Edited Transcript of AKE.PA earnings conference call or presentation 27-Feb-20 11:00am GMT

And as announced with regard to the whole strategy, we give an update at our Capital Market Day on April 2. These actions as well as the quality of our financial performance support the confidence of the group in the long term and also the decision of the Board to propose a dividend, notable increase, plus 8%, which would represent a total amount of EUR 205 million in 2019.

After this brief introduction and this underlining of key points, let’s have a closer look at various businesses. I will start with specialties. First of all, adhesives, they deliver remarkable performance. I think, with EBITDA growing in the high teens, driven by the momentum of new business development in construction and structural bonding, which are 2 areas which are growing year after year, the benefit also of the pricing action we took in ’18 and in the first part of ’19, with stable raw materials, a little bit favorable and also synergies from past acquisition, including Den Braven. Having mostly recouped the impact from higher raw materials which has started in 2016, Bostik’s EBITDA margin now stands at close to 13%. So consistent with our plan and what we said last year, and we have still this ambition to reach 15% and higher in the medium term.

Meanwhile, we continue to make value-added bolt-on acquisition with Prochimir and more recently with LIP, which is a Scandinavian leader in construction chemicals, which we finalized on January. And we’ll continue this bolt-on strategy on adhesives in 2020.

I move now to Advanced Materials. They deliver a rather resilient performance despite lower volume, which we saw especially in the transportation, oil and gas and consumer electronics sectors, no surprise there. Everybody knows the trend of these businesses last year. Our Advanced Materials line benefited from the integration of ArrMaz, which delivered a good performance in line with our expectations. The teams also worked hard to optimize product mix toward higher value application, which helped maintain profitability at a good level.

Last and not least, we benefited from our continued innovation rise, which, for example, led to significant growth in attractive markets like 3D printing, batteries or lightweight polymers. Many exciting opportunities still lie ahead. In composite during the spring of ’19, we opened a joint R&D laboratory in France with XL, the leader in carbon fiber composite, especially for aircraft, future generation of aircraft.

In 3D printing, we signed an agreement with AutoDesk and Farsoon to develop optimized software, hardware Advanced Materials ecosystem with a goal of accelerating industrial production with polymer laser sintering. We inaugurated last November, a new center of excellence for 3D printing in France, which complement what we have in the U.S. in 2 centers. And this effort should ensure we stay well positioned to capture growth in really the rapidly attractive 3D printing market. And finally, not covering everything and all the like, Thiochemicals performed very well in 2019 in context of growing end markets.

As you all know, the performance of our intermediate product line in ’19 was impacted by weak market condition in flurogases, where illegal imports of HFCs in Europe weighed materially on volume and prices. In MMA/PMMA, the year was marked by normalization, it was expected. But the impact of this normalization was softened by our strong integration along the chain. It’s one of the very strong element of our MMA/PMMA positioning, the benefit of innovation and somewhat more favorable raw materials.

Finally, acrylic delivered solid volume growth in 2019, thanks to the diversity of the end market, mainly in Asia and U.S., where our new state-of-the-art reactor in CLEC started in the summer. And this strong growth of volume offset some more weakness at the end of the year in the spread. So overall, we delivered a very solid set of results in 2019 in a complex macroeconomic environment, while pursuing a transformation and making further progress toward our 2023 objective of making at least 80% of sales in specialty.

So the shareholder specialties now stands at pro forma with the impact of the acquisition of ArrMaz, Prochimir, Lambson and LIP as well as the proposed divestment of the functional polyolefin business, which should be finalized in the second quarter, stands at 75% pro forma.

Going forward, we continue to look for small and medium-sized acquisition target with the right strategic fit and synergy potential on our 3 growth platforms, namely Adhesives, Advanced Materials and Performance Coatings.

2019 was also richer in terms of organic projects in higher-growth market region. We started our first world-scale PEKK plant in the U.S. after 10 years of development of this incredible polymer in R&D. We increased specialty polyamide power of capacity more in France by 50%, very attractive product line. We expanded sartomer capacity in China by 30%. And we started the powder cutting resin facility in India. In 2020, one of our major projects, the doubling of capacity of our Kerteh Unit in Malaysia in thiochemical is expected to start shortly. Project for the second half of the year, if I stay with the CapEx, includes a 25% expansion of polyamide 12 capacity and the 50% PVDF expansion dedicated to batteries, both in Changshu in China.

We’re also ramping up our construction of our PA11 plant in Singapore, which is really an absolutely major important project, is expected to start in 2022. So these high-return CapEx projects should enable the group to capture the structural growth opportunities, which are incredible in materials long term.

As I said at the beginning, reflecting our confidence in Arkema’s long-term prospects, solid cash flow generation, the Board of Directors will propose to increase the dividend by 8% to EUR 2.70 per share compared to EUR 2.50 per share last year, which means a significant increase in the payout ratio to 33% versus 26% last year.

