Arkema S/Adr

Good morning, everybody. So welcome to Arkema's Q3 2023 results conference call. Joining me today are Marie-Josée Donchon, our CFO that you know well, and the investor relations team. As always, supporting this conference call, we have posted a set of slides on our website. I will now comment the quarter's highlights before letting Marie-Josée go through the financials in more detail. And at the end of the presentation, we'll be able to answer your questions. So I don't want to sound like a broken record, but the economic environment in Q3 was broadly similar to what we experienced through this year, with low volumes, hopefully now at a trough, driven by weak demand and some residual stocking. In these circumstances, our Q3 2023 financial performance was robust and our EBITDA was in fact comparable to pre-COVID levels but in a much lower volume environment. Our resilient EBITDA margin versus last year and our high cash generation are also strong elements of performances and are testament to the success of the group's repositioning in high performance specialty materials. Here are some of the key points of the quarter I'd like to highlight. First of all, we delivered an EBITDA of €386 million in Q3. Year on year, our results were impacted by the absence of exceptional profits in PVDF we had in 2022, as you know, as well as less favorable market conditions in acrylics, and they also underline lower demand trends in most end markets, although we continue to see a positive dynamic in automotive energy crop nutrition and batteries. And again, these 386 million euros of EBITDA was comparable to what we achieved in 2019 despite lower volumes. I'll let Marie-Josée go through the detail by segment afterwards. Our EBITDA margin stood at 16.6%, showing, we think, a good resilience given the economic context and reflecting the evolution toward higher value-added solutions as well as our dynamic pricing policy. Group volumes were some 7% lower relative to last year. Europe and the US bore the brunt of the decline, while Asia performed a bit better, benefiting amongst other elements from higher battery volumes. The lower price effects mainly reflect, as expected, the normalization of PVDF and lower upstream accolades. and to a lesser extent lower raw materials. Excluding the former, net pricing was globally positive thanks to our disciplined pricing policy as well as the favorable products missed as we benefited from our innovation-led new business developments. Thanks to our team's efforts to tactfully manage working capital and costs, our cash generation was solid. with recurring cash flow of 312 million euros in the quarter, in line with our full year objective to maintain an elevated cash conversion ratio. As well as dealing with a challenging short-term picture, our teams are fully mobilized around the 2028 ambition we unveiled at the Capital Markets Day in September, which a number of you attended. On that day, you will remember we disclosed three new industrial projects, all geared toward decarbonization and aligned with our new ambition. They concern purification technology to improve the environmental footprint and efficiency of our acreage production in France, the DMDS capacity increase in the US to support the growth of biofuels, and organic peroxide in China for renewable energies. I won't go into them in detail, as we already spoke about them at length during the capital markets day. Shorter term, a few important projects are expected to have a material contribution in 2024, namely our bio-based polyimide 11 unit in Singapore, which is gradually ramping up, as well as a plant at Nutrien and 233ZD for batteries and home insulation in the US. I will now let Marie-Josée go through the financials in more detail before we discuss the outlook at the end of the presentation.

