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Welcome to Solvay First Quarter 2020 Results Conference call for analysts and investors. Solvay team, the floor is yours.
Good afternoon, and welcome to our first quarter 2020 earnings call. This is Jodi Allen, Head of Investor Relations. And I'm joined virtually by our CEO, Ilham Kadri; and our CFO, Karim Hajjar. Today's call is being recorded and will be made available for replay on the Investor Relations section of our website. I would like to remind all participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties. You may refer to the slides related to today's broadcast, which are available on our website. With that, I'll turn the call over to Ilham.
Thank you, Jodi. Hello, everyone. I hope that you and your families are all in good health and managing well through these challenging times. It has now been 3 months since COVID-19 started taking its toll in China. In the meantime, the virus outbreak has spread into a pandemic and is now provoking an unprecedented global economic crisis. Today, we have 8 colleagues who are infected with COVID-19 and 184 employees in quarantine, down from our peak of 369. This low level results from our good practices and lessons learned from our colleagues in China and Korea, especially the early adoption of preventive measures, including mandatory teleworking for over 6 weeks now for about 10,000 employees. I wish our affected colleagues a speedy and complete recovery. And I take the opportunity to acknowledge and appreciate all of our employees for their dedication, those keeping our operations running smoothly and safely and also those working remotely at home. I'm inspired by the way I'm seeing Solvay teams connect and collaborate virtually to meet the changing demands of our customers. While I have always taken pride in the hard work and dedication that exists at every level of the Solvay organization, the last few months has been nothing short of a tremendous team effort. This crisis is bringing our purpose to life faster than I could have ever imagined, to bond with our customers, to bond together as teams and to be at our best for one and another. To that end, we at Solvay are doing our part where possible to support the fight against COVID-19. There are countless examples of how we are bonding with and supporting our communities in these difficult times, and several are shown here on Slide 5. Our peroxide business has donated 700,000 liters of disinfectants to hospitals and more than 1 million bottles of sanitizing gel. We also partnered with Boeing, a key customer of Solvay, by supplying our RADEL medical-grade polymer for use in the production of face shields for healthcare workers. We have also taken a number of actions to help navigate through this complex global health and economic crisis and best position Solvay to return to growth when the markets start to normalize. First, we recognize that Solvay plays an important role in supplying our customers with products and services they rely on. Our technologies and chemistries were considered essential, which means we were able to maintain our global operations at full capacity throughout the first quarter, and there were no shutdowns issued by authorities. The only exception, as you know, was the temporary mandatory shutdown in China when the virus began. We established a global crisis response team at the executive level that quickly mobilized and developed a strategy to monitor, evaluate and successfully navigate through the crisis situation. We have been holding daily meetings to manage the safety of our employees, prioritize our resources and take decisive actions in a timely and disciplined manner. Turning now to the business and macroeconomic environment. The IMF now forecasts global economic output to fall by 3% in 2020. We are entering the worst crisis since the Great Depression of 1930. The automotive industry has been among the hardest hit by the collapse in demand with global production declining 26% in the first quarter following a decline of 6% in 2019. Many European and U.S. OEMs in the auto industry stopped production in the first quarter, and the aerospace industry is now starting to follow suit. IATA's latest assessment projects air passenger volumes in 2020 to contract 48%. And in the past weeks, Airbus has already announced cutting their production by 30%, and Boeing has made similar production cuts. As you know, these 2 markets represent about 25% of Solvay's sales. So this represents our biggest headwind. Our other key markets, including healthcare, consumer goods, agro and food, which collectively represents about 30% of sales are relatively resistant, and we are seeing more stable demand. Solvay's diversified portfolio and balanced end market exposures were strengths in 2019 and will continue to weather the 2020 storm, and we will build on these strengths throughout any market cycle. As you know, at Solvay, we are a long-term company focused on the short term. The impact facing many of our customers is unprecedented and therefore, we must adapt many of our short-term priorities accordingly, but still keep an eye on our long-term objectives. In this vein, what hasn't changed and where we have doubled down our effort is on our costs, cash and, of course, on our customers. Nevertheless, the impact facing many of our customers is unprecedented, and we have had to adapt many of our near-term priorities accordingly. I will now touch briefly on each of these objectives, starting with costs. In addition to our ongoing austerity measures, we took steps to advance our cost reduction programs, which delivered EUR 50 million in total savings in quarter 1, 1/3 labor and 2/3 indirect spend. We did this by accelerating against our existing restructuring plans announced last year. We implemented a group-wide salary freeze as from January 1, and we reduced the indirect spend, particularly related to technical goods and services across our global business units as well as general expenses. So turning to cash. As discussed, cash generation has improved significantly over the past year, especially in terms of phasing and inventories. This continued in quarter 1, where we delivered record level cash generation at EUR 202 million. This marks the fourth consecutive quarter of positive cash flow and demonstrated that our clear focus and related incentives are working. Looking ahead we are even more focused on inventory levels and credit risk during this period. And of our customers, in times of uncertainty, especially important to stay close to our customers. To that end, since the onset of COVID-19, the executive committee, myself included, has taken on the responsibility of overseeing progress with our key strategic customers. I'm delighted that we continue increasing the share of wallets. Here are some examples. We are extremely proud of being involved in developing a product used in COVID-19 testing. We cannot divulge many details on this new confidential healthcare application, but we can say that our teams acted quickly to collaborate with our customers, develop pilots and produce an ingredient used for testing. We are also supplying technologies for a potential vaccine for COVID-19. A second