Before concluding my initial remarks, I would like to highlight Arkema commitment to corporate social responsibility. You know that it’s very important for me, it’s very important for our management and our Board. It’s an integral part of our business and strategy. Having already reached or made significant progress toward our 2025 social, environmental and safety targets, we have decided to unveil new environmental and climate change targets for 2030. Specifically, as part of our commitment to the Paris Agreement, we have introduced a new second base greenhouse gas reduction target, which calls for a reduction of greenhouse gas emission of 38% by 2030 relative to 2015. So a very significant decrease, very ambitious target indeed, and I hope it reflects the important environmental issues have in all employee decision process today inside Arkema.

And I would like also to add the 2 corporate social responsibility criteria, diversity and greenhouse gas emission, has been included as part of my own long-term incentive scheme.

Thank you for your attention. So now I’d like to turn over the call to our CFO, Marie-José who will detail the 2019 financial performance.

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Marie-José Donsion, Arkema S.A. – Group CFO [3]

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Thank you, Thierry, and good morning, everyone. So I’d like to start with some comments on our fourth quarter results. The economic context remained challenging, translating into a 2 billion sales level for the quarter, which represents a 10% organic decrease compared to last year’s Q4. Half of the impact came from volumes and the other half from the price effect, reflecting, in particular, the lower price of propylene on the Coating Solutions segment. At EUR 295 million, though the EBITDA was up 3% on last year’s already strong performance, reaching a 14.4% margin level.

So looking at each division, in high-performance materials, we achieved strong results, with EBITDA up 12%, thanks, in particular, to continued growth at Bostik and to the integration of Harman. Sales were up 1.3%, benefiting from pricing actions and favorable product mix and despite a 7% decrease in volumes coming from specific industries as well as general customer destocking.

Industrial Specialty had a rather contrasted performance. So on one hand, thiochemicals and hydrogen peroxide delivered another good quarter, and MMA/PMMA remained resilient, helped by our footprint in the U.S. and our high level of integration.

On the other hand, Fluorogases still suffered from the illegal HFC imports in Europe, as Thierry mentioned. Finally, Coating Solutions posted a 13% sales decline in Q4, driven by the mechanical impact of lower propylene prices as well as a 3% volume decline. EBITDA came in at EUR 36 million versus EUR 44 million last year as the better downstream unit margins could not fully offset less favorable market conditions in upstream activities.

I propose we move on now to our full year 2019 numbers. So let’s start with the P&L. Our sales reached EUR 8.7 billion, so broadly in line with last year’s level, including a positive 2% currency effect, mainly due to a stronger U.S. dollar versus euro and a positive scope effect of 1.8%, mainly corresponding to the integration of ArrMaz in July.

Volumes were down 2.4%, mainly due to lower demand in high-performance materials, and the price effect was a negative 2.3% localized in Coating Solutions and Fluorogases, which offset positive pricing across our specialty business lines.

EBITDA at EUR 1.46 billion was similar to last year’s record levels, and the EBITDA margin was stable at 16.7%. What does that mean in terms of contribution mix between specialties and intermediates? It actually means that specialties delivered an EBITDA growth of more than EUR 100 million, partly offsetting the contribution from intermediates that actually declined by more than EUR 100 million in EBITDA.

Our recurring EBIT reached EUR 926 million versus just over EUR 1 billion last year. This translated into a REBIT margin at 10.6%. The nonrecurring charges amounted to EUR 73 million, so mainly corresponding to restructuring charges and asset impairments.

Financial results at EUR 116 million was impacted by the higher interest rates on our U.S. dollar debt. In 2020, we could assume the financial results to benefit from the refinancing of our EUR 480 million senior notes that are maturing in April 2020, and that would represent roughly EUR 10 million saving.

Taxes stood at EUR 137 million, which, excluding exceptional items, correspond to a tax rate of 19% of our REBIT, which is unchanged year-on-year. For 2020, we anticipate the tax rate on REBIT to be around 20% as well.

Finally, 2019 adjusted net income came in at EUR 625 million or EUR 8.2 per share, if you like. A few comments now on cash flow and net debt. As mentioned by Thierry, at EUR 667 million, the free cash flow generation was once again the highlight for us this year. This reflects an inflow from working capital resulting from tight control, lower activity levels towards the end of the year and lower raw material prices, indeed. This corresponds to an exceptional EBITDA-to-cash conversion rate of 52% compared to the 38% achieved last year. At, let’s say, 13.8% of our sales, our working capital ratio is close to last year’s figure.

Recurring CapEx came in at EUR 511 million, which represents 5.8% of our sales. Exceptional CapEx amounted to EUR 96 million and reflect the progress of our thiochemical expansion in Malaysia and our specialty polyamide plant in Asia. For 2020, the sum of recurring and exceptional capital expenditure should amount to around EUR 700 million in total, of which EUR 200 million exceptional CapEx are linked to the ramp-up, in particular, of the Singapore plant.

