see in the outlook, which I will comment at the end of the presentation, we are very confident for the rest of the year. I will now hand it over to Marie-José Donsion , who will review in more detail on those Q3 results.
Thank you, Thierry. Good morning to all of you. I'll go quick through the financials. Regarding the sales brief, at EUR 2.4 billion, sales grew 29% organically year-on-year versus 2020, and 17% versus the pre-COVID Q3 2019 level. The volumes are up by over 5% relative to last year, with a positive underlying momentum in all regions. The price effect is close to 24%, which reflects the decisive pricing actions to offset higher input costs, as well as favorable conditions in the acrylic chain in all three regions as well.
There is a negative perimeter effect a bit short of 5% versus 2020, which is attributable to the divestment of PMMA in May of this year, and which is only partially offset with the bolt-ons that we have made in specialty materials. Currency had a slight positive impact of around 1% on sales in Q3 in light of the strengthening of the dollar versus euro, in particular. Driven by higher volumes, the positive net pricing and mix improvements, Arkema achieved a very strong 54% growth in Q3 EBITDA at EUR 474 million, as mentioned by Thierry.
Looking at the EBITDA of the different segments, we have, of course, Bostik that achieved an EBITDA of EUR 79 million, up 8% year-on-year, thanks to a solid pricing power, leading to a broadly neutral net pricing impact. This has more than offset the effect of lower year-on-year volumes linked to raw material shortages and difficulties in logistics. The underlying demand momentum, though, remains strong in all major markets. Advanced Materials EBITDA is up nearly 40% year-on-year at EUR 174 million, which is about 10% above the Q3 2019 level, while the EBITDA margin remain at a high level above 22%. High Performance Polymers had a very strong quarter again with strong volume growth in most end markets, especially batteries, electronics, and consumer goods.
They also benefited from an improved product mix. Performance Additives, on the other hand, were less buoyant, let's say, impacted by a sluggish oil and gas and paper markets. EBITDA of Coating Solutions is at EUR 168 million, so, frankly, strongly up versus Q3 2020, as well as Q3 2019. The segment benefited from higher volumes across all major markets, and, naturally, we benefited from the price increases in downstream activities, offsetting higher raw material and energy costs, as well as from favorable conditions in the acrylics chain. Finally, Intermediates EBITDA grew nearly 35% to EUR 74 million, thanks to good market conditions in acrylics in Asia and in fluorogases in the U.S.
With depreciation and amortization at EUR 131 million, basically recurring EBITDA came to EUR 343 million, which is double last year's level, and EBIT margins stood at 14.3%, up from the 9% of last year. We can imagine this impacted very favorably the return on capital employed ratio. Financial results stood at EUR 15 million versus EUR 23 million in Q3 last year, and this is clearly in light of the lower interest rate on debt swapped into dollars in our portfolio.
In the first nine months, the recurring effective tax rate came to 20% of recurring EBIT, which is basically in line with the guidance we gave and is a bit below last year's level of 22%, thanks to a more favorable geographic split of profits. Consequently, Q3 adjusted net income more than doubled year-on-year at EUR 258 million, which corresponds to EUR 3.4 per share. Briefly on cash flow and debt, basically the Q3 recurring cash flow amounted to EUR 236 million versus EUR 311 million in Q3 2020. The difference comes from the working capital variance mainly, which represents an outflow of EUR 103 million in the quarter versus an inflow of EUR 158 million last year.
This is the result of higher volumes of activity as well as price inflation, leading to a gradual rebuilding of inventories. The working capital ratio on annualized sales still stands at a low level of 12.3% versus last year's level of close to 14%. The latter being basically what we consider to be close to a normative level. Capital expenditure totaled EUR 175 million in the quarter versus 138 million last year, which reflects the momentum in exceptional CapEx as a result of the acceleration in the construction of the polyamide 11 plant in Singapore and the Nutrien project in the U.S. Total recurring and exceptional capital expenditure is still expected to amount to around EUR 750 million this year.
Q3 free cash flow amounts to EUR 74 million and includes a non-recurring outflow in the quarter of EUR 99 million relating to the tax disbursement linked to the PMMA sale in the U.S. Consequently, net debt at the end of September is at EUR 1.3 billion. This includes the EUR 700 million of hybrid bonds, which remains basically stable quarter on quarter. The net debt level to last twelve months EBITDA ratio stands at 0.8x .
Thank you very much for your attention, and I'll now hand over to Thierry for the outlook.
Thank you, Marie-José Donsion , for this explanation. After this pleasing third quarter, the fundamentals of the fourth quarter should be in line more or less with those we have seen in the past few months. The underlying demand is still good across most of our end markets, and we believe our unique portfolio, Specialty Materials, is very well positioned to seize the growth opportunities thanks to our sustainable innovation and recent capacity additions. We are, however, mindful of the challenges in automotive due to chip shortages and of the energy-related restrictions in China. Of course, the shortages and increases in raw materials will remain a point of attention, and we will adapt our pricing policy accordingly, as we did in the previous quarters.