Thank you, Thierry. I'll start with the profit and loss as usual. So at 2.3 billion euros, Arkemasa quarter sales were down 17% at constant scope and currency. Williams were down 7% and the price effect at minus 10.6% reflected the trend on raw material prices. as well as the normalization of PVDS and less favorable conditions in upstream acrylics. The currency impact is at minus 4.5%, driven by the strength of the euro versus the US dollar and versus the Chinese yuan relative to Q3 2022. Our Q3 EBDA came in at 386 million euros, which demonstrates a good resilience of the margin at 16.6% in line with last year's. This margin level was achieved through discipline in pricing management as well as strong control over fixed costs. Looking quickly at the performance of our segments, we have Adesys, which had a good quarter growing EBDA by 9% despite a 10% decline in sales, which equates to a 250 basis points improvement in the EBDA margin to 14.4% for this quarter. With some help from lower raw material costs, this performance was driven by efforts to control costs over the weaker volume environment, a better product mix, and continued operational excellence initiatives to improve efficiency. In advanced materials, we were impacted by the reversal of the PPDF over-earning of last year. This overshadowed the benefits from new business developments which drove increased volumes in high-performance polymers, as well as a strong EBDA in performance additives. In the current context, our EBDA margin is holding well at 20%. In coatings, we face challenging conditions in upstream acrylics, all the more in the context of last year's high comparison base. The combination of lower unit margins and lower volumes explains the EBDA decrease The performance of our downstream business is more resilient despite slower demand and destocking. It's boosted by the success of eco-friendly solutions and more favorable raw materials. Finally, in intermediates, our performance is robust given the macro environment supported by the resilience of refrigerant gases. For the group, depreciation and amortization stood at 140 million euros, stable versus last year, leading to a recurring EBIT of 246 million euros and a rebate margin of 10.6%. Non-recurring items amounted to 64 million euros in line with Q2 level. Around half corresponds to PPA depreciation and amortization and the other half to one-off charges as well as the startup cost of our polyamide 11 plant in Singapore. With financial expenses at 9 million euros and tax expenses at 54 million euros, Q3 adjusted net income stood at 277 million, which corresponds to 2.38 euros per share. Q3 free cash flow amounts to 273 million euros, which includes the 138 million inflow from working capital as a result of lower activity levels and lower raw material prices. This strong performance emphasizes the focus on cash generation across the company. Social capital expenditure amounted to 137 million euros, broadly similar to last year's level. And to finish, basically net debt at the end of September 23 amounts at 2.4 billion euros, including the 700 million euro hybrid bonds. Our balance sheet remains therefore solid, with the net debt to last 12 months EBITDA ratio standing at 1.7 times. Thank you for your attention, and I hand it over to Thierry.

Thank you, Marie-José. So as you know, the macroeconomic environment has not shown any signs of improvement, and the overall visibility remains limited. This is true across all regions, I would say, although Asia remains somewhat more resilient relative to Europe or the U.S., at least for the time being. In addition, as you all know, geopolitical tensions have risen over the past few weeks. We are therefore really focusing on what we control. So we maintain a strict operational discipline in this context. We manage fixed costs very strictly. We'll deliver on these two what we said we would deliver, which is 30 million euro savings compared to our budget, and we spoke about it when we published Q2 results. And we are also, as Marie-Josée mentioned, optimizing working capital to take into account the weak macro to adapt permanently on the sales forecast and to maintain a strong cash flow dynamic. So with Q3 results, which were, as you could see, in line with our expectation, and as we had indicated recently and during the Capital Markets Day, we confirmed our target to reach an EBITDA of around 1.5 billion euros in 2023. As we look towards the month ahead, we are actively working on the industrial projects that you are familiar with, both the ones which have started already and those which will shortly be finalized. as we expect those projects to contribute nicely to our growth in 2024. Beyond these short-term considerations, the Capital Markets Day was a great opportunity to focus the teams on our larger, longer-term ambitions. So we are all highly motivated, focused to achieve the financial target we set ourselves longer-term for 2028. And we are convinced that with our portfolio of cutting-edge technology and sustainability-driven innovation, we are ideally positioned to ride the waves of the megatrends and capture the opportunities in the high-growth sub-market that we detailed during the event. So, after these few words, I thank you very much for your attention, and together with Marie-José, we are now ready to answer your questions.

Thank you. If you wish to ask a question over the phone, please press star and 1 on your telephone keypad. If you wish to withdraw your question, please press star and two. Again, please press star and one on your telephone to enter the question queue and wait for your name to be announced. The first question is from JD Pandya with Onfield Research. Please go ahead.