Net debt rose by around EUR 600 million during the year to just over EUR 1.6 billion at the end of December ’19, including EUR 729 million spent on acquisitions and EUR 154 million linked to the application of IFRS 16 on 1st of January ’19. With a net debt-to-EBITDA ratio of 1.1x, excluding our EUR 700 million of hybrid financing, our balance sheet, of course, remains very healthy.

So this would conclude my presentation, and I now hand it over to Thierry for the comments on the outlook.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [4]

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Marie-José, thank you. So now the outlook. So looking ahead, we expect the economic environment, no surprise to remain volatile this year with challenging also. In this context, in 2020, as we mentioned in the slides and in the press release, Arkema aims to reach an EBITDA comparable to the 2019 very solid level, excluding the impact of the Covid-19.

For the full year, I will give you some color, excluding again the impact of the Covid-19 on the main drivers without going into every business. Bostik, I think, is again expected to be an important driver for the group and should achieve around 10% EBITDA growth, including a couple of small bolt-on acquisitions, which will be, again a combination of organic and smaller acquisition, thanks to further progress on synergies, operational excellence measure, we have still room there and we assume stable raw material, which is valid for the whole group.

Advanced Material contribution should be broadly stable despite expected continued weakness in auto and electro mix on the first part of the year, where, if we don’t see discontinuity in the trend compared to what we saw in — for the time being, last year for second semester, while Fluorogases should decline a bit, to a much lesser extent than last year, but we still should have some decline in Fluorogases because of the illegal import issue.

As we have shown in 2019, we’ll maintain a strong focus on our operational excellence measures. We usually don’t comment broadly on all the savings we are making, but I can tell you, and the last year example was a good one. We really are focused on that throughout the organization. And we plan to offset at least half of cost inflation by a fixed cost improvement and by variable cost improvement. Normally, we do better than that. We will certainly remain agile. This is a message which has passed through all the organization and adapt to this economic environment as it evolves.

In terms of seasonality, we expect for different reasons, a more balanced contribution between the 2 halves relative to last year. One of the reasons being the Covid-19. So regarding this Covid-19, as everybody knows, visibility is low at this stage. The situation is changing nearly every week. We know with some cases in Europe. While we do not have any factories in the Hubei province, I mention it because it has been asked to us. This question came through many times. So we don’t have any factories in the Hubei province. But like many companies, we have been facing a strong slowdown in demand from our customers, who are themselves impacted. We also face challenges with regard to the transportation of good, transportation of raw material. We have restriction and [raise our] quarantine in China, like many companies. And as you know, China represents 12% of our sales; and Asia, 25%.

It seems to us that in the recent days, the epidemic was stabilizing in China, but we have to remain cautious. But on the contrary, it’s spreading in some countries in Europe and the U.S. As written in the press release this morning, we estimate the negative EBITDA impact at the end of February, which means including January and February around EUR 20 million. We got also some questions on the split. So this includes around EUR 5 million in January and EUR 15 million in February. And we don’t want — it’s our position, we don’t want to speculate with regard to the impact going forward. There is still uncertainty on how the situation evolves. So it’s too early to gauge the final impact at this stage.

Finally, I hope to see as many of you as possible at our Capital Markets Day in London on April 2, during which we will present the group’s long-term strategy and growth project. So I thank you very much for your attention. We are now, together with Marie-José ready to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from Martin Roediger from Kepler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division – Equity Research Analyst [2]

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I have 3, please. First, on the news that you have filed an antidumping petition on refrigerant R-32 in the U.S. due to Chinese imports there. What is the situation and the prospects for fluorochemicals in North America because you just today spoke about Europe? The second question is on Coating Solutions. And here, especially on the — on scope effects, because I remember in Q3, you had a positive scope effect in sales from the acquisition of the Jurong stake in Taixing SUnke, but in Q4, there was no scope effect at all. Why not? And the third question. Picking up some news from Bloomberg in recent days, do you really prepare disposals? And if so, what do you see as your priority?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [3]

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Okay. Thank you, Martin, for your question. So as you know, we have filed with antidumping — no, in fact we filed an antidumping recently on [component] in the U.S., but it’s a process which will take some time, so I will not comment on it. With regard to the situation on Fluorogases in North America, I would consider it, which is a difference with Europe, where we have this uncertainty on illegal import. I would consider it as stable, okay? Maybe we will get some insight, we’ll see. But for the time being, my starting point is that it should be rather stable year-on-year. But still, the first months of the year are our low season. So it’s too early to plan for the full year with no more on the string, but let’s say, stable.