example, and aside from healthcare, we have expanded our business with MuRata who is a leading Japanese manufacturer of electronic components. Almost every piece of electronic equipment in the world has a MuRata component in it, and each will have now a Solvay insight. Finally, we signed a long-term exclusive agreement with Honda aircraft for supplying composite materials for their business jets. So as we understand, our immediate strategic focus on our cost, cash and customers has supported Solvay's strong financial performance in quarter 1. We delivered greater than expected EBITDA of EUR 569 million, essentially flat with last year's quarter 1. Our pricing power, combined with our disciplined cost management program, enabled us to improve our industry-leading margins by 0.8 percentage points to a level of 23%. And our free cash flow delivery of EUR 202 million was nearly EUR 300 million more than the first quarter last year. While we continue to monitor the pandemic and the impact it has across our relevant markets, we are pleased to see that our resilient businesses and focus on execution have positioned Solvay to deliver strong first quarter performance. Before turning the call over to Karim to review our financials in more detail, I want to note that the market environment we are facing is unprecedented and will remain dynamic and uncertain. We will continue to be nimble and adapt quickly as the situation evolves, but we will also remain disciplined. While some of our near-term priorities may change, our commitment to our growth strategy remains intact. We are continuing to see progress as we work to implement a strong enterprise-wide operational model, instill a performance-based culture across the entire organization and, of course, live up to our purpose and values every day. With that, I will turn it over to Karim. Karim?
Thank you, Ilham. Good afternoon, everybody. As you've seen, our reported EBITDA was stable, and our underlying post-tax profit was up over 4.5% on the back of reduced financial charges, and these profits are despite a 6% fall in reported sales. Let's turn to the business segments, I will refer to figures on an organic basis, by which I mean constant scope and currency. I'll start with materials on Slide #8. Net sales of EUR 789 million were down 2.9% organically, driven primarily by reduced volumes in the aerospace market. I'll first discuss our 2 largest markets, auto and aero, which together represent 25% of group sales. Composite Materials, as anticipated, was impacted by the production stoppage of the 737 MAX program. Sales to other commercial aero programs were stable in the quarter, whereas sales to the military sector grew by double digits in the quarter. Mitigation plans, which were already underway late last year were deepened and accelerated early in the quarter and helped to offset the 737 volume decline to maintain EBITDA levels. Specialty polymer sales were essentially flat versus Q1 2019. Our high-performance polymers used in auto were up 2% versus Q1 2019, and they outperformed the market in the context of LMC light vehicle world production estimates being down 26% in Q1 this year. Part of the overall performance -- the outperformance relates to further penetration of our technologies into specific areas, such as electric motor components and turbochargers. And we believe also that some of the outperformance could have resulted in higher inventory levels in the industry. Other markets proved resilient, including consumer goods and healthcare, electronics, and together, these represent about 17% of group sales. And together, they were resilient. Taking a step back, overall EBITDA for Materials was down 5% organically to EUR 228 million as our substantial cost measures and price support helped to mitigate much of the aero volume decline. It's also important to note that costs in specialty polymers were EUR 25 million higher in Q1 this year related to the accounting effect of reduced inventory levels this year compared to last year. Despite this accounting effect, we were able to deliver solid EBITDA and margins of 29%, only 0.5 percentage point below that of last year and up sequentially against Q4 last year. So overall, in these circumstances, a strong quarter for Materials. Moving to Slide 9 and to the Chemicals segment. Sales declined 3.2% organically to EUR 800 million. In soda ash, sales were down 4.2% due to low demand in building and construction, which represents 8% of group sales. Other markets, including container glass, detergents and healthcare partially mitigated the decline and prices remained stable overall. Peroxides performed well with sales of EUR 172 million, in line with last year's level. The business saw good demand in traditional pulp markets, including tissue products and disinfectants. Pricing power combined with cost discipline enabled us to maintain a strong bottom line performance in the quarter. The remaining businesses in the Chemicals segment, namely our Silica and Coatis businesses were stable with organic sales levels similar to the first quarter last year. Overall, the Chemicals segment continued to demonstrate its intrinsic resilience, with EBITDA increasing 5.4% organically to EUR 239 million, thanks to the combination of solid demand, improved pricing and operational excellence. And together, these translated into 2.5 percentage points increase in margins, which are now at 29.8%. Turning to the Solutions segment on Slide 10. Net sales declined 6.5% organically to EUR 883 million. I will begin with oil and gas, which is one of the most challenged markets, but now represents less than 5% of group sales. We've all witnessed the unique developments over the past few weeks. And that was on the back, I'll remind you, of an already very difficult period in the industry since the middle of 2019. The dramatic fall in demand has led to an oversupply of oil and gas, and our customers are significantly impacted. Now we had already initiated a strong turnaround in the third quarter of last year, including restructuring of business, cutting costs and fundamentally aligning our value proposition to the changed market environment. Our team has already reduced the cost base substantially. And they're focused on bringing solutions that address the new needs of our customers. Our exposure to other end markets in Novecare, such as home and personal care, agro and coatings, altogether represent about 30% of the group and about half of Novecare sales and demand in these markets was resilient, and this led to slightly higher sales year-over-year, despite some impact from the shutdowns in China. This strength helped to partially offset the oil and gas headwinds. Turning to Technology Solutions. Sales were down just over 2%. Mining, the largest market in this business, sustained good demand, as most of our key customers were still operational. And this helped to offset weaker conditions in other industrial and auto markets. Special Chem sales were slightly down, but strong demand for semiconductors helped to offset weaker demand in thermal insulation. Aroma sales were up 9%, thanks to higher volumes and pricing for natural vanilla ingredients, which are used in food and in fragrances. Taking a step