Hi, thank you so much. My first question is on adhesives, on the margin performance, and well done on that. You're already at 14.4% margin for Q3, and obviously raw materials keep continuing to go down. So I just wanted to understand that, you know, when we look at 2024, how do we see margins for adhesives? And the second question really is on PVDF. When we look at the volume environment for PVDF, you've grown volumes marginally, it looks like, in Q3. Again, when you look at dynamics in Asia, how do you see volumes for PVDF recovering in 2024, if you could give us some color? And finally, on coatings, it seems like your coating customers have started to buy more larger ticket, you know, more volume-oriented products like acrylic acid or solvents, for that matter. So do you see that in 2024, the destock that we've seen in the coding chain will be over, and we will see some normalcy in buying patterns? Thanks a lot for my question.

Hello, Philippe, and thank you for your question. So the difficulty is that you are more than focusing on the, what we publish are focusing on 24, which is a bit early, frankly speaking. Normally, we talk about the following year, as you know, every year when we published previous year, so it would be in effect. So what I can say so far, so first of all, we're happy, back to your first question, we're happy with the marching of ADESYS, which reflects the huge work which is being achieved by the team and also the evolution of this segment. In fact, this segment plays really the role of that we defined for it when we started to build an additive franchise. It's really more resilient overall in this kind of economies, and we like that. It's important to have this pillar. Now, with regard to the margin, 24 is certainly too early to tell you in detail. The idea is to continue to grow year by year. So as you know, we have a target for 28, which is 17%. If you take a straight line between 23 and 28, you could be where we target for 24, something like that. And we try, you know, in the way we develop the company, we try not to have too much bumps, but to do it really steadily. So take a straight line between 23 and 24. 28 will benefit, for example, from the synergies on Ashland and will continue to ramp up with some recovery. With regard to raw material, when you say they continue to decrease, they don't continue to decrease. So we had 19 at a certain point, then it increased pretty much. From this high point we had at the beginning of the year, it decreased, but we are still well above where we were in 2019. And we think that the point we have reached today is, from what we see, more or less stable. And because don't forget that the oil price has increased recently for different reasons, including geopolitical reasons. And because of that, overall, you had some decrease on certain raw materials, but some others have increased back. So I would talk more about stability at a at a level which is inflated compared to what it was in 2019, while below the peak of the start of the year. With regard to PVDF, actually the volumes are there. So at the beginning of the year, they were not there. You remember we discussed on batteries, it was quite distoking. But I would say the volumes are there. because of what you know about Chinese capacities and also the reference point of last year is more unit margin topic, where they have decreased, prices have well decreased, but volume out there. So next year, you know, we have had some project with some start expansion, which were implemented mid this year in China and China. In France, next year, we should benefit on our volumes, and we believe we will pull it up. We should benefit on our volume of the expansion of capacity we had in 2023. So in terms of contribution, I think to compare to what would be contribution from Nutrien or from Singapore on polyamide, but there will be a an incremental positive contribution of this fuel expansion we had, and we believe that the volume should be there in PVDF next year, just supported by, in particular, by battery. And also oil and gas, which is not bad. On the coatings, so really the destocking is getting more limited compared to what it was at the start of the year. We have still some residual destocking, particularly in the U.S., because in the U.S., the destocking started later compared to Europe. Okay. So hopefully in 2024, there will be some recovery at a certain point in the year. This is at least our assumption. Now, when the availability is too limited to be more precise on that, certainly we will give you more granularity when we discuss in the outlook for 2024. Okay, thanks a lot. You're welcome.

The next question is from Aaron Ceccarelli with Barenburg. Please go ahead.

Hi, good morning. I have a question on PVDF capacity. My understanding is that this year we have got quite a good chunk of capacity additions from China, and it looks like there's more to come next year. Maybe can you elaborate around this, please? And my second question is on fluorogases. We continue to see strength in pricing in both Europe and the U.S. Maybe can you explain a little bit what is driving this? Thank you.