With regard to Coating Solutions, you have to treat — to consider Sunke really as a capacity addition, which we made really at a perfect time because since the market when we negotiate this capacity addition, which was to buy the 50% remaining of Sunke was, at that time, China spread was quite low. We could get it really for costs for an investment in a plant of this quality, which was really absolutely uniquely low. And so we got it. So if you take it as a capacity, then you have to consider that at the end of the last year and the second part of last year, volumes were — because of the seasonality, but also because of some uncertainty on China were a bit weak, and we did not need this capacity, so it’s a long-term shot. And as you know, with regard to our position in acrylics in China and in Asia, where we are working on downstream development, rebalancing the upstream, we have still some way to go. But to answer precisely to your question, on the second part of last year, we did not need more capacity, okay?

With regard and for the sake of the efficiency of our discussion today, otherwise, we spend a lot of time. I think you know us since now, especially you, Martin, a lot of time, you know that our policy has never changed about any comment. It can be on the shareholder. It can be on portfolio movement, whatever, we never comment. So I have no more comments. You know that we have, and you mentioned it, a Capital Market Day, which will come on April 2. You know that we have this Capital Market Day organized every 3 years. So it will be an opportunity for you and hopefully, you will be there to see us presenting an update of our strategy, a full review of the Arkema — in-depth review of the Arkema strategy in all the components, as we do for every Capital Market Day with innovation, with measure our organic CapEx and with M&A. And also, there will be certainly a part on CSR. So I wanted to make the point clear enough to save time in the discussion.

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Operator [4]

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Next question from Matthew Yates from Bank of America.

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Matthew John Peter Yates, BofA Merrill Lynch, Research Division – Director in Equity Research, Head of European Chemicals Research & Research Analyst [5]

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I apologize if I’m going to preempt that April presentation, but a couple of questions, please. The first one is around your carbon targets, which are obviously quite long-dated in terms of the time frame. But does that begin to influence the way you think about the portfolio as you said in your introduction since 2006. You’ve been constantly transforming it. But does this greater focus on carbon emissions maybe accelerate some of the changes to the portfolio?

And the second question is around Capex. You helpfully outlined in the slides the projects you’re doing and the high returns you expect on those. So it looks a very good use of capital. Can you comment about your sort of pipeline of additional projects beyond 2020? Should we expect continuation of high CapEx, high return projects? Or will we see that moderate and cash generation increase?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [6]

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Okay. So first of all, with regard to carbon emission, it’s clear that every big project of the company first, is integrating now the price of carbon, which is higher and higher. So the last one is 50. So we take now 50, and it’s included in the internal rate of return of the capital expenditures that we have and also in our decision process. Beyond the economics, which are often not so much impacted by the decision, what is important is that it obliges us to raise questions with regard to the impact of our manufacturing process. And if we can do better when we build or expand the plant and it’s really a very positive way of thinking.

Now with regard to the portfolio, we assess ongoing leases now 2 years the portfolio of Arkema with this — not only with this angle, but with this angle, so by definition, it can influence — I don’t say it will influence, but it can influence, it’s taken into account when we think about the strategy, organic and also M&A of Arkema. So hopefully, it’s the case for Arkema, but is the case for any chemical company today.

With regard to the Capex, clearly we are very selective in organic growth. We have invested a lot in Asia in the past 10, 15 years because our positioning there was very limited. So we had to do what our predecessor had not done, which was to put a modern and significant plant in Asia. I would say we have covered a lot of ground there. It does not mean that the road is finished, but we have still some way to go. But at least, we are caught up with our best competitors, but there will be still plants and investment there.

Beyond that, you — the fashion when we started Arkema was more about the emerging countries. Now the fashion is more about the megatrends, especially, I think, about electronics, batteries, lightweight material, and this could trigger some important CapEx. This is why — and we’ll certainly not do it before the Capital Markets Day. We’ll continue with some CapEx of major investment, but we will be very, very selective on that.

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Operator [7]

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Next question from Georgina Iwamoto from Goldman Sachs.

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Georgina Iwamoto, Goldman Sachs Group Inc., Research Division – Associate [8]

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I’ve got 3. The first one is on adhesives. Could you give us an idea of what the run rate margin is for Bostik at the moment? And I know that we talked about around about 13% at the third quarter. Just wondering if it’s inched up a little bit with raw materials coming off? And in your guidance for EUR 300 million EBITDA in 2020. Can you help quantify how much of that growth is from scope? And whether those acquisitions have already been announced or you’re factoring in some new ones to come in 2020?

And second question on CapEx. Just wanted to understand, is there a risk that your medium-term exceptional CapEx guidance needs to be raised? At the previous Capital Markets Day, you talked about EUR 500 million over 2018 to ’21. And I also wanted to just have a refresher of exactly the breakdown of your overall CapEx guide in terms of what is maintenance, what is growth and what is exceptional?

And then finally, just on cost savings. So given the challenging macro backdrop, we’ve had a lot of peers announce cost savings programs and you have mentioned today inflation offsetting measures. I was just wondering if there is scope for further actions if the business environment continues to deteriorate?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [9]

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Okay, Georgina. So you went very fast. I will try to cover everything maybe in the right direction, Beatrice with here to me to consult the questions. So okay, let’s start. So with regard to adhesives, I would say that currently, we are just starting the year, our run rate is consistent with last year, around 13%. But we plan to increase it a little bit again this year. It’s at least 0.5 point every year. And so after that, it depends also on the appetite for some bolt-on acquisition, but at least 0.5 point every year, is a good target.

