Solvay S.A.

Jean-Pierre Clamadieu - CEO Karim Hajjar - CFO

Martin Roediger - Kepler Cheuvreux Thomas Wrigglesworth - Citi Alex Stewart - Barclays Geoffrey Haire - UBS Patrick Lambert - Raymond James Peter Clark - Societe Generale Laurent Favre - Exane

Thank you very much. Hello, everyone, and thanks for joining us.

I’m here in Brussels with Karim, our CFO; and [indiscernible]. And as usual, we’d like to go through our results, same sequence as usual.

I’ll make a few introductory comments, turning to Karim for more a detailed presentation and then come back with a few concluding statements, and we’ll move into a Q&A session. I think the what we’ve seen is that volume growth is continuing into Q3, and we get during this quarter also some support of pricing, which leads us for the first 9 months of the year to an organic net sales growth of 6%, driven by volume growth in all 3 segments as you’ve seen a bit of a differentiation between these 3.

Net pricing for the group is 2% higher despite rising raw material costs. This clearly shows the strength of our pricing power and liquidity of our portfolio.

Margins remain quite strong at 22%, which in the European environment is a pretty good level. Going quickly on what I think are the key business events that are worth considering at the beginning of this call.

Volumes sold into the oil and gas market supported our double-digit EBITDA growth in Advanced Formulations for the 9 months period. So clearly, this is a segment which is showing during this first 9 months of 2018 best performance as far as group is concerned.

We saw in oil and gas a bit of stabilization late in Q3. However, demand in other markets, such as agro and coating, showed improvement and contributed to the growth of the segment in the third quarter.

So very strong performance and no real worries. In oil and gas, stabilization is linked to a number of bottleneck that have developed downstream in this very active segment, but the dynamics is very good.

Very good dynamic also in -- regarding the top line of composite, especially composite used in aircraft, high single-digit growth. Main driver of the military program, the F45, which is indeed becoming quite successful.

And commercial programs ramp up, mostly at Boeing, where we have largest exposure, 787 and 737. And we continued to see a very, very good momentum and full order books for many years going forward in these 2 segments, both military program and commercial aircraft.

Specialty Polymers delivered significant growth, namely in automotive and SK [ph] application, and this overcame the anticipated reduction in smart devices. We knew, and I think it’s probably overall a good thing that smart devices will be less contributive to our growth this year.

When I say it’s good is that at the end of the day, the objective is to have a very balanced exposure into a number of different markets and probably we came a couple of years ago in a situation where smart devices were contributing a little bit too much. So overall, a very good run for Specialty Polymers business.

It’s a business which has significant exposure to the automotive industry, and I know that there’s a number of headlines these days showing, demonstrating concerns regarding the performance of the auto sector. Just a few comments there.

Polymers sold in year 2 remain the contributor of growth, including in the third quarter. We’ve seen some signs of softness in September and some reduction in our order books, and we are watching development closely.

Reasons are very different: number of regulatory, supply chain issues in Europe, a bit of a softness in the end market in China and then we’ve seen people in the supply chain adjusting their level of inventories accordingly. I remind you that in the past few years, we’ve grown in the auto sector 3 time faster than the overall growth of the market because our product are very much part of the transformation of this auto segment, and we are, overall, quite optimistic on the fact that we are very well prepared for any changes, short term or long term, which can happen in the auto market.

Overall, results to date are in line with our expectation, and I’m very confident in our ability to capture many of the significant opportunities for growth across the midterm. We’ve shared with the market in London mid-September our midterm view for the various businesses and what we see developing since that is there is emerging support of the comments we’ve made during this market update.

With that, Karim, can you give us some additional insight into our financial performance?

Absolutely. Thanks, Jean-Pierre.

Hello, everybody. As usual, I’m going to refer to slides that you can access on our website.

And results I’m going to refer to are, of course, on an underlying basis, and they reflect a discontinuation of the Polyamide activities. I’ll start with sales.