back. Overall, the Solutions segment EBITDA was down 4.3% in the quarter with stable demand across a variety of markets, combined with strong -- very strong cost control measures, and this helped to partially offset the headwinds of oil and gas. In fact, EBITDA margins were improved 0.2 percentage points and now stand at 17.4%. Moving to cash management on Slide 11. As Ilham mentioned, the strong Q1 free cash flow performance is almost EUR 300 million above Q1 last year and was fundamentally driven by group-wide focus on cash. But I'm going to focus and highlight 3 particular factors. One is, we continue to see the benefits of a sharpened focus on working capital intensity and on phasing. And we began to -- and that we began to see that indeed in the second quarter of last year. By way of example, our inventory levels in Q1 this year were EUR 162 million lower compared to Q1 last year. Two, we had a tax gain of EUR 65 million cash associated with additional voluntary pension contributions following the receipt of proceeds from the Polyamide divestiture. Three, as you know, we decided to curtail our capital expenditure plans during the quarter and already benefited from lower cash spend of EUR 15 million in this regard. Now I turn to Slide 12. In April, we increased our committed undrawn credit facilities by EUR 750 million to take the cumulative total to EUR 3.25 billion, committed undrawn credit. On top of that, we have cash and cash equivalents of EUR 0.9 billion at the end of March. We have no financial covenants and very low refinancing risk indeed because our next maturity is a hybrid bond of EUR 500 million with a coupon of 5.12% and the first call date of June 2021. So whilst we acknowledge and we see that credit rating agencies have been taking rating actions on a large number of chemical companies, we do note Moody's recently affirmed our credit rating at Baa2, albeit with a negative outlook. Turning to the topic of pensions. I will highlight that we made additional voluntary contributions to several plans. In Q1, we made a total of EUR 460 million contributions in France and in the U.S., and I'll remind you that this is on top of the EUR 114 million contribution in the U.K. in December 2019. These total contributions amount to EUR 574 million, and they will reduce our annual pension cash spend by over EUR 60 million a year beginning this year. So in short, you've seen that over time, our portfolio has proved to be strong and resilient. We are delivering consistently strong cash generation. And indeed, we are now tackling the more structural pension issues that have previously weighed on our cash generation. And as I've explained, we have a strong balance sheet with ample liquidity reserves and low refinancing risk.So it shouldn't be a surprise that Solvay's Board supported management's recommendation to continue with the final dividend proposal of EUR 2.25 per share at the Annual General Meeting on the 12th of May next week. And with that, I'll hand you back to Ilham to discuss the environment in the second quarter and to provide her closing remarks. Ilham?
Thank you, Karim. So despite our strong start to the year, there remains significant uncertainty around the extent of the impact that COVID-19 will have on our business. We are staying close to our customers to understand and quickly meet new demand patterns across our markets as well as manage our inventories and align our operating rates to newer levels. To that end, and as previously announced, we have withdrawn our full year 2020 guidance originally provided on February 26. We will provide you with a better view of the full year once market visibility improves. While we do not believe that we can reliably forecast financial targets at this time, we want to provide you with directional color on early trends we are starting to see as we enter the second quarter. We saw market decline in sales in April, and our order books for May and June indicate further deterioration, and this is what we confirm that we expect Q2 to be substantially lower. Indeed, we are seeing pronounced declines in aero, oil and gas and auto and softness in pulp and paper and in construction as flat glass producers are shuttering capacity. As these trends continue to unfold, we will continue to make quick, informed business decisions with our 3 immediate priorities in mind. Based on the trends, we have decided in early April to immediately implement additional actions to address the changing environment. First, we are adapting capacity to align with reduced demand, in particular in challenged markets, such as oil and gas, auto and aero. In doing so, we will maintain a higher utilization rate and reduced unit production cost. As of the end of April, approximately 10% of our global sites were idle, and we also have a significant number of sites running well below normal operating rates. We will continue to monitor the situation and further align our production to demand. Second, we are reducing staff temporary. Effective May 4, we implemented furlough that impacts around 5,000 employees in industrial and administrative functions globally. Third, we applied strict CapEx management. And as previously announced, we reduced our full year CapEx plan by EUR 250 million. But let me be clear. We are prepared to resume these plans when our customers need us. As you know, Solvay has lived through many market disruption in its 156-year history, and while we don't have visibility into how markets will evolve, we remain confident in our ability to manage our business through these near-term headwinds and position the company for success across a range of post-crisis scenarios. Our strong diversified portfolio, coupled with our financial flexibility and the additional structural actions underway, will enable us to emerge a stronger, more resilient company that is well positioned to unleash our full potential.Before I close, I want to remind you that we put in place a solidarity fund to support our employees and their dependents who may experience hardship due to the impact of COVID-19. The fund will be a charitable entity administered by the King Baudouin Foundation. We launched this initiative a few weeks ago because we care. It truly exemplifies one of the key pillars of Solvay One Planet and ESG goals, which is to improve the quality of life of our employees and society at large. In addition to senior leaders and the Chairman of the Board, I'm very encouraged by our nonexecutive directors and the many Solvay employees and private shareholders who have indicated an intention to contribute. More importantly, I take the opportunity to note and appreciate our reference shareholder, Solvac, for their commitment to contribute a minimum of EUR 10 million up to EUR 24 million to the solidarity fund. I also learned that around 200 investors have also decided to contribute funds and is current -- and currently is around EUR 2 million, and I'm hopeful that this figure will increase in the next few weeks. We encourage all shareholders to contribute towards this important cause. Indeed, we consider this to be a concrete example of a truly responsible capitalism. And with that, thank you very much. Karim and I will now address your questions.