With regard, I will not say on the Capex, but before that, because I have in mind the cost savings, not to forget, we — I know that we are different from our competitor, and I respect all type of communication. It’s true that with our style, and you know us, we are not the one who put in front all the competitiveness that we are implementing. And most of what you see from competitors is never net of inflation. So in fact, at the end, either they cover inflation or they cover a part of inflation, so we are very in line with them. What is clear, you are seeing the quality, and hopefully, you have been positively surprised of our EBITDA in the fourth quarter. And you can imagine that to deliver this quality of EBITDA in the first quarter in the kind of environment we have (inaudible) in the first quarter, the impact of further competitiveness, both on variable costs and fixed costs, has been there. So we have been very reactive, very agile, but we try not to put this big plan. What is clear is that ongoingly every year to offset at least half of the inflation. And last year, at the end of the year, in fact, we nearly covered the full inflation between variable cost savings and fixed cost savings, is quite a significant step. So let’s continue on this track. And I think we navigate well with the environment.

So with regard to the EBITDA of Bostik of EUR 300 million of 2020, I will not give you the split. It will be compared to this year. Or I can nearly give you the split, it’s nearly between the organic improvement and what will come from bolt-on acquisition is nearly half and half, okay? It’s a split between the 2. So with all the data I will give you, you should have a good idea with a simple math of where we stood in EBITDA in 2019. You see where — or what we target for 2020, and you can take half-half between bolt-on and acquisition and organic, which means that organic continues to be quite strong.

With regard to the CapEx split and the exceptional CapEx, your question with regard to the CapEx split, we have before exceptional, half between maintenance and growth. You — sometimes, we are a bit more in maintenance than in growth because of pressure on regulation is bigger and bigger. So some years, it can go to 55% for maintenance and 45% for growth.

With regard to the question on exceptional, a little bit back to the question of Matthew. But for the view of what we have today and we will update you on the Capital Market Day, by definition, okay? On these 2 projects that are today in the envelope of exceptional CapEx, where we gave EUR 500 million, we just need to take into account the euro-dollar, which has been — which has been a little bit higher dollar, but this is the main point. We are really very consistent with the envelope that we have disclosed to the market.

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Operator [10]

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Next question from Mubasher Chaudhry from Citi.

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Mubasher Ahmed Chaudhry, Citigroup Inc, Research Division – VP [11]

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Mine are a little bit on the guidance. On the outlook, can you provide some color on fluorogases and the acrylic market. So for fluorogases, should we be expecting to go back to kind of 2015 and 2016 levels of sales? And then on the acrylic side, are you seeing any improvement in upstream margins as you go into the new year? And then secondly, just to clarify on the guidance. The guidance, does that include the impact of the bolt-ons? Or will the bolt-ons — any bolt-on incrementally carried out from this point going forward are going to be on top of the guidance that you’ve announced?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [12]

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Okay. So with regard to the Fluorogases, I have not exactly in mind, I mean, we’ll come back to you later, where we were in ’15, ’16. What I can say is that last year, we had a significant drop, which took us below the ’17 level and between — closer to the ’16, but in between ’16 and ’17, a little bit closer to ’16. And after that, we should continue to decline a bit, not at all the same magnitude as we had last year, but still a bit. So we’ll get back to a level which are closer to ’16, but I will eed to check that. But it’s a good question. But I think I was thinking about ’16, ’17. So yes, ’16 should be [similar place.] After that, illegal import at a certain point, will be solved. The only thing is that we want to stay cautious on this year. I think it will take some time for it to normalize. So we have to be a bit patient there.

With regard to acrylic, it’s the low season, it’s difficult to comment. For the time being, we don’t see any discontinuity. Don’t forget the discontinuity we had in the Q4 was more in Asia, okay? And Asia is very difficult to read because China has been very impacted by the virus, so — plus you had the Chinese New Year. So it’s very difficult to give you any insights there. You need to wait a bit more, but we enter the spring to tell you where we stand with acrylic.

With regard to the guidance. If it includes bolt-on, it includes recent bolt-ons towards the end. I would say with the guidance, which is comparable that we gave at the beginning of the year, frankly speaking, these are not the 2 bolt-on acquisitions that we are going to make in adhesives on top of LIP, which will make any significant difference. So for me, it’s not material.

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Operator [13]

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Next question from [Mendy Penda] from Millennium.

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Unidentified Analyst, [14]

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Thierry, I want to ask you, firstly, on Fluorogases, and it’s a question for 2021, when the next set of regulation kicks in Europe. And then if you think that there is any sort of regulations that are coming in China or phase out. So I just want to know what your view is, how the industry is going to react in Europe and then in China?

