Arkema S/Adr

Ladies and gentlemen, welcome to the ARCEMAS Q2 2020 Results Conference Call. I will now hand the call over to Mr. Thierry Lehenaf, Chairman and CEO. Sir, please go ahead.

Thank you very much. Good morning, everyone. Welcome to ARCEMAS Q2 2020 Results Conference Call. With me today are Marie-Josée Doncion, our CFO, and the whole Investor Relations team. To support this conference call, we have posted on our website a set of slides. which detail our performance. Otherwise, we will answer your questions at the end of the call. Overall, given the challenge of the current economic environment, we delivered a solid set of results in Q2. And really, I would like to thank all the group's employees for their strong commitment and the quality of their work during this period. Our results and our cash generation clearly demonstrate a good level of resilience. My feeling is that we have resisted well relative to our industry peers, but I will let you be the judge of that. This confirms the merits of our ongoing strategy to increase the share of specialties in our portfolio and become a pure specialty materials player by 2024. As we all know, the second quarter was marked by the exceptional context of the COVID-19 pandemic. In these circumstances, the health and safety of our employees continues to be our utmost priority, and we have taken all the necessary steps to ensure a safe workplace environment. In April and May in particular, economic activity was severely impacted by the lockdown measures implemented in many countries, important for Arkema, affecting our customers across various sectors of the economy. We confirmed this demand should be the low point of the year, and we started to see some improvement in June, driven by market segments linked to construction. This especially benefited Bostik, and I know some of you were expecting higher results for Adelgim in Q2, but you have to be aware that construction in April and May in countries with strict lockdown measures, for example in France. This mechanically weighs heavily on our volumes and therefore EBITDA, and by the way, in this environment, prices still end up well. So the decline in EBITDA is linked only to lower volumes. thing about construction-related adhesives is that when the rebound materializes, as it did in June in Europe and in the US, we immediately see the results in our earnings. So Bostik's EBITDA in June was nearly flat year-on-year after the two very difficult months in April and May. In July, although we don't have the final numbers, we are tracking broadly in-line with June, with construction on the same trend and industrial markets still mixed. Overall, So for this year, really I'm convinced, so there is absolutely no worry there, that ADD will prove to be one of the most resilient businesses in our portfolio, and I would say for the chemical industry in general. Beyond the numbers, these past months have been very busy for us as we prepare for the medium and long term. It is a paradox that this period has yielded many opportunities for innovation. in the areas of batteries, hydrogen, composites, filtration, including for face masks. In all of those areas, Arkema has a lot to offer with its cutting-edge innovation. In addition, the use of technology, which became a day-to-day tool when working from home or organizing virtual investor interactions, has allowed us to actually accelerate certain projects and partnerships with some customers. It is our conviction that some niche markets, like 3D printing, for example, where growth paused during the COVID crisis, will come back strongly and we will be well positioned to serve and work with our customers when growth returns, as, in a sense, these difficult times actually reinforce the relationship we have with our customers. Furthermore, and it's very important, We finished the second quarter in quite good shape. We have kept our financial flexibility intact. Surely, we have reduced our debt significantly despite the difficulty of the environment. And this is important as my sentiment is that in the next year or two, there will be many opportunities for a company like Arkema in terms of both organic and external growth in specialty materials. I will now comment On the second quarter's performance, before leaving, Marie-Josée goes through the financials in more detail. Just the following key points. First, while the Q2 EBITDA level reflects a strong impact of lockdown measures on the economy across many important countries for the group, our balanced geographic footprint, diverse end-market exposure, and also project innovation, end us whether on the downturn. Sales were down 15%, 15.6% to be exact, and volumes around 12% in Q2, reflecting declines in transportation, construction, and industrial markets especially. In particular, the abrupt decline in construction strongly impacted, as I said before, our additive business, specifically in April and May, before bouncing back in June, thanks to the lifting of lockdown measures mechanically. Meanwhile, we continue to see solid demand in a few end markets such as packaging, nutrition, and various niche applications such as medical and protective barriers and masks. In this context of lower volume, pricing remains firm in our additive solution and advanced material businesses, demonstrating the quality of our product portfolio and initiative in 2019 to improve the product mix. Together, we support from lower raw material and set measures this end of specialty material FBDA margin state above 15%, which I would say is a good achievement in this context of double-digit volume declines. As announced during Q1 results in May, we have implemented significant cost-cutting measures across the organization to mitigate the impact of this crisis on our reserves. We reacted quickly and those efforts are already visible in our Q2 numbers. I can confirm that we are well on track to deliver our goal to achieve €50 million cost savings in 2020 relative to 2019. This is also true for the €100 million reduction in capital expenditure related to our original plan of €700 million, while largely preserving the pace of investment dedicated to our Polymite 11 plant in Singapore. Cash generation was clearly a highlight of the quarter for our schema. We generated a record level of free cash flow for the second quarter, even significantly better than last year, which was already quite high for the second quarter. It was also true for the first half. Up strongly year on year. as the decline in earnings was more than offset by tight control of working capital by the teams in the context of low activity levels and raw materials decline. I would really like to once again thank our employees at Arkema for their hard work delivering these results, both in terms of working capital and fixed costs. This has not been easy, as you know, to achieve since our industry is mostly with continuous processes So they can really be proud of this result. Finally, while we continue to remain more focused in managing the short term, we are also making progress towards our long-term goals and implementation of 2024 strategy presented recently at the April Investor Day. Having closed the acquisition of Leap in January, and by the way, Leap is delivering, you know, it's a Danish company. and is really delivering on expectation despite the COVID. So, having closed this acquisition early, we closed the divestment of our functional poly-electronics business to SK in June. So, in the middle of the COVID, we closed this divestment. I think it was a good milestone for our group. Less than two weeks ago, we announced the acquisition, a small one, but important one, of Fixati. which will strengthen Bostik's global offering of FortMent adhesive solutions. It means that we don't want to slow down the pace of bolt-on acquisition for Bostik. Pixati is a great example of this strategy in adhesive. This company is quite profitable, offers significant synergy potential, both from technology and market standpoint. Product ranges are very complementary with the one of Bostik. Last but not least, as you now know, we appointed the Bank to support us in exploring the potential sale of our PMMA business underlined as a CMD. So we move forward, not only on the short term, but also on the long term. On the organic project side, we started at the end of the Q1 the capacity expansion of Ontario Chemical Plant in Curtin, Malaysia. It was expected. And in spite of the pandemic, And we are very close to the authorities in Singapore. You know, Singapore is a little bit complicated in terms of COVID. We started the first step of the construction of the bio-based polyamide 11 project in Singapore. Together with important partnerships with Nutrien, all these initiatives will certainly contribute to our ambition to become a pure specialty materials player by 2024. So now, I propose to turn over the call to our CFO, Marie-Josée, who will detail the Q2 financial performance.