Thank you, Ilham and Karim. [Operator Instructions] And now I'll hand it over to our moderator.
[Operator Instructions] We have first question from Markus Mayer from Baader-Helvea.
I have 2 questions -- one question first, and then I'll ask one more later on. With the full year reporting, you have guided for an expected COVID-19 effect of around EUR 25 million. Was the actual impact larger or smaller than you've expected? Or can you quantify this effect?
Markus, good to have you with us. So the question is about our COVID-19 impact in quarter 1, right, Markus?
Exactly, exactly.
Yes. So you may remember, Markus, my promise to most of you is to be open and transparent as we possibly can when we have the most accurate, current and relevant info in hand. We guided last -- actually in February, we guided you that the impact of COVID-19 in quarter 1 will be EUR 25 million. And we ended up at EUR 20 million. So not bad, right? For -- taking into account the situation. The impact was mainly in reduced volumes in 2 segments, mainly in Solutions and in Chemicals. And main markets were mostly around the oil and gas, some Silica, some Coatis, some Novecare. You may remember that we had a mandatory shutdown in China for 2 weeks, right? And that's the impact we sized. Having said that, COVID-19 in China and Korea had another phase than what we experience today in Europe and in the U.S. I must say, the authorities have been, really speaking, clean and very transparent about the time of the shutdowns, the right to return to work. As you know, we had no operation -- Solvay had no operation in the Wuhan -- in the Hubei province. And that also made us extremely agile to come back to work very quickly. So we have -- we made EUR 20 million for EUR 25 million estimates.
The next question comes from Laurence Alexander from Jefferies.
This is Dan Rizzo on for Laurence. How does the down -- the current downturn affecting the thinking about the longer-term targets? Should we think about targets as more directional at this point?
Sorry, Laurence. We couldn't hear you very well. Can you repeat please and maybe...
Hold on a second. Maybe that's better. This is Dan Rizzo on for Laurence. I was just wondering how the current downturn is affecting the thinking about longer-term targets. Should we think about those targets as more directional at this point?
You are talking about the midterm targets?
Yes. I'm having a bad connection here. Sorry about that. I just wanted to know on the long-term targets, are they still achievable? Or is it more directional at this point?
Okay. So I guess, you talked about 2024 targets, right, and are they [ achievable ], right, Laurence?
Yes, I think.
Yes. Probably the connection is not good from both ways, so...This is a good question, Laurence. But as you have noticed, [ projection on ] full year 2020 is still unclear. It was Dan, basically, right, not Laurence. As I said, Dan and Laurence, we are a long-term company, which is right now focused on the short-term priorities. There is no long term without the short term. Today, we are not withdrawing our midterm guidance. When we have more visibility, we will come back to you in due time. It's clear that if the economic crisis resulting from the pandemic lasts longer and deeper than what we can all see right now, this would put these targets at risk. But whatever recovery shape you wish to assume, some of them serve you [indiscernible] data between the V, U, the prolonged U, the L or the W, right? I mean the V is probably more [indiscernible] in many regions. What I can tell you is that you can count on us, on Solvay people and employees and me personally and the executive committee to make progress executing and delivering our plan, which is still grow with the key fundamentals, and I believe that this crisis is actually strengthening the fundamentals of it and do whatever we can to serve our customers. Thank you for the question.
Your next question comes from Mubasher Chaudhry from Citi.
I had one on working capital. As I can see, a large portion of the inflow was from other current liabilities. Could you just provide some color as to what those relate to, please? And what are the -- a quick tack on to that. You mentioned the 5,000 employees are in furlough. Are you relying on any government schemes for those employees while they are in furlough?
The first question, Mubasher, was around working capital. Again, I think the line is very bad here. My apologies.
Sorry. So the working capital inflow for the first quarter, a large portion of it was coming in from the other current liabilities. If you could just provide some color as to what that relates to, please?
Okay.
Let me just look at my detailed notes, and I'll come back to you in one moment, Mubasher, on the specifics on the working capital because the main drivers are exactly one that I've described, but I'll come back to you on that, on working capital.