On Slide 8, you will see that our organic sales increased by 6% over the 9 months, and volumes and mix represented 4% of that growth, the balance related to pricing. Advanced Formulations.

Organic sales up 11%, driven mostly by volume, but also by some price benefits. Now the main drivers of the growth related to this is recovery in the oil and gas market, especially in the first 7 to 8 months of the year.

Jean-Pierre has talked about the stabilization since that period. We’ve also seen and delivered growth in agro and in coatings.

Mining chemicals is growing strongly. We’re seeing additional volumes related to new mine openings, indeed, and only by way of example, we secured new copper business in the Democratic Republic of Congo, in Kazakhstan and in South Africa.

We also benefited from demand growth from cobalt refineries in Turkey and in China. Advanced Materials.

Sales grew 4% organically, as Jean-Pierre indicated, driven by the automotive market, where the trend for fuel-efficient vehicles is continuing to support the greater use of our polymer technology across a multitude of platforms, from hybrid, electric vehicles, et cetera. Volume growth was also driven by higher composite sales to aeronautics and indeed we are seeing high single-digit growth in that domain.

Now that’s what generated most of the growth, although we also saw some positive contributions and good growth in health care, where polymer use is increasing across a number of different medical applications. But we also had a few headwinds in some of the smaller markets.

Jean-Pierre has talked about the substantial decline in sales of the smart devices, device market relative to last year, and we’ve experienced a reduction in sales in insulation blowing agents as well as in catalysts that are used in diesel fuels. Performance Chemicals.

Strong growth. Organic sales up 6% nearly, 4% of that related to pricing, 2% volumes.

The increase was attributed to both peroxide and soda ash, where we’re benefiting from robust demand environment, strong momentum there, and our soda ash plants are operating at very high levels. Our Coatis business also contributed to the sales growth, thanks to improved domestic demand in the Latin American region.

So all in all, good top line organic growth year-to-date. But, of course, we can’t defy gravity, and scope and foreign exchange in fact restricted the underlying sales growth to 0.5%.

Turning to EBITDA on slide 9. You will have noticed the 6% organic growth in the 9-month period, although again, scope and foreign exchange meant that EBITDA is down 0.7%.

The organic growth of 6% reflects the impact of the strong volume growth that I’ve referred to just now and that alone had a 7% positive impact on our EBITDA evolution. We’ve also had good pricing dynamics across many of our businesses and that helped to overcome the higher energy and the raw material costs.

I wish to highlight an increase in fixed costs and that predominantly reflects the capability that we’re building to support our growth. For example, in the composite business, we’re also investing in some initiatives that are focused on improving our productivity, on driving even more operating efficiencies as we prepare for the continued volume growth that we see ahead of us.

If I turn to net income on slide 10, you will notice that the net income, our net income from continuing businesses is up 10% and that is despite the 0.7% reduction in reported underlying EBITDA. Why is it?

Quite simple. It reflects the benefits related to the ongoing decrease in financial charges as we deleverage and also a reduction in our underlying tax rate, which is now 25%, 2% better than last year.

These positive developments supported EPS growth, and especially, growth from our continuing operations, like-for-like, with an increase of 11% in EPS, and that is despite scope and foreign exchange impact. Cash is and will always remain high on the agenda.

I’m now turning to slide 11. Free cash flow from continuing operations at €275 million through the 9 months is down than last year, predominantly as we’ve built higher working capital.

We’ve built inventory, in particular, in order to meet increased demand from our customers, but also ahead of planned regular maintenance shutdowns. As I look at free cash flow to shareholders, which I’ll remind you is after financial charges, they increased 7% to €271 million in the first 9 months.

Now this reflects the profit and reduction in financial charges I’ve alluded to, but more importantly, continued strong performance and high cash generation from our discontinued operations in 2018 relative to the same period last year. And with that, I hand you back to Jean-Pierre.

Thank you very much, Karim. I think this presentation shows that our results are, indeed, in line with the expectation we set for this year.