So two different, completely different dynamics between PVDF and fluorogas. So with regard to PVDF, yes, you're right to say, and we have been quite transparent to you on this. significant capacity addition in China, which is, and why China for two obvious reasons. The first one is that it's a country of fluorospar. With Mexico, it's one of the two countries in the world where you have a lot of fluorospar. So it drives a sort of fluorogas and fluoropolymer. It's not an EPVDF strategy by a Chinese player. And the second one is that the battery capacity We are just at the start of the EV, not only in China, but also in the world. And as you know, electrical vehicles made in China will not be made only for China, but also for all sides of China. So because of that, you have two elements coming in parallel. The ongoing growth of PVDF demand, which will be quite significant in the next 10 years, and at the same time, significant capacities. So, based on that, what's the strategy of Arkema? As usual, we have a growth strategy, but which is reasonable. This is what we presented at the Capital Market Day. And we try to have a qualitative growth. We try really to focus, and this includes also what we do in battery, where we are not chasing for the whole market. We are really focusing on what is the high end of the range in order to continue to get differentiated. And flue gas, it's a different dynamic because it's not driven so much by the end demand. It's more driven by the replacement of old generation of flue gas by new generation and by the mechanism of quotas. To make the story simple, this year is a solid, robust year for flue gas for Arkema. And we are optimistic that next year should be, again, another solid year and robust in fluorogas. You mentioned Europe and the US. You're right. They are, for Arkema, the two main contributors for fluorogas. And we have also, beyond that, a few specialties that we are developing. We start to contribute nicely. And they are positioned in the HPP segment.

Perfect. Thank you very much.

You're welcome.

The next question is from Geoff Hare with UBS. Please go ahead.

Good morning, and thank you for the presentation. I just wanted to ask two related questions. First of all, when you look into 2024, What do you have in your control, i.e., what do you expect from new project contribution to EBITDA and also cost savings as well? And is there any other levers that you have control of that you could give us? That would be great.

So, again, on 24, I try to be a bit shy because it's more discussion for participants. or end of February when we publish our full year 23 results. But I will try to give you a little bit of substance already today. So in fact, for the growth on the cost savings, we'll do them, but it's more a mitigation of the inflation on cost. So it's a different nature. So in terms of growth, we get more or less three, let's say, elements. The first one are organic projects, so you know them well because we are quite transparent, including but not only the ramp-up of the polyimide plant in Singapore, the ramp-up of the nitrogen HF, 1233ZD for the thermal insulation, the PVDF I've just mentioned to JDIP at the beginning of the discussion. So, again, we'll be more, let's say we'll confirm this number, but... Shortly speaking, we should generate around 70 million, 70, 70 million of additional euros in the 24 versus 23 coming from there. Then we got the PM acquisition as we saw nothing more than what we presented when we made the acquisition. By the way, we think we should close either before the end of the year or early next year. So we'll get close to a full contribution next year on PM, but we cannot be more precise on the number because we have not closed. And as you know, it's a listed company. But we'll discuss that again on the early 24. And the last one is there will be a rebound in 24. The question is when. So it's too early to be more precise, and even yourself, you cannot be more precise. But that will be the third pillar of our goals for next year.

Okay, thank you very much.

You're welcome.

The next question is from Angelina Glazova with JP Morgan. Please go ahead.

Good morning. Thank you for the presentation and for taking my question. If possible, could you give us a bit more color on the full-year guidance and Q4? For instance, if we assume full-year EBITDA at $1.5 billion, that would imply fourth quarter EBITDA of around $330 million. So could you confirm if you're happy with this assumption for Q4 from our side, or rather you're implying a certain range for the full-year guidance, and therefore if this is the case, what would the range be for Q4? Thank you.

By nature, and you know the answer, we are already very precise because we publish around 1.5 billion, which I would say, if I compare to my peers, is already a very precise guidance. It is difficult to be even more precise than the euro. So I think, no, we confirm what we say at the Capital Market Day. around 1.5 billion. We are happy with this around 1.5 billion. And so you can make the math on the Q4 that you are doing. So this is, we confirm and we refer this guidance and it will return in the press release.