And the second question then is just around acrylic acid. So we are starting to see more and more sort of supply come in countries, which used to be natural importers like India, for instance. So when do you really think that we will sort of globally be in a mid-cycle world? I mean, do you think that in your planning assumptions, now you’ve sort of just taken that out? And then lastly, on Polyamide 11, could you just tell us how tight are you today, i.e. if there are 100 customers, only 50 are getting this product. And therefore, when the supply comes in 2022, 2023, you already have decent level of demand to fill that plant?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [15]

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Okay. So on Fluorogases, with regard to regulation in China, I have not the full picture on by definition because it’s an evolving picture. My feeling is that it will really take time in China to implement the new regulation. So for me it’s not a topic for 2021. With regard to acrylic — by the way, we are not far from mid-cycle. It’s not like — I don’t know your view of acrylics, but so — and it was mostly, I would say, the [low and mid-cycle] was mostly a matter of the end of the year, especially with some slowdown in China that everybody has identified.

With regard to new capacity, India, which will take time. And I think when I started Arkema, you had already 3 projects in China — in India, which are never done through, okay? So it’s a complicated country from this standpoint, but maybe this one will go through. I think it’s a market of acrylic which is growing every year at GDP-plus supported by water treatment, by SAP, so super absorbent, et cetera. So it’s a growing market and quite — from a demand standpoint, quite healthy market. You have new capacity coming, but it’s far more reasonable than it has been 5 years ago. You cannot compare. So it’s more now, I would say, step by step. And at the same time, you have some closure of site because you have site, which really have been built at a period where it was built cheaply, especially in China. So overall, no, we don’t change our assumption, what we have told you on acrylics over the past year. So — and for us, as you know, the important part of the strategy is really to develop the downstream. If you look at the evolution of the Coating Solution margin, even if on the value, we have to continue to increase. I would say, in terms of resilience over the past year, despite some volatility on the acreage, you could see that this mechanism, which values integration, is working very well because the segment itself has been very resilient.

With regard to polyamide 11, so first of all, up until early last year, it was very, very tight, incredible. After that, you got automotive and electronics. Certainly, the tightness has been eased, but it’s really temporary, and we are not anxious about that. The new business pipeline is quite good. After that, if your question is that for the specialty business, you start the plant and 6 months after the plant is full, no, it doesn’t work like that. There are specialties. They need homologation. It’s high-value product. So we have always said that the ramp-up to fulfill the plant will be 4 to 5 years. It’s a greenfield plant. It’s important capacity. We don’t want to push too quickly the volume on the market. We want to do it really with a high-specialty view, high value. So it will take 4 to 5 years, but the profitability of the plant will be quite strong. We are very, very, very confident about the timing of this new plant early ’22, the use of the plant, but — and the plant will be profitable quite quickly and very profitable after 4, 5 years, once the ramp-up has been fully achieved.

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Unidentified Analyst, [16]

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Sorry, just on F-Gas for 2021, do you think that could be sort of a fresh oxygen for European Fluorogases next year?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [17]

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I would be — frankly speaking, last year, we were hit, and I’m honest about that. We did not forecast it. We have been hit by illegal import. I will not, just now starting ’20, tell you what will be in ’21. What is sure is that the starting point of end of 2018 is far more normalized than the 1 of — end of 2019, sorry, is far more normalized than the 1 of ’18, which is, from the standpoint, once it was followed good news.

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Operator [18]

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Next question from Geoffrey Haire from UBS.

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Geoffrey Robert Haire, UBS Investment Bank, Research Division – MD and Equity Research Analyst [19]

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I just wanted to touch on thiochemicals. Clearly at least looking at the mix for Q4, you had very strong delivery and profitability in thiochemicals. I just wonder if you could run through what exactly is driving the increase in profitability of thiochemicals?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [20]

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I cannot comment on every quarter on every business line. But what is clear is that, and it’s not just the fourth quarter, it’s all along the year, Thiochemical has been performing very well. As you know, we have about 50% of the thiochemical, which is for animal feed, which is a growing market, steadily growing. Even there are some capacity for the — and overcapacity for the end consumer. I think we are well positioned with our partners. That’s one element. And then you have the new [distribution node] which help also in the oil and gas segment, plus some specialties that we don’t mention too much, but which are developing. So overall, if you add everything, I think it’s a nice specialty business, which are the 3, 4 main segments and which are in terms of end market, growth doing well.

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Geoffrey Robert Haire, UBS Investment Bank, Research Division – MD and Equity Research Analyst [21]

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And is it mix then that’s driving margin?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [22]

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The mix is — yes, the mix is driving the margin a little bit, but the margin has not increased significantly, but the mix is going in the right direction. But you know what you saw in ’19 is something that you have seen in many years during the period 2006, 2019. It’s not like suddenly, ’19 thiochemical was waking up. It has been an ongoing development, not every year. Last year was especially good. But I think the end markets are quite healthy. And we are really a leader in this segment, which helps.