Priorities for us are very clear. Under the current market circumstances -- and by the way, we’ve not seen any real change in the first weeks of the last quarter.

We expect organic EBITDA growth around 5% to 6%, within the range provided at the start of the year. We also confirm that we’ll convert that performance into strong free cash flow generation.

We know that the macro-economic and political climate are often bringing some uncertainties. We cannot control those variables, obviously, so we are focusing on what’s in our control, including focus on innovation and customers and delivering growth and cash.

We remain focused, as I was mentioning at the end of my introduction on capturing opportunities in the midterm. And we are really convinced that there is a tremendous potential that we should be able to unleash in the next few years as we have outlined during our recent investor update in London.

And before starting the Q&A session, I would really like to give a warm welcome to my successor, Ilham Kadri, who, the board recently announced, will become the CEO of the group effective March 1, 2019. She will join us at the beginning of January and spend 2 months with me before taking over as a whole, and I’m confident that many of you will have an opportunity to interact with her in the first few months next year.

And with that, Karim and myself are ready to take your questions. Thank you.

Good morning Jean-Pierre, Karim. Three questions from my side.

First, on peroxides. What is your take on the announcement by Evonik today to consolidate the market with the acquisition of PeroxyChem?

And did you have also look at this asset? And if so, why wasn’t that appealing to you?

The second question is a clarification question on your statements about the dynamics in the end market of automotive. You said that September, there was softness, and your order books show reduction.

Do I understand you correctly that October was as bad or even worse than September?

We have difficulty hearing you, so if you can just

Repeat?

If you can just rephrase -- yes.

The second question is about the business dynamics in the automotive industry. You mentioned that there was some softness in September, and you saw reduced order books.

And my question is, does that mean a worsening momentum or a stabilizing momentum? And the third question is on specialty chemicals.

Can you talk a bit about the gradual phase-out of insulation gases and how this item will impact you? Thank you.

Okay. So on the automotive market, what I was implying is that we’ve seen in September some impact or some softness in our order book.

And we’ve seen then the trend stabilizing. So no further degradation, but the -- really is something which happened at the end of September.

You know that it’s mostly linked to a couple of different events, disruption in the supply chain in Europe, links mostly but not only to regulatory issues and then some actual softness in the Chinese market. But we don’t have any sign that this is degrading.

On the specialty -- on the special chem business, we have a small business within special chem, which produces the gases which are used for insulation application, foam blowing, in application of Montreal Protocol. These gases would be phased out over the next few years.

We’ve seen a bit of an acceleration. So nothing overall unexpected, but the situation which degrades a bit faster than we were thinking.

And as we are very much all of us are focusing on growth, indeed, this overall small impact is visible, if we look at the performance of the Advanced Materials cluster because special chem is consolidated within the Advanced Materials cluster. Peroxide, frankly speaking, we are very pleased with the current footprint.

We are a strong and detached market leader and no reason for us to look for pretty small acquisitions here and there.

Good afternoon, thank you. Three questions, if I may.

Firstly, on the composite growth that was double digits in Composite Materials. Is that kind of a required level of performance that you’ll need to hit your Advanced Materials target from ‘19 to 2021 of the 6% to 10%?

Or is, actually, that running now a bit higher than the required contribution from that business? Secondly, staying on Advanced Materials, in terms of the mix, it looks like there’s been a negative mix effect in the quarter.

I’m just wondering if that’s because actually the loss in the smart devices margin was slightly higher than the incremental margin from the growth in Composite Materials. Could you help me understand that?

And then lastly, on free cash flow, just by my calculations, it looks like versus last year you need to take out about another €50 million of working capital. Actually, does the slowdown in some of the end markets help you with that working capital kind of unwind and has your conviction there kind of increased or decreased through the quarter?

Thank you.

Karim, you take the free cash flow question?

Sure. Thomas, I think the €50 million is -- I think I know how you can compute something like this.