Thank you.

You're welcome.

The next question is from Matthew Yeats with Bank of America. Please go ahead.

Hey, good morning, everyone. Can I ask you about high-performance polymers? You had a really tough first half in that business, so good to see volume growth returning in Q3. In your introductory remarks, you talked about business development and specifically auto and energy. Can you just elaborate a little bit more on where that volume growth has come from, be it the applications and even what type of polymer? Is this PA11 ramping up or is this more broadly in the portfolio? And I guess what I'm struggling a little bit here is with the volatility from quarter to quarter in the business. So just things like order timing really influence the numbers or is this a more underlying or recurring business development that would give you confidence on growth into Q4 and beyond? Thank you.

Okay, thank you, Mathieu. As you know, in terms of EBITDA, we publish on the segment advanced material, which is made of two components, HPP and performance additive, which I would say two different dynamics. On HPP, you said tough. Okay, I accept that, but it's tough compared to last year, which was outstanding because of this overwhelming in PVDFs. If you come back on the longer comparison, I think given the macroeconomic, it was a good level of profitability. And you can see that with regard to EBITDA, the whole segment where we are above 20%, which given the macro contact, which is challenging, obviously, since the start of the year. is a good performance. So I say you have two different dynamics. On HPP, you have decent volumes, and they were growing actually on the Q3. But you have this, on your comparison, you compare to this overrunning of last year. And on PVDF, I come back to the previous point of the conversation. you have some short-term pressure because of these new capacities. On the development, I would say EVDA volumes now, after the start-up of the year, the volumes are okay. On polyamide, in fact, it's not the ramp-up of the plant. It's really that we are sold out because, as you know, we are starting the plant. So the volume are still quite limited as a new plant. So it's mostly based on the legacy capacity and that we are still rather sold out. So I would say rather stable volumes on the polyamide and growing volume on PVDL. I would take advantage of your question to mention performance additives, which has a growing EBITDA, which is remarkable in the current context. Not coming from the volume, but really the evolution of the product mix. We mentioned, because it was one of the assumptions for the future investment in the U.S., the development in additive for biofuel is one element. We mentioned also what we do in renewable energy in Asia. It's another element. It's a high-margin business, and they support the evolution of the mix-up.

Thanks. Marie-José, can I ask a question about working capital? Thierry's introductory remarks suggested that the end environment wasn't getting particularly better. Do you expect to still reduce inventory further in Q4, or are levels now about normal?

No, I think they're still... The classical seasonality that we have in the business for Q4, we still have some decrease in raw material prices being factored progressively into the inventory pricing. So definitely I would still expect to reverse basically the negative working capital that we have here today.

Perfect. Thanks both.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. The next question is a follow-up from Jaydeep Pandya with Onfield Research. Please go ahead.

Hello. Thanks. Just on biochemicals, obviously the methionine market has been a bit difficult in the last 12 months. So how has biochemicals, which used to be a very, very solid and stable business for you, How has that evolved in 2023, and how do you see it sort of on a forward basis? And then just an add-on to that, you know, there is obviously backward integration capacity being built by one of the key players in the U.S. So will that lead to lower earnings for you, you know, in 2024, 2025, when sort of the capacity, you know, comes on stream? And then just an additional question. around performance additives is around molecular sieves, which used to be quite a nice profitable business for you guys. So we haven't spoken a lot about this in recent times. How do you see molecular sieves in current environment? Thanks a lot.