Well, I mean -- I mean, quickly on the working capital because I didn't get this, and we are remote. We know, Mubasher, that since last year, we've been focused on inventories and working capital management. You may remember that. And when I joined the company, and it's actually my first year anniversary in my fourth quarter, I was not happy with the cash flow phasing and part of it was due to less structured and phased inventory and working capital management. We are making progress. It's part of our growth strategy. In quarter 1 2020, inventories are down EUR 162 million or 9% year-on-year. We are now -- because of the crisis situation and lack of visibility, we are working closely with our customers to adapt to their changing needs, and that will help us in managing inventory levels and that's the challenge as we speak for better managing quarter 2 forward. Of course, accounts receivables or accounts payable are really important. In terms of risk, it's important to manage very well your receivables. With Karim and the finance team and the Business Unit Presidents, we implemented the risk management for all our customers. We have 5 categories, 1 is low risk, 5 is high risk. Anything above 3 needs the signature from our -- and sign off from our CFO. So we are really looking at credit. And me personally, I experienced the '08, '09, and my nightmare and the pain was really on credit management. So the team hears me a lot now saying that the sell is a charity till we collect the money. On the payables, I think we are doing a better job since the year, looking at how we can extend payment term, how we can have strategic suppliers with us. And I commend what the team has been doing, the procurement team across the globe on doing so. So work in progress. We have no strategic programs. It was part of our EUR 350 million of cost savings program. You may remember it, which we launched in November, and we updated and increased in February. So definitely, working capital and value chain management in collaboration with our customers is in progress. We started with Specialty Polymers, we will move to Novecare because those are where we see a low-hanging fruit, and we see the big impact for Solvay as a corporation. On the furloughs, I mean, obviously, it's always painful to make furloughs like any other action touching people but at the end of the day here, what we are experiencing is less demand, less external activity, therefore, less internal activity. And that's what we are adapting. It's about operations. So operating run rate, as I mentioned it, either in capacity whenever we can do that while being very agile and elastic to rebound whenever customers need us. So this is the trick. Second, indeed, we're putting people on furlough, but we have launched HR guidelines and protection for our people regardless of the country of residence. And this is what you can expect from Solvay. Some of the countries have an excellent social and health benefits for people who are going to furlough, who are subject to diseases or illness during these tough times. At Solvay, we have one unique guideline, and we protect all our people equally, including in countries where they are not covered very well. So with those HR principles, we have announced the furlough. And we're going to adapt as the demand comes back as our customers need us back. And obviously, this is fluid and dynamic. So yes, you will see us giving you an update in the coming weeks.
Maybe just to come back to your very first point, Mubasher. The working capital exactly as we've said, it's inventory, receivables, very strong, consistent progress. To your specific point on other working capital, it's a mixed bag of many, many other things like customs, duties, VAT. And we've also been optimizing and centralizing a lot of those activities globally, and that's a contribution towards it. It's not the full figure, but it's a good -- it's about half of it approximately. So essentially, the optimization covers everything to do with cash, not just inventories, et cetera. Thank you.
Next question comes from Mutlu Gundogan from ABN AMRO.
One question it is. On Q1, your EBITDA ended up flat year-on-year, which is significantly better than your guidance at the end of February. Can you tell us why March was so much stronger than expected? And if you allow me, not so much a question but more a remark. I really like the old EBITDA bridge. I mean the new one is also good, I think, but we miss the volume effect, the operating leverage. We can't see the benefit from raw material deflation. And especially cost savings is an important part right now, we can't track that besides the quote of remarks. So would you be able to provide that on an ongoing basis?
Thank you, Mutlu. I'm smiling because the simplified press release was actually a result of the comments and my onboarding tour with you guys and many who have complained that we are too complicated to understand. So we tried to simplify. So bear with us, right? We will -- obviously, we want to be, again, as open and transparent and give you the real dynamics and the underlying performance KPIs of our business. But a point well taken. Listen, on the Q1 performance, I think there are a few things, and I'll add to what Karim and I, we've shared. I think what this company has seen, and we've been very busy last year, 4 quarters, times go fast for me. I'm first year in the company, and we've been very busy in 2019 or in the past 4 quarters. I think we have renewed the foundation for the company to start really building up on delivering against the growth strategy. Obviously, we didn't expect COVID-19 to happen, but this renewed foundation, I'm truly a believer that is going to help us to weather the storm in 2020, although sometimes you cannot define gravity. And I remind you a few things. We changed management to focus on cash. So cash is king, obviously, you hear a lot about it in 2020 and with the crisis, but we say this in quarter 2, that free cash flow is important. And we managed it since then. We changed the incentives of our Presidents. We changed the capital and resources allocation. And frankly, we are very blessed that we did it last year, not in January or in February or in March when COVID-19 started expanding from the east to west. We stopped City Light, I don't regret it a second, the architecture project. We sold Polyamide on time, and we are repairing our balance sheet and paying down the debt or funding pensions, which is helping us to decrease our expenses on a yearly basis. So all of this, I think there is not 1, 2, 3, there are many ingredients, and I commend the heavy work, the hard work, the intensity of it in the past year, which the team did behind the scene, and that was to see the strong performance on EBITDA, which is indeed at the same level of 2019. I'm very proud of the free cash flow generation and the financial robustness. I think I'm believer that liquidity, debt, deleveraging goes along with the rest, and I think what we've done with Karim and the executive committee is quickly preparing for the crisis and ensure that we have enough liquidity, EUR 4 billion. We have no covenants. The debt, obviously, next maturity is June 2021, as we told you, and deleveraging, we did that, and we will continue looking at that. So all in all, this is it. It's about now during crisis situation, we embraced the reality. There is no point to deny or to think twice about that. It is happening. We can do nothing about that. And with my team, we are redefining what does it mean winning. Even if the strategy is consistent, I think winning will take a different shape during crisis times than during noncrisis times. This is what I learned in my '08 , '09 financial crisis and during the 9/11 crisis, and then the trick, and I've been saying it, is to execute against the plan flawlessly. Now bear with me, it's easy to say, it's harder to do because we manage volatility and uncertainty, but we are developing the muscle, and I'm very happy that I have 1 year and 4 quarters with these fabulous teams with us to really go through 2020 and its challenges. Thank you for the question.