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Operator [23]

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Next question from Alex Stewart from Barclays.

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James Alexander Stewart, Barclays Bank PLC, Research Division – Chemicals Analyst [24]

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The first one is quite straightforward, I hope. Your comment about seasonality. Can I just clarify, when you say that you expect it to be more even, does that mean closer to 50-50 in 2020? Or do you just mean more balanced and more normal than it was last year? I’m a bit confused about what that means. And then the second question, which is less easy, I’m afraid. But you make a comment in the release saying there was a solid performance in all the other business lines in industrial specialties. And yet, if I look at the revenue performance, hydrogen peroxide revenue was down 6%, which is one of the biggest year-on-year declines for years. Thiochemicals revenue was down 10%, which is one of the year-on-year declines — biggest year-on-year decline for years. So it actually looks like there’s quite a lot of top line pressure in the other segments in the fourth quarter. So could you just help me understand whether there’s something specific going on at the top line, which isn’t impacting earnings? Or whether something is changing in those segments would be extremely helpful?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [25]

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With regard to the seasonality, in fact, as you know, not every year is the same. Last year was stronger in the first half and not atypically, but was a little bit atypical stronger in the first half than the second half, a little bit on the high side. This year will be moderate because you compare year-on-year, so you know how it works and you have some specific element this year or the beginning of the year. So I would say it’s — we’ll see at the end of the year, if it is half-half or still a bit more on the first semester than the second one. I mean, we cannot give you the level of precision now. But what is clear is that compared to last year, which was more heavy in the first semester than the second one, it will get closer to the half-half, okay? It’s more a question of comparison and also the fact that you have the virus on the first half, which will impact. So — and even without the virus, I think we would have said the same thing, okay?

With regard to the H2, and we’ll come back to you on the industrial specialty, this seems to be from what — because I was surprised by your comment, and I check talking to you, to the team. Béatrice, tell me if I’m right, is that there was a rounding error?

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Beatrice Zilm, Arkema S.A. – IR [26]

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Yes, it was an error, but you have wrong figures, so it’s difficult to assess properly exactly the figures for each business line, but regarding H2, in fact, it has been a flattish year-on-year in Q4 volume.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [27]

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Okay, so this is what is.

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Beatrice Zilm, Arkema S.A. – IR [28]

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Yes. Okay.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [29]

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So this is what I had in mind, but I was surprised by your question, but Beatrice is confirming that — okay, but she will come back to you precisely on this point, okay? To make no mistake.

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James Alexander Stewart, Barclays Bank PLC, Research Division – Chemicals Analyst [30]

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Okay, Thierry. That’s very kind of you to clarify that. Maybe it would just be really useful if you could give us the exact sales numbers for the different segments because I know you’ve always given a percentage, but this does introduce rounding error, which is frustrating. So perhaps something to think about.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [31]

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We do as — all right. But I will not comment now. I think Béatrice will come back to you, then we are sure we understand exactly you’re clear, we are okay and that’s good. Okay. Thank you.

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Operator [32]

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Next question from Laurent Favre from Exane BNP Paribas.

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Laurent Guy Favre, Exane BNP Paribas, Research Division – Research Analyst [33]

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The first question, not — Thierry, not to preempt the CMD in London or Paris. I’m a bit puzzled now if it’s Paris or London. But on the dividend, I was wondering if you could tell us, I guess, how we should be thinking about the dividend increase for 2019, given what happened to operating profit on one side. On the other side, cash flow being stronger. I mean, the 8% increase, is it driven by your view on where the payout should go, ultimately? Or was there something else driving this increase of the dividend? So I guess that’s the first question.

And then the second question on Slide #19, Specialty is up 13%, 20% decline in intermediates. I don’t remember you disclosing, I guess, numbers or profit numbers in this way. Could you maybe help us understand, I guess, what is your thinking around that disclosure, but also, maybe can you help us understand what the starting point was in terms of EBITDA? That would be very helpful, excluding corporate costs, for instance, for the 2 clusters?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [34]

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Okay. So on the second one, I will ask Marie-José to answer. She will know it perfectly. On the dividend, no, I think if you look at the first 4 years, the average, I think, what 9% increase, okay? So now we do 8%. You’re right to say that the net result is below even if the EBITDA is comparable. But on the other side, the cash is quite good. So I think the Board wanted to show the confidence as in the long run of the company. So there is no — nothing behind that more than that. I think we are confident in the long run. We have the space in the balance sheet to continue to have a nice increase. I hope our shareholders will appreciate that. I think it’s more of a good news than bad news. It’s consistent with what we have delivered. Sometimes when we have a wonderful year, some people say, “Yes, but why don’t you increase the dividend more than that?” What we try to do, it was something rather regular, visible. So I think it’s consistent with this approach, but nothing more than that. I think it’s good news, good cash, solid results. And if you look at the payout ratio, it’s still something which is competitive for the Board for Arkema. I think we are below some peers. So no, nothing special except that we are confident, and we wanted to return this amount to our shareholders. So that is completely consistent with what we did in the past. So maybe Marie-José, on the second question of Laurent.