Okay, Gilles. So Ontario Chemicals, without giving you all secret, because if I do that, I will share it with my competitors. But overall, you have, as you know, different businesses. On the methionine, it has been now a couple of years, which is more challenging. So we have been able to limit the pain, I would say, because of our positioning. But it's not what we have had for many years, which was a growing market. It's not the case anymore. That is still a nice contributor, but performance has been a little bit reduced compared to what it has been. But on the other side, as we mentioned, we are developing some additives, including the one for biofuels, but also some application linked to oil and gas, which are doing very well. And because of that, overall, we are able to be stable at a high point. And so it's a good position to be in. So it's a good business. And thank you for asking the question. On Molucar Seas, it has been now, you know, we have two businesses, a sort of recurring business, which is stable, I would say, and will continue to be stable. The big contribution you are referring to are more coming from project-related business, which has been rather weak in the past years and will continue to be weak for a couple of years. So don't count on that for next year. But you have been able to see that on performance additive. We have been able to mitigate that by other development, and we are happy about that. So you have a strong performance additive and resilience. And you could see it, especially this year, where in the macro, when you add all the addition of the different product line or contribution of performance entities, we are really contributing nicely and growing a little bit, which is really a performance.

If I may just ask one follow-up on PVDF, where are we on the technology evolution? for suspension grade for Akeema. Are you guys going to, you know, compete with one of your close competitors there? Or, you know, you don't need to be there and you can still grow and sort of upgrade your emulsion technology. You know, could you give us some color on that, please? Thanks a lot.

Again, we have not created this debate, but we also anyway, so I'm a bit puzzled when you ask the question because suspension is good for a part of the binders. It's not necessarily well positioned for separators and for other applications of the cell. And emission is good for a part, as you know, LFP related, which is more or less taking half of the market long term. and is good for separators. So I think for us it's important to build the two, especially we are making some good research which midterm will help us to be positioned, but we are happy with what we have. This means that not everybody in PVDF is positioned the same way. I think with the cards we play, positioning of the high value, I think we are well positioned. now each player is a little bit different. And we are talking about batteries. Then there is all the rest in which we have very strong positioning. Thanks a lot. We are very consistent with what we said, the capital market day, where you, as you know, when we have a showroom, we could really explain where we were in batteries, and not only, in fact, PVDF for batteries, but also in acrylic technology, other technologies, so I mean, the game is starting and we have plenty of cards to play. Not exactly the same card as our competitor, but we are happy with that.

Thanks a lot.

The last question is from Martin Evans with HSBC. Please go ahead.

Thank you. Yeah, it's just a very quick question. Thierry, on your longevity at Arkema, I noticed last night the main board... directors yeah they agreed to extend your contract for another four years starting next year so that's 2024 that'll take you up to 2028 and i first met you back in well i think it was before 2006 with the spin-off when again you were chief executive that's an awfully long time In fact, it must be a record for anyone to hold a job in the chemical industry for over 20 years. It's obviously very reassuring for everyone who knows you, for investors, for analysts and so on. But what was your motivation? I guess you'll say it's simply because you want to carry out the latest strategy up until 2028. Did you not think of possibly having a rest? Because it is an awfully long time to be running a company. Essentially.

Okay, thank you for the question, Martin. So first of all, this is the board. I was deciding this is not myself, so I was happy to see that the board is supporting that. Now there will be the General Assembly with Cheryl Doe. This is her voice at the end. And with regard to me, as you know, pretty good shape. And the good thing, as you know, with the chemical industry and the world in general, is that it's moving all the time. So we had... I would say the topics are changing, the stakes are changing, which is very good, and with the capital market there, I think as you could see, we have quite a very interesting project to lead, and I was happy to see that I get the support of the board to lead this project, which is really very exciting, and because the world is really changing, so it keeps me in good shape. Hopefully I answered your question, more or less. Yeah, excellent. Well, good luck and congratulations. Thank you very much, Martin. Do we have other questions?

No, Mr. Louina, that was the last question. I turn the conference back to you for the closing remarks.

Okay, so I would like to thank you all for your questions and for listening to us. And as usual, Beatrice and Peter will be at your disposal for questions in the short term, and Marie-Joseph and myself when we have the opportunity to meet you in the coming weeks and months. Thank you very much.