Fundamentally, we’re not banking on a slowdown to deliver the cash. If you go back to each of the 3, 4 years worth of Q4 cash flows, you will see that what lies ahead of us is not materially different from what we’ve delivered in the past.

Fundamentally, I see the contribution to our cash flow to come mainly from, I’d say, normal, disciplined working capital management. The profits we’ve explained.

I’m not expecting any slowdown at all. It’s just continued discipline.

We’ll be seeing some reduction, for example, in some of the inventories that we’ve built due to shutdowns, but nothing that’s more dramatic than that.

Thank you, Karim. On composite, the, we’ve seen, indeed, pretty strong top line growth, very much what we were expecting, and we are, we’re very well positioned on programs which are at an inflection point and moving towards very significant growth, both on the LEAP engine and the F45 and, more broadly speaking, some of the Boeing new aircraft.

So very good performance, top line. To be completely transparent with you, I think we still have some efforts to do to make sure that this top line performance falls into the EBITDA line.

And we still see here and there a number of operational hiccups, operational inefficiency, opportunities for us to be on the positive side, opportunities for us to improve the delivery, and we are working very hard on this. We are making sure that the global business unit management team is very much focused, both is very focused enough, but also on the optimization of the operations and the delivery.

So probably longer term, looking at composite, I could expect we would need to achieve our plans, or we can achieve our plans with a little bit lower level of top line growth, but better delivery. Under mix effect, yes, directionally, you’re right.

We’ve lost some sales in the smart devices. Yes, it has been compensated by areas where the margins are slightly less favorable.

But frankly speaking, I wouldn’t delve too much into these types of detail. Overall, Advanced Materials has the ability midterm to grow very much in line with what we presented in London, and the number of opportunities that we have there is very significant.

And clearly, it’s a business which has no margin issues. We are at a level of margins where indeed -- which indeed puts these businesses into a value creation mode and very high in terms of return on capital.

So very strong business and a very solid position, and yes, some small mix effect, if you look at the Q3 result.

Hi, thanks for taking my question. Firstly, you talked about building inventories ahead of shutdowns.

Can you just remind us which plants are going to be offline in the fourth quarter? In which divisions would this be?

And how big, or how long the shutdowns be? And then secondly, the fixed cost increases you’ve talked about in composites, which offsets some of the top line growth.

Could you give us a little more detail about where they’re coming from? Is it new plants starting up?

Is it hiring new people? Any information you can give would be great.

Thank you.

I will let Karim answer the first question.

I think, I don’t have the list of which plants. I do recall from earlier conversations in my business.

I think Specialty Polymers has a couple of plants. Beyond that, there’s nothing in particular.

It’s just happened, a bit of phasing this time around in Q4. Yes, nothing more than that.

And nothing at all unusual. It’s just happened.

It’s just normal phasing, let’s put it this way.

On composite fixed cost, I mean, I can give some visible example is the new adhesive plant that we have commissioned in Wrexham, and the plant has been up and running to produce qualification lot for several months now. Although it’s not yet commercial because we need to wait for the amalgamation at the, which will happen at the end of the year.

By the way, it’s a great plant. And all the feedback we get from our customers are very supportive of what we’ve done there.

And clearly, this is a very, is a small, but very interesting tool that we have within the Composite Materials business, and we have great expectation with this plant. But short term, it weighs in terms of fixed cost without adding the top line contribution.

You could add a couple of programs in which we are investing money. Thermoplastic composite is one of them.

And at the end of the day, it explains why we’ve seen some increase in fixed cost.

Yes, just got 2 questions. First of all, just on the, coming back on the fixed costs of the composites business.

Just wanted to check, are those fixed costs related to orders that you have received that you will, hopefully, fill in 2019? I’m also just trying to understand how you protect yourself from, clearly, the volatility we sometimes see in aerospace delivery programs where platforms can shift.

How do you sort of go about protecting the composite business? And then on Specialty Polymers, you, obviously, have the PEEK plant within U.S.