We are confident that we can deliver a robust performance in the fourth quarter, and so we decided to raise for the third time this year our full year 2021 guidance for Specialty Materials. We now expect Specialty Materials EBITDA to increase by at least 40% year-over-year in 2021 at constant scope and currency versus the +30% announced when we raised guidance at the H1 results publication in July. For the group, we expect an EBITDA of around EUR 1.6 billion in 2021 versus the previous guidance, which was EUR 1.4 billion.
This guidance shows a significant value creation we have generated over the past few years and will generate this year, as our EBITDA will be well above the 2019 and 2018 levels, but with a much better mix and much lower debt, as well as a smaller perimeter following the divestment of PMMA. All the teams at Arkema are focused on delivering the new vision for the company, which we announced at last year's CMD. Innovation in Specialty Materials is at the core of what we do to capture the huge opportunities from mega trends and at the heart of our brand positioning. We will also continue making value-added bolt-on acquisition in Specialty Materials, progress with a strategic review in Fluorogases, and aim to remain best-in-class within our sector in corporate social responsibility, including further significant progress on our carbon footprint reduction.
I thank you very much for your attention, and now, together with Marie-José Donsion , we are ready to answer your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press zero one on your telephone keypad. It's zero one on your telephone keypad. We have our first question from Mr. Emmanuel Matot from Oddo BHF. Please go ahead.
Good morning, Marie-José Donsion . Good morning, Thierry.
Hello.
Thank you for this presentation. Maybe first, what can you tell us about 2022? Is Arkema in a position to further grow its EBITDA? Because the basis of comparison looks now very impressive, very challenging. Second, the cycle remains very good in Coating Solutions. When do you think you will go back to more normal market conditions? Are there notably some new capacities to come in acrylics in the acrylics market in Europe and North America in the next quarters? Third, do we have to worry about access to key raw materials for Arkema in the coming months? Do you expect a higher negative impact on volumes for adhesive?
As you mentioned, if I'm correct, -5% to -6% loss of volumes in Q3 in adhesive. Could these shortages extend to other businesses? Last question, do you confirm that CapEx are going to reach a peak this year and should go down as from next year? Thank you.
Okay. Thank you for your questions. With regard to 2022, clearly we are publishing today our third quarter. I think, first of all, we need to appreciate the quality of the results. Otherwise, we'll already discuss the future and never what we have just achieved. I think it's important to recognize the quality. With regard to 2022, I will make you the same answer as I do every year. I think it's a topic we'll more address when we publish the full year. Let's deliver the fourth quarter, and then let's discuss 2022. Nobody knows exactly today what will be 2022 macro environment.
I think that you look at 2021, you remember the discussion we had in 2020. Nobody would have predicted what has been 2021. Everybody can have an advice on the macro, which is a starting point on 2022, but nobody knows exactly, and everybody will be wrong. It depends really on the assumption. What I often say is that, and it has been, as you could see, quite beneficial, that inside Arkema, we focus on the self-help and on our positioning in order to be able to adapt to and to be good in what will be the condition of the year. I think every year, we try to outperform the market. This year, it's absolutely obvious.
We are operating in conditions that are completely different from the one we would have thought for 2021. Now, for 2022, we continue on the big elements. We continue to progress on the sustainability solutions. I mean, we will benefit from our new business in HPP, in adhesives, in downstream of coatings. Certainly, we should expect some normalization in acrylic value chain, but we know that. On the other side, if raw materials are getting lower, we benefit from it in upstream. It will be, as usual, a sum of elements, but to go beyond that is too early.
What is clear is that we are confident on our positioning to do better than most of our peers in any given market, and this is what we did this year, we did previous year, we try to do next year. With regard to the Coating Solutions, you say what we should expect on things going back to normal or whatever. First question to you is what is normal? Because, I mean, it's something which is a definition which is changing all the time. What is clear is that in Coating Solutions, what we said has been true, is that we were not satisfied with our performance in the past years, which means that we consider that level of profitability was not enough to reinvest.
We believe that this year we appreciate the fact that we did the right choices and what we said was true, which means that it's a strong product line, and we appreciate that. Now it's clear that in some parts, we earn more than what should be the normal line, so there could be some normalization, clearly. But it will stay at a solid level. After that, the question is when it could normalize. It depends really, I mean, again, each context is different. If you have some less tightness on the more capital-intensive products, you would benefit from the downstream and vice versa.
What is very important for Arkema, again, is a positioning upstream, downstream, different product line, coatings, adhesives, HPP, Performance Additives, to make sure that whatever the environment, we perform well against competitors and we perform well in absolute terms. I think our positioning is better and better. Now, what the market conditions in acrylics are too early to tell you. Next year, I think they should be solid. At which level, we don't know, we don't know exactly. What is more important for us is to continue to improve structurally our portfolio and to be more and more on specialties, and you see the full benefit clearly this year. On raw materials, yes, it will continue to be challenging, but also we benefit from it.
