Arkema S/Adr

Good morning, everyone. Welcome to Arkemas Q2 2021 Results Conference Call. With me today are Marie-José, our CFO, and the Investor Relations Team. As always, you will be able to download the set of slides used during this webcast from our website. And together with Marie-José, we'll be happy to answer your questions at the end of the presentation. After an already strong start of the year, we are very pleased. with the way this second quarter has developed. Actually, we consider this quarter to be another significant milestone in the development of the company, consolidating all the growth ingredients which were steadily implemented over the past years. Market dynamics stayed very well oriented with a combination of strong underlying growth and tight supply chains. On top of that, we benefited from a clear acceleration in the demand for sustainable solutions and from the strength of our innovation pipeline. We really took advantage of our unique positioning in high-performance materials, the demand for which will definitely continue to expand on the back of powerful megatrends like climate change, resource scarcity, urbanization, and clean mobility. In the first half, we have many very exciting examples of high-growth applications, such as battery, but there are many others, and this will continue over the coming months and years. Our performance was therefore excellent this quarter, with an EBITDA of 478 million euros, up 67% year-on-year, despite a negative combined scope and currency effects, of around 30 million euros. EBDA margin reached a record level of 20%. Just as importantly, the EBDA was well above the pre-COVID level of Q2 2019. This reflects also the soundness of our decisions made during 2020 not to cut R&D investment and CAPEX project, And this now allows us to capitalize on our recent capacity additions and to capture the growth. We are strongly encouraged by the quality of this performance. Importantly, it was rerun by all segments, each of them showing strong EBITDA progression supported by high volumes and robust pricing power. With volumes of almost 20% compared to last year, and 3.5% above 2019 levels, specialty material, which now represents around 85% of our sales, led the growth. In the continuity of Q1, underlying demand was still very solid in most of the groups and market. And as I said just before, we also benefited from the accelerating contribution of new developments driven by sustainable innovation in attractive and promising areas like battery, bio-based materials, 3D printing, engineering adhesives, or eco-friendly paints. As you certainly know, the raw materials environment was quite challenging this quarter. This is part and parcel of the economic recovery. We saw a sharp increase of input costs, including energy and logistics, which we continue in Q3. Thanks to our pricing actions, we managed to completely offset this negative impact at group level, including in our most downstream businesses. Of course, there are nuances depending on activities and geographies, but the net impact was neutral to positive in all the segments of the group. At Bostik, Pricing versus raw materials net impact was neutral, which is quite an achievement given the context. It is highly positive in coating solutions, benefiting from good pricing power in the downstream businesses, as well as tight market conditions in the acrylic chain. This pricing action will continue in Q3, so that despite further significant increases in input costs, the net pricing impact will be again at least neutral for Q3 for the group. Our specialty material, the ABDA, reached 417 million euros, almost 40% above Q2-19 pre-COVID levels, back on track with our 2024 ambition. The ABDA margin was also excellent, despite the raw materials inflation, high-performance polymer and cotexation achieving a historically high performance, above 20%, while Bostik delivered on its promise and reached 14.3% despite the dilutive mechanical effect of price increases of around 50 bps. This is in line with Bostik's confirmed objective of 14% for the full year despite the ongoing challenge of raw materials. Intermediate showed also a strong progression year-on-year despite a negative scope effect linked to the PMMA disposal on the back of more favorable market conditions. Given this strong set of results and the dynamics of the market, we remain rather positive on the outlook, even if we stay attentive and agile with regard to the evolution of both the public health situation and the difficult for material environment. Please also note that last year H2 already showed a good recovery, so the base of comparison with the higher will be higher than in H1. On the qualitative front, I would like to shed some light on several developments and projects which reinforce our commitment to sustainability and strengthen our positioning in high-performance materials in line with our 2024 ambition. Firstly, I wanted to highlight some examples of our eco-friendly innovation. As I said before, the demand for sustainable solutions is accelerating. driven by megatrends, and we are ideally positioned to benefit from it. Our high-performance materials are a good example, with our PVDF in batteries, serving clean mobility, our biobased conception of biobased polymer 11 used not only in transportation to replace metal parts and reduce energy consumption, but also in customers' eyewear for its ease of design. In construction, we have developed low VOC powder coatings, mainly for automotive applications, or new eco-friendly additive solutions for insulated glass ceilings. All this is really very exciting for the coming months and years. We also recently announced two new organic projects supporting our commitment to sustainability. The supplier 233ZD, which is part of the new generation of fluorospecialties with minimal emissive impact, and the launch of our new renewable PVDF grades for battery, which will allow an almost 20% climate change impact reduction using a residue of wood pulp manufacturing as a source of carbon. In parallel, we are significantly progressing with the construction of our two major CAPEX projects, also directing towards sustainability. We have launched the final phase of our integrated biofactory in Singapore for polyimide 11, and we are on track to start mid-2022 the production of HF in the U.S. from an innovative process allowing to reduce CO2 emissions by 20 times compared to the traditional process. Last and not least, on the M&A side, as you know, we finalized in Q2 the PMMA disposal ahead of an already ambitious schedule. We also made a few bolt-on acquisitions and equity investments in specialty materials to strengthen our positioning, for example, in the circular economy with the acquisition of AgiPlus, which is a leader in the regeneration of high-performance polymers and which was an historical partner of Arkema in recycling operations. We reinforced our additive segment with two Bolton acquisitions in the start of the year. And we also took minority stakes in innovative companies like recently Verkost to accelerate our battery strategy in Europe or Airpro 3D to extend our expertise in 3D printing. So as you could see, a very positive quarter. And we now hand it over to Marie-Josée and we'll comment then on the outlook at the end of the presentations.