I just wondered if you could comment on how full that plant is, where you are in capacity utilization and equally with, obviously, the slowing demand in smart devices, at least my understanding was that plant was built to service smart device market predominantly. What are you doing to look for other ways to fill that, take the capacity out of that plant?

Frankly speaking, on PEEK, we have a number of opportunities in front of us in terms of market, and we have to make some choices on how we prioritize. And we’ve made some choices in the past when the demand was very high in the smart device market.

And we’re in a position to rebalance in a way which I think is, overall, positive our exposure to various markets. So I don’t have any worries regarding our ability to load that plant or this plant at a level which guarantee good level of performance.

But on composite, there is no magic wand. I mean, yes, there are sometime volatility in the management of the supply chain that we see in aerospace, although it has not been a factor in the past months.

I mean, since the beginning of the year, the overall discussion has been working very well, but we just try to get close to the customer and make sure that we can anticipate and manage as effectively as possible with this volatility, but don’t, I mean, when I look at all the markets that we are serving, aerospace has a lot of positive -- I mean, the demand trend is extremely favorable. I mean, we are seeing multi-year growth opportunities in front of us.

We have very long qualification time, which is an issue when you are not qualified, but which becomes a strong protection once you are qualified. Close relationship with the customer.

So overall, that’s really a market where we have significant opportunities in front of us and behavior, which is pretty good.

I’d like to add one other comment to Jean-Pierre on the cost increase in composites. Filling back, we haven’t -- we looked -- we haven’t seen high single-digit growth, let’s say, in the last couple of years.

We’ve seen -- in the past, we’ve variabilized the fixed costs, and that’s part of the ramp-up as well as what Jean-Pierre described, Jean really gearing up to meet the volume demand. It’s very much as far as I see, bottom line accretive in many, many ways.

It’s an investment. Next question?

Good afternoon. Thanks for taking few questions.

It’s mostly regarding pricing, which was pretty strong in Q3 and if you could give some granularity on both Advanced Formulations and performance products -- Performance Chemicals. It seems still to come from a few businesses like Coatis and Aroma.

So I just want to add a bit more color on the broad-based pricing in those 2 divisions, question number one. And question number two, again, I think on slide deck on my numbers, it looks like you get double-digit volume growth in Q3.

And is that -- again, I think, what you see on your stability of F35 and Boeing, is that a sort of guarantee over high single-digit growth for next year, of course, without potential disruption and any change on your order book, it looks like that can be achieved? Thank you.

Well, on pricing, it’s pretty broad-based. I mean, we see an impact in almost all of the division.

To name one where we’ve seen a bit of a more significant contribution is probably Novecare, where we’ve seen a number of pricing actions combined, by the way, with the impact of better conditions through -- better conditions as far as raw material access is concerned. Regarding aerospace, yes, I think there is a very good runway in front of us.

To use a term which is linked with the business we are talking about, yes, F45, LEAP engine, these programs are at a point when they are starting to reach their growth height, which are very significant. 737 is also in such a situation plus a few military program.

So all of that gives us a good sense of what could be the top line growth in the next couple of years. And this is why, I underline the need to make sure that we transform the top line growth into bottom line performance, and this is the grand focus of the business.

Next question.

Yes good afternoon, thank you everyone. Two questions.

So oil and gas side, I hear the comments and I’ve assumed stabilization in the growth year-on-year, et cetera, in the oil and gas market. But just wondering on the mix effect within that business.

Just wondering have you seen much shift towards guar? Are you expecting with the higher oil gas price the guar business to be stronger into 2019?

And then my second question, again, a little bit on pricing, but this time on soda ash. Obviously, the negotiations are ongoing in Europe and look pretty favorable from what I can read.

Would you be more confident now than potentially you were at the end of September at the Investor Day on where pricing might go in 2019 on soda ash? Thank you.

To make a short answer on the subject, we should be cautious in our comment. The short answer is, yes, on your last question.