You saw it in your previous question. Again, it's difficult to take one element and not the other. It's a sum of element. Clearly, access to raw material is working against us this year, and particularly with the more downstream businesses and for plastic, because, as we mentioned often, if for plastic you have one raw material which is missing, this is a whole product that you cannot make. It has a direct impact on the top line, which we got because we have lost, more or less 5% of our sales in adhesives that we will recoup when the raw material will be more accessible. But that we lost just because we could not make the product because one small additive was missing. What is our visibility on that?
I think things will improve. At which speed, we don't know, because we have all been surprised this year. It will not be easy to have a precise forecast. We think it will improve, not in Q4. Q4 will be again difficult from this standpoint, hopefully in the first semester next year it will improve. Again, you have never a perfect environment. Some environment are better for this product line, some other are better for another product line. I think what is important for us is to be from a geographical and product line standpoint, to be balanced in order to answer to different kind of environment. The last one, because you have many of them, one-
CapEx.
CapEx. Do you want to answer, Marie-José Donsion ?
I can. It is correct that the exceptional CapEx is at a peak this year with a EUR 250 million spend in 2021. Basically, since the start of both plants is taking place, let's say, in the second half of next year, we should basically have a tail of spending, which probably would represent something like EUR 150 million next year. Definitely, this will reduce, let's say, the total spend in CapEx that we project in 2022.
Again, maybe to complete what Marie-José Donsion , I mean, the CapEx we have this year, we had last year, we had next year, this exceptional CapEx, they are done for the good of the company, which means they are very interesting CapEx in terms of return, in terms of sustainability component, and they are very, very good CapEx. For you, it's good news, because we are able to find project which really at the same time a good return and a significant improvement of the footprint of the company, both in terms of sustainability and in terms of innovation. You should appreciate that. I'm sure you do.
I do. Thank you very much.
You're welcome.
Thank you, sir. Next question is from Mr. Mubasher Chaudhry from Citi. Sir, please go ahead.
Hi, Marie-Jos Donsion, . Hi, Thierry. Thank you for taking my questions. Just two, please. I was thinking about the Nutrien project. I think it's expected to come on sometime in 2022. Just firstly, just on the timing of the startup, and then secondly, what kind of contribution should we expect from that? And then in the press release, I think you talked about that you were constrained or there was some capacity constraint from the dual controls in Asia acrylic. Is there any way of quantifying what that was? And are you already seeing that picture turn, and are you starting to see more normalized operation in Asia acrylic? Thank you.
Okay. With regard to Nutrien, yes, it will start in the second quarter, 2022, so a little bit in advance compared to the polyamide 11 if we keep the same track. In terms of contribution, overall, you know, for this big project, we target to have between 4x and 5x EBITDA at maturity. This means that, let's say if we spend, to say something, EUR 150 million, we derive between four and five to get at maturity the profitability and the maturity for this kind of a big project is after four to five years. Okay? If you want to have an assumption, you take a linear from a zero point. On four to five years, you take a linear progression.
With regard to Asia capacity constraint, yes, it's sure that, especially now, with this restriction which has been implemented by the Chinese government, the acrylic is more tight even than it was at the beginning of the year, but you have less volume. It put a pressure on the price, but you have less volume. At the end, you make certainly less money.
Overall, it's clear that after many years where we have suffered and challenged in China, we appreciate the fact that finally the results are really at the expectation we had, which means that the investment we have made there, at least from a return on capital employed standpoint, we can debate about the cyclicality, but return on capital standpoint and IRR is really very good. Now can it stay next year at the same level? The answer normally is no. I come back to the previous question from Emmanuel. There will be normalization. The only thing is that what is the normal? I think it's above what it has been in the previous years and is below what it is this year. Now do we see, but maybe it's a question which is beyond acrylics.
Do we see overall in our kind of products significant capacity addition? I would say no. The trend is less than it has been at a certain period, and this is for different reasons. The first reason is that the cost of making new capacity is more and more important because of a lack of talent, not in our company, but for construction, for finding the lack of resources. It's true in U.S., it's true in Asia. The cost of metal, as you can see, or any materials you need to build your plant is far more expensive because what you see on our pricing, on our raw material is also true when you want to build a plant.
You have a market condition which makes the decision more difficult today to make. I think from a CapEx standpoint we don't see significant capacity addition with regard to the products we are making, which is, I believe, a good thing knowing that in China for acrylics, we were starting from the high point in terms of capacity. We can only appreciate the fact that we start to see the light.
That's very helpful. Thank you.
Thank you, sir. Next question is from Matthew Yates from Bank of America. Sir, please go ahead.