Thank you. Let's review some financial metrics together, starting with the sales range. At 2.4 billion euros, sales are up 26% on-year. So in organic terms, they grew 35% versus the second quarter of 2020, and 12% versus the pre-COVID quarter of 2019 level. Relative to last year, organic growth was evenly split between volume growth and price effect. And relative to 2019, the 12% organic growth is picked between 3% volume growth and 9% price. From a regional perspective, Europe and Asia were particularly strong, with North America a little below, partly due to some raw material shortages constraining growth. The strong price effect is linked to our actions to increase prices in the face of a much higher input cost. But we also benefited from favorable conditions in the acrylics chain in all three regions. There is a negative 4.5% perimeter effect in the quarter versus 2020, which is attributable to divestment of functional polyolefins last year and the sale of PMMA in May of this year, with some offset from the acquisitions that remain on specialty materials. When comparing to 2019, this perimeter effect is only 2% as ARMA's integration only took place in July 2019. Currency also had an adverse effect on sales in the second quarter, to the tune of 4.2% negative. The same effect applies when compared to 2020 or 2019, since it comes mainly from the stronger euro versus dollar. US dollar, which stands basically at around 120 in the second quarter 2021 versus 110 in the second quarter 2019. The turnover growth allowed Arkema to achieve a very strong 67% growth in Q2 EBDA to 478 million euros. Looking at it in the different segments, we are first in Bostik. an achievement of 82 million euros EBDA at 64% year-on-year, and by more than 15% relative to the second quarter 19. As it is, the benefit is from strong volumes in construction, do-it-yourself and industrial markets, as well as from the integration of acquisitions and price increases in the face of high-euro materials. The EBDA margin was a strong 14.3%, fully in line with our full-year target that we confirmed at 14% for 2021. Advanced material DBDA is up over 40% year-on-year and up 25% versus second quarter 19. And DBDA margin is at a record level of 24.4%. High-performance polymers are the very strong quarter indeed, with volumes boosted by accelerating demand in most end markets, including construction, batteries, electronics, consumer goods, and transportation. Performance additives were less dynamic than the decline in oil and gas, and a high comparison base in animal nutrition, detergents, and disinfection applications. EBITDA of cooking solutions of €167 million is much higher than last year. and even than the second quarter 2019 level, which was at 91 million euros. This is driven by higher values across all major markets, including decorative paints, 3D printing, and industrial coatings, with an acceleration of the trend toward eco-friendly offerings, such as powder coatings and water-based paints. We also implemented price increases to reflect higher raw material and energy costs. The price versus raw materials impact was clearly positive for the segments overall, as we benefited from favorable conditions in the acrylics chain for activities that are not integrated downstream, so for the more merchant part of it. Finally, intermediate CBD exudes 32% to 87 million euros, in spite of the negative parameter impact from the divestment of PMNA and functional polyolefins. The segment benefited from good market conditions in acrylics in Asia in particular. With depreciation and amortization at 133 million recurring EBIT came to 345 million euros versus the 144 million in second quarter 2020. and the rebate margin stood at 14.4%, which is up almost 8% versus last year. After the particular year linked to COVID in 2020, our performance this year places our return on capital employed back above our long-term target of 10%. Non-recurring items amount to a positive 732 million euros. This mainly reflects the pre-tax capital gain of nearly €960 million into the sale of PMMA and also includes PPM amortization when off charges and restructuring expenses. Financial results stand at €13 million negative thanks notably to the benefits of refinancing our bonds at a lower rate and lower interest rates coming from the debt swapped into US dollar. At €218 million, the tax charge includes the tax linked to the capital gain on the sale of PMMA that will be mostly disbursed in the second half of 2021, and also reflects improving profitability. In the first half, the recurring effective tax rate came to 20% of recurring EBIT, which is a bit lower than last year's level of 22%, thanks to a more favourable geographic split of profits. Consequently, Q2 adjusted net income was nearly multiplied by 3 to 267 million euros, which corresponds to 