Yes, indeed, the developments -- the recent developments in the soda ash market are quite supportive of the messages we’ve shared a few months ago. Regarding the -- regarding oil and gas, we are not seeing much changes in the trends that we’ve seen in terms of product mix or in terms of customer behavior.

The stabilization of the market is mostly linked to some difficulties for people to ship the oil that they are producing, and there’s a number pipe issues in the U.S., which creates a bottleneck I was mentioning. So yes, people are working hard to solve this situation.

But I think, again, that we are well positioned to benefit from what we expect to be positive development next year. The only point I would probably underline is the fact that under friction reducers side, we’ve been very successful with our innovation.

We brought to the market a number of products, which indeed allow us to achieve overall cost optimization for our customers, and this product has been well received strong support from our customer base. Next question.

Good afternoon, good afternoon Jean-Pierre and Karim. I have 2 questions, please.

The first one, can you give us a bit of an update on the execution plan for the, I guess, let’s not call it cost cutting, but for the efficiency measures and, in particular, if there’s any delay on that with the transition of the new CEO? And the second question, on special chem.

So I think that at the CMD, you talked very positively about the battery exposure. We were aware of the issues around the catalyst business and the shift in the powertrain.

I think this morning, you reminded us that you have a ferro-chemical business with the phase-out on HFCs. So I’m just wondering, can you give us a bit of a guide as to how we should think about this business on a -- not quarterly view, but on a 2- to 3-year view?

Is this a business which may struggle to grow overall given those challenges?

Well, on the first question on our simplification and customer-focused plan, it’s really going on exactly as expected. I don’t know if Karim wants to give you a bit more color there?

No, that’s absolutely the case, completely on track, marginally ahead, but not anywhere that you’re going to see on the bottom line. But, no, no, completely on track and absolutely no hint of any delay for any reason whatsoever.

And on special chem, it’s not a huge business, but it has a bit of a complexity embedded. So we see a couple of areas where we are facing headwinds.

The first one is, obviously, the insulation business. Again, it’s a few tens of millions in terms of sales.

So it’s pretty small, and it’s one of the reason why we have not spent much time discussing the detail a bit. We know that this business is bound to disappear after certain period of time.

The question is, really, the rate of decrease. And yes, we’ve been a bit surprised during the first months of the year by a bit of a steeper rate of decrease.

Second element, which is a headwind, is a move from diesel to gasoline because we’re producing catalysts. And in terms of margins, the diesel catalysts are a bit better than the gasoline catalysts.

And the move from diesel to gasoline has been a little bit faster than expected. Now on the positive side, we have batteries.

Also, most of the battery impact today is in Specialty Polymers, but special chem is working on some new advanced solutions regarding batteries. And very interesting market that special chem is now addressing is the electronic market with high-purity H2O2, which is very successful.

So when we bring all of these elements together, yes, we see special chem contributing to the growth of the business in the next couple of years. We are just, as we speak, in a situation in 2018 where the negatives were a little bit more significant than we thought or faster than we thought, whether in both cases, insulation and diesel.

And the positives, I’ve some difficulties to catch up. But overall, clearly, opportunities in this business, which is built around our ability to master the fuel chain.

Very good. So it’s probably a good sign that we need to wrap up this call.

So thank you very much for your attendance. Once again, I think we’ve seen a quarter which is very much in the continuity of what we’ve seen since the beginning of 2018.

A good performance in terms of volume growth over the last 9 months, good pricing power and a group which is very much in line to continue to deliver short and medium term according to the elements that we’ve shared with you, both at the beginning of the year as far as the guidance for 2018 is concerned or for the midterm element that we’ve shared back in September in London. So I will have the opportunity to talk to you for the last time when we’ll present our full year results.

I will probably share the call with Ilham, and she will give you her own perspective at the time for 2019. But looking forward to meet some of you on the road in the next few months.

Thank you very much, and thanks to all.