Thank you, Thierry, and hello to everyone. I will start with the Q2 sales bridge. As you can see, revenues are down 15.6% compared to last year at €1.9 billion. The 12% drop in volume, which Thierry already commented, is obviously the main driver for this decline. The price effect was of close to minus 6%, and it mainly linked to the lower propylene prices in the coating solution segment, and more largely to the tough market conditions in the intermediates. Prices in adhesives and advanced materials were marginally down, demonstrating their resilience in the context of much lower volumes. In the quarter, we benefited from nearly 3% perimeter effect, thanks to the successful integration of ALMA in advanced materials, LAMSON in coating solutions, Prochemair and LIP in the analysis. It also includes, of course, the disposal of the functional polyolefins business on the month of June itself. The currency effect is a slightly negative 0.4%, mainly reflecting some weak Latin American currencies versus the euro in the quarter. 42 EBITDA came out at 286 million euros, down around 30 cents versus last year. The challenging market conditions in intermediates and the lower volumes in specialty materials are the two concepts that really weighted on our earnings. But a few positive factors helped mitigate this decline. Firstly, the quick implementation of fixed cost savings, which we announced in May. You should bear in mind that the cost savings are mainly transitory, as we expect them to return at the previous level as the level of activity picks up. Secondly, we benefited of a lower raw materials and some product mix improvements in our specialty businesses. Thirdly, the solid results of performance additives helped by Armaz and the resilience of its end markets, like Crap Nutrition, also supported the performance. The EPTA margin stands at 15% for the grid. So while in some cases, so a significant margin for contraction year-on-year, coating solutions and advanced materials showed good resilience. Incoating solutions are upstream-downstream integration cells as well. Given the severity of the prices, our EBDA margin at 13.5%, I think, held up really well. In advanced materials, our EBDA margin was close to 20%, benefiting from a good product mix, lower raw materials, and cost reduction. The EBDA margin of adhesive solutions was, I think, extensively commenced by Fieri. It stands at 11% in Q2. And as mentioned, it was temporarily impacted by the strong decline of construction in the months of April and May, in particular. And we expect a recovery from Q3 following a better month of June. Depreciation and amortization reached €142 million, which is slightly up as a result of the startup of production units and the integration of acquisitions. Therefore, the recurring EBIT came at €144 million. Non-recurring items were a positive, €92 million in the quarter. They basically include a roughly 240 million euro gain from the sale of the functional polyolefins, and around 150 million euros of various items, so asset write-downs, PPI amortization, restructuring, and acquisition charges. Financial expenses stand at 22 million euros, which is lower than last year, thanks mainly to two factors. First, the redemption of our €480 million bond in April, which carried a coupon of 3.85% and that we refinanced actually last year with a €500 million bond at a coupon of 0.75%. The second effect is the lower interest rates in the U.S., which we benefit from actually in the portion of debt that we saw with walking to U.S. dollars. The tax rate at the end of the first half stands at around 22% of recurring EBIT. It should be a good proxy actually for the year. And consequently, the 42 adjusted net income amounted to 90 million euros, which corresponds to close to 1.2 euros to share. Moving on to the cash flow and net debt, so as mentioned by Thierry, positive free cash flow amounts to 288 million euros, establishing a new record for Actima in the second quarter. The performance, this performance reflects the good work to try to manage your working capital. The working household ratio on an annualized sales basis stands at 16.5% versus 16% last year. The free cash flow figure also includes a €65 million tax saving related to the use of tax clusters in France. Total tax expenditure was stable quarter to quarter at €123 million. We reiterate that the total recurring and exceptional technical expenditure should amount to around 600 billion euros this year. Net debt reached 2.1 billion euros at the end of June, including a billion euros of hybrid bonds. This represents a decrease of nearly 350 million euros relative to net debt of close to 2.5 billion at the end of March. So, coming mainly from the inflow related to the sale of the functional polyolescence business, the strong free cash flow generation over the period, and integrating the payment of the dividend in May, which amounted to €168 million. Also, please remember that we temporarily carry a €300 million hybrid bond in duplicate. Since we took advantage of the favorable market conditions last January to issue €300 million of hybrid bonds at a yearly coupon of 1.5%, in advance of our initial €300 million hybrid bond maturing next October at a 4.75% interest rate. So, as a conclusion, our balance sheet remains extremely solid. ASNA debt, including hybrid bonds, represents 1.7 times the last quarter to be done. We also remain comfortable with our liquidity level, which stands at 1.8 billion euros at the end of June. And as you may have seen in the press release this morning, we also renewed our revolving credit facility for a billion euros. with an initial term of three years and the possibility to extend further two years. I thank you for your attention and I will now hand over to Pierre for the outlook.