3.5 euros per share. Moving on to cash flow and net debt, I would like to flag first that in order to facilitate comparability of the cash performance indicators, we have defined a recurring cash flow metric that excludes actually the positive variance and working capital coming from the tax liability and disposals. This recurring cash flow amounts to 245 million in Q2 2021 versus 284 million in Q2 2020. The year-on-year variance includes, first, the increased cash generated from our operations, consistent with our improved profitability, and second, the working capital rebuilt in the context of higher volumes and higher raw material prices. I'd like to flag that the working capital ratio on annualized sales, excluding PMMA activity now, stands at a very low level, just below 12%, versus 15.5% of sales last year. This is well below our normative level, which would be more around 14% of sales for a normative working capital ratio. The high level of demand did not really allow the various businesses to rebuild stock at this point, and we would therefore expect this working capital level to rise in second half as we rebuild some inventories in a continued price inflation context. Capital expenditure totalled €157 million in the quarter, versus €122 last year, partly inflicting higher exceptional capex of €64 million, This is as a result of the acceleration in the construction of the polyamide 11 plant in Singapore and the nutrient projects in the U.S. Total recurring and exceptional capital expenditure is still expected to amount to around 750 million euros this year. Second quarter free cash flow amounts to 313 million euros including a non-recurring amount of €132 million due to the timing of tax disbursements linked to the PMMA sale. The net debt at the end of June 2021 amounts to €1.3 billion, and that includes €700 million of hybrid bonds. The net debt also includes the totality of the €300 million commitment linked to the share-buy-back program that we launched in May, Our balance sheet remains extremely solid with an adept to EBITDA ratio at 0.9 times. Thank you for your attention and I'll now hand it over to Thierry for the outlook.

Thank you Marie-José for your explanations. Again, we were very pleased by the result of the first half which reflects the increasing strength of our portfolio. The positive dynamics that we saw in H1 are continuing. with good demand across the majority of our end markets. Our specialty materials in particular will continue to strongly benefit from our sustainable innovation drive and recent capacity expansions we made to leverage the accelerating demand linked to global megatrends. We are also keeping a close eye on the evolution of the public health situation and raw materials inflation. This is why we remain nimble, and in particular ready to further increase prices when needed. Our raw materials index will continue to increase materially in Q3, but we have demonstrated, as you know, our pricing power so far this year, and I am quite confident that we will at least neutralize their impact in H2. Given the strength of our first half results, and our confidence in the unique quality of our portfolio and of our growth levels, we decided to raise for the second time this year our full year 2021 guidance for specialty materials, which as you know now constitute the vast majority of our scope. We now expect specialty materials EBITDA to increase by around 30% year-on-year in 2021 at constant scope and currency, versus plus 20% announced when we raised guidance at the Q1 results publication in May, and plus 10% when we gave the original guidance in Feb. This would mean a very robust H2 for specialty materials, with an EBITDA slightly above H2 2019, despite a negative currency impact of around 30 million euros. All in all, this means that for the group, we expect an EBITDA of around 1.4 billion euros in 2021. At constant currency, our EBITDA would then be close to the 19 and 18 levels for the whole group, despite the disposal of functional polyethylene and PMMA for 8 months and the significant decline in fluorogase contribution over the period. so with a much better mix and also much lower debt. And it was the whole aim of our new vision for the company which we announced last year in April, and this is very value-creative for our shareholders. Beyond delivering on our financial results, we'll continue to execute our strategy, accelerating innovation and new development in Megatrend, continuing Bolton acquisitions, specialty materials, implementing the strategic review in fluorogases, and above all, making further progress on our policy of corporate social responsibility, to which our employees are fully committed. So I thank you very much for your attention, and we are now together with Marie-Josée, ready to answer the questions you may have.