Next question comes from Chetan Udeshi from JPMorgan.
I just had maybe a couple. I know it says limit to one, but maybe I'll try to squeeze in 2. The first question is how are you adjusting structurally to the potential that the aerospace demand may remain depressed for a long time? What can you do, what can you not in terms of adjusting your capacity, cost base, not just for temporary purposes, but for, say, for a longer period of demand weakness? That's the first question. Second question was this EUR 50 million of cost savings that you talked about, firstly, how much of that was -- how much of that benefit was already in Q1? And does that include the benefit from 20% of employees being on furlough? Because I think I wasn't very clear whether you are using some of the government schemes as part of the furlough or not?
Okay. So Chetan, I will take the first question, and Karim will take the second one. Your first one was about aerospace, right? I mean you've seen -- I mean, I'm sure you have all our numbers. IATA's latest assessment, as I mentioned in my prepared remarks around air passenger volumes, they expected it to contract 48% in the past weeks. Let's see. As I said, Airbus has already announced cutting their productivity by 30%, Boeing is doing the same. So we are reducing our production to reflect this level that customers like or OEMs like Airbus and Boeing have shared with us, right? I remind you 2 things about composites before I tell you how we're going to address the challenges ahead of us. I'm very proud of composites. And what they've done last year, you may remember when I joined the company, and most of you told me the same, you were not that much happy about the leverage between the top line and the bottom line since the acquisition of Cytec. Last year, and this is the word of our GBU President, not mine, was the best year in the history of Cytec. So they've done a great job into improving the operational efficiency, right, last year, and they prepared themselves for actually weathering the storm of quarter 1. 737 MAX grounding is not new to us. It started at the end of last year -- I mean, most of last year, but end of last year was getting a bigger impact, quarter 1 as well. And despite that, we had record EBITDA levels last year. And this year, we delivered EBITDA in quarter 1 at the same level as that record quarter, right? So now it's different. We are entering unprecedented times, and we are again accelerating our mitigation efforts. We are taking a strategic look at our manufacturing footprint to look for more ways to improve efficiencies and reduce costs during this time of lower demand. So indeed, we are focused on trying to manage what is our control. And finally, let me remind you about an important point that the reduction relates to commercial aircraft. We are not adjusting production in the military sector as this continues to remain stable and possibly grow at double-digit levels. So military, I remind you, represents 25% of composite sales. Having said that, Karim, can you address the second question?
Sure. Well, on the EUR 50 million of costs, so I'll make it easy. So it doesn't yet include the furlough benefits, which are really starting now in major part. But I'll give you some more color on it. 1/3 of it has to do with people-related costs and 2/3, other. Now by people, what's in it. It's continuing with the focus and acceleration of the restructuring programs we'd announced previously. That's the first piece. The hiring freeze, austerity measures, we should expect, the salary freeze that we've implemented globally, these are the kind of measures we've taken place. On the 2/3, which are more of an external spend, there's an element of austerity, necessarily you can't travel, et cetera, at the moment, but it's much more than that. The structural programs on indirect spend, which is part of our growth strategy. So it's really around battening down the hatches. But that's what this is about. The furlough points, which are essentially ahead of us for Q2, is really intended as a temporary measure to mitigate and adapt to declining activity levels, and that's yet to come. But clearly, you'll see that with the partial mitigation of a sales decline typically. Does that help?
Next question comes from Matthew Yates from Bank of America.
Congratulations on what looks like an outstanding quarter in this environment. I appreciate you're trying to temper our expectations somewhat for Q2. Ilham, you've said several times that cash has clearly been a priority for you over the last year since joining. So let me ask you a couple of questions related to that. The first is a strategic one. I think Karim highlighted earlier in the call that you've now been put on negative outlook by the agencies. So can you talk about the decision to still go ahead and pay that final dividend versus what's a fairly significant CapEx cut that you're making and why that won't impact the long-term prospects of the business? The second question is, apologies, just my own confusion around what is going on with the tax payments in the quarter. It looks like from a cash perspective, you've got a refund. I'm just wondering if that's complicated by the Polyamide disposal and capital gains or what we think an underlying cash tax rate for the year is?