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Marie-José Donsion, Arkema S.A. – Group CFO [35]

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Regarding the mix of EBITDA contribution, as you know, we give basically a rough split of the portfolio between the portion that is more volatile and the portion that is more resilient and that we call specialties. We expect normally this ratio in terms of sales. And we thought it was, let’s say, important to share with you the magnitude, let’s say, of what has happened in the intermediates this year. That was, in fact, clearly, largely offset by the improvement in the specialty businesses. So that’s why I mentioned that we have in ’19, more than EUR 100 million improvement on the EBITDA contribution of the specialty businesses, which actually almost fully offset the decrease in EBITDA that we faced from the intermediate activities. So I thought it was helpful, but maybe not.

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Laurent Guy Favre, Exane BNP Paribas, Research Division – Research Analyst [36]

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No. No. It’s extremely helpful, as always. But when I try to reconcile the 2 starting points, I ended up with almost EUR 650 million of EBITDA from intermediates, which was certainly a lot higher than what I had in mind. And presumably, a lot of investors and analysts as well. So I was just wondering if you could confirm that, that [acrylics, PMMA and Ferro] in 2019, let’s say, was around EUR 500 million to EUR 550 million, still?

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Marie-José Donsion, Arkema S.A. – Group CFO [37]

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Yes. Let’s review offline whatever the assumptions were. As you don’t — know, we don’t disclose the EBITDA in this format. So otherwise, it would be actually part of the document, but it is important that you see the magnitude of the swings and the resilience of the specialty portfolio that we have in Arkema and that clearly has performed extremely well in ’19 despite quite adverse environment — economic environment. So let’s do [separately].

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [38]

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And also, maybe to complete what Marie-José is saying, I think it also reflect our strategy and the benefit of the strategy to reinforce the size of the specialty, not only in terms of the size revenues, but also in terms of profitability. And I think for those investors will appreciate this move to specialty. I think it’s a good news, and it was important to give you these elements.

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Operator [39]

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And last question for the moment from Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division – Research Analyst [40]

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One clarification and one other question. One clarification question is, out of the 1% decline in EBITDA — reported EBITDA for 2019, can you maybe help us understand how much is that on an organic basis, so stripping out IFRS 16, M&A, FX, et cetera? That’s the first question. And the second question was more on the polyamide outlook. You guys are expanding 11, Evonik is expanding PA12. Do you see any risk — of course, those are different, but can they be swapped from, say, the application and application, can you swap from 11 to 12? And does that pose any threat in terms of pricing over the next 2, 3 years in that market?

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [41]

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Okay. I will let Marie-José answer the first one and I will answer the second one.

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Marie-José Donsion, Arkema S.A. – Group CFO [42]

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So regarding the EBITDA bridge, as I said, we don’t disclose, in fact, EBITDA beyond, let’s say, the 3 segments that are published. What is clearly fully documented is the impact of IFRS 16 in this year’s numbers. So we explained, in fact, this reclassification of rent, OpEx charges into a depreciation of assets represents a bit more than EUR 50 million for the year. So what you observe is a favorable impact in EBITDA and an increase in depreciation accordingly. And therefore, 0 effect — almost 0 effect on recurring EBIT. So this is the information that is available. Let’s say, for the rest, that’s why I gave you some color in terms of what’s going on in terms of contribution of EBITDA. EBITDA telling you basically specialties increased EUR 100 million plus and almost offset basically the decline in intermediates businesses, which declined more than EUR 100 million as well. So this basically is the qualitative information that we provide.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [43]

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Thank you, Marie-José. So for the PA12. First of all, on the PA12, as you know, Arkema is also an important player. So I’m not the one who is not going to say — who is going to say that PA12 is not a very good product because it is a very good product, and we are strong in this area. But one says that, polyamide 11, because it is biosourced, because of this mechanical property, is absolutely unique. And the more time goes, the more we are able to develop high value-added application, which cannot be met with PA12. So I think really we have said that many times, is one of the key strengths of Arkema, PA11, it’s a fantastic product, which will be supported uniquely by this ongoing demand of new materials. And so I think PA12 is one, and PA11 is another one. And the more it goes, the more PA11 differentiate from PA12 and its own field of application. So we are not concerned by that.

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Operator [44]

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We don’t have any more question for the moment. (Operator Instructions) We don’t have any question, back to you for the conclusion.

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Thierry Le Hénaff, Arkema S.A. – Chairman & CEO [45]

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Okay. So we would like to thank you very much for your question, which were very diverse. I propose as usual that the IR team follow-up with you if you have complementary question. And we see you again in the short run because we’ll start our roadshows on Monday. So looking forward to see you. Again, thank you very much.

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Operator [46]

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Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.