Hi. Good morning, Thierry and Marie-José Donsion .
Good morning, Matthew.
A couple questions, please. Maybe it's around the CapEx theme, but very impressive performance in the materials division this quarter. Obviously that's an area you've been putting CapEx to work to try and support the future growth in these high margin, high return areas. Even so, given the growth that you're seeing and the mega trends you talked about, is this suggesting that we need to have an extended period of CapEx to add more capacity in areas like PVDF over the coming years? What you've described as exceptional CapEx actually becomes closer to normality. The second question is around the Intermediates division. I'm just wondering how you're prioritizing the remaining strategic actions in the portfolio in light of recent market events.
I guess you've got these better market conditions for acrylic spreads in China, and I gather the EPA has also now formalized a phase out process for the HFC gases in the U.S. I don't know if that regulatory clarity helps you engage in any fluorogases discussions. Be good to get an update there. Thank you.
Okay. Thank you, Matthew. The first question is a very interesting one because it's clear that, as you mentioned, as I mentioned, we are successful in the expansion that we have implemented. It's a matter of balance between being reasonable in terms of CapEx, which is part of the equity story of the company, but also to follow the growth. I would split the kind of investment in two. When you talk about PVDF, and we have increased CapEx very significantly in the past, finally it's recurring. It's higher than it has been, but it's recurring. After that, we can debate if the base is 5.5% or 6%, but the discussion is around that. After that, you have really the big ones.
Again, so far, we'll see if it change, but so far, where we believe we could have a sort of a new exceptional CapEx is to double the plant in Singapore. If we announce to you one day that we double the plant, then it will be good news. This means that really, it develops the way we thought, this appetite for bio-sourced high-performance polymer because this product is unique, and we believe that we should not wait too long in order to double the plant. Because the plant is more or less half of what we have in France, so the natural size is to double it.
So far my answer to your question is, let's say, maybe the 5.5% is a little bit fresh, and it should be closer to 6% in a recurring basis, okay? To be confirmed. We have not, for the time being, the complete answer. Someday to announce a doubling of Singapore, which basically we would not be able to complete its recurring envelope. Is that clear to you?
Yes, very much so.
With regard to the Intermediates, the consolidation disposal, the way you want to name it, we are still following, I would say, the step-by-step approach. We did PMMA. Next step will be the Fluorogases. Clearly what you say is helping us. This means that at least in the U.S., we have now a good idea on what will be the legislation framework which is working in our favor and is better to sell activities when the landscape is solid and in your favor. It's clear that acrylics in Asia are working also in the right direction, but I don't think it will change our order of doing things.
I mean, if we have opportunities, we'll certainly look at it. For the time being, the way we see it is that let's take advantage of the Fluorogases. As I say, I think in my speech I say we'll, and many times we'll not update every month on that. I will just update if we have some breaking news, which is not the case. Then we'll do acrylics after.
Thank you, Thierry.
You're welcome.
Thank you, sir. Next question is from Mr. Martin Roediger from Jefferies. Sir, please go ahead.
Yes, good morning, Marie-José Donsion , Thierry, and hello to the whole RR team. Three only minor questions. Firstly, on Coating Solutions, did earnings in both business units, i.e., Coating Resins and Coating Additives, grow similar percentage-wise like the segment, which was up by 147%? Or was the earnings growth in upstream clearly higher than in downstream? Secondly, on the general earnings drivers across the portfolio, you mentioned accelerating demand for more eco-friendly and higher value-added solutions in Coating Solutions. You mentioned accelerating demand for sustainable and high-performance materials in Advanced Materials. I understand that you benefit from such innovations. Can you provide some color how strongly innovations performed in your portfolio versus the rest of your portfolio, and what is the current innovation rate? Thirdly, a really minor question on the tax rate.
Can you provide some guidance for the full year? Especially what do you think about the likely tax rate next year, given your exposure to the U.S. and the discussed changes in the tax rate there? Thank you.
Thank you, Martin. Maybe we can start with the last one, if Marie-José Donsion wants to answer.
Okay. Basically right now, I understand, the Biden administration is not fully clear on the tax rate for next year. Initially we thought there would be an increase from a 21% federal tax to 26.5%. This was what we were basically starting to work with. We understand now the latest tax bill lets us believe that the tax rate could remain at 21%. Let's say, obviously we will all be probably fixed at the end of the year. Right now, I'm building a budget at a flat federal tax rate of 21%.
Thank you, Marie-José Donsion .
Unless you have different information on your side, I don't know.
On Coating Solutions, we contribute both upstream and downstream. It is the first thing to have in mind. This means because we had some question on that. Some of you had some impression that Coating Solution was nearly only driven by acrylic upstream, which is not the case. We have very strong performance downstream. For me, downstream is Arkema Coating Resins, Sartomer products and Coatex products. It's really additives under any kind of form and any kind of technology. Now, the improvement from is a bit higher from upstream than downstream. Does it mean that upstream is a pure cyclical matter?
This means that if you look at the previous years, we are starting from really a low point, which was below the reinvestment point. This means that this year for the upstream, you have two things. You have, and we agree, some overearnings because the market is very tight, and we accept that. You have also some catch up from a situation which was not acceptable long term for the players. Okay? Have that in mind. Then on the downstream, frankly speaking, we do a good job. Beyond fully offsetting the increase of raw material and this raw material includes the acrylic monomer itself, we have a good volume trend coming. This come to your second question from this innovation on mega trend and sustainability.
Now, if I understand well your second point, you are saying, innovation is really coming more on the HPP and Coating Solutions.
Mm-hmm.
You say, "What about the rest of the portfolio?" In fact, if you go to page 14 of the presentation. Everywhere in the presentation you have plenty examples which go in different platform or business units. If you go on page 14, you...
Oh, okay. The Capital Markets Day. You have also on the slide.
Right.
You have our six platforms of Water Management, New Energy, Lightweighting, Electronics, Management of Natural Resources. On this platform, they concern really all our business segments, Coating Solutions, Adhesive Solutions and Advanced Materials, including HPP and Performance Additives. If you take, for example, adhesives, they are present on New Energy. For example, you have adhesive from cell to cell in battery. Lightweighting, they are very important. Everything we develop through structural adhesives is present in lightweighting. We are working on the bio-based raw material in order to develop new kind of adhesive compostable packaging also. We look at it. You have plenty of examples in adhesive, and the same for Performance Additives.
I would say it's true that when we give you examples, we try to give to everybody examples they can really understand easily. This is why we mentioned a lot about batteries, about tomorrow hydrogen tanks, about eco-friendly paints or about sports shoes. It's more than that. It's really every year in the company, and we have more and more platforms which touch not only one segment, but the all four segments. In terms of KPI, which was your last question, we can say that we have 15% of sales consist of product below five years old. I would say nearly everything now is dedicated to sustainability. Nearly all our new business development, our research, I don't talk about fundamental research, but really research for new business is dedicated to sustainability.
Okay, Martin, that's all for you.
Thank you.
You're welcome.
Thank you, sir. Next question is from Mr. Chetan Udeshi from JP Morgan. Sir, please go ahead.
Yeah. Hi. Thank you. Morning. Two questions from me. The first question was it's really impressive to see the ramp up in Advanced Materials prices to almost 15% year-on-year in Q3. Are you able to give us some color on which products are driving that sort of big increase? Is it across the board or is it specific to certain products? You know, we've seen, for instance, the PVDF in China, the prices have gone through the roof. So I don't know if that's contributing to that big price increase we've seen in HPP. That was the first question.
The second question was going back to the discussion around acrylics and coating solutions in general. Is there a way for you to maybe isolate what could be the impact from the upstream tightness on earnings in Q3 or first three quarters of this year? I think the broader question here is, if I go back to the capital market day last year, the target was to have 16% margin in this business. Today, maybe we are on a run rate basis close to 20%. Is there a reason to believe maybe it should be more than 16% in the future? That's the second question. Third, can I just confirm because I wasn't very clear, should we at least expect the absolute CapEx to go down from this year into next year?
Is there a chance that it may not go down because of some additional growth CapEx that might be, you know, needed? Thank you.
I will let Marie-José Donsion complete on the CapEx because I thought she was clear, but maybe she can complete and will do it, certainly. On the pricing, in fact, what you should have in mind is that our pricing is mostly dictated by the raw material. This means that we have more pricing increase where we have more raw material increase. This is the first thing. Now, beyond that, it is clear that we have more support from acrylics, as we mentioned. But in fact, it's fully across the board. We passed price increase nearly everywhere. And even for adhesive, which is not a market where typically, since it's very downstream, very formulated, you expect price increase. We have also in adhesive significant price increase.
You have, for example, in Q3, you have 6.6%, but it's an average. This means that between the start of the Q3 and the end of the Q3, you have a ramp up, and it will continue in Q4. It's really a very special year I've never seen where you have raw material and input cost because you should add energy and transportation, which is all across the board. Because of that, you have significant price increase all across the board. Now, it's true that once we have said that we have significant price increase all across the board, you have some which are increasing a bit more than the other, but I will not enter into specifics. The specifics can vary from quarter to quarter, so it can be even misleading.
Clearly, we said we benefit beyond the natural pricing power coming from our innovation, our positioning. We have worked so much on the positioning since many years that this year, clearly, we benefit from it. You mentioned battery. Yes, clearly it's doing well. We can mention plenty of niches where we benefit from a unique with superior value product because there is a lot of innovation in them, and we really appreciate that. Now, again, on coating, second question, Coating Solutions to be clear to everyone. You have two different on acrylic, you have two different situation. You have the one of Coating Solutions, which is Specialty Materials, where we are the acrylic upstream for Europe and U.S. This is where we have a significant integration.
Because the integration, and you have seen in the past 10 years, we have been able to build a model of specialty, which is rather resilient and where between the upstream and the downstream you have some compensation factors. This is one. Now the point you mentioned, it's clearly mostly focused on the acrylics in Asia. You benefit from this new segmentation where you have in the Intermediates a big part of the contribution which is coming from fluorogases and acrylic in Asia, and a big part of the growth which is coming from acrylics in Asia. I think you have the picture which helps you really to understand where we have a superior increase.
Now, once I've said that, it's clear that even in Coating Solutions in this very special year, you have some overhead links which are linked to the special situation in acrylics that you need to appreciate. Overall, our improvement in Coating Solutions is also significantly coming from the downstream. Now, I hand it over to Marie-José Donsion to complete your element on CapEx.
Okay.
Mm-hmm.
As I mentioned in my speech, basically the total CapEx for 2021 is expected at EUR 750 million and includes, in fact, a peak of spending in exceptional CapEx, which amounts in 2021 to EUR 250 million within this total of EUR 750 million.
This should decrease next year as the projects come to completion by roughly EUR 100 million. All in all, I certainly expect the total CapEx to go down by the same amount.
Is that clear?
Yes. Thank you.
Maybe another point I would like to mention, and this is where what we are very proud of this year is that this year is not really the story of one product line or one specific element. It's really a sum of plenty of elements which help us really to deliver a superior growth in every element of Arkema. If you look year-to-date in Adhesive, despite all this difficulty, operating difficulty with raw material, with logistics, I think it's quite a good year. Which, frankly speaking, you are hopefully pleased about the development in acrylic. If you take HPP, which is mostly based on innovation, really it's a very, very strong year.
Clearly, Performance Additives is more in a cash cow mode this year because of different elements, but it's still a solid performance. Coating Solutions is really quite strong, but coming both from the upstream and the downstream, which is very nice to see. Intermediates is better than expected. Overall, it's really, and this is what should be good for you, it's really this performance of the year is not one point or two points. It's really a sum of different points. We came to appreciate this context, which is quite diversified.
Thank you.
Thank you, sir. Next question is from Mr. Laurent Favre from Exane BNP Paribas. Sir, go ahead.
Yes, thanks, and good morning. Thierry-
Hello.
I was wondering if you could talk about inventory levels in Advanced Materials. It sounds like inventory for your customers are very tight in Adhesives and Coatings. In Advanced Materials, I was wondering what the situation is there, in particular in HPP, where your sales were up massively versus Q1 and Q2, even if one of the key end markets like autos actually saw a production decline. That's the first question. My second question is on Advanced Materials margins. I think you're targeting 22%, which is a stable margin through 2024. You're obviously on track to beat that this year. I was wondering if, going forward, you are still driving the business to get to 22% and focusing on growth, or do you think there is upside to that margin target?
The last small question, free cash flow for Q4. I was wondering if we should expect the big seasonal inflow of working capital in Q4, Marie-José Donsion , or whether you're trying to build up your own inventories and therefore we shouldn't get too carried away. Thank you.
Okay. Marie-José Donsion will answer the last one. I will start to answer the first one, and certainly Marie-José Donsion , because it's linked, will answer also about the first one. I think you were more talking in the first question about the stock of our customers than of ourselves, Laurent.
Yes. In particular in HPP-
Yes.
Where your sales were incredibly high in Q3.
In fact, I agree this is maybe in Advanced Materials where we have a decline in certain end markets. The majority is robust. We have a decline in certain end markets, and you could maybe expect some other stock here and there, but it's not the case. Even in auto, the decline is coming from the lack of chips. In fact, they simply don't have enough stock. I think I don't know how long it will take to get the chips back to normal, but then it will mean restocking from the automotive industry at that time.
Overall, my feeling is that the level of stock in the chain, including ourselves in fact, and it will be a part of the answer of Marie-José Donsion , is still rather tight. Not as tight as it has been after the COVID and the rebound, but I would say still rather tight. It's certainly an element which will be supportive in the next year, even if in certain end markets you can have some less robustness than this year. I would say overall some restock will help next year in a certain point. With regard to the margin target, I'm sorry, because I did not answer for Coating Solutions before. It's a little bit the same question.
We are compared to our, which is good news, we should not complain. Compared to our midterm target, we are above both in Coating Solutions and Advanced Materials. The question of the two questions, yours and the one before, was, does it mean that we can do better than our midterm target? Or is that, basically, shall you consider that what is on top should be considered as overall earnings and will disappear? Basically, I imagine this is, you have the double view.
Well, not necessarily in Advanced Materials. I guess that's-
Okay.
In Advanced Materials it's a genuine question.
Okay. No, I think that, again, it's more a question for Capital Market Day because we need to take our time really to look at things in detail. Clearly it means that we should at least deliver the percentage that we have mentioned for 2024. Which means that for you, what was a question mark become the certainty, now, can we do a bit more? Maybe, but it's too early. We need to take our time. Clearly, we are more than on track from a percentage standpoint. Now, does it mean that we should be above?
You can believe it, but I prefer to answer this kind of question in more formal way when we have capital market day, because it's more a question for me in terms of capital market day. We are very pleased by the fact that we get more value on this new business development. It goes to a certain extent with the evolution of our mix, both in coatings and in advanced materials, and it should help. Again, for me, we are the starting point. We announced target for 2024. The first reaction to the target were they are a little bit ambitious. Now we have the answer. They are more than realistic. Can we do more? It's a little bit too early to confirm. Okay.
Thank you, Thierry.
If I might, Thierry, in fact, the reasoning behind the 22% was also because we were adding the Singapore plant and therefore bringing capacity to the market. The ambition was definitely to manage the ramp up rather than go and chase after, let's say, increased margin levels. This was basically behind the reasoning of the 22%.
Yes. At the same time, it's true that we have a lot of niches, including PVDF, which are doing fine. This is why. Thank you, Marie-José Donsion , for the complementary point. It's always a sum of elements, and it's always important to take the time to think about it. This is what capital market day are made about, is really to rethink about what we have done and to confirm where we are. The good news for all of you is that we are really on track of what we have announced for 2024, and we are pleased about that.
If I come to the free cash flow question for Q4. As I mentioned, it's fair to say that our working capital level is today a bit below, let's say, what we consider is our normative level, which is closer to 14% of our sales versus our current position, which is a bit above 12%. Definitely our intention is to try to rebuild a bit of volume in stock. And today the increase in the stock value is in fact 50% coming from volume, 50% coming from price, if I give you a ballpark assessment.
I would definitely still believe in Q4 we should in fact probably for the first time in quite a number of years, not really be in the kind of recurring trend that we had historically in terms of phasing of the year. I still believe the working capital should in fact not decrease as much as it was the case in previous years and remain, let's say, kind of flattish versus our Q3 level. This is what I am projecting at this point.
Okay. Thank you.
Thank you, sir. Next question is from Mr. Philippe Andria from Kepler Cheuvreux . Sir, please go ahead.
Hi. Thank you a lot for taking the question. I have a couple. First of all, by the way, Thierry, great logo, so well done. Firstly on PFAS, sorry to ask this, but just wanted to understand what is Arkema's position here, sort of officially, especially in the light of what is happening in Europe with regards to 3M and Belgium. You know, you're changing your raw material mix significantly in, with the Nutrien project, you know, changing the eco footprint, for the fluorine chain. If you can just remind us, you know, on the PFAS topic, is there any reason for us to worry or you're indemnified by Total for the New Jersey side and we shouldn't worry except for that?
The second question is a little bit tricky one, but I'm just gonna ask it anyway. I mean, you know, Thierry, you've done everything you've promised over the years, and the stock is still sort of, you know, sub-7 times or seven times. You know, now Bostik becomes a EUR 550 million EBITDA asset. You know, what would be your answer to an approach where you're sort of pushed to spin off Bostik to have value unlocking? So in other words, I'm just trying to understand, you know, how would you tackle a situation like that? What is sort of, you know, your way to unlock value and still keep everything in the current structure? The final question really is around M&A.
There are a lot of funky polymers, which are specialty polymers in the polyamide chain that are coming to the market from both sides of the Atlantic. Just wondering if you're very happy with your polyamide exposure, or would you care to sign a few more checks on the M&A side? Thanks a lot.
Okay. I will be quick on your question. Thank you. With regard, I will take the last one. On M&A, first of all, we are very pleased with our positioning of today in HPP, and I think you read the numbers, it's obvious that we should be very pleased, and hopefully you are the same. There are some names which are looking for some strategic review. Certainly as every strategic review, we look at them, and we see if we get position. I think we have not answered today. It's part of our ongoing strategic review each time somebody is making a move and to see if it makes sense for us, not at all. We'll see.
I think the good thing with Arkema is that we have a very good positioning, so there is no urgency to make any moves. We could stay with what we have, and each time we make a move, this is because we believe we can create value for the company. We'll see. I have no answer except that we have this flexibility to be able to review ongoingly what we do in terms of M&A. With regard to the second question, I was surprised with our second question. As you know, we have been in the business since the spin-off. Where we started with a company for which the share price was EUR 27, I think we are above EUR 120 today.
We compare with nearly all our European peers, okay? We see the value creation, so you can always debate that it could be better. Maybe you will be able yourself to do more than that. But frankly speaking, it's a fantastic story of value creation. You in terms of you should also spend time to read again what has been communicated at the Capital Markets Day last year, which was really a fantastic presentation of explaining what is the science of material. If you want to learn more, we can share with you between a coating solution, adhesive, and advanced material. It's really a complementary portfolio. It goes together.
You cannot imagine how many customers ask us to come really as a group in order to be fed with new innovations in the science of materials, because you can stick materials, you can substitute materials, you can create new materials, and you can coat materials. It's a unique offer. We took 15 years to build it. We are very proud of it. We have created a lot of value. As you are mentioning, the multiples have not caught up, the multiples give us a lot of space for further value creation, so we are in a very good situation. Clearly, we have a portfolio we like that we have built over the years. It has been really a long journey.
Now we have this platform which is, frankly speaking, very attractive for the coming years, which is very coherent, lot of synergy, incredible synergy between the different platforms, and we'll continue to develop this platform on this three feet. Capital Markets Day, and I think we have delivered a lot in the Capital Markets Day last year, was very clear on what is our strategy, what we want to do, and we like the support of our shareholders, long-term shareholders on this strategy. With regard to PFAS, we have no specific news to comment, otherwise we would have done it. I think if you read the reference documents, you have the elements you need to have on this issue. On Nutrien, yes, you're right, and thank you for mentioning it.
It's a very strong project in terms of eco-footprint, and because the way to make HF, not from a mine, but from starting from a by-product from phosphate, in fact, it's in terms of impact on the environment, is so much more positive. Now the team are very proud to have implemented this breakthrough technology, and it goes certainly in the right direction. With the names you have mentioned with regard to their environmental impact, whatever, I cannot comment on other companies. I mean, they are different from us, so I cannot answer for them.
All right. Thank you a lot for your color.
You're welcome. Thank you.
Thank you, sir. Next question is from Mr. Rob Hales from Morningstar. Please go ahead.
Hi. Thanks for taking my question, Rob Hales from Morningstar. Just one question on Adhesive Solutions and pricing versus raw material changes. You know, I think historically the lag was quite long, maybe six months or later, but that you know seems to have compressed now. I'm just wondering, is there a structural change in terms of your pricing negotiations with customers, or is that just truly 'cause we're in an exceptional environment right now and, you know, a year from now we kinda go back to that historical six-month lag or so?
No, I think there is. I don't know if I answer your question, but there is a lag in the adhesive. I think the adhesive is certainly the most difficult part of our portfolio to pass through raw material because it's more downstream. This is why the performance we have done is very good. But the performance is a sum of plenty of elements, working on the productivity, reformulation, product mix. I've always said that Bostik is in a permanent transition, and we started from a low point at 10% of EBITDA. We target now 17%. We are in the middle of the journey, a little bit beyond the middle of the journey. The journey is made of plenty of elements.
We have certainly significant headwind coming from raw material, and I can tell you it's not easy. We have a lag, clearly, between passing raw material and getting the raw material input. At the same time, we work on the product mix. We have more and more innovation, and we work on the cost. Because of that, we are able to gain one point of EBITDA compared to last year, while most of our competitors have lost some ground. I think it is story of rebuilding from point which was okay but low compared to what was our ambition and compared to the best peer. Now we are really completely on track with our ambitions.
No, I mean, nothing has changed for sure in this market, okay? Still, the same because the downstream, it's not a matter of, what business, what positioning. It's just that the nature of a more downstream business compared to a more upstream business, it takes more time, and you have lag. You have still lag, but with, everything we are doing, we were able to compensate that.
Great. Thanks very much.
I will take a last question because time is running, but if you have more questions, don't hesitate to come to Beatrice and Peter.
We have one last question from Mr. Jean-Luc Romain from CIC Market Solutions. Sir, go ahead.
Good morning. Thank you for taking my question. It relates to HPP and particularly Elium.
Can you speak a little bit louder please, Jean-Luc Romain? Because you're
Okay. My understanding is that Elium could be a very good material for recyclable wind turbine blades. How are you progressing to qualify this material with the main builders of wind turbine blades?
It's true that Elium, which is part of the new polymers we have developed over the past years, and it's rare to develop a new polymer, but we have a few of them like PEKK. Elium is another one. As you mentioned, fully recyclable, and we know the process to recycle with chemical recycling. The difficulty with the wind turbine blade is that you have a long homologation. We now are close to a full homologation of a 20-meter blade. We are on the right track. Now we hopefully will come to have you start to see in the next couple of years blades made of Elium, which is certainly a unique material. I don't think there is another one which is recyclable.
Not only recyclable, but the product once recycled is of the quality of the product before. The difficulty is to have the same usage. We are very satisfied of the development. I would say it's, for me, a matter of couple of years to start really to see some ramp-up. It's a long shot by definition on this kind of breakthrough.
Thank you.
Thank you to all for all your question. It was very interesting, and hopefully you appreciated the quality of the result this quarter. Don't hesitate for any further question to come back to Beatrice and to Peter. Thank you.
Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.