Okay. Well, let me talk to the second point, and I'll come back to the dividend. I'm sure Ilham will add to it. On the tax, essentially, by making a contribution in a structured fiscally effective way by using the proceeds of the Polyamide sale, we basically get a tax reduction. You can look at it as a one-off, it's cash. It's good quality, but it's more of a one-off nature, which is why I've highlighted it. So that's all really I can offer on that. The rest is pretty confidential essentially to how we do things here, but it's very, very secure. On the first point, now beyond what I've described already, talk about Moody's putting us on a negative outlook, et cetera, fundamentally, we've got a very strong balance sheet. We've got strong cash generation and confidence, both in the portfolio resilience. And you also made the point on the CapEx. Maybe one thing to highlight, and it may not be apparent because we haven't made it apparent yet is whilst we've decided to adapt our CapEx plans, we are really making sure we have our eye on the growth. So 40% of the reduced CapEx programs for this year are still eyeing future growth projects and R&I. So we're not sacrificing future growth to conserve cash. We're really keeping a healthy tension between adapting to today's priority and preparing for tomorrow's growth. And maybe just one final thought on Moody's rating action. What is helpful is also in the fine print, they have given us significant time compared to a few others to come to a stronger performance from a gross debt-to-EBITDA metric in particular. That is what they're focused on, more than the cash generation, overall liquidity. Ilham, on the dividend?
Thank you, Matthew. Well, listen, we paid a dividend this year for 2019 results, right. And I remind you that we had a record free cash flow generating in 2019, basically, if I remember well, it was EUR 300 million year-on-year, right, and quarter 1 has seen a similar trend as our -- as we said very well, our focus on free cash flow has happened since day 1 I joined the company. So at the end of the day, when you close the year, you look actually at paying bonuses to your employees, and we wanted to reward our people on the hard work they've done in 2019 and also to acknowledge, reward our shareholders who have put their trust in us and counting on the dividends, right? And that's basically the reason why we decided to recommend a stable dividend furthermore taking into account our ability to remain cash-generative in quarter 1. Now you know also the level of our liquidity, so EUR 4 billion, as Karim said, no covenants, being in a very, very solid financial robustness, and that's important that indeed we preserve the strength of the company, both in liquidity and also, we closed the pack, so we had proceeds to repair the balance sheet, as I mentioned. I think that's the reason. The future now, 2020 is another year, right, with its own share of challenges, right? And we will make the decisions concerning 2020 in due time. So that's how we saw it right, Matthew. It's very clinical, very consistent with the way we've done it and with the situation of our financial robustness, cash flow generation, balance sheet and liquidity.
Matthew, one other final comment. I just remembered, I didn't fully answer your question on the effective underlying tax rate. Just to remind you, this comprises both deferred tax and current tax, it's nothing to do with cash. Now at this point, we're still at 26.4%. The strategic guidance remains unchanged. But let's be clear that as the profit pools in the U.S., et cetera, changed temporarily, I expect all sorts of potential short term changes. But at this point, I'd say no strategic changes to our guidance on things like taxes.
And one more, Matthew, because you had so many questions, I almost forgot, is that it should not be unanswered. It's on your CapEx, right? So obviously, the question was why you are reducing your CapEx by EUR 250 million? And are you jeopardizing the future? Well, listen, we remain very agile in this environment, right? I mean we're not here to hijack or penalize our future. As I said, we are a long-term company managing and tackling the short term. We have an eye on the microscope and eye on the telescope. Let me tell you that 40% of the remaining CapEx is 40% investment, it's still going to our research and innovation and development projects, right? So we didn't kill or get to the bone of the growth investments. We're not going to do that. Now in reality, we need to be, again, very agile, adaptable, embrace the new realities. We are assessing regularly all investments and making sure the strategic ones continue and that we are not making any delays whenever it makes sense. But if customers do not need new capacity, if by now, we have enough capacities in our own assets and I remind you that we are also pushing digitalization inside our manufacturing and industrial footprint at Solvay, we are actually debottlenecking, and we believe we have enough capacity today to serve our customers today and tomorrow. And frankly, we are looking very carefully at the post-crisis shape of recovery, and we are looking how to rebound and be at the start-up to be the quickest one to obviously win and conquer. But thank you for the question.
Next question comes from Geoff Haire from Kepler Capital Markets (sic) [ UBS ].
This is Geoff Haire from UBS. Just had a quick question on the Composite business. Just given the recent updates we've seen from Boeing and Airbus, would it be reasonable to assume that you're going to see negative organic growth on an annual basis, both this year and the next year on Composite Materials? And could you just break down the different end markets within composites, please?
So as I told you, on Composites Materials, obviously, as you said, the large big 2 are reducing their production of fleet. And obviously, Airbus announced 30%, that Boeing reduced production on wide-bodies by similar rates for the big planes. Commercial aircraft for us is around 60%, 65%. Military is 25%, and the balance is industrial. That's more or less at high level, you can take those numbers, right? The -- I mean, again, we shall see how things are going to evolve. Airlines are expected to use this crisis to retire also older aircraft. This will create the demand for newer aircraft models. We're hearing it. New airplanes will be probably 25%, 40% more efficient. They have more composite in it. And we are well underway with mitigation exports. And this is how we were able to deliver, frankly, a good quarter 1 and even second half 2019 was very robust because we started really looking at our operational efficiencies. We started looking at our manufacturing footprint. So this is extremely important. Operational efficiencies, manufacturing footprint, automation is extremely important to improve the cost structure. So we will continue doing that in the coming weeks and days. So that's the name of the game. But in a way, we are blessed to have military doing well, and we are blessed that we started already this hard work last year. So you will see more from us in the coming weeks and months, Geoff.
Next question comes from Sebastian Bray from Berenberg.
It's on composites and profitability. What is the balance of fixed and variable costs in this business? If I look at Hexcel, the market consensus appears to be suggesting that a $1 decline in sales is going to cause a slightly less than $2 decline in EBITDA. Is that a reasonable rule of thumb for the Cytec business? And a quick follow-up. Are there any -- how much more book value is there left in oil and gas that could potentially be impaired?
Okay. So I'll take the composites, and maybe Karim can take the oil and gas. Well, listen, is that Sebastian?
Yes. Yes.
Yes, it was Sebastian. Yes. Sebastian, as a reminder, our asset base in composites is a bit more flexible, and I don't want to compare with anybody else. I give you that. Meaning we are not 100% vertically integrated, you know it, into carbon fiber as we procure a large portion of our needs. This means we have less of an issue with fixed costs in a way. In addition, and to complete probably the former question, our portfolio is also well aligned with the new single-aisle aircraft, right, such as the A220, A320, 737 and so on. We do not have a large position on the wide-body such as the A350 or A380. So you may also think about this when you do some comparisons, right? We tend to believe that these aircraft may be slower to recover. International travel may take longer to return to normal flow in the crisis. But then we have to watch and see. We have a leading position in the defense sector, as I mentioned. This sector grew by double digits in quarter 1 and is expected to remain resilient. Military represents, again, 25% of the composite sales. That's it. I think this is -- it doesn't mean that we can defy gravity and don't put me wrong. We will be hit. We are hit and -- but since last year, we've been preparing not for COVID-19 again, but we were preparing really to look again at our return on capital employed, at our efficiencies. I didn't like, like many of you, the leverage between the bottom line growth and the -- top line growth, sorry, and the bottom line growth. I didn't see the right multipliers when I came to the job. And the composites team did a fabulous job in starting really addressing the operating rates. We took the best competencies we had within heritage Solvay, legacy Solvay, and we put them in place with the composite leadership. And now since 4 quarters in a row, they are delivering leverage between the top line and the bottom line. So I truly believe that they have, again, developed the muscle, and we have a mitigation plan underway, which we will share with you in due time, Sebastian. On the question, next question...
On oil and gas, Sebastian, quite simply, we haven't disclosed that when we took the impairment late last year. It's significantly below, obviously, as a result of the impairment we took in Q3 last year. But that's probably as far as I can help you at this point. It is significantly less material. Because of total assets of Solvay, it's not going to feature materially.
Okay. Well, I think we've reached -- yes, we reached close to the end. So maybe we have time for one last question before we close.
Yes, one last.
So for the last question, we have Peter Clark from Societe General.
It's just a quick one. In terms of the comments you made on Cytec, are you expecting some sort of mix drag coming on either end or EBIT on the basis that we're likely to see a much slower recovery in automotive and aerospace, if it's something you can overcome?
It's a good question. I mean the aero has its own dynamics. If I hear the most pessimistic people, they may see it coming in, recovering for a long time, at least, as I said, not the international travel any short term. You may see domestic travel kicking off a bit quicker than the international ones. The wide-bodies and single-aisle, and this will favor the single-aisle as compared to the wide-bodies and the large aircraft, but it's very difficult to answer right very specifically. The auto -- I mean you've seen LMC forecast. All of this is going to depend on the confinement strategies and how fast people are going to come back to work, how fast the economy is going to rebound, what type of stimulus regions or countries, including China, Europeans and the U.S., are going to put into the auto value chain. A question as well is about the electrification, how fast it's going to go and the emission regulations, which have been favoring many of us, specifically in China. But at the end of the day, I'm a believer that we are well positioned. I remind you that the value proposition for both composites and Specialty Polymer is about light-weighting. I used to say I like metal because we can replace it. And this is, for sure, going to continue under the hood, batteries in a traditional internal combustion engine car, they use 6 kilos polymers, our polymers, the high-technology polymers. In hybrid, they used 12 kilos. In electric, they use 9 kilo. Batteries need Specialty Polymers product, they need Special Chem solutions, Composite Materials along with Specialty Polymer, and that's why they belong to the same material cluster. It's not because it was funny to put materials together, it's because we are innovating the thermoplastic composites, and we believe we are the best-in-class to really develop unique innovative, highly proprietary technologies and solutions for these markets and beyond. Because thermoplastic composites, as you know, is recyclable, has a fabulous sustainability profile and can beat many of the metals and metallic alloys type of specification. By the way, this type of programs is not heightened during the crisis. We continue doing testing and innovation programs and running them with our customers. So yes, all in all, tough markets environment, but again, I ask the team to not focus on what we cannot control. I think our customers are asking on us. And by the way, most of those -- I mean I should not forget one of the big value proposition in replacing metal, which is important to keep in mind in the crisis times, is that we are lowering the total cost of ownership as well. It has a huge impact on the total cost of ownership end to end at the level of 10%, 20%, 30%, depending on the segment. So I think everybody now is looking at how they can improve. And this is medium term. Obviously, the short term is another story. But medium term, the value proposition we have between Specialty Polymer and Composites is really a strong one, and we believe that we are best-in-class to deliver those solutions.
Thank you so much. That concludes today's call. But please, I do invite you to reach out to the Investor Relations team if you have any further questions. Thank you so much for your participation today.
